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 December 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 Febuary 11, 2000, there were 933,523 shares of the registrant's common
stock were outstanding.
RFS BANCORP, INC. AND SUBSIDIARY
INDEX
PAGE
----
PART I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 1999 and
September 30, 1999 ......................................................1
Consolidated Statements of Income - Three Months Ended
December 31, 1999 and 1998 ..............................................2
Consolidated Statements of Changes in Stockholders' Equity-Three
Months Ended December 31, 1999 and 1998 .................................3
Consolidated Statements of Cash Flows - Three Months Ended
December 31, 1999 and 1998 ..............................................4
Notes to Unaudited Consolidated Financial Statements -
December 31, 1999 .......................................................5
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operation ...................................................11
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K ........................................23
SIGNATURES ..............................................................24
RFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
December 31, 1999 September 30, 1999
----------------- ------------------
(Unaudited)
ASSETS
Cash and due from banks ................................. $ 3,598 $ 2,498
Federal funds sold ...................................... 4,478 931
--------- ---------
Total cash and cash equivalents .................. 8,076 3,429
Securities available for sale, at fair value ............ 5,342 5,631
Securities held to maturity, at amortized cost .......... 27,999 26,074
Federal Home Loan Bank stock, at cost ................... 1,517 1,517
Loans, net of allowance for loan losses of $660 and $624, 73,364 72,461
respectively
Bank premises and equipment, net ........................ 2,235 2,128
Accrued interest receivable ............................. 682 640
Other assets ............................................ 324 284
--------- ---------
Total assets .......................................... $ 119,539 $ 112,164
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ................................................ $ 79,030 $ 74,807
Federal Home Loan Bank borrowings ....................... 27,236 27,036
Due to broker ........................................... 3,000 --
Accrued expenses and other liabilities .................. 127 301
--------- ---------
Total liabilities ..................................... 109,393 102,144
--------- ---------
Stockholders' equity:
Common stock $.01 par value, 5,000,000 shares ......... 9 9
authorized, 933,523 shares issued and 915,973
shares outstanding
Additional paid-in capital ............................ 3,742 3,736
Retained earnings ..................................... 6,538 6,357
Unearned shares, stock-based incentive plan (17,550 ... (168) (168)
shares, at cost)
Accumulated other comprehensive income ................ 341 437
Unallocated ESOP shares ............................... (316) (351)
--------- ---------
Total stockholders' equity ............................ 10,146 10,020
--------- ---------
Total liabilities and stockholders' equity ............ $ 119,539 $ 112,164
========= =========
1
RFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended
------------------------------------
December 31, 1999 December 31, 1998
----------------- -----------------
(Unaudited)
Interest and dividend income:
Interest and fees on loans ........................................ $1,467 $1,042
Interest and dividends on securities .............................. 499 512
Other interest .................................................... 53 63
------ ------
Total interest and dividend income .............................. 2,019 1,617
------ ------
Interest expense:
Deposits .......................................................... 626 605
Federal Home Loan Bank borrowings ................................. 391 256
------ ------
Total interest expense .......................................... 1,017 861
------ ------
Net interest and dividend income ....................................... 1,002 756
Provision for loan losses .............................................. 36 22
------ ------
Net interest and dividend income, after provision for loan losses ...... 966 734
------ ------
Other income:
Loan servicing fees ............................................... 16 27
Deposit account fees .............................................. 67 36
Gain on sales of mortgage loans, net .............................. 3 1
Other income ...................................................... 44 47
------ ------
Total other income ............................................. 130 111
------ ------
Operating expenses:
Salaries and employees benefits ................................... 431 352
Occupancy and equipment expenses .................................. 124 102
Professional services ............................................. 74 95
Data processing expenses .......................................... 65 51
Other expenses .................................................... 125 141
------ ------
Total operating expenses ....................................... 819 741
------ ------
Income before income taxes ............................................. 277 104
Provision for income taxes ............................................. 96 38
------ ------
Net income ............................................................. $ 181 $ 66
====== ======
Basic earnings per share (annualized) $ 0.80 N/A
Diluted earnings per share (annualized) $ 0.80 N/A
Weighted average shares outstanding:
Basic 902,431 N/A
Diluted 908,502 N/A
2
RFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)
(UNAUDITED)
UNEARNED SHARES, ACCUMULATED
ADDITIONAL STOCK-BASED OTHER
COMMON PAID-IN RETAINED INCENTIVE PLAN, COMPREHENSIVE
STOCK CAPITAL EARNINGS 17,550 SHARES INCOME
----- ---------- -------- --------------- -------------
Balance at September 30, 1999 .......... $ 9 $ 3,736 $ 6,357 $ (168) $ 437
Comprehensive income:
Net income ........................... -- -- 181 -- --
Change in unrealized holding gain
on securities available for sale
net of taxes ........................ -- -- -- -- (96)
Comprehensive income .............
Unearned compensation payment ........ -- -- -- -- --
Recognition and retention plan ....... -- 6 -- -- --
-------- -------- -------- -------- --------
Balance at December 31, 1999 ........... $ 9 $ 3,742 $ 6,538 $ (168) $ 341
======== ======== ======== ======== ========
Balance at September 30, 1998 .......... $ -- $ -- $ 5,971 $ -- $ 513
Comprehensive income:
Net income ........................... -- -- 66 -- --
Change in unrealized holding gain
on securities available for sale, net
of taxes ............................ -- -- -- -- 157
Comprehensive income .............
Net proceeds from common
stock issued pursuant to IPO ......... 9 3,749 -- -- --
Common stock acquired by ESOP .......... -- -- -- -- --
-------- -------- -------- -------- --------
Balance at December 31, 1998 ........... $ 9 $ 3,749 $ 6,037 $ -- $ 670
======== ======== ======== ======== ========
TOTAL
UNALLOCATED ESOP STOCKHOLDERS'
SHARES EQUITY
---------------- -------------
Balance at September 30, 1999 .......... $ (351) $ 10,020
Comprehensive income:
Net income ........................... -- --
Change in unrealized holding gain
on securities available for sale
net of taxes ........................ -- --
Comprehensive income ............. 85
Unearned compensation payment ........ 35 35
Recognition and retention plan ....... -- 6
-------- --------
Balance at December 31, 1999 ........... $ (316) $ 10,146
======== ========
Balance at September 30, 1998 .......... $ -- $ 6,484
Comprehensive income:
Net income ........................... -- --
Change in unrealized holding gain
on securities available for sale, net
of taxes ............................ -- --
Comprehensive income ............. 223
Net proceeds from common
stock issued pursuant to IPO ......... -- 3,758
Common stock acquired by ESOP .......... (351) (351)
-------- --------
Balance at December 31, 1998 ........... $ (351) $ 10,114
======== ========
3
RFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Three Months Three Months
Ended Ended
December 31, 1999 December 31, 1998
----------------- -----------------
(unaudited)
Cash flows from operating activities:
Net income .................................................... $ 181 $ 66
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ..................................... 36 22
(Gain) loss on sale of mortgage loans ......................... 2 (2)
Amortization, net of accretion, of securities ................. 10 21
Depreciation .................................................. 57 51
Recognition and retention plan ................................ 6 --
Unearned compensation payment ................................. 35 --
(Increase) in interest receivable ............................. (42) (102)
(Increase) decrease in other assets .......................... (40) 146
Increase (decrease) in accrued expenses and other ............. (104) 15
liabilities
Change in deferred loan origination fees, net ................. (3) (22)
-------- --------
Net cash provided by operating activities ..................... 138 195
-------- --------
Cash flows from investing activities:
Purchase of Federal Home Loan Bank Stock ...................... -- --
Purchases of held-to-maturity securities ...................... -- (4,022)
Purchase of available-for-sale securities ..................... -- --
Proceeds from held-to-maturity securities ..................... 1,188 2,297
Net increase in loans, net .................................... (1,376) (7,660)
Proceeds from sale of loans ................................... 438 1,714
Purchases of banking premises and equipment ................... (164) (584)
-------- --------
Net cash provided by (used in) investing activities ........... 86 (8,255)
-------- --------
Cash flows from financing activities:
Net increase in deposits ...................................... 4,207 4,371
Proceeds from Federal Home Loan Bank of Boston ................ 11,500 --
advances
Repayment of advances from Federal Home Loan .................. (11,300) (281)
Bank of Boston
Net increase in mortgagors' escrow accounts ................... 16 29
Net proceeds from common stock issued pursuant to
initial public offering ..................................... -- 3,758
Payments to acquire common stock for ESOP ..................... -- (351)
-------- --------
Net cash provided by financing activities ..................... 4,423 7,526
-------- --------
Net change in cash and cash equivalents ....................... 4,647 (534)
Cash and cash equivalents at beginning of period .............. 3,429 7,930
-------- --------
Cash and cash equivalents at end of period .................... $ 8,076 $ 7,396
======== ========
Supplemental cash flow information:
Interest paid on deposits .................................. $ 626 $ 604
Interest paid on Federal Home Loan Bank of Boston borrowings $ 391 $ 256
Income taxes paid .......................................... $ 55 $ 5
4
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1) BASIS OF PRESENTATION AND CONSOLIDATION
The unaudited consolidated interim financial statements of RFS Bancorp, Inc. and
subsidiary ("RFS Bancorp" or the "Company") presented herein should be read in
conjunction with the consolidated financial statements for the year ended
September 30, 1999, 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 December 31, 1999 are those of the
Company and Bank. The Company had not issued any stock and had not conducted any
business until December 18, 1998 when RFS Bancorp became the Bank's holding
company in connection with the Bank's reorganization from the mutual savings
association to a federal mutual holding company structure. 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 December 31, 1999, the Bank had outstanding commitments to originate loans
amounting to approximately $2.5 million, unused construction advances amounting
to approximately $1.1 million and unused lines of credit amounting to
approximately $1.3 million for commercial loans and $4.0 million for home equity
loans. Also at December 31, 1999, the Bank had outstanding commitments to
purchase investment securities amounting to $3.0 million.
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 was organized at the direction of the Board of
Directors of the Bank. The Company issued 933,523 shares of which 47%
5
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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"). Net proceeds of
the offering were approximately $3.7 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 December 31, 1999 were $0.80 and
$0.80, respectively, on a basic and diluted basis.
Basic earnings per share represents income available to common stock divided
by the weighted-average number of common shares outstanding during the
period. In calculating basic earnings per share, the number of shares of
common stock outstanding is reduced by the number of shares held by the
Company's Employee Stock Ownership Plan (the "ESOP") that have not been
allocated or are not committed for release to participants' individual
accounts. Diluted earnings per share reflects additional common shares that
would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the
assumed conversion. Potential common shares that may be issued by the Company
related solely to outstanding stock options and unearned RRP shares and are
determined using the treasury stock method.
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
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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:
DECEMBER 31, 1999 SEPTEMBER 30, 1999
--------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ----- --------- -----
(In Thousands)
Securities Available for Sale:
Mortgage-backed securities . $ 4,730 $ 4,492 $ 4,853 $ 4,692
Marketable equity securities 24 850 24 939
------- ------- ------- -------
Total ............ $ 4,754 $ 5,342 $ 4,877 $ 5,631
======= ======= ======= =======
Securities held to maturity:
U.S. Government & federal
agency Obligations ........ $ 7,000 $ 6,635 $ 4,000 $ 3,733
Mortgage-backed securities . 18,115 17,645 18,818 18,550
Asset-backed securities .... 2,884 2,859 3,256 3,231
------- ------- ------- -------
Total ............ $27,999 $27,139 $26,074 $25,514
======= ======= ======= =======
7
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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.
DECEMBER 31, 1999 SEPTEMBER 30, 1999
------------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(Dollars in Thousands)
Residential mortgage loans ....... $46,668 63.0% $47,172 64.5%
Commercial real estate loans ..... 14,088 19.0 13,258 18.1
Construction and land loans ...... 2,751 3.7 2,192 3.0
Commercial loans ................. 5,968 8.1 5,932 8.1
Consumer loans ................... 982 1.3 971 1.3
Home equity loans ................ 3,654 4.9 3,650 5.0
------- ----- ------- -----
Total loans .................. 74,111 100.0% 73,175 100.0%
===== =====
Loans held for sale .............. -- --
Less :
Deferred loan origination fees ... 87 90
Allowance for loan losses ........ 660 624
------- ------
Total loans, net $73,364 $72,461
======= =======
8
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
8) ALLOWANCE FOR LOAN LOSSES
The following table analyzes activity in the Company's allowance for loan losses
for the periods indicated.
THREE THREE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
(Dollars in Thousands)
Average loans, net ..................................... $73,799 $50,459
======= =======
Period-end gross loans ................................. $74,111 $53,102
======= =======
Allowance for loan losses at beginning of period ....... $ 624 $ 528
Provision for loan losses .............................. 36 22
Plus recoveries ........................................ -- --
Loans charged-off ...................................... -- 2
------- -------
Allowance for loan losses at end of period ............. $ 660 $ 548
======= =======
Non-performing loans ................................... $ 33 $ 171
======= =======
Ratios:
Allowance for loan losses to period-end gross loans .89% 1.03%
Allowance for loan losses to non-performing loans . 2,000.0% 320.5%
9
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
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.
DECEMBER 31, 1999 SEPTEMBER 30, 1999
-------------------------- -------------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
(Dollars in Thousands)
Deposits:
Savings accounts ............ $18,071 22.9% $17,598 23.5%
NOW checking ................ 7,768 9.8 6,703 9.0
Demand deposits ............. 8,928 11.3 6,877 9.2
Money market accounts ....... 2,610 3.3 2,665 3.6
Certificates of deposit ..... 41,653 52.7 40,964 54.7
------- --------- ------- ---------
Total deposits ......... $79,030 100.0% $74,807 100.0%
======= ========= ======= =========
Borrowed funds:
Advances from Federal .......
Home Loan Bank of Boston .... $27,236 $ 27,036
Other borrowed funds ........ -- --
------- ---------
Total borrowed funds ... $27,236 $ 27,036
======= =========
10
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 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
compares the financial condition of the Company and the Bank, at December 31,
1999 to September 30, 1999, and the results of operations for the three months
ended December 31, 1999, compared to the same period in 1998. This discussion
and analysis should be read in conjunction with the consolidated financial
statements and related notes thereto included within this report.
The Company and the Bank may from time to time make written or oral
"forward-looking statements." These forward-looking statements may be contained
in this quarterly filing with the Securities and Exchange Commission (the
"SEC"), the Annual Report to Shareholders, other filings with the SEC, and in
other communications by the Company and the Bank, which are made in good faith
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. The words "may,""could," "should,""would," "believe,"
"anticipate," "estimate," "expect," "intend," "plan" and similar expressions are
intended to identify forward-looking statements.
Forward-looking statements include statements with respect to the Company's
beliefs, plans, objectives, goals, expectations, anticipations, estimates and
intentions, that are subject to significant risks and uncertainties. The
following factors, many of which are subject to change based on various other
factors beyond the Company's control, and other factors discussed in this Form
10-QSB, as well as other factors identified in the Company's filings with the
SEC and those presented elsewhere by management from time to time, could cause
its financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such forward-looking
statements:
- the strength of the United States economy in general and the strength
of the local economies in which the Company and the Bank conduct
operations;
- the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;
- inflation, interest rate, market and monetary fluctuations;
- the timely development of and acceptance of new products and services
and the perceived overall value of these products and services by
users, including the features, pricing and quality compared to
competitors' products and services;
- the willingness of users to substitute competitors' products and
services for the
11
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
Company's and the Bank's products and services;
- the Company's and the Bank's success in gaining regulatory approval of
their products and services, when required;
- the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
- the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
- the impact of technological changes;
- acquisitions;
- changes in consumer spending and saving habits; and
- the Company's and the Bank's success at managing the risks involved in
their business.
This list of important factors is not exclusive. The Company or the Bank
does not undertake to update any forward-looking statement, whether written or
oral, that may be made from time to time by or on behalf of the Company or the
Bank.
Results of operations 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.
12
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
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.
13
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
THREE MONTHS ENDED DECEMBER 31, 1999 THREE MONTHS ENDED DECEMBER 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 .......................... $ 73,799 $ 1,467 7.95% $ 50,459 $ 1,042 8.26%
Investments ............................... 30,089 499 6.63% 30,207 512 6.78%
Other earning assets ...................... 4,182 53 5.07% 5,084 63 4.96%
-------- -------- -------- --------
Total interest-earning assets ............. 108,070 2,019 7.47% 85,750 1,617 7.54%
-------- --------
Cash and due from banks ................... 1,821 625
Other assets .............................. 6,309 4,661
-------- --------
Total assets .............................. $116,200 $ 91,036
======== ========
INTEREST-BEARING LIABILITIES:
Passbook & Statement Savings .............. $ 17,931 67 1.49% $ 16,808 57 1.36%
NOW's and MMA's ........................... 9,803 35 1.43% 7,450 27 1.45%
Certificate of deposits ................... 41,582 524 5.04% 38,076 521 5.47%
-------- -------- -------- --------
Total interest-bearing deposits ........... 69,316 626 3.61% 62,334 605 3.88%
Federal Home Loan Bank of Boston borrowings 27,178 391 5.75% 18,106 256 5.66%
-------- -------- -------- --------
Total interest-bearing liabilities ........ 96,494 1,017 4.22% 80,440 861 4.28%
-------- --------
Demand deposit accounts ................... 8,771 3,672
Other liabilities ......................... 826 849
-------- --------
Total liabilities ......................... 106,091 84,961
Stockholders' equity ...................... 10,109 6,075
-------- --------
Total liabilities and stockholders' equity $116,200 $ 91,036
======== ========
Net interest income ....................... $ 1,002 $ 756
======== ========
Interest rate spread ...................... 3.25% 3.26%
Net interest margin ....................... 3.71% 3.53%
Interest-earning asset/interest-bearing
liabilities.............................. 112.00% 106.60%
14
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
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 DECEMBER 31,
1999 VS. 1998
INCREASE (DECREASE)
-------------------------------
DUE TO
------------------
RATE VOLUME TOTAL
---- ------ -----
(In Thousands)
Interest and dividend income:
Loans, net .................. $ (48) $ 473 $ 425
Investments ................. (11) (2) (13)
Other earning assets ........ 1 (11) (10)
----- ----- -----
Total ....................... (58) 460 402
----- ----- -----
Interest expense:
Deposits .................... (44) 65 21
Borrowed funds .............. 5 130 135
----- ----- -----
Total ....................... (39) 195 156
----- ----- -----
Change in net interest income $ (19) $ 265 $ 246
===== ===== =====
15
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
COMPARISON OF FINANCIAL CONDITIONS AT DECEMBER 31, 1999 AND SEPTEMBER 30, 1999
Total assets increased by $7.4 million or 6.6% to $119.5 million at
December 31, 1999 from $112.2 million at September 30, 1999. The net increase in
total assets is primarily attributable to a $903,000 increase in net loans, an
increase in cash and cash equivalents of $4.6 million and an increase of $1.6
million in investment securities. Total net loans increased by $903,000 or 1.2%
to $73.4 million at December 31, 1999 as compared to $72.5 million at September
30, 1999, due to the Company's continued emphasis on small business lending and
a favorable interest rate environment. Investment securities held by the Company
increased by $1.6 million or 5.2% to $33.3 million at December 31, 1999 from
$31.7 million at September 30, 1999. This increase is primarily due to the
purchase of $3.0 million in agency bonds offset by scheduled principal paydowns
of mortgage-backed and asset-backed securities.
Total liabilities increased by $7.2 million or 7.1% at December 31, 1999
from $109.4 million to $102.1 million at September 30, 1999. This increase
primarily resulted from a $4.2 million or 5.6% increase in total deposits to
$79.0 million at December 31, 1999 from $74.8 million at September 30, 1999.
The increase in total deposits was primarily the result of a rise in deposits
at the Chelsea branch office as well as general deposit growth. We also
experienced a slight increase in Federal Home Loan Bank of Boston borrowings
of $200,000 to $27.2 million at December 31, 1999 from $27.0 million at
September 31, 1999. Offsetting the above increases in liabilities for the
period were decreases in accrued expenses and other liabilities of $174,000.
COMPARISON OF THE OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1999
AND 1998.
GENERAL. Results of operations 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.
16
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
NET INCOME. Net income for the three months ended December 31, 1999 was $181,000
as compared to $66,000 for the three months ended December 31, 1998. This
$115,000 or 174.2% increase in net income during the period was the result of an
increase of $402,000 in interest and dividend income, an increase of $19,000 in
other income, offset by a increase of $156,000 in interest expense, an increase
of $78,000 in operating expenses, an increase of $14,000 in the provision for
loan losses and an increase in the provision for income taxes of $58,000. The
Company's continued expansion of its lending activities accounted for the
increase in interest income, while its operating expenses increased due to
increased staffing and non-recurring start-up expenses associated with the
Bank's branch office in Chelsea, Massachusetts. 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, an
expansion of the main office and as a stock institution, including the adoption
of additional stock based employee benefit plans. The return on average assets
for the three months ended December 31, 1999 was .62% compared to .29% for the
three months ended December 31, 1998.
NET INTEREST AND DIVIDEND INCOME. Net interest and dividend income for the three
months ended December 31, 1999 increased $246,000 or 32.5% to $1.0 million from
$756,000 for the three months ended December 31, 1998. The increase is
attributed to a combination of a $402,000 increase in interest and dividend
income attributable primarily to continued loan growth and a $156,000 increase
in interest expense on deposits and borrowed funds due to ordinary deposit
growth and additional borrowings to fund asset growth.
The average yield on interest-earning assets decreased 7 basis points to
7.47% for the three months ended December 31, 1999 from 7.54 % for the three
months ended December 31, 1998, while the average cost of interest-bearing
liabilities decreased by 6 basis points to 4.22% for the three months ended
December 31, 1999 from 4.28% for the three months ended December 31, 1998.
Interest rate spread decreased to 3.25% for the three months ended December
31, 1999 from 3.26% for the three months ended December 31, 1998 and the net
interest margin improved from 3.52% to 3.71% during this period.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income increased by
$402,000 or 24.9% to $2.0 million for the three months ended December 31, 1999
from $1.6 million for the three months ended December 31, 1998. The increase in
interest and dividend income was a result of a greater mix
17
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
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 December 31,
1999 was $73.8 million compared to $50.5 million for the three months ended
December 31, 1998. The average yield on net loans was 7.95% for the three months
ended December 31, 1999 compared to 8.26% for the three months ended December
31, 1998, reflecting a general decline in interest rates. The average balance of
investment securities for the three months ended December 31, 1999 was $30.1
million compared to $30.2 million for the three months ended December 31, 1998.
The average yield on investment securities was 6.63% for the three months ended
December 31, 1999 compared to 6.78% for the three months ended December 31,
1998.
INTEREST EXPENSE. Interest expense increased by $156,000 or 18.1 % to $1.0
million for the three months ended December 31, 1999 from $861,000 for the three
months ended December 31, 1998. Interest expense increased primarily as a result
of an increase in interest rates paid on Federal Home Loan Bank of Boston
borrowings and deposit accounts. Average interest-bearing deposits increased by
$7.0 million or 11.2% to $69.3 million for the three months ended December 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 Chelsea branch. Accordingly, interest expense
on deposits increased $21,000 or 3.5% to $626,000 for the three months ended
December 31, 1999 compared to $605,000 for the three months ended December 31,
1998. Interest expense on advances from the Federal Home Loan Bank of Boston
increased $135,000 or 52.7% to $391,000 for the three months ended December 31,
1999 from $256,000 for the three months ended December 31, 1998. This increase
is attributable to an increase in the rates paid on such advances and an
increase in the level of Federal Home Loan Bank of Boston advances during the
periods.
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
December 31, 1999, the balance of the allowance for loan losses was $660,000 or
.89% of total loans as compared to $624,000 or .85% of total loans at September
30, 1999. As the Bank continues to expand its small business lending, additional
increases to the provision are expected.
18
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
NONINTEREST INCOME. Total noninterest income increased by $19,000 or 17.1% to
$130,000 for the three months ended December 31, 1999 from $111,000 for the
three months ended December 31, 1998. The increase was primarily the result of
increased fees on transactional deposit accounts. 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 is offering various investment
products through a relationship with a third-party broker-dealer.
NONINTEREST EXPENSE. Noninterest expense increased by $78,000 or 10.5% to
$819,000 for the three months ended December 31, 1999 from $741,000 for the
three months ended December 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 $431,000 for the three months ended December 31, 1999 as
compared to $352,000 for the three months ended December 31, 1998, an increase
of $79,000 or 22.4%. This increase was primarily associated with an increase of
full time employees to staff the Bank's branch in Chelsea, commercial
lending and operations departments. Occupancy and equipment expense increased by
$22,000 or 21.6% to $124,000 for the three months ended December 31, 1999 as
compared to $102,000 for the three months ended December 31, 1998, with the
increase primarily related to additional space utilized for certain
administrative functions and the opening of the Bank's 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 public company, including the adoption of
additional stock based employee benefit plans.
INCOME TAXES. The net provision for income taxes amounted to $96,000 for the
three months ended December 31, 1999 as compared to $38,000 for the three months
ended December 31, 1998, resulting in effective tax rates of 34.7% and 36.5%,
respectively. The effective tax rate reflects the Company's utilization of a
securities investment subsidiary to substantially reduce state income taxes.
19
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
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 December 31, 1999 was
9.48%.
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 Federal Home Loan
Bank of Boston. At December 31, 1999, the Company had borrowings of $27.2
million.
At December 31, 1999, the Company had $2.5 million in outstanding
commitments to originate loans and $3.0 million in outstanding commitments to
purchase investment securities. The Company anticipates that it will have
sufficient funds available to meet its current loan origination and investments
commitments. Certificates of deposit which are scheduled to mature in one year
or less totaled $31.1 million at December 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 addition
to the main office, costs associated with the potential installations of
off-site ATMs, a data-processing conversion and additional renovation costs.
Management anticipates that it will have sufficient funds available to meet its
planned capital expenditures throughout 2000.
At December 31, 1999, the Company and the Bank exceeded all of their
regulatory capital requirements.
20
RFS BANCORP, INC. AND SUBSIDIARY
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DECEMBER 31, 1999
YEAR 2000
Based on a review of the Bank's and the Company's business since January 1,
2000, the Company has not experienced any material effects of the year 2000
problem. Although the Company has not been informed of any material risks
associated with the year 2000 problem from third parties, there can be no
assurance that the Company will not be impacted in the future. The Company will
continuously monitor its business applications and maintain contact with its
third party vendors and key business partners to resolve any year 2000 problems
that may arise in the future.
Monitoring and managing the Year 2000 project has resulted in direct and
indirect costs to the Company and the Bank. Total direct costs associated with
the Year 2000 problem incurred to date are approximately $60,000. The Company
does not believe that any further costs will have a material effect on results
of operations. Both direct and indirect costs of addressing the Year 2000
problem have been changed to earnings as incurred.
IMPACT OF THE GRAMM-LEACH-BLILEY ACT
On November 12, 1999, President Clinton signed the Gramm-Leach Bliley
Act (the "Act"), which among other things, establishes a comprehensive framework
to permit affiliations among commercial banks, insurance companies and
securities firms. Generally, the Act (i) repeals the historical restrictions and
eliminates many federal and state law barriers to affiliations among banks and
securities firms, insurance companies and other financial service providers,
(ii) provides a uniform framework for the activities of banks, savings
institutions and their holding companies, (iii) broadens the activities that may
be conducted by subsidiaries of national banks and state banks, (iv) provides an
enhanced framework for protecting the privacy of information gathered by
financial institutions regarding their customers and consumers, (v) adopts a
number of provisions related to the capitalization, membership, corporate
governance and other measures designed to modernize the Federal Home Loan Bank
System, (vi) requires public disclosure of certain agreements relating to funds
expended in connection with an institution's compliance with the Community
Retirement Act, (vii) addresses a variety of other legal and regulatory issues
affecting both day-to-day operations and long-term activities of financial
institutions, including the functional regulation of bank securities and
insurance activities.
21
The Act also restricts the powers of new unitary savings and loan
association holding companies. Unitary savings and loan holding companies that
are "grandfathered," I.E., unitary savings and loan holding companies in
existence or with applications filed with the OTS on or before May 4, 1999, such
as the Company, retain their authority under the prior law. All other unitary
savings and loan holding companies are limited to financially related activities
permissible for bank holding companies, as defined under the Act. The Act also
prohibits non-financial companies from acquiring grandfathered unitary savings
and loan association holding companies.
The Act also requires financial institutions to disclose, on ATM
machines, any non-customer fees and to disclose to their customers upon the
issuance of an ATM card any fees that may be imposed by the institutions on ATM
users. For older ATMs, financial institutions will have until December 31, 2004
to provide such notices.
The OTS has recently proposed regulations implementing the privacy
protection provisions of the Act. The proposed regulations would require each
financial institution to adopt procedures to protect customers' and
consumers' "nonpublic personal information" by November 13, 2000. We would be
required to disclose our privacy policy, including identifying with whom we
share "nonpublic personal information," to customers at the time of
establishing the customer relationship and annually thereafter. In addition,
we would be required to provide our customers with the ability to "opt-out"
of having us share their personal information with unaffiliated third
parties. We are in the process of developing a privacy protection policy and
intend to review and amend that policy once completed, if necessary, for
compliance with the regulations when they are adopted in final form. The Act
also provides for the ability of each state to enact legislation that is more
protective of consumers' personal information.
We do not believe that the Act will have a material adverse affect upon
our operations in the near term. However, to the extent the Act permits banks,
securities firms and insurance companies to affiliate, the financial services
industry may experience further consolidation. This could result in a growing
number of larger financial institutions that offer a wider variety of financial
services than we currently offer and that can aggressively compete in the
markets we currently serve.
22
RFS BANCORP, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
DECEMBER 31, 1999
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.4 Amended and Restated Executive Employment Agreement Between
Judith E. Tenaglia and Revere Federal Savings bank
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
23
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: By: /s/ James J. McCarthy
----------------------------- ----------------------------------
James J. McCarthy
President and Chief Executive Officer
Date: By: /s/ Anthony J. Patti
----------------------------- ----------------------------------
Anthony J. Patti
Executive Vice President and
Chief Financial Officer (principal
accounting officer)
24