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, 1998
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, 1998, was 1,539,461.
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
MARCH 31, 1998
INDEX
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Condition, March 31, 1998
(Unaudited) and September 30, 1997
Consolidated Statements of Income, (Unaudited) three months and six
months ended March 31, 1998, and March 31, 1997
Consolidated Statement of Changes in Stockholders' Equity, (Unaudited)
six months ended March 31, 1998
Consolidated Statements of Cash Flows, (Unaudited) six months ended
March 31, 1998, and March 31, 1997
Notes to (Unaudited) Consolidated Financial Statements, March 31, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II - Other Information
Item 1. Legal Proceedings
Item 2. Changes In Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters To a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
MARCH 31, 1998
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 acquired all of the common stock issued by the
Association. For additional discussion of the Company's formation and intended
operations, see the Form S-1 Registration Statement (No. 33-83758) filed with
the Securities and Exchange Commission and the Company's annual report on Form
10-KSB for the fiscal year ended September 30, 1997, also filed with the
Commission.
The financial statements presented in this Form 10-QSB reflect the consolidated
financial condition and results of operations of the Company and its wholly
owned subsidiary, First Federal Savings and Loan Association of Tyler.
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
March 31, 1998 September 30, 1997
------------- -------------
(Unaudited)
Cash and due from banks ........................................ $ 910,924 $ 508,729
Interest-bearing deposits with banks ........................... 4,190,911 6,422,404
Interest earning time deposits with financial institutions ..... 1,467,617 1,565,573
Federal funds sold ............................................. 755,226 753,847
Mortgage-backed securities available for sale .................. 8,979,785 4,356,271
Investment securities held-to-maturity (estimated market value
of $25,145,293 at March 31, 1998, and $30,114,685
at September 30, 1997) .................................... 25,059,420 23,058,359
Mortgage-backed securities held-to-maturity (estimated market
value of $14,607,615 at March 31, 1998, and
$25,383,579 at September 30, 1997) ........................ 14,264,392 18,151,765
Loans receivable, net of allowance for credit losses
of $236,107 at March 31, 1998, and $272,851
at September 30, 1997 ..................................... 61,193,852 57,110,029
Accrued interest receivable .................................... 927,132 885,383
Federal Home Loan Bank stock, at cost .......................... 1,036,000 1,005,700
Premises and equipment ......................................... 1,070,893 1,123,311
Foreclosed real estate, net of allowances of $-0- .............. 170,200 0
Mortgage servicing rights ...................................... 178,777 149,094
Other assets ................................................... 737,520 858,147
------------- -------------
Total Assets .......................................... $ 120,942,649 $ 115,948,612
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Demand deposits ........................................... $ 1,554,898 $ 1,882,109
Savings and NOW deposits .................................. 9,778,621 9,771,266
Other time deposits ....................................... 76,573,858 76,897,274
------------- -------------
Total deposits ........................................ 87,907,377 88,550,649
FHLB advances ............................................. 11,025,888 4,195,000
Advances from borrowers for taxes and insurance ........... 394,960 881,685
Federal income taxes
Current ............................................... (33,820) 0
Deferred .............................................. 112,227 127,909
Accrued expenses and other liabilities .................... 459,095 1,314,001
------------- -------------
Total Liabilities ..................................... 99,865,727 95,069,244
------------- -------------
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(continued)
ASSETS
March 31, 1998 September 30, 1997
------------- -------------
(Unaudited)
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 ................................... 12,564 12,564
Additional paid-in capital ................................ 12,203,160 12,196,879
Deferred compensation - RRP shares ........................ (271,557) (329,748)
Unearned employee stock ownership plan shares ............. (650,614) (650,614)
Unrealized gain/(loss) investments - AFS (net) ............ (42,687) 15,512
Retained earnings (substantially restricted) .............. 13,557,073 13,365,792
Treasury stock, 345,031 shares at cost .................... (3,731,017) (3,731,017)
------------- -------------
Stock stockholders' equity ............................ 21,076,922 20,879,368
------------- -------------
Total liabilities and stockholders' equity ............ $ 120,942,649 $ 115,948,612
============= =============
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Six Months
Ended March 31, Ended March 31,
(Unaudited) (Unaudited)
1998 1997 1998 1997
---------- ---------- ---------- ----------
INTEREST INCOME
Loans receivable:
First Mortgage ......................... $1,152,062 $1,005,529 $2,286,895 $1,973,167
Consumer and other loans ............... 40,783 20,401 70,088 40,928
Securities available for sale:
Investment securities .................. 15,104 13,716 30,313 27,702
Mortgage-backed securities ............. 104,684 0 169,074 0
Securities held to maturity:
Investment securities .................. 406,515 460,336 800,424 938,469
Mortgage-backed securities ............. 281,066 389,152 595,768 810,586
Deposits with banks ...................... 54,923 65,188 131,885 143,988
---------- ---------- ---------- ----------
Total interest income ................ 2,055,137 1,954,322 4,084,447 3,934,840
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits ................................. 1,105,465 1,094,930 2,229,135 2,204,602
FHLB advances ............................ 121,675 0 183,848 0
---------- ---------- ---------- ----------
Total interest expense ............... 1,227,140 1,094,930 2,412,983 2,204,602
---------- ---------- ---------- ----------
Net interest income before
provision for loan losses ......... 827,998 859,392 1,671,464 1,730,238
Provision for loan losses ................ 0 0 0 5,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses .......... 827,998 859,392 1,671,464 1,725,238
---------- ---------- ---------- ----------
NONINTEREST INCOME
Gain(loss) on sale of interest-earning
assets ................................ 42,008 18,243 63,445 31,322
Loan origination and commitment fees ..... 18,807 10,074 41,770 27,293
Loan servicing fees ...................... 26,621 15,251 48,924 46,937
Gain on foreclosed real estate ........... 560 0 560 0
Other .................................... 10,926 16,985 21,638 32,415
---------- ---------- ---------- ----------
Total noninterest income ............. 98,922 60,553 176,337 137,967
---------- ---------- ---------- ----------
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(continued)
Three Months Six Months
Ended March 31, Ended March 31,
(Unaudited) (Unaudited)
1998 1997 1998 1997
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Compensation and benefits ................ 460,684 418,099 952,794 845,754
Occupancy and equipment .................. 45,513 38,196 93,759 72,060
SAIF deposit insurance premium ........... 14,299 3,124 28,446 51,175
Loss on foreclosed real estate ........... 0 5,633 0 5,691
Other .................................... 157,288 162,273 296,954 302,210
---------- ---------- ---------- ----------
Total noninterest expense ............ 677,784 627,325 1,371,953 1,276,890
---------- ---------- ---------- ----------
Income (loss) before provision for
income taxes .......................... 249,135 292,620 475,84 586,315
Income tax expense (benefit) ................ 91,340 106,827 173,749 217,292
---------- ---------- ---------- ----------
NET INCOME (LOSS) ........................... $ 157,795 $ 185,793 $ 302,099 $ 369,023
========== ========== ========== ==========
Earnings per common share ................... $ .11 $ .12 $ .21 $ .25
Earnings per common share - assuming dilution .11 .12 .20 .24
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED
March 31, 1998
Common Unearned Unallocated Net Unrealized
Stock and RRP ESOP Gain on Avail. Retained
Paid in Capital Shares Shares For Sale Securities Earnings
--------------- ------ ------ ------------------- --------
Balance October 1, 1997 ........ $ 12,209,443 $ (329,748) $ (650,614) $ 15,512 $ 13,365,792
Deferred compensation
amortization ................ -- 58,191 -- -- --
Payment of cash dividends ...... -- -- -- -- (101,990)
Accrued dividends - RRP stock .. -- -- -- -- (2,547)
Net change in unrealized gain .. -- -- -- (58,199) --
on securities available for
sale, net of deferred taxes
of $29,980.79
Transfer of par value of ....... 6,281 -- -- -- (6,281)
shares created in stock split
Net income for the six months
ended March 31, 1998 ........ -- -- -- -- 302,099
Balance March 31, 1998 ......... $ 12,215,724 $ (271,557) $ (650,614) $ (42,687) $ 13,557,073
============ ============ ============ ============ ============
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(continued)
SIX MONTHS ENDED
March 31, 1998
Total
Treasury Stockholders'
Stock Equity
Balance October 1, 1997 ........ $(3,731,017) $ 20,879,368
Deferred compensation
amortization ................ -- 58,191
Payment of cash dividends ...... --
(101,990)
Accrued dividends - RRP stock .. -- (2,547)
Net change in unrealized gain .. --
(58,199)
on securities available for
sale, net of deferred taxes
of $29,980.79
Transfer of par value of ....... -- --
shares created in stock split
Net income for the six months
ended March 31, 1998 ........ -- 302,099
Balance March 31, 1998 ......... $(3,731,017) $ 21,076,922
============= ==============
The accompanying notes are an integral part of these financial statements.
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
March 31,
----------------------------
1998 1997
----------- -----------
Cash lows from operating activites:
Net income .............................................. $ 302,099 $ 369,023
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of deferred loan origination fees ...... 2,071 (1,194)
Amortization of premiums and discounts on investment
securities, mortgage-backed securities, and loans . 64,514 54,068
Amortization of deferred compensation ............... 58,191 58,191
Compensation charge related to release of ESOP shares 60,547 46,350
Depreciation ........................................ 48,881 33,801
Deferred income taxes ............................... 14,299 13,602
Stock dividends on FHLB stock ....................... (30,300) (27,600)
Origination of mortgage servicing rights ........... (49,826) (23,788)
Amortization of mortgage servicing rights ........... 20,143 13,307
Net (gain) loss on sale of:
Securities held to maturity ....................... 0 0
Foreclosed real estate ............................ 0 0
Fixed assets ...................................... 0 0
Net loss on disposal of fixed assets .............. 3,889 0
Other assets ...................................... 0 0
Loans ............................................. (13,619) (31,321)
Loans held for sale ............................... 0 0
Proceeds from loan sales ............................ 4,199,237 1,950,639
Originations of loans held for sale ................. 0 0
Proceeds from sale of fixed assets .................. 0 0
(Increase) decrease in:
Accrued interest receivable ....................... (41,749) 29,985
Other assets ...................................... 120,627 316,077
Accrued loan loss ................................. 0 5,000
Increase (decrease) in:
Federal income tax payable ........................ (33,820) (8,898)
Accrued expenses and other liabilities ............ (915,453) (639,709)
Capitalized interest on time deposits ............... 0 0
----------- -----------
Net cash provided (used) by operating activities ........... 3,809,731 2,157,533
----------- -----------
The accompanying notes are an integral part of the financial statements.
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended
March 31,
------------------------------
1998 1997
------------ ------------
Cash flows from investing activites:
Purchases of interest earning time deposits ....................... $ (99,617) $ (98,000)
Net decrease (increase) in fed funds sold ......................... (1,379) 171,055
Purchases of obligations - U.S. Govt. and agencies
held-to-maturity ................................................ (8,530,438) (3,513,046)
Proceeds from maturity of time deposits ........................... 197,573 98,000
Proceeds from sale of securities held-to-maturity ................. 0 0
Proceeds from maturity of securities held-to-maturity ............. 0 0
Proceeds from maturity of obligations - U.S. Govt. and
agencies held-to-maturity ....................................... 6,500,000 7,500,000
Proceeds from sale of obligations of U.S. Govt. agencies
held-to-maturity
Purchases of mortgage-backed securities available for sale ........ (5,559,986)
Purchases of mortgage-backed securities held-to-maturity .......... 0 0
Principal payments on mortgage-backed securities available for sale 815,511
Principal payments on mortgage-backed securities held-to-maturity . 3,885,016 4,080,367
Net originations and principal collections on loans ............... (8,438,910) (6,225,858)
Capitalized acquisition cost related to foreclosed real estate .... (2,800) (9,489)
Proceeds from sale of foreclosed real estate ...................... 0 184,269
Expenditures for premises and equipment ........................... (352) (6,703)
------------ ------------
Net cash provided (used) by investing activities ..................... (11,235,382) 2,180,595
------------ ------------
Cash flows from financing activities:
Net increase(decrease) in:
Non-interest bearing deposits, savings, NOW accounts ............ (319,856) (1,903,542)
Time deposits ................................................... (323,416) 33,131
FHLB Advances ................................................... 45,273,500 0
Repayment of FHLB Advances ...................................... (38,442,612) 0
Advances from borrowers for taxes and insurance ................. (486,725) (530,169)
Dividends paid to stockholders .................................... (104,538) (107,930)
Purchase of treasury stock ........................................ 0 0
Proceeds from sale of common stock ................................ 0 0
------------ ------------
Net cash provided (used) by financing activities ..................... 5,596,353 (2,508,510)
------------ ------------
Net increase (decrease) in cash and cash equivalents ................. (1,829,298) 1,829,618
Cash and cash equivalents at beginning of the period ................. 6,931,133 5,699,647
------------ ------------
Cash and cash equivalents at end of the period ....................... $ 5,101,835 $ 7,529,265
============ ============
EAST TEXAS FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(continued)
For the Six Months Ended
March 31,
------------------------------
1998 1997
------------ ------------
Supplemental disclosure:
Cash paid for:
Interest on deposits .............................................. $ 1,114,472 $ 1,115,923
Income taxes ...................................................... $ 0 $ 212,701
Transfers from loans to real estate
Acquired through foreclosures ..................................... $ 207,229 $ 419,527
Loans charged off to loan loss reserves .............................. $ 36,744 $ 54,083
Recoveries credited to loan loss reserves ............................ $ 0 $ 33,622
The accompanying notes are an integral part of the financial statements.
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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, 1997.
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 share for the three months ended March 31, 1998 and 1997, 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 March 31, 1998
and 1997, the weighted average number of shares outstanding totaled 1,441,868
and 1,504,446 respectively. For the six months ended March 31, 1998 and 1997,
the weighted average number of shares outstanding totaled 1,441,868 and
1,504,446 shares respectively.
Earnings per common share - assuming dilution, for the three months and six
months ended March 31, 1998 and 1997, 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, 1998
and 1997, the weighted average number of shares outstanding for earnings per
share - assuming dilution totaled 1,496,037 and 1,535,612 shares respectively.
For the six months ended March 31, 1998 and 1997, the weighted average number of
shares outstanding for earnings per share assuming dilution totaled 1,493,398
and 1,527,808 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 I, Item 1 - Note 4 to consolidated financial statements for further
information on the changes applicable for earnings per share reporting.) (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, 1998 and
1997.)
NOTE 3 - SECURITIES
The amortized cost and estimated market values of investment securities
held-to-maturity as of March 31, 1998, are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
Debt securities:
U. S. Treasury ........... $ 2,507,776 $ 15,314 $ 0 $ 2,523,090
U. S. government agency... 22,551,644 81,363 10,804 22,622,203
----------- ----------- ----------- -----------
Total debt securities $25,059,420 $ 96,677 $ 10,804 $25,145,293
----------- ----------- ----------- -----------
The amortized cost and estimated market values of investment securities
held-to-maturity as of March 31, 1998, by contractual maturity are shown below:
Estimated
Amortized Market
Cost Value
------------ -----------
Due in one year or less ...................... $ 8,000,367 $ 8,012,144
Due after one year through two
years ........................................ 6,561,514 6,593,834
Due after two years through three years....... 5,989,701 6,036,487
Due after three years through five years...... 4,507,838 4,502,828
----------- -----------
Total debt securities ................ $25,059,420 $25,145,293
----------- -----------
As of March 31, 1998, the weighted average yield on the Company's investment
security held-to-maturity portfolio was approximately 5.99% while the Company's
overall investment portfolio, including securities held-to-maturity, overnight
deposits and interest earning time deposits with other financial institutions
was approximately 5.93%.
The carrying values and estimated market values of mortgage-backed and related
securities available-for-sale as of March 31, 1998, by type of security are as
follows:
Principal Unamortized Unearned Unrealized Carrying
Balance Premiums Discounts Gain/(Loss) Value
----------- ----------- ----------- ----------- -----------
Fixed Rate .... $ 0 $ 0 $ 0 $ 0 0
Adjustable Rate 8,817,427 227,035 0 (64,677) 8,979,785
----------- ----------- ----------- ----------- -----------
$ 8,817,427 $ 227,035 0 $ (64,677) 8,979,785
----------- ----------- ----------- ----------- -----------
The carrying values and estimated market values of mortgage-backed and related
securities held-to-maturity as of March 31, 1998, by type of security are as
follows:
Estimated
Principal Unamortized Unearned Carrying Market
Balance Premiums Discounts Value Value
----------- ----------- ----------- ----------- -----------
Fixed Rate .... $ 2,570,493 $ 0 $ 5,220 2,565,273 $ 2,564,863
Adjustable Rate 11,628,489 84,310 13,680 11,699,119 12,042,752
----------- ----------- ----------- ----------- -----------
$14,198,982 $ 84,310 $ 18,900 $14,264,392 $14,607,615
----------- ----------- ----------- ----------- -----------
The overall yield on the Company's mortgage-backed securities portfolio as of
March 31, 1998, was approximately 7.08%.
NOTE 4 - CURRENT ACCOUNTING ISSUES
SFAS NO. 128 In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share.
SFAS No. 128 establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock or potential
common stock. The Statement simplifies the standards for computing EPS and makes
them comparable with international EPS standards.
SFAS No. 128 replaces the presentation of primary EPS previously prescribed in
Accounting Principles Board Opinion (APB) No. 15, Earnings Per Share, with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation.
Basic EPS does not include dilution and is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15.
The Statement is effective for financial statements issued for periods ending
after December 15, 1997. The Company adopted the Statement as required.
SFAS No. 129 In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 129, Disclosure of
Information About Capital Structure. It requires information about capital
structure to be disclosed in three separate categories: information about
securities, liquidation preference of preferred stock and redeemable stock.
The Statement is effective for financial statements issued for periods ending
after December 15, 1997. The Company adopted the Statement as required.
The Company has not issued any preferred or redeemable stock and does not
anticipate any disclosure requirements for these types of capital instruments.
The Company has issued stock options and certain disclosure requirements related
to the number of shares, vesting, and exercise price of the options are required
to be disclosed in the financial statements. (See Note 5 to the Consolidated
Financial Statements of this report for a detailed presentation of the Company's
stock option plan.)
SFAS No. 130 In June of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS ) No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components in general purpose financial
statements. Comprehensive income includes net income and several other items
that current accounting standards require to be recognized outside of net
income.
SFAS No. 130 requires companies to display comprehensive income in its financial
statements, to classify items of comprehensive income by their nature in their
financial statements and to display accumulated balances of comprehensive income
in stockholders' equity separately from retained earnings and addition paid-in
capital.
The Statement is effective for fiscal years beginning after December 31, 1997.
The Company adopted the Statement as required.
SFAS No. 131 In June of 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 131, Disclosure About
Segments of and Enterprise and Related Information. The Statement requires
entities to report certain information about their operating segments in a
complete set of financial statements. It requires them to report certain
enterprise-wide information about their products and services, activities in
different geographic regions and their reliance on major customers, and to
disclose certain segment information in their interim financial statements.
The Statement is effective for fiscal years beginning after December 15, 1997.
The Company has not determined the effects, if any, that the disclosure
requirements will have on its financial statements. The Company adopted the
Statement as required.
SFAS No. 132 In February of 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard (SFAS) No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132
revises current disclosures for employers' disclosures for pensions and other
postretirement benefit plans. It standardizes the disclosure requirements for
these plans to the extent possible, and it requires additional information about
changes in the benefit obligations and the fair value of plan assets that are
expected to enhance financial analysis. It does not change measurement or
recognition standards for these plans.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997.
The Company anticipates changing the disclosure requirements of its defined
benefit pension plan as a result of the statement. The Company has no other
postretirement benefit plans.
NOTE 5 - STOCK OPTION AND INCENTIVE PLAN
The 1995 Stock Option and Incentive Plan (the "Stock Option Plan") provides for
awards in the form of stock options, stock appreciation rights, limited stock
appreciation rights, and restricted stock.
Options to purchase shares of common stock of the Company may be granted to
selected directors, officers and key employees. The number of shares of common
stock reserved for issuance under the stock option plan was equal to 121,519 or
10% of the total number of common shares issued pursuant to the conversion. The
option exercise price cannot be less than the fair market value of the
underlying common stock as of the date of the option grant, and the maximum
option term cannot exceed ten years. Awards vest at a rate of 20% per year
beginning at the date of the grant. The Company plans to use treasury stock for
the exercise of options. The following is a summary of changes in options
outstanding:
Options outstanding:
Balance, September 30, 1995 103,411
Granted 0
Exercised (2,090)
Forfeited and expired 0
-----------
Balance, September 30, 1996 101,321
Balance, September 30, 1996 101,321
Granted 0
Exercised (1,045)
Forfeited and expired 0
-----------
Balance, September 30, 1997 100,276
===========
All outstanding options were granted at an exercise price of $14.125 per
share.
On March 25, 1998, the Company completed a 3 for 2 stock split in the form of a
50% stock dividend. As a result of the split, the number of outstanding options,
option price, options exercisable at year end, and shares available for the
future grants were adjusted as follows:
Options outstanding at September 30, 1997 150,411
===========
Option price $ 9.42
============
Options exercisable at year end under stock option plan 57,350
===========
Shares available for future grants 27,162
===========
During the six months ended March 31, 1998, no options were exercised, issued,
or forfeited.
NOTE 6 - COMMON STOCK SPLIT
On March 25, 1998, the Company completed a 3 for 2 stock split in the form of a
50% stock dividend. The effect of the split is presented retroactively within
stockholder's equity by transferring the par value of the additional shares from
retained earnings to additional paid in capital.
All share per share data, including stock option plan information, has been
retroactively restated to reflect the stock split.
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
MARCH 31, 1998
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
The principle business of the Company is that of a community-oriented financial
institution attracting deposits from the general public and using such deposits
to originate one- to four-family residential loans and, to a lesser extent,
commercial real estate, one- to four-family construction, multi-family and
consumer loans. These funds have also been used to purchase mortgage-backed
securities, U. S. government and agency obligations and other permissible
securities. The 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 $120.9 million at March 31, 1998, a $5.0 million increase from
the $115.9 million reported at September 30, 1997, the Company's most recent
fiscal year end. The increase in total assets was the result of a $4.6 million
increase in mortgage-backed securities available-for-sale, a $4.1 million
increase in loans receivable and a $2.0 million increase in investment
securities held-to-maturity. The increases were partially offset by a $3.9
million decline in mortgage-backed securities held-to-maturity and a $2.3
million decrease in interest-bearing deposits with banks and federal funds sold.
The increase in loans-receivable was a result of the Company's continued efforts
to originate and place into portfolio one- to four-family loans. During the
quarter ended March 31, 1998, the Company continued its policy of placing all
fixed interest rate one- to four-family loans with original terms of less than
or equal to 15 years and with interest rates of greater than or equal to 7.00%
into portfolio. Continued lower mortgage rates have influenced borrowers to
select fixed rate loans and, as result, the Company was able to increase its
loans receivable portfolio. Several times during the six months ended March 31,
1998, interest rates on 15 year mortgage loans dropped below 7.00% and the
Company elected to sell such loans into the secondary market. A continued period
of declining mortgage rates could impede the Company's ability to continue to
increase its loans receivable portfolio as few, if any, loans would be placed
into portfolio under the Company's current policy. The result could be an
overall decline in the Company's yield on earning assets as cash flows normally
directed to loans are reinvested into lower yielding assets.
In an effort to minimize some of the interest rate risk inherent in its 15 year
fixed rate mortgage portfolio and in an effort to achieve higher yielding
assets, the Company made the decision, during the quarter ended March 31, 1998,
to begin offering home equity loans. Home equity lending was approved by Texas
voters in an amendment to the Texas Constitution in November of 1997. Financial
institutions were able to begin making loans on January 1, 1998.
The Company currently offers home equity loans for up to 80% of the borrowers
equity in the property, the maximum allowed by Texas law. Loan terms of up to 15
years are offered at interest rates, depending upon the size of the loan,
ranging from 7.75% to 9.00%. As of March 31, 1998, the Company had approximately
32 home equity loans outstanding totaling $1.4 million.
At March 31, 1998, loans receivable totaled $61.2 million, compared to $57.1
million at September 30, 1997. For the three months and six months ended March
31, 1998, the Company originated a total of 7.9 million and 16.0 in loans
respectively.
The increase in the mortgage-backed securities available-for-sale portfolio was
primarily the result of the Company's decision to continue its program of
borrowing funds from the FHLB and investing the proceeds into mortgage-backed
and similar securities in an effort to achieve a positive margin on the
transaction. At March 31, 1998, the portfolio totaled $8.9 million, compared to
$4.4 million at September 30, 1997.
Subject to favorable interest rates, the Company intends, over the next several
quarters, to systematically borrow up to approximately $20.0 million from the
Federal Home Loan Bank ("FHLB") and invest the proceeds in adjustable rate
mortgage-backed securities to be held in an available-for-sale accounting
classification. The purpose of the program is to leverage a portion of the
Company's excess capital and to achieve a rate of return on the difference in
the rate earned on the securities and the cost of the advances. The success of
the program will be dependent upon several factors, including the Company's
ability to purchase adjustable rate securities that will maintain a positive
margin above the FHLB advance rates. The Company intends to primarily borrow
funds from the FHLB with terms of approximately thirty days and invest in
mortgage-backed securities with interest rate adjustment frequencies that vary
between one month and one year. As a result, the success of the program will be
dependent upon the difference between very short-term federal fund type interest
rates and interest rates comparable to U.S. Treasury bill rates. In general, the
program will be more successful as the difference in these types of interest
rates widens and less successful as the difference narrows. Also, the general
level of interest rates, which in turn affect mortgage rates, will have an
effect on the success of the program. A period of lower interest rates could
have the effect of increasing prepayments of the principal balances on the
securities as borrowers on underlying loans of the securities elect to refinance
their mortgages. A rapid period of prepayments could have the effect of
decreasing the overall yield on the program.
At March 31, 1998, the average yield on the securities in the program was
approximately 6.14% while the cost of the FHLB advance was approximately 5.55%.
At March 31, 1998, the investment securities held-to-maturity portfolio totaled
$25.1 million, compared to $23.1 million at September 30, 1997. At March 31,
1998, the overall yield on the portfolio was approximately 5.99%, compared to
6.06% at September 30, 1997. The increase in outstanding balances was a result
of the Company's decision to transfer excess interest-earning bank balances and
federal funds sold into longer term higher yielding investments. At March 31,
1998, the portfolio contained $8.0 million in securities with remaining terms
until maturity of less than one year, $6.0 million with remaining maturities of
one through two years, $6.6 million with remaining maturities of two through
three years and $4.5 million with remaining maturities of three through five
years.
The Company's mortgage-backed securities held-to-maturity portfolio totaled
$14.3 million at March 31, 1998, compared to $18.2 million at September 30,
1997. The decrease in mortgage-backed securities held-to-maturity was primarily
due to principal payments received on the portfolio during the period. Continued
lower long-term interest rates could continue to influence borrower decisions to
refinance the adjustable rate mortgage loans underlying the Company's
mortgage-backed securities held-to-maturity portfolio. The result would be a
continued decrease in the balances reported in this asset category.
The Company's decision to invest in mortgage-backed securities held-to-maturity,
as it is with investment securities held-to-maturity, is primarily dependent
upon the Company's ability to originate portfolio loans. A decision by the
Company to discontinue placing mortgage loans into portfolio could have the
effect of increasing the balances reported in this account as cash flow normally
directed to mortgage lending would be redirected to mortgage-backed securities
held-to-maturity. The weighted-average yield on the portfolio was approximately
7.53% at March 31, 1998.
Total deposits were $87.9 million at March 31, 1998, a $644,000 decrease from
the $88.6 million reported at September 30, 1997. The Company's average funds
cost was approximately 4.98% at March 31, 1998, compared to the 4.91% reported
at September 30, 1997.
The Company reported $11.0 million in borrowed funds at March 31, 1998, an
increase of $6.8 million from the $4.2 million reported at September 30, 1997.
Approximately $9.2 million of the borrowed funds were used to invest in
mortgage-backed securities available-for-sale as part of the Company's wholesale
funded arbitrage program. The advance had a remaining term of less than 30 days
and had an interest rate of 5.55%. The remaining $1.8 million in advances were
used to fund a portion of the Company's commercial real estate loan portfolio
and had a weighted average cost of approximately 6.05%.
Stockholders' equity totaled $21.1 million at March 31, 1998, an increase of
$198,000 from the $20.9 million reported at September 30, 1997. The increase was
primarily attributable to the net income of $302,000 reported for the six months
ended March 31, 1998, offset partially by a $58,000 decline in net unrealized
gains and losses on securities available-for-sale.
At March 31, 1998, the Company reported a book value per share of $13.69 based
on 1,539,461 net outstanding shares. The Company did not repurchase any treasury
stock during the six months ended March 31, 1998. The Company held 345,031
shares of treasury stock at an average cost of $10.81 per share at March 31,
1998.
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, 1998 AND MARCH 31, 1997
General. Net income for the three months ended March 31, 1998 was $158,000 or
$.11 per share, a decrease of $28,000 from the $ 186,000 or $.12 per share
reported for the three months ended March 31, 1997. The decrease in net income
was attributable to a $31,000 decline in net interest income after provision for
loan losses and a $50,000 increase in total non-interest expense, which were
partially offset by a $38,000 increase in total non-interest income and a
$15,000 decrease in income tax expense.
Net Interest Income. For the quarter ended March 31, 1998, net interest income
before provision for loan losses totaled $828,000, a decrease of $31,000 from
the $859,000 reported for the quarter ended March 31, 1997. On an annualized
basis, the $828,000 in net interest income for the current quarter was
approximately 2.84% of average interest earning assets and 2.75% of average
total assets. For the quarter ended March 31, 1997, the $859,000 in net interest
income was approximately 3.14% of average interest earning assets and 3.05% of
average total assets. Average interest earning assets were approximately $116.7
million for the quarter ended March 31, 1998, compared to $109.5 million for the
quarter ended March 31, 1997.
The decline in net interest income, despite the fact that average interest
earning assets increased by approximately $7.2 million, was primarily the result
of continued period of minimal differences in short term and long term interest
rates. Cash flow from the Company's interest earning assets has increased over
the past several quarters as mortgage borrowers have elected to refinance their
mortgages. In addition, scheduled maturities of the investment securities
portfolios have also provided additional challenges for reinvesting cash flow in
this current interest rate environment. The result has been, despite growth in
interest-earning assets, a yield on the Company's average interest-earning
assets that declined from 7.13% for the quarter ended March 31, 1997 to 7.05%
for the quarter ended March 31, 1998 as the cash flow has been reinvested at
lower interest rates.
Contrarily, interest rates on the Company's primary source of funds,
certificates of deposits, have not decreased. Continued competition for deposits
in the Company's market has compelled the Company to continue to pay higher
interest rates in order to maintain current deposit levels. On an annualized
basis, the $1.1 million in interest expense on deposits, reported for the
quarter ended March 31, 1998, was approximately 4.94% of average deposits
outstanding for the quarter. For the quarter ended March 31, 1997, the $1.1
million in interest expense on deposits was approximately 4.82% of average
deposits outstanding for the quarter. In addition, growth of the Company's
balance sheet has been done through advances from the Federal Home Loan Bank of
Dallas and at marginal rates higher than the Company's average cost of funds.
For the quarter ended March 31, 1998, the $121,000 in interest expense on FHLB
advances was approximately 5.21%.
Total interest income was $2.1 million for the quarter ended March 31, 1998, an
increase of $101,000 from the $2.0 million reported for the same quarter in
1997. Interest income on loans-receivable totaled $1.2 million or 7.86% of
average loans receivable balances outstanding for the quarter ended March 31,
1998. For the three months ended March 31, 1997, interest income on
loans-receivable was approximately 8.23% of average loans receivable balances.
During the quarter ended March 31, 1998, the Company continued its plan to place
into portfolio mortgage loans with an original maturity of less than or equal to
15 years and with interest rates of greater than or equal to 7.00%. As a result,
the Company has been able to increase its loan receivable portfolio and increase
interest income from loans-receivable. The growth has been at marginal yields at
less than the average in the portfolio and the result has been a decline in the
average yield on the portfolio. For the quarter ended March 31, 1998, the
Company originated $7.9 million in loans. Approximately $4.2 million were sold
into the secondary market while the remainder were place into portfolio.
Interest income from mortgage-backed securities available-for sale totaled
$105,000 for the three months ended March 31, 1998, compared to none for the
three months ended March 31, 1997. Interest income from this portfolio is part
of the Company's plan to borrow funds from the FHLB and invest in
mortgage-related securities in an effort to achieve a margin on the difference
in the investment yield and the cost of the borrowings from the FHLB. The yield
on the portfolio was approximately 6.14% at March 31, 1998. [See "Financial
Condition"]
Interest income from the investment securities held-to-maturity portfolio
totaled $407,000 for the three months ended March 31, 1998, compared to $460,000
for the same quarter in 1997. The decline was partially the result of a $1.5
million decrease in the average balance outstanding in the portfolio from $27.1
million for the three months ended March 31, 1997 to $25.6 million for the three
months ended March 31, 1998. In addition, the average yield on the portfolio
declined from 6.78% for the quarter ended March 31, 1997 to 6.35% for the
quarter ended March 31, 1998. The decline in the yield on the portfolio was a
result of maturing investment securities that were replaced at lower yields.
Interest income from the mortgage-backed securities held-to-maturity portfolio
totaled $281,000 for the three months ended March 31, 1998, compared to $389,000
for the same period in 1997. Continued prepayments on the adjustable rate
securities in the portfolio caused the average balance in the portfolio to
decline to $15.3 million for the quarter ended March 31, 1998 from $22.1 million
for the quarter ended March 31, 1997. The Company redirected the cash flow from
the portfolio into its lending operations. The result was a decline in interest
income from the portfolio, despite the fact that the average yield on the
portfolio increased from 7.05% for the quarter ended march 31, 1997 to 7.35% for
the quarter ended march 31, 1998.
Interest paid to depositors totaled $1.1 million for the three months ended
March 31, 1998, unchanged from the $1.1 million for the three months ended March
31, 1997. Average deposit balances declined $1.3 million from $90.8 million for
the quarter ended March 31, 1997 to $89.5 million for the quarter ended March
31, 1998.
Total interest expense as a percentage of average interest costing liabilities
was approximately 4.97% for the three months ended March 31, 1998, compared to
4.82% for the three months ended March 31, 1997.
Provision For Loan Losses. The Company made no provision for loan losses for the
quarter ended March 31, 1998 or for the quarter ended March 31, 1997. [See -
"Asset Quality"]
Non-Interest Income. Non-interest income totaled $99,000 for the three months
ended March 31, 1998, compared to $61,000 for the same period in 1997, a $38,000
increase.
Gains on sales of interest earning assets equaled $42,000 for the current
quarter, a $24,000 increase from the $18,000 reported for the same quarter in
1997. The increase was attributable to additional gains on the sale of mortgage
loans into the secondary market during the quarter ended March 31, 1998,
compared to the same quarter in 1997. In addition, loan origination fees
increased to $19,000 for the three months ended March 31, 1998 from $10,000 for
the three months ended March 31, 1997. The increase was attributable to the
increase in lending activity for the current quarter compared to the same
quarter in 1997.
Non-Interest Expenses. Non-interest expenses totaled $678,000 for the three
months ended March 31, 1998, compared to $627,000 for the three months ended
March 31, 1997.
The increase in non-interest expense was primarily the result of a $43,000
increase in compensation and benefits expense from $418,000 for the three months
ended March 31, 1997 to $461,000 for the three months ended March 31, 1998. The
increase in compensation and benefits expense was essentially the result of
additional compensation for two new employees added in 1997 in conjunction with
the opening of a new loan production office by the Company and the addition of a
loan officer in one of its full service locations. Also, additional expense
associated with the funding of the Company's defined benefit pension plan and
additional expenses associated with the Company's Employee Stock Ownership Plan
accounted for a portion of the increase.
Occupancy and equipment expense increased $8,000 from $38,000 for the three
months ended March 31, 1997 to $46,000 for the three months ended March 31,
1998. The increase was also attributable to additional expenses associated with
the opening of a new loan production office in 1997.
Provision For Income Taxes. The Company incurred federal income tax expense of
$91,000 or 36.7% of pre-tax income for the three months ended March 31, 1998,
compared to $107,000 or 36.5% of pre-tax income for the three months ended March
31, 1997.
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997
General. For the six months ended March 31, 1998, the Company reported net
income of $302,000 or $.21 per common share and $.20 per common share - assuming
dilution, compared to $369,000 or $.25 per common share and $.24 per common
share - assuming dilution for the six months ended March 31, 1997. The decrease
in net income was attributable to a $54,000 decline in net interest income after
provisions for loan losses and a $95,000 increase in noninterest operating
expenses, which were partially offset by a $38,000 increase in noninterest
income and a $44,000 decrease in income tax expense.
Net Interest Income. For the six months ended March 31, 1998, net interest
income after provisions for loan losses totaled $1.7 million, unchanged from the
$1.7 million reported for the six months ended March 31, 1997. On an annualized
basis, the $1.7 million in net interest income after provisions for loan losses
for the current period was approximately 2.91% of average interest earning
assets and 2.87% of average total assets. For the six months ended March 31,
1997, the $1.7 million in net interest income after provisions for loan losses
was approximately 3.14% of average interest earning assets and 3.05% of average
total assets. Average interest earning assets were approximately $114.7 million
for the six months ended March 31, 1998, compared to $109.9 million for the six
months ended March 31, 1997.
Total interest income was $4.1 million or 7.12% of average interest earning
assets for the six months ended March 31, 1998, compared to $3.9 million or
7.21% of average interest earning assets for the six months ended March 31,
1997. The decline in average yield on interest earning assets was a result of
continued lower interest rates and a continued narrowing of the difference in
short and long term interest rates. Cash flow from the Company's interest
earning assets are being re-deployed in lower yielding assets in the current
interest rate and the result is a decline in the average yield on the Company's
interest earning asset portfolio.
Interest income on loans receivable totaled $2.4 million for the six months
ended March 31, 1998, a $343,000 increase from the $2.0 million reported for the
six months ended March 31, 1997. The increase in interest income on loans
receivable, despite a decline in the average yield on the portfolio, was a
direct result of the increase in balances outstanding in the portfolio as the
Company continued its policy of placing into portfolio the majority of the loans
it originates. Average loans receivable balances increased to $59.2 million for
the six months ended March 31, 1998 from $49.9 million for the six months ended
March 31,1997. For the six months ended March 31, 1998, the $2.4 million in
interest income on loans receivable was approximately 7.97%, compared to 8.08%
on the $2.0 million reported for the six months ended March 31, 1997.
Interest income from mortgage-backed securities available-for sale totaled
$169,000 for the six months ended March 31, 1998, compared to none for the six
months ended March 31, 1997. Interest income from this portfolio is part of the
Company's program, begun in June of 1997, to borrow funds from the FHLB and
invest in mortgage-related securities in an effort to achieve a margin on the
difference in the investment yield and the cost of the borrowings. At March 31,
1998, the Company had approximately $8.9 million invested in the program.
[See "Financial Condition"]
Interest income on investment securities held-to-maturity totaled $800,000 for
the six months ended March 31, 1998, compared to $938,000 for the six months
ended March 31, 1997. The decrease in interest income on the portfolio was
partially the result of a decline in the overall yield on the portfolio as
maturing securities were re-invested at lower yields. In addition, the average
balance outstanding in the portfolio decreased from $28.1 million for the six
months ended March 31, 1997 to $24.1 million for the six months ended March 31,
1998 as the Company re-directed a portion of the cash flow from maturing
investment securities to its lending operations. For the six months ended March
31, 1998, the $800,000 in interest income was approximately 6.65% of the average
balance outstanding, compared to 6.67% for the $938,000 reported for the six
months ended March 31, 1997.
Interest income on mortgage-backed securities held-to-maturity was $596,000 for
the six months ended March 31, 1998, compared to $811,000 for the six months
ended March 31, 1997. The decline in interest income on the portfolio was
primarily the result of a decline in the average balance outstanding in the
portfolio from $22.9 million for the six months ended March 31, 1997 to $15.2
million for the six months ended March 31, 1998. The Company re-directed cash
flow from the portfolio into its lending operations. The average yield on the
portfolio increased to 7.80% for the six month period ended March 31, 1998 from
7.07% for the six month period ended March 31, 1997. The increase in the overall
yield on the portfolio, despite an overall decline in the general level of
interest rates, was attributable to the adjustable rate features of the
securities in the portfolio. The portfolio is predominately made up of
adjustable rate mortgage-backed securities. The securities have an interest rate
that is determined by a spread or margin over an index rate. A portion of the
securities in the portfolio when purchased had discounted initial coupon rates.
Over the past several quarters, despite an overall decline in interest rates,
the coupon rates and consequently the yields on the securities have increased.
However, the adjustable rate feature of the underlying loans in the securities,
the higher coupon rates on such loans, and lower rates of interest on fixed
interest mortgage loans have caused borrowers on the underlying loans to seek
out opportunities to refinance their mortgages. The result has been an increase
in the cash flow from the portfolio and resulted in the decline in the average
balances in the portfolio.
Interest expense was $2.4 million for the six months ended March 31, 1998, an
increase of $208,000 from the $2.2 million reported for the six month period
ended March 31,1997. An increase in average interest costing liabilities,
including advances from the FHLB, from $90.7 million for the six months ended
March 31, 1997 to $95.8 million for the six months ended March 31, 1998
primarily accounted for the increase in interest expense. The $2.4 million in
interest expense reported for the six month period ended March 31, 1998 was
approximately 5.04% of average interest costing liabilities, compared to 4.86%
for the same period in 1997.
Non-Interest Income. Non-interest income was $176,000 for the six months ended
March 31, 1998, compared to $138,000 for the six months ended march 31, 1997.
The increase in income was directly attributable to additional gains on sales of
interest earning assets and additional loan origination fees. Gains on sales on
interest earning asset totaled $63,000 for the six month period ended March 31,
1998, compared to $31,000 for the six months ended March 31, 1997. The increase
was a direct result of the increased lending activity of the Company and the
fact that more loans were sold into the secondary market during the current
period and more gains on sales of loan were reported. At certain times during
the six months ended March 31, 1998, interest rates on the 15-year loans being
made by the Company fell below 7.00%. The Company elected to sell such loans
into the secondary market and additional gains on sales of loans were reported.
In addition, loan origination and commitment fees were $42,000 for the six
months ended March 31, 1998, compared to $27,000 for the six months ended March
31, 1997. The increase was directly attributable to the increase lending
activity of the Company during the current period.
Non-Interest Expense. Non-interest expense was reported as $1.4 million for the
six month period ended March 31, 1998, a $95,000 increase from the $1.3 million
reported for the six months ended March 31, 1997.
The increase in non-interest expense was primarily the result of a $107,000
increase in compensation and benefits expense from $846,000 for the six months
ended March 31, 1997 to $953,000 for the six months ended March 31, 1998. The
increase in compensation and benefits expense was essentially the result of
additional compensation for two new employees added in 1997 in conjunction with
the opening of a new loan production office by the Company. Also, additional
expense associated with the funding of the Company's defined benefit pension
plan and additional expenses associated with the Company's Employee Stock
Ownership Plan accounted for a portion of the increase.
Occupancy and equipment expense totaled $94,000 for the six months ended March
31, 1998, compared to $72,000 for the six months ended March 31, 1997. The
increase was attributable to additional expenses associated with the opening of
a new loan production office and the installation of a computer network linking
all of the Company offices, both in late 1997.
Provision For Income Taxes. The Company incurred federal income tax expense of
$174,000 or 36.5% of pre-tax income for the six months ended March 31, 1998,
compared to $217,000 or 37.1% of pre-tax income for the six months ended March
31, 1997.
ASSET QUALITY
At March 31, 1998, the Company's non-performing assets totaled $496,000 or .41%
of total assets, compared to $310,000 or .27% of total assets at September 30,
1997. At March 31, 1998, non-performing assets were comprised of eighteen (18)
loans, the largest of which was $90,000, secured by one (1) single family
dwelling and one (1) foreclosed single family real estate property in the amount
of $170,000.
Non-performing loans at March 31, 1998, equaled $326,000 or .53% of loans
receivable, compared to $310,000 or .54% of loans receivable at September 30,
1997.
Classified assets totaled $954,000 or .79% of total assets at March 31, 1998,
compared to $904,000 or .78% of total assets at September 30, 1997.
Classified assets and non-performing assets differ in that classified assets may
include loans less than ninety (90) days delinquent. Also, assets guaranteed by
government agencies such as the Veterans Administration and the Federal Housing
Administration are not included in classified assets but are included in
non-performing assets. All classified assets at March 31, 1998, were deemed to
be "substandard". No assets were classified "doubtful" or "loss" as of such
date.
The Company's allowance for loan losses totaled $236,000 at March 31, 1998, a
decrease of $37,000 from September 30, 1997. The allowance for loan losses as a
percentage of loans receivable equaled .38% at March 31, 1998, compared to .48%
at September 30, 1997. The decrease was a result of the Company's acquisition of
a foreclosed real estate property during the quarter ended March 31, 1998. The
property was appraised at acquisition and the balance was written down to its
estimated "fair value."
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of funds are deposits from customers, advances
from the FHLB, amortization and prepayment of loan principal (including
mortgage-backed securities), maturities of securities, sales of loans and
operations.
Current Office of Thrift Supervision regulations require the Association to
maintain, at a minimum, cash and eligible investments, in an amount not less
than 4.0% of net withdrawable savings accounts and borrowings payable on demand
or in one year or less. Liquid assets include cash on hand, unpledged demand
deposits, certain time deposits, and, U. S Government and agency obligations.
The Association maintains a liquid asset ratio above the minimum required level
of the Office of Thrift Supervision. At March 31, 1998, the Association's liquid
asset ratio equaled 40.5%.
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, 1998,
the Association had outstanding commitments to extend credit on $4.4 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 $21.1 million at March 31, 1998, an increase
of $198,000 from the $20.9 million reported at September 30, 1997. The increase
was primarily a result of the $302,000 net income for the six months ended March
31, 1998, less $102,000 in cash dividends paid during the six month period.
As of March 31, 1998, the Company's reported book value per share, using total
stockholders' equity of $21.0 million (net of the cost of unallocated ESOP and
RRP shares) and 1,539,461 outstanding shares of common stock (the total issued
shares including unallocated ESOP and RRP shares, less treasury shares), equaled
$13.69 per share.
Subsequent to the quarter ended March 31, 1998, the Company announced its
intention to pay a cash dividend of $.05 per share on May 27, 1998, to
stockholders of record at May 13, 1998.
Under the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), Congress imposed a three part capital requirement for thrift
institutions. At March 31, 1998, the Association's actual and required capital
amounts under each of the three requirements were as follows:
- - Tangible Capital (stockholders' equity) was $18.0 million or 14.9% of total
assets, exceeding the minimum requirement of 1.5% by $16.2 million.
- - Core Capital (Tangible capital plus certain intangible assets) was $18.0
million or 14.9% of total assets, exceeding the minimum requirement of 4.0% by
$13.2 million.
- - Risk-based Capital (Core capital plus general loan and valuation allowances
less an adjustment for capitalized mortgage servicing rights) equaled $18.3
million of 39.0% of risk weighted assets, exceeding the minimum requirement of
8.0% of risk weighted assets by $14.5 million.
At March 31, 1998, the Association was 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.
YEAR 2000 ISSUE
The Year 2000 or Century Date Change issue is a result of computer programs
being written using two digits rather than four digits to define the applicable
year. A computer system's inability to recognize the date "00" as the year 2000
or if the system recognized the date "00" as the year 1900, could result in a
system failure or miscalculations causing disruptions of operations. The Company
outsources its primary computer processing functions.
The Company has established a management committee to identify all of its
systems potentially affected by the year 2000 and to ensure that re-programming
of affected systems is completed. The committee will also be responsible for
testing all company computer systems and ensuring that all third-party computer
system vendors complete Year 2000 remediation.
The Company believes that the Year 2000 issue will not pose a significant
operational problem. However, it is possible that non-compliant third-party
computer systems that fail to successfully address this issue could adversely
affect the Company.
EAST TEXAS FINANCIAL SERVICES, INC.
AND SUBSIDIARY
FORM 10-QSB
MARCH 31, 1998
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which the Company or the
Association is a party or of which any of their property is subject. From
time-to-time, the Association is a party to various legal proceedings
incident to the conduct of its business.
Item 2. Changes In Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submissions Of Matters To A Vote Of Security Holders
None.
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit 11.0 - Computation of Earnings Per Share
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
During the quarter ended March 31, 1998, the Company filed a report on
Form 8-K on January 28, 1998, to report the issuance of a press release
dated January 28, 1998, announcing the Company's intention to pay, on
February 25, 1998, a cash dividend of $.05 per share for the quarter
ended December 31, 1997, to stockholders of record on February 11,
1998.
During the quarter ended March 31, 1998, the Company filed a report on
Form 8-K on January 28, 1998, to report the issuance of a press release
dated January 28, 1998, announcing the Company's earnings for the
quarter ended December 31, 1997.
During the quarter ended March 31, 1998, the Company filed a report on
Form 8-K on February 24, 1998, to report the issuance of a press
release dated February 24, 1998, announcing the Company's intention to
issue a 3 for 2 stock split in the form of a 50% stock dividend payable
on March 25, 1998 to stockholders of record on March 11, 1998.
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 11, 1997 /s/ Gerald W. Free
------------------
Vice Chairman, President and CEO
(Principal Executive Officer)
Date: May 11, 1997 /s/ Derrell W. Chapman
-----------------------
Vice President/COO/CFO
(Principal Financial and
Accounting Officer)