UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ To ___________
Commission file number 0-25047
RFS BANCORP, INC.
(Exact name of registrant as specified in its charter)
UNITED STATES 04-3449818
- ------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
310 BROADWAY
REVERE, MASSACHUSETTS 02151
- --------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 284-7777
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 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.
YES X NO
----- -----
As of March 31, 1999, 933,523 shares of the registrant's common stock were
outstanding.
RFS BANCORP, INC. and SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page
--------------------- ----
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets - March 31, 1999
and September 30, 1998 1
Consolidated Statements of Income - Three Months
Ended March 31, 1999 and 1998 2
Consolidated Statements of Income - Six Months
Ended March 31, 1999 and 1998 3
Consolidated Statements of Changes in Stockholders'
Equity-Six Months Ended March 31, 1999
and 1998 4
Consolidated Statements of Cash Flows - Six Months
Ended March 31, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements -
March 31, 1999 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II OTHER INFORMATION
-----------------
Item 6 Exhibits and Reports on Form 8-K 28
SIGNATURES 29
----------
RFS BANCORP, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 31, 1999 September 30, 1998
-------------- ------------------
(Unaudited)
ASSETS
- ------
Cash and due from banks $ 442 $ 1,195
Federal funds sold 4,307 6,735
----------------------------
Total cash and cash equivalents 4,749 7,930
Securities available for sale, at fair value 1,034 896
Securities held to maturity, at amortized cost 29,519 30,110
Federal Home Loan Bank stock, at cost 1,517 1,517
Loans, net of allowance for loan losses of $570,985,
and $528,250, respectively 59,000 46,852
Bank premises and equipment, net 1,857 1,252
Accrued interest receivable 559 519
Other assets 333 392
----------------------------
Total Assets $98,568 $89,468
============================
LIABILITIES and STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $70,280 $64,327
Federal Home Loan Bank borrowings 17,628 18,204
Mortgagors' escrow accounts 234 157
Accrued expenses and other liabilities 365 296
----------------------------
Total liabilities 88,507 82,984
----------------------------
Stockholders' equity:
Common stock $.01 par value, 5,000,000 shares
authorized, 933,523 shares issued 9 ---
Additional paid-in capital 3,698 ---
Retained earnings 6,129 5,971
Accumulated Other Comprehensive Income 576 513
Unallocated ESOP shares (351) ---
----------------------------
Total stockholders' equity 10,061 6,484
----------------------------
Total liabilities and stockholders' equity $98,568 $89,468
============================
RFS BANCORP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended
---------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
(Unaudited)
Interest and dividend income:
Interest and fees on loans $1,139 $ 939
Interest and dividends on securities 509 584
Other interest 43 114
-------------------------
Total interest and dividend income 1,691 1,637
-------------------------
Interest expense:
Deposits 610 562
Federal Home Loan Bank borrowings 238 358
-------------------------
Total interest expense 848 920
-------------------------
Net interest and dividend income 843 717
Provision for loan losses 22 51
-------------------------
Net interest and dividend income, after
provision for loan losses 821 666
-------------------------
Other income:
Loan servicing fees 19 21
Deposit account fees 46 34
Gain (loss) on sales of mortgage loans, net (1) (1)
Other income 36 28
-------------------------
Total other income 100 82
-------------------------
Operating expenses:
Salaries and employees benefits 400 318
Occupancy and equipment expenses 140 91
Professional services 65 91
Data processing expenses 54 36
Other expenses 117 103
-------------------------
Total operating expenses 776 639
-------------------------
Income before income taxes 145 109
Provision for income taxes 53 41
-------------------------
Net income $ 92 $ 68
=========================
Earnings per share (annualized) $ 0.39 N/A
Weighted average shares outstanding 934 N/A
RFS BANCORP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
Six Months Ended
---------------------------------
March 31, 1999 March 31, 1998
-------------- --------------
(Unaudited)
Interest and dividend income:
Interest and fees on loans $2,181 $1,854
Interest and dividends on securities 1,021 1,231
Other interest 106 164
-------------------------
Total interest and dividend income 3,308 3,249
-------------------------
Interest expense:
Deposits 1,215 1,126
Federal Home Loan Bank borrowings 494 732
-------------------------
Total interest expense 1,709 1,858
-------------------------
Net interest and dividend income 1,599 1,391
Provision for loan losses 45 123
-------------------------
Net interest and dividend income, after
provision for loan losses 1,554 1,268
-------------------------
Other income:
Loan servicing fees 46 41
Deposit account fees 82 65
Gain (loss) on sales of mortgage loans, net 1 (5)
Other income 82 54
-------------------------
Total other income 211 155
-------------------------
Operating expenses:
Salaries and employees benefits 752 614
Occupancy and equipment expenses 241 177
Professional services 160 165
Data processing expenses 105 70
Other expenses 258 200
-------------------------
Total operating expenses 1,516 1,226
-------------------------
Income before income taxes 249 197
Provision for income taxes 91 75
-------------------------
Net income $ 158 $ 122
=========================
Earnings per share (annualized) $ 0.34 N/A
Weighted average shares outstanding 934 N/A
RFS BANCORP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1999 AND 1998
(In Thousands)
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Unallocated ESOP Stockholders'
Stock Capital Earnings Income Shares Equity
------ ---------- -------- ------------- ---------------- -------------
Balance at September 30, 1998 $--- $ --- $5,971 $513 $ --- $ 6,484
Comprehensive Income:
Net income --- --- 158 --- --- ---
Change in unrealized holding
gain on securities available for
sale, net of taxes --- --- --- 63 --- ---
Comprehensive income 221
Net proceeds from common
stock issued pursuant to IPO 9 3,698 --- --- --- 3,707
Unallocated ESOP shares (351) (351)
----------------------------------------------------------------------------------
Balance at March 31, 1999 $ 9 $3,698 $6,129 $576 $(351) $10,061
==================================================================================
Balance at September 30, 1997 $--- $ --- $5,681 $358 $ --- $ 6,039
Comprehensive Income:
Net income --- --- 122 --- --- ---
Change in unrealized holding
gain on securities available for
sale, net of taxes --- --- --- 125 --- ---
Comprehensive income 247
----------------------------------------------------------------------------------
Balance at March 31, 1998 $--- $ --- $5,803 $483 $ --- $ 6,286
==================================================================================
RFS BANCORP, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
Six Months Six Months
Ended Ended
March 31, 1999 March 31, 1998
-------------- --------------
(unaudited)
Cash flows from operating activities:
Net income $ 158 $ 122
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 45 123
(Gain) loss on sale of loans (1) 5
Amortization, net of accretion, of securities 37 14
Depreciation 108 74
(Increase) decrease in interest receivable (40) 152
(Increase) decrease in other assets 59 (169)
Decrease in accrued expenses and other
liabilities (6) (161)
Change in deferred loan origination fees, net 2 3
---------------------------
Net cash provided by operating activities 362 163
---------------------------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank Stock --- (112)
Purchases of held-to-maturity securities (4,021) (5,500)
Proceeds from maturities, h-t-m securities 4,575 10,200
Net increase in loans, net (15,373) (8,402)
Proceeds from sale of loans 3,179 4,093
Purchases of banking premises and equipment (713) (71)
---------------------------
Net cash provided by (used in) investing activities (12,353) 208
---------------------------
Cash flows from financing activities:
Net increase in deposits 5,953 5,140
Proceeds from FHLB advances --- 9,500
Repayment of advances from FHLB (576) (10,043)
Net increase in mortgagors' escrow accounts 77 30
Net proceeds from common stock issued pursuant to
initial public offering 3,707 ---
Payments to acquire common stock for ESOP (351) ---
---------------------------
Net cash provided by financing activities 8,810 4,627
---------------------------
Net change in cash and cash equivalents (3,181) 4,998
Cash and cash equivalents at beginning of period 7,930 1,832
---------------------------
Cash and cash equivalents at end of period $ 4,749 $ 6,830
===========================
Supplemental cash flow information:
Interest paid on deposits $ 1,214 $ 1,126
Interest paid on FHLB borrowings $ 494 $ 732
Income taxes paid $ 102 $ 257
RFS BANCORP, INC. and SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
Notes to Unaudited Consolidated Financial Statements
March 31, 1999
1) Basis of Presentation and Consolidation
The unaudited consolidated interim financial statements of RFS Bancorp,
Inc. and Subsidiaries ("RFS Bancorp" or the "Company") presented herein
should be read in conjunction with the consolidated financial statements
for the year ended September 30, 1998, included in the Annual Report on
Form 10-KSB of RFS Bancorp, Inc., the holding company for Revere Federal
Savings Bank (the "Bank"). The operating results for the period ended
March 31, 1999 are those of the Bank and Company. RFS Bancorp had not
issued any stock and had not conducted any business until December 18, 1998
when RFS Bancorp became the Bank's stock holding company in connection with
the Bank's reorganization from the mutual savings association to the mutual
holding company form of organization. Operating results prior to December
18, 1998 include only the Bank and not the Company.
The unaudited consolidated interim financial statements herein have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for completed financial statements.
In the opinion of management, the consolidated financial statements reflect
all adjustments (consisting solely of normal recurring accruals) necessary
for a fair presentation of such information. Interim results are not
necessarily indicative of results to be expected for the entire year.
2) Commitments and Contingencies
At March 31, 1999, the Bank had outstanding commitments to originate loans
amounting to approximately $3.8 million, and unused lines of credit
amounting to approximately $1.2 million for commercial loans and $3.2
million for home equity loans.
3) Stock Conversion
The Bank is a federally chartered stock savings bank founded in 1901. The
Bank converted from a federal mutual savings association into a mutual
holding company form of organization on December 18, 1998 and issued 100%
of its capital stock to the Company. RFS Bancorp has been organized at the
direction of the Board of Directors of the Bank. The Company issued
933,523 shares of which 47% of these shares, or 438,756 shares, were sold
to the Bank's depositors and employee benefit plans and 53% of these
shares, or 494,767 shares, were issued to Revere, MHC, a federal mutual
holding company (the "MHC"). The initial offering price was $10.00 per
share and the gross proceeds raised was $4,387,560. Net proceeds of the
offering were approximately $3.8 million. On December 18, 1998, the
Company loaned approximately $351,000 to the Company's Employee Stock
Ownership Plan to fund its purchase of 35,100 shares of common stock of the
Company.
4) Earnings Per Share
Earnings per share for the three months ended March 31, 1999 (annualized)
was $.39. Earnings per share for the six months ended March 31, 1999
(annualized) was $.34. Earnings per share data is not presented for the
three and six months ended March 31, 1998 since there were no outstanding
shares of common stock until the reorganization on December 18, 1998.
5) Recent Accounting Pronouncement
On June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. Accounting
principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Certain FASB statements, however,
require entities to report specific changes in assets and liabilities, such
as unrealized gains and losses on available-for-sale securities, as a
separate component of the equity section of the consolidated balance sheet.
Such items, along with net income, are components of comprehensive income.
SFAS No. 130 requires that all items of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. Additionally, SFAS No. 130 requires that the
accumulated balance of other comprehensive income be displayed separately
from retained earnings and additional paid-in capital in the equity section
of the consolidated balance sheet. The Company adopted these disclosure
requirements in the quarter ending December 31, 1998.
6) Investment Securities
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities
and their approximate fair values are as follows:
March 31, 1999 September 30, 1998
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
(In Thousands)
Securities Available for Sale:
Marketable equity securities $ 24 $ 1,034 $ 24 $ 896
-------------------------------------------
Total $ 24 $ 1,034 $ 24 $ 896
===========================================
Securities held to maturity:
U.S. Government & Federal
Agency Obligations $ 4,500 $ 4,423 $ 5,000 $ 5,031
Mortgage-backed securities 21,097 21,301 20,164 20,640
Asset-backed securities 3,922 3,878 4,946 4,976
-------------------------------------------
Total $29,519 $29,602 $30,110 $30,647
===========================================
7) Loans
The following table presents selected data relating to the composition of
the Company's loan portfolio by type of loan on the dates indicated.
March 31, 1999 September 30, 1998
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Resident mortgage loans $39,638 67.0% $34,475 73.0%
Commercial real estate loans 7,133 12.1 3,969 8.4
Construction and land loans 3,668 6.2 1,885 4.0
Commercial loans 4,392 7.4 2,724 5.8
Consumer loans 1,214 2.1 1,091 2.3
Home equity loans 3,091 5.2 3,061 6.5
-----------------------------------------
Total loans 59,136 100.0% 47,205 100.0%
Loans held for sale 497 235
Less:
Deferred loan origination fees 62 60
Allowance for loan losses 571 528
------- -------
Total Loans, net $59,000 $46,852
======= =======
8) Allowance for Loan Losses
The following table analyzes activity in the Company's allowance for loan
losses for the periods indicated.
Six Six
Months Ended Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
(Dollars in Thousands)
Average loans, net $ 53,145 $ 44,062
===========================
Period-end gross loans $ 59,136 $ 45,892
===========================
Allowance for loan losses at beginning of period $ 528 $ 377
Provision for loan losses 45 123
Plus recoveries --- ---
Loans charged-off 2 39
---------------------------
Allowance for loan losses at end of period $ 571 $ 461
===========================
Non-performing loans $ 2 $ 5
===========================
Ratios:
Allowance for loan losses to period-end gross loans .97% 1.00%
Allowance for loan losses to non-performing loans 28,550.0% 9,220.0%
9) Deposits and Borrowed Funds
The following tables set forth the various types of deposit accounts at the
Company and the balances in these accounts as well as the borrowings of the
Company at the dates indicated.
March 31, 1999 September 30, 1998
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
Deposits:
Savings accounts $17,471 24.9% $16,668 25.9%
NOW checking 6,547 9.3 5,345 8.3
Demand deposits 4,403 6.3 2,823 4.4
Money market accounts 2,053 2.9 1,883 2.9
Certificates of deposit 39,806 56.6 37,608 58.5
------- -------
Total deposits $70,280 100.0% $64,327 100.0%
======= =======
Borrowed funds:
Advances from FHLB $17,628 $18,204
Other borrowed funds --- ---
------- -------
Total borrowed funds $17,628 $18,204
======= =======
RFS BANCORP, INC. and SUBSIDIARIES
Part I - Financial Information
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
March 31, 1999
General
Revere Federal Savings Bank (the "Bank") completed its conversion
from a federal mutual savings association to a stock institution and was
simultaneously acquired by RFS Bancorp, Inc. (the "Company") on December
18, 1998 upon the consummation of the Bank's reorganization to the mutual
holding company form of organization and stock offering (the
"Reorganization"). The following discussion and analysis should be read in
conjunction with the consolidated financial statements and related notes
thereto included within this report. This analysis provides an overview of
the significant changes that occurred during the period presented.
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. When used in this
discussion, the words "believes", "anticipates", "contemplates", "expects",
and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from those projected.
Those risks and uncertainties include changes in interest rates generally
and changes in real estate values and other economic conditions in eastern
Massachusetts, the Bank's principal market area. The Company undertakes no
obligation to publicly release the results of any revisions to those
forward-looking statements which may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Additional information on potential factors which
could affect the Company's financial results are included in the Annual
Report on Form 10-KSB of RFS Bancorp.
The Company's operating results are primarily dependent upon net
interest and dividend income. Net interest income is the difference between
income earned on the Company's loan and investment portfolio and the
Company's funds which consists of interest paid on deposits and borrowings.
Operating results are also affected by the provision for loan losses,
securities sales activities and service charges on deposit accounts as well
as other fees. The Company's operating expenses consist of salaries and
employee benefits, occupancy and equipment expenses, professional fees as
well as marketing and other expenses. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates and government and regulatory
policies.
Market Risk Analysis
Qualitative Disclosures About Market Risk. Like other institutions,
the Company's most significant form of market risk is interest rate risk.
The Company is subject to interest rate risk to the degree that the
Company's interest-bearing liabilities, primarily deposits with short and
medium-term maturities, mature or reprice at different rates than the
Company's interest-earning assets. The Company believes it is critical to
manage the relationship between interest rates and the effect on the
Company's net portfolio value ("NPV"). This approach calculates the
difference between the present value of expected cash flows from assets and
the present value of expected cash flows from liabilities, as well as cash
flows from off-balance sheet contracts. The Company manages assets and
liabilities within the context of the marketplace, regulatory limitations
and within limits established by the Company's Board of Directors on the
amount of change in NPV which is acceptable given certain interest rate
changes.
An asset or liability is interest rate sensitive within a specific
time period if it will mature or reprice within that time period. If the
Company's assets mature or reprice more quickly or to a greater extent than
the Company's liabilities, the Company's net portfolio value and net
interest income would tend to increase during periods of rising interest
rates but decrease during periods of falling interest rates. Conversely,
if the Company's assets mature or reprice more slowly or to a lesser extent
than the Company's liabilities, the Company's net portfolio value and net
interest income would tend to decrease during periods of rising interest
rates but increase during periods of falling interest rates. The Company's
policy has been to mitigate the interest rate risk inherent in the
historical savings institution business of originating long-term loans
funded by short-term deposits by pursuing certain strategies designed to
decrease the vulnerability of the Company's earnings to material and
prolonged changes in interest rates. In this regard, the Company's
attempts to minimize interest rate risk by, among other things, emphasizing
the origination and retention of adjustable-rate loans and loans with
shorter maturities and the sale of long-term one-to-four family fixed-rate
loans in the secondary market.
Average Balances, Interest, Yields and Rates
The following tables set forth certain information relating to the
Company's average balance sheet and reflect the interest earned on assets
and interest cost of liabilities for the periods indicated and the average
yields earned and rates paid for the periods indicated. Such yields and
costs are derived by dividing income or expense by the average monthly
balances of assets and liabilities, respectively, for the periods
presented. Average balances are derived from daily balances. Loans on
nonaccrual status are included in the average balances of loans shown in
the tables. The investment securities in the following tables are
presented at amortized cost.
Three Months Ended March 31, 1999 Three Months Ended March 31, 1998
--------------------------------- ---------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- -------- ------ ------- -------- ------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Total loans, net $55,960 $1,139 8.14% $44,490 $ 939 8.44%
Investments 31,594 509 6.44% 33,738 584 6.92%
Other earning assets 4,260 43 4.04% 8,438 114 5.40%
------------------- -------------------
Total interest-earning assets 91,814 1,691 7.37% 86,666 1,637 7.56%
------ ------
Cash and due from banks 880 586
Other assets 4,359 3,455
------- -------
Total assets $97,053 $90,707
======= =======
INTEREST-BEARING LIABILITIES:
Passbook & Statement Savings $16,607 59 1.41% $14,927 47 1.25%
NOW's and MMA's 6,642 32 1.95% 5,813 23 1.60%
Certificate of deposits 39,253 519 5.29% 35,615 492 5.53%
------------------- -------------------
Total interest-bearing deposits 62,502 610 3.90% 56,355 562 3.99%
FHLB borrowings 17,815 238 5.34% 25,312 358 5.66%
------------------- -------------------
Total interest-bearing liabilities 80,317 848 4.22% 81,667 920 4.51%
------ ------
Demand deposit accounts 6,156 2,345
Other liabilities 510 394
------- -------
Total liabilities 86,983 84,406
Stockholders' equity 10,070 6,301
------- -------
Total liabilities and stockholders' equity $97,053 $90,707
======= =======
Net interest income $ 843 $ 717
====== ======
Interest rate spread 3.15% 3.05%
Net interest margin 3.67% 3.31%
Interest-earning assets/interest-bearing liabilities 114.31% 106.12%
Six Months Ended March 31, 1999 Six Months Ended March 31, 1998
------------------------------- -------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------- -------- ------ ------- -------- ------
(Dollars in Thousands)
INTEREST-EARNING ASSETS:
Total loans, net $53,145 $2,181 8.21% $44,062 $1,854 8.42%
Investments 31,485 1,021 6.49% 35,392 1,231 6.96%
Other earning assets 4,628 106 4.58% 6,204 164 5.29%
------------------- -------------------
Total interest-earning assets 89,258 3,308 7.41% 85,658 3,249 7.59%
------ ------
Cash and due from banks 787 524
Other assets 4,257 3,106
------- -------
Total assets $94,302 $89,288
======= =======
INTEREST-BEARING LIABILITIES:
Passbook & Statement Savings $16,647 112 1.35% $14,513 90 1.24%
NOW's and MMA's 7,966 60 1.51% 5,505 42 1.53%
Certificate of deposits 38,647 1,043 5.40% 35,174 994 5.65%
------------------- -------------------
Total interest-bearing deposits 63,260 1,215 3.84% 55,192 1,126 4.08%
FHLB borrowings 17,962 494 5.50% 25,145 732 5.82%
------------------- -------------------
Total interest-bearing liabilities 81,222 1,709 4.21% 80,337 1,858 4.63%
------ ------
Demand deposit accounts 4,157 2,325
Other liabilities 298 383
------- -------
Total liabilities 85,677 83,045
Stockholders' equity 8,625 6,243
------- -------
Total liabilities and stockholders' equity $94,302 $89,288
======= =======
Net interest income $1,599 $1,391
====== ======
Interest rate spread 3.20% 2.96%
Net interest margin 3.58% 3.25%
Interest-earning assets/interest-bearing liabilities 109.89% 106.62%
Rate/Volume Analysis
The following tables set forth certain information regarding changes
in interest income and interest expense of the Company for the periods
indicated. For each category of interest-earning asset and interest-
bearing liability, information is provided on changes attributable to : (i)
changes in volume (changes in volume multiplied by old rate); (ii) changes
in rates (change in rate multiplied by old volume). Changes in rate-volume
(changes in rate multiplied by the changes in volume) are allocated between
changes in rate and changes in volume.
Three Months Ended March 31,
1999 vs. 1998
Increase (decrease)
----------------------------
Due to
-----------------
Rate Volume Total
----------------------------
(In Thousands)
Interest and dividend income:
Loans, net ($38) $ 238 $ 200
Investments (39) (36) (75)
Other earning assets (21) (50) (71)
----------------------------
Total (98) 152 54
----------------------------
Interest expense:
Deposits (13) 61 48
Borrowed funds (17) (103) (120)
----------------------------
Total (30) (42) (72)
----------------------------
Change in net interest income ($68) $ 194 $ 126
============================
Six Months Ended March 31,
1999 vs. 1998
Increase (decrease)
--------------------------
Due to
-----------------
Rate Volume Total
----------------------------
(In Thousands)
Interest and dividend income:
Loans, net ($51) $ 378 $ 327
Investments (78) (132) (210)
Other earning assets (18) (40) (58)
----------------------------
Total (147) 206 59
----------------------------
Interest expense:
Deposits (71) 160 89
Borrowed funds (35) (203) (238)
----------------------------
Total (106) (43) (149)
----------------------------
Change in net interest income ($41) $ 249 $ 208
============================
Financial Condition and Results of Operations
Comparison of Financial Condition at March 31, 1999 and September 30, 1998.
The Company's total assets increased by $9.1 million or 10.2% to
$98.6 million at March 31, 1999 from $89.5 million at September 30, 1998.
The net increase in total assets is primarily attributable to a $12.1
million increase in net loans, offset by a $3.2 million decrease in cash
and cash equivalents. Total net loans increased by $12.1 million or 25.9%
to $59.0 million or 59.9% of total assets at March 31, 1999 as compared to
$46.9 million or 52.4% of total assets at September 30, 1998, due to the
receipt of $3.4 million in net proceeds from the issuing of stock and the
Company's continued emphasis on small business lending and a favorable
interest rate environment. Investment securities held by the Company
decreased by $453,000 or 1.5% to $30.6 million at March 31, 1999 from $31.0
million at September 30, 1998. This decrease is primarily due to normal
principal paydowns of mortgaged-backed and asset-backed securities.
Total deposits increased by $6.0 million or 9.3% to $70.3 million at
March 31, 1999 from $64.3 million at September 30, 1998. This increase was
the result of the opening of the Chelsea branch and ordinary deposit
growth. Total Federal Home Loan Bank of Boston ("FHLB") advances decreased
by $576,000 or 3.2% to $17.6 million at March 31, 1999 from $18.2 million
at September 30, 1998. Total equity increased by $3.6 million or 55.2% to
$10.1 million at March 31, 1999 from $6.5 million at September 30, 1998 as
a result of $3.4 million raised from the sale of stock, an increase of
$63,000 in the net unrealized gain on securities and net income of
$158,000.
Comparison of the Operating Results for the Three Months ended March 31,
1999 and 1998.
Net Income. The Company's net income for the three months ended March 31,
1999 was $92,000 as compared to $68,000 for the three months ended March
31, 1998. This $24,000 or 35.3% increase in net income during the period
was the result of an increase of $54,000 in interest and dividend income,
an increase of $18,000 in other income, a decrease of $72,000 in interest
expense and a decrease in provision for loan losses of $29,000, offset by
an increase of $137,000 in operating expenses and an increase in provisions
for income taxes of $12,000. The Company's continued expansion of its
lending activities accounted for the increase in interest income, while its
operating expenses increased due to the Company's planned expenditures in
human and technological resources, including increased staffing and non-
recurring start-up expenses associated with the Bank's new branch office in
Chelsea, Massachusetts. The return on average assets for the three months
ended March 31, 1999 was .38% compared to .30% for the three months ended
March 31, 1998.
Net Interest and Dividend Income. The Company's net interest and dividend
income for the three months ended March 31, 1999 increased $126,000 or
17.6% to $843,000 from $717,000 for the three months ended March 31, 1998.
The increase can be attributed to a combination of the $54,000 increase in
interest and dividend income and a $72,000 decrease in interest expense on
deposits and borrowed funds due to lower interest rates and maturing FHLB
advances.
The average yield on interest-earning assets decreased 19 basis
points to 7.37% for the three months ended March 31, 1999 from 7.56 % for
the three months ended March 31, 1998, while the average cost on interest-
bearing liabilities decreased by 29 basis points to 4.22% for the three
months ended March 31, 1999 from 4.51% for the three months ended March 31,
1998. As a result of the Company's strategy to restructure the balance
sheet by expanding its small business lending activities in order to
increase interest rate spread, the interest rate spread increased to 3.15%
for the three months ended March 31, 1999 from 3.05% for the three months
ended March 31, 1998 and the net interest margin improved from 3.31% to
3.67% during this period.
Interest and Dividend Income. Total interest and dividend income increased
by $54,000 or 3.3% to $1.7 million for the three months ended March 31,
1999 from $1.6 million for the three months ended March 31, 1998. The
increase in interest and dividend income was a result of a higher level of
loans and a greater mix of higher yielding commercial and commercial real
estate loans, partially offset by a decline in the average balance of
investment securities and lower yields on investment securities. The
average balance of net loans for the three months ended March 31, 1999 was
$56.0 million compared to $44.5 million for the three months ended March
31, 1998. The average yield on net loans was 8.14% for the three months
ended March 31, 1999 compared to 8.44% for the three months ended March 31,
1998, reflecting a general decline in interest rates. The average balance
of investment securities for the three months ended March 31, 1999 was
$31.6 million compared to $33.7 million for the three months ended March
31, 1998. The average yield on investment securities was 6.44% for the
three months ended March 31, 1999 compared to 6.92% for the three months
ended March 31, 1998.
Interest Expense. Interest expense decreased by $72,000 or 7.8 % to
$848,000 for the three months ended March 31, 1999 from $920,000 for the
three months ended March 31, 1998. Interest expense decreased primarily as
a result of a decrease in interest rates paid on FHLB borrowings and
deposit accounts and a significant decline in the level of FHLB advances
during the periods. Average interest-bearing deposits increased by $6.1
million or 10.9% to $62.5 million for the three months ended March 31,
1999. Deposit balances have increased as a result of offering free
checking products, certificate of deposit products with competitive rates
and new deposits attributable to the new Chelsea branch. Accordingly,
interest expense on deposits increased $48,000 or 8.5% to $610,000 for the
three months ended March 31, 1999 compared to $562,000 for the three months
ended March 31, 1998. Interest expense on advances from the FHLB decreased
$120,000 or 33.5% to $238,000 for the three months ended March 31, 1999
from $358,000 for the three months ended March 31, 1998. This is
attributable to a decline in the rates paid on such advances, and the
payment of such advances as they matured.
Provision for Loan Losses. The allowance for loan losses is maintained
through the provision for loan losses which is a charge to operations. The
provision reflects management's assessment of potential losses and is based
on a review of the risk characteristics as well as the growth of the loan
portfolio. The Bank considers many factors in determining the level of the
provision for loan losses. Collateral value on a loan by loan basis,
trends of loan delinquencies, risk classification identified in the Bank's
regular review of individual loans, and economic conditions are major
factors in establishing the provision. At March 31, 1999, the balance of
the allowance for loan losses was $571,000 or .97% of total loans versus
$528,000 or 1.13% of total loans at September 30, 1998. As the Bank
continues to expand its small business lending, additional increases to the
provision are likely.
Noninterest Income. Total noninterest income increased by $18,000 or
22.0% to $100,000 for the three months ended March 31, 1999 from $82,000
for the three months ended March 31, 1998. The increase was primarily the
result of increased fees on transactional deposit accounts and serviced
loans. The Company anticipates increases to noninterest income as it
continues to expand the volume of its deposit relationships. It is also
the Company's goal to increase its level of noninterest income by expanding
its delivery systems to include PC banking, debit cards and additional ATMs
and by continually considering additional sources of revenue. In this
regard, the Company began offering various investment products through a
relationship with a third-party broker-dealer during the second quarter of
its current fiscal year.
Noninterest Expense. Noninterest expense increased by $137,000 or 21.4% to
$776,000 for the three months ended March 31, 1999 from $639,000 for the
three months ended March 31, 1998. The increase resulted primarily from
planned expenditures in human and technological resources, including
increased staffing and non-recurring start up expenses associated with the
opening of the Chelsea branch. Salaries and employee benefits, the largest
component of noninterest expense was $400,000 for the three months ended
March 31, 1999 as compared to $318,000 for the three months ended March 31,
1998, an increase of $82,000 or 25.8%. This increase was primarily
associated with an increase of full time employees to staff the Bank's new
branch in Chelsea, commercial lending and operations departments.
Occupancy and equipment expense increased by $49,000 or 53.8% to $140,000
for the three months ended March 31, 1999 as compared to $91,000 for the
three months ended March 31, 1998, with the increase primarily related to
additional space utilized for certain administrative functions and the
opening of the Company's new Chelsea branch. Other increases were incurred
in the areas of equipment, data processing and advertising services,
primarily related to the expansion of the Company's product lines and
additional services, including PC banking and debit cards, and the opening
of the Chelsea branch. Annual operating expenses are also expected to
increase in future periods due to the increased cost of operating an
additional branch location and as a stock institution, including the
adoption of additional stock based employee benefit plans.
Income Taxes. The net provision for income taxes amounted to $53,000 for
the three months ended March 31, 1999 as compared to $41,000 for the three
months ended March 31, 1998, resulting in effective tax rate of 36.6% and
37.6%, respectively. The effective tax rate reflects the Company's
utilization of a securities investment subsidiary to substantially reduce
state income taxes.
Comparison of the Operating Results for the Six Months ended March 31, 1999
and 1998.
Net Income. The Company's net income for the six months ended March 31,
1999 was $158,000 as compared to $122,000 for the six months ended March
31, 1998. This $36,000 or 29.5% increase in net income during the period
was the result of an increase of $59,000 in interest and dividend income,
an increase of $56,000 in other income, a decrease of $149,000 in interest
expense and a decrease in provision for loan losses of $78,000, offset by
an increase of $290,000 in operating expenses. The Company's continued
expansion of its lending activities accounted for the increase in interest
income, while its operating expenses increased due to the Company's planned
expenditures in human and technological resources, including increased
staffing and non-recurring start-up expenses associated with the Bank's new
branch office in Chelsea, Massachusetts. The return on average assets for
the six months ended March 31, 1999 was .34% compared to .27% for the six
months ended March 31, 1998.
Net Interest and Dividend Income. The Company's net interest and dividend
income for the six months ended March 31, 1999 increased $208,000 or 15.0%
to $1.6 million from $1.4 million for the six months ended March 31, 1998.
The increase can be attributed to a combination of the $59,000 increase in
interest and dividend income and a $149,000 decrease in interest expense on
deposits and borrowed funds due to lower interest rates and maturing FHLB
advances.
The average yield on interest-earning assets decreased 18 basis
points to 7.41% for the six months ended March 31, 1999 from 7.59 % for the
six months ended March 31, 1998, while the average cost on interest-bearing
liabilities decreased by 42 basis points to 4.21% for the six months ended
March 31, 1999 from 4.63% for the six months ended March 31, 1998. As a
result of the Company's strategy to restructure the balance sheet by
expanding its small business lending activities in order to increase
interest rate spread, the interest rate spread increased to 3.20% for the
six months ended March 31, 1999 from 2.96% for the six months ended March
31, 1998 and the net interest margin improved from 3.25% to 3.58% during
this period.
Interest and Dividend Income. Total interest and dividend income increased
by $59,000 or 1.8% to $3.3 million for the six months ended March 31, 1999
from $3.2 million for the six months ended March 31, 1998. The increase in
interest and dividend income was a result of a higher level of loans and a
greater mix of higher yielding commercial and commercial real estate loans,
partially offset by a decline in the average balance of investment
securities and lower yields on investment securities. The average balance
of net loans for the six months ended March 31, 1999 was $53.1 million
compared to $44.1 million for the six months ended March 31, 1998. The
average yield on net loans was 8.21% for the six months ended March 31,
1999 compared to 8.42% for the six months ended March 31, 1998, reflecting
a general decline in interest rates. The average balance of investment
securities for the six months ended March 31, 1999 was $31.5 million
compared to $35.4 million for the six months ended March 31, 1998. The
average yield on investment securities was 6.49% for the six months ended
March 31, 1999 compared to 6.96% for the six months ended March 31, 1998.
Interest Expense. Interest expense decreased by $149,000 or 8.0 % to $1.7
million for the six months ended March 31, 1999 from $1.9 million for the
six months ended March 31, 1998. Interest expense decreased primarily as a
result of a decrease in interest rates paid on FHLB borrowings and deposit
accounts and a significant decline in the level of FHLB advances during the
periods. Average interest-bearing deposits increased by $8.1 million or
14.6% to $63.3 million for the six months ended March 31, 1999. Deposit
balances have increased as a result of offering free checking products,
certificate of deposit products with competitive rates and new deposits
attributable to the new Chelsea branch. Accordingly, interest expense on
deposits increased $89,000 or 7.9% to $1.2 million for the six months ended
March 31, 1999 compared to $1.1 million for the six months ended March 31,
1998. Interest expense on advances from the FHLB decreased $238,000 or
32.5% to $494,000 for the six months ended March 31, 1999 from $732,000 for
the six months ended March 31, 1998. This is attributable to a decline in
the rates paid on such advances, and the payment of such advances as they
matured.
Provision for Loan Losses. The allowance for loan losses is maintained
through the provision for loan losses which is a charge to operations. The
provision reflects management's assessment of potential losses and is based
on a review of the risk characteristics as well as the growth of the loan
portfolio. The Bank considers many factors in determining the level of the
provision for loan losses. Collateral value on a loan by loan basis,
trends of loan delinquencies, risk classification identified in the Bank's
regular review of individual loans, and economic conditions are major
factors in establishing the provision. The provision for loan losses for
the six months ended March 31, 1999 decreased by $78,000 or 63.4% to
$45,000 from $123,000 for the six months ended March 31, 1998. At March
31, 1999, the balance of the allowance for loan losses was $571,000 or .97%
of total loans. As the Bank continues to expand its small business
lending, additional increases to the provision are likely.
Noninterest Income. Total noninterest income increased by $56,000 or 36.1%
to $211,000 for the six months ended March 31, 1999 from $155,000 for the
six months ended March 31, 1998. The increase was primarily the result of
increased fees on transactional deposit accounts and serviced loans. The
Company anticipates increases to noninterest income as it continues to
expand the volume of its deposit relationships. It is also the Company's
goal to increase its level of noninterest income by expanding its delivery
systems to include PC banking, debit cards and additional ATMs and by
continually considering additional sources of revenue. In this regard, the
Company began offering various investment products through a relationship
with a third-party broker-dealer during the second quarter of its current
fiscal year.
Noninterest Expense. Noninterest expense increased by $290,000 or 23.7% to
$1.5 million for the six months ended March 31, 1999 from $1.2 million for
the six months ended March 31, 1998. The increase resulted primarily from
planned expenditures in human and technological resources, including
increased staffing and non-recurring start up expenses associated with the
opening of the Chelsea branch. Salaries and employee benefits, the largest
component of noninterest expense was $752,000 for the six months ended
March 31, 1999 as compared to $614,000 for the six months ended March 31,
1998, an increase of $138,000 or 22.5%. This increase was primarily
associated with an increase of full time employees to staff the Bank's new
branch in Chelsea, commercial lending and operations departments.
Occupancy and equipment expense increased by $64,000 or 36.2% to $241,000
for the six months ended March 31, 1999 as compared to $177,000 for the six
months ended March 31, 1998, with the increase primarily related to
additional space utilized for certain administrative functions and the
opening of the Company's new Chelsea branch. Other increases were incurred
in the areas of equipment, data processing and advertising services,
primarily related to the expansion of the Company's product lines and
additional services, including PC banking and debit cards, and the opening
of the Chelsea branch. Annual operating expenses are also expected to
increase in future periods due to the increased cost of operating an
additional branch location and as a stock institution, including the
adoption of additional stock based employee benefit plans.
Income Taxes. The net provision for income taxes amounted to $91,000 for
the six months ended March 31, 1999 as compared to $75,000 for the six
months ended March 31, 1998, resulting in effective tax rate of 36.5% and
38.1%, respectively. The effective tax rate reflects the Company's
utilization of a securities investment subsidiary to substantially reduce
state income taxes.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, proceeds from
the principal and interest payments on loans, debt and equity securities,
and to a lesser extent, borrowings and proceeds from the sale of fixed rate
mortgage loans to the secondary market. While maturities and scheduled
amortization of loans and securities are predictable sources of funds,
deposit outflows, mortgage prepayments, mortgage loan sales, and borrowings
are greatly influenced by general interest rates, economic conditions and
competition.
The Company is required to maintain adequate levels of liquid assets.
This guideline, which may be varied depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term
borrowings. The Company has historically maintained a level of liquid
assets in excess of regulatory requirements. The Company's liquidity ratio
at March 31, 1999 was 7.42%.
Liquidity management is both a daily and long-term function of
management. If the Company requires funds beyond its ability to generate
them internally, the Company believes it could borrow additional funds from
the FHLB. At March 31, 1999, the Company had borrowings of $17.6 million.
At March 31, 1999, the Company had $3.8 million in outstanding
commitments to originate loans. The Company anticipates that it will have
sufficient funds available to meet its current loan origination
commitments. Certificates of deposit which are scheduled to mature in one
year or less totaled $27.4 million at March 31, 1999. Based on historical
experience, management believes that a significant portion of such deposits
will remain with the Bank.
The Company expects to incur additional costs associated with the
Chelsea branch office and the main office, including costs associated with
the potential installation of an ATM and additional renovation costs.
Management anticipates that it will have sufficient funds available to meet
its planned capital expenditures throughout 1999.
At March 31, 1999, the Company and the Bank exceeded all of their
regulatory capital requirements.
Year 2000
The "Year 2000 Problem" centers on the inability of computer systems
to recognize the Year 2000. Software, hardware, and equipment both within
and outside the Bank's direct control and with whom the Bank electronically
or operationally interfaces (e.g. third party vendors providing data
processing, information system management, maintenance of computer systems,
and credit bureau information) are likely to be affected. Furthermore, if
computer systems are not adequately changed to identify the Year 2000, many
computer applications could fail or create erroneous results. As a result,
many calculations which rely on the date field information, such as
interest, payment or due dates and other operating functions, will generate
results which could be significantly misstated, and the Bank could
experience a temporary inability to process transactions, send invoices or
engage in similar normal business activities. In addition, noninformation
technology systems, such as equipment like telephones, copiers and
elevators may also contain embedded technology which control their
operation and which may be effected by the Year 2000 Problem.
Under certain circumstances, failure to adequately address the Year
2000 Problem could adversely affect the viability of the Company's
suppliers and creditors and the creditworthiness of its borrowers. Thus,
if not adequately addressed, the Year 2000 Problem could result in a
significant adverse impact on the Company's products, services and
competitive condition.
In order to address the Year 2000 issue and to minimize its potential
adverse impact, management has begun a process to identify areas that will
be affected by the Year 2000 Problem, assess its potential impact on the
operations of the Company, monitor the progress of third party software
vendors in addressing the matter, test changes provided by these vendors,
and develop contingency plans for any critical systems which are not
effectively reprogrammed. A committee of senior officers of the Company
has been formed to evaluate the effects that the upcoming Year 2000 could
have on computer programs utilized by the Company. The Company's plan is
divided into the five phases: (1) awareness - define the problem, obtain
executive level support and develop an overall strategy; (2) assessment -
identify all systems and the criticality of the systems; (3) renovation -
program enhancements, hardware and software upgrades, system replacements,
and vendor certifications; (4) validation - test and verify system changes
and coordinate with outside parties; and (5) implementation - components
certified as Year 2000 compliant and moved to production. As of March 31,
1999, the Company has completed the first four phases and is working with
third parties to complete the implementation phase. This phase is expected
to be completed by June 30, 1999. The Company believes that its internal
systems and equipment are Year 2000 compliant.
Third party vendors provide the majority of software used by the
Company. All of the Company's vendors are aware of the Year 2000
situation, and each has assured the Company that it is currently working to
have its software compliant by June, 1999. The Bank utilizes the service
of a third party vendor to provide the software which is used to process
and maintain most mortgage and deposit customer-related accounts. This
vendor has provided the Company with a software version which has been
certified to be Year 2000 compliant. Testing by the Bank is underway to
verify compliance for its application and usage. The Company presently
believes that with modifications to existing software and conversions to
new software, the Year 2000 Problem will be mitigated without causing a
material adverse impact on the operations of the Company. However, if such
modifications and conversions are not made, or are not completed timely,
the Year 2000 Problem could have an impact on the operations of the
Company.
The Company carefully considers the Year 2000 readiness of its
potential commercial borrowers in the lending process. Commencing in
September 1998, each potential new commercial borrower was required to
enter into a Year 2000 agreement with the Company certifying that the
borrower is or will shortly be Year 2000 compliant. Moreover, the failure
to be Year 2000 compliant constitutes a default under the terms of new loan
agreements with commercial borrowers. In addition, in April 1998, the
Company sent letters to all of its commercial borrowers asking them to
certify that they will be Year 2000 compliant by March 31, 1999. Follow up
letters have been sent to all commercial borrowers who have failed to
respond to the Company's Year 2000 inquiries.
Monitoring and managing the year 2000 project will result in
additional direct and indirect costs to the Company. Direct costs include
potential charges by third party software vendors for product
enhancements, costs involved in testing software products for Year 2000
compliance, and any resulting costs for developing and implementing
contingency plans for critical software products which are not enhanced.
Indirect costs will principally consist of the time devoted by existing
employees in monitoring software vendor progress, testing enhanced software
products and implementing any necessary contingency plans. The Company has
spent approximately $30,000 on Year 2000 related costs to date and
estimates that it will spend an additional $17,000 for Year 2000
compliance. Both direct and indirect costs of addressing the Year 2000
Problem will be charged to earnings as incurred. The Company does not
believe that such costs will have a material effect on results of
operations. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company or a conversion that is
incompatible with the Company's systems, would not have material adverse
effect on the Company. Although no independent analysis of the Company's
potential exposure has been obtained, the Company believes it has no
exposure to contingencies related to the Year 2000 Problem for the products
it has sold. The Company's network consultant, EOS Systems, Inc., has
examined the hardware and software used by the Company and has certified
that such hardware and software is Year 2000 compliant.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties. The Company has
developed a contingency plan which would be implemented in the unlikely
event that Year 2000 issues arise.
RFS BANCORP, INC. and SUBSIDIARIES
Part II - Other Information
March 31, 1999
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RFS BANCORP, INC.
Date: May 13, 1999 By: /s/ James J. McCarthy
------------------------ ---------------------
James J. McCarthy
President and Chief
Executive Officer
Date: May 13, 1999 By: /s/ Anthony J. Patti
------------------------ ---------------------
Anthony J. Patti
Executive Vice President and
Chief Financial Officer
(principal accounting officer)