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 March 31, 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 (I.R.S. Employer
of 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 May 5, 2000, there were 1,603,877 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 March 31, 2000 and June 30, 1999 1
Consolidated Statements of Income for the three and
nine months ended March 31, 2000 and 1999 2
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended March 31, 2000 and 1999 3
Consolidated Statements of Cash Flows for the nine months
ended March 31, 2000 and 1999 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)
March 31, June 30,
ASSETS 2000 1999
-------- --------
Cash and due from banks $6,119 $7,939
Short-term investments 3,352 5,451
-------- --------
Total cash and cash equivalents 9,471 13,390
-------- --------
Certificates of deposit 500 500
Securities available for sale 80,975 69,912
Securities held to maturity, at cost 4,763 --
Federal Home Loan Bank stock, at cost 1,564 1,300
Loans 99,943 86,724
Less allowance for loan losses (759) (740)
-------- --------
Loans, net 99,184 85,984
-------- --------
Banking premises and equipment, net 4,280 4,012
Accrued interest receivable 1,742 1,678
Bank-owned life insurance 2,048 --
Other assets 2,653 1,382
-------- --------
Total assets $207,180 $178,158
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $163,465 $133,138
Federal Home Loan Bank advances 27,268 25,993
Other liabilities 1,457 2,548
-------- --------
Total liabilities 192,190 161,679
-------- --------
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 7,432 7,444
Retained earnings 11,417 10,784
Accumulated other comprehensive loss (2,605) (1,182)
Treasury stock, at cost - 68,500 shares at March
31, 2000 and 10,000 shares at June 30, 1999 (560) (83)
Unearned ESOP shares - 45,267 shares at March
31, 2000 and 50,101 shares at June 30, 1999 (452) (501)
Unearned RRP Stock - 37,578 shares at March 31,
2000 (259) --
-------- --------
Total stockholders' equity 14,990 16,479
-------- --------
Total liabilities and stockholders' equity $207,180 $178,158
======== ========
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 Nine Months Ended
March 31, March 31,
---------------------------------------
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,976 $1,568 $5,573 $4,798
Interest and dividends on securities 1,389 974 4,031 2,388
Interest on short-term investments
and certificates of deposit 52 46 176 387
--------- --------- -------- --------
Total interest and dividend income 3,417 2,588 9,780 7,573
--------- --------- -------- --------
Interest expense:
Interest on deposits 1,338 958 3,699 2,985
Interest on FHLB advances 399 182 1,083 567
--------- --------- -------- --------
Total interest expense 1,737 1,140 4,782 3,552
--------- --------- -------- --------
Net interest income 1,680 1,448 4,998 4,021
Provision for loan losses 60 30 140 80
--------- --------- -------- --------
Net interest income, after provision
for loan losses 1,620 1,418 4,858 3,941
--------- --------- -------- --------
Other income:
Customer service fees 198 153 574 431
Gain on sales of securities available for
sale, net 33 128 266 448
Gain on sales of loans -- 20 -- 50
Miscellaneous 27 9 70 30
--------- --------- -------- --------
Total other income 258 310 910 959
--------- --------- -------- --------
Operating expenses:
Salaries and benefits 877 635 2,444 1,942
Occupancy and equipment expenses 387 271 1,060 742
Data processing expenses 97 101 286 262
Professional fees 57 76 208 174
Advertising expenses 47 44 173 119
Other general and administrative expenses 220 183 613 477
--------- --------- -------- --------
Total operating expenses 1,685 1,310 4,784 3,716
--------- --------- -------- --------
Income before income taxes 193 418 984 1,184
Provision for income taxes 62 141 351 410
--------- --------- -------- --------
Net income $131 $277 $633 $774
========= ========= ========= ========
Weighted average common shares
outstanding during the period -
Basic and Diluted 1,573,120 1,658,236 1,607,535 N/A
========= ========= =========
Earnings per common share(Basic and Diluted) $0.08 $0.17 $0.39 N/A
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 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, 1999 $ 17 $ 7,444 $10,784 ($1,182) ($83) ($501) $ -- $ 16,479
Comprehensive Loss:
Net Income -- -- 633 -- -- -- -- 633
Change in net unrealized
loss on securities available
for sale, net of tax and
reclassification adjustment -- -- -- (1,423) -- -- -- (1,423)
--------
Total comprehensive loss (790)
--------
Common stock held by ESOP released
and committed to be released
(4,833 shares) -- (12) -- -- -- 49 -- 37
Purchase of treasury stock
(58,500 shares) -- -- -- -- (477) -- -- (477)
Purchase of RRP stock
(37,578 shares) -- -- -- -- -- -- ($270) (270)
Amortization of RRP stock -- -- -- -- -- -- 11 11
------- ------- ------- ------- ----- ----- ------ --------
Balance at March 31, 2000 $ 17 $ 7,432 $11,417 ($2,605) ($560) ($452) ($259) $ 14,990
======= ======= ======= ======= ===== ===== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 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 Income 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 -- -- 774 -- -- -- -- 774
Change in net unrealized
gain on securities available
for sale net of tax and
reclassification adjustment -- -- -- -436 -- -- -- (436)
--------
Comprehensive income 338
-------- -------- -------- -------- ----- -------- ----- --------
Balance at March 31, 1999 $ 17 $ 7,449 $ 10,474 $ 13 $ -- ($544) $ -- $ 17,383
======== ======== ======== ======== ===== ======== ===== ========
</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>
Nine Months Ended
March 31,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 633 $ 774
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Provision for loan losses 140 80
Amortization of unearned loan income 42 --
Gain on sales of securities available for
sale, net (266) (448)
Amortization(accretion) of securities, net (91) 25
Depreciation and amortization expense 468 287
Decrease in accrued interest receivable (64) (99)
Deferred tax benefit (87) (32)
Loans originated for sale -- (5,809)
Principal balance of loans sold -- 5,809
Other, net (1,094) 384
-------- --------
Net cash provided (used) by operating
activities (319) 971
-------- --------
Cash flows from investing activities:
Maturity of certificates of deposit -- 1,000
Proceeds from sales of securities
available for sale 3,425 1,229
Proceeds from maturities of and
principal payments on securities
available for sale 3,927 10,474
Purchase of securities available for sale (20,752) (37,059)
Purchase of securities held to maturity (4,736) --
Purchase of FHLB stock (264) (175)
Net decrease (increase) in loans (13,382) 760
Purchase of bank-owned life insurance (2,037) --
Purchase of banking premises and equipment (736) (2,047)
-------- --------
Net cash used by investing activities (34,582) (25,818)
-------- --------
Cash flows from financing activities:
Net increase in deposits 30,327 11,568
Proceeds from Federal Home Loan Bank
advances 37,009 7,047
Repayment of Federal Home Loan Bank
advances (35,734) (3,485)
Release of common stock held by ESOP 37 100
Purchase of RRP stock (270) --
Increase in mortgagors' escrow deposits 90 46
Purchase of common stock for ESOP -- (644)
Net proceeds from issuance of common stock -- 7,480
Purchase of treasury stock (477) --
-------- --------
Net cash provided by financing activities 30,982 22,112
-------- --------
Net change in cash and cash equivalents (3,919) (2,735)
Cash and cash equivalents at beginning of period 13,390 16,383
-------- --------
Cash and cash equivalents at end of period $ 9,471 $ 13,648
======== ========
Supplementary information:
Interest paid on deposits 3,718 2,987
Interest paid on Federal Home Loan
Bank advances 1,048 568
Income taxes paid 599 439
Decrease in due to/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 March 31, 2000 for the current
fiscal year, and January 1, 1999 through March 31, 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. 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 March 31, 2000, the Company had outstanding commitments to originate loans of
$6.4 million. Unused lines of credit available to customers amounted to $8.6
million, $8.1 million of which were equity lines of credit.
(5) Securities
The following table sets forth the Company's securities at the dates indicated.
March 31, 2000 June 30, 1999
--------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Available for Sale (Dollars in thousands)
Securities:
Federal agency obligations $45,649 $43,562 $41,909 $40,870
Mortgage-backed securities 17,190 16,228 17,620 16,975
Other debt securities 18,217 17,597 9,441 9,216
-------- -------- -------- ---------
Total debt securities 81,056 77,387 68,970 67,061
Marketable equity securities 3,896 3,586 2,746 2,851
-------- -------- -------- ---------
Total available for
sale securities $84,952 $80,973 $71,716 $69,912
======== ======== ======== =========
Held to Maturity Securities:
Other debt securities $4,763 $4,757 -- --
======== ======== ======== =========
(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.
March 31, 2000 June 30, 1999
----------------------- -------------------
Amount Percent Amount Percent
---------- ----------- --------- ---------
(Dollars in thousands)
Real estate loans:
Residential $ 58,396 58.42% $ 47,394 54.62%
Commercial 24,277 24.28 20,981 24.19
Construction 2,770 2.77 4,974 5.73
-------- -------- -------- ----------
Total real estate loans 85,443 85.47 73,349 84.54
Other loans:
Consumer loans:
Collateral 572 0.57 513 0.59
Home equity 4,867 4.87 4,591 5.29
Other 1,467 1.47 1,829 2.11
-------- -------- -------- ----------
Total consumer loans 6,906 6.91 6,933 7.99
Commercial business loans 7,618 7.62 6,481 7.47
-------- -------- -------- ----------
Total other loans 14,524 14.53 13,414 15.46
-------- -------- -------- ----------
Total loans 99,967 100.00% 86,763 100.00%
======== ======
Net deferred loan fees (45) (51)
Deferred premium 21 12
Allowance for loan losses (759) (740)
-------- -------
Total loans, net $ 99,184 $85,984
======== =======
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.
March 31, 2000 June 30, 1999
----------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Demand $ 15,926 9.74% $ 12,524 9.41%
NOW 18,921 11.57 21,082 15.83
Money market deposits 12,198 7.46 10,163 7.63
Regular and other savings 27,998 17.13 25,414 19.09
-------- ------ -------- ------
Total non-certificate
accounts 75,043 45.92 69,183 51.96
Term certificates 88,422 54.08 63,955 48.04
-------- ------ -------- ------
Total deposits $163,465 100.00% $133,138 100.00%
======== ====== ======== ======
The following is a list of advances from the Federal Home Loan Bank of Boston by
maturity date.
March 31, 2000 June 30, 1999
----------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
Maturities less than one year $ -- --% $ 5,218 20.07%
Maturities greater than one year 27,747 100.00 20,775 79.93%
------- ------- ------- -------
Total borrowed funds $27,747 100.00% $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 March 31, 2000 and June 30, 1999
Assets increased by $29.0 million, or 16.3 %, from $178.2 million at June 30,
1999 to $207.2 million at March 31, 2000. The increase reflected management's
growth strategy and was funded by the $30.3 million, or 22.8%, increase in total
deposits since June 30, 1999, and a $1.3 million, or 4.9%, increase in total
borrowings over this timeframe.
The funds provided during the nine months ended March 31, 2000 were invested
in securities available for sale and held to maturity and net loans which
increased $15.8 million, or 22.6%, and $13.2 million, or 15.4% respectively. The
two investment categories which changed materially within the securities
portfolios were federal agency obligations and other debt securities (primarily
corporate debt) which increased $2.7 million, or 6.6%, and $13.1 million, or
142.6%, respectively. Short-term investments, consisting of overnight funds
investments with large area financial institutions, decreased $2.1 million, or
38.5%, as the Bank deployed these funds into longer-term investment and loan
portfolios.
Net loans increased primarily because of a $11.0 million, or 23.2%, increase
in residential real estate loans since June 30, 1999. This increase was
primarily attributable to the purchase of three residential loan packages and
originated by other financial institutions in the Bank's geographical area
totaling $9.7 million. In addition, the origination of commercial real estate
loans and commercial secured and unsecured loans increased $3.3 million, or
15.7%, and $1.1 million, or 17.5%, respectively, since June 30, 1999. During
this same timeframe construction loans and other consumer loans declined $2.2
million, or 44.3%, and $362,000, or 19.8%, respectively, while home equity loans
increased $276,000, or 6.0%. The emphasis during the first nine months of the
fiscal year has been to increase the residential loan portfolio which had
declined due to the increase in loan payoffs and the increase in competition
from other financial institutions. It is the Bank's continued objective to
increase the residential fixed and variable products by originating loans within
the area serviced by the Bank's branch network. The purchase of loan packages
from other financial institutions will be considered as 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 growth in the commercial
loan portfolio, which generally provides higher yields than residential and
consumer loans, and potentially improves
9
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
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 $30.3 million in deposits was primarily attributable to a
$24.5 million, or 38.3%, increase in term certificates from June 30, 1999.
Within non-certificate accounts, demand deposit accounts, regular savings, and
money market deposits increased $3.4 million, or 27.2 %, $2.6 million, or 10.2%,
and $2.0 million, or 20.0%, respectively, while NOW accounts decreased $2.2
million, or 10.3% from June 30, 1999 to March 31, 2000. In addition, borrowings
increased $1.3 million, or 4.9% since June 30, 1999, primarily to partially fund
the purchase of the residential loan packages mentioned above.
Stockholders' equity decreased from $16.5 million, or 9.25% of total assets
at June 30, 1999 to $15.0 million, or 7.24% of total assets at March 31, 2000.
This decrease resulted primarily from an increase of $1.4 million since June 30,
1999 in unrealized losses 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 37,578 shares
for its Recognition and Retention Plan for $270,000. 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.
March 31, June 30,
2000 1999
---------- ----------
(Dollars in thousands)
Non-accrual loans:
One-to-four family real estate
loans $313 $317
Commercial loans 74 81
Consumer loans 14 --
---------- ----------
Total non-accrual loans 401 398
Other real estate owned -- --
---------- ----------
Total non-performing assets $401 $398
========== ==========
Allowance for loan losses $759 $740
========== ==========
10
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
March 31, June 30,
2000 1999
----------- ------------
Allowance for loan losses as a
percent of total loans, net 0.77% 0.86%
=========== ============
Allowance for loan losses as a
percent of non-accrual loans 189.28% 185.93%
=========== ============
Non-accrual loans as a percent of
total loans, net 0.40% 0.46%
=========== ============
Non-performing assets as a percent
of total assets 0.19% 0.22%
=========== ============
During the nine months ended March 31, 2000 the Bank added $140,000 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 $126,000 in loan charge-offs and $5,000 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 March 31, 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 March 31, 2000 was $131,000 as compared
to $277,000 for the three months ended March 31, 1999, a decrease of $146,000,
or 52.7%. This decrease was primarily attributable to increases of $375,000, or
28.6%, and $30,000, or 100.0%, in total operating expenses and the provision for
loan losses, respectively, as well and decreases of $95,000, or 74.2%, and
$20,000, or 100.0%, respectively, in the gains on sales of securities and loans.
Partially offsetting these were increases of $232,000, or 16.0%, and $45,000, or
29.4%, respectively, in net interest income and customer service fees.
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) decreased from 3.52%
for the three months ended March 31, 1999 to 3.38% for the three months ended
March 31, 2000. Interest rate margin (net interest income divided by average
earning assets) decreased from 4.07% to 3.74 %. The interest rate spread and
margin decreased primarily as a result of the increase of 47 basis points in
funding costs for both deposits and borrowings between periods due to Federal
Reserve interest rate increases since June 1999. Partially offsetting this was
an increase of 33 basis points in the yield on earning assets between periods 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 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 March 31,
-----------------
2000 1999
---- ----
Weighted average yield earned on:
Short-term investments 5.67% 4.83%
Investments 7.05% 6.28%
Total loans, net 8.14% 8.22%
-------- --------
All earning assets 7.61% 7.28%
Weighted average rate paid on:
Deposits 3.96% 3.59%
Borrowed funds 5.47% 5.03%
-------- --------
All interest-bearing
liabilities 4.23% 3.76%
-------- --------
Weighted average rate spread 3.38% 3.52%
======== ========
Net interest margin 3.74% 4.07%
======== ========
Earnings per share data for the three months ended March 31, 2000 was $0.08 for
both "basic" and "diluted" calculations as compared to $0.17 per share for both
"basic" and "diluted" calculations for the three months ended March 31, 1999.
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 $829,000, or 32.0%, from $2.6
million for the three months ended March 31, 1999 to $3.4 million for the
comparable period in 2000. This increase was primarily attributable to a $37.4
million, or 26.3%, increase in average earning assets between the two periods as
well as a 33 basis point increase in the yield on earning assets between the two
periods. The average balances in net loans increased $20.8 million, or 27.3%,
while total loan yield declined by 8 basis points to 8.14%. The average loan
balance within the loan portfolio for commercial loans increased by $8.9
million, while residential loans and other loan types grew by $11.9 million. The
non-commercial loans generally have lower yields than the commercial products
and hence would tend to have an influence on reducing the loan yield. In
addition, the loan yield decline was impacted by the competitive pricing from
other area financial institutions especially for commercial loans, which has
reduced the Bank's ability to price the loan products at similar rate levels as
those during previous reporting periods.
The average investment portfolio balance increased $16.8 million or 27.1%
over this same period and the portfolio yield improved by 77 basis points to
7.05%. 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 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 $213,000, or 5.5%, between
periods while the portfolio yield increased by 84 basis points to 5.67 % between
the two periods. This yield increase reflects the Federal Reserve Bank's
increase in short-term interest rates since June 1999.
Interest Expense
Interest expense on deposits increased $380,000, or 40.0%, from $958,000 for
the three months ended March 31, 1999, to $1.3 million for the three months
ended March 31, 2000. This increase was attributable to a $28.2 million, or
26.4%, increase in average interest-bearing deposit balances between periods,
while deposit rates increased from 3.59% to 3.96% over the same period. The
increase in the interest rates was primarily attributable to the growth of $24.8
million, or 43.7%, in higher-priced certificate accounts over this timeframe at
a time when the Federal Reserve 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 $29.2
million during the three months ended March 31, 2000, an increase of $14.7
million, or 101.5 % from the three months ended March 31, 1999. Over this same
timeframe, average borrowing rates increased slightly from 5.03% to 5.47%. These
borrowings were used in many cases to fund the purchase of investment securities
and residential mortgages 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 $217,000, or 119.2%, from $182,000 for the
three months ended March 31, 1999 to $399,000 for the three months ended March
31, 2000.
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 decreased $52,000, or 16.8 %, from $310,000 for the three
months ended March 31, 1999 to $258,000 for the same period in 2000. This change
was caused primarily by decreases of $95,000, or 74.2%, and $20,000, or 100.0%,
in the net gains on sales of securities and loans, respectively, which was
partially offset by the increase of $45,000, or 29.4%, in customer service fees
between periods. 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 $375,000, or 28.6%, from $1.3 million for
the three months ended March 31, 1999 to $1.7 million for the three months ended
March 31, 2000. Salaries and benefits and occupancy and equipment expenses
increased $242,000, or 38.1%, and $116,000, or 42.8%, 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 increased
only slightly from 3.46 % for the three months ended March 31, 1999 to 3.48% for
the 2000 period.
Income Taxes
The effective income tax rate was 32.1% and 33.7% for the three months ended
March 31, 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.
Comparison of Operating Results for the Nine Months Ended March 31, 2000 and
1999
General
Net income for the nine months ended March 31, 2000 was $633,000 as compared
to $774,000 for the nine months ended March 31, 1999, a decrease of $141,000, or
18.2%. This decrease was primarily attributable to increases of $1.1 million, or
28.7%, and $60,000, or 75.0%, in total operating expenses and the loan loss
provision, respectively, and decreases of $182,000, or 40.6%, and $50,000, or
100.0%, in the net gains on securities and loans, respectively. This decrease in
net income was partially offset by increases of $977,000, or 24.3%, and
$143,000, or 33.2%, in net interest income and customer service fees,
respectively. The customer service fees increased primarily due to increases in
Visa Debit card income, ATM surcharge income and NOW account and NSF fees.
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:
Nine months ended
March 31,
--------------------
2000 1999
---- ----
Weighted average yield earned on:
Short-term investments 5.44% 5.02%
Investments 6.94% 6.13%
Total loans, net 8.18% 8.47%
-------- -------
All earning assets 7.55% 7.33%
Weighted average rate paid on:
Deposits 3.82% 3.79%
Borrowed funds 5.34% 5.23%
-------- --------
All interest-bearing
liabilities 4.08% 3.96%
-------- --------
Weighted average rate spread 3.47% 3.37%
======== =========
Net interest margin 3.86% 3.89%
======== =========
Interest and Dividend Income
Total interest and dividend income increased by $2.2 million, or 29.1%, from
$7.6 million for the nine months ended March 31, 1999 to $9.8 million for the
comparable period in 2000. This increase was primarily attributable to a $34.9
million, or 25.3%, increase in average earning assets between the two periods
and a 22 basis point increase in the yield on earning assets. The average
balances in net loans increased $15.3 million, or 20.3%, while total loan yield
declined by 29 basis points to 8.18%. The loan yield decline was impacted by the
competitive pricing from other area financial institutions, and especially for
commercial loans, which has reduced the Bank's ability to price loan products at
similar rate levels as those during previous reporting periods.
The average investment portfolio balance increased $25.5 million, or 49.1 %,
over this same timeframe and its portfolio yield has improved by 81 basis points
to 6.94%. 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
ALCO management process discussed below. The average balance in short-term
investments declined $5.8 million, or 58.1%, between periods while the portfolio
yield increased by 42 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 $714,000, or 23.9%, from $3.0 million
for the nine months ended March 31, 1999, to $3.7 million for the nine months
ended March 31, 2000. This increase was attributable to a $24.1 million, or
22.9%, increase in average interest-bearing deposit balances between periods,
and an increase in deposit rates over the same period from 3.79% to 3.82%. The
increase in deposit interest rates was primarily due to the increase in interest
rates by the Federal Reserve 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 $27.0
million during the nine months ended March 31, 2000, an increase of $12.6
million, or 87.2% from the nine months ended March 31, 1999. Over this same
timeframe, average borrowing rates increased from 5.23% to 5.34%. These
borrowings were used in many cases to fund the purchase of investment securities
and mortgages 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 $516,000, or 91.0%, from $567,000 for the nine months ended
March 31, 1999 to $1.1 million for the nine months ended March 31, 2000.
Other Income
Total other income decreased $49,000, or 5.1%, from $959,000 for the nine
months ended March 31, 1999 to $910,000 for the same period in 2000. This change
was caused primarily by decreases of $182,000, or 40.6%, and $50,000, or 100.0%,
in the net gains on sales of securities and loans, respectively, which was
partially offset by an increase of $143,000, or 33.2%, in customer service fees
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 $1.1 million, or 28.7%, from $3.7 million
for the nine months ended March 31, 1999 to $4.8 million for the nine months
ended March 31, 2000. Salaries and benefits and occupancy and equipment expenses
increased $502,000 , or 25.9%, and $318,000, 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 3.38 % for the nine months
ended March 31, 1999 to 3.43% for the 2000 period.
Income Taxes
The effective income tax rate was 35.7% and 34.6% for the nine months ended
March 31, 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.
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 March 31, 2000 amounted to $27.3
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
17
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation(Continued)
guaranteed by the U.S. government or a government agency, and funds on deposit
with the FHLB. As of March 31, 2000, the Bank's total borrowing capacity was
$71.0 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 March 31, 2000, the Bank had $6.4 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 $77.6 million at March 31,
2000. Based upon historical experience, management believes that a significant
portion of such deposits will remain with the Bank.
At March 31, 2000, the Company and the Bank exceeded all regulatory capital
requirements.
Year 2000 ("Y2K") Disclosure
The Company had developed and implemented a plan to deal with the issues
associated with programming code within computer systems and related embedded
technology with respect to the rollover of the two digit year value to 00 ("Year
2000"). The issue was whether computer systems would properly recognize date
sensitive information when the year changed to 2000.
The Company has not experienced any significant issues associated with the
Year 2000 problem as a result of the date change to January 1, 2000 or any date
subsequent thereto. The Company's Y2K expenses since inception have been
immaterial to its financial performance. No additional material expenses are
anticipated. Management will continue to monitor operations throughout the year
2000, and, although no assurances can be given, it is not expected that any
future adverse developments will arise with respect to Year 2000.
18
<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
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: May 11, 2000 By: /s/ Eugene G. Stone
------------ --------------------------
Eugene G. Stone
President and Chief Executive Officer
Date: May 11, 2000 By: /s/ Warren W. Chase, Jr.
------------ -------------------------------
Warren W. Chase, Jr.
Senior Vice President and Treasurer
20
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<CASH> 6,119
<INT-BEARING-DEPOSITS> 500
<FED-FUNDS-SOLD> 3,352
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 80,975
<INVESTMENTS-CARRYING> 4,763
<INVESTMENTS-MARKET> 4,757
<LOANS> 99,943
<ALLOWANCE> 759
<TOTAL-ASSETS> 207,180
<DEPOSITS> 163,465
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,457
<LONG-TERM> 27,268
0
0
<COMMON> 17
<OTHER-SE> 14,973
<TOTAL-LIABILITIES-AND-EQUITY> 207,180
<INTEREST-LOAN> 5,573
<INTEREST-INVEST> 4,031
<INTEREST-OTHER> 176
<INTEREST-TOTAL> 9,780
<INTEREST-DEPOSIT> 3,699
<INTEREST-EXPENSE> 4,782
<INTEREST-INCOME-NET> 4,998
<LOAN-LOSSES> 140
<SECURITIES-GAINS> 266
<EXPENSE-OTHER> 4,784
<INCOME-PRETAX> 984
<INCOME-PRE-EXTRAORDINARY> 984
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 633
<EPS-BASIC> 0.39
<EPS-DILUTED> 0.39
<YIELD-ACTUAL> 7.55
<LOANS-NON> 401
<LOANS-PAST> 39
<LOANS-TROUBLED> 0
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<ALLOWANCE-OPEN> 740
<CHARGE-OFFS> 126
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</TABLE>
