SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
OR
|_|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ___________________ to ______________________
Commission File Number: 0-23945
SERVICE BANCORP, INC.
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(Exact Name of Registrant as Specified in its Charter)
Massachusetts 04-3430806
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
81 Main Street, Medway, Massachusetts 02053
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(Address of Principal Executive Office) (Zip Code)
(508) 533-4343
---------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
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 twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. |_|
The Registrant's revenues for the fiscal year ended June 30, 1999 were
$11.8 million.
As of June 30, 1999, there were issued and outstanding 1,702,630 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the closing price of
the Common Stock as of July 31, 1999 ($8.375) was $5,552,927.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended June
30, 1999 (Parts II and IV).
2. Proxy Statement for the 1999 Annual Meeting of Stockholders (Part III)
<PAGE>
PART I
ITEM 1. Business
Service Bancorp, Inc.
Service Bancorp, Inc. (the "Company") was organized at the direction of
the Board of Directors of Summit Bank (the "Bank") and the Board of Trustees of
Service Bancorp, MHC (the "Mutual Company") for the purpose of acting as the
holding company of the Bank. The Company's assets consist primarily of the
outstanding capital stock of the Bank and cash and investments of $3.2 million,
representing a portion of the net proceeds from the Company's stock offering
completed October 7, 1998. At June 30, 1999, 794,936 shares of the Company's
common stock, par value $0.01 per share, were held by the public, and 907,694
shares were held by the Mutual Company. The Company's principal business is
overseeing and directing the business of the Bank and investing the net stock
offering proceeds retained by it.
At June 30, 1999, the Company had total assets of $178.2 million, total
deposits of $133.1 million and total equity of $16.5 million.
The Company's office is located at 81 Main Street, Medway, Massachusetts
02053. Its telephone number is (508) 533-4343.
Summit Bank
The Bank was organized in 1871 as a Massachusetts-chartered mutual savings
bank and was reorganized into the stock form of ownership in August 1997 as part
of the Bank's original mutual holding company reorganization. No common stock
was offered for sale to depositors or other persons at the time of the
reorganization in 1997. The Bank's deposits are insured by the Bank Insurance
Fund, as administered by the Federal Deposit Insurance Corporation ("FDIC"), up
to the maximum amount permitted by law, and by the Depositors Insurance Fund in
excess of the maximum FDIC insurance. The Bank is a community-oriented savings
bank engaged primarily in the business of offering FDIC-insured deposits to
customers through its branch offices and using those deposits, together with
funds generated from operations and borrowings, to make one- to four-family
residential mortgage loans, commercial real estate loans, commercial business
loans, construction loans and consumer loans, and to invest in mortgage-backed
and other securities.
The Bank's main office is located at 81 Main Street, Medway, Massachusetts
02053. Its telephone number is (508) 533-4343.
Service Bancorp, MHC
The Mutual Company was formed in August 1997 as part of the Bank's
conversion from mutual to stock form. The Mutual Company is a
Massachusetts-chartered mutual holding company with the powers set forth in its
Charter and Bylaws and under Massachusetts law. The Mutual Company owns 53% of
the voting stock of the Company. The Mutual Company is subject to regulation and
supervision by the FRB and the Division. The Mutual Company does not engage in
any business activity other than to hold the Company's common stock and to
invest any liquid assets of the Mutual Company.
The Mutual Company's offices are located at 81 Main Street, Medway,
Massachusetts 02053, and its telephone number is (508) 533-4343.
<PAGE>
Market Area
The Bank operates seven full-service banking offices in the towns of
Medway, Franklin, Medfield, Millis, Bellingham and Hopkinton, all of which are
located in Norfolk County, a suburban area adjacent to the city of Boston. In
addition, the Bank has opened a limited-service banking location at an assisted
living facility in Franklin. The Bank's deposits are gathered from the general
public primarily in these towns and surrounding communities. The Bank's lending
activities are concentrated primarily in Norfolk County and nearby surrounding
markets in the greater Boston metropolitan area. Consistent with large
metropolitan areas in general, the economy in the Bank's market area is based on
a mixture of service, manufacturing, wholesale/retail trade, and state and local
government. Maintaining operations in a large metropolitan area serves as a
benefit to the Bank in periods of economic growth, while at the same time
fosters significant competition for the financial services provided by the Bank.
Future growth opportunities for the Bank depend in part on national economic
factors, the future growth in the Bank's market area, and the intensity of the
competitive environment for financial institutions.
Norfolk County has experienced population growth during the 1990s, with
the county showing a higher growth rate than the Commonwealth of Massachusetts
as a whole. Population growth has been supported by the outward expansion of the
greater Boston metropolitan area, with Norfolk County's proximity to Boston and
more affordable housing attracting a number of individuals wishing to maintain
jobs in greater Boston. Within Norfolk County, the town of Franklin in
particular has experienced considerable growth in recent years in population and
employment, and is one of the fastest growing towns in Massachusetts. The
increased demand for housing resulting from this growth has had a positive
impact on real estate values and on loan demand in the area in recent years.
Lending Activities
Loan Portfolio Composition. The types of loans that the Bank may originate
are subject to federal and state laws and regulations. Interest rates charged by
the Bank on loans are affected primarily by the demand for such loans, the
supply of money available for lending purposes and the rates offered by
competitors. These factors are, in turn, affected by national, regional and
local economic conditions, the levels of federal government spending and
revenue, monetary policies of the Federal Reserve Board, and tax policies.
The Bank's loan portfolio consists primarily of first mortgage loans
secured by one- to four-family residential real estate and commercial real
estate located in the Bank's primary lending area. The Bank also provides
financing for construction projects, home equity and second mortgage loans and
other consumer loans, and commercial business loans.
At June 30, 1999, the Bank's gross loan portfolio totaled $86.8 million,
of which $47.4 million, or 54.6%, were one- to four-family residential mortgage
loans, and $21.0 million, or 24.2%, were commercial real estate loans. Home
equity loans were $4.6 million, or 5.3% of gross loans, construction loans were
$5.0 million, or 5.7% of gross loans, and commercial business loans were $6.5
million, or 7.5% of gross loans at June 30, 1999.
2
<PAGE>
Loan Portfolio Composition. The following information relates to the
composition of the Bank's loan portfolio in dollar amounts and in percentages
(before deferred fees and premiums, and allowances for loan losses) as of the
dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family......................... $47,394 54.63% $48,574 62.76% $47,196 69.91%
Commercial.................................. 20,981 24.18 12,856 16.61 8,342 12.36
Construction................................ 4,974 5.73 4,743 6.13 2,880 4.27
------- ------ ------- ------ ------- ------
Total real estate loans................. 73,349 84.54 66,173 85.50 58,418 86.54
------- ------ ------- ------ ------- ------
Other loans:
Consumer loans:
Collateral............................... 513 0.59 786 1.02 596 0.88
Home equity.............................. 4,591 5.29 4,514 5.83 4,574 6.78
Other.................................... 1,829 2.11 1,704 2.20 1,362 2.02
------- ------ ------- ------ ------- ------
Total consumer loans.................... 6,933 7.99 7,004 9.05 6,532 9.68
Commercial business loans................... 6,481 7.47 4,217 5.45 2,554 3.78
------- ------ ------- ------ ------- ------
Total other loans....................... 13,414 15.46 11,221 14.50 9,086 13.46
------- ------ ------- ------ ------- ------
Total gross loans....................... 86,763 100.00% 77,394 100.00% 67,504 100.00%
====== ====== ======
Net deferred loan fees................... (51) (102) (99)
Deferred premium......................... 12 20 4
Allowance for loan losses................ (740) (577) (475)
------- ------- -------
Total loans receivable, net............. $85,984 $76,735 $66,934
======= ======= =======
</TABLE>
Loan Originations. Substantially all of the Bank's loan origination
activity is conducted by the Bank's loan personnel at its main office and, to a
lesser extent, at the Bank's other retail office locations. The Bank relies on
referrals from existing customers, attorneys, accountants and other real estate
professionals to generate business within its lending area. In addition,
existing borrowers are an important source of business since many of its
commercial real estate and commercial business loan customers have more than one
loan outstanding with the Bank. Construction loans are obtained primarily from
builders who have an established relationship with the Bank. Consumer loans are
largely generated through existing customers and walk-in customers. Loan
generation is further supported by advertising and community service by Bank
employees.
The Bank's ability to originate loans depends on the strength of the
economy, trends in interest rates, customer demands and competition.
Loan Sales and Servicing. While the Bank has not originated for sale large
commercial real estate and commercial business loans, the Bank may originate
such loans for sale in the future to accommodate customers seeking larger loans
without taking on credit risks beyond policy guidelines.
The Bank's general practice has been to retain all one- to four-family
adjustable-rate residential mortgage loans and to sell one- to four-family
fixed-rate mortgage loans on a servicing-released basis. However, due to the
current limited demand for ARM loans and the potential for portfolio shrinkage
resulting from refinanced loans, the Bank's current policy is to retain in its
portfolio fixed-rate one- to four-family residential mortgage loans. When the
sale of fixed-rate one- to four-family residential mortgage loans takes place,
such loans are generally underwritten to conform to secondary market guidelines.
The Bank does not service loans originated by other financial institutions.
3
<PAGE>
Loan Purchases. To supplement originations of one- to four-family
residential mortgage loans, the Bank purchases adjustable-rate one- to
four-family mortgage loans secured by residential properties in the New England
area originated by other New England-based financial institutions. All purchased
loans are priced at market rates and must meet the underwriting standards
applied to loans originated by the Bank. Such loan purchases totaled $9.3
million, $5.9 and $2.7 million for the twelve months ended June 30, 1999, 1998
and 1997, respectively. The Bank has purchased only whole loans and participates
in loans originated by others.
The following table sets forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated.
Years Ended June 30,
-----------------------------------
1999 1998 1997
--------- --------- --------
(In Thousands)
Originations:
Real estate:
One- to four-family.................... $ 22,859 $ 21,591 $ 8,701
Commercial............................. 11,284 6,666 4,132
Construction........................... 7,275 5,785 4,227
Non-real estate:
Consumer............................... 5,127 5,420 4,057
Commercial business.................... 7,161 3,786 2,658
--------- --------- --------
Total loans originated................... 53,706 43,248 23,775
--------- --------- --------
Purchases:
Real estate:
One- to four-family.................... 4,447 5,899 2,670
Commercial............................. 4,896 -- --
--------- --------- --------
Total loans purchased.................... 9,343 5,899 2,670
--------- --------- --------
Sales and Repayments:
Sales:
Real estate:
One- to four-family.................... 5,809 8,219 2,219
--------- --------- --------
Principal repayments....................... 47,871 31,038 16,990
--------- --------- --------
Total reductions......................... 53,680 39,257 19,209
--------- --------- --------
Net increase - gross loans................. $ 9,369 $ 9,890 $ 7,236
========= ========= ========
4
<PAGE>
Loan Maturity and Repricing. The following table sets forth certain
information as of June 30, 1999, regarding the dollar amount of loans maturing
in the Bank's portfolio based on their contractual terms to maturity. Demand
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating rate
loans are included in the period in which interest rates are next scheduled to
adjust rather than the period in which they contractually mature, and fixed-rate
loans are included in the period in which the final contractual repayment is
due. This table does not include prepayments on scheduled principal
amortizations.
<TABLE>
<CAPTION>
One Three Five Ten
Within Through Through Through Through Beyond
One Three Five Ten Twenty Twenty
Year Years Years Years Years Years Total
------- ------- ------- ------ ------ ------ -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family.............. $14,809 $14,666 $ 7,208 $3,075 $3,522 $4,114 $47,394
Commercial....................... 5,177 3,267 6,426 3,228 1,624 1,259 20,981
Construction..................... 2,547 1,851 30 84 156 306 4,974
------- ------- ------- ------ ------ ------ -------
Total real estate loans........ 22,533 19,784 13,664 6,387 5,302 5,679 73,349
Other loans
Consumer......................... 5,683 1,112 130 8 -- -- 6,933
Commercial business.............. 3,500 1,389 873 719 -- -- 6,481
------- ------- ------- ------ ------ ------ -------
Total loans.................... $31,716 $22,285 $14,667 $7,114 $5,302 $5,679 86,763
======= ======= ======= ====== ====== ======
Deferred loan origination fees... (51)
Deferred premiums................ 12
Allowance for loan losses........ (740)
-------
Net loans.................... $85,984
=======
</TABLE>
Prepayments and scheduled principal amortization totaled $47.9 million,
$31.0 million and $17.0 million for the years ended June 30, 1999, 1998 and
1997, respectively.
The following table sets forth at June 30, 1999, the dollar amount of
gross loans, net of unadvanced funds on loans, contractually due or scheduled to
reprice after June 30, 2000, and whether such loans have fixed interest rates or
adjustable interest rates. This table does not include prepayments on scheduled
principal amortizations.
Due After June 30, 2000
------------------------------------
Fixed Adjustable Total
------- ---------- -------
(In Thousands)
Real estate loans:
One- to four-family.................. $13,526 $19,059 $32,585
Commercial........................... 13,601 2,203 15,804
Construction......................... 2,095 332 2,427
------- ------- -------
Total real estate loans............ 29,222 21,594 50,816
Other loans:
Consumer loans....................... 1,249 1 1,250
Commercial business loans............ 1,616 1,365 2,981
------- ------- -------
Total loans receivable............. $32,087 $22,960 $55,047
======= ======= =======
The Bank originates commercial real estate loans both as fixed-rate loans
and adjustable-rate loans. Typical terms for adjustable-rate commercial real
estate loans provide for a 5-year repricing term with a 25-year amortization.
5
<PAGE>
One- to Four-Family Mortgage Lending. The Bank currently offers both
fixed-rate and adjustable-rate mortgage loans secured by one- to four-family
residences located in the Bank's primary lending area, with maturities ranging
from fifteen to thirty years. One- to four-family mortgage loan originations are
generally obtained by the Bank through relationships established with real
estate brokers within the Bank's market area and by personnel at the Bank's
seven full-service operating offices. The Bank originates fixed-rate one- to
four-family mortgage loans for sale in the secondary mortgage market, except for
15-year fixed-rate mortgage loans originated at an interest rate of 7% or
higher. Fixed-rate loans sold by the Bank are generally sold on a servicing
released basis. At June 30, 1999, the Bank's one- to four-family mortgage loans
totaled $47.4 million, or 54.6% of gross loans.
The Bank currently offers the following adjustable-rate mortgage loan
programs: a one year adjustable-rate loan that reprices annually, a three year
adjustable-rate loan that reprices every third year, a "5-1" loan (for
first-time home buyers) where the interest rate is fixed for the first five
years and is adjusted on an annual basis thereafter, and a "5-5" loan where each
adjustment is for a five year period. The interest rates on the adjustable-rate
loans are indexed to the comparable-term U.S. Treasury securities rate, with the
initial rate of interest being dependent upon the length of the repricing term
(i.e., a higher rate is charged for loans with an initial three-year repricing
term). Initial rates on ARM loans are typically discounted from the
fully-indexed rate. The one year adjustable-rate loan and the 5-1
adjustable-rate loans are subject to interest rate caps of 2% for each
adjustment period up to a maximum of 6% over the life of the loan. The three
year and "5-5" adjustable-rate loans are subject to a 3% cap for each adjustment
period up to a maximum of 6% over the life of the loan. As of June 30, 1999, the
interest rates offered by the Bank on the types of adjustable-rate loans ranged
from 125 basis points to 213 basis points below the fully indexed rates at the
loan inception.
The volume and type of adjustable-rate loans originated by the Bank are
affected by market factors such as interest rates, consumer preferences and the
availability of funds. While the origination of adjustable-rate loans helps
reduce the Bank's exposure to increases in interest rates, credit risk can
increase if borrowers are unable to make the larger payments that result from
upward interest rate adjustments. Periodic and lifetime caps on interest rate
increases help to reduce the risks associated with adjustable-rate loans but
also limit the Bank's sensitivity to interest rate risk.
One- to four-family residential mortgage loans are generally underwritten
in accordance with FNMA and FHLMC guidelines, with some exceptions on
adjustable-rate loans originated for retention in the Bank's loan portfolio.
Loans are originated in amounts up to 95% of the lower of the appraised value or
the selling price of the property securing the loan. The Bank requires private
mortgage insurance to be obtained for loans in excess of an 80% loan-to-value
ratio.
Commercial Real Estate Mortgage Lending. Origination of loans secured by
commercial real estate is the Bank's most significant area of lending activity
after one- to four-family residential mortgage lending. The loans are generally
secured by office and manufacturing buildings, office warehouses, apartments and
retail stores located in the Bank's primary market area. At June 30, 1999,
commercial real estate mortgage loans totaled $21.0 million, or 24.2% of gross
loans, an increase of $8.1 million, or 63.2%, since June 30, 1998.
Pursuant to the Bank's underwriting policies, a number of factors are
considered before a commercial real estate loan is made. The qualifications and
financial condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying property, are
evaluated. When evaluating the qualifications of the borrower for a multi-family
mortgage loan, the Bank considers the financial resources of the borrower, the
borrower's experience in owning or managing similar property and the borrower's
payment history with the Bank and other financial institutions. Factors
considered in evaluating the underlying property include the net operating
income of the mortgaged premises before debt service and depreciation, the debt
service coverage ratio (the ratio of net operating income to debt service) and
the ratio of the loan amount to the appraised value.
According to Bank policy, multi-family mortgage loans may be made in an
amount up to 80% of the lower of the appraised value (as determined by the Bank
or a qualified independent appraiser, whichever is lower) or the sales price of
the underlying property, provided the debt service coverage ratio is not less
than 120%. The appraisal process takes into consideration geographic location,
comparable sales, vacancy rates, if applicable, operating expenses and historic,
current and projected economic conditions. Appraisals are obtained from
independent licensed and certified fee appraisers for all loan requests.
6
<PAGE>
Commercial real estate loans are offered both as adjustable-rate and
fixed-rate loans. Typical terms for loans provide for a five-year repricing
term, with up to a 25-year amortization. The adjustable-rate is generally tied
to the Prime Rate as published in the Wall Street Journal. The Bank from time to
time will partially fund fixed-rate loans through fixed-rate borrowings from the
FHLB of Boston obtained for periods that approximate the fixed-rate terms of the
loans originated.
A number of the Bank's commercial real estate borrowers have done business
with the Bank for many years and have more than one loan outstanding. The Bank
generally originates commercial real estate loans of $150,000 to $500,000, a
range the Bank views as being too small for larger commercial banks. At June 30,
1999, the largest commercial real estate borrower had aggregate loans
outstanding of $1.4 million, or 7.7% of core capital. Including this borrower,
there were 18 borrowers each with aggregate commercial loans outstanding at June
30, 1999 of $500,000 or more, the cumulative total of which was $16.2 million,
or 18.7% of gross loans. At June 30, 1999, all of these loans were performing in
accordance with their contractual terms.
Loans secured by commercial real estate generally involve larger principal
amounts and a greater degree of risk than one-to-four family residential
mortgage loans. Because payments of loans secured by commercial real estate are
often dependent on successful operation or management of the properties,
repayment of such loans may be subject to a greater extent to adverse conditions
in the real estate market or the economy.
The Bank intends to emphasize its commercial real estate lending
activities in its primary lending area depending on the demand for such loans
and trends in the real estate market and the economy. Accordingly, the Bank has
expanded the staff of the commercial loan department in the origination and
underwriting areas because of this increased emphasis.
Construction Lending. The Bank provides funding for construction projects
involving residential properties within its primary lending area. These loans
may be for the construction of new properties or the rehabilitation of existing
properties. Most of the Bank's construction lending activities consist of
construction loans on pre-sold property. The Bank underwrites
construction-permanent loans for owner-occupied one- to four-family property
according to its own internal guidelines for adjustable-rate and fixed-rate
mortgages. For this type of construction loan, the Bank will lend up to 90% of
the lesser of appraised value upon completion of construction or the cost of
construction, provided private mortgage insurance coverage is obtained for any
loan with a loan-to-value or loan-to-cost ratio in excess of 80%. For loans on
one-to-four family properties being constructed for sale, the Bank lends up to
80% of the lesser of completed value or project cost (and up to 70% for
speculative loans). Typically, loan proceeds are disbursed in increments as
construction progresses as determined by property inspections and title
rundowns.
At June 30, 1999, total construction loans outstanding amounted to $5.0
million, or 5.7% of gross loans, and the Bank had committed to fund additional
construction loans totaling $2.5 million.
Construction financing is generally considered to involve a higher degree
of risk than long-term financing on improved, occupied real estate. Risk of loss
on a construction loan is largely dependent upon the accuracy of the initial
estimate of construction costs, the estimated time to sell or rent the completed
property at an adequate price or rate of occupancy, and market conditions. If
the estimates and projections prove to be inaccurate, the Bank may be confronted
with a project which, upon completion, has a value that is insufficient to
assure full loan repayment.
Home Equity Lending. The Bank offers home equity lines of credit and
fixed-term loans secured by one- to four-family owner-occupied properties in its
primary lending area. Loans are offered in amounts up 80% of the value of the
property, less the first lien. Values are determined by a recent tax bill from
the town where the property is located showing the assessed value of the
property. Fixed-term home equity loans are written at fixed rates, and are
amortized for terms of up to 10 years, while home equity lines of credit are
written with adjustable rates, and may be extended for up to 15 years (with a 5
year draw period and a 10 year repayment period). At June 30, 1999, the Bank had
$4.6 million in home equity loans, or 5.3% of gross loans.
Commercial Loans. The Bank originates both secured and unsecured
commercial business loan to businesses located in the Bank's primary lending
area. Commercial business loans are originated as both fixed-rate loans and
adjustable-rate loans set at a percentage above the Prime Rate as published in
the Wall Street Journal. Fixed-rate loans
7
<PAGE>
generally are originated for terms of seven years or less. The Bank intends for
commercial business lending (and, specifically, the Bank's "Small Business
Express" loan product, which is a line of credit or term available for
commercial loan and Small Business Express customers seeking a transaction
account with the Bank) to be an area of growth for the Bank. At June 30, 1999,
commercial business loans totaled $6.5 million, or 7.5% of gross loans.
Consumer Loans. The Bank's origination of consumer loans, other than home
equity loans, has been fairly limited. This consumer loan portfolio includes
direct automobile loans and various other types of installment loans, including
loans secured by deposits, as well as a modest amount of revolving credit
balances. Consumer lending is expected to remain a limited part of the Bank's
overall lending program. At June 30, 1999, consumer loans other than home equity
loans totaled $2.3 million, or 2.7% of gross loans.
Loan Approval Procedures and Authority. The Board of Directors annually
approves the lending policies and loan approval limits for the Bank as well as
the independent appraisers used by the Bank. Loans may be approved by loan
officers, management, the Loan Committee or the Board of Directors, depending on
the type and size of the loan and the borrower's aggregate loan balances with
the Bank. Where the borrower's aggregate loan balances with the Bank are
$250,000 and below, individual loan officers (depending on lending limits) may
approve loans, and where the borrower's aggregate loan balances with the Bank
are between $250,001 and $500,000, the loan request must be approved by the Loan
Committee. The Loan Committee is made up of the President, Senior Vice President
and Chief Lending Officer, Senior Vice President-Retail Banking, Vice President
of Commercial Lending and the head of the loan servicing department. Where the
borrower's aggregate borrowings with the Bank exceed $500,000, the loan request
must be approved by the Board of Directors.
The Bank requires an environmental site assessment to be performed by an
independent professional for all non-residential mortgage loans. It is also the
Bank's policy to require title and hazard insurance on all mortgage loans. In
addition, the Bank may require borrowers to make payments to a mortgage escrow
account for the payment of property taxes. Any exceptions to the Bank's loan
policies must be made in accordance with the limitations set out in each policy.
Typically, the exception authority ranges from the Chief Lending Officer to the
Board of Directors, depending on the size and type of loan involved.
Environmental Issues
The Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for costs
of cleaning up hazardous materials found on property securing their loans. In
addition, the existence of hazardous materials may make it unattractive for a
lender to foreclose on such properties. Although environmental risks are usually
associated with loans secured by commercial real estate, risks also may be
substantial for loans secured by residential real estate if environmental
contamination makes the property unsuitable for use. This could also have a
negative effect on nearby property values. The Bank attempts to control its risk
by requiring appropriate environmental assessments as part of its underwriting
of all non-residential real estate mortgage loans.
The Bank believes its procedures regarding the assessment of environmental
risk are adequate and, as of June 30, 1999, the Bank was unaware of any
environmental issues which would subject it to any material liability. However,
no assurance can be given that the values of properties securing loans in the
Bank's portfolio will not be adversely affected by unforeseen environmental
risks.
Delinquent Loans, Other Real Estate Owned and Classified Assets
Delinquent Loans. The Chief Lending Officer reviews the status of all
delinquent loans on an on-going basis. The actions taken by the Bank with
respect to delinquencies vary depending upon the nature of the loan and the
period of delinquency. Notices are generated by the Bank's service bureau when a
loan is five and twelve days past due. Collection letters are used in addition
to and as a supplement to telephone calls. Typically, collection letters are
sent out when a loan becomes fifteen days overdue, and again at thirty days.
Where allowed, late charges are assessed once a loan becomes past due the
required number of days.
On loans secured by one- to four-family residences, the Bank attempts to
work out a payment schedule with the borrower in order to avoid foreclosure. If
a satisfactory payment plan is not arranged, the Bank typically refers the
8
<PAGE>
loan to legal counsel and foreclosure procedures are initiated after the 90th
day of delinquency. At any time prior to a sale of the property at foreclosure,
foreclosure proceedings will be terminated if the borrower and the Bank are able
to work out a satisfactory payment plan. On loans secured by commercial real
estate properties, the Bank also seeks to reach a satisfactory payment plan so
as to avoid foreclosure. If a satisfactory payment plan is not arranged, the
Bank typically refers the loan to legal counsel for foreclosure after the loan
becomes ninety days past due. Prior to any foreclosure, the Bank requires an
updated appraisal of the property.
Other Real Estate Owned. Property acquired through foreclosure or
acceptance of a deed in lieu of foreclosure are classified in the Bank's
financial statements as other real estate owned ("OREO"). When a property is
placed in OREO, the excess of the loan balance over the estimated fair value is
charged to the allowance for loan losses. Estimated fair value usually
represents the sales price a buyer would be willing to pay on the basis of
current market conditions, including normal loan terms from other financial
institutions, less estimated costs to sell the property. Management inspects all
OREO properties periodically. When a decline in estimated fair value of a
property is deemed to have taken place, management establishes an allowance for
such decline by a charge to income. The adequacy of the allowance for OREO is
evaluated by management and reviewed with the Loan Committee on a quarterly
basis, taking into consideration each property in the portfolio and current real
estate market conditions. At June 30, 1999, the Bank had no OREO.
Classified Assets. Consistent with regulatory guidelines, the Bank
provides for the classification of loans and other assets considered to be of
lesser quality. Such ratings coincide with the "Substandard", "Doubtful" and
"Loss" classifications used by regulators in their examination of financial
institutions. Generally, an asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligors and/or the collateral pledged. Substandard assets include those
characterized by the distinct possibility that the insured financial institution
will sustain some loss if the deficiencies are not corrected. Assets classified
as Doubtful have all the weaknesses inherent in assets classified Substandard
with the added characteristic that the weaknesses present make collection or
liquidation in full, on the basis of currently existing facts, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve and/or charge-off is not warranted.
Assets which do not currently expose the insured financial institution to
sufficient risk to warrant classification in one of the aforementioned
categories but otherwise possess weaknesses are designated "Special Mention."
When the Bank classifies problem assets as either Substandard or Doubtful,
it establishes general valuation allowances or "loss reserves" in an amount
deemed prudent by management. General allowances represent loss allowances that
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When the Bank classifies problem assets as "Loss," it
is required either to establish a specific allowance for losses equal to 100% of
the amount of assets so classified, or to charge-off such amount. The Bank's
determination as to the classification of its assets and the amount of its
valuation allowance is subject to review by its regulatory agencies, which can
order the establishment of additional general or specific loss allowances. The
Bank reviews its portfolio monthly to determine whether any assets require
classification in accordance with applicable regulations.
On the basis of management's review of its assets, at June 30, 1999, the
Bank had classified a total of $579,000 of its loans and other assets as
follows:
June 30, 1999
-------------
(In Thousands)
Special Mention........................ $ --
Substandard............................ 543
Doubtful assets........................ 36
Loss assets............................ --
---------
Total................................ 579
---------
General allowance...................... $ 622
=========
Specific allowance..................... $ 118
=========
Charge-offs............................ $ --
=========
9
<PAGE>
The FDIC, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on allowances for loan and lease losses.
The policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of a financial institution's valuation methodology. Generally, the
policy statement recommends that financial institutions have effective systems
and controls to identify, monitor and address asset quality problems; that
management analyze all significant factors that affect the collectibility of the
portfolio in a reasonable manner; and that management establish acceptable
valuation processes that meet the objectives set forth in the policy statement.
While the Bank believes that it has established adequate allowances for losses
on loans and OREO, there can be no assurance that the regulators, in reviewing
the Bank's loan portfolio and OREO, will not request the Bank to materially
increase at that time its allowances for losses, thereby negatively affecting
the Bank's financial condition and earnings at that time. Although management
believes that adequate specific and general loss allowances have been
established, actual losses are dependent upon future events and, as such,
further additions to the level of specific and general loss allowances may
become necessary.
Non-Accrual Loans and Non-Performing Assets. The table below sets forth
the amounts and categories of non-performing assets in the Bank's loan
portfolio. Loans are placed on non-accrual status when the collection of
principal and/or interest become doubtful. For all years presented, the Bank had
two troubled debt restructurings (which involve forgiving a portion of interest
or principal on any loans or making loans at a rate materially less than that of
market rates). The loan balances were $345,000 and $26,000, respectively, at
June 30, 1999 and 1998. There were no troubled debt restructurings at June 30,
1997. Foreclosed assets include assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
---------------------------------
1999 1998 1997
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans:
One- to four-family real estate........................... $ 317 $ 206 $ 193
Commercial business....................................... 81 83 --
------- ------- -------
Total................................................... 398 289 193
------- ------- -------
Accruing loans delinquent more than 90 days:
One- to four-family real estate........................... 233 -- 334
Commercial real estate.................................... -- 135 --
Consumer.................................................. -- 12 --
Commercial business....................................... -- -- 2
------- ------- -------
Total................................................... 233 147 336
------- ------- -------
Foreclosed assets:
Construction.............................................. -- -- 37
------- ------- -------
Total................................................... -- -- 37
------- ------- -------
Total non-performing assets and delinquent loans............ $ 631 $ 436 $ 566
======= ======= =======
Total as a percentage of total assets....................... 0.35% 0.31% 0.54%
======= ======= =======
</TABLE>
10
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio
as of the dates indicated:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------------------------------------- ------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
--------------------- -------------------- -------------------- --------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family real estate.. 4 $ 309 1 $ 185 5 $ 226 1 $ 123
Commercial real estate........... -- -- -- -- -- -- 1 136
Consumer loans................... 2 2 -- -- 2 25 3 12
Commercial business.............. -- -- 3 80 -- -- 3 83
----- -------- ----- -------- ----- -------- ----- --------
Total........................ 6 $ 311 4 $ 265 7 $ 251 8 $ 354
===== ======== ===== ======== ===== ======== ===== ========
Delinquent loans to total loans.. 0.36% 0.31% 0.32% 0.46%
======== ======== ======== ========
</TABLE>
June 30, 1997
------------------------------------------
60-89 Days 90 Days or More
-------------------- --------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- -------- -------- --------
(Dollars in Thousands)
One- to four-family real estate 3 $ 431 5 $ 443
Commercial real estate......... 1 138 -- --
Consumer loans................. 5 28 -- --
Commercial business............ -- -- 1 2
----- -------- ----- --------
Total...................... 9 $ 597 6 $ 445
===== ======== ===== ========
Delinquent loans to total loans 0.89% 0.66%
======== ========
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan
losses based on management's on-going evaluation of the risks inherent in the
Bank's loan portfolio. Factors considered in the evaluation process include
growth of the loan portfolio, the risk characteristics of the types of loans in
the portfolio, geographic and large borrower concentrations, current regional
economic and real estate market conditions that could affect the ability of
borrowers to pay, the value of underlying collateral, and trends in loan
delinquencies and charge-offs. The allowance for loan losses is maintained at an
amount management considers adequate to cover estimated losses in its loan
portfolio which are deemed probable and estimable based on information currently
known to management.
11
<PAGE>
The following table sets forth activity in the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------
1999 1998 1997
------ ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period............................................. $ 577 $ 475 $ 470
Charge-offs:
One- to four-family...................................................... -- 8 --
Consumer................................................................. 22 16 20
Commercial business...................................................... -- 2 74
------ ------- -------
22 26 94
------ ------- -------
Recoveries:
One- to four-family...................................................... -- -- 20
Consumer................................................................. 7 13 8
Commercial business...................................................... -- 15 36
------ ------- -------
7 28 64
------ ------- -------
Net charge-offs (recoveries)............................................... 15 (2) 30
Additions charged to earnings.............................................. 178 100 35
------ ------- -------
Balance at end of period................................................... $ 740 $ 577 $ 475
====== ======= =======
Ratio of net charge-offs (recoveries) during the period to average loans
outstanding during the period............................................ 0.02% --% 0.05%
====== ======= =======
Ratio of net charge-offs (recoveries) during the period to average
non-performing assets.................................................... 4.54% (0.75)% 5.35%
====== ======= =======
</TABLE>
12
<PAGE>
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- ------------------------------- -------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- -------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family real estate.. $ 171 $ 47,394 54.63% $ 178 $ 48,574 62.76% $ 199 $ 47,196 69.91%
Commercial real estate........... 204 20,981 24.18 108 12,856 16.61 117 8,342 12.36
Construction..................... 50 4,974 5.73 47 4,743 6.13 7 2,880 4.27
Home equity...................... 14 4,591 5.29 14 4,514 5.83 11 4,574 6.78
Consumer......................... 9 2,342 2.70 8 2,490 3.22 7 1,958 2.90
Commercial business.............. 241 6,481 7.47 73 4,217 5.45 28 2,554 3.78
Unallocated...................... 51 -- -- 149 -- -- 106 -- --
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total......................... $ 740 $ 86,763 100.00% $ 577 $ 77,394 100.00% $ 475 $ 67,504 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
</TABLE>
Investment Activities
The investment policy of the Bank is reviewed and approved by the Board of
Directors on an annual basis. The Bank views its investment portfolio as an
alternative earning asset vehicle into which to deploy excess funds as well as
to assist in interest-rate risk management. Compliance with the Bank's
investment policy is the responsibility of the President. Investment purchases
are initiated in accordance with specific guidelines and criteria specified in
the investment policy. No sales of investment securities can be made without the
prior permission of the President. All investment transactions are reported to
and reviewed by the Board of Directors on a monthly basis.
The Bank's current policy generally favors investment in U.S. Government
and Agency securities, corporate debt obligations and corporate equities. The
policy permits investment in mortgage-backed and mortgage-related securities but
does not allow the use of interest rate swaps, options and futures. The Bank's
current investment strategy has emphasized the purchase of U.S. Government and
Agency obligations and corporate debt obligations generally maturing within ten
years.
At June 30, 1999, the Bank had $71.7 million, or 40.3% of total assets, in
securities consisting primarily of U.S. Government and Agency obligations ($40.9
million), mortgage-backed securities ($17.0 million), corporate obligations
($9.2 million), marketable equity securities ($2.9 million) and certificates of
deposit ($500,000). Also included in investments is $1.3 million of FHLB stock.
To avail itself of services offered by that organization, in particular the
ability to borrow funds, the Bank is required to invest in the stock of the FHLB
in an amount determined on the basis of the Bank's residential mortgage loans
and borrowings from the FHLB. The stock is redeemable at par and earns dividends
declared at the discretion of the FHLB.
SFAS No. 115 requires the Bank to designate its securities as held to
maturity, available for sale or trading depending on the Bank's intent regarding
its investments. The Bank does not currently maintain a trading portfolio of
securities. At June 30, 1999, all of the Bank's securities, except for
certificates of deposit and FHLB stock were designated as available for sale.
The net unrealized loss on securities classified as available for sale was $1.8
million at June 30, 1999.
U.S. Government and Agency Obligations. At June 30, 1999, the Bank's U.S.
Government and Agency securities portfolio totaled $40.9 million, all of which
was classified as available for sale. This portfolio consists primarily of
medium-term (maturities of 5 to 10 years) securities. The Bank's current
investment strategy, however, is
13
<PAGE>
to maintain investments in such instruments for liquidity purposes, as
collateral for borrowings, and for prepayment protection. The Bank's Agency
debentures are callable on a semi-annual basis following a holding period of
twelve months. The Bank generally does not purchase structured notes and there
were no structured notes in the Bank's portfolio at June 30, 1999.
Mortgage-Backed Securities. At June 30, 1999, the Bank's mortgage-backed
securities totaled $17.0 million, all of which were classified as available for
sale. Mortgage-backed securities are generally purchased by the Bank as a means
to deploy excess liquidity at more favorable yields than other investment
alternatives. In addition, mortgage-backed securities generate positive interest
rate spreads with minimal administrative expense and lower the Bank's overall
credit risk due to the guarantees on such securities provided by GNMA, FNMA and
FHLMC. The Bank generally does not invest in collateralized mortgage obligations
and the Bank's portfolio of mortgage-backed securities included no
collateralized mortgage obligations at June 30, 1999. At June 30, 1999, the
Bank's mortgage-backed securities portfolio had a weighted average yield of
7.66%.
Mortgage-backed securities are created by pooling individual mortgages and
bear an interest rate that is less than the interest rate on the underlying
mortgages. Mortgage-backed securities typically represent a participation
interest in a pool of single family or multi-family mortgages, although the Bank
generally purchases only mortgage-backed securities backed by single family
mortgage loans. The issuers of such securities (generally U.S. Government
agencies and Government sponsored enterprises, including FNMA, FHLMC and GNMA)
pool and resell the participation interests in the form of securities to
investors and guarantee the payment of principal and interest to these
investors. Investments in mortgage-backed securities involve a risk that actual
prepayments on the underlying mortgage loans will be greater than estimated over
the life of the security, which may require adjustments to the amortization of
any premium or accretion of any discount relating to such instruments, thereby
affecting the net yield on such securities. There is also reinvestment risk
associated with the cash flows from such securities or in the event such
securities are redeemed by the issuer. Finally, the market value of such
securities may be adversely affected by changes in interest rates.
Corporate Obligations and Certificates of Deposit. At June 30, 1999, the
Bank's portfolio of corporate debt obligations and certificates of deposit
totaled $9.2 million and $500,000, respectively. The Bank's policy generally
requires that investment in corporate debt obligations be limited to corporate
bonds with an "A" rating or better by at least one nationally recognized rating
service at the time of purchase.
Marketable Equity Securities. At June 30, 1999, the Bank's marketable
equity securities portfolio totaled $2.9 million, all of which was in common
stocks. Since June 30, 1996, the Bank's marketable equity securities portfolio
has ranged from $2.6 million to $3.8 million. While the Bank has no policy
limiting the aggregate carrying value of marketable equity securities,
applicable regulations limit the aggregate carrying value of such securities to
100% of the Bank's retained earnings. However, management has no present
intention of increasing the size of this portfolio. The Bank purchases
marketable equity securities as growth investments that can provide the
opportunity for capital appreciation that is taxed on a more favorable basis
than operating income. There can be no assurance that investment in marketable
equity securities will achieve appreciation in value and, therefore, such
investments involve higher risk. Aggregate purchases of marketable equity
securities totaled $2.4 million and $2.9 million for the twelve months ended
June 30, 1999 and 1998, respectively. At June 30, 1999, pre-tax net unrealized
gains on common stocks amounted to $105,000.
14
<PAGE>
The following table sets forth the composition of the Bank's investment
securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
--------- ------ --------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government and Agency securities.... $ 41,909 74.98% $ 27,502 76.88% $ 16,823 74.09%
Other debt securities.................... 9,441 16.89 2,253 6.30 1,615 7.11
--------- ------ --------- ------ -------- ------
Total debt securities................... 51,350 91.87 29,755 83.18 18,438 81.20
Marketable equity securities................ 2,746 4.91 3,785 10.58 3,232 14.23
--------- ------ --------- ------ -------- ------
Total debt and equity securities......... 54,096 96.78 33,540 93.76 21,670 95.43
FHLB stock.................................. 1,300 2.33 731 2.05 538 2.37
Certificates of deposit..................... 500 0.89 1,500 4.19 500 2.20
--------- ------ --------- ------ -------- ------
Total investment securities............. $ 55,896 100.00% $ 35,771 100.00% $ 22,708 100.00%
========= ====== ========= ====== ======== ======
Other interest-earning assets:
Bank Liquidity Fund...................... $ 450 8.26% $ 3,525 29.54% $ 1,316 20.87%
Federal funds sold....................... 5,001 91.74 8,406 70.46 4,989 79.13
--------- ------ --------- ------ -------- ------
Total other interest-earning assets...... $ 5,451 100.00% $ 11,931 100.00% $ 6,305 100.00%
========= ====== ========= ====== ======== ======
</TABLE>
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
1999 1998 1997
------------------- -------------------- --------------------
Amortized % of Amortized % of Amortized % of
Cost Total Cost Total Cost Total
--------- ------ --------- ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GNMA..................................... $15,089 85.64% $ 306 5.12% $ 378 13.80%
FNMA..................................... 2,257 12.81 4,742 79.34 984 35.91
FHLMC.................................... 247 1.40 871 14.57 1,371 50.04
------- ------ ------ ------ ------ ------
Total................................... 17,593 99.85 5,919 99.03 2,733 99.74
Unamortized premium, net.................... 27 0.15 58 0.97 7 0.26
------- ------ ------ ------ ------ ------
Total mortgage-backed securities......... $17,620 100.00% $5,977 100.00% $2,740 100.00%
======= ====== ====== ====== ====== ======
</TABLE>
15
<PAGE>
The following table sets forth certain information regarding the amortized
cost and fair values of the Bank's securities, at the dates indicated.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
------- ------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government and Agency securities.... $41,909 $40,870 $27,502 $27,668 $16,823 $16,642
Other debt securities.................... 9,441 9,216 2,253 2,252 1,615 1,613
------- ------- ------- ------- ------- -------
Total debt securities.................... 51,350 50,086 29,755 29,920 18,438 18,255
Marketable equity securities................ 2,746 2,851 3,785 4,271 3,232 3,696
------- ------- ------- ------- ------- -------
Total debt and equity securities.......... 54,096 52,937 33,540 34,191 21,670 21,951
FHLB stock.................................. 1,300 1,300 731 731 538 538
Certificates of deposit..................... 500 500 1,500 1,500 500 500
------- ------- ------- ------- ------- -------
Total investment securities................. 55,896 54,737 35,771 36,422 22,708 22,989
------- ------- ------- ------- ------- -------
Mortgage-backed securities:
GNMA..................................... 15,106 14,490 304 305 375 368
FNMA..................................... 2,264 2,232 4,793 4,794 980 987
FHLMC.................................... 250 253 880 881 1,385 1,390
------- ------- ------- ------- ------- -------
Total mortgage-backed securities......... 17,620 16,975 5,977 5,980 2,740 2,745
------- ------- ------- ------- ------- -------
Net unrealized (losses) gains on
available-for-sale securities............ (1,804) 654 286
------- ------- -------
Total securities............................ $71,712 $71,712 $42,402 $42,402 $25,734 $25,734
======= ======= ======= ======= ======= =======
</TABLE>
16
<PAGE>
The table below sets forth certain information regarding the amortized
cost, weighted average yields and contractual maturities of the Bank's
securities portfolio as of June 30, 1999.
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------------------------------------
More Than One More Than Five
One Year or Less Year to Five Years Years to Ten Years
-------------------- --------------------- -------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt securities:
US Government
and agency securities....... $ -- --% $ 2,000 5.78% $ 39,909 6.75%
Other debt securities........ -- -- 3,240 6.64 3,319 6.53
-------- -------- --------
Total debt securities..... -- -- 5,240 6.31 43,228 6.73
Marketable equity securities... -- -- -- -- -- --
FHLB stock..................... -- -- -- -- -- --
Certificates of deposit........ 500 6.50 -- -- -- --
-------- -------- --------
Total investment
securities................ 500 6.50 5,240 6.31 43,228 6.73
-------- -------- --------
Mortgage-backed securities:
GNMA......................... $ -- -- $ -- -- $ 278 6.09
FNMA......................... -- -- 706 6.91 -- --
FHLMC........................ 75 4.77 121 6.86 -- --
-------- -------- --------
Total mortgage-backed
securities................. 75 4.77 827 6.90 278 6.09
-------- -------- --------
Total securities............... $ 575 6.27% $ 6,067 6.39% $ 43,506 6.73%
======== ======== ========
<CAPTION>
June 30, 1999
------------------------------------------
More Than
Ten Years Total
------------------- --------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
--------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Debt securities:
US Government
and agency securities....... $ -- --% $ 41,909 6.70%
Other debt securities........ 2,882 7.55 9,441 6.88
-------- --------
Total debt securities..... 2,882 7.55 51,350 6.74
Marketable equity securities... 2,746 2.84 2,746 2.84
FHLB stock..................... 1,300 6.40 1,300 6.40
Certificates of deposit........ 0 -- 500 6.50
-------- --------
Total investment
securities................ 6,928 5.47 55,896 6.53
-------- --------
Mortgage-backed securities:
GNMA......................... $ 14,828 7.87 $ 15,106 7.84
FNMA......................... 1,558 6.44 2,264 6.59
FHLMC........................ 54 9.99 250 6.91
-------- --------
Total mortgage-backed
securities................. 16,440 7.74 17,620 7.66
-------- --------
Total securities............... $ 23,368 7.07% $ 73,516 6.81%
======== ========
</TABLE>
Sources of Funds
General. Deposits, repayments and prepayments of loans, proceeds from
sales of loans and securities, proceeds from maturing securities and cash flows
from operations are the primary sources of the Bank's funds for use in lending,
investing and other general purposes. The Bank utilizes borrowed funds from the
FHLB to fund its loans in connection with its management of the interest rate
sensitivity of its assets and liabilities.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of
non-interest-bearing checking accounts and interest-bearing NOW accounts,
savings accounts and money market deposit accounts (referred to in the aggregate
as "transaction accounts") and certificate of deposit accounts. The Bank offers
Individual Retirement Accounts ("IRAs") and other qualified plan accounts.
For the period ended June 30, 1999, the Bank had $118.4 million in total
average deposits, of which $62.1 million, or 52.5%, were transaction accounts.
Of the $64.0 million of certificate of deposit accounts at June 30, 1999, $54.6
million, or 85.4% were scheduled to mature within one year. While this
percentage is significant, based on its monitoring of historical trends in
deposit flows and its current pricing strategy for deposits, management believes
the Bank will retain a large portion of its certificate of deposit accounts upon
maturity.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and the
relative attractiveness of competing deposit and investment alternatives. During
the past few years, the strength of the stock market has affected deposit flows
as some customers have opted to place their funds in instruments such as mutual
funds rather than in deposit products perceived to have less attractive returns.
The Bank's deposits are obtained predominantly from the communities surrounding
its five branch offices in Norfolk County. The Bank relies primarily on
competitive pricing of its deposit products and customer service and
long-standing relationships with customers to attract and retain these deposits.
In addition, the Bank has actively marketed its core deposit products to elderly
customers in the Bank's market area through the organization of travel clubs
designed to promote savings by the Bank's senior citizen customers. Finally, the
Bank has emphasized the acquisition of customers
17
<PAGE>
dissatisfied with the less personalized and more costly services provided by
recently merged financial institutions. However, market interest rates and rates
offered by competing financial institutions significantly affect the Bank's
ability to attract and retain deposits. The Bank uses traditional means of
advertising its deposit products, including transit and print media, and
generally does not solicit deposits from outside its market area. The Bank does
not use brokers to obtain deposits.
The following table presents the deposit activity of the Bank for the
periods indicated.
Years Ended June 30,
--------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in Thousands)
Beginning balance............................ $ 112,247 $ 92,897 $ 81,189
Deposits..................................... 904,866 651,556 473,815
Withdrawals.................................. 887,973 635,902 465,157
Interest credited............................ 3,998 3,696 3,050
--------- --------- ---------
Ending balance............................... $ 133,138 $ 112,247 $ 92,897
========= ========= =========
Net increase................................. $ 20,891 $ 19,350 $ 11,708
========= ========= =========
Percent increase............................. 18.61% 20.83% 14.42%
========= ========= =========
The following tables set forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods presented
utilize average daily balances.
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------------------
1999 1998
--------------------------------- --------------------------------
Percent Percent
of Total Weighted of Total Weighted
Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate
-------- ------ -------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts....................... $ 9,699 8.19% 2.70% $ 8,925 8.90% 2.87%
Savings accounts............................ 24,022 20.28 2.31 21,711 21.64 2.53
NOW accounts................................ 16,837 14.22 0.87 12,949 12.90 1.31
Non-interest-bearing accounts............... 11,583 9.78 -- 8,482 8.45 --
-------- ------ -------- -------
Total non-certificate accounts........... 62,141 52.47 1.55 52,067 51.89 1.87
-------- ------ -------- -------
Certificates of deposit:
Less than six months........................ 9,287 7.84 5.02 8,606 8.58 5.43
Over six through 12 months.................. 28,877 24.38 5.48 21,465 21.39 5.76
Over 12 through 24 months................... 15,147 12.79 5.43 13,954 13.91 5.46
Over 24 months.............................. 2,983 2.52 5.46 4,241 4.23 6.06
-------- ------ -------- -------
Total certificate accounts............... 56,294 47.53 5.39 48,266 48.11 5.64
-------- ------ -------- -------
Total average deposits................... $118,435 100.00% 3.38 $100,333 100.00% 3.68
======== ====== ======== =======
Certificates over $100,000............... $ 11,016 5.47% $ 7,703 5.50%
======== ========
</TABLE>
18
<PAGE>
For the Year Ended June 30,
------------------------------
1997
------------------------------
Percent
of Total Weighted
Average Average Average
Balance Deposits Rate
------- -------- --------
(Dollars in Thousands)
Money market accounts....................... $ 7,854 9.28% 2.86%
Savings accounts............................ 20,637 24.39 2.52
NOW accounts................................ 10,429 12.33 1.29
Non-interest-bearing accounts............... 6,638 7.85 --
------- ------
Total non-certificate accounts........... 45,558 53.85 1.93
------- ------
Certificates of deposit:
Less than six months........................ 6,468 7.65 5.10
Over six through 12 months.................. 15,347 18.14 5.52
Over 12 through 24 months................... 12,185 14.40 5.65
Over 24 months.............................. 5,042 5.96 6.01
------- ------
Total certificate accounts............... 39,042 46.15 5.56
------- ------
Total average deposits................... $84,600 100.00% 3.61%
======= ======
Certificates over $100,000............... $ 6,198 5.73%
=======
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 1999.
<TABLE>
<CAPTION>
Maturity
----------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over 12
or Less Months Months Months Total
------- ------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000............. $16,159 $13,862 $14,205 $ 7,554 $51,780
Weighted average rate............................... 5.21% 5.05% 5.16% 5.10% 5.14%
Certificates of deposit of $100,000 or more............ 3,960 2,900 3,508 1,807 12,175
Weighted average rate............................... 5.37% 5.17% 5.23% 5.20% 5.25%
Total certificates of deposit.......................... $20,119 $16,762 $17,713 $ 9,361 $63,955
</TABLE>
Borrowings. The Bank utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. The advances are collateralized primarily by certain of the
Bank's mortgage loans and secondarily by the Bank's investment in the stock of
the FHLB. The maximum amount that the FHLB will advance to member institutions,
including the Bank, fluctuates from time to time in accordance with the policies
of the FHLB. At June 30, 1999, the Bank had $26.0 million in outstanding
advances from the FHLB and had
19
<PAGE>
the capacity to increase that amount to $59.3 million. The Bank expects to
continue to utilize borrowings from the FHLB as part of its management of the
interest sensitivity of its assets and liabilities.
The following table sets forth the maximum month-end balance and average
balance of FHLB advances for the periods indicated.
Years Ended June 30,
---------------------------
1999 1998 1997
------- ------- ------
(In Thousands)
Maximum balance.............................. $25,993 $14,610 $3,401
Average balance.............................. $16,024 $ 7,566 $2,161
The following table sets forth certain information as to the Bank's FHLB
advances at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------
1999 1998 1997
-------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances......................................... $25,993 $14,562 $2,622
Weighted average interest rate of FHLB advances....... 5.04% 5.30% 5.69%
</TABLE>
Employees
As of June 30, 1999, the Bank had 74 full-time equivalent employees. The
employees are not represented by a collective bargaining unit and the Bank
considers its relationship with its employees to be good.
REGULATION
General
The Bank is a Massachusetts-chartered stock savings bank and its deposit
accounts are insured up to applicable limits by the Bank Insurance Fund ("BIF")
of the FDIC and by the Depositors Insurance Fund. The Bank is subject to
extensive regulation by the Massachusetts Division of Banks (the "Division") as
its chartering agency, and by the FDIC, as its deposit insurer. The Bank is
required to file reports with, and is periodically examined by, the FDIC and the
Division concerning its activities and financial condition and must obtain
regulatory approvals prior to entering into certain transactions, including, but
not limited to, mergers with or acquisitions of other savings institutions. The
Bank is a member of the Federal Home Loan Bank of Boston and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System. As bank holding companies, the Mutual Company and the Company are
subject to regulation by the FRB and the Division and required to file reports
with such regulatory bodies. Any change in such regulations, whether by the
Division, the FDIC, or the FRB could have a material adverse impact on the Bank,
the Company, or the Mutual Company. Certain of the regulatory requirements
applicable to the Bank, the Company and the Mutual Company are referred to below
or elsewhere herein.
Massachusetts Bank Regulation
As a Massachusetts-chartered savings bank, the Bank is subject to
supervision, regulation and examination by the Division and to various
Massachusetts statutes and regulations which govern, among other things,
investment powers, lending and deposit-taking activities, borrowings,
maintenance of surplus and reserve accounts, distribution of earnings, and
payment of dividends. In addition, the Bank is subject to Massachusetts consumer
protection and civil
20
<PAGE>
rights laws and regulations. The Division's approval is required for a
Massachusetts bank to establish or close branches, merge with other banks,
organize a holding company, issue stock and undertake certain other activities.
Parity Regulation. Massachusetts regulation on parity with national banks
establishes procedures allowing state-chartered banks to exercise additional or
more flexible parallel powers granted to national banks under federal law which
are otherwise not permitted under state law. Under the parity regulation, a bank
which is either "adequately capitalized" or "well capitalized," which has not
been informed in writing by the Commissioner or an applicable federal bank
regulatory agency that it has been designated to be in "troubled condition," and
which has received as least a "satisfactory" CRA rating (as defined below)
during its most recent examination by the Commissioner or other applicable
federal banking regulatory agency may engage in certain activities in which
Massachusetts chartered banks ordinarily may not engage. Such activities
include, but are not limited to, the establishment of temporary branch offices,
investment in corporate affiliates and subsidiaries, engagement in lease
financing transactions, investment in community development and public welfare
projects, and the provision of tax planning and preparation, payroll and
financial planning services, among others. The procedures and requirements for
engaging in such activities range from an application process or expedited
review and notice process to no application or notice whatsoever. The applicable
procedures and requirements vary according to the nature of the activity to be
engaged in and the capitalization of the bank. As of the date of this document,
the Bank was "adequately capitalized," had received a CRA rating of
"satisfactory" and was not in "troubled condition" and was therefore eligible to
engage in certain of the above-referenced activities, subject to the applicable
procedures and requirements of Massachusetts Regulation.
Investment Activities. As a Massachusetts-chartered savings bank, the Bank
may invest in preferred and common stock of any corporation provided such
investments do not involve control of any corporation and do not, in the
aggregate, exceed 4% of the Bank's deposits. Subject to certain limits, a
Massachusetts-chartered savings bank may invest up to 7% of its deposits in
investments not otherwise legally permitted, provided that any such amounts
which exceed 3% of deposits must be invested in companies organized for the
purpose of acquiring, constructing, rehabilitating, leasing, financing and
disposing of housing, and no investment in the equity securities or debt
securities of any one issuer made pursuant to such authority may exceed 2% of
the bank's deposits.
Regulatory Enforcement Authority. Any Massachusetts bank that does not
operate in accordance with the regulations, policies and directives of the
Commissioner may be subject to sanctions for non-compliance, including seizure
of the property and business of the bank and suspension or revocation of its
charter. The Commissioner may under certain circumstances suspend or remove
officers or directors who have violated the law, conducted the Bank's business
in a manner which is unsafe, unsound or contrary to the depositors' interests,
or been negligent in the performance of their duties. In addition, upon finding
that a bank has engaged in an unfair or deceptive act or practice, the
Commissioner may issue an order to cease and desist and impose a fine on the
bank concerned. Finally, Massachusetts consumer protection and civil rights
statutes applicable to the Bank permit private individual and class action law
suits and provide for the rescission of consumer transactions, including loans,
and the recovery of statutory and punitive damages and attorneys' fees in the
case of certain violations.
Depositors Insurance Fund. All Massachusetts-chartered savings banks are
required to be members of the Depositors Insurance Fund, a corporation that
insures savings bank deposits not covered by federal deposit insurance. The DIF
is authorized to charge savings banks an annual assessment of up to 1/16th of 1%
of a savings bank's deposits.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
charges deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a risk to the insurance fund. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the Commissioner an opportunity to take such action, and may terminate deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
21
<PAGE>
The FDIC has authority under federal law to appoint a conservator or
receiver for an insured bank under certain circumstances. The FDIC is required,
with certain exceptions, to appoint a receiver or conservator for an insured
state bank if that bank was "critically undercapitalized" on average during the
calendar quarter beginning 270 days after the date on which the bank became
"critically undercapitalized." For this purpose, "critically undercapitalized"
means having a ratio of tangible capital to total assets of less than 2%. The
FDIC may also appoint a conservator or receiver for a state bank on the basis of
the institution's financial condition or upon the occurrence of certain events,
including: (i) insolvency (whereby the assets of the bank are less than its
liabilities to depositors and others); (ii) substantial dissipation of assets or
earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the bank will be unable to meet the demands of its depositors or
to pay its obligations in the normal course of business; and (v) insufficient
capital, or the incurring or likely incurring of losses that will deplete
substantially all of the institution's capital with no reasonable prospect of
replenishment of capital without federal assistance.
On September 30, 1996, legislation was enacted to eliminate the premium
differential between SAIF-insured institutions and BIF-insured institutions by
recapitalizing the SAIF to the required ratio of 1.25% of insured deposits. The
legislation provided (i) that the holders of SAIF-assessable deposits pay a
one-time special assessment to recapitalize the SAIF, (ii) for the merger of the
BIF and the SAIF, with such merger being conditioned upon the prior elimination
of the thrift charter, and (iii) that BIF-insured institutions would share in
part in the obligation to repay Financing Corporation bonds that were issued in
1987 to help finance losses to the former insurance fund for state and federal
savings associations.
Following the imposition of the one-time special assessment, the FDIC
lowered assessment rates for SAIF members to reduce the disparity in the
assessment rates paid by BIF and SAIF members. From 1997 through 1999,
FDIC-insured institutions will pay approximately 1.3 basis points of their
BIF-assessable deposits and 6.4 basis points of their SAIF-assessable deposits
to fund the Financing Corporation bonds. The Bank's insurance premium, which had
amounted to the minimum $2,000 annual fee for its BIF-insured deposits, was
increased to 1.3 basis points.
Regulatory Capital Requirements
FDIC-insured savings banks are subject to risk-based capital guidelines
that establish a framework for making regulatory capital requirements more
sensitive to the risk profiles of each institution. The Bank is required to
maintain certain levels of regulatory capital in relation to risk-weighted
assets. The ratio of such regulatory capital to risk-weighted assets is referred
to as the Bank's "risk-based capital ratio." Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet items to four
risk-weighted categories ranging from 0% to 100%, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio equal to at least 8% of risk-weighted assets, of which at least 4%
must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage capital ratio (Tier I capital to adjusted total assets as
specified in the regulations). These regulations provide for a minimum Tier I
leverage ratio of 3% for banks that meet certain specified criteria, including
that they have the highest examination rating and are not experiencing or
anticipating significant growth. All other banks are required to maintain a Tier
I leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis
points. The FDIC may, however, set higher leverage and risk-based capital
requirements on individual institutions when particular circumstances warrant.
Savings banks experiencing or anticipating significant growth are expected to
maintain capital ratios, including tangible capital positions, well above the
minimum levels.
22
<PAGE>
The FDIC has also proposed that a bank's interest rate risk exposure
should be quantified using either the measurement system set forth in the
proposal or the institution's internal model for measuring such exposure.
Management of the Bank has not determined what effect, if any, the proposed
interest rate risk component would have on the Bank's capital if adopted as
proposed.
Standards for Safety and Soundness
The federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
federal law. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit program; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted additions to the Guidelines which require institutions to examine asset
quality and earnings standards. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by federal
law. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
Limitations on Dividends and Other Capital Distributions
The FDIC has the authority to use its enforcement powers to prohibit a
savings bank from paying dividends if, in its opinion, the payment of dividends
would constitute an unsafe or unsound practice. Federal law also prohibits the
payment of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. Massachusetts law also
restricts the Bank from declaring a dividend which would reduce its capital
below (i) the amount required to be maintained by state and federal law and
regulations, or (ii) the amount of the Bank's liquidation account established in
connection with the Reorganization.
Prompt Corrective Action
The federal banking agencies have promulgated regulations to implement the
system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk- based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institution. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized." "Significantly undercapitalized" banks
are subject to one or more of a number of additional restrictions, including an
order by the FDIC to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cease receipt of deposits
from correspondent banks or to dismiss directors or officers, and restrictions
on interest rates paid on deposits, compensation of executive officers and
capital distributions by a parent holding company.
23
<PAGE>
Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.
Activities and Investments of Insured State-Chartered Banks
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks, notwithstanding state laws. Under regulations dealing with equity
investments, an insured state bank generally may not, directly or indirectly,
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things: (i) acquiring or retaining a majority interest in a
subsidiary; (ii) investing as a limited partner in a partnership, the sole
purpose of which is direct or indirect investment in the acquisition,
rehabilitation, or new construction of a qualified housing project, provided
that such limited partnership investments may not exceed 2% of the bank's total
assets; (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees' and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions; and (iv) acquiring or retaining, through a subsidiary,
up to 10% of the voting shares of a depository institution if certain
requirements are met.
Federal law and FDIC regulations permit certain exceptions to the
foregoing limitations. For example, certain state-chartered banks, such as the
Bank, may continue to invest, up to certain limits, in common or preferred stock
listed on a National Securities Exchange or the National Market System of
NASDAQ, and in the shares of an investment company registered under the
Investment Company Act of 1940, as amended. Such banks may also continue to sell
savings bank life insurance. As of June 30, 1999, the Bank had marketable equity
securities with a cost of $2.7 million pursuant to this exception.
Transactions with Affiliates and Insiders of the Bank
Under current federal law, transactions between depository institutions
and their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extensions of credit to an affiliate; the purchase of assets from an
affiliate; the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, acceptances or letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers and principal shareholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.
24
<PAGE>
Holding Company Regulation
General. Bank holding companies are subject to comprehensive regulation
and regular examinations by the FRB and the Division. The FRB also has extensive
enforcement authority over bank holding companies, including, among other
things, the ability to assess civil money penalties, to issue cease and desist
or removal orders and to require that a holding company divest subsidiaries
(including its bank subsidiaries). In general, enforcement actions may be
initiated for violations of law and regulations and unsafe or unsound practices.
As a savings bank, the Bank may elect to have the Company and the Mutual Company
regulated as savings and loan holding companies by the Office of Thrift
Supervision ("OTS"). Regulation as a savings and loan holding company would
require application to, and prior approval of, the OTS.
The Company is subject to capital adequacy guidelines for bank holding
companies (on a consolidated basis) which are substantially similar to those of
the FDIC for the Bank. The Company's stockholders' equity exceeds these
requirements.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary bank. Under this policy, the FRB may require, and
has required in the past, a holding company to contribute additional capital to
an undercapitalized subsidiary bank.
A bank holding company must obtain Massachusetts Board of Bank
Incorporation and FRB approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (iii) merging or consolidating with another bank holding company.
The Bank Holding Company Act also prohibits a bank holding company, with
certain exceptions, from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any company which is not a bank or bank
holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services for
its subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the FRB includes,
among other things, operating a savings institution, mortgage company, finance
company, credit card company or factoring company; performing certain data
processing operations; providing certain investment and financial advice;
underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Company and the Mutual Company have no
present plans to engage in any of these activities.
Interstate Banking and Branching. Federal law allows the FRB to approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state,
without regard to whether the transaction is prohibited by the laws of any
state. The FRB may not approve the acquisition of the bank that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The FRB is prohibited from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. Individual states continue to
have authority to limit the percentage of total insured deposits in the state
which may be held or controlled by a bank or bank holding company to the extent
such limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit referred to above.
Additionally, beginning on June 1, 1997, the federal banking agencies were
authorized to approve interstate merger transactions without regard to whether
such transactions are prohibited by the law of any state, unless the home state
of one of the banks "opted out" by adopting a law which applies equally to all
out-of-state banks and expressly
25
<PAGE>
prohibits merger transactions involving out-of-state banks. Interstate
acquisitions of branches are permitted only if the law of the state in which the
branch is located permits such acquisitions.
In 1996, the Massachusetts legislature enacted a new interstate banking
statute pursuant to which an out-of-state bank may (subject to various
regulatory approvals and to reciprocity in its home state) establish and
maintain bank branches in Massachusetts by (i) merging with a Massachusetts bank
that has been in existence for at least three years, (ii) acquiring a branch or
branches of a Massachusetts bank without acquiring the entire bank, or (iii)
opening such branches de novo. Massachusetts banks' ability to exercise similar
interstate banking powers in other states depend upon the laws of the other
states. For example, according to the law of the bordering state of New
Hampshire, out-of-state banks may acquire New Hampshire banks by merger, but may
not acquire individual branches or establish de novo bank branches in New
Hampshire.
Federal law authorizes the FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching. The appropriate federal banking agencies are required to
prescribe regulations which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit production.
The FDIC and FRB have adopted such regulations. These regulations include
guidelines to ensure that interstate branches operated by an out-of-state bank
in a host state are reasonably helping to meet the credit needs of the
communities which they serve. Should the FDIC determine that a bank's interstate
branch is not reasonably helping to meet the credit needs of the communities
serviced by the interstate branch, the FDIC is authorized to close the
interstate branch or not permit the bank to open a new branch in the state in
which the bank previously opened an interstate branch.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the holding
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earnings retention that is consistent with the holding
company's capital needs, asset quality and overall financial condition. The FRB
also indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the FRB, the FRB may prohibit a
bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized."
Bank holding companies are required to give the FRB prior written notice
of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the consolidated net worth of the bank
holding company. The FRB may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe or unsound practice or
would violate any law, regulation, FRB order, or any condition imposed by, or
written agreement with, the FRB. This notification requirement does not apply to
any company that meets the well-capitalized standard for commercial banks, has a
safety and soundness examination rating of at least a "2" and is not subject to
any unresolved supervisory issues.
Dividend Waivers by the Mutual Company. It has been the policy of many
mutual holding companies to waive the receipt of dividends declared by their
savings institution subsidiary. In connection with its approval of mutual
holding company reorganizations since 1994, however, the FRB has imposed certain
conditions on the waiver of dividends by mutual holding companies declared on
the common stock of subsidiary savings banks, and the Mutual Company expects
that the FRB will impose such conditions on any dividend waivers by the Mutual
Company on the common stock of the Company.
The FRB requires that the amount of any waived dividends will not be
available for payment to stockholders other than the Mutual Company ("Minority
Stockholders") and will be excluded from capital for purposes of calculating
dividends payable to Minority Stockholders. Moreover, the cumulative amount of
waived dividends must be maintained in a restricted capital account which would
be added to any liquidation account of the Bank in the event of the conversion
of the Mutual Company to stock form (a "Conversion Transaction"), and would not
be available for distribution to Minority Stockholders. The restricted capital
account and liquidation account amounts would not be reflected in the Bank's
financial statements or the notes thereto, but would be considered as a
notational or memorandum account of the Bank, and would be maintained in
accordance with the rules, regulations and policy of the Office of
26
<PAGE>
Thrift Supervision except that such rules would be administered by the FRB, and
any other rules and regulations adopted by the FRB. The stock issuance plan also
provides that if the Mutual Company converts to stock form in the future, any
waived dividends may reduce the Minority Ownership Interest following such
Conversion Transaction.
If the Mutual Company decides that it is in its best interest to waive a
particular dividend to be paid by the Company, and the FRB and the Division
approve such waiver, then the Company would pay such dividend only to Minority
Stockholders, and the amount of the dividend waived by the Mutual Company would
be treated in the manner described above. The Mutual Company's decision as to
whether or not to waive a particular dividend, if such waiver is approved by the
FRB and the Division, will depend on a number of factors, including the Mutual
Company's capital needs, the investment alternatives available to the Mutual
Company as compared to those available to the Company, and regulatory approvals.
There can be no assurance (i) that after the reorganization the Mutual Company
will waive dividends paid by the Company, (ii) that the FRB and the Division
will approve any dividend waivers by the Mutual Company or (iii) of the terms
that may be imposed by the FRB or the Division on any dividend waiver.
Federal Securities Law
The common stock of the Company is registered with the Securities and
Exchange Commission ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
Federal Reserve System
The FRB requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At June 30,
1999, the Bank was in compliance with these reserve requirements. Savings banks
are authorized to borrow from the Federal Reserve Bank "discount window," but
FRB regulations require savings banks to exhaust other reasonable alternative
sources of funds, including FHLB borrowings, before borrowing from the Federal
Reserve Bank.
Community Reinvestment Act
Under the Community Reinvestment Act, as amended (the "CRA"), as
implemented by FDIC regulations, a savings bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution, including applications to acquire branches and other
financial institutions. The CRA requires the FDIC to provide a written
evaluation of an institution's CRA performance utilizing a four-tiered
descriptive rating system. The Bank's latest CRA rating was "satisfactory."
Massachusetts has its own statutory counterpart to the Community
Reinvestment Act which is also applicable to the Bank. The Massachusetts version
is generally similar to the Community Reinvestment Act but utilizes a
five-tiered descriptive rating system. Massachusetts law requires the
Commissioner to consider, but not be limited to, a bank's record of performance
under Massachusetts law in considering any application by the bank to establish
a branch or other deposit-taking facility, to relocate an office, or to merge or
consolidate with or acquire the assets and assume the liabilities of any other
banking institution. The Bank's most recent rating under the Massachusetts law
was "satisfactory."
Consumer Protection and Fair Lending Regulations
The Bank is subject to a variety of federal and Massachusetts statutes and
regulations that are intended to protect consumers and prohibit discrimination
in the granting of credit. These statutes and regulations provide for a range of
sanctions for non-compliance, including imposition of administrative fines and
remedial orders, and referral to the Attorney General for prosecution of a civil
action for actual and punitive damages and injunctive relief. Certain
27
<PAGE>
of these statutes authorize private individual and class action lawsuits and the
award of actual, statutory and punitive damages and attorneys' fees for certain
types of violations.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Boston, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Boston. At June 30, 1999, the Bank owned $1.3 million of FHLB stock. In
past years, the Bank has received dividends on its FHLB stock. The dividend
yield from FHLB stock was 6.40% for the year ended June 30, 1999. No assurance
can be given that such dividends will continue in the future at such levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
Federal Taxation
General. The Mutual Company, the Company and the Bank are subject to
federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to these entities.
Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
fiscal year ending June 30 for filing its consolidated federal income tax
returns.
Bad Debt Reserves. The Bank is permitted to establish a reserve for bad
debts and to make annual additions to the reserve. These additions can, within
specified formula limits, be deducted in arriving at the Bank's taxable income.
In addition, the 1996 Act requires the recapture (over a six year period) of the
excess of tax bad debt reserves accumulated after October 31, 1988. The amount
of such reserve subject to recapture by the Bank as of June 30, 1999 was
$188,000.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to November 1, 1988 were subject to recapture into
taxable income should the Bank fail to meet certain thrift asset and
definitional tests. New federal legislation eliminated these thrift related
recapture rules. However, under current law, pre-1988 reserves remain subject to
recapture should the Bank make certain non-dividend distributions or cease to
maintain a bank charter. At June 30, 1996, the Bank's total federal pre-1988
reserve was $1.1 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
28
<PAGE>
Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after 1996. At June 30, 1999, the Bank had no net
operating loss carryforwards for federal income tax purposes.
Corporate Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. Because the Mutual Company owns less than 80%
of the outstanding common stock of the Company, the Mutual Company is not
permitted to file a consolidated federal income tax return with the Company and
the Bank. The corporate dividends-received deduction is 80% in the case of
dividends received from corporations with which a corporate recipient does not
file a consolidated return, and corporations which own less than 20% of the
stock of a corporation distributing a dividend may deduct only 70% of dividends
received or accrued on their behalf.
State Taxation
Massachusetts State Taxation. For Massachusetts income tax purposes, a
consolidated tax return cannot be filed. Instead, the Bank and each of its
subsidiaries file an annual income tax return. The Bank is subject to an annual
Massachusetts excise tax at a rate of 10.91% of its net income for the year
ended June 30, 1999 and declining to 10.50% for the year ending June 30, 2000
and thereafter. In addition, the Bank's two wholly owned subsidiaries are both
securities corporations and, accordingly, are subject to an excise tax at the
rate of 1.32% of its gross income. For these purposes, Massachusetts net income
is defined as gross income from all sources without any exclusions, less the
following deductions: all deductions (but not credits) which are allowable under
the Code except for those deductions under the Code relating to (1) dividends
received, (2) losses sustained in other taxable years and (3) taxes on or
measured by income, franchise taxes for the privilege of doing business and
capital stock taxes imposed by any state of the United States, the District of
Columbia, the Commonwealth of Puerto Rico, any territory or possession of the
United States or any foreign country, or a political subdivision of any of the
foregoing. The Bank is not permitted to carry its losses forward or back for
Massachusetts tax purposes. The Company may apply to the Massachusetts
Department of Revenue to be classified as a Massachusetts security corporation.
Bank holding companies that are so classified are subject to a state tax rate of
0.33% of gross income.
29
<PAGE>
ITEM 2. Properties
The following table sets forth certain information regarding the Company's
offices at June 30, 1999.
Location Year Opened Leased/Owned Deposits
- --------------------------- ----------- ------------ --------------
(In Thousands)
81 Main Street 1980 Owned $54,364
Medway, Massachusetts
1098 Main Street 1962 Owned 24,357
Millis, Massachusetts
18 North Meadow Road 1990 Leased 14,609
Medfield, Massachusetts
1000 Franklin Village Drive 1995 Leased 30,595
Franklin, Massachusetts
281A East Central Street 1997 Leased 7,422
Franklin, Massachusetts
267 Hartford Avenue 1999 Owned 762
Bellingham, Massachusetts
59 Main Street 1999 Leased 1,029
Hopkinton, Massachusetts
ITEM 3. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition and results of operations of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. Market for Company's Common Stock and Related Security Holder Matters
The "Market for Common Stock" section of the Company's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 6. Selected Financial Data
The selected financial information for the year ended June 30, 1999 is
filed as part of the Company's Annual Report to Stockholders and is incorporated
by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
30
<PAGE>
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report to Stockholders which is incorporated herein by
reference.
ITEM 8. Financial Statements and Supplementary Data
The financial statements are contained in the Company's Annual Report to
Stockholders and is incorporated herein by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Company
The "Proposal 1--Election of Directors" section of the Company's
definitive Proxy Statement for the Company's 1999 Annual Meeting of Stockholders
(the "1999 Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
The "Proposal I--Election of Directors" section of the Company's 1999
Proxy Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The "Proposal I--Election of Directors" section of the Company's 1999
Proxy Statement is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
The "Transactions with Certain Related Persons" section of the Company's
1999 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this
Form 10-KSB are as follows:
(A) Independent Auditors' Report
(B) Consolidated Balance Sheets
(C) Consolidated Statements of Income
(D) Consolidated Statements of Changes in Stockholders' Equity
31
<PAGE>
(E) Consolidated Statements of Cash Flows
(F) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to
Consolidated Financial Statements.
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Stock Holding Company Charter of Service Bancorp, Inc. (incorporated
herein by reference to the Company's registration statement on SB-2,
file No. 333-156851 (the "SB-2"))
3.2 Bylaws of Service Bancorp, Inc. (incorporated herein by reference to
the Company's SB-2)
4 Form of Stock Certificate of Service Bancorp, Inc. (incorporated
herein by reference to the Form SB-2)
10.1 Employment Agreement with Eugene G. Stone (incorporated herein by
reference to the Company's SB-2)
10.2 Deferred Compensation and Income Continuation Agreement
(incorporated herein by reference to the Company's SB-2)
10.3 Employee Stock Ownership Plan (incorporated herein by reference to
the Company's SB-2)
10.4 Supplemental Executive Retirement Plan (incorporated herein by
reference to the Company's SB-2)
13 Annual Report to Stockholders
21 Subsidiaries of the Company
27 EDGAR Financial Data Schedule
32
<PAGE>
Signatures
Pursuant to the requirements of Section 13 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: September 23, 1999 By:\s\ Eugene G. Stone
--------------------------
Eugene G. Stone
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: \s\ Eugene G. Stone By: \s\ Warren W. Chase, Jr.
---------------------------------- ------------------------------
Eugene G. Stone Warren W. Chase, Jr.
President, Chief Executive Officer Senior Vice President and
and Director (Principal Executive Treasurer (Principal Financial
Officer) and Accounting Officer)
Date: September 23, 1999 Date: September 23, 1999
By: \s\ Kelly A. Verdolino By: \s\ William L. Casey
---------------------------------- ------------------------------
Kelly A. Verdolino, Director William L. Casey, Director
(Chairman of the Board)
Date: September 23, 1999 Date: September 23, 1999
By: \s\ John G. Dugan By: \s\ Richard Giusti
---------------------------------- ------------------------------
John G. Dugan, Director Richard Giusti, Director
Date: September 23, 1999 Date: September 23, 1999
By: \s\ John Hasenjaeger By: \s\ Robert J. Heavey
---------------------------------- ------------------------------
John Hasenjaeger, Director Robert J. Heavey, Director
Date: September 23, 1999 Date: September 23, 1999
By: \s\ Thomas R. Howie By: \s\ Kenneth C.A. Isaacs
---------------------------------- ------------------------------
Thomas R. Howie, Director Kenneth C.A. Isaacs, Director
Date: September 23, 1999 Date: September 23, 1999
By: \s\ Paul V. Kenney By: \s\ Eugene R. Liscombe
---------------------------------- ------------------------------
Paul V. Kenney, Director Eugene R. Liscombe, Director.
Date: September 23, 1999 Date: September 23, 1999
By: \s\ James W. Murphy By: \s\ Robert A. Matson
---------------------------------- ------------------------------
James W. Murphy, Director Robert A. Matson, Director.
Date: September 23, 1999 Date: September 23, 1999
By: \s\ Lawrence E. Novick
----------------------------------
Lawrence E. Novick, Director
Date: September 23, 1999
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
1999 ANNUAL REPORT TO STOCKHOLDERS
SERVICE BANCORP, INC.
<PAGE>
TABLE OF CONTENTS
Page
Message to Our Stockholders............................................. 1
Selected Consolidated Financial and Other Data.......................... 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 4
Common Stock and Related Matters........................................ 15
Stockholder Information................................................. 16
Independent Auditors' Report............................................ 17
Consolidated Balance Sheets............................................. 18
Consolidated Statements of Income....................................... 19
Consolidated Statements of Changes in Stockholders' Equity.............. 20
Consolidated Statements of Cash Flows................................... 21
Notes to Consolidated Financial Statements.............................. 23
<PAGE>
[LETTERHEAD OF SERVICE BANCORP, INC.]
To our Stockholders:
We at Service Bancorp, Inc. are proud to present you with the first annual
report of the Company. The structure of the organization is that of a two-tier
mutual holding company in which the Company owns 100% of the outstanding common
stock of Summit Bank. Service Bancorp, MHC owns 53.7% of the common stock of the
Company and 46.3% of the Company's common stock is owned by the public.
The additional capital acquired in the Company's public offering completed in
October 1998, has allowed Summit Bank to pursue an aggressive growth strategy.
Since the public offering, the Bank has opened a limited service office in a new
100-unit assisted living facility in Franklin, a full service free standing,
wholly-owned facility in Bellingham and a leased store front branch in
Hopkinton, and plans to move a store front shopping center branch to a leased
free standing full service facility in Franklin. Another component of the Bank's
growth strategy is to substantially increase the origination of commercial
mortgage loans. We will endeavor to achieve this growth through a focused
officer calling program to promote loan products.
During the year ended June 30, 1999 total assets increased from $139.0 million
to $178.2 million, an increase of $39.2 million, or 28.2%. Gross income net of
security gains for the year ended June 30, 1999 climbed 21% to $11.1 million
compared to the prior year. Net income after taxes showed a slight drop from
$1.2 million to $1.1 million compared to the prior year. This decrease was
attributable to an increase in non-interest expense of $1.2 million, or 31.3%,
resulting from the additional branch locations and to an increase in the loan
loss provision of $78,000. Please review "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for further details.
In April 1999, the Board of Directors approved a stock repurchase program of 4%,
or 68,505 shares of outstanding Company common stock to be purchased over the
following 12 months. As of June 30, 1999, 10,000 shares had been purchased at an
average price of $8.25. We believe that our stock is attractively priced and
plan to continue the program.
The Company and the Bank have taken prudent measures to ensure that our computer
systems are Year 2000 (Y2K) ready. Thorough testing of our hardware and software
has taken place. Additionally, we have developed a business resumption
contingency plan and are implementing a disaster recovery plan to be tested in
September of 1999.
The continued commitment and performance of our employees, management and Board
of Directors in addition to the support of our customers and stockholders have
permitted Summit Bank to continue the growth that has contributed to the success
of the Bank over the past several years.
On behalf of the Directors, Officers and employees, thank you for your
confidence and trust.
Sincerely,
/s/ Eugene G. Stone
Eugene G. Stone
President & Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following information is derived from the audited consolidated
financial statements of Service Bancorp, Inc. (the "Company"), or prior to
October 7, 1998, Summit Bank (the "Bank"). For additional information about the
Company and the Bank's reorganization, reference is made to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and related notes included
elsewhere herein.
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
1999 1998 1997 1996
--------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Total assets.................................................... $ 178,158 $138,952 $104,878 $ 90,354
Loans receivable, net .......................................... 85,984 76,735 66,934 59,667
Short-term investments.......................................... 5,451 11,931 6,305 2,597
Mortgage-backed securities--available for sale.................. 16,975 5,980 2,745 2,076
Investment securities--available for sale (1)................... 54,737 36,422 22,989 19,181
Deposits........................................................ 133,138 112,247 92,897 81,189
Total borrowings................................................ 25,993 14,562 2,622 369
Stockholders' equity............................................ 16,479 10,123 8,695 7,421
</TABLE>
Summary of Operations
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1999 1998 1997 1996
--------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Total interest income........................................... $ 10,419 $ 8,636 $ 7,037 $ 6,102
Total interest expense.......................................... 4,830 4,116 3,174 2,746
--------- -------- -------- --------
Net interest income.......................................... 5,589 4,520 3,863 3,356
Provision for loan losses....................................... 178 100 35 93
--------- -------- -------- --------
Net interest income, after provision for loan losses............ 5,411 4,420 3,828 3,263
--------- -------- -------- --------
Fees and service charges........................................ 600 430 406 388
Gain on sales of loans and securities........................... 723 833 493 308
Other non-interest income....................................... 41 58 60 78
--------- -------- -------- --------
Total non-interest income....................................... 1,364 1,321 959 774
--------- -------- -------- --------
Total non-interest expense...................................... 5,130 3,908 3,094 2,735
--------- -------- -------- --------
Income before income taxes...................................... 1,645 1,833 1,693 1,302
Income tax provision............................................ 561 632 611 501
--------- -------- -------- --------
Net income...................................................... $ 1,084 $ 1,201 $ 1,082 $ 801
========= ======== ======== ========
</TABLE>
- -----------------------
(1) Includes certificates of deposit and FHLB stock, which are not available
for sale.
2
<PAGE>
Key Operating Ratios and Other Data
<TABLE>
<CAPTION>
At or for the Years Ended June 30,
-----------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Performance Ratios:
Return on average assets.................................... 0.72% 1.02% 1.13% 0.97%
Return on average stockholders' equity...................... 7.23% 12.80% 13.58% 11.35%
Average interest rate spread................................ 3.44% 3.60% 3.86% 3.99%
Net interest margin (1)..................................... 3.95% 4.05% 4.29% 4.34%
Ratio of operating expense to average assets................ 3.41% 3.31% 3.24% 3.31%
Ratio of average interest-earning assets to
average interest-bearing liabilities..................... 115.07% 112.21% 112.38% 109.81%
Efficiency ratio (2)........................................ 73.78% 66.91% 64.16% 66.22%
Asset Quality Ratios:
Non-accrual loans and other real estate owned
to total assets.......................................... 0.22% 0.21% 0.22% 0.99%
Allowance for loan losses as a percent of
non-accrual loans........................................ 185.93% 199.65% 246.11% 52.28%
Allowance for loan losses as a percent of
loans receivable, net.................................... 0.86% 0.75% 0.71% 0.79%
Capital Ratios and Data:
Stockholders' equity to total assets........................ 9.25% 7.29% 8.29% 8.21%
Average stockholders' equity to average assets.............. 9.96% 7.94% 8.33% 8.55%
Net book value per share.................................... $ 9.97 N/A N/A N/A
Other Data:
Number of full-service offices.............................. 7 5 4 4
Number of deposit accounts.................................. 17,764 16,488 15,598 14,830
Number of loans outstanding................................. 1,757 1,695 1,557 1,410
</TABLE>
- --------------------------
(1) Net interest income divided by average interest-earning assets.
(2) Non-interest expense divided by the sum of net interest income and
non-interest income.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this document contains
forward-looking statements. The forward-looking statements contained in the
following sections are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected in the
forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, those discussed. Readers should not place undue
reliance on these forward- looking statements, as they reflect management's
analysis as of the date of this report. The Company has no obligation to update
or revise these forward-looking statements to reflect events or circumstances
that occur after the date of this report. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the SEC, including quarterly reports on Form 10-QSB and current reports
filed on Form 8-K.
General
The Company's results of operations depend primarily on its net interest
income, which is the difference between the income earned on the Company's loan
and securities portfolios and its cost of funds, consisting of the interest paid
on deposits and borrowings. Results of operations are also affected by the
Company's provision for loan losses, income and expenses pertaining to other
real estate owned, gains and losses from sales of securities, and non-interest
expenses. The Company's non-interest expenses consist principally of
compensation and employee benefits, occupancy, equipment and data processing,
and other operating expenses. Results of operations are also significantly
affected by general economic and competitive conditions, changes in interest
rates, as well as government policies and actions of regulatory authorities.
Future changes in applicable law, regulations or government policies may
materially affect the Company.
In this document, the Company is being discussed on a consolidated basis
with its wholly-owned subsidiary, Summit Bank (the "Bank"). References to the
Company may signify the Bank, depending on the context of the reference.
Management of Credit Risk
Management considers credit risk to be an important risk factor affecting
the financial condition and operating results of the Company. The potential for
loss associated with this risk factor is managed through a combination of
policies approved by the Company's Board of Directors, the monitoring of
compliance with these policies, and the periodic reporting and evaluation of
loans with problem characteristics. Policies relate to the maximum amount that
can be granted to a single borrower and such borrower's related interests, the
aggregate amount of loans outstanding by type in relation to total assets and
capital, loan concentrations, loan-to-collateral-value ratios, approval limits
and other underwriting criteria. Policies also exist with respect to performing
credit reviews by an officer not involved in loan origination, the rating of
loans, when loans should be placed in a non-performing status, and the factors
that should be considered in establishing the Company's allowance for loan
losses.
Management of Interest Rate Risk
Another important risk factor affecting the financial condition and
operating results of the Company is interest rate risk. This risk is managed by
periodic evaluation of the interest rate risk inherent in certain balance sheet
accounts, determination of the level of risk considered appropriate given the
Company's capital and liquidity requirements, business strategy, performance
objectives and operating environment, and maintenance of such risks within
guidelines approved by the Board of Directors. Through such management, the
Company seeks to reduce the vulnerability of its operations to changes in
interest rates. The Company's Asset/Liability Committee, comprised of senior
management, is responsible for managing interest rate risk and reviewing with
the Board of Directors on a quarterly basis its activities and strategies, the
effect of those strategies on the Company's operating results, the Company's
interest rate risk
4
<PAGE>
position, and the effect changes in interest rates would have on the Company's
net interest income. The extent of movement of interest rates is an uncertainty
that could have a negative impact on the earnings of the Company.
The principal strategies used by the Company to manage interest rate risk
include (1) emphasizing the origination and retention of adjustable-rate and
fixed-rate loans, (2) originating fixed-rate commercial real estate loans, (3)
investing in debt securities with maturities with shorter call dates of 2 to 5
years, (4) classifying all of the Company's investment portfolio as available
for sale so as to provide sufficient flexibility in liquidity management, and
(5) maintaining a high concentration of less interest-rate-sensitive and
lower-costing "core deposits".
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is deemed to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest bearing-liabilities maturing or repricing within that
same time period. At June 30, 1999, the Company's cumulative one-year gap
position, the difference between the amount of interest-earning assets maturing
or repricing within one year and interest-bearing liabilities maturing or
repricing within one year, was a negative 18.4%. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Accordingly, during a period of rising interest rates, an
institution with a negative gap position generally would not be in as favorable
a position, compared to an institution with a positive gap, to invest in higher
yielding assets. The resulting yield on the institution's assets generally would
increase at a slower rate than the increase in its cost of interest-bearing
liabilities. Conversely, during a period of falling interest rates, an
institution with a negative gap would tend to experience a repricing of its
assets at a slower rate than its interest-bearing liabilities which,
consequently, would generally result in its net interest income growing at a
faster rate than an institution with a positive gap position.
The following table sets forth the amortized cost of interest-earning
assets and interest-bearing liabilities outstanding at June 30, 1999, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. Except as stated below, the amount of
assets and liabilities shown which reprice or mature during a particular period
were determined in accordance with the earlier of term to repricing or the
contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at June 30,
1999, on the basis of contractual maturities, anticipated prepayments and
scheduled rate adjustments within a three month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be redeployed and/or repriced as a result of contractual
amortization and anticipated prepayments of adjustable-rate and fixed-rate
loans, and as a result of contractual rate adjustments on adjustable-rate loans.
The annual prepayment rate for loans (other than consumer loans) and
mortgage-backed securities is assumed to range between 8% and 12% depending upon
the type of loan, and the annual prepayment rate for consumer loans is assumed
to be 25%. Finally, the Company made a decision during fiscal 1999 to invest in
agency obligations and corporate debt with longer maturities to lock in higher
yields and enhance interest income performance. The agency and corporate debt
obligations have maturities ranging from 5 to 15 years, a principal portion of
which have call features of between 2 to 5 years. The GAP table generally
presents the full contractual maturity of these obligations, notwithstanding the
call features.
5
<PAGE>
<TABLE>
<CAPTION>
Amounts maturing or repricing at June 30, 1999
----------------------------------------------
Less
Than Three 3-6 6 Months to 1-3
Months Months 1 Year Years
------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets (1):
Loans receivable (2)........................... $20,923 $ 7,551 $ 16,110 $ 29,566
Short-term investments......................... 5,451 -- -- --
Mortgage-backed securities..................... 418 418 837 3,348
Debt securities and certificates of deposit.... -- -- 500 1,831
Equity securities.............................. -- -- -- --
FHLB stock..................................... -- -- -- --
------- -------- -------- --------
Total interest-earning assets................ 26,792 7,969 17,447 34,745
------- -------- -------- --------
Interest-bearing liabilities:
Savings deposits (3)(4)........................ 3,187 3,188 3,188 3,188
Money market deposits (3)...................... 1,271 1,270 1,270 1,270
NOW deposits (5)............................... 3,953 3,953 3,953 3,953
Certificate accounts........................... 20,119 16,761 17,716 9,359
FHLB advances.................................. 5,132 90 5 18
------- -------- -------- --------
Total interest-bearing liabilities........... $33,663 $ 25,262 $ 26,132 $ 17,788
------- -------- -------- --------
Interest sensitivity gap (6)..................... $(6,870) $(17,293) $ (8,685) $ 16,957
======= ======== ======== ========
Cumulative interest sensitivity gap.............. $(6,870) $(24,163) $(32,848) $(15,891)
======= ======== ======== ========
Cumulative interest sensitivity gap as a
percentage of total assets..................... (3.86)% (13.56)% (18.44)% (8.92)%
Cumulative interest sensitivity gap as a
percentage of total interest-earning assets ... (4.16)% (14.61)% (19.87)% (9.61)%
Cumulative interest-earning assets as a
percentage of cumulative interest-bearing
liabilities.................................... 79.59% 58.99% 61.38% 84.55%
<CAPTION>
Amounts maturing or repricing at June 30, 1999
----------------------------------------------
3-5 5-10 Over 10
Years Years Years Total
------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets (1):
Loans receivable (2)........................... $ 6,804 $ 3,140 $ 2,271 $ 86,365
Short-term investments......................... -- -- -- 5,451
Mortgage-backed securities..................... 3,348 9,251 -- 17,620
Debt securities and certificates of deposit.... 3,409 43,228 2,882 51,850
Equity securities.............................. -- -- 2,746 2,746
FHLB stock..................................... -- -- 1,300 1,300
------- ------- -------- --------
Total interest-earning assets................ 13,561 55,619 9,199 165,333
------- ------- -------- --------
Interest-bearing liabilities:
Savings deposits (3)(4)........................ -- -- 12,751 25,502
Money market deposits (3)...................... -- -- 5,082 10,163
NOW deposits (5)............................... -- -- 5,270 21,082
Certificate accounts........................... -- -- -- 63,955
FHLB advances.................................. 2,018 16,049 2,681 25,993
------- ------- -------- --------
Total interest-bearing liabilities........... $ 2,018 $16,049 $ 25,784 146,695
------- ------- -------- --------
Interest sensitivity gap (6)..................... $11,543 $39,570 $(16,585)
======= ======= ========
Cumulative interest sensitivity gap.............. $(4,348) $35,222 $ 18,637
======= ======= ========
Cumulative interest sensitivity gap as a
percentage of total assets..................... (2.44)% 19.77% 10.46%
Cumulative interest sensitivity gap as a
percentage of total interest-earning assets ... (2.63)% 21.30% 11.27%
Cumulative interest-earning assets as a
percentage of cumulative interest-bearing
liabilities.................................... 95.85% 129.13% 112.70%
</TABLE>
- -------------------------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) For the purposes of the gap analysis, the allowance for loan losses,
deferred loan fees, unearned income, and non-accrual loans have been
excluded.
(3) 50% of regular savings and money market account balances is included in
the over 10 year period; the remaining 50% of such balances is spread
evenly within the four intervals up to and including the one- to
three-year period.
(4) Includes mortgagors' escrow payments.
(5) 25% of NOW account balances are included in the over 10 year period; the
remaining balances are spread evenly within the four intervals up to and
including the one- to three-year period.
(6) Interest sensitivity gap represents the difference between
interest-earning assets and interest-bearing liabilities.
6
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in
the GAP table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets such as adjustable-rate loans, have features
which restrict changes in interest rates both on a short-term basis and over the
life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
Analysis of Net Interest Income
Net interest income represents the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income also depends on the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rates earned or paid on
them.
7
<PAGE>
Average Balance Sheet. The following table presents, for the periods
indicated, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax equivalent adjustments were made. All average balances are monthly
average balances. Non-accruing loans have been included in the table as loans
carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Interest Interest
Average Earned/ Average Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate
--------- --------- ---------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1).......................... $ 75,724 $ 6,400 8.45% $ 70,730 $ 6,121 8.65%
Mortgage-backed securities.................... 9,207 559 6.07 4,315 252 5.84
Debt securities (2)........................... 43,614 2,927 6.71 28,281 1,895 6.70
Equity securities............................. 3,228 98 3.04 2,662 70 2.63
FHLB stock.................................... 820 53 6.46 612 40 6.54
Short-term investments........................ 8,802 382 4.34 4,952 258 5.21
--------- --------- --------- ---------
Total interest-earning assets............... 141,395 10,419 7.37 111,552 8,636 7.74
--------- ---------
Non-interest-earning assets...................... 9,150 6,628
--------- ---------
Total assets................................ $ 150,545 $ 118,180
========= =========
Interest-bearing liabilities:
Savings deposits (3).......................... $ 24,022 556 2.31 $ 21,711 550 2.53
Money market deposits......................... 9,699 262 2.70 8,925 256 2.87
NOW accounts.................................. 16,837 147 0.87 12,949 169 1.31
Certificate accounts.......................... 56,294 3,033 5.39 48,266 2,721 5.64
FHLB borrowings............................... 16,024 832 5.19 7,566 420 5.55
--------- --------- --------- ---------
Total interest-bearing liabilities.......... 122,876 4,830 3.93 99,417 4,116 4.14
--------- ---------
Demand deposits.................................. 11,583 8,482
Other non-interest bearing liabilities........... 1,097 897
Stockholders' equity............................. 14,989 9,384
--------- ---------
Total liabilities and stockholders' equity.... $ 150,545 $ 118,180
========= =========
Net interest income.............................. $ 5,589 $ 4,520
========= =========
Net interest spread.............................. 3.44% 3.60%
======= =======
Net earning assets............................... $ 18,519 $ 12,135
========= =========
Net yield on average interest-earning assets..... 3.95% 4.05%
======= =======
Average interest-earning assets to average
interest-bearing liabilities................. 115.07% 112.21%
========= =========
<CAPTION>
Year Ended June 30,
--------------------------------
1997
--------------------------------
Interest
Average Earned/
Balance Paid Yield/Rate
--------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable (1).......................... $ 63,009 $ 5,343 8.48%
Mortgage-backed securities.................... 2,151 145 6.74
Debt securities (2)........................... 18,367 1,222 6.65
Equity securities............................. 2,234 86 3.85
FHLB stock.................................... 489 31 6.34
Short-term investments........................ 3,792 210 5.54
--------- ---------
Total interest-earning assets............... 90,042 7,037 7.82
---------
Non-interest-earning assets...................... 5,555
---------
Total assets................................ $ 95,597
=========
Interest-bearing liabilities:
Savings deposits (3).......................... $ 20,637 521 2.52
Money market deposits......................... 7,854 225 2.86
NOW accounts.................................. 10,429 135 1.29
Certificate accounts.......................... 39,042 2,169 5.56
FHLB borrowings............................... 2,161 124 5.74
--------- ---------
Total interest-bearing liabilities.......... 80,123 3,174 3.96
---------
Demand deposits.................................. 6,638
Other non-interest bearing liabilities........... 870
Stockholders' equity............................. 7,966
---------
Total liabilities and stockholders' equity.... $ 95,597
=========
Net interest income.............................. $ 3,863
=========
Net interest spread.............................. 3,86%
=======
Net earning assets............................... $ 9,919
=========
Net yield on average interest-earning assets..... 4.29%
=======
Average interest-earning assets to average
interest-bearing liabilities................. 112.38%
=========
</TABLE>
- -------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Debt securities include certificates of deposit.
(3) Savings deposits include mortgagors' escrow accounts.
8
<PAGE>
Rate/Volume Analysis. The following table presents the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the changes related to outstanding balances and that due to the changes
in interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Years Ended June 30, Years Ended June 30,
------------------------------- ------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------- ------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Loans receivable.......................... $ 423 $ (144) $ 279 $ 672 $ 106 $ 778
Mortgage-backed securities................ 297 10 307 129 (22) 107
Debt securities........................... 1,029 3 1,032 663 10 673
Other..................................... 28 13 41 20 (27) (7)
Short-term investments.................... 173 (49) 124 62 (14) 48
------ ------ ------ ------ ------- ------
Total................................... 1,950 (167) 1,783 1,546 53 1,599
------ ------ ------ ------ ------ ------
Interest expense:
Savings deposits.......................... 56 (50) 6 25 4 29
Money market deposits..................... 22 (16) 6 31 -- 31
NOW deposits ............................. 43 (65) (22) 33 1 34
Certificate accounts...................... 437 (125) 312 522 30 552
FHLB borrowings........................... 441 (29) 412 300 (4) 296
------ ------ ------ ------ ------ ------
Total................................... 999 (285) 714 911 31 942
------ ------ ------ ------ ------ ------
Net interest income.......................... $ 951 $ 118 1,069 $ 635 $ 22 $ 657
====== ====== ====== ====== ====== ======
</TABLE>
9
<PAGE>
Comparison of Financial Condition at June 30, 1999 and June 30, 1998
Total assets increased by $39.2 million, or 28.2%, from $139.0 million at
June 30, 1998 to $178.2 million at June 30, 1999. Funding for this increase was
attributable primarily to the completion of the Company's stock offering on
October 7, 1998, and growth in both deposits and borrowings. Net proceeds from
the offering, net of loan proceeds to the Bank's Employee Stock Ownership Plan,
amounted to $6.8 million, while deposits increased $20.9 million, or 18.6%, from
$112.2 million to $133.1 million. In addition, total borrowings increased $11.4
million, or 78.5%, from $14.6 million to $26.0 million over the same time-frame.
Short-term investments (federal funds sold and overnight funds) decreased
by $6.5 million, or 54.3%, from $11.9 million at June 30, 1998 to $5.5 million
at June 30, 1999 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 stock offering, were invested in federal
agency obligations, mortgage-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
$13.2 million, or 47.7%, $11.0 million, or 183.9%, and $7.0 million, or 309.2%,
respectively.
Net loans increased $9.2 million, or 12.1% from June 30, 1998 to June 30,
1999. 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, respectively, at June 30, 1998 to
$21.0 million and $6.5 million, respectively, at June 30, 1999 reflecting growth
of $8.1 million, or 63.2% and $2.3 million, or 53.7%, respectively. The Company
has increased its emphasis on the commercial loan portfolio. Conversely, despite
the increase in residential loan originations during fiscal 1998 and 1999, an
increase in the loan payoff amounts within the residential and construction loan
portfolios in fiscal 1999 over the previous period was the primary reason for
the lack of growth in these portfolios. A decline in mortgage lending rates
during fiscal 1998 and 1999 and increased lending competition within our lending
area primarily caused this increase in the loan payoff amounts. Residential
mortgage loans decreased $1.2 million, or 2.4% from $48.6 million at June 30,
1998 to $47.4 million at June 30, 1999, while net construction loan advances
increased slightly by $231,000, or 4.9%, from $4.7 million to $5.0 million.
Deposits increased $20.9 million, or 18.6% from June 30, 1998 to June 30,
1999. Term certificates and non-certificate accounts increased $12.5 million, or
24.2%, and $8.4 million, or 13.9%, respectively, during this time-frame. In
addition, borrowings increased $11.4 million, or 78.5%, the proceeds of which
were used to fund the purchase of primarily mortgage-backed securities which
have similar or more favorable rates and terms than the current originations
within the Company's mortgage portfolio.
Stockholders' equity increased from $10.1 million, or 7.29% of total
assets at June 30, 1998 to $16.5 million, or 9.25% of total assets at June 30,
1999. The increase resulted primarily from the net proceeds from the stock
offering and net income earned. Unrealized gains (losses) on securities
available for sale are reported as accumulated other comprehensive income (loss)
and between June 30, 1998 and June 30, 1999, the change amounted to a decrease
of $1.6 million.
Comparison of Operating Results for the Years Ended June 30, 1999 and June 30,
1998
General. Net income decreased by $117,000, or 9.7%, to $1.1 million for
the year ended June 30, 1999 from $1.2 million for the comparable period in
1998. This decrease was primarily attributable to increases of $1.2 million and
$78,000, respectively, in total operating expenses and the provision for loan
losses and a decrease of $94,000 in the gain on sales of securities. These
decreases were partially offset by increases of $1.1 million and $170,000 in net
interest income and customer service fees, respectively.
The Company's interest rate spread (the difference between yields earned
on earning assets and rates paid on deposits and borrowings) declined from 3.60%
for the year ended June 30, 1998 to 3.44% for the year ended June 30, 1999.
During the same period, the interest rate margin (net interest income divided by
average earning assets) decreased
10
<PAGE>
from 4.05% to 3.95%. The interest rate margin indicates that in addition to
interest-bearing liabilities, demand deposits and capital serve as a source for
funding for earning assets. The decline was primarily attributable to lower
yields in all earning assets offset in part by lower rates on deposits and
borrowings.
Interest and Dividend Income. Total interest and dividend income increased
by $1.8 million, or 20.6%, from $8.6 million for the year ended June 30, 1998 to
$10.4 million for the comparable period in 1999. This increase was primarily
attributable to a $29.8 million, or 26.8%, increase in average earning assets,
which was partially offset by a 37 basis point decline in the yield on earning
assets. The average balances in net loans increased $5.0 million, or 7.1%, while
total loan yield declined by 20 basis points to 8.45%. This loan yield decline
was primarily attributable to the fact that the residential loan portfolio has
experienced larger than normal principal payoffs as borrowers sought to
refinance their loans at lower rates. In addition, commercial loans were
impacted by current market conditions and the pricing for new commercial loan
originations were driven down by the loan pricing of the Company's competition.
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.
The average debt and mortgage-backed securities portfolio balances
increased $15.3 million, or 54.2%, and $4.9 million, or 113.4%, respectively,
and their portfolio yields improved by 1 and 23 basis points, respectively. The
Company decided to invest in federal agency, corporate obligations, and
government agency sponsored mortgage-backed securities with longer maturities
and higher yields in order to improve the interest rate margin while not
sacrificing the interest rate profile objectives of the Asset-Liability ("ALCO")
management process discussed above. The average balance in short-term
investments increased $3.9 million, or 77.7%, between periods while the
portfolio yield declined by 87 basis points as these investments were impacted
by the decline of short-term interest rates during the period.
Interest Expense. Interest expense on deposits increased $302,000, or
8.2%, from $3.7 million for the year ended June 30, 1998, to $4.0 million for
the same period for 1999. This increase was attributable to a $15.0 million, or
15.1%, increase in average interest-bearing deposit balances between periods,
which was partially offset by a reduction in deposit rates over the same period
from 4.02% to 3.74%. The decrease in deposit interest rates was primarily due to
the declining interest rate environment between the two periods.
The Company increased its use of borrowings from the FHLB as part of its
management of interest rate risk. Average balances in these advances were $16.0
million during the twelve months ended June 30, 1999, an increase of $8.5
million, or 111.8% from the comparable period ended June 30, 1998. Over this
same period, average borrowing rates declined from 5.55% to 5.19%. These
borrowings were used in many cases to fund the purchase of investment securities
where the yield and matching maturing terms favorably affected the net income
and ALCO management performance of the Company.
Provision for Loan Losses. The provision for loan losses increased by
$78,000, from $100,000 for the year ended June 30, 1998 to $178,000 for the
comparable period in 1999. The increase reflected a desire by management to keep
the allowance for loan losses at a level to properly match inherent losses
related to loan growth, especially in the commercial loan area. The ratio of
non-accruing loans and other real estate owned to total assets was 0.22%, at
June 30, 1999. The allowance for loan losses was $577,000 at June 30, 1998 and
$740,000 at June 30, 1999, respectively. While management believes that, based
on information currently available, the Company's allowance for loan losses is
sufficient to cover losses inherent in its loan portfolio at this time, no
assurances can be given that the level of the Company's allowance will be
sufficient to cover future loan losses incurred by the Company 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
allowance.
Non-Interest Income. Total non-interest income increased $43,000, or 3.3%,
from $1.3 million for the year ended June 30, 1998 to $1.4 million for the same
period in 1999. Customer service fees increased by $170,000, from $430,000 to
$600,000, primarily because of the increase in VISA debit card and ATM surcharge
fees between periods. This increase was partially offset by a decline in the
gain on sale of securities available for sale of $94,000, from
11
<PAGE>
$764,000 to $670,000 between the periods. Marketable equity securities are held
by the Company primarily for capital appreciation and not for trading purposes.
Non-Interest Expense. Total non-interest expense increased $1.2 million,
or 31.3%, from $3.9 million for the year ended June 30, 1998 to $5.1 million for
the comparable period in 1999. Between the two periods, salaries and benefits,
occupancy and equipment expenses, and advertising expenses increased $691,000,
or 35.5%, $175,000 or 20.8% and $64,000, or 54.2%, respectively. Much of the
increase in expense was attributed to the Company's asset growth as management
added staff and incurred costs for the new branches opened during the year and
to service the full range of retail and loan products added to the Company's
product lines. The ratio of operating expenses to average assets increased
slightly from 3.31% for the year ended June 30, 1998 to 3.41% for the same
period in 1999.
Income Taxes. The effective income tax rate was 34.1% and 34.5% for the
year ended June 30, 1999 and 1998, respectively. The effective tax rates reflect
the utilization by the Company of securities investment subsidiaries to
substantially reduce state income tax rates.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and
interest payments on loans and debt securities and borrowings from the FHLB.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by interest
rate trends, economic conditions and competition.
Total assets increased by $39.2 million to $178.2 million at June 30, 1999
compared to $139.0 million at June 30, 1998. Total federal agency obligations,
mortgage-backed securities, and other debt securities increased $13.2 million,
$11.0 million, and $7.0 million, respectively, while short-term investments
decreased $6.5 million. In addition, net loans increased $9.2 million.
Asset growth was funded primarily by growth in total deposits and
borrowings of $20.9 million and $11.4 million, respectively. In addition, $6.8
million of net proceeds from the Company's stock offering provided additional
funds for investment. The Company's ability to fund asset growth will continue
to come from deposits, specifically from the new branch openings and from
Federal Home Loan Bank borrowings. As of June 30, 1999, the Company has $26.0
million in outstanding borrowings and has the capacity to increase that total to
$59.3 million.
The Company's most liquid assets are cash and due from banks, short-term
investments, and debt securities. The levels of these assets are dependent on
the Company's operating, financing, lending and investment activities during any
given period. At June 30, 1999, cash and due from banks, short-term investments,
and debt securities maturing within one year amounted to $13.9 million, or 7.8%
of total assets. Additional funds will be available during the next year from
the prepayment of loans and mortgage-backed securities.
At June 30, 1999, the Company had commitments to originate loans, unused
outstanding lines of credit and undisbursed proceeds of loans totaling $15.5
million. The Company anticipates that it will have sufficient funds available to
meets its current loan commitments. Certificates of deposit maturing within one
year from June 30, 1999 amounted to $54.6 million. The Company expects that
substantially all of the maturing certificate accounts will be retained by the
Company at maturity.
At June 30, 1999, the Company exceeded all of its regulatory requirements
with a Tier 1 capital of $17.7 million, or 18.0% of risk-weighted assets, which
is above the required level of $3.9 million or 4.0%, and total capital of $18.4
million, or 18.8% of risk-weighted assets, which is above the required level of
$7.8 million, or 8.0%.
12
<PAGE>
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
Year 2000 Considerations
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 has followed a
comprehensive process to assure that such systems are ready for the year 2000
date change.
To become Y2K compliant, the Company has followed 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 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 has been completed.
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 readiness, including actions to become compliant
if they are not already compliant. A plan was developed to repair or replace
systems and equipment not currently Y2K compliant. This step has been completed.
Responses from key mission-critical vendors have been received. Y2K team members
will continue to contact these vendors to receive updates regarding their Y2K
compliance.
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 of the required testing has been completed.
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 have been developed. The contingency
plan will be tested during September 1999.
13
<PAGE>
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 incurred expenses for Y2K totaling $33,000 and $32,000
respectively, for the years ended June 30, 1999 and 1998. Additional costs may
be incurred during the remainder of 1999 to become Y2K compliant, but management
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 other unforeseen problems arise from
circumstances beyond the control of the Company, such as with third party
vendors, 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.
Impact of New Accounting Standards
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires that all
derivatives be recognized at fair value as either assets or liabilities on the
balance sheet. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for- sale security or a
foreign-currency-denominated forecasted transaction. The accounting for changes
in fair value of a derivative depends on the intended use of the derivative and
the resulting designation. This Statement generally provides for matching the
timing of a gain or loss recognition on the hedging instrument with the
recognition of (a) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (b) the earnings effect of
the hedged forecasted transaction. This Statement, as amended by SFAS No. 137,
is effective for fiscal years beginning after June 15, 2000. The Company does
not generally use derivative instruments and therefore the adoption of the
Statement is not expected to have a material impact on the consolidated
financial statements of the Company.
14
<PAGE>
COMMON STOCK AND RELATED MATTERS
The Company's Common Stock is listed on the Over-the-Counter Bulletin
Board under the symbol "SERC." As of July 30, 1999, the Company had six
registered market makers, 511 stockholders of record (excluding the number of
persons or entities holding stock in street name through various brokerage
firms), and 1,702,630 shares outstanding. As of such date, Service Bancorp, MHC
(the "Mutual Company"), the Company's mutual holding company, held 907,694
shares of common stock and stockholders other than the Mutual Company held
794,936 shares.
The following table sets forth market price and dividend information for
the Common Stock since the completion of the Company's reorganization into the
two-tier mutual holding company structure, which was completed on October 7,
1998.
Fiscal Year Ended Cash Dividends
June 30, 1999 High Low Declared
- ----------------- ------- ------- --------------
Third quarter $9.59 $8.00 None
Fourth quarter $8.63 $7.00 None
Payment of dividends on the Company's common stock is subject to
determination and declaration by the Board of Directors and depends upon a
number of factors, including capital requirements, regulatory limitations on the
payment of dividends, the Company's results of operations and financial
condition, tax considerations and general economic conditions. No assurance can
be given that dividends will be declared or, if declared, what the amount of
dividends will be, or whether such dividends, once declared, will continue.
15
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Stockholders will be held at 3:00 P.M. on October 26,
1999, at the Courtyard by Marriot Hotel, 10 Fortune Boulevard, Milford,
Massachusetts.
Stock Listing
Over-the-Counter Bulletin Board Symbol: SERC
Special Counsel
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W., Suite 400
Washington, D.C. 20015
Independent Auditors
Wolf & Company, P.C.
One International Place
Boston, MA 02110
Transfer Agent and Registrar
Continental Stock Transfer and Trust Co.
2 Broadway
New York, New York 10004
(212) 509-4000
Contact our transfer agent directly for assistance in changing your address,
elimination of duplicate mailings, transferring stock, or replacing lost, stolen
or destroyed stock certificates.
Annual Report on Form 10-KSB
A copy of the Company's Form 10-KSB for the fiscal year ended June 30, 1999,
will be furnished without charge to stockholders as of August 31, 1999, upon
written request to Warren W. Chase, Jr., Vice President, Service Bancorp, Inc.,
81 Main Street, Medway, Massachusetts 02053.
16
<PAGE>
[Wolf & Company, P.C. Letterhead]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Service Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Service Bancorp,
Inc. and subsidiary (formerly "Summit Bank") as of June 30, 1999 and 1998, and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Service Bancorp,
Inc. and subsidiary as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
July 29, 1999
17
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
ASSETS
June 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash and due from banks $ 7,939 $ 4,452
Short-term investments 5,451 11,931
--------- ---------
Total cash and cash equivalents 13,390 16,383
--------- ---------
Certificates of deposit 500 1,500
Securities available for sale 69,912 40,171
Federal Home Loan Bank stock, at cost 1,300 731
Loans 86,724 77,312
Less allowance for loan losses (740) (577)
--------- ---------
Loans, net 85,984 76,735
--------- ---------
Banking premises and equipment, net 4,012 1,455
Accrued interest receivable 1,678 1,173
Net deferred tax asset 1,081 122
Other assets 301 682
--------- ---------
$ 178,158 $ 138,952
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 133,138 $ 112,247
Federal Home Loan Bank advances 25,993 14,562
Other liabilities 2,548 2,020
--------- ---------
Total liabilities 161,679 128,829
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 12,000,000 shares
authorized, 1,712,630 shares issued 17 --
Additional paid-in capital 7,444 --
Retained earnings 10,784 9,700
Accumulated other comprehensive income (loss) (1,182) 423
Treasury stock, at cost (10,000 shares) (83) --
Unearned ESOP shares (50,101 shares) (501) --
--------- ---------
Total stockholders' equity 16,479 10,123
--------- ---------
$ 178,158 $ 138,952
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
1999 1998
------- -------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 6,400 $ 6,121
Interest and dividends on securities available
for sale and Federal Home Loan Bank stock 3,573 2,198
Interest on short-term investments and certificates of deposit 446 317
------- -------
Total interest and dividend income 10,419 8,636
------- -------
Interest expense:
Interest on deposits 3,998 3,696
Interest on FHLB advances 832 420
------- -------
Total interest expense 4,830 4,116
------- -------
Net interest income 5,589 4,520
Provision for loan losses 178 100
------- -------
Net interest income, after provision for loan losses 5,411 4,420
------- -------
Other income:
Customer service fees 600 430
Gain on sales of securities available for sale, net 670 764
Gain on sales of loans 53 69
Miscellaneous 41 58
------- -------
Total other income 1,364 1,321
------- -------
Operating expenses:
Salaries and employee benefits 2,640 1,949
Occupancy and equipment expenses 1,015 840
Data processing expenses 363 325
Professional fees 238 206
Advertising expenses 182 118
Other general and administrative expenses 692 470
------- -------
Total operating expenses 5,130 3,908
------- -------
Income before income taxes 1,645 1,833
Provision for income taxes 561 632
------- -------
Net income $ 1,084 $ 1,201
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1999 and 1998
(In Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned
Common Paid-in Retained Comprehensive Treasury ESOP
Stock Capital Earnings Income (Loss) Stock Shares Total
--------- -------- --------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ - $ - $ 8,499 $ 196 $ - $ - $ 8,695
Comprehensive income:
Net income - - 1,201 - - - 1,201
Change in net unrealized gain on
securities available for sale, net of
taxes and reclassification adjustment - - - 227 - - 227
----------
Total comprehensive income 1,428
--------- -------- --------- ------------ ----------- ------------ ----------
Balance at June 30, 1998 - - 9,700 423 - - 10,123
----------
Comprehensive income:
Net income - - 1,084 - - - 1,084
Change in net unrealized gain (loss) on
securities available for sale, net of
taxes and reclassification adjustment - - - (1,605) - - (1,605)
----------
Total comprehensive loss (521)
----------
Net proceeds from sale of common stock
(1,712,630 shares) 17 7,464 - - - - 7,481
Common stock acquired by ESOP (64,394 shares) - - - - - (644) (644)
Common stock held by ESOP released and committed
to be released (14,293 shares) - (20) - - - 143 123
Purchase of treasury stock (10,000 shares) - - - - (83) - (83)
--------- -------- --------- ------------ ----------- ------------ ----------
Balance at June 30, 1999 $ 17 $ 7,444 $ 10,784 $ (1,182) $ (83) $ (501) $ 16,479
========= ======== ========= ============ =========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,084 $ 1,201
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 178 100
Gain on sales of securities available for sale, net (670) (764)
Net accretion of securities available for sale (9) (36)
Gain on other real estate owned -- (6)
Depreciation and amortization expense 409 349
Increase in accrued interest receivable (505) (352)
Deferred tax benefit (106) (62)
Loans originated for sale (5,809) (8,219)
Principal balance of loans sold 5,809 8,219
Other, net 1,464 (31)
-------- --------
Net cash provided by operating
activities 1,845 399
-------- --------
Cash flows from investing activities:
Purchase of certificates of deposit -- (1,000)
Proceeds from maturities of certificates of deposits 1,000 --
Activity in securities available for sale:
Sales 3,333 3,942
Maturities, prepayments and calls 11,062 11,639
Purchases (46,447) (28,563)
Net increase in loans (9,427) (10,075)
Proceeds from other real estate owned -- 217
Purchase of banking premises and equipment (2,966) (402)
Purchase of Federal Home Loan Bank stock (569) (193)
-------- --------
Net cash used by investing activities (44,014) (24,435)
-------- --------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
21
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(In Thousands)
Years Ended June 30,
-----------------------
1999 1998
-------- --------
Cash flows from financing activities:
Net increase in deposits 20,891 19,350
Proceeds from Federal Home Loan Bank advances 14,000 16,300
Repayment of Federal Home Loan Bank advances (2,569) (4,360)
Proceeds from sale of common stock 7,481 --
Common stock acquired by ESOP (644) --
ESOP shares released 100 --
Purchase of treasury stock (83) --
-------- --------
Net cash provided by financing activities 39,176 31,290
-------- --------
Net change in cash and cash equivalents (2,993) 7,254
Cash and cash equivalents at beginning of year 16,383 9,129
-------- --------
Cash and cash equivalents at end of year $ 13,390 $ 16,383
======== ========
Supplementary information:
Interest paid on deposits $ 3,999 $ 3,694
Interest paid on Federal Home Loan Bank advances 808 368
Income taxes paid 559 686
Increase in due to broker 532 1,053
See accompanying notes to consolidated financial statements.
22
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 1999 and 1998
(Dollars in Thousands, Except per Share Amounts)
1. CORPORATE STRUCTURE
On August 19, 1997, Summit Bank, a Massachusetts-chartered mutual savings
bank, was reorganized into a Massachusetts-chartered mutual holding
company, Service Bancorp, MHC, ("MHC") pursuant to Section 2 of Chapter
167H of the Massachusetts General Laws. Concurrent with the
reorganization, a Massachusetts-chartered stock savings bank was
established as a subsidiary of the MHC, known as Summit Bank. MHC
exchanged certain of its assets and liabilities, including all of its
deposits, for 100% of the common stock of Summit Bank. The Bank has
continued the operations of the predecessor mutual savings bank. The
transaction has been accounted for as a pooling of interests and had no
effect on the consolidated financial results of MHC and the Bank.
Service Bancorp, Inc. (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 MHC, 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 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 MHC and 804,936
shares 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. These
costs were deducted to arrive at net proceeds of $7,481.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The consolidated financial statements include the accounts of Service
Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Summit Bank
(the "Bank") which includes the Bank's wholly-owned subsidiaries, Medway
Securities Corp. and Franklin Village Security Corp., which engage in the
purchase and sale of investment securities. All significant intercompany
balances and transactions have been eliminated in consolidation.
23
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Business and operating segments
The Company provides a variety of financial services to individuals and
small businesses through its offices in Norfolk County. Its primary
deposit products are savings, checking and term certificate accounts and
its primary lending products are mortgage, consumer and commercial loans.
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures
about Segments of an Enterprise and Related Information," effective for
fiscal years beginning after December 15, 1997. SFAS No. 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual and interim financial statements. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. Generally, financial
information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. Management evaluates the Company's performance and
allocates resources based on a single segment concept. Accordingly, there
are no separately identified operating segments for which discrete
financial information is available. The Company does not derive revenues
from, or have assets located in, foreign countries, nor does it derive
revenues from any single customer that represents 10% or more of the
Company's total revenues.
Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the consolidated balance sheet and reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. A material estimate that is particularly
susceptible to significant change in the near term relates to the
determination of the allowance for loan losses.
Reclassifications
Certain amounts have been reclassified in the 1998 consolidated financial
statements to conform to the 1999 presentation.
Cash equivalents
Cash equivalents include amounts due from banks and short-term
investments. Short-term investments consist primarily of federal funds
sold and other interest-bearing deposits which mature on a daily basis.
24
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Securities available for sale
Securities available for sale are carried at fair value, with unrealized
gains and losses excluded from earnings and reported in other
comprehensive income.
Amortization of premiums and accretion of discounts on debt securities are
computed using a method which approximates the interest method. Gains and
losses on sales are recorded on the trade date and are computed using the
specific identification method.
Loans
The Company grants mortgage, consumer and commercial loans to its
customers. A substantial portion of the loan portfolio consists of
mortgage loans in Norfolk County. The ability of the Company's debtors to
honor their contracts is dependent upon the local economy and the local
real estate market.
Loans, as reported, have been adjusted by unadvanced construction loans,
the allowance for loan losses, net deferred loan fees and deferred
premium.
Income on loans, including impaired loans, is recognized on the simple
interest basis and is not accrued when in the judgment of management the
collectibility of the loan principal or interest becomes doubtful. Loans
delinquent 90 days or more remain on accrual status when the loan-to-value
ratio is less than 80% and the collateral value is sufficient to cover all
amounts due including principal, interest and related expenses.
Net deferred loan fees are amortized over the contractual lives of the
related loans using the interest method. Deferred premium is amortized
using the interest method.
Allowance for loan losses
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of known and inherent risks in the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
25
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for loan losses (concluded)
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis using the fair value of
existing collateral.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer loans for impairment disclosures.
Banking premises and equipment
Land is carried at cost. Buildings, leasehold improvements and equipment
are stated at cost less accumulated depreciation and amortization computed
on the straight-line method over the estimated useful lives of the assets
or the expected terms of the leases, if shorter.
Retirement plan
The Company accounts for defined benefit pension plan benefits on the net
periodic pension cost method for financial reporting purposes. This method
recognizes the compensation cost of an employee's pension benefit over the
employee's approximate service period. Pension costs are funded in the
year of accrual using the aggregate cost method.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," effective for fiscal
years beginning after December 15, 1997. The Statement revises employers'
disclosures about pension and other postretirement benefit plans. It does
not change the measurement or recognition of those plans. The Statement
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practical, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that were previously required by generally accepted accounting
principles. The Company has adopted these disclosure requirements for all
years presented herein.
26
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted accordingly through the provision for income taxes. The Bank's
base amount of its federal income tax reserve for loan losses is a
permanent difference for which there is no recognition of a deferred tax
liability. However, the loan loss allowance maintained for financial
reporting purposes is a temporary difference with allowable recognition of
a related deferred tax asset, if it is deemed realizable.
Employee Stock Ownership Plan ("ESOP")
Compensation expense is recognized based on cash contributions paid or
committed to be paid to the ESOP. All shares held by the ESOP that are
allocated and committed to be allocated are deemed outstanding for
purposes of earnings per share calculations. Dividends declared, if any,
on all shares held by the ESOP are charged to retained earnings. The value
of unearned shares to be allocated to ESOP participants for future
services not yet performed is reflected as a reduction of stockholders'
equity.
Earnings per share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares (common stock equivalents) that would have been
outstanding if dilutive potential common shares had been issued, as well
as any adjustment to income that would result from the assumed issuance.
The Company has no common stock equivalents. Earnings per share is not
presented for periods beginning prior to January 1, 1999 since the Company
completed its offering on October 7, 1998 and, accordingly, such data
would not be meaningful.
Comprehensive income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of
July 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along
with net income, are components of comprehensive income. The adoption of
SFAS No. 130 had no effect on the Company's net income or stockholders'
equity.
27
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Comprehensive income (concluded)
The components of other comprehensive income (loss) and related tax
effects are as follows:
Years Ended June 30,
---------------------
1999 1998
------- -------
Unrealized holding gains (losses) on
securities available for sale $(1,788) $ 1,132
Reclassification adjustment for gains
realized in income (670) (764)
------- -------
Net unrealized gains (losses) (2,458) 368
Tax effect 853 (141)
------- -------
Net-of-tax amount $(1,605) $ 227
======= =======
Recent accounting pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June 15, 2000. This Statement establishes accounting and
reporting standards for derivative instruments and hedging activities,
including certain derivative instruments embedded in other contracts, and
requires that an entity recognize all derivatives as assets or liabilities
in the balance sheet and measure them at fair value. Management is
currently evaluating the impact of adopting this Statement on the
consolidated financial statements, but does not anticipate that it will
have a material impact.
3. CERTIFICATES OF DEPOSIT
A summary of certificates of deposit follows:
June 30,
------------------
Maturity Date Rate 1999 1998
------- ------- -------
January 8, 1999 5.65% $ -- $ 1,000
June 5, 2000 6.40 500 500
------- -------
$ 500 $ 1,500
======= =======
28
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. SECURITIES AVAILABLE FOR SALE
A summary of securities available for sale follows:
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Federal agency obligations $ 41,909 $ 7 $ (1,046) $ 40,870
Mortgage-backed securities 17,620 9 (654) 16,975
Other debt securities 9,441 67 (292) 9,216
-------- -------- -------- --------
Total debt securities 68,970 83 (1,992) 67,061
Marketable equity securities 2,746 285 (180) 2,851
-------- -------- -------- --------
$ 71,716 $ 368 $ (2,172) $ 69,912
======== ======== ======== ========
<CAPTION>
June 30, 1998
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Federal agency obligations $ 27,502 $ 242 $ (76) $ 27,668
Mortgage-backed securities 5,977 40 (37) 5,980
Other debt securities 2,253 3 (4) 2,252
-------- -------- -------- --------
Total debt securities 35,732 285 (117) 35,900
Marketable equity securities 3,785 585 (99) 4,271
-------- -------- -------- --------
$ 39,517 $ 870 $ (216) $ 40,171
======== ======== ======== ========
</TABLE>
29
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES AVAILABLE FOR SALE (concluded)
The amortized cost and estimated fair value of debt securities by
contractual maturity at June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Within 1 year $ -- $ -- $ 500 $ 500
Over 1 year to 5 years 5,240 5,167 3,000 3,015
Over 5 years to 10 years 43,228 42,061 25,255 25,409
Over 10 years 2,882 2,858 1,000 996
------- ------- ------- -------
51,350 50,086 29,755 29,920
Mortgage-backed
securities 17,620 16,975 5,977 5,980
------- ------- ------- -------
$68,970 $67,061 $35,732 $35,900
======= ======= ======= =======
</TABLE>
Proceeds from the sale of securities available for sale during fiscal 1999
and 1998 were $3,333 and $3,670, respectively. Gross gains of $684 and
$769, and gross losses of $14 and $5, were realized during fiscal 1999 and
1998, respectively.
30
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. LOANS
A summary of the balances of loans follows:
June 30,
------------------------
1999 1998
-------- --------
Real estate loans:
Residential $ 47,394 $ 48,574
Commercial 20,981 12,856
Construction 7,506 7,648
-------- --------
75,881 69,078
Less unadvanced construction loans (2,532) (2,905)
-------- --------
73,349 66,173
-------- --------
Other loans:
Home equity 4,591 4,514
Installment 1,829 1,704
Commercial 6,481 4,217
Passbook secured 513 786
-------- --------
13,414 11,221
-------- --------
Total loans 86,763 77,394
Allowance for loan losses (740) (577)
Net deferred loan fees (51) (102)
Deferred premium 12 20
-------- --------
$ 85,984 $ 76,735
======== ========
An analysis of the allowance for loan losses is as follows:
Years Ended June 30,
------------------------
1999 1998
-------- --------
Balance at beginning of year $ 577 $ 475
Provision for loan losses 178 100
Recoveries 7 28
Charge-offs (22) (26)
-------- --------
Balance at end of year $ 740 $ 577
======== ========
31
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LOANS (concluded)
The following is a summary of impaired and non-accrual loans:
June 30,
-------------------
1999 1998
------ ------
Loans with no valuation allowance $ 836 $ 342
Loans with a corresponding valuation allowance 93 83
------ ------
Total impaired loans $ 929 $ 425
====== ======
Corresponding valuation allowance on impaired loans $ 18 $ 12
====== ======
Non-accrual loans $ 398 $ 289
====== ======
Years Ended June 30,
--------------------
1999 1998
------ ------
Average recorded investment in impaired loans $ 401 $ 298
====== ======
Interest income recognized on impaired loans $ 25 $ 20
====== ======
Interest income recognized on a cash basis on
impaired loans $ 24 $ 12
====== ======
No additional funds are committed to be advanced in connection with
impaired loans.
32
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives follows:
June 30,
----------------- Estimated
1999 1998 Useful Lives
------- ------- ------------
Banking premises:
Land $ 1,580 $ 113
Building and leasehold
improvements 2,727 1,761 1 - 40 years
Equipment 2,492 1,958 3 - 10 years
------- -------
6,799 3,832
Less accumulated depreciation and
amortization (2,787) (2,377)
------- -------
$ 4,012 $ 1,455
======= =======
Depreciation and amortization expense for the years ended June 30, 1999
and 1998 amounted to $409 and $349, respectively.
7. DEPOSITS
A summary of deposit balances by type is as follows:
June 30,
-------------------
1999 1998
-------- --------
Demand $ 12,524 $ 10,597
NOW 21,082 17,891
Money market deposits 10,163 9,162
Regular and other savings 25,414 23,112
-------- --------
Total non-certificate accounts 69,183 60,762
-------- --------
Term certificates $100,000 or greater 12,175 8,521
Term certificates less than $100,000 51,780 42,964
-------- --------
Total certificate accounts 63,955 51,485
-------- --------
Total deposits $133,138 $112,247
======== ========
33
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DEPOSITS (concluded)
A summary of certificate accounts by maturity is as follows:
June 30, 1999 June 30, 1998
-------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- -------- -------- --------
Within 1 year $54,594 5.17% $43,625 5.65%
Over 1 year to 3 years 9,361 5.12 7,860 5.58
------- -------
$63,955 5.16% $51,485 5.64%
======= =======
8. FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank (FHLB) advances by maturity follows:
June 30, 1999 June 30, 1998
-------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- -------- -------- --------
Within 1 year $ 5,218 5.21% $ 2,058 5.81%
Over 1 year to 2 years -- -- 720 5.93
Over 3 years to 4 years (a) 2,000 4.99 -- --
Over 5 years to 10 years (b) 16,000 5.02 11,000 5.06
Over 10 years to 20 years (c) 2,775 4.90 784 6.74
------- -------
$25,993 5.04% $14,562 5.30%
======= =======
(a) Advance is callable by the FHLB in fiscal 2000.
(b) At June 30, 1999, advances amounting to $14,000 and $2,000 are
callable by the FHLB in fiscal 2000 and 2001, respectively. At June
30, 1998, advances amounting to $11,000 are callable by the FHLB in
fiscal 2000.
(c) At June 30, 1999, an advance amounting to $2,000 is callable by the
FHLB in fiscal 2000.
34
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FEDERAL HOME LOAN BANK ADVANCES (concluded)
The Bank also has an available line of credit with the FHLB at an interest
rate that adjusts daily. Borrowings under the line are limited to $2,626
at June 30, 1999.
All borrowings from the FHLB are secured by a blanket lien primarily on
U.S. Government and federal agency obligations and real estate loans in
accordance with the FHLB agreement.
9. INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
Years Ended June 30,
--------------------
1999 1998
----- -----
Current tax provision:
Federal $ 617 $ 667
State 50 27
----- -----
667 694
----- -----
Deferred tax benefit:
Federal (79) (46)
State (27) (16)
----- -----
(106) (62)
----- -----
$ 561 $ 632
===== =====
The reasons for the differences between the effective tax rates and the
statutory federal income tax rate are summarized as follows:
Years Ended June 30,
--------------------
1999 1998
----- -----
Statutory rate 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 0.9 0.4
Dividend received deduction (1.3) (0.9)
Other 0.5 1.0
------ ------
Effective tax rates 34.1% 34.5%
====== ======
35
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES (continued)
The components of the net deferred tax asset are as follows:
June 30,
----------------------
1999 1998
------- -------
Deferred tax asset:
Federal $ 1,034 $ 361
State 160 125
------- -------
1,194 486
------- -------
Deferred tax liability:
Federal (84) (317)
State (29) (47)
------- -------
(113) (364)
------- -------
Net deferred tax asset $ 1,081 $ 122
======= =======
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
June 30,
----------------------
1999 1998
------- -------
Allowance for loan losses $ 226 $ 133
Net unrealized (gain) loss on securities
available for sale 622 (231)
Employee benefit plans 103 97
Net deferred loan fees 25 51
Depreciation 124 85
Other (19) (13)
------- -------
Net deferred tax asset $ 1,081 $ 122
======= =======
A summary of the change in the net deferred tax asset is as follows:
Years Ended June 30,
----------------------
1999 1998
------- -------
Balance at beginning of year $ 122 $ 201
Deferred tax benefit 106 62
Change in deferred tax effect of net
unrealized gain/loss on securities
available for sale 853 (141)
------- -------
Balance at end of year $ 1,081 $ 122
======= =======
There was no valuation reserve required for the years presented.
36
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES (concluded)
The federal income tax reserve for loan losses at the Bank's base year is
approximately $1,142. If any portion of the reserve is used for purposes
other than to absorb loan losses, approximately 150% of the amount
actually used, limited to the amount of the reserve, would be subject to
taxation in the fiscal year in which used. As the Bank intends to use the
reserve solely to absorb loan losses, a deferred tax liability of
approximately $467 has not been provided.
10. STOCKHOLDERS' EQUITY
Minimum regulatory capital requirements
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's and the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier
1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1
capital (as defined) to average assets (as defined). Management believes
that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of June 30, 1999 and 1998, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the following table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table.
37
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STOCKHOLDERS' EQUITY (continued)
Minimum regulatory capital requirements (concluded)
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
---------------- ---------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1999:
Total capital to risk weighted assets:
Consolidated $18,401 18.76% $ 7,847 8.0% $ -- --%
Summit Bank 14,682 14.97 7,845 8.0 9,807 10.0
Tier 1 capital to risk weighted assets:
Consolidated 17,661 18.01 3,923 4.0 -- --
Summit Bank 13,942 14.22 3,923 4.0 5,884 6.0
Tier 1 capital to average assets:
Consolidated 17,661 10.83 4,891 3.0 -- --
Summit Bank 13,942 8.55 4,891 3.0 8,151 5.0
June 30, 1998:
Total capital to risk weighted assets $10,277 13.3% $ 6,206 8.0% $ 7,757 10.0%
Tier 1 capital to risk weighted assets 9,700 12.5 3,103 4.0 4,654 6.0
Tier 1 capital to average assets 9,700 7.5 3,900 3.0 6,500 5.0
</TABLE>
Liquidation account
At the time of the Offering, the Company established a liquidation account
in the amount of $4,648. In accordance with Massachusetts statute, the
liquidation account will be maintained for the benefit of eligible account
holders who continue to maintain their accounts in the Bank after the
Offering. The liquidation account will be reduced annually to the extent
that eligible account holders have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete
liquidation, each eligible account holder will be entitled to receive a
distribution in an amount equal to their current adjusted liquidation
account balance, to the extent that funds are available. According to the
Company's transfer agent, the balance in the liquidation account at June
30, 1999 amounted to $2,992.
38
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STOCKHOLDERS' EQUITY (concluded)
Other capital restrictions
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by the Bank to the Company. The
total amount of dividends which may be paid at any date is generally
limited to the retained earnings of the Bank, and loans or advances are
limited to 10% of the Bank's capital stock and surplus on a secured basis.
In addition, dividends paid by the Bank to the Company would be prohibited
if the effect thereof would cause the Bank's capital to be reduced below
applicable minimum capital requirements. At June 30, 1999, $7,845 of the
Company's equity in the Bank was restricted and funds available for loans
or advances amounted to $1,468.
39
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. PENSION AND COMPENSATION PLANS
Defined benefit plan
The Bank provides basic and supplemental pension benefits for eligible
employees through the Savings Banks Employees Retirement Association
("SBERA") Pension Plan. Each employee reaching the age of 21 and having
completed at least 1,000 hours of service in one consecutive twelve-month
period, beginning with such employee's date of employment, automatically
becomes a participant in the retirement plan. All participants are fully
vested after three years of service. Information pertaining to the
activity in the plan is as follows:
Years Ended October 31,
-----------------------
1998 1997
----- -----
Change in benefit obligation:
Benefit obligation at beginning of year $ 655 $ 477
Service cost 100 70
Interest cost 48 36
Actuarial loss 8 74
Benefits paid (36) (2)
----- -----
Benefit obligation at end of year 775 655
----- -----
Change in plan assets:
Fair value of plan assets at beginning of year 620 473
Actual return on plan assets 53 90
Employer contribution 126 59
Benefits paid (36) (2)
----- -----
Fair value of plan assets at end of year 763 620
----- -----
Funded status (12) (35)
Unrecognized net actuarial loss (107) (117)
Transition asset (29) (32)
----- -----
Accrued pension cost $(148) $(184)
===== =====
The accumulated benefit obligation (substantially all vested) at October
31, 1998 amounted to $529, which was less than the plan assets at fair
value.
40
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
PENSION AND COMPENSATION PLANS (continued)
Defined benefit plan (concluded)
Years Ended October 31,
-----------------------
1998 1997
----- -----
Service cost $ 100 $ 70
Interest cost 48 36
Expected return on plan assets (50) (38)
Transition asset (3) (3)
Recognized net actuarial gain (5) (7)
----- -----
$ 90 $ 58
===== =====
Pension expense for the years ended June 30, 1999 and 1998 amounted to
$102 and $80, respectively.
For the plan years ended October 31, 1998 and 1997, actuarial assumptions
include an assumed discount rate on benefit obligations of 7.25% and 7.50%
respectively, and an expected long-term rate of return on plan assets of
8.00% and 8.00% respectively. An annual salary increase of 5% was utilized
for all years.
401(k) plan
In addition to the defined benefit plans, the Bank provides a savings plan
which qualifies under Section 401(k) of the Internal Revenue Code and
provides for voluntary contributions by participating employees ranging
from one percent to fifteen percent of their compensation, subject to
certain limitations. The Bank will make matching contributions equal to
50% of each employee's voluntary contribution, up to 3% of the employee's
compensation. Total expense under the plan for each of the years ended
June 30, 1999 and 1998 amounted to $30.
Supplemental executive retirement plan
The Bank has a supplemental retirement agreement with an officer of the
Bank which provides for supplemental compensation payments upon
retirement, subject to certain limitations as set forth in the agreement.
The present value of these future payments amounted to $207 and $123 at
June 30, 1999 and 1998, respectively. Compensation expense applicable to
the agreement for the years ended June 30, 1999 and 1998 amounted to $84
and $48, respectively.
41
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
PENSION AND COMPENSATION PLANS (concluded)
Employment agreement
The Bank has entered into a three-year employment agreement with its
President which expires in October 2001, unless extended, that generally
provides for a specified minimum annual compensation and the continuation
of benefits currently received. However, such employment may be terminated
for cause, as defined, without incurring any continuing obligations. The
agreement also provides for a lump sum severance payment upon occurrence
of an "event of termination," as defined in the agreement, during the
President's employment under the agreement.
Employee Stock Ownership Plan
Effective November 1, 1998, in connection with the Offering, the Bank
established an Employee Stock Ownership Plan (the "ESOP") for the benefit
of each employee that has reached the age of 21 and has completed at least
1000 hours of service in the previous twelve-month period. The ESOP is
funded by the Bank's contributions of cash (which generally will be
invested in common stock) or common stock. Benefits may be paid in shares
of common stock or in cash, subject to the employees' right to demand
shares.
The ESOP has a loan agreement with the Company whereby $644 was borrowed
for the purpose of purchasing shares of the Company's common stock. The
loan provides for ten annual principal payments of $64 commencing on the
last business day of September 1999. The Bank made a $100 principal
pre-payment on October 31, 1998.
The Bank has committed to make contributions to the ESOP sufficient to
support the debt service of the loan. The loan is secured by the shares
purchased which are held in a suspense account for allocation among the
members as the loans are paid. Total compensation expense applicable to
the ESOP amounted to $123 for the year ended June 30, 1999.
Shares held by the ESOP at June 30, 1999 include 10,000 allocated, 4,293
committed to be allocated and 50,101 unallocated.
Any cash dividends received on allocated shares would be allocated to
members and cash dividends received on shares held in suspense would be
applied to repay the outstanding debt of the ESOP.
42
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. OTHER COMMITMENTS AND CONTINGENCIES
General
In the ordinary course of business, various legal claims arise from time
to time and, in the opinion of management, these claims will have no
material effect on the Company's consolidated financial statements.
Loan commitments
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, which involve elements of credit and interest rate risk in excess
of the amount recognized in the accompanying consolidated balance sheets.
The Bank's exposure to credit loss is represented by the contractual
amount of the instruments. The Bank uses the same credit policies in
making commitments as it does for on-balance-sheet instruments.
Financial instruments whose contract amount represents credit risk consist
of:
June 30,
-------------------
1999 1998
------ ------
Commitments to grant loans $2,046 $3,171
Unadvanced funds on home equity lines-of-credit 6,546 5,441
Unadvanced funds on commercial lines-of-credit 3,895 1,846
Unadvanced funds on personal lines-of-credit 515 333
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The commitments for
lines-of-credit may expire without being drawn upon, therefore, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case
basis. Commitments to grant loans and lines-of-credit are secured by real
estate or other collateral, if deemed necessary.
43
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OTHER COMMITMENTS AND CONTINGENCIES (concluded)
Operating lease commitments
Pursuant to the terms of noncancelable lease agreements in effect at June
30, 1999 pertaining to banking premises, future minimum rent commitments
are as follows:
Year Ending
June 30, Amount
----------- ------
2000 $ 274
2001 278
2002 280
2003 254
2004 225
Thereafter 702
------
$2,013
======
These leases contain options to extend for periods from five to fifteen
years. The cost of such rentals is not included above. Total rent expense
the years ended June 30, 1999 and 1998 amounted to $278 and $199,
respectively.
13. RELATED PARTY TRANSACTIONS
Certain of the Bank's trustees and officers and their affiliates are also
customers of the Bank. At June 30, 1999 and 1998, total loans to such
persons amounted to $543 and $670, respectively. During the year ended
June 30, 1999, total principal additions and principal payments amounted
to $162 and $289, respectively. The loans were made in the ordinary course
of business at the Bank's normal credit terms, including interest rate and
collateral requirements and do not represent more than a normal risk of
collection.
44
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires disclosure of estimated fair
values of all financial instruments where it is practicable to estimate
such values. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows.
Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. Statement No. 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and
short-term investments approximate fair values.
Certificates of deposit: The carrying amount of certificates of
deposit approximates fair value.
Securities available for sale: Fair values for securities available
for sale are based on quoted market prices.
FHLB stock: The carrying value of FHLB stock is deemed to
approximate fair value, based on the redemption provisions of the
FHLB.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. Fair values for other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for
loans with similar terms and adjusted for credit risk. Fair values
for non-performing loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
45
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
Deposits: The fair values disclosed for non-certificate accounts
are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for
fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Federal Home Loan Bank advances: The fair values for the FHLB
advances are estimated using discounted cash flow analyses based on
rates currently in effect for similar types of borrowing
arrangements.
Accrued interest: The carrying amounts of accrued interest
approximate fair value.
Off-balance-sheet instruments: Fair values for off-balance-sheet
lending com-mitments are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standing and are not
material.
The estimated fair values and related carrying amounts of the Company's
financial instruments are as follows:
June 30,
-----------------------------------------
1999 1998
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- -------- -------- ---------
Financial assets:
Cash and cash equivalents $ 13,390 $ 13,390 $ 16,383 $ 16,383
Certificates of deposit 500 500 1,500 1,500
Securities available for sale 69,912 69,912 40,171 40,171
FHLB stock 1,300 1,300 731 731
Loans, net 85,984 86,746 76,735 78,078
Accrued interest receivable 1,678 1,678 1,173 1,173
Financial liabilities:
Deposits 133,138 133,238 112,247 112,273
Federal Home Loan Bank
advances 25,993 25,869 14,562 13,892
46
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to the Company is as follows:
BALANCE SHEET
June 30,
1999
--------
Assets:
Interest bearing deposit in Summit Bank $ 3,186
Investment in common stock of Summit Bank 12,760
Loan receivable from Summit Bank ESOP 544
Other assets 19
--------
Total assets $ 16,509
========
Other liabilities $ 30
Stockholders' equity 16,479
--------
$ 16,509
========
STATEMENT OF INCOME
For the
Period from
Inception
to June 30,
1999
-----------
Interest income $ 99
Provision for income taxes (41)
--------
58
Equity in undistributed net income of Summit Bank 802
--------
Net income $ 860
========
47
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded)
STATEMENT OF CASH FLOWS
For the
Period from
Inception
to June 30,
1999
------------
Cash flows from operating activities:
Net income $ 860
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in other assets and liabilities 17
Equity in undistributed net income of Summit Bank (802)
---------
Net cash provided by operating activities 75
---------
Cash flows from investing activities:
Common stock acquired by ESOP (644)
ESOP shares released 100
Capital contribution to Summit Bank (3,743)
---------
Net cash used by investing activities (4,287)
---------
Cash flows from financing activities:
Proceeds from sale of common stock 7,481
Purchase of treasury stock (83)
---------
Net cash provided by financing activities 7,398
---------
Net change in cash and cash equivalents 3,186
Cash and cash equivalents, beginning of year --
---------
Cash and cash equivalents, end of year $ 3,186
=========
48
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
16. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------------------
1999
-----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest and dividend income $ 2,846 $ 2,588 $ 2,552 $ 2,433
Interest expense 1,278 1,140 1,203 1,209
---------- ---------- ----------- -----------
Net interest income 1,568 1,448 1,349 1,224
Provision for loan losses 98 30 25 25
---------- ---------- ----------- -----------
Net interest income, after provision
for loan losses 1,470 1,418 1,324 1,199
Other income 405 310 427 222
Other expenses 1,414 1,310 1,327 1,079
---------- ---------- ----------- -----------
Income before income taxes 461 418 424 342
Provision for income taxes 151 141 151 118
---------- ---------- ----------- -----------
Net income $ 310 $ 277 $ 273 $ 224
========== ========== =========== ===========
Earnings per share:
Basic $ 0.19 $ 0.17 n/a n/a
========== ========== =========== ===========
Diluted $ 0.19 $ 0.17 n/a n/a
========== ========== =========== ===========
<CAPTION>
-----------------------------------------------------
1998
-----------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Interest and dividend income $ 2,327 $ 2,208 $ 2,081 $ 2,020
Interest expense 1,144 1,060 984 928
---------- ---------- ----------- ----------
Net interest income 1,183 1,148 1,097 1,092
Provision for loan losses 25 75 - -
---------- ---------- ----------- ----------
Net interest income, after provision
for loan losses 1,158 1,073 1,097 1,092
Other income 246 277 402 396
Other expenses 1,047 1,056 972 833
---------- ---------- ----------- ----------
Income before income taxes 357 294 527 655
Provision for income taxes 111 107 189 225
---------- ---------- ----------- ----------
Net income $ 246 $ 187 $ 338 $ 430
========== ========== =========== ==========
Earnings per share:
Basic n/a n/a n/a n/a
========== ========== =========== ==========
Diluted n/a n/a n/a n/a
========== ========== =========== ==========
</TABLE>
n/a - not applicable since the conversion to stock form was completed on October
7, 1998.
49
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Percent Owned
- ------------------------------- -------------
Summit Bank 100% owned by the Company
Medway Securities Corp. 100% owned by the Bank.
Franklin Village Security Corp. 100% owned by the Bank
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,939
<INT-BEARING-DEPOSITS> 500
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 71,212
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 86,724
<ALLOWANCE> 740
<TOTAL-ASSETS> 178,158
<DEPOSITS> 133,138
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,548
<LONG-TERM> 25,993
0
0
<COMMON> 17
<OTHER-SE> 16,462
<TOTAL-LIABILITIES-AND-EQUITY> 178,158
<INTEREST-LOAN> 6,400
<INTEREST-INVEST> 3,573
<INTEREST-OTHER> 446
<INTEREST-TOTAL> 10,419
<INTEREST-DEPOSIT> 3,998
<INTEREST-EXPENSE> 4,830
<INTEREST-INCOME-NET> 5,589
<LOAN-LOSSES> 178
<SECURITIES-GAINS> 670
<EXPENSE-OTHER> 5,130
<INCOME-PRETAX> 1,645
<INCOME-PRE-EXTRAORDINARY> 1,645
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,084
<EPS-BASIC> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.37
<LOANS-NON> 398
<LOANS-PAST> 233
<LOANS-TROUBLED> 345
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 577
<CHARGE-OFFS> 22
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 740
<ALLOWANCE-DOMESTIC> 689
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 51
</TABLE>
