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 quarterly period ended December 31, 1998
[ ] 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 0-24935
SERVICE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3430806
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
81 Main Street,
Medway, Massachusetts 02053
(Address of principal executive offices) (Zip Code)
(508) 533-4343
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last year.)
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 [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practical date.
At January 31, 1999, there were 1,712,630 shares of common stock
outstanding, par value $0.01 per share.
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
Index
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Balance Sheets
As of December 31, 1998 and June 30, 1998 1
Consolidated Statements of Income for the three months
and six months ended December 31, 1998 and 1997 2
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended December 31, 1998 and 1997 3
Consolidated Statements of Cash Flows for the six months
ended December 31, 1998 and 1997 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other information 21
Item 6. Exhibits and reports on Form 8-K 21
Signature page 22
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, June 30,
ASSETS 1998 1998
--------- ----------
Cash and due from banks $6,483 $4,452
Short-term investments 4,494 11,931
--------- ---------
Total cash and cash equivalents 10,977 16,383
Certificates of deposit 1,500 1,500
Securities available for sale 59,739 40,171
Federal Home Loan Bank stock, at cost 731 731
Loans 77,300 77,312
Less allowance for loan losses (624) (577)
--------- ---------
Loan, net 76,676 76,735
Banking premises and equipment, net 1,474 1,455
Accrued interest receivable 1,445 1,173
Other assets 522 804
--------- ---------
Total Assets $153,064 $138,952
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $120,060 $112,247
Federal Home Loan Bank advances 14,272 14,562
Due to broker -- 1,053
Other liabilities 1,171 967
--------- ---------
Total Liabilities 135,503 128,829
Stockholders' Equity:
Common stock, $.01 par value; 12,000 shares
authorized, 1,712,630 issued and
Outstanding 17 --
Additional paid-in capital 7,449 --
Retained earnings 10,197 9,700
Accumulated other comprehensive income 442 423
Unearned ESOP shares (544) --
--------- ---------
Total Stockholders' Equity 17,561 10,123
--------- ---------
Total Liabilities and Stockholders' Equity $153,064 $138,952
========= =========
See accompanying notes to the unaudited consolidated financial statements.
1
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,593 $1,509 $3,230 $2,995
Interest and dividends on securities
available for sale and FHLB stock 761 540 1,414 975
Interest on short-term investments
and certificates of deposit 198 32 341 131
-------- -------- -------- --------
Total interest and dividend income 2,552 2,081 4,985 4,101
-------- -------- -------- --------
Interest expense:
Interest on deposits 1,012 929 2,027 1,816
Interest on FHLB advances 191 55 385 96
-------- -------- -------- --------
Total interest income 1,203 984 2,412 1,912
-------- -------- -------- --------
Net interest income 1,349 1,097 2,573 2,189
Provision for loan losses 25 -- 50 --
-------- -------- -------- --------
Net interest income, after provision for loan losses 1,324 1,097 2,523 2,189
-------- -------- -------- --------
Other income:
Customer service fees 155 112 278 200
Gain on sales of securities available for sale, net 247 256 320 539
Gain on sales of loans 13 14 30 26
Miscellaneous 12 20 21 33
-------- -------- -------- --------
Total other income 427 402 649 798
-------- -------- -------- --------
Operating expenses:
Salaries and benefits 742 505 1,307 944
Occupancy and equipment expenses 229 205 471 404
Data processing expenses 85 72 161 144
Professional fees 57 36 98 54
Advertising expenses 42 34 75 56
Other general and administrative expenses 172 120 294 203
-------- -------- -------- --------
Total operating expenses 1,327 972 2,406 1,805
-------- -------- -------- --------
Income before income taxes 424 527 766 1,182
Provision for income taxes 151 189 269 414
-------- -------- -------- --------
Net income $273 $338 $497 $768
======== ======== ======== ========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
2
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned
Comprehensive Common Paid-in Retained Comprehensive ESOP
Income Stock Capital Earnings Income Shares Total
------------- -------- -------- -------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $ -- $ -- $ 9,700 $ 423 $ -- $ 10,123
Net proceeds from sale of
common stock 17 7,449 -- -- -- 7,466
Common stock acquired
by ESOP (64,394) -- -- -- -- (644) (644)
Common stock held by ESOP
committed to be released
(10,000 shares) -- -- -- -- 100 100
Comprehensive Income
Net Income $ 497 -- -- 497 -- -- 497
Change in net unrealized gain
on securities available for sale,
net of tax reclassification
adjustment 19 -- -- -- 19 -- 19
-------- -------- -------- -------- -------- -------- --------
Comprehensive Income $ 516
========
Balance at December 31, 1998 $ 17 $ 7,449 $ 10,197 $ 442 ($ 544) $ 17,561
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997(CONCLUDED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned
Comprehensive Common Paid-in Retained Comprehensive ESOP
Income Stock Capital Earnings Income Shares Total
------------- --------- ---------- -------- ------------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ -- $ -- $8,499 $ 196 $ -- $8,695
Comprehensive Income:
Net Income $ 768 -- -- 768 -- -- 768
Change in net unrealized gain
on securities available for sale
net of tax reclassification
adjustment 140 -- -- -- 140 -- 140
------ --------- --------- ------ ------ ------ ------
Comprehensive Income $ 908
======
Balance at December 31, 1997 $ -- $ -- $9,267 $ 336 $ -- $9,603
========= ========= ====== ====== ====== ======
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended
December 31,
---------------------
1998 1997
-------- --------
Cash flows from operating activities:
Net income $ 497 $ 768
Adjustments to reconcile net income to
net cash provided by operating
activities:
Provision for loan losses 50 --
Gain on sales of securities available for
sale, net (320) (539)
Net amortization of securities
available for sale 31 12
Depreciation and amortization expense 186 168
Increase in accrued interest receivable (272) (215)
Deferred tax benefit (44) (15)
Loans originated for sale (3,016) (3,045)
Principal balance of loans sold 3,016 3,045
Other, net 511 552
-------- --------
Net cash provided by operating activities 639 731
-------- --------
Cash flows from investing activities:
Proceeds from sales of securities
available for sale 1,195 2,663
Proceeds from maturities of and
principal payments on securities
available for sale 7,490 4,737
Purchase of securities available for sale (28,979) (15,937)
Net decrease (increase) in loans 9 (4,084)
Purchase of banking premises and equipment (205) (350)
-------- --------
Net cash used by investing activities (20,490) (12,971)
-------- --------
Cash flows from financing activities:
Net increase in deposits 7,813 7,811
Proceeds from Federal Home Loan Bank
advances 2,006 5,000
Repayment of Federal Home Loan Bank
advances (2,296) (2,079)
Purchase of common stock for ESOP (644) --
Release of common stock held by ESOP 100 --
Increase in mortgagors' escrow deposits -- 58
Net proceeds from issuance of common stock 7,466 --
-------- --------
Net cash provided by financing activities 14,445 10,790
-------- --------
Net change in cash and cash equivalents (5,406) (1,450)
Cash and cash equivalents at beginning of period 16,383 9,129
-------- --------
Cash and cash equivalents at end of period $ 10,977 $ 7,679
======== ========
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(Dollars in thousands)
Six Months Ended
December 31,
---------------------
1998 1997
-------- --------
Supplementary information:
Interest paid on deposits $2,029 $1,817
Interest paid on Federal Home Loan
Bank advances 392 84
Income taxes paid 318 365
Decrease in due from broker 1,053 --
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
Six Months Ended December 31, 1998 and 1997
(1) Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Service Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Summit Bank (the "Bank"), and the Bank's wholly-owned subsidiaries,
Medway Securities Corp. and Franklin Village Security Corp., which engage solely
in the purchase and sale of investment securities. All significant intercompany
balances and transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and
the instructions for Form 10-QSB and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
have been included. Interim results are not necessarily indicative of the
results that may be expected for the entire year.
(2) Reorganization and Stock Offering
The Company is a Massachusetts corporation that was organized in August, 1998 at
the direction of the Board of Directors of the Bank and the Board of Trustees of
Service Bancorp, MHC (the "MHC"), the mutual holding company parent of the Bank,
for the purpose of owning all of the outstanding capital stock of the Bank. The
Company offered for sale 47% of the shares of its outstanding common stock in a
public offering to eligible depositors, employees, and members of the general
public (the "Offering"). The remaining 53% of the Company's shares of common
stock were issued to the MHC. The Offering was completed on October 7, 1998.
Prior to that date, the Company had no assets or liabilities.
Completion of the Offering resulted in the issuance of 1,712,630 shares of
common stock, 907,694 shares of which were issued to the MHC and 804,936 shares
of which were sold to eligible depositors, employees, and the general public at
$10.00 per share. The Company began trading on the OTC Bulletin Board under the
symbol "SERC" on October 7, 1998. Costs related to the Offering (primarily
marketing fees paid to an underwriting firm, professional fees, registration
fees, and printing and mailing costs) aggregated $569,000. These costs together
with funds loaned to purchase shares for the ESOP were deducted to arrive at net
proceeds of $6.8 million. The Company contributed 50% of the net proceeds of the
Offering to the Bank for general corporate use. On October 7, 1998, the Company
loaned approximately $644,000 to the Company's Employee Stock Option Plan to
fund its purchase of 64,394 shares of common stock of the Company.
(3) Earnings per Share
Earnings per share is not presented for the three and six months periods ended
December 31, 1998 since there were no outstanding shares of common stock until
the closing of the Offering on October 7, 1998.
(4) Other Comprehensive Income
The Company adopted Financial Accounting Standards Board Statement No. 130,
"Reporting Comprehensive" (SFAS No. 130), effective January 1, 1998. SFAS No.
130 established standards for
7
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
Six Months Ended December 31, 1998 and 1997
reporting comprehensive income and its components (revenue, expenses, gains and
losses). The Statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The Company adopted this
disclosure requirement in the quarter ended September 30, 1998.
(5) Commitments
At December 31, 1998, the Company had outstanding commitments to originate loans
of $5.6 million, $5.0 million of which were commercial real estate loans. Unused
lines of credit available to customers amounted to $5.7 million, $5.3 million of
which were equity lines of credit.
(6) Securities Available for Sale
The following table sets forth the Company's securities available for sale at
the dates indicated.
December 31, 1998 June 30, 1998
-----------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
(Dollars in thousands)
Federal agency obligations $36,462 $36,902 $27,502 $27,668
Mortgage-backed securities 11,023 11,081 5,977 5,980
Other debt securities 8,598 8,625 2,253 2,252
------- ------- ------- -------
Total debt securities 56,083 56,608 35,732 35,900
Marketable equity securities 2,964 3,131 3,785 4,271
------- ------- ------- -------
Total securities $59,047 $59,739 $39,517 $40,171
======= ======= ======= =======
8
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
Six Months Ended December 31, 1998 and 1997
(7) Loans
The following table presents data relating to the composition of the Company's
loan portfolio by type of loan on the dates indicated. Dollars listed below are
in thousands.
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
------------------------- ------------------------
Amount Percent Amount Percent
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Real estate loans:
Residential $45,396 58.69% $48,574 62.76%
Commercial 17,411 22.51 12,856 16.61
Construction 2,271 2.94 4,743 6.13
-------- ---------- -------- ----------
Total real estate loans 65,078 84.14 66,173 85.50
Other loans:
Consumer loans:
Collateral 610 0.79 786 1.02
Home equity 4,202 5.43 4,514 5.83
Other 1,560 2.02 1,704 2.20
-------- ---------- -------- ----------
Total consumer loans 6,372 8.24 7,004 9.05
Commercial business loans 5,897 7.62 4,217 5.45
-------- ---------- -------- ----------
Total other loans 12,269 15.86 11,221 14.50
-------- ---------- -------- ----------
Total loans 77,347 100.00% 77,394 100.00%
========== ==========
Net deferred loan fees (60) (102)
Deferred premium 13 20
Allowance for loan losses (624) (577)
-------- --------
Total loans, net $76,676 $76,735
======== ========
</TABLE>
(8) Deposits and Borrowed Funds
The following tables indicates types and balances in deposit accounts on dates
indicated. Dollars listed below are in thousands.
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
------------------------ ------------------------
Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Demand $13,325 11.10% $10,597 9.44%
NOW 18,357 15.29 17,891 15.94
Money market deposits 9,400 7.83 9,162
8.16
Regular and other savings 22,617 18.84 23,112 20.59
-------- ------ -------- ------
Total non-certificate accounts 63,699 53.06 60,762 54.13
Term certificates 56,361 46.94 51,485 45.87
-------- ------ -------- ------
Total deposits $120,060 100.00% $112,247 100.00%
======== ====== ======== ======
</TABLE>
9
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Unaudited Consolidated Financial Statements
Six Months Ended December 31, 1998 and 1997
The following is a list of maturities for advances from the Federal Home Loan
Bank of Boston (the "FHLB") for the dates indicated. Dollars listed below are in
thousands.
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998
----------------------- -----------------------
Amount Percent Amount Percent
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maturities less than one year $493 3.45% $2,058 14.13%
Maturities greater than one year 13,779 96.55 12,504 85.87
------- ------ ------- ------
Total borrowed funds $14,272 100.00% $14,562 100.00%
======= ====== ======= ======
</TABLE>
10
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
General
Service Bancorp, Inc. (the "Company"), completed its stock offering on
October 7, 1998. The Company offered for sale 47% of the shares of its common
stock to eligible depositors, employees, and members of the general public. The
remaining 53% of the Company's shares of common stock were issued to its parent,
Service Bancorp, MHC, a state-chartered mutual holding company incorporated in
Massachusetts. Prior to that date, the Company had no assets or liabilities. Its
principal activities since that date through December 31, 1998 have been to
complete the Offering, contribute 50% of the net proceeds of the Offering to the
Bank and use the remaining 50% of the net proceeds to acquire short-term
investments and fund a loan to the Bank's employee stock ownership plan
("ESOP").
This quarterly report on Form 10-QSB contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believe", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Bank's continued
ability to originate quality loans, fluctuation in interest rates, real estate
conditions in the Bank's lending areas, general and local economic conditions,
the Bank's continued ability to attract and retain deposits, the Company's
ability to control costs, new accounting pronouncements, and changing regulatory
requirements. 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.
Comparison of Financial Condition at December 31, 1998 and June 30, 1998
Assets increased by $14.1 million, or 10.2%, from $139.0 million at June
30, 1998 to $153.1 million at December 31, 1998. The increase was attributable
primarily to the completion of the Company's Offering on October 7, 1998 and
growth in deposits between these two dates. Net proceeds from the Offering
amounted to $6.8 million, while deposits grew $7.8 million, or 7.0%, from $112.3
million to $120.1 million.
Short-term investments (federal funds sold and overnight funds) decreased
by $7.4 million, or 62.3%, from $11.9 million at June 30, 1998 to $4.5 million
as the Company began to deploy these lower-yielding liquid funds into
higher-yielding longer term investments. These short-term funds, together with
the proceeds from the Offering were invested in federal agency obligations,
mortgaged-backed securities, and other debt securities, with callable features
or monthly payback amortization. Accordingly, federal agency obligations,
mortgage-backed securities, and other debt securities increased $9.2 million, or
33.4%, $5.1 million, or 85.3%, and $6.4 million, or 283.0%, respectively.
Net loans remained relatively stable from June 30, 1998 to December 31,
1998, declining $59,000, or 0.1%. However, the loan composition within this
portfolio shifted from residential to commercial lending products. Commercial
real estate and other commercial loans increased from $12.9 million and $4.2
million at June 30, 1998 to $17.4 million and $5.9 million at December 31, 1998
reflecting growth of $4.6 million, or 35.4% and $1.7 million, or 39.8%,
respectively. Competitive interest rate conditions were primary reasons for the
decline in the residential and construction loan portfolios. Residential
mortgage
11
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
loans decreased $3.2 million, or 6.5% from $48.6 million at June 30, 1998 to
$45.4 million at December 31, 1998, while construction loans decreased $2.5
million, or 52.1%, from $4.8 million to $2.3 million.
Stockholders' equity increased from $10.1 million, or 7.29% of total assets
at June 30, 1998 to $17.6 million, or 11.47% of total assets at December 31,
1998. The increase resulted primarily from the net proceeds from the Offering
and net income earned. Unrealized gains on securities available for sale are
reported as accumulated other comprehensive income.
Non-Performing Assets and Allowance for Loan Losses
The following indicates the non-performing assets and related allowance for
loan loss ratios for the dates indicated.
December 31, June 30,
1998 1998
----------- ----------
(Dollars in thousands)
Non-accrual loans:
One-to-four family real estate loans $202 $205
Commercial loans 84 84
Consumer loans 13 --
------ ------
Total non-accrual loans 299 289
Other real estate owned -- --
------ ------
Total non-performing assets $299 $289
====== ======
Allowance for loan losses $624 $577
====== ======
Allowance for loan losses as a percent
of total loans, net 0.81% 0.75%
====== ======
Allowance for loan losses as a percent
of non-accrual loans 208.70% 199.65%
====== ======
Non-accrual loans as a percent of
total loans, net 0.39% 0.38%
====== ======
Non-performing assets as a percent of
total assets 0.20% 0.21%
====== ======
During the six months ended December 31, 1998, $50,000 was added to the
loan loss provision due to the growth of the commercial loan portfolio, which
because of its nature is more risky than the residential mortgage portfolio.
During this period, there were $7,000 in loan charge-offs and $4,000 in
recoveries from previously charged-off loans.
12
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
While management believes that, based on information currently available,
the allowance for loan losses is sufficient to cover losses in the Bank's loan
portfolio at this time, no assurances can be given that the level of the
allowance will be sufficient to cover future loan losses or that future
adjustments to the allowance will not be necessary if economic and/or other
conditions differ substantially from the economic and other conditions
considered by management in evaluating the adequacy of the current level of the
allowance.
Comparison of Operating Results for the Three Months Ended December 31, 1998 and
1997
General
Operating results are primarily dependent on the Bank's net interest
income, which is the difference between the interest earned on the Bank's
earning assets (short-term investments, loans, and investment securities) and
the interest paid on deposits and borrowings. Operating results are also
affected by provisions for loan losses, the level of income from non-interest
sources such as fees and sales of investment securities and other assets,
operating expenses and income taxes. Operating results are also significantly
affected by general economic conditions, particularly changes in interest rates,
as well as government policies and actions of regulatory authorities.
Net income for the three months ended December 31, 1998 was $273,000 as
compared to $338,000 for the three month period ended December 31, 1997, a
decrease of $65,000, or 19.2%. This decrease was primarily attributable to
increases of $355,000 and $25,000, respectively in operating expenses and the
provision for loan losses which were partially offset by increases of $252,000
and $25,000 in net interest income and other income, respectively.
Interest rate spread (the difference between yields earned on earning
assets and rates paid on deposits and borrowings) declined from 3.68% for the
three months ended December 31, 1997 to 3.29% for the three months ended
December 31, 1998. During the same period, interest rate margin (net interest
income divided by average earning assets) declined from 4.14% to 3.84%. The
interest rate margin indicates that in addition to interest-bearing liabilities,
demand deposits and capital serve as a source of funding for earning assets. The
decline was attributable in part to an increase in short-term investments during
the current period and a decrease in longer term, higher yielding loans and
investment securities. Much of the net proceeds of the Offering were placed in
these short-term investments as well as funds received from callable investments
and early payoffs of mortgage-backed securities and residential mortgages, as
customers refinanced their existing higher-yielding mortgage loans. Also
contributing to the decline were lower yields on prime rate and indexed loans
and new loan originations caused by the current declining interest rate
environment. If current market trends continue, management believes that
interest rate spread could decline further.
13
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
The interest rate spread and margin for the periods indicated are as
follows:
Three months ended
December 31,
-----------------
1998 1997
----- -----
Weighted average yield earned on:
Short-term investments 4.70% 6.38%
Investments 6.20 6.39
Total loans, net 8.53 8.59
---- ----
All earning assets 7.26 7.85
Weighted average rate paid on:
Deposits 3.79 4.09
Borrowed funds 5.32 6.01
---- ----
All interest-bearing liabilities 4.17 3.97
---- ----
Weighted average rate spread 3.29% 3.68%
==== ====
Net interest margin 3.84% 4.14%
==== ====
Earnings per share data is not presented for the three months ended
December 31, 1998 because the Company became a publicly owned entity on October
7, 1998 and accordingly, did not have shares outstanding throughout any of the
periods presented.
Interest and Dividend Income
Total interest and dividend income increased by $471,000, or 22.6%, from
$2.1 million for the three months ended December 31, 1997 to $2.6 million for
the comparable period in 1998. This increase was primarily attributable to a
$34.6 million, or 32.6%, increase in average earning assets between the two
periods, which was partially offset by a decline in the yield on earning assets.
The average balances in short-term investments, investment securities, and net
loans increased $14.8 million, $15.3 million, and $4.5 million, respectively,
while their yields declined over the same timeframe. Interest on the investment
portfolio and short-term investments, increased $221,000 and $166,000, or 41.0%
and 500.0%, respectively, while interest on loans increased $84,000, or 5.6%,
during the same period.
The reduction in yields is a reflection of the declining interest rate
environment over the past year as loan payoffs, callable investment proceeds,
and net Offering proceeds have been redeployed in lower yielding short-term
investments and new investment security instruments. The Bank has been able to
maintain a relatively stable loan yield between the periods by its emphasis on
the commercial mortgage and loan portfolios, whose increased balances and
higher-yields have partially offset the decline in the residential mortgage
balances and yields. If interest rates continue to decline, the yields on new
loan originations, and existing loans with prime and index-based rates could be
adversely affected.
14
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
Interest Expense
Interest expense on deposits and borrowings increased $219,000, or 22.3%,
from $984,000 for the three months ended December 31, 1997, to $1.2 million for
the three months ended December 31, 1998. This increase was attributable to a
$16.0 million, or 17.6%, increase in average deposit balances between periods,
which was partially offset by a reduction in deposit rates over the same period
from 4.09% to 3.79%. The decrease in deposit interest rates was primarily due
the declining interest rate environment between the two periods.
The Bank increased its use of borrowings from the FHLB as part of its
management of interest rate risk. Average balances in these advances were $14.4
million during the three months ended December 31, 1998, an increase of $10.7
million, or 291.9% from the three months ended December 31, 1997. Over this same
timeframe, average borrowing rates declined from 6.01% to 5.32%.
Other Income
Total other income increased $25,000, or 6.2%, from $402,000 for the three
months ended December 31, 1997 to $427,000 for the same period in 1998. Customer
service fees increased by $43,000, from $112,000 to $155,000, while the gain on
sale of securities available for sale declined $9,000, from $256,000 to $247,000
between the periods. Marketable equity securities are held by the Bank primarily
for capital appreciation and not for trading purposes.
Operating Expense
Total operating expense increased $355,000, or 36.5 %, from $972,000 for
the three months ended December 31, 1997 to $1.3 million for the three months
ended December 31, 1998. Between the two periods, salaries and benefits,
occupancy and equipment expenses, data processing expenses, and professional
fees increased $237,000, $24,000, $13,000, and $21,000, respectively. No other
individual expense category increased materially between periods. Much of the
expense increase was attributed to the Company's asset growth as management
added staff and incurred costs to service the full range of retail and loan
products added to the Bank's product lines. In addition, the Company incurred
$96,000 in ESOP compensation expenses during the three months ended December 31,
1998 as it implemented the ESOP in October, 1998.
Income Taxes
The effective income tax rate was 35.6% and 35.9% for the three months
ended December 31, 1998 and 1997, respectively. The effective tax rates are
below the statutory combined state and federal income tax rates because the
Bank's two security corporations purchase investment securities to take
advantage of the lower state tax rate afforded these types of entities.
15
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
Comparison of Operating Results for the Six Months Ended December 31, 1998 and
1997
General
Net income for the six months ended December 31, 1998 was $497,000 as
compared to $768,000 for the six months ended December 31, 1997, a decrease of
$271,000, or 35.3%. This decrease was primarily attributable to increases of
$601,000 and $50,000 in operating expenses and the loan loss provision,
respectively, and a decrease on $149,000 in other income between periods, which
were partially offset by an increase of $384,000 in net interest income over the
same period.
Interest rate spread and interest rate margin declined from 3.75% and
4.21%, respectively, for the six months ended December 31, 1997 to 3.29% and
3.79%, respectively, for the six months ended December 31, 1998. The decline was
primarily attributable to lower yields in all earning assets offset in part by
lower rates on deposits and borrowings.
The interest rate spread and margin for the periods indicated are as
follows:
Six months ended
December 31,
----------------
1998 1997
----- -----
Weighted average yield earned on:
Short-term investments 5.07% 6.18%
Investments 6.02 6.33
Total loans, net 8.59 8.70
---- ----
All earning assets 7.35 7.89
Weighted average rate paid on:
Deposits 3.88 4.07
Borrowed funds 5.34 6.00
---- ----
All interest-bearing liabilities 4.06 4.14
---- ----
Weighted average rate spread 3.29% 3.75%
==== ====
Net interest margin 3.79% 4.21%
==== ====
Interest and Dividend Income
Total interest and dividend income increased by $884,000, or 21.6%, from
$4.1 million for the six months ended December 31, 1997 to $5.0 million for the
comparable period in 1998. This increase in interest income was primarily
attributable to a $31.8 million, or 30.6%, increase in average earning assets
between the two periods, which was partially offset by a decline in yield on
earning assets. The average balances in short-term investments, investment
securities, and net loans increased $9.2 million, $16.2 million, and $6.4
million, respectively, while their comparable yields declined over the same
timeframe.
16
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
The reduction of earning asset yields is a reflection of the declining
interest rate environment over the past year as loan payoffs, callable
investment proceeds, and net Offering proceeds have been redeployed in lower
yielding short-term investments and new investment security instruments.
Interest Expense
Interest expense on deposits and borrowings was $2.4 million for the six
months ended December 31, 1998, an increase of $500,000, or 26.2%, from $1.9
million, for the six months ended December 31, 1997. This increase was
attributable to a $15.1 million, or 17.0%, increase in average deposit balances
between periods, which was partially offset by a reduction in deposit rates over
the same period from 4.07% to 3.88%. This decrease in deposit interest rates was
primarily due the declining interest rate environment between the two periods.
The Bank increased its use of borrowings from the FHLB as part of its
management of interest rate risk. Average balances in these advances were $14.4
million during the six months ended December 31, 1998, an increase of $11.2
million, or 350.6% from the six months ended December 31, 1997. Over this same
timeframe, average borrowing rates declined from 6.00% to 5.34%.
Other Income
Total other income decreased $149,000, or 18.7%, from $798,000 for the six
months ended December 31, 1997 to $649,000 for the same period in 1998. This
decrease was caused primarily by a $219,000 decrease in the gain on sale of
securities available for sale from $539,000 for the six months ended December
31, 1997 to $320,000 for the current period. This was partially offset by an
increase in customer service fees of $78,000 over the same timeframe.
Operating Expense
Total operating expense increased $601,000, or 33.3%, from $1.8 million for
the six months ended December 31, 1997 to $2.4 million for the six month period
ended December 31, 1998. Between the two periods, salaries and benefits,
occupancy and equipment expenses, advertising expenses, and professional fees
increased $363,000, $67,000, $19,000, and $44,000, respectively. Much of the
expense increase was attributed to the Company's asset growth as management
added staff and incurred costs to service the full range of retail and loan
products added to the Bank's product lines. In addition, the Company incurred
$96,000 in ESOP compensation expenses during the six months ended December 31,
1998 as it implemented the ESOP in October, 1998.
Income Taxes
The effective income tax rate was 35.1% and 35.0%, respectively, for the
six months ended December 31, 1998 and 1997. The effective tax rate are below
the statutory combined state and federal income tax rates because the Bank's two
security corporations purchase investment securities to take advantage of the
lower state tax rate afforded these types of entities.
17
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
Asset/Liability Management
A principal operating objective of the Bank is to produce stable earnings
by achieving a favorable interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Since the Bank's principal
interest-earning assets generally have longer terms to maturity than its primary
source of funds, i.e. deposit liabilities, increases in general interest rates
will generally result in an increase in the Bank's cost of funds before the
yield on its asset portfolio adjusts upward. Financial institutions have
generally sought to reduce their exposure to adverse changes in interest rates
by attempting to achieve a closer match between the repricing periods of
interest rate sensitive assets and liabilities. Such matching, however, is
carefully monitored so as not to sacrifice net interest margin performance for
the perfect matching of these interest rate sensitive instruments. The Bank has
established an Asset/Liability Management Committee ("ALCO") made up of members
of senior management to assess the asset/liability mix and recommend strategies
that will enhance income while managing the Bank's vulnerability to changes in
interest rate. This committee meets regularly to discuss interest rate
conditions and potential product lines that would enhance the Bank's income
performance.
Certain strategies have been implemented to improve the match between
interest rate sensitive assets and liabilities. These strategies include, but
are not limited to: daily monitoring of the Bank's cash requirements,
originating adjustable and fixed rate mortgage loans, both residential and
commercial, for the Bank's own portfolio, managing the cost and structure of
deposits, and generally using the matched borrowings to fund specific purchases
of loan packages and large loan originations. Occasionally, management may
choose to deviate from specific matching of maturities of assets and
liabilities, if an attractive opportunity to enhance yield becomes available.
Quarterly, ALCO modeling is performed with the assistance of an outside
investment advisor which projects the Bank's financial performance over the next
twenty four months using loan and deposit projections, projections of changes in
interest rates, and anticipated changes in other income and operating expenses
to reveal the full impact of the Bank's operating strategies on financial
performance. The results of the ALCO process are reported to the Board at least
on a quarterly basis.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans, sales of loans and investments, maturities
and early calls of investments, and funds provided from operations. While
scheduled repayments of loans and maturities of investments are predictable
sources of funds, deposit flows and loan prepayments are greatly influenced by
the general level of interest rates, economic conditions, and competition. The
Bank uses its liquidity resources primarily to fund existing and future loan
commitments, to fund net deposit outflows, to invest in other interest-earning
assets, to maintain liquidity, and to pay operating expenses.
From time to time, the Bank utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. Total advances outstanding at December 31, 1998 amounted to
$14.3 million. The Bank's ability to borrow from the FHLB is dependent upon the
amount and type of collateral the Bank has to secure the loans. Such collateral
consists of, but is not limited to, one-to-four family owner-occupied
residential property, mortgage-backed securities guaranteed by the U.S.
government or a government agency, and funds on deposit with
18
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
the FHLB. As of June 30, 1998, the end of the latest fiscal year, the Bank's
total borrowing capacity was $51 million.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, short-term investments, U.S. Government and federal agency
obligations, mortgage-backed securities, and other debt securities. The level of
these assets is dependent upon the Bank's operating, lending, and financing
activities during any given period.
At December 31, 1998, the Bank had $5.6 million of outstanding commitments
to originate loans. The Bank anticipates that it will have sufficient funds
available to meet these commitments. Certificates of deposit, which are
scheduled to mature in one year or less, totaled $49.8 million at December 31,
1998. Based upon historical experience, management believes that a significant
portion of such deposits will remain with the Bank.
At December 31, 1998, the Company and the Bank exceeded all regulatory
capital requirements.
Year 2000 ("Y2K") Compliance
Changing from the year 1999 to 2000 has the potential to cause problems in
data processing and other data-sensitive systems, a problem known as the Year
2000 or Y2K dilemma. The Company uses computer systems to perform financial
calculations, track deposits and loan payments, transfer funds and make direct
deposits. The processing of the Company's loan and deposit transactions is
outsourced to a third-party data processing vendor. The Company is following a
comprehensive process to assure that such systems are ready for the year 2000
date change.
To become Y2K compliant, the Company is following a five-step process
mandated by the federal bank regulatory agencies. A description of each of the
steps and the status of the Company's efforts in completing the steps is as
follows:
Step 1. Awareness and Understanding of the Problem. The Company has formed
a Year 2000 team that has investigated the problem and its potential impact on
the Company's systems. An independent consulting firm has been engaged to assist
the Company's development of its approach to becoming Y2K compliant. This phase
also includes education of the Company's employees and customers about Y2K
issues. The awareness and understanding phase of this step has been completed.
Training and communication has taken place and will continue in 1999.
Step 2. Identification of All Potentially Affected Systems. This step has
included a review of all major information technology ("IT") and non-information
technology ("non-IT") systems to determine how they are affected by Y2K issues.
An inventory has been prepared of all vendors who render IT and non-IT services
to the Company. This step is considered complete.
Step 3. Assessment and Planning. The Y2K team has completed its assessment
of which systems and equipment are most prone to placing the Company at risk if
they are not Y2K compliant. The project team has developed an inventory of
vendors, an inventory of actions to be taken, identification of the team members
responsible for completion of each action, a completion timetable, and project
tracking methodology. Significant vendors have been requested to advise the
Company in writing of their Y2K
19
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
readiness, including actions to become compliant if they are not already
compliant. A plan has been developed to repair or replace systems and equipment
not currently Y2K compliant. This step is substantially complete. Responses from
certain vendors have not yet been received, but Y2K team members will contact
these vendors to ensure that all vendors respond regarding their Y2K compliance
on a timely manner.
Step 4. Correction and Testing. The Company's third party data processing
servicer as well as vendors who provide significant technology-related services
have modified their systems to become Y2K compliant. The Company has developed
scripts involving typical transactions to test the proper functioning of the
modified systems. It has also arranged for repair or replacement of equipment
programs affected by Y2K issues. All required testing will be completed by the
end of March, 1999. The monitoring of certain non-IT vendors will continue into
1999.
Step 5. Implementation. This step includes the repair or replacement of
systems and computer equipment and the development of contingency plans. The
repair and replacement phase is substantially completed. Contingency plans on
how the Company would resume business if unanticipated problems arise from
non-performance by IT and non-IT vendors are being developed and are expected to
be completed by June 30, 1999, as dictated by the regulatory authorities.
The Company's efforts to become Y2K compliant are being monitored by its
federal banking regulators. Failure to be Y2K compliant could subject the
Company to formal supervisory or enforcement actions.
The Company expensed $9,000 for the six months ended December 31, 1998, and
an additional $31,500 from January through June, 1998 for Y2K compliance needs.
It expects to incur additional costs throughout 1999 to become Y2K compliant,
but does not expect such costs to be material to the operating expenses of the
Company. Some of the costs are not expected to be incremental to the Company,
but rather represent new equipment and software that would otherwise be
purchased in the normal course of the Company's business. The Company is
monitoring Y2K compliance for each of its large borrowers and will adjust the
loan loss allowance accordingly if any Y2K noncompliance affects their ability
to fulfill the terms and conditions of any loan agreement. The Company presently
believes the Y2K issue will not pose significant operating problems for the
Company. However, if implementation and testing plans are not completed in a
satisfactory and timely manner, in particular by third parties on which the
Company is dependent, or other unforeseen problems arise, no assurance can be
given with respect to the cost or timing of such efforts or any potential
adverse effects on the Company's business, financial condition, or results of
operation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiary are not involved in any litigation, nor is
the Company aware of any pending litigation, other than legal proceedings
incident to the business of the Company. Management condition or results of
operations of the Company.
20
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION (Continued)
Item 2. Changes in Securities
The Company is a Massachusetts corporation that was organized in August,
1998 at the direction of the Board of Directors of the Bank and the Board of
Trustees of the MHC for the purpose of owning all of the capital stock of the
Bank. The Company offered for sale 47% of the shares of its common stock an to
eligible depositors, employees, and members of the general public (the
"Offering"). The remaining 53% of the Company's shares of common stock were
issued to the MHC. The Offering was completed on October 7, 1998. Prior to that
date, the Company had no assets or liabilities.
Completion of the Offering resulted in the issuance of 1,712,630 shares of
common stock, 907,694 shares (53%) of which were issued to the MHC and 804,936
shares (47%) of which were sold to eligible depositors, employees, and the
general public at $10.00 per share. Costs related to the Offering (primarily
marketing fees paid to an underwriting firm, professional fees, registration
fees, and printing and mailing costs) aggregated $569,000. These costs together
with funds loaned to purchase shares for the ESOP were deducted to arrive at net
proceeds of $6.8 million. The Company contributed 50% of the net proceeds of the
Offering to the Bank for general corporate use. On October 7, 1998, the Company
loaned approximately $644,000 to the Company's Employee Stock Option Plan to
fund its purchase of 64,394 shares of common stock of the Company.
Item 3. Default Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 EDGAR financial data schedule.
There were no reports filed on Form 8-K.
21
<PAGE>
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.
SERVICE BANCORP, INC.
Date: February 10, 1999 By: /s/ Eugene G. Stone
-----------------------------------------
Eugene G. Stone
President and Chief Executive Officer
Date: February 10, 1999 By: /s/ Warren W. Chase, Jr.
-----------------------------------------
Warren W. Chase, Jr.
Vice President and Treasurer
22
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 6,483
<INT-BEARING-DEPOSITS> 1,500
<FED-FUNDS-SOLD> 3,969
<TRADING-ASSETS> 0
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<ALLOWANCE> 624
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<LONG-TERM> 14,272
0
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