UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 0-24935
-------
SERVICE BANCORP, INC.
---------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3430806
------------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
81 Main Street,
Medway, Massachusetts 02053
--------------------- -----
(Address of principal executive offices) (Zip Code)
(508) 533-4343
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last year.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practical date.
At October 29, 1999, there were 1,672,730 shares of common stock
outstanding, par value $0.01 per share.
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
Index
PART I FINANCIAL INFORMATION Page
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets
as of September 30, 1999 and June 30, 1999 1
Consolidated Statements of Income for the three
months ended September 30, 1999 and 1998 2
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended September 30, 1999 and 1998 3
Consolidated Statements of Cash Flows for the three months
ended September 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature Page 20
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for per share amounts)
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 1999 1999
--------- ---------
<S> <C> <C>
Cash and due from banks $ 6,231 $ 7,939
Short-term investments 5,952 5,451
--------- ---------
Total cash and cash equivalents 12,183 13,390
--------- ---------
Certificates of deposit 500 500
Securities available for sale 77,786 69,912
Federal Home Loan Bank stock, at cost 1,300 1,300
Loans 87,299 86,724
Less allowance for loan losses (776) (740)
--------- ---------
Loan, net 86,523 85,984
--------- ---------
Banking premises and equipment, net 4,058 4,012
Accrued interest receivable 1,566 1,678
Other assets 1,602 1,382
--------- ---------
Total assets $ 185,518 $ 178,158
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 143,005 $ 133,138
Federal Home Loan Bank advances 25,361 25,993
Other liabilities 1,178 2,548
--------- ---------
Total liabilities 169,544 161,679
--------- ---------
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 issued 17 17
Additional paid-in capital 7,441 7,444
Retained earnings 10,952 10,784
Accumulated other comprehensive loss (1,607) (1,182)
Treasury stock, at cost - 39,900 shares at Sept. 30, 1999
and 10,000 shares at June 30, 1999 (344) (83)
Unearned ESOP shares - 48,489 shares at Sept. 30, 1999
and 50,101 shares at June 30, 1999 (485) (501)
--------- ---------
Total stockholders' equity 15,974 16,479
--------- ---------
Total liabilities and stockholders' equity $ 185,518 $ 178,158
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except for per share amounts)
Three Months Ended
September 30,
-------------------------
1999 1998
---------- ----------
Interest and dividend income:
Interest and fees on loans $ 1,758 $ 1,637
Interest and dividends on securities
available for sale and FHLB stock 1,242 653
Interest on short-term investments
and certificates of deposit 73 143
---------- ----------
Total interest and dividend income 3,073 2,433
---------- ----------
Interest expense:
Interest on deposits 1,159 1,015
Interest on FHLB advances 311 194
---------- ----------
Total interest expense 1,470 1,209
---------- ----------
Net interest income 1,603 1,224
Provision for loan losses 45 25
---------- ----------
Net interest income, after provision
for loan losses 1,558 1,199
---------- ----------
Other income:
Customer service fees 180 123
Gain on sales of securities available for
sale, net 19 73
Gain on sales of loans -- 17
Miscellaneous 16 9
---------- ----------
Total other income 215 222
---------- ----------
Operating expenses:
Salaries and benefits 756 565
Occupancy and equipment expenses 328 242
Data processing expenses 92 76
Professional fees 62 41
Advertising expenses 69 33
Other general and administrative expenses 198 122
---------- ----------
Total operating expenses 1,505 1,079
---------- ----------
Income before income taxes 268 342
Provision for income taxes 100 118
---------- ----------
Net income $ 168 $ 224
========== ==========
Weighted average common shares
outstanding during the period 1,643,187 N/A
==========
Earnings per common share (basic and diluted) $ 0.10 N/A
==========
See accompanying notes to consolidated financial statements.
2
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned
Common Paid-in Retained Comprehensive Treasury ESOP
Stock Capital Earnings Loss Stock Shares Total
-------- ---------- -------- ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 $ 17 $ 7,444 $ 10,784 ($ 1,182) ($ 83) ($ 501) $ 16,479
Common stock held by ESOP released
and committed to be released
(1,612 shares) -- (3) -- -- -- 16 13
Comprehensive loss:
Net Income -- -- 168 -- -- -- 168
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- (425) -- -- (425)
--------
Total comprehensive loss (257)
--------
Purchase of treasury stock
(29,900 shares) -- -- -- -- (261) -- (261)
-------- -------- -------- -------- -------- -------- --------
Balance at September 30, 1999 $ 17 $ 7,441 $ 10,952 ($ 1,607) ($ 344) ($ 485) $ 15,974
======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Concluded)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned
Common Paid-in Retained Comprehensive Treasury ESOP
Stock Capital Earnings Income Stock Shares Total
--------- ----------- -------- ------------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $ -- $ -- $ 9,700 $ 423 $ -- $ -- 10,123
Comprehensive income:
Net income -- -- 224 -- -- -- 224
Change in net unrealized gain
on securities available for sale
net of tax and reclassification
adjustment -- -- -- 220 -- -- 220
-------
Comprehensive income 444
--------- --------- ------- ------- ---------- ---------- -------
Balance at September 30, 1998 $ -- $ -- $ 9,924 $ 643 $ -- $ -- $10,567
========= ========= ======= ======= == ======= ========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 168 $ 224
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Provision for loan losses 45 25
Gain on sales of securities available for sale, net (19) (73)
Amortization (accretion) of securities
available for sale, net (27) 19
Depreciation and amortization expense 147 91
Decrease in accrued interest receivable 112 95
Deferred tax benefit (42) (37)
Loans originated for sale 0 (1,309)
Principal balance of loans sold 0 1,309
Other, net (867) (181)
-------- --------
Net cash provided (used) by operating activities (483) 163
-------- --------
Cash flows from investing activities:
Proceeds from sales of securities
available for sale 143 194
Proceeds from maturities of and
principal payments on securities
available for sale 1,903 4,268
Purchase of securities available for sale (11,046) (10,289)
Net decrease (increase) in loans (585) 2,269
Purchase of banking premises and equipment (192) (135)
-------- --------
Net cash used by investing activities (9,777) (3,693)
-------- --------
Cash flows from financing activities:
Net increase in deposits 9,867 9,355
Proceeds from Federal Home Loan Bank
advances 4,500 6
Repayment of Federal Home Loan Bank
advances (5,133) (150)
Release of common stock held by ESOP 13 --
Increase in mortgagors' escrow deposits 67 39
Purchase of treasury stock (261) --
-------- --------
Net cash provided by financing activities 9,053 9,250
-------- --------
Net change in cash and cash equivalents (1,207) 5,720
Cash and cash equivalents at beginning of period 13,390 16,383
-------- --------
Cash and cash equivalents at end of period $ 12,183 $ 22,103
======== ========
Supplementary information:
Interest paid on deposits $ 1,165 $ 1,012
Interest paid on Federal Home Loan
Bank advances 298 195
Income taxes paid 101 6
Decrease in due from broker 521 --
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Service Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Summit Bank (the "Bank"), and the Bank's wholly-owned subsidiaries,
Medway Securities Corp. and Franklin Village Security Corp., both which engage
solely in the purchase and sale of investment securities. All significant
intercompany balances and transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and
the instructions for Form 10-QSB and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
have been included. Interim results are not necessarily indicative of the
results that may be expected for the entire year.
(2) Reorganization and Stock Offering
The Company is a Massachusetts corporation that was organized in August, 1998 at
the direction of the Board of Directors of the Bank and the Board of Trustees of
Service Bancorp, MHC (the "MHC"), the mutual holding company parent of the Bank,
for the purpose of owning all of the outstanding capital stock of the Bank. The
Company offered for sale 47% of the shares of its outstanding common stock in a
public offering to eligible depositors, employees, and members of the general
public (the "Offering"). The remaining 53% of the Company's shares of common
stock were issued to the MHC. The Offering was completed on October 7, 1998.
Prior to that date, the Company had no assets or liabilities.
Completion of the Offering resulted in the issuance of 1,712,630 shares of
common stock, 907,694 shares of which were issued to the MHC and 804,936 shares
of which were sold to eligible depositors, employees, and the general public at
$10.00 per share. The Company began trading on the OTC Bulletin Board under the
symbol "SERC" on October 7, 1998. Costs related to the Offering (primarily
marketing fees paid to an underwriting firm, professional fees, registration
fees, and printing and mailing costs) aggregated $569,000. These costs together
with funds loaned to purchase shares for the Bank's Employee Stock Ownership
Plan (the "ESOP") were deducted to arrive at net proceeds of $6.8 million. The
Company contributed 50% of the net proceeds of the Offering to the Bank for
general corporate use. On October 7, 1998, the Company loaned approximately
$644,000 to the ESOP to fund its purchase of 64,394 shares of common stock of
the Company.
(3) Earnings per Share
Earnings per share is based on the weighted average number of shares outstanding
during the period beginning July 1, 1999 through September 30, 1999. The
Company's "basic" and "diluted" earnings per share computations are identical as
there were no common stock equivalents during the periods covered by the report.
Earnings per share is not presented for periods prior to January 1, 1999 since
the Company completed its Offering on October 7, 1998 and, accordingly, such
data would not be meaningful.
6
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) Commitments
At September 30, 1999, the Company had outstanding commitments to originate
loans of $6.7 million, $5.7 million of which were commercial real estate loans.
Unused lines of credit available to customers amounted to $7.5 million, $7.0
million of which were equity lines of credit.
(5) Securities Available for Sale
The following table sets forth the Company's securities available for sale at
the dates indicated.
September 30, 1999 June 30, 1999
-----------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
(Dollars in thousands)
Federal agency
obligations $47,816 $46,535 $41,909 $40,870
Mortgage-backed
securities 17,716 16,994 17,620 16,975
Other debt securities 11,591 11,204 9,441 9,216
------- ------- ------- -------
Total debt
securities 77,123 74,733 68,970 67,061
Marketable equity
securities 3,118 3,053 2,746 2,851
------- ------- ------- -------
Total securities $80,241 $77,786 $71,716 $69,912
======= ======= ======= =======
(6) Loans
The following table presents data relating to the composition of the Company's
loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
---------------------- ----------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real estate loans: (Dollars in thousands)
Residential $ 47,560 54.46% $ 47,394 54.62%
Commercial 23,234 26.60 20,981 24.18
Construction 3,211 3.67 4,974 5.74
-------- ------ -------- ------
Total real estate loans 74,005 84.73 73,349 84.54
Other loans:
Consumer loans:
Collateral 638 0.73 513 0.59
Home equity 4,685 5.36 4,591 5.29
Other 1,490 1.71 1,829 2.11
-------- ------ -------- ------
Total consumer loans 6,813 7.80 6,933 7.99
Commercial business loans 6,519 7.47 6,481 7.47
-------- ------ -------- ------
Total other loans 13,332 15.27 13,414 15.46
-------- ------ -------- ------
Total loans 87,337 100.00% 86,763 100.00%
====== ======
Net deferred loan fees (48) (51)
Deferred premium 10 12
Allowance for loan losses (776) (740)
-------- --------
Total loans, net $ 86,523 $ 85,984
======== ========
</TABLE>
7
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(8) Deposits and Borrowed Funds
The following tables indicate types and balances in deposit accounts at the
dates indicated.
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Demand $ 12,801 8.95% $ 12,524 9.41%
NOW 19,754 13.81 21,082 15.83
Money market deposits 11,261 7.87 10,163 7.63
Regular and other savings 26,481 18.52 25,414 19.09
-------- ------ -------- ------
Total non-certificate accounts 70,297 49.15 69,183 51.96
Term certificates 72,708 50.85 63,955 48.04
-------- ------ -------- ------
Total deposits $143,005 100.00% $133,138 100.00%
======== ====== ======== ======
</TABLE>
The following is a list of maturities for advances from the Federal Home Loan
Bank of Boston ("the "FHLB") at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1999 June 30, 1999
------------------- -------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Maturities less than one year $ 4,588 18.09% $ 5,218 20.07%
Maturities greater than one year 20,773 81.91 20,775 79.93
-------- ------ -------- ------
Total borrowed funds $ 25,361 100.00% $ 25,993 100.00%
======== ====== ======== ======
</TABLE>
8
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
General
This quarterly report on Form 10-QSB contains forward-looking
statements. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believe", "anticipates", "plans",
"expects" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those contemplated by such
forward-looking statements. These important factors include, without limitation,
the Bank's continued ability to originate quality loans, fluctuation in interest
rates, real estate conditions in the Bank's lending areas, general and local
economic conditions, the Bank's continued ability to attract and retain
deposits, the Company's ability to control costs, new accounting pronouncements,
and changing regulatory requirements. The Company undertakes no obligation to
publicly release the results of any revisions to those forward-looking
statements which may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Comparison of Financial Condition at September 30, 1999 and June 30, 1999
Assets increased by $7.4 million, or 4.1%, from $178.2 million at June 30,
1999 to $185.5 million at September 30, 1999. The increase reflected
management's growth strategy and was funded by the $9.9 million, or 7.4%,
increase in total deposits since June 30, 1999, which was partially offset by a
$632,000, or 2.4%, decrease in total borrowings over this timeframe.
The funds provided during the three months ended September 30, 1999 were
invested in securities available for sale, net loans, and short-term investments
which increased $7.9 million, or 11.3%, $539,000, or 0.63%, and $501,000, or
9.2%, respectively. The two investment categories which changed materially
within the securities available for sale were federal agency obligations and
other debt securities (primarily corporate debt) which increased $5.7 million,
or 13.9%, and $2.0 million, or 21.6%, respectively. Short-term investments
consist of overnight funds investments with large area financial institutions
and serve as a temporary investment vehicle for the Bank while it waits to
deploy funds in the longer-term investment and loan portfolios.
Net loans increased primarily because of a $2.3 million, or 10.7%,
increase in commercial real estate loans since June 30, 1999. During this same
timeframe construction loans and other consumer loans declined $1.8 million, or
35.4%, and $339,000, or 18.5%, respectively, while all other loan categories,
including residential mortgage and home equity loans remained relatively
unchanged. The Bank continues to emphasis the growth in the commercial loan
portfolio which generally provides higher yields than residential and consumer
loans while also giving you the added benefit of potentially improving the
Bank's core deposit base. The Bank frequently receives commercial checking and
money market accounts from the Bank's commercial borrowers. An increase in the
loan payoff amounts within the residential and construction loan portfolios was
primarily due to the increase in interest rates and increase in competition from
other financial institutions within the Bank's geographical area was the primary
reason for the decline in these portfolios.
9
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
The increase of $9.9 million in deposits was primarily attributable to a
$8.8 million, or 13.7%, increase in term certificates from June 30, 1999, as
nine and twelve month certificates increased $10.7 million. Within the
non-certificate accounts, regular savings and money market deposits increased
$2.2 million, or 6.1%, while NOW and demand deposit accounts declined $1.1
million, or 3.1% from June 30, 1999 to September 30, 1999. In addition,
borrowings decreased $632,000, or 2.4%, as certain borrowings within the
portfolio were either paid down or repositioned within the three month period.
Repositioning refers to paying off some existing borrowings and then initiating
new borrowings to fund new federal agency obligations and commercial loans
during the period.
Stockholders' equity decreased from $16.5 million, or 9.25% of total
assets at June 30, 1999 to $16.0 million, or 8.61% of total assets at September
30, 1999. This decrease resulted primarily from an increase of $425,000 in
unrealized losses to $1.6 million in the Company's securities available for sale
portfolio and the repurchase of 29,900 shares of the Company's common stock
during the period for $262,000. These items were partially offset by the
Company's earnings for the period.
Non-Performing Assets and Allowance for Loan Losses
The following indicates the non-performing assets and related allowance
for loan loss ratios at the dates indicated.
September 30, June 30,
1999 1999
------------- --------
(Dollars in thousands)
Non-accrual loans:
One-to-four family real estate loans $316 $317
Commercial loans 415 81
Consumer loans -- --
---- ----
Total non-accrual loans 731 398
Other real estate owned -- --
---- ----
Total non-performing assets $731 $398
==== ====
Allowance for loan losses $776 $740
==== ====
10
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
September 30, June 30,
1999 1999
------------- --------
Allowance for loan losses as a percent
of total loans 0.89% 0.85%
====== ======
Allowance for loan losses as a percent
of non-accrual loans 106.16% 185.93%
====== ======
Non-accrual loans as a percent of
total loans, net 0.84% 0.46%
====== ======
Non-performing assets as a percent of
total assets 0.39% 0.22%
====== ======
During the three months ended September 30, 1999, the Bank added $45,000 to the
loan loss provision due to the growth of the commercial loan portfolio which
presents a greater risk of loss than the residential loans. During this period,
there were $11,000 in loan charge-offs and $2,000 in recoveries from previously
charged-off loans.
While management believes that, based on information currently available,
the allowance for loan losses is sufficient to cover losses in the Company's
loan portfolio at this time, no assurances can be given that the level of the
allowance will be sufficient to cover future loan losses or that future
adjustments to the allowance will not be necessary if economic and/or other
conditions differ substantially from the economic and other conditions
considered by management in evaluating the adequacy of the current level of the
allowance.
Comparison of Operating Results for the Three Months Ended September 30, 1999
and 1998
General
Operating results are primarily dependent on the Bank's net interest
income, which is the difference between the interest earned on the Bank's
earning assets (short-term investments, loans, and investment securities) and
the interest paid on deposits and borrowings. Operating results are also
affected by provisions for loan losses, the level of income from non-interest
sources such as fees and sales of investment securities and other assets,
operating expenses and income taxes. Operating results are also significantly
affected by general economic conditions, particularly changes in interest rates,
as well as government policies and actions of regulatory authorities.
Net income for the three months ended September 30, 1999 was $168,000 as
compared to $224,000 for the three month ended September 30, 1998, a decrease of
$56,000, or 25.0%. This decrease was primarily attributable to increases of
$426,000 and $20,000, respectively, in total operating expenses and the
provision for loan losses as well as a $54,000 decrease, or 74%, in the gain on
sales of securities between periods. This was partially offset by increases of
$379,000, or 31.0%, and $57,000, or 46.3%, in the net interest income and
customer service fees, respectively, over the same timeframe.
11
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
The Bank's interest rate spread (the difference between yields earned on
earning assets and rates paid on deposits and borrowings) increased from 3.30%
for the three months ended September 30, 1998 to 3.46% for the three months
ended September 30, 1999. Interest rate margin (net interest income divided by
average earning assets) increased from 3.75% to 3.88%. The interest rate spread
and margin improved as the Bank increased its emphasis in the investment and
loan portfolios in higher yielding, in some cases longer maturing, corporate and
federal agency bonds and commercial loans, respectively. The Bank's objective is
for continued growth. A new retail branch is expected to open within the next
three months and an existing branch is planning to move to a more strategic
location during the first part of the year 2000. While core-based deposit growth
will be emphasized, past experience indicates that such growth is achieved
through a greater increase in the higher-cost retail certificates than the
lower-cost core deposits. An increase in interest rates and continued
competition from other financial institutions together with the aforementioned
growth in retail certificates could cause future tightening in the interest rate
spread.
The interest rate spread and margin for the periods indicated are as
follows:
Three months ended
September 30,
------------------
1999 1998
---- ----
Weighted average yield earned on:
Short-term investments 5.70% 5.68%
Investments 6.73 5.81
Total loans, net 8.14 8.65
---- ----
All earning assets 7.43 7.45
Weighted average rate paid on:
Deposits 3.73 3.98
Borrowed funds 5.17 5.35
---- ----
All interest-bearing liabilities 3.97 4.15
---- ----
Weighted average rate spread 3.46% 3.30%
==== ====
Net interest margin 3.88% 3.75%
==== ====
Earnings per share data for the three months ended September 30, 1999 was
$0.10 for both "Basic" and "Diluted" calculations. Earnings per share is not
presented for the three months ended September 30, 1998 because the Company
became a publicly owned entity on October 7, 1998 and, accordingly, did not have
shares outstanding throughout any of the periods presented prior to that date.
12
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
Interest and Dividend Income
Total interest and dividend income increased by $640,000, or 26.3%, from
$2.4 million for the three months ended September 30, 1998 to $3.1 million for
the comparable period in 1999. This increase was primarily attributable to a
$34.6 million, or 26.5%, increase in average earning assets between the two
periods, which was partially offset by a 2 basis point decline in the yield on
earning assets. The average balances in net loans increased $10.7 million, or
14.1%, while total loan yield declined by 51 basis points to 8.14%. 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, the yield on
commercial loans declined due to lower market interest rates and the loan
pricing of new commercial originations was impacted by the competitive pricing
from other area financial institutions.
The average investment portfolio balance increased $28.9 million or 64.3%
over this same timeframe and its portfolio yield has improved by 92 basis points
to 6.73%. The Bank decided to invest in federal agency and corporate obligations
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 below. The average balance
in short-term investments declined $4.9 million, or 49.1%, between periods while
the portfolio yield increased slightly by 2 basis points as the Bank reinvested
the maturity proceeds from these investments into longer-maturing and
higher-yielding investments and loans.
Interest Expense
Interest expense on deposits increased $144,000, or 14.2%, from $1.0
million for the three months ended September 30, 1998, to $1.2 million for the
three months ended September 30, 1999. This increase was attributable to a $22.2
million, or 21.8%, increase in average interest-bearing deposit balances between
periods, which was partially offset by a reduction in deposit rates over the
same period from 3.98% to 3.73%. The decrease in deposit interest rates was
primarily due the declining interest rate environment between the two periods.
The Bank increased its use of borrowings from the FHLB as part of its
management of interest rate risk. Average balances in these advances were $24.0
million during the three months ended September 30, 1999, an increase of $9.5
million, or 65.8% from the three months ended September 30, 1998. Over this same
timeframe, average borrowing rates declined from 5.35% to 5.17%. 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 Bank. Interest expense on FHLB advances
increased $117,000, or 60.3%, from $194,000 for the three months ended September
30, 1998 to $311,000 for the three months ended September 30, 1999.
Other Income
Total other income decreased $7,000, or 3.2 %, from $222,000 for the three
months ended September 30, 1998 to $215,000 for the same period in 1999. This
change was caused by decreases of $54,000 and
13
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
$17,000 on gain on sale of securities and loans, respectively. This decrease was
partially offset by an increase of $57,000 in customer service fees primarily
due to increases in ATM surcharge fees and Visa debit card fees.
Operating Expense
Total operating expense increased $426,000, or 39.5 %, from $1.1 million
for the three months ended September 30, 1998 to $1.5 million for the three
months ended September 30, 1999. Salaries and benefits and occupancy and
equipment expenses increased $191,000, or 33.8%, and $86,000, or 35.5%
respectively. No other individual expense category increased materially between
periods. Much of the increase in operating expense was attributed to the
Company's asset growth as management added staff and incurred costs to service
the full range of retail and loan products added to the Bank's product lines.
Accordingly, the ratio of operating expenses to average assets increased from
3.11 % for the three months ended September 30, 1998 to 3.39% for the 1999
period.
Income Taxes
The effective income tax rate was 37.3% and 34.5% for the three months
ended September 30, 1999 and 1998, respectively. The effective tax rates are
below the statutory combined state and federal income tax rates because the
Bank's two security corporations take advantage of the lower state tax rate
afforded to these types of entities.
14
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
Asset/Liability Management
A principal operating objective of the Bank is to produce stable earnings
by achieving a favorable interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Since the Bank's principal
interest-earning assets generally have longer terms to maturity than its primary
source of funds, i.e., deposit liabilities, increases in general interest rates
will generally result in an increase in the Bank's cost of funds before the
yield on its asset portfolio adjusts upward. Financial institutions have
generally sought to reduce their exposure to adverse changes in interest rates
by attempting to achieve a closer match between the repricing periods of
interest rate sensitive assets and liabilities. Such matching, however, is
carefully monitored so as not to sacrifice net interest margin performance for
the perfect matching of these interest rate sensitive instruments. The Bank has
established an Asset/Liability Management Committee ("ALCO") made up of members
of senior management to assess the asset/liability mix and recommend strategies
that will enhance income while managing the Bank's vulnerability to changes in
interest rate. This committee meets regularly to discuss interest rate
conditions and potential product lines that would enhance the Bank's income
performance.
Certain strategies have been implemented to improve the match between
interest rate sensitive assets and liabilities. These strategies include, but
are not limited to: daily monitoring of the Bank's cash requirements,
originating adjustable and fixed rate mortgage loans, both residential and
commercial, for the Bank's own portfolio, managing the cost and structure of
deposits, and generally using the matched borrowings to fund specific purchases
of loan packages and large loan originations. Occasionally, management may
choose to deviate from specific matching of maturities of assets and
liabilities, if an attractive opportunity to enhance yield becomes available.
Quarterly, ALCO modeling is performed with the assistance of an outside
investment advisor which projects the Bank's financial performance over the next
twenty four months using loan and deposit projections, projections of changes in
interest rates, and anticipated changes in other income and operating expenses
to reveal the full impact of the Bank's operating strategies on financial
performance. The results of the ALCO process are reported to the Board at least
on a quarterly basis.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans, sales of loans and investments, maturities
and early calls of investments, and funds provided from operations. While
scheduled repayments of loans and maturities of investments are predictable
sources of funds, deposit flows and loan prepayments are greatly influenced by
the general level of interest rates, economic conditions, and competition. The
Bank uses its liquidity resources primarily to fund existing and future loan
commitments, to fund net deposit outflows, to invest in other interest-earning
assets, to maintain liquidity, and to pay operating expenses.
From time to time, the Bank utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. Total advances outstanding at September 30, 1999 amounted to
$25.4 million. The Bank's ability to borrow from the FHLB is dependent upon the
amount and type of collateral the Bank has to secure the loans. Such collateral
consists of, but is not limited to, one-to-four family owner-occupied
residential property, mortgage-backed securities guaranteed by the U.S.
government or a government agency, and funds on deposit with
15
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
the FHLB. As of September 30, 1999, the Bank's total borrowing capacity was
$65.6 million.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, short-term investments, U.S. Government and federal agency
obligations, mortgage-backed securities, and other debt securities. The level of
these assets is dependent upon the Bank's operating, lending, and financing
activities during any given period.
At September 30, 1999, the Bank had $6.7 million of outstanding
commitments to originate loans. The Bank anticipates that it will have
sufficient funds available to meet these commitments. Certificates of deposit,
which are scheduled to mature in one year or less, totaled $64.4 million at
September 30, 1999. Based upon historical experience, management believes that a
significant portion of such deposits will remain with the Bank.
At September 30, 1999, the Company and the Bank exceeded all regulatory
capital requirements.
Year 2000 ("Y2K") Compliance
Changing from the year 1999 to 2000 has the potential to cause problems in
data processing and other data-sensitive systems, a problem known as the Year
2000 or Y2K dilemma. The Company uses computer systems to perform financial
calculations, track deposits and loan payments, transfer funds and make direct
deposits. The processing of the Company's loan and deposit transactions is
outsourced to a third-party data processing vendor. The Company is following a
comprehensive process to assure that such systems are ready for the year 2000
date change.
To become Y2K compliant, the Company is following a five-step process
mandated by the federal bank regulatory agencies. A description of each of the
steps and the status of the Company's efforts in completing the steps is as
follows:
Step 1. Awareness and Understanding of the Problem. The Company formed a
Year 2000 team that 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
included 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 through the end of 1999.
Step 2. Identification of All Potentially Affected Systems. This step
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 completed its assessment of
which systems and equipment were most prone to placing the Company at risk if
they were not Y2K compliant. The project team 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 were requested to advise the Company
in writing of their Y2K
16
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation (Continued)
readiness, including actions to become compliant if they are not already
compliant. A plan has been developed to repair or replace systems and equipment
not currently Y2K compliant. This step has been complete. To date, all vendors
that were contacted by the Y2K team have responded as to their system's
compliance with Y2K.
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 developed
scripts involving typical transactions to test the proper functioning of the
modified systems. It also arranged for repair or replacement of equipment
programs affected by Y2K issues. All of the required testing was completed by
the end of March, 1999. The monitoring of certain non-IT vendors will continue
into 1999.
Step 5. Implementation. This step includes the repair or replacement of
systems and computer equipment and the development of contingency plans. The
repair and replacement phase has been completed. Contingency plans on how the
Company would resume business if unanticipated problems arise from
non-performance by IT and non-IT vendors were developed as dictated by
regulatory authorities.
The Company's efforts to become Y2K compliant are being monitored by its
federal banking regulators. Failure to be Y2K compliant could subject the
Company to formal supervisory or enforcement actions.
The Company's Y2K expenses since inception have been immaterial to its
financial performance. It may incur additional costs for the remainder of 1999
to become Y2K compliant, but does not expect such costs to be material to the
operating expenses of the Company. Some of the costs are not expected to be
incremental to the Company, but rather represent new equipment and software that
would otherwise be purchased in the normal course of the Company's business. The
Company is monitoring Y2K compliance for each of its large borrowers and will
adjust the loan loss allowance accordingly if any Y2K noncompliance affects
their ability to fulfill the terms and conditions of any loan agreement. The
Company presently believes the Y2K issue will not pose significant operating
problems for the Company. However, if implementation and testing plans are not
completed in a satisfactory and timely manner, in particular by third parties on
which the Company is dependent, or other unforeseen problems arise, no assurance
can be given with respect to the cost or timing of such efforts or any potential
adverse effects on the Company's business, financial condition, or results of
operation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is a defendant in a lawsuit, Summit Bancorp v. Summit Bank
(Medway, MA), filed on October 5, 1999 in the U.S. District Court for the
District of Connecticut, whereby plaintiff, a bank holding company headquartered
in New Jersey, is arguing that it has the exclusive right to the name "Summit
Bank." Plaintiff is seeking injunctive relief relating to the Bank's use of the
word "Summit," including "Sumbank.com," as well as monetary damages and legal
fees. The Bank expects that the lawsuit will be settled in the near future as it
intends to enter into a settlement agreement with the plaintiff whereby the Bank
will discontinue using the name "Summit" on the earlier of December 31, 2000 or
90 days after plaintiff announces a present intention to open an office in
Massachusetts. Neither the Bank nor the Company expect to incur any material
costs, expenses or monetary damages as a result of the litigation, other than
expenses associated with changing its name.
The Bank is not involved in any other pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involved amounts which are believed by management to be
immaterial to the financial condition and operations of the Bank.
17
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION (Continued)
Item 2. Changes in Securities
Not applicable.
Item 3. Default Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On October 26, 1999, the Company held its annual meeting of stockholders
for the purpose of the election of four Directors to three year terms, the
approval of the Company's 1999 Stock Option Plan and 1999 Recognition and
Retention Plan, and the ratification of the appointment of Wolf & Company, P.C.,
as the Company's independent auditors for the fiscal year ending June 30, 2000.
The number of votes cast at the meeting as to each matter acted upon was
as follows:
NO. OF NO. OF
VOTES FOR VOTES WITHHELD
1. Election of Directors:
Eugene G. Stone 1,460,565 12,182
Richard Giusti 1,464,347 8,400
Thomas R. Howie 1,464,247 8,500
James W. Murphy 1,458,765 13,982
NO. OF NO. OF NO. OF
VOTES FOR VOTES AGAINST VOTES ABSTAINING
2. Approval of the
Company's 1999
Stock Option Plan 1,196,285 113,079 11,721
3. Approval of the
Company's 1999
Recognition and
Retention Plan 1,205,145 107,519 8,420
4. Ratification of the
Appointment of Wolf
& Company, P.C. as
the Company's
Independent Auditors 1,465,905 2,300 4,542
18
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 EDGAR financial data schedule.
There were no reports filed on Form 8-K.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SERVICE BANCORP, INC.
Date: November 10, 1999 By: /s/ Eugene G. Stone
----------------- ----------------------------
Eugene G. Stone
President and Chief Executive Officer
Date: November 10, 1999 By: /s/ Warren W. Chase, Jr.
----------------- ----------------------------
Warren W. Chase, Jr.
Senior Vice President and Treasurer
20
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