FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended December 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission file number 0-24848
EAST TEXAS FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2559089
(State or other jurisdiction of (I.R.S. employer
incorporation or organization identification number)
1200 South Beckham, Tyler, Texas 75701
(Address of principal executive offices) (Zip code)
(903) 593-1767
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 of 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
[X] Yes [_] No
The number of shares of the registrant's common stock ($.01 par value)
outstanding as of December 31, 2000, was 1,162,320.
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
December 31, 2000
INDEX
Page No.
--------
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition, December 31, 2000
(Unaudited) and September 30, 2000.................................................... 4
Consolidated Statements of Income, (Unaudited) three months ended
December 31, 2000, and December 31, 1999.............................................. 5
Consolidated Statement of Changes in Stockholders' Equity, (Unaudited)
three months ended December 31, 2000.................................................. 6
Consolidated Statements of Cash Flows, (Unaudited) three months ended
December 31, 2000, and December 31, 1999.............................................. 7
Notes to (Unaudited) Consolidated Financial Statements, December 31, 2000............. 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 14
Part II - Other Information
Item 1. Legal Proceedings................................................................ 21
Item 2. Changes In Securities............................................................ 21
Item 3. Defaults Upon Senior Securities.................................................. 21
Item 4. Submission of Matters To a Vote of Security Holders.............................. 21
Item 5. Other Information................................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................................. 22
Signature
Page............................................................................................ 23
Page 2 of 23
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
December 31, 2000
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
East Texas Financial Services, Inc. (the "Company") was formed in September of
1994 for the purpose of acquiring all of the common stock of First Federal
Savings and Loan Association of Tyler (the "Association"), concurrent with its
conversion from the mutual to stock form of ownership. The Company completed its
initial public stock offering of 1,215,190 shares of $.01 par value common stock
on January 10, 1995. The Company utilized approximately one half of the net
stock sale proceeds to acquire all of the common stock issued by the
Association.
On June 30, 2000, the Company acquired by merger 100% of the common stock of
Gilmer Financial Services, Inc. ("Gilmer" or "the Gilmer transaction") and its
wholly owned subsidiary, Gilmer Savings Bank, F.S.B. The acquisition was
accounted for as a purchase transaction. Gilmer was merged into the Company's
wholly owned subsidiary, First Federal Savings and Loan Association. The assets
and liabilities of Gilmer were recorded at their fair market values. The
difference in the purchase price and the fair market value of the assets and
liabilities acquired is recorded as goodwill. The statement of income for the
period ended December 31, 1999 do not reflect income for Gilmer.
The financial statements presented in this Form 10-QSB reflect the consolidated
financial condition and results of operations of the Company and its wholly
owned subsidiary, First Federal Savings and Loan Association of Tyler.
Page 3 of 23
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS December 31, 2000 September 30, 2000
------------------ ------------------
(Unaudited)
Cash and due from banks $ 1,446,166 $ 1,661,435
Interest-bearing deposits with banks 759,602 543,288
Interest-earning time deposits with financial institutions 991,000 1,089,000
Federal funds sold 2,396,214 364,822
Investment securities available-for-sale 8,010,876 7,916,597
Mortgage-backed securities available-for-sale 43,122,089 44,012,663
Investment securities held-to-maturity (estimated market
value of $24,867,235 at December 31, 2000, and
$25,428,105 at September 30, 2000) 24,972,745 25,970,113
Mortgage-backed securities held-to-maturity (estimated
market value of $3,977,682 at December 31, 2000
and $4,349,164 at September 30, 2000) 3,919,600 4,279,132
Loans receivable, net of allowance for credit losses of $1,003,158
at December 31, 2000 and $1,057,374 at September 30, 2000 103,474,091 102,064,137
Accrued interest receivable 1,623,653 1,548,840
Federal Home Loan Bank stock, at cost 4,180,600 4,115,000
Premises and equipment 2,712,432 2,744,278
Foreclosed assets, net 130,081 86,465
Goodwill, net 2,268,891 2,313,491
Deferred tax asset 136,607 255,233
Mortgage servicing rights 239,611 258,682
Other assets 1,362,536 986,482
------------------ ------------------
Total Assets $ 201,746,794 $ 200,209,658
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest-bearing $ 2,975,995 $ 2,644,220
Interest-bearing 104,631,355 98,975,563
------------------ ------------------
Total deposits 107,607,350 101,619,783
FHLB advances 74,140,165 78,959,065
Advances from borrowers for taxes and insurance 227,890 1,478,438
Federal income taxes
Current 29,555 0
Deferred 0 0
Accrued expenses and other liabilities 3,311,652 1,943,399
------------------ ------------------
Total liabilities 185,316,612 184,000,685
------------------ ------------------
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 12,444,372
Unearned employee stock ownership plan shares (346,020) (346,020)
Retained earnings (substantially restricted) 13,723,045 13,732,109
Accumulated other comprehensive income (542,778) (773,051)
Treasury stock, 722,172 shares at cost (8,867,282) (8,867,282)
------------------ ------------------
Total stockholder's equity 16,430,182 16,208,973
------------------ ------------------
Total liabilities and stockholders' equity $ 201,746,794 $ 200,209,658
================== ==================
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4 of 23
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months
Ended December 31,
(Unaudited)
2000 1999
------------- -------------
INTEREST INCOME
Loans receivable:
First Mortgage $ 1,656,335 $ 1,143,396
Consumer and other loans 438,518 169,390
Securities available for sale:
Investment securities 198,352 37,159
Mortgage-backed securities 814,520 577,956
Securities held to maturity:
Investment securities 394,790 582,503
Mortgage-backed securities 83,920 88,002
Deposits with banks 33,259 23,621
------------- -------------
Total interest income 3,619,694 2,622,027
------------- -------------
INTEREST EXPENSE
Deposits 1,441,400 1,021,580
FHLB advances 1,268,842 728,342
Interest expense other bank borrowings 0 14,688
------------- -------------
Total interest expense 2,710,242 1,764,610
------------- -------------
Net interest income before
provision for loan losses 909,452 857,417
Provision for loan losses 16,234 0
------------- -------------
Net interest income after
provision for loan losses 893,218 857,417
------------- -------------
NONINTEREST INCOME
Gain(loss) on sale of interest-earning assets 10,469 12,208
Loan origination and commitment fees 19,899 11,959
Loan servicing fees 10,194 14,917
Gain on foreclosed real estate (2,798) (410)
Other 88,883 21,225
------------- -------------
Total noninterest income 126,647 59,899
------------- -------------
NONINTEREST EXPENSE
Compensation and benefits 563,474 587,853
Occupancy and equipment 115,339 70,220
SAIF deposit insurance premium 5,324 12,979
Loss on foreclosed real estate 188 0
Goodwill 39,212 0
Other 217,721 97,038
------------- -------------
Total noninterest expense 941,258 768,090
------------- -------------
Income (loss) before provision for income taxes 78,607 149,226
Income tax expense (benefit) 29,555 55,468
------------- -------------
NET INCOME (LOSS) $ 49,052 $ 93,758
============= =============
Earnings per common share and earnings per
common share - assuming dilution $ .04 $ .08
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5 of 23
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED
December 31, 2000
Common Stock Unallocated Unrealized
and Additional ESOP Gain (loss) on Retained
Paid in Capital Shares AFS Securities Earnings
----------------- ------------ -------------- --------------
Balance September 30, 2000 $ 12,463,217 $(346,020) $ (773,051) $13,732,109
Comprehensive income:
Net Income 49,052
Unrealized holding gains 230,273
Comprehensive income
Deferred compensation
amortization
Payment of cash dividends (58,116)
Balance December 31, 2000 $ 12,463,217 $(346,020) $ (542,778) $13,723,045
================= ============ ============= ==============
Total
Treasury Comprehensive Stockholders'
Stocks Income Equity
-------------- ----------------- ---------------
Balance September 30, 2000 $(8,867,282) $ - $ 16,208,973
Comprehensive income:
Net Income 49,052
Unrealized holding gains 230,273
-----------------
Comprehensive income $ 279,325 279,325
=================
Deferred compensation
amortization -
Payment of cash dividends (58,116)
Balance December 31, 2000 $(8,867,282) $ 16,430,182
============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
Page 6 of 23
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Three Months Ended
December 31,
2000 1999
---------------------------------
Cash flows from operating activities:
Net income $ 49,052 $ 93,758
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred loan origination fees (1,486) (1,003)
Amortization of premiums and discounts on investment
securities, mortgage-backed securities, and loans 277 13,017
Amortization of deferred compensation 0 29,095
Amortization of goodwill 39,212 0
Compensation charge related to release of ESOP shares 4,975 21,892
Depreciation 47,707 41,069
Provision for loan losses 16,234 0
Deferred income taxes 0 12,275
Stock dividends on FHLB stock (67,500) (37,100)
Amortization of mortgage servicing rights 27,913 13,870
Net (gain) loss on sale of:
Loans 0 (548)
Loans held for sale (326) 0
Fixed assets 0 0
Foreclosed real estate 188 0
Other repossessed property (2,300) 0
Proceeds from loan sales 716,826 990,992
Originations of loans held for sale (716,500) 0
(Increase) decrease in
Accrued interest receivable (74,813) (156)
Other assets (370,666) (402,533)
Increase (decrease) in:
Federal income tax payable 29,555 43,193
Accrued expenses and other liabilities (1,368,253) (1,298,207)
------------ -----------
Net cash provided (used) by operating activities (1,066,601) (480,386)
------------ -----------
The accompanying notes are an integral part of the financial statements.
Page 7 of 23
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Three Months End
December 31,
2000 1999
---------------- ---------------
Cash flows from investing activities
Net (increase) decrease in interest-earning time deposits 98,000 682,617
Net (increase) decrease in fed funds sold (2,031,392) 0
Purchases of securities available-for-sale 0 (485,930)
Purchase of securities held-to-maturity 0 0
Proceeds from maturities of securities held-to-maturity 1,000,000 2,000,000
Purchases of mortgage-backed securities
available-for-sale 0 (5,208,739)
Principal payments on mortgage-backed securities available for sale 1,119,535 760,792
Principal payments on mortgage-backed securities held to maturity 356,143 533,085
Purchases of FHLB stock 0 (439,900)
Proceeds from redemption of FHLB stock 1,900 0
Net increase in loans (1,487,295) (2,259,551)
Proceeds from sale of foreclosed real estate 42,254 0
Acquisition costs related to foreclosed real estate 0 0
Proceeds from sales of fixed assets 0 0
Expenditures for premises and equipment (15,861) (35,339)
Origination of mortgage servicing rights (8,843) (11,661)
---------------- --------------
Net cash provided (used) by investing activities (925,559) (4,464,626)
---------------- --------------
Cash flows from financing activities:
Net increase (decrease) in:
Deposits 5,987,567 (1,203,836)
Advances from borrowers (1,250,548) (713,155)
Proceeds from note payable to bank 0 1,500,000
Principal payments on note payable to bank 0 0
Proceeds from advances from Federal Home Loan Bank 237,558,000 131,125,206
Payment of advances from Federal Home Loan Bank (242,376,900) (121,710,399)
Purchase of treasury stock at cost 0 (1,882,425)
Exercise of stock options 0 0
Dividends paid to stockholders (58,116) (64,103)
---------------- --------------
Net cash provided (used) by financing activities (139,997) 7,051,228
---------------- --------------
Net increase (decrease) in cash and cash equivalents 1,045 2,106,276
Cash and cash equivalents at beginning of the period 2,204,723 1,994,564
---------------- --------------
Cash and cash equivalents at end of the period $ 2,205,768 $ 4,100,840
================ ==============
Supplemental disclosure:
Cash paid for:
Interest on deposits $ 776,207 $ 612,398
Interest on FHLB advances and other borrowed funds 1,268,841 743,030
Income taxes 0 0
Transfers from loans to real estate and other
assets acquired through foreclosures 58,433 2,966
Loans made to facilitate the sale of foreclosed assets 54,600 0
The accompanying notes are an integral part of the consolidated financial
statements
Page 8 of 23
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
NOTE 1 - BASIS OF PRESENTATION
The financial statements presented in this report have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all adjustments which are, in the
opinion of management, necessary for fair presentation. These financial
statements have not been audited by an independent accountant. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations for interim
reporting. The Company believes that the disclosures are adequate to make the
information not misleading. However, these financial statements should be read
in conjunction with the financial statement and notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended September 30, 2000.
The financial data and results of operations for interim periods presented may
not necessarily reflect the results to be anticipated for the complete year.
NOTE 2 - EARNINGS PER SHARE
Earnings per common share for the three months ended December 31, 2000 and 1999,
has been computed based on net income divided by the weighted average number of
common shares outstanding during the period. For the three months ended December
31, 2000 and 1999, the weighted average number of shares outstanding totaled
1,162,320.
Earnings per common share - assuming dilution, for the three months ended
December 31, 2000 and 1999, has been computed based on net income divided by the
weighted average number of common shares outstanding. In addition, it includes
the effects of all dilutive potential common shares that were outstanding during
the period. For the three months ended December 31, 2000 and 1999, the weighted
average number of shares outstanding for earnings per share - assuming dilution
totaled 1,110,497 and 1,226,999, shares respectively.
For both earnings per share and earnings per common share - assuming dilution
and as prescribed by the American Institute of Certified Public Accountants
Statement of Position 93-6 ("SOP 93-6") Employer's Accounting for Employees
Stock Ownership Plans, the weighted average number of shares outstanding does
not include unallocated Employee Stock Ownership Plan ("ESOP") shares.
See Part II, Item 6 - Exhibits for a detailed presentation of the earnings per
share calculation for the three month period ended December 31, 2000 and 1999.
Page 9 of 23
NOTE 3 - SECURITIES
The carrying values and estimated market values of investment securities
available-for-sale as of December 31, 2000, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying
Balance Premiums Discounts Gain/(Loss) Value
-------------- --------------- -------------- --------------- ---------------
Corporate debt $ 7,500,000 $ 49,640 $ 122,200 $ (2,730) $ 7,424,710
Municipal bonds 585,000 0 6,500 7,666 586,166
-------------- --------------- -------------- --------------- ---------------
$ 8,085,000 $ 49,640 $ 128,700 $ 4,936 $ 8,010,876
-------------- --------------- -------------- --------------- ---------------
The weighted average yield on the investment security available-for-sale
portfolio was 6.41% for the quarter ended December 31, 2000.
The amortized cost and estimated market values of investment securities
held-to-maturity as of December 31, 2000, are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- -------------- --------------- --------------
Debt securities:
U. S. government agency 24,972,745 39,187 144,697 24,867,235
-------------- -------------- --------------- --------------
Total debt securities 24,972,745 39,187 144,697 24,867,235
-------------- -------------- --------------- --------------
The amortized cost and estimated market values of investment securities
held-to-maturity as of December 31, 2000, by contractual maturity are shown
below:
Estimated
Amortized Market
Cost Value
-------------- ---------------
Due in one year or less $ 0 $ 0
Due after one year through two
years 4,000,000 3,988,760
Due after two years through three years
18,973,331 18,913,635
Due after three years through six years
1,999,414 1,964,840
-------------- ---------------
Total debt securities $ 24,972,745 $ 24,867,235
-------------- ---------------
As of December 31, 2000, all of the securities had call options exercisable at
the discretion of the issuer.
Page 10 of 23
As of December 31, 2000, the weighted average yield on the Company's investment
security held-to-maturity portfolio was approximately 6.08% while the Company's
overall investment portfolio, including securities held-to-maturity, investment
securities available-for-sale, overnight deposits and interest earning time
deposits with other financial institutions was approximately 6.14%.
The carrying values and estimated market values of mortgage-backed and related
securities available-for-sale as of December 31, 2000, by type of security are
as follows:
Principal Unamortized Unearned Unrealized Carrying
Balance Premiums Discounts Gain/(Loss) Value
-------------- --------------- -------------- -------------- ---------------
Fixed Rate $ 6,152,310 $ 6,038 $ 90,445 $ 42,863 $ 6,110,766
Adjustable Rate 37,876,753 227,089 222,329 (870,190) 37,011,323
-------------- --------------- -------------- -------------- ---------------
44,029,063 233,127 312,774 (827,327) 43,122,089
-------------- --------------- -------------- -------------- ---------------
The carrying values and estimated market values of mortgage-backed and related
securities held-to-maturity as of December 31, 2000, by type of security are as
follows:
Estimated
Principal Unamortized Unearned Carrying Market
Balance Premiums Discounts Value Value
-------------- --------------- -------------- -------------- ---------------
Adjustable Rate 3,894,001 28,169 2,570 3,919,600 3,977,682
-------------- --------------- -------------- -------------- ---------------
$ 3,894,001 $ 28,169 $ 2,570 $ 3,919,600 $ 3,977,682
-------------- --------------- -------------- -------------- ---------------
The overall yield on the Company's mortgage-backed securities portfolios as of
December 31, 2000, was approximately 7.51%.
NOTE 4 - CURRENT ACCOUNTING ISSUES
SFAS No. 133 In June of 1998, the Financial Accounting Standards Board issued
- ------------
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and requires
recognition of all derivatives in the statement of financial position at fair
value. The Company currently does not invest in any derivative instruments or
hedging activities as defined in this Statement.
The Statement is effective for fiscal years beginning after June 15, 1999. The
Company adopted the Statement as required.
NOTE 5 - STOCK OPTION AND INCENTIVE PLAN
The 1995 Stock Option and Incentive Plan (the "Stock Option Plan") provides for
awards in the form of stock options, stock appreciation rights, limited stock
appreciation rights, and restricted stock.
Options to purchase shares of common stock of the Company may be granted to
selected directors, officers and key employees. The number of shares of common
stock reserved for issuance under the stock option plan was equal to 182,278 or
10% of the total number of common shares issued pursuant to the conversion. The
option exercise price
Page 11 of 23
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 generally 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:
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 December 31, 2000 under stock option plan 147,276
=========
Shares available for future grants 22,662
=========
During the three months ended December 31, 2000, no options were exercised,
issued, or forfeited.
Page 12 of 23
NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK
The outstanding advances from the FHLB consisted of the following at December
31, 2000:
Maturity Balance Rate
- ------------------------ ---------------------- -------
01/02/2001 $ 22,000,000 6.63%
01/05/2001 $ 1,000,000 6.64%
01/08/2001 $ 35,700,000 6.62%
01/08/2001 $ 3,190,000 6.62%
02/15/2001 $ 20,000 5.94%
02/15/2002 $ 25,000 5.98%
02/15/2003 $ 100,000 6.00%
09/01/2003 $ 1,420,300 6.25%
02/15/2004 $ 100,000 6.01%
12/31/2004 $ 243,481 6.09%
01/03/2005 $ 88,721 6.03%
02/15/2005 $ 100,000 6.04%
02/15/2006 $ 150,000 6.05%
01/01/2013 $ 434,834 6.09%
01/01/2013 $ 413,267 6.13%
02/01/2013 $ 409,884 5.91%
03/03/2014 $ 843,535 5.45%
04/01/2014 $ 814,596 5.97%
05/01/2014 $ 1,108,957 5.66%
06/01/2014 $ 845,444 5.90%
07/01/2014 $ 782,597 6.38%
08/01/2014 $ 568,410 6.37%
09/01/2014 $ 717,908 6.59%
10/01/2014 $ 629,949 6.86%
11/03/2014 $ 1,554,516 6.77%
12/01/2014 $ 531,154 6.57%
01/01/2015 $ 347,612 6.73%
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock and deposit accounts in the FHLB, mortgage
collateral, securities collateral, and other collateral.
Page 13 of 23
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
December 31, 2000
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The principle business of the Company is that of a community-oriented financial
institution attracting deposits from the general public and using such deposits
to originate one- to four-family residential loans, commercial real estate, one-
to four-family construction, multi-family, commercial and consumer loans. These
funds have also been used to purchase mortgage-backed securities, U. S.
government and agency obligations and other permissible investments. The Company
also borrows funds from the Federal Home Loan Bank of Dallas ("FHLB") to fund
loans and to purchase securities. The ability of the Company to attract deposits
is influenced by a number of factors, including interest rates paid on competing
investments, account maturities and levels of personal income and savings. The
Company's cost of funds is influenced by interest rates on competing investments
and general market rates of interest. Lending activities are influenced by the
demand for real estate loans and other types of loans, which is in turn affected
by the interest rates at which such loans are made, general economic conditions
affecting loan demand, the availability of funds for lending activities,
economic conditions and changes in real estate values.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan and
investment portfolios and the interest paid on deposits and borrowings. Results
of operations are also affected by the Company's provision for loan losses and
the net gain (loss) on sales of interest earning assets and loan fees. The
Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
On June 30, 2000, the Company completed the acquisition of Gilmer and its wholly
owned subsidiary, Gilmer Savings Bank, F.S.B. The Company acquired 100% of the
outstanding stock of Gilmer, the transaction was accounted for as a purchase
transaction. The assets and liabilities of Gilmer were recorded at their fair
market values as of June 30, 2000. The difference in the net fair value of
Gilmer's assets and liabilities and the purchase price of approximately $5.4
million was recorded as goodwill. The statement of financial condition, the
statement of changes in stockholder's equity and the statement of cash flows
reflect the acquisition of Gilmer. The statement of income for the three months
ended December 31, 1999 reflects only activity for the Company prior to the
acquisition of Gilmer.
FINANCIAL CONDITION
Total assets were $201.8 million at December 31, 2000, a $1.6 million increase
from the $200.2 million reported at September 30, 2000, the Company's most
recent fiscal year end. The increase in total assets was the result of a $2.0
million increase in federal funds sold, a $1.4 million increase in loans
receivable, a $216,000 increase in interest-earning deposits with banks and a
$94,000 increase in investment securities available-for-sale. The increases were
partially offset by a $997,000 decrease in investment securities held to
maturity, an $891,000 decline in mortgage-backed securities available-for-sale,
and a $360,000 decline in mortgage-backed securities held to maturity.
At December 31, 2000, loans-receivable totaled $103.5 million, and increase of
$1.4 million compared to $102.1 million at September 30, 2000. The increase in
loans-receivable was primarily the result of the Company's
Page 14 of 23
continued efforts to expand its origination of consumer, commercial, and
commercial real estate loans. The increase in the origination of such loans
helped to offset a decline, due to rising interest rates, in the volume of one-
to four-family loans originated.
For the quarter ended December 31, 2000, the Company originated a total of
approximately $5.0 million in consumer, commercial, and commercial real-estate
loans. Approximately $800,000 of the loans originated were renewals of existing
loans. The result was an increase in the balance of such loans outstanding to
$24.4 million at December 31, 2000, compared to $22.4 million at September 30,
2000. The origination of consumer, commercial, and commercial real estate loans
is primarily conducted through the Company's full service banking location in
Gilmer, Texas and the S. Broadway office in Tyler, Texas. The predominant method
for originating these loans is through direct contacts with existing or
potential new customers. However, the Company has increased its origination of
indirect automobile loans through a network of dealers in the Tyler and Gilmer
markets. Prior to purchasing a loan contract from a dealer, the Company
underwrites each indirect loan in the same manner as its direct loans. In
addition, each dealer maintains a reserve account with the Company. For the
quarter ended December 31, 2000, the Company originated approximately $875,000
in automobile loans through its indirect program.
Federal funds sold totaled $2.4 million at December 31, 2000, an increase of
$2.0 million from the $365,000 at September 30, 2000. The additional balances,
which are held in a "sweep" account arrangement with the Company's major
correspondent bank, were funds held at the correspondent bank in anticipation of
funding year end tax payments of the Company's mortgage loan portfolio. The
Company issues checks to various taxing entities on the last day of the calendar
year, when most property tax accounts are due. The balance in federal funds sold
decreased by approximately $2.0 million as the checks were presented to the
correspondent bank for payment.
Investment securities available-for-sale increased by $94,000 to a total of $8.0
million at December 31, 2000. The increase was solely the result of increases in
the mark-to-market value of the securities in the portfolio from September 30,
2000 to December 31, 2000. This portfolio consists of corporate debt securities
and municipal bonds. All of the corporate debt securities have a fixed rate and
term and are non-callable. The Company's investment policy only allows for the
purchase of investment-grade securities. All corporate debt securities have a
final maturity of eight years or less. The municipal bonds, which comprise only
$585,000 of the portfolio, are primarily bonds issued by Upshur County, where
the Company's Gilmer office is located.
Investment securities held-to-maturity was reported as $25.0 million at December
31, 2000, a decline of $997,000 from the $26.0 million reported at September 30,
2000. The decrease was the result of bonds that matured or were called by the
issuer during the quarter. This portfolio consists entirely of debt issued by
governmental agencies such as Federal National Mortgage Corporation, Federal
Home Loan Mortgage Corporation, or the Federal Home Loan Bank System. All of the
bonds in the portfolio are currently callable at the discretion of the issuer.
The Company expects, with anticipated declining interest rates, much of the
portfolio to be called by the issuer over the next several months. The
additional cash flow will provide a challenge for the Company to reinvest in a
declining interest rate environment.
Mortgage-backed securities available-for-sale totaled $43.1 million at December
31, 2000, a decrease of $891,000 from the $44.0 million at September 30, 2000.
The decrease was the result of principal repayments on the bonds in the
portfolio during the quarter.
Mortgage-backed securities held-to-maturity portfolio totaled $3.9 million at
December 31, 2000, a decrease of $360,000 from the $4.3 million reported at
September 30, 2000. The decrease was primarily due to principal payments
received on the portfolio during the period.
Total deposits were $107.6 million at December 31, 2000, an $6.0 million
increase from the $101.6 million reported at September 30, 2000. The increase
was primarily the result of additional increases in certificates of deposit as
the Company elected to pay higher interest rates on such deposits during the
quarter.
Page 15 of 23
The Company reported $74.1 million in borrowed funds at December 31, 2000, a
decrease of $4.8 million from the $79.0 million reported at September 30, 2000.
The decrease was primarily due to the Company's decision to repay short-term
advances from excess cash flow. The advances are primarily used to fund
investments in mortgage-backed securities, which are purchased by the Company
when the Company is unable to originate mortgage loans and place such loans into
the portfolio. In addition, the Company utilizes such advances to fund
commercial real estate loans. The Company is able to structure the advances to
mirror the terms of the loans. Also, the Company utilizes short-term advances to
provide needed liquidity.
Stockholder's equity totaled $16.4 million at December 31, 2000, an increase of
$221,000 from the $16.2 million reported at September 30, 2000. The increase was
primarily attributable to a net increase in unrealized losses on
available-for-sale securities, of approximately $230,000, during the quarter.
Stockholder's equity also increased due to the $49,000 of net income reported
for the quarter. Both of these increases were offset by the payment of $58,000
in cash dividends during the quarter.
At December 31, 2000, the Company reported a book value per share of $14.14
based on 1,162,320 net outstanding shares.
RESULTS OF OPERATIONS
The Company's net income is dependent primarily upon net interest income, the
difference or spread between the average yield earned on loans and investments
and the average rate paid on deposits, as well as the relative amounts of such
assets and liabilities. The Company, like other financial intermediaries, is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different times, or on a different basis, than
its interest earning assets.
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
General. Net income for the three months ended December 31, 2000 was $49,000 or
$.04 per share, a decrease of $45,000 from the $94,000, or $.08 per share,
reported for the three months ended December 31, 1999. The decrease in net
income was attributable to a $173,000 increase in non-interest expense which was
partially offset by a $67,000 increase in non-interest income, a $36,000
increase in net interest income after provision for loan losses, and a $26,000
decline in income tax expense.
Net Interest Income. For the quarter ended December 31, 2000, net interest
income before provision for loan losses totaled $909,000, and increase of
$52,000 over the $857,000 reported for the quarter ended December 31, 1999. On
an annualized basis, the $909,000 in net interest income for the current quarter
was approximately 1.91% of average interest-earning assets and 1.81% of average
total assets. For the quarter ended December 31, 1999, the $857,000 in net
interest income before provisions for loan losses was approximately 2.27% of
average interest-earning assets and 2.19% of average total assets. Average
interest-earning assets were approximately $190.1 million for the quarter ended
December 31, 2000, compared to $150.8 million for the quarter ended December 31,
1999.
Total interest income was $3.6 million for the quarter ended December 31, 2000,
an increase of $998,000 over the $2.6 million reported for the quarter ended
December 31, 1999. The increase was primarily due to the increase in interest
earning assets, primarily as a result of the additional interest-earning assets
acquired in the Gilmer merger, and, to a lesser extent, in additional
interest-earning assets acquired by the Company during the 12 months ended
December 31, 2000.
Interest income on loans-receivable was $2.1 million for the quarter ended
December 31, 2000. On an annualized basis, the $2.1 million was approximately
8.15% or average loans-receivable balances outstanding for the quarter ended
December 31, 2000, compared to approximately 7.74% for the quarter ended
December 31, 1999. The increase in average yield on the loan portfolio was
primarily the result of the increase in consumer, commercial, and commercial
real estate loan balances and the higher yields on such loans recorded over the
past 12 months.
Page 16 of 23
Interest income from mortgage-backed securities available-for-sale totaled
$815,000 for the quarter ended December 31, 2000, compared to $578,000 for the
quarter ended December 31, 1999. The increase in interest income from
mortgage-backed securities available-for-sale was primarily due to an increase
in the balances in the portfolio, from $32.9 million at September 30, 2000 to
$43.1 million at December 31, 2000. The increase in the balance in the portfolio
was primarily the result of additional securities acquired in the Gilmer merger.
To a lesser extent the increase was due to securities purchased by the Company
during the 12 months ended December 31, 2000. The average yield on the portfolio
was approximately 6.39% for the quarter ended December 31, 2000, compared to
approximately 6.60% for the quarter ended December 31, 1999.
Interest income from the investment securities held-to-maturity portfolio was
$395,000 for the quarter ended December 31, 2000, compared to $583,000 for the
quarter ended December 31, 1999. The decline in the income from the portfolio
was the result of a decline in the balance in the portfolio from $30.5 million
at September 30, 2000 to $25.0 million at December 31, 2000, as the Company
redirected cash flow into its lending operations.
Interest income from investment securities available-for-sale increase to
$198,000 for the quarter ended December 31, 2000 from $37,000 for the quarter
ended December 31, 1999, a $161,000 increase. The increase was due primarily to
an increase in the balance in the portfolio from $5.9 million at September 30,
1999 to $8.0 million at December 31, 2000. The increase in balances in the
portfolio was due to the securities acquired in the Gilmer merger and to
additional securities acquired by the Company.
Interest income on mortgage-backed securities held-to-maturity totaled $84,000
for the quarter ended December 31, 2000, a decrease of $4,000 from the $88,000
reported for the quarter ended December 31, 1999. The decline in interest income
was due to a decline in the balance in the portfolio as the Company directed
cash flow from the portfolio into it lending operations or other investment
portfolios.
Interest paid to depositors totaled $1.4 million for the quarter ended December
31, 2000, and increase of $420,000 from the $1.0 million reported for the
quarter ended December 31, 1999. The increase in interest expense on deposit
accounts was primarily attributable to the increase in deposit balances acquired
by the Company in the Gilmer merger. To a lesser extent, additional balances
acquired by the Company during the year and increasing interest rates on
certificate of deposit account renewals during the past year contributed to the
increase in interest expense.
Interest on FHLB advances was $1.3 million for the quarter ended December 31,
2000, compared to $728,000 for the quarter ended December 31, 1999. The increase
in interest expense was a direct result of an increase in average FHLB advance
balances outstanding from approximately $50.0 million for the quarter ended
December 31, 1999 to $76.5 million for the quarter ended December 31, 2000.
Increasing interest rates during the past year also contributed to the increase
in interest expense. During the past 12 months, the Company increased its
reliance on short term funding from the FHLB to fund loans and investments.
Rising interest rates in 1999 and 2000 decreased cash flow from the Company's
investment portfolios and reduced cash flow from prepayments in the loan
portfolio. The result was that the Company needed additional FHLB borrowings to
fund the loans and investments. As interest rates begin to decline in 2001 and
cash flow increases, the Company will, depending upon loan demand, reduce its
reliance on short- term borrowings from the FHLB. However, the Company's goal is
to maintain total assets at around $200.0 million and fully utilize its existing
capital. To the extent that excess cash flow not otherwise invested in the
Company's loan portfolio can be invested in securities at interest rates higher
than existing short term advance, the Company may continue to utilize borrowings
from the FHLB to fund assets.
Provision for Loan Losses. The Company made $16,000 in provision for loan losses
for the quarter ended December 31, 2000, compared to none for the quarter ended
December 31, 1999. The increase in provision for loan losses was the result of
the Company's decision to establish additional reserves for losses in its
checking with overdraft privilege program. In 2000, the Company instigated a
program designed to attract additional checking accounts and to increase fee
income from new and current checking accounts. The program allows approved
checking account customers to overdraft their account up to $500. The Company
agrees to not return the insufficient checks but charges the customer the usual
insufficient check charge fee. The Company reviews overdraft checking account
balances on a monthly basis to determine if, additional reserves for potential
losses in the program or any of its other checking accounts, is warranted.
Page 17 of 23
Noninterest Income. Noninterest income totaled $127,000 for the quarter ended
December 31, 2000 compared to $60,000 for the quarter ended December 31, 1999, a
$67,000 increase.
The increase was the result of a $68,000 increase in other noninterest income.
Additional fee income from the Company's free checking and checking with
overdraft privilege programs introduced in 2000 accounted for most of the
increase. In addition, additional fee income from the transaction accounts
acquired in the Gilmer merger accounted for a portion of the increase in fee
income for the current quarter.
Noninterest Expense. Noninterest expense was $941,000 for the quarter ended
December 31, 2000, an increase of $173,000 from the $768,000 for the quarter
ended December 31, 1999.
The increase was primarily attributable to a $121,000 increase in other
operating expenses. The $121,000 increase in other operating expenses was
attributable to a $71,000 increase in franchise tax expense paid by the
Company's subsidiary, First Federal Savings and Loan Association of Tyler to the
state of Texas. In the quarter ended December 31, 1999, the Association received
approximately $63,000 in one-time refunds on previously filed franchise tax
returns. The refunds were due to a change in the definition of certain items
included as income under state of Texas franchise tax rules. In addition, the
increase in other operating expenses was attributable to an additional $18,000
in data processing expenses, primarily due to the additional account processing
associated with the Gilmer merger. Also, a $10,000 commission paid to the
consultant that assisted the Company in designing and implementing the free
checking and checking with overdraft privilege programs accounted for a portion
of the increase in other operating expenses. Finally, a $6,000 increase in
advertising expenses associated with initial marketing efforts in the Gilmer
market and a $6,000 increase in postage expense, also as a result of additional
account processing with the Gilmer merger, accounted for the remainder of the
increase in other operating expenses.
A $39,000 increase in amortization of the goodwill created in the Gilmer merger
also accounted for a portion of the increase in noninterest expenses for the
quarter ended December 31, 2000, compared to the quarter ended December 31,
1999. Occupancy and equipment expenses increased by $45,000 for the current
quarter, primarily due to additional expenses in the Gilmer operation.
The increases in noninterest expenses were partially offset by a $24,000
decrease in compensation and benefits expense to $563,000 for the quarter ended
December 31, 2000, compared to $588,000 for the quarter ended December 31, 1999.
The decrease was due to the elimination of year-end bonuses to employees that
were paid to employees in the quarter ended December 31, 1999 and not paid in
the quarter ended December 31, 2000.
Provision for Income Taxes. The Company incurred federal income tax expense of
$30,000 or 37.6% or pre-tax income for the quarter ended December 31, 2000,
compared to $55,000 or 37.2% or pre-tax income for the quarter ended December
31, 1999.
ASSET QUALITY
At December 31, 2000, the Company's non-performing assets totaled $874,000 or
0.43% of total assets, compared to $1.0 million or 0.52% of total assets at
September 30, 2000. At December 31, 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.
Non-performing loans at December 31, 2000 equaled $874,000 or 0.84% of loans
receivable, compared to $1.0 million or 0.97% of loans receivable at September
30, 2000.
Classified assets totaled $2.8 million or 1.41% of total assets at December 31,
2000, compared to $3.0 million or 1.49% of total assets at September 30, 2000.
Classified assets and non-performing assets differ in that classified assets may
include loans less than ninety (90) days delinquent. Also, assets guaranteed by
government agencies such as the Veterans Administration and the Federal Housing
Administration are not included in classified assets but are included in
non-performing assets. On
Page 18 of 23
the basis of management's review of its assets, at December 31, 2000, the
Company had classified $2.6 million assets as substandard, $154,000 as doubtful,
and $127.000 as loss.
The Company's allowance for loan losses totaled $1.0 million at December 31,
2000, a slight decrease from the $1.1 million at September 30, 2000. The
allowance for loan losses as a percentage of loans receivable equaled 0.97% at
December 31, 2000 and 1.04% at September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits from customers, advances
from the FHLB, amortization and prepayment of loan principal (including
mortgage-backed securities), maturities of securities, sales of loans and
operations.
The Association uses its liquidity and capital resources principally to meet
ongoing commitments to fund maturing certificates of deposit and loan
commitments, maintain liquidity and pay operating expenses. At December 31,
2000, the Association had outstanding commitments to extend credit on $4.2
million of real estate loans.
Management believes that present levels of liquid assets are sufficient to meet
anticipated future loan commitments as well as deposit withdrawal demands.
Total stockholders' equity equaled $16.4 million at December 31, 2000, an
increase of $221.000 from the $16.2 million reported at September 30, 2000. The
increase was the result of the $230,000 net gain on available-for-sale
securities and net income of $49,000 reported for the three month period ended
December 31, 2000. The decrease was offset by the $58,000 cash dividend paid
during the quarter.
As of December 31, 2000, the Company's reported book value per share, using
total stockholders' equity of $16.4 million (net of the cost of unallocated ESOP
and RRP shares) and 1,162,320 outstanding shares of common stock (the total
issued shares including unallocated ESOP and RRP shares, less treasury shares),
equaled $14.14 per share.
Subsequent to the quarter ended December 31, 2000, the Company announced its
intention to pay a cash dividend of $.05 per share on February 21, 2001, to
stockholders of record at February 7, 2001.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), Congress imposed a three part capital requirement for thrift
institutions. At December 31, 2000, the Association's actual and required
capital amounts under each of the three requirements were as follows:
- - Tangible Capital (stockholders' equity) was $13.8 million or 6.829% of total
assets, exceeding the minimum requirement of 1.5% by $10.8 million.
- - Core Capital (Tangible capital plus certain intangible assets) was $13.8
million or 6.829% of total assets, exceeding the minimum requirement of 4.0% by
$5.7 million.
- - Risk-based Capital (Core capital plus general loan and valuation allowances
less an adjustment for capitalized mortgage servicing rights) equaled $14.8
million of 16.019% of risk weighted assets, exceeding the minimum requirement of
8.0% of risk weighted assets by $7.4 million.
At December 31, 2000, the Association was considered a "well capitalized"
institution under the prompt corrective action requirements of the Federal
Deposit Insurance Corporation Improvement Act of 1991.
Page 19 of 23
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB or future filings by the Company with the
Securities and Exchange Commission, the Company's press releases or other public
or shareholder communications or in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project",
"believe" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit risks of lending
activities, and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Page 20 of 23
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
DECEMBER 31, 2000
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which the Company or the
Association is a party or of which any of their property is subject. From
time-to-time, the Association is a party to various legal proceedings
incident to the conduct of its business.
Item 2. Changes In Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submissions Of Matters To A Vote Of Security Holders
On January 24, 2001, the Company's Annual Stockholders' Meeting was held to
elect directors and ratify the appointment of independent auditors for the
current fiscal year. The following are the voting results of each of these
matters submitted to stockholders.
The election of Gerald W. Free For 698,178
as director for a three year term Withheld 131,277
ending January 2004 Abstain 0
Broker Non-Votes 0
The election of H. H. Richardson, Jr. For 698,344
and Jim M. Vaughn, M.D. Withheld 131,211
as directors for a three year term Abstain 0
ending January 2004 Broker Non-Votes 0
Ratification of the appointment of For 815,605
Bryant And Welborn, L.L.P. as Against 13,950
independent auditors for the Abstain 0
fiscal year ending
September 30, 2001.
The text of the matters referred to in this Item 4 is set forth in the
Proxy Statement dated December 28, 2000, previously filed with the
Securities and Exchange Commission.
Item 5. Other Information.
None
Page 21 of 23
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27. The following exhibits are filed herewith:
Exhibit 11.0 - Computation of Earnings Per Share
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended December 31, 2000, the Company filed a report
on Form 8-K on October 24, 2000, to report the issuance of a press
release dated October 24, 2000, announcing a cash dividend for the
quarter ending September 31, 2000 and the annual stockholders' meeting.
Page 22 of 23
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
East Texas Financial Services, Inc.
Date: February 14, 2001 /s/ Gerald W. Free
--------------------------------------------
Vice Chairman, President and CEO
(Principal Executive Officer)
Date: February 14, 2001 /s/ Derrell W. Chapman
--------------------------------------------
Vice President/COO/CFO
(Principal Financial and Accounting Officer)
Page 23 of 23