U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
Commission File No.: 00-25047
RFS BANCORP, INC.
(Name of small business issuer in its charter)
United States Application Pending
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
310 Broadway, Revere, Massachusetts 02151
(Address of principal executive offices)
(781) 284-7777
(Issuer's Telephone Number)
Securities registered pursuant to section 12(b) of the Exchange Act:
Title of each class Name of Exchange on which registered:
- ------------------- -------------------------------------
Common Stock, par value OTC Bulletin Board
$0.01 per share
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. [X]
The revenues for the issuer's fiscal year ended September 30, 1998 are
$6,798,000
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which
the common equity was sold, as of a specified date within the last 60 days.
On December 21, 1998: $3,211,440.
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. The Company had 933,523
shares outstanding as of December 21, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS 1
ITEM 2. DESCRIPTION OF PROPERTY 40
ITEM 3. LEGAL PROCEEDINGS 40
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 40
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDERS MATTERS 40
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 41
ITEM 7. FINANCIAL STATEMENTS 56
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 56
PART III
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK
AND THE COMPANY 57
ITEM 10. EXECUTIVE COMPENSATION 59
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 65
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 66
ITEM 13. EXHIBIT AND REPORTS ON FORM 8-K 67
SIGNATURES 69
PART I
ITEM 1. BUSINESS
General.
RFS Bancorp, Inc. (the "Company") is a federally chartered stock
holding company for Revere Federal Savings (the "Bank "), a federally
chartered stock savings association which conducts business from its main
office located in Revere, Massachusetts, which is located five miles
northeast of Boston, Massachusetts. On December 18, 1998, the Bank, under an
Agreement and Plan of Reorganization, reorganized into a "two tiered" mutual
holding company structure (the "Reorganization"). Under the Reorganization,
the (1) the Bank formed Revere, MHC (the "MHC"), a federal mutual holding
company, which is the majority owner of the Company; (2) the Bank converted
from a federally chartered mutual savings association to a federally
chartered stock savings association and issued 100% of its capital stock to
the Company; and (3) the Company issued shares of its common stock, $0.01
per share (the "Common Stock") to the public at a price of $10.00 per share
in a subscription offering (the "Offering") to eligible members of the Bank
and to the Company's Employee Stock Ownership Plan ("ESOP"). In the Offering
438,756 shares of the Company's common stock, or 47% shares issued in the
Reorganization, were sold to the public and 494,767 shares were sold to the
MHC, or 53% of the shares issued in the Reorganization. The Company's sole
business activity consists of the business of the Bank.
The Company also invests in long and short-term investment grade
marketable securities and other liquid investments. In the future, the
Company will consider using some of the proceeds of the Offering retained by
it to expand its operations in its existing primary market and other nearby
areas by acquiring other financial institutions which could be merged with
the Bank or operated as separate subsidiaries. Presently, there are no
agreements or understandings for expansion of the Company's operations. The
Company's Common Stock is traded on the Over the Counter Bulletin Board
under the symbol "RFED." Unless other wise disclosed, the information
presented in this Report on Form 10-KSB represents the activity of the Bank
and its subsidiary for the fiscal year ended September 30, 1998.
At September 30, 1998, the Bank had total assets of $89.5 million,
total deposits of $64.5 million and total equity of $6.5 million. The Bank's
deposits are insured by the Savings Association Insurance Fund ("SAIF") of
the Federal Deposit Insurance Corporation (the "FDIC") to the maximum extent
permitted by law. On December 21, 1998, the Bank opened a branch in Chelsea,
Massachusetts.
The business of the Bank primarily consists of attracting savings
deposits from the general public and investing such deposits in mortgage
loans secured by single-family residential real estate, commercial real
estate, commercial assets and investment securities, including U.S.
Government and Federal Agency securities, asset-backed securities, FNMA,
GNMA and FHLMC mortgaged-backed securities and interest-earning deposits.
The Bank's commercial and commercial real estate borrowers are comprised of
diverse small businesses, without a particular concentration in any one
industry. The Bank also makes consumer loans, including home equity loans,
automobile, loans on deposit accounts and other consumer loans. The Bank
offers both fixed-rate and adjustable-rate loans and emphasizes the
origination of residential real estate mortgage loans and commercial loans
with adjustable interest rates.
The Bank's principal sources of income are interest, dividends and
fees on loans and investments, and the Bank's principal expenses are
interest paid on deposit accounts, borrowings, and general operating
expenses.
Market Area
The Bank's office is located in Revere, Suffolk County, Massachusetts.
The City of Revere, containing approximately 39,000 residents, is located
approximately five miles from downtown Boston in the northern suburbs of
Boston, bounded by the towns of Chelsea, Everett, Malden and Lynn. The City
of Revere is easily accessible from downtown Boston via Route 1, Route 1A,
Route 16 and other state roads connecting the communities within the Logan
Airport corridor northeast of Boston. As an established metropolitan suburb,
Revere consists mostly of developed single- and multi-family properties
within a network of well-maintained neighborhoods.
The majority of the Bank's lending and deposit activity has
historically been in Revere. In recent years, the Bank's lending operations
have expanded beyond the Revere City limits to include other areas of the
metropolitan region, including the cities of Chelsea, Everett, Malden and
Saugus. These cities contain an active and growing commercial business
environment for financial institutions. Logan International Airport is
located in East Boston, a portion of the city of Boston, which is adjacent
to Revere and Chelsea. The Bank has recently targeted the area surrounding
Logan International Airport as a source of potential business, and fully
intends to increase activities in that area. The Bank's commercial loan
department has been largely responsible for expanded business in this area
and throughout Suffolk County.
The economic base of the Bank's market area is diversified and
includes a multitude of small businesses including services, wholesale and
retail trade, government, air freight forwarding and other businesses
servicing Logan Airport. Over the past few years, the regional economy in
the Bank's primary market area, based on economic indicators such as
unemployment rates, residential and commercial real estate values and
vacancy rates and household income trends, has strengthened. However,
unemployment rates for both Revere and Suffolk County remain slightly above
statewide averages.
Business Strategy
Historically, the primary focus of the Bank has been to provide
financing for single family housing in its market area of Revere,
Massachusetts and surrounding communities. Indeed, at September 30, 1995,
over 96% of the Bank's loan portfolio consisted of one- to four-family
residential loans, and the Bank had no commercial real estate or commercial
loans in its portfolio. Beginning in 1996, the Bank began to make
significant investments in the human and technological resources necessary
to create a platform for the future growth and profitability of the Bank.
While the Bank believes growth-oriented business strategy is best for its
long term success and viability, it has been and will continue to be
necessary for the Bank to increase investment in infrastructure, product
development, and technology enhancements. As evidenced by the Bank's recent
efficiency ratio increase, noninterest expenses have steadily increased
since 1995 and should continue to grow until the Bank has adequate resources
in place to offer an expanded range of service. Consequently, short-term net
income may remain flat. Long-term profitability, however, should improve as
the Bank realizes the benefits of diversified product lines and market share
growth.
* Retail Banking and Customer Service. The Bank continues to focus on
expanding its residential lending and retail banking franchise and
increasing the number of households served within the Bank's market
area. For nearly 100 years, the Bank has served the needs of Revere
and its surrounding communities and remains the only bank
headquartered in Revere. The Bank's Board of Directors and its
management are active in many charitable organizations throughout
Revere and the Bank's employees have taken pride in providing hands
on, personal service. The Bank views its reputation as a service
oriented institution which meets the needs of the local community as
one of its greatest assets. Given the increasing consolidation in the
financial services sector, the Bank believes that expanding its market
share for traditional community banking products will enhance this
reputation and provide inroads to new segments of the banking markets.
* Small Business Banking. The Bank views its entry into the small
business banking market as a natural outgrowth of its traditional
community banking services. Since 1996, the Bank has made a major
commitment to small business commercial lending (involving commercial
and industrial loans and commercial real estate loans) as a means to
increase the yield on its loan portfolio and attract lower cost
transaction deposit accounts. The Bank has worked to develop a niche
of making commercial loans to the small and medium sized companies in
a wide variety of industries located in Revere and elsewhere in the
greater Boston area. In particular, the Bank has expanded its lending
to the business community surrounding the Logan International Airport
which comprises a growing sector of the Revere and Chelsea markets.
The Bank offers these businesses a variety of traditional loans
products and commercial services administered by the Bank's commercial
loan department which are designed to give business owners borrowing
opportunities for modernization, inventory, equipment, construction,
consolidation, real estate, working capital, vehicle purchases and the
refinancing of existing corporate debt. In addition, in order to
better serve the unique financing needs of its commercial customers,
the Bank also offers specialized products such as direct courier pick
up for deposits. The Bank has also recently applied to become an
approved lender of the Small Business Administration to better serve
the needs of local businesses. The Bank has staffed its commercial
lending department with the addition of a senior commercial loan
officer with considerable commercial lending expertise in the Boston
area and has developed a staff to support the commercial loan
department. The Bank has recently added a second commercial lending
officer to the small business banking area and will add additional
qualified employees as market conditions warrant.
* Branch Expansion. The Bank believes that a branch network is crucial
to increasing its market share in the traditional community banking
and small business banking arenas and that its lending and deposit
gathering activities are presently limited by the fact that it
operates from only one location. The Bank has recently purchased its
first branch facility in Chelsea, Massachusetts in a stable and
growing small business market. This branch location will emphasize
convenience for the Bank's small business clients and be designed to
augment the Bank's small business lending activities. In the future,
the Bank expects to fund the construction and/or acquisition of one or
more additional branch locations either de novo, or by purchasing an
existing deposit base and/or location and to expand and renovate its
main office to allow the Bank's administrative functions to be
performed in a single facility. Expansion will facilitate greater
services and increased loan originations within the Bank's existing
underwriting standards. On December 21, 1998, the Bank opened a branch
in Chelsea, Massachusetts.
* Expanded Delivery Systems. The increased use of alternative delivery
channels has simplified and reduced the costs of financial
transactions for consumers, businesses and financial institutions. In
addition to conducting financial transactions at branch offices,
customers are increasingly using ATMs, online banking and online bill
payment and electronic fund transfers to communicate with financial
services providers. The Bank has responded to these market trends in
several ways. First, since May 1997, the Bank has offered its 24 hour
telebanking product which provides its customers with around the clock
access to their accounts through the use of a touch tone telephone.
The Bank also has located an ATM at Logan Airport and one in downtown
Boston. Another ATM is scheduled to open in Revere. Finally, the Bank
plans to introduce its home banking product which will give its
customers access to their accounts through the use of their personal
computers in the first quarter of 1999.
* Expansion of Product Lines. Regulatory changes and cross-sector
acquisitions have diminished the distinctions among various types of
financial institutions such as banks, insurance companies and
securities brokerage firms. Financial institutions today have the
opportunity to leverage their client base, expand their market share
and compete for an increased share of customers' financial services
business by offering a diverse range of products and services that
formerly may have been offered only by one particular type of
financial institution. Recognizing this trend, the Bank intends to
broaden its product line in order to better serve its customers,
expand customer relations and diversify its income stream. In the near
term, the Bank is contemplating offering various uninsured investment
products, including fixed-rate and variable annuities and mutual
funds, through relationships with third party broker-dealers and/or
money managers that would service both retail and small business
customers needs for investment products. The Bank also plans to
investigate opportunities presented by affiliations with insurance
agencies over the longer term. The Bank's strategy is to become a full
service provider of financial services, enhancing the Bank's ability
to attract and retain both retail and commercial customers.
Lending Activities
General. The Bank originates loans through its office located in
Revere, Massachusetts. The principal lending activities of the Bank are the
origination of conventional mortgage loans for the purpose of purchasing or
refinancing owner-occupied, one- to four-family residential properties and
the origination of commercial loans secured by commercial real estate and
commercial assets. To a lesser extent, the Bank also originates consumer
loans, including home equity and loans on deposit accounts, construction
loans and multifamily residential real estate loans.
The Bank's ten largest borrowing relationship, outstanding as of
September 30, 1998, ranged from $265,000 to $492,000.
The following table sets forth the composition of the Bank's mortgage
and other loan portfolios in dollar amounts and percentages at the dates
indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family $34,475 73.03% $32,928 79.11% $30,046 89.84%
Commercial real estate 3,969 8.41 2,577 6.19 460 1.38
Construction and land 1,885 3.99 815 1.96 1,075 3.21
------------------------------------------------------------------
Total mortgage loans 40,329 85.43 36,320 87.26 31,581 94.43
------------------------------------------------------------------
Commercial loans 2,724 5.77 1,684 4.04 49 0.15
------------------------------------------------------------------
Consumer loans:
Home equity lines 3,061 6.48 2,761 6.63 1,303 3.90
Secured by deposit accounts 604 1.28 374 0.90 370 1.11
Auto loans 409 0.87 413 0.99 121 0.36
Other consumer loans 78 0.17 73 0.18 19 0.05
------------------------------------------------------------------
Total consumer loans 4,152 8.80 3,621 8.70 1,813 5.42
------------------------------------------------------------------
Total loans receivable 47,205 100.00% 41,625 100.00% 33,443 100.00%
====== ====== ======
Loans held for sale 235 --- ---
Less:
Allowance for loan losses (528) (377) (325)
Deferred loan origination
fees, net (60) (73) (72)
------- ------- -------
Loans, net $46,852 $41,175 $33,046
======= ======= =======
</TABLE>
One- to Four-Family Residential Real Estate Lending. The primary
emphasis of the Bank's lending activity is the origination of conventional
mortgage loans on one- to four-family residential dwellings located in the
Bank's primary market area. As of September 30, 1998, loans on one- to four-
family residential properties accounted for 73.0% of the Bank's total loan
portfolio.
The Bank's mortgage loan originations are for terms of up to 30 years,
amortized on a monthly basis with interest and principal due each month.
Residential real estate loans often remain outstanding for significantly
shorter periods than their contractual terms as borrowers may refinance or
prepay loans at their option, without penalty. Conventional residential
mortgage loans granted by the Bank customarily contain "due-on-sale" clauses
which permit the Bank to accelerate the indebtedness of the loan upon
transfer of ownership of the mortgaged property.
The Bank makes conventional mortgage loans and uses standard Federal
National Mortgage Association ("FNMA") documents, to allow for the sale of
qualifying loans in the secondary mortgage market. The Bank lends up to a
maximum loan-to-value ratio on mortgage loans secured by owner-occupied
properties of 100% of the lesser of the appraised value or purchase price of
the property, with the condition that private mortgage insurance is required
on loans with a loan-to-value ratio in excess of 80%. To a lesser extent,
the Bank originates non-conforming loans which are tailored for its local
community, but which may not satisfy the various requirements imposed by
FNMA. On a limited basis the Bank offers special products, including
mortgage loans with a 100% loan-to-value ratio without private mortgage
insurance to customers with co-signers or who have excellent credit and
income, for which the Bank receives a rate premium over conventional loans.
The Bank offers adjustable-rate mortgage loans with terms of up to 30
years. Adjustable-rate loans offered by the Bank include loans which reprice
every one, three, five or seven years and provide for an interest rate which
is based on the interest rate paid on U.S. Treasury securities of a
corresponding term, plus a margin of up to 2.75%. The Bank currently offers
adjustable-rate loans with initial rates below those which would prevail
under the foregoing computations, based upon the Bank's determination of
market factors and competitive rates for adjustable-rate loans in its market
area. For adjustable-rate loans, borrowers are qualified at the initial
rate.
The Bank's adjustable-rate mortgages include limits on increases or
decreases of the interest rate of the loan. The interest rate may increase
or decrease by 2.0% per year and 6.0% over the life of the loan for all of
the Bank's adjustable rate mortgages. The retention of adjustable-rate
mortgage loans in the Bank's loan portfolio helps reduce the Bank's exposure
to fluctuations in interest rates. However, there are unquantifiable credit
risks resulting from potential increased costs to the borrower as a result
of the repricing of adjustable-rate mortgage loans. During periods of rising
interest rates, the risk of default on adjustable-rate mortgage loans may
increase due to the upward adjustment of interest cost to the borrower.
During the year ended September 30, 1998, the Bank originated $2.8
million in adjustable-rate mortgage loans and $14.9 million in fixed-rate
mortgage loans. Of the fixed-rate loans originated, the Bank sold $8.4
million of fixed-rate loans and retained $6.5 million of fixed-rate loans
based on the rate of the loans. Approximately 70% of all loan originations
during fiscal 1998 were refinancings of loans already in the Bank's loan
portfolio. At September 30, 1998, the Bank's loan portfolio included $9.2
million in adjustable-rate one- to four-family residential mortgage loans or
19.5% of the Bank's total loan portfolio, and $25.4 million in fixed-rate
one- to four-family residential mortgage loans, or 53.8% of the Bank's total
loan portfolio.
Commercial Real Estate Loans. The Bank originates commercial real
estate loans to finance the purchase of real property, which generally
consists of developed real estate. In underwriting commercial real estate
loans, consideration is given to the property's historical cash flow,
current and projected occupancy, location and physical condition. At
September 30, 1998, the Bank's commercial real estate loan portfolio
consisted of 24 loans, totaling $4.0 million, or 8.4% of total loans. The
Bank's largest loan is a commercial real estate loan with an outstanding
balance of $492,000 at September 30, 1998 secured by a commercial property
located in downtown Boston. The Bank's commercial real estate loan portfolio
is diverse, and does not have any significant loan concentration by type of
property or borrower.
Commercial real estate lending entails additional risks compared with
one- to four-family residential lending. Because payments on loans secured
by commercial real estate properties are often dependent on the successful
operation or management of the properties, repayment of such loans may be
subject, to a greater extent, to adverse conditions in the real estate
market or the economy. Also, commercial real estate loans typically involve
large loan balances to single borrowers or groups of related borrowers and
the payment experience on such loans is typically dependent on the
successful operation of a real estate project and/or the collateral value of
the commercial real estate securing the loan. See "Risk Factors-Growth of
the Bank's Commercial Loan and Commercial Real Estate Loan Portfolio."
Commercial Loans. In the past two years, the Bank has made a major
commitment to small business commercial lending. The Bank has worked to
develop a niche of making commercial loans to small and medium sized
businesses in a wide variety of industries located in the Bank's market area
and has recently applied to become an approved lender of the Small Business
Administration. Small business loans are expected to comprise a growing
portion of the Bank's loan portfolio in the future. At September 30, 1998,
the Bank's commercial loan portfolio consisted of 60 loans, totaling $2.7
million, or 5.8% of total loans.
Unless otherwise structured as a mortgage on commercial real estate,
such loans generally are limited to terms of five years or less.
Substantially all such commercial loans have variable interest rates tied to
the prime rate as reported in the Wall Street Journal. Whenever possible,
the Bank collateralizes these loans with a lien on commercial real estate,
or alternatively, with a lien on business assets and equipment and the
personal guarantees from principals of the borrower.
The Bank offers commercial services administered by the Bank's
commercial loan department which are designed to give business owners
borrowing opportunities for modernization, inventory, equipment,
construction, consolidation, real estate, working capital, vehicle purchases
and the refinancing of existing corporate debt. In addition, the Bank has
tailored certain products and services (such as courier pick up of deposits)
to better serve the unique needs of local businesses. The Bank has staffed
its commercial lending department with the addition of a senior commercial
loan officer with considerable commercial lending expertise in the Boston
area and has developed a staff to support the commercial loan department.
The Bank has recently added a second commercial lending officer to the small
business banking area and will add additional qualified employees as market
conditions warrant.
Commercial loans are generally considered to involve a higher degree
of risk than residential mortgage loans because the collateral may be in the
form of intangible assets and/or inventory subject to market obsolescence.
Commercial loans may also involve relatively large loan balances to single
borrowers or groups of related borrowers, with the repayment of such loans
typically dependent on the successful operation and income stream of the
borrower. Such risks can be significantly affected by economic conditions.
In addition, commercial business lending generally requires substantially
greater oversight efforts compared to residential real estate lending. The
Bank utilizes the services of an outside consultant to conduct quarterly on-
site reviews of the commercial loan portfolio to ensure adherence to
underwriting standards and policy requirements.
Consumer Loans. The Bank's consumer loans consist of home equity
loans, loans secured by deposits, and other consumer loans, including
automobile loans. At September 30, 1998, the consumer loan portfolio totaled
$4.2 million or 8.8% of total loans. Consumer loans (other than home equity
loans) generally are offered for terms of up to five years at fixed interest
rates and do not exceed $25,000 individually.
The Bank's home equity loans are secured by available equity based on
the appraised value of owner-occupied one- to four-family residential
property. Home equity loans will be made for up to 80% of the appraised
value of the property (less the amount of the first mortgage). Home equity
loans are offered at adjustable rates. The adjustable interest rate is prime
minus 0.5% for the first year and the prime rate as reported in the Wall
Street Journal for the remaining life of the loan. The Bank's home equity
loans generally have a five-year draw (renewable for up to an additional
five years) with a ten year repayment period. At September 30, 1998, the
Bank had $3.1 million in home equity loans with unused credit available to
existing borrowers of $2.7 million.
The Bank makes loans secured by deposit accounts up to 90.0% of the
amount of the depositor's savings account balance. The interest rate on the
loan is 2.5% higher than the rate being paid on passbook accounts and 2.0%
higher than the rate being paid on certificates of deposit. The Bank also
makes other consumer loans, which may or may not be secured. The terms of
such loans vary depending on the collateral.
The Bank makes loans for automobiles, both new and used, directly to
the borrowers. The loans are generally limited to 80% of the purchase price
or the retail value listed by the National Automobile Dealers Book. The
terms of the loans are determined by the age and condition of the
collateral. The Bank obtains title to the vehicle and collision insurance
policies are required on all these loans.
Consumer loans are generally originated at higher interest rates than
residential mortgage loans but also tend to have a higher credit risk than
residential loans due to the loan being unsecured or secured by rapidly
depreciable assets. Despite these risks, the Bank's level of consumer loan
delinquencies generally has been low. No assurance can be given, however,
that the Bank's delinquency rate on consumer loans will continue to remain
low in the future, or that the Bank will not incur future losses on these
activities.
Construction Loans. The Bank engages in a limited amount of
construction lending usually for the construction of single family
residences or commercial real estate. Most are construction/permanent loans
to the future occupants, structured to become permanent loans upon the
completion of construction. All construction loans are secured by first
liens on the property. Loan proceeds are disbursed as construction
progresses and inspections warrant. Loans involving construction financing
present a greater risk than loans for the purchase of existing homes, since
collateral values and construction costs can only be estimated at the time
the loan is approved. Due to the small amount of construction loans in the
Bank's portfolio, the risk in this area is limited.
Origination, Sale and Servicing of Loans. The Bank's lending
activities are conducted through its office in Revere, Massachusetts and
will soon be conducted through its branch in Chelsea, Massachusetts. The
Bank's ability to originate loans is dependent upon the relative customer
demand for fixed-rate or adjustable-rate mortgage loans, which is affected
by the current and expected future levels of interest rates. The Bank is a
qualified seller/servicer for FNMA and has applied to be an approved SBA
lender. Historically, the Bank sells certain of its fixed-rate loans to FNMA
based on liquidity needs and prevailing market conditions. All of the Bank's
sales to FNMA have been made with servicing retained on the loans. At
September 30, 1998, the Bank was servicing $19.7 million in loans for FNMA.
Originations for the year ended September 30, 1998, compared to the
prior period, have increased due to the addition of a commercial lending
officer. Loan sales also increased during the same period. In January 1998,
the Bank has also entered into a participation agreement with a local bank
for a commercial real estate loan for the development of 14 single family
homes on a fourteen acre subdivision in Saugus, Massachusetts. The following
table sets forth information with respect to originations, sales of loans
and principal repayments during the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30,
------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance, loans, net $ 41,175 $ 33,046 $ 21,273
------------------------------------
Loans originated:
Mortgage loans:
One- to four-family 17,718 6,843 18,385
Commercial real estate 3,124 2,245 463
Construction and land 2,850 1,047 511
------------------------------------
Total mortgage loans 23,692 10,135 19,359
Commercial loans 1,550 1,946 ---
Consumer loans 4,183 2,329 965
Loans held for sale 235 -- --
------------------------------------
Total loans originated 29,660 14,410 20,324
------------------------------------
Total 70,835 47,456 41,597
Principal repayments and other, net (15,518) (3,463) (5,110)
Loan charge-offs, net (46) (8) (29)
Sale of mortgage loans, principal
balance (8,419) (2,810) (3,412)
------------------------------------
Ending balance, loans, net $ 46,852 $ 41,175 $ 33,046
====================================
</TABLE>
The following tables set forth the dollar amounts in each loan
category at September 30, 1998 that are due after September 30, 1999, and
whether such loans have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
Due After September 30, 1999
--------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
<S> <C> <C> <C>
Mortgage loans:
One-to four-family $24,865 $ 235 $25,100
Commercial real estate 672 3,039 3,711
Construction and land 1,183 110 1,293
--------------------------------
Total mortgage loans 26,720 3,384 30,104
--------------------------------
Commercial loans 1,332 --- 1,332
--------------------------------
Consumer loans:
Home equity lines --- --- ---
Secured by deposit accounts 355 --- 355
Auto loans 403 --- 403
Other consumer loans 33 --- 33
--------------------------------
Total consumer loans 791 --- 791
--------------------------------
Total loans $28,843 $3,384 $32,227
================================
</TABLE>
Loan Commitments. The Bank generally makes loan commitments to
borrowers not exceeding 30 days. At September 30, 1998, the Bank had $1.7
million in loan commitments outstanding, primarily for the origination of
one- to four-family residential real estate loans, commercial loans and
commercial real estate loans.
Loan Solicitation. Loan originations are derived from a number of
sources, including the Bank's existing customers, referrals, realtors,
advertising and "walk-in" customers at the Bank's office.
Loan Administration. Upon receipt of a loan application from a
prospective borrower, a credit report and verifications are ordered to
verify specific information relating to the loan applicant's employment,
income and credit standing. For all mortgage loans, an appraisal of real
estate intended to secure the proposed loan is obtained from an independent
appraiser who has been approved by the Bank's Board of Directors. Fire and
casualty insurance are required on all loans secured by improved real
estate. Insurance on other collateral is required unless waived by the Loan
Approval Committee. The Board of Directors of the Bank has the
responsibility and authority for the general supervision over the loan
policies of the Bank. The Board has established written lending policies for
the Bank.
All residential and commercial real estate mortgages and commercial
business loans must be ratified by the Loan Approval Committee of the Bank's
Board of Directors. In addition, certain designated officers of the Bank
have authority to approve loans not exceeding specified levels, while the
Loan Approval Committee of the Board of Directors must approve loans in
excess of (a) $50,000 for commercial real estate loans; (b) $50,000 for
commercial loans; (c) loans over the current FNMA limit for residential
mortgage loans; and (d) $75,000 for consumer loans. All loans in excess of
$250,000 must be ratified by the Board of Directors as a whole.
Interest rates charged by the Bank on all loans are primarily
determined by competitive loan rates offered in its market area and interest
rate costs of the source of funding for the loan. The Bank generally charges
an origination fee on new mortgage loans. The origination fees, net of
direct origination costs, are deferred and amortized into income over the
life of the loan. At September 30, 1998, the amount of net deferred loan
origination fees was $60,000.
Loan Maturity and Repricing. The following table shows the maturity or
period to repricing of the Bank's loan portfolio at September 30, 1998.
Loans that have adjustable rates are shown as being due in the period which
the interest rates are next subject to change. The table does not include
prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
At September 30, 1998
-------------------------------------------------------------------------------
Mortgage Loans
-------------------------------------------
One- to Four- Commercial Construction
Family Real Estate and Land Commercial Consumer Total
-------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Amount due:
One year or less $ 9,375 $ 258 $ 592 $1,392 $3,361 $14,978
----------------------------------------------------------------------------
After one year:
More than one year to three years 53 450 83 122 266 974
More than three years to five years 653 2,455 110 741 242 4,201
More than five years to ten years 2,140 134 --- 412 --- 2,686
More than ten years to twenty years 6,545 672 --- 57 46 7,320
More than twenty years 15,709 --- 1,100 --- 237 17,046
---------------------------------------------------------------------------
Total due after one year 25,100 3,711 1,293 1,332 791 32,227
---------------------------------------------------------------------------
Total amount due $34,475 $3,969 $1,885 $2,724 $4,152 47,205
=================================================================
Loans held for sale 235
Less:
Allowance for loan losses (528)
Deferred loan origination fees, net (60)
-------
Loans, net $46,852
=======
</TABLE>
Non-Performing Assets, Asset Classification and Allowances for Losses.
Management and the Loan Approval Committee of the Board of Directors perform
a monthly review of all delinquent loans. Loans are placed on nonaccrual
status when loans are 90 days past due or, in the opinion of management, the
collection of principal and interest is doubtful. One of the primary tools
used to manage and control problem loans is the Bank's "Watch-List," a
listing of all loans or commitments that are considered to have
characteristics that could result in loss to the Bank if not properly
supervised. The list is managed by the Loan Approval Committee which meets
periodically to discuss the status of the loans on the Watch List and to add
or delete loans from the list. At September 30, 1998, the Bank had $35,000
in assets classified as special mention. There were none classified as
doubtful or loss and $5,000 in assets were designated as substandard.
Real estate acquired by the Bank as a result of foreclosure is classified as
other real estate owned until such time as it is sold. When such property is
acquired, it is recorded at the lower of the unpaid principal balance or its
fair value. Any required write-down of the loan to its fair value is charged
to the allowance for loan losses.
The following table sets forth the Bank's non-performing assets at the
dates indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------
1998 1997 1996
---------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Non-performing loans:
Mortgage loans:
One-to four-family $ 143 $ 144 $ 28
Commercial real estate --- --- ---
Construction and land --- --- ---
----------------------------------
Total mortgage loans 143 144 28
----------------------------------
Commercial loans 37 --- ---
----------------------------------
Consumer loans:
Home equity lines --- --- ---
Security by deposit accounts 14 --- ---
Auto loans 4 --- ---
Other consumer loans 1 13 ---
----------------------------------
Total consumer loans 19 13 ---
----------------------------------
Total non-performing loans(1) 199 157 28
Other real estate owned, net --- --- ---
----------------------------------
Total non-performing assets(2) $ 199 $ 157 $ 28
==================================
Allowance for loan losses as a percent of loans(3) 1.11% 0.91% 0.97%
==================================
Allowance for loan losses as a percent of non-performing loans(4) 265.45% 240.03% 1,159.67%
==================================
Non-performing loans as a percent of loans(3)(4) 0.42% 0.38% 0.08%
==================================
Non-performing assets as a percent of total assets(2) 0.22% 0.18% 0.04%
==================================
<FN>
<F1> For all periods presented, the non-performing loans consist entirely
of non-accrual loans.
<F2> Non-performing assets consist of non-performing loans and other real
estate owned.
<F3> Loans are presented before allowance for loan losses and deferred loan
origination fees, net.
<F4> Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by the Bank as presenting
uncertainty with respect to the collectibility of interest or
principal.
</FN>
</TABLE>
The following tables set forth delinquencies of the Bank's loan
portfolio by type of loan at the dates indicated:
<TABLE>
<CAPTION>
At September 30, 1998 At September 30, 1997
------------------------------------------- -------------------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More
-------------------- -------------------- -------------------- --------------------
Number Principal Number Principal Number Principal Number Principal
of Loans Balance of Loans Balance of Loans Balance of Loans Balance
-------- --------- -------- --------- -------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family 9 $512 1 $143 8 $565 1 $144
Commercial real estate --- --- --- --- 1 100 --- ---
Construction and land --- --- --- --- --- --- --- ---
-----------------------------------------------------------------------------------
Total mortgage loans 9 512 1 143 9 665 1 144
-----------------------------------------------------------------------------------
Commercial loans 1 76 2 37 --- --- --- ---
-----------------------------------------------------------------------------------
Consumer loans:
Home equity loans 1 34 --- --- 3 84 --- ---
Secured by savings accounts 3 23 1 14 1 7 --- ---
Auto loans 1 2 2 4 --- --- --- ---
Other consumer loans --- --- 1 1 3 8 2 13
-----------------------------------------------------------------------------------
Total consumer loans 5 59 4 19 7 99 2 13
-----------------------------------------------------------------------------------
Total loans 15 $647 7 $199 16 $764 3 $157
===================================================================================
Delinquent loans to loans, net 1.38% 0.42% 1.86% 0.38%
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1996
-------------------------------------------
30-89 Days 90 Days or More
-------------------- --------------------
Number Principal Number Principal
of Loans Balance of Loans Balance
-------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
One-to four-family 8 $477 1 $ 28
Commercial real estate --- --- --- ---
Construction and land --- --- --- ---
-------------------------------------
Total mortgage loans 8 477 1 28
-------------------------------------
Commercial loans --- --- --- ---
-------------------------------------
Consumer loans:
Home equity loans --- --- --- ---
Secured by savings accounts 1 3 --- ---
Auto loans --- --- --- ---
Other consumer loans --- --- --- ---
-------------------------------------
Total consumer loans 1 3 --- ---
-------------------------------------
Total loans 9 $480 1 $ 28
=====================================
Delinquent loans to loans, net 1.45% 0.08%
=====================================
</TABLE>
During the year ended September 30, 1998, gross interest income of
$11,270, would have been recorded on loans accounted for on a nonaccrual
basis if the loans had been current throughout the period. Of this amount,
$8,466 of interest on such loans was included in income during the period.
At September 30, 1998, management was not aware of any loans not currently
classified as nonaccrual, 90 days past due or restructured but which may be
so classified in the near future because of concerns over the borrower's
ability to comply with repayment terms.
Federal regulations require each banking institution to classify its
asset quality on a regular basis. In addition, in connection with
examinations of such banking institutions, federal examiners have authority
to identify problem assets and, if appropriate, classify them. An asset is
classified substandard if it is determined to be inadequately protected by
the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. As a general rule, the Bank will classify a loan
as substandard if the Bank can no longer rely on the borrower's income as
the primary source for repayment of the indebtedness and must look to
secondary sources such as guarantors or collateral. An asset is classified
as doubtful if full collection is highly questionable or improbable. An
asset is classified as loss if it is considered uncollectible, even if a
partial recovery could be expected in the future. The regulations also
provide for a special mention designation, described as assets which do not
currently expose a banking institution to a sufficient degree of risk to
warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require a banking institution to establish general
allowances for loan losses. If an asset or portion thereof is classified as
a loss, a banking institution must either establish specific allowances for
loan losses in the amount of the portion of the asset classified as a loss,
or charge off such amount. Examiners may disagree with a banking
institution's classifications and amounts reserved. If a banking institution
does not agree with an examiner's classification of an asset, it may appeal
this determination to the Regional Director of the OTS.
In originating loans, the Bank recognizes that credit losses will
occur and that the risk of loss will vary with, among other things, the type
of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan,
the quality of the security for the loan. It is management's policy to
maintain an adequate general allowance for loan losses based on, among other
things, the Bank's and the industry's historical loan loss experience,
evaluation of economic conditions and regular reviews of delinquencies and
loan portfolio quality. Further, after properties are acquired following
loan defaults, additional losses may occur with respect to such properties
while the Bank is holding them for sale. The Bank increases its allowances
for loan losses and losses on other real estate owned by charging provisions
for losses against the Bank's income. Specific reserves are also recognized
against specific assets when management believes it is warranted.
In the past few years, there has been a greater level of scrutiny by
regulatory authorities of the loan portfolios of financial institutions
undertaken as part of the examination of the institution by federal
regulators. Results of recent examinations indicate that these regulators
may be applying more conservative criteria in evaluating real estate market
values, requiring significantly increased provisions for potential loan
losses. While the Bank believes it has established its existing allowances
for loan losses in accordance with GAAP there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the
Bank to increase its allowance for loan losses, thereby negatively affecting
the Bank's financial condition and earnings. Alternately, there can be no
assurance that increases in the Bank's allowance for loan losses will occur.
The following table sets forth activity in the Bank's allowance for
loan losses and other ratios at or for the dates indicated.
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
--------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $ 377 $ 325 $ 206
---------------------------------
Provision for loan losses 197 60 148
---------------------------------
Charge-offs:
Mortgage loans:
One-to four-family --- --- 16
Commercial real estate --- --- ---
Construction and land --- --- ---
Commercial loans --- --- ---
Consumer loans:
Home equity lines --- --- ---
Secured by deposit accounts --- --- ---
Auto loans 40 --- ---
Other consumer loans 6 8 13
---------------------------------
Total charge-offs 46 8 29
---------------------------------
Recoveries --- --- ---
---------------------------------
Balance at end of period $ 528 $ 377 $ 325
=================================
Ratio of net charge-offs to average
loans outstanding during the period 0.10% 0.02% 0.10%
=================================
Allowance for loan losses as a
percent of loans 1.11% 0.91% 0.97%
=================================
Allowance for loan losses as a
percent of non-performing loans 265.45% 240.03% 1,159.67%
=================================
</TABLE>
The following tables set forth the Bank's allowance for loan losses
allocated by loan category and the percent of loans in each category to
total loans at the dates indicated.
<TABLE>
<CAPTION>
At September 30, 1998 At September 30, 1997 At September 30, 1996
------------------------------- ------------------------------- ---------------------------------
Percent of Percent of Percent of Percent of Percent of Percent of
Allowance Loans in Each Allowance Loans in Each Allowance Loans in Each
to Total Category to to Total Category to to Total Category to
Amount Allowance Total Loans Amount Allowance Total Loans Amount Allowance Total Loans
------ ---------- ----------- ------ ---------- ----------- ------ ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family $205 38.83% 73.03% $201 53.32% 79.11% $178 54.77% 89.84%
Commercial real estate 76 14.39 8.41 35 9.28 6.19 7 2.15 1.38
Construction and land 10 1.89 3.99 --- --- 1.96 --- --- 3.21
---------------------------------------------------------------------------------------------
Total mortgage loans 291 55.11 85.43 236 62.60 87.26 185 56.92 94.43
Commercial loans 71 13.45 5.77 39 10.34 4.04 1 0.31 0.15
Consumer loans 6 1.14 8.80 5 1.33 8.70 2 0.62 5.42
Unallocated 160 30.30 --- 97 25.73 --- 137 42.15 ---
---------------------------------------------------------------------------------------------
Total allowance for loan
losses $528 100.00% 100.00% $377 100.00% 100.00% $325 100.00% 100.00%
=============================================================================================
</TABLE>
Investment Activities
General. The Bank is required to maintain an amount of liquid assets
appropriate for its level of net savings withdrawals and current borrowings.
It has generally been the Bank's policy to maintain a liquidity portfolio in
excess of regulatory requirements. At September 30, 1998, the Bank's
liquidity ratio was 11.10%. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives, management's judgment
as to the attractiveness of the yields then available in relation to other
opportunities, management's expectations of the level of yield that will be
available in the future and management's projections as to the short-term
demand for funds to be used in the Bank's loan origination and other
activities.
Interest income from investments in various types of liquid assets
provides a significant source of revenue for the Bank. The Bank invests in
U.S. Treasury and Federal Agency securities, asset-backed securities and
FNMA, GNMA and FHLMC mortgage-backed securities. The balance of investment
securities maintained by the Bank in excess of regulatory requirements
reflects management's historical objective of maintaining liquidity at a
level that assures the availability of adequate funds, taking into account
anticipated cash flows and available sources of credit, for meeting
withdrawal requests and loan commitments and making other investments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" As part of its business
strategy, depending on market conditions, the Bank is restructuring its
balance sheet to increase the size of its loan portfolio relative to the
investment portfolio.
The Bank purchases securities through a primary dealer of U.S.
Government obligations or such other securities dealers authorized by the
Board of Directors and requires that the securities be delivered to a
safekeeping agent before the funds are transferred to the broker or dealer.
The Bank purchases investment securities pursuant to an investment policy
established by the Board of Directors.
Investment securities are recorded on the books of the Bank in
accordance with GAAP. The Bank does not purchase investment securities for
trading. Effective September 30, 1994, the Bank implemented SFAS No. 115.
Available for sale securities are reported at fair value with unrealized
gains or losses reported as a separate component of equity, net of tax
effects. Held-to-maturity securities are carried at amortized cost.
Substantially all purchases of investment securities conform to the Bank's
interest rate risk policy.
The following table sets forth activity in the Bank's mortgage-backed
securities held-to-maturity portfolio for the periods indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30,
---------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Beginning balance $25,144 $24,945 $23,085
Purchases --- 2,962 4,950
Maturities (52) --- ---
Principal repayments (4,904) (2,737) (3,054)
Premium and discount amortization, net (24) (26) (36)
---------------------------------
Ending balance $20,164 $25,144 $24,945
=================================
</TABLE>
The following table sets forth certain information regarding the
amortized cost and fair value of the Bank's securities at the dates
indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ----- --------- ----- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
Investment securities $ 5,000 $ 5,031 $ 9,202 $ 9,207 $ 8,500 $ 8,502
Mortgage-backed and
mortgage-related securities 20,164 20,640 25,144 25,458 24,945 24,609
Asset-backed securities 4,946 4,976 5,807 5,842 7,235 7,245
------------------------------------------------------------------------
Total held-to-maturity 30,110 30,647 40,153 40,507 40,680 40,356
Available-for-sale(1) 24 896 24 636 24 441
------------------------------------------------------------------------
Total securities $30,134 $31,543 $40,177 $41,143 $40,704 $40,797
========================================================================
<FN>
<F1> Consists of marketable equity securities.
</FN>
</TABLE>
The following table sets forth the amortized cost and fair value of
the Bank's mortgage-backed and mortgage-related securities, all of which
were classified as held-to-maturity at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Amortized Percent of Fair Amortized Percent of Fair Amortized Percent of Fair
Cost Total(1) Value Cost Total(1) Value Cost Total(1) Value
--------- ---------- ----- --------- ---------- ----- --------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed and mortgage-
related securities
Fixed rate:
GNMA $13,358 66.25% $13,741 $15,851 63.04% $15,963 $13,910 55.76% $13,489
FHLMC 176 0.87 186 238 0.95 250 300 1.20 316
-------------------------------------------------------------------------------------------------------
Total fixed rate 13,534 67.12 13,927 16,089 63.99 16,213 14,210 56.96 13,805
-------------------------------------------------------------------------------------------------------
Adjustable rate:
GNMA 5,935 29.43 6,011 7,910 31.46 8,085 9,282 37.21 9,341
FHLMC 248 1.23 251 365 1.45 376 418 1.68 427
FNMA 447 2.22 451 780 3.10 784 1,035 4.15 1,036
-------------------------------------------------------------------------------------------------------
Total adjustable
rate 6,630 32.88 6,713 9,055 36.01 9,245 10,735 43.04 10,804
-------------------------------------------------------------------------------------------------------
Total mortgage-
backed and mortgage-
related securities $20,164 100.00% $20,640 $25,144 100.00% $25,458 $24,945 100.00% $24,609
=======================================================================================================
<FN>
<F1> Based on amortized cost.
</FN>
</TABLE>
The following table sets forth certain information regarding the
amortized cost and weighted average rate of the Bank's mortgage-backed and
investment securities held-to-maturity at September 30, 1998, by remaining
period to contractual maturity. With respect to mortgage-backed securities,
the entire amount is reflected in the maturity period that includes the
final security payment date, and accordingly, no effect has been given to
periodic repayments or possible prepayments.
<TABLE>
<CAPTION>
At September 30, 1998
-------------------------------------------------------------------------------------------------------
More than One Year More than Five Years
One Year or Less to Five Years to Ten Years More than Ten Years Total
------------------- ------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
Investment securities(1) $500 6.60% $--- ---% $1,500 6.82% $ 3,000 7.00% $ 5,000 6.91%
Mortgage-backed and
mortgage-related securities:
Fixed rate:
GNMA --- --- --- --- --- --- 13,358 7.31 13,358 7.31
FHLMC --- --- 27 7.95 94 8.51 55 10.91 176 9.17
Adjustable rate:
GNMA --- --- --- --- --- --- 5,935 6.96 5,935 6.96
FHLMC --- --- --- --- --- --- 248 6.97 248 6.97
FNMA --- --- --- --- --- --- 447 6.84 447 6.84
Asset-backed securities --- --- 454 9.47 250 8.37 4,242 7.22 4,946 7.48
--------------------------------------------------------------------------------------------------
Total debt securities $500 6.60% $481 9.38% $1,844 7.12% $27,285 7.18% $30,110 7.20%
==================================================================================================
<FN>
<F1> Consists of U.S. Treasury and government agency obligations.
</FN>
</TABLE>
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank
derives funds from principal repayments and interest payments on loans and
investments as well as other sources arising from operations in the
production of net earnings. Loan repayments and interest payments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources, or on a longer
term basis for general business purposes.
Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a broad selection of deposit
instruments, including passbook savings, NOW accounts, demand deposits,
money market accounts and certificates of deposit. Deposit account terms
vary, with the principal differences being the minimum balance required, the
time periods the funds must remain on deposit and the interest rate.
The Bank's policies are designed primarily to attract deposits from
local residents and businesses rather than to solicit deposits from areas
outside its primary market. The Bank does not accept deposits from brokers
due to the volatility and rate sensitivity of such deposits. Interest rates
paid, maturity terms, service fees and withdrawal penalties are established
by the Bank on a periodic basis. Determination of rates and terms are
predicated upon funds acquisition and liquidity requirements, rates paid by
competitors, growth goals and federal regulations.
The Bank has a significant amount of regular savings accounts which
the Bank believes constitute "core deposits." In addition, since September
30, 1995, the Bank has attracted $2.3 million in no-cost demand deposit
accounts, resulting from the increase in commercial customers during this
time period, and $5.2 million in NOW accounts and Money Market accounts,
resulting from increased marketing and competitive fee structure. At
September 30, 1998, such accounts represented approximately 11.2% of the
Bank's total deposits compared to 5.9% at September 30, 1995.
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods
presented utilize month-end balances.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Percent of Percent of Percent of
Total Total Total
Average Average Average Average Average Average Average Average Average
Amount Deposits Rate Amount Deposits Rate Amount Deposits Rate
------- --------- ------- ------- --------- ------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand deposits $ 2,595 4.35% ---% $ 1,219 2.32% ---% $ 914 1.88% ---%
NOW accounts 4,329 7.25 1.09 3,443 6.55 1.02 2,041 4.19 1.13
Regular savings accounts 15,370 25.74 1.15 14,548 27.67 1.11 14,743 30.29 1.06
Money market accounts 1,645 2.76 3.10 739 1.40 3.11 212 0.44 2.83
------------------ ------------------ ------------------
Total 23,939 40.10 1.14 19,949 37.94 1.17 17,910 36.80 1.09
------------------ ------------------ ------------------
Time deposits:(1)
6 months or less 4,172 6.99 4.64 3,612 6.87 4.73 4,561 9.37 4.91
Over 6 months through 12
months 13,933 23.34 5.30 12,026 22.87 5.20 12,569 25.82 5.66
Over 12 through 36 months 15,664 26.24 5.73 15,168 28.84 6.09 11,934 24.52 6.15
Over 36 months 1,997 3.33 6.68 1,828 3.48 6.67 1,699 3.49 6.66
------------------ ------------------ ------------------
Total time deposits 35,766 59.90 5.64 32,634 62.06 5.64 30,763 63.20 5.79
------------------ ------------------ ------------------
Total average deposits $59,705 100.00% 4.01% $52,583 100.00% 4.02% $48,673 100.00% 4.11%
================== ================== ==================
<FN>
<F1> Based on remaining maturity of deposits.
</FN>
</TABLE>
For more information on the Bank's deposit accounts, see Note 6 of
Notes to Consolidated Financial Statements.
The following table represents, by interest rate ranges, the amount of
time deposits outstanding at the dates indicated and the periods to maturity
of the time deposits outstanding at September 30, 1998.
<TABLE>
<CAPTION>
At September 30,
---------------------------------
Interest Rate Range 1998 1997 1996
---- ---- ----
(In thousands)
<C> <C> <C> <C>
Time deposits:
0 to 4.00% $ 334 $ 187 $ 53
4.01% to 5.00% 11,262 9,912 11,515
5.01% to 6.00% 21,116 17,698 12,255
6.01% to 7.00% 3,881 2,420 2,802
7.01% to 8.00% 1,014 4,501 4,516
8.01% to 9.00% --- --- ---
Over 9.01% --- --- ---
---------------------------------
Total $37,607 $34,718 $31,141
=================================
</TABLE>
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
For the Year Ended September 30,
--------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net deposits (withdrawals) $6,739 $4,000 $ (809)
Interest credited on deposit accounts 2,292 2,059 1,970
------------------------------
Total increase in deposit accounts $9,031 $6,059 $1,161
==============================
</TABLE>
At September 30, 1998, the Bank had $11.1 million in jumbo
certificates of deposit (accounts in amounts over $100,000) maturing as
follows:
<TABLE>
<CAPTION>
Weighted Average
Amount Rate
------ ----------------
(Dollars in thousands)
<S> <C> <C>
Maturity Period:
Within three months $ 1,107 5.58%
After three but within six months 2,619 5.38
After six but within twelve months 3,584 5.55
After twelve months 3,805 6.03
-------------------
Total $11,115 5.68%
===================
</TABLE>
Borrowings. Savings deposits historically have been the primary source
of funds for the Bank's lending and investment activities and for its
general business activities. The Bank is authorized, however, to use
advances from the FHLB to supplement its supply of lendable funds and to
meet liquidity requirements. Due to recent lending activity and demand for
liquidity, the Bank has utilized this borrowing power, and has received
advances from the FHLB. Advances from the FHLB are secured by the Bank's
mortgage loans and investment securities. The Bank had FHLB advances of
$18.2 million outstanding at September 30, 1998.
The FHLB functions as a central reserve bank providing credit for
savings institutions and certain other financial institutions. As a member,
the Bank is required to own capital stock in the FHLB and is authorized to
apply for advances on the security of such stock and certain of its home
mortgages and other assets (principally, securities which are obligations
of, or guaranteed by the United States) provided certain standards related
to creditworthiness have been met.
Prior to 1997, the Bank supplemented deposits with borrowings in order
to grow its balance sheet. During such periods, the decision to leverage the
Bank's capital allowed it to earn wider spreads by investing borrowed funds
in agency securities than was possible if such funds were invested in
single-family residential mortgages. Upon its entry into the small business
lending market in 1996, the Bank has used available liquidity to fund
commercial loans with higher spreads. In the year ended September 30, 1998,
the FHLB called eleven (11) agency bonds for $8.7 million and the Bank used
such funds to pay down its borrowings. The Bank may continue to match
borrowings against investments after the Offering is consummated.
The following table sets forth certain information regarding the
Bank's borrowed funds at or for the periods ended on the dates indicated:
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
--------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
FHLB of Boston advances:
Average balance outstanding $22,858 $26,044 $17,648
Maximum amount outstanding at any
month-end during the period 25,019 26,958 23,007
Balance outstanding at end of period 18,204 25,104 22,712
Weighted average interest rate
during the period 5.74% 5.86% 5.94%
Weighted average interest rate at
end of period 5.43% 5.84% 5.81%
</TABLE>
Competition
The Bank experiences competition both in attracting and retaining
savings deposits and in the making of mortgage, commercial and other loans.
Direct competition for savings deposits primarily comes from larger
commercial banks and other savings institutions located in or near the
Bank's primary market area which often have significantly greater financial
and technological resources than the Bank. Additional significant
competition for savings deposits comes from credit unions, money market
funds and brokerage firms.
With regard to lending competition in the local market area, the Bank
experiences the most significant competition from the same institutions
providing deposit services, most of whom have placed an emphasis on real
estate lending as a line of business. In addition, the Bank competes with
local and regional mortgage companies, independent mortgage brokers and
credit unions in originating mortgage and non-mortgage loans. The primary
factors in competing for loans are interest rates and loan origination fees
and the range of services offered by the various financial institutions.
Competition from other financial institutions operating in the Bank's
local community includes a number of both large and small commercial banks
and savings institutions. As of September 30, 1998, the Bank's market share
was approximately 14.0% of overall financial institution deposits in the
City of Revere. The Bank has experienced growth in deposits in recent years
primarily due to an increased emphasis on marketing products and services.
However, competition remains high in the marketplace.
Employees
At September 30, 1998, the Bank had 21 full-time and 8 part-time
employees. None of the Bank's employees is represented by a collective
bargaining agreement. Management of the Bank believes that it enjoys
excellent relations with its personnel.
Subsidiary Activities
The Bank's subsidiary, RFS Investment Corp., holds certain investments
of the Bank and is a tax-advantaged qualified "security corporation" under
Massachusetts law. The Bank's investment in its wholly-owned service
corporation, RFS Investment Corp., was $24.0 million at September 30, 1998.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The following discussion is intended only as a summary and
does not purport to be a comprehensive description of the tax rules
applicable to the Bank, the MHC or the Company. For federal income tax
purposes, the Bank reports its income on the basis of a taxable year ending
September 30, using the accrual method of accounting, and is subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's tax reserve for bad debts,
discussed below. Following the Reorganization, the Bank and the Company will
constitute an affiliated group of corporations and, therefore, will be
eligible to report their income on a consolidated basis. Because the MHC
will own less than 80% of the Common Stock, it will not be a member of such
affiliated group and will report its income on a separate return. The Bank
has not been audited by the Internal Revenue Service (the "IRS") or the
Massachusetts Department of Revenue (the "DOR") during the past five years.
Bad Debt Reserves. The Bank, as a "small bank" (one with assets having
an adjusted tax basis of $500 million or less) is permitted to maintain a
reserve for bad debts with respect to "qualifying loans," which, in general,
are loans secured by certain interests in real property, and to make, within
specified formula limits, annual additions to the reserve which are
deductible for purposes of computing the Bank's taxable income. Pursuant to
the Small Business Job Protection Act of 1996, the Bank is now recapturing
(taking into income) over a multi-year period a portion of the balance of
its bad debt reserve as of September 30, 1996. Since the Bank has already
provided a deferred tax liability equal to the amount of such recapture, the
recapture will not adversely impact the Bank's financial condition or
results of operations.
Distributions. To the extent that the Bank makes "non-dividend
distributions" to shareholders, such distributions will be considered to
result in distributions from the Bank's "base year reserve," i.e., it
reserve as of September 30, 1988, to the extent thereof and then from its
supplemental reserve for losses on loans, and an amount based on the amount
distributed will be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock and
distributions in partial or complete liquidation. However, dividends paid
out of the Bank's current or accumulated earnings and profits, as calculated
for federal income tax purposes, will not constitute non-dividend
distributions and, therefore, will not be included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of the Bank's base year reserve and
supplemental reserve for losses on loans; or an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the
distribution. Thus, in certain situations approximately one and one-half
times the non-dividend distribution would be includable in gross income for
federal income tax purposes, assuming a 34% federal corporate income tax
rate.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended (the "Code"), imposes a tax ("AMT") on alternative minimum
taxable income ("AMTI") at a rate of 20%. Only 90% of AMTI can be offset by
net operating loss carryovers of which the Bank currently has none. AMTI is
also adjusted by determining the tax treatment of certain items in a manner
that negates the deferral of income resulting from the regular tax treatment
of those items. Thus, the Bank's AMTI is increased by an amount equal to 75%
of the amount by which the Bank's adjusted current earnings exceeds its AMTI
(determined without regard to this adjustment and prior to reduction for net
operating losses). Although the corporate environmental tax of 0.12% of the
excess of AMTI (with certain modifications) over $2.0 million has expired,
under current Administration proposals, such tax will be retroactively
reinstated for taxable years beginning after December 31, 1996 and before
January 2008.
Elimination of Dividends; Dividends Received Deduction. The Company
may exclude from its income 100% of dividends received from the Bank as a
member of the same affiliated group of corporations. Because, following
completion of the Reorganization, the MHC will not be a member of such
affiliated group, it will not qualify for such 100% dividends exclusion, but
will be entitled to deduct 80% of the dividends it receives from Stock
Company so long as it owns more than 20% of the Common Stock.
State Taxation
Prior to July, 1995, the Bank was subject to an annual Massachusetts
excise (income) tax equal to 12.54% of its pre-tax income. In 1995,
legislation was enacted to reduce the Massachusetts bank excise (income) tax
rate and to allow Massachusetts-based financial institutions to apportion
income earned in other states. Further, this legislation expands the
applicability of the tax to non-bank entities and out-of-state financial
institutions. The Massachusetts excise tax rate for co-operative banks is
currently 11.32% of federal taxable income, adjusted for certain items. It
is anticipated that this rate will be gradually reduced over the next few
years so that the Bank's tax rate will become 10.5% by March 31, 2000.
Taxable income includes gross income as defined under the Code, plus
interest from bonds, notes and evidences of indebtedness of any state,
including Massachusetts, less deductions, but not the credits, allowable
under the provisions of the Code. No deductions, however, are allowed for
dividends received until July 1, 1999. In addition, carryforwards and
carrybacks of net operating losses are not allowed. As a "financial
institution" under Massachusetts law, the Company will be subject to an
annual Massachusetts excise (income) tax equal to 10.50% of its pre-tax
income.
The Bank's active subsidiary, RFS Investment Corp., was established
solely for the purpose of acquiring and holding investments which are
permissible for banks to hold under Massachusetts law. RFS Investment Corp.
is classified with the Massachusetts Department of Revenue as a "security
corporation" under Massachusetts law, qualifying it to take advantage of the
low 1.32% income tax rate on gross income applicable to companies that are
so classified.
REGULATION
General
The Bank is subject to extensive regulation, examination, and
supervision by the OTS, as its chartering agency. The Bank's savings deposit
accounts are insured up to applicable limits by the FDIC, and the Bank is a
member of the FHLB of Boston. The Bank must file reports with the OTS
concerning its activities and financial condition, and it must obtain
regulatory approvals prior to entering into certain transactions, such as
mergers with, or acquisitions of, other depository institutions. The OTS
conduct periodic examinations to assess the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which a savings association can
engage and is intended primarily for the protection of the insurance fund
and depositors.
The OTS has significant discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment
of adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS or the Congress, could have a material adverse
impact on the MHC, the Company or the Bank.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings associations and their
holding companies, and it does not purport to be a comprehensive description
of all such statutes and regulations.
Regulation of Federal Savings Associations
Business Activities. The Bank derives its lending and investment
powers from the Home Owners' Loan Act, as amended (the "HOLA"), and the
regulations of the OTS thereunder. Under these laws and regulations, the
Bank may invest in mortgage loans secured by residential and commercial real
estate, commercial and consumer loans, certain types of debt securities and
certain other assets. The Bank may also establish service corporations that
may engage in activities not otherwise permissible for the Bank, including
certain real estate equity investments and securities and insurance
brokerage. These investment powers are subject to various limitations,
including (a) a prohibition against the acquisition of any corporate debt
security that is not rated in one of the four highest rating categories; (b)
a limit of 400% of an association's capital on the aggregate amount of loans
secured by non-residential real estate property; (c) a limit of 20% of an
association's assets on the aggregate amount of commercial loans, with the
amount of commercial loans in excess of 10% of assets being limited to small
business loans; (d) a limit of 35% of an association's assets on the
aggregate amount of consumer loans and acquisitions of certain debt
securities; (e) a limit of 5% of assets on non-conforming loans (loans in
excess of the specific limitations of the HOLA); and (f) a limit of the
greater of 5% of assets or an association's capital on certain construction
loans made for the purpose of financing what is or is expected to become
residential property.
Loans to One Borrower. Under the HOLA, savings associations are
generally subject to the same limits on loans to one borrower as are imposed
on national banks. Generally, under these limits, a savings association may
not make a loan or extend credit to a single or related group of borrowers
in excess of 15% of the association's unimpaired capital and surplus.
Additional amounts may be lent, not in excess of 10% of unimpaired capital
and surplus, if such loans or extensions of credit are fully secured by
readily-marketable collateral. Such collateral is defined to include certain
debt and equity securities and bullion, but generally does not include real
estate. At September 30, 1998, the Bank's regulatory limit on loans to one
borrower was $896,000. At September 30, 1998, the Bank's largest aggregate
amount of loans to one borrower was $750,000, and the second largest
borrower had an aggregate balance of $697,785. The Bank is in compliance
with all applicable limitations on loans to one borrower.
QTL Test. The HOLA requires a savings association to meet a qualified
thrift lender, or "QTL" test. Under the QTL test, a savings association is
required to maintain at least 65% of its "portfolio assets" in certain
"qualified thrift investments" in at least nine months of the most recent
12-month period. "Portfolio assets" means, in general, an association's
total assets less the sum of (a) specified liquid assets up to 20% of total
assets, (b) goodwill and other intangible assets, and (c) the value of
property used to conduct the association's business. "Qualified thrift
investments" includes various types of loans made for residential and
housing purposes, investments related to such purposes, including certain
mortgage-backed and related securities, and loans for personal, family,
household and certain other purposes up to a limit of 20% of an
association's portfolio assets. Recent legislation broadened the scope of
"qualified thrift investments" to include 100% of an institution's credit
card loans, education loans, and small business loans. A savings association
may also satisfy the QTL test by qualifying as a "domestic building and loan
association" as defined in the Internal Revenue Code of 1986. At September
30, 1998, the Bank maintained 90.64% of its portfolio assets in qualified
thrift investments. The Bank had also met the QTL test in each of the prior
12 months and was, therefore, a qualified thrift lender.
A savings association that fails the QTL test must either operate
under certain restrictions on its activities or convert to a bank charter.
The initial restrictions include prohibitions against (a) engaging in any
new activity not permissible for a national bank, (b) paying dividends not
permissible under national bank regulations, (c) obtaining new advances from
any Federal Home Loan Bank and (d) establishing any new branch office in a
location not permissible for a national bank in the association's home
state. In addition, within one year of the date that a savings association
ceases to meet the QTL test, any company controlling the association would
have to register under, and become subject to the requirements of, the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). If the savings
association does not requalify under the QTL test within the three-year
period after it failed the QTL test, it would be required to terminate any
activity and to dispose of any investment not permissible for a national
bank and would have to repay as promptly as possible any outstanding
advances from a Federal Home Loan Bank. A savings association that has
failed the QTL test may requalify under the QTL test and be free of such
limitations, but it may do so only once.
Capital Requirements. The OTS regulations require savings associations
to meet three minimum capital standards: a tangible capital ratio
requirement of 1.5% of total assets as adjusted under the OTS regulations, a
leverage ratio requirement of 3% of core capital to such adjusted total
assets and a risk-based capital ratio requirement of 8% of core and
supplementary capital to total risk-weighted assets. The OTS and the federal
banking regulators have proposed amendments to their minimum capital
regulations to provide that the minimum leverage capital ratio for a
depository institution that has been assigned the highest composite rating
of 1 under the Uniform Financial Institutions Ratings System will be 3% and
that the minimum leverage capital ratio for any other depository institution
will be 4%, unless a higher leverage capital ratio is warranted by the
particular circumstances or risk profile of the depository institution. In
determining compliance with the risk-based capital requirement, a savings
association must compute its risk-weighted assets by multiplying its assets
and certain off-balance sheet items by risk-weights, which range from 0% for
cash and obligations issued by the United States Government or its agencies
to 100% for consumer and commercial loans, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of
asset.
Tangible capital is defined, generally, as common stockholders' equity
(including retained earnings), certain non-cumulative perpetual preferred
stock and related earnings and minority interests in equity accounts of
fully consolidated subsidiaries, less intangibles (other than certain
mortgage servicing rights) and investments in and loans to subsidiaries
engaged in activities not permissible for a national bank. Core capital is
defined similarly to tangible capital, but core capital also includes
certain qualifying supervisory goodwill and certain purchased credit card
relationships. Supplementary capital currently includes cumulative and other
perpetual preferred stock, mandatory convertible securities, subordinated
debt and intermediate preferred stock and the allowance for loan and lease
losses. The allowance for loan and lease losses includable in supplementary
capital is limited to a maximum of 1.25% of risk-weighted assets, and the
amount of supplementary capital that may be included as total capital cannot
exceed the amount of core capital.
The OTS has promulgated a regulation that requires a savings
association with "above normal" interest rate risk, when determining
compliance with its risk-based capital requirement, to hold additional
capital to account for its "above normal" interest rate risk. A savings
association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance
sheet contracts) resulting from a hypothetical 2% increase or decrease in
market rates of interest, divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth
by the OTS. At the times when the 3-month Treasury bond equivalent yield
falls below 4%, an association may compute its interest rate risk on the
basis of a decrease equal to one-half of that Treasury rate rather than on
the basis of 2%. A savings association whose measured interest rate risk
exposure exceeds 2% would be considered to have "above normal" risk. The
interest rate risk component is an amount equal to one-half of the
difference between the association's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Any required deduction
for interest rate risk becomes effective on the last day of the third
quarter following the reporting date of the association's financial data on
which the interest rate risk was computed. The regulations authorize the
Director of the OTS to waive or defer an association's interest rate risk
component on a case-by-case basis. The OTS has indefinitely deferred the
implementation of the interest rate risk component in the computation of an
institution's risk-based capital requirements. The OTS continues to monitor
the interest rate risk of individual institutions and retains the right to
impose additional capital requirements on individual institutions. At
September 30, 1998, the Bank was not required to maintain any additional
risk-based capital under this rule.
At September 30, 1998, the Bank met each of its capital requirements.
The table below presents the Bank's regulatory capital as compared to
the OTS regulatory capital requirements at September 30, 1998.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective Action
Actual Adequacy Purposes Provisions
---------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Total Capital (to Risk Weighted Assets) $6,425 17.72% $2,901 >=8.0% $3,627 >=10.0%
Core Capital (to Adjusted Tangible Assets) 5,971 6.67 3,579 >=4.0 4,473 >= 5.0
Tangible Capital (to Tangible Assets) 5,971 6.67 1,342 >=1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets) 5,971 16.46 N/A N/A 2,176 >= 6.0
</TABLE>
Limitation on Capital Distributions. OTS regulations currently impose
limitations upon capital distributions by a savings association, such as
cash dividends, payments to repurchase or otherwise acquire its shares,
payments to stockholders of another institution in a cash-out merger and
other distributions charged against capital. At least 30-days written notice
must be given to the OTS of a proposed capital distribution by a savings
association, and capital distributions in excess of specified earnings or by
certain institutions are subject to approval by the OTS. An association that
has capital in excess of all fully phased-in regulatory capital requirements
before and after a proposed capital distribution and that is not otherwise
restricted in making capital distributions, may, after prior notice but
without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of (a) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year, or (b) 75% of its net
earnings for the previous four quarters. Any additional capital
distributions would require prior OTS approval. In addition, the OTS can
prohibit a proposed capital distribution, otherwise permissible under the
regulation, if the OTS has determined that the association is in need of
more than normal supervision or if it determines that a proposed
distribution by an association would constitute an unsafe or unsound
practice. Furthermore, under the OTS prompt corrective action regulations,
the Bank would be prohibited from making any capital distribution if, after
the distribution, the Bank failed to meet its minimum capital requirements,
as described above. See "- Prompt Corrective Regulatory Action." The OTS has
proposed amendments of its capital distribution regulations to reduce
regulatory burdens on savings associations. If adopted as proposed, certain
savings associations will be permitted to pay capital distributions within
the amounts described above for Tier 1 institutions without notice to, or
the approval of, the OTS. However, a savings association subsidiary of a
savings and loan holding company, such as the Bank after the Reorganization,
will continue to have to file a notice unless the specific capital
distribution requires an application.
Liquidity. The Bank is required to maintain an average daily balance
of liquid assets (cash, certain time deposits, certain bankers' acceptances,
specified United States Government, state and federal agency obligations,
shares of certain mutual funds and certain corporate debt securities and
commercial paper) equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement may be changed from time to time by
the OTS to any amount within the range of 4% to 10% depending upon economic
conditions and the savings flows of member institutions, and is currently
4%. Monetary penalties may be imposed for failure to meet the liquidity
requirement. The Bank's average liquidity ratio for the month ended
September 30, 1998 was 11.10% which exceeded the applicable requirements.
The Bank has never been subject to monetary penalties for failure to meet
its liquidity requirements.
Assessments. Savings associations are required by OTS regulation to
pay assessments to the OTS to fund the operations of the OTS. The general
assessment, paid on a semi-annual basis, is computed upon the savings
association's total assets, including consolidated subsidiaries, as reported
in the association's latest quarterly Thrift Financial Report. During
January and July 1998, the Bank paid assessments of $14,272 and $14,911,
respectively.
The OTS has proposed amendments to its regulations that are intended
to assess savings associations on a more equitable basis. The proposed
regulations would base the assessment for an individual savings associaton
on three components: the size of the association, on which the basic
assessment would be based; the associaton's supervisory condition, which
would result in percentage increases for any savings institution with a
composite rating of 3, 4 or 5 in its most recent safety and soundness
examination; and the complexity of the association's operations, which would
result in percentage increases for a savings association that managed over
$1 billion in trust assets, serviced for others loans aggregating more than
$1 billion, or had certain off-balance sheet assets aggregating more than $1
billion. In order to avoid a disproportionate impact on the smaller savings
institutions, the OTS is proposing to permit the portion of the assessment
based on assets size either under the current regulations or under the
amended regulations. Management believes that, assuming the proposed
regulations are adopted as proposed, any change in its rate of OTS
assessments will not be material.
Branching. Subject to certain limitations, the HOLA and the OTS
regulations permit federally chartered savings associations to establish
branches in any state of the United States. The authority to establish such
branches is available (a) in states that expressly authorize branches of
savings associations located in another state or (b) to an association that
qualifies as a "domestic building and loan association" under the Internal
Revenue Code of 1986, which imposes qualification requirements similar to
those for a "qualified thrift lender" under the HOLA. See "- QTL Test." The
authority for a federal savings association to establish an interstate
branch network would facilitate a geographic diversification of the
association's activities. This authority under the HOLA and the OTS
regulations preempts any state law purporting to regulate branching by
federal savings associations.
Community Reinvestment. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, a savings association has a
continuing and affirmative obligation consistent with its safe and sound
operation to help meet the credit needs of its entire community, including
low and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and
services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a savings association, to assess the association's record of
meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such association. The
CRA also requires all institutions to make public disclosure of their CRA
ratings. The Bank received a "Satisfactory" CRA rating in its most recent
examination.
In April 1995, the OTS and the other federal banking agencies adopted
amendments revising their CRA regulations. Among other things, the amended
CRA regulations substitute for the prior process-based assessment factors a
new evaluation system that would rate an institution based on its actual
performance in meeting community needs. In particular, the proposed system
would focus on three tests: (a) a lending test, to evaluate the
institution's record of making loans in its assessment areas; (b) an
investment test, to evaluate the institution's record of investing in
community development projects, affordable housing, and programs benefitting
low or moderate income individuals and businesses; and (c) a service test,
to evaluate the institution's delivery of services through its branches,
ATMs and other offices. The amended CRA regulations also clarify how an
institution's CRA performance would be considered in the application
process.
Transactions with Related Parties. The Bank's authority to engage in
transactions with its "affiliates" is limited by the OTS regulations and by
Sections 23A and 23B of the Federal Reserve Act (the "FRA"). In general, an
affiliate of the Bank is any company that controls the Bank or any other
company that is controlled by a company that controls the Bank, excluding
the Bank's subsidiaries other than those that are insured depository
institutions. The OTS regulations prohibit a savings association including
any of its subsidiaries (a) from lending to any of its affiliates that is
engaged in activities that are not permissible for bank holding companies
under Section 4(c) of the BHC Act and (b) from purchasing the securities of
any affiliate other than a subsidiary. Section 23A limits the aggregate
amount of transactions with any individual affiliate to 10% of the capital
and surplus of the savings association and also limits the aggregate amount
of transactions with all affiliates to 20% of the savings association's
capital and surplus. Extensions of credit to affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A,
and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same
or at least as favorable to the association as those prevailing at the time
for comparable transactions with non-affiliated companies. In the absence of
comparable transactions, such transactions may only occur under terms and
circumstances, including credit standards, that in good faith would be
offered to or would apply to non-affiliated companies.
The Bank's authority to extend credit to its directors, executive
officers, and 10% shareholders, as well as to entities controlled by such
persons, is currently governed by the requirements of Sections 22(g) and
22(h) of the FRA and Regulation O of the FRB thereunder. Among other things,
these provisions require that extensions of credit to insiders (a) be made
on terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the association's capital. In addition, extensions of credit in
excess of certain limits must be approved by the association's Board of
Directors.
Enforcement. Under the Federal Deposit Insurance Act (the "FDI Act"),
the OTS has primary enforcement responsibility over savings associations and
has the authority to bring enforcement action against all "institution-
affiliated parties," including any controlling stockholder or any
stockholder, attorney, appraiser or accountant who knowingly or recklessly
participates in any violation of applicable law or regulation or breach of
fiduciary duty or certain other wrongful actions that causes or is likely to
cause a more than a minimal loss or other significant adverse effect on an
insured savings association. Civil penalties cover a wide range of
violations and actions and range from $5,000 for each day during which
violations of law, regulations, orders, and certain written agreements and
conditions continue, up to $1 million per day for such violations if the
person obtained a substantial pecuniary gain as a result of such violation
or knowingly or recklessly caused a substantial loss to the institution.
Criminal penalties for certain financial institution crimes include fines of
up to $1 million and imprisonment for up to 30 years. In addition,
regulators have substantial discretion to take enforcement action against an
institution that fails to comply with its regulatory requirements,
particularly with respect to its capital requirements. Possible enforcement
actions range from the imposition of a capital plan and capital directive to
receivership, conservatorship, or the termination of deposit insurance.
Under the FDI Act, the FDIC has the authority to recommend to the Director
of OTS that enforcement action be taken with respect to a particular savings
association. If action is not taken by the Director of the OTS, the FDIC has
authority to take such action under certain circumstances.
Standards for Safety and Soundness. Pursuant to the FDI Act, as
amended by FDICIA and the Riegle Community Development and Regulatory
Improvement Act of 1994 (the "Community Development Act"), the OTS and the
federal bank regulatory agencies have adopted, effective August 9, 1995, a
set of guidelines prescribing safety and soundness standards pursuant to
FDICIA, as amended. The guidelines establish general standards relating to
internal controls and information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
asset quality, earnings, and compensation, fees and benefits. In general,
the guidelines require, among other things, appropriate systems and
practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and
unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal stockholder. In
addition, the OTS adopted regulations that authorize, but do not require,
the OTS to order an institution that has been given notice by the OTS that
it is not satisfying any of such safety and soundness standards to submit a
compliance plan. If, after being so notified, an institution fails to submit
an acceptable compliance plan or fails in any material respect to implement
an accepted compliance plan, the OTS must issue an order directing action to
correct the deficiency and may issue an order directing other actions of the
types to which an undercapitalized association is subject under the "prompt
corrective action" provisions of FDICIA. If an institution fails to comply
with such an order, the OTS may seek to enforce such order in judicial
proceedings and to impose civil money penalties.
Real Estate Lending Standards. The OTS and the other federal banking
agencies adopted regulations to prescribe standards for extensions of credit
that (a) are secured by real estate or (b) are made for the purpose of
financing the construction of improvements on real estate. The OTS
regulations require each savings association to establish and maintain
written internal real estate lending standards that are consistent with safe
and sound banking practices and appropriate to the size of the association
and the nature and scope of its real estate lending activities. The
standards also must be consistent with accompanying OTS guidelines, which
include loan-to-value ratios for the different types of real estate loans.
Associations are also permitted to make a limited amount of loans that do
not conform to the proposed loan-to-value limitations so long as such
exceptions are reviewed and justified appropriately. The guidelines also
describe the procedures to be followed for loans that would be exceptions to
the loan-to-value standards.
Prompt Corrective Regulatory Action. Under the OTS prompt corrective
action regulations, the OTS is required to take certain, and is authorized
to take other, supervisory actions against undercapitalized savings
associations. For this purpose, a savings association would be placed in one
of five categories based on the association's capital. Generally, a savings
association is treated as "well capitalized" if its ratio of total capital
to risk-weighted assets is at least 10.0%, its ratio of core capital to
risk-weighted assets is at least 6.0%, its ratio of core capital to total
assets is at least 5.0%, and it is not subject to any order or directive by
the OTS to meet a specific capital level. A savings association will be
treated as "adequately capitalized" if its ratio of total capital to risk-
weighted assets is at least 8.0%, its ratio of core capital to risk-weighted
assets is at least 4.0%, and its ratio of core capital to total assets is at
least 4.0% (3.0% if the association receives the highest rating under the
Uniform Financial Institutions Rating System). A savings association that
has a total risk-based capital of less than 8.0% or a leverage ratio or a
Tier 1 capital ratio that is less than 4.0% (3.0% leverage ratio if the
association receives the highest rating under the Uniform Financial
Institutions Rating System) is considered to be "undercapitalized." A
savings association that has a total risk-based capital of less than 6.0% or
a Tier 1 risk-based capital ratio or a leverage ratio of less than 3.0% is
considered to be "significantly undercapitalized." A savings association
that has a tangible capital to assets ratio equal to or less than 2% is
deemed to be "critically undercapitalized." The elements of an association's
capital for purposes of the prompt corrective action regulations are defined
generally as they are under the regulations for minimum capital
requirements. See "- Capital Requirements."
The severity of the action authorized or required to be taken under
the prompt corrective action regulations increases as an association's
capital deteriorates within the three undercapitalized categories. All
associations are prohibited from paying dividends or other capital
distributions or paying management fees to any controlling person if,
following such distribution, the association would be undercapitalized. An
undercapitalized association is required to file a capital restoration plan
within 45 days of the date the association receives notice that it is within
any of the three undercapitalized categories. The OTS is required to monitor
closely the condition of an undercapitalized association and to restrict the
asset growth, acquisitions, branching, and new lines of business of such an
association. Significantly undercapitalized associations are subject to
restrictions on compensation of senior executive officers; such an
association may not, without OTS consent, pay any bonus or provide
compensation to any senior executive officer at a rate exceeding the
officer's average rate of compensation (excluding bonuses, stock options and
profit-sharing) during the 12 months preceding the month when the
association became undercapitalized. A significantly undercapitalized
association may also be subject, among other things, supervisory orders to
change the composition of its Board of Directors or senior management,
additional restrictions on transactions with affiliates, restrictions on
acceptance of deposits from correspondent associations, further restrictions
on asset growth, restrictions on rates paid on deposits, direction to
terminate or reduce activities deemed risky, and any further operational
restriction deemed necessary by the OTS.
If one or more grounds exist for appointing a conservator or receiver
for an association, the OTS may require the association to issue additional
debt or stock, sell assets, be acquired by a depository association holding
company or combine with another depository association. The OTS and the FDIC
have a broad range of grounds under which they may appoint a receiver or
conservator for an insured depository association. Under FDICIA, the OTS is
required to appoint a receiver (or with the concurrence of the FDIC, a
conservator) for a critically undercapitalized association within 90 days
after the association becomes critically undercapitalized or, with the
concurrence of the FDIC, to take such other action that would better achieve
the purposes of the prompt corrective action provisions. Such alternative
action can be renewed for successive 90-day periods. However, if the
association continues to be critically undercapitalized on average during
the quarter that begins 270 days after it first became critically
undercapitalized, a receiver must be appointed, unless the OTS makes certain
findings with which the FDIC concurs and the Director of the OTS and the
Chairman of the FDIC certify that the association is viable. In addition, an
association that is critically undercapitalized is subject to more severe
restrictions on its activities, and is prohibited, without prior approval of
the FDIC from, among other things, entering into certain material
transactions or paying interest on new or renewed liabilities at a rate that
would significantly increase the association's weighted average cost of
funds.
When appropriate, the OTS can require corrective action by a savings
association holding company under the "prompt corrective action" provisions
of FDICIA.
Insurance of Deposit Accounts. The Bank is a member of the SAIF, and
the Bank pays its deposit insurance assessments to the SAIF. The FDIC also
maintains another insurance fund, the Bank Insurance Fund (the "BIF"), which
primarily insures the deposits of banks and state chartered savings banks.
Pursuant to FDICIA, the FDIC established a new risk-based assessment
system for determining the deposit insurance assessments to be paid by
insured depository institutions. Under the assessment system, the FDIC
assigns an institution to one of three capital categories based on the
institution's financial information as of the reporting period ending seven
months before the assessment period. The three capital categories consist of
(a) well capitalized, (b) adequately capitalized, or (c) undercapitalized.
The FDIC also assigns an institution to one of three supervisory
subcategories within each capital group. The supervisory subgroup to which
an institution is assigned is based on a supervisory evaluation provided to
the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition
and the risk posed to the deposit insurance funds. An institution's
assessment rate depends on the capital category and supervisory category to
which it is assigned. Under the regulation, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory
subgroups) to which different assessment rates are applied. Assessment rates
currently range from 0.0% of deposits for an institution in the highest
category (i.e., well-capitalized and financially sound, with no more than a
few minor weaknesses) to 0.27% of deposits for an institution in the lowest
category (i.e., undercapitalized and substantial supervisory concern). The
FDIC is authorized to raise the assessment rates as necessary to maintain
the required reserve ratio of 1.25%. As a result of the Deposit Insurance
Funds Act of 1996 (the "Funds Act"), both the BIF and the SAIF currently
satisfy the reserve ratio requirement. If the FDIC determines that
assessment rates should be increased, institutions in all risk categories
could be affected. The FDIC has exercised this authority several times in
the past and could raise insurance assessment rates in the future. If such
action is taken by the FDIC, it could have an adverse effect on the earnings
of the Bank.
The Funds Act also amended the FDIA to expand the assessment base for
the payments on the FICO bonds. Beginning January 1, 1997, the assessment
base for the FICO bonds included the deposits of both BIF- and SAIF-insured
institutions. Until December 31, 1999, or such earlier date on which the
last savings association ceases to exist, the rate of assessment for BIF-
assessable deposits shall be one-fifth of the rate imposed on SAIF-
assessable deposits. The annual rate of assessments for the payments on the
FICO bonds for the semi-annual period beginning on July 1, 1998 was 0.0122%
for BIF-assessable deposits and 0.0610% for SAIF-assessable deposits.
The Funds Act also provides for the merger of the BIF and SAIF on
January 1, 1999, with such merger being conditioned upon the prior
elimination of the thrift charter. The Funds Act required the Secretary of
the Treasury to conduct a study of relevant factors with respect to the
development of a common charter for all insured depository institutions and
abolition of separate charters for banks and thrifts and to report the
Secretary's conclusions and findings to the Congress. The Secretary of the
Treasury recommended to the Congress that the separate charter for thrifts
be eliminated only if other legislation is adopted that permits bank holding
companies to engage in certain non-financial activities. However, the
current version of bank modernization legislation, The Financial Services
Act of 1998, H.R. 10, which was passed by the U.S. House of Representatives
in May 1998 and is currently being considered by the U.S. Senate, does not
require thrift institutions to convert to bank charter.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or
has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC or the OTS. The management of the Bank does not know of
any practice, condition or violation that might lead to termination of
deposit insurance.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Boston, which is one of the regional Federal Home Loan Banks composing the
Federal Home Loan Bank System. Each Federal Home Loan Bank provides a
central credit facility primarily for its member institutions. The Bank, as
a member of the FHLB of Boston, is required to acquire and hold shares of
capital stock in the FHLB of Boston in an amount at least equal to the
greater of 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year or 1/20
of its advances (borrowings) from the FHLB of Boston. The Bank was in
compliance with this requirement with an investment in the capital stock of
the FHLB of Boston at September 30, 1998, of $1.5 million. Any advances from
a Federal Home Loan Bank must be secured by specified types of collateral,
and all long-term advances may be obtained only for the purpose of providing
funds for residential housing finance.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts and to contribute funds for affordable
housing programs. These requirements could reduce the amount of earnings
that the Federal Home Loan Banks can pay as dividends to their members and
could also result in the Federal Home Loan Banks imposing a higher rate of
interest on advances to their members. The FHLB of Boston paid dividends on
the Bank's capital stock of $95,000, $91,000 and $60,000 during the years
ended September 30, 1998, 1997 and 1996, respectively. If dividends were
reduced, or interest on future Federal Home Loan Bank advances increased,
the Bank's net interest income would likely also be reduced.
Federal Reserve System. The Bank is subject to provisions of the FRA
and the FRB's regulations pursuant to which depository institutions may be
required to maintain noninterest-earning reserves against their deposit
accounts and certain other liabilities. Currently, reserves must be
maintained against transaction accounts (primarily NOW and regular checking
accounts). The FRB regulations generally require that reserves be maintained
in the amount of 3% of the aggregate of transaction accounts up to $47.8
million. The amount of aggregate transaction accounts in excess of $47.8
million are currently subject to a reserve ratio of 10%, which ratio the FRB
may adjust between 8% and 12%. The FRB regulations currently exempt $4.7
million of otherwise reservable balances from the reserve requirements,
which exemption is adjusted by the FRB at the end of each year. The Bank is
in compliance with the foregoing reserve requirements. Because required
reserves must be maintained in the form of either vault cash, a noninterest-
bearing account at a Federal Reserve Bank, or a pass-through account as
defined by the FRB, the effect of this reserve requirement is to reduce the
Bank's interest-earning assets. The balances maintained to meet the reserve
requirements imposed by the FRB may be used to satisfy liquidity
requirements imposed by the OTS. Federal Home Loan Bank System members are
also authorized to borrow from the Federal Reserve "discount window," but
FRB regulations require such institutions to exhaust all Federal Home Loan
Bank sources before borrowing from a Federal Reserve Bank.
Regulation of the Holding Company
General. The Mutual Company and the Stock Company are holding
companies chartered pursuant to Section 10(o) of the HOLA. As such, the
Mutual Company and the Stock Company are registered with and subject to OTS
examination and supervision as well as certain reporting requirements. In
addition, the OTS has enforcement authority over the Mutual Company and the
Stock Company and any of its non-savings institution subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the financial safety,
soundness, or stability of a subsidiary savings institution. Unlike bank
holding companies, federal mutual holding companies are not subject to any
regulatory capital requirements or to supervision by the Federal Reserve
System.
Restrictions Applicable to Activities of Mutual Holding Companies.
Pursuant to Section 10(o) of the HOLA, a mutual holding company, such as the
Mutual Company, and a federally chartered mid-tier holding company such as
the Stock Company may engage only in the following activities: (i) investing
in the stock of a savings institution; (ii) acquiring a mutual association
through the merger of such association into a savings institution subsidiary
of such holding company or an interim savings institution subsidiary of such
holding company; (iii) merging with or acquiring another holding company,
one of whose subsidiaries is a savings institution; (iv) investing in a
corporation the capital stock of which is available for purchase by a
savings institution under federal law or under the law of any state where
the subsidiary savings institution or associations have their home offices;
(v) furnishing or performing management services for a savings institution
subsidiary of such holding company; (vi) holding, managing, or liquidating
assets owned or acquired from a savings institution subsidiary of such
company; (vii) holding or managing properties used or occupied by a savings
institution subsidiary of such company; (viii) acting as trustee under a
deed of trust; (ix) any other activity (a) that the FRB, by regulation, has
determined to be permissible for bank holding companies under Section 4(c)
of the BHC Act, unless the Director of the OTS, by regulation, prohibits or
limits any such activity for savings and loan holding companies, or (b) in
which multiple savings and loan holding companies were authorized by
regulation to directly engage on March 5, 1987; and (x) purchasing, holding,
or disposing of stock acquired in connection with a qualified stock issuance
if the purchase of such stock by such holding company is approved by the
Director of the OTS. If a mutual holding company acquires or merges with
another holding company, the holding company acquired or the holding company
resulting from such merger or acquisition may only invest in assets and
engage in activities listed above, and it has a period of two years to cease
any non-conforming activities and divest any non-conforming investments.
Restrictions Applicable to All Savings and Loan Holding Companies. The
HOLA prohibits a savings and loan holding company, including the Stock
Company and the Mutual Company, directly or indirectly, from acquiring (i)
control (as defined under HOLA) of another savings institution (or a holding
company parent thereof) without prior OTS approval; (ii) more than 5% of the
voting shares of another savings institution (or holding company parent
thereof) that is not a subsidiary, subject to certain exceptions; (iii)
through merger, consolidation, or purchase of assets, another savings
institution or a holding company thereof, or acquiring all or substantially
all of the assets of such institution (or a holding company thereof) without
prior OTS approval; or (iv) control of any depository institution not
insured by the FDIC (except through a merger with and into the holding
company's savings institution subsidiary that is approved by the OTS).
A savings and loan holding company may not acquire as a separate
subsidiary an insured institution that has a principal office outside of the
state where the principal office of its subsidiary institution is located,
except (i) in the case of certain emergency acquisitions (as defined under
HOLA) approved by the FDIC; (ii) if such holding company controls a savings
institution subsidiary that operated a home or branch office in such
additional state as of March 5, 1987, or (iii) if the laws of the state in
which the savings institution to be acquired is located specifically
authorize a savings institution chartered by that state to be acquired by a
savings institution chartered by the state where the acquiring savings
institution or savings and loan holding company is located or by a holding
company that controls such a state chartered association. The conditions
imposed upon interstate acquisitions by those states that have enacted
authorizing legislation vary. Some states impose conditions of reciprocity,
which have the effect of requiring that the laws of both the state in which
the acquiring holding company is located (as determined by the location of
its subsidiary savings institution) and the state in which the association
to be acquired is located, have each enacted legislation allowing its
savings institutions to be acquired by out-of-state holding companies on the
condition that the laws of the other state authorize such transactions on
terms no more restrictive than those imposed on the acquirer by the state of
the target association. Some of these states also impose regional
limitations, which restrict such acquisitions to states within a defined
geographic region. Other states allow full nationwide banking without any
condition of reciprocity. Some states do not authorize interstate
acquisitions of savings institutions. In evaluating an application by a
holding company to acquire a savings institution, the OTS must consider the
financial and managerial resources and future prospects of the company and
savings institution involved, the effect of the acquisition on the risk to
the insurance funds, the convenience and needs of the community, and
competitive factors.
If the savings institution subsidiary of a federal mutual holding
company fails to meet the QTL test set forth in Section 10(m) of the HOLA
and regulations of the OTS, the holding company must register with the FRB
as a bank holding company under the BHC Act within one year of the savings
institution's failure to so qualify.
Federal Securities Laws
The Common Stock to be issue in the Offering will be registered with
the SEC under the Exchange Act. The Stock Company will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
ITEM 2. DESCRIPTION OF PROPERTY.
The following table sets forth certain information at September 30,
1998 regarding the Bank's office facilities, which are owned by the Bank and
certain other information relating to its property at that date.
<TABLE>
<CAPTION>
Year Completed Square Footage Cost Value
-------------- -------------- ----------
<S> <C> <C> <C> <C>
Main Office: 310 Broadway
Revere, MA 1977 3,500 $479,000
</TABLE>
In addition to its main office, the Bank leases office space in an
adjacent building to house certain administrative personnel. The Bank also
has a full service ATM at Logan Airport and opened a branch office on
December 21, 1998 in Chelsea, Massachusetts. At September 30, 1998, the cost
value of the Bank's computer equipment and other furniture, fixtures and
equipment at its existing offices totaled $823,000. For more information,
see note 5 of the Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
Although the Bank and the Company, from time to time, are involved in
various legal proceedings in the normal course of business, there are no
material legal proceedings to which the Bank or the Company, its directors
or its officers is a party or to which any of its property is subject as of
the date of this Form 10-KSB.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Prior to the Reorganization and the Offering, the Bank was a mutual
savings association and, therefore, no trading market for common stock
existed as of the fiscal year ended September 30, 1998. On December 21,
1998, RFS Bancorp, Inc. common stock began trading on the over-the-counter
market with quotations available through the OTC Bulletin Board under the
symbol "RFED." The price range of the common stock from the date the common
stock began trading on December 21, 1998 was as follows:
<TABLE>
<CAPTION>
PERIOD HIGH LOW
------ ---- ---
<C> <C> <C>
December 21 to $10.00 $9.50
December 22, 1998.
</TABLE>
The Company has not paid a dividend since its incorporation. The Board
of Directors may consider the payment of cash dividends, dependent upon the
results of operations and financial condition of the Company, tax
considerations, industry standards, economic considerations, regulatory
restrictions, general business factors and other conditions. The Company's
ability to pay dividends is dependent upon the dividend payments it receives
from the Bank which are subject to regulations and the Bank's continued
compliance with all regulatory capital requirements.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Selected Consolidated Financial and Other Data of the Bank
The selected consolidated financial and other data of the Bank set
forth below is derived in part from, and should be read in conjunction with,
the Consolidated Financial Statements of the Bank and Notes thereto.
<TABLE>
<CAPTION>
At September 30,
---------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Selected Financial Data:
Total assets $89,468 $86,920 $77,898
Loans, net 46,852 41,175 33,046
Investments (1) 31,005 40,790 41,120
Total deposits 64,484 55,452 49,393
FHLB advances 18,204 25,104 22,712
Total equity 6,484 6,039 5,447
Allowance for loan losses 528 377 325
Non-performing loans 199 157 28
Non-performing assets 199 157 28
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended September 30,
---------------------------------
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Selected Operating Data:
Interest and dividend income $ 6,643 $ 6,180 $ 5,110
Interest expense 3,604 3,585 3,018
---------------------------------
Net interest and dividend income 3,039 2,595 2,092
Provision for loan losses 197 60 148
---------------------------------
Net interest and dividend income
after provision for loan losses 2,842 2,535 1,944
Total noninterest income 155 116 67
Total noninterest expense 2,533 1,888 1,891
---------------------------------
Income before income taxes 464 763 120
Income taxes 173 287 26
---------------------------------
Net income $ 291 $ 476 $ 94
=================================
</TABLE>
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
--------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Selected Financial Ratios and Other Data(2)
Performance Ratios:
Return on average assets 0.33% 0.56% 0.13%
Return on average equity 4.94 8.66 1.84
Average equity to average assets 6.66 6.52 7.13
Equity to total assets at end of period 7.25 6.95 6.99
Average interest rate spread 3.20 2.89 2.72
Net interest margin 3.53 3.16 3.00
Average interest-earning assets to
average interest-bearing liabilities 107.71 106.16 106.60
Total noninterest expense to average
assets 2.86 2.24 2.63
Efficiency ratio(3) 79.30 69.64 87.59
Regulatory Capital Ratios:
Tangible capital 6.67 6.54 6.69
Core capital 6.67 6.54 6.69
Risk-based capital 17.72 21.33 24.03
Asset Quality Ratios:
Non-performing loans as a percent
of loans 0.42 0.38 0.08
Non-performing assets as a percent
of total assets 0.22 0.18 0.04
Allowance for loan losses as a percent
of loans 1.11 0.91 0.97
Allowance for loan losses as a percent
of non-performing loans 265.45 240.03 1,159.67
Number of:
Loans outstanding 857 775 569
Deposit accounts 8,083 6,907 6,008
Full-service offices 1 1 1
Full-time equivalent employees 27 22 17
<FN>
<F1> The Bank adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115") as of September 30, 1994.
<F2> Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are
based on average daily balances during the indicated periods and are
annualized where appropriate.
<F3> The efficiency ratio represents the ratio of noninterest expenses
divided by the sum of net interest and dividend income and noninterest
income.
</FN>
</TABLE>
General
Our operating results are primarily dependent upon net interest and
dividend income. Net interest income is the difference between income earned
on our loan and investment portfolio and our cost of 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. Our 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,
our most significant form of market risk is interest rate risk. We are
subject to interest rate risk to the degree that our interest-bearing
liabilities, primarily deposits with short and medium-term maturities,
mature or reprice at different rates than our interest-earning assets. We
believe it is critical to manage the relationship between interest rates and
the effect on our 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. We manage assets and liabilities
within the context of the marketplace, regulatory limitations and within
limits established by our 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 our
assets mature or reprice more quickly or to a greater extent than our
liabilities, our 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 our assets mature or reprice more
slowly or to a lesser extent than our liabilities, our 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. Our
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 our earnings to material and prolonged changes
in interest rates. In this regard, we attempt 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.
Quantitative Disclosures About Market Risk. The OTS issued a
regulation which uses a net market value methodology to measure the interest
rate risk exposure of savings associations. Under this OTS regulation, an
institution's "normal" level of interest rate risk in the event of an
assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR
is used by the OTS to calculate changes in NPV (and the related "normal"
level of interest rate risk) based upon certain interest rate changes
(discussed below). Associations which do not meet either of the filing
requirements are not required to file OTS Schedule CMR, but may do so
voluntarily. As we do not meet either of these requirements, we are not
required to file Schedule CMR, although we do so voluntarily. Under the
regulation, associations which must file are required to take a deduction
(the interest rate risk capital component) from their total capital
available to calculate their risk based capital requirement if their
interest rate exposure is greater than "normal." The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to a 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets.
Presented below, as of September 30, 1998, is an analysis performed by
the OTS of our interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 400 basis points. Our exposure to interest
rate risk results from the concentration of fixed rate mortgage loans in our
portfolio.
<TABLE>
<CAPTION>
Net Portfolio Value NPV as % of Present Value of Assets
Change ------------------- -----------------------------------
In Rates $ Amount $ Change % Change NPV Ratio Change*
- -------- -------- -------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $6,596 $(2,224) (25)% 7.76% -178
+300 bp 7,397 -1,424 -16 8.51 -104
+200 bp 8,115 -706 -8 9.12 -42
+100 bp 8,613 -207 -2 9.49 -6
0 bp 8,821 9.54
- -100 bp 8,624 -197 -2 9.2 -35
- -200 bp 8,430 -391 -4 8.85 -69
- -300 bp 8,409 -411 -5 8.68 -87
- -400 bp 8,298 -523 -6 8.41 -114
<FN>
<F*> Basis points
</FN>
</TABLE>
As with any method of measuring interest rate risk, the methods of
analysis presented above have certain short comings. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also, the interest rates on certain types of assets and liabilities
may fluctuate in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in market rates. Additionally,
certain assets, such as adjustable-rate loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table.
Average Balances, Interest, Yields and Rates
The following tables set forth certain information relating to the
Bank for the years ended September 30, 1998, 1997 and 1996, and reflects the
average yield on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense
by the average balance of assets or liabilities, respectively, for the
periods shown. Average balances are derived from average daily balances. The
yields include fees which are considered adjustments to yields.
<TABLE>
<CAPTION>
For the Year Ended September 30,
---------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- ------- ------- -------- -------
Assets: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ 422 $ 18 4.27% $ 453 $ 16 3.53% $ 237 $ 14 5.91%
Federal funds sold 5,224 279 5.34 1,308 69 5.28 730 43 5.89
Investment securities(1) 35,445 2,473 6.98 44,092 3,068 6.96 40,908 2,690 6.58
Loans(2) 45,043 3,873 8.60 36,324 3,027 8.33 27,849 2,363 8.49
------------------ ------------------ ------------------
Total interest-earning assets 86,134 6,643 7.71 82,177 6,180 7.52 69,724 5,110 7.33
Noninterest-earning assets 2,356 2,144 2,078
------- ------- -------
Total assets $88,490 $84,321 $71,802
======= ======= =======
Liabilities and Equity:
Interest-bearing liabilities:
NOW accounts $ 4,329 $ 47 1.09% $ 3,443 $ 35 1.02% $ 2,041 $ 23 1.13%
Regular savings accounts 15,370 176 1.15 14,548 161 1.11 14,743 157 1.06
Money market accounts 1,645 51 3.10 739 23 3.11 212 6 2.83
Time deposits 35,766 2,018 5.64 32,634 1,839 5.64 30,763 1,784 5.79
------------------ ------------------ ------------------
Total interest-bearing deposits 57,110 2,292 4.01 51,364 2,058 4.02 47,759 1,970 4.11
Advances from FHLB 22,858 1,312 5.74 26,044 1,527 5.86 17,648 1,048 5.94
------------------ ------------------ ------------------
Total interest-bearing
liabilities 79,968 3,604 4.51 77,408 3,585 4.63 65,407 3,018 4.61
------ ------ ------
Demand deposits 2,595 1,219 914
Other liabilities 32 199 362
------- ------- -------
Total liabilities 82,595 78,826 66,683
Equity 5,895 5,495 5,119
------- ------- -------
Total liabilities and equity $88,490 $84,321 $71,802
======= ======= =======
Net interest income $3,039 $2,595 $2,092
====== ====== ======
Net interest rate spread(3) 3.20% 2.89% 2.72%
==== ==== ====
Net interest margin(4) 3.53% 3.16% 3.00%
==== ==== ====
Ratio of interest-earning assets
to interest-bearing liabilities 107.71% 106.16% 106.60%
====== ====== ======
<FN>
<F1> Includes investment securities available-for-sale, held-to-maturity
and stock in FHLB-Boston.
<F2> Amount is net of deferred loan origination fees, allowance for loan
losses and includes non-accrual loans.
<F3> Net interest rate spread represents the difference between the
weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
<F4> Net interest margin represents net interest income as a percentage of
average interest-earning assets.
</FN>
</TABLE>
The following table analyzes the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
and interest-bearing liabilities. The table distinguishes between (i)
changes attributable to volume (changes in volume multiplied by the prior
period's rate) (ii) changes attributable to rate (changes in rate multiplied
by the prior period's volume) and (iii) mixed changes (changes in volume
multiplied by changes in rate).
<TABLE>
<CAPTION>
For the Year
For the Year Ended Ended September 30, 1997
September 30, 1998 Compared to Compared to Year Ended
Year Ended September 30, 1997 September 30, 1996
------------------------------ -----------------------------
Incease/(Decrease) Incease/(Decrease)
Due to Due to
------------------ ------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits $ (1) $ 3 $ 2 $ 4 $ (2) $ 2
Federal funds sold 209 1 210 30 (4) 26
Investment securities (603) 8 (595) 216 162 378
Loans, net 747 99 846 705 (41) 664
----------------------------------------------------------
Total interest-earning assets 352 111 463 955 115 1,070
----------------------------------------------------------
Interest-bearing liabilities:
NOW accounts 9 3 12 14 (2) 12
Regular savings accounts 9 6 15 (2) 6 4
Money market accounts 28 --- 28 16 1 17
Time deposits 179 --- 179 98 (43) 55
----------------------------------------------------------
Total deposits 225 9 234 126 (38) 88
FHLB advances (183) (32) (215) 492 (13) 479
----------------------------------------------------------
Total interest-bearing liabilities 42 (23) 19 618 (51) 567
----------------------------------------------------------
Net change in net interest income $ 310 $134 $ 444 $337 $166 $ 503
==========================================================
</TABLE>
Comparison of Financial Condition at September 30, 1998
and September 30, 1997.
The Bank's total assets increased by $2.6 million or 3.0% to $89.5
million at September 30, 1998 from $86.9 million at September 30, 1997. The
net increase in total assets is primarily attributable to a $5.7 million
increase in net loans and an increase in federal funds sold of $5.5 million,
offset by a $9.8 million decrease in investment securities. Total net loans
increased by $5.7 million or 13.8% to $46.9 million or 52.4% of total assets
at September 30, 1998 as compared to $41.2 million or 47.4% of total assets
at September 30, 1997. The Bank's loan growth reflected the continued
emphasis on commercial and commercial real estate lending. Investment
securities held by the Bank decreased by $9.8 million or 24.0% to $31.0
million at September 30, 1998 from $40.8 million at September 30, 1997. This
decrease is primarily due to the call of $8.7 million of agency bonds.
Total deposits increased by $9.0 million or 16.2% to $64.5 million at
September 30, 1998 from $55.5 million at September 30, 1997. Total FHLB
advances decreased by $6.9 million or 27.5% to $18.2 million at September
30, 1998 from $25.1 million at September 30, 1997. The Bank used proceeds
from bonds called and excess cash to paydown advances during this period.
Total equity increased by $445,000 or 7.4% to $6.5 million at September 30,
1998 from $6.0 million at September 30, 1997 principally as a result of net
income $291,000.
Comparison of the Operating Results for the
Twelve Months ended September 30, 1998 and 1997.
Net Income. The Bank's net income for the twelve months ended
September 30, 1998 was $291,000 as compared to $476,000 for the twelve
months ended September 30, 1997. This $185,000 or 38.9% decrease in net
income during the period was the result of an increase of $463,000 in
interest and dividend income and an increase of $39,000 in other income,
offset by an increase of $645,000 in operating expenses, an increase of
$137,000 in provision for loan losses, an increase of $19,000 in interest
expense, and a decrease in provision for income taxes of $114,000. The
Bank's continued expansion of its lending activities accounted for the
increase in interest income, while its operating expenses increased due to
increased staffing and advertising. The return on average assets for the
twelve months ended September 30, 1998 was .33% compared to .56% for the
twelve months ended September 30, 1997.
Interest and Dividend Income. Total interest and dividend income
increased by $463,000 or 7.5% to $6.6 million for the twelve months ended
September 30, 1998 from $6.2 million for the twelve months ended September
30, 1997. 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 funded by bonds called. The average balance of
net loans for the twelve months ended September 30, 1998 was $45.0 million
compared to $36.3 million for the twelve months ended September 30, 1997.
The average yield on net loans was 8.60% for the twelve months ended
September 30, 1998 compared to 8.33% for the twelve months ended September
30, 1997, reflecting an increase in the amount of commercial and commercial
real estate loans. The average balance of investment securities for the
twelve months ended September 30, 1998 was $35.4 million compared to $44.1
million for the twelve months ended September 30, 1997. The average yield on
investment securities was 6.98% for the twelve months ended September 30,
1998 compared to 6.96% for the twelve months ended September 30, 1997.
Interest Expense. Interest expense increased by $19,000 or .53 % to
$3.6 million for the twelve months ended September 30, 1998 from $3.6
million for the twelve months ended September 30, 1997. Interest expense
increased as a result of increases in overall deposit balances as well as a
decrease in Federal Home Loan Bank of Boston borrowings. Average interest-
bearing deposits increased by $5.7 million or 11.2% to $57.1 million for the
twelve months ended September 30, 1998. Deposit balances have increased as a
result of offering free checking products and certificate of deposit
products with competitive rates. Accordingly, interest expense on deposits
increased $233,000 or 11.3% to $2.3 million during this period from $2.1
million during fiscal year 1997. Interest expense on advances from the
Federal Home Loan Bank decreased $215,000 or 14.1% to $1.3 million for the
year ended September 30, 1998 from $1.5 million for the year ended September
30, 1997.
Net Interest and Dividend Income. The Bank's net interest and dividend
income for the twelve months ended September 30, 1998 increased $444,000 or
17.1% to $3.0 million from $2.6 million for the twelve months ended
September 30, 1997. The increase is attributed to a combination of the
$463,000 increase in interest and dividend income and the $19,000 increase
in interest expense on deposits and borrowed funds.
The average yield on interest earning assets increased 19 basis points
to 7.71% for the twelve months ended September 30, 1998 from 7.52 % for the
twelve months ended September 30, 1997, while the average cost on interest-
bearing liabilities increased by 12 basis points to 4.51% for the twelve
months ended September 30, 1998 from 4.63% for the twelve months ended
September 30, 1997. As a result of the Bank's strategy to restructure the
balance sheet, the interest rate spread increased to 3.20% for the twelve
months ended September 30, 1998 from 2.89% for the twelve months ended
September 30, 1997 and the net interest margin improved to 3.53% from 3.16%
during this period.
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 losses and is based on the
perceived higher risks inherent in small business and commercial real estate
lending 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 increased by $137,000 or 228.3% to $197,000 for
the twelve months ended September 30, 1998 from $60,000 for the twelve
months ended September 30, 1997. At September 30, 1998, the balance of the
allowance for loan losses was $528,000 or 1.11% of total loans versus
$377,000 or .91% of total loans at September 30, 1997. The increase in the
provision is due to the overall increase in loan volume and the increased
focus on the origination of commercial real estate and commercial 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 $39,000 or
33.6% to $155,000 for the twelve months ended September 30, 1998 from
$116,000 for the twelve months ended September 30, 1997. The increase was
primarily the result of increased fees on transactional deposit accounts.
The Bank anticipates increases to noninterest income as it continues to
expand the volume of its deposit relationships. It is also the Bank's goal
to increase its level of noninterest income by continually considering
additional sources of revenue.
Noninterest Expense. Noninterest expense increased by $645,000 or
34.2% to $ 2.5 million for the twelve months ended September 30, 1998 from
$1.9 million for the twelve months ended September 30, 1997. The increase
resulted primarily from a general increase in operating expenses. Salaries
and employee benefits, the largest component of noninterest expense, was
$1.2 million for the twelve months ended September 30, 1998 as compared to
$919,000 for the twelve months ended September 30, 1997, an increase of
$298,000 or 32.4%. This increase was primarily associated with approximately
$223,000 in additional compensation expenses due to the addition of five
full time equivalent employees, including two commercial lending department
employees and three operations department employees, necessary to provide
support for the Bank's expanded lending and deposit activities resulting
from the establishment of the Bank's commercial lending department. During
the period, professional fees increased from $122,000 to $213,000 or 74.6%
due to the added cost of outside loan review and certain legal and
consulting costs associated with the Bank's expansion. Occupancy expense
increased by $40,000 or 35.0% to $155,000 for the twelve months ended
September 30, 1998 as compared to $115,000 for the twelve months ended
September 30, 1997, with the increase primarily related to additional space
utilized for certain administrative functions. Other increases were incurred
in the areas of equipment, data processing and advertising services,
primarily related to the expansion of the Bank's product lines and
additional services. Annual operating expenses are also expected to
increase in future periods due to the increased cost associated with an
additional branch location and the cost of operating as a stock institution.
Income Taxes. The net provision for income taxes amounted to $173,000
for the year ended September 30, 1998 as compared to $287,000 for the year
ended September 30, 1997, resulting in effective tax rate of 37.3% for the
period. The effective tax rate reflects the Bank's utilization of a
securities investment subsidiary to substantially reduce state income taxes.
Comparison of Financial Condition at September 30, 1997 and 1996.
The Bank's total assets increased by $9.0 million or 11.6% to $86.9
million at September 30, 1997 from $77.9 million at September 30, 1996. The
Bank's asset growth reflected commencement of the Bank's emphasis on
commercial and commercial real estate lending and increased origination of
commercial loans during 1997. Net loans were $41.2 million or 47.4% of total
assets at September 30, 1997 as compared to $33.0 million or 42.4% of total
assets at September 30, 1996, representing an increase of $8.2 million or
24.8%. The increase in loans was funded through FHLB borrowings and an
increase in deposits. Investment securities held by the Bank decreased by
$330,000 or 0.8% to $40.8 million in 1997 from $41.1 million in 1996. Total
deposits increased by $6.1 million or 12.3% to $55.5 million at September
30, 1997 from $49.4 million at September 30, 1996. Deposits increased due to
the increased profile of the Bank resulting from marketing efforts and the
development of new deposit products which resulted in new deposit
relationships. Total advances from the FHLB of Boston were $25.1 million at
September 30, 1997 compared $22.7 million at September 30, 1996. Total
equity increased by $592,000 or 11.0% to $6.0 million at September 30, 1997
from $5.4 million at September 30, 1996 as a result of net income of
$476,000 and an increase in the net unrealized gain on securities available
for sale of $116,000. In addition, land increased by $104,000 due to the
purchase of an adjacent property to be used to provide additional parking
for the Bank's customers. The Bank does not believe that the acquisition or
use of this property will materially affect the Bank's operations.
Comparison of the Operating Results for the Years
Ended September 30, 1997 and 1996.
Net Income. The Bank's net income for the year ended September 30,
1997 was $476,000 as compared to $94,000 for the year ended September 30,
1996. This $382,000 or 406.4% increase in net income during the period was
the result of an increase of $591,000 in net interest and dividend income
after provision for loan losses, partially offset by an increase of $261,000
in income taxes. The increase in net interest and dividend income was due to
the expansion of the Bank's lending activities and investment in higher
yielding callable agency securities. During the same period, the Bank's
salaries and employee benefits increased due to the higher compensation
costs associated with the addition of employees to meet the staffing needs
of the commercial lending department and the establishment of an operations
department to handle increased customer service. The return on average
assets for the year ended September 30, 1997 was 0.56% compared to 0.13% for
the year ended September 30, 1996.
Interest and Dividend Income. Total interest and dividend income
increased by $1.1 million or 21.6% to $6.2 million for the year ended
September 30, 1997 from $5.1 million for the year ended September 30, 1996.
The increase in interest and dividend income was a result of a higher level
of loan originations and increased investment in higher yielding callable
agency securities, offset by the decrease in the average rate of one- to
four-family loans.
Interest Expense. Total interest expense increased by $567,000 or
18.9% to $3.6 million for the year ended September 30, 1997 from $3.0
million for the year ended September 30, 1996. Interest expense on deposits
increased $89,000, or 4.5%, from $2.0 million at September 30, 1996 to $2.1
million at September 30, 1997. Interest expense on advances from the FHLB
increased $478,000, or 47.8%, from $1.0 million at September 30, 1996 to
$1.5 million at September 30, 1997. Such advances were used in order to
finance the acquisition of higher yielding callable agency securities.
Interest expense increased due to an increase in overall deposit balances as
well as the increase in FHLB advances.
Net Interest and Dividend Income. Net interest and dividend income for
the year ended September 30, 1997 was $2.6 million as compared to $2.1
million for the year ended September 30, 1996. The $502,000 or 23.9%
increase can be attributed to an increased volume of loan originations and
investment in higher yielding callable agency securities and higher yielding
commercial loans, offset by additional borrowing expenses. The average yield
on interest-earning assets increased 19 basis points to 7.52% for the year
ended September 30, 1997 from 7.33% for the year ended September 30, 1996,
while the average cost of interest-bearing liabilities increased by 2 basis
points to 4.63% for the year ended September 30, 1997 from 4.61% for the
year ended September 30, 1996. During this period, the Bank began
originating commercial loans. As a result, the net interest rate spread
increased to 2.89% for the year ended September 30, 1997 from 2.72% for the
year ended September 30, 1996 and the net interest margin increased to 3.16%
from 3.00% for the same periods.
Provision for Loan Losses. The provision for loan losses was $60,000
for the year ended September 30, 1997 as compared to $148,000 for the year
ended September 30, 1996. The provision in 1996 was in response to the
Bank's commencement of small business lending and the perceived higher risk
inherent in small business and commercial real estate lending. At September
30, 1997, the balance of the allowance for loan losses was $377,000 or 0.91%
of total loans. During the year ended September 30, 1997, $8,000 was charged
against the allowance for loan losses. At September 30, 1996, the balance of
the allowance for loan losses was $325,000 or 0.97% of total loans. During
the year ended September 30, 1996, $29,000 was charged against the allowance
for loan losses.
Noninterest Income. Noninterest income was $116,000 for the year ended
September 30, 1997 compared to $67,000 for the year ended September 30,
1996. The $49,000 or 73.1% increase was primarily the result of a $42,000
increase in service charges on deposit accounts and an $8,000 increase in
other income. These increases were due to the increase in transactional
accounts.
Noninterest Expense. Noninterest expense for the year ended September
30, 1997 remained relatively stable when compared to the year ended
September 30, 1996. While the amounts of noninterest expense were
comparable, the 1996 period includes a one-time charge in FDIC Insurance to
recapitalize the SAIF deposit insurance fund. During 1997, the decrease in
deposit insurance expense was offset by an increase of $167,000 in salaries
and employee benefits resulting from the addition of five employees in the
commercial loan department and an increase of $183,000 in other expenses.
Annual operating expenses are also expected to increase in future periods
due to future branching and product expansion and the increased cost of
operating as a stock institution.
Income Taxes. Income tax expense was $287,000 for the year ended
September 30, 1997 as compared to $26,000 for the year ended September 31,
1996, resulting in an effective tax rate at September 30, 1997 of 37.6%
compared to 21.3% for the prior period.
Impact of New Accounting Standards
Accounting for Long Lived Assets. In March 1995, the FASB issued SFAS
No. 121, "Accounting for Impairment of Long-Lived Assets and for Long Lived
Assets to be Disposed of" ("SFAS No. 121"). This Statement established
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and for long-lived assets and certain identifiable intangibles to be
disposed of. The Statement required that long-lived assets and certain
identifiable intangibles to be held and used by an institution be reviewed
for impairment whenever events change and circumstances indicate the
carrying amount of the asset may not be recoverable. This Statement became
effective for the Bank on October 1, 1996. Adoption of this Statement did
not have a material impact on the earnings or financial position of the
Bank.
Accounting for Stock-Based Compensation. In November 1995, the FASB
issued SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS No.
123"). This statement established financial accounting standards for stock-
based employee compensation plans. SFAS No. 123 permitted the Bank to choose
either a new fair value based method or the current Accounting Principles
Board ("APB") Opinion 25 intrinsic value based method of accounting for its
stock-based compensation arrangements. SFAS No. 123 required pro forma
disclosures of net earnings and earnings per share computed as if the fair
value based method had been applied in financial statements of companies
that continue to follow current practice in accounting for such arrangements
under APB Opinion 25. SFAS No. 123 applied to all stock-based employee
compensation plans in which an employer grants shares of its stock or other
equity instruments to employees except for employee stock ownership plans.
SFAS No. 123 also applied to plans in which the employer incurs liabilities
to employees in amounts based on the price of the employer's stock, (e.g.,
Stock Option Plan, stock purchase plans, restricted stock plans and stock
appreciation rights). The statement also specified the accounting for
transactions in which a company issues stock options or other equity
instruments for services provided by nonemployees or to acquire goods or
services from outside suppliers or vendors. The recognition provisions of
SFAS No. 123 for companies choosing to adopt the new fair value based method
of accounting for stock-based compensation arrangements will apply to all
transactions entered into in fiscal years that begin after December 15,
1995. Any effect that this statement will have on the Stock Company will be
applicable upon the consummation of the Reorganization. The Stock Company
intends to follow the APB Opinion 25 method upon adoption, but will provide
pro forma disclosure as if the fair value method had been applied.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996 the FASB issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities based on consistent application of a financial-components
approach that focuses on control. It distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. Under the
financial-components approach, after a transfer of financial assets, an
entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and does not recognize financial assets it no
longer controls and liabilities that have been extinguished. The financial-
components approach focuses on the assets and liabilities that exist after
the transfer. Many of these assets and liabilities are components of
financial assets that exited prior to the transfer. If a transfer does not
meet the criteria for a sale, the transfer is accounted for as a secured
borrowing with a pledge of collateral. The Statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, applied prospectively.
Earlier or retroactive application of this Statement is not permitted. The
adoption of the non-deferred provisions of this Statement as of January 1,
1997 did not have a material impact on the Bank's consolidated financial
statements. The Bank believes that the impact of the adoption as of January
1, 1998 of the deferred provisions of this Statement will not be material to
its future consolidated financial statements.
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income," ("SFAS No. 130"). This statement
establishes standards for reporting and display of comprehensive income and
its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This
statement does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement. SFAS No.
130 requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement
of financial position. It does not address issues of recognition or
measurement for comprehensive income and its components. SFAS No. 130 is
effective for fiscal years beginning after December 31, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Bank does not expect that upon
adoption, this statement will have a material effect on its consolidated
financial statements.
Disclosures about Segments of an Enterprise and Related Information.
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS No. 131"). This Statement
establishes standards for the way public business enterprises report
information about operating segments in financial statements. SFAS No. 131
is effective for financial statements for periods beginning after December
15, 1997. The Bank does not expect that under this statement it will be
required to report additional information because its present organization
consists of only one operating segment as defined by the Statement.
Other New Accounting Standards. SFAS No. 128 "Earnings per Share"
("SFAS No. 128") is effective for periods ending after December 15, 1997.
SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS No.
129") is effective for periods ending after December 15, 1997. The Stock
Company expects that the adoption of these standards will not have a
material impact on the Stock Company's consolidated financial statements.
Disclosures about Pensions and Other Postretirement Benefits. In
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits- an amendment of FASB Statements
No. 87, 88 and 106" ("SFAS No. 132") which revises employers' disclosures
about pension and other postretirement benefit plans, though it does not
change the measurement or recognition of those plans. The Bank will adopt
SFAS No. 132 for the fiscal year beginning on October 1, 1998. Adoption of
this Statement will not have a material impact on the Stock Company's or the
Bank's financial position or results of operations.
Accounting for Derivative Instruments and Hedging Activities. In June
1998 the FASB issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No.133"). This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives.) It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. It is not expected that the adoption of this statement will have a
material impact on the Stock Company's financial statements. The Bank at
this time does not plan to adopt SFAS No. 133 early. Also, the Bank has no
plan, on adoption of SFAS No. 133, to use the window of opportunity to
reclassify held-to-maturity securities to available-for-sale.
Liquidity and Capital Resources
Our 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.
Our primary investing activities are the origination of various types
of loans and the purchase of debt and equity securities. During years ended
September 30, 1998, 1997 and 1996, our loan originations totaled $70.8
million, $14.4 million and $20.3 million, respectively. These activities are
funded primarily by deposit growth, principal repayment of loans, and
interest and dividend income from debt and equity securities. Loan sales
provide an additional source of liquidity, totaling $8.4 million, $2.8
million and $3.4 million for the years ended September 30, 1998, 1997 and
1996, respectively.
We experienced a net increase in total deposits of $9.0 million, $6.1
million and $1.2 million for the years ended September 30, 1998, 1997 and
1998, respectively. Deposit flows are affected by the level of interest
rates, the interest rates and products offered by local competitors, and
other factors.
We monitor our liquidity position on a daily basis. Excess short-term
liquidity is usually invested in overnight federal funds sold. In the event
we require funds beyond our ability to generate them internally, additional
sources of funds are available through the use of FHLB advances. At
September 30, 1998, we had $18.2 million outstanding in FHLB advances.
Loan commitments totaled $1.7 million at September 30, 1998, comprised
of $1.6 million at variable rates and $163,000 at fixed rates. We anticipate
that we will have sufficient funds available to meet current loan
commitments. Certificates of deposit which are scheduled to mature in one
year or less from September 30, 1998, totaled $28.0 million. Based upon this
experience and our current pricing strategy, we believe that a significant
portion of such deposits will remain with the Bank.
In December 1998, we plan to continue expanding our retail banking
franchise by opening a branch location. The acquisition and renovation of
this office is expected to cost approximately $600,000. Management
anticipates it will have sufficient funds available to meet its planned
capital expenditures throughout 1998.
At September 30, 1998, we exceeded all of our regulatory capital
requirements with a tangible capital level of $6.0 million, or 6.67% of
adjusted assets, which is above the required level of $1.3 million, or 1.5%
and total risk-based capital of $6.4 million, or 17.72% of adjusted assets,
which is above the required level of $2.9 million, or 8.00%. See "Regulatory
Capital Compliance" and "Regulation - Regulatory Capital Requirements."
Our most liquid assets are cash, federal funds sold and interest-
bearing demand accounts. The level of these assets are dependent on our
operating, financing, lending and investing activities during any given
period. At September 30, 1998, cash, federal funds sold and interest-bearing
demand accounts totaled $7.9 million, or 8.9% of total assets.
Year 2000
The "Year 2000 Problem" centers on the inability of computer systems
to recognize the Year 2000. Many existing computer programs and systems were
originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the
upcoming change in the century. With the impending millennium, these
programs and computers will recognize "00" as the year 1900 rather than the
year 2000. Like most financial service providers, the Bank and its
operations may be significantly affected by the Year 2000 Problem due to the
nature of financial information. 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.
When the Year 2000 arrives, systems, including some of those with embedded
chips, may not work properly because of the way they store date information.
They may not be able to deal with the date 01/01/00, and may not be able to
deal with operational 'cycles' such as 'do X every 100 days'. Thus, even
noninformation technology systems may affect the normal operations of the
Bank upon the arrival of the Year 2000.
Under certain circumstances, failure to adequately address the Year
2000 Problem could adversely affect the viability of the Bank'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 Bank'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 Bank, 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 Bank has been formed to
evaluate the effects that the upcoming Year 2000 could have on computer
programs utilized by the Bank. The Bank's plan is divided into the five
phases: (1) awareness - define the problem, obtain executive level support
and develop an overall strategy. This phase was completed in September,
1997; (2) assessment - identify all systems and the criticality of the
systems. This phase was completed in September, 1997; (3) renovation -
program enhancements, hardware and software upgrades, system replacements,
and vendor certifications. This phase is in process and with a scheduled
completion date of December, 1998; (4) validation - test and verify system
changes and coordinate with outside parties. This phase is in process with a
scheduled completion date of December, 1998; and (5) implementation -
components certified as year 2000 compliant and moved to production. This
phase is in process with a scheduled completion date of December, 1998.
Third party vendors provide the majority of software used by the Bank.
All of the Bank's vendors are aware of the Year 2000 situation, and each has
assured the Bank that it is currently working to have its software compliant
by December, 1998, and testing for the critical applications began in April,
1998. This will enable the Bank to devote substantial time to the testing of
the upgraded systems prior to the arrival of the millennium. 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 Bank
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 Bank. 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
Bank.
The Bank 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 Bank 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 Bank sent letters to all of its
commercial borrowers asking them to certify that they will be Year 2000
compliant by December 31, 1998. Follow up letters have been sent to all
commercial borrowers who have failed to respond to the Bank's Year 2000
inquiries.
In addition, monitoring and managing the year 2000 project will result
in additional direct and indirect costs to the Stock Company and the Bank.
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 Bank has
spent approximately $25,000 on Year 2000 related costs to date and estimates
that it will spend an additional $30,000 for Year 2000 compliance. Both
direct and indirect costs of addressing the Year 2000 Problem will be
charged to earnings as incurred. The Bank 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 Bank's systems
rely will be timely converted, or that a failure to convert by another
company or a conversion that is incompatible with the Bank's systems, would
not have material adverse effect on the Bank. Although no independent
analysis of the Bank's potential exposure has been obtained, the Bank
believes it has no exposure to contingencies related to the Year 2000
Problem for the products it has sold. The Bank's network consultant, EOS
Systems, Inc., has examined the hardware and software used by the Bank and
has certified that such hardware and software is Year 2000 compliant.
The costs of the project and the date on which the Bank 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 Bank has not
developed a contingency plan which would be implemented in the unlikely
event that it is not Year 2000 compliant. The Bank will continue to closely
monitor the progress of its Year 2000 compliance plan and will determine by
December 31, 1998 if the need for a contingency plan exists.
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying footnotes have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars
without consideration for changes in the relative purchasing power of money
over time due to inflation. The assets and liabilities of the Bank are
primarily monetary in nature and changes in market interest rates have a
greater impact on the Bank's performance than do the effects of inflation.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of Revere Federal Savings and
Loan Association and subsidiary are included in pages F-1 through F-18 of
this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK AND THE COMPANY
MANAGEMENT
The Board of Directors of the Bank is divided into three groups, each
of which contains approximately one-third of the Board. The directors are
elected for staggered three-year terms, or until their successors are
elected and qualified. One group of directors, consisting of Messrs.
Todisco, Verrengia, and Mattuchio has a term of office expiring at the first
annual meeting of stockholders; a second group, consisting of Messrs.
McCarthy, Becker, and O'Brien, has a term of office expiring at the second
annual meeting of stockholders; and a third group, consisting of Messrs.
Bommer, Conte, and Charles has a term of office expiring at the third annual
meeting of stockholders.
Directors
The following table sets forth certain information regarding the Board
of Directors of the Bank in its mutual form who will initially serve on the
Board of Directors of the Bank in its stock form and on the Board of
Directors of the Stock Company.
<TABLE>
<CAPTION>
Current
Director Term
Directors Age(1) Position Since Expires
- --------- ------ -------- ------- -------
<S> <C> <C> <C> <C>
Ernest F. Becker 68 Vice-Chairman 1977 2001
and Director
Arno P. Bommer 71 Chairman of the Board 1955 2001
and Director
Theodore E. Charles 55 Director 1997 2000
Anthony R. Conte 50 Director 1988 2001
Carmen R. Mattuchio 60 Director 1994 1999
James J. McCarthy 37 President, Chief Executive 1989 2000
Officer and Director
J. Michael O'Brien 45 Director 1997 2000
Angelo A. Todisco 69 Director 1980 1999
John J. Verrengia 42 Director 1994 1999
<FN>
<F1> At December 1, 1998.
</FN>
</TABLE>
Biographical Information
The following information relates to the directors and executive
officers of the Bank. Unless otherwise indicated, each director and
executive officer has held his current occupation for the last five years.
Ernest F. Becker has been a director of the Bank since 1977. Mr.
Becker, a licensed engineer, served as Chief Engineer, Vice President and
President of Whitmore Company, an engineering company located in Revere,
Massachusetts, from 1952 until his retirement in 1996.
Arno P. Bommer has served on the Board of Directors of the Bank since
1955. He was elected to the position of Chairman of the Bank's Board of
Directors in 1978. Mr. Bommer is a consultant to both the Massachusetts
Dental Service Corporation and the Division of Medical Assistance of the
Commonwealth of Massachusetts. He is also a partner in Fanuiel Associates,
which provides dental office reviews throughout the Commonwealth of
Massachusetts. Mr. Bommer is a also a licensed dentist and had a private
practice in Revere, Massachusetts before his retirement in 1996.
Theodore E. Charles has been a director of the Bank since 1996. Mr.
Charles is the Chairman of the Board and Chief Executive Officer of
Investors Capital Holdings which is located in Lynnfield, Massachusetts. As
Chairman and Chief Executive Officer of Investors Capital Holdings, Mr.
Charles is responsible for supervising the brokerage and investment services
provided by its affiliates, Investors Capital Corporation, a brokerage
concern registered with the National Association of Securities Dealers and
Eastern Point Advisors, registered investment advisors.
Anthony R. Conte was elected to the Bank's Board of Directors in 1988.
Mr. Conte has been a practicing attorney since 1974. He is presently the
Regional Solicitor for the U.S. Department of the Interior, Northeast
Region.
Carmen R. Mattuchio has served on the Board of Directors of the Bank
since 1994. Mr. Mattuchio is the owner of Burnett & Moynihan, Inc., a
building materials supplier, located in Revere, Massachusetts. Mr. Mattuchio
has been self-employed by Burnett & Moynihan for the past 20 years.
James J. McCarthy joined the Bank in 1985 and has served as President
and Chief Executive Officer of the Bank since 1989. He has also served as a
director of the Bank since 1989. Prior to joining the Bank, Mr. McCarthy, a
CPA, was employed by the predecessor to Ernst & Young, Boston,
Massachusetts, serving in a variety of audit functions. Mr. McCarthy has
also been employed by Pell Rudman & Company, a Broker Dealer/Investment
Advisor firm as a consultant with respect to accounting and reporting to the
NASD. Mr. McCarthy is on the Board of Directors of the Massachusetts Bankers
Association and is involved in many local Revere charities and business
organizations including the Revere Chamber of Commerce, Revere Rotary and
the Revere Partnership for Economic Development. Mr. McCarthy also served as
the Executive Committee Chairman of the Massachusetts Thrift Fund for
Economic Development until its dissolution in 1997.
J. Michael O'Brien has been a director of the Bank since 1997. He is
the President, Chief Executive Officer and a principal of Eagle Air Freight,
a domestic air freight provider, founded in 1981 and based in Chelsea,
Massachusetts. Mr. O'Brien is also the trustee and a principal of O'Brien
Realty Trust. O'Brien Realty Trust owns and leases warehouse and commercial
office space in Chelsea, Massachusetts.
Angelo A. Todisco was elected to the Board of Directors of the Bank in
1980. Mr. Todisco is a retired licensed public adjuster and serves as
President of DePiano & Todisco Adjusters, Inc. which appraises damages to
residential and commercial properties on behalf of its clients in connection
with the settlement of insurance claims.
John J. Verrengia has served on the Board of Directors of the Bank
since 1994. Mr. Verrengia is a certified public accountant and is currently
self-employed as principal accountant of John J. Verrengia, CPA, a
professional corporation. Mr. Verrengia is also a registered investment
advisor and provides financial and investment advice to clients through
Anchor Investments, a consulting firm which he founded in 1992.
Executive Officers Who are Not Directors
Anthony J. Patti, age 43, has been the Executive Vice President and
Chief Financial Officer of the Bank since 1992. He is responsible for the
financial, lending operations, information systems, customer service and
marketing functions of the Bank on a day-to-day basis. Prior to joining the
Bank, Mr. Patti served as an Operations Specialist for the Resolution Trust
Corporation. Mr. Patti has also been employed by Home Owners Savings Bank,
F.S.B., located in Boston, Massachusetts where he served as a First Vice
President and Controller and by Andover Savings Bank, Andover,
Massachusetts, where he served as Comptroller.
Judith E. Tenaglia, age 46, has been employed by the Bank for 21 years
and has been Treasurer of the Bank since 1991. Prior to becoming the Bank's
Treasurer, Ms. Tenaglia worked in the customer service department of the
Bank.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that the Company's
directors, executive officers, and any person holding more than ten percent
of the Company's Common Stock file with the SEC reports of ownership
changes, and that such individuals furnish the Company with copies of the
reports.
Based solely on its review of the copies of such forms received by it,
or written representations from certain reporting persons, the Company
believes that all of our executive officers and directors complied with all
Section 16(a) filing requirements applicable to them.
ITEM 10. EXECUTIVE COMPENSATION
Directors' Compensation
Fee Arrangements. Members of the Board of Directors of the Bank
receive a fee of $275 for attendance at each of the twelve regularly
scheduled meetings of the Board of Directors with the Chairman and Vice-
Chairman receiving $300 for each meeting attended. The directors also
receive fees ranging from $25 to $50 per month for each committee meeting
attended. The aggregate amount of directors' fees paid during fiscal 1998
totaled $22,575 and the aggregate amount of committee fees totaled $4,400.
The members of the Board of Directors of the Stock Company will not receive
compensation for their services on such Board but will participate in the
Option and Restricted Stock Programs expected to be implemented by the
Company for directors, officers, executives and key employees at a future
date.
Executive Compensation
Compensation Decisions. Decisions regarding the compensation of the
Company's executives will be determined by the members of the Compensation
Committee. However, because directors employed by the Company who are
appointed to serve on the Compensation Committee will not be permitted to
make decisions with respect to the compensation and benefits payable to
executives of Company, no interlocks will exist between members of the
Compensation Committee and the employees of the Company.
Cash Compensation. The following table sets forth the cash
compensation paid by the Bank for services rendered in all capacities during
the fiscal year ended September 30, 1998 to the Chief Executive Officer of
the Bank and all other executive officers of the Bank who received
compensation in excess of $100,000 (each, a "Named Executive Officer")
during such fiscal year.
<TABLE>
<CAPTION>
Annual Compensation (1)
--------------------------------------------------------------------------
Name and Other Annual Long-term All Other
Principal Fiscal Compensation Incentive Plan Compensation
Position Year Salary ($) Bonus ($) ($)(2) Payouts (3) ($)(4)
--------- ------ ---------- --------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
James J. McCarthy, 1998 123,414 8,885 5,000
President and Chief 1997 105,000 4,039 --- --- 4,750
Executive Officer
Anthony J. Patti, 1998 98,846 7,480 5,000
Executive Vice President 1997 88,475 3,400 --- --- 4,750
and Chief Financial Officer
<FN>
<F1> Under Annual Compensation, the column titled "Salary" includes the
Named Executive Officer's base salary including all payroll deductions
for health insurance under the Bank's health insurance plan and pre-
tax contributions to the Bank's 401(k) Plan.
<F2> For the fiscal year ended September 30, 1998, there were no: (a)
perquisites with an aggregate value for each Named Executive Officer
in excess of the lesser of $50,000 or 10% of the total of the
individual's salary and bonus for the year; (b) payments of above-
market preferential earnings on deferred compensation; (c) payments of
earnings with respect to long-term incentive plans prior to settlement
or maturation; or (d) preferential discounts on stock.
<F3> During the fiscal year ended September 30, 1998, the Bank did not
maintain any stock option, restricted stock or other long-term
incentive compensation plans.
<F4> Reflects matching contributions made by the Bank under the 401(k)
Plan.
</FN>
</TABLE>
Employment Agreements
Effective upon the Reorganization, the Bank, subject to non-objection
from the OTS, entered into separate Employment Agreements with each of Mr.
McCarthy, Mr. Patti and Ms. Tenaglia ("Senior Executive(s)"). The Employment
Agreements provide for initial terms of three years, in the case of Messrs.
McCarthy and Patti and two years in the case of Ms. Tenaglia. Commencing on
the first anniversary of the effective date of each Employment Agreement,
and continuing on each anniversary date thereafter, the Senior Executive's
Agreement may be extended, after review by the Bank's Board of Directors,
for an additional one-year period, so that the remaining term will be three
years, in the case of Messrs. McCarthy and Patti and two years, in the case
of Ms. Tenaglia. If the Senior Executive's Employment Agreement is not
renewed, the Agreement will expire in accordance with its terms. The current
base salaries for Mr. McCarthy, Mr. Patti and Ms. Tenaglia are $156,800,
$110,000, and $60,000, respectively. The Employment Agreements provide for
each Senior Executive's base salary to be reviewed annually and it is
anticipated that each Senior Executive's base salary will be increased on
the basis of his or her job performance and the overall performance of the
Bank. In addition to base salary, each Employment Agreement provides for,
among other things, participation in stock, retirement and welfare benefit
plans and eligibility for fringe benefits applicable to executive personnel
such as fees for club and organization membership deemed appropriate by the
Bank and the Senior Executive. The Agreements provide for the termination of
the Senior Executive by the Bank for "cause" as defined in the Agreement at
any time during the term. In the event the Bank terminates a Senior
Executive's employment for reasons other than for "cause," or in the event
of the Executive's resignation from the Bank upon (i) failure to re-appoint,
elect or re-elect the executive to his or her current offices; (ii) a
material change in the Senior Executive's functions, duties or
responsibilities, or relocation of the Senior Executive's principal place of
employment by more than 30 miles; (iii) a "change in control" of the Bank
(as defined below) such as its liquidation or dissolution; or (iv) a breach
of the agreement by the Bank, the Senior Executive, or in the event of
death, his or her beneficiary would be entitled to a lump sum cash payment
in an amount equal to the remaining base salary due to the Senior Executive
at the time of termination that would have been payable during the remaining
term of the Executive's Employment Agreement. In addition, the Employment
Agreement for Mr. McCarthy provides for him to receive, as additional
severance, the highest cash bonus and the additional contributions or
benefits that he would have earned or accrued under any employee benefit
plans of the Bank or the Stock Company during the remaining unexpired term
of his Employment Agreement. As additional severance, all of the Employment
Agreements provide for the Bank to continue the Senior Executive's life,
health, dental and disability coverage for the remaining term of the
Executive's Employment Agreement.
The Bank's Employment Agreements will have restrictions on the
aggregate dollar amount of compensation and benefits payable to a Senior
Executive in the event of an employment termination following a "change in
control" of the Bank. In general, for purposes of the Employment Agreements
and the plans maintained by the Bank, a "change in control" will be deemed
to occur when a person or group of persons acting in concert acquires
beneficial ownership of 25% or more of any class of equity security, such as
Common Stock of the Bank, or in the event of a tender offer, exchange offer,
merger or other form of business combination, sale of assets or contested
election of directors which results in a "change in control" of the majority
of the Board of Directors of the Bank.
If the total cash and benefits paid to a Senior Executive under an
Employment Agreement together with payments under other benefit plans
following a "change in control" constitutes an "excess parachute payment"
under section 280G of the Internal Revenue Code of 1986 (the "Code"), the
compensation payable to the Senior Executive would be reduced (but not below
zero) to avoid the assessment of excise taxes on such excess parachute
payments.
Benefits
Pension Plan. The Bank maintains a tax-qualified defined benefit plan
through the Financial Institutions Retirement Fund ("Pension Plan"). An
employee of the Bank who has attained age 21 and completed at least one year
of service with the Bank will be eligible to participate and accrue benefits
under the Plan. The Pension Plan provides an annual pension benefit for
each participant, including the Named Executive Officers, equal to 2.25% of
the participant's "average annual salary" multiplied by the participant's
years of benefit service, up to a maximum of 30 years. The Pension Plan
defines "average annual salary" to mean the average of a participant's
salary over a five year period of employment with the Bank during which the
participant's salary was the highest. A participant will become fully vested
in the benefits that have accrued for him under the Pension Plan after
completion of five years of service with the Bank. The Pension Plan provides
for benefits to be paid in a straight life or joint and survivor annuity;
however, optional forms of benefits payment, such as lump sum distributions,
are also available under the Plan.
The Bank makes annual contributions to the Pension Plan in an amount
necessary to satisfy the actuarially determined minimum funding requirements
of the Code and the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). The assets of the Pension Plan are held in a separate
trust established by the Financial Institutions Retirement Fund.
Pension Plan Table. The following table sets forth the estimated
annual benefits payable under the Pension Plan upon a participant's normal
retirement at age 65, expressed in the form of a single life annuity and for
the average annual salary and years of credited service specified therein.
The annual benefits shown in the table assume the participant would receive
his retirement benefits under the Pension Plan in the form of a straight
life annuity, upon normal retirement, at age 65. The benefits provided under
the Pension Plan are not integrated with federal Social Security retirement
benefits. Pursuant to the terms of the Pension Plan, no more than a maximum
of 30 years of service may be recognized for benefit accrual purposes.
<TABLE>
<CAPTION>
Years of Service and Benefit Payable at Retirement
Average --------------------------------------------------
Annual Salary 15 20 25 30
- ------------- -- -- -- --
<S> <C> <C> <C> <C>
$ 50,000 $16,900 $22,500 $28,100 $ 33,800
$ 75,000 $25,300 $33,800 $42,200 $ 50,600
$100,000 $33,800 $45,000 $56,300 $ 67,500
$125,000 $42,200 $56,300 $70,300 $ 84,400
$150,000 $50,600 $67,500 $84,400 $101,300
</TABLE>
As of September 30, 1998, Mr. McCarthy had 12 years of credited
service and Mr. Patti had 5 years and 7 months of credited service
for benefit accrual purposes under the Pension Plan.
401(k) Plan. The Bank also maintains a tax-qualified 401(k) defined
contribution plan through the Financial Institutions Thrift Fund ("401(k)
Plan"). Generally, any employee of the Bank who has attained age 21 and
completed at least one year of service will be eligible to participate in
the 401(k) Plan and make pre-tax deferrals from 1% to 15% of his annual
compensation, subject to limitations of the Code (for 1997, the annual limit
was $9,500; this limit was increased to $10,000 for 1998). The Bank makes
matching contributions of 50%, up to a maximum of 10% of the participant's
salary each year. Employees are always 100% fully vested in their pre-tax
deferrals and matching contributions made by the Bank.
In connection with the Reorganization, the Bank also amended the
401(k) Plan to permit employer matching contributions to be made in shares
of Common Stock or cash, at the discretion of the Bank. In addition, the
Bank intends to amend the 401(k) Plan to establish an employer stock fund in
order to allow participants to invest their 401(k) Plan account balances in
shares of Common Stock in addition to the other investment alternatives
available under the 401(k) Plan. The assets of the employer stock fund will
be held by an independent corporate trustee to be appointed for the 401(k)
Plan and allocated to the accounts of individual participants. Participants
will control the exercise of voting and tender rights relating to the shares
of Common Stock held in their accounts in the 401(k) Plan. The Common Stock
held by the 401(k) Plan employer stock fund may be newly issued or treasury
shares acquired from the Company or outstanding shares purchased in the open
market or in privately negotiated transactions.
Employee Stock Ownership Plan and Trust. The Company implemented a
tax-qualified employee stock ownership plan ("ESOP") in connection with the
Reorganization. Employees with at least one year of employment with the Bank
and who have attained age 21 will be eligible to participate. As part of the
Reorganization, the ESOP borrowed funds from the Company and to used those
funds to purchase a number of shares equal to up to 8% of the Common Stock d
sold in the Offering. Collateral for the loan is the Common Stock purchased
by the ESOP. The loan will be repaid principally from the Bank's
contributions to the ESOP over a period of not less than ten years. It is
anticipated that the interest rate for the loan will be 8%.
Shares purchased by the ESOP will be held in a suspense account
pending allocation among eligible participants on an annual basis as the
loan is repaid. The ESOP will provide for the shares held in the suspense
account to be released in an amount proportional to the repayment of the
ESOP loan and will be allocated among ESOP participants on the basis of
compensation in the year of allocation. Participants in the ESOP will
receive credit for service prior to the effective date of the ESOP. A
participant will become 100% vested in his benefits after five years of
service with the Bank or upon normal retirement (as defined in the ESOP),
disability or death. A participant who terminates employment for reasons
other than death, retirement, or disability prior to completing five years
of service with the Bank will forfeit his ESOP benefits. Benefits will be
payable in the form of Common Stock and/or cash upon death, retirement,
disability or separation from service. The Bank's contributions to the ESOP
will be subject to the loan terms and federal income tax law limits, and,
therefore, the aggregate dollar amount of the benefits payable under the
ESOP cannot be estimated at this time.
In connection with the establishment of the ESOP, the Stock Company
will establish a committee of nonemployee directors to administer the ESOP;
it will also appoint an independent corporate trustee for the ESOP trust.
The ESOP trustee, subject to its fiduciary duty, will be required to vote
all allocated shares held in the ESOP in accordance with the instructions of
participating employees. Under the ESOP, nondirected shares, and shares held
in the suspense account, will be voted in a manner calculated to most
accurately reflect the instructions the ESOP trustee has received from
participants regarding the allocated stock so long as such vote is in
accordance with the provisions of ERISA.
In addition to the provisions described above, the ESOP will also
provide for certain actions to occur upon a "change in control" of the Stock
Company or the Bank. The ESOP will provide that, if such "change in control"
occurs, the ESOP trustee will be directed to sell the shares of Common Stock
held in the ESOP's suspense account and to use the proceeds to repay the
outstanding ESOP loan. Following this action, the ESOP will provide for each
eligible participant to receive a final allocation of the shares of Common
Stock, or the proceeds received from the sale of such Stock, held in the
ESOP's trust. Once the final allocation of shares has been completed, the
ESOP will provide for the automatic termination of the plan to occur and for
final distributions of account balances to be made to participants and
beneficiaries. Upon such "change in control," all ESOP participants would
automatically become 100% vested in their ESOP account balances.
Benefit Restoration Plan. In connection with the Reorganization, the Company
also intends to adopt the Benefit Restoration Plan of RFS Bancorp, Inc.
("BRP"). This Plan will provide eligible employees with the benefits that
would otherwise be due to them as participants in the Pension Plan, the
401(k) Plan and the ESOP if such benefits were not limited under the Code.
The Company intends to establish an irrevocable "grantor trust" to
hold the assets of the BRP. This trust would be funded with contributions of
the Company to be made from time to time for the purpose of providing the
benefits under the BRP. The assets of the trust are considered to be part of
the general assets of the Company and will be subject to the claims of its
general creditors. Earnings on the trust's assets will be taxable to the
Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders of the Company
The following table contains stockholder information for persons known
to the Company to "beneficially own" 5% or more of the Company's common
stock as of December 21, 1998, the date of the Reorganization. In general,
beneficial ownership includes those shares that a person has the power to
vote, sell, or otherwise dispose. Beneficial ownership also includes that
number of shares which an individual has the right to acquire within 60 days
(such as stock options). Two or more persons may be considered the
beneficial owner of the same share. We obtained the information provided in
the following table from filings with the Securities and Exchange Commission
(the "SEC") and with the Company. In this Annual Report on Form 10-KSB,
"voting power" is the power to vote or direct the voting of shares, and
"investment power" includes the power to dispose or direct the disposition
of shares.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Ownership Percent
- -------------- ------------------- -------------------- -------
<S> <C> <C> <C>
Common Stock, $.01 par value RFS Bancorp, Inc. Employee 35,101 8.0%
Stock Ownership Plan Trust
Marine Midland Bank
140 Broadway
New York, NY 10005
<FN>
<F1> The RFS Bancorp, Inc. Employee Stock Ownership Plan ("ESOP") is
administered by the compensation committee of the Company's Board of
Directors (the "Compensation Committee"). The ESOP's assets are held
in a trust (the "ESOP Trust"), for which Marine Midland Bank, serves
as trustee (the "ESOP Trustee"). The ESOP Trust purchased these shares
with funds borrowed from the Company, initially placed these shares in
a suspense account for future allocation and intends to allocate them
to employees participating in the ESOP over a period of years as its
acquisition debt is retired. The ESOP Trustee is the beneficial owner
of the shares held in the ESOP Trust. The terms of the ESOP Trust
Agreement provide that, subject to the ESOP Trustee's fiduciary
responsibilities under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), the ESOP Trustee will vote, tender or
exchange shares of Common Stock held in the ESOP Trust allocated to
participants' accounts in accordance with instructions received from
the participants. However, since annual allocations under the ESOP
will occur on December 31, as of December 21, 1998, no shares of
Common Stock held by the ESOP Trust have been allocated to eligible
participants. Because no shares have been allocated to the ESOP
participants as of the record date, the ESOP Trustee will vote the
shares of Common Stock held in the ESOP Trust in the best interests of
its participants and beneficiaries and consistent with its fiduciary
duties in accordance with ERISA. The Compensation Committee generally
has sole investment power, but no voting power over the Common Stock
held in the ESOP Trust.
</FN>
</TABLE>
Security Ownership of Management
The following table shows the Company's common stock beneficially
owned by each director and executive officer, and all directors and
executive officers of the Company as a group, as of December 21, 1998, the
date of the Company's stock began trading. Except as otherwise indicated,
each person and each group shown in the table has sole voting and investment
power with respect to the shares of common stock listed next to their name.
<TABLE>
<CAPTION>
Amount and Nature Percent of
Position with of Beneficial Common Stock
Name the Company(1) Ownership(2) Outstanding
---- -------------- ----------------- ------------
<S> <C> <C> <C>
Ernest F. Becker Vice- Chairman and Director 1,000 .23%
Arno P. Bommer Chairman of the Board 10,500 2.39
and Director
Theodore E. Charles Director 15,000 3.42
Carmen R. Matthuchio Director 15,000 3.42
James J. McCarthy President, Chief Executive 15,000 3.42
Officer and Director
J. Michael O'Brien Director 1,000 .23
Angelo A. Todisco Director 2,000 .46
John J. Verrengia Director 6,942 1.58
All directors and
executive officers as
a group (10 persons) 82,511 18.81%
<FN>
<F1> Titles are for both the Company and the Bank.
<F2> See "Principal Stockholders of the Company" for a definition of
"beneficial ownership."
</FN>
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Bank has made loans or extended credit to executive officers and
directors and also to certain persons related to executive officers and
directors. All such loans were made by the Bank in the ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
the general public, nor did they involve more than the normal risk of
collectibility or present other unfavorable features. The outstanding
principal balance of such loans to directors, executive officers and their
associates totaled $43,000 or 0.66% of the Bank's total equity at September
30, 1998.
The Company intends that all transactions in the future between the
Company and its executive officers, directors, holders of 10% or more of the
shares of any class of its common stock and affiliates thereof, will contain
terms no less favorable to the Company than could have been obtained by it
in arm's-length negotiations with unaffiliated persons and will be approved
by a majority of independent outside directors of the Company not having any
interest in the transaction.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits. The following exhibits are either filed as part of this report or
are incorporated herein by reference:
2.1 Plan of Reorganization from Mutual Savings Bank to Mutual Holding
Company and Stock Issuance Plan of Revere Federal Savings*
3.1 Federal Stock Charter of RFS Bancorp, Inc.*
3.2 Bylaws of RFS Bancorp, Inc.*
3.3 Federal Stock Charter of Revere Federal Savings Bank*
3.4 Bylaws of Revere Federal Savings Bank*
3.5 Federal Stock Charter of Revere, M.H.C.*
0.03 Bylaws of Revere, M.H.C.
4.1 Federal Stock Charter of RFS Bancorp, Inc. (See Exhibit 3.1)
4.2 Bylaws of RFS Bancorp, Inc. (See Exhibit 3.2)
4.3 Form of Stock Certificate of RFS Bancorp, Inc.*
10.1(a) Form of Employee Stock Ownership Plan of RFS Bancorp, Inc.*
10.1(b) Form of ESOP Trust Agreement*
10.2 Form of Executive Employment Agreement, by and between James J.
McCarthy and Revere Federal Savings*
10.3 Form of Executive Employment Agreement, by and between Anthony J.
Patti and Revere Federal Savings*
10.4 Form of Executive Employment Agreement, by and between Judith
Tenaglia and Revere Federal Savings*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Shatswell MacLeod & Company, P.C.
27.1 Financial Data Schedule (only filed in electronic format)
(1) Incorporated herein by reference Registration Statement on Form SB-2
(Registration No. 333-63083), as filed with the Securities and
Exchange Commission on September 9, 1998, as amended.
* Filed in electronic format only.
a. Reports on Form 8-K.
None.
This Form 10-KSB contains certain forward looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of the Bank and the Company that are subject to
various factors which could cause actual results to differ materially from
these estimates. These factors include: changes in general, economic and
market conditions, or the development of an adverse interest rate
environment that adversely affects the interest rate spread or other income
anticipated from the Bank's or the Company's operations and investments.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RFS BANCORP, INC.
By: /s/ James J. McCarthy
--------------------------------
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ James J. McCarthy Director, President and Chief December 28, 1998
- ------------------------ Executive Officer
James J. McCarthy (Principal executive officer)
/s/ Arno P. Bommer Chairman December 28, 1998
- ------------------------
Arno P. Bommer
/s/ Ernest F. Becker Vice Chairman December 28, 1998
- ------------------------
Ernest F. Becker
/s/ John J. Verrengia Director December 28, 1998
- ------------------------
John J. Verrengia
/s/ Angelo A. Todisco Director December 28, 1998
- ------------------------
Angelo A. Todisco
/s/ Anthony R. Conte Director December 28, 1998
- ------------------------
Anthony R. Conte
/s/ Carmen R. Mattuchio Director December 28, 1998
- ------------------------
Carmen R. Mattuchio
/s/ J. Michael O'Brien Director December 28, 1998
- ------------------------
J. Michael O'Brien
/s/ Theodore E. Charles Director December 28, 1998
- ------------------------
Theodore E. Charles
/s/ Anthony J. Patti Chief Financial Officer December 28, 1998
- ------------------------ (Principal Accounting Officer)
Anthony J. Patti
The Board of Directors
Revere Federal Savings and Loan Association
Revere, Massachusetts
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of Revere
Federal Savings and Loan Association and Subsidiary as of September 30, 1998
and 1997 and the related consolidated statements of income, changes in
equity and cash flows for each of the years in the three-year period ended
September 30, 1998. These consolidated financial statements are the
responsibility of the Association's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Revere Federal Savings and Loan Association and Subsidiary as of
September 30, 1998 and 1997 and the consolidated results of their operations
and their cash flows for each of the years in the three-year period ended
September 30, 1998, in conformity with generally accepted accounting
principles.
SHATSWELL, MacLEOD & COMPANY, P.C.
October 22, 1998
REVERE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
</TABLE>
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 602,672 $ 558,622
Interest bearing demand deposits with other banks 591,751 27,641
Federal Home Loan Bank overnight deposits 6,735,368 1,245,359
----------------------------
Cash and cash equivalents 7,929,791 1,831,622
Investments in available-for-sale securities (at
fair value) 895,820 636,380
Investments in held-to-maturity securities (fair
values of $30,646,458 as of September 30, 1998
and $40,507,431 as of September 30, 1997) 30,109,583 40,153,278
Federal Home Loan Bank stock, at cost 1,517,000 1,405,400
Loans held for sale 235,000
Loans, net 46,617,125 41,175,133
Premises and equipment, net of depreciation and
amortization 1,251,817 951,887
Accrued interest receivable 519,345 702,142
Other assets 392,577 64,169
----------------------------
Total assets $89,468,058 $86,920,011
============================
LIABILITIES AND EQUITY
Demand deposits $ 2,822,689 $ 1,983,174
NOW accounts and MMDA deposits 7,228,443 4,592,525
Savings deposits 16,825,183 14,158,572
Time deposits 37,607,396 34,718,003
----------------------------
Total deposits 64,483,711 55,452,274
Advances from Federal Home Loan Bank of Boston 18,204,150 25,104,420
Other liabilities 296,091 324,090
----------------------------
Total liabilities 82,983,952 80,880,784
----------------------------
Equity:
Retained earnings 5,971,404 5,680,732
Net unrealized holding gain on available-for-sale
securities, net of taxes 512,702 358,495
----------------------------
Total equity 6,484,106 6,039,227
----------------------------
Total liabilities and equity $89,468,058 $86,920,011
============================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
REVERE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $3,872,606 $3,026,756 $2,362,623
Interest and dividends on securities:
Taxable interest and dividends 2,473,406 3,067,872 2,690,400
Other interest 297,287 85,681 57,446
------------------------------------------
Total interest and dividend income 6,643,299 6,180,309 5,110,469
------------------------------------------
Interest expense:
Interest on deposits:
Savings deposits 176,506 142,775 146,342
NOW accounts and MMDA deposits 97,297 57,583 28,965
Time deposits 2,018,340 1,858,330 1,794,423
Interest on advances from Federal Home
Loan Bank 1,311,990 1,526,633 1,048,212
------------------------------------------
Total interest expense 3,604,133 3,585,321 3,017,942
------------------------------------------
Net interest and dividend income 3,039,166 2,594,988 2,092,527
Provision for loan losses 197,000 60,000 148,500
------------------------------------------
Net interest and dividend income
after provision for loan losses 2,842,166 2,534,988 1,944,027
------------------------------------------
Other income:
Service charges on deposit accounts 134,348 93,483 51,512
Other income 20,662 22,982 15,131
------------------------------------------
Total other income 155,010 116,465 66,643
------------------------------------------
Other expense:
Salaries and employee benefits 1,217,490 919,443 752,042
Occupancy expense 154,995 114,788 111,220
Equipment expense 149,015 117,626 114,763
FDIC insurance 37,112 46,558 400,235
Advertising expense 125,356 45,000 125,618
Office supplies expense 97,918 59,188 49,304
Data processing expense 157,787 107,801 78,011
Professional fees 212,683 122,084 90,511
Other expense 380,724 355,318 168,980
------------------------------------------
Total other expense 2,533,080 1,887,806 1,890,684
------------------------------------------
Income before income taxes 464,096 763,647 119,986
Income taxes 173,424 287,245 25,579
------------------------------------------
Net income $ 290,672 $ 476,402 $ 94,407
==========================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
REVERE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Net Unrealized
Holding Gain on
Retained Available-for-
Earnings Sale Securities Total
-------- --------------- -----
<S> <C> <C> <C>
Balance, September 30, 1995 $5,109,923 $167,376 $5,277,299
Net income 94,407 94,407
Net change in unrealized holding gain on
available-for-sale securities 75,494 75,494
-------------------------------------------
Balance, September 30, 1996 5,204,330 242,870 5,447,200
Net income 476,402 476,402
Net change in unrealized holding gain on
available-for-sale securities 115,625 115,625
-------------------------------------------
Balance, September 30, 1997 5,680,732 358,495 6,039,227
Net income 290,672 290,672
Net change in unrealized holding gain on
available-for-sale securities 154,207 154,207
-------------------------------------------
Balance, September 30, 1998 $5,971,404 $512,702 $6,484,106
===========================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
REVERE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 290,672 $ 476,402 $ 94,407
Adjustments to reconcile net income to
net cash provided by operating activities:
Loss on sales of loans, net 10,757 13,778 12,878
Amortization, net of accretion of securities 39,381 70,247 132,045
Forfeited deposit on fixed assets 1,000
Depreciation and amortization 156,451 126,211 121,791
Provision for loan losses 197,000 60,000 148,500
Deferred tax expense (benefit) (67,823) 7,141 10,959
Increase (decrease) in taxes payable (169,810) 340,347 (318,177)
(Increase) decrease in interest receivable 182,797 (137,984) (71,816)
Increase (decrease) in interest payable (2,786) 848 (158,427)
Increase (decrease) in accrued expenses 40,280 (359,865) 249,568
(Increase) decrease in prepaid expenses (252,461) 22,218 (19,326)
(Increase) decrease in other assets (1,018) 36,801 17,245
Increase (decrease) in other liabilities (8,022) (89,939) 103,937
Net increase in loans held-for-sale (235,000)
Change in deferred loan origination fees, net (12,881) 212 43,213
------------------------------------------------
Net cash provided by operating activities 167,537 567,417 366,797
------------------------------------------------
Cash flows from investing activities:
Purchases of Federal Home Loan Bank stock (111,600) (627,700)
Purchases of held-to-maturity securities (5,499,960) (11,315,230) (8,591,714)
Proceeds from maturities of held-to-maturity securities 15,504,274 11,771,428 9,521,918
Net increase in loans (14,045,546) (10,999,729) (15,388,342)
Proceeds from sales of loans 8,408,678 2,796,711 3,411,133
Capital expenditures (456,381) (230,446) (96,842)
------------------------------------------------
Net cash provided by (used in) investing activities 3,799,465 (7,977,266) (11,771,547)
------------------------------------------------
Cash flows from financing activities:
Net increase in demand deposits,
savings and NOW accounts 6,142,044 2,481,759 706,647
Net increase in time deposits 2,889,393 3,577,158 454,594
Advances from FHLB 12,500,000 31,100,000 12,871,000
Repayments of advances from FHLB (19,400,270) (28,707,535) (3,976,703)
------------------------------------------------
Net cash provided by financing activities 2,131,167 8,451,382 10,055,538
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,098,169 1,041,533 (1,349,212)
Cash and cash equivalents at beginning of period 1,831,622 790,089 2,139,301
------------------------------------------------
Cash and cash equivalents at end of period $ 7,929,791 $ 1,831,622 $ 790,089
================================================
Supplemental disclosures:
Interest paid $ 3,606,919 $ 3,584,473 $ 3,176,369
Income taxes (received) paid 411,057 (60,243) 332,797
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
REVERE FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 1998, 1997 and 1996
NOTE 1 - NATURE OF OPERATIONS
Revere Federal Savings and Loan Association (Association) is a federally
chartered mutual savings and loan association which was incorporated in 1901
and is headquartered in Revere, Massachusetts. The Association is engaged
principally in the business of attracting deposits from the general public
and investing those deposits in residential and real estate loans, and in
consumer and small business loans.
NOTE 2 - ACCOUNTING POLICIES
The accounting and reporting policies of the Association and Subsidiary
conform to generally accepted accounting principles and predominant
practices within the savings institution industry. The consolidated
financial statements were prepared using the accrual method of accounting.
The significant accounting policies are summarized below to assist the
reader in better understanding the consolidated financial statements and
other data contained herein.
PERVASIVENESS OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Association and its wholly-owned subsidiary, RFS Investment
Corporation. RFS Investment Corporation, an active security
corporation, was established solely for the purpose of acquiring and
holding investments which are permissible for banks to hold under
Massachusetts law. All significant intercompany accounts and
transactions have been eliminated in the consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, cash items, due from banks and Federal Home Loan
Bank overnight deposits.
SECURITIES:
Investments in debt securities are adjusted for amortization of
premiums and accretion of discounts. Gains or losses on sales of
investment securities are computed on a specific identification basis.
At the time of purchase the Association classifies debt and equity
securities into one of three categories: held-to-maturity, available-
for-sale, or trading. In general, securities may be classified as
held-to-maturity only if the Association has the positive intent and
ability to hold them to maturity. Trading securities are defined as
those bought and held principally for the purpose of selling them in
the near term. All other securities must be classified as available-
for-sale.
-- Held-to-maturity securities are measured at amortized cost in
the balance sheet. Unrealized holding gains and losses are not
included in earnings or in a separate component of capital.
They are merely disclosed in the notes to the consolidated
financial statements.
-- Available-for-sale securities are carried at fair value on the
balance sheet. Unrealized holding gains and losses are not
included in earnings, but are reported as a net amount (less
expected tax) in a separate component of capital until realized.
-- Trading securities are carried at fair value on the balance
sheet. Unrealized holding gains and losses for trading
securities are included in earnings.
LOANS HELD-FOR-SALE:
Loans held-for-sale are carried at the lower of cost or estimated
market value in the aggregate. Net unrealized losses are recognized
through a valuation allowance by charges to income.
LOANS:
Loans receivable that management has the intent and ability to hold
until maturity or payoff are reported at their outstanding principal
balances reduced by amounts due to borrowers on unadvanced loans, any
charge-offs, the allowance for loan losses and any deferred fees or
costs on originated loans, or unamortized premiums or discounts on
purchased loans.
Interest on loans is accrued on outstanding balances on a simple
interest basis.
Loan origination and commitment fees and certain direct origination
costs are deferred, and the net amount amortized as an adjustment of
the related loan's yield. The Association is amortizing these amounts
over the contractual life of the related loans using the interest
method.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized
as interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income
on an impaired loan on a cash basis is appropriate, the amount of
income that is recognized is limited to that which would have been
accrued on the net carrying amount of the loan at the contractual
interest rate. Any cash interest payments received in excess of the
limit and not applied to reduce the net carrying amount of the loan
are recorded as recoveries of charge-offs until the charge-offs are
fully recovered.
ALLOWANCE FOR LOAN LOSSES:
The allowance is increased by provisions charged to current operations
and is decreased by loan losses, net of recoveries. The allowance for
loan losses is established through a provision for loan losses based
on management's evaluation of the risks inherent in its loan portfolio
and the general economy. The allowance for loan losses is maintained
at an amount management considers adequate to cover estimated losses
on loans which are deemed probable and estimable based on information
currently known to management. The allowance is based upon a number
of factors, including current economic conditions, actual loss
experience and industry trends.
As of October 1, 1995, the Association adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by SFAS No. 118. According to SFAS No. 114 a
loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due
according to the contractual terms of the loan agreement. The
Statement requires that impaired loans be measured on a loan by loan
basis by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's
observable market price, or the fair value of the collateral if the
loan is collateral dependent.
The Statement is applicable to all loans, except large groups of
smaller balance homogeneous loans that are collectively evaluated for
impairment, loans that are measured at fair value or at the lower of
cost or fair value, leases, and convertible or nonconvertible
debentures and bonds and other debt securities. The Association
considers its residential real estate loans and consumer loans that
are not individually significant to be large groups of smaller balance
homogeneous loans.
Factors considered by management in determining impairment include
payment status, net worth and collateral value. An insignificant
payment delay or an insignificant shortfall in payment does not in
itself result in the review of a loan for impairment. The Association
applies SFAS No. 114 on a loan-by-loan basis. The Association does not
apply SFAS No. 114 to aggregations of loans that have risk
characteristics in common with other impaired loans. Interest on a
loan is not generally accrued when the loan becomes ninety or more
days overdue. The Association may place a loan on nonaccrual status
but not classify it as impaired, if (i) it is probable that the
Association will collect all amounts due in accordance with the
contractual terms of the loan or (ii) the loan is an individually
insignificant residential mortgage loan or consumer loan. Impaired
loans are charged-off when management believes that the collectibility
of the loan's principal is remote. Substantially all of the
Association's loans that have been identified as impaired have been
measured by the fair value of existing collateral.
The financial statement impact of adopting the provisions of this
Statement was not material.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Cost and related allowances for
depreciation and amortization of premises and equipment retired or
otherwise disposed of are removed from the respective accounts with
any gain or loss included in income or expense. Depreciation and
amortization are calculated principally on the straight-line method
over the estimated useful lives of the asset.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through
foreclosure and properties classified as in-substance foreclosures in
accordance with Financial Accounting Standards Board Statement No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring."
These properties are carried at the lower of cost or estimated fair
value less estimated costs to sell. Any writedown from cost to
estimated fair value required at the time of foreclosure or
classification as in-substance foreclosure is charged to the allowance
for loan losses. Expenses incurred in connection with maintaining
these assets, subsequent writedowns and gains or losses recognized
upon sale are included in other expense.
Beginning on October 1, 1995, in accordance with Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for
Impairment of a Loan," the Association classifies loans as in-
substance repossessed or foreclosed if the Association receives
physical possession of the debtor's assets regardless of whether
formal foreclosure proceedings take place.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," requires that the
Association disclose estimated fair value for its financial
instruments. Fair value methods and assumptions used by the
Association in estimating its fair value disclosures are as follows:
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and federal funds sold approximate those
assets' fair values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its
fair value.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, passbook savings and money
market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificate accounts are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected
monthly maturities on certificate accounts.
Federal Home Loan Bank Advances: Fair values for FHLB advances are
estimated using a discounted cash flow technique that applies interest
rates currently being offered on advances to a schedule of aggregated
expected monthly maturities on FHLB advances.
Off-balance sheet instruments: The fair value of commitments to
originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties.
For fixed-rate loan commitments and the unadvanced portion of loans,
fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of letters of
credit is based on fees currently charged for similar agreements or on
the estimated cost to terminate them or otherwise settle the
obligation with the counterparties at the reporting date.
INCOME TAXES:
The Association recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis
and the tax basis of the Association's assets and liabilities at
enacted tax rates expected to be in effect when the amounts related to
such temporary differences are realized or settled.
NOTE 3 - 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:
<TABLE>
<CAPTION>
Gross
Amortized Unrealized
Cost Holding Fair
Basis Gains Value
--------- ---------- -----
<S> <C> <C> <C>
Available-for-sale securities (1):
September 30, 1998:
Marketable equity securities $23,870 $871,950 $895,820
===================================
September 30, 1997:
Marketable equity securities $23,870 $612,510 $636,380
===================================
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized
Cost Holding Holding Fair
Basis Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Held-to-maturity securities:
September 30, 1998:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations and
agencies $ 4,999,664 $ 30,951 $ $ 5,030,615
Mortgage-backed securities 20,164,151 477,600 2,128 20,639,623
Asset-backed securities 4,945,768 30,452 4,976,220
--------------------------------------------------------
$30,109,583 $539,003 $ 2,128 $30,646,458
========================================================
September 30, 1997:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations and
agencies $ 9,202,078 $ 14,829 $ 10,155 $ 9,206,752
Mortgage-backed securities 25,144,248 452,634 138,681 25,458,201
Asset-backed securities 5,806,952 35,526 5,842,478
--------------------------------------------------------
$40,153,278 $502,989 $148,836 $40,507,431
========================================================
<FN>
- -------------------
<F1> Marketable equity securities consists of common stock issued by
government-sponsored agencies.
</FN>
</TABLE>
Mortgage-backed securities are issued by GNMA, FHLMC or Fannie Mae, and are
backed by fixed-rate mortgages. Asset-backed securities are SBA loan pools.
The scheduled maturities of held-to-maturity securities were as follows as
of September 30, 1998:
<TABLE>
<CAPTION>
Amortized
Cost Fair
Basis Value
--------- -----
<S> <C> <C>
Debt securities other than mortgage-backed and
asset-backed securities:
Due within one year $ 499,664 $ 504,610
Due after five years through ten years 1,500,000 1,510,075
Due after ten years 3,000,000 3,015,930
Mortgage-backed securities 20,164,151 20,639,623
Asset-backed securities 4,945,768 4,976,220
----------------------------
$30,109,583 $30,646,458
============================
</TABLE>
For the years ended September 30, 1998, 1997 and 1996, there were no sales
of available-for-sale securities.
During the years ended September 30, 1998, 1997 and 1996 no held-to-maturity
securities were sold or transferred.
The Association had no investments in securities, other than U.S. Treasury
and agency securities, with an aggregate amortized cost basis and fair value
which exceeded 10% of equity as of September 30, 1998.
Investment securities pledged as of September 30, 1998 and 1997 amounted to
$8,003,861 and $6,155,162, respectively. The securities were pledged to
secure certain time deposits, $100,000 and over, received from customers.
NOTE 4 - LOANS
Loans consisted of the following as of September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Mortgage loans:
One to four family $34,474,719 $32,927,514
Commercial real estate 3,968,775 2,577,312
Construction and land 1,884,941 814,963
------------------------------
Total mortgage loans 40,328,435 36,319,789
------------------------------
Commercial loans 2,724,534 1,684,387
------------------------------
Consumer loans:
Home equity lines 3,061,308 2,760,863
Secured by deposit accounts 604,470 373,686
Auto loans 409,148 413,193
Other consumer loans 77,508 72,978
------------------------------
Total consumer loans 4,152,434 3,620,720
------------------------------
Total loans receivable 47,205,403 41,624,896
Allowance for loan losses (528,250) (376,854)
Deferred loan origination fees, net (60,028) (72,909)
------------------------------
Net loans $46,617,125 $41,175,133
==============================
</TABLE>
Certain directors and executive officers of the Association were customers
of the Association during the year ended September 30, 1998. At September
30, 1998 and 1997 total loans to such persons and their companies amounted
to $43,133 and $66,450, respectively. During the year ended September 30,
1998 total payments amounted to $23,317 and there were no principal
advances.
Changes in the allowance for loan losses were as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $376,854 $324,708 $206,073
Loans charged off (45,604) (7,854) (29,865)
Provision for loan losses 197,000 60,000 148,500
------------------------------------
Balance at end of period $528,250 $376,854 $324,708
====================================
</TABLE>
During the years ended September 30, 1998 and 1997, the Association had no
loans that met the definition of an impaired loan in Statement of Financial
Accounting Standards No. 114. There were no impaired loans outstanding as
of September 30, 1998 and 1997.
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights," (SFAS No. 122), became effective for the Association on
October 1, 1996. SFAS No. 122 was superseded by Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," (SFAS No. 125)
effective for transfers and servicing occuring after December 31, 1996. In
the fiscal years ending September 30, 1998 and 1997 the Association sold
mortgage loans totaling approximately $8,419,000 and $2,810,000, respectively
and retained the servicing rights. The fair value of those rights under SFAS
No. 122 and SFAS No. 125 is not material and has not been recognized in the
consolidated financial statements for the years ended September 30, 1998 and
1997.
NOTE 5 - PREMISES AND EQUIPMENT, NET OF DEPRECIATION AND AMORTIZATION
The following is a summary of premises and equipment as of September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 400,000 $ 170,000
Buildings 478,932 448,932
Furniture and equipment 822,632 626,251
Renovations 389,309 389,309
--------------------------
2,090,873 1,634,492
Accumulated depreciation and amortization (839,056) (682,605)
--------------------------
$1,251,817 $ 951,887
==========================
</TABLE>
NOTE 6 - DEPOSITS
The aggregate amount of time deposit accounts (including CDs), each with a
minimum denomination of $100,000, was approximately $11,115,185 and
$10,115,066 as of September 30, 1998 and 1997, respectively.
For time deposits as of September 30, 1998, the aggregate amount of
maturities for each of the following five years ended after September 30,
and thereafter are:
<TABLE>
<S> <C>
1999 $27,993,006
2000 7,317,469
2001 1,912,576
2002 283,466
2003 100,879
-----------
$37,607,396
===========
</TABLE>
NOTE 7 - ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON
Advances consist of funds borrowed from the Federal Home Loan Bank of Boston
(FHLB).
Maturities of advances from the Federal Home Loan Bank of Boston for the
five fiscal years ending after September 30, 1998 and thereafter are
summarized as follows:
<TABLE>
<CAPTION>
INTEREST RATE AMOUNT
------------- ------
<S> <C> <C>
1999 5.36% to 6.64% $ 1,067,453
2000 5.36% to 6.64% 1,232,704
2001 5.36% to 6.64% 1,307,569
2002 5.36% to 6.64% 1,391,488
2003 5.36% to 6.64% 1,476,740
Thereafter 4.99% to 6.64% 11,728,196
-----------
$18,204,150
===========
</TABLE>
Amortizing advances are being repaid in equal monthly payments and are being
amortized from the date of the advance to the maturity date on a direct
reduction basis.
Advances are secured by the Association's stock in that institution, its
residential real estate mortgage portfolio and the remaining U.S. government
and agencies obligation not otherwise pledged.
NOTE 8 - INCOME TAXES
The components of income tax expense are as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $215,051 $259,454 $(1,378)
State 26,196 20,650 15,998
-----------------------------------
241,247 280,104 14,620
-----------------------------------
Deferred:
Federal (51,423) 2,545 46,073
State (16,400) 4,596 (35,114)
-----------------------------------
(67,823) 7,141 10,959
-----------------------------------
Total income tax expense $173,424 $287,245 $25,579
===================================
</TABLE>
The following reconciles the income tax provision from the statutory rate to
the amount reported in the consolidated statements of income for the years
ended September 30:
<TABLE>
<CAPTION>
1998 1997 1996
% of % of % of
Income Income Income
------ ------ ------
<S> <C> <C> <C>
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Dividends received deduction (.4) (.2) (1.4)
Unallowable expenses and other adjustments 1.9 1.7 .3
State tax, net of federal tax benefit 1.9 2.1 (11.6)
--------------------------
37.4% 37.6% 21.3%
==========================
</TABLE>
The Association had gross deferred tax assets and gross deferred tax
liabilities as follows as of September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 189,882 $121,358
Interest on non-performing loans 1,579
Loan origination fees 63,941 63,404
Estimated expenses 3,169 28,245
Investment writedown 1,518 1,526
Depreciation 20,844 7,560
Accrued pension expense 12,360 2,488
-----------------------
Gross deferred tax assets 293,293 224,581
-----------------------
Deferred tax liabilities:
Unrealized gain on available-for-sale
securities (359,248) (254,015)
Deferred loan costs (34,184) (33,295)
-----------------------
Gross deferred tax liabilities (393,432) (287,310)
-----------------------
Net deferred tax liability $(100,139) $ (62,729)
=======================
</TABLE>
Deferred tax assets as of September 30, 1998 and 1997 have not been reduced
by a valuation allowance because management believes that it is more likely
than not that the full amount of deferred tax assets will be realized.
As of September 30, 1998, the Association had no operating loss and tax
credit carryovers for tax purposes.
In prior years, the Association was allowed a special tax-basis bad debt
deduction under certain provisions of the Internal Revenue Code. As a
result, retained earnings of the Association as of September 30, 1998
includes approximately $1,111,595 for which federal and state income taxes
have not been provided. Under the provisions of recent federal income tax
legislation, if the Association no longer qualifies as a bank as defined in
certain provision of the Internal Revenue Code, this amount will be subject
to recapture in taxable income ratably over six (6) years, subject to a
combined federal and state tax rate of approximately 41%.
NOTE 9 - FINANCIAL INSTRUMENTS
The Association is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to originate
loans. The instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the balance sheets. The contract
amounts of those instruments reflect the extent of involvement the
Association has in particular classes of financial instruments.
The Association's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments is
represented by the contractual amounts of those instruments. The
Association uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Association
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Association upon
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies, but may include secured interests in
mortgages, accounts receivable, inventory, property, plant and equipment and
income-producing properties.
Standby letters of credit are conditional commitments issued by the
Association to guarantee the performance by a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
Notional amounts of financial instrument liabilities with off-balance sheet
credit risk are as follows as of September 30:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commitments to originate loans $1,748,000 $3,786,000
Unadvanced funds on construction loans 1,112,721 225,231
Unadvanced funds on home equity lines of credit 2,685,208 1,701,653
Unadvanced funds on commercial lines of credit 415,291 247,955
Unadvanced funds on consumer lines of credit 82,450 52,913
Standby letters of credit 50,000 50,000
--------------------------
$6,093,670 $6,063,752
==========================
</TABLE>
The estimated fair values of the Association's financial instruments, all of
which are held or issued for purposes other than trading, are as follows as
of September 30:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 7,929,791 $ 7,929,791 $ 1,831,622 $ 1,831,622
Available-for-sale securities 895,820 895,820 636,380 636,380
Held-to-maturity securities 30,109,583 30,646,458 40,153,278 40,507,431
Federal Home Loan Bank stock 1,517,000 1,517,000 1,405,400 1,405,400
Loans held-for-sale 235,000 235,000
Loans, net 46,617,125 48,173,857 41,175,133 41,753,000
Accrued interest receivable 519,345 519,345 702,142 702,142
Financial liabilities:
Deposits 64,483,711 64,802,000 55,452,274 55,785,000
Federal Home Loan Bank advances 18,204,150 18,517,000 25,104,420 25,035,000
</TABLE>
The carrying amounts of financial instruments shown in the above tables are
included in the consolidated balance sheets under the indicated captions.
Accounting policies related to financial instruments are described in Note 2.
The Association has no derivative financial instruments subject to the
provisions of SFAS No. 119, "Disclosure About Derivative Financial
Instruments and Fair Value of Financial Instruments."
NOTE 10 - PENSION PLAN
The Association is a member of a multiemployer comprehensive retirement
program sponsored by Financial Institutions Retirement Fund. The defined
benefit pension plan is a non-contributory plan available to each employee
meeting service and age requirements. Employees are eligible to participate
in the Retirement Plan after the completion of 12 consecutive months of
employment with the Association and the attainment of age 21. Hourly paid
employees are excluded from participation in the Plan. The Association
matches employee contributions to the 401(k) plan at 50% of member's
contribution up to 10% of their W-2 salary. The expenses for the defined
benefit and contribution plans are $26,895 and $29,889, respectively for the
year ended September 30, 1998, $30,226 and $25,367, respectively for the
year ended September 30, 1997, $1,800 and $20,885, respectively for the year
ended September 30, 1996.
NOTE 11 - REGULATORY MATTERS
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Association's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets, liabilities
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Association's capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier 1 capital (as defined in the regulations)
to risk-weighted assets (as defined), of Tier 1 capital (as defined) to
adjusted total assets (as defined) and Tangible capital (as defined) to
Tangible assets (as defined). Management believes, as of September 30, 1998
that the Association meets all capital adequacy requirements to which it is
subject.
As of September 30, 1998, the most recent notification from the Office of
Thrift Supervision categorized the Association as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Association must maintain minimum total risk-based,
Tier 1 risk-based, Tier 1 and Tangible capital ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the association's category.
The Association's actual capital amounts and ratios are also presented in
the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
----------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollar Amounts in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Total Capital (to Risk Weighted Assets) $6,425 17.72% $2,901 >=8.0% $3,627 >=10.0%
Core Capital (to Adjusted Tangible Assets) 5,971 6.67 3,579 >=4.0 4,473 >= 5.0
Tangible Capital (to Tangible Assets) 5,971 6.67 1,342 >=1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets) 5,971 16.46 N/A N/A 2,176 >= 6.0
As of September 30, 1997:
Total Capital (to Risk Weighted Assets) 6,035 21.33 2,263 >=8.0 2,829 >=10.0
Core Capital (to Adjusted Tangible Assets) 5,681 6.54 3,477 >=4.0 4,346 >= 5.0
Tangible Capital (to Tangible Assets) 5,681 6.54 1,304 >=1.5 N/A N/A
Tier 1 Capital (to Risk Weighted Assets) 5,681 20.08 N/A N/A 1,697 >= 6.0
</TABLE>
NOTE 12 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Association's business activity is with customers located within
the state. There are no concentrations of credit to borrowers that have
similar economic characteristics. The majority of the Association's loan
portfolio is comprised of loans collateralized by real estate located in the
state of Massachusetts.
NOTE 13 - PLAN OF REORGANIZATION
On January 21, 1998 the Board of Directors of the Association approved a
Plan of Reorganization from Mutual Savings Association to Mutual Holding and
Stock Issuance (the "Plan") under which the Association will be reorganized
from a federally chartered mutual savings association into a mutual holding
company (the "MHC") under the laws of the United States of America and the
regulations of the Office of Thrift Supervision (the "O.T.S."). As part of
the reorganization and the Plan, the Association will convert to a federal
stock savings Association (the "Stock Association") and will establish a
federal corporation (the "Holding Company"). The Holding Company will be a
majority-owned subsidiary of the MHC and the Stock Association will be a
wholly-owned subsidiary of the Holding Company. Concurrently with the
reorganization, the Holding Company intends to offer for sale up to 47.0% of
its common stock to qualifying depositors and the tax-qualifying employee
plans of the Association, with any remaining shares offered to the public in
a community offering.
As part of the Offering, the Association will establish a liquidation
account in an amount equal to the Minority Ownership Interest multiplied by
the net worth of the Association as of the date of the latest consolidated
balance sheet appearing in the final prospectus. The liquidation account
will be maintained for the benefit of eligible account holders and
supplemental eligible account holders who maintain their accounts at the
Association after the Offering. The liquidation account will be reduced
annually to the extent that such account holders have reduced their
qualifying deposits as of each anniversary date. Subsequent increases will
not restore an account holder's interest in the liquidation account. In the
event of a complete liquidation, each eligible account holder will be
entitled to receive balances for accounts then held.
The costs associated with Reorganization will be deferred and will be
deducted from the proceeds upon the sale and issuance of stock. In the
event the Reorganization is not consummated, costs incurred will be charged
to expense. At September 30, 1998 there was $138,666 (unaudited) in
deferred conversion costs.
The Plan is subject to the approval of the O.T.S. and the majority of
depositors and borrowers entitled to vote.
After Reorganization, the Holding Company will not be able to declare or pay
a cash dividend on, or repurchase any of its common stock, if the effect
thereof would cause the regulatory capital of the Association to be reduced
below the amount required under O.T.S. rules and regulations.
NOTE 14 - RECLASSIFICATION
Certain amounts in the prior year have been reclassified to be consistent
with the current year's statement presentation.
[Letterhead of Shatswell, MacLeod & Company, P.C.]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the registration
statement (No. 333-67103) on Form S-8 of RFS Bancorp, Inc. of our report
dated October 22, 1998, relating to the consolidated balance sheets of
Revere Federal Savings and Loan Association and Subsidiary as of September
30, 1998 and 1997, and the related consolidated statements of income, changes
in equity and cash flows for each of the years in the three-year period
ended September 30, 1998, which report is included in the September 30, 1998
Form 10-KSB of RFS Bancorp, Inc.
/s/ Shatswell, MacLeod & Company, P.C.
SHATSWELL, MACLEOD & COMPANY, P.C.
West Peabody, Massachusetts
December 28, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the consolidated
balance sheets and the statements of income of RFS Bancorp, Inc. and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 602,672
<INT-BEARING-DEPOSITS> 591,751
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 895,820
<INVESTMENTS-CARRYING> 30,109,583
<INVESTMENTS-MARKET> 30,646,458
<LOANS> 46,617,125
<ALLOWANCE> 528,250
<TOTAL-ASSETS> 89,468,058
<DEPOSITS> 64,483,711
<SHORT-TERM> 0
<LIABILITIES-OTHER> 296,091
<LONG-TERM> 18,204,150
0
0
<COMMON> 0
<OTHER-SE> 6,484,106
<TOTAL-LIABILITIES-AND-EQUITY> 6,484,106
<INTEREST-LOAN> 3,872,606
<INTEREST-INVEST> 2,473,406
<INTEREST-OTHER> 297,287
<INTEREST-TOTAL> 6,643,299
<INTEREST-DEPOSIT> 2,292,143
<INTEREST-EXPENSE> 3,604,133
<INTEREST-INCOME-NET> 3,039,166
<LOAN-LOSSES> 197,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,533,080
<INCOME-PRETAX> 464,096
<INCOME-PRE-EXTRAORDINARY> 464,096
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 290,672
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.71
<LOANS-NON> 199,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 376,854
<CHARGE-OFFS> 45,604
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 528,250
<ALLOWANCE-DOMESTIC> 368,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 160,250
</TABLE>
