-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DxuLybU/WMQBPTT+OXwmDOfOmYaCLWV9CSoLBbWeoxiuNbJDkLvKQD+Oc6BR5TjN z/J0U0qxiAOblN+UsPGE6w== 0001005477-99-005311.txt : 19991117 0001005477-99-005311.hdr.sgml : 19991117 ACCESSION NUMBER: 0001005477-99-005311 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SERVICE BANCORP INC CENTRAL INDEX KEY: 0001063939 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 000000000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-24935 FILM NUMBER: 99755057 BUSINESS ADDRESS: STREET 1: 81 MAIN STREET CITY: MEDWAY STATE: MA ZIP: 02053 MAIL ADDRESS: STREET 1: 81 MAIN STREET CITY: MEDWAY STATE: MA ZIP: 02053 10QSB 1 FORM 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------- FORM 10-QSB |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission File Number 0-24935 ------- SERVICE BANCORP, INC. --------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-3430806 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 81 Main Street, Medway, Massachusetts 02053 --------------------- ----- (Address of principal executive offices) (Zip Code) (508) 533-4343 -------------- (Registrant's telephone number, including area code) Not Applicable -------------- (Former name, former address and former fiscal year, if changed since last year.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practical date. At October 29, 1999, there were 1,672,730 shares of common stock outstanding, par value $0.01 per share. SERVICE BANCORP, INC. AND SUBSIDIARY FORM 10-QSB Index PART I FINANCIAL INFORMATION Page - ------ --------------------- ---- Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1999 and June 30, 1999 1 Consolidated Statements of Income for the three months ended September 30, 1999 and 1998 2 Consolidated Statements of Changes in Stockholders' Equity for the three months ended September 30, 1999 and 1998 3 Consolidated Statements of Cash Flows for the three months ended September 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities 18 Item 3. Defaults upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 Signature Page 20 SERVICE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except for per share amounts)
September 30, June 30, ASSETS 1999 1999 --------- --------- Cash and due from banks $ 6,231 $ 7,939 Short-term investments 5,952 5,451 --------- --------- Total cash and cash equivalents 12,183 13,390 --------- --------- Certificates of deposit 500 500 Securities available for sale 77,786 69,912 Federal Home Loan Bank stock, at cost 1,300 1,300 Loans 87,299 86,724 Less allowance for loan losses (776) (740) --------- --------- Loan, net 86,523 85,984 --------- --------- Banking premises and equipment, net 4,058 4,012 Accrued interest receivable 1,566 1,678 Other assets 1,602 1,382 --------- --------- Total assets $ 185,518 $ 178,158 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 143,005 $ 133,138 Federal Home Loan Bank advances 25,361 25,993 Other liabilities 1,178 2,548 --------- --------- Total liabilities 169,544 161,679 --------- --------- Stockholders' equity: Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 12,000,000 shares authorized, 1,712,630 issued 17 17 Additional paid-in capital 7,441 7,444 Retained earnings 10,952 10,784 Accumulated other comprehensive loss (1,607) (1,182) Treasury stock, at cost - 39,900 shares at Sept. 30, 1999 and 10,000 shares at June 30, 1999 (344) (83) Unearned ESOP shares - 48,489 shares at Sept. 30, 1999 and 50,101 shares at June 30, 1999 (485) (501) --------- --------- Total stockholders' equity 15,974 16,479 --------- --------- Total liabilities and stockholders' equity $ 185,518 $ 178,158 ========= =========
See accompanying notes to consolidated financial statements. 1 SERVICE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except for per share amounts) Three Months Ended September 30, ------------------------- 1999 1998 ---------- ---------- Interest and dividend income: Interest and fees on loans $ 1,758 $ 1,637 Interest and dividends on securities available for sale and FHLB stock 1,242 653 Interest on short-term investments and certificates of deposit 73 143 ---------- ---------- Total interest and dividend income 3,073 2,433 ---------- ---------- Interest expense: Interest on deposits 1,159 1,015 Interest on FHLB advances 311 194 ---------- ---------- Total interest expense 1,470 1,209 ---------- ---------- Net interest income 1,603 1,224 Provision for loan losses 45 25 ---------- ---------- Net interest income, after provision for loan losses 1,558 1,199 ---------- ---------- Other income: Customer service fees 180 123 Gain on sales of securities available for sale, net 19 73 Gain on sales of loans -- 17 Miscellaneous 16 9 ---------- ---------- Total other income 215 222 ---------- ---------- Operating expenses: Salaries and benefits 756 565 Occupancy and equipment expenses 328 242 Data processing expenses 92 76 Professional fees 62 41 Advertising expenses 69 33 Other general and administrative expenses 198 122 ---------- ---------- Total operating expenses 1,505 1,079 ---------- ---------- Income before income taxes 268 342 Provision for income taxes 100 118 ---------- ---------- Net income $ 168 $ 224 ========== ========== Weighted average common shares outstanding during the period 1,643,187 N/A ========== Earnings per common share (basic and diluted) $ 0.10 N/A ========== See accompanying notes to consolidated financial statements. 2 SERVICE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Dollars in thousands)
Accumulated Additional Other Unearned Common Paid-in Retained Comprehensive Treasury ESOP Stock Capital Earnings Loss Stock Shares Total -------- ---------- -------- ------------- -------- -------- -------- Balance at June 30, 1999 $ 17 $ 7,444 $ 10,784 ($ 1,182) ($ 83) ($ 501) $ 16,479 Common stock held by ESOP released and committed to be released (1,612 shares) -- (3) -- -- -- 16 13 Comprehensive loss: Net Income -- -- 168 -- -- -- 168 Change in net unrealized loss on securities available for sale, net of tax and reclassification adjustment -- -- -- (425) -- -- (425) -------- Total comprehensive loss (257) -------- Purchase of treasury stock (29,900 shares) -- -- -- -- (261) -- (261) -------- -------- -------- -------- -------- -------- -------- Balance at September 30, 1999 $ 17 $ 7,441 $ 10,952 ($ 1,607) ($ 344) ($ 485) $ 15,974 ======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 3 SERVICE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Concluded) (Dollars in thousands)
Accumulated Additional Other Unearned Common Paid-in Retained Comprehensive Treasury ESOP Stock Capital Earnings Income Stock Shares Total --------- ----------- -------- ------------- ---------- ---------- ------- Balance at June 30, 1998 $ -- $ -- $ 9,700 $ 423 $ -- $ -- 10,123 Comprehensive income: Net income -- -- 224 -- -- -- 224 Change in net unrealized gain on securities available for sale net of tax and reclassification adjustment -- -- -- 220 -- -- 220 ------- Comprehensive income 444 --------- --------- ------- ------- ---------- ---------- ------- Balance at September 30, 1998 $ -- $ -- $ 9,924 $ 643 $ -- $ -- $10,567 ========= ========= ======= ======= == ======= ========== =======
See accompanying notes to consolidated financial statements. 4 SERVICE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three Months Ended September 30, --------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net income $ 168 $ 224 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 45 25 Gain on sales of securities available for sale, net (19) (73) Amortization (accretion) of securities available for sale, net (27) 19 Depreciation and amortization expense 147 91 Decrease in accrued interest receivable 112 95 Deferred tax benefit (42) (37) Loans originated for sale 0 (1,309) Principal balance of loans sold 0 1,309 Other, net (867) (181) -------- -------- Net cash provided (used) by operating activities (483) 163 -------- -------- Cash flows from investing activities: Proceeds from sales of securities available for sale 143 194 Proceeds from maturities of and principal payments on securities available for sale 1,903 4,268 Purchase of securities available for sale (11,046) (10,289) Net decrease (increase) in loans (585) 2,269 Purchase of banking premises and equipment (192) (135) -------- -------- Net cash used by investing activities (9,777) (3,693) -------- -------- Cash flows from financing activities: Net increase in deposits 9,867 9,355 Proceeds from Federal Home Loan Bank advances 4,500 6 Repayment of Federal Home Loan Bank advances (5,133) (150) Release of common stock held by ESOP 13 -- Increase in mortgagors' escrow deposits 67 39 Purchase of treasury stock (261) -- -------- -------- Net cash provided by financing activities 9,053 9,250 -------- -------- Net change in cash and cash equivalents (1,207) 5,720 Cash and cash equivalents at beginning of period 13,390 16,383 -------- -------- Cash and cash equivalents at end of period $ 12,183 $ 22,103 ======== ======== Supplementary information: Interest paid on deposits $ 1,165 $ 1,012 Interest paid on Federal Home Loan Bank advances 298 195 Income taxes paid 101 6 Decrease in due from broker 521 --
See accompanying notes to consolidated financial statements. 5 SERVICE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (1) Basis of Presentation and Consolidation The accompanying unaudited consolidated financial statements include the accounts of Service Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Summit Bank (the "Bank"), and the Bank's wholly-owned subsidiaries, Medway Securities Corp. and Franklin Village Security Corp., both which engage solely in the purchase and sale of investment securities. All significant intercompany balances and transactions have been eliminated in consolidation. These financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and the instructions for Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation have been included. Interim results are not necessarily indicative of the results that may be expected for the entire year. (2) Reorganization and Stock Offering The Company is a Massachusetts corporation that was organized in August, 1998 at the direction of the Board of Directors of the Bank and the Board of Trustees of Service Bancorp, MHC (the "MHC"), the mutual holding company parent of the Bank, for the purpose of owning all of the outstanding capital stock of the Bank. The Company offered for sale 47% of the shares of its outstanding common stock in a public offering to eligible depositors, employees, and members of the general public (the "Offering"). The remaining 53% of the Company's shares of common stock were issued to the MHC. The Offering was completed on October 7, 1998. Prior to that date, the Company had no assets or liabilities. Completion of the Offering resulted in the issuance of 1,712,630 shares of common stock, 907,694 shares of which were issued to the MHC and 804,936 shares of which were sold to eligible depositors, employees, and the general public at $10.00 per share. The Company began trading on the OTC Bulletin Board under the symbol "SERC" on October 7, 1998. Costs related to the Offering (primarily marketing fees paid to an underwriting firm, professional fees, registration fees, and printing and mailing costs) aggregated $569,000. These costs together with funds loaned to purchase shares for the Bank's Employee Stock Ownership Plan (the "ESOP") were deducted to arrive at net proceeds of $6.8 million. The Company contributed 50% of the net proceeds of the Offering to the Bank for general corporate use. On October 7, 1998, the Company loaned approximately $644,000 to the ESOP to fund its purchase of 64,394 shares of common stock of the Company. (3) Earnings per Share Earnings per share is based on the weighted average number of shares outstanding during the period beginning July 1, 1999 through September 30, 1999. The Company's "basic" and "diluted" earnings per share computations are identical as there were no common stock equivalents during the periods covered by the report. Earnings per share is not presented for periods prior to January 1, 1999 since the Company completed its Offering on October 7, 1998 and, accordingly, such data would not be meaningful. 6 SERVICE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (4) Commitments At September 30, 1999, the Company had outstanding commitments to originate loans of $6.7 million, $5.7 million of which were commercial real estate loans. Unused lines of credit available to customers amounted to $7.5 million, $7.0 million of which were equity lines of credit. (5) Securities Available for Sale The following table sets forth the Company's securities available for sale at the dates indicated. September 30, 1999 June 30, 1999 ----------------------------------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- ----- --------- ----- (Dollars in thousands) Federal agency obligations $47,816 $46,535 $41,909 $40,870 Mortgage-backed securities 17,716 16,994 17,620 16,975 Other debt securities 11,591 11,204 9,441 9,216 ------- ------- ------- ------- Total debt securities 77,123 74,733 68,970 67,061 Marketable equity securities 3,118 3,053 2,746 2,851 ------- ------- ------- ------- Total securities $80,241 $77,786 $71,716 $69,912 ======= ======= ======= ======= (6) Loans The following table presents data relating to the composition of the Company's loan portfolio by type of loan at the dates indicated.
September 30, 1999 June 30, 1999 ---------------------- ---------------------- Amount Percent Amount Percent ------ ------- ------ ------- Real estate loans: (Dollars in thousands) Residential $ 47,560 54.46% $ 47,394 54.62% Commercial 23,234 26.60 20,981 24.18 Construction 3,211 3.67 4,974 5.74 -------- ------ -------- ------ Total real estate loans 74,005 84.73 73,349 84.54 Other loans: Consumer loans: Collateral 638 0.73 513 0.59 Home equity 4,685 5.36 4,591 5.29 Other 1,490 1.71 1,829 2.11 -------- ------ -------- ------ Total consumer loans 6,813 7.80 6,933 7.99 Commercial business loans 6,519 7.47 6,481 7.47 -------- ------ -------- ------ Total other loans 13,332 15.27 13,414 15.46 -------- ------ -------- ------ Total loans 87,337 100.00% 86,763 100.00% ====== ====== Net deferred loan fees (48) (51) Deferred premium 10 12 Allowance for loan losses (776) (740) -------- -------- Total loans, net $ 86,523 $ 85,984 ======== ========
7 SERVICE BANCORP, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements (8) Deposits and Borrowed Funds The following tables indicate types and balances in deposit accounts at the dates indicated.
September 30, 1999 June 30, 1999 ------------------- ------------------- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in thousands) Demand $ 12,801 8.95% $ 12,524 9.41% NOW 19,754 13.81 21,082 15.83 Money market deposits 11,261 7.87 10,163 7.63 Regular and other savings 26,481 18.52 25,414 19.09 -------- ------ -------- ------ Total non-certificate accounts 70,297 49.15 69,183 51.96 Term certificates 72,708 50.85 63,955 48.04 -------- ------ -------- ------ Total deposits $143,005 100.00% $133,138 100.00% ======== ====== ======== ======
The following is a list of maturities for advances from the Federal Home Loan Bank of Boston ("the "FHLB") at the dates indicated.
September 30, 1999 June 30, 1999 ------------------- ------------------- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in thousands) Maturities less than one year $ 4,588 18.09% $ 5,218 20.07% Maturities greater than one year 20,773 81.91 20,775 79.93 -------- ------ -------- ------ Total borrowed funds $ 25,361 100.00% $ 25,993 100.00% ======== ====== ======== ======
8 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation General This quarterly report on Form 10-QSB contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believe", "anticipates", "plans", "expects" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those contemplated by such forward-looking statements. These important factors include, without limitation, the Bank's continued ability to originate quality loans, fluctuation in interest rates, real estate conditions in the Bank's lending areas, general and local economic conditions, the Bank's continued ability to attract and retain deposits, the Company's ability to control costs, new accounting pronouncements, and changing regulatory requirements. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Comparison of Financial Condition at September 30, 1999 and June 30, 1999 Assets increased by $7.4 million, or 4.1%, from $178.2 million at June 30, 1999 to $185.5 million at September 30, 1999. The increase reflected management's growth strategy and was funded by the $9.9 million, or 7.4%, increase in total deposits since June 30, 1999, which was partially offset by a $632,000, or 2.4%, decrease in total borrowings over this timeframe. The funds provided during the three months ended September 30, 1999 were invested in securities available for sale, net loans, and short-term investments which increased $7.9 million, or 11.3%, $539,000, or 0.63%, and $501,000, or 9.2%, respectively. The two investment categories which changed materially within the securities available for sale were federal agency obligations and other debt securities (primarily corporate debt) which increased $5.7 million, or 13.9%, and $2.0 million, or 21.6%, respectively. Short-term investments consist of overnight funds investments with large area financial institutions and serve as a temporary investment vehicle for the Bank while it waits to deploy funds in the longer-term investment and loan portfolios. Net loans increased primarily because of a $2.3 million, or 10.7%, increase in commercial real estate loans since June 30, 1999. During this same timeframe construction loans and other consumer loans declined $1.8 million, or 35.4%, and $339,000, or 18.5%, respectively, while all other loan categories, including residential mortgage and home equity loans remained relatively unchanged. The Bank continues to emphasis the growth in the commercial loan portfolio which generally provides higher yields than residential and consumer loans while also giving you the added benefit of potentially improving the Bank's core deposit base. The Bank frequently receives commercial checking and money market accounts from the Bank's commercial borrowers. An increase in the loan payoff amounts within the residential and construction loan portfolios was primarily due to the increase in interest rates and increase in competition from other financial institutions within the Bank's geographical area was the primary reason for the decline in these portfolios. 9 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation (Continued) The increase of $9.9 million in deposits was primarily attributable to a $8.8 million, or 13.7%, increase in term certificates from June 30, 1999, as nine and twelve month certificates increased $10.7 million. Within the non-certificate accounts, regular savings and money market deposits increased $2.2 million, or 6.1%, while NOW and demand deposit accounts declined $1.1 million, or 3.1% from June 30, 1999 to September 30, 1999. In addition, borrowings decreased $632,000, or 2.4%, as certain borrowings within the portfolio were either paid down or repositioned within the three month period. Repositioning refers to paying off some existing borrowings and then initiating new borrowings to fund new federal agency obligations and commercial loans during the period. Stockholders' equity decreased from $16.5 million, or 9.25% of total assets at June 30, 1999 to $16.0 million, or 8.61% of total assets at September 30, 1999. This decrease resulted primarily from an increase of $425,000 in unrealized losses to $1.6 million in the Company's securities available for sale portfolio and the repurchase of 29,900 shares of the Company's common stock during the period for $262,000. These items were partially offset by the Company's earnings for the period. Non-Performing Assets and Allowance for Loan Losses The following indicates the non-performing assets and related allowance for loan loss ratios at the dates indicated. September 30, June 30, 1999 1999 ------------- -------- (Dollars in thousands) Non-accrual loans: One-to-four family real estate loans $316 $317 Commercial loans 415 81 Consumer loans -- -- ---- ---- Total non-accrual loans 731 398 Other real estate owned -- -- ---- ---- Total non-performing assets $731 $398 ==== ==== Allowance for loan losses $776 $740 ==== ==== 10 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation (Continued) September 30, June 30, 1999 1999 ------------- -------- Allowance for loan losses as a percent of total loans 0.89% 0.85% ====== ====== Allowance for loan losses as a percent of non-accrual loans 106.16% 185.93% ====== ====== Non-accrual loans as a percent of total loans, net 0.84% 0.46% ====== ====== Non-performing assets as a percent of total assets 0.39% 0.22% ====== ====== During the three months ended September 30, 1999, the Bank added $45,000 to the loan loss provision due to the growth of the commercial loan portfolio which presents a greater risk of loss than the residential loans. During this period, there were $11,000 in loan charge-offs and $2,000 in recoveries from previously charged-off loans. While management believes that, based on information currently available, the allowance for loan losses is sufficient to cover losses in the Company's loan portfolio at this time, no assurances can be given that the level of the allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will not be necessary if economic and/or other conditions differ substantially from the economic and other conditions considered by management in evaluating the adequacy of the current level of the allowance. Comparison of Operating Results for the Three Months Ended September 30, 1999 and 1998 General Operating results are primarily dependent on the Bank's net interest income, which is the difference between the interest earned on the Bank's earning assets (short-term investments, loans, and investment securities) and the interest paid on deposits and borrowings. Operating results are also affected by provisions for loan losses, the level of income from non-interest sources such as fees and sales of investment securities and other assets, operating expenses and income taxes. Operating results are also significantly affected by general economic conditions, particularly changes in interest rates, as well as government policies and actions of regulatory authorities. Net income for the three months ended September 30, 1999 was $168,000 as compared to $224,000 for the three month ended September 30, 1998, a decrease of $56,000, or 25.0%. This decrease was primarily attributable to increases of $426,000 and $20,000, respectively, in total operating expenses and the provision for loan losses as well as a $54,000 decrease, or 74%, in the gain on sales of securities between periods. This was partially offset by increases of $379,000, or 31.0%, and $57,000, or 46.3%, in the net interest income and customer service fees, respectively, over the same timeframe. 11 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation (Continued) The Bank's interest rate spread (the difference between yields earned on earning assets and rates paid on deposits and borrowings) increased from 3.30% for the three months ended September 30, 1998 to 3.46% for the three months ended September 30, 1999. Interest rate margin (net interest income divided by average earning assets) increased from 3.75% to 3.88%. The interest rate spread and margin improved as the Bank increased its emphasis in the investment and loan portfolios in higher yielding, in some cases longer maturing, corporate and federal agency bonds and commercial loans, respectively. The Bank's objective is for continued growth. A new retail branch is expected to open within the next three months and an existing branch is planning to move to a more strategic location during the first part of the year 2000. While core-based deposit growth will be emphasized, past experience indicates that such growth is achieved through a greater increase in the higher-cost retail certificates than the lower-cost core deposits. An increase in interest rates and continued competition from other financial institutions together with the aforementioned growth in retail certificates could cause future tightening in the interest rate spread. The interest rate spread and margin for the periods indicated are as follows: Three months ended September 30, ------------------ 1999 1998 ---- ---- Weighted average yield earned on: Short-term investments 5.70% 5.68% Investments 6.73 5.81 Total loans, net 8.14 8.65 ---- ---- All earning assets 7.43 7.45 Weighted average rate paid on: Deposits 3.73 3.98 Borrowed funds 5.17 5.35 ---- ---- All interest-bearing liabilities 3.97 4.15 ---- ---- Weighted average rate spread 3.46% 3.30% ==== ==== Net interest margin 3.88% 3.75% ==== ==== Earnings per share data for the three months ended September 30, 1999 was $0.10 for both "Basic" and "Diluted" calculations. Earnings per share is not presented for the three months ended September 30, 1998 because the Company became a publicly owned entity on October 7, 1998 and, accordingly, did not have shares outstanding throughout any of the periods presented prior to that date. 12 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation (Continued) Interest and Dividend Income Total interest and dividend income increased by $640,000, or 26.3%, from $2.4 million for the three months ended September 30, 1998 to $3.1 million for the comparable period in 1999. This increase was primarily attributable to a $34.6 million, or 26.5%, increase in average earning assets between the two periods, which was partially offset by a 2 basis point decline in the yield on earning assets. The average balances in net loans increased $10.7 million, or 14.1%, while total loan yield declined by 51 basis points to 8.14%. This loan yield decline was primarily attributable to the fact that the residential loan portfolio has experienced larger than normal principal payoffs as borrowers sought to refinance their loans at lower rates. In addition, the yield on commercial loans declined due to lower market interest rates and the loan pricing of new commercial originations was impacted by the competitive pricing from other area financial institutions. The average investment portfolio balance increased $28.9 million or 64.3% over this same timeframe and its portfolio yield has improved by 92 basis points to 6.73%. The Bank decided to invest in federal agency and corporate obligations with longer maturities and higher yields in order to improve the interest rate margin while not sacrificing the interest rate profile objectives of the Asset-Liability ("ALCO") management process discussed below. The average balance in short-term investments declined $4.9 million, or 49.1%, between periods while the portfolio yield increased slightly by 2 basis points as the Bank reinvested the maturity proceeds from these investments into longer-maturing and higher-yielding investments and loans. Interest Expense Interest expense on deposits increased $144,000, or 14.2%, from $1.0 million for the three months ended September 30, 1998, to $1.2 million for the three months ended September 30, 1999. This increase was attributable to a $22.2 million, or 21.8%, increase in average interest-bearing deposit balances between periods, which was partially offset by a reduction in deposit rates over the same period from 3.98% to 3.73%. The decrease in deposit interest rates was primarily due the declining interest rate environment between the two periods. The Bank increased its use of borrowings from the FHLB as part of its management of interest rate risk. Average balances in these advances were $24.0 million during the three months ended September 30, 1999, an increase of $9.5 million, or 65.8% from the three months ended September 30, 1998. Over this same timeframe, average borrowing rates declined from 5.35% to 5.17%. These borrowings were used in many cases to fund the purchase of investment securities where the yield and matching maturing terms favorably affected the net income and ALCO management performance of the Bank. Interest expense on FHLB advances increased $117,000, or 60.3%, from $194,000 for the three months ended September 30, 1998 to $311,000 for the three months ended September 30, 1999. Other Income Total other income decreased $7,000, or 3.2 %, from $222,000 for the three months ended September 30, 1998 to $215,000 for the same period in 1999. This change was caused by decreases of $54,000 and 13 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation (Continued) $17,000 on gain on sale of securities and loans, respectively. This decrease was partially offset by an increase of $57,000 in customer service fees primarily due to increases in ATM surcharge fees and Visa debit card fees. Operating Expense Total operating expense increased $426,000, or 39.5 %, from $1.1 million for the three months ended September 30, 1998 to $1.5 million for the three months ended September 30, 1999. Salaries and benefits and occupancy and equipment expenses increased $191,000, or 33.8%, and $86,000, or 35.5% respectively. No other individual expense category increased materially between periods. Much of the increase in operating expense was attributed to the Company's asset growth as management added staff and incurred costs to service the full range of retail and loan products added to the Bank's product lines. Accordingly, the ratio of operating expenses to average assets increased from 3.11 % for the three months ended September 30, 1998 to 3.39% for the 1999 period. Income Taxes The effective income tax rate was 37.3% and 34.5% for the three months ended September 30, 1999 and 1998, respectively. The effective tax rates are below the statutory combined state and federal income tax rates because the Bank's two security corporations take advantage of the lower state tax rate afforded to these types of entities. 14 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation (Continued) Asset/Liability Management A principal operating objective of the Bank is to produce stable earnings by achieving a favorable interest rate spread that can be sustained during fluctuations in prevailing interest rates. Since the Bank's principal interest-earning assets generally have longer terms to maturity than its primary source of funds, i.e., deposit liabilities, increases in general interest rates will generally result in an increase in the Bank's cost of funds before the yield on its asset portfolio adjusts upward. Financial institutions have generally sought to reduce their exposure to adverse changes in interest rates by attempting to achieve a closer match between the repricing periods of interest rate sensitive assets and liabilities. Such matching, however, is carefully monitored so as not to sacrifice net interest margin performance for the perfect matching of these interest rate sensitive instruments. The Bank has established an Asset/Liability Management Committee ("ALCO") made up of members of senior management to assess the asset/liability mix and recommend strategies that will enhance income while managing the Bank's vulnerability to changes in interest rate. This committee meets regularly to discuss interest rate conditions and potential product lines that would enhance the Bank's income performance. Certain strategies have been implemented to improve the match between interest rate sensitive assets and liabilities. These strategies include, but are not limited to: daily monitoring of the Bank's cash requirements, originating adjustable and fixed rate mortgage loans, both residential and commercial, for the Bank's own portfolio, managing the cost and structure of deposits, and generally using the matched borrowings to fund specific purchases of loan packages and large loan originations. Occasionally, management may choose to deviate from specific matching of maturities of assets and liabilities, if an attractive opportunity to enhance yield becomes available. Quarterly, ALCO modeling is performed with the assistance of an outside investment advisor which projects the Bank's financial performance over the next twenty four months using loan and deposit projections, projections of changes in interest rates, and anticipated changes in other income and operating expenses to reveal the full impact of the Bank's operating strategies on financial performance. The results of the ALCO process are reported to the Board at least on a quarterly basis. Liquidity and Capital Resources The Bank's primary sources of funds consist of deposits, borrowings, repayment and prepayment of loans, sales of loans and investments, maturities and early calls of investments, and funds provided from operations. While scheduled repayments of loans and maturities of investments are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, economic conditions, and competition. The Bank uses its liquidity resources primarily to fund existing and future loan commitments, to fund net deposit outflows, to invest in other interest-earning assets, to maintain liquidity, and to pay operating expenses. From time to time, the Bank utilizes advances from the FHLB primarily in connection with its management of the interest rate sensitivity of its assets and liabilities. Total advances outstanding at September 30, 1999 amounted to $25.4 million. The Bank's ability to borrow from the FHLB is dependent upon the amount and type of collateral the Bank has to secure the loans. Such collateral consists of, but is not limited to, one-to-four family owner-occupied residential property, mortgage-backed securities guaranteed by the U.S. government or a government agency, and funds on deposit with 15 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation (Continued) the FHLB. As of September 30, 1999, the Bank's total borrowing capacity was $65.6 million. A major portion of the Bank's liquidity consists of cash and cash equivalents, short-term investments, U.S. Government and federal agency obligations, mortgage-backed securities, and other debt securities. The level of these assets is dependent upon the Bank's operating, lending, and financing activities during any given period. At September 30, 1999, the Bank had $6.7 million of outstanding commitments to originate loans. The Bank anticipates that it will have sufficient funds available to meet these commitments. Certificates of deposit, which are scheduled to mature in one year or less, totaled $64.4 million at September 30, 1999. Based upon historical experience, management believes that a significant portion of such deposits will remain with the Bank. At September 30, 1999, the Company and the Bank exceeded all regulatory capital requirements. Year 2000 ("Y2K") Compliance Changing from the year 1999 to 2000 has the potential to cause problems in data processing and other data-sensitive systems, a problem known as the Year 2000 or Y2K dilemma. The Company uses computer systems to perform financial calculations, track deposits and loan payments, transfer funds and make direct deposits. The processing of the Company's loan and deposit transactions is outsourced to a third-party data processing vendor. The Company is following a comprehensive process to assure that such systems are ready for the year 2000 date change. To become Y2K compliant, the Company is following a five-step process mandated by the federal bank regulatory agencies. A description of each of the steps and the status of the Company's efforts in completing the steps is as follows: Step 1. Awareness and Understanding of the Problem. The Company formed a Year 2000 team that investigated the problem and its potential impact on the Company's systems. An independent consulting firm has been engaged to assist the Company's development of its approach to becoming Y2K compliant. This phase included education of the Company's employees and customers about Y2K issues. The awareness and understanding phase of this step has been completed. Training and communication has taken place and will continue through the end of 1999. Step 2. Identification of All Potentially Affected Systems. This step included a review of all major information technology ("IT") and non-information technology ("non-IT") systems to determine how they are affected by Y2K issues. An inventory has been prepared of all vendors who render IT and non-IT services to the Company. This step has been completed. Step 3. Assessment and Planning. The Y2K team completed its assessment of which systems and equipment were most prone to placing the Company at risk if they were not Y2K compliant. The project team developed an inventory of vendors, an inventory of actions to be taken, identification of the team members responsible for completion of each action, a completion timetable, and project tracking methodology. Significant vendors were requested to advise the Company in writing of their Y2K 16 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation (Continued) readiness, including actions to become compliant if they are not already compliant. A plan has been developed to repair or replace systems and equipment not currently Y2K compliant. This step has been complete. To date, all vendors that were contacted by the Y2K team have responded as to their system's compliance with Y2K. Step 4. Correction and Testing. The Company's third party data processing servicer as well as vendors who provide significant technology-related services have modified their systems to become Y2K compliant. The Company developed scripts involving typical transactions to test the proper functioning of the modified systems. It also arranged for repair or replacement of equipment programs affected by Y2K issues. All of the required testing was completed by the end of March, 1999. The monitoring of certain non-IT vendors will continue into 1999. Step 5. Implementation. This step includes the repair or replacement of systems and computer equipment and the development of contingency plans. The repair and replacement phase has been completed. Contingency plans on how the Company would resume business if unanticipated problems arise from non-performance by IT and non-IT vendors were developed as dictated by regulatory authorities. The Company's efforts to become Y2K compliant are being monitored by its federal banking regulators. Failure to be Y2K compliant could subject the Company to formal supervisory or enforcement actions. The Company's Y2K expenses since inception have been immaterial to its financial performance. It may incur additional costs for the remainder of 1999 to become Y2K compliant, but does not expect such costs to be material to the operating expenses of the Company. Some of the costs are not expected to be incremental to the Company, but rather represent new equipment and software that would otherwise be purchased in the normal course of the Company's business. The Company is monitoring Y2K compliance for each of its large borrowers and will adjust the loan loss allowance accordingly if any Y2K noncompliance affects their ability to fulfill the terms and conditions of any loan agreement. The Company presently believes the Y2K issue will not pose significant operating problems for the Company. However, if implementation and testing plans are not completed in a satisfactory and timely manner, in particular by third parties on which the Company is dependent, or other unforeseen problems arise, no assurance can be given with respect to the cost or timing of such efforts or any potential adverse effects on the Company's business, financial condition, or results of operation. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Bank is a defendant in a lawsuit, Summit Bancorp v. Summit Bank (Medway, MA), filed on October 5, 1999 in the U.S. District Court for the District of Connecticut, whereby plaintiff, a bank holding company headquartered in New Jersey, is arguing that it has the exclusive right to the name "Summit Bank." Plaintiff is seeking injunctive relief relating to the Bank's use of the word "Summit," including "Sumbank.com," as well as monetary damages and legal fees. The Bank expects that the lawsuit will be settled in the near future as it intends to enter into a settlement agreement with the plaintiff whereby the Bank will discontinue using the name "Summit" on the earlier of December 31, 2000 or 90 days after plaintiff announces a present intention to open an office in Massachusetts. Neither the Bank nor the Company expect to incur any material costs, expenses or monetary damages as a result of the litigation, other than expenses associated with changing its name. The Bank is not involved in any other pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involved amounts which are believed by management to be immaterial to the financial condition and operations of the Bank. 17 SERVICE BANCORP, INC. AND SUBSIDIARY PART II - OTHER INFORMATION (Continued) Item 2. Changes in Securities Not applicable. Item 3. Default Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders On October 26, 1999, the Company held its annual meeting of stockholders for the purpose of the election of four Directors to three year terms, the approval of the Company's 1999 Stock Option Plan and 1999 Recognition and Retention Plan, and the ratification of the appointment of Wolf & Company, P.C., as the Company's independent auditors for the fiscal year ending June 30, 2000. The number of votes cast at the meeting as to each matter acted upon was as follows: NO. OF NO. OF VOTES FOR VOTES WITHHELD 1. Election of Directors: Eugene G. Stone 1,460,565 12,182 Richard Giusti 1,464,347 8,400 Thomas R. Howie 1,464,247 8,500 James W. Murphy 1,458,765 13,982 NO. OF NO. OF NO. OF VOTES FOR VOTES AGAINST VOTES ABSTAINING 2. Approval of the Company's 1999 Stock Option Plan 1,196,285 113,079 11,721 3. Approval of the Company's 1999 Recognition and Retention Plan 1,205,145 107,519 8,420 4. Ratification of the Appointment of Wolf & Company, P.C. as the Company's Independent Auditors 1,465,905 2,300 4,542 18 SERVICE BANCORP, INC. AND SUBSIDIARY Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K Exhibit 27 EDGAR financial data schedule. There were no reports filed on Form 8-K. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SERVICE BANCORP, INC. Date: November 10, 1999 By: /s/ Eugene G. Stone ----------------- ---------------------------- Eugene G. Stone President and Chief Executive Officer Date: November 10, 1999 By: /s/ Warren W. Chase, Jr. ----------------- ---------------------------- Warren W. Chase, Jr. Senior Vice President and Treasurer 20 EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS JUN-30-2000 SEP-30-1999 6,231 500 5,202 0 77,786 0 0 87,299 776 185,518 143,005 0 1,178 25,361 0 0 17 15,957 185,518 1,758 1,242 73 3,073 1,159 1,470 1,603 45 19 1,505 268 268 0 0 168 0.10 0.10 7.43 731 96 0 0 740 11 2 776 721 0 55
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