UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ To ___________
Commission file number 0-25047
RFS BANCORP, INC.
(Exact name of registrant as specified in its charter)
UNITED STATES 04-3449818
------------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
310 BROADWAY
REVERE, MASSACHUSETTS 02151
--------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (781) 284-7777
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
As of February 11, 1999, 933,523 shares of the registrant's common stock
were outstanding.
RFS BANCORP, INC. and SUBSIDIARIES
INDEX
PART I FINANCIAL INFORMATION Page
--------------------- ----
Item 1 Financial Statements:
Consolidated Balance Sheets - December 31, 1998
and September 30, 1998 1
Consolidated Statements of Income - Three Months
Ended December 31, 1998 and 1997 2
Consolidated Statements of Changes in Stockholders'
Equity-Three Months Ended December 31, 1998 and 1997 3
Consolidated Statements of Cash Flows - Three Months
Ended December 31, 1998 and 1997 4
Notes to Unaudited Consolidated Financial Statements -
December 31, 1998 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION
-----------------
Item 2 Changes in Securities and Use of Proceeds 23
Item 6 Exhibits and Reports on Form 8-K 24
SIGNATURES 25
----------
RFS BANCORP, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
----------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 2,436 $ 1,195
Federal funds sold 4,960 6,735
------- -------
Total cash and cash equivalents 7,396 7,930
Securities available for sale, at fair value 1,163 896
Securities held to maturity, at amortized cost 31,813 30,110
Federal Home Loan Bank stock, at cost 1,517 1,517
Loans, net of allowance for loan losses of
$548,485, and $528,250, respectively 52,800 46,852
Bank premises and equipment, net 1,785 1,252
Accrued interest receivable 621 519
Other assets 247 392
------- -------
Total Assets $97,342 $89,468
======= =======
LIABILITIES and STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $68,698 $64,327
Federal Home Loan Bank borrowings 17,923 18,204
Mortgagors' escrow accounts 186 157
Accrued expenses and other liabilities 421 296
------- -------
Total liabilities 87,228 82,984
------- -------
Stockholders' equity:
Common stock $.01 par value, 5,000,000 shares
authorized, 933,523 shares issued 9 --
Additional paid-in capital 3,749 --
Retained earnings 6,037 5,971
Accumulated Other Comprehensive Income 670 513
Unallocated ESOP shares (351) --
------- -------
Total stockholders' equity 10,114 6,484
------- -------
Total liabilities and stockholders' equity $97,342 $89,468
======= =======
</TABLE>
RFS BANCORP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
December 31, 1998 December 31, 1997
----------------- -----------------
(Unaudited)
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,042 $ 915
Interest and dividends on securities 512 647
Other interest 63 50
------ ------
Total interest and dividend income 1,617 1,612
------ ------
Interest expense:
Deposits 605 564
Federal Home Loan Bank borrowings 256 374
------ ------
Total interest expense 861 938
------ ------
Net interest and dividend income 756 674
Provision for loan losses 22 22
------ ------
Net interest and dividend income, after
provision for loan losses 734 652
------ ------
Other income:
Loan servicing fees 27 20
Deposit account fees 36 31
Gain (loss) on sales of mortgage loans, net 2 (4)
Other income 46 26
------ ------
Total other income 111 73
------ ------
Operating expenses:
Salaries and employees benefits 352 296
Occupancy and equipment expenses 102 86
Professional services 95 59
Data processing expenses 51 34
Other expenses 141 97
------ ------
Total operating expenses 741 572
------ ------
Income before income taxes 104 153
Provision for income taxes 38 56
------ ------
Net income $ 66 $ 97
====== ======
Earnings per share (annualized) $ 0.28 N/A
Weighted average shares outstanding 934 N/A
</TABLE>
RFS BANCORP, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
(In Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Unallocated ESOP Stockholders'
Stock Capital Earnings Income Shares Equity
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $ --- $ --- $5,971 $513 $ --- $ 6,484
Comprehensive Income:
Net income --- --- 66 --- --- ---
Change in unrealized holding
gain on securities available
for sale, net of taxes --- --- --- 157 --- ---
Comprehensive income 223
Net proceeds from common
stock issued pursuant to IPO 9 3,749 --- --- --- 3,758
Unallocated ESOP shares (351) (351)
------------------------------------------------------------------------------
Balance at December 31, 1998 $ 9 $3,749 $6,037 $670 $(351) $10,114
==============================================================================
Balance at September 30, 1997 $ --- $ --- $5,681 $358 $ --- $ 6,039
Comprehensive Income:
Net income --- --- 97 --- --- ---
Change in unrealized holding
gain on securities available
for sale, net of taxes --- --- --- 125 --- ---
Comprehensive income 222
Balance at December 31, 1997 $ --- $ --- $5,778 $483 $ --- $ 6,261
==============================================================================
</TABLE>
RFS BANCORP, INC. and SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, 1998 December 31, 1997
----------------- -----------------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 66 $ 97
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 22 22
(Gain) loss on sale of loans (2) 4
Amortization, net of accretion, of securities 21 6
Depreciation 51 36
(Increase) decrease in interest receivable (102) 150
(Increase) decrease in other assets 146 (33)
Increase (decrease) in accrued expenses and other
liabilities 15 (76)
Change in deferred loan origination fees, net (22) 6
--------------------------
Net cash provided by operating activities 195 212
--------------------------
Cash flows from investing activities:
Purchases of held-to-maturity securities (4,022) ---
Proceeds from maturities 2,297 7,462
Net increase in loans, net (7,660) (4,161)
Proceeds from sale of loans 1,714 620
Purchases of banking premises and equipment (584) (91)
--------------------------
Net cash provided by (used in) investing activities (8,255) 3,830
--------------------------
Cash flows from financing activities:
Net increase in deposits 4,371 3,035
Proceeds from FHLB advances --- 2,000
Repayment of advances from FHLB (281) (4,266)
Net increase in mortgagors' escrow accounts 29 27
Net proceeds from common stock issued pursuant to
initial public offering 3,758 ---
Payments to acquire common stock for ESOP (351) ---
--------------------------
Net increase (decrease) provided by financing activities 7,526 796
--------------------------
Net change in cash and cash equivalents (534) 4,838
Cash and cash equivalents at beginning of period 7,930 1,832
--------------------------
Cash and cash equivalents at end of period $7,396 $6,670
==========================
Supplemental cash flow information:
Interest paid on deposits $ 604 $ 561
Interest paid on FHLB borrowings $ 256 $ 374
Income taxes paid $ 5 $ 171
</TABLE>
RFS BANCORP, INC. and SUBSIDIARIES
Part I - Financial Information
Item 1 - Financial Statements
Notes to Unaudited Consolidated Financial Statements
December 31, 1998
1) Basis of Presentation and Consolidation
The unaudited consolidated interim financial statements of RFS Bancorp, Inc.
and Subsidiaries ("RFS Bancorp" or the "Company") presented herein should be
read in conjunction with the consolidated financial statements for the year
ended September 30, 1998, included in the Annual Report on Form 10-KSB of
RFS Bancorp, Inc., the holding company for Revere Federal Savings Bank (the
"Bank"). The operating results for the period ended December 31, 1998 are
those of the Bank and Company. RFS Bancorp had not issued any stock and had
not conducted any business other than that of an organizational nature until
December 18, 1998 when RFS Bancorp became the Bank's stock holding company
in connection with the Bank's reorganization from the mutual savings
association to the mutual holding company form of organization. Operating
results prior to December 18, 1998 include only the Bank and not the
Company.
The unaudited consolidated interim financial statements herein have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for completed financial statements.
In the opinion of management, the consolidated financial statements reflect
all adjustments (consisting solely of normal recurring accruals) necessary
for a fair presentation of such information. Interim results are not
necessarily indicative of results to be expected for the entire year.
2) Commitments and Contingencies
At December 31, 1998, the Bank had outstanding commitments to originate
loans amounting to approximately $3.0 million, and unused lines of credit
amounting to approximately $647,000 for commercial loans and $2.9 million
for home equity loans.
3) Stock Conversion
The Bank is a federally chartered stock savings bank founded in 1901. The
Bank converted from a federal mutual savings association into a mutual
holding company form of organization on December 18, 1998 and issued 100% of
its capital stock to the Company. RFS Bancorp has been organized at the
direction of the Board of Directors of the Bank. The Company issued 933,523
shares of which 47% of these shares, or 438,756 shares, were sold to the
Bank's depositors and the public and 53% of these shares, or 494,767 shares,
were issued to Revere, MHC, a federal mutual holding company (the "MHC").
The initial offering price was $10.00 per share and the gross proceeds
raised was $4,387,560. Net proceeds of the offering were approximately $3.8
million. On December 18, 1998, the Company loaned approximately $351,000 to
the Company's Employee Stock Ownership Plan to fund its purchase of 35,100
shares of common stock of the Company in open-market purchases following
completion of the conversion.
4) Earnings Per Share
Earnings per share for the three months ended December 31, 1998 (annualized)
was $.28. Earnings per share data is not presented for the three months
ended December 31, 1997 since there were no outstanding shares of common
stock until the reorganization on December 18, 1998.
5) Recent Accounting Pronouncement
On June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. Accounting
principles generally require that recognized revenue, expenses, gains and
losses be included in net income. Certain FASB statements, however, require
entities to report specific changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, as a separate
component of the equity section of the consolidated balance sheet. Such
items, along with net income, are components of comprehensive income. SFAS
No. 130 requires that all items of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Additionally, SFAS No. 130 requires that the
accumulated balance of other comprehensive income be displayed separately
from retained earnings and additional paid-in capital in the equity section
of the consolidated balance sheet. The Company adopted these disclosure
requirements in the quarter ending December 31, 1998.
6) Investment Securities
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities
and their approximate fair values are as follows:
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
------------------ ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-----------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale:
Marketable equity securities $ 24 $ 1,163 $ 24 $ 896
-----------------------------------------
Total $ 24 $ 1,163 $ 24 $ 896
=========================================
Securities held to maturity:
U.S. Government & Federal Agency Obligations $ 5,000 $ 4,985 $ 5,000 $ 5,031
Mortgage-backed securities 22,511 22,822 20,164 20,640
Asset-backed securities 4,302 4,297 4,946 4,976
-----------------------------------------
Total $31,813 $32,104 $30,110 $30,647
=========================================
</TABLE>
7) Loans
The following table presents selected data relating to the composition of
the Company's loan portfolio by type of loan on the dates indicated.
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
------------------ ------------------
Amount Percent Amount Percent
----------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Resident mortgage loans $36,939 69.6% $34,475 73.0%
Commercial real estate loans 4,958 9.3 3,969 8.4
Construction and land loans 2,879 5.4 1,885 4.0
Commercial loans 4,218 7.9 2,724 5.8
Consumer loans 1,011 2.0 1,091 2.3
Home equity loans 3,097 5.8 3,061 6.5
------- -------
Total loans 53,102 100.0% 47,205 100.0%
Loans held for sale 284 235
Less :
Deferred loan origination fees 38 60
Allowance for loan losses 548 528
------- -------
Total Loans, net $52,800 $46,852
======= =======
</TABLE>
8) Allowance for Loan Losses
The following table analyzes activity in the Company's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Three Three
Months Ended Months Ended
December 31, 1998 December 31, 1998
----------------- ------------------
(Dollars in Thousands)
<S> <C> <C>
Average loans, net $ 50,459 $ 43,918
=============================
Period-end gross loans $ 53,102 $ 45,155
=============================
Allowance for loan losses at beginning of period $ 528 $ 377
Provision for loan losses 22 22
Plus recoveries --- ---
Loans charged-off 2 ---
-----------------------------
Allowance for loan losses at end of period $ 548 $ 399
=============================
Non-performing loans $ 171 $ 95
=============================
Ratios:
Allowance for loan losses to period-end gross loans 1.03% 0.88%
Allowance for loan losses to non-performing loans 320.47% 420.00%
</TABLE>
9) Deposits and Borrowed Funds
The following tables set forth the various types of deposit accounts at the
Company and the balances in these accounts as well as the borrowings of the
Company at the dates indicated.
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
------------------ ------------------
Amount Percent Amount Percent
----------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Deposits:
Savings accounts $16,452 23.9% $16,668 25.9%
NOW checking 6,863 10.0 5,345 8.3
Demand deposits 5,278 7.7 2,823 4.4
Money market accounts 1,752 2.6 1,883 2.9
Certificates of deposit 38,353 55.8 37,608 58.5
---------------------------------------
Total deposits $68,698 100% $64,327 100%
======= =======
Borrowed funds:
Advances from FHLB $17,923 $18,204
Other borrowed funds --- ---
------- -------
Total borrowed funds $17,923 $18,204
======= =======
</TABLE>
RFS BANCORP, INC. and SUBSIDIARIES
Part I - Financial Information
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
December 31, 1998
General
Revere Federal Savings Bank (the "Bank") completed its conversion from
a federal mutual savings association to a stock institution and was
simultaneously acquired by RFS Bancorp, Inc. (the "Company") on December 18,
1998 upon the consummation of the Bank's reorganization to the mutual
holding company form of organization and stock offering (the
"Reorganization"). The following discussion and analysis should be read in
conjunction with the consolidated financial statements and related notes
thereto included within this report. This analysis provides an overview of
the significant changes that occurred during the period presented.
The Private Securities Litigation Reform Act of 1995 contains safe
harbor provisions regarding forward-looking statements. When used in this
discussion, the words "believes", "anticipates", "contemplates", "expects",
and similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could
cause actual results to differ materially from those projected. Those risks
and uncertainties include changes in interest rates generally and changes in
real estate values and other economic conditions in eastern Massachusetts,
the Bank's principal market area. The Company undertakes no obligation to
publicly release the results of any revisions to those forward-looking
statements which may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Additional information on potential factors which could affect the Company's
financial results are included in the Annual Report on Form 10-KSB of RFS
Bancorp.
The Company's operating results are primarily dependent upon net
interest and dividend income. Net interest income is the difference between
income earned on the Company's loan and investment portfolio and the
Company's funds which consists of interest paid on deposits and borrowings.
Operating results are also affected by the provision for loan losses,
securities sales activities and service charges on deposit accounts as well
as other fees. The Company's operating expenses consist of salaries and
employee benefits, occupancy and equipment expenses, professional fees as
well as marketing and other expenses. Results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in interest rates and government and regulatory
policies.
Market Risk Analysis
Qualitative Disclosures About Market Risk. Like other institutions,
the Company's most significant form of market risk is interest rate risk.
The Company is subject to interest rate risk to the degree that the
Company's interest-bearing liabilities, primarily deposits with short and
medium-term maturities, mature or reprice at different rates than the
Company's interest-earning assets. The Company believes it is critical to
manage the relationship between interest rates and the effect on the
Company's net portfolio value ("NPV"). This approach calculates the
difference between the present value of expected cash flows from assets and
the present value of expected cash flows from liabilities, as well as cash
flows from off-balance sheet contracts. The Company manages assets and
liabilities within the context of the marketplace, regulatory limitations
and within limits established by the Company's Board of Directors on the
amount of change in NPV which is acceptable given certain interest rate
changes.
An asset or liability is interest rate sensitive within a specific
time period if it will mature or reprice within that time period. If the
Company's assets mature or reprice more quickly or to a greater extent than
the Company's liabilities, the Company's net portfolio value and net
interest income would tend to increase during periods of rising interest
rates but decrease during periods of falling interest rates. Conversely, if
the Company's assets mature or reprice more slowly or to a lesser extent
than the Company's liabilities, the Company's net portfolio value and net
interest income would tend to decrease during periods of rising interest
rates but increase during periods of falling interest rates. The Company's
policy has been to mitigate the interest rate risk inherent in the
historical savings institution business of originating long-term loans
funded by short-term deposits by pursuing certain strategies designed to
decrease the vulnerability of the Company's earnings to material and
prolonged changes in interest rates. In this regard, the Company's attempts
to minimize interest rate risk by, among other things, emphasizing the
origination and retention of adjustable-rate loans and loans with shorter
maturities and the sale of long-term one-to-four family fixed-rate loans in
the secondary market.
Average Balances, Interest, Yields and Rates
The following tables set forth certain information relating to the
Company's average balance sheet and reflect the interest earned on assets
and interest cost of liabilities for the periods indicated and the average
yields earned and rates paid for the periods indicated. Such yields and
costs are derived by dividing income or expense by the average monthly
balances of assets and liabilities, respectively, for the periods presented.
Average balances are derived from daily balances. Loans on nonaccrual
status are included in the average balances of loans shown in the tables.
The investment securities in the following tables are presented at amortized
cost.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
---------------------------- ----------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans, net $50,459 $1,042 8.26% $43,918 $ 915 8.33%
Investments 30,207 512 6.78% 36,604 647 7.07%
Other earning assets 5,084 63 4.96% 4,027 50 4.97%
------------------ ------------------
Total interest-earning assets 85,750 1,617 7.54% 84,549 1,612 7.62%
------ ------
Cash and due from banks 625 471
Other assets 4,661 3,884
------- -------
Total assets $91,036 $88,904
======= =======
INTEREST-BEARING LIABILITIES:
Passbook & Statement Savings $16,808 57 1.36% $14,114 42 1.19%
NOW's and MMA's 7,450 27 1.45% 5,654 20 1.41%
Certificate of deposits 38,076 521 5.47% 35,210 502 5.70%
------------------ ------------------
Total interest-bearing deposits 62,334 605 3.88% 54,978 564 4.10%
FHLB borrowings 18,106 256 5.66% 24,963 374 5.99%
------------------ ------------------
Total interest-bearing liabilities 80,440 861 4.28% 79,941 938 4.69%
------ ------
Demand deposit accounts 3,672 1,909
Other liabilities 849 1,241
------- -------
Total liabilities 84,961 83,091
Stockholders' equity 6,075 5,813
------- -------
Total liabilities and stockholders'
equity $91,036 $88,904
======= =======
Net interest income $ 756 $ 674
====== ======
Interest rate spread 3.26% 2.93%
Net interest margin 3.52% 3.18%
Interest-earning assets/interest-bearing liabilities 106.60% 104.07%
</TABLE>
Rate/Volume Analysis
The following table sets forth certain information regarding changes
in interest income and interest expense of the Company for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to : (i) changes
in volume (changes in volume multiplied by old rate); (ii) changes in rates
(change in rate multiplied by old volume). Changes in rate-volume (changes
in rate multiplied by the changes in volume) are allocated between changes
in rate and changes in volume.
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 vs. 1997
Increase (decrease)
-------------------------
Due to
---------------
Rate Volume Total
------------------------
(In Thousands)
<S> <C> <C> <C>
Interest and dividend income:
Loans, net $ (9) $ 136 $ 127
Investments (25) (110) (135)
Other earning assets 0 13 13
------------------------
Total (34) 39 5
------------------------
Interest expense:
Deposits (32) 73 41
Borrowed funds (18) (100) (118)
------------------------
Total (50) (27) (77)
------------------------
Change in net interest income $ 16 $ 66 $ 82
========================
</TABLE>
Financial Condition and Results of Operations
Comparison of Financial Condition at December 31, 1998
and September 30, 1998.
The Company's total assets increased by $7.8 million or 8.7% to $97.3
million at December 31, 1998 from $89.5 million at September 30, 1998. The
net increase in total assets is primarily attributable to a $5.9 million
increase in net loans, an increase in investment securities of $2.0 million
and receipt of $3.4 million in net proceeds from the Reorganization, offset
by a $534,000 decrease in cash and cash equivalents. Total net loans
increased by $5.9 million or 12.7% to $52.8 million or 54.2% of total assets
at December 31, 1998 as compared to $46.9 million or 52.4% of total assets
at September 30, 1998, due to the receipt of $3.4 million in net proceeds
and the Company's continued emphasis on small business lending and a
favorable interest rate environment. Investment securities held by the
Company increased by $2.0 million or 6.4% to $33.0 million at December 31,
1998 from $31.0 million at September 30, 1998. This increase is primarily
due to the purchase of $4.0 million of GNMA mortgaged-backed securities.
Total deposits increased by $4.4 million or 6.8% to $68.7 million at
December 31, 1998 from $64.3 million at September 30, 1998. This increase
was the result of the opening of the Chelsea branch and ordinary deposit
growth. Total Federal Home Loan Bank of Boston (the "FHLB") advances
decreased by $281,000 or 1.5% to $17.9 million at December 31, 1998 from
$18.2 million at September 30, 1998. Total equity increased by $3.6 million
or 56.0% to $10.1 million at December 31, 1998 from $6.5 million at
September 30, 1998 as a result of $3.4 million raised from the sale of
stock, an increase of $157,000 in the net unrealized gain on securities and
net income of $66,000.
Comparison of the Operating Results for the Three Months
ended December 31, 1998 and 1997.
Net Income. The Company's net income for the three months ended December 31,
1998 was $66,000 as compared to $97,000 for the three months ended December
31, 1997. This $31,000 or 32.0% decrease in net income during the period
was the result of an increase of $5,000 in interest and dividend income, an
increase of $38,000 in other income, a decrease of $77,000 in interest
expense and a decrease in provision for income taxes of $18,000, offset by
an increase of $169,000 in operating expenses. The Company's continued
expansion of its lending activities accounted for the increase in interest
income, while its operating expenses increased due to the Company's planned
expenditures in human and technological resources, including increased
staffing and non-recurring start-up expenses associated with the Bank's new
branch office in Chelsea, Massachusetts. The return on average assets for
the three months ended December 31, 1998 was .29% compared to .44% for the
three months ended December 31, 1997.
Net Interest and Dividend Income. The Company's net interest and dividend
income for the three months ended December 31, 1998 increased $82,000 or
12.1% to $756,000 from $674,000 for the three months ended December 31,
1997. The increase can be attributed to a combination of the $5,000
increase in interest and dividend income and a $77,000 decrease in interest
expense on deposits and borrowed funds.
The average yield on interest-earning assets decreased 8 basis points
to 7.54% for the three months ended December 31, 1998 from 7.62 % for the
three months ended December 31, 1997, while the average cost on interest-
bearing liabilities decreased by 41 basis points to 4.28% for the three
months ended December 31, 1998 from 4.69% for the three months ended
December 31, 1997. As a result of the Company's strategy to restructure the
balance sheet by expanding its small business lending activities in order to
increase interest rate spread, the interest rate spread increased to 3.26%
for the three months ended December 31, 1998 from 2.93% for the three months
ended December 31, 1997 and the net interest margin improved from 3.18% to
3.52% during this period.
Interest and Dividend Income. Total interest and dividend income increased
by $5,000 or .31% to $1.6 million for the three months ended December 31,
1998 from $1.6 million for the three months ended December 31, 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, partially offset by a decline in the average balance of
investment securities and lower yields on investment securities. The
average balance of net loans for the three months ended December 31, 1998
was $50.4 million compared to $43.9 million for the three months ended
December 31, 1997. The average yield on net loans was 8.26% for the three
months ended December 31, 1998 compared to 8.33% for the three months ended
December 31, 1997, reflecting an increase in the amount of commercial and
commercial real estate loans. The average balance of investment securities
for the three months ended December 31, 1998 was $30.2 million compared to
$36.6 million for the three months ended December 31, 1997. The average
yield on investment securities was 6.78% for the three months ended December
31, 1998 compared to 7.07% for the three months ended December 31, 1997.
Interest Expense. Interest expense decreased by $77,000 or 8.2 % to
$861,000 for the three months ended December 31, 1998 from $938,000 for the
three months ended December 31, 1997. Interest expense decreased primarily
as a result of a decrease in interest rates paid on FHLB borrowings and
deposit accounts and a significant decline in the level of FHLB advances
during the quarter. Average interest-bearing deposits increased by $7.4
million or 13.4% to $62.3 million for the three months ended December 31,
1998. Deposit balances have increased as a result of offering free checking
products, certificate of deposit products with competitive rates and new
deposits attributable to the new branch. Accordingly, interest expense on
deposits increased $41,000 or 7.3% to $605,000 for the three months ended
December 31, 1998 compared to $564,000 for the three months ended December
31, 1997. Interest expense on advances from the FHLB decreased $118,000 or
31.6% to $256,000 for the three months ended December 31, 1998 from $374,000
for the three months ended December 31, 1997.
Provision for Loan Losses. The allowance for loan losses is maintained
through the provision for loan losses which is a charge to operations. The
provision reflects management's assessment of potential losses and is based
on a review of the risk characteristics as well as the growth of the loan
portfolio. The Bank considers many factors in determining the level of the
provision for loan losses. Collateral value on a loan by loan basis, trends
of loan delinquencies, risk classification identified in the Bank's regular
review of individual loans, and economic conditions are major factors in
establishing the provision. The provision for loan losses remained the same
for the three months ended December 31, 1998 as compared to the three months
ended December 31, 1997. At December 31, 1998, the balance of the allowance
for loan losses was $548,000 or 1.03% of total loans versus $528,000 or
1.12% of total loans at September 30, 1998. As the Bank continues to expand
its small business lending, additional increases to the provision are
likely.
Noninterest Income. Total noninterest income increased by $38,000 or 52.0%
to $111,000 for the three months ended December 31, 1998 from $73,000 for
the three months ended December 31, 1997. The increase was primarily the
result of increased fees on transactional deposit accounts and serviced
loans. The Company anticipates increases to noninterest income as it
continues to expand the volume of its deposit relationships. It is also the
Company's goal to increase its level of noninterest income by expanding its
delivery systems to include PC banking, debit cards and additional ATMs and
by continually considering additional sources of revenue. In this regard,
the Company plans to offer various investment products through a
relationship with a third-party broker-dealer during the second quarter of
its current fiscal year.
Noninterest Expense. Noninterest expense increased by $169,000 or 29.5% to
$741,000 for the three months ended December 31, 1998 from $572,000 for the
three months ended December 31, 1997. The increase resulted primarily from a
general increase in operating expenses. Salaries and employee benefits, the
largest component of noninterest expense was $352,000 for the three months
ended December 31, 1998 as compared to $296,000 for the three months ended
December 31, 1997, an increase of $56,000 or 18.9%. This increase was
primarily associated with an increase of five full time equivalent employees
to staff the commercial lending and operations departments. During the
period, professional fees increased from $59,000 to $95,000 or 61.0% due to
the added cost of outside loan review and certain legal and consulting costs
associated with the Company's expansion. Occupancy and equipment expense
increased by $16,000 or 18.6% to $102,000 for the three months ended
December 31, 1998 as compared to $86,000 for the three months ended December
31, 1997, with the increase primarily related to additional space utilized
for certain administrative functions and the opening of the Company's new
Chelsea branch. Other increases were incurred in the areas of equipment,
data processing and advertising services, primarily related to the expansion
of the Company's product lines and additional services, including PC banking
and debit cards, and the opening of the Chelsea branch. Annual operating
expenses are also expected to increase in future periods due to the
increased cost of operating an additional branch location and as a stock
institution, including the adoption of additional stock based employee
benefit plans.
Income Taxes. The net provision for income taxes amounted to $38,000 for
the three months ended December 31, 1998 as compared to $56,000 for the
three months ended December 31, 1997, resulting in effective tax rate of
36.5% and 36.6%, respectively. The effective tax rate reflects the
Company's utilization of a securities investment subsidiary to substantially
reduce state income taxes.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, proceeds from the
principal and interest payments on loans, debt and equity securities, and to
a lesser extent, borrowings and proceeds from the sale of fixed rate
mortgage loans to the secondary market. While maturities and scheduled
amortization of loans and securities are predictable sources of funds,
deposit outflows, mortgage prepayments, mortgage loan sales, and borrowings
are greatly influenced by general interest rates, economic conditions and
competition.
The Company is required to maintain adequate levels of liquid assets.
This guideline, which may be varied depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term
borrowings. The Company has historically maintained a level of liquid
assets in excess of regulatory requirements. The Company's liquidity ratio
at December 31, 1998 was 10.4%.
Liquidity management is both a daily and long-term function of
management. If the Company requires funds beyond its ability to generate
them internally, the Company believes it could borrow additional funds from
the FHLB. At December 31, 1998, the Company had borrowings of $17.9
million.
At December 31, 1998, the Company had $3.0 million in outstanding
commitments to originate loans. The Company anticipates that it will have
sufficient funds available to meet its current loan origination commitments.
Certificates of deposit which are scheduled to mature in one year or less
totaled $34.6 million at December 31, 1998. Based on historical experience,
management believes that a significant portion of such deposits will remain
with the Bank.
The Company plans to incur additional costs associated with the
Chelsea branch office, including costs associated with the potential
installation of an ATM and additional renovation costs. Management
anticipates that it will have sufficient funds available to meet its planned
capital expenditures throughout 1998.
At December 31, 1998, the Company and the Bank exceeded all of their
regulatory capital requirements.
Year 2000
The "Year 2000 Problem" centers on the inability of computer systems
to recognize the Year 2000. Software, hardware, and equipment both within
and outside the Bank's direct control and with whom the Bank electronically
or operationally interfaces (e.g. third party vendors providing data
processing, information system management, maintenance of computer systems,
and credit bureau information) are likely to be affected. Furthermore, if
computer systems are not adequately changed to identify the Year 2000, many
computer applications could fail or create erroneous results. As a result,
many calculations which rely on the date field information, such as
interest, payment or due dates and other operating functions, will generate
results which could be significantly misstated, and the Bank could
experience a temporary inability to process transactions, send invoices or
engage in similar normal business activities. In addition, noninformation
technology systems, such as equipment like telephones, copiers and elevators
may also contain embedded technology which control their operation and which
may be effected by the Year 2000 Problem.
Under certain circumstances, failure to adequately address the Year
2000 Problem could adversely affect the viability of the Company's suppliers
and creditors and the creditworthiness of its borrowers. Thus, if not
adequately addressed, the Year 2000 Problem could result in a significant
adverse impact on the Company's products, services and competitive
condition.
In order to address the Year 2000 issue and to minimize its potential
adverse impact, management has begun a process to identify areas that will
be affected by the Year 2000 Problem, assess its potential impact on the
operations of the Company, monitor the progress of third party software
vendors in addressing the matter, test changes provided by these vendors,
and develop contingency plans for any critical systems which are not
effectively reprogrammed. A committee of senior officers of the Company has
been formed to evaluate the effects that the upcoming Year 2000 could have
on computer programs utilized by the Company. The Company's plan is divided
into the five phases: (1) awareness - define the problem, obtain executive
level support and develop an overall strategy; (2) assessment - identify all
systems and the criticality of the systems; (3) renovation - program
enhancements, hardware and software upgrades, system replacements, and
vendor certifications; (4) validation - test and verify system changes and
coordinate with outside parties; and (5) implementation - components
certified as Year 2000 compliant and moved to production. As of December
31, 1998, the Company has completed the first three phases and is working
with third parties to complete the validation and implementation phases.
These phases are expected to be completed by June 30, 1999. The Company
believes that its internal systems and equipment are Year 2000 compliant.
Third party vendors provide the majority of software used by the
Company. All of the Company's vendors are aware of the Year 2000 situation,
and each has assured the Company that it is currently working to have its
software compliant by June, 1999. The Bank utilizes the service of a third
party vendor to provide the software which is used to process and maintain
most mortgage and deposit customer-related accounts. This vendor has
provided the Company with a software version which has been certified to be
Year 2000 compliant. Testing by the Bank is underway to verify compliance
for its application and usage. The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 Problem will be mitigated without causing a material adverse impact on
the operations of the Company. However, if such modifications and
conversions are not made, or are not completed timely, the Year 2000 Problem
could have an impact on the operations of the Company.
The Company carefully considers the Year 2000 readiness of its
potential commercial borrowers in the lending process. Commencing in
September 1998, each potential new commercial borrower was required to enter
into a Year 2000 agreement with the Company certifying that the borrower is
or will shortly be Year 2000 compliant. Moreover, the failure to be Year
2000 compliant constitutes a default under the terms of new loan agreements
with commercial borrowers. In addition, in April 1998, the Company sent
letters to all of its commercial borrowers asking them to certify that they
will be Year 2000 compliant by December 31, 1998. Follow up letters have
been sent to all commercial borrowers who have failed to respond to the
Company's Year 2000 inquiries.
Monitoring and managing the year 2000 project will result in
additional direct and indirect costs to the Company. Direct costs include
potential charges by third party software vendors for product enhancements,
costs involved in testing software products for Year 2000 compliance, and
any resulting costs for developing and implementing contingency plans for
critical software products which are not enhanced. Indirect costs will
principally consist of the time devoted by existing employees in monitoring
software vendor progress, testing enhanced software products and
implementing any necessary contingency plans. The Company has spent
approximately $27,000 on Year 2000 related costs to date and estimates that
it will spend an additional $20,000 for Year 2000 compliance. Both direct
and indirect costs of addressing the Year 2000 Problem will be charged to
earnings as incurred. The Company does not believe that such costs will have
a material effect on results of operations. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted, or that a failure to convert by another
company or a conversion that is incompatible with the Company's systems,
would not have material adverse effect on the Company. Although no
independent analysis of the Company's potential exposure has been obtained,
the Company believes it has no exposure to contingencies related to the Year
2000 Problem for the products it has sold. The Company's network consultant,
EOS Systems, Inc., has examined the hardware and software used by the
Company and has certified that such hardware and software is Year 2000
compliant.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties. The Company has
developed a contingency plan which would be implemented in the unlikely
event that Year 2000 issues arise.
RFS BANCORP, INC. and SUBSIDIARIES
Part II - Other Information
December 31, 1998
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds
(d) Use of Proceeds
The Company's Registration Statement on Form SB-2 (File No. 333-63083)
(the "Registration Statement") was declared effective by the United States
Securities and Exchange Commission (the "SEC") on November 12, 1998. 438,756
shares of common stock, par value of $.01 per share (the "Common Stock"),
registered in the Registration Statement and offered in the Company's
Subscription Offering (the "Offering") were sold at a price of $10.00 per
share. The Offering closed on December 18, 1998 and raised gross proceeds
of $4,387,560 for the Company. Trident Securities, Inc. of Raleigh, North
Carolina served as Sales Agent for the Offering.
No Offering expenses were paid, either directly or indirectly, to
directors or officers of the Company or their associates, to persons owning
ten percent or more of the Company's Common Stock or to any other affiliates
of the Company.
The net proceeds of the Offering for the Company, after deducting the
expenses of the Offering (including sales agency commissions and expenses)
were $3.7 million. Of such proceeds, $3.1 million were distributed to the
Bank, which used the proceeds to fund $1.5 million adjustable and fixed-rate
residential loans, commercial and commercial real estate loans as of
December 31, 1998. The remaining $1.6 million was invested in overnight
deposits at the FHLB. The Company intends to invest these funds in
additional loans in the near future. Of the proceeds retained by the
Company, $351,000 was loaned to the Company's Employee Stock Ownership Plan
to fund its purchase of 35,100 shares of Common Stock in open-market
purchases. The use of proceeds does not represent a material change from
the use of proceeds described in the Company's prospectus.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RFS BANCORP, INC.
Date: February 12, 1999 By: /s/ James J. McCarthy
---------------------- ------------------------------
James J. McCarthy
President and Chief Executive Officer
Date: February 12, 1999 By: /s/ Anthony J. Patti
---------------------- ------------------------------
Anthony J. Patti
Executive Vice President and
Chief Financial Officer (principal
accounting officer)
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