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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, 1999
COMMISSION FILE NO.: 00-25047
RFS BANCORP, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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<S> <C>
UNITED STATES 04-3449818
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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310 BROADWAY, REVERE, MASSACHUSETTS 02151
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(781) 284-7777
(ISSUER'S TELEPHONE NUMBER)
Securities registered pursuant to section 12(g) of the Exchange Act:
Title of each class
COMMON STOCK, PAR VALUE $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, 1999 are
$7,455,000
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
November 23, 1999: $2,652,713.
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 November 23, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
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TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. BUSINESS.................................................... 1
ITEM 2. DESCRIPTION OF PROPERTY..................................... 34
ITEM 3. LEGAL PROCEEDINGS........................................... 34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 34
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS......................................... 34
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 35
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS........................... 48
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 48
PART III
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK AND THE
COMPANY..................................................... 48
ITEM 10. EXECUTIVE COMPENSATION...................................... 48
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 48
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 49
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K............................ 49
SIGNATURES................................................................ 50
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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.
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PART I
ITEM 1. BUSINESS
GENERAL
RFS Bancorp, Inc. (the "Company") is a federally chartered stock holding
company for Revere Federal Savings Bank (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 and its branch office located in Chelsea, Massachusetts. On
December 18, 1998, the Bank 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 Company and its subsidiary for the fiscal year ended
September 30, 1999.
At September 30, 1999, the Company had total assets of $112.2 million, total
deposits of $74.8 million and total equity of $10.0 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.
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 mortgage-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 Company's principal sources of income are interest, dividends and fees
on loans and investments, and the Company's principal expenses are interest paid
on deposit accounts, borrowings, and general operating expenses.
MARKET AREA
The Company's main 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
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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.
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
2
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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 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 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 until recently were limited by the fact that it operates from
only one location. On December 21, 1998, the Bank opened its first branch
facility located in Chelsea, Massachusetts in a growing small business
market. This branch location emphasizes convenience for the Bank's small
business clients and is 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, operational efficiencies and increased
loan originations within the Bank's existing underwriting standards.
- 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, one in downtown Boston, and one in the
Beachmont area of Revere. Another ATM is scheduled to open in Chelsea.
Finally, the Bank has introduced its home banking product which will give
its customers access to their accounts through the use of their personal
computers.
- 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. The Bank now offers various uninsured investment products,
including fixed-rate and variable annuities and mutual funds, through a
relationship with a third party broker-dealer that services 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.
3
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LENDING ACTIVITIES
GENERAL. The Bank originates loans through its main office located in
Revere, Massachusetts and its branch office in Chelsea, 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 relationships, outstanding as of
September 30, 1999, ranged from $603,000 to $1.2 million.
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.
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AT SEPTEMBER 30,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
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Mortgage loans:
One- to four-family.................... $47,172 64.46% $34,475 73.03% $32,928 79.11%
Commercial real estate................. 13,252 18.11 4,367 9.25 2,577 6.19
Construction and land.................. 2,192 3.00 1,885 3.99 815 1.96
------- ------ ------- ------ ------- ------
Total mortgage loans............... 62,616 85.57 40,727 86.27 36,320 87.26
------- ------ ------- ------ ------- ------
Commercial loans......................... 5,938 8.11 2,326 4.93 1,684 4.04
------- ------ ------- ------ ------- ------
Consumer loans:
Home equity lines...................... 3,650 4.99 3,061 6.48 2,761 6.63
Secured by deposit accounts............ 561 0.77 604 1.28 374 0.90
Auto loans............................. 300 0.41 409 0.87 413 0.99
Other consumer loans................... 110 0.15 78 0.17 73 0.18
------- ------ ------- ------ ------- ------
Total consumer loans............... 4,621 6.32 4,152 8.80 3,621 8.70
------- ------ ------- ------ ------- ------
Total loans receivable............. 73,175 100.00% 47,205 100.00% 41,625 100.00%
====== ====== ======
Loans held for sale.................... -- 235 --
LESS:
Allowance for loan losses.............. (624) (528) (377)
Deferred loan origination fees, net.... (91) (60) (73)
------- ------- -------
Loans, net........................... $72,460 $46,852 $41,175
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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, 1999, loans on one- to four-family residential
properties accounted for 64.5% 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.
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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.
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, 1999, the Bank originated $3.5 million
in adjustable-rate one- to four-family mortgage loans and $21.6 million in
fixed-rate one- to four-family mortgage loans. Of the fixed-rate loans
originated, the Bank sold $5.5 million of fixed-rate loans and retained
$16.1 million of fixed-rate loans based on the rate of the loans. Approximately
29.1% of all loan originations during fiscal 1999 were refinancings of loans
already in the Bank's loan portfolio. At September 30, 1999, the Bank's loan
portfolio included $11.4 million in adjustable-rate one- to four-family
residential mortgage loans or 15.6% of the Bank's total loan portfolio, and
$35.8 million in fixed-rate one- to four-family residential mortgage loans, or
48.8% 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, 1999, the
Bank's commercial real estate loan portfolio consisted of 62 loans, totaling
$13.3 million, or 18.1% of total loans. The Bank's largest commercial real
estate loan, with an outstanding balance of $703,000 at September 30, 1999, is
secured by a commercial property located in downtown Everett. 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.
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. Small business
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loans are expected to comprise a growing portion of the Bank's loan portfolio in
the future. At September 30, 1999, the Bank's commercial loan portfolio
consisted of 99 loans, totaling $5.9 million, or 8.1% 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 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 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, 1999, the consumer loan portfolio totaled $4.6 million or 6.3%
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
$50,000 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, 1999, the Bank had $3.7 million in home equity loans with
unused credit available to existing borrowers of $3.4 million.
The Bank makes loans secured by deposit accounts up to 90% of the amount of
the depositor's savings account balance. The interest rate on the loan is 3.0%
higher than the rate being paid on passbook accounts and 3.0% 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
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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 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. 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, 1999, the Bank was servicing
$21.0 million in loans for FNMA.
Originations for the year ended September 30, 1999, compared to the prior
period, have increased due to the addition of a commercial lending officer. 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,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance, loans, net............................... $ 46,852 $ 41,175 $33,046
-------- -------- -------
Loans originated:
Mortgage loans:
One- to four-family..................................... 25,142 17,718 6,843
Commercial real estate.................................. 11,744 3,124 2,245
Construction and land................................... 4,810 2,850 1,047
-------- -------- -------
Total mortgage loans.................................. 41,696 23,692 10,135
Commercial loans.......................................... 6,852 1,550 1,946
Consumer loans............................................ 3,189 4,183 2,329
Loans held for sale....................................... -- 235 --
-------- -------- -------
Total loans originated................................ 51,737 29,660 14,410
-------- -------- -------
Total................................................. 98,589 70,835 47,456
Principal repayments and other, net......................... (20,594) (15,518) (3,463)
Loan charge-offs, net....................................... (7) (46) (8)
Sale of mortgage loans, principal balance................... (5,528) (8,419) (2,810)
-------- -------- -------
Ending balance, loans, net.................................. $ 72,460 $ 46,852 $41,175
======== ======== =======
</TABLE>
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The following tables set forth the dollar amounts in each loan category at
September 30, 1999 that are due after September 30, 2000, and whether such loans
have fixed or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 2000
--------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One-to four-family........................................ $35,628 $10,351 $45,979
Commercial real estate.................................... 777 9,747 10,524
Construction and land..................................... 1,178 -- 1,178
------- ------- -------
Total mortgage loans.................................. 37,583 20,098 57,681
------- ------- -------
Commercial loans............................................ 3,447 247 3,694
------- ------- -------
Consumer loans:
Home equity lines......................................... -- 13 13
Secured by deposit accounts............................... 103 -- 103
Auto loans................................................ 285 -- 285
Other consumer loans...................................... 54 -- 54
------- ------- -------
Total consumer loans.................................. 442 13 455
------- ------- -------
Total loans........................................... $41,472 $20,358 $61,830
======= ======= =======
</TABLE>
LOAN COMMITMENTS. The Bank generally makes loan commitments to borrowers
not exceeding 30 days. At September 30, 1999, the Bank had $5.5 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) $400,000 for commercial real estate loans; (b) $250,000 for commercial
loans; (c) loans over the current FNMA limit for residential mortgage loans; and
(d) $75,000 for consumer loans. Commercial and residential real estate loans in
excess of $750,000 and commercial loans in excess of $500,000, 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,
1999, the amount of net deferred loan origination fees was $91,000.
8
<PAGE>
LOAN MATURITY AND REPRICING. The following table shows the maturity or
period to repricing of the Bank's loan portfolio at September 30, 1999. 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, 1999
-----------------------------------------------------------------------------
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................. $ 1,193 $ 2,728 $1,014 $2,244 $4,166 $11,345
------- ------- ------ ------ ------ -------
After one year:
More than one year to three
years............................ 5,822 3,810 50 447 200 10,329
More than three years to five
years............................ 3,961 5,701 -- 2,008 211 11,881
More than five years to ten
years............................ 2,656 383 -- 1,184 -- 4,223
More than ten years to twenty
years............................ 14,374 630 -- 55 44 15,103
More than twenty years........... 19,166 -- 1,128 -- -- 20,294
------- ------- ------ ------ ------ -------
Total due after one year....... 45,979 10,524 1,178 3,694 455 61,830
------- ------- ------ ------ ------ -------
Total amount due............... $47,172 $13,252 $2,192 $5,938 $4,621 73,175
======= ======= ====== ====== ====== =======
Loans held for sale.............. --
Less:..............................
Allowance for loan losses........ (624)
Deferred loan origination fees,
net.............................. (91)
-------
Loans, net......................... $72,460
=======
</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, 1999, the Bank had $245,000 in assets classified as special
mention. There were none classified as doubtful or loss and $664,000 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.
9
<PAGE>
The following table sets forth the Bank's non-performing assets at the dates
indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------
1999 1998 1997
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-performing loans:
Mortgage loans:
One-to four-family...................................... $ -- $ 143 $ 144
Commercial real estate -- -- --
Construction and land -- -- --
--------- ------ ------
Total mortgage loans.................................. -- 143 144
--------- ------ ------
Commercial loans.......................................... -- 37 --
--------- ------ ------
Consumer loans:
Home equity lines....................................... -- -- --
Secured by deposit accounts............................. -- 14 --
Auto loans.............................................. -- 4 --
Other consumer loans.................................... 3 1 13
--------- ------ ------
Total consumer loans.................................. 3 19 13
--------- ------ ------
Total non-performing loans(1)......................... 3 199 157
Other real estate owned, net.............................. -- -- --
--------- ------ ------
Total non-performing assets(2)........................ $ 3 $ 199 $ 157
========= ====== ======
Allowance for loan losses as a percent of loans(3).......... 0.85% 1.11% 0.91%
========= ====== ======
Allowance for loan losses as a percent of non-performing
loans(4).................................................. 20,800.00% 265.45% 240.03%
========= ====== ======
Non-performing loans as a percent of loans(3)(4)............ 0.00% 0.42% 0.38%
========= ====== ======
Non-performing assets as a percent of total assets(2)....... 0.00% 0.22% 0.18%
========= ====== ======
</TABLE>
- ------------------------
(1) For all periods presented, the non-performing loans consist entirely of
non-accrual loans.
(2) Non-performing assets consist of non-performing loans and other real estate
owned.
(3) Loans are presented before allowance for loan losses and deferred loan
origination fees, net.
(4) 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.
10
<PAGE>
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, 1999 AT SEPTEMBER 30, 1998
-------------------------------------------- --------------------------------------------
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............... 10 $1,139 -- $ -- 9 $512 1 $143
Commercial real estate........... 1 169 -- -- -- -- -- --
Construction and land............ -- -- -- -- -- -- -- --
--- ------ --- ---- --- ---- --- ----
Total mortgage loans........... 11 1,308 -- -- 9 512 1 143
--- ------ --- ---- --- ---- --- ----
Commercial loans................... 4 100 -- -- 1 76 2 37
--- ------ --- ---- --- ---- --- ----
Consumer loans:
Home equity loans................ 3 82 -- -- 1 34 -- --
Secured by savings accounts...... -- -- -- -- 3 23 1 14
Auto loans....................... 4 21 -- -- 1 2 2 4
Other consumer loans............. 5 6 1 3 -- -- 1 1
--- ------ --- ---- --- ---- --- ----
Total consumer loans........... 12 109 1 3 5 59 4 19
--- ------ --- ---- --- ---- --- ----
Total loans........................ 27 $1,517 1 $ 3 15 $647 7 $199
=== ====== === ==== === ==== === ====
Delinquent loans to loans, net..... 2.09% 0.00% 1.38% 0.42%
====== ==== ==== ====
<CAPTION>
AT SEPTEMBER 30, 1997
--------------------------------------------
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 $565 1 $144
Commercial real estate........... 1 100 -- --
Construction and land............ -- -- -- --
--- ---- --- ----
Total mortgage loans........... 9 665 1 144
--- ---- --- ----
Commercial loans................... -- -- -- --
--- ---- --- ----
Consumer loans:
Home equity loans................ 3 84 -- --
Secured by savings accounts...... 1 7 -- --
Auto loans....................... -- -- -- --
Other consumer loans............. 3 8 2 13
--- ---- --- ----
Total consumer loans........... 7 99 2 13
--- ---- --- ----
Total loans........................ 16 $764 3 $157
=== ==== === ====
Delinquent loans to loans, net..... 1.86% 0.38%
==== ====
</TABLE>
11
<PAGE>
At September 30, 1999, 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.
12
<PAGE>
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,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.............................. $ 528 $ 377 $ 325
--------- ------- -------
Provision for loan losses................................... 103 197 60
--------- ------- -------
Charge-offs:
Mortgage loans:
One-to four-family...................................... -- -- --
Commercial real estate.................................. -- -- --
Construction and land................................... -- -- --
Commercial loans.......................................... 5 -- --
Consumer loans:
Home equity lines....................................... -- -- --
Secured by deposit accounts............................. -- -- --
Auto loans.............................................. 5 40 --
Other consumer loans.................................... -- 6 8
--------- ------- -------
Total charge-offs..................................... 10 46 8
--------- ------- -------
Recoveries.................................................. 3 -- --
--------- ------- -------
Balance at end of period.................................... $ 624 $ 528 $ 377
========= ======= =======
Ratio of net charge-offs to average loans outstanding during
the period................................................ 0.01% 0.10% 0.02%
========= ======= =======
Allowance for loan losses as a percent of loans............. 0.85% 1.11% 0.91%
========= ======= =======
Allowance for loan losses as a percent of non-performing
loans..................................................... 20,800.00% 265.45% 240.03%
========= ======= =======
</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, 1999 AT SEPTEMBER 30, 1998
------------------------------------- -------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS IN EACH ALLOWANCE LOANS IN EACH
TO TOTAL CATEGORY TO TO TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS AMOUNT ALLOWANCE TOTAL LOANS
-------- ---------- ------------- -------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family.... $247 39.58% 64.46% $ 205 38.83% 73.03%
Commercial real
estate.............. 194 31.09 18.11 76 14.39 8.41
Construction and
land................ 19 3.05 3.00 10 1.89 3.99
---- ------ ------ ------ ------ ------
Total mortgage
loans............. 460 73.72 85.57 291 55.11 85.43
Commercial loans........ 160 25.64 8.11 71 13.45 5.77
Consumer loans.......... 4 0.64 6.32 6 1.14 8.80
Unallocated............. -- -- -- 160 30.30 --
---- ------ ------ ------ ------ ------
Total allowance for
loan losses......... $624 100.00% 100.00% $ 528 100.00% 100.00%
==== ====== ====== ====== ====== ======
<CAPTION>
AT SEPTEMBER 30, 1997
---------------------------------------
PERCENT OF PERCENT OF
ALLOWANCE TO LOANS IN EACH
TOTAL CATEGORY TO
AMOUNT ALLOWANCE TOTAL LOANS
-------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage loans:
One-to four-family.... $201 53.32% 79.11%
Commercial real
estate.............. 35 9.28 6.19
Construction and
land................ -- -- 1.96
---- ------ ------
Total mortgage
loans............. 236 62.60 87.26
Commercial loans........ 39 10.34 4.04
Consumer loans.......... 5 1.33 8.70
Unallocated............. 97 25.73 --
---- ------ ------
Total allowance for
loan losses......... $377 100.00% 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
13
<PAGE>
portfolio in excess of regulatory requirements. At September 30, 1999, the
Bank's liquidity ratio was 7.22%. 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.
14
<PAGE>
The following table sets forth activity in the Bank's mortgage-backed
securities held-to-maturity and available-for-sale portfolio for the periods
indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Held-to-maturity:
Beginning balance......................................... $20,164 $25,144 $24,945
Purchases................................................. 4,021 -- 2,962
Maturities................................................ -- (52) --
Principal repayments...................................... (5,343) (4,904) (2,737)
Premium and discount amortization, net.................... (24) (24) (26)
------- ------- -------
Ending balance............................................ $18,818 $20,164 $25,144
======= ======= =======
Available-for-sale:
Beginning balance......................................... $ -- $ -- $ --
Purchases................................................. 4,908 -- --
Maturities................................................ -- -- --
Principal repayments...................................... (59) -- --
Premium and discount amortization, net.................... 4 -- --
------- ------- -------
Ending balance............................................ $ 4,853 $ -- $ --
======= ======= =======
</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,
------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
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 (1)........... $ 4,000 $ 3,733 $ 5,000 $ 5,031 $ 9,202 $ 9,207
Mortgage-backed and mortgage-related
securities........................ 18,818 18,550 20,164 20,640 25,144 25,458
Asset-backed securities............. 3,256 3,231 4,946 4,976 5,807 5,842
------- ------- ------- ------- ------- -------
Total held-to-maturity............ 26,074 25,514 30,110 30,647 40,153 40,507
------- ------- ------- ------- ------- -------
Available-for-sale:
Marketable equity securities........ 24 938 24 896 24 636
Mortgage-backed and mortgage-related
securities........................ 4,853 4,692 -- -- -- --
------- ------- ------- ------- ------- -------
Total available-for-sale.......... 4,877 5,630 24 896 24 636
------- ------- ------- ------- ------- -------
Total securities.................. $30,951 $31,144 $30,134 $31,543 $40,177 $41,143
======= ======= ======= ======= ======= =======
</TABLE>
- ------------------------
(1) Consists of U.S. Treasury and government agency obligations.
15
<PAGE>
The following table sets forth the amortized cost and fair value of the
Bank's mortgage-backed and mortgage-related securities which were classified as
held-to-maturity and available-for-sale at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
AMORTIZED PERCENT OF FAIR AMORTIZED PERCENT OF FAIR
COST TOTAL(1) VALUE COST TOTAL(1) VALUE
--------- ---------- -------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed and
mortgage-related
securities
Held-to-maturity:
Fixed rate:
GNMA.................... $13,901 58.73% $13,602 $13,358 66.25% $13,741
FHLMC................... 122 0.51 127 176 0.87 186
------- ------ ------- ------- ------ -------
Total fixed rate...... 14,023 59.24 13,729 13,534 67.12 13,927
------- ------ ------- ------- ------ -------
Adjustable rate:
GNMA.................... 4,362 18.43 4,393 5,935 29.43 6,011
FHLMC................... 182 0.77 184 248 1.23 251
FNMA.................... 251 1.06 244 447 2.22 451
------- ------ ------- ------- ------ -------
Total adjustable
rate................ 4,795 20.26 4,821 6,630 32.88 6,713
------- ------ ------- ------- ------ -------
Total
held-to-maturity.... 18,818 79.50 18,550 20,164 100.00 20,640
------- ------ ------- ------- ------ -------
Available-for-sale:
Fixed rate:
GNMA.................... 2,472 10.44 2,383 -- -- --
FNMA.................... 2,381 10.06 2,309 -- -- --
------- ------ ------- ------- ------ -------
Total
available-for-sale.. 4,853 20.50 4,692 -- -- --
------- ------ ------- ------- ------ -------
Total mortgage-
backed and
mortgage-related
securities........ $23,671 100.00% $23,242 $20,164 100.00% $20,640
======= ====== ======= ======= ====== =======
<CAPTION>
AT SEPTEMBER 30,
---------------------------------
1997
---------------------------------
AMORTIZED PERCENT OF FAIR
COST TOTAL(1) VALUE
--------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Mortgage-backed and
mortgage-related
securities
Held-to-maturity:
Fixed rate:
GNMA.................... $15,851 63.04% $15,963
FHLMC................... 238 0.95 250
------- ------ -------
Total fixed rate...... 16,089 63.99 16,213
------- ------ -------
Adjustable rate:
GNMA.................... 7,910 31.46 8,085
FHLMC................... 365 1.45 376
FNMA.................... 780 3.10 784
------- ------ -------
Total adjustable
rate................ 9,055 36.01 9,245
------- ------ -------
Total
held-to-maturity.... 25,144 100.00 25,458
------- ------ -------
Available-for-sale:
Fixed rate:
GNMA.................... -- -- --
FNMA.................... -- -- --
------- ------ -------
Total
available-for-sale.. -- -- --
------- ------ -------
Total mortgage-
backed and
mortgage-related
securities........ $25,144 100.00% $25,458
======= ====== =======
</TABLE>
- ------------------------------
(1) Based on amortized cost.
16
<PAGE>
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 and available-for-sale at September 30, 1999, 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, 1999
---------------------------------------------------------------
MORE THAN MORE THAN
ONE YEAR FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
Held-to-maturity:
Investment securities(1).................... $-- --% $ -- --% $1,000 6.50%
Mortgage-backed and mortgage-related
securities:
Fixed rate:
GNMA...................................... -- -- -- -- -- --
FHLMC..................................... -- -- 19 7.88 73 8.60
Adjustable rate:
GNMA...................................... -- -- -- -- -- --
FHLMC..................................... -- -- -- -- -- --
FNMA...................................... -- -- -- -- -- --
Asset-backed securities..................... 31 7.88 105 9.38 162 7.88
--- ---- ------
Total held-to-maturity.................. 31 7.88 124 9.15 1,235 6.81
--- ---- ------
Available-for-sale:
Fixed rate:
GNMA...................................... -- -- -- -- -- --
FNMA...................................... -- -- -- -- -- --
Total available-for-sale................ -- -- -- -- -- --
--- ---- ------
Total debt securities................... $31 7.88% $124 9.15% $1,235 6.81%
=== ==== ======
<CAPTION>
AT SEPTEMBER 30, 1999
-----------------------------------------
MORE THAN
TEN YEARS TOTAL
------------------- -------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
AMOUNT YIELD AMOUNT YIELD
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Debt securities:
Held-to-maturity:
Investment securities(1).................... $ 3,000 7.00% $ 4,000 6.88%
Mortgage-backed and mortgage-related
securities:
Fixed rate:
GNMA...................................... 13,901 7.08 13,901 7.08
FHLMC..................................... 30 11.00 122 9.08
Adjustable rate:
GNMA...................................... 4,362 6.27 4,362 6.27
FHLMC..................................... 182 6.25 182 6.25
FNMA...................................... 251 6.02 251 6.02
Asset-backed securities..................... 2,958 6.73 3,256 6.88
------- -------
Total held-to-maturity.................. 24,684 6.87 26,074 6.88
------- -------
Available-for-sale:
Fixed rate:
GNMA...................................... 2,472 6.50 2,472 6.50
FNMA...................................... 2,381 5.50 2,381 5.50
------- -------
Total available-for-sale................ 4,853 6.01 4,853 6.01
------- -------
Total debt securities................... $29,537 6.73% $30,927 6.74%
======= =======
</TABLE>
- ------------------------
(1) Consists of U.S. Treasury and government agency obligations.
17
<PAGE>
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 $6.5 million in no-cost demand deposit accounts, resulting
from the increase in commercial customers during this time period, and
$7.0 million in NOW accounts and Money Market accounts, resulting from increased
marketing and competitive fee structure. At September 30, 1999, such accounts
represented approximately 12.0% of the Bank's total deposits compared to 5.9% at
September 30, 1995.
18
<PAGE>
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,
-------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
PERCENT OF PERCENT OF
TOTAL WEIGHTED TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
-------- ---------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits............... $ 4,919 7.03% --% $ 2,595 4.35% --%
NOW accounts.................. 6,646 9.49 0.84 4,329 7.25 1.09
Regular savings accounts...... 16,227 23.18 1.28 15,370 25.74 1.15
Money market accounts......... 2,225 3.18 3.06 1,645 2.76 3.10
------- ------ ------- ------
Total..................... 30,017 42.88 1.32 23,939 40.10 1.28
------- ------ ------- ------
Time deposits:(1)
6 months or less............ 5,729 8.19 4.54 4,172 6.99 4.64
Over 6 months through
12 months................. 16,542 23.63 4.84 13,933 23.34 5.30
Over 12 through 36 months... 15,637 22.34 5.36 15,664 26.24 5.73
Over 36 months.............. 2,072 2.96 6.52 1,997 3.33 6.68
------- ------ ------- ------
Total time deposits....... 39,980 57.12 5.24 35,766 59.90 5.62
------- ------ ------- ------
Total average deposits.... $69,997 100.00% 3.73% $59,705 100.00% 4.00%
======= ====== ======= ======
<CAPTION>
AT SEPTEMBER 30,
--------------------------------
1997
--------------------------------
PERCENT OF
TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE
AMOUNT DEPOSITS RATE
-------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Demand deposits............... $ 1,219 2.32% --%
NOW accounts.................. 3,443 6.55 1.02
Regular savings accounts...... 14,548 27.67 0.98
Money market accounts......... 739 1.40 3.11
------- ------
Total..................... 19,949 37.94 1.07
------- ------
Time deposits:(1)
6 months or less............ 3,612 6.87 4.73
Over 6 months through
12 months................. 12,026 22.87 5.20
Over 12 through 36 months... 15,168 28.84 6.09
Over 36 months.............. 1,828 3.48 6.67
------- ------
Total time deposits....... 32,634 62.06 5.67
------- ------
Total average deposits.... $52,583 100.00% 3.99%
======= ======
</TABLE>
- ------------------------------
(1) Based on remaining maturity of deposits.
For more information on the Bank's deposit accounts, see Note 6 of
Notes to Consolidated Financial Statements.
19
<PAGE>
The following table represents, by interest rate ranges, the amount of time
deposits outstanding at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
------------------------------
INTEREST RATE RANGE 1999 1998 1997
- ------------------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Time deposits:
0 to 4.00%................................................ $ 299 $ 334 $ 187
4.01% to 5.00%............................................ 26,350 11,262 9,912
5.01% to 6.00%............................................ 10,831 21,116 17,698
6.01% to 7.00%............................................ 2,500 3,881 2,420
7.01% to 8.00%............................................ 984 1,014 4,501
8.01% to 9.00%............................................ -- -- --
Over 9.01%................................................ -- -- --
------- ------- -------
Total................................................... $40,964 $37,607 $34,718
======= ======= =======
</TABLE>
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net deposits................................................ $ 7,898 $6,746 $4,009
Interest credited on deposit accounts....................... 2,425 2,285 2,050
------- ------ ------
Total increase in deposit accounts.......................... $10,323 $9,031 $6,059
======= ====== ======
</TABLE>
At September 30, 1999, the Bank had $14.4 million in time deposits (accounts
in amounts over $100,000) maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
AMOUNT AVERAGE RATE
-------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Maturity Period:
Within three months....................................... $ 3,234 4.82%
After three but within six months......................... 2,087 4.99
After six but within twelve months........................ 6,180 5.44
After twelve months....................................... 2,850 5.21
-------
Total................................................... $14,351 5.19%
=======
</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 $27.0 million outstanding at
September 30, 1999.
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.
20
<PAGE>
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.
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,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
FHLB of Boston advances:
Average balance outstanding............................... $20,292 $22,858 $26,044
Maximum amount outstanding at any month-end during the
period.................................................. 27,036 25,019 26,958
Balance outstanding at end of period...................... 27,036 18,204 25,104
Weighted average interest rate during the period.......... 5.55% 5.74% 5.86%
Weighted average interest rate at end of period........... 5.54% 5.43% 5.84%
</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, 1999, the Bank's market share was
approximately 14% 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, 1999, the Bank had 27 full-time and 10 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 $24.8 million at September 30, 1999.
21
<PAGE>
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.
22
<PAGE>
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 10.91% 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. 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.
23
<PAGE>
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, 1999, the Bank's
regulatory limit on loans to one borrower was $1.4 million. At September 30,
1999, the Bank's largest aggregate amount of loans to one borrower was
$1.2 million, and the second largest borrower had an aggregate balance of
$1.1 million. 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.
24
<PAGE>
"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, 1999, the Bank
maintained 93.44% 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 4.0% 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.
25
<PAGE>
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, 1999, the Bank was not required to maintain any
additional risk-based capital under this rule.
At September 30, 1999, 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, 1999.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
-------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1999:
Total Capital (to Risk Weighted
Assets)........................... $ 9,534 18.58% $ 4,106 8.00% $ 5,133 10.00%
Core Capital (to Adjusted Tangible
Assets)........................... 8,911 7.98 4,469 4.00 5,586 5.00
Tangible Capital (to Tangible
Assets)........................... 8,911 7.98 1,676 1.50 N/A N/A
Tier 1 Capital (to Risk Weighted
Assets)........................... 8,911 17.36 N/A N/A 3,080 6.00
</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
26
<PAGE>
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, 1999 was 7.22% 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 1999, the Bank paid assessments of $13,896 and $14,819, 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
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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
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<PAGE>
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
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<PAGE>
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
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<PAGE>
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 first, second,
third and fourth quarters of 1999 were 0.0622%, 0.0610%, 0.0582% and 0.0610%,
respectively.
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)
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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, 1999,
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
$98,000, $95,000 and $91,000 during the years ended September 30, 1999, 1998 and
1997, 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 COMPANIES
GENERAL. The Company and the MHC are holding companies chartered pursuant
to Section 10(o) of the HOLA. As such, the Company and the MHC 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 Company
and the MHC 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 MHC, and a
federally chartered mid-tier holding company such as the 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
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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 Company and the MHC,
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.
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FEDERAL SECURITIES LAWS
The Company is registered with the SEC under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Accordingly, the Company is 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, 1999
regarding the Company's office facilities, which are owned by the Company 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 $ 449,000
Branch Office: 357 Beacham Avenue Chelsea, MA 1998 1,800 $ 295,000
</TABLE>
In addition to its main office, the Company leases office space in an
adjacent building to house certain administrative personnel. The Company also
has a cash dispensing ATM at Logan Airport, a cash dispensing ATM at 616
Winthrop Avenue, Revere, a cash dispensing ATM at 173 Commercial Street, Boston
and opened a branch office on December 21, 1998 in Chelsea, Massachusetts. At
September 30, 1999, the cost value of the Company's computer equipment and other
furniture, fixtures and equipment at its existing offices totaled $1.1 million.
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>
STOCK PRICE
--------------------
1999 HIGH LOW
- ---------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter............................................................... $ 9.75 $ 8.50
Second Quarter.............................................................. 10.25 8.25
Third Quarter............................................................... 8.50 8.00
Fourth Quarter.............................................................. 10.75 7.25
</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
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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 FINANCIAL DATA
The selected consolidated financial and other data of the Company set forth
below is derived in part from, and should be read in conjunction with, the
Consolidated Financial Statements of the Company and Notes thereto.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------------
1999 1998 1997
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
SELECTED FINANCIAL DATA:
Total assets.................................................................. $ 112,164 $ 89,468 $ 86,920
Loans, net.................................................................... 72,460 46,852 41,175
Investments (1)............................................................... 31,705 31,005 40,790
Total deposits................................................................ 74,807 64,484 55,452
FHLB advances................................................................. 27,036 18,204 25,104
Total equity.................................................................. 10,020 6,484 6,039
Allowance for loan losses..................................................... 624 528 377
Non-performing loans.......................................................... 3 199 157
Non-performing assets......................................................... 3 199 157
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER
30,
-------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
SELECTED OPERATING DATA:
Interest and dividend income....................................................... $ 7,108 $ 6,577 $ 6,150
Interest expense................................................................... 3,552 3,597 3,577
--------- --------- ---------
Net interest and dividend income................................................... 3,556 2,980 2,573
Provision for loan losses.......................................................... 103 197 60
--------- --------- ---------
Net interest and dividend income after provision for loan losses................... 3,453 2,783 2,513
Total noninterest income........................................................... 348 214 138
Total noninterest expense.......................................................... 3,225 2,533 1,888
--------- --------- ---------
Income before income taxes......................................................... 576 464 763
Income taxes....................................................................... 191 173 287
--------- --------- ---------
Net income......................................................................... $ 385 $ 291 $ 476
========= ========= =========
</TABLE>
(FOOTNOTES ON NEXT PAGE)
35
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
SEPTEMBER 30,
--------------------------------
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(2)
PERFORMANCE RATIOS:
Return on average assets.......................................................... 0.38% 0.33% 0.56%
Return on average equity.......................................................... 4.09 4.94 8.66
Average equity to average assets.................................................. 9.39 6.66 6.52
Equity to total assets at end of period........................................... 8.93 7.25 6.95
Average interest rate spread...................................................... 3.37 3.14 2.86
Net interest margin............................................................... 3.77 3.46 3.13
Average interest-earning assets to average interest-bearing liabilities........... 110.61 107.71 106.16
Total noninterest expense to average assets....................................... 3.22 2.86 2.24
Efficiency ratio(3)............................................................... 82.61 79.30 69.64
REGULATORY CAPITAL RATIOS:
Tangible capital.................................................................. 7.98 6.67 6.54
Core capital...................................................................... 7.98 6.67 6.54
Risk-based capital................................................................ 18.58 17.72 21.33
ASSET QUALITY RATIOS:
Non-performing loans as a percent of loans........................................ 0.00 0.42 0.38
Non-performing assets as a percent of total assets................................ 0.00 0.22 0.18
Allowance for loan losses as a percent of loans................................... 0.85 1.11 0.91
Allowance for loan losses as a percent of non-performing loans.................... 20,800.00 265.45 240.03
NUMBER OF:
Loans outstanding................................................................. 1,284 857 775
Deposit accounts.................................................................. 8,942 8,083 6,907
Full-service offices.............................................................. 2 1 1
Full-time equivalent employees.................................................... 31 27 22
</TABLE>
- ------------------------
(1) 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. Investments exclude FHLB Stock of
$1.5 million, $1.5 million, and $1.4 million for the years ended
September 30, 1999, September 30, 1998 and September 30, 1997, respectively.
(2) 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.
(3) The efficiency ratio represents the ratio of noninterest expenses divided by
the sum of net interest and dividend income and noninterest income.
36
<PAGE>
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.
37
<PAGE>
Presented below, as of September 30, 1999, 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>
NPV AS % OF PRESENT
NET PORTFOLIO VALUE VALUE OF ASSETS
---------------------- ------------------------
CHANGE IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE*
- -------------------------------------------------------- ----------- --------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
+400 bp................................................. $ -- $ -- --% --% --
+300 bp................................................. 4,574 -6,762 -60 4.37 -563
+200 bp................................................. 6,893 -4,443 -39 6.41 -360
+100 bp................................................. 9,223 -2,113 -19 8.34 -166
0 bp................................................. 11,336 10.00
- -100 bp................................................. 12,848 1,512 +13 11.12 +112
- -200 bp................................................. 13,952 2,616 +23 11.89 +188
- -300 bp................................................. 14,961 3,625 +32 12.56 +255
- -400 bp................................................. -- -- -- -- --
</TABLE>
- ------------------------
* Basis points
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.
38
<PAGE>
AVERAGE BALANCES, INTEREST, YIELDS AND RATES
The following tables set forth certain information relating to the Bank for
the years ended September 30, 1999, 1998 and 1997, 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,
---------------------------------------------------------------------------------------
1999 1998 1997
----------------------------------- ------------------------------------- -----------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE
--------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS:
Interest-bearing deposits............ $ 585 $ 17 2.91% $ 422 $ 18 4.27% $ 453
Federal funds sold................... 2,921 154 5.27 5,224 279 5.34 1,308
Investment securities(1)............. 31,904 2,120 6.64 35,445 2,473 6.98 44,092
Loans(2)............................. 59,016 4,817 8.16 45,043 3,807 8.45 36,324
--------- ---------
Total interest-earning assets...... 94,426 7,108 7.53 86,134 6,577 7.64 82,177
--------- ---------
Noninterest-earning assets........... 5,757 2,356 2,144
--------- --------- ---------
Total assets....................... $ 100,183 $ 88,490 $ 84,321
========= ========= =========
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
NOW accounts......................... $ 6,646 $ 56 0.84% $ 4,329 $ 47 1.09% $ 3,443
Regular savings accounts............. 16,227 208 1.28 15,370 176 1.15 14,548
Money market accounts................ 2,225 68 3.06 1,645 51 3.10 739
Time deposits........................ 39,980 2,093 5.24 35,766 2,011 5.62 32,634
--------- ---------
Total interest-bearing deposits.... 65,078 2,425 3.73 57,110 2,285 4.00 51,364
Advances from FHLB................... 20,292 1,127 5.55 22,858 1,312 5.74 26,044
--------- ---------
Total interest-bearing
liabilities...................... 85,370 3,552 4.16 79,968 3,597 4.50 77,408
--------- ---------
Demand deposits........................ 4,919 2,595 1,219
Other liabilities...................... 482 32 199
--------- --------- ---------
Total liabilities.................. 90,771 82,595 78,826
Equity................................. 9,412 5,895 5,495
--------- --------- ---------
Total liabilities and equity....... $ 100,183 $ 88,490 $ 84,321
========= ========= =========
Net interest income.................... $ 3,556 $ 2,980
========= =========
Net interest rate spread(3)............ 3.37% 3.14%
========= =========
Net interest margin(4)................. 3.77% 3.46%
========= =========
Ratio of interest-earning assets to
interest-bearing liabilities......... 110.61% 107.71% 106.16%
========= ========= =========
<CAPTION>
AVERAGE
YIELD/
INTEREST COST
----------- -----------
<S> <C> <C>
ASSETS:
INTEREST-EARNING ASSETS:
Interest-bearing deposits............ $ 16 3.53%
Federal funds sold................... 69 5.28
Investment securities(1)............. 3,068 6.96
Loans(2)............................. 2,997 8.25
---------
Total interest-earning assets...... 6,150 7.48
---------
Noninterest-earning assets...........
Total assets.......................
LIABILITIES AND EQUITY:
INTEREST-BEARING LIABILITIES:
NOW accounts......................... $ 35 1.02%
Regular savings accounts............. 142 0.98
Money market accounts................ 23 3.11
Time deposits........................ 1,850 5.67
---------
Total interest-bearing deposits.... 2,050 3.99
Advances from FHLB................... 1,527 5.86
---------
Total interest-bearing
liabilities...................... 3,577 4.62
---------
Demand deposits........................
Other liabilities......................
Total liabilities..................
Equity.................................
Total liabilities and equity.......
Net interest income.................... $ 2,573
=========
Net interest rate spread(3)............ 2.86%
=========
Net interest margin(4)................. 3.13%
=========
Ratio of interest-earning assets to
interest-bearing liabilities.........
</TABLE>
- ------------------------------
(1) Includes investment securities available-for-sale, held-to-maturity and
stock in FHLB-Boston.
(2) Amount is net of deferred loan origination fees, allowance for loan losses
and includes non-accrual loans.
(3) 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.
(4) Net interest margin represents net interest income as a percentage of
average interest-earning assets.
39
<PAGE>
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 ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
COMPARED TO YEAR ENDED COMPARED TO YEAR ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
-------------------------------------- --------------------------------------
INCREASE/(DECREASE) INCREASE/(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......... $ 6 $ (7) $ (1) $ (1) $ 3 $ 2
Federal funds sold................ (122) (3) (125) 209 1 210
Investment securities............. (240) (113) (353) (603) 8 (595)
Loans, net........................ 1,160 (150) 1,010 729 81 810
------ ----- ------ ----- ---- -----
Total interest-earning assets..... 804 (273) 531 334 93 427
------ ----- ------ ----- ---- -----
Interest-bearing liabilities:
NOW accounts...................... 22 (13) 9 9 3 12
Regular savings accounts.......... 11 21 32 8 26 34
Money market accounts............. 18 (1) 17 28 -- 28
Time deposits..................... 227 (145) 82 166 (5) 161
------ ----- ------ ----- ---- -----
Total deposits.................... 278 (138) 140 211 24 235
FHLB advances..................... (143) (42) (185) (183) (32) (215)
------ ----- ------ ----- ---- -----
Total interest-bearing
liabilities..................... 135 (180) (45) 28 (8) 20
------ ----- ------ ----- ---- -----
Net change in net interest
income.......................... $ 669 $ (93) $ 576 $ 306 $101 $ 407
====== ===== ====== ===== ==== =====
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998.
The Company's total assets increased by $22.7 million or 25.4% to
$112.2 million at September 30, 1999 from $89.5 million at September 30, 1998.
The net increase in total assets is primarily attributable to a $25.6 million
increase in net loans. Total net loans increased by $25.6 million or 54.6% to
$72.5 million or 64.6% of total assets at September 30, 1999 as compared to
$46.9 million or 52.4% of total assets at September 30, 1998. The Company's loan
growth reflected the continued emphasis on commercial and commercial real estate
lending. Investment securities held by the Bank increased by $700,000 or 2.2% to
$33.2 million at September 30, 1999 from $32.5 million at September 30, 1998.
This increase is due primarily to the purchase of $8.9 million in
mortgage-backed securities net of the scheduled principal paydowns of
mortgage-backed and asset-backed securities.
Total deposits increased by $10.3 million or 16.0% to $74.8 million at
September 30, 1999 from $64.5 million at September 30, 1998. This increase was
primarily the result of the opening of the Chelsea branch and ordinary deposit
growth. Total Federal Home Loan Bank of Boston ("FHLB") advances increased by
$8.8 million or 48.4% to $27.0 million at September 30, 1999 from $18.2 million
at September 30, 1998 due to the Bank's need to fund increased loan
originations. Total equity increased by $3.5 million or 53.8% to $10.0 million
at September 30, 1999 from $6.5 million at September 30, 1998 as a result of
$3.7 million raised from the sale of common stock, net income of $385,000 and a
decrease of $75,000 in the net unrealized gain on securities.
40
<PAGE>
COMPARISON OF THE OPERATING RESULTS FOR THE TWELVE MONTHS ENDED SEPTEMBER 30,
1999 AND 1998.
NET INCOME. The Company's net income for the twelve months ended
September 30, 1999 was $385,000 as compared to $291,000 for the twelve months
ended September 30, 1998. This $94,000 or 32.3% increase in net income during
the period was the result of an increase of $531,000 in interest and dividend
income, an increase of $133,000 in other income, a decrease of $45,000 in
interest expense, offset by an increase of $692,000 in operating expenses. The
increase in other income was primarily the result of increased fees on
transactional deposit accounts. The Company's continued expansion of its lending
activities accounted for the increase in interest income, while its operating
expenses increased due to the Company's planned expenditures in human and
technological resources, including increased staffing and non-recurring start-up
expenses associated with the Company's new branch office in Chelsea,
Massachusetts. The return on average assets for the twelve months ended
September 30, 1999 was .38% compared to .33% for the twelve months ended
September 30, 1998.
INTEREST AND DIVIDEND INCOME. Total interest and dividend income increased
by $531,000 or 8.1% to $7.1 million for the twelve months ended September 30,
1999 from $6.6 million for the twelve months ended September 30, 1998. The
increase in interest and dividend income was a result of a higher level of
commercial and commercial real estate loans. The average balance of net loans
for the twelve months ended September 30, 1999 was $59.0 million compared to
$45.0 million for the twelve months ended September 30, 1998. The average yield
on net loans was 8.16% for the twelve months ended September 30, 1999 compared
to 8.45% for the twelve months ended September 30, 1998. The average balance of
investment securities for the twelve months ended September 30, 1999 was
$31.9 million compared to $35.4 million for the twelve months ended
September 30, 1998. The average yield on investment securities was 6.64% for the
twelve months ended September 30, 1999 compared to 6.98% for the twelve months
ended September 30, 1998.
INTEREST EXPENSE. Interest expense decreased by $45,000 or 1.3% to
$3.6 million for the twelve months ended September 30, 1999 from $3.6 million
for the twelve months ended September 30, 1998. Average interest-bearing
deposits increased by $8.0 million or 14.0% to $65.1 million for the twelve
months ended September 30, 1999. Deposit balances have increased as a result of
offering various deposit products with competitive rates. Accordingly, interest
expense on deposits increased $140,000 or 6.1% to $2.4 million during this
period from $2.3 million during fiscal year 1998. Interest expense on advances
from the Federal Home Loan Bank decreased $185,000 or 14.1% to $1.1 million for
the year ended September 30, 1999 from $1.3 million for the year ended
September 30, 1998.
NET INTEREST AND DIVIDEND INCOME. The Company's net interest and dividend
income for the twelve months ended September 30, 1999 increased $576,000 or
19.3% to $3.6 million from $3.0 million for the twelve months ended
September 30, 1998. The increase is attributed to a combination of the $531,000
increase in interest and dividend income and the $45,000 decrease in interest
expense on deposits and borrowed funds.
The average yield on interest earning assets decreased 11 basis points to
7.53% for the twelve months ended September 30, 1999 from 7.64% for the twelve
months ended September 30, 1998, while the average cost on interest-bearing
liabilities decreased by 34 basis points to 4.16% for the twelve months ended
September 30, 1999 from 4.50% for the twelve months ended September 30, 1998. As
a result of the Company's strategy to restructure the balance sheet, the
interest rate spread increased to 3.37% for the twelve months ended
September 30, 1999 from 3.14% for the twelve months ended September 30, 1998 and
the net interest margin improved to 3.77% from 3.46% 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 Company considers many
factors in determining the level of the
41
<PAGE>
provision for loan losses. Collateral value on a loan-by-loan basis, trends of
loan delinquencies, risk classification identified in the Company's regular
review of individual loans, and economic conditions are major factors in
establishing the provision. The provision for loan losses decreased by $94,000
or 47.7% to $103,000 for the twelve months ended September 30, 1999 from
$197,000 for the twelve months ended September 30, 1998. At September 30, 1999,
the balance of the allowance for loan losses was $624,000 or .85% of total loans
versus $528,000 or 1.11% of total loans at September 30, 1998.
NONINTEREST INCOME. Total noninterest income increased by $133,000 or 62.4%
to $347,000 for the twelve months ended September 30, 1999 from $214,000 for the
twelve months ended September 30, 1998. 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 $692,000 or 27.3% to
$3.2 million for the twelve months ended September 30, 1999 from $2.5 million
for the twelve months ended September 30, 1998. The increase resulted primarily
from a general increase in operating expenses. Salaries and employee benefits,
the largest component of noninterest expense, was $1.6 million for the twelve
months ended September 30, 1999 as compared to $1.2 million for the twelve
months ended September 30, 1998, an increase of $390,000 or 32.0%. This increase
was primarily associated with approximately $311,000 in additional compensation
expenses due to the addition of full time equivalent employees, in our branch,
lending and operations department, necessary to provide support for the
Company's expanded lending and deposit activities resulting from the
establishment of the Company's commercial lending department. During the period,
professional fees increased $72,000 to $285,000 or 33.8% due to the added cost
of outside loan review and certain legal and consulting costs. Occupancy expense
increased by $51,000 or 32.9% to $206,000 for the twelve months ended
September 30, 1999 as compared to $155,000 for the twelve months ended
September 30, 1998, with the increase primarily related to the Chelsea branch.
Other increases were incurred in the areas of equipment, data processing and
other expenses, primarily related to the opening of the Chelsea branch and the
expansion of the Company's product lines and additional services.
INCOME TAXES. The net provision for income taxes amounted to $191,000 for
the year ended September 30, 1999 as compared to $173,000 for the year ended
September 30, 1998, resulting in effective tax rate of 33.2% for the period. The
effective tax rate reflects the Company's utilization of a securities investment
subsidiary to substantially reduce state income taxes.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND 1997.
The Company'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 Company's loan growth reflected the continued emphasis
on commercial and commercial real estate lending. Investment securities held by
the Company 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 Company used proceeds from bonds called
and excess cash to paydown advances during this period. Total equity increased
42
<PAGE>
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 Company'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 $427,000 in interest and dividend
income and an increase of $75,000 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 $20,000 in interest expense, and a decrease in provision
for income taxes of $114,000. The Company's continued expansion of its lending
activities accounted for the increase in interest income, while its operating
expenses increased due to increased staffing and 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 $427,000 or 6.9% 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 8.45%
for the twelve months ended September 30, 1998 compared to 8.25% 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 $20,000 or .55% 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 offset by a decrease in Federal
Home Loan Company 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 $235,000 or 11.4% to
$2.3 million during this period from $2.1 million during fiscal year 1997.
Interest expense on advances from the Federal Home Loan Company 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 Company's net interest and dividend
income for the twelve months ended September 30, 1998 increased $408,000 or
15.8% 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 $427,000
increase in interest and dividend income and the $20,000 increase in interest
expense on deposits and borrowed funds.
The average yield on interest earning assets increased 16 basis points to
7.64% for the twelve months ended September 30, 1998 from 7.48% for the twelve
months ended September 30, 1997, while the average cost on interest-bearing
liabilities decreased by 12 basis points to 4.50% for the twelve months ended
September 30, 1998 from 4.62% for the twelve months ended September 30, 1997. As
a result of the Company's strategy to restructure the balance sheet, the
interest rate spread increased to 3.14% for the twelve months ended
September 30, 1998 from 2.86% for the twelve months ended September 30, 1997 and
the net interest margin improved to 3.46% from 3.13% during this period.
43
<PAGE>
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 Company 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 Company'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.
NONINTEREST INCOME. Total noninterest income increased by $75,000 or 54.0%
to $214,000 for the twelve months ended September 30, 1998 from $139,000 for the
twelve months ended September 30, 1997. The increase was primarily the result of
increased fees on transactional deposit accounts. The Company anticipates
increases to noninterest income as it continues to expand the volume of its
deposit relationships.
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 Company's expanded lending and
deposit activities resulting from the establishment of the Company'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 Company'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 Company's product lines and additional services.
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 37.4% for the period. The
effective tax rate reflects the Company's utilization of a securities investment
subsidiary to substantially reduce state income taxes.
IMPACT OF NEW ACCOUNTING STANDARDS
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 Company at this time does not plan to adopt
44
<PAGE>
SFAS No. 133 early. Also, the Company 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, 1999, 1998 and 1997, our loan originations totaled $98.6 million,
$70.8 million and $47.5 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 $5.5 million, $8.4 million and
$2.8 million for the years ended September 30, 1999, 1998 and 1997,
respectively.
We experienced a net increase in total deposits of $10.3 million,
$9.0 million and $6.1 million for the years ended September 30, 1999, 1998 and
1997, 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, 1999,
we had $27.0 million outstanding in FHLB advances.
Loan commitments totaled $5.5 million at September 30, 1999, comprised of
$4.3 million at variable rates and $1.2 million 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, 1999, totaled $23.7 million. Based upon this experience and our
current pricing strategy, we believe that a significant portion of such deposits
will remain with the Company.
At September 30, 1999, the Bank exceeded all of its regulatory capital
requirements with a tangible capital level of $8.9 million, or 7.98% to tangible
assets, which is above the required level of $1.7 million, or 1.50% and total
risk-based capital of $9.5 million, or 18.58% of adjusted assets, which is above
the required level of $4.1 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, 1999, cash, federal funds sold and interest-bearing demand
accounts totaled $3.4 million, or 3.1% of total assets.
FINANCIAL SERVICES MODERNIZATION BILL
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999, federal
legislation intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. The legislation has been forwarded to the President for his approval.
Generally, the legislation (i) repeals the historical restrictions and eliminate
many federal and state law barriers to affiliations among banks, securities
firms, insurance companies and other financial service providers, (ii) provides
a uniform framework for the functional regulation of the activities of banks,
savings institutions and their holding companies, (iii) broadens the activities
that may be
45
<PAGE>
conducted by national banks, banking subsidiaries of bank holding companies and
their financial subsidiaries, (iv) provides an enhanced framework for protecting
the privacy of consumer information, (v) adopts a number of provisions related
to the capitalization, membership, corporate governance and other measures
designed to modernize the Federal Home Loan Bank system, (vi) modifies the laws
governing the implementation of the Community Reinvestment Act and
(vii) addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.
In particular, the legislation restricts the authority of unitary savings
and loan holding companies under current law to engage in non-financially
related activities. Unitary savings and loan holding companies that are
"grandfathered," I.E., became a unitary savings and loan holding company
pursuant to an application filed with the OTS before May 4, 1999, (such as the
Company) retain this authority. All other savings and loan holding companies are
limited to financially related activities permissible for financial holding
companies, as defined under the new law. The legislation also prohibits
non-financial companies from acquiring savings and loan holding companies.
Bank holding companies are now permitted to engage in a wider variety of
financial activities than permitted under current law, particularly with respect
to insurance and securities activities. In addition, in a change from prior law,
bank holding companies are in a position to be owned, controlled or acquired by
any company engaged in financially related activities.
We do not believe that the proposed legislation, as publicly reported, would
have a material adverse effect on our operations in the near term. However, to
the extent the legislation permits banks, securities firms and insurance
companies to affiliate, the financial services industry may experience further
consolidation. This could result in a growing number of larger financial
institutions that offer a wider variety of financial services than we currently
offer and that can aggressively compete in the markets we currently serve.
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 Company 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
Company's direct control and with whom the Company 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 Company 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 Company upon the
arrival of the Year 2000.
46
<PAGE>
Under certain circumstances, failure to adequately address the Year 2000
Problem could adversely affect the viability of the Company's suppliers and
creditors and the creditworthiness of its borrowers. Thus, if not adequately
addressed, the Year 2000 Problem could result in a significant adverse impact on
the Company's products, services and competitive condition.
In order to address the Year 2000 issue and to minimize its potential
adverse impact, management has begun a process to identify areas that will be
affected by the Year 2000 Problem, assess its potential impact on the operations
of the Company, monitor the progress of third party software vendors in
addressing the matter, test changes provided by these vendors, and develop
contingency plans for any critical systems which are not effectively
reprogrammed. A committee of senior officers of the Company has been formed to
evaluate the effects that the upcoming Year 2000 could have on computer programs
utilized by the Company. The Company's plan is divided into the five phases:
(1) awareness--define the problem, obtain executive level support and develop an
overall strategy. 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 was completed in October 1999; (4) validation--test and verify system
changes and coordinate with outside parties. This phase was completed in
June 1999; and (5) implementation--components certified as year 2000 compliant
and moved to production. This phase was completed in October 1999.
Third party vendors provide the majority of software used by the Company.
All of the Company's vendors are aware of the Year 2000 situation, and each has
assured the Company that it is currently working to have its software compliant
by December, 1998, and testing for the critical applications began in April,
1998. This will enable the Company to devote substantial time to the testing of
the upgraded systems prior to the arrival of the millennium. The Company
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 Company is underway to
verify compliance for its application and usage. The Company presently believes
that with modifications to existing software and conversions to new software,
the Year 2000 Problem will be mitigated without causing a material adverse
impact on the operations of the Company. However, if such modifications and
conversions are not made, or are not completed timely, the Year 2000 Problem
could have an impact on the operations of the Company.
The Company carefully considers the Year 2000 readiness of its potential
commercial borrowers in the lending process. Commencing in September 1998, each
potential new commercial borrower was required to enter into a Year 2000
agreement with the Company certifying that the borrower is or will shortly be
Year 2000 compliant. Moreover, the failure to be Year 2000 compliant constitutes
a default under the terms of new loan agreements with commercial borrowers.
In addition, monitoring and managing the year 2000 project will result in
additional direct and indirect costs to the Stock Company and the Company.
Direct costs include potential charges by third party software vendors for
product enhancements, costs involved in testing software products for Year 2000
compliance, and any resulting costs for developing and implementing contingency
plans for critical software products which are not enhanced. Indirect costs will
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and implementing
any necessary contingency plans. The Company has spent approximately $32,000 on
Year 2000 related costs to date and estimates that it will spend an additional
$15,000 for Year 2000 compliance. Both direct and indirect costs of addressing
the Year 2000 Problem will be charged to earnings as incurred. The Company does
not believe that such costs will have a material effect on results of
operations. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company or a conversion that is incompatible
with the Company's systems, would not have material adverse effect on the
Company. Although no independent analysis of the Company's potential exposure
has been obtained, the Company
47
<PAGE>
believes it has no exposure to contingencies related to the Year 2000 Problem
for the products it has sold. The Company's network consultant, EOS
Systems, Inc., has examined the hardware and software used by the Company and
has certified that such hardware and software is Year 2000 compliant.
The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties. The
Company has developed a contingency plan which would be implemented in the
unlikely event that it is not Year 2000 compliant.
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 Company are primarily
monetary in nature and changes in market interest rates have a greater impact on
the Company's performance than do the effects of inflation.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The Consolidated Financial Statements of RFS Bancorp and Subsidiary are
included in pages F-1 through F-29 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK AND THE COMPANY
The information relating to Director and Executive Officers of the Company
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on January 19, 2000.
ITEM 10. EXECUTIVE COMPENSATION
The information relating to executive compensation is incorporated herein by
reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 19, 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Company's Proxy
Statement for the Annual Meeting of Stockholders to be held on January 19, 2000.
48
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
is incorporated herein by reference to the Company's Proxy Statement for the
Annual Meeting of Stockholders to be held on January 19, 2000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
1. Exhibits. The following exhibits are either filed as part of this report or
are incorporated herein by reference:
<TABLE>
<C> <S>
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.*
3.6 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*
27.1 Financial Data Schedule (only filed in electronic format)**
</TABLE>
- ------------------------
* 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.
2. Reports on Form 8-K.
None.
49
<PAGE>
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.
<TABLE>
<S> <C> <C>
RFS BANCORP, INC.
By: /s/ JAMES J. MCCARTHY
-----------------------------------------
James J. McCarthy
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
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
---- ----- ----
<C> <S> <C>
Director, President and
/s/ JAMES J. MCCARTHY Chief Executive Officer
------------------------------------------- (Principal Executive December 15, 1999
James J. McCarthy Officer)
/s/ ARNO P. BOMMER
------------------------------------------- Chairman December 15, 1999
Arno P. Bommer
/s/ ERNEST F. BECKER
------------------------------------------- Vice Chairman December 15, 1999
Ernest F. Becker
/s/ JOHN J. VERRENGIA
------------------------------------------- Director December 15, 1999
John J. Verrengia
/s/ ANGELO A. TODISCO
------------------------------------------- Director December 15, 1999
Angelo A. Todisco
/s/ ANTHONY R. CONTE
------------------------------------------- Director December 15, 1999
Anthony R. Conte
/s/ CARMEN R. MATTUCHIO
------------------------------------------- Director December 15, 1999
Carmen R. Mattuchio
/s/ J. MICHAEL O'BRIEN
------------------------------------------- Director December 15, 1999
J. Michael O'Brien
/s/ THEODORE E. CHARLES
------------------------------------------- Director December 15, 1999
Theodore E. Charles
Executive Vice President
/s/ ANTHONY J. PATTI and Chief Financial Officer
------------------------------------------- (Principal Accounting December 15, 1999
Anthony J. Patti Officer)
</TABLE>
50
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheet as of September 30, 1999 and
1998...................................................... F-3
Consolidated Statements of Operations for each of the years
ended September 30, 1999, 1998 and 1997................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for each of the years ended September 30, 1999, 1998 and
1997...................................................... F-5
Consolidated Statements of Cash Flows for each of the years
ended September 30, 1999, 1998 and 1997................... F-6
Notes to Consolidated Financial Statements.................. F-7 to F-29
</TABLE>
F-1
<PAGE>
SHATSWELL, MACLEOD & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
83 PINE STREET
WEST PEABODY, MASSACHUSETTS 01980-9835
TELEPHONE (978) 535-0206
FACSIMILE (978) 535-9908
The Board of Directors
RFS Bancorp, Inc.
Revere, Massachusetts
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated balance sheets of RFS
Bancorp, Inc. and Subsidiary as of September 30, 1999 and 1998 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended September 30, 1999.
These consolidated financial statements are the responsibility of the Company'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
RFS Bancorp, Inc. and Subsidiary as of September 30, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended September 30, 1999, in conformity with
generally accepted accounting principles.
/s/ SHATSWELL, MACLEOD & COMPANY, P.C.
----------------------------------------
SHATSWELL, MacLEOD & COMPANY, P.C.
October 29, 1999
F-2
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 1,530,348 $ 602,672
Interest bearing demand deposits with other banks........... 967,714 591,751
Federal Home Loan Bank overnight deposits................... 930,839 6,735,368
------------ -----------
Cash and cash equivalents............................. 3,428,901 7,929,791
Investments in available-for-sale securities (at fair
value).................................................... 5,630,449 895,820
Investments in held-to-maturity securities (fair values of
$25,513,780 as of September 30, 1999 and $30,646,458 as of
September 30, 1998)....................................... 26,074,272 30,109,583
Federal Home Loan Bank stock, at cost....................... 1,517,000 1,517,000
Loans held for sale......................................... 235,000
Loans, net.................................................. 72,460,876 46,617,125
Premises and equipment, net of depreciation and
amortization.............................................. 2,128,100 1,251,817
Accrued interest receivable................................. 640,399 519,345
Other assets................................................ 283,634 392,577
------------ -----------
Total assets.......................................... $112,163,631 $89,468,058
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing....................................... $ 7,042,617 $ 2,822,689
Interest-bearing.......................................... 67,764,464 61,661,022
------------ -----------
Total deposits........................................ 74,807,081 64,483,711
Advances from Federal Home Loan Bank of Boston.............. 27,036,209 18,204,150
Other liabilities........................................... 300,673 296,091
------------ -----------
Total liabilities..................................... 102,143,963 82,983,952
------------ -----------
Stockholders' equity:
Common stock, par value $.01 per share, authorized
5,000,000 shares; issued 933,523 shares; outstanding
915,973 shares.......................................... 9,335
Paid-in capital........................................... 3,736,351
Retained earnings......................................... 6,356,537 5,971,404
Treasury stock (17,550 shares, at cost)................... (168,799)
Accumulated other comprehensive income.................... 437,244 512,702
Unallocated ESOP shares................................... (351,000)
------------ -----------
Total stockholders' equity............................ 10,019,668 6,484,106
------------ -----------
Total liabilities and stockholders' equity............ $112,163,631 $89,468,058
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans............................. $4,816,626 $3,806,711 $2,996,502
Interest and dividends on securities:
Taxable interest and dividends....................... 2,119,677 2,473,406 3,067,872
Other interest......................................... 171,694 297,287 85,681
---------- ---------- ----------
Total interest and dividend income................. 7,107,997 6,577,404 6,150,055
---------- ---------- ----------
Interest expense:
Interest on deposits:
Savings deposits..................................... 208,119 176,506 142,775
NOW accounts and MMDA deposits....................... 123,915 97,297 57,583
Time deposits........................................ 2,092,430 2,011,293 1,850,266
Interest on advances from Federal Home Loan Bank....... 1,127,202 1,311,990 1,526,633
---------- ---------- ----------
Total interest expense............................. 3,551,666 3,597,086 3,577,257
---------- ---------- ----------
Net interest and dividend income................... 3,556,331 2,980,318 2,572,798
Provision for loan losses................................ 102,500 197,000 60,000
---------- ---------- ----------
Net interest and dividend income after provision
for loan losses.................................. 3,453,831 2,783,318 2,512,798
---------- ---------- ----------
Other income:
Service charges on deposit accounts.................... 177,992 134,348 93,483
Other income........................................... 169,317 79,510 45,172
---------- ---------- ----------
Total other income................................. 347,309 213,858 138,655
---------- ---------- ----------
Other expense:
Salaries and employee benefits......................... 1,606,990 1,217,490 919,443
Occupancy expense...................................... 205,518 154,995 114,788
Equipment expense...................................... 213,567 149,015 117,626
FDIC insurance......................................... 42,622 37,112 46,558
Advertising expense.................................... 68,500 125,356 45,000
Office supplies expense................................ 95,256 97,918 59,188
Data processing expense................................ 200,364 157,787 107,801
Professional fees...................................... 285,011 212,683 122,084
Other expense.......................................... 506,819 380,724 355,318
---------- ---------- ----------
Total other expense................................ 3,224,647 2,533,080 1,887,806
---------- ---------- ----------
Income before income taxes......................... 576,493 464,096 763,647
Income taxes............................................. 191,360 173,424 287,245
---------- ---------- ----------
Net income......................................... $ 385,133 $ 290,672 $ 476,402
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER UNALLOCATED
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE ESOP
STOCK CAPITAL EARNINGS STOCK INCOME SHARES TOTAL
-------- ---------- ---------- --------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996......... $ $ $5,204,330 $ $ 242,870 $ $ 5,447,200
Comprehensive income:
Net income........................ 476,402
Net change in unrealized holding
gain on available-for-sale
securities, net of tax effect of
$80,047......................... 115,625
Comprehensive income.......... 592,027
------ ---------- ---------- --------- --------- --------- -----------
Balance, September 30, 1997......... 5,680,732 358,495 6,039,227
Comprehensive income:
Net income........................ 290,672
Net change in unrealized holding
gain on available-for-sale
securities, net of tax effect of
$105,233........................ 154,207
Comprehensive income.......... 444,879
------ ---------- ---------- --------- --------- --------- -----------
Balance, September 30, 1998......... 5,971,404 512,702 6,484,106
Comprehensive income:
Net income........................ 385,133
Net change in unrealized holding
gain on available-for-sale
securities, net of tax effect... (75,458)
Comprehensive income.......... 309,675
Recognition and retention plan...... 5,790 5,790
Stock issued pursuant to initial
common stock offering............. 9,335 3,730,561 3,739,896
Purchases of treasury stock......... (168,799) (168,799)
Common stock acquired by ESOP....... (351,000) (351,000)
------ ---------- ---------- --------- --------- --------- -----------
Balance, September 30, 1999......... $9,335 $3,736,351 $6,356,537 $(168,799) $ 437,244 $(351,000) $10,019,668
====== ========== ========== ========= ========= ========= ===========
Reclassification disclosure for the year ended September 30, 1999:
Net unrealized losses on available-for-sale securities..... $(118,081)
Less reclassification adjustment for realized gains or
losses in net income.....................................
---------
Other comprehensive loss before income tax effect........ (118,081)
Income tax benefit.................. 42,623
---------
Other comprehensive loss, net of tax................... $ (75,458)
=========
</TABLE>
Accumulated other comprehensive income as of September 30, 1999, 1998 and 1997
consists of net unrealized holding gains on available-for-sale securities, net
of taxes.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 385,133 $ 290,672 $ 476,402
Adjustments to reconcile net income to net cash provided
by operating activities:
Recognition and retention plan........................ 5,790
(Gain) loss on sales of loans, net.................... (36,165) 10,757 13,778
Amortization, net of accretion of securities.......... 65,374 39,381 70,247
Forfeited deposit on fixed assets..................... 1,000
Depreciation and amortization......................... 215,216 156,451 126,211
Provision for loan losses............................. 102,500 197,000 60,000
Deferred tax expense (benefit)........................ (96,910) (67,823) 7,141
Increase (decrease) in taxes payable.................. 49,118 (169,810) 340,347
(Increase) decrease in interest receivable............ (121,054) 182,797 (137,984)
Increase (decrease) in interest payable............... 2,154 (2,786) 848
Increase (decrease) in accrued expenses............... 38,672 40,280 (359,865)
(Increase) decrease in prepaid expenses............... 115,740 (252,461) 22,218
(Increase) decrease in other assets................... (42,332) (1,018) 36,801
Increase (decrease) in other liabilities.............. 89,706 (8,022) (89,939)
Net (increase) decrease in loans held-for-sale........ 235,000 (235,000)
Change in deferred loan origination fees, net......... 30,558 (12,881) 212
----------- ----------- -----------
Net cash provided by operating activities................. 1,038,500 167,537 567,417
----------- ----------- -----------
Cash flows from investing activities:
Purchases of Federal Home Loan Bank stock................. (111,600)
Purchases of available-for-sale securities................ (4,907,862)
Proceeds from maturities of available-for-sale
securities................................................ 58,656
Purchases of held-to-maturity securities.................. (4,021,250) (5,499,960) (11,315,230)
Proceeds from maturities of held-to-maturity securities... 7,987,683 15,504,274 11,771,428
Net increase in loans..................................... (31,507,589) (14,045,546) (10,999,729)
Recoveries of loans previously charged-off................ 2,505
Proceeds from sales of loans.............................. 5,564,440 8,408,678 2,796,711
Capital expenditures...................................... (1,091,499) (456,381) (230,446)
----------- ----------- -----------
Net cash provided by (used in) investing activities....... (27,914,916) 3,799,465 (7,977,266)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock.................... 4,387,560
Costs related to issuance of common stock................. (647,664)
Purchases of treasury stock............................... (168,799)
Common stock acquired by ESOP............................. (351,000)
Net increase in demand deposits savings and NOW
accounts................................................ 6,966,750 6,142,044 2,481,759
Net increase in time deposits............................. 3,356,620 2,889,393 3,577,158
Advances from Federal Home Loan Bank...................... 10,000,000 12,500,000 31,100,000
Repayments of advances from Federal Home Loan Bank........ (1,167,941) (19,400,270) (28,707,535)
----------- ----------- -----------
Net cash provided by financing activities................. 22,375,526 2,131,167 8,451,382
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents........ (4,500,890) 6,098,169 1,041,533
Cash and cash equivalents at beginning of period............ 7,929,791 1,831,622 790,089
----------- ----------- -----------
Cash and cash equivalents at end of period.................. $ 3,428,901 $ 7,929,791 $ 1,831,622
=========== =========== ===========
Supplemental disclosures:
Interest paid............................................. $ 3,549,512 $ 3,599,872 $ 3,576,409
Income taxes (received) paid.............................. 239,152 411,057 (60,243)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 1--NATURE OF OPERATIONS
RFS Bancorp, Inc. (the "Company") is a federally chartered stock holding
company for Revere Federal Savings Bank (the "Bank"), a federally chartered
stock savings association which conducts business from its main office located
in Revere, 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, called Revere Federal Savings and Loan 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% of the shares
issued in the Reorganization, were sold to the public and 494,767 shares were
issued 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. Revere
Federal Savings Bank was incorporated in 1901.
The Bank is engaged principally in the business of attracting deposits from
the general public and investing those deposits in residential real estate loans
and in consumer and small business loans.
NOTE 2--ACCOUNTING POLICIES
The accounting and reporting policies of the Company and its 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 accompanying consolidated financial statements include the accounts
of RFS Bancorp, Inc. and its wholly-owned subsidiary Revere Federal Savings
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.
F-7
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 2--ACCOUNTING POLICIES (CONTINUED)
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 Company 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 Company 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 Company 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.
F-8
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 2--ACCOUNTING POLICIES (CONTINUED)
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.
The Company considers a loan to be impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. The Company measures impaired loans 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 Company considers for impairment 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 Company 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 Company reviews its loans for
impairment on a loan-by-loan basis. The Company does not apply impairment 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 Company may place a loan on
nonaccrual status but not classify it as impaired, if (i) it is probable
that the Company 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 Company's loans that have been
identified as impaired have been measured by the fair value of existing
collateral.
LOAN SERVICING:
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 125 (SFAS No. 125). This statement requires the
Company to recognize as separate assets from their related loans the rights
to service mortgage loans for others, either through acquisition of those
rights or from the sale or securitization of loans with the servicing rights
retained on those loans, based on their relative fair values. To determine
the fair value of the servicing rights created, the Company uses the market
prices under comparable servicing sale contracts, when available, or
alternatively uses a valuation model that calculates the present value of
future cash flows to determine the fair value of the servicing rights. In
using this valuation method, the Company incorporates assumptions that
market participants would use in estimating future net servicing income,
which includes estimates of the cost of servicing loans, the discount rate,
ancillary income, prepayment speeds and default rates.
F-9
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 2--ACCOUNTING POLICIES (CONTINUED)
The cost of mortgage servicing rights is amortized on a straight-line
basis which has substantially the same effect as amortizing the rights in
proportion to, and over the period of, estimated net servicing revenues.
Impairment of mortgage servicing rights is assessed based on the fair value
of those rights. Fair values are estimated using discounted cash flows based
on a current market interest rate. For purposes of measuring impairment, the
rights are stratified based on the interest rate risk characteristics of the
underlying loans. The amount of impairment recognized is the amount by which
the capitalized mortgage servicing rights for a stratum exceed their fair
value.
The Company did not adopt SFAS No. 125 for periods prior to October 1,
1998 due to the immateriality of the assets at that time.
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.
In accordance with Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan," the Company classifies
loans as in-substance repossessed or foreclosed if the Company 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 Company disclose
estimated fair value for its financial instruments. Fair value methods and
assumptions used by the Company in estimating its fair value disclosures are
as follows:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents 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.
F-10
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 2--ACCOUNTING POLICIES (CONTINUED)
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 Federal Home Loan Bank
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 Federal Home Loan Bank 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 Company 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 Company'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.
F-11
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
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 GROSS
AMORTIZED UNREALIZED UNREALIZED
COST HOLDING HOLDING FAIR
BASIS GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available-for-sale securities (1):
September 30, 1999:
Mortgage-backed securities................ $ 4,852,710 $ $ 160,769 $ 4,691,941
Marketable equity securities.............. 23,870 914,638 938,508
----------- -------- ---------- -----------
$ 4,876,580 $914,638 $ 160,769 $ 5,630,449
=========== ======== ========== ===========
September 30, 1998:
Marketable equity securities.............. $ 23,870 $871,950 $ $ 895,820
=========== ======== ========== ===========
</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, 1999:
Debt securities issued by the U.S.
Treasury and other U.S. government
corporations and agencies.............. $ 4,000,000 $ $ 267,340 $ 3,732,660
Mortgage-backed securities................. 18,817,900 100,486 367,964 18,550,422
Asset-backed securities.................... 3,256,372 59,111 84,785 3,230,698
----------- --------- ---------- -----------
$26,074,272 $ 159,597 $ 720,089 $25,513,780
=========== ========= ========== ===========
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
=========== ========= ========== ===========
</TABLE>
- ------------------------
(1) Marketable equity securities consists of common stock issued by
government-sponsored agencies.
Mortgage-backed securities are issued by GNMA, FHLMC or FNMA, and are backed
by fixed-rate mortgages. Asset-backed securities are SBA loan pools.
F-12
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 3--SECURITIES (CONTINUED)
The scheduled maturities of held-to-maturity securities were as follows as
of September 30, 1999:
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR
BASIS VALUE
----------- -----------
<S> <C> <C>
Debt securities other than mortgage-backed and
asset-backed securities:
Due after five years through ten years........... $ 1,000,000 $ 956,250
Due after ten years.............................. 3,000,000 2,776,410
Mortgage-backed securities......................... 18,817,900 18,550,422
Asset-backed securities............................ 3,256,372 3,230,698
----------- -----------
$26,074,272 $25,513,780
=========== ===========
</TABLE>
For the years ended September 30, 1999, 1998 and 1997, there were no sales
of available-for-sale securities.
During the years ended September 30, 1999, 1998 and 1997 no held-to-maturity
securities were sold or transferred.
The Company 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, 1999.
A total carrying amount of $8,280,168 of debt securities were pledged to
secure certain time deposits, $100,000 and over, received from customers as of
September 30, 1999.
F-13
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 4--LOANS
Loans consisted of the following as of September 30:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Mortgage loans:
One to four family............................... $47,171,861 $34,474,719
Commercial real estate........................... 13,252,071 4,366,969
Construction and land............................ 2,192,100 1,884,941
----------- -----------
Total mortgage loans........................... 62,616,032 40,726,629
----------- -----------
Commercial loans................................... 5,937,447 2,326,340
----------- -----------
Consumer loans:
Home equity lines................................ 3,650,061 3,061,308
Secured by deposit accounts...................... 561,101 604,470
Auto loans....................................... 300,379 409,148
Other consumer loans............................. 110,009 77,508
----------- -----------
Total consumer loans........................... 4,621,550 4,152,434
----------- -----------
Total loans receivable..................... 73,175,029 47,205,403
Allowance for loan losses.......................... (623,567) (528,250)
Deferred loan origination fees, net................ (90,586) (60,028)
----------- -----------
Net loans.................................. $72,460,876 $46,617,125
=========== ===========
</TABLE>
Certain directors and executive officers of the Company were customers of
the Bank during the year ended September 30, 1999. As of September 30, 1999
total loans to such persons and their companies amounted to $285,188. During the
year ended September 30, 1999 total payments amounted to $51,073 and total
principal advances amounted to $55,539.
Changes in the allowance for loan losses were as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period................ $528,250 $376,854 $324,708
Loans charged off............................. (9,688) (45,604) (7,854)
Recoveries of loans previously charged-off.... 2,505
Provision for loan losses..................... 102,500 197,000 60,000
-------- -------- --------
Balance at end of period...................... $623,567 $528,250 $376,854
======== ======== ========
</TABLE>
During the years ended September 30, 1999 and 1998, the Company 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,
1999 and 1998.
In the fiscal years ending September 30, 1999 and 1998 the Company sold
mortgage loans totaling approximately $5,528,000 and $8,419,000, respectively
and retained the servicing rights. The fair value of those rights under SFAS
No. 122 and SFAS No. 125 has been recognized in the consolidated financial
F-14
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 4--LOANS (CONTINUED)
statements for the year ended September 30, 1999. The fair value of such rights
as of September 30, 1998 was not recognized due to immateriality.
The balance of capitalized servicing rights, net of valuation allowances,
included in other assets at September 30, 1999 and 1998 was $41,401 and $0,
respectively. The fair value of these rights were equal to their carrying
amounts. The following summarizes for the year ended September 30, 1999 mortgage
servicing rights capitalized and amortized, along with the aggregate activity in
related valuation allowances:
<TABLE>
<S> <C>
Mortgage servicing rights capitalized....................... $48,549
=======
Mortgage servicing rights amortized......................... $ 7,148
=======
Valuation allowances:
Balances at beginning of year............................. $ 0
Additions............................................... 0
Reductions.............................................. 0
Write-downs............................................. 0
-------
Balances at end of year................................... $ 0
=======
</TABLE>
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>
1999 1998
---------- ----------
<S> <C> <C>
Land........................................................ $ 649,174 $ 400,000
Buildings................................................... 1,390,991 868,241
Furniture and equipment..................................... 1,142,207 822,632
---------- ----------
3,182,372 2,090,873
Accumulated depreciation and amortization................... (1,054,272) (839,056)
---------- ----------
$2,128,100 $1,251,817
========== ==========
</TABLE>
NOTE 6--DEPOSITS
The aggregate amount of time deposit accounts in denominations of $100,000
or more, was $14,351,565 and $11,115,185 as of September 30, 1999 and 1998,
respectively.
F-15
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997
NOTE 6--DEPOSITS (CONTINUED)
For time deposits as of September 30, 1999, the scheduled maturities for
each of the following four years ended at September 30, and thereafter are:
<TABLE>
<S> <C>
2000........................................................ $23,718,842
2001........................................................ 12,565,678
2002........................................................ 2,639,416
2003........................................................ 214,949
-----------
Thereafter.................................................. 1,825,131
===========
</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, 1999 and thereafter are summarized
as follows:
<TABLE>
<CAPTION>
INTEREST RATE RANGE AMOUNT
------------------------------ ------------------------------
<S> <C> <C>
2000.......................... 5.03%-6.64% $3,632,216
2001.......................... 5.36%-6.64% 4,307,569
2002.......................... 5.36%-6.64% 5,891,488
2003.......................... 5.36%-6.64% 1,476,740
2004.......................... 5.64%-6.64% 671,748
Thereafter.................... 4.99%-6.64% 11,056,448
------------------------------
$27,036,209
==============================
</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 Company's stock in that institution, its
residential real estate mortgage portfolio and the remaining U.S. government and
agencies obligation not otherwise pledged.
F-16
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997
NOTE 8--INCOME TAXES
The components of income tax expense are as follows for the years ended
September 30:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal..................................... $253,197 $215,051 $259,454
State....................................... 35,073 26,196 20,650
-------- -------- --------
288,270 241,247 280,104
-------- -------- --------
Deferred:
Federal..................................... (74,197) (51,423) 2,545
-------- -------- --------
State....................................... (22,713) (16,400) 4,596
-------- -------- --------
(96,910) (67,823) 7,141
-------- -------- --------
Total income tax expense.............. $191,360 $173,424 $287,245
======== ======== ========
</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>
1999 1998 1997
% 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) (.4) (.2)
Unallowable expenses and other adjustments......... (1.4) 1.9 1.7
State tax, net of federal tax benefit................ 1.0 1.9 2.1
---- ---- ----
Effective tax rate........................... 33.2% 37.4% 37.6%
==== ==== ====
</TABLE>
F-17
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997
NOTE 8--INCOME TAXES (CONTINUED)
The Company had gross deferred tax assets and gross deferred tax liabilities
as follows as of September 30:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses........................... $ 234,543 $ 189,882
Interest on non-performing loans.................... 135 1,579
Loan origination fees............................... 87,432 63,941
Estimated expenses.................................. 3,169
Investment writedown................................ 1,508 1,518
Depreciation........................................ 42,721 20,844
Accrued pension expense............................. 12,279 12,360
Other............................................... 27,883
--------- ---------
Gross deferred tax assets..................... 406,501 293,293
========= =========
Deferred tax liabilities:
Unrealized gain on available-for-sale securities.... (316,625) (359,248)
Deferred loan costs................................. (50,482) (34,184)
--------- ---------
Gross deferred tax liabilities................ (367,107) (393,432)
--------- ---------
Net deferred tax asset (liability).................... $ 39,394 $(100,139)
========= =========
</TABLE>
Deferred tax assets as of September 30, 1999 and 1998 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, 1999, the Company had no operating loss and tax credit
carryovers for tax purposes.
In prior years, the Company was allowed a special tax-basis bad debt
deduction under certain provisions of the Internal Revenue Code. As a result,
retained earnings of the Company as of September 30, 1999 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 Company 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 Company 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 Company has in particular
classes of financial instruments.
F-18
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997
NOTE 9--FINANCIAL INSTRUMENTS (CONTINUED)
The Company'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 Company 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 Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company 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 Company
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>
1999 1998
----------- ----------
<S> <C> <C>
Commitments to originate loans...................... $ 5,476,800 $1,748,000
Unadvanced funds on construction loans.............. 1,266,895 1,112,721
Unadvanced funds on home equity lines of credit..... 3,434,954 2,685,208
Unadvanced funds on commercial lines of credit...... 1,238,035 415,291
Unadvanced funds on consumer lines of credit........ 98,303 82,450
Standby letters of credit........................... 50,000 50,000
----------- ----------
$11,564,987 $6,093,670
=========== ==========
</TABLE>
F-19
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997
NOTE 9--FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments, all of
which are held or issued for purposes other than trading, are as follows as of
September 30:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............... $ 3,428,901 $ 3,428,901 $ 7,929,791 $ 7,929,791
Available-for-sale securities........... 5,630,449 5,630,449 895,820 895,820
Held-to-maturity securities............. 26,074,272 25,513,780 30,109,583 30,646,458
Federal Home Loan Bank stock............ 1,517,000 1,517,000 1,517,000 1,517,000
Loans held-for-sale..................... 235,000 235,000
Loans, net.............................. 72,460,876 71,415,000 46,617,125 48,173,857
Accrued interest receivable............. 640,399 640,399 519,345 519,345
Financial liabilities:
Deposits................................ 74,807,081 75,173,000 64,483,711 64,802,000
Federal Home Loan Bank advances......... 27,036,209 26,962,000 18,204,150 18,517,000
</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 Company 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 AND BENEFITS
PENSION PLAN
The Company is a member of a multi-employer 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 Company and
the attainment of age 21. Hourly paid employees are excluded from participation
in the Plan. The Company 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 $0 and $39,444, respectively for the
year ended September 30, 1999, $26,895 and $29,889, respectively for the year
ended September 30, 1998 and $30,226 and $25,367, respectively for the year
ended September 30, 1997.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
As of December 18, 1998 the Company implemented a tax-qualified employee
stock ownership plan ("ESOP") in connection with the reorganization discussed in
Note 13. 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 used those funds to
purchase a number of shares equal to up to 8% of the Common Stock sold in the
Offering. Collateral for the loan is the
F-20
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997
NOTE 10--PENSION PLAN AND BENEFITS (CONTINUED)
Common Stock purchased by the ESOP. The loan will be repaid principally from the
Bank's contributions to the ESOP over a period of ten years. The interest rate
for the loan is 8%.
Shares purchased by the ESOP are 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 Company established a
committee of nonemployee directors to administer the ESOP; and appointed an
independent corporate trustee for the ESOP trust. The ESOP trustee, subject to
its fiduciary duty, is 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, are 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 also provides for
certain actions to occur upon a "change in control" of the Company or the Bank.
The ESOP provides 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.
Any shares of the Company purchased by the ESOP are subject to the
accounting specified by the American Institute of CPA's Statement of Position
93-6. Under the statement, as any shares are released from collateral, the
Company will report compensation expense equal to the current market price of
the shares and the shares will be outstanding for earnings-per-share
computations. Also, as the shares are released, the related dividends will be
recorded as a reduction of retained earnings and dividends on the allocated
shares will be recorded as a reduction of debt and accrued interest.
F-21
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998, 1997
NOTE 10--PENSION PLAN AND BENEFITS (CONTINUED)
The ESOP shares were as follows as of September 30, 1999:
<TABLE>
<S> <C>
Allocated shares............................................ 0
Committed to be released shares............................. 4,008
Unreleased shares........................................... 31,092
--------
35,100
--------
Fair value of unreleased shares............................. $326,466
========
</TABLE>
Annual contributions to the plan are discretionary. Contributions to the
ESOP Plan by the Bank were $35,100 for the year ended September 30, 1999 and
ESOP compensation expense was $35,886.
STOCK OPTION PLAN
The Company adopted the RFS Bancorp, Inc. Stock Option Plan. The plan was
approved by shareholders effective June 29, 1999. A total of 43,875 shares were
made available for issuance under the Plan. Under the Plan, the Company may
grant options to purchase shares of the common stock of the Company to eligible
officers of the Company and its subsidiaries and outside directors of the
Company.
STOCK OPTIONS GRANTED TO ELIGIBLE DIRECTORS
The price, at which an option granted to an eligible director may be
exercised, is the fair market value of a share on the date on which the option
is granted. Such options expire ten years after the grant date. The options are
not exercisable in the first year after grant. In the second through fifth year
after the grant, the options are exercisable on a pro rata basis up to 80% of
the grant by the fifth year. After the fifth year, 100% of the grant not
previously exercised may be exercised.
STOCK OPTIONS GRANTED TO ELIGIBLE EMPLOYEES
An option granted to an eligible employee must be designated as either an
Incentive Stock Option or a Non-Qualifying Stock Option. The price at which an
option may be exercised is determined by the Company, in its discretion;
provided, however, that the exercise price shall not be less than the fair
market value of a share on the grant date. These options may be exercised in
periods specified by the Company in the option agreement.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized for its
stock option plan. Had compensation cost for the Company's stock-based
compensation plan been determined based on the fair value at the grant dates for
awards under those plans consistent with the method of FASB Statement 123, the
Company's net income for the year ended September 30, 1999 would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<S> <C> <C>
Net income As reported........................................... $385,133
Pro forma............................................. $378,460
</TABLE>
F-22
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 10--PENSION PLAN AND BENEFITS (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the year ended September 30, 1999: dividend yield
of 0 percent; expected volatility of 36 percent, risk-free interest rate of
6.03 percent; and expected life of 8 years.
A summary of the status of the Company's stock option plan as of
September 30, 1999 and changes during the year ending on that date is presented
below:
<TABLE>
<CAPTION>
OPTIONS SHARES EXERCISE PRICE
- ------- -------- --------------
<S> <C> <C>
Outstanding at beginning of year....................... 0
Granted................................................ 39,926 $7.25
Exercised.............................................. 0
Forfeited.............................................. 0
------
Outstanding at end of year............................. 39,926 $7.25
======
Options exercisable at year-end........................ None
Weighted-average fair value of options granted during
the year............................................. $ 3.88
------
</TABLE>
The following table summarizes information about stock options outstanding
as of September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------- ------------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
OUTSTANDING REMAINING EXERCISABLE
AS OF 09/30/99 CONTRACTUAL LIFE EXERCISE PRICE AS OF 09/30/99 EXERCISE PRICE
- --------------------- ---------------- -------------- -------------- -------------------
<S> <C> <C> <C> <C>
39,926 9.75 years $7.25 None --
</TABLE>
RECOGNITION AND RETENTION PLAN
On March 17, 1999, the Company adopted the RFS Bancorp, Inc. 1999
Recognition and Retention Plan. The Company established the Revere Federal
Savings Bank Recognition and Retention Trust and contributes, or causes to be
contributed, to the Trust, from time to time, common stock of the Company and
amounts of money. In no event shall the assets of the Trust be used to purchase
more than 17,550 shares of Company common stock. In its discretion, the Company
may grant awards of restricted stock to officers and employees. Each award will
become vested and distributable at a rate of 20% on each anniversary date of the
grant and fully vested on the date of the award holder's death or disability.
Stock subject to awards is held in the Trust until the award is vested. An
individual to whom an award is granted is entitled to exercise voting rights and
receive cash dividends with respect to stock subject to awards granted to
him/her whether or not vested. The Company exercises voting rights with respect
to the shares in the Trust that have not been allocated as directed by the
individuals eligible to participate. On June 29, 1999, 15,972 shares were
awarded, with vesting beginning as of June 29, 2000. Compensation expense
amounted to $5,790 for the year ending September 30, 1999. Compensation expense
is based on the fair
F-23
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 10--PENSION PLAN AND BENEFITS (CONTINUED)
value of the common stock on the grant date. As of September 30, 1999, the Trust
had purchased a total of 17,550 shares, and no vested shares had been
distributed to eligible participants.
NOTE 11--REGULATORY MATTERS
The Company and its Subsidiary, the Bank, are 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 Company's and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Their 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 Company and the Bank 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), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of
September 30, 1999, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
As of September 30, 1999, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
F-24
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 11--REGULATORY MATTERS (CONTINUED)
The Company's and the Bank'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, 1999:
Total Capital (to Risk
Weighted Assets):
-greater than or
Consolidated............ $10,206 19.98% $4,086 equal to-8.0% N/A N/A
Revere Federal Savings -greater than or -greater than or
Bank.................. 9,534 18.58 4,106 equal to-8.0% $5,133 equal to-10.0%
Core Capital (to Adjusted
Tangible Assets)
-greater than or
Consolidated............ 9,583 8.60 4,459 equal to-4.0% N/A N/A
Revere Federal Savings -greater than or -greater than or
Bank.................. 8,911 7.98 4,469 equal to-4.0% 5,586 equal to-5.0%
Tangible Capital (to
Tangible Assets):
Consolidated............ 9,583 8.60 N/A N/A N/A N/A
Revere Federal Savings -greater than or
Bank.................. 8,911 7.98 1,676 equal to-1.5% N/A N/A
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated............ 9,583 18.76 N/A N/A N/A N/A
Revere Federal Savings -greater than or
Bank.................. 8,911 17.36 N/A N/A 3,080 equal to-6.0%
As of September 30, 1998:
Total Capital (to Risk -greater than or -greater than or
Weighted Assets)........ 6,425 17.72 2,901 equal to-8.0% 3,627 equal to-10.0%
Core Capital (to Adjusted -greater than or -greater than or
Tangible Assets)........ 5,971 6.67 3,579 equal to-4.0% 4,473 equal to-5.0%
Tangible Capital (to -greater than or
Tangible Assets)........ 5,971 6.67 1,342 equal to-1.5% N/A N/A
Tier 1 Capital (to Risk -greater than or
Weighted Assets)........ 5,971 16.46 N/A N/A 2,176 equal to-6.0%
</TABLE>
NOTE 12--SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Company'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 Company's loan portfolio is
comprised of loans collateralized by real estate located in the state of
Massachusetts.
NOTE 13--CONVERSION TO MUTUAL HOLDING COMPANY
On January 21, 1998 the Board of Directors of the Revere Federal Savings and
Loan Association approved a Plan of Reorganization from Mutual Savings
Association to Mutual Holding and Stock Issuance (the "Plan") under which the
Association was reorganized from a federally chartered mutual savings
association into Revere, MHC, 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 converted to Revere Federal Savings Bank; a federal stock savings
Association (the "Bank") and established a federal corporation RFS
Bancorp, Inc. (the "Company"). The Company is a majority-owned subsidiary of the
MHC and the Bank is a wholly-owned subsidiary of the Company. Concurrently with
the reorganization, the Company intended to offer for sale
F-25
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 13--CONVERSION TO MUTUAL HOLDING COMPANY (CONTINUED)
up to 47.0% of its common stock to qualifying depositors and the tax-qualifying
employee plans of the Company, with any remaining shares offered to the public
in a community offering.
In the year ended September 30, 1999, the Company issued shares of its
common stock through a public offering which provided net proceeds of $3,739,896
after costs of $647,664. The costs associated with reorganization were deducted
from the proceeds upon the sale and issuance of stock.
In the event of a voluntary or involuntary liquidation, dissolution or
winding-up of Revere, MHC holders of deposit accounts in the Bank would be
entitled, pro rata to the value of their accounts, to distribution of any assets
of Revere, MHC remaining after the claims of all creditors of the Company are
satisfied. Revere, MHC established a special "liquidation account" in the amount
of $6,374,214 for the benefit of eligible account holders and supplemental
eligible account holders in an amount equal to the net worth of Revere, MHC as
of the date of the reorganization. Each eligible account holder and supplemental
eligible account holder, if he/she were to continue to maintain his/her deposit
account at the Bank, would be entitled, on a complete liquidation of Revere,
MHC, to an interest in the liquidation account. The liquidation account is
maintained for the benefit of eligible account holders and supplemental eligible
account holders who maintain their accounts at the Bank. 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 Holding Company is not 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 Bank to be reduced below the amount required under
O.T.S. rules and regulations.
NOTE 14--EARNINGS PER SHARE (EPS)
Earnings per share data have not been presented because such data would not
be meaningful given the short period during which common stock was outstanding.
NOTE 15--RECLASSIFICATION
Certain amounts in the prior year have been reclassified to be consistent
with the current year's statement presentation.
F-26
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 16--PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following financial statements are for RFS Bancorp, Inc. (Parent Company
Only) and should be read in conjunction with the consolidated financial
statements of RFS Bancorp, Inc. and Subsidiary.
RFS BANCORP, INC.
(PARENT COMPANY ONLY)
BALANCE SHEET
SEPTEMBER 30, 1999
<TABLE>
<S> <C>
ASSETS
Cash in Revere Federal Savings Bank......................... $ 174,200
Investment in subsidiary, Revere Federal Savings Bank....... 9,347,957
Loan to ESOP................................................ 351,000
Accrued interest receivable................................. 7,078
Other assets................................................ 182,628
-----------
Total assets............................................ $10,062,863
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities........................................... $ 43,195
-----------
Stockholders' equity:
Common stock, par value $.01 per share, authorized
5,000,000 shares; issued 933,523 shares; outstanding
915,973 shares.......................................... 9,335
Paid-in capital........................................... 9,750,472
Retained earnings......................................... 342,416
Treasury stock (17,550 shares, at cost)................... (168,799)
Accumulated other comprehensive income.................... 437,244
Unallocated ESOP shares................................... (351,000)
-----------
Total stockholders' equity............................ 10,019,668
-----------
Total liabilities and stockholders' equity............ $10,062,863
===========
</TABLE>
F-27
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 16--PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
RFS BANCORP, INC.
(PARENT COMPANY ONLY)
INCOME STATEMENT
FOR THE PERIOD FROM DECEMBER 18, 1998 TO SEPTEMBER 30, 1999
<TABLE>
<S> <C>
Income:
Dividend from Revere Federal Savings Bank................. $250,000
Interest income........................................... 21,900
--------
Total income............................................ 271,900
--------
Expenses:
Other expense............................................. 25,498
--------
Total expenses.......................................... 25,498
--------
Income before income tax expense and equity in undistributed
net income of subsidiary.................................. 246,402
Income tax expense.......................................... 2,477
--------
Income before equity in undistributed net income of
subsidiary................................................ 243,925
Equity in undistributed net income of subsidiary............ 98,491
--------
Net income.................................................. $342,416
========
</TABLE>
F-28
<PAGE>
RFS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
NOTE 16--PARENT COMPANY ONLY FINANCIAL STATEMENTS (CONTINUED)
RFS BANCORP, INC.
(PARENT COMPANY ONLY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 18, 1998 TO SEPTEMBER 30, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 342,416
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in taxes payable............................... 43,195
Increase in other assets................................ (182,628)
Increase in accrued interest receivable................. (7,078)
Undistributed net income of subsidiary.................. (98,491)
-----------
Net cash provided by operating activities................. 97,414
-----------
Cash flows from investing activities:
Investment in subsidiary, Revere Federal Savings Bank..... (3,143,311)
Loan to ESOP.............................................. (351,000)
-----------
Net cash used in investing activities..................... (3,494,311)
-----------
Cash flows from financing activities:
Purchases of treasury stock............................... (168,799)
Proceeds from issuance of common stock.................... 4,387,560
Costs related to issuance of common stock................. (647,664)
-----------
Net cash provided by financing activities................. 3,571,097
-----------
Net increase in cash and cash equivalents................... 174,200
Cash and cash equivalents at beginning of period............
-----------
Cash and cash equivalents at end of period.................. $ 174,200
===========
</TABLE>
F-29
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,530
<INT-BEARING-DEPOSITS> 968
<FED-FUNDS-SOLD> 931
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,630
<INVESTMENTS-CARRYING> 26,074
<INVESTMENTS-MARKET> 25,514
<LOANS> 73,084
<ALLOWANCE> 624
<TOTAL-ASSETS> 112,164
<DEPOSITS> 74,807
<SHORT-TERM> 14,228
<LIABILITIES-OTHER> 301
<LONG-TERM> 12,808
0
0
<COMMON> 9
<OTHER-SE> 10,011
<TOTAL-LIABILITIES-AND-EQUITY> 112,164
<INTEREST-LOAN> 4,817
<INTEREST-INVEST> 2,120
<INTEREST-OTHER> 171
<INTEREST-TOTAL> 7,108
<INTEREST-DEPOSIT> 2,424
<INTEREST-EXPENSE> 3,552
<INTEREST-INCOME-NET> 3,556
<LOAN-LOSSES> 103
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,225
<INCOME-PRETAX> 576
<INCOME-PRE-EXTRAORDINARY> 576
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 385
<EPS-BASIC> .41
<EPS-DILUTED> .41
<YIELD-ACTUAL> 7.53
<LOANS-NON> 3
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 528
<CHARGE-OFFS> 10
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 624
<ALLOWANCE-DOMESTIC> 624
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
