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, 2000
|_| 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 November 6, 2000, there were 1,611,052 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, 2000 and June 30, 2000 1
Consolidated Statements of Income for the three
months ended September 30, 2000 and 1999 2
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended September 30, 2000 and 1999 3
Consolidated Statements of Cash Flows for the three months
ended September 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 19
<PAGE>
SERVICE BANCORP, INC. AND SUBIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for per share amounts)
<TABLE>
<CAPTION>
September 30, June 30,
ASSETS 2000 2000
--------- ---------
<S> <C> <C>
Cash and due from banks $ 7,767 $ 8,133
Short-term investments 5,443 6,112
--------- ---------
Total cash and cash equivalents 13,210 14,245
--------- ---------
Certificates of deposit 100 100
Securities available for sale, at fair value 84,082 81,596
Securities held to maturity, at cost 5,162 4,771
Federal Home Loan Bank stock, at cost 1,588 1,588
Loans 108,559 107,224
Less allowance for loan losses (860) (802)
--------- ---------
Loans, net 107,699 106,422
--------- ---------
Banking premises and equipment, net 4,261 4,223
Accrued interest receivable 1,894 2,007
Bank-owned life insurance 2,087 2,070
Other assets 2,786 2,411
--------- ---------
Total assets $ 222,869 $ 219,433
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 179,920 $ 176,345
Federal Home Loan Bank advances 25,263 26,350
Other liabilities 1,363 1,560
--------- ---------
Total liabilities 206,546 204,255
--------- ---------
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 7,421 7,426
Retained earnings 11,855 11,630
Accumulated other comprehensive loss (1,753) (2,638)
Treasury stock, at cost - 68,506 shares at September 30, 2000
and June 30, 2000 (560) (560)
Unearned ESOP shares - 42,052 shares at September 30, 2000
and 43,662 shares at June 30, 2000 (421) (436)
Unearned RRP Stock - 33,078 shares at September 30, 2000
and 36,482 shares at June 30, 2000 (236) (261)
--------- ---------
Total stockholders' equity 16,323 15,178
--------- ---------
Total liabilities and stockholders' equity $ 222,869 $ 219,433
========= =========
</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)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 2,210 $ 1,758
Interest and dividends on securities 1,587 1,242
Interest on short-term investments
and certificates of deposit 60 73
---------- ----------
Total interest and dividend income 3,857 3,073
---------- ----------
Interest expense:
Interest on deposits 1,703 1,159
Interest on FHLB advances 371 311
---------- ----------
Total interest expense 2,074 1,470
---------- ----------
Net interest income 1,783 1,603
Provision for loan losses 56 45
---------- ----------
Net interest income, after provision for loan losses 1,727 1,558
---------- ----------
Other income:
Customer service fees 246 180
Gain on sales of securities available for sale, net 76 19
Miscellaneous 35 16
---------- ----------
Total other income 357 215
---------- ----------
Operating expenses:
Salaries and benefits 901 756
Occupancy and equipment expenses 380 328
Data processing expenses 132 92
Professional fees 53 62
Advertising expenses 51 69
Other general and administrative expenses 223 198
---------- ----------
Total operating expenses 1,740 1,505
---------- ----------
Income before income taxes 344 268
Provision for income taxes 119 100
---------- ----------
Net income $ 225 $ 168
========== ==========
Weighted average common shares
outstanding during the period -
Basic and Diluted 1,565,694 1,643,187
========== ==========
Earnings per common share(Basic and Diluted) $ 0.14 $ 0.10
========== ==========
</TABLE>
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, 2000 AND 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive Treasury ESOP RRP
Stock Capital Earnings Loss Stock Shares Stock Total
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 2000 $ 17 $ 7,426 $11,630 $(2,638) $ (560) $ (436) $ (261) $15,178
Comprehensive income:
Net Income -- -- 225 -- -- -- -- 225
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- 885 -- -- -- 885
-------
Total comprehensive income 1,110
-------
Common stock held by ESOP released
and committed to be released
(1,610 shares) -- (5) -- -- -- 15 -- 10
Amortization of RRP stock -- -- -- -- -- -- 25 25
(3,404 shares)
------- ------- ------- ------- ------- ------- ------- -------
Balance at September 30, 2000 $ 17 $ 7,421 $11,855 $(1,753) $ (560) $ (421) $ (236) $16,323
======= ======= ======= ======= ======= ======= ======= =======
</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, 2000 AND 1999 (Concluded)
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive Treasury ESOP RRP
Stock Capital Earnings Loss Stock Shares Stock Total
-------- -------- -------- -------- -------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 $ 17 $ 7,444 $ 10,784 $ (1,182) $ (83) $ (501) $ -- $ 16,479
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)
--------
Common stock held by ESOP released
and committed to be released
(1,612 shares) -- (3) -- -- -- 16 -- 13
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.
4
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
(Dollars in thousands)
Sept. 30, June 30,
2000 1999
-------- --------
Cash flows from operating activities:
Net income $ 225 $ 168
Adjustments to reconcile net income to
net cash used by operating activities:
Provision for loan losses 56 45
Gain on sales of securities available for sale, net (76) (19)
Accretion of securities, net (51) (27)
Depreciation and amortization expense 167 147
Decrease in accrued interest receivable 113 112
Deferred tax benefit (71) (42)
Loans originated for sale -- (5,809)
Principal balance of loans sold -- 5,809
Other, net (996) (867)
-------- --------
Net cash used by operating activities (633) (483)
-------- --------
Cash flows from investing activities:
Proceeds from sales of securities
available for sale 317 143
Proceeds from maturities of and
principal payments on securities
available for sale 381 1,903
Purchase of securities available for sale (1,705) (11,046)
Purchase of securities held to maturity (391) --
Net increase in loans (1,385) (585)
Purchase of banking premises and equipment (205) (192)
-------- --------
Net cash used by investing activities (2,988) (9,777)
-------- --------
Cash flows from financing activities:
Net increase in deposits 3,576 9,867
Proceeds from Federal Home Loan Bank
advances 5,976 4,500
Repayment of Federal Home Loan Bank
advances (7,063) (5,133)
Release of common stock held by ESOP 10 13
Increase in mortgagors' escrow deposits 62 67
Amortization of RRP stock 25 --
Purchase of treasury stock
-- (261)
-------- --------
Net cash provided by financing activities 2,586 9,053
-------- --------
Net change in cash and cash equivalents (1,035) (1,207)
Cash and cash equivalents at beginning of period 14,245 13,390
-------- --------
Cash and cash equivalents at end of period $ 13,210 $ 12,183
======== ========
5
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
(Dollars in thousands)
Sept. 30, June 30,
Supplementary information: 2000 1999
------ ------
Interest paid on deposits $1,712 $1,165
Interest paid on Federal Home Loan
Bank advances 384 298
Income taxes paid 27 101
Decrease in due to/from broker
-- 521
See accompanying notes to consolidated financial statements
6
<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, Strata Bank (the "Bank"), and the Bank's wholly-owned subsidiaries,
Medway Securities Corp. and Franklin Village Security Corp., both of which
engage solely in the purchase and sale of 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, 2000 through September 30, 2000 for the
current fiscal year, and July 1, 1999 through September 30, 1999 for the prior
year. The Company's "basic" and "diluted" earnings per share are identical as
there were no material common stock equivalents outstanding during the periods
covered by the report.
7
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(4) Commitments
At September 30, 2000, the Company had outstanding commitments to originate
loans of $3.3 million. Unused lines of credit available to customers amounted to
$10.3 million, $9.5 million of which were equity lines of credit.
(5) Securities
The following table sets forth the Company's securities at the dates indicated.
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
----------------------------------------------
(Dollars in thousands) Amortized Fair Amortized Fair
Cost Value Cost Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Available for Sale Securities:
Federal agency obligations $45,684 $44,317 $45,667 $43,633
Mortgage-backed securities 16,472 15,906 16,876 16,028
Other debt securities 20,354 19,930 19,359 18,621
------- ------- ------- -------
Total debt securities 82,510 80,153 81,902 78,282
Marketable equity securities 4,229 3,929 3,724 3,314
------- ------- ------- -------
Total available for sale securities $86,739 $84,082 $85,626 $81,596
======= ======= ======= =======
Held to Maturity Securities:
Other debt securities $ 5,162 $ 5,232 $ 4,771 $ 4,738
======= ======= ======= =======
</TABLE>
(6) Loans
The following table presents data relating to the composition of the Company's
loan portfolio by type of loans as at the date indicated.
(Dollars in thousands) September 30, 2000 June 30, 2000
--------------------- ---------------------
Amount Percent Amount Percent
-------- ------- -------- -------
Real estate loans:
Residential $ 60,504 55.75% $ 61,689 57.56%
Commercial 26,018 23.97 25,035 23.36
Construction 3,657 3.37 2,742 2.56
-------- ------ -------- ------
Total real estate loans 90,179 83.10 89,466 83.47
Other loans:
Consumer loans:
Collateral 728 0.67 634 0.59
Home equity 8,524 7.85 7,685 7.17
Other 1,786 1.65 1,629 1.52
-------- ------ -------- ------
Total consumer loans 11,038 10.17 9,948 9.28
Commercial business loans 7,308 6.73 7,763 7.24
-------- ------ -------- ------
Total other loans 18,346 16.90 17,711 16.53
-------- ------ -------- ------
Total loans 108,525 100.00% 107,177 100.00%
====== ======
Net deferred loan fees 24 37
Deferred premium 10 10
Allowance for loan losses (860) (802)
-------- --------
Total loans, net $107,699 $106,422
======== ========
8
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(7) Deposits and Borrowed Funds
The following tables indicate types and balances in deposit accounts at
the dates indicated.
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
--------------------- ---------------------
(Dollars in thousands) Amount Percent Amount Percent
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Demand $ 21,488 11.94% $ 19,684 11.16%
NOW 21,701 12.06 22,521 12.77
Money market deposits 14,605 8.12 12,992 7.37
Regular and other savings 29,718 16.52 28,998 16.44
-------- ------ -------- ------
Total non-certificate accounts 87,512 48.64 84,195 47.74
Term certificates 92,408 51.36 92,150 52.26
-------- ------ -------- ------
Total deposits $179,920 100.00% $176,345 100.00%
======== ====== ======== ======
</TABLE>
The following is a list of advances from the Federal Home Loan Bank of
Boston by maturity date.
<TABLE>
<CAPTION>
September 30, 2000 June 30, 2000
-------------------- --------------------
(Dollars in thousands) Amount Percent Amount Percent
------- ------- ------- -------
<S> <C> <C> <C> <C>
Maturities less than one year $ 2,000 7.92% $ 85 0.32%
Maturities greater than one year 23,263 92.08 26,265 99.68
------- ------ ------- ------
Total borrowed funds $25,263 100.00% $26,350 100.00%
======= ====== ======= ======
</TABLE>
9
<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, 2000 and June 30, 2000
Assets increased by $3.4 million, or 1.6 %, from $219.4 million at June
30, 2000 to $222.9 million at September 30, 2000. The increase was funded by the
$3.6 million, or 2.0%, increase in total deposits since June 30, 2000. Over the
same timeframe, total borrowings decreased by $1.1 million, or 4.1%.
The funds provided during the three months ended September 30, 2000 were
invested in securities both available for sale and held to maturity and net
loans which increased $2.9 million, or 3.3%, and $1.3 million, or 1.2%
respectively. The investment categories which changed materially within the
securities portfolios were other debt securities (primarily corporate debt),
federal agency obligations, and marketable equity securities which increased
$1.7million, or 7.3%, $684,000, or 1.6%, and $615,000, or 18.6%, respectively.
Short-term investments, consisting of overnight funds investments with large
area financial institutions located in the Boston area, decreased $669,000, or
10.1%, as the Bank deployed these funds into longer-term investment and loan
portfolios.
Net loans increased primarily because of increases of $983,000, or 3.9%,
$915,000, or 33.4%, and $839,000, or 10.9%, in commercial mortgages,
construction loans, and home equity loans, respectively, since June 30, 2000.
During this same timeframe, residential loans and commercial business loans
declined $1.2 million, or 1.9%, and $455,000, or 5.9%, respectively. It is the
Bank's continued objective to increase its origination of the fixed and variable
residential products through originations within the area serviced by the Bank's
branch network. As the opportunities present themselves the Bank will consider
purchasing loans from other financial institutions as opportunities arise. While
no such purchases have occurred since July 1, 2000, $9.7 million in residential
loans were purchased during the most recent fiscal year which ended June 30,
2000. The Bank considers many factors when deciding to purchase a loan package,
including but not limited to the loan pricing, loan underwriting, interest rate
risk, and the geographical location of the real estate securing the loans. In
addition, the Bank continues to emphasize growth in the commercial loan and home
equity loan products, which generally provides higher yields than residential
and consumer loans.
10
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
The increase of $3.6 million in deposits was primarily attributable to
increases of $1.8 million, or 9.2%, and $1.6 million, or 12.4%, in demand
deposits and money market deposits, respectively. Total non-certificate deposits
increased $3.3 million, or 3.9%, while higher priced term certificates increased
only $258,000, or 0.3%. Throughout its retail branching network the Bank has
recently been emphasizing the acquiring of lower cost non-certificate deposits
as a primary source of funding for the Bank. As loan activity increases, term
certificates and borrowings will be used as an additional source of funding.
During the quarter ended September 30, 2000, borrowings decreased $1.1 million,
or 4.1% as the Bank used excess liquidity to reduce certain borrowing balances.
Stockholders' equity increased from $15.2 million, or 6.92% of total
assets at June 30, 2000 to $16.3 million, or 7.32% of total assets at September
30, 2000. This increase resulted primarily from a decrease of $885,000 in
unrealized losses in the Company's securities available for sale portfolio and
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.
(Dollars in thousands) Sept. 30, June 30,
2000 2000
------ ------
Non-accrual loans:
One-to-four family real estate loans $159 $160
Commercial loans 132 117
Commercial business loans 152 153
Consumer loans -- 2
------ ------
Total non-accrual loans 443 432
Other real estate owned -- --
------ ------
Total non-performing assets $443 $432
====== ======
Allowance for loan losses $860 $802
====== ======
Allowance for loan losses as a percent
of total loans, net 0.80% 0.75%
====== ======
Allowance for loan losses as a percent
of non-accrual loans 194.13% 185.65%
====== ======
Non-accrual loans as a percent of
total loans, net 0.41% 0.41%
====== ======
Non-performing assets as a percent of
total assets 0.20% 0.20%
====== ======
11
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
During the three months ended September 30, 2000 the Bank recorded a $56,000 to
the loan loss provision due to the growth of the commercial loan portfolio.
Generally ,commercial loans are considered to present a greater risk of loss
than residential loans. During this period, there were $6,000 in loan
charge-offs and $8,000 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, 2000
and 1999
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, 2000 was $225,000 as
compared to $168,000 for the three months ended September 30, 1999, an increase
of $57,000, or 33.9%. This increase was primarily attributable to increases of
$180,000, or 11.2%, $66,000, or 36.7%,and $57,000, or 300.0%, in net interest
income, customer service fees, and net gains on security sales, respectively.
Partially offsetting these increases were increases of $235,000, or 15.6%, and
$11,000, or 24.4%, in total operating expenses and the provision for loan
losses, respectively.
The Bank's interest rate spread (the difference between yields earned on
earning assets and rates paid on deposits and borrowings) decreased from 3.46%
for the three months ended September 30, 1999 to 3.10% for the three months
ended September 30, 2000. Interest rate margin (net interest income divided by
average earning assets) decreased from 3.88% to 3.58 %. The interest rate spread
and margin decreased primarily as a result of the increase of 67 basis points in
funding costs for both deposits and borrowings between periods due to Federal
Reserve Board interest rate increases since June 1999. Partially offsetting this
was an increase of 31 basis points in the yield on earning assets between
periods.
While core-based deposit growth will be emphasized, past experience
indicates that such growth is achieved through a greater increase in higher-cost
retail certificates than 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 further tightening in
the interest rate spread.
12
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
The interest rate spread and margin for the periods indicated are as
follows:
Three months ended
September 30,
-------------------
2000 1999
---- ----
Weighted average yield earned on:
Short-term investments 6.71% 5.70%
Investments 7.11% 6.73%
Total loans, net 8.30% 8.14%
---- ----
All earning assets 7.74% 7.43%
Weighted average rate paid on:
Deposits 4.43% 3.73%
Borrowed funds 5.89% 5.17%
---- ----
All interest-bearing liabilities 4.64% 3.97%
---- ----
Weighted average rate spread 3.10% 3.46%
==== ====
Net interest margin 3.58% 3.88%
==== ====
Earnings per share data for the three months ended September 30, 2000 was $0.14
for both "basic" and "diluted" calculations as compared to $0.10 per share for
both "basic" and "diluted" calculations for the three months ended September,
1999.
Interest and Dividend Income
Total interest and dividend income increased by $784,000, or 25.5%, from
$3.1 million for the three months ended September 30, 1999 to $3.9 million for
the comparable period in 2000. This increase was primarily attributable to a
$34.0 million, or 20.6%, increase in average earning assets between the two
periods as well as a 31 basis point increase in the yield on earning assets
between the two periods. The average balances in net loans increased $20.1
million, or 23.3%, while total loan yield increased by 16 basis points to 8.30%.
The average loan balance within the loan portfolio for commercial loans and home
equity loans increased by $3.1 million and $2.9 million, respectively, while
residential loans increased by $13.7 million. The loans originated between
periods were influenced by the increase in market interest rates since the end
of 1999, thus accounting for some of the increase in earning asset yield. In
addition, any existing prime-based loans, such as home equity loans, and certain
commercial business loans, were repriced at higher rates during the same period
due to the increase in interest rates.
13
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
The average investment portfolio balance increased $15.3 million or 20.7%
over this same period and the portfolio yield improved by 38 basis points to
7.11%. The Bank continued its strategy to invest in federal agency and corporate
obligations with longer maturities and higher yields in order to improve the
interest rate margin consistent with the interest rate profile objectives of the
asset-liability management process discussed below. In addition, the average
balance in short-term investments declined $1.4 million, or 27.9%, between
periods while the portfolio yield increased by 101 basis points to 6.71 %
between the two periods. This yield increase reflects the Federal Reserve
Board's increase in short-term interest rates since June 1999.
Interest Expense
Interest expense on deposits increased $544,000, or 46.9%, from $1.1
million for the three months ended September 30, 1999, to $1.7 million for the
three months ended September 30, 2000. This increase was attributable to a $29.6
million, or 23.8%, increase in average interest-bearing deposit balances between
periods, while deposit rates increased from 3.73% to 4.43% over the same period.
The increase in average interest rates was primarily attributable to the growth
of $22.3 million, or 31.7%, in higher-priced certificate accounts during the
Federal Reserve Board's increased interest rates.
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 $25.2
million during the three months ended September 30, 2000, an increase of $1.1
million, or 4.7 % from the average balances for the three months ended September
30, 1999. Over this same timeframe, average borrowing rates increased slightly
from 5.17% to 5.89%. These borrowings were used primarily to fund the purchase
of investment securities and residential mortgages. Interest expense on FHLB
advances increased $60,000, or 19.3%, from $311,000 for the three months ended
September 30, 1999 to $371,000 for the three months ended September 30, 2000.
Other Income
Total other income increased $142,000, or 66.1%, from $215,000 for the
three months ended September 30, 1999 to $357,000 for the same period in 2000.
This change was caused primarily by increases of $66,000, or 36.7%, and $57,000,
or 300.0%, in customer service fees and net gains on sales of securities,
respectively. Customer service fees increased primarily due to increases in Visa
Debit Card income, ATM surcharge income, and NOW account and NSF
("Non-sufficient funds") fees between periods.
Operating Expense
Total operating expense increased $235,000, or 15.6%, from $1.5 million
for the three months ended September 30, 1999 to $1.7 million for the three
months ended September 30, 2000. Salaries and benefits and occupancy and
equipment expenses increased $145,000, or 19.2%, and $52,000, or 15.9%,
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.
Specifically, the Bank opened a new branch in Milford, Massachusetts in January
2000 and has installed
14
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
Operating Expense(Continued)
a wide-area computer network to improve communication within the Bank and better
service the needs of the Bank's customers. Despite the increase in operating
expenses, the ratio of operating expenses to average assets decreased from 3.39
% for the three months ended September 30, 1999 to 3.23% for the same period in
2000.
Income Taxes
The effective income tax rate was 34.6% and 37.3% for the three months
ended September 30, 2000 and 1999, 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.
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 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, asset-liability management 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 asset-liability
management process are reported to the Board at least on a quarterly basis.
15
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
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, 2000 amounted to
$25.3 million. The Bank's ability to borrow from the FHLB is dependent upon the
amount and type of collateral the Bank has to secure the loans. Such collateral
consists of, but is not limited to, one-to-four family owner-occupied
residential property, mortgage-backed securities
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, 2000, the Bank had $3.3 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 $82.9 million at
September 30, 2000. Based upon historical experience, management believes that a
significant portion of such deposits will remain with the Bank.
At September 30, 2000, the Company and the Bank exceeded all regulatory
capital requirements.
16
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Item 1. 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, involved amounts which are believed by management to be
immaterial to the financial condition and operations of the Company.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On October 24, 2000, the Company held its annual meeting of stockholders
for the purpose of the election of five Directors to three year terms and one
Director to a two year term, and the ratification of Wolf & Company, P.C. as the
Company's independent auditors for the fiscal year ending June 30, 2001.
The number of votes cast at the meeting as to each matter acted upon was
as follows:
<TABLE>
<CAPTION>
NO. OF NO. OF
VOTES FOR VOTES WITHHELD
<S> <C> <C>
1. Election of Directors:
Kelly A. Verdolino 1,284,546 80,475
Kenneth C.A. Isaacs 1,284,546 80,475
Paul V. Kenney 1,284,546 80,475
Eugene R. Liscombe 1,284,546 80,475
Robert A. Matson 1,284,546 80,475
Pamela J. Mozynski 1,284,546 80,475
<CAPTION>
NO. OF NO. OF NO. OF
VOTES FOR VOTES AGAINST VOTES ABSTAINING
<S> <C> <C> <C>
2. Ratification of the
Appointment of Wolf
& Company, P.C. as
the Company's
Independent Auditors 1,338,146 22,325 4,550
</TABLE>
17
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
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.
18
<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 13, 2000 By: /s/ Eugene G. Stone
----------------- ---------------------------------
Eugene G. Stone
President and Chief Executive Officer
Date: November 13, 2000 By: /s/ Warren W. Chase, Jr.
----------------- ---------------------------------
Warren W. Chase, Jr.
Senior Vice President and Treasurer
19
