UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-QSB
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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 January 31, 2000, there were 1,620,430 shares of common stock
outstanding, par value $0.01 per share.
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
Index
PART I FINANCIAL INFORMATION Page
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 1999 and June 30, 1999 1
Consolidated Statements of Income for the three and
six months ended December 31, 1999 and 1998 2
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended December 31, 1999 and 1998 3
Consolidated Statements of Cash Flows for the six months
ended December 31, 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 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
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>
December 31, June 30,
ASSETS 1999 1999
------------ ---------
<S> <C> <C>
Cash and due from banks $ 10,985 $ 7,939
Short-term investments 957 5,451
--------- ---------
Total cash and cash equivalents 11,942 13,390
--------- ---------
Certificates of deposit 500 500
Securities available for sale 74,913 69,912
Federal Home Loan Bank stock, at cost 1,548 1,300
Loans 97,423 86,724
Less allowance for loan losses (804) (740)
--------- ---------
Loans, net 96,619 85,984
--------- ---------
Banking premises and equipment, net 4,001 4,012
Accrued interest receivable 1,758 1,678
Other assets 2,265 1,382
--------- ---------
Total assets $ 193,546 $ 178,158
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 149,162 $ 133,138
Federal Home Loan Bank advances 28,270 25,993
Other liabilities 1,062 2,548
--------- ---------
Total liabilities 178,494 161,679
--------- ---------
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 7,437 7,444
Retained earnings 11,286 10,784
Accumulated other comprehensive loss (2,577) (1,182)
Treasury stock, at cost - 68,500 shares at Dec. 31, 1999
and 10,000 shares at June 30, 1999 (560) (83)
Unearned ESOP shares - 46,879 shares at Dec. 31, 1999
and 50,101 shares at June 30, 1999 (469) (501)
Unearned RRP Stock - 10,800 shares at Dec. 31, 1999 (82) --
--------- ---------
Total stockholders' equity 15,052 16,479
--------- ---------
Total liabilities and stockholders' equity $ 193,546 $ 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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 1,839 $ 1,593 $ 3,597 $ 3,230
Interest and dividends on securities
available for sale and FHLB stock 1,400 761 2,642 1,414
Interest on short-term investments
and certificates of deposit 51 198 124 341
---------- ---------- ---------- ----------
Total interest and dividend income 3,290 2,552 6,363 4,985
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 1,202 1,012 2,361 2,027
Interest on FHLB advances 373 191 684 385
---------- ---------- ---------- ----------
Total interest expense 1,575 1,203 3,045 2,412
---------- ---------- ---------- ----------
Net interest income 1,715 1,349 3,318 2,573
Provision for loan losses 35 25 80 50
---------- ---------- ---------- ----------
Net interest income, after provision for loan losses 1,680 1,324 3,238 2,523
---------- ---------- ---------- ----------
Other income:
Customer service fees 196 155 376 278
Gain on sales of securities available for sale, net 214 247 233 320
Gain on sales of loans -- 13 -- 30
Miscellaneous 27 12 43 21
---------- ---------- ---------- ----------
Total other income 437 427 652 649
---------- ---------- ---------- ----------
Operating expenses:
Salaries and benefits 811 742 1,567 1,307
Occupancy and equipment expenses 345 229 673 471
Data processing expenses 97 85 189 161
Professional fees 89 57 151 98
Advertising expenses 57 42 126 75
Other general and administrative expenses 195 172 393 294
---------- ---------- ---------- ----------
Total operating expenses 1,594 1,327 3,099 2,406
---------- ---------- ---------- ----------
Income before income taxes 523 424 791 766
Provision for income taxes 189 151 289 269
---------- ---------- ---------- ----------
Net income $ 334 $ 273 $ 502 $ 497
========== ========== ========== ==========
Weighted average common shares
outstanding during the period -
Basic 1,606,478 N/A 1,624,743 N/A
========== ==========
Diluted 1,606,478 N/A 1,626,678 N/A
========== ==========
Earnings per common share (Basic and Diluted) $ 0.21 N/A $ 0.31 N/A
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(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
Common stock held by ESOP released
and committed to be released
(3,222 shares) -- (7) -- -- -- 32 -- 25
Comprehensive loss:
Net Income -- -- 502 -- -- -- -- 502
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- (1,395) -- -- -- (1,395)
--------
Total comprehensive loss (893)
--------
Purchase of treasury stock
(58,500 shares) (477) -- -- (477)
Purchase of RRP stock
(10,800 shares) -- -- -- -- -- -- (82) (82)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1999 $ 17 $ 7,437 $ 11,286 ($ 2,577) ($ 560) ($ 469) ($ 82) $ 15,052
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998 (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, 1998 $ -- $ -- $ 9,700 $ 423 $ -- $ -- $ -- $ 10,123
Net proceeds from sale of 17 7,449 -- -- -- -- -- 7,466
common stock
Common stock acquired
by ESOP (64,394) -- -- -- -- -- (644) -- (644)
Common stock held by ESOP
committed to be released
(10,000 shares) -- -- -- -- -- 100 -- 100
Comprehensive income:
Net income -- -- 497 -- -- -- -- 497
Change in net unrealized gain
on securities available for sale
net of tax and reclassification
adjustment -- -- -- 19 -- -- -- 19
--------
Comprehensive income 516
-------- -------- -------- -------- ----- -------- ----- --------
Balance at December 31, 1998 $ 17 $ 7,449 $ 10,197 $ 442 $ -- ($ 544) $ -- $ 17,561
======== ======== ======== ======== ===== ======== ===== ========
</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>
Six Months Ended
December 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 502 $ 497
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Provision for loan losses 80 50
Amortization of unearned loan income 29 --
Gain on sales of securities available for
sale, net (233) (320)
Amortization(accretion) of securities
available for sale, net (60) 31
Depreciation and amortization expense 299 186
Decrease in accrued interest receivable (81) (272)
Deferred tax benefit (78) (44)
Loans originated for sale -- (3,016)
Principal balance of loans sold -- 3,016
Other, net (1,060) 511
-------- --------
Net cash provided (used) by operating activities (602) 639
-------- --------
Cash flows from investing activities:
Proceeds from sales of securities
available for sale 3,346 1,195
Proceeds from maturities of and
principal payments on securities
available for sale 3,691 7,490
Purchase of securities available for sale (14,645) (28,979)
Net decrease (increase) in loans (10,744) 9
Purchase of banking premises and equipment (288) (205)
-------- --------
Net cash used by investing activities (18,640) (20,490)
-------- --------
Cash flows from financing activities:
Net increase in deposits 16,024 7,813
Proceeds from Federal Home Loan Bank
advances 20,740 2,006
Repayment of Federal Home Loan Bank
advances (18,463) (2,296)
Release of common stock held by ESOP 25 100
Purchase of RRP stock (82) --
Increase in mortgagors' escrow deposits 27 --
Purchase of common stock for ESOP -- (644)
Net proceeds from issuance of common stock -- 7,466
Purchase of treasury stock (477) --
-------- --------
Net cash provided by financing activities 17,794 14,445
-------- --------
Net change in cash and cash equivalents (1,448) (5,406)
Cash and cash equivalents at beginning of period 13,390 16,383
-------- --------
Cash and cash equivalents at end of period $ 11,942 $ 10,977
======== ========
Supplementary information:
Interest paid on deposits $ 2,375 $ 2,029
Interest paid on Federal Home Loan
Bank advances 643 392
Income taxes paid 376 318
Decrease in due from broker 521 1,053
</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 of 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 December 31, 1999. The
Company's "basic" and "diluted" earnings per share are identical as there were
no material 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 December 31, 1999, the Company had outstanding commitments to originate loans
of $4.1 million. Unused lines of credit available to customers amounted to $7.9
million, $7.5 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.
December 31, 1999 June 30, 1999
--------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in thousands)
Federal agency obligations $44,635 $42,624 $41,909 $40,870
Mortgage-backed securities 17,426 16,439 17,620 16,975
Other debt securities 14,205 13,480 9,441 9,216
------- ------- ------- -------
Total debt securities 76,266 72,543 68,970 67,061
Marketable equity securities 2,581 2,370 2,746 2,851
------- ------- ------- -------
Total securities $78,847 $74,913 $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>
December 31, 1999 June 30, 1999
---------------------- ---------------------
Amount Percent Amount Percent
-------- ---------- -------- ----------
Real estate loans: (Dollars in thousands)
<S> <C> <C> <C> <C>
Residential $ 56,428 57.90% $ 47,394 54.62%
Commercial 23,451 24.06 20,981 24.18
Construction 3,006 3.08 4,974 5.73
-------- ---------- -------- ----------
Total real estate loans 82,885 85.05 73,349 84.54
Other loans:
Consumer loans:
Collateral 576 0.59 513 0.59
Home equity 4,951 5.08 4,591 5.29
Other 1,477 1.52 1,829 2.11
-------- ---------- -------- ----------
Total consumer loans 7,004 7.19 6,933 7.99
Commercial business loans 7,562 7.79 6,481 7.47
-------- ---------- -------- ----------
Total other loans 14,566 14.95 13,414 15.46
-------- ---------- -------- ----------
Total loans 97,451 100.00% 86,763 100.00%
========== ==========
Net deferred loan fees (50) (51)
Deferred premium 22 12
Allowance for loan losses (804) (740)
-------- --------
Total loans, net $ 96,619 $ 85,984
======== ========
</TABLE>
7
<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.
December 31, 1999 June 30, 1999
-------------------- ----------------------
Amount Percent Amount Percent
-------- --------- -------- ---------
(Dollars in thousands)
Demand $ 17,480 11.72% $ 12,524 9.41%
NOW 19,247 12.90 21,082 15.83
Money market deposits 10,532 7.06 10,163 7.63
Regular and other savings 27,349 18.34 25,414 19.09
-------- --------- -------- ---------
Total non-certificate
accounts 74,608 50.02 69,183 51.96
Term certificates 74,554 49.98 63,955 48.04
-------- --------- -------- ---------
Total deposits $149,162 100.00% $133,138 100.00%
======== ========= ======== =========
The following is a list of maturities for advances from the Federal Home Loan
Bank of Boston ("the "FHLB") at the dates indicated.
December 31, 1999 June 30, 1999
----------------- -----------------
Amount Percent Amount Percent
------- ------- ------- -------
(Dollars are in thousands)
Maturities less than one year $ 5,500 19.46% $ 5,218 20.07%
Maturities greater than one year 22,770 80.54 20,775 79.93
------- ------ ------- ------
Total borrowed funds $28,270 100.00% $25,993 100.00%
======= ====== ======= ======
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 December 31, 1999 and June 30, 1999
Assets increased by $15.3 million, or 8.6%, from $178.2 million at June
30, 1999 to $193.5 million at December 31, 1999. The increase reflected
management's growth strategy and was funded by the $16.0 million, or 12.0%,
increase in total deposits since June 30, 1999, and a $2.3 million, or 8.8%,
increase in total borrowings over this timeframe.
The funds provided during the six months ended December 31, 1999 were
invested in securities available for sale and net loans which increased $5.0
million, or 7.2%, and $10.6 million, or 12.4% 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 $1.8 million, or 4.3%, and $4.3 million, or 46.3%,
respectively. Short-term investments, consisting of overnight funds investments
with large area financial institutions, decreased $4.5 million, or 82.4%, during
the periods as the Bank deployed these funds into longer-term investment and
loan portfolios.
Net loans increased primarily because of a $9.0 million, or 19.1%,
increase in residential real estate loans since June 30, 1999. This increase was
primarily attributable to the purchase of three residential loan packages from
other financial institutions in the Bank's geographical area totaling $7.7
million. In addition, commercial real estate loans and commercial secured and
unsecured loans increased $2.5 million, or 11.8%, and $1.1 million, or 16.7%,
respectively, since June 30, 1999. During this same timeframe construction loans
and other consumer loans declined $2.0 million, or 39.6%, and $352,000, or
19.3%, respectively, while home equity loans increased $360,000, or 7.8%, and
all other loan categories remained relatively the same. The emphasis during the
first six months of the year had been to increase the residential loan portfolio
which had declined over recent quarters due to the increase in loan payoffs and
the increase of competition from other financial institutions. It is the Bank's
continued objective to grow the residential fixed and variable products from
loan originations within the Bank branch network. The purchase of loan packages
from other financial institutions will be considered as the opportunities
present themselves. 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 the growth in the
commercial loan portfolio which generally provides higher yields than
residential and consumer loans
9
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
as well as potentially improving the Bank's core deposit base. The Bank
frequently receives commercial checking and money market accounts from the
Bank's commercial borrowers.
The increase of $16.0 million in deposits was primarily attributable to a
$10.6 million, or 16.6%, increase in term certificates from June 30, 1999.
Within non-certificate accounts, demand deposit accounts, regular savings, and
money market deposits increased $5.0 million, or 39.6%, $1.9 million, or 7.6%,
and $369,000, or 3.6%, respectively, while NOW accounts decreased $1.8 million,
or 8.7% from June 30, 1999 to December 31, 1999. In addition, borrowings
increased $2.3 million, or 8.8% since June 30, 1999, primarily to partially fund
the purchase of residential loan packages mentioned earlier.
Stockholders' equity decreased from $16.5 million, or 9.25% of total
assets at June 30, 1999 to $15.1 million, or 7.78% of total assets at December
31, 1999. This decrease resulted primarily from an increase to $2.6 million in
unrealized losses from $1.4 million in the Company's securities available for
sale portfolio and the repurchase of 58,500 shares of the Company's common stock
during the period for $477,000. In addition, the Company purchased 10,800 shares
for its Recognition and Retention Plan for $82,000. 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.
December 31, June 30,
1999 1999
------------ ----------
(Dollars in thousands)
Non-accrual loans:
One-to-four family real estate loans $ 234 $ 317
Commercial loans 241 81
Consumer loans 12 --
---------- ----------
Total non-accrual loans 487 398
Other real estate owned -- --
---------- ----------
Total non-performing assets $ 487 $ 398
========== ==========
Allowance for loan losses $ 804 $ 740
========== ==========
10
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
December 31, June 30,
1999 1999
----------- --------
Allowance for loan losses as a percent
of total loans, net 0.83% 0.86%
======= =======
Allowance for loan losses as a percent
of non-accrual loans 165.09% 185.93%
======= =======
Non-accrual loans as a percent of
total loans, net 0.50% 0.46%
======= =======
Non-performing assets as a percent of
total assets 0.25% 0.22%
======= =======
During the six months ended December 31, 1999, the Bank added $80,000 to the
loan loss provision due to the growth of the commercial loan portfolio which
generally is considered to present a greater risk of loss than residential
loans. During this period, there were $19,000 in loan charge-offs and $3,000 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 December 31, 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 December 31, 1999 was $334,000 as
compared to $273,000 for the three months ended December 31, 1998, an increase
of $61,000, or 22.3%. This increase was primarily attributable to an increase of
$366,000, or 27.1%, in net interest income, which was partially offset by an
increase of $267,000, or 20.1%, in total operating expenses. In addition,
customer service fees increased $41,000, or 26.5%, between periods, while net
gains on the sales of securities and loans decreased $33,000 and $13,000 over
the same period, respectively.
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 3.29%
for the three months ended December 31, 1998 to 3.57% for the three months ended
December 31, 1999. Interest rate margin (net interest income divided by average
earning assets) increased from 3.84% to 3.96%. The interest rate spread and
margin improved as the Bank increased its emphasis in the investment and loan
portfolios in higher yielding, and in some cases longer maturing, corporate and
federal agency bonds and commercial loans, respectively. The Bank opened a new
retail branch in Milford, Massachusetts on January 13, 2000 and the Bank will
explore opening additional retail branches in the future in locations with
growth opportunities in both the retail and commercial markets. 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 future tightening in the interest rate
spread.
The interest rate spread and margin for the periods indicated are as
follows:
Three months ended
December 31,
-------------------
1999 1998
---- ----
Weighted average yield earned on:
Short-term investments 5.34% 4.70%
Investments 6.98% 6.20%
Total loans, net 8.24% 8.53%
------- -------
All earning assets 7.60% 7.26%
Weighted average rate paid on:
Deposits 3.74% 3.79%
Borrowed funds 5.35% 5.32%
------- -------
All interest-bearing liabilities 4.03% 3.97%
------- -------
Weighted average rate spread 3.57% 3.29%
======= =======
Net interest margin 3.96% 3.84%
======= =======
Earnings per share data for the three months ended December 31, 1999 was
$0.21 for both "Basic" and "Diluted" calculations. Earnings per share is not
presented for the three months ended December 31, 1998 because the Company
became a publicly owned entity on October 7, 1998 and, accordingly, did not have
shares outstanding throughout any of the periods presented 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 $738,000, or 28.9%, from
$2.6 million for the three months ended December 31, 1998 to $3.3 million for
the comparable period in 1999. This increase was primarily attributable to a
$32.6 million, or 23.2%, increase in average earning assets between the two
periods as well as a 34 basis point increase in the yield on earning assets
between the two periods. The average balances in net loans increased $14.6
million, or 19.5%, while total loan yield declined by 29 basis points to 8.24%.
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 $31.6 million or 64.5%
over this same period and the portfolio yield improved by 78 basis points to
6.98%. 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 consistent with the interest rate profile objectives of the
Asset-Liability ("ALCO") management process discussed below. In addition, the
average balance in short-term investments declined $13.6 million, or 80.9%,
between periods while the portfolio yield increased by 64 basis points to 5.34%
between the two periods. Most of the funds within the short-term investment
portfolio were obtained from the stock offering in October 1998 and from normal
investment maturities and calls. The Bank reinvested these proceeds into
longer-maturing and higher-yielding investments and loans.
Interest Expense
Interest expense on deposits increased $190,000, or 18.8%, from $1.0
million for the three months ended December 31, 1998, to $1.2 million for the
three months ended December 31, 1999. This increase was attributable to a $21.9
million, or 20.5%, increase in average interest-bearing deposit balances between
periods, which was partially offset by a reduction in deposit rates over the
same period from 3.79% to 3.74%. The decrease in deposit interest rates was
primarily due to 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 $27.9
million during the three months ended December 31, 1999, an increase of $13.5
million, or 94.4% from the three months ended December 31, 1998. Over this same
timeframe, average borrowing rates increased slightly from 5.32% to 5.35%. 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 $182,000, or 95.3%, from $191,000 for the three months ended December
31, 1998 to $373,000 for the three months ended December 31, 1999.
13
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
Other Income
Total other income increased $10,000, or 2.3%, from $427,000 for the
three months ended December 31, 1998 to $437,000 for the same period in 1999.
This change was caused primarily by an increase of $41,000 in customer service
fees between periods which was partially offset by decreases of $33,000, or
13.4%, and $13,000, or 100.0% in the net gains on the sales of securities amd
loans, 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 $267,000, or 20.1%, from $1.3 million
for the three months ended December 31, 1998 to $1.6 million for the three
months ended December 31, 1999. Salaries and benefits and occupancy and
equipment expenses increased $69,000, or 9.3%, and $116,000, or 50.7%,
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.
Despite the increase in operating expenses, the ratio of operating expenses to
average assets decreased from 3.56% for the three months ended December 31,
1998 to 3.41% for the 1999 period.
Income Taxes
The effective income tax rate was 36.1% and 35.6% for the three months
ended December 31, 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.
Comparison of Operating Results for the Six Months Ended December 31, 1999 and
1998
General
Net income for the six months ended December 31, 1999 was $502,000 as
compared to $497,000 for the six months ended December 31, 1998, an increase of
$5,000, or 1.0%. This increase was primarily attributable to an increase of
$745,000, or 29.0%, in net interest income, which was partially offset by an
increase of $693,000, or 28.8% in total operating expenses. In addition,
customer service fees increased by $98,000, or 35.3%, primarily due to increases
in Visa Debit card income, ATM surcharge income and NOW account and NSF fees.
There were also decreases of $87,000, or 27.2%, and $30,000, or 100.0%, in net
gains in the sales of securities and loans between periods, respectively.
14
<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:
Six months ended
December 31,
-------------------
1999 1998
---- ----
Weighted average yield earned on:
Short-term investments 5.18% 5.07%
Investments 6.88% 6.02%
Total loans, net 8.19% 8.59%
------- -------
All earning assets 7.52% 7.35%
Weighted average rate paid on:
Deposits 3.74% 3.88%
Borrowed funds 5.27% 5.34%
------- -------
All interest-bearing liabilities 4.00% 4.06%
------- -------
Weighted average rate spread 3.52% 3.29%
======= =======
Net interest margin 3.92% 3.79%
======= =======
Interest and Dividend Income
Total interest and dividend income increased by $1.4 million, or 27.6%,
from $5.0 million for the six months ended December 31, 1998 to $6.4 million for
the comparable period in 1999. This increase was primarily attributable to a
$33.6 million, or 24.8%, increase in average earning assets between the two
periods and a 17 basis point increase in the yield on earning assets. The
average balances in net loans increased $12.6 million, or 16.8%, while total
loan yield declined by 40 basis points to 8.19%. 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 $30.3 million, or
64.4%, over this same timeframe and its portfolio yield has improved by 86 basis
points to 6.88%. 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 consistent with the interest rate profile
objectives of the Asset-Liability ("ALCO") management process discussed below.
The average balance in short-term investments declined $9.3 million, or 69.0%,
between periods while the portfolio yield increased by 11 basis points. Most of
the funds within the short-term investment portfolio were obtained from the
stock offering in October 1998 and from normal investment maturities and calls.
The Bank reinvested these proceeds into longer-maturing and higher-yielding
investments and loans.
15
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
Interest Expense
Interest expense on deposits increased $334,000, or 16.5%, from $2.0
million for the six months ended December 31, 1998, to $2.4 million for the six
months ended December 31, 1999. This increase was attributable to a $22.0
million, or 21.1%, increase in average interest-bearing deposit balances between
periods, which was partially offset by a reduction in deposit rates over the
same period from 3.88% to 3.74%. The decrease in deposit interest rates was
primarily due to he 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 $26.0
million during the six months ended December 31, 1999, an increase of $11.5
million, or 80.0% from the six months ended December 31, 1998. Over this same
timeframe, average borrowing rates declined from 5.34% to 5.27%. 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 $299,000, or 77.7%, from $385,000 for the six months ended December
31, 1998 to $684,000 for the six months ended December 31, 1999.
Other Income
Total other income increased $3,000, or 0.5%, from $649,000 for the six
months ended December 31, 1998 to $652,000 for the same period in 1999. This
change was caused primarily by an increase of $98,000 in customer service fees
between periods which was partially offset by decreases of $87,000, or 27.2%,
and $30,000, or 100%, in the net gains on the sales of securities and loans,
respectively. Customer service fees improved primarily due to increases in Visa
Debit Card income, ATM surcharge income, and NOW account and NSF fees between
periods.
Operating Expense
Total operating expense increased $693,000, or 28.8%, from $2.4 million
for the six months ended December 31, 1998 to $3.1 million for the six months
ended December 31, 1999. Salaries and benefits and occupancy and equipment
expenses increased $260,000, or 19.9%, and $202,000, or 42.9% 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. Accordingly, the ratio of
operating expenses to average assets increased from 3.35% for the six months
ended December 31, 1998 to 3.40% for the 1999 period.
Income Taxes
The effective income tax rate was 36.5% and 35.1% for the six months ended
December 31, 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.
16
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
Asset/Liability Management
A principal operating objective of the Bank is to produce stable earnings
by achieving a favorable interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Since the Bank's principal
interest-earning assets generally have longer terms to maturity than its primary
source of funds, i.e., deposit liabilities, increases in general interest rates
will generally result in an increase in the Bank's cost of funds before the
yield on its asset portfolio adjusts upward. Financial institutions have
generally sought to reduce their exposure to adverse changes in interest rates
by attempting to achieve a closer match between the repricing periods of
interest rate sensitive assets and liabilities. Such matching, however, is
carefully monitored so as not to sacrifice net interest margin performance for
the perfect matching of these interest rate sensitive instruments. The Bank has
established an Asset/Liability Management Committee ("ALCO") made up of members
of senior management to assess the asset/liability mix and recommend strategies
that will enhance income while managing the Bank's vulnerability to changes in
interest rate. This committee meets regularly to discuss interest rate
conditions and potential product lines that would enhance the Bank's income
performance.
Certain strategies have been implemented to improve the match between
interest rate sensitive assets and liabilities. These strategies include, but
are not limited to: daily monitoring of the Bank's cash requirements,
originating adjustable and fixed rate mortgage loans, both residential and
commercial, for the Bank's own portfolio, managing the cost and structure of
deposits, and generally using the matched borrowings to fund specific purchases
of loan packages and large loan originations. Occasionally, management may
choose to deviate from specific matching of maturities of assets and
liabilities, if an attractive opportunity to enhance yield becomes available.
Quarterly, ALCO modeling is performed with the assistance of an outside
investment advisor which projects the Bank's financial performance over the next
twenty four months using loan and deposit projections, projections of changes in
interest rates, and anticipated changes in other income and operating expenses
to reveal the full impact of the Bank's operating strategies on financial
performance. The results of the ALCO process are reported to the Board at least
on a quarterly basis.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans, sales of loans and investments, maturities
and early calls of investments, and funds provided from operations. While
scheduled repayments of loans and maturities of investments are predictable
sources of funds, deposit flows and loan prepayments are greatly influenced by
the general level of interest rates, economic conditions, and competition. The
Bank uses its liquidity resources primarily to fund existing and future loan
commitments, to fund net deposit outflows, to invest in other interest-earning
assets, to maintain liquidity, and to pay operating expenses.
From time to time, the Bank utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. Total advances outstanding at December 31, 1999 amounted to
$28.3 million. The Bank's ability to borrow from the FHLB is dependent upon the
amount and type of collateral the Bank has to secure the loans. Such collateral
consists of, but is not limited to, one-to-four family owner-occupied
residential property, mortgage-backed securities guaranteed by the U.S.
government or a government agency, and funds on deposit with
17
<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 December 31, 1999, the Bank's total borrowing capacity was $68.7
million.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, short-term investments, U.S. Government and federal agency
obligations, mortgage-backed securities, and other debt securities. The level of
these assets is dependent upon the Bank's operating, lending, and financing
activities during any given period.
At December 31, 1999, the Bank had $4.1 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 $66.2 million at December 31,
1999. Based upon historical experience, management believes that a significant
portion of such deposits will remain with the Bank.
At December 31, 1999, the Company and the Bank exceeded all regulatory
capital requirements.
Year 2000 ("Y2K") Disclosure
The Company has devoted significant resources to minimize the risk of
potential disruption due to Y2K issues. The Company has identified its
mission-critical systems including its "core" data processing system for loans,
deposits, and general ledger. In addition, the Company has identified and
assessed its computer operating systems and network software; applications
software; data processing hardware platforms such as personal computers and
automated teller machines; third party interfaces; and environmental systems,
including, but not limited to, climate control systems, sprinklers, and security
systems. The Company's Y2K expenses since inception have been immaterial to its
financial performance. No additional material expenses are anticipated.
It is the intention of the Company to maintain normal business operations
during the Year 2000 transition and beyond; including, for example, potential
problems related to the first leap year of the new millennium: February 29,
2000. The Company has developed a Year 2000 Business Continuity and Contingency
Plan in addition to the Company's Disaster Recovery Plan. Together, these plans
help insure the continuity of daily operations in the event of a loss of
essential resources due to Year 2000 induced failures. These plans describe
individual contingency plans concerning specific software and hardware issues,
operational plans for continuing operations, and specific policies and
procedures that would be put in place upon the occurrence of a power outage,
computer interruptions, telecommunications interruptions, natural disasters,
etc. Such plans identify participants, processes and equipment that will be
necessary to permit the Company to resume and continue operations until the
problem is solved.
Based upon our assessment of operations through February 11, 2000, we have
not experienced any significant Year 2000 issues. In addition to expenses
related to its own computer systems, the Company is aware of potential Year 2000
risks to third parties, including vendors, depositors, and borrowers and the
possible adverse impact on the Company resulting from failures by these parties
to adequately address the Year 2000 problem. As of February 11, 2000, we are not
aware of any significant Year 2000 issues of vendors, borrowers, or depositors
of the Company. In addition, the Company has analyzed the potential risks
involved with its significant vendors, depositors, and borrowers, and
anticipates them to have a relatively low level of risk of a major Year 2000
operating-related problem.
18
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Concluded)
The preceding paragraphs include forward-looking statements that involve
inherent risks and uncertainties. The actual costs of Year 2000 compliance and
the impact of Year 2000 issues could differ materially from what is currently
anticipated. Factors that might result in such differences include incomplete
inventory and assessment results, higher than anticipated costs to update
software and hardware, and vendors', customers, and other third parties'
inability to effectively address the Year 2000 issues.
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
Not Applicable
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 EDGAR financial data schedule.
There were no reports filed on Form 8-K.
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: February 11, 2000 By: /s/ Eugene G. Stone
--------------------------
Eugene G. Stone
President and Chief Executive Officer
Date: February 11, 2000 By: /s/ Warren W. Chase, Jr.
--------------------------
Warren W. Chase, Jr.
Senior Vice President and Treasurer
20
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<S> <C>
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<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> DEC-31-1999
<CASH> 10,985
<INT-BEARING-DEPOSITS> 500
<FED-FUNDS-SOLD> 857
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<INVESTMENTS-HELD-FOR-SALE> 74,913
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<TOTAL-ASSETS> 193,546
<DEPOSITS> 149,162
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<LONG-TERM> 28,270
0
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<INCOME-PRETAX> 791
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