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 March 31, 2002
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 March 31, 2002, was 1,162,320.
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
March 31, 2002
- --------------------------------------------------------------------------------
INDEX
Page No.
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition, March 31, 2002
(Unaudited) and September 30, 2001......................................................4
Consolidated Statements of Income, (Unaudited) three months and six months ended
March 31, 2002 and March 31, 2001.......................................................5
Consolidated Statement of Changes in Stockholders' Equity, (Unaudited)
six months ended March 31, 2002.........................................................6
Consolidated Statements of Cash Flows, (Unaudited) six months ended
March 31, 2002, and March 31, 2001......................................................7
Notes to (Unaudited) Consolidated Financial Statements, March 31, 2002..................9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................16
Part II - Other Information
Item 1. Legal Proceedings.......................................................................25
Item 2. Changes In Securities...................................................................25
Item 3. Defaults Upon Senior Securities.........................................................25
Item 4. Submission of Matters To a Vote of Security Holders...............................25
Item 5. Other Information.......................................................................25
Item 6. Exhibits and Reports on Form 8-K........................................................25
Signature Page..................................................................................26
2
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
March 31, 2002
- --------------------------------------------------------------------------------
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 of Tyler.
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 was recorded as goodwill.
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.
Certain items from prior periods have been reclassified for comparability
purposes.
3
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS March 31, 2002 September 30, 2001
--------------- -------------------
(Unaudited)
Cash and due from banks $ 1,972,145 $ 2,013,647
Interest-bearing deposits with banks 1,249,643 2,824,364
Interest-earning time deposits with financial institutions 300,000 600,000
Federal funds sold 426,595 86,242
Investment securities available-for-sale 527,508 6,843,583
Mortgage-backed securities available-for-sale 22,554,703 27,352,449
Investment securities held-to-maturity (estimated market
value of $9,790,540 at March 31, 2002, and
$8,075,494 at September 30, 2001) 9,744,850 7,765,537
Mortgage-backed securities held-to-maturity (estimated
market value of $30,972,950 at March 31, 2002
and $36,585,979 at September 30, 2001) 30,691,165 35,879,076
Loans receivable, net of allowance for credit losses of $723,424
at March 31, 2002 and $769,225 at September 30, 2001 132,380,753 115,847,396
Accrued interest receivable 1,301,126 1,285,582
Federal Home Loan Bank stock, at cost 4,388,700 4,323,900
Premises and equipment 2,606,827 2,656,988
Foreclosed assets, net 361,085 259,498
Goodwill, net 2,170,381 2,170,381
Mortgage servicing rights 123,148 174,128
Other assets 867,086 1,698,338
------------- -------------
Total Assets $ 211,665,715 $ 211,781,109
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Noninterest deposits $ 3,460,751 $ 3,319,015
Interest-bearing deposits 103,288,767 112,292,026
------------- -------------
Total deposits 106,749,518 115,611,041
FHLB advances 83,120,947 74,468,248
Advances from borrowers for taxes and insurance 404,211 1,267,900
Federal income taxes
Current 510,580 0
Deferred 517,175 670,706
Accrued expenses and other liabilities 1,840,759 1,849,333
------------- -------------
Total liabilities 193,143,190 193,867,228
------------- -------------
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 12,473,302 12,473,302
Unearned employee stock ownership plan shares (255,597) (255,597)
Retained earnings (substantially restricted) 15,106,032 14,199,357
Accumulated other comprehensive income 47,225 345,256
Treasury stock, 722,172 shares at cost (8,867,282) (8,867,282)
------------- -------------
Total stockholder's equity 18,522,525 17,913,881
------------- -------------
Total liabilities and stockholders' equity $ 211,665,715 $ 211,781,109
============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
4
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Six Months
Ended March 31, Ended March 31,
2002 2001 2002 2001
----------- ----------- ----------- -----------
INTEREST INCOME
Loans receivable:
First Mortgage $ 1,597,670 $ 1,645,319 $ 3,157,844 $ 3,301,654
Consumer and other loans 867,946 498,543 1,650,886 937,061
Securities available-for-sale:
Investment securities 42,346 165,417 126,173 363,769
Mortgage-backed securities 104,106 663,612 372,668 1,478,132
Securities held-to-maturity:
Investment securities 154,181 347,660 309,260 742,450
Mortgage-backed securities 496,414 290,076 1,023,377 373,996
Deposits with banks: 10,718 26,691 27,529 59,950
----------- ----------- ----------- -----------
Total interest income 3,273,381 3,637,318 6,667,737 7,257,012
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 1,010,237 1,506,257 2,224,652 2,947,657
FHLB advances 649,423 1,030,196 1,332,433 2,299,038
----------- ----------- ----------- -----------
Total interest expense 1,659,660 2,536,453 3,557,085 5,246,695
----------- ----------- ----------- -----------
Net interest income before
provision for loan losses 1,613,721 1,100,865 3,110,652 2,010,317
Provision for loan losses 101,438 7,405 111,197 23,639
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 1,512,283 1,093,460 2,999,455 1,986,678
----------- ----------- ----------- -----------
NONINTEREST INCOME
Gain (loss) on sale of 43,639 188,829 452,173 199,298
interest-earning assets
Loan origination and commitment fees 33,506 22,756 82,995 42,655
Loan servicing fees (23,197) 20,723 (59,318) 30,917
Other 81,560 92,757 198,028 181,640
----------- ----------- ----------- -----------
Total noninterest income 135,508 325,065 673,878 454,510
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Compensation and benefits 653,324 573,566 1,290,095 1,137,040
Occupancy and equipment 114,668 109,364 221,907 224,703
SAIF deposit insurance premium 5,279 5,052 10,473 10,376
Foreclosed assets, net 20,235 (28,640) 35,231 (25,654)
Goodwill amortization 0 39,206 0 78,418
Other 274,267 252,507 531,374 470,228
----------- ----------- ----------- -----------
Total noninterest expense 1,067,773 951,055 2,089,080 1,895,111
----------- ----------- ----------- -----------
Income (loss) before provision for income 580,018 467,470 1,584,253 546,077
taxes
Income tax expense (benefit) 210,277 176,271 561,346 205,826
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 369,741 $ 291,199 $ 1,022,907 $ 340,251
=========== =========== =========== ===========
Earnings per common share $ 0.33 $ 0.26 $ 0.91 $ 0.31
Earnings per common share - assuming 0.32 0.26 0.90 0.31
dilution
The accompanying notes are an integral part of the consolidated financial
statements.
5
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED
March 31, 2002
Common Stock and Unrealized Total
Additional Paid in Unallocated Gain(loss) on Retained Treasury Comprehensive Stockholders'
Capital ESOP Shares AFS Securities Earnings Stock Income Equity
------------------ ------------ -------------- ------------ ------------- ------------- ------------
Balance September 30, 2001 $ 12,492,147 $ (255,597) $ 345,256 $ 14,199,357 $ (8,867,282) $ $ 17,913,881
Comprehensive income:
Net Income 1,022,907 1,022,907
Unrealized holding losses (298,031) (298,031)
------------
Comprehensive income $ 724,876 724,876
============
Deferred compensation
amortization
Payment of cash dividends (116,232) (116,232)
Balance March 31, 2002 $ 12,492,147 $ (255,597) $ 47,225 $ 15,106,032 $ (8,867,282) $ 18,522,525
============ ========== ========= ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
6
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
March 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 1,022,907 $ 340,251
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of deferred loan origination fees (1,808) (3,809)
Amortization of premiums and discounts on investment
securities, mortgage-backed securities, and loans (7,839) (15,250)
Amortization of goodwill 0 78,418
Compensation charge related to release of ESOP shares 0 9,364
Depreciation 79,427 95,415
Provision for loan losses 111,197 23,637
Deferred income taxes 0 215,426
Stock dividends on FHLB stock (64,800) (123,400)
Amortization of mortgage servicing rights 121,324 58,466
Net (gain) loss on sale of:
Loans held for sale (56,327) (8,235)
Fixed assets 8,287 0
Foreclosed assets 19,943 (30,458)
Interest earning assets (325,503) (171,884)
Proceeds from loan sales 6,589,095 1,704,418
Originations of loans held for sale (6,532,768) (2,008,688)
(Increase) decrease in
Accrued interest receivable (15,544) 119,602
Other assets 831,252 (471,862)
Increase (decrease) in:
Federal income tax payable 510,580 (31,275)
Accrued expenses and other liabilities (8,851) (597,672)
----------- -----------
Net cash provided (used) by operating activities 2,280,572 (817,536)
----------- -----------
The accompanying notes are an integral part of the financial statements.
7
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
March 31,
2002 2001
------------- -------------
Cash flows from investing activities
Net (increase) decrease in interest-earning time deposits $ 300,000 $ 98,000
Net (increase) decrease in fed funds sold (340,353) (1,278,227)
Purchase of securities held-to-maturity (2,000,000) (4,751,239)
Proceeds from sale of securities available-for-sale 6,308,899 1,495,125
Proceeds from maturities of securities available-for-sale 25,000 20,000
Proceeds from maturities of securities held-to-maturity 0 15,500,000
Proceeds from sale of mortgage-backed securities 0 3,961,253
available-for-sale
Purchases of mortgage-backed securities
available-for-sale (6,522,879) 0
Purchase of mortgage-backed securities held-to-maturity (7,627,398) (15,447,927)
Principal payments on mortgage-backed securities 11,177,578 2,141,344
available-for-sale
Principal payments on mortgage-backed securities held-to- 12,842,999 631,573
maturity
Proceeds from redemption of FHLB stock 0 1,900
Net increase in loans (16,946,517) (3,167,669)
Proceeds from sale of foreclosed assets 182,240 82,772
Proceeds from recovery of charged off loans 0 9,644
Acquisition costs related to foreclosed assets (2,974) (2,151)
Expenditures for premises and equipment (37,553) (32,953)
Origination of mortgage servicing rights (70,344) (19,179)
------------- -------------
Net cash provided (used) by investing activities (2,711,302) (757,734)
Cash flows from financing activities:
Net increase (decrease) in:
Deposits (8,861,523) 11,062,925
Advances from borrowers (860,437) (889,952)
Proceeds from advances from Federal Home Loan Bank 354,000,000 530,120,000
Payment of advances from Federal Home Loan Bank (345,347,301) (537,473,556)
Dividends paid to stockholders (116,232) (116,232)
------------- -------------
Net cash provided (used) by financing activities (1,185,493) 2,703,185
------------- -------------
Net increase (decrease) in cash and cash equivalents (1,616,223) 1,127,915
Cash and cash equivalents at beginning of the period 4,838,011 2,204,723
------------- -------------
Cash and cash equivalents at end of the period $ 3,221,788 $ 3,332,638
============= =============
Supplemental disclosure:
Cash paid for:
Interest on deposits $ 1,499,090 $ 1,571,080
Interest on FHLB advances and other borrowed funds 1,332,433 2,286,009
Income taxes 25,380 0
Transfers from loans to real estate and other
assets acquired through foreclosures 415,923 269,147
Loans made to facilitate the sale of foreclosed assets 128,187 119,435
The accompanying notes are an integral part of the financial statements.
8
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002
- --------------------------------------------------------------------------------
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, 2001.
The financial data and results of operations for interim periods presented may
not necessarily reflect the results to be anticipated for the complete year.
NOTE 2 - EARNINGS PER SHARE
Earnings per common share for the three months and six months ended March 31,
2002 and 2001, has been computed based on net income divided by the weighted
average number of common shares outstanding during the period. For the three
months and six months ended March 31, 2002 and 2001, the weighted average number
of shares outstanding totaled 1,123,979 and 1,110,416 shares respectively.
Earnings per common share - assuming dilution, for the three months and six
months ended March 31, 2002 and 2001, 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 March 31, 2002
and 2001, the weighted average number of shares outstanding for earnings per
share - assuming dilution totaled 1,150,703 and 1,110,416, shares respectively.
For the six months ended March 31, 2002 and 2001, the weighted average number of
shares outstanding for earnings per share - assuming dilution totaled 1,137,079
and 1,110,421 shares respectively.
For both earnings per share and earnings per common share - assuming dilution
and as prescribed by the American Institute of Certified Public Accountants
Statement of Position 93-6 ("SOP 93-6") Employer's Accounting for Employees
Stock Ownership Plans, the weighted average number of shares outstanding does
not include unallocated Employee Stock Ownership Plan ("ESOP") shares.
See Part II, Item 6 - Exhibits for a detailed presentation of the earnings per
share calculation for the three-month and six-month periods ended March 31, 2002
and 2001.
9
NOTE 3 - SECURITIES
The carrying values and estimated market values of investment securities
available-for-sale as of March 31, 2002, by type of security are as follows:
Principal Unamortized Unearned Unrealized Carrying
Balance Premiums Discounts Gain/(Loss) Value
-------------- --------------- -------------- --------------- ---------------
Municipal bonds $ 510,000 $ 0 $ 3,388 $ 20,896 $ 527,508
-------------- --------------- -------------- --------------- ---------------
$ 510,000 $ 0 $ 3,388 $ 20,896 $ 527,508
-------------- --------------- -------------- --------------- ---------------
The amortized cost and estimated market values of investment securities
held-to-maturity as of March 31, 2002, are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- -------------- --------------- --------------
Debt securities:
U. S. government agency $ 3,482,349 $ 74,762 $ 81,260 $ 3,475,851
Corporate Debt 6,262,501 83,805 31,617 6,314,689
-------------- -------------- --------------- --------------
Total debt securities $ 9,744,850 $ 158,567 $ 112,877 $ 9,790,540
-------------- -------------- --------------- --------------
The amortized cost and estimated market values of investment securities
held-to-maturity as of March 31, 2002, by contractual maturity are shown below:
Estimated
Amortized Market
Cost Value
-------------- ---------------
Due in one year through two years $ 1,000,000 $ 1,035,000
Due in two years through three years 1,049,055
996,920
Due in three years through six years 5,787,745
5,747,930
Due after six years 2,000,000 1,918,740
------------ -------------
Total debt securities $ 9,744,850 $ 9,790,540
------------ -------------
10
The carrying values and estimated market values of mortgage-backed and related
securities available-for-sale as of March 31, 2002, by type of security are as
follows:
Principal Unamortized Unearned Unrealized Carrying
Balance Premiums Discounts Gain/(Loss) Value
-------------- --------------- -------------- -------------- ---------------
Fixed Rate $ 1,376,095 $ 0 $ 10,190 $ 40,030 $ 1,405,935
Adjustable Rate 21,026,317 116,483 4,659 10,627 21,148,768
-------------- --------------- -------------- -------------- ---------------
$ 22,402,412 $ 116,483 $ 14,849 $ 50,657 $ 22,554,703
-------------- --------------- -------------- -------------- ---------------
The carrying values and estimated market values of mortgage-backed and related
securities held-to-maturity as of March 31, 2002, by type of security are as
follows:
Estimated
Principal Unamortized Unearned Carrying Market
Balance Premiums Discounts Value Value
-------------- --------------- -------------- -------------- ---------------
Fixed Rate $ 21,549,406 $ 34,133 $ 18,329 $ 21,565,210 $ 21,767,928
Adjustable Rate 9,129,202 13,279 16,526 9,125,955 9,205,022
-------------- --------------- -------------- -------------- ---------------
$ 30,678,608 $ 47,412 $ 34,855 $ 30,691,165 $ 30,972,950
-------------- --------------- -------------- -------------- ---------------
NOTE 4 - CURRENT ACCOUNTING ISSUES
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, Business Combinations. This
statement addresses financial accounting and reporting for business combinations
and superseded APB Opinion No. 16, Business Combinations, and FASB Statement No.
38, Accounting for Preacquisition Contingencies of Purchased Enterprises. All
business combinations in the scope of this Statement are to be accounted for
using one method, the purchase method. This Statement does not change many of
the provisions of Opinion 16 and Statement 38 related to the application of the
purchase method. The provisions of this Statement apply to all business
combinations initiated after June 30, 2001. This Statement also applies to all
business combinations accounted for using the purchase method for which the date
of acquisition is July 1, 2001, or later. The Company adopted this Statement as
of October 1, 2001, the beginning of its current fiscal year.
In June 2001, the FASB also issued SFAS No. 142, Goodwill and Other Intangible
Assets. This Statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets and superceded APB Opinion No. 17,
Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of assets (but not those acquired in a business
combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. Intangible assets acquired in a business combination shall
be recognized as an asset apart from goodwill (goodwill is measured as the
excess of the cost of an acquired entity over the net amounts assigned to assets
acquired and liabilities assumed) if the asset does not arise from contractual
or legal rights. If an asset does not arise from contractual or other legal
rights, it shall be recognized as an asset apart from goodwill only if it is
separable, that is, capable of being separated or divided from the acquired
enterprise and sold, transferred, licensed, rented, or exchanged (regardless of
whether there is an intent to do so).
11
Goodwill will not be amortized but must be tested for impairment at least
annually at the reporting unit level. Any impairment of the amount of goodwill
reported must be expensed through the income statement in the period that the
impairment is discovered. This Statement is required to be applied to all
goodwill and other intangible assets recognized in its financial statements at
that date. Impairment losses for goodwill and indefinite-lived intangible assets
that arise due to the initial application of this Statement (resulting from a
transitional impairment test) are reported as resulting from a change in
accounting principle. Goodwill and intangible assets acquired after June 30,
2001, are subject immediately to the nonamortization and amortization provisions
of this Statement. The Company adopted this statement as of October 1, 2001, the
beginning of its fiscal year. During the quarter ended March 31, 2002, the
Company completed its initial test for impairment of the goodwill recorded in
the statement of financial position. The Company utilized the services of an
independent consulting firm to test goodwill recorded in the statement of
financial position for possible impairment. Based upon the analysis of the
independent consulting firm and its own analysis, the Company has concluded that
no impairment of the goodwill exists as of the most recent fiscal year-end,
September 30, 2001. As a result, the Company will not make any adjustment to the
amount of goodwill recorded in the statement of financial position.
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 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 uses treasury stock for the
exercise of options. The following is a summary of changes in options
outstanding:
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
Granted -0-
Exercised at $9.42 per share -0-
Forfeited and expired -0-
-------
Balance, September 30, 2001 151,776
=======
Options exercisable at March 31, 2002 under stock option plan 148,776
=======
Shares available for future grants 22,662
=======
During the six months ended March 31, 2002, no options were exercised, issued,
or forfeited.
12
NOTE 6 - ADVANCES FROM FEDERAL HOME LOAN BANK
The outstanding advances from the FHLB consisted of the following at March 31,
2002:
Maturity Balance Rate
------------- -------------- ------
04/03/02 $ 2,500,000 1.88%
04/04/02 $36,500,000 1.92%
12/05/02 $ 5,000,000 2.41%
12/05/03 $ 5,000,000 3.58%
02/15/03 $ 100,000 6.00%
03/10/03 $ 2,000,000 2.78%
03/10/03 $ 2,000,000 5.00%
09/01/03 $ 804,796 6.25%
12/31/04 $ 233,026 6.09%
02/15/04 $ 100,000 6.01%
01/03/05 $ 63,837 6.03%
02/15/05 $ 100,000 6.04%
02/15/06 $ 150,000 6.05%
04/11/11 $ 5,000,000 3.91%
04/11/11 $ 5,000,000 3.73%
04/11/11 $ 5,000,000 4.25%
06/07/11 $ 5,000,000 4.38%
01/01/13 $ 403,171 6.09%
01/01/13 $ 383,249 6.13%
02/01/13 $ 379,997 5.91%
03/03/14 $ 709,394 5.45%
04/01/14 $ 687,179 5.97%
05/01/14 $ 934,705 5.66%
06/01/14 $ 713,837 5.90%
07/01/14 $ 662,631 6.38%
08/01/14 $ 481,537 6.37%
09/01/14 $ 609,139 6.59%
10/01/14 $ 535,449 6.86%
11/03/14 $ 1,321,821 6.77%
12/01/14 $ 451,395 6.57%
01/01/15 $ 295,784 6.73%
-----------
Total Advances $83,120,947
===========
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.
13
NOTE 7 - PROFORMA EFFECTS OF SFAS NO. 142
SFAS No. 142 requires that all periods presented in the statements of income
must be adjusted to exclude amortization expense (including any related tax
effects) recognized in the periods presented related to goodwill. The following
are condensed income statements showing restatement of income for the three and
six months ended March 31,2001.
Three Months Six Months
Ended Ended
March 31, 2001 March 31, 2001
(Unaudited) (Unaudited)
-------------- --------------
Reported net income $ 291,199 $ 340,251
Add back: goodwill amortization 39,206 78,418
----------- -----------
Adjusted net income $ 330,405 $ 418,669
=========== ===========
Earnings per common share and
earnings per common share - assuming dilution
Reported net income $ 0.26 $ 0.31
Goodwill amortization 0.04 0.07
----------- -----------
Adjust Earnings per share $ 0.30 $ 0.38
=========== ===========
NOTE 8 - CHANGES IN ACCOUNTING ESTIMATE
During the quarter ended March 31, 2002, the Company elected to make changes to
the assumptions and actuarial method for its Defined Benefit Plan. The valuation
interest rate was increased from 7.00% to 7.50%, the projected compensation
increase rate was reduced to 5.00% from 6.00%, and the asset method for
actuarial value of assets was changed to a 5-year smoothing method from an
annual basis. All of the changes were made in order to more closely reflect the
Company's future long-term expectations. The changes should have the effect of
reducing fluctuations in the net periodic pension cost and minimum required
funding of the plan. The changes were effective for the plan year beginning
October 1, 2001.
For the fiscal year beginning October 1, 2001, the Company's estimated net
periodic pension cost under the previous actuarial assumptions and methods was
approximately $291,000. Under the revised assumptions, the estimated net
periodic pension cost is approximately $238,000. On an after-tax basis, the
change in net income in the current fiscal year due to the change in accounting
estimate is approximately $35,000.
14
NOTE 9 - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The following table sets forth an analysis of the Company's allowance for loan
losses.
Six Months Ended Quarter Ended Quarter Ended
March 31, 2002 March 31, 2002 December 31, 2001
----------------- ---------------- ------------------
Dollars in Thousands
Balance at beginning of period $ 769 $ 721 $ 769
Charge-offs:
One-to-four family (3) (3) 0
Consumer and other loans (173) (112) (61)
----- ----- -----
Total charge-offs (176) (115) (61)
----- ----- -----
Recoveries:
One-to-four family 0 0 0
Consumer and other loans 19 16 3
----- ----- -----
Total recoveries 19 16 3
----- ----- -----
Net (charge-offs)/recoveries (157) (99) (58)
Additions charged to income 111 101 10
----- ----- -----
Balance at end of period $ 723 $ 723 $ 721
===== ===== =====
Ratio of net charge-offs/recoveries during the period to
average loans outstanding during the period (0.12)% (0.08)% (0.04)%
===== ===== =====
Ratio of net charge-offs/recoveries during the period to
average non-performing assets (12.94)% (9.09)% (3.85)%
===== ===== =====
The distribution of the Company's allowance for losses at the dates indicated is
summarized as follows:
March 31, 2002 September 30, 2001
------------------------------ -----------------------------
Percent Percent
of of
Loans Loans
Category to Category t
Amount of Loan Total Amount of Loan Total
Loss Allowance Loans Loss Allowance Loans
------------------------------ -----------------------------
(Dollars in Thousands) (Dollars in Thousands)
One-to-four family $ 113 0.12% $ 148 0.16%
Consumer and other loans 248 0.66 325 1.21
Unallocated 362 N/A 296 N/A
--------- ---------- ---------- ----------
Total $ 723 $ 769
========= ==========
15
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
March 31, 2002
- --------------------------------------------------------------------------------
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.
FINANCIAL CONDITION
Total assets were $211.7 million at March 31, 2002, a $115,000 decrease from the
$211.8 million reported at September 30, 2001, the Company's most recent fiscal
year end. The decrease in total assets was the result of a $6.3 million decrease
in investment securities available-for-sale, a $5.2 million decrease in
mortgage-backed securities held-to-maturity, a $4.8 million decline in
mortgage-backed securities available-for-sale, a $1.6 million decrease in
interest-earning deposits with banks, and an $831,000 decrease in other assets.
The decreases were partially offset by a $16.5 million increase in loans
receivable, a $1.9 million increase in investment securities held to maturity,
and a $340,000 increase in federal funds sold.
At March 31, 2002, loans-receivable totaled $132.4 million, an increase of $16.5
million or 14.3% over the $115.8 million at September 30, 2001. The increase in
loans-receivable was primarily the result of the Company's continued efforts to
increase the origination of consumer, commercial, and commercial real estate
loans.
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 Company originates
these loans through direct contacts with existing or potential new customers and
indirectly through a network of automobile 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. For the
six months ended March 31, 2002, the Company originated approximately $ 14.0
million in one-to-four family residential loans, which included loans for the
purchase, refinance, or, construction of one-to-four family homes. The Company
originated approximately $32.8 million in consumer, (including home-equity),
16
commercial and commercial real estate loans during the six months ended March
31, 2002. Approximately $9.9 million of the consumer, commercial and commercial
real estate loans was originated on an indirect basis.
Investment securities available-for-sale decreased by $6.3 million from $6.8
million at September 30, 2001 to $528,000 at March 31, 2002. The decrease was
the result of the Company's decision to sell approximately 50% of its corporate
debt securities portfolio. The Company elected to sell the corporate bonds in
order to provide liquidity to fund loans and reduce the Company's exposure to
possible downgrades of ratings on corporate debt in the portfolio. This
portfolio now consists of municipal bonds, primarily issued by Upshur County,
where the Company's Gilmer office is located.
Investment securities held-to-maturity was reported as $9.7 million at March 31,
2002, an increase of $1.9 million from the $7.8 million reported at September
30, 2001. The increase was the result of additional purchases of bonds during
the six months ended March 31, 2002. This portfolio consists of approximately
$3.5 million of debt issued by governmental agencies such as Federal National
Mortgage Corporation, Federal Home Loan Mortgage Corporation, or the Federal
Home Loan Bank System and approximately $6.2 million of corporate debt
securities. All securities in the portfolio are fixed rate and term.
Mortgage-backed securities available-for-sale totaled $22.6 million at March 31,
2002, a decrease of $4.8 million from the $27.4 million at September 30, 2001.
The decrease was primarily the result of the principle repayments on the
securities during the six months ended March 31, 2002.
Mortgage-backed securities held-to-maturity portfolio totaled $30.7 million at
March 31, 2002, an increase of $5.2 million from the $35.9 million reported at
September 30, 2001. The increase was primarily due to the Company's decision to
reinvest funds in this portfolio from cash flow from its mortgage-backed
securities available-for-sale portfolio. The additional securities purchased
were primarily adjustable rate.
Total deposits were $106.7 million at March 31, 2002, a $8.9 million decrease
from the $115.6 million reported at September 30, 2001. The decrease was
primarily the result of declines in certificates of deposit balances as the
Company elected not to pay higher interest rates on renewing certificates of
deposits during the period.
The Company reported $83.1 million in borrowed funds at March 31, 2002, an
increase of $8.6 million from the $74.5 million reported at September 30, 2001.
The increase was primarily due to the Company's decision to utilize advances
from the FHLB to fund loans and investments.
Stockholder's equity totaled $18.5 million at March 31, 2002, an increase of
$609,000 from the $17.9 million reported at September 30, 2001. The increase was
primarily attributable to a net increase in retained earnings of $906,000 which
was partially offset by a decline in accumulated other comprehensive income of
$298,000. The increase in retained earnings was due to the $1.0 million in net
income less $116,000 in cash dividends paid during the six months ended March
31, 2002.
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 MARCH 31, 2002
AND MARCH 31, 2001
General. Net income for the three months ended March 31, 2002 was $370,000 or
$.33 per share, an increase of $79,000 from the $291,000, or $.26 per share,
reported for the three months ended March 31, 2001. The increase in net income
was attributable to a $419,000 increase in net interest income after provision
for loan losses, which was partially offset by a $190,000 decrease in
17
noninterest income, a $117,000 increase in non-interest expense, and a $34,000
increase in income tax expense.
Net Interest Income. For the quarter ended March 31, 2002, net interest income
before provision for loan losses totaled $1.6 million, an increase of $513,000
over the $1.1 million reported for the quarter ended March 31, 2001. On an
annualized basis, the $1.6 million in net interest income for the current
quarter was approximately 3.21% of average interest-earning assets and 3.07% of
average total assets. For the quarter ended March 31, 2001, the $1.1 million in
net interest income before provisions for loan losses was approximately 2.28% of
average interest-earning assets and 2.17% of average total assets. Average
interest-earning assets were approximately $200.8 million for the quarter ended
March 31, 2002, compared to $192.9 million for the quarter ended March 31, 2001.
Total interest income was $3.3 million for the quarter ended March 31, 2002, a
decrease of $364,000 from the $3.6 million reported for the quarter ended March
31, 2001. The decrease was primarily due to a decline in interest on
mortgage-backed securities available-for-sale of $560,000, a decline in combined
interest on investment securities available-for-sale and investment securities
held-to-maturity of approximately $317,000, and a decline in interest on
mortgage loans of $48,000. The declines in interest income were partially offset
by a $369,000 increase in interest income on consumer and other loans and a
$206,000 increase in income on mortgage-backed securities held-to-maturity.
Interest income on loans-receivable was $2.5 million for the quarter ended March
31, 2002, compared to 2.1 million for the quarter ended March 31, 2001. On an
annualized basis, the $2.5 million was approximately 7.73% of average
loans-receivable balances outstanding for the quarter ended March 31, 2002,
compared to approximately 8.21% for the quarter ended March 31, 2001. The
increase in interest income on the loan portfolio was primarily the result of an
increase in consumer, commercial and commercial real estate loan balances. The
overall decline in interest rates over the past 12 months and the number of
mortgage loans refinanced by the Company contributed to the decline in overall
yield on the loan portfolio.
Interest income from mortgage-backed securities available-for-sale totaled
$104,000 for the quarter ended March 31, 2002, compared to $664,000 for the
quarter ended March 31, 2001. The decrease in income was due to a decline in the
balance of the portfolio from $39.0 million at March 31, 2001 to $22.6 million
at March 31, 2002. The decline in the balance in the portfolio resulted from the
sale of securities, principle repayments, and the Company's decision to
re-direct the cash flow into its loan portfolio.
Interest income from the investment securities held-to-maturity portfolio was
$154,000 for the quarter ended March 31, 2002, compared to $348,000 for the
quarter ended March 31, 2001. The decrease in income from the portfolio was due
to a decline in the balance in the portfolio from $15.2 million at March 31,
2001 to $9.7 million at March 31, 2002. At March 31, 2001, the portfolio was
primarily comprised of debt issued by Government agencies such as FHLMC, FNMA
and the Federal Home Loan Bank System and corporate debt securities. The agency
securities had call options at the discretion of the issuer. As interest rates
declined in 2001, the issuer elected to call the bonds. The Company elected to
redirect cash flow from the called bonds into its mortgage-backed securities
held-to-maturity portfolio, its investment securities held-to-maturity
portfolio, and its loans receivable portfolio. The result was a decline in the
average balance on the portfolio and a decrease in income from the portfolio.
Interest income on mortgage-backed securities held-to-maturity totaled $496,000
for the quarter ended March 31, 2002, an increase of $206,000 from the $290,000
reported for the quarter ended March 31, 2001. The increase was due primarily to
an increase in the balance in the portfolio from $19.1 million at March 31, 2001
to $30.7 million at March 31, 2002 as the Company invested excess cash flow into
adjusted rate mortgage securities.
Interest paid to depositors totaled $1.0 million for the quarter ended March 31,
2002, a decrease of $496,000 from the $1.5 million reported for the quarter
ended March 31, 2001. On an annualized basis, the $1.0 million in interest
expense on deposits was approximately 3.76% for the quarter ended March 31,
2002, compared to 5.47% for the quarter ended March 31, 2001. The decline in
interest expense was primarily attributable to a decline in certificate of
deposit account balances as the Company elected not to pay higher rates on
renewing certificates of deposit. The Company relied more heavily on advances
from the FHLB.
18
Interest on FHLB advances was $649,000 for the quarter ended March 31, 2002,
compared to $1.0 million for the quarter ended March 31, 2001. The decrease in
interest expense was a direct result of declining interest rates during 2001. At
March 31, 2001, the Company had approximately $35.0 million in short-term
advances, which re-priced approximately every 30 days. As short-term interest
rates declined in 2001 and 2002, the Company benefited from an overall lower
cost of borrowing as the rate of interest on the short-term advances declined
substantially. The short-term advances had an interest rate of 1.92% at March
31, 2002, compared to 5.12% at March 31, 2001.
Provision for Loan Losses. The Company made $101,000 in provision for loan
losses for the quarter ended March 31, 2002, compared to $7,000 for the quarter
ended March 31, 2001. The increase in provision for loan losses was the result
of the Company's decision to establish additional allowances for loan losses,
due to the increase in volume of consumer and commercial lending. See "Asset
Quality" and Note 9.
Noninterest Income. Noninterest income totaled $136,000 for the quarter ended
March 31, 2002 compared to $325,000 for the quarter ended March 31, 2001, a
$189,000 decrease. The decrease was primarily due to a decline in gains on the
sale of interest-earning assets from $189,000 for the quarter ended March 31,
2001 to $44,000 for the quarter ended March 31, 2002. In 2001, the Company
elected to sell a significant portion of the securities acquired in the Gilmer
Savings Bank acquisition. They were predominately small balance securities and
generally securities the Company would not normally hold in portfolio. For the
quarter ended March 31, 2002, the $44,000 in gains on the sale of
interest-earning assets was the result of gains on the sale of mortgage loans
into the secondary market.
Also, loan servicing fees were reported as a negative $23,000 for the quarter
ended March 31, 2002, compared to $21,000 for the quarter ended March 31, 2001.
The decrease in income was primarily due to the amortization of previously
recognized mortgage servicing rights.
As mortgage interest rates declined in 2001 and 2002, loan customers refinanced
their mortgages. Any remaining balance in originated mortgage servicing rights
associated with the loan must be expensed at the time the loan is refinanced or
paid off. The expense is an offset to monthly serving fees in the loans. The
result was an overall decline in net loan servicing fee income.
Noninterest Expense. Noninterest expense was $1.1 for the quarter ended March
31, 2002, an increase of $117,000 from the $951,000 for the quarter ended March
31, 2001. The increase in noninterest expense was primarily the result of an
$80,000 increase in compensation and benefits expense, mainly associated with
the Company's defined benefit pension plan and normal increases in employee
compensation. In addition, net expenses associated with the Company's foreclosed
asset portfolio increased to $20,000 for the quarter ended March 31, 2002 from a
negative $29,000 for the quarter ended March 31, 2001. The negative expense for
the quarter ended March 31, 2001 was primarily due to gains on the sale of
foreclosed real estate.
Provision for Income Taxes. The Company incurred federal income tax expense of
$210,000 or 36.3% or pre-tax income for the quarter ended March 31, 2002,
compared to $176,000 or 37.7% or pre-tax income for the quarter ended March 31,
2001.
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2002
AND MARCH 31, 2001
General. For the six months ended March 31, 2002, the Company reported net
income of $1.0 million or $.91 per common share and $.90 per common share -
assuming dilution, compared to $340,000 or $.31 per common share and $.31 per
common share - assuming dilution for the six months ended March 31, 2001. The
increase in net income was due to a $1.0 million increase in net interest income
after provisions for loan losses and a $219,000 increase in noninterest income.
The increases were partially offset by a $356,000 increase in income tax expense
and a $194,000 increase in noninterest expense.
Net Interest Income. For the six months ended March 31, 2002, net interest
income before provisions for loan losses totaled $3.1 million, an increase of
$1.1 from the $2.0 million reported for the six months ended March 31, 2001. On
an annualized basis, the $3.1 million in net interest income before provisions
for loan losses for the current period was approximately 3.10% of average
interest earning assets and 2.95% of average total assets. For the six months
19
ended March 31, 2001, the $2.0 million in net interest income before provisions
for loan losses was, on an annualized basis, approximately 2.09% of average
interest earning assets and 1.99% of average total assets. Average interest
earning assets were approximately $201.1 million for the six months ended March
31, 2002, compared to $192.2 million for the six months ended March 31, 2001.
Total interest income was $6.7 million or 6.63%, on an annualized basis, of
average interest earning assets for the six months ended March 31, 2002,
compared to $7.3 million or 7.49% of average interest earning assets for the six
months ended March 31, 2001. The decrease was primarily due to a decline in
interest on mortgage-backed securities available-for-sale of $1.1 million, a
decline in combined interest on investment securities available-for-sale and
investment securities held-to-maturity of approximately $671,000, and a decline
in interest on mortgage loans of $144,000. The declines in interest income were
partially offset by a $714,000 increase in interest income on consumer and other
loans and a $649,000 increase in mortgage-backed securities held-to-maturity.
Interest income on loans receivable totaled $4.8 million for the six months
ended March 31, 2002 an increase of $570,000 from the $4.2 million reported for
the six months ended March 31, 2001. Average loans receivable balances increased
to $123.6 million for the six months ended March 31, 2002 from $103.7 million
for the six months ended March 31, 2001. For the six months ended March 31,
2002, the $4.8 million in interest income on loans receivable was, on an
annualized basis, approximately 7.78% of average loans receivable, compared to
8.17% for the six months ended March 31, 2001. The increase in interest income
on loans receivable was primarily attributable to the increase in loan balances
outstanding during the six months ended March 31, 2002, compared to the six
months ended March 31, 2001. The increase in loans receivable was the result of
the Company's continued focus on the origination of consumer and commercial real
estate loans. Consumer loans outstanding, including home equity and improvement
loans, increased from approximately $18.1 million at March 31, 2001 to
approximately $44.1 million at March 31, 2002.
Interest income from mortgage-backed securities available-for sale totaled
$373,000 for the six months ended March 31, 2002, compared to $1.5 million for
the six months ended March 31, 2001. The decrease in income was primarily
attributable to a decrease in the balance in the portfolio from $39.0 million at
March 31, 2001 to $22.4 million at March 31, 2002 as the Company sold securities
in the portfolio and redirected cash flow from principle payments on the
securities to its loan and other investment portfolios.
Interest income on investment securities held-to-maturity totaled $309,000 for
the six months ended March 31, 2002, compared to $742,000 for the six months
ended March 31, 2001. The decrease was due primarily to a decline in the balance
in the portfolio from $15.2 million at March 31, 2001 to $9.8 million at March
31, 2002. The decline in balances in the portfolio was due to the Company's
decision to sell a portion of its corporate debt holdings in the current period.
Interest income on mortgage-backed securities held-to-maturity was $1.0 million
for the six months ended March 31, 2002, compared to $374,000 for the six months
ended March 31, 2001. The increase in interest income on the portfolio was
primarily the result of an increase in the balance outstanding in the portfolio
from $19.0 million at March 31, 2001 to $30.7 million at March 31, 2002. The
Company redirected excess cash flow into this portfolio, primarily to purchase
adjustable rate securities.
Interest expense was $3.6 million for the six months ended March 31, 2002, a
decrease of $1.6 million from the $5.2 million reported for the six-month period
ended March 31, 2001. The $3.6 million in interest expense reported for the six
month period ended March 31, 2002 was approximately 3.77% of average interest
costing liabilities, compared to 5.74% for the same period in 2001.
Noninterest Income. Noninterest income was $674,000 for the six months ended
March 31, 2002, compared to $455,000 for the six months ended March 31, 2001.
The increase was attributable to a $253,000 increase in gains on sales of
interest earning assets as the Company sold securities during the six months
ended March 31, 2002. In addition, the Company reported $83,000 in loan
origination and commitment fees, an increase of $40,000 over the $43,000
reported for the six months ended March 31, 2001. The additional fee income was
due to the Company's decision to sell, into the secondary market, most of the
one-to-four family loans originated during 2001 and 2002. The increases in
noninterest income were partially offset by a $90,000 decline in loan servicing
20
fees. The decline in loan serving fees was the result of the amortization of
previously recorded originated mortgage servicing rights. With lower interest
rates many borrowers refinanced their mortgage loans during 2001 and 2002. For
any such loan on which the Company had previously recognized originated mortgage
income, the unamortized balance of the rights was charged against loan servicing
income.
Noninterest Expense. Noninterest expense was reported as $2.1 million for the
six-month period ended March 31, 2002, a $194,000 increase from the $1.9 million
reported for the six months ended March 31, 2001. The increase was primarily
attributable to a $153,000 increase in compensation and benefits expense due to
additional employees and normal compensation increases. A $61,000 increase in
net expenses on foreclosed and repossessed assets accounted for a portion of the
increase in noninterest expense. The increase in net expenses on foreclosed and
repossessed assets was primarily due to expenses associated with the disposition
of repossessed automobiles from the Company's consumer loan portfolio and other
consumer installment loans.
A $78,000 decrease in amortization of goodwill offset a portion of the increase
in noninterest expense. Under revised accounting guidelines for the year
beginning October 1, 2001, the Company is no longer required to systematically
amortize goodwill recorded on the statement of financial position. The Company
now monitors, on at least an annual basis, the balance of goodwill in the
financial statements for any possible impairment to the recorded amount. See
Note 4 and Note 7.
Provision For Income Taxes. The Company incurred federal income tax expense of
$561,000 or 35.4% of pre-tax income for the six months ended March 31, 2002,
compared to $206,000 or 37.7% of pre-tax income for the six months ended March
31, 2001.
ASSET QUALITY
At March 31, 2002, the Company's non-performing assets (non-performing loans
plus foreclosed assets) totaled $1.1 million or .51% of total assets, compared
to $1.6 million or .74% of total assets at September 30, 2001. At March 31,
2002, 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 March 31, 2002 equaled $713,000 or .54% of loans
receivable, compared to $1.3 million or 1.14% of loans receivable at September
30, 2001. The Company defines non-performing loans as any loan past due for 90
days or more. All such loans are accounted for on a nonaccrual basis by
reserving for 100% of the accrued interest or placing the loan in a nonaccrual
status when the loan reaches 90 days delinquent. At March 31, 2002 the Company
had no loans which were contractually past 90 days or more and for which it was
still accruing interest. At March 31, 2002, the Company had no "troubled debt
restructurings" as defined in Statement of Financial Accounting Standards No. 15
"Accounting by Debtors and Creditor for Troubled Debt Restructurings", or any
other loans for which the Company has information about possible credit problems
of borrowers that would cause management to have serious doubts as to the
ability of such borrowers to comply with the preset loan repayment terms.
Classified assets totaled $2.2 million or 1.03% of total assets at March 31,
2002, compared to $2.7 million or 1.27% of total assets at September 30, 2001.
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. At March 31, 2002, $2.0 million of classified assets were
deemed to be substandard and $200,000 assets were classified as doubtful.
The Company's allowance for loan losses totaled $723,000 at March 31, 2002,
compared to $769,000 September 30, 2001. The allowance for loan losses as a
percentage of loans receivable equaled .55% at March 31, 2002 and 0.66% at
September 30, 2001. The Company uses a methodology for estimating the adequacy
of its allowance for loan loss that encompasses three separate components. The
first component is a historical loss analysis of loans segregated by different
loan categories. A three-year rolling average of annual net gains and losses on
each category of loans is calculated and then summed together to comprise the
21
first component. The second component is an estimate of losses on the Company's
list of currently classified assets. A percentage, generally ranging from 5% to
50% of each classified asset, is applied to the balance of the asset. The
percentage for each asset is combined to determine the second component. The
third component is an unidentified risk component. The Company arbitrarily
establishes a percentage of each category of net loans as an inherent or
unidentified risk. The percentages range from .10% for one-to-four family to
...35% for consumer loans. The balance in each loan category is reduced for any
loans specifically reviewed by the Company and any classified assets, before
applying the percentage amounts. At March 31, 2002, the individual components
were calculated to be $151,000 for the historical loss component, $308,000 for
the classified asset component, and $201,000 for the unidentified risk
component, a total of $661,000. At September 20, 2001, the individual components
were calculated as $114,000 for the historical loss component, $331,000 for the
classified asset component, and $156,000 for the unidentified risk component, a
total of $601,000.
The increase in the historical loss component was a direct result of increased
losses on the Company's consumer installment lending program, including its
indirect auto-lending program. The decrease in the classified asset component
was the result of the $520,000 decline in classified assets. The increase in the
inherent risk component was due to the overall increase in the loan portfolio,
primarily consumer installment loans, from $115.8 million at September 30, 2001
to $132.4 million at March 31, 2002.
The Company also establishes a specific loan loss allowance of 100% of the
outstanding balance of loans that are severely past due and deemed unlikely to
be collected in a timely manner. Generally, the Company establishes a specific
reserve when a real estate secured loan is 180 days are more past due and when a
consumer loan is 120 days or more past due. The Company may establish a specific
reserve sooner than these general guidelines in the case of a bankruptcy. Also,
the Company may choose not to establish a specific reserve for loans that would
otherwise warrant doing so, if there is sufficient value supporting the loan
balance.
At March 31, 2002, the Company had $52,000 in specific loan loss reserves
established, compared to $142,000 at September 30, 2001. The decrease in the
specific reserve was due to a decrease in the balances of loans exceeding the
past due limits.
When combined, the general allowance for loan losses estimate of $661,000, and
the $52,000 in specific loan loss allowances total $713,000, which is the
Company's estimate of an adequate total loan loss allowance calculation at March
31, 2002. The Company reported an actual combined loan loss allowance of
$723,000 in the statement of financial position at March 31, 2002.
In general, the Company made no changes to its estimate of the adequacy of the
allowance for loan losses as a result of any actual changes or expected trends
in non-performing loans. The Company believes that the overall quality of its
loan portfolio is good.
The Company anticipates that the general trend in the level of the allowance for
loan loss will be to increase the size of the allowance. The Company expects to
continue its focus on increasing the size of its consumer, commercial, and
commercial real estate loan portfolios. The result would be an expected increase
in the estimated allowance for loan loss under the unidentified risk component.
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 March 31, 2002,
the Association had outstanding commitments to extend credit on approximately
$8.8 million of loans.
Management believes that present levels of liquid assets are sufficient to meet
anticipated future loan commitments as well as deposit withdrawal demands.
22
Total stockholders' equity equaled $18.5 million at March 31, 2002, an increase
of $609,000 million from the $17.9 million reported at September 30, 2001. The
increase was primarily the result of a $907,000 increase in retained earnings
from the $1.0 million net income less the $116,000 in cash dividends paid during
the six months ended March 31, 2002. A $298,000 decrease in unrealized gains on
available-for sale securities partially offset the increase in retained
earnings.
As of March 31, 2002, the Company's reported book value per share, using total
stockholders' equity of $18.5 million (net of the cost of unearned ESOP shares)
and 1,162,320 outstanding shares of common stock (the total issued shares
including unearned ESOP shares, less treasury shares), equaled $15.94 per share.
Subsequent to the quarter ended March 31, 2002, the Company announced its
intention to pay a cash dividend of $.05 per share on May 22, 2002, to
stockholders of record at May 8, 2002. During the six months ended March 31,
2002, the Company paid cash dividends of $.10 per share, which equates to
approximately 11.0% of the $.91 in earnings per share reported. The Company paid
$.05 per share in cash dividends in the three months ended March 31, 2002, which
is approximately 15.2% of the $.33 in reported earnings per share. The Company
reported an equity to assets ratio of approximately 8.75% at March 31, 2002.
Federally insured savings associations, such as First Federal, are required to
maintain a minimum level of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings associations. These capital requirements must be generally as stringent
as the comparable capital requirements for national banks. The OTS is also
authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of adjusted
total assets (as defined by regulation). Tangible capital generally includes
common stockholders' equity and retained income, and certain non-cumulative
perpetual preferred stock and related income. In addition, all intangible
assets, other than a limited amount of purchased mortgage-servicing rights, must
be deducted from total capital for calculating compliance with this requirement.
At March 31, 2002, the Association had approximately $2.2 million of intangible
assets and other required regulatory adjustments that were required to be
deducted from total capital.
At March 31, 2002, the Association had tangible capital of $15.7 million, or
7.48% of adjusted total assets, which is approximately $12.5 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require Tier 1 capital equal to at least 4.0% of
adjusted total assets. Tier 1 capital generally consists of tangible capital
plus certain intangible assets, including a limited amount of purchased credit
card receivables.
At March 31, 2002, the Association had Tier 1 capital equal to $15.7 million, or
7.48% of adjusted total assets, which is $7.3 million above the minimum
requirement for capital adequacy purposes of 4.0% as in effect on that date.
The OTS risk-based requirement requires savings associations to have total
capital of at least 8.0% of risk-weighted assets. Total risk-based capital
consists of core capital, as defined above and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. The OTS is also authorized to require a savings
association to maintain an additional amount of total capital to account for
concentration of credit risk and the risk of non-traditional activities. At
March 31, 2002, the Association had no capital instruments that qualify as
supplementary capital and $667,000 of general loss reserves, which was less than
1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating total risk-based capital. First Federal had no such
exclusions from capital and assets at March 31, 2002.
23
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to
100%, based on the risk inherent in the type of asset. For example, the OTS has
assigned a risk of 50% for prudently underwritten permanent one-to-four family
first lien mortgage loans not more than 90 days delinquent and having a loan to
value ratio of not more than 80% at origination unless insured to such ratio by
a insurer approved by Fannie Mae or Freddie Mac.
On March 31, 2002, First Federal had total risk based capital of $16.3 million
(including $15.7 million in Tier 1 capital and $667,000 in loan loss reserves)
and risk-weighted assets of $110.8 million, or total risk-based capital of
14.75% of risk-weighted assets. This amount was $7.5 million above the 8.0%
requirement in effect on that date.
At March 31, 2002, the Association was also considered a "well capitalized"
institution under the prompt corrective action requirements of the Federal
Deposit Insurance Corporation Improvement Act of 1991.
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.
24
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
MARCH 31, 2002
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
There are no material legal proceedings to which the Company or the
Association is a party or of which any of their property is subject. From
time-to-time, the Association is a party to various legal proceedings
incident to the conduct of its business.
Item 2. Changes In Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
None
Item 4. Submissions Of Matters To A Vote Of Security Holders
----------------------------------------------------
None
Item 5. Other Information.
------------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
The following exhibits are filed herewith:
Exhibit 11.0 - Computation of Earnings Per Share
(b) Reports on Form 8-K
During the quarter ended March 31, 2002, the Company filed a report on
Form 8-K on January 30, 2002 to report the issuance of a press release
dated January 29, 2002, announcing the Company's intention to pay, on
February 20, 2002, a cash dividend of $.05 per share for the quarter
ended December 31, 2001, to stockholders of record on February 6,
2002.
Also during the quarter ended March 31, 2002, the Company filed a
report on Form 8-K on February 11, 2002, to report the issuance of a
press release dated February 11, 2002, announcing the Company's
earnings for the quarter ended December 31, 2001.
25
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: May 15, 2002 /s/ Gerald W. Free
--------------------------------------------
Gerald W. Free
Vice Chairman, President and CEO
(Principal Executive Officer)
Date: May 15, 2002 /s/ Derrell W. Chapman
--------------------------------------------
Vice President/COO/CFO
(Principal Financial and Accounting Officer)
26