EXHIBIT 13
Annual Report to Security Holders
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
T a b l e o f C o n t e n t s
Selected Financial Data 2
Letter to Shareholders 3
Glossary 5
Management's Discussion and Analysis of
Financial Condition and Operating Results 6
Forward Looking Information 6
General 6
Results of Operations
Net Income 7
Interest Income 9
Interest Expense 12
Net Interest Income 14
Provisions for Loan Losses 15
Other Operating Income 16
Operating Expenses 17
Income Tax Expense 19
Financial Condition 19
Interest Rate Sensitivity 22
Asset Quality 25
Liquidity and Capital Position 26
Impact of Inflation and Changing Prices 27
Market Price of Common Stock 27
Report of Independent Accountants 28
Consolidated Financial Statements 29
Notes To Consolidated Financial Statements 35
Corporate Directory 61
Shareholder Reference 62
1
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Selected Financial Data
<TABLE>
<CAPTION>
(Dollars in Thousands, except share data) 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At September 30,
Total assets $ 200,211 $ 153,725 $ 124,017 $ 115,949 $ 114,373
Loans receivable, net 102,064 67,250 61,119 57,110 47,925
Investment securities - available-for-sale 7,917 5,919 0 0 0
Investment securities - held-to-maturity 25,970 30,481 29,767 23,058 30,139
Mortgage-backed securities - available-for-sale 44,013 32,894 12,810 4,356 0
Mortgage-backed securities - held-to-maturity 4,279 5,807 10,941 18,152 24,949
Goodwill 2,313 0 0 0 0
Deposits 101,620 87,540 86,644 88,551 90,768
FHLB Advances 78,959 45,058 14,946 4,195 0
Stockholders' equity 16,210 18,419 20,384 20,879 20,931
Common shares outstanding 1,162,320 1,294,420 1,464,056 1,026,366 1,079,285
Book value per share 13.95 14.23 13.92 20.34 19.39
Tangible book value per share 11.95 N/A N/A N/A N/A
For The Year Ended September 30,
Net interest income $ 3,436 $ 3,231 $ 3,298 $ 3,419 $ 3,552
Provision for loan losses 28 0 0 5 0
Other operating income 361 358 361 302 371
Operating expenses 3,275 3,141 2,768 2,523 3,200
Net income 296 298 561 767 458
Base earnings per share .26 .23 .39 .52 .28
Diluted earnings per share .26 .22 .38 .51 .28
Selected Financial Ratios
Return on average assets .18 % 0.21 % 0.46 % 0.67 % 0.40 %
Return on average equity 1.77 1.51 2.72 3.67 2.08
Interest rate spread (average) 1.60 1.81 2.00 2.21 2.27
Net interest margin 2.13 2.41 2.83 3.12 3.16
Ratio of interest-earning assets to interest-
Bearing liabilities 110.40 113.80 119.58 122.29 122.23
Operating expenses to average assets 1.95 2.26 2.31 2.19 2.77
Efficiency ratio 87.20 91.21 78.96 69.24 84.10
Net interest income to operating expenses 1.05 x 1.03 x 1.20 x 1.35 x 1.11 x
Asset Quality Ratios
Non-performing assets to total assets .52 % 0.50 % 0.18 % 0.27 % 0.39 %
Non-performing loans to total loans receivable 0.94 1.14 0.37 0.54 0.94
Allowance for loan losses to non-performing loans 110.33 35.16 102.19 88.06 64.22
Allowance for loan losses to total loans 1.04 0.40 0.38 0.48 0.60
Allowance for loan losses to total assets .53 0.18 0.18 0.24 0.25
Regulatory Capital Ratios (Association only)
Tangible capital ratio 6.80 % 11.30 % 14.95 % 15.20 % 15.30 %
Core capital ratio (Tier 1) 6.80 11.30 14.95 15.20 15.30
Risk-based capital ratio 16.20 27.94 38.29 40.22 44.23
</TABLE>
2
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
To Our Shareholders
The year 2000 was yet another challenging time for the financial services
industry and it was no less so for the Company.
A Federal Reserve Bank tightening and the resulting higher short-term interest
rates continued to exert downward pressure on net interest margins. The
Company's history as a traditional mortgage lender compounds the effect as
interest rates on deposits and short-term borrowings increased at a faster rate
than most loan products. Also, a dramatic decline in the stock markets,
including small bank stocks, had a negative effect on the value of your
investment. Our stock traded from $14.50 down to $7.00, before closing at fiscal
year end at $8.75 per share. The closing price was approximately 63% of book
value per share, compared to the national average of 75% for similar
institutions.
Even though per share earnings were up three cents to $.26 per share compared to
$.23 in 1999, we are certainly not pleased with our net income for the fiscal
year ended September 30, 2000. The additional net interest income and
non-interest income gained through our new consumer and commercial banking
products were offset by increases in non-interest expenses and declining fee
income from our traditional mortgage lending operations.
Despite the negatives, we would like to make note of a few key areas of
improvement made during the year.
First, we successfully completed the acquisition of Gilmer Saving Bank, F.S.B.
("Gilmer", "the Gilmer merger" or "the merger") on June 30, 2000. Although we
created approximately $2.3 million in goodwill with the transaction, we believe
that the long-term benefits will prove to be beneficial to the Company. None of
the senior management of Gilmer remained subsequent to the merger. However, we
were fortunate to recruit a local banker with over 21 years of experience in the
Gilmer market to manage the office. He has produced an average of over $1.0
million per month in consumer and commercial loans since beginning on July 1,
2000. He is well known and respected in the community and we are optimistic that
we can be successful in the Gilmer market, making it a profitable acquisition.
Second, our south Tyler location, which opened in April 1999, continues to meet
our loan targets and deposit production goals. At September 30, 2000, after 18
months of operations, the office has approximately $11.5 million in consumer,
commercial, and commercial real estate loans outstanding. Total deposits in the
office are over $7.0 million and approximately 60% of the deposits are in
transaction type accounts, which have the effect of increasing net interest
margins and non-interest fee income.
Finally, we have undertaken the challenge of reshaping our Whitehouse office
location into a full service consumer and commercial banking office. Subsequent
to year-end, we established a completely new management team in the office
headed by a manager with commercial banking experience. The office now offers a
full line of consumer and commercial banking products and extended office hours.
3
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
We believe an opportunity exists in this fast growing market to increase loans
and deposits and improve the earnings of the Company.
Other actions we took to improve stockholder value included the repurchase of an
additional 132,100 shares of stock during the year. At year-end, we held 722,172
shares of treasury stock at an average price of $12.28. We ended the year with
1,162,320 shares outstanding and a book value per share of approximately $13.95
and a tangible book value per share of approximately $11.95. We do not
anticipate that we will repurchase additional shares of treasury stock during
the fiscal year ending September 30, 2001.
We do not anticipate increasing total assets of the Company over the next
several quarters. Current capital levels at the Company's thrift subsidiary will
preclude any significant growth in total assets in the near future. Instead, we
will focus our efforts on increasing our consumer and commercial loan portfolios
and funding such loans with maturing investment and mortgage securities in an
effort to increase the average yield on interest earning assets. In an effort to
lower our overall cost of funds, we will continue to try to attract additional
transaction accounts as a source of funds to replace short term borrowings from
the Federal Home Loan Bank of Dallas ("FHLB") and to increase non-interest
income. We may also explore the feasibility of offering non-deposit investment
and insurance products through our branch office locations in an effort to also
increase non-interest income.
We invite you to attend our annual meeting of stockholders. The meeting will be
held at 2:00 p.m. on January 24, 2001 at the offices of the Company, 1200 South
Beckham, Tyler, Texas. We would be happy to discuss, at any time, the results of
our operations for the past year or our plans for the future.
Sincerely,
/s/ Jack W. Flock /s/ Gerald W. Free
----------------- ------------------------
Chairman of the Vice-Chairman, President
Board of Directors and Chief Executive Officer
4
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
G l o s s a r y
Book Value Per Share
Indicates the amount of stockholders' equity attributable to each outstanding
share of common stock. It is determined by dividing total stockholders' equity
by the total number of common shares outstanding as of a date.
Earnings Per Share
Indicates the amount of net income attributable to each share of common stock.
It is determined by dividing net income for the period by the weighted average
number of common shares outstanding during the same period.
Efficiency Ratio
A measure of operating efficiency determined by dividing total operating
expenses by the sum of net interest income after provisions for loan losses and
non-interest income, excluding net gains or losses on sale of assets.
Interest Rate Sensitivity
A measure of the sensitivity of the Company's net interest income to changes in
market interest rates. It is determined by analyzing the difference between the
amount of interest-earning assets maturing or repricing within a given time
period and the amount of interest-bearing liabilities maturing or repricing
within that same time period.
Interest Rate Spread
The difference between the average yield earned on the Company's
interest-earning assets and the average rate paid on its interest-bearing
liabilities.
Net Interest Income
The dollar difference between the interest earned on the Company's
interest-earning assets and the interest paid on its interest-bearing
liabilities.
Net Interest Margin
Net interest income as a percentage of average interest-earning assets.
Net Portfolio Value
The present value of future expected cash flows on interest-earning assets less
the present value of future expected cash flows on interest-bearing liabilities.
Non-Performing Assets
Loans on which the Company has discontinued accruing interest or are delinquent
more than ninety days and still accruing interest, and foreclosed real estate.
Return On Average Assets
A measure of profitability determined by dividing net income by average assets.
Return On Average Stockholders' Equity
A measure of profitability determined by dividing net income by average
stockholders' equity.
5
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Management's Discussion and Analysis
of Financial Condition and
Operating Results
Results of Operations
Forward-Looking Information
Except for the historical information contained herein, the matters discussed in
the Annual Report may be deemed to be forward-looking statements according to
the provisions of the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties, including statements that are other than
statements of historical facts, and the other risks detailed from time to time
in the Company's SEC reports, including the report on Form 10-KSB, for the year
ended September 30, 2000. Readers are advised that various factors, including,
but not limited to - changes in law, regulations or generally accepted
accounting principles; East Texas's competitive position within its market area;
increasing consolidation within the banking industry; unforeseen changes in
interest rates; any unforeseen downturns in the local, regional or national
economies - could cause East Texas' actual results or circumstances for future
periods to differ materially from those indicated or projected. These
forward-looking statements represent the Company's judgment as of the date of
this Report. The Company disclaims, however, any intent or obligation to update
these forward-looking statements.
General
The principal business of the Company consists of attracting retail deposits
from the general public and investing those funds in one- to four-family
residential mortgage loans, commercial real estate, one- to four-family
construction, multi-family, consumer and commercial loans. The Company also
purchases mortgage-backed securities and invests in U.S. Government and agency
obligations and other permissible investments.
The Company's revenues are derived primarily from interest earned on loans,
mortgage-backed securities and investments and, to a lesser extent, from service
charges and loan origination fees, gains on sales of loans and mortgage-backed
securities, and loan servicing fee income.
The Company currently offers a variety of deposit accounts having a wide range
of interest rates and terms. The Company's deposits include personal and
business checking accounts, passbook and money market accounts and certificate
accounts with terms ranging from one month to five years. The Company solicits
deposits solely within its primary market area.
6
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Net Income
2000 and 1999 Comparison
Net income was reported as $296,000 or $.26 in basic earnings per share for the
fiscal year ended September 30, 2000, compared to $298,000 or $.23 in basic
earnings per share for the year ended September 30, 1999. Diluted earnings per
share totaled $.26 and $.22 per share for the fiscal years ended September 30,
2000 and 1999 respectively. Net interest income after provisions for loan losses
increased by $177,000 to $3.4 million for the fiscal year ended September 30,
2000 from $3.2 million for the year ended September 30, 1999. The increase in
net interest income after provisions for loan losses was offset by a $134,000
increase in non-interest expense and a $47,000 increase in income tax expense.
The $296,000 in net income equaled a return on average assets of approximately
.18% and a return on average stockholders' equity of approximately 1.77% for the
year ended September 30, 2000, compared to .21% and 1.51% respectively for the
year ended September 30, 1999.
1999 and 1998 Comparison
Net income totaled $298,000, or $.23 in basic earnings per share for the year
ended September 30, 1999, compared to $561,000, or $.39 in basic earnings per
share for the year ended September 30, 1998. On a diluted basis, earnings per
share was calculated at $.22 and $.38 for the years ended September 30, 1999 and
1998 respectively. Both per share earnings reflect the results of the Company's
three for two stock split in the form of a 50% stock dividend in 1998. The
decrease in net income was primarily attributable to a $373,000 increase in
non-interest expense to $3.1 million for the year ended September 30, 1999,
compared to $2.8 million for the year ended September 30, 1998. Additionally, a
$66,000 decline in net interest income after provision for loan losses to $3.2
million for the year ended September 30, 1999 from $3.3 million for the year
ended September 30, 1998 contributed to the overall decline in net income. The
decline in net interest income and the increase in non-interest operating
expense were partially offset by a $179,000 decline in income tax expense.
For the year ended September 30, 1999, the Company reported a return on average
assets of approximately .21%, compared to .46% for the year ended September 30,
1998. Return on average stockholders' equity was 1.51% for the year ended
September 30, 1999, compared to 2.72% for the year ended September 30, 1998.
7
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
The following table presents, for the periods indicated, the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates.
Net Interest Income Analysis
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------------------
2000 1999
Interest Interest
Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate
--------------------------------------------------------------------------
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $ 76,941 $ 5,980 7.77% $ 62,494 $4,810 7.70%
Mortgage-backed securities 43,012 3,115 7.25 33,179 1,995 6.00
Investment securities 38,484 2,325 6.04 36,704 2,204 6.01
FHLB stock 3,015 242 8.01 1,576 86 5.48
------- ------- ----- -------- ------ -----
Total interest-earning assets (1) 161,452 $11,662 7.22% $133,953 $9,095 6.79%
======== ======= ===== ======== ====== =====
Interest-bearing liabilities:
Non-Interest Checking $ 2,929 $ 0 0.00% $ 1,358 $ 0 0.00%
Interest Checking 12,832 512 3.99 9,484 322 3.40
Savings accounts 2,768 88 3.18 2,842 85 3.01
Certificate accounts 68,984 3,815 5.54 72,940 3,831 5.25
Borrowings 58,736 3,811 6.49 31,086 1,626 5.23
------- ------- ----- -------- ------ -----
Total interest-bearing
liabilities $146,249 $ 8,226 5.62% $117,710 $5,864 4.98%
======== ======= ===== ======== ====== =====
Net interest income $ 3,436 $3,231
======== ======
Net interest rate spread 1.60% 1.81%
===== =====
Net earning assets $ 15,203 $ 16,243
======== ========
Net interest margin 2.13% 2.41%
===== =====
Average interest-earning assets to
Average interest-bearing liabilities 110.40% 113.80%
======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------
1998
Interest
Average Earned/ Yield/
Balance Paid Rate
---------------------------------
Interest-earning assets:
<S> <C> <C> <C>
Loans receivable $ 60,563 $4,771 7.88%
Mortgage-backed securities 22,665 1,526 6.73
Investment securities 32,249 1,913 5.93
FHLB stock 905 54 5.92
-------- ----- ------
Total interest-earning assets (1) $116,382 $8,264 7.10%
======== ====== ======
Interest-bearing liabilities:
Non-Interest Checking $ 1,284 $ 0 0.00%
Interest Checking 7,332 226 3.08
Savings accounts 2,852 86 3.02
Certificate accounts 76,138 4,114 5.40
Borrowings 9,724 540 5.55
-------- ------ ------
Total interest-bearing
liabilities $ 97,330 $4,966 5.10%
======== ====== =====
Net interest income $3,298
======
Net interest rate spread 2.00%
=====
Net earning assets $ 19,052
========
Net interest margin 2.83%
=====
Average interest-earning assets to
Average interest-bearing liabilities 119.58%
=======
</TABLE>
----------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process,
loss reserves and premiums or discounts.
8
<PAGE>
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates.
Rate/Volume Analysis
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------
2000 vs 1999 1999 vs 1998
--------------------------------- --------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------------------- ------------ ------------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $ 1,112 $ 58 $ 1,170 $ 152 $ (113) $ 39
Mortgage-backed securities 590 530 1,120 708 (239) 469
Investment securities 107 14 121 264 27 291
FHLB stock 79 77 156 40 (8) 32
------- -------- --------- -------- --------- -------
Total interest-earning assets $ 1,888 $ 679 $ 2,567 $ 1,164 $ (333) $ 831
======= ======== ========= ======== ========= ======
Interest-bearing liabilities:
Interest checking $ 114 $ 76 $ 190 $ 42 $ 54 $ 96
Savings deposits (2) 5 3 (1) 0 (1)
Certificate accounts (208) 192 (16) (173) (110) (283)
Borrowings 1,446 739 2,185 1,186 (100) 1,086
------- -------- --------- -------- --------- -------
Total interest-bearing
liabilities $ 1,350 $ 1,012 $ 2,362 $ 1,054 $ (156) $ 898
======== ======== ========= ======== ========= =======
Net change in interest income $ 205 $ (67)
========= =======
Net interest income $ 3,436 $3,231
========= =======
</TABLE>
Interest Income
Interest income is dependent upon the composition and dollar amounts of the
Company's interest-earning assets and the yield on those assets, which is
influenced by the current level of market interest rates. Interest income is
generated by the earnings on the Company's loans receivable, investment
securities and mortgage-backed securities portfolios. The Company's loans
receivable portfolio has historically been comprised primarily of fixed rate,
single family residential mortgages and, to a lesser extent, adjustable rate
single family mortgages and other real estate loans with both fixed and
adjustable rates. In the fiscal year ended September 30, 1999, the Company made
the decision to expand its line of lending products to include consumer and
commercial loans and to re-emphasize its commercial real estate lending program.
The decision to expand its lending products was made to increase the overall
yield on the Company's loan portfolio with shorter-term higher yielding loans.
Generally, all fixed rate one- to four-family mortgage loans with final
maturities of more than fifteen years are sold into the secondary market upon
origination. Depending upon the mortgage rate, fixed rate loans with maturities
of fifteen years or less may be placed into portfolio or sold into the secondary
market. All adjustable rate and all consumer and commercial loans are held in
portfolio.
9
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
2000 and 1999 Comparison
Interest income totaled $11.7 million for the fiscal year ended September 30,
2000, an increase of $2.6 million or 28.2% over the $9.1 million reported for
the fiscal year ended September 30, 1999.
The increase in total interest income was due to an increase in average
interest-earning assets to $161.5 million for the year ended September 30, 2000,
compared to $134.0 million for the year ended September 30, 1999, a 20.5%
increase. In addition, the average yield on the Company's interest-earning
assets increased approximately 43 basis points to 7.22% for the fiscal year
ended September 30, 2000 from 6.79% for the year ended September 30, 1999.
The increase in average interest-earning assets was partially the result of the
Company's decision to continue to increase the size of its wholesale funded
investment program. In addition, the increase in average interest-earning assets
was a result of the continued success of the Company's consumer and commercial
lending program and the additional interest-earning assets acquired in the
merger with Gilmer Savings Bank on June 30, 2000. The increase in the average
yield on interest-earning assets was partially the result of an overall increase
in the general level of interest rates during 1999 and 2000 and the resulting
increase in yields on the Company's adjustable rate mortgage-backed securities
and loans. Also, the additional commercial and consumer loans placed into the
loan portfolio during the fiscal year ended September 30, 2000 and the
additional consumer loans acquired in the Gilmer merger had the effect of
increasing the overall yield on interest-earning assets.
Average loans receivable were $76.9 million for the fiscal year ended Sept 30,
2000, compared to $62.5 million for the year ended September 30, 1999, an
increase of $14.4 million. The average yield on the loan portfolio increased
from 7.70% for the year ended September 30, 1999 to 7.77% for the year ended
September 30, 2000. See - "Financial Condition - Loans" and Note 5 of the
Consolidated Financial Statements for a discussion and presentation of the
change in the loan portfolio during the year ended September 30, 2000. Average
mortgage-backed securities increased to $43.0 million for the year ended
September 30, 2000 from $33.2 million for the year ended September 30, 1999. The
average yield on the mortgage-backed securities portfolio was 7.25% for the
fiscal year ended September 30, 2000, compared to 6.00% for the year ended
September 30, 1999. The increase in average yield was primarily the result of
the increase in the general level of interest rates as rates on the
predominately adjustable rate portfolio increased. The increase in the average
balance in the portfolio was a result of the Company's decision to increase the
size of its wholesale funded investment program during the year.
The Company's ability to continue to increase total interest income will be
dependent on several factors. The general level of interest rates will have an
effect on total interest income. The Company has approximately 30.0% of its
interest earning assets in adjustable rate products. An interest rate decrease
will have the general effect of decreasing total interest income as yields on
interest sensitive assets decline. However, such declines in yields could be
mitigated by periodic limits on the change in rates on such products. An
increase in total interest income will also be dependent upon the Company's
ability to continue to increase the size of its consumer and commercial loan
portfolios. The Company does not anticipate increasing the size of its wholesale
funded investment program during the next fiscal year, primarily due to the fact
that the Company does not anticipate substantially increasing total assets
during the next year. Management does not anticipate decreasing regulatory
10
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
capital levels for the Company's wholly owned subsidiary beyond current levels
through additional growth in total assets. Therefore, the Company will focus its
efforts on changing the mix of interest-earning assets to include additional
consumer and commercial loans. Management anticipates funding such increases in
the consumer and commercial loans through cash flow from maturing investment
securities and cash flow from its mortgage-backed security portfolio. In
addition, increases in total interest income will be dependent upon the
Company's ability to continue to increase its mortgage loan portfolio. The
Company's ability to increase its mortgage loan portfolio will be primarily
dependent upon the level of interest rates. If interest rates decline, the
Company could elect, due to concerns over interest rate risk, to not place lower
yielding loans into its portfolio. The result would be that additional cash flow
would be invested in lower yielding investments and total interest income could
decline. In addition, the Company's ability to increase its mortgage loan
portfolio will be dependent upon meeting loan production targets, which are
affected by the economic environment in which the Company operates.
1999 and 1998 Comparison
Total interest income was $9.1 million for the year ended September 30, 1999, an
increase of $832,000 or 10.1% from the $8.3 million reported for the year ended
September 30, 1998.
The increase in interest income was primarily due to a $17.6 million increase in
average interest earning assets from $116.4 million for the year ended September
30, 1998 to $134.0 million for the year ended September 30, 1999. The increase
in interest income due to the increase in average interest earning assets was
partially offset by a decline in the average yield on interest earning assets
from 7.10% for the year ended September 30, 1998 to 6.79% for the year ended
September 30, 1999.
The increase in average interest earning assets was primarily the result of a
$10.5 million increase in average mortgage-backed securities from $22.7 million
for the year ended September 30, 1998 to $33.2 million for the year ended
September 30, 1999. Interest income from mortgage-backed securities increased
$468,000 to $2.0 million for the year ended September 30, 1999 from $1.5 million
for the year ended September 30, 1998. The average yield on the Company's
mortgage-backed securities portfolio declined to 6.01% for the year ended
September 30, 1999 from 6.73% for the year ended September 30, 1998. The
increase in mortgage-backed securities was a direct result of the Company's
decision to continue to increase the size of its wholesale funding and
investment arbitrage program. The decline in the overall yield on the
mortgage-backed securities portfolio was the result of adjustable rate
securities prepaying during the year. Even though interest rates remained
relatively stable during the year, older securities with higher interest rates
either declined in yield or the underlying loans in the securities prepaid as
borrowers moved into fixed rate lending products.
The increase in average interest earning assets was also partially due to a $4.5
million increase in average investment securities from $32.2 million for the
year ended September 30, 1998 to $36.7 million for the year ended September 30,
1999. In addition, the increase in interest income was partially due to an
increase in the average yield on the Company's investment securities portfolio
11
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
to 6.01% for the year ended September 30, 1999 from 5.93% for the year ended
September 30, 1998. The increase in the size of the investment securities
portfolio resulted as the Company deployed excess liquidity.
An increase in average loans receivable balances from $60.6 million for the year
ended September 30, 1998 to $62.5 million for the year ended September 30, 1999
also contributed to the increase in average interest earning assets. The
increase in average loans receivable was a result of the Company's decision to
continue to place all 15 year and shorter one- to four-family loans into
portfolio. The Company began a program during the year to fund its production of
one- to four-family mortgage loans and its home equity loans with advances from
the Federal Home Loan Bank of Dallas. Even though during the year interest rates
on one- to four-family loans declined to levels that the Company historically
has not placed into portfolio, the ability to match fund the loans with
borrowings at a positive margin allowed the Company's overall loan portfolio to
increase during the year. In addition, the Company began making commercial and
consumer loans during the year, which are all placed into portfolio. The average
yield on the Company's loan portfolio declined to 7.70% for the year ended
September 30, 1999 from 7.88% for the year ended September 30, 1998.
Interest Expense
The Company's interest expense is dependent upon the pricing and volume of its
interest-bearing liabilities, comprised primarily of certificates of deposit and
borrowed funds and, to a lesser extent, savings accounts, NOW accounts and money
market accounts. The level of interest expense depends upon the composition,
pricing and dollar amount of the Company's interest-bearing liabilities,
competition for deposits and the current level of market interest rates.
2000 and 1999 Comparison
Interest expense totaled $8.2 million for the fiscal year ended September 30,
2000, a $2.4 million increase from the $5.9 million reported for the year ended
September 30, 1999. The increase in total interest expense was the result of a
$28.5 million increase in average interest-bearing liabilities from $117.7
million for the fiscal year ended September 30, 1999 to $146.2 million for the
year ended September 30, 2000. In addition, the average cost of interest-bearing
liabilities increased to 5.62% for the 12 months ended September 30, 2000 from
4.98% for the fiscal year ended September 30, 2000.
The increase in average interest-bearing liabilities was the direct result of an
increase in borrowings from the FHLB. Average borrowings increased from $31.1
million for the year ended September 30, 1999 to $58.7 million for the fiscal
year ended September 30, 2000. The increase was due to the Company's decision to
increase the size of its wholesale funded investment program during the fiscal
year ended September 30, 2000. The program, designed to achieve a positive
margin on the difference in the rate paid for borrowings and the yield on the
investments, is funded with short-term advances of similar terms to maturity
from the FHLB. Also, the Company borrowed additional short-term funds from the
FHLB during the year for liquidity to fund loans. See - "Financial Condition -
Deposits and Borrowings" and Notes 11 and 12 to the Consolidated Financial
Statements for a discussion and presentation of the Company's borrowings.
12
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
The Company's ability to decrease total interest expense will be dependent upon
the overall level of interest rates. The Company currently has approximately
$66.3 million in short term borrowings from the FHLB. Short-term interest rates,
such as federal funds and U.S. Treasury Bonds, have the greatest effect on the
rates on such borrowings. An increase in market rates will have the effect of
increasing the Company's total interest expense. A decline in interest rates
will have the opposite effect. Also, the Company's ability to decrease total
interest expense will be impacted by the success of its efforts to increase
checking and savings accounts. Such accounts generally have no interest rate or
a rate lower than longer-term certificates of deposit and borrowings from the
FHLB. An increase in such accounts would allow the Company to be less dependent
upon longer-term certificates of deposit and FHLB borrowings. See - "Financial
Condition - Deposits and Borrowings".
1999 and 1998 Comparison
Total interest expense was $5.9 million for the year ended September 30, 1999,
compared to $5.0 million for the year ended September 30, 1998, an $898,000 or
18.1% increase.
The increase was primarily attributable to a $20.4 million increase in average
interest-bearing liabilities from $97.3 million for the year ended September 30,
1998 to $117.7 million for the year ended September 30, 1999. Partially
offsetting the increase in interest expense that resulted from the increase in
average interest-bearing liabilities was a 12 basis point decline in the
Company's overall cost of interest-bearing liabilities from 5.10% for the year
ended September 30, 1998 to 4.98% for the year ended September 30, 1999.
The increase in average interest-costing liabilities was due to the Company's
decision to continue its wholesale fund investment security program and its
decision to begin funding a portion of its loan portfolio with borrowings from
the Federal Home Loan Bank of Dallas. At September 30, 1999, total borrowings
were $45.1 million, a $30.1 million increase from the $14.9 million at September
30, 1998. Total deposit accounts also increased slightly to $87.5 million at
September 30, 1999 from $86.6 million at September 30, 1998. The decline in the
Company's average cost of funds was partially attributable to the increase in
transaction and savings accounts that resulted from the Company's focus on
commercial and consumer banking and the opening of its new location in Tyler
during the year. Such transaction accounts, which included personal and business
checking accounts, NOW accounts, Money Market accounts and savings accounts
totaled approximately $17.0 million at September 30, 1999, a $5.0 million
increase over the $12.0 million at September 30, 1998.
Net Interest Income
Net interest income is the Company's principal source of earnings, and is
directly affected by the relative level, composition and pricing of interest
sensitive assets and liabilities. These factors are, in turn, affected by
current economic conditions and the overall level of interest rates.
13
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
2000 and 1999 Comparison
Net interest income after provisions for loan losses totaled $3.4 million for
the fiscal year ended September 30, 2000, a $177,000 or 5.5% increase over the
$3.2 million reported for the fiscal year ended September 30, 1999. The
Company's net interest margin on average interest-earning assets was
approximately 2.13% for the year ended September 30, 2000, compared to 2.41% for
the year ended September 30, 1999.
The Company was able to increase net interest income primarily by increasing
total interest-earning assets through its wholesale funded investment program
and through its acquisition of additional interest-earning assets as a result
the Gilmer merger. The assets acquired through the wholesale funded investment
program are funded with short-term borrowings from the FHLB and are at smaller
margins than typical retail funded products. As a result, net interest income
increased during the year, despite a decline in the Company's net interest
margin.
The Company's ability to increase net interest income will be primarily
dependent upon its ability to continue to increase its higher yielding mortgage,
consumer, and commercial loan portfolios and fund such growth with cash flow
from maturing investment and mortgage-backed securities, which are at lower
yields. In addition, the Company's net interest income is dependent upon the
difference in short term and longer term interest rates. A continued period of
higher short term interest rates relative to longer term interest rates, as
currently exists, will make it more difficult for the Company to increase net
interest income.
1999 and 1998 Comparison
Net interest income after provision for loan losses totaled $3.2 million for the
year ended September 30, 1999, a $66,000 or 2.0% decline from the $3.3 million
reported for the year ended September 30, 1998. During the year ended September
30, 1999, the Company's average net interest spread was approximately 1.81%,
compared to 2.00% for the year ended September 30, 1998. The Company's net
interest margin on average interest earning assets was approximately 2.41% for
the year ended September 30, 1999, compared to 2.83% for the year ended
September 30, 1998.
The continued decline in the Company's net interest margin was one of the
primary reasons for the Company's decision, in 1999, to expand its lending
operations to include commercial and consumer loans. To the extent the Company
can replace lower yielding assets such as investment and mortgage-backed
securities with higher yielding commercial and consumer loans and minimize
losses on the riskier loan portfolio, it expects an improvement in its net
interest margin.
14
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Provision for Loan Losses
The Company's provisions for loan losses are 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.
2000 and 1999 Comparison
The Company made provisions for loan losses of $28,000 during the fiscal year
ended September 30, 2000, compared to none for the year ended September 30,
1999. In conjunction with the Gilmer merger, the Company established additional
reserves for loan losses, reflecting the Company' review of the quality of the
Gilmer loan portfolio and its level of reserves. At September 30, 2000, the
Company had approximately $1.1 million in established reserves for loan losses,
compared to $270,000 at September 30, 1999. The increase was primarily due to
the reserves acquired in the Gilmer merger. As a result, and despite an increase
in loans receivable outstanding from $67.2 million at September 30, 1999 to
$102.1 million at September 30, 2000, the Company only made $28,000 in
provisions for loan losses during the fiscal year ended September 30, 2000.
At September 30, 2000, the Company had non-performing assets of approximately
$1.0 million. Non-performing assets to total assets were .52% at September 30,
2000, compared to .50% at September 30, 1999. Non-performing loans to total
loans receivable totaled 0.94% at September 30, 2000, compared to 1.14% at
September 30, 1999. The Company's allowance for loan losses as a percentage of
loans receivable equaled 1.04% at September 30, 2000, compared to .40% at
September 30, 1999. The allowance for loan losses as a percentage of
non-performing loans was 110.33% at September 30, 2000, compared to 35.2% at
September 30, 1999. See - "Asset Quality".
1999 and 1998 Comparison
The Company made no provision for loan losses during the year ended September
30, 1999 or the year ended September 30, 1998. The quality of the Company's loan
portfolio contributed to the decision to make no additional provisions for loan
losses during the years ended September 30, 1999 and September 30, 1998. In
addition, a $39,000 recovery on a previously recorded deficiency judgement was
added back to the reserve for loan losses in 1999.
Non-performing assets to total assets were .50% at September 30, 1999, compared
to .18% at September 30, 1998. Non-performing loans to total loans receivable
totaled 1.14% at September 30, 1999, compared to .37% at September 30, 1998. The
Company's allowance for loan losses as a percentage of loans receivable equaled
.40% at September 30, 1999, compared to .38% at September 30, 1998 while
allowance for loan losses as a percentage of non-performing loans was 35.16% at
September 30, 1999, compared to 102.19% at September 30, 1998.
15
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Noninterest Income
Noninterest 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.
2000 and 1999 Comparison
Noninterest income totaled $361,000 for the fiscal year ended September 30,
2000, an increase of $3,000 from the $358,000 reported for the year ended
September 30, 1999. Customer service fees increased to $108,000 for the fiscal
year ended September 30, 2000, compared to $33,000 during the year ended
September 30, 1999, a $75,000 increase. The increase was a direct result of the
Company's decision to begin offering additional consumer and commercial checking
account products in 1999. The Company began offering a "free" checking product
and an "overdraft privilege" program during the fiscal year ended September 30,
2000. Both products are designed to attract additional transaction accounts and
to increase customer service fee income. In addition, the Company obtained
additional transaction account balances in the Gilmer merger. Other operating
income increased by $57,000 to $97,000 for the fiscal year ended September 30,
2000, compared to $40,000 for the year ended September 30, 1999. The increase
was primarily the result of an additional $35,000 in commissions from the sale
of credit life insurance in conjunction with the Company's consumer lending
operations and a $14,000 increase in late charges on loans. Offsetting the
increases in customer service fees and other operating income was a $105,000
decrease in net gains on sales of loans and a $32,000 decrease in loan
origination and commitment fees. Both of the decreases were a direct result of a
decline in the total number of mortgage related loans made by the Company during
the fiscal year ended September 30, 2000, compared to the year ended September
30, 1999. During the year ended September 30, 2000, the Company originated
approximately 239 loans, compared to 314 during the year ended September 30,
1999. The decline in mortgage loan production was directly related to additional
competition for such products in the Company's market and, to a lesser degree,
increases in interest rates during the fiscal year ended September 30, 2000,
compared to the year ended September 30, 1999. In addition, of the 239 loans
originated during the fiscal year ended September 30, 2000, the Company retained
a higher percentage of such loans in portfolio as compared to the prior year,
primarily as a result of the borrowers preference for loans that the Company
retained in the loan portfolio. The result was that the Company recorded fewer
gains on originated mortgage servicing rights.
1999 and 1998 Comparison
Other operating income was $358,000 for the year ended September 30, 1999, a
decrease of $3,000 from the $361,000 for the year ended September 30, 1998. The
decrease in other operating income was primarily the result of a $14,000
decrease in loan servicing fees to $57,000 for the year ended September 30,
1999, compared to $70,000 for the year ended September 30, 1998. Net gains on
sales of loans also declined by $7,000 to $146,000 for the year ended September
16
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
30, 1999 from $153,000 for the year ended September 30, 1998. The decline in
loan servicing fees was primarily the result of a continued decrease in the
Company's overall loan servicing margins as older loans with higher servicing
margins continued to pay off even though total loans serviced for others
increased from $42.6 million at September 30, 1998 to $43.8 million at September
30, 1999. In addition, net gains on sales of loans and loan servicing fees
declined as the result of fewer loans being sold into the secondary market as
the Company continued to hold the majority of its loans in portfolio.
Offsetting a portion of the declines in gains on sales of loans and loan
servicing fees, was a $9,000 increase in loan origination and commitment fees
and a $9,000 increase in other non-interest income. The increase in loan
origination and commitment fees was the result of the continued volume of one-
to four-family loans made by the Company during the year.
Noninterest Expenses
Noninterest expenses are comprised of compensation and benefits, occupancy and
equipment and general and administrative expense, together with FDIC insurance
premiums.
2000 and 1999 Comparison
Noninterest expenses totaled $3.3 million for the fiscal year ended September
30, 2000, a $134,000 increase from the $3.1 million reported for the fiscal year
ended September 30, 1999. Compensation and benefits increased by $77,000 to $2.1
million for the year ended September 30, 2000. The increase in compensation and
benefits was the result of a full year of expenses, in the current fiscal year,
associated with the opening of the Company's new branch office facility. The new
facility was opened in April 1999 and the year ended September 30, 1999
reflected only a partial year of increased compensation and benefits expenses
associated with the new office. In addition, compensation and benefits expense
associated with the additional personnel acquired in the Gilmer merger on June
30, 2000 accounted for a portion of the increase. The increase in occupancy and
equipment expenses is also a result of the addition of the new branch office
facility opened in 1999 and the additional expenses associated with one quarter
of operations at the Gilmer office. Amortization of goodwill from the Gilmer
merger totaled $41,000 for the year ended September 30, 2000. The amount
reflects three months of goodwill amortization from the date of the merger on
June 30, 2000.
Total non-interest expense as a percentage of average total assets was 1.95% for
the year ended September 30, 2000, compared to 2.26% for the fiscal year ended
September 30, 1999. The Company's efficiency ratio was approximately 87.2% for
the year ended September 30, 2000, compared to 91.2% for the year ended
September 30, 1999.
1999 and 1998 Comparison
Operating expenses increased substantially for the fiscal year ended September
30, 1999 compared to 1998. The increase was a direct result of the additional
expenses associated with the opening of the Company's new office and the
Company's expansion of its lines of business to include commercial and consumer
17
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
lending and other banking products. In April of 1999, the Company opened a new
full service banking office in Tyler designed primarily to attract commercial
and consumer deposits and focus on commercial and consumer lending. The office
is staffed with 8 full time and 2 part time employees. For the fiscal year ended
September 30, 1999, the Company estimates that non-interest expense, directly
associated with the new office location, totaled approximately $312,000. Such
expenses accounted for approximately 84% of the increase in the Company's
non-interest expense for the year. The Company estimates that operating expenses
associated with the new location will total $400,000 on an annual basis.
Total non-interest expense was $3.1 million for the year ended September 30,
1999, a $373,000 or 13.5% increase from the $2.8 million reported for the year
ended September 30, 1998. The increase in total non-interest expense was
primarily the result of a $194,000 increase in compensation and benefits
expense, a $110,000 increase in occupancy and equipment expenses and a $82,000
increase in miscellaneous operating expenses.
The increase in compensation and benefits expense was primarily the result of
additional employees associated with the new office location and an increase in
funding costs on the Company's defined benefit pension plan. Occupancy and
equipment expense totaled $302,000 for the year ended September 30, 1999,
compared to $192,000 for the year ended September 30, 1998. The increase was
primarily due to additional expense associated with the new office location. The
increase in other operating expenses was primarily the result of additional
advertising expense made in conjunction with the new office.
Total non-interest expense as a percentage of average total assets was 2.26% for
the year ended September 30, 1999, compared to 2.31% for the year ended
September 30, 1998. The Company's efficiency ratio was 91.21% for the year ended
September 30, 1999, compared to 78.96% for the year ended September 30, 1998.
Income Tax Expense
Income tax expense is comprised of federal income tax. The Company does not
incur any state or local income tax liability.
2000 and 1999 Comparison
Income tax expense totaled $198,000 or approximately 40.1% of pre-tax income for
the fiscal year ended September 30, 2000, compared to $151,000 or 33.6% of
pre-tax income for the year ended September 30, 1999. The increase in income tax
expense was a direct result of the additional pre-tax income for the current
fiscal year. The increase in the effective tax rate was primarily due to the
amortization of the goodwill from the Gilmer merger. Such expense is not
deductible for federal income tax expenses and has the effect of increasing the
effective tax rate.
18
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
1999 and 1998 Comparison
Income tax expense totaled $151,000 for the year ended September 30, 1999 or
33.6% of pre-tax income, compared to $329,000 or 37.0% of pre-tax income for the
year ended September 30, 1998. The decrease in income tax expense was
attributable to the reduction in pre-tax income from $890,000 for the year ended
September 30, 1998 to $449,000 for the year ended September 30, 1999.
Financial Condition
Total assets were reported as $200.2 million at September 30, 2000, an increase
of $46.5 million over the $153.7 million reported at September 30, 1999. The
increase in total assets was primarily the result of the additional assets
acquired in the Gilmer merger on June 30, 2000. In addition, the Company
increased total assets through the expansion of its wholesale funded investment
program during the fiscal year ended September 30, 2000.
Cash and cash equivalents, interest-earning time deposits and federal funds sold
totaled $3.7 million at September 30, 2000, compared to $4.5 million at
September 30, 1999. During the year, the Company elected to redirect cash flow
from maturing time deposits into its lending operations.
Investment securities available-for-sale totaled $7.9 million at September 30,
2000, compared to $5.9 million at September 30, 1999. The increase was the
result of additional bonds acquired in the Gilmer merger and additional bonds
purchased by the Company during the year. At September 30, 2000, the portfolio
was comprised of approximately $7.3 million in fixed interest rate corporate
debt securities with maturity dates ranging from one to nine years. The average
yield on the portfolio is approximately 6.4%. The remaining $585,000 was
comprised of a group of municipal bonds acquired in the Gilmer merger. The
bonds, primarily issued by Upsher County where the Company's Gilmer office is
located, had remaining terms of no longer than six years. The average
tax-equivalent yield on the municipal bond portfolio was approximately 8.6%. The
size of this portfolio will be dependent upon the Company's ability to invest
excess cash flow into its lending operations. Excess cash flow not invested into
the loan portfolios could be redirected to this portfolio.
Investment securities held-to-maturity totaled $26.0 million at September 30,
2000, compared to $30.5 million at September 30, 1999. The portfolio is
primarily composed of debt issued by governmental agencies such as the Federal
Home Loan Bank System, Federal National Mortgage Association, and Federal Home
Loan Mortgage Corporation. The size of this portfolio will also be dependent
upon the Company to otherwise invest excess cash flow into the loan portfolio.
Mortgage-backed securities available-for-sale were reported as $44.0 million at
September 30, 2000, compared to $32.9 million at September 30, 1999. The
increase in this portfolio was primarily the result of securities acquired in
the Gilmer merger and, to a lesser extent, the Company's decision to increase
its program of borrowing wholesale funds from the FHLB and investing the funds
19
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
in adjustable rate securities. The securities have interest rate adjustment
frequencies of either monthly, quarterly, semi-annually or annually. The
interest rates earned on the securities are determined by an index and generally
have a margin above the index of 100 to 225 basis points. The index is typically
based upon market interest rates such as the one-year U.S. Treasury rate or the
one, three, or six-month LIBOR. The FHLB advances are generally for terms of 30
days and interest rates, which are established by the FHLB, are based on
short-term market interest rates such as the one-month U.S. Treasury bill or the
one-month LIBOR. The Company does not anticipate a significant increase in the
size of the program during the fiscal year ending September 30, 2001.
Mortgage-backed securities held-to-maturity, which are primarily adjustable rate
securities, continued to decline throughout the year as the Company elected to
not invest additional assets in these types of securities.
Loans receivable totaled $102.1 million at September 30, 2000, a $34.8 million
or 51.8% increase over the $67.3 million reported at September 30, 1999. The
increase in loans receivable was primarily the result of the loans acquired in
the Gilmer merger and the Company's decision to continue to place into portfolio
most of its one- to four-family mortgage loans and the additional consumer and
commercial loans made during the year.
One- to four-family loans totaled $72.4 million at September 30, 2000, a $16.5
million increase compared to $55.9 million at September 30, 1999. The increase
was primarily attributable to the additional loans acquired by the Company in
the Gilmer merger and the Company's decision to continue to place all one- to
four-family real estate loans with a final maturity of 15 years or less into the
loan portfolio. During the fiscal year, 15-year loans were the predominant
choice of borrowers in the Company's market. The Company continued to place all
adjustable rate one- to four-family loans into portfolio as well. One- to
four-family loans equaled approximately 68.5% of total loans receivable at
September 30, 2000. The Company's ability to continue to increase the one- to
four-family loan portfolio will primarily be determined by the overall level of
interest rates over the next fiscal year. At current interest rate levels, the
Company will continue to place all fixed interest rate one- to four-family loans
with a final maturity of 15 years or less into its loan portfolio. A decrease in
mortgage rates could cause the Company to elect to not hold such loans in
portfolio. The Company could conclude that the risk of placing loans with lower
interest rates would not warrant the interest rate risk associated with so
doing. In addition, in a declining interest rate environment, borrowers may
select 15 or 30 year fixed interest rate loans rather than adjustable interest
rate products. The result could be that the one- to four-family loan portfolio
balances decline as cash flow from existing loans is redirected into other
lending or investment products.
Home equity and improvement loans totaled $7.0 million at September 30, 2000, an
increase of $3.2 million over the $3.8 million reported at September 30, 1999.
The portfolio comprised approximately 6.7% of the total loans receivable
portfolio at September 30, 2000. Home equity and improvement loans made by the
Company have fixed interest rates and generally have a final maturity of less
than 15 years. In addition, interest rates on such loans are at levels higher
than comparable one- to four-family loans. The Company will continue to promote
home equity and improvement loans and place such loans into the loan portfolio.
20
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Nonresidential real estate loans equaled $9.6 million at September 30, 2000, a
$7.4 million increase over the $2.2 million reported at September 30, 1999. The
increase was a direct result of the Company's decision in 1999 to focus its
efforts on originating such loans. In conjunction with the opening of the new
branch office location in south Tyler in April 1999, the Company made the
decision to focus on originating commercial real estate, commercial and consumer
loans. The decision was part of the Company's overall strategy to introduce a
full line of consumer and commercial banking products in all of its office
locations. The Company intends to continue focusing its efforts on originating
nonresidential real estate loans. The loans are generally at higher yields than
traditional one- to four-family real estate loans. Most of the loans have fixed
interest rates and usually have a final maturity of 15 years or less.
Consumer and commercial loans totaled $12.9 million or 12.2% of the total loans
receivable portfolio at September 30, 2000, compared to $5.1 million at
September 30, 1999. The $7.8 million increase was also the result of the
Company's strategy, to introduce a full line of consumer and commercial banking
products in addition to the loans acquired in the Gilmer merger. Consumer loans
in the portfolio generally have fixed interest rates and a final maturity of
less than six years. The loans are primarily secured by consumer goods and have
the highest interest rates of any of the loans that the Company originates.
Generally, commercial loans are secured with inventory and receivables and are
predominantly adjustable rate with the interest rate linked to an index such as
a national prime lending rate. The Company expects to continue originating
consumer and commercial loans and placing such loans into the loan portfolio.
Federal Home Loan Bank stock increased to $4.1 million at September 30, 2000
from $2.3 million at September 30, 1999. The Company's investment in such stock
is determined by the amount of borrowings from the FHLB. Dividends on the stock
are usually at least as favorable and generally more favorable than comparable
short term investments. The increase in the balance was due to the additional
borrowings of the Company during the year and stock acquired in the Gilmer
merger.
Goodwill net of amortization from the Gilmer merger was $2.3 million at
September 30, 2000. The balance will be amortized on a straight-line basis over
15 years. The amortization is not a deductible expense for federal income tax
purposes.
Total deposits were $101.6 million at September 30, 2000, a $14.1 million
increase over the $87.5 million reported at September 30, 1999. The increase in
total deposits was primarily the result of additional deposit accounts acquired
in the Gilmer merger. However, the increase in deposits from the Gilmer merger
was offset by a decline in certificate of deposit account balances during the
fiscal year. Competition for certificate of deposit accounts and the Company's
decision to not pay the highest rates in the market accounted for the decrease
in certificate of deposit balances, other than those acquired in the Gilmer
merger. The Company was able to continue to increase the amount of transaction
type accounts during the fiscal year ended September 30, 2000. At September 30,
2000, balances on personal and business checking accounts, savings accounts, and
money market checking accounts totaled approximately $22.3 million, compared to
$17.0 million reported at September 30, 1999.
21
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
At September 30, 2000, advances from the FHLB totaled $79.0 million, compared to
$45.1 million at September 30, 1999. The increase was the result of the
Company's decision to continue its wholesale funded investment program with
short term FHLB advances, the need for additional liquidity to fund loans and
deposit withdrawals during the year, and from advances acquired in the Gilmer
merger.
Loan Portfolio Analysis
<TABLE>
<CAPTION>
September 300,
-------------------------------------------------------------------------------------------
2000 1999 1998
Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residences $ 72,414 68.51% $ 55,902 78.33% $ 52,298 83.88%
Other residential 960 .91 460 0.64 551 0.97
Home equity and improvement 7,032 6.65 3,763 5.27 2,971 0.00
Nonresidential 9,580 9.06 2,184 3.06 4,106 6.83
Construction loans 2,860 2.71 3,988 5.59 2,256 6.11
---------- ----------- --------- ---------- --------- ---------
Total real estate loans 92,846 87.84 66,297 92.89 62,182 97.79
---------- ----------- --------- ---------- --------- ---------
Other loans:
Consumer Loans 7,567 7.16 1,436 2.01 403 0.64
Commercial Loans 5,284 5.00 3,636 5.10 168 0.27
---------- ----------- --------- ---------- --------- ---------
Total other loans 12,851 12.16 5,072 7.11 571 0.91
---------- ----------- --------- ---------- --------- ---------
Total loans 105,697 100.00% 71,369 100.00% 62,753 100.00%
====== ====== ======
Less:
Loans in process 2,539 3,818 1,373
Deferred loan fees 37 31 28
Allowance for loan losses 1,057 270 233
---------- --------- ---------
Total loans receivable, net $ 102,064 $ 67,250 $ 61,119
========== ========= =========
</TABLE>
Interest Rate Sensitivity
Interest rate sensitivity is a measure of the extent to which the Company's net
interest income and net portfolio value may be affected by future changes in
market interest rates. Numerous assumptions, primarily future changes in
interest rates, changes in cash flows on assets and liabilities and future
product preferences of customers, which are affected by assumptions about future
pricing of products, are required to arrive at the approximation of the net
interest income impact.
The Company also monitors interest rate risk by measuring the difference between
rate sensitive assets and rate sensitive liabilities that mature or reprice
within a given time period, adjusted for the effects of estimated prepayments
and early withdrawals on interest sensitive assets and liabilities.
22
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Certain deficiencies are inherent in the assumptions and methods used to
calculate the Company's level of interest rate sensitivity. For example, changes
in the overall levels of interest rates could affect prepayment and early
withdrawal assumptions used in the calculations. Also, interest rates on certain
assets and liabilities may change in advance of or lag behind changes in market
rates.
In an attempt to ensure that interest rate risk is maintained within limits
established by the Board of Directors, management presently monitors and
evaluates the potential impact of interest rate changes upon the market value of
the Association's equity and the level of its net interest income on a quarterly
basis. Management conducts this analysis with an asset and liability management
simulation model using estimated prepayment rates for various classes of
interest sensitive assets and estimated decay rates for interest-bearing NOW
accounts, money market accounts and savings accounts. The assumptions used may
not be indicative of future withdrawals of deposits or prepayments on loans and
mortgage-backed securities.
The following table presents First Federal's analysis of its net portfolio value
and net interest income under various instantaneous changes in interest rates at
September 30, 2000.
<TABLE>
<CAPTION>
Net Portfolio Value Net Interest Income
------------------------------------------------ -----------------------------------------------
Change In
Interest Rates Estimated Amount Of Percent Net Interest Amount Of Percent Of
(basis points) NPV Change Of Change Income Change Change
----------------- ------------- ------------- -------------- ------------- ------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
+300 4,099 (9,497) (69.9)% 3,355 (367) (9.9)%
+200 7,373 (6,223) (45.8) 3,495 (227) (6.1)
+100 10,575 (3,021) (22.2) 3,622 (100) (2.7)
0 13,596 3,722
-100 15,974 2,378 17.5 3,733 11 0.3
-200 17,385 3,789 27.9 3,778 56 1.5
-300 19,709 6,113 45.0 4,065 343 9.2
</TABLE>
The table indicates that First Federal's estimated net portfolio value is
approximately $13.6 million or 6.9% of the market value of assets at September
30, 2000. The estimated net portfolio value is approximately $1.7 million less
than First Federal's capital of $15.3 million, which is approximately 7.7% of
total assets. Under a scenario of a 200 basis point immediate and permanent
increase in interest rates, First Federal's estimated net portfolio value would
decline by 45.8% to 7.4 million and would still be approximately 3.9% of market
value of assets.
The table also shows that First Federal's net interest income, in an unchanged
rate scenario, would approximate $3.7 million and would decline by $227,000 or
6.1%, under an increase in the level of interest rates up to 200 basis points.
23
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Asset Quality
At September 30, 2000 non-performing assets were $1.0 million or .52% of total
assets, compared to $768,000 or .50% of total assets at September 30, 1999. At
September 30, 2000, non-performing assets were comprised of non-accruing one- to
four family loans, consumer and other loans delinquent more than 90 days and
still accruing, foreclosed one- to four family, and foreclosed consumer and
other loans.
The Company's allowance for loan losses totaled $1.1 million at September 30,
2000, an increase of $787,000 from $270,000 at September 30, 1999. At September
30, 2000, the Company's allowance for loan losses was 1.04% of loans receivable,
compared to .40% at September 30, 1999, and was 110.33% of non-performing loans
at September 30, 2000, compared to 35.16% at September 30, 1999. The increase in
the allowance for loan losses was primarily due to an additional $789,000 in
allowance acquired in the Gilmer merger.
The following table presents the amounts and categories of non-performing assets
of the Company:
<TABLE>
<CAPTION>
September 30,
------------ ------------ ------------ ------------
2000 1999 1998 1997
------------ ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family $ 712 $ 768 $ 187 $ 306
Consumer and other loans 0 0 0 4
----------- ----------- ---------- -----------
Total 712 768 187 310
----------- ----------- ---------- -----------
Accruing loans delinquent more than 90 days:
One- to four-family 0 0 6 0
Consumer and other loans 246 0 0 0
----------- ----------- ---------- -----------
Total 246 0 6 0
----------- ----------- ---------- -----------
Foreclosed assets:
One- to four-family 43 0 35 0
Consumer and other loans 43 0 0 0
----------- ----------- ---------- -----------
Total 86 0 35 0
----------- ----------- ---------- -----------
Total non-performing assets $ 1,044 $ 768 $ 228 $ 310
=========== =========== ========== ===========
Total as a percentage of total assets 0.52% 0.50% 0.18% 0.27%
=========== =========== ========== ===========
</TABLE>
24
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
The following table sets forth an analysis of the Company's allowance for loan
losses:
<TABLE>
<CAPTION>
Year Ended September 30,
-------------- ------------- ------------- ------------
2000 1999 1998 1997
-------------- ------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period $ 270 $ 233 $ 273 $ 289
Charge-offs:
One- to four-family 1 (2) (40) (26)
Other loans 39 0 0 (1)
------------- ----------- ------------ -------------
Total charge-offs 40 (2) (40) (27)
------------- ----------- ------------ -------------
Recoveries:
One- to four-family 10 0 0 6
Other loans 0 39 0 0
------------- ----------- ------------ -------------
Total recoveries 10 39 0 6
------------- ----------- ------------ -------------
Net (charge-offs)/recoveries 30 37 (40) (21)
Additions charged to income 28 0 0 5
Allowance acquired 789 0 0 0
------------- ----------- ------------ -------------
Balance at end of period $ 1,057 $ 270 $ 233 $ 273
============= =========== ============ =============
Ratio of net charge-offs/recoveries during the period to
Average loans outstanding during the period 0.04% 0.06% (0.07)% (0.04)%
============= =========== ============ =============
Ratio of net charge-offs/recoveries during the period to
Average non-performing assets 3.31% 7.43% (14.87)% (5.53)%
============= =========== ============ =============
</TABLE>
Liquidity and Capital Position
The Company's principal sources of funds are deposits from customers, advances
from the FHLB, amortization and prepayments of loan principal (including
mortgage-backed securities), maturities of securities, sales of loans and
operations.
The Company uses its liquidity and capital resources principally to meet ongoing
commitments to fund maturing certificates of deposit and loan commitments,
maintain liquidity and pay operating expenses. At September 30, 2000, the
Company had outstanding commitments to extend credit on $4.6 million on mortgage
loans and $453,000 on consumer and other loans.
Cash and cash equivalents totaled $2.2 million at September 30, 2000, compared
to $2.0 million at September 30, 1999. The primary use of funds during the year
was to fund loan originations, purchase securities, and purchase treasury stock.
The primary source of funds during the year was from maturing investment
25
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
securities and payments on mortgage-backed securities and loans and borrowings
from the FHLB. Management believes that it has adequate resources to fund all of
its current commitments.
During the fiscal year ended September 30, 2000, the Company repurchased 132,100
shares of stock at an average price of $14.25 per share. At September 30, 2000,
the Company owned 722,172 shares of treasury stock at an average price of $12.28
per share. The Company ended the year with 1,162,320 shares outstanding. The
closing stock price on that date was $8.75 per share. The high and low prices
for the year were $14.50 and $7.00, respectively.
The Company continued its current dividend policy by declaring and paying four
quarterly cash dividends of $.05 per share for a total of $239,069 during the
year. Based on the September 30, 2000 closing stock price of $8.75 per share,
the annualized dividend amount of $.20 per share would equal an annual dividend
rate of 2.3%.
Total stockholders' equity equaled $16.2 million at September 30, 2000, a
decrease of $2.2 million from the $18.4 million reported at September 30, 1999.
As of September 30, 2000, the Company's reported book value per share, using a
total stockholders' equity of $16.2 million (net of unallocated ESOP and RRP
shares) and 1,162,320 outstanding shares of common stock (the total outstanding
shares including unallocated ESOP and RRP shares), equaled $13.95 per share.
Tangible book value per share was $11.95 per share at September 30, 2000.
At September 30, 2000, First Federal's actual and required capital amounts under
each of the requirements were as follows:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
------------------------- ------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital
(to risk-weighted assets) $ 14,619 16.2% $ 7,216 8.0% $ 9,020 10.0%
Tier 1 capital
(to risk-weighted assets) $ 13,562 15.0% $ 3,608 4.0% $ 5,412 6.0%
Tier 1 capital
(to adjusted total assets) $ 13,562 6.8% $ 7,955 4.0% $ 9,944 5.0%
Tangible capital
(to adjusted total assets) $ 13,562 6.8% $ 2,983 1.5% $ 2,983 1.5%
</TABLE>
At September 30, 2000, First Federal met all of the requirements to be
considered a "well capitalized" institution under the Federal Deposit Insurance
Corporation Improvement Act.
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.
26
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Most of the Company's assets and liabilities are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or at the same magnitude as the prices of goods and
services.
Market Price of Common Stock
At September 30, 2000, the common stock of East Texas Financial Services, Inc.
traded on the OTC Bulletin Board under the symbol "ETFS". On such date, the
Company had 1,162,320 shares outstanding and approximately 256 stockholders of
record.
The following table sets forth the cash dividends paid per share and the high,
low and closing prices for the fiscal periods indicated:
High Low Close Dividends
Fiscal 2000
First Quarter $ 14.50 $ 11.75 $ 12.00 $ 0.05
Second Quarter $ 9.62 $ 7.00 $ 7.25 $ 0.05
Third Quarter $ 8.52 $ 7.25 $ 8.52 $ 0.05
Fourth Quarter $ 9.50 $ 8.25 $ 8.75 $ 0.05
High Low Close Dividends
Fiscal 1999
First Quarter $ 10.45 $ 8.12 $ 9.88 $ 0.05
Second Quarter $ 12.13 $ 8.38 $ 11.00 $ 0.05
Third Quarter $ 14.13 $ 10.13 $ 14.13 $ 0.05
Fourth Quarter $ 14.63 $ 12.50 $ 14.00 $ 0.05
27
<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, 2000
and 1999, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years ended September 30, 2000.
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, 2000 and 1999,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended September 30, 2000, in
conformity with generally accepted accounting principles.
/s/ Bryant & Welborn, L.L.P.
----------------------------
Bryant & Welborn, L.L.P.
Tyler, Texas
December 8, 2000
28
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Financial Condition
September 30, 2000 and 1999
<TABLE>
<CAPTION>
Assets 2000 1999
------------- -------------
<S> <C> <C>
Cash and due from banks $ 1,661,435 $ 1,019,937
Interest-bearing deposits due from banks 543,288 974,627
------------ ------------
Total cash and cash equivalents 2,204,723 1,994,564
Interest-earning time deposits 1,089,000 2,461,617
Federal funds sold 364,822 0
Securities available-for-sale 7,916,597 5,918,750
Securities held-to-maturity (fair value of $25,428,105 in 2000
and $29,948,866 in 1999) 25,970,113 30,481,413
Mortgage-backed securities available-for-sale 44,012,663 32,893,809
Mortgage-backed securities held-to-maturity (fair value
of $4,349,164 in 2000 and $5,949,914 in 1999) 4,279,132 5,806,975
Loans, net of allowance for loan losses of $1,057,374 in 2000
and $270,039 in 1999 102,064,137 67,250,334
Accrued interest receivable 1,548,840 1,167,245
Federal Home Loan Bank stock, at cost 4,115,000 2,283,000
Premises and equipment, net 2,744,278 2,607,213
Foreclosed assets, net 86,465 0
Goodwill, net 2,313,491 0
Deferred tax asset 255,233 0
Mortgage servicing rights, net 258,682 266,010
Other assets 986,482 593,991
------------ ------------
Total assets $200,209,658 $153,724,921
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Noninterest-bearing $ 2,644,220 $ 2,021,914
Interest-bearing 98,975,563 85,517,925
------------ ------------
Total deposits 101,619,783 87,539,839
Advances from Federal Home Loan Bank 78,959,065 45,057,877
Advances from borrowers for taxes and insurance 1,478,438 823,755
Federal income taxes
Current 0 0
Deferred 0 108,184
Accrued expenses and other liabilities 1,943,399 1,775,938
------------ ------------
Total liabilities 184,000,685 135,305,593
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 500,000 shares authorized,
none outstanding
Common stock, $0.01 par value, 5,500,000 shares authorized,
1,884,492 shares issued and 1,162,320 outstanding 18,845 18,845
Additional paid-in capital 12,444,372 12,397,167
Deferred compensation - RRP shares 0 (96,985)
Unearned employee stock ownership plan shares (346,020) (442,059)
Retained earnings (substantially restricted) 13,732,109 13,675,391
Accumulated other comprehensive loss (773,051) (148,174)
Treasury stock, at cost, 722,172 shares at September 30, 2000,
and 590,072 shares at September 30, 1999 (8,867,282) (6,984,857)
---------------- ----------------
Total stockholders' equity 16,208,973 18,419,328
---------------- ----------------
Total liabilities and stockholders' equity $ 200,209,658 $ 153,724,921
================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended September 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
Interest and dividend income
Loans receivable: $ 5,427,273 $4,644,373 $4,665,915
First mortgage loans Consumer and other loans 553,072 165,845 104,721
Securities available-for-sale 867,492 151,550 -0-
Securities held-to-maturity 1,391,122 1,910,894 1,687,024
Mortgage-backed securities available-for-sale 2,573,225 1,460,232 473,084
Mortgage-backed securities held-to-maturity 542,105 534,255 1,053,114
Deposits with banks 65,918 141,966 226,256
Federal Home Loan Bank dividends 241,416 86,385 53,616
----------- ---------- ----------
Total interest and dividend income 11,661,623 9,095,500 8,263,730
----------- ---------- ----------
Interest expense
Deposits 4,415,060 4,237,906 4,425,979
Advances from Federal Home Loan Bank 3,810,799 1,626,225 540,094
----------- ---------- ----------
Total interest expense 8,225,859 5,864,131 4,966,073
----------- ---------- ----------
Net interest income 3,435,764 3,231,369 3,297,657
Provisions for loan losses 27,854 0 0
----------- ---------- ----------
Net interest income after provision
for loan losses 3,407,910 3,231,369 3,297,657
----------- ---------- ----------
Noninterest income
Customer service fee 108,306 33,044 21,773
Net gain on sale of loans 41,122 146,113 152,603
Loan origination and commitment fees 50,868 82,607 74,086
Loan servicing fees 63,099 56,622 70,417
Other 97,204 39,556 41,762
----------- ---------- ----------
Total noninterest income 360,599 357,942 360,641
----------- ---------- ----------
Noninterest expense
Compensation and benefits 2,114,459 2,037,691 1,843,610
Occupancy and equipment 385,762 301,821 191,671
SAIF deposit insurance premium 29,361 51,916 56,471
Loss on foreclosed assets 3,009 4,075 12,911
Amortization of goodwill 41,045 -0- -0-
Other 700,976 745,193 663,416
----------- ---------- ----------
Total noninterest expense 3,274,612 3,140,696 2,768,079
----------- ---------- ----------
Income before provision for income taxes 493,897 448,615 890,219
Income tax expense 198,110 150,625 329,273
----------- ---------- ----------
Net income $ 295,787 $ 297,990 $ 560,946
=========== ========== ==========
Basic earnings per common share $ .26 $ .23 $ .39
=========== ========== ==========
Diluted earnings per common share $ .26 $ .22 $ .38
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended September 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
Deferred
Compensation
Additional Recognition
Common Paid-in Retained Treasury & Retention
Stock Capital Earnings Stock Plan
----------- ------------- -------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1997 $ 12,564 $ 12,196,879 $ 13,365,792 $(3,731,017) $ (329,748)
Common stock split effected in
the form of a dividend 6,281 (6,281)
Comprehensive income:
Net income 560,946
Net change in unrealized gain
(loss) on mortgage-backed
securities available-for-sale net
of deferred taxes of $41,462
Total comprehensive income
Deferred compensation
amortization 116,382
Release of employee stock
ownership plan shares
Appreciation in employee stock
ownership plan shares released 122,745
Purchase of treasury stock
at cost (76,973 shares) (1,080,369)
Exercise of stock options (1,568
shares) (2,352) 17,123
Cash dividends of $0.20 per share (256,713)
----------- ------------- -------------- ----------- -----------
Balance at September 30, 1998 18,845 12,319,624 13,661,392 (4,794,263) (213,366)
Comprehensive income:
Net income 297,990
Net change in unrealized gain
(loss) on mortgage-backed
and other securities
available-for- sale net
of deferred taxes of $42,861
Total comprehensive income
Deferred compensation
amortization 116,381
Release of employee stock
ownership plan shares
Appreciation in employee stock
ownership plan shares released 77,543
Purchase of treasury stock
at cost (171,203 shares) (2,207,706)
Exercise of stock options (1,567
shares) (2,352) 17,112
Cash dividends of $0.20 per share (281,639)
----------- ------------- -------------- ----------- -----------
Balance at September 30, 1999 18,845 12,397,167 13,675,391 (6,984,857) (96,985)
</TABLE>
<TABLE>
<CAPTION>
Net
Unearned
Employee Other
Stock Accumulated
Ownership Comprehensive
Plan Shares Income Total
------------- ------------- ------------
<S> <C> <C> <C>
Balance at September 30, 1997 $ (650,614) $ 15,512 $20,879,368
Common stock split effected in
the form of a dividend 0
Comprehensive income:
Net income 560,946
Net change in unrealized gain
(loss) on mortgage-backed
securities available-for-sale net
of deferred taxes of $41,462 (80,486) (80,486)
-----------
Total comprehensive income 480,460
Deferred compensation
amortization 116,382
Release of employee stock
ownership plan shares 107,050 107,050
Appreciation in employee stock
ownership plan shares released 122,745
Purchase of treasury stock
at cost (76,973 shares) (1,080,369)
Exercise of stock options (1,568
shares) 14,771
Cash dividends of $0.20 per share (256,713)
-------------- ------------- ----------
Balance at September 30, 1998 (543,564) (64,974) 20,383,694
Comprehensive income:
Net income 297,990
Net change in unrealized gain
(loss) on mortgage-backed
and other securities
available-for- sale net
of deferred taxes of $42,861 (83,200) (83,200)
-----------
Total comprehensive income 214,790
Deferred compensation
amortization 116,381
Release of employee stock
ownership plan shares 101,505 101,505
Appreciation in employee stock
ownership plan shares released 77,543
Purchase of treasury stock
at cost (171,203 shares) (2,207,706)
Exercise of stock options (1,567
shares) 14,760
Cash dividends of $0.20 per share (281,639)
-------------- ----------- ----------
Balance at September 30, 1999 (442,059) (148,174) 18,419,328
</TABLE>
(continued)
31
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended September 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
Net
Deferred Unearned
Compensation Employee
Additional Recognition Stock
Common Paid-in Retained Treasury & Retention Ownership
Stock Capital Earnings Stock Plan Plan Shares
---------- ------------- ------------- ------------- -------- ------------
Comprehensive income:
<S> <C> <C> <C> <C> <C> <C>
Net income $ 295,787
Net change in unrealized gain
(loss) on mortgage-backed
and other securities
available-for- sale net
of deferred taxes of $321,906
Total comprehensive income
Deferred compensation
amortization 96,985
Release of employee stock
ownership plan shares 96,039
Appreciation in employee stock
ownership plan shares released 47,205
Purchase of treasury stock
at cost (132,100 shares) (1,882,425)
Cash dividends of $0.20 per share (239,069)
---------- ------------- ------------- ------------- -------- ------------
Balance at September 30, 2000 $ 18,845 $ 12,444,372 $ 13,732,109 $ (8,867,282) $ 0 $ (346,020)
========== ============= ============= ============= ======== ============
</TABLE>
<TABLE>
<CAPTION>
Other
Accumulated
Comprehensive
Income Total
------------ -------------
Comprehensive income:
<S> <C> <C>
Net income $ 295,787
Net change in unrealized gain
(loss) on mortgage-backed
and other securities
available-for- sale net
of deferred taxes of $321,906 (624,877) (624,877)
-------------
Total comprehensive income (329,090)
Deferred compensation
amortization 96,985
Release of employee stock
ownership plan shares 96,039
Appreciation in employee stock
ownership plan shares released 47,205
Purchase of treasury stock
at cost (132,100 shares) (1,882,425)
Cash dividends of $0.20 per share (239,069)
------------ -------------
Balance at September 30, 2000 $ (773,051) $ 16,208,973
============ =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended September 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 295,787 $ 297,990 $ 560,946
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of deferred loan origination fees (4,165) (7,008) (2,474)
Amortization of premiums and discounts on
investment securities, mortgage-backed
securities, and loans 43,144 149,823 136,080
Amortization of deferred compensation 96,985 116,381 116,382
Amortization of mortgage servicing rights 66,771 73,517 52,710
Amortization of goodwill 41,045 0 0
Compensation charge related to
release of ESOP shares 46,035 81,841 132,587
Depreciation 154,818 121,836 96,236
Provision for loan losses 27,854 0 0
Deferred income taxes 128,346 119,426 (54,829)
Stock dividend on FHLB stock (241,200) (86,200) (53,500)
Net (gain) loss on sale of:
Loans held for sale 5,533 (23,465) (32,108)
Fixed assets (4,273) 0 2,512
Foreclosed real estate (2,750) 2,826 2,124
Proceeds from sale of loans 2,948,485 10,260,097 10,064,554
Originations of loans held for sale (2,954,018) (10,236,632) (10,032,446)
(Increase) decrease in:
Accrued interest receivable (5,411) (188,867) (92,995)
Other assets (301,715) 709,129 (444,973)
Increase (decrease) in:
Federal income tax payable 0 0 0
Accrued expenses and other liabilities (659,263) 607,485 (145,548)
------------ ------------ ------------
Net cash provided (used) by operating activities (317,992) 1,998,179 305,258
------------ ------------ ------------
Cash flows from investing activities:
Net cash used in acquisition activity (3,421,124) 0 0
Net (increase) decrease in interest-earning time deposits 1,372,617 (502,000) (394,044)
Net (increase) decrease in fed funds sold (364,822) 129,187 624,660
Purchases of securities available-for-sale (949,445) (6,045,737) 0
Purchases of securities held-to-maturity (1,468,672) (13,972,031) (18,765,094)
Proceeds from maturities of securities held-to-maturity 6,000,000 13,225,000 12,000,000
Purchases of mortgage-backed securities
available-for-sale (6,908,715) (26,075,873) (11,513,223)
Principal payments on mortgage-backed
securities available-for-sale 3,819,590 5,896,141 2,862,783
Principal payments on mortgage-backed
securities held-to-maturity 1,514,286 5,113,178 7,206,392
Purchases of FHLB stock (992,500) (1,407,700) 0
Proceeds from redemption of FHLB stock 0 0 270,100
Net increase in loans (12,941,831) (6,099,036) (4,073,492)
Proceeds from sale of foreclosed real estate 37,390 6,431 30,670
Acquisition costs related to foreclosed real estate (4,221) 0 (346)
Proceeds from sales of fixed assets 4,500 0 0
Expenditures for premises and equipment (44,895) (455,982) (1,248,504)
Origination of mortgage servicing rights (35,022) (122,648) (120,495)
------------ ------------ ------------
Net cash used by investing activities (14,382,864) (30,311,070) (13,120,593)
------------ ------------ ------------
</TABLE>
(continued)
33
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended September 30, 2000, 1999, and 1998
<TABLE>
<CAPTION>
2000 1999 1998
-------------- -------------- ----------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in: $ (8,825,315) $ 896,182 $ (1,906,992)
Deposits Advances from borrowers 107,811 (20,433) (37,497)
Proceeds from note payable to bank 1,500,000 500,000 0
Principal payments on note payable to bank (1,500,000) (500,000) 0
Proceeds from advances from Federal Home
Loan Bank 707,490,661 359,656,964 114,351,500
Payments of advances from Federal Home
Loan Bank (681,837,856) (329,544,939) (103,600,648)
Purchase of treasury stock at cost (1,882,425) (2,207,706) (1,080,369)
Exercise of stock options 0 14,760 14,771
Dividends paid (239,069) (281,639) (256,713)
ESOP loan repayment 97,208 97,208 97,208
------------- ------------- -------------
Net cash provided by financing activities 14,911,015 28,610,397 7,581,260
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 210,159 297,506 (5,234,075)
Cash and cash equivalents at beginning of year 1,994,564 1,697,058 6,931,133
------------- ------------- -------------
Cash and cash equivalents at end of year $ 2,204,723 $ 1,994,564 $ 1,697,058
============= ============= =============
Supplemental disclosure of cash flow information
Cash paid for:
Interest on deposits Interest on FHLB advances and other $ 2,758,226 $ 2,251,084 $ 2,161,979
borrowed funds 3,762,819 1,475,054 521,896
Income taxes 104,913 158,488 173,358
Transfers from loans to real estate and other
assets acquired through foreclosures 142,516 8,758 246,620
Loans made to facilitate the sale of foreclosed assets 32,500 34,000 140,000
Transfer of foreclosed assets to fixed assets 11,660 0 0
Acquisition activity:
Fair value of noncash assets acquired 33,593,827 0 0
Fair value of liabilities assumed 32,527,238 0 0
</TABLE>
34
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The accompanying notes are an integral part of the consolidated financial
statements.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
East Texas Financial Services, Inc. (the Company) was organized in January 1995
as the holding company for its wholly-owned subsidiary, First Federal Savings
and Loan Association of Tyler (the Association), in connection with the
Association's conversion from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association. On
January 10, 1995, the Company completed it's initial public offering and sold
1,215,900 shares at $10 per share to a tax-qualified employee stock ownership
plan, eligible account holders of record, and other members of the Association.
The cost of the conversion and stock offering was accounted for as a reduction
of the proceeds from the issuance of common stock of the holding company. Upon
closing of the stock offering, the holding company purchased all common shares
issued by the Association for $5,750,000. This transaction was accounted for in
a manner similar to the pooling of interests method.
The Association offers customary banking services, including acceptance of
checking, saving, and time deposits and the making of mortgage, commercial, and
consumer loans to customers located primarily in Smith and Upshur Counties in
East Texas and surrounding areas. The Association operates under a federal
savings and loan charter and is subject to regulations by the Office of Thrift
Supervision.
Principles of consolidation - The consolidated financial statements include the
accounts of East Texas Financial Services, Inc. and its wholly-owned subsidiary,
which owns all of the Association's premises. All intercompany transactions and
balances have been eliminated in consolidation.
Cash and cash equivalents - For purposes of the consolidated statements of cash
flows, cash and cash equivalents include cash, deposits due from banks, and
interest-bearing deposits due from banks.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Securities - Securities that management has both the positive intent and ability
to hold to maturity are classified as securities held-to-maturity and are
carried at cost, adjusted for amortization of premium or accretion of discounts
using the interest method. Securities that may be sold prior to maturity for
asset/liability management purposes, or that may be sold in response to changes
in interest rates, to changes in prepayment risk, to increase regulatory capital
or to other similar factors, are classified as other similar securities
available-for-sale and carried at fair value with any adjustments to fair value,
after tax, reported as a separate component of shareholders' equity. Declines in
the fair value of individual held-to-maturity and available-for-sale securities
below their cost that are other than temporary have resulted in write-downs of
the individual securities to their fair value. The related write- downs are
included in earnings as realized losses. Securities purchased for trading
purposes are held in the trading portfolio at fair value, with changes in fair
value included in noninterest income.
Interest and dividends on securities, including the amortization of premiums and
the accretion of discounts, are reported in interest and dividends on securities
using the interest method. Gains and losses on the sale of securities are
recorded on the trade date and are calculated using the specific-identification
method.
Loans held for sale - Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income. The Company did not have any loans held for sale
on hand at September 30, 2000, 1999, or
1998.
35
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - Nature of Operations and Summary of Significant Accounting Policies,
continued
Loans - Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay- off generally are reported at their
outstanding unpaid principal balances adjusted for charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans or
unamortized premiums or discounts on purchased loans. Interest income is accrued
on the unpaid principal balance. Discounts and premiums are amortized to income
using the interest method. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the yield
(interest income) of the related loans.
Loans are generally classified as nonaccrual when there exists reasonable doubt
as to the full, timely collection of interest or principal of the loan (usually
when a loan is delinquent for greater than 90 days). Uncollectible interest on
loans that is contractually past due is charged off or an allowance is
established based on management's periodic valuation. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent cash payments
are received until, in management's judgment, the borrower's ability to make
periodic interest and principal payments is back to normal, in which case the
loan is returned to accrual status.
Allowance for loan losses - The allowance for loan losses is established through
charges to operations in the form of a provision for loan losses. Increases and
decreases in the allowance due to changes in the measurement of the impaired
loans are included in the provision for loan losses. Loans continue to be
classified as impaired unless they are brought fully current and the collection
of scheduled interest and principal is considered probable. When a loan is
determined to be uncollectible, the portion deemed uncollectible is charged
against the allowance and subsequent recoveries, if any, are credited to the
allowance.
The adequacy of the allowance for loan losses is periodically evaluated by the
Company. Such evaluation includes a review of loans on which full collectibility
may not be reasonably assured and considers the estimated value of the
underlying collateral on the loan, current and anticipated economic conditions,
and other factors, which in management's judgment deserve recognition. The
evaluation of the adequacy of loan collateral is often based upon estimates and
appraisals. Because of changing economic conditions, the valuations determined
from such estimates and appraisals may also change. Accordingly, losses may
ultimately be incurred in amounts different from management's current estimates.
Additionally, the Association is subject to regulatory examinations and may be
directed to record loss allowances by regulatory authorities. Adjustments to the
allowance for estimated losses will be reported in the period such adjustments
become known or are reasonably estimable. The Association's most recent
regulatory examination, dated November 1999, did not result in an increase to
the allowance for loan losses.
Federal Home Loan Bank stock - The FHLB stock is a required investment for
institutions that are members of the Federal Home Loan Bank system. The required
investment in the common stock is based on a predetermined formula and is
carried at cost.
Premises and equipment - Land is carried at cost. Buildings, furniture,
fixtures, and equipment are carried at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the respective
assets on a straight-line basis. Maintenance and repairs are charged to
operating expense, and renewals and betterments are capitalized. Gains or losses
on dispositions are reflected currently in the statement of income.
36
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 - Nature of Operations and Summary of Significant Accounting Policies,
continued
Foreclosed assets - Assets 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 an asset 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, the asset 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 an asset 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.
Goodwill - Goodwill represents the excess of the purchase price over the fair
value of net assets acquired for transactions accounted for using the purchase
method of accounting. Goodwill is amortized using the straight-line method over
the estimated period of benefit, not to exceed fifteen years. Goodwill is
periodically reviewed by management for recoverability, and any impairment is
recognized by a charge to income if a permanent loss in value is indicated.
Mortgage servicing rights - For originated mortgage servicing rights, the
Company allocates the net cost of the mortgage loans to the mortgage servicing
rights and the loans (without the mortgage servicing rights) based on their
relative fair values. Fair values are based on quoted market prices in active
markets for loans and loan servicing rights.
Mortgage servicing rights are amortized in proportion to, and over the period
of, estimated net servicing income which approximates the level-yield method.
The Company stratifies mortgage servicing rights based on one or more of the
predominant risk characteristics of the underlying loans. The Company
periodically evaluates the carrying value of the mortgage servicing rights in
relation to the present value of the estimated future net servicing revenue
based on management's best estimate of remaining loan lives. Impairment is
recognized through a valuation allowance for an individual stratum, and the
amount of impairment is the amount by which the mortgage servicing rights for a
stratum exceed their fair value.
Income taxes - Deferred tax assets and liabilities are determined using the
liability method. Under this method, the net deferred tax asset or liability is
determined based on the differences between the book and tax bases of the
various statement of financial condition assets and liabilities and gives
current recognition to changes in tax rates and laws.
Advertising - The Company expenses the costs of advertising the first time the
advertising takes place.
Financial instruments - All derivative financial instruments held or issued by
the Company are held or issued for purposes other than trading. In the ordinary
course of business the Company has entered into off-balance-sheet financial
instruments consisting of commitments to extend credit. Such financial
instruments are recorded in the
37
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
financial statements when they are funded.
Comprehensive income - Comprehensive income represents the sum of net income and
items of other comprehensive income or loss, which are reported directly in
shareholders' equity, net of tax, such as the change in the net unrealized gain
or loss on securities available for sale. Accumulated other comprehensive income
or loss, which is a component of shareholders' equity, represents the net
unrealized gain or loss on securities available for sale, net of tax.
Note 1 - Nature of Operations and Summary of Significant Accounting Policies,
continued
Impact of new accounting standards - As of October 1, 1998, the Company had
adopted Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
Accounting for Derivative Instruments and Hedging Activities, with an effective
date of October 1, 1999. In June 1999, the Financial Accounting Standards Board
issued SFAS No. 137, Deferral of the Effective Date of SFAS No. 133. This
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The adoption of this statement will not have a material impact on
the Company's financial position or results of operations.
In June 2000, SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, was issued by the Financial Accounting Standards
Board. This statement addresses a limited number of issues causing
implementation difficulties for entities that apply SFAS No. 133. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
2000. The adoption of this statement will not have a material impact on the
Company's financial position or results of operations.
Reclassifications - Certain amounts previously reported in the financial
statements for 1999 and 1998 have been reclassified to facilitate comparability
with 2000. These reclassifications had no effect on net income or stockholders'
equity.
Note 2 - Pro Forma Summary Financial Information
On June 30, 2000, the Company completed its acquisition of Gilmer Financial
Services, Inc. (GFSI) and its wholly owned subsidiary, Gilmer Savings Bank,
exchanging $26.10 in cash for each share of GFSI common stock outstanding. The
total cost of the acquisition was approximately $5.4 million. At the date of
acquisition, GFSI had approximately $35.6 million in assets, $22.9 million in
deposits, and $3.1 million in shareholders' equity. Pursuant to the merger
agreement, GFSI was merged into the Company's wholly owned subsidiary, First
Federal Savings and Loan Association of Tyler, Inc. The combined entity now
operates as one institution under the name of First Federal Savings and Loan.
The Company utilized short-term advances from the Federal Home Loan Bank to fund
the transaction and accounted for the acquisition under the purchase method of
accounting. Under purchase accounting rules, the assets acquired and the
liabilities assumed were adjusted to their estimated fair value. Goodwill,
amounting to $2.4 million, related to this transaction was recorded and will be
amortized on a straight line basis over fifteen years. The results of operations
of GFSI are reflected in the Company's consolidated financial statements only
since the date of acquisition.
The following (unaudited) pro forma consolidated results of operations have been
prepared as if the acquisition of GFSI had occurred at October 1, 1999 and 1998,
respectively:
38
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Twelve Months
Ended September 30
(Unaudited)
-------------------------------
2000 1999
-------------- -------------
Revenue $ 14,222,967 $ 10,391,376
Net income (loss) (797,987) 152,601
Net income (loss) per share - basic (0.71) 0.12
Net income (loss) per share - diluted (0.71) 0.11
Note 2 - Pro Forma Summary Financial Information, continued
The pro forma information is presented for informational purposes only and is
not necessarily indicative of the results of operations that actually would have
been achieved had the acquisition been consummated as of that time, nor is it
intended to be a projection of future results.
Note 3 - Investment Securities
The amortized cost and fair values of investment securities available-for-sale
are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
September 30, 2000:
Corporate debt securities $7,425,802 $ 34,565 $ (128,746) $7,331,621
State and municipal securities 578,466 6,510 0 584,976
---------- --------- ----------- ----------
$8,004,268 $ 41,075 $ (128,746) $7,916,597
========== ========= =========== ==========
September 30, 1999:
Corporate debt securities $6,036,189 $ 1,508 $ (118,947) $5,918,750
========== ========= =========== ==========
</TABLE>
The following is a summary of amortized cost and fair value of investment
securities available-for-sale at September 30, 2000, by contractual maturity:
Amortized Fair
Cost Value
---------- ----------
Due in one year or less $ 19,963 $ 20,000
Due after one year through five years 7,391,416 7,286,576
Due after five years through ten years 592,889 610,020
Due after ten years 0 0
---------- ----------
$8,004,268 $7,916,596
========== ==========
39
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
There were no sales of investment securities available-for-sale for 2000, 1999,
and 1998.
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, 2000 $25,970,113 $13,388 $(555,396) $25,428,105
=========== ======= ========= ===========
September 30, 1999 $30,481,413 $14,819 $(547,366) $29,948,866
=========== ======= ========= ===========
</TABLE>
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, 2000, by contractual maturity:
Amortized Fair
Cost Value
------------ -------------
Due in one year or less $ 1,000,034 $ 999,840
Due after one year through five years 22,971,136 22,520,455
Due after five years through ten years 1,998,943 1,907,810
Due after ten years 0 0
----------- -----------
$25,970,113 $25,428,105
=========== ===========
There were no sales of investment securities held-to-maturity for 2000, 1999,
and 1998.
Note 4 - Mortgage-backed Securities
The amortized cost and fair values of mortgage-backed securities
available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
September 30, 2000:
U.S. government
agency pass-through
certificates $ 9,535,567 $ 64,506 $ (35,643) $ 9,564,430
U.S. government
agency collateralized
mortgage obligations 35,560,679 35,396 (1,147,842) 34,448,233
----------- ----------- ------------ -----------
$45,096,246 $ 99,902 $ (1,183,485) $44,012,663
----------- ----------- ------------ -----------
</TABLE>
40
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
September 30, 1999:
U.S. government
agency pass-through
certificates 3,043,701 $ 3,040 $ (37,141) $ 3,009,600
U.S. government
agency collateralized
mortgage obligations 29,957,175 105,867 (178,833) 29,884,209
----------- -------- ---------- -----------
$33,000,876 $108,907 $ 215,974) $32,893,809
----------- -------- ---------- -----------
There were no sales of mortgage-backed securities available-for-sale for 2000,
1999, and 1998.
Note 4 - Mortgage-backed Securities, continued
The following is a summary of the amortized cost and fair value of
mortgage-backed securities available-for-sale at September 30, 2000, by
contractual maturity. These contractual maturities do not take into
consideration the effects of scheduled repayments or the effects of possible
prepayments.
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 0 $ 0
Due after one year through five years 1,682,458 1,690,074
Due after five years through ten years 1,002,411 1,016,065
Due after ten years 42,411,377 41,306,524
-----------
$45,096,246 $44,012,663
----------- -----------
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, 2000:
U.S. government
agency pass-through
certificates $4,279,132 $ 70,032 $ 0 $4,349,164
========== ======== ======= ==========
September 30, 1999:
U.S. government
agency pass-through
certificates $5,806,975 $145,901 $(2,962) $5,949,914
========== ======== ======= ==========
</TABLE>
There were no sales of mortgage-backed securities held-to-maturity for 2000,
1999, or 1998.
41
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The following is a summary of the amortized cost and fair value of
mortgage-backed securities held-to-maturity at September 30, 2000, by
contractual maturity. These contractual maturities do not take into
consideration the effects of scheduled repayments or the effects of possible
prepayments.
Amortized Fair
Cost Value
---------- ----------
Due in one year or less $ 0 $ 0
Due after one year through five years 0 0
Due after five years through ten years 0 0
Due after ten years 4,279,132 4,349,164
---------- ----------
$4,279,132 $4,349,164
========== ==========
Note 5 - Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
September 30
---------------------------
2000 1999
---------- ----------
<S> <C> <C>
Real estate loans:
One- to four-family residences $ 72,413,942 $55,902,266
Other residential 959,658 459,841
Home equity and improvement 7,032,418 3,763,768
Nonresidential 9,579,506 2,183,800
Construction loans 2,860,072 3,987,586
------------ -----------
Total real estate loans 92,845,596 66,297,261
------------ -----------
Other loans:
Consumer loans 7,566,853 1,435,944
Commercial loans 5,284,297 3,636,292
------------ -----------
Total other loans 12,851,150 5,072,236
------------ -----------
Total loans 105,696,746 71,369,497
Less:
Allowance for loan losses 1,057,374 270,039
Unadvanced loan funds 2,538,035 3,818,155
Deferred loan fees 37,200 30,969
------------ -----------
Total loans receivable, net $102,064,137 $67,250,334
------------ -----------
</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):
42
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
2000 1999 1998
----------- ---------- ----------
Balance at beginning of year $ 270,039 $233,180 $ 272,851
Provision charged to income 27,854 0 0
Charge-offs and recoveries, net (29,315) 36,859 (39,671)
Allowance acquired 788,796 0 0
----------- -------- ---------
Balance at end of year $ 1,057,374 $270,039 $ 233,180
=========== ======== =========
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, 2000 and 1999, 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.
Note 5 - Loans Receivable, continued
At September 30, 2000 and 1999, the Company had discontinued the accrual of
interest on nonperforming loans aggregating approximately $704,693 and $767,668,
respectively. Net interest income for 2000, 1999, and 1998 would have been
higher by $27,045, $20,854, and $3,963, 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 Company in the
aggregate amount of $463,051 and $542,196 as of September 30, 2000 and 1999,
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 Company. A summary of the activity of loans to
directors and executives in excess of $60,000 is as follows:
2000 1999
--------- ---------
Balance, beginning of year $ 542,196 $ 438,595
New loans 40,702 201,400
Repayment (119,847) (97,799)
--------- ---------
Balance, end of year $ 463,051 $ 542,196
========= =========
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:
43
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
2000 1999
------------ -------------
Principal balance $51,426,371 $ 43,797,931
Custodial escrow balance 1,189,248 917,487
The following is an analysis of the changes in loan servicing rights
capitalized:
2000 1999
--------- ----------
Balance, beginning of year $ 266,010 $ 216,879
Addition 35,021 122,648
Amortization (66,770) (73,517)
Servicing rights acquired 24,421 0
--------- ---------
Balance, end of year $ 258,682 $ 266,010
========= =========
Note 7 - Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
2000 1999
----------- -----------
Investment securities $ 517,117 $ 609,027
Mortgage-backed securities 290,463 210,113
Loans receivable 778,837 379,194
Allowance for uncollectible interest (37,577) (31,089)
----------- -----------
$ 1,548,840 $ 1,167,245
=========== ===========
Note 8 - Foreclosed Assets
The Company has acquired various assets through loan foreclosures. At September
30, 2000 and 1999, the properties are summarized as follows:
2000 1999
------- -------
Residential real estate $43,240 $0
Personal property 43,225 0
------- --
$86,465 $0
======= ==
There was no activity in the allowance for losses on foreclosed assets during
2000, 1999, and 1998.
44
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Expenses applicable to foreclosed assets at September 30, 2000, 1999, and 1998,
are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net (gain) loss on sales of foreclosed assets $(2,750) $ 2,826 $ 2,124
Provision for losses 0 0 0
Operating expenses 5,759 1,249 10,788
------- ------- -------
$ 3,009 $ 4,075 $12,912
======= ======= =======
</TABLE>
Note 9 - Premises and Equipment
Premises and equipment are summarized as follows:
2000 1999
---------- ----------
Land $1,591,266 $1,529,489
Buildings and premises 1,288,335 1,199,913
Furniture, fixtures, and equipment 730,268 652,241
Autos 81,323 58,742
---------- ----------
3,691,192 3,440,385
Less accumulated depreciation 946,914 833,172
---------- ----------
$2,744,278 $2,607,213
========== ==========
Certain premises and equipment are leased under operating leases. Rental expense
was $69,434 in 2000, $43,332 in 1999, and $7,350 in 1998.
Future minimum rental commitments under noncancelable leases are:
2001 $ 19,400
2002 9,686
2003 10,361
2004 11,070
2005 11,624
Thereafter 5,954
-----------
$ 68,095
===========
45
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 10 - Other Assets
Other assets are summarized below:
2000 1999
-------- ---------
Principal receivable on mortgage-backed securities $189,207 $ 86,856
Prepaid federal income tax 45,148 151,133
Prepaid expenses 447,601 208,287
Outstanding drafts 129,539 107,246
Other 174,987 40,469
-------- --------
$986,482 $593,991
======== ========
Note 11 - Deposits
The aggregate amount of accounts with a minimum denomination of $100,000 was
approximately $30,163,724 and $26,256,387 at September 30, 2000 and 1999.
At September 30, 2000, scheduled maturities of certificates of deposit are as
follows:
2001 $ 59,482,462
2002 14,941,990
2003 4,349,812
2004 907,241
2005 1,170,529
Thereafter 5,342
------------
$ 80,857,376
=============
Interest expense on deposits is summarized as follows:
2000 1999 1998
---------- ---------- ----------
Demand deposits $ 0 $ 0 $ 0
Savings and NOW deposits 599,965 407,788 303,617
Time deposits 3,815,095 3,830,118 4,122,362
---------- ---------- ----------
$4,415,060 $4,237,906 $4,425,979
---------- ---------- ----------
46
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
The Association held deposits of approximately $3,810,972 and $3,868,437 for
related parties at September 30, 2000 and 1999, respectively.
Note 12 - Advances from Federal Home Loan Bank
The outstanding advances from the FHLB consisted of the following at September
30, 2000 and 1999:
Maturity 2000 Rate 1999 Rate
--------------- ----------- ----- ----------- -----
October 7, 1999 $ 0 $33,374,700 5.37%
October 7, 1999 0 2,575,000 5.37%
October 13, 2000 25,500,000 6.64% 0
October 13, 2000 500,000 6.74% 0
October 16, 2000 40,280,000 6.64% 0
February 15, 2001 20,000 5.94% 0
February 15, 2002 25,000 5.98% 0
February 15, 2003 100,000 6.00% 0
September 1, 2003 1,537,749 6.25% 0
February 15, 2004 100,000 6.01% 0
December 31, 2004 245,479 6.09% 253,172 6.09%
January 3, 2005 93,477 6.03% 111,803 6.03%
February 15, 2005 100,000 6.04% 0
February 15, 2006 150,000 6.05% 0
January 1, 2013 440,883 6.09% 464,181 6.09%
January 1, 2013 419,001 6.13% 441,077 6.13%
February 1, 2013 415,601 5.91% 437,647 5.91%
47
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
March 3, 2014 872,322 5.45% 994,488 5.45%
April 1, 2014 841,894 5.97% 957,581 5.97%
May 1, 2014 1,146,324 5.66% 1,304,801 5.66%
June 1, 2014 873,644 5.90% 993,165 5.90%
July 1, 2014 808,264 6.38% 916,921 6.38%
August 1, 2014 586,997 6.37% 665,681 6.37%
September 1, 2014 741,164 6.59% 839,560 6.59%
October 1, 2014 650,138 6.86% 728,100 6.86%
November 3, 2014 1,604,233 6.77% 0
December 1, 2014 548,207 6.57% 0
January 1, 2015 358,688 6.73% 0
----------- -----------
$78,959,065 $45,057,877
=========== ===========
Pursuant to collateral agreements with the FHLB, advances are secured by all
stock and deposit accounts in the FHLB, mortgage collateral, securities
collateral, and other collateral. In addition to the assets pledged under the
FHLB's blanket floating lien, specific mortgage-backed securities are also
pledged as collateral for the advances at September 30, 2000, as follows:
Carrying value $16,801,812
Estimated fair value 16,597,391
Note 13 - Pension Plan
The Company has a qualified, noncontributory defined benefit retirement plan
covering substantially all of its employees. Benefits are based on years of
service and the employee's highest average rate of earnings for the five
consecutive years during the last ten full years before retirement. The benefits
are reduced by a specified percentage of the employee's social security
benefits. An employee becomes fully vested upon completion of five years of
qualifying service. It is the policy of the Company to fund the maximum amount
that can be deducted for federal income tax purposes.
The following table sets forth the plan's funded status and amounts recognized
in the Company's statements of financial condition at September 30:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,571,790 $ 2,364,813 $ 2,145,930
Service cost 164,269 151,965 144,524
Interest cost 187,622 171,504 157,582
Actuarial (gain) loss (32,113) (40,059) (6,790)
Benefits paid (76,283) (76,283) (76,283)
Expenses paid (195) (150) (150)
----------- ----------- -----------
Benefit obligation at end of year 2,815,090 2,571,790 2,364,813
</TABLE>
48
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year 2,655,522 2,149,711 2,035,418
Actual return on plan assets 362,074 381,110 37,623
Employer contribution 240,363 201,134 153,103
Benefits paid (76,283) (76,283) (76,283)
Expenses paid (195) (150) (150)
----------- ----------- -----------
Fair value of plan assets at end of year 3,181,481 2,655,522 2,149,711
----------- ----------- -----------
Funded status 366,391 83,732 (215,102)
Unrecognized net actuarial loss 45,158 214,645 480,213
Unrecognized prior service cost 86,704 94,063 101,422
Unrecognized net transition obligation (asset) (285,530) (318,510) (351,490)
----------- ----------- -----------
Prepaid pension cost $ 212,723 $ 73,930 $ 15,043
=========== =========== ===========
</TABLE>
Note 13 - Pension Plan, continued
A summary of the components of income follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Service cost-benefits earned during the year $ 164,269 $ 151,965 $ 144,524
Interest cost on projected benefit obligation 187,622 171,504 157,582
Return on plan assets (224,700) (168,945) (172,048)
Net asset gain recognition 0 13,344 8,783
Amortization of unrecognized net asset (32,980) (32,980) (32,980)
Amortization of prior service cost 7,359 7,359 7,359
--------- --------- ---------
Net periodic pension cost $ 101,570 $ 142,247 $ 113,220
========= ========= =========
</TABLE>
Assumptions used in the accounting for the pension plan were as follows:
49
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
2000 1999 1998
---- ---- ----
Weighted average discount rate 7.50% 7.50% 7.50%
Rate of increase in future compensation levels 5.00% 5.00% 5.00%
Expected long-term rate of return on assets 8.00% 8.00% 8.00%
The Company contributed $240,363, $201,134, and $153,103 to the plan in 2000,
1999, and 1998, respectively.
Note 14 - Income Taxes
The Company and the Association file a consolidated federal income tax return.
The consolidated provision for income taxes for 2000, 1999, and 1998 consists of
the following:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Current (benefit) $ 69,764 $ 31,199 $ 384,102
Deferred (benefit) 128,346 119,426 (54,829)
--------- --------- ---------
$ 198,110 $ 150,625 $ 329,273
========= ========= =========
</TABLE>
Total income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to income before income taxes as a result
of the following:
2000 1999 1998
---- ---- ----
Expected income tax expense at
statutory tax rate of 34% $ 167,925 $ 152,528 $ 302,674
Other 30,185 (1,903) 26,599
--------- --------- ---------
$ 198,110 $ 150,625 $ 329,273
========= ========= =========
Effective tax rate 40% 34% 37%
========= ========= =========
Note 14 - Income Taxes, continued
Deferred tax assets and liabilities included in the statement of financial
condition at September 30 consist of the following:
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 65,409 $ 66,945
Net unrealized loss on market value adjustment
to mortgage-backed securities available-for-sale 398,238 76,332
Deferred compensation 22,842 29,834
Other 11,756 9,694
Net operating loss carryover 121,674 0
Investment securities available-for-sale 107,269 0
-------- --------
727,188 182,805
-------- --------
</TABLE>
50
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
2000 1999
------- -------
Deferred tax liabilities:
FHLB stock (173,018) (40,698)
Mortgage servicing rights (87,952) (90,444)
Depreciable assets (65,846) (40,466)
Unrealized loss on loans held for sale (13,242) (12,521)
Pension liability (131,897) (106,860)
-------- --------
(471,955) (290,989)
-------- --------
Net deferred tax asset (liability) $255,233 $(108,184)
======== ==========
A deferred tax asset of $169,856 was recorded with an offsetting reduction of
goodwill to the year ended September 30, 2000, in connection with the purchase
accounting for the GFSI acquisition.
As part of the acquisition of GFSI, the Company acquired a net operating loss
carryforward of approximately $436,000. Of this amount, approximately $78,000
was utilized in the current year and $358,000 remains available, subject to
certain limitations, to offset future taxable income through year 2019.
No valuation allowance for deferred tax assets was recorded as of September 30,
2000 and 1999, 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 includes approximately $2,392,722 and $2,692,722, respectively
at September 30, 2000 and 1999, 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 $813,525 and $915,525
at September 30, 2000 and 1999, respectively.
Note 15 - 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 182,278 or
10% of the total number of common shares issued pursuant to the conversion. The
option exercise price cannot be less than the fair market value of the
underlying common stock as of the date of the option grant, and the maximum
option term cannot exceed ten years. Awards vest at a rate of 20% per year
beginning at the date of the grant. The Company plans to use treasury stock for
the exercise of options. The following is a summary of changes in options
outstanding:
51
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Options outstanding
Balance, September 30, 1998 148,843
Granted 0
Exercised at $9.42 per share (1,567)
Forfeited and expired 0
--------
Balance, September 30, 1999 147,276
Granted 4,500
Exercised at $9.42 per share 0
Forfeited and expired 0
--------
Balance, September 30, 2000 151,776
========
Options exercisable at year end under stock option plan 147,276
=======
Shares available for future grants 22,662
=======
Stock appreciation rights (SARs) may be granted under the Option and Incentive
Plan giving the participant the right to receive the excess of the market value
of the shares on the date exercised over the exercise price. Upon exercise, the
participant will receive either cash or shares as determined by the Company.
Limited SARs may be granted which are exercisable only for a limited period of
time in the event of a tender or exchange offer for shares of holding company
stock. Payment upon exercise of a limited SAR shall be in cash. No SARs or
limited SARs have been granted.
Restricted stock may also be granted under the Option and Incentive Plan,
subject to forfeiture if the participant fails to remain in the continuous
service of the Company. The time period for such restriction may be removed or
accelerated at the Company's discretion.
Note 16 - Employee Stock Ownership Plan (ESOP)
In conjunction with the stock conversion, the Company established an ESOP for
eligible employees. Employees with at least one year of employment and who have
attained the age of twenty-one are eligible to participate. The ESOP borrowed
funds in the amount of $972,080 from the Company to purchase 145,823 common
shares issued in the conversion. Collateral for the loan is the common stock
purchased by the ESOP. The ESOP loan is payable in quarterly principal payments
of $24,302 over a ten-year period plus interest at an annual rate of 7.93%. In
accordance with generally accepted accounting principles, the unpaid balance of
the ESOP loan on the Association's books and the related receivable on the
holding company's books have been eliminated in the consolidated statement of
financial condition. The cost of shares not committed to be released and
unallocated shares is reported as a reduction of stockholders' equity. Shares
are released to participants' accounts under the shares allocated method.
The Company intends to make annual contributions to the ESOP in an amount to be
determined annually by the
52
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Board of Directors, but not less than the amount required to pay any currently
maturing obligations under loans made to the ESOP. The Company will not make
contributions if such contributions would cause the Company to violate its
regulatory capital requirements.
Company contributions to the ESOP and shares released from the suspense account
in an amount proportional to the repayment of the ESOP loan will be allocated
among ESOP participants on the basis of compensation in the year of allocation.
Benefits generally become 100% vested after five years of credited service.
Prior to the completion of five years of credited service, a participant who
terminates employment for reasons other than death, retirement (or normal
retirement), or disability will not receive any benefit under the ESOP.
Forfeitures will be reallocated among the remaining participating employees in
the same proportion as contributions. Benefits may be payable in the form of
stock or cash upon termination of employment.
ESOP compensation expense for the years ended September 30, 2000, 1999, and
1998, totaled $143,239, $179,049, and $229,795, respectively. The fair value of
unearned ESOP shares at September 30, 2000 and 1999, totaled $454,160 and
$928,340, respectively. Following is a summary of ESOP shares at September 30:
2000 1999
------ ------
Shares allocated 91,926 77,520
Shares committed to be released 0 0
Unearned 51,905 66,311
------ ------
Total 143,831 143,831
======= =======
Note 17 - Recognition and Retention (RRP)
On July 26, 1995, the stockholders approved the Company's formation of a RRP
which was authorized to award 4%, or 72,912 shares (48,608 shares prior to stock
split), of the total shares of common stock issued in the conversion. On July
26, 1995, the RRP awarded 61,796 shares (41,197 shares prior to stock split) of
common stock to directors and employees in key management positions in order to
provide them with a proprietary interest in the Company in a manner designed to
encourage such employees to remain with the Company.
Note 17 - Recognition and Retention (RRP), continued
Unearned compensation of $581,908, representing the shares' fair market value of
$14.125 per share at the date of award, will be charged to income on a
straight-line basis over the five-year vesting period as the Company's directors
and employees perform the related future services. The unamortized balance,
which is comparable to deferred compensation, is reflected as a reduction of
stockholders' equity. The Company recognized $96,985 as compensation and
benefits expense relating to this plan for the year ended September 30, 2000,
and $116,382 for each of the years ended September 30, 1999 and 1998.
Note 18 - Earnings per Common Share
53
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Basic earnings per common share are computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period, adjusted retroactively for a 3 for 2 stock split in the form
of a stock dividend, which was authorized by the Board of Directors on February
18, 1998, to shareholders of record as of March 11, 1998. Diluted earnings per
share reflect per share amounts that would result if dilutive potential common
stock had been converted to common stock. The following reconciles amounts
reported in the financial statements:
<TABLE>
<CAPTION>
2000 1999
--------------------------------------- --------------------------------------
Income Shares Per-Share Income Shares Per-Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------ ------------ --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income from
continuing
operations $ 295,787 $ 297,990
Less preferred
stock dividends 0 0
----------- ------------
Income available
to common
stockholders -
basic earnings
per share 295,787 1,117,441 $ 0.26 297,990 1,324,359
Effect of dilutive
securities:
Options 0 7,763 0 29,539
---------- ----------
Income available
to common
stockholders -
diluted earnings
per share $ 295,787 1,125,204 $ 0.26 $ 297,990 1,353,898 $ 0.22
========== ========== ========== ========== ========== ========
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Income from
continuing
operations $ 560,946
Less preferred
stock dividends 0
------------
Income available
to common
stockholders -
basic earnings
per share 560,946 1,431,623 $ 0.39
Effect of dilutive
securities:
Options 0 51,266
------------ ----------
Income available
to common
stockholders -
diluted earnings
per share $ 560,946 1,482,889 $ 0.38
========== ========== ========
</TABLE>
Note 19 - Subsequent Event
At the October 18, 2000, directors' meeting, a cash dividend of $0.05 was
declared. This dividend is to holders of record on November 8, 2000, and payable
on November 21, 2000.
Note 20 - 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, 2000 and 1999, the Company had $543,288 and $974,627,
respectively, on deposit with the Federal Home Loan Bank of Dallas, and
$1,598,589 and $657,734, respectively, on deposit with Bank of America.
54
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 21 - Financial Instruments
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments include commitments to extend credit and involve, to
varying degrees, elements of credit risk and interest-rate risk in excess of the
amount recognized in the consolidated statements of financial condition.
The exposure to credit loss, in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit, is represented by
the contractual amount of those instruments. The Company uses the same credit
policies in making commitments and condition obligations as it does for
on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Company evaluates each customer's creditworthiness
on a case-by-case basis. The amount and nature of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on management's
credit evaluation of the counter-party. Such collateral includes primary real
estate.
The Company has not been required to perform on any financial guarantee during
the past two years. The Company has not incurred any losses on its commitments
in either 2000 or 1999.
The Association had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
------------------------------------------ ------------------------------------------
Fixed Variable Fixed Variable
Rate Rate Total Rate Rate Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
First mortgage $3,705,075 $ 900,400 $4,605,475 $5,294,566 $1,200,000 $6,494,566
Consumer and
other loans 452,936 0 452,936 152,889 0 152,889
---------- ---------- ---------- ---------- ---------- ----------
$4,158,011 $ 900,400 $5,058,411 $5,447,455 $1,200,000 $6,647,455
========== ========== ========== ========== ========== ==========
</TABLE>
Note 22 - Legal Contingencies
Various legal claims arise from time to time in the normal course of business
which, in the opinion of management, will have no material effect on the
Company's consolidated financial statements.
Note 23 - Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of the Company's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Company
could have realized in a sales transaction on the dates indicated. The estimated
fair value amounts have been measured as of their respective year ends and have
not been reevaluated or updated for purposes of these consolidated financial
statements subsequent to those respective dates. As such, the estimated fair
values of these financial instruments
55
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
subsequent to the respective reporting dates may be different than the amounts
reported at each year end.
The following information should not be interpreted as an estimate of the fair
value of the entire Company since a fair value calculation is only provided for
a limited portion of the Company's assets. Due to a wide range of valuation
techniques and the degree of subjectivity used in making the estimates,
comparisons between the Company's disclosures and those of other companies may
not be meaningful. The following methods and assumptions were used to estimate
the fair values of the Company's financial instruments at September 30, 2000 and
1999:
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.
Federal Funds Sold. The carrying amounts of federal funds sold approximate their
fair value.
Available-for-sale and held-to-maturity securities. Fair values for securities,
excluding restricted equity securities, are based on available quoted market
prices. If quoted market prices are unavailable, fair values are based on quoted
market prices of comparable instruments. Available-for-sale securities are
carried at their aggregate fair value.
Loans receivable. Fair values for loans receivable are estimated using
discounted cash flow analysis, utilizing 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.
Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money market accounts and certificates of deposit (CDS) approximate their fair
values at the reporting date. Fair values for fixed-rate CDS are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits.
Borrowings. The estimated fair value of the FHLB advance is based upon the
discounted value of the difference between contractual rates and current market
rates for similar agreements.
Advance from borrowers for taxes and insurance. The carrying amount of escrow
accounts approximate fair value.
Accrued interest. The carrying amounts of accrued interest approximate their
fair values.
Note 23 - Fair Value of Financial Instruments, continued
Off-balance-sheet instruments. Commitments to extend credit were evaluated and
fair value was estimated using
56
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the
counter parties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The estimated fair values of the Company's financial instruments were as follows
at:
<TABLE>
<CAPTION>
September 30, 2000 September 30, 1999
--------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,204,723 $ 2,204,723 $ 1,994,564 $ 1,994,564
Interest-earning time deposits 1,089,000 1,081,000 2,461,617 2,453,000
Federal funds sold 364,822 364,822 0 0
Securities available-for-sale 7,916,597 7,916,597 5,918,750 5,918,750
Securities held-to-maturity 25,970,113 25,428,105 30,481,413 29,948,866
Mortgage-backed securities
available-for-sale 44,012,663 44,012,663 32,893,809 32,893,809
Mortgage-backed securities
held-to-maturity 4,279,132 4,349,164 5,806,975 5,949,914
Loans receivable, net 102,064,137 101,823,000 67,250,334 67,520,000
Accrued interest receivable 1,548,840 1,548,840 1,167,245 1,167,245
Federal Home Loan Bank stock 4,115,000 4,115,000 2,283,000 2,283,000
Financial liabilities:
Deposit liabilities 101,619,783 100,591,000 87,539,839 87,539,000
Advances from Federal Home
Loan Bank 78,959,065 84,331,000 45,057,877 44,776,000
Advances from borrowers for
taxes and insurance 1,478,438 1,478,438 823,755 823,755
</TABLE>
The carrying amounts in the preceding table are included in the statement of
financial condition under the applicable captions. The contract or notional
amounts of the Company's financial instruments with off-balance-sheet risk are
disclosed in Note 21.
Note 24 - Regulatory Matters
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possible additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Association and the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital guidelines that
involve quantitative measures of the Association's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Association's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
57
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 24 - Regulatory Matters, continued
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in the
table below) of total risk-based capital and Tier 1 capital to risk- weighted
assets (as defined in the regulations), Tier 1 capital to adjusted total assets
(as defined), and tangible capital to adjusted total assets (as defined).
Management believes, as of September 30, 2000, that the Association meets all
capital adequacy requirements to which it is subject.
As of September 30, 2000, the most recent notification from the Office of Thrift
Supervision (OTS) categorized the Association as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Association must maintain minimum total risk-based, Tier 1
risk-based, Tier 1 leverage, and tangible capital ratios as set forth in the
table. There are no conditions or events since that notification that management
believes have changed the institution's category.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
---------------------- -----------------------------------------------------------------------
Amount Ratio Amount Ratio
-------- ------- ----------------------------------- --------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 2000:
Total risk-based capital
(to risk-weighted assets) $ 14,619 16.2% Greater than or Equal to $ 7,216 Greater than or Equal to 8.0%
Tier 1 capital
(to risk-weighted assets) $ 13,562 15.3% Greater than or Equal to $ 3,608 Greater than or Equal to 4.0%
Tier 1 capital
(to adjusted total assets) $ 13,562 6.8% Greater than or Equal to $ 7,955 Greater than or Equal to 4.0%
Tangible capital
(to adjusted total assets) $ 13,562 6.8% Greater than or Equal to $ 2,983 Greater than or Equal to 1.5%
As of September 30, 1999:
Total risk-based capital
(to risk-weighted assets) $ 17,654 27.9% Greater than or Equal to $ 5,055 Greater than or Equal to 8.0%
Tier 1 capital
(to risk-weighted assets) $ 17,388 27.5% Greater than or Equal to $ 2,528 Greater than or Equal to 4.0%
Tier 1 capital
(to adjusted total assets) $ 17,388 11.3% Greater than or Equal to $ 6,155 Greater than or Equal to 4.0%
Tangible capital
(to adjusted total assets) $ 17,388 11.3% Greater than or Equal to $ 2,308 Greater than or Equal to 1.5%
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
-------------------------------------------------------------------------------
Amount Ratio
-------------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
As of September 30, 2000:
Total risk-based capital
(to risk-weighted assets) Greater than or Equal to $ 9,020 Greater than or Equal to 10.0%
Tier 1 capital
(to risk-weighted assets) Greater than or Equal to $ 5,412 Greater than or Equal to 6.0%
Tier 1 capital
(to adjusted total assets) Greater than or Equal to $ 9,944 Greater than or Equal to 5.0%
Tangible capital
(to adjusted total assets) Greater than or Equal to $ 2,983 Greater than or Equal to 1.5%
As of September 30, 1999:
Total risk-based capital
(to risk-weighted assets) Greater than or Equal to $ 6,319 Greater than or Equal to 10.0%
Tier 1 capital
(to risk-weighted assets) Greater than or Equal to $ 3,792 Greater than or Equal to 6.0%
Tier 1 capital
(to adjusted total assets) Greater than or Equal to $ 7,694 Greater than or Equal to 5.0%
Tangible capital
(to adjusted total assets) Greater than or Equal to $ 2,308 Greater than or Equal to 1.5%
</TABLE>
Note 25 - Stockholders' Equity
Federal regulations require that, upon conversion from a mutual to stock form of
ownership, a "liquidation account" be established by restricting a portion of
retained earnings for the benefit of eligible savings account holders who
maintain their savings accounts with the Association after conversion. In the
event of complete liquidation (and only in such event), each savings account
holder who continues to maintain his savings account shall be entitled to
receive a distribution from the liquidation account after payment to all
creditors, but before any liquidation distribution with respect to capital
stock. This account will be proportionately reduced for any subsequent reduction
in the eligible holders' savings accounts.
58
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 25 - Stockholders' Equity, continued
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 OTS.
Note 26 - Compensated Absences
Employees of the Company are entitled to paid vacation after one year of
employment. The vacation time does not vest; therefore, no accrual for vacation
was recorded due to the immateriality. Sick leave is not accrued because it does
not vest. The costs of these compensated absences are recognized when paid.
Note 27 - Interest and Dividends on Investment Securities
Interest income received from investment securities available-for-sale includes
$8,216, $0, and $0, of nontaxable interest for the years ended September 30,
2000, 1999, and 1998, respectively.
Note 28 - Other Noninterest Income and Expense
Other noninterest income and expense amounts are summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Other noninterest income:
Loan late charges $ 42,033 $ 29,009 $ 29,127
Other 55,171 10,547 12,635
--------- --------- ---------
$ 97,204 $ 39,556 $ 41,762
========= ========= =========
Other noninterest expense:
Advertising and promotion $ 37,648 $ 79,799 $ 34,895
Data processing 171,424 133,581 99,501
Professional fees 93,308 68,526 72,634
Supervisory examination 42,141 36,109 36,307
Printing, postage, stationery, and supplies 104,306 81,939 54,660
Telephone 28,734 27,712 22,519
Insurance and bond premiums 44,933 49,237 52,332
Loan servicing expenses 46,606 35,116 42,246
Franchise taxes (24,858) 94,316 94,363
Other 156,734 138,858 153,959
--------- --------- ---------
$ 700,976 $ 745,193 $ 663,416
========= ========= =========
</TABLE>
59
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 29 - Condensed Parent Company Only Financial Statements
The following condensed statements of financial condition as of September 30,
2000 and 1999, and related condensed statements of income and statements of cash
flows for the years ended September 30, 2000 and 1999, should be read in
conjunction with the consolidated financial statements and the related notes.
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
STATEMENT OF FINANCIAL CONDITION
Assets:
Cash $ 530,849 $ 529,813
Note receivable - ESOP Trust 413,134 510,342
Investment in the Association 15,342,806 17,337,121
Receivable from subsidiary 27,936 63,016
Prepaid expenses 0 2,867
Other assets 2,500 0
------------ ------------
Total assets $ 16,317,225 $ 18,443,159
============ ============
Liabilities:
Other liabilities $ 108,252 $ 23,831
------------ ------------
Stockholders' Equity:
Common stock 18,845 18,845
Additional paid-in capital 12,444,372 12,397,167
Retained earnings 13,732,109 13,675,391
Treasury stock (8,867,282) (6,984,857)
Unearned ESOP shares (346,020) (442,059)
Deferred compensation - RRP shares 0 (96,985)
Net unrealized gain on available-for-sale securities, net of tax (773,051) (148,174)
------------ ------------
16,208,973 18,419,328
------------ ------------
Total liabilities and stockholders' equity $ 16,317,225 $ 18,443,159
============ ============
STATEMENT OF INCOME
Income:
Equity in earnings of Association $ 436,666 $ 438,145
Interest income 38,604 45,920
------------ ------------
Total income 475,270 484,065
------------ ------------
Expenses:
Management expenses paid to subsidiary 130,500 130,500
Franchise tax expense 32,915 48,624
Professional fees 37,863 28,089
Other 42,836 26,521
------------ ------------
Total expenses 244,114 233,734
------------ ------------
Income before federal income taxes 231,156 250,331
Federal income taxes (benefit) (64,631) (47,659)
--------- ---------
Net income $ 295,787 $ 297,990
========= =========
</TABLE>
60
<PAGE>
East Texas Financial Services, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 29 - Condensed Parent Company Only Financial Statements, continued
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
STATEMENT OF CASH FLOWS Cash flows from operating activities:
Net income $ 295,787 $ 297,990
Equity in earnings of the Association, net of dividends 6,696,879 1,384,641
Decrease in prepaid expenses and other assets 367 2,744
Increase (decrease) in other liabilities 84,421 (2,483)
----------- -----------
Net cash provided by operating activities 7,077,454 1,682,892
----------- -----------
Cash flows from investing activities:
ESOP loan repayment 97,208 97,208
Decrease in receivable from subsidiary 35,080 55,086
Purchase of Gilmer Financial Services, Inc. (5,231,402) 0
----------- -----------
Net cash provided (used) by investing activities (5,099,114) 152,294
----------- -----------
Cash flows from financing activities:
Proceeds from note payable to bank 1,500,000 500,000
Principal payments on note payable to bank (1,500,000) (500,000)
Net proceeds from issuance of common stock 144,190 193,924
Purchase of treasury stock at cost (1,882,425) (2,207,706)
Sale of treasury stock for exercise of stock options 0 14,760
Dividends paid (239,069) (281,639)
----------- -----------
Net cash used by financing activities (1,977,304) (2,280,661)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,036 (445,475)
Cash and cash equivalents at beginning of year 529,813 975,288
----------- -----------
Cash and cash equivalents at end of year $ 530,849 $ 529,813
----------- -----------
Supplemental disclosure of cash flow information Cash paid for:
Interest on borrowed funds $ 21,979 $ 5,500
Income taxes 0 0
Receivable from subsidiary for ESOP shares issued 47,205 77,544
</TABLE>
61
<PAGE>
CORPORATE DIRECTORY
East Texas Financial Services, Inc. and Subsidiary
<TABLE>
<CAPTION>
Board of Directors*
<S> <C> <C> <C>
Jack W. Flock Gerald W. Free Jim M. Vaughn, M.D. James W. Fair
Chairman of Vice Chairman, Retired Physician Real Estate Investment
the Board President and Chief Investments Oil and Gas Interests
Of Counsel to Executive Officer
Ramey & Flock, P. C.
L. Lee Kidd M. Earl Davis Charles R. Halstead H. H. Richardson, Jr.
Oil and Gas Interests Vice President Geologist President
Compliance and Oil and Gas Interests H. H. Richardson, Jr.
Marketing of the Construction Company
Association
Officers
Gerald W. Free Derrell W. Chapman ** Sandra J. Allen
Vice Chairman, Vice President and Corporate Secretary
President and Chief Chief Operating and
Executive Officer Chief Financial Officer
First Federal Savings and Loan Association of Tyler
Officers
Gerald W. Free Derrell W. Chapman ** Joe C. Hobson Sandra J. Allen
Vice Chairman, Vice President and Sr. Vice President Corporate Secretary
President and Chief Chief Operating and Mortgage Lending
Executive Officer Chief Financial Officer
William L. Wilson M. Earl Davis Elizabeth G. Taylor Stephen W. Horlander
Treasurer and Vice President Vice President Vice President
Controller Compliance and Mortgage Loan Officer Commercial Lending
Marketing
John R. Mills Earlene Cool Jerry Richardson
Vice President Assistant Treasurer Vice President - Manager
Consumer Lending Gilmer Division
</TABLE>
* Directors of the Company also serve as directors of the Association
** Advisory Director
62
<PAGE>
Shareholder
R e f e r e n c e
Executive Offices
1200 South Beckham Avenue
Tyler, Texas 75701
SEC Counsel
Silver, Freedman and Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005-3934
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, N.J. 07016
Independent Auditors
Bryant and Welborn, L.L.P.
601 Chase Drive
Tyler, Texas 75701
Investor Relations
Shareholders, analysts and others seeking information
about East Texas Financial Services, Inc., are invited to contact:
Gerald W. Free, Vice Chairman, President and CEO
or
Derrell W. Chapman, Vice President and COO, CFO
at (903) 593-1767
(903) 593-1094 (Fax)
Copies of the Company's earnings releases and other
financial publications, including the annual report on
Form 10-KSB filed with the Securities
and Exchange Commission, are
available without cost upon
request.
Annual Meeting of
Shareholders January 24,
2001, at 2:00 p.m.
Company Offices
1200 South Beckham Avenue
Tyler, Texas
63
