Exhibit 13
Annual Report to Stockholders.
2000 ANNUAL REPORT TO STOCKHOLDERS
SERVICE BANCORP, INC.
<PAGE>
TABLE OF CONTENTS
Page
Message to Our Stockholders.................................................. 1
Selected Consolidated Financial and Other Data............................... 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 4
Common Stock and Related Matters............................................. 13
Stockholder Information...................................................... 14
Independent Auditors' Report................................................. 15
Consolidated Balance Sheets.................................................. 16
Consolidated Statements of Income............................................ 17
Consolidated Statements of Changes in Stockholders' Equity................... 18
Consolidated Statements of Cash Flows........................................ 19
Notes to Consolidated Financial Statements................................... 21
<PAGE>
[LETTERHEAD OF SERVICE BANCORP, INC.]
To Our Stockholders:
Service Bancorp, Inc. is pleased to present you with the second annual report of
the Company. The structure of the organization remains a two-tier mutual holding
company in which the Company owns 100% of the outstanding common stock of Strata
Bank, formerly known as Summit Bank. Service Bancorp, MHC owns 57% of the common
stock of the Company and 43% of the Company's common stock is owned by the
public.
The aggressive growth strategy of the Bank continued into the new year with a
new branch opening in Milford in January of 2000. The Bank terminated plans to
relocate a branch in Franklin and has since applied to open a storefront branch
in the Westborough Shopping Center in Westborough, Massachusetts. The Bank has
also applied to open a second assisted living facility branch office in
Worcester, Massachusetts.
During the year ended June 30, 2000 total assets increased from $178.2 million
to $219.4 million, an increase of $41.2 million or 23.2%. Net income after taxes
was $846,000 compared to $1.1 million in the prior year. The decrease was
attributable to an increase of non-interest expenses that was primarily due to
the opening of three branches since June of 1999 and one-time non-recurring
charges for the name change. Please review "Management's Discussion and Analysis
of Financial Condition and Results of Operations" for further details.
The Bank is making every effort to take advantage of technology in banking by
planning to introduce "Internet Banking" to deposit customers and small business
customers. The Bank has installed a wide area network and has upgraded all
customer service terminals to the latest sales and service technology.
In June of 2000, the Board of Directors of Strata Bank elevated Pamela Mozynski
from Senior Vice President of Retail Banking to President and Chief Operating
Officer of the Bank. The extensive search conducted by the Board of Directors of
the Bank determined the best candidate to succeed me upon my scheduled
retirement in 2001 was already on board.
The continued commitment and performance of our employees, management and Board
of Directors in addition to the support of our customers and stockholders have
permitted Service Bancorp, Inc. to continue to grow and prosper in these, the
best of times.
On behalf of the directors, officers and employees, thank you for your
confidence and trust.
Sincerely,
/s/ Eugene G. Stone
Eugene G. Stone
President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following information is derived from the audited consolidated
financial statements of Service Bancorp, Inc. (the "Company"), or prior to
October 7, 1998, Strata Bank (the "Bank," and formerly "Summit Bank"). For
additional information about the Company and the Bank, reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and related
notes included elsewhere herein.
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
2000 1999 1998 1997
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Total assets ................................. $219,433 $178,158 $138,952 $104,878
Loans receivable, net ........................ 106,422 85,984 76,735 66,934
Short-term investments ....................... 6,112 5,451 11,931 6,305
Mortgage-backed securities--available
for sale ................................... 16,028 16,975 5,980 2,745
Investment securities--available for sale .... 65,568 52,937 34,191 21,951
Investment securities--held to maturity ...... 4,771 -- -- --
Deposits ..................................... 176,345 133,138 112,247 92,897
Total borrowings ............................. 26,350 25,993 14,562 2,622
Stockholders' equity ......................... 15,178 16,479 10,123 8,695
</TABLE>
Summary of Operations
Years Ended June 30,
-------------------------------------
2000 1999 1998 1997
------- ------- ------- -------
(In Thousands)
Total interest and dividend income ..... $13,477 $10,419 $ 8,636 $ 7,037
Total interest expense ................. 6,723 4,830 4,116 3,174
------- ------- ------- -------
Net interest income ................. 6,754 5,589 4,520 3,863
Provision for loan losses .............. 220 178 100 35
------- ------- ------- -------
Net interest income, after provision
for loan losses ........................ 6,534 5,411 4,420 3,828
------- ------- ------- -------
Fees and service charges ............... 803 600 430 406
Gain on sales of loans and securities .. 336 723 833 493
Other non-interest income .............. 109 41 58 60
------- ------- ------- -------
Total non-interest income .............. 1,248 1,364 1,321 959
------- ------- ------- -------
Total non-interest expense ............. 6,487 5,130 3,908 3,094
------- ------- ------- -------
Income before income taxes ............. 1,295 1,645 1,833 1,693
Income tax provision ................... 449 561 632 611
------- ------- ------- -------
Net income ............................. $ 846 $ 1,084 $ 1,201 $ 1,082
======= ======= ======= =======
2
<PAGE>
Key Operating Ratios and Other Data
<TABLE>
<CAPTION>
At or for the Years Ended June 30,
-------------------------------------------------
2000 1999 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Performance Ratios:
Return on average assets ................... 0.44% 0.72% 1.02% 1.13%
Return on average stockholders' equity ..... 5.59% 7.23% 12.80% 13.58%
Average interest rate spread ............... 3.41% 3.44% 3.60% 3.86%
Net interest margin (1) .................... 3.80% 3.95% 4.05% 4.29%
Ratio of operating expense to average assets 3.39% 3.41% 3.31% 3.24%
Ratio of average interest-earning assets to
average interest-bearing liabilities .... 110.33% 115.07% 112.21% 112.38%
Efficiency ratio (2) ....................... 81.07% 73.78% 66.91% 64.16%
Asset Quality Ratios:
Non-accrual loans and other real estate
owned to total assets ...................... 0.20% 0.22% 0.21% 0.22%
Allowance for loan losses as a percent
of non-accrual loans ....................... 185.65% 185.93% 199.65% 246.11%
Allowance for loan losses as a percent of
loans receivable, net ................... 0.75% 0.86% 0.75% 0.71%
Capital Ratios and Data:
Stockholders' equity to total assets ....... 6.92% 9.25% 7.29% 8.29%
Average stockholders' equity to average
assets ..................................... 7.90% 9.96% 7.94% 8.33%
Net book value per share ................... $ 9.70 $ 9.97 N/A N/A
Other Data:
Number of full-service offices ............. 8 7 5 4
Number of deposit accounts ................. 21,656 17,764 16,488 15,598
Number of loans outstanding ................ 2,177 1,757 1,695 1,557
</TABLE>
----------
(1) Net interest income divided by average interest-earning assets.
(2) Non-interest expense divided by the sum of net interest income and
non-interest income.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
In addition to historical information, this document contains
forward-looking statements. The forward-looking statements contained in the
following sections are subject to certain risks and uncertainties that could
cause actual results to differ materially from those projected in the
forward-looking statements. Important factors that might cause such a difference
include, but are not limited to, those discussed. Readers should not place undue
reliance on these forward- looking statements, as they reflect management's
analysis as of the date of this report. The Company has no obligation to update
or revise these forward-looking statements to reflect events or circumstances
that occur after the date of this report. Readers should carefully review the
risk factors described in other documents the Company files from time to time
with the SEC, including quarterly reports on Form 10-QSB and current reports
filed on Form 8-K.
General
The Company's results of operations depend primarily on its net interest
income, which is the difference between the income earned on the Company's loan
and securities portfolios and its cost of funds, consisting of the interest paid
on deposits and borrowings. Results of operations are also affected by the
Company's provision for loan losses, gains and losses from sales of securities,
and non-interest expenses. The Company's non-interest expenses consist
principally of compensation and employee benefits, occupancy, equipment and data
processing, and other operating expenses. Results of operations are also
significantly affected by general economic and competitive conditions, changes
in interest rates, as well as government policies and actions of regulatory
authorities. Future changes in applicable law, regulations or government
policies may materially affect the Company.
In this document, the Company is being discussed on a consolidated basis
with its wholly-owned subsidiary, the Bank. References to the Company may
signify the Bank, depending on the context of the reference.
Management of Credit Risk
Management considers credit risk to be an important risk factor affecting
the financial condition and operating results of the Company. The potential for
loss associated with this risk factor is managed through a combination of
policies approved by the Company's Board of Directors, the monitoring of
compliance with these policies, and the periodic reporting and evaluation of
loans with problem characteristics. Policies relate to the maximum amount that
can be granted to a single borrower and such borrower's related interests, the
aggregate amount of loans outstanding by type in relation to total assets and
capital, loan concentrations, loan-to-collateral-value ratios, approval limits
and other underwriting criteria. Policies also exist with respect to performing
credit reviews by an officer not involved in loan origination, the rating of
loans, when loans should be placed in a non-performing status, and the factors
that should be considered in establishing the Company's allowance for loan
losses.
Management of Interest Rate Risk
Another important risk factor affecting the financial condition and
operating results of the Company is interest rate risk. This risk is managed by
periodic evaluation of the interest rate risk inherent in certain balance sheet
accounts, determination of the level of risk considered appropriate given the
Company's capital and liquidity requirements, business strategy, performance
objectives and operating environment, and maintenance of such risks within
guidelines approved by the Board of Directors. Through such management, the
Company seeks to reduce the vulnerability of its operations to changes in
interest rates. The Company's Asset/Liability Committee, comprised of senior
management, is responsible for managing interest rate risk and reviewing with
the Board of Directors on a quarterly basis its activities and strategies, the
effect of those strategies on the Company's operating results, the Company's
interest rate risk position, and the effect changes in interest rates would have
on the Company's net interest income. The extent of movement of interest rates
is an uncertainty that could have a negative impact on the earnings of the
Company.
4
<PAGE>
The principal strategies used by the Company to manage interest rate risk
include (1) emphasizing the origination and retention of both adjustable-rate
and fixed-rate loans, (2) originating shorter-term fixed-rate commercial real
estate loans, (3) investing in debt securities with maturities with shorter call
dates of 2 to 5 years, (4) classifying most of the Company's investment
portfolio as available for sale so as to provide sufficient flexibility in
liquidity management, and (5) maintaining a high concentration of less
interest-rate-sensitive and lower-costing "core deposits".
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is deemed to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period and
the amount of interest bearing-liabilities maturing or repricing within that
same time period. At June 30, 2000, the Company's cumulative one-year gap
position, the difference between the amount of interest-earning assets maturing
or repricing within one year and interest-bearing liabilities maturing or
repricing within one year, was a negative 25.6%. A gap is considered positive
when the amount of interest rate sensitive assets exceeds the amount of interest
rate sensitive liabilities. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Accordingly, during a period of rising interest rates, an
institution with a negative gap position generally would not be in as favorable
a position, compared to an institution with a positive gap, to invest in higher
yielding assets. The resulting yield on the institution's assets generally would
increase at a slower rate than the increase in its cost of interest-bearing
liabilities. Conversely, during a period of falling interest rates, an
institution with a negative gap would tend to experience a repricing of its
assets at a slower rate than its interest-bearing liabilities which,
consequently, would generally result in its net interest income growing at a
faster rate than an institution with a positive gap position.
The following table sets forth the amortized cost of interest-earning
assets and interest-bearing liabilities outstanding at June 30, 2000, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. Except as stated below, the amount of
assets and liabilities shown which reprice or mature during a particular period
were determined in accordance with the earlier of the repricing term or the
contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at June 30,
2000, on the basis of contractual maturities, anticipated prepayments and
scheduled rate adjustments within a three month period and subsequent selected
time intervals. The loan amounts in the table reflect principal balances
expected to be redeployed and/or repriced as a result of contractual
amortization and anticipated prepayments of adjustable-rate and fixed-rate
loans, and as a result of contractual rate adjustments on adjustable-rate loans.
The annual prepayment rate for loans (other than consumer loans) and
mortgage-backed securities is assumed to range between 8% and 12% depending upon
the type of loan, and the annual prepayment rate for consumer loans is assumed
to be 25%. Finally, the Company made a decision during fiscal 1999 to invest in
agency obligations and corporate debt with longer maturities to lock in higher
yields and enhance interest income performance. The agency and corporate debt
obligations have maturities ranging from 5 to 15 years, a principal portion of
which have call features of between 2 to 5 years. The GAP table generally
presents the full contractual maturity of these obligations, notwithstanding the
call features.
5
<PAGE>
<TABLE>
<CAPTION>
Amounts maturing or repricing at June 30, 2000
------------------------------------------------
Less
Than Three 3-6 6 Months to 1-3
Months Months 1 Year Years
---------- -------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable (2) ........................................ $ 18,815 $ 8,738 $ 17,820 $ 32,950
Short-term investments ...................................... 6,112 -- -- --
Mortgage-backed securities - available for sale ............. 401 401 802 3,206
Debt securities - held to maturity .......................... -- -- -- 482
Debt securities - available for sale and
certificates of deposit ................................. -- 200 -- 5,305
Equity securities ........................................... -- -- -- --
FHLB stock .................................................. -- -- -- --
-------- -------- -------- --------
Total interest-earning assets ............................ 25,328 9,339 18,622 41,943
-------- -------- -------- --------
Interest-bearing liabilities:
Savings deposits (3)(4) ..................................... 3,625 3,625 3,625 3,625
Money market deposits (3) ................................... 1,624 1,624 1,624 1,624
NOW deposits (5) ............................................ 4,222 4,222 4,222 4,222
Certificate accounts ........................................ 26,064 14,277 40,585 11,170
FHLB advances ............................................... 87 2 5 2,018
-------- -------- -------- --------
Total interest-bearing liabilities ....................... $ 35,622 $ 23,750 $ 50,061 $ 22,659
-------- -------- -------- --------
Interest sensitivity gap (6) .................................. $(10,294) $(14,411) $(31,439) $ 19,284
======== ======== ======== ========
Cumulative interest sensitivity gap ........................... $(10,294) $(24,705) $(56,144) $(36,860)
======== ======== ======== ========
Cumulative interest sensitivity gap as a percentage of
total assets ................................................ (4.69)% (11.26)% (25.59)% (16.80)%
Cumulative interest sensitivity gap as a percentage of
total interest-earning assets ............................... (5.02)% (12.05)% (27.40)% (17.99)%
Cumulative interest-earning assets as a percentage of
cumulative interest-bearing liabilities ..................... 71.10% 58.39% 48.70% 72.10%
<CAPTION>
Amounts maturing or repricing at June 30, 2000
----------------------------------------------
3-5 5-10 Over 10
Years Years Years Total
-------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets(1):
Loans receivable (2) ......................................... $ 19,223 $ 3,631 $ 5,568 $106,745
Short-term investments ....................................... -- -- -- 6,112
Mortgage-backed securities - available for sale .............. 3,206 8,860 -- 16,876
Debt securities - held to maturity ........................... 2,977 1,312 -- 4,771
Debt securities - available for sale and
certificates of deposit ................................... 13,867 41,164 4,590 65,126
Equity securities ............................................ -- -- 3,724 3,724
FHLB stock ................................................... -- -- 1,588 1,588
-------- -------- -------- --------
Total interest-earning assets ............................. 39,273 54,967 15,470 204,942
-------- -------- -------- --------
Interest-bearing liabilities:
Savings deposits (3)(4) ...................................... -- -- 14,498 28,998
Money market deposits (3) .................................... -- -- 6,496 12,992
NOW deposits (5) ............................................. -- -- 5,633 22,521
Certificate accounts ......................................... 54 -- -- 92,150
FHLB advances ................................................ 7,018 16,549 671 26,350
-------- -------- -------- --------
Total interest-bearing liabilities ........................ $ 7,072 $ 16,549 $ 27,298 183,011
-------- -------- -------- --------
Interest sensitivity gap (6) ................................... $ 32,201 $ 38,418 $(11,828)
======== ======== ========
Cumulative interest sensitivity gap ............................ $ (4,659) $ 33,759 $ 21,931
======== ======== ========
Cumulative interest sensitivity gap as a percentage of
total assets ................................................. (2.12)% 15.38% 9.99%
Cumulative interest sensitivity gap as a percentage of
total interest-earning assets ................................ (2.27)% 16.47% 10.70%
Cumulative interest-earning assets as a percentage of
cumulative interest-bearing liabilities ...................... 96.65% 121.68% 111.98%
</TABLE>
-------------------------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) For the purposes of the gap analysis, the allowance for loan losses,
deferred loan fees, unearned income, and non-accrual loans have been
excluded.
(3) 50% of regular savings and money market account balances is included in
the over 10 year period; the remaining 50% of such balances is spread
evenly within the four intervals up to and including the one- to
three-year period.
(4) Includes mortgagors' escrow payments.
(5) 25% of NOW account balances are included in the over 10 year period; the
remaining balances are spread evenly within the four intervals up to and
including the one- to three-year period.
(6) Interest sensitivity gap represents the difference between
interest-earning assets and interest-bearing liabilities.
6
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in
the GAP table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets such as adjustable-rate loans, have features
which restrict changes in interest rates both on a short-term basis and over the
life of the asset. Further, in the event of changes in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of many borrowers
to service their adjustable-rate loans may decrease in the event of an interest
rate increase.
Analysis of Net Interest Income
Net interest income represents the difference between interest income on
interest-earning assets and interest expense on interest-bearing liabilities.
Net interest income also depends on the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rates earned or paid on
them.
7
<PAGE>
Average Balance Sheet. The following table presents, for the periods
indicated, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, expressed both in dollars and
rates. No tax equivalent adjustments were made. All average balances are monthly
average balances. Non-accruing loans have been included in the table as loans
carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------------------
2000 1999
---------------------------------- -------------------------------
Interest Interest
Average Earned/ Average Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) .................................... $ 93,559 $ 7,644 8.17% $ 75,724 $ 6,400 8.45%
Mortgage-backed securities ............................. 17,375 1,127 6.49 9,207 559 6.07
Debt securities(2) ..................................... 56,637 4,259 7.52 43,614 2,927 6.71
Equity securities ...................................... 4,930 112 2.27 3,228 98 3.04
FHLB stock ............................................. 1,444 101 6.99 820 53 6.46
Short-term investments ................................. 3,565 234 6.56 8,802 382 4.34
-------- -------- -------- --------
Total interest-earning assets ....................... 177,510 13,477 7.59 141,395 10,419 7.37
-------- --------
Non-interest-earning assets ............................... 14,079 9,150
-------- --------
Total assets ........................................ $191,589 $150,545
======== ========
Interest-bearing liabilities:
Savings deposits(3) .................................... $ 27,137 574 2.12 $ 24,022 556 2.31
Money market deposits .................................. 11,310 321 2.84 9,699 262 2.70
NOW accounts ........................................... 16,669 133 0.80 16,837 147 0.87
Certificate accounts ................................... 78,348 4,187 5.34 56,294 3,033 5.39
FHLB borrowings ........................................ 27,431 1,508 5.50 16,024 832 5.19
-------- -------- -------- --------
Total interest-bearing liabilities .................. 160,895 6,723 4.18 122,876 4,830 3.93
-------- --------
Demand deposits ........................................... 14,173 11,583
Other non-interest bearing liabilities .................... 1,390 1,097
Stockholders' equity ...................................... 15,131 14,989
-------- --------
Total liabilities and stockholders' equity ............. $191,589 $150,545
======== ========
Net interest income ....................................... $ 6,754 $ 5,589
======== ========
Net interest spread ....................................... 3.41% 3.44%
==== ====
Net earning assets ........................................ $ 16,615 $ 18,519
======== ========
Net yield on average interest-earning assets .............. 3.80% 3.95%
==== ====
Average interest-earning assets to average interest-bearing
liabilities ............................................ 110.33% 115.07%
====== ======
<CAPTION>
Year Ended June 30,
-----------------------------------
1998
-----------------------------------
Interest
Average Earned/
Balance Paid Yield/Rate
------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable(1) .................................... $ 70,730 $ 6,121 8.65%
Mortgage-backed securities ............................. 4,315 252 5.84
Debt securities(2) ..................................... 28,281 1,895 6.70
Equity securities ...................................... 2,662 70 2.63
FHLB stock ............................................. 612 40 6.54
Short-term investments ................................. 4,952 258 5.21
-------- --------
Total interest-earning assets ....................... 111,552 8,636 7.74
--------
Non-interest-earning assets ............................... 6,628
--------
Total assets ........................................ $118,180
========
Interest-bearing liabilities:
Savings deposits(3) .................................... $ 21,711 550 2.53
Money market deposits .................................. 8,925 256 2.87
NOW accounts ........................................... 12,949 169 1.31
Certificate accounts ................................... 48,266 2,721 5.64
FHLB borrowings ........................................ 7,566 420 5.55
-------- --------
Total interest-bearing liabilities .................. 99,417 4,116 4.14
--------
Demand deposits ........................................... 8,482
Other non-interest bearing liabilities .................... 897
Stockholders' equity ...................................... 9,384
--------
Total liabilities and stockholders' equity ............. $118,180
========
Net interest income ....................................... $ 4,520
========
Net interest spread ....................................... 3.60%
====
Net earning assets ........................................ $ 12,135
========
Net yield on average interest-earning assets .............. 4.05%
====
Average interest-earning assets to average interest-bearing
liabilities ............................................ 112.21%
======
</TABLE>
----------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Debt securities include certificates of deposit.
(3) Savings deposits include mortgagors' escrow accounts.
8
<PAGE>
Rate/Volume Analysis. The following table presents the dollar amount of
changes in interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities. It distinguishes
between the changes related to outstanding balances and that due to the changes
in interest rates. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii)
changes in rate (i.e., changes in rate multiplied by old volume). For purposes
of this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
Years Ended June 30, Years Ended June 30,
----------------------------------- ---------------------------------
2000 vs. 1999 1999 vs. 1998
----------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
-------------------- Increase -------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- ---------- ------- ------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income:
Loans receivable ......... $ 1,463 $ (219) $ 1,244 $ 423 $ (144) $ 279
Mortgage-backed securities 527 41 568 297 10 307
Debt securities .......... (290) 142 (148) 1,029 3 1,032
Other .................... 949 383 1,332 28 13 41
Short-term investments ... 87 (25) 62 173 (49) 124
------- ------- ------- ------- ------- -------
Total ................. 2,736 322 3,058 1,950 (167) 1,783
------- ------- ------- ------- ------- -------
Interest expense:
Savings deposits ......... 66 (48) 18 56 (50) 6
Money market deposits .... 45 14 59 22 (16) 6
NOW deposits ............. (2) (12) (14) 43 (65) (22)
Certificate accounts ..... 1,182 (28) 1,154 437 (125) 312
FHLB borrowings .......... 624 52 676 441 (29) 412
------- ------- ------- ------- ------- -------
Total ................. 1,915 (22) 1,893 999 (285) 714
------- ------- ------- ------- ------- -------
Net interest income ......... $ 821 $ 344 $ 1,165 $ 951 $ 118 1,069
======= ======= ======= ======= ======= =======
</TABLE>
9
<PAGE>
Comparison of Financial Condition at June 30, 2000 and June 30, 1999
Assets increased by $41.2 million, or 23.2%, from $178.2 million at June
30, 1999 to $219.4 million at June 30, 2000. Funding for this increase was
attributable primarily to an increase in deposits of $43.2 million, or 32.5%,
from $133.1 million to $176.3 million. In addition, total borrowings increased
$357,000, or 1.4%, from $26.0 million to $26.4 million over the same time frame.
Net loans increased $20.4 million, or 23.8%, from June 30, 1999 to June
30, 2000. Most of this increase can be attributed to the $14.9 million, or
31.8%, growth in residential mortgage loans as the Bank supplemented its own
loan originations with $9.7 million in purchased loans, all of which are secured
by real estate in Massachusetts and originated by financial institutions in
Massachusetts. In addition, commercial mortgage loans, fixed and revolving home
equity loans, and commercial business loans increased $4.1 million, or 19.3%,
$2.5 million, or 48.0%, and $1.3 million, or 19.8%, respectively. Conversely,
construction loans and collateral and other consumer loans decreased $2.2
million, or 44.9%, and $79,000, or 3.3%, respectively.
Investment securities (both available for sale and held to maturity)
increased $16.5 million, or 23.5%, from $69.9 million at June 30, 1999 to $86.4
million at June 30, 2000. Most of this increase was in other debt securities
(primarily corporate bonds) which increased $14.1 million, or 153.5%. Federal
agencies and marketable equity securities increased $2.8 million, or 6.8%, and
$463,000, or 16.2%, respectively, while mortgage-backed securities decreased
$947,000, or 5.6%. In addition, short-term investments increased $661,000, or
12.1%, between June 30, 1999 and June 30, 2000, while certificates of deposits
decreased $400,000, or 80.0%, during the fiscal year.
Deposits increased $43.2 million, or 32.5% from June 30, 1999 to June 30,
2000. Term certificates and non- certificate accounts increased $28.2 million,
or 44.1 %, and $15.0 million or 21.7%, respectively, during this time frame. In
addition, borrowings increased $357,000, or 1.4%, over this same period.
The Bank had increases in certain other asset categories during the year.
Banking premises increased by $211,000, primarily due to the opening of a new
retail branch office in January 2000 and Bank-owned life insurance purchased
during the year which, as of June 30, 2000, had a cash surrender value of $2.1
million. The increase in accrued interest receivable was primarily attributable
to the increases in loan and investment securities balances, while net deferred
tax assets increased due to the tax effect of the increase in net unrealized
loss on securities available for sale.
Stockholders' equity decreased from $16.5 million, or 9.25% of total
assets at June 30, 1999 to $15.2 million, or 6.92% of total assets at June 30,
2000. The decrease resulted primarily from $1.5 million in unrealized loss on
securities available for sale, which is reported as accumulated other
comprehensive loss, and the repurchase of treasury and Recognition and Retention
Plan stock during the fiscal year which reduced stockholders' equity by $477,000
and $261,000, respectively. These decreases were partially offset by net income
earned for the fiscal year.
Comparison of Operating Results for the Fiscal Years Ended June 30, 2000 and
June 30,1999
General. Net income decreased by $238,000, or 22.0%, to $846,000 for the
year ended June 30, 2000 from $1.1 million for the year ended June 30, 1999.
This decrease was primarily attributable to increases of $1.4 million and
$42,000, respectively, in total operating expenses and the provision for loan
losses and a decrease of $387,000 in the gain on sales of securities and loans.
These results were partially offset by increases of $1.2 million and $203,000 in
net interest income and customer service fees, respectively.
The Bank's interest rate spread (the difference between yields earned on
earning assets and rates paid on deposits and borrowings) declined slightly from
3.44% for the year ended June 30, 1999 to 3.41% for the year ended June 30,
2000. During the same period, interest rate margin (net interest income divided
by average earning assets) decreased from 3.95% to 3.80%. The decline was
primarily attributable to higher rates on deposits and borrowings, partially
offset by higher yields on all earning assets.
10
<PAGE>
Interest and Dividend Income. Total interest and dividend income increased
by $3.1 million, or 29.4%, from $10.4 million for the twelve months ended June
30, 1999 to $13.5 million for the comparable period in 2000. This increase was
primarily attributable to a $36.1 million, or 25.5%, 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 $17.8 million, or
23.6%, while total loan yield declined by 28 basis points to 8.17%. This loan
yield decline was primarily attributable to the fact that most of the increase
in net loans was in the residential loan portfolio which, due to competitive
market conditions, usually has lower yields on new loan originations than other
loan products in the portfolio. In addition, commercial loans were impacted by
current market conditions and the pricing for new commercial loan originations
was impacted by the loan pricing of the Bank's competition.
The average investment (including debt, equity, and short-term
investments) and mortgage-backed securities portfolios balances increased $10.1
million, or 17.9%, and $8.2 million, or 88.7%, respectively between the fiscal
years and their portfolio yields improved by 94 and 42 basis points,
respectively. The Bank decided to invest in federal agency, corporate
obligations, and government agency sponsored mortgage-backed securities with
longer maturities and higher yields in order to improve the interest rate
margin. This approach was able to stabilize the interest spread between
reporting periods and partially offset the increase in cost of funds over the
same period.
Interest Expense. Interest expense on deposits increased $1.2 million, or
30.4%, from $4.0 million for the twelve months ended June 30, 1999, to $5.2
million for the same period for 2000. This increase was attributable to a $38.0
million, or 30.9%, increase in average interest-bearing deposit balances between
periods and an increase of 17 basis points in deposit rates over the same
period. The increase in deposit interest rates was primarily due to the
increased interest rate environment between the two periods.
Interest expense on borrowings increased by $676,000, or 81.3%. The Bank
increased its use of borrowings from the Federal Home Loan Bank of Boston (the
"FHLB") between June 30, 1999 and June 30, 2000 as average balances increased
$11.4 million, or 71.2%, while the cost of funds on these borrowings increased
from 5.19% to 5.50% between these periods. 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 asset-liability management
performance of the Bank.
Provision for Loan Losses. The provision for loan losses increased by
$42,000, from $178,000 for the year ended June 30, 1999 to $220,000 for the
comparable period in 2000. The increase reflected a desire by management to keep
the allowance for loan losses at a level to properly match loan growth,
especially in the commercial loan area. The ratio of non-accruing loans and
other real estate owned to total assets was 0.20% at June 30, 2000, as compared
to 0.22%, at June 30, 1999. The allowance for loan losses was $802,000 at June
30, 2000 and $740,000 at June 30, 1999, respectively. While management believes
that, based on information currently available, the Bank's allowance for loan
losses is sufficient to cover losses inherent in its loan portfolio at this
time, no assurances can be given that the level of the Bank's allowance will be
sufficient to cover future loan losses incurred by the Bank 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.
Non-interest Income. Total non-interest income decreased $116,000, or
8.5%, from $1.4 million for the twelve months ended June 30, 1999 to $1.2
million for the same period in 2000. This decrease was primarily attributable to
a reduction of $387,000, or 53.5%, in the gain on sale of securities and loans
between periods. This was partially offset by an increase in customer service
fees of $203,000, from $600,000 to $803,000, primarily because of the increase
in Visa Debit card and ATM surcharge fees between periods. In addition,
miscellaneous income increased by $68,000 primarily due to the increase in the
cash surrender value of the Bank-owned life insurance purchased during the year.
Non-interest Expense. Total non-interest expense increased $1.4 million,
or 26.5 %, from $5.1 million for the twelve months ended June 30, 1999 to $6.5
million for the comparable period in 2000. Between the two periods, salaries and
benefits and occupancy and equipment expenses increased $594,000 or 22.5% and
$418,000 or 41.2%, respectively.
11
<PAGE>
Much of the increase in expense was attributed to the Bank's asset growth as
management added staff and incurred costs for the new branches opened during the
year and to service the full range of retail and loan products added to the
Bank's product lines. In addition, there were $105,000 in one-time non-recurring
expenses attributable to the Bank's name change. Despite the increase in
noninterest expense, the ratio of operating expenses to average assets decreased
slightly from 3.41% for the year ended June 30, 1999 to 3.39% for the year ended
June 30, 2000.
Income Taxes. The effective income tax rate was 34.7% and 34.1% for the
twelve months ended June 30, 2000 and 1999, respectively. The effective tax
rates reflect the utilization by the Bank of securities investment subsidiaries
to substantially reduce state income tax rates.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and interest
payments on loans and debt securities and borrowings from the FHLB. While
maturities and scheduled amortization of loans are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by interest rate
trends, economic conditions and competition.
The Company's most liquid assets are cash and due from banks, short-term
investments, and debt securities. The levels of these assets are dependent on
the Company's operating, financing, lending and investment activities during any
given period. At June 30, 2000, cash and due from banks, short-term investments,
and debt securities maturing within one year amounted to $14.4 million, or 6.6%
of total assets. Additional funds amounting to $47.0 million will be available
during the next year from the prepayment of loans and mortgage-backed
securities.
At June 30, 2000, the Company had commitments to originate loans, unused
outstanding lines of credit and undisbursed proceeds of loans totaling $22.5
million. The Company anticipates that it will have sufficient funds available to
meets its current loan commitments. Certificates of deposit maturing within one
year from June 30, 2000 amounted to $80.9 million. The Company expects that
substantially all of the maturing certificate accounts will be retained by the
Company at maturity.
At June 30, 2000, the Company exceeded all of its regulatory requirements
with a Tier 1 capital of $17.4 million, or 13.3% of risk-weighted assets, which
is above the required level of $5.2 million or 4.0%, and total capital of $18.2
million, or 13.9% of risk-weighted assets, which is above the required level of
$10.4 million, or 8.0%.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollar amounts without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
industrial companies, nearly all of the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
Impact of New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which, as amended by SFAS No. 137 and 138,
is effective for fiscal years beginning after June 15, 2000. This Statement
establishes accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as assets or
liabilities in the balance sheet and measures them at fair value. Management is
currently evaluating the impact of adopting this Statement on the consolidated
financial statements, but does not anticipate that it will have a material
impact.
12
<PAGE>
COMMON STOCK AND RELATED MATTERS
The Company's Common Stock is listed on the Over-the-Counter Bulletin
Board under the symbol "SERC." As of September 8, 2000, the Company had seven
registered market makers, 472 stockholders of record (excluding the number of
persons or entities holding stock in street name through various brokerage
firms), and 1,603,877 shares outstanding. As of such date, Service Bancorp, MHC
(the "Mutual Company"), the Company's mutual holding company, held 907,694
shares of common stock and stockholders other than the Mutual Company held
696,183 shares.
The following table sets forth market price and dividend information for
the Common Stock since the completion of the Company's reorganization into the
two-tier mutual holding company structure, which was completed on October 7,
1998.
Fiscal Year Ended Cash Dividends
June 30, 2000 High Low Declared
----------------- -------- ------- --------------
First quarter $ 9.13 $ 8.00 None
Second quarter 7.88 6.50 None
Third quarter 8.13 6.31 None
Fourth quarter 7.00 5.94 None
Fiscal Year Ended Cash Dividends
June 30, 1999 High Low Declared
----------------- -------- ------- --------------
Third quarter $ 9.59 $ 8.00 None
Fourth quarter 8.63 7.00 None
Payment of dividends on the Company's common stock is subject to
determination and declaration by the Board of Directors and depends upon a
number of factors, including capital requirements, regulatory limitations on the
payment of dividends, the Company's results of operations and financial
condition, tax considerations and general economic conditions. No assurance can
be given that dividends will be declared or, if declared, what the amount of
dividends will be, or whether such dividends, once declared, will continue.
13
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Stockholders will be held at 3:00 P.M. on October 24,
2000, at the Courtyard by Marriott Hotel, 10 Fortune Boulevard, Milford,
Massachusetts.
Stock Listing
Over-the-Counter Bulletin Board
Symbol: SERC
Special Counsel
Luse Lehman Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W., Suite 400
Washington, D.C. 20015
Independent Auditors
Wolf & Company, P.C.
One International Place
Boston, MA 02110
Transfer Agent and Registrar
Continental Stock Transfer and Trust Co.
2 Broadway
New York, New York 10004
(212) 509-4000
Contact our transfer agent directly for assistance in changing your address,
elimination of duplicate mailings, transferring stock, or replacing lost, stolen
or destroyed stock certificates.
Annual Report on Form 10-KSB
A copy of the Company's Form 10-KSB for the fiscal year ended June 30, 2000,
will be furnished without charge to stockholders as of September 8, 2000, upon
written request to Warren W. Chase, Jr., Senior Vice President, Service Bancorp,
Inc., 81 Main Street, Medway, Massachusetts 02053.
14
<PAGE>
[LETTERHEAD OF WOLF & COMPANY, P.C.]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Service Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Service Bancorp,
Inc. and subsidiary as of June 30, 2000 and 1999, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Service Bancorp,
Inc. and subsidiary as of June 30, 2000 and 1999, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
July 28, 2000
15
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
ASSETS
June 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Cash and due from banks $ 8,133 $ 7,939
Short-term investments 6,112 5,451
--------- ---------
Total cash and cash equivalents 14,245 13,390
--------- ---------
Certificates of deposit 100 500
Securities available for sale 81,596 69,912
Securities held to maturity 4,771 --
Federal Home Loan Bank stock, at cost 1,588 1,300
Loans 107,224 86,724
Less allowance for loan losses (802) (740)
--------- ---------
Loans, net 106,422 85,984
--------- ---------
Banking premises and equipment, net 4,223 4,012
Accrued interest receivable 2,007 1,678
Net deferred tax asset 1,937 1,081
Bank-owned life insurance 2,070 --
Other assets 474 301
--------- ---------
$ 219,433 $ 178,158
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 176,345 $ 133,138
Federal Home Loan Bank advances 26,350 25,993
Other liabilities 1,560 2,548
--------- ---------
Total liabilities 204,255 161,679
--------- ---------
Commitments and contingencies (Notes 11 and 13)
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 12,000,000 shares
authorized, 1,712,630 shares issued 17 17
Additional paid-in capital 7,426 7,444
Retained earnings 11,630 10,784
Accumulated other comprehensive loss (2,638) (1,182)
Treasury stock, at cost (68,506 and 10,000 shares, respectively) (560) (83)
Unearned ESOP shares (43,662 and 50,101 shares, respectively) (436) (501)
Unearned RRP shares (36,482 shares) (261) --
--------- ---------
Total stockholders' equity 15,178 16,479
--------- ---------
$ 219,433 $ 178,158
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
2000 1999
---------- -------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 7,644 $ 6,400
Interest and dividends on securities
and Federal Home Loan Bank stock 5,599 3,573
Interest on short-term investments and certificates of deposit 234 446
---------- -------
Total interest and dividend income 13,477 10,419
---------- -------
Interest expense:
Interest on deposits 5,215 3,998
Interest on FHLB advances 1,508 832
---------- -------
Total interest expense 6,723 4,830
---------- -------
Net interest income 6,754 5,589
Provision for loan losses 220 178
---------- -------
Net interest income, after provision for loan losses 6,534 5,411
---------- -------
Other income:
Customer service fees 803 600
Gain on sales of securities available for sale, net 336 670
Gain on sales of loans -- 53
Miscellaneous 109 41
---------- -------
Total other income 1,248 1,364
---------- -------
Operating expenses:
Salaries and employee benefits 3,234 2,640
Occupancy and equipment expenses 1,433 1,015
Data processing expenses 410 363
Professional fees 269 238
Advertising expenses 214 182
Other general and administrative expenses 927 692
---------- -------
Total operating expenses 6,487 5,130
---------- -------
Income before income taxes 1,295 1,645
Provision for income taxes 449 561
---------- -------
Net income $ 846 $ 1,084
========== =======
Weighted average shares outstanding (basic and diluted) 1,595,648 N/A
========== =======
Earnings per share (basic and diluted) $ 0.53 N/A
========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended June 30, 2000 and 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive Treasury ESOP RRP
Stock Capital Earnings Income (Loss) Stock Shares Shares Total
----- ------- -------- --------------- -------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 $ -- $ -- $ 9,700 $ 423 $ -- $ -- $ -- $ 10,123
--------
Comprehensive loss:
Net income -- -- 1,084 -- -- -- -- 1,084
Change in net unrealized gain/loss on
securities available for sale, net of
taxes and reclassification adjustment -- -- -- (1,605) -- -- -- (1,605)
--------
Total comprehensive loss (521)
--------
Net proceeds from sale of common stock
(1,712,630 shares) 17 7,464 -- -- -- -- -- 7,481
Common stock acquired by ESOP (64,394 shares) -- -- -- -- -- (644) -- (644)
Common stock held by ESOP released and committed
to be released (14,293 shares) -- (20) -- -- -- 143 -- 123
Purchase of treasury stock (10,000 shares) -- -- -- -- (83) -- -- (83)
----- ------- ------- ------- ----- ----- ----- --------
Balance at June 30, 1999 17 7,444 10,784 (1,182) (83) (501) -- 16,479
--------
Comprehensive loss:
Net income -- -- 846 -- -- -- -- 846
Change in net unrealized gain/loss on
securities available for sale, net of
taxes and reclassification adjustment -- -- -- (1,456) -- -- -- (1,456)
--------
Total comprehensive loss (610)
--------
Common stock held by ESOP released and committed
to be released (6,439 shares) -- (18) -- -- -- 65 -- 47
Purchase of RRP stock (40,247 shares) -- -- -- -- -- -- (288) (288)
Amortization of RRP stock (3,765 shares) -- -- -- -- -- -- 27 27
Purchase of treasury stock (58,506 shares) -- -- -- -- (477) -- -- (477)
----- ------- ------- ------- ----- ----- ----- --------
Balance at June 30, 2000 $ 17 $ 7,426 $11,630 $(2,638) $(560) $(436) $(261) $ 15,178
===== ======= ======= ======= ===== ===== ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 846 $ 1,084
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 220 178
Gain on sales of securities available for sale, net (336) (670)
Net accretion on securities (140) (9)
Depreciation and amortization expense 640 409
Increase in accrued interest receivable (329) (505)
Deferred tax benefit (86) (106)
Loans originated for sale -- (5,809)
Principal balance of loans sold -- 5,809
Other, net (692) 1,464
-------- --------
Net cash provided by operating activities 123 1,845
-------- --------
Cash flows from investing activities:
Purchase of certificates of deposit (100) --
Proceeds from maturities of certificates of deposits 500 1,000
Activity in securities available for sale:
Sales 4,668 3,333
Maturities, prepayments and calls 3,240 11,062
Purchases (21,873) (46,447)
Purchase of securities held to maturity (4,761) --
Net increase in loans (20,658) (9,427)
Purchase of banking premises and equipment (851) (2,966)
Purchase of Federal Home Loan Bank stock (288) (569)
Purchase of bank-owned life insurance (2,036) --
-------- --------
Net cash used by investing activities (42,159) (44,014)
-------- --------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
19
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(In Thousands)
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits 43,207 20,891
Proceeds from Federal Home Loan Bank advances 32,085 14,000
Repayment of Federal Home Loan Bank advances (31,728) (2,569)
Proceeds from sale of common stock -- 7,481
Common stock acquired by ESOP -- (644)
ESOP shares released 65 100
Purchase of RRP stock (288) --
Amortization of RRP stock 27 --
Purchase of treasury stock (477) (83)
-------- --------
Net cash provided by financing activities 42,891 39,176
-------- --------
Net change in cash and cash equivalents 855 (2,993)
Cash and cash equivalents at beginning of year 13,390 16,383
-------- --------
Cash and cash equivalents at end of year $ 14,245 $ 13,390
======== ========
Supplementary information:
Interest paid on deposits $ 5,203 $ 3,999
Interest paid on Federal Home Loan Bank advances 1,464 808
Income taxes paid 681 559
Decrease in due to broker 521 532
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended June 30, 2000 and 1999
(Dollars in Thousands, Except per Share Amounts)
1. CORPORATE STRUCTURE
Service Bancorp, Inc. (the "Company") is a Massachusetts corporation
organized in August, 1998 for the purpose of owning all of the outstanding
capital stock of Strata Bank (the "Bank"), formerly known as Summit Bank.
The Company was organized as a wholly-owned subsidiary of Service Bancorp,
MHC ("MHC"), which is a Massachusetts-chartered mutual holding company.
On October 7, 1998, the Company completed a public offering of 47% of the
shares of its outstanding common stock in a public offering to eligible
depositors, employees, and members of the general public (the "Offering").
The remaining 53% of the Company's shares of common stock were issued to
MHC. Prior to that date, the Company had no assets or liabilities.
Completion of the Offering resulted in the issuance of 1,712,630 shares of
common stock, 907,694 shares of which were issued to MHC and 804,936
shares of which were sold to eligible depositors, employees, and the
general public at $10.00 per share. Costs related to the Offering
(primarily marketing fees paid to an underwriting firm, professional fees,
registration fees, and printing and mailing costs) aggregated $569. These
costs were deducted to arrive at net proceeds of $7,481.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, the Bank, which includes the Bank's
wholly-owned subsidiaries, Medway Securities Corp. and Franklin Village
Security Corp., which engage in the purchase and sale of securities. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Business and operating segments
The Company provides a variety of financial services to individuals and
small businesses through its offices in Norfolk County. Its primary
deposit products are savings, checking and term certificate accounts and
its primary lending products are mortgage, consumer and commercial loans.
21
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Business and operating segments (concluded)
Management evaluates the Company's performance and allocates resources
based on a single segment concept. Accordingly, there are no separately
identified operating segments for which discrete financial information is
available. The Company does not derive revenues from, or have assets
located in, foreign countries, nor does it derive revenues from any single
customer that represents 10% or more of the Company's total revenues.
Use of estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the consolidated balance sheet and reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. A material estimate that is particularly
susceptible to significant change in the near term relates to the
determination of the allowance for loan losses.
Reclassifications
Certain amounts in the 1999 consolidated financial statements have been
reclassified to conform to the 2000 presentation.
Cash equivalents
Cash equivalents include amounts due from banks and short-term
investments. Short-term investments consist primarily of federal funds
sold and other interest-bearing deposits which mature on a daily basis.
Securities
Debt securities that management has the positive intent and ability to
hold to maturity are classified as held to maturity and recorded at
amortized cost. All other securities are classified as available for sale
and are carried at fair value, with unrealized gains and losses excluded
from earnings and reported in other comprehensive income/loss.
Amortization of premiums and accretion of discounts on debt securities are
computed using the interest method. Gains and losses on sales are recorded
on the trade date and are computed using the specific identification
method.
22
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans
The Company grants mortgage, consumer and commercial loans to its
customers. A substantial portion of the loan portfolio consists of
mortgage loans in Norfolk County. The ability of the Company's debtors to
honor their contracts is dependent upon the local economy and the local
real estate market.
Loans, as reported, have been adjusted by unadvanced construction loans,
the allowance for loan losses, net deferred loan fees/costs and deferred
premium.
Income on loans, including impaired loans, is recognized on the simple
interest basis and is not accrued when in the judgment of management the
collectibility of the loan principal or interest becomes doubtful. Loans
delinquent 90 days or more remain on accrual status when the loan-to-value
ratio is less than 80% and the collateral value is sufficient to cover all
amounts due including principal, interest and related expenses.
Deferred premium and net deferred loan fees/costs are amortized over the
contractual lives of the related loans using the interest method.
Allowance for loan losses
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of known and inherent risks in the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
23
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for loan losses (concluded)
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis using the fair value of
existing collateral.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer loans for impairment disclosures.
Banking premises and equipment
Land is carried at cost. Buildings, leasehold improvements and equipment
are stated at cost less accumulated depreciation and amortization computed
on the straight-line method over the estimated useful lives of the assets
or the expected terms of the leases, if shorter.
Retirement plan
The Company accounts for defined benefit pension plan benefits on the net
periodic pension cost method for financial reporting purposes. This method
recognizes the compensation cost of an employee's pension benefit over the
employee's approximate service period. Pension costs are funded in the
year of accrual using the aggregate cost method.
Advertising
Advertising costs are expensed as incurred.
24
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are
adjusted accordingly through the provision for income taxes. The Bank's
base amount of its federal income tax reserve for loan losses is a
permanent difference for which there is no recognition of a deferred tax
liability. However, the loan loss allowance maintained for financial
reporting purposes is a temporary difference with allowable recognition of
a related deferred tax asset, if it is deemed realizable.
Stock compensation plans
The Company measures compensation cost for its Recognition and Retention
Plan ("RRP") based on the market value of the stock at the grant date and
is recognized over the vesting period
The Company measures compensation cost for its Stock Option Plan using the
intrinsic value based method of accounting, whereby compensation cost is
the excess, if any, of the quoted market price of the stock at the grant
date (or other measurement date) over the amount an employee must pay to
acquire the stock. Stock options issued under the Company's Stock Option
Plan have no intrinsic value at the grant date and no compensation cost is
recognized for them. The Company is required to make pro forma disclosures
of net income and earnings per share as if compensation cost had been
measured at the grant date based on the fair value of the award and
recognized over the service period, which is usually the vesting period.
(See Note 12.)
Employee Stock Ownership Plan ("ESOP")
Compensation expense is recognized based on shares released or committed
to be released to the ESOP. All shares held by the ESOP that are released
and committed to be released are deemed outstanding for purposes of
earnings per share calculations. Dividends declared, if any, on all shares
held by the ESOP are charged to retained earnings. The value of unearned
shares to be allocated to ESOP participants for future services not yet
performed is reflected as a reduction of stockholders' equity.
25
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings per share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares (common stock equivalents) that would have been
outstanding if dilutive potential common shares had been issued, as well
as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate to
outstanding stock options and are determined using the treasury stock
method. Assumed conversion of the outstanding dilutive stock options would
increase the shares outstanding but would not require an adjustment to
income as a result of the conversion. For the year ended June 30, 2000,
options applicable to 39,722 shares were anti-dilutive and excluded from
the diluted earnings per share computation.
Earnings per share is not presented for periods beginning prior to January
1, 1999 since the Company completed its offering on October 7, 1998 and,
accordingly, such data would not be meaningful.
Comprehensive income/loss
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in
assets and liabilities, such as unrealized gains and losses on securities
available for sale, are reported as a separate component of the equity
section of the consolidated balance sheet, such items, along with net
income, are components of comprehensive income/loss.
The components of other comprehensive income/loss and related tax effects
are as follows:
Years Ended June 30,
--------------------
2000 1999
------- -------
Unrealized holding losses on securities
available for sale $(1,890) $(1,788)
Reclassification adjustment for net gains
realized in income (336) (670)
------- -------
Net unrealized losses (2,226) (2,458)
Tax effect 770 853
------- -------
Net-of-tax amount $(1,456) $(1,605)
======= =======
26
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Recent accounting pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which, as amended by SFAS
No. 137 and 138, is effective for fiscal years beginning after June 15,
2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain
derivative instruments embedded in other contracts, and requires that an
entity recognize all derivatives as assets or liabilities in the balance
sheet and measure them at fair value. Management has evaluated the impact
of adopting this Statement on the consolidated financial statements and
determined that it will not have a material impact.
3. CERTIFICATES OF DEPOSIT
The certificate of deposit at June 30, 2000 matures on June 9, 2003 and
bears interest at 5.0%. The certificate of deposit at June 30, 1999
matured on June 5, 2000 and had an interest rate of 6.4%.
27
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. SECURITIES
A summary of securities follows:
June 30, 2000
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- -------- -------
Securities Available for Sale
Federal agency obligations $45,667 $ 7 $ (2,041) $43,633
Mortgage-backed securities 16,876 5 (853) 16,028
Other debt securities 19,359 47 (785) 18,621
------- ------- -------- -------
Total debt securities 81,902 59 (3,679) 78,282
Marketable equity securities 3,724 145 (555) 3,314
------- ------- -------- -------
$85,626 $ 204 $ (4,234) $81,596
======= ======= ======== =======
Securities Held to Maturity
Other debt securities $ 4,771 $ 6 $ (39) $ 4,738
======= ======= ======== =======
June 30, 1999
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------- ------- -------- -------
Securities Available for Sale
Federal agency obligations $41,909 $ 7 $ (1,046) $40,870
Mortgage-backed securities 17,620 9 (654) 16,975
Other debt securities 9,441 67 (292) 9,216
------- ------- -------- -------
Total debt securities 68,970 83 (1,992) 67,061
Marketable equity securities 2,746 285 (180) 2,851
------- ------- -------- -------
$71,716 $ 368 $ (2,172) $69,912
======= ======= ======== =======
28
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SECURITIES (concluded)
The amortized cost and estimated fair value of debt securities by
contractual maturity at June 30, 2000 follows:
<TABLE>
<CAPTION>
Securities Available for Sale Securities Held to Maturity
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------- ------- ------ ------
<S> <C> <C> <C> <C>
Within 1 year $ 200 $ 200 $ -- $ --
Over 1 year to 5 years 19,072 18,638 3,459 3,444
Over 5 years to 10 years 41,164 39,132 1,312 1,294
Over 10 years 4,590 4,284 -- --
------- ------- ------ ------
65,026 62,254 4,771 4,738
Mortgage-backed
securities 16,876 16,028 -- --
------- ------- ------ ------
$81,902 $78,282 $4,771 $4,738
======= ======= ====== ======
</TABLE>
Proceeds from the sale of securities available for sale during fiscal 2000
and 1999 were $4,668 and $3,333, respectively. Gross gains of $352 and
$684, and gross losses of $16 and $14, were realized during fiscal 2000
and 1999, respectively.
29
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. LOANS
A summary of the balances of loans follows:
June 30,
---------------------
2000 1999
--------- --------
Real estate loans:
Residential $ 61,689 $ 46,793
Commercial 25,035 20,981
Construction 4,577 7,506
--------- --------
91,301 75,280
Less unadvanced construction loans (1,835) (2,532)
--------- --------
89,466 72,748
--------- --------
Other loans:
Home equity 5,266 4,591
Second mortgages 2,419 601
Installment 1,629 1,829
Commercial 7,763 6,481
Passbook secured 634 513
--------- --------
17,711 14,015
--------- --------
Total loans 107,177 86,763
Allowance for loan losses (802) (740)
Net deferred loan (fees) costs 37 (51)
Deferred premium 10 12
--------- --------
$ 106,422 $ 85,984
========= ========
An analysis of the allowance for loan losses is as follows:
Years Ended June 30,
---------------------
2000 1999
----- -----
Balance at beginning of year $ 740 $ 577
Provision for loan losses 220 178
Recoveries 19 7
Charge-offs (177) (22)
----- -----
Balance at end of year $ 802 $ 740
===== =====
30
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LOANS (concluded)
The following is a summary of information pertaining to impaired and
non-accrual loans:
June 30,
-------------
2000 1999
---- ----
Impaired loans with no valuation allowance $554 $836
Impaired loans with a corresponding valuation allowance -- 93
---- ----
Total impaired loans $554 $929
==== ====
Corresponding valuation allowance on impaired loans $ -- $ 18
==== ====
Non-accrual loans $432 $398
==== ====
Years Ended June 30,
--------------------
2000 1999
Average recorded investment in impaired loans $643 $401
==== ====
Interest income recognized on impaired loans $ 50 $ 25
==== ====
Interest income recognized on a cash basis on
impaired loans $ 46 $ 24
==== ====
No additional funds are committed to be advanced in connection with
impaired loans.
31
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives follows:
<TABLE>
<CAPTION>
June 30,
----------------------- Estimated
2000 1999 Useful Lives
------- ------- ------------
<S> <C> <C> <C>
Banking premises:
Land $ 1,582 $ 1,580
Building and leasehold
improvements 2,970 2,727 2 - 40 years
Equipment 3,098 2,492 3 - 10 years
------- -------
7,650 6,799
Less accumulated depreciation and
amortization (3,427) (2,787)
------- -------
$ 4,223 $ 4,012
======= =======
</TABLE>
Depreciation and amortization expense for the years ended June 30, 2000
and 1999 amounted to $640 and $409, respectively.
7. DEPOSITS
A summary of deposit balances by type is as follows:
June 30,
---------------------
2000 1999
-------- --------
Demand $ 19,684 $ 12,524
NOW 22,521 21,082
Money market deposits 12,992 10,163
Regular and other savings 28,998 25,414
-------- --------
Total non-certificate accounts 84,195 69,183
-------- --------
Term certificates $100,000 or greater 23,993 12,175
Term certificates less than $100,000 68,157 51,780
-------- --------
Total certificate accounts 92,150 63,955
-------- --------
Total deposits $176,345 $133,138
======== ========
32
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DEPOSITS (concluded)
A summary of certificate accounts by maturity is as follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
-------------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- ------- ------- -------
<S> <C> <C> <C> <C>
Within 1 year $80,926 5.84% $54,594 5.17%
Over 1 year to 3 years 11,170 5.90 9,361 5.12
Over 3 years to 4 years 54 6.54 -- --
------- -------
$92,150 5.85% $63,955 5.16%
======= =======
</TABLE>
8. FEDERAL HOME LOAN BANK ADVANCES
A summary of Federal Home Loan Bank (FHLB) advances by maturity follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
-------------------- --------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- ------- ------- -------
<S> <C> <C> <C> <C>
Within 1 year $ 85 7.52% $ 5,218 5.21%
Over 1 year to 2 years 2,000 6.75 -- --
Over 3 years to 4 years (a), (d) 7,000 5.67 2,000 4.99
Over 5 years to 10 years (a), (b) 16,500 5.76 16,000 5.02
Over 10 years to 20 years (c) 765 6.74 2,775 4.90
------- -------
$26,350 5.84% $25,993 5.04%
======= =======
</TABLE>
(a) At June 30, 2000, advances amounting to $23,500 are callable by the
FHLB in fiscal 2001.
(b) At June 30, 1999, advances amounting to $14,000 and $2,000 are
callable by the FHLB in fiscal 2000 and 2001, respectively.
(c) At June 30, 1999, an advance amounting to $2,000 is callable by the
FHLB in fiscal 2000.
(d) At June 30, 1999, the advance is callable by the FHLB in fiscal
2000.
33
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FEDERAL HOME LOAN BANK ADVANCES (concluded)
The Bank also has an available line of credit with the FHLB at an interest
rate that adjusts daily. Borrowings under the line are limited to $4,000
at June 30, 2000, of which $85 was advanced at June 30, 2000 and is
included in the table above.
All borrowings from the FHLB are secured by a blanket lien primarily on
U.S. Government and federal agency obligations and real estate loans in
accordance with the FHLB agreement.
9. INCOME TAXES
Allocation of federal and state income taxes between current and deferred
portions is as follows:
Years Ended June 30,
----------------------
2000 1999
----- -----
Current tax provision:
Federal $ 474 $ 617
State 61 50
----- -----
535 667
----- -----
Deferred tax benefit:
Federal (64) (79)
State (22) (27)
----- -----
(86) (106)
----- -----
$ 449 $ 561
===== =====
The reasons for the differences between the effective tax rates and the
statutory federal income tax rate are summarized as follows:
Years Ended June 30,
--------------------
2000 1999
---- ----
Statutory rate 34.0% 34.0%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit 2.0 0.9
Dividend received deduction (1.1) (1.3)
Other (0.2) 0.5
---- ----
Effective tax rates 34.7% 34.1%
==== ====
34
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES (continued)
The components of the net deferred tax asset are as follows:
June 30,
-------------------------
2000 1999
------- -------
Deferred tax asset:
Federal $ 1,844 $ 1,034
State 201 160
------- -------
2,045 1,194
------- -------
Deferred tax liability:
Federal (80) (84)
State (28) (29)
------- -------
(108) (113)
------- -------
Net deferred tax asset $ 1,937 $ 1,081
======= =======
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
June 30,
-------------------
2000 1999
------- -------
Allowance for loan losses $ 277 $ 226
Net unrealized loss on securities available for sale 1,392 622
Employee benefit plans 164 103
Net deferred loan fees/costs (15) 25
Depreciation 147 124
Other (28) (19)
------- -------
Net deferred tax asset $ 1,937 $ 1,081
======= =======
A summary of the change in the net deferred tax asset is as follows:
Years Ended June 30,
--------------------
2000 1999
------ ------
Balance at beginning of year $1,081 $ 122
Deferred tax benefit 86 106
Change in deferred tax effect of net unrealized
gain/loss on securities available for sale 770 853
------ ------
Balance at end of year $1,937 $1,081
====== ======
There was no valuation reserve required for the years ended June 30, 2000
and 1999.
35
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES (concluded)
The federal income tax reserve for loan losses at the Bank's base year is
$1,142. If any portion of the reserve is used for purposes other than to
absorb loan losses, approximately 150% of the amount actually used,
limited to the amount of the reserve, would be subject to taxation in the
fiscal year in which used. As the Bank intends to use the reserve solely
to absorb loan losses, a deferred tax liability of $467 has not been
provided.
10. STOCKHOLDERS' EQUITY
Minimum regulatory capital requirements
The Company (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Company's and the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors. Prompt corrective action provisions are not
applicable to the Company.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier
1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1
capital (as defined) to average assets (as defined). Management believes
that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of June 30, 2000, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the following table.
There are no conditions or events since that notification that management
believes have changed the Bank's category. The Company's and the Bank's
actual capital amounts and ratios are also presented in the table.
36
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STOCKHOLDERS' EQUITY (continued)
Minimum regulatory capital requirements (concluded)
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
----------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
June 30, 2000:
Total capital to risk weighted assets:
Consolidated $18,208 13.9% $10,454 8.0 $ -- --%
Bank 15,168 11.6 10,454 8.0 13,067 10.0
Tier 1 capital to risk weighted assets:
Consolidated 17,406 13.3 5,227 4.0 -- --
Bank 14,366 11.0 5,227 4.0 7,840 6.0
Tier 1 capital to average assets:
Consolidated 17,406 8.4 8,321 4.0 -- --
Bank 14,366 6.9 8,321 4.0 10,401 5.0
June 30, 1999:
Total capital to risk weighted assets:
Consolidated $18,401 18.8% $ 7,847 8.0 $ -- --%
Bank 14,682 15.0 7,845 8.0 9,807 10.0
Tier 1 capital to risk weighted assets:
Consolidated 17,661 18.0 3,923 4.0 -- --
Bank 13,942 14.2 3,923 4.0 5,884 6.0
Tier 1 capital to average assets:
Consolidated 17,661 10.8 4,891 3.0 -- --
Bank 13,942 8.6 4,891 3.0 8,151 5.0
</TABLE>
37
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STOCKHOLDERS' EQUITY (concluded)
Liquidation account
At the time of the Offering, the Company established a liquidation account
in the amount of $4,648. In accordance with Massachusetts statute, the
liquidation account will be maintained for the benefit of eligible account
holders who continue to maintain their accounts in the Bank after the
Offering. The liquidation account will be reduced annually to the extent
that eligible account holders have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete
liquidation, each eligible account holder will be entitled to receive a
distribution in an amount equal to their current adjusted liquidation
account balance, to the extent that funds are available.
Other capital restrictions
Federal and state banking regulations place certain restrictions on
dividends paid and loans or advances made by the Bank to the Company. The
total amount of dividends which may be paid at any date is generally
limited to the retained earnings of the Bank, and loans or advances are
limited to 10% of the Bank's capital stock and surplus on a secured basis.
In addition, dividends paid by the Bank to the Company would be prohibited
if the effect thereof would cause the Bank's capital to be reduced below
applicable minimum capital requirements. At June 30, 2000, $10,454 of the
Company's equity in the Bank was restricted and funds available for loans
or advances amounted to $1,517.
38
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. PENSION AND COMPENSATION PLANS
Defined benefit plan
Prior to March 31, 2000, the Bank had a qualified defined benefit pension
plan (the Plan) covering substantially all of its full time employees who
have completed one year of service and worked at least 1,000 hours per
year. On March 31, 2000, the Bank terminated the plan and amended the Plan
to reallocate excess assets of the Plan to provide additional benefits to
its participants. No curtailment gain or loss resulted from this
termination. The Bank expects the termination of the Plan to settle in the
second quarter of fiscal 2001, resulting in a settlement gain of
approximately $95. Information pertaining to the activity in the Plan is
as follows:
<TABLE>
<CAPTION>
Five Months Years Ended
Ended October 31,
March 31, ----------------
2000 1999 1998
------- ------- -----
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period $ 978 $ 775 $ 655
Service cost 55 106 100
Interest cost 32 52 48
Actuarial loss -- 56 8
Benefits paid (17) (11) (36)
------- ------- -----
Benefit obligation at end of period 1,048 978 775
------- ------- -----
Change in plan assets:
Fair value of plan assets at beginning of period 1,105 763 620
Actual return on plan assets 264 188 53
Employer contribution -- 165 126
Benefits paid (17) (11) (36)
------- ------- -----
Fair value of plan assets at end of period 1,352 1,105 763
------- ------- -----
Funded status 304 127 (12)
Unrecognized net actuarial gain (397) (174) (107)
Transition asset (25) (26) (29)
------- ------- -----
Accrued pension cost $ (118) $ (73) $(148)
======= ======= =====
</TABLE>
The accumulated benefit obligation (substantially all vested) at March 31,
2000 amounted to $716, which was less than the plan assets at fair value.
39
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
PENSION AND COMPENSATION PLANS (continued)
Defined benefit plan (concluded)
The components of net periodic pension cost are as follows:
Five Months Years Ended
Ended October 31,
March 31, ------------------
2000 1999 1998
---- ----- -----
Service cost $ 55 $ 106 $ 100
Interest cost 32 52 48
Expected return on plan assets (37) (61) (50)
Transition asset (1) (3) (3)
Recognized net actuarial gain (3) (5) (5)
---- ----- -----
$ 46 $ 89 $ 90
==== ===== =====
Pension expense for the years ended June 30, 2000 and 1999 amounted to $73
and $102, respectively.
For the five months ended March 31, 2000 and the plan years ended October
31, 1999 and 1998, actuarial assumptions include an assumed discount rate
on benefit obligations of 7.75%, 6.75% and 7.25%, respectively. For all
periods, an expected long-term rate of return on plan assets of 8% and
annual salary increase of 5% was utilized.
401(k) plan
In addition to the defined benefit plan, the Bank provides a savings plan
which qualifies under Section 401(k) of the Internal Revenue Code and
provides for voluntary contributions by participating employees ranging
from one percent to fifteen percent of their compensation, subject to
certain limitations. Prior to January 1, 2000, the Bank made matching
contributions equal to 50% of each employee's voluntary contribution, up
to 3% of the employee's compensation. Effective January 1, 2000, the Bank
will match 100% of each employee's voluntary contribution, up to 4% of the
employee's compensation. Total expense under the plan for the years ended
June 30, 2000 and 1999 amounted to $52 and $30, respectively.
Supplemental retirement agreements
The Bank has a supplemental retirement agreement with an officer of the
Bank which provides for supplemental compensation payments upon
retirement, subject to certain limitations as set forth in the agreement.
The present value of these future payments amounted to $294 and $207 at
June 30, 2000 and 1999, respectively. Compensation expense applicable to
the agreement for the years ended June 30, 2000 and 1999 amounted to $81
and $84, respectively.
40
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
PENSION AND COMPENSATION PLANS (concluded)
Supplemental retirement agreements (concluded)
During fiscal 2000, the Bank entered into supplemental retirement
agreements with the directors of the Bank which provide for compensation
payments upon retirement, subject to certain limitations as set forth in
the agreements. Compensation expense applicable to these agreements
amounted to $6 for the year ended June 30, 2000.
Employment agreement
The Bank has entered into a three-year employment agreement with its Chief
Executive Officer which expires in October 2001, unless extended, that
generally provides for a specified minimum annual compensation and the
continuation of benefits currently received. However, such employment may
be terminated for cause, as defined, without incurring any continuing
obligations. The agreement also provides for a lump sum severance payment
upon occurrence of an "event of termination," as defined in the agreement,
during the Chief Executive Officer's employment under the agreement.
12. STOCK COMPENSATION PLANS AND ESOP
Stock Option Plan
On September 1, 1999, the Board of Directors approved the 1999 Stock
Option Plan. Under the Plan, the Company may grant options to its
directors, officers and employees for up to 80,484 shares of common stock.
Both incentive stock options and non-qualified stock options may be
granted under the Plan. The exercise price of each option equals the
market price of the Company's stock on the date of grant and an option's
maximum term is ten years. Shares awarded vest in five equal annual
installments beginning on January 1, 2001.
The Plan also permits the inclusion of limited rights, reload options and
dividend equivalent rights.
Limited rights would permit the optionee to surrender an option, or
portion thereof, for cancellation and to receive cash or common stock
equal to the excess, if any, of the then fair market value of the common
stock subject to such option or portion thereof over the option exercise
price. Limited rights can only be exercised upon a change in control (as
defined) and, if the related options are exercised or terminated, the
related rights are terminated. Limited rights with respect to 42,387
options were granted during fiscal 2000 and 6,000 were forfeited.
41
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STOCK COMPENSATION PLANS AND ESOP (continued)
Stock Option Plan (concluded)
Reload options would permit the exchange of shares of stock in
satisfaction of all or a portion of the exercise price of the original
option grant. The exercise price of the stock subject to the reload option
will be determined at the time the original option is exercised. Dividend
equivalent rights would permit the optionee to receive a cash benefit per
share underlying the related vested stock options outstanding in the
amount of any extraordinary dividend (as defined) declared by the Company.
Reload options and dividend equivalent rights with respect to 64,387
options were granted during fiscal 2000 and 6,000 were forfeited.
The Company measures compensation cost for the stock option plan using the
intrinsic value based method of accounting. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the
grant dates, the Company's net income and earnings per share (basic and
diluted) for the year ended June 30, 2000 would have been $832 and $0.52,
respectively.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the year ended June 30, 2000:
Dividend yield - %
Expected life 10 years
Expected volatility 26%
Risk-free interest rate 6.5%
During the year ended June 30, 2000, 64,387 options were granted at an
exercise price of $7.50, of which 6,000 options were forfeited. At June
30, 2000, options outstanding amounted to 58,387, of which none were
exercisable. The weighted average remaining contractual life of options
outstanding at June 30, 2000 was 9.3 years. The weighted average fair
value of options granted during the year was $4.08.
42
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STOCK COMPENSATION PLANS AND ESOP (concluded)
Recognition and Retention Plan
On September 1, 1999, the Board of Directors approved the 1999 Recognition
and Retention Plan (the "RRP") for key employees and directors of the
Company and the Bank and reserved 40,247 shares of common stock of the
Company for issuance. During the year ended June 30, 2000, 31,567 shares
were awarded and 2,500 shares were forfeited. Shares awarded vest in five
equal annual installments beginning on January 1, 2001 and become fully
vested upon the recipient's retirement. Compensation expense relating to
the RRP amounted to $27,000 for the year ended June 30, 2000.
Employee Stock Ownership Plan
Effective November 1, 1998, in connection with the Offering, the Bank
established an Employee Stock Ownership Plan (the "ESOP") for the benefit
of each employee that has reached the age of 21 and has completed at least
1,000 hours of service in the previous twelve-month period. The ESOP is
funded by the Bank's contributions of cash (which generally will be
invested in common stock) or common stock. Benefits may be paid in shares
of common stock or in cash, subject to the employees' right to demand
shares.
The ESOP has a loan agreement with the Company whereby $644 was borrowed
for the purpose of purchasing shares of the Company's common stock. The
loan provides for ten annual principal payments of $64 commencing on the
last business day of September 1999. The Bank made a $100 principal
pre-payment on October 31, 1998.
The Bank has committed to make contributions to the ESOP sufficient to
support the debt service of the loan. The loan is secured by the shares
purchased which are held in a suspense account for allocation among the
members as the loans are paid. Total compensation expense applicable to
the ESOP amounted to $47 and $123 for the years ended June 30, 2000 and
1999, respectively.
Shares held by the ESOP include the following:
June 30,
-----------------------
2000 1999
------ ------
Allocated 16,439 10,000
Committed to be allocated 4,293 4,293
Unallocated 43,662 50,101
------ ------
64,394 64,394
====== ======
Any cash dividends received on allocated shares would be allocated to
members and cash dividends received on shares held in suspense would be
applied to repay the outstanding debt of the ESOP. The fair value of
unearned ESOP shares at June 30, 2000 is $259.
43
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. OTHER COMMITMENTS AND CONTINGENCIES
General
In the ordinary course of business, various legal claims arise from time
to time and, in the opinion of management, these claims will have no
material effect on the Company's consolidated financial statements.
Loan commitments
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, which involve elements of credit and interest rate risk in excess
of the amount recognized in the accompanying consolidated balance sheets.
The Bank's exposure to credit loss is represented by the contractual
amount of the instruments. The Bank uses the same credit policies in
making commitments as it does for on-balance-sheet instruments.
Financial instruments whose contract amount represents credit risk consist
of:
June 30,
------------------
2000 1999
------ ------
Commitments to grant loans $4,660 $2,046
Unadvanced funds on home equity lines-of-credit 8,876 6,546
Unadvanced funds on commercial lines-of-credit 6,365 3,895
Unadvanced funds on personal lines-of-credit 750 515
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The commitments for
lines-of-credit may expire without being drawn upon, therefore, the total
commitment amounts do not necessarily represent future cash requirements.
The Bank evaluates each customer's credit worthiness on a case-by-case
basis. Commitments to grant loans and lines-of-credit are secured by real
estate or other collateral, if deemed necessary.
44
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
OTHER COMMITMENTS AND CONTINGENCIES (concluded)
Operating lease commitments
Pursuant to the terms of noncancelable lease agreements in effect at June
30, 2000 pertaining to banking premises, future minimum rent commitments
are as follows:
Year Ending
June 30, Amount
------------ --------
2001 $ 317
2002 319
2003 293
2004 264
2005 204
Thereafter 711
--------
$ 2,108
========
These leases contain options to extend for periods from five to fifteen
years. The cost of such rentals is not included above. Total rent expense
the years ended June 30, 2000 and 1999 amounted to $346 and $278,
respectively.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires disclosure of estimated fair
values of all financial instruments where it is practicable to estimate
such values. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows.
Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. Statement No. 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and
short-term investments approximate fair values.
Certificates of deposit: The carrying amount of certificates of
deposit approximates fair value.
45
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Securities: Fair values for securities are based on quoted market
prices.
FHLB stock: The carrying value of FHLB stock is deemed to
approximate fair value, based on the redemption provisions of the
FHLB.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
values. Fair values for other loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for
loans with similar terms and adjusted for credit risk. Fair values
for non-performing loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.
Deposits: The fair values disclosed for non-certificate accounts
are, by definition, equal to the amount payable on demand at the
reporting date (i.e., their carrying amounts). Fair values for
fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Federal Home Loan Bank advances: The fair values for the FHLB
advances are estimated using discounted cash flow analyses based on
rates currently in effect for similar types of borrowing
arrangements.
Accrued interest: The carrying amounts of accrued interest
approximate fair value.
Off-balance-sheet instruments: Fair values for off-balance-sheet
lending com-mitments are based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of
the agreements and the counterparties' credit standing and are not
material.
46
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
The estimated fair values and related carrying amounts of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
2000 1999
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 14,245 $ 14,245 $ 13,390 $ 13,390
Certificates of deposit 100 100 500 500
Securities available for sale 81,596 81,596 69,912 69,912
Securities held to maturity 4,771 4,738 -- --
FHLB stock 1,588 1,588 1,300 1,300
Loans, net 106,422 103,590 85,984 86,746
Accrued interest receivable 2,007 2,007 1,678 1,678
Financial liabilities:
Deposits 176,345 176,350 133,138 133,238
Federal Home Loan Bank
advances 26,350 26,002 25,993 25,869
</TABLE>
47
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Condensed financial information pertaining only to the Company is as
follows:
BALANCE SHEETS
June 30,
--------------------
2000 1999
------- -------
Assets:
Interest-bearing deposit in Strata Bank $ 2,600 $ 3,186
Investment in common stock of Strata Bank 12,138 12,760
Loan receivable from Strata Bank ESOP 479 544
Other assets 22 19
------- -------
Total assets $15,239 $16,509
======= =======
Other liabilities $ 61 $ 30
Stockholders' equity 15,178 16,479
------- -------
$15,239 $16,509
======= =======
STATEMENTS OF INCOME
For the
For the Period from
Year Ending Inception
June 30, to June 30,
2000 1999
----- -----
Interest income $ 128 $ 99
Operating expenses (27) --
----- -----
Income before income taxes 101 99
Provision for income taxes (42) (41)
----- -----
59 58
Equity in undistributed net income of 787 802
Strata Bank ----- -----
Net income $ 846 $ 860
===== =====
48
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (concluded)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
For the Period from
Year Ending Inception
June 30, to June 30,
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 846 $ 860
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in other assets and liabilities 28 17
Equity in undistributed net income of Strata Bank (787) (802)
------- -------
Net cash provided by operating activities 87 75
------- -------
Cash flows from investing activities:
Common stock acquired by ESOP -- (644)
ESOP shares released 65 100
Capital contribution to Strata Bank -- (3,743)
------- -------
Net cash provided (used) by investing activities 65 (4,287)
------- -------
Cash flows from financing activities:
Proceeds from sale of common stock -- 7,481
Purchase of treasury stock (477) (83)
Purchase of RRP stock (288) --
Amortization of RRP stock 27 --
------- -------
Net cash provided (used) by financing activities (738) 7,398
------- -------
Net change in cash and cash equivalents (586) 3,186
Cash and cash equivalents at beginning of period 3,186 --
------- -------
Cash and cash equivalents at end of period $ 2,600 $ 3,186
======= =======
</TABLE>
49
<PAGE>
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
16. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Years Ended June 30,
---------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $3,697 $3,417 $3,290 $3,073 $2,846 $2,588 $2,552 $2,433
Interest expense 1,941 1,737 1,575 1,470 1,278 1,140 1,203 1,209
------ ------ ------ ------ ------ ------ ------ ------
Net interest income 1,756 1,680 1,715 1,603 1,568 1,448 1,349 1,224
Provision for loan losses 80 60 35 45 98 30 25 25
------ ------ ------ ------ ------ ------ ------ ------
Net interest income, after provision for loan losses 1,676 1,620 1,680 1,558 1,470 1,418 1,324 1,199
Gain on sales of securities available for sale 70 33 214 19 222 128 247 73
Other income 268 225 223 196 183 182 180 149
Other expenses 1,703 1,685 1,594 1,505 1,414 1,310 1,327 1,079
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes 311 193 523 268 461 418 424 342
Provision for income taxes 98 62 189 100 151 141 151 118
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 213 $ 131 $ 334 $ 168 $ 310 $ 277 $ 273 $ 224
====== ====== ====== ====== ====== ====== ====== ======
Earnings per share (basic and diluted) $ 0.14 $ 0.08 $ 0.21 $ 0.10 $ 0.19 $ 0.17 n/a n/a
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
n/a - not applicable since the conversion to stock form was completed on October
7, 1998.
50
