-----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, CICp8Snas88IUvjasTaR7o7PIL7Q6kZAq3n+ACejVli292ddtjeRQvfJkrlFsLkH 9MIaY4dtCB+E7ER0ykgTEw== 0001133884-01-500025.txt : 20010214 0001133884-01-500025.hdr.sgml : 20010214 ACCESSION NUMBER: 0001133884-01-500025 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010213 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: 1537192 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 g10q-23456.txt 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 December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to __________ Commission File Number 0-24935 ------- SERVICE BANCORP, INC. --------------------- (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-3430806 (State or other jurisdiction 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 February 5, 2001, there were 1,612,254 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 December 31, 2000 and June 30, 2000 ........................ 1 Consolidated Statements of Income for the three and six months ended December 31, 2000 and 1999 ...................... 2 Consolidated Statements of Changes in Stockholders' Equity for the six months ended December 31, 2000 and 1999 .............. 3 Consolidated Statements of Cash Flows for the six months ended December 31, 2000 and 1999 ................................. 5 Notes to Consolidated Financial Statements ....................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................ 9 PART II OTHER INFORMATION Item 1. Legal Proceedings ................................................ 17 Item 2. Changes in Securities ............................................ 17 Item 3. Defaults upon Senior Securities .................................. 17 Item 4. Submission of Matters to a Vote of Security Holders .............. 17 Item 5. Other Information ................................................ 18 Item 6. Exhibits and Reports on Form 8-K ................................. 18 Signature Page ................................................... 19
SERVICE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except for per share amounts)
December 31, June 30, ASSETS 2000 2000 ------ --------------------- --------------------- Cash and due from banks $9,195 $8,133 Short-term investments 9,499 6,112 --------------------- --------------------- Total cash and cash equivalents 18,694 14,245 --------------------- --------------------- Certificates of deposit 100 100 Securities available for sale, at fair cost 78,828 81,596 Securities held to maturity, at amortized cost 5,171 4,771 Federal Home Loan Bank stock, at cost 1,588 1,588 Loans 112,609 107,224 Less allowance for loan losses (883) (802) --------------------- --------------------- Loans, net 111,726 106,422 --------------------- --------------------- Banking premises and equipment, net 4,247 4,223 Accrued interest receivable 2,040 2,007 Bank-owned life insurance 2,104 2,070 Other assets 1,734 2,411 --------------------- --------------------- Total assets $226,232 $219,433 ===================== ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $183,006 $176,345 Federal Home Loan Bank advances 24,373 26,350 Other liabilities 1,418 1,560 --------------------- --------------------- Total liabilities 208,797 204,255 --------------------- --------------------- Stockholders' equity: Preferred stock, $.01 par value; 5,000,000 shares authorized, none issued -- -- Common stock, $.01 par value; 12,000,000 shares authorized, 1,712,630 issued 17 17 Additional paid-in capital 7,414 7,426 Retained earnings 12,082 11,630 Accumulated other comprehensive loss (880) (2,638) Treasury stock, at cost - 68,506 shares at December 31, 2000 and June 30, 2000 (560) (560) Unearned ESOP shares - 40,434 shares at December 31, 2000 and 43,662 shares at June 30, 2000 (405) (436) Unearned RRP Stock - 32,587 shares at December 31, 2000 and 36,482 shares at June 30, 2000 (233) (261) --------------------- --------------------- Total stockholders' equity 17,435 15,178 --------------------- --------------------- Total liabilities and stockholders' equity $226,232 $219,433 ===================== =====================
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 Mos. Ended Dec. 31, Six Mos. Ended Dec. 31, 2000 1999 2000 1999 --------- --------- --------- --------- Interest and dividend income: Interest and fees on loans $2,307 $1,839 $4,517 $3,597 Interest and dividends on securities 1,513 1,400 3,100 2,642 Interest on short-term investments and certificates of deposit 115 51 175 124 --------- --------- --------- --------- Total interest and dividend income 3,935 3,290 7,792 6,363 --------- --------- --------- --------- Interest expense: Interest on deposits 1,736 1,202 3,439 2,361 Interest on FHLB advances 384 373 755 684 --------- --------- --------- --------- Total interest expense 2,120 1,575 4,194 3,045 --------- --------- --------- --------- Net interest income 1,815 1,715 3,598 3,318 Provision for loan losses 62 35 118 80 --------- --------- --------- --------- Net interest income, after provision for loan losses 1,753 1,680 3,480 3,238 --------- --------- --------- --------- Other income: Customer service fees 257 196 503 376 Gain on sales of securities available for sale, net 214 214 290 233 Miscellaneous 42 27 77 43 --------- --------- --------- --------- Total other income 513 437 870 652 --------- --------- --------- --------- Operating expenses: Salaries and benefits 1,011 811 1,912 1,567 Occupancy and equipment expenses 380 345 760 673 Data processing expenses 129 97 261 189 Professional fees 79 89 132 151 Advertising expenses 79 57 130 126 Other general and administrative expenses 249 195 472 393 --------- --------- --------- --------- Total operating expenses 1,927 1,594 3,667 3,099 --------- --------- --------- --------- Income before income taxes 339 523 683 791 Provision for income taxes 112 189 231 289 --------- --------- --------- --------- Net income $227 $334 $452 $502 ========= ========= ========= ========= Weighted average common shares outstanding during the period - Basic 1,569,561 1,606,478 1,567,627 1,624,743 ========= ========= ========= ========= Diluted 1,569,561 1,606,478 1,567,627 1,626,678 ========= ========= ========= ========= Earnings per common share(Basic and Diluted) $0.14 $0.21 $0.29 $0.31 ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 2 SERVICE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (DOLLARS IN THOUSANDS)
Accumulated Additional Other Common Paid-in Retained Comprehensive Stock Capital Earnings Loss --------- --------- --------- ---------- Balance at June 30, 2000 $17 $7,426 $11,630 ($2,638) Comprehensive income: Net Income -- -- 452 -- Change in net unrealized loss on securities available for sale, net of tax and reclassification adjustment -- -- -- 1,758 Total comprehensive income 2,210 Common stock held by ESOP released and committed to be released (3,228 shares) -- (12) -- -- Amortization of RRP stock -- -- -- -- (3,895 shares) --------- --------- --------- ---------- Balance at December 31, 2000 $17 $7,414 $12,082 ($880) ========= ========= ========= ========== Unearned Unearned Treasury ESOP RRP Stock Shares Stock Total -------- ------- ------- ------- Balance at June 30, 2000 ($560) ($436) ($261) $15,178 Comprehensive income: Net Income -- -- -- 452 Change in net unrealized loss on securities available for sale, net of tax and reclassification adjustment -- -- -- 1,758 Total comprehensive income Common stock held by ESOP released and committed to be released (3,228 shares) -- 31 -- 19 Amortization of RRP stock -- -- 28 28 (3,895 shares) -------- ------- ------- ------- Balance at December 31, 2000 ($560) ($405) ($233) $17,435 ======== ------- ------- -------
See accompanying notes to consolidated financial statements. 3 SERVICE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 (CONCLUDED)
Additional Common Paid-in Retained Comprehensive Stock Capital Earnings Loss --------- --------- --------- ---------- Balance at June 30, 1999 $17 $7,444 $10,784 ($1,182) Comprehensive loss: Net income -- -- 502 -- Change in net unrealized loss on securities available for sale, net of tax and reclassification adjustment -- -- -- (1,395) Total comprehensive loss Common stock held by ESOP released and committed to be released (3,222 shares) -- (7) -- -- Purchase of treasury stock (58,500 shares) -- -- -- -- Purchase of RRP stock (10,800 shares) -- -- -- -- ----- ------- ------- ------- Balance at December 31, 1999 $17 $7,437 $11,286 ($2,577) ===== ======= ======= ======= Accumulated Other Unearned Unearned Treasury ESOP RRP Stock Shares Stock Total -------- ------- ------- ------- Balance at June 30, 1999 ($83) ($501) $-- $16,479 Comprehensive loss: Net income -- -- -- 502 Change in net unrealized loss on securities available for sale, net of tax and reclassification adjustment -- -- -- (1,395) -------- Total comprehensive loss (893) -------- Common stock held by ESOP released and committed to be released (3,222 shares) -- 32 -- 25 Purchase of treasury stock (58,500 shares) (477) -- -- (477) Purchase of RRP stock (10,800 shares) -- -- (82) (82) ----- ----- ---- -------- Balance at December 31, 1999 ($560) ($469) ($82) $15,052 ===== ===== ==== ========
See accompanying notes to consolidated financial statements 4 SERVICE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED (DOLLARS IN THOUSANDS)
Dec. 31, Dec. 31, 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 452 $ 502 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 118 80 Gain on sales of securities available for sale, net (290) (233) Amortization of unearned loan income 87 29 Accretion of securities, net of amortization (99) (60) Depreciation and amortization expense 329 299 Decrease in accrued interest receivable (33) (81) Deferred tax benefit (110) (78) Other, net (328) (1,060) -------- -------- Net cash provided (used) by operating activities 126 (602) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales and calls of securities available for sale 8,082 3,346 Proceeds from maturities of and principal payments on securities available for sale 914 3,691 Purchase of securities available for sale (3,151) (14,645) Purchase of securities held to maturity (400) -- Net increase in loans (5,509) (10,744) Purchase of banking premises and equipment (353) (288) -------- -------- Net cash used by investing activities (417) (18,640) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 6,661 16,024 Proceeds from Federal Home Loan Bank advances 16,089 20,740 Repayment of Federal Home Loan Bank advances (18,066) (18,463) Release of common stock held by ESOP 19 25 Purchase of RRP stock -- (82) Increase in mortgagors' escrow deposits 9 27 Amortization of RRP stock 28 -- Purchase of treasury stock -- (477) -------- -------- Net cash provided by financing activities 4,740 17,794 -------- -------- Net change in cash and cash equivalents 4,449 (1,448) Cash and cash equivalents at beginning of period 14,245 13,390 -------- -------- Cash and cash equivalents at end of period $ 18,694 $ 11,942 ======== ======== SUPPLEMENTARY INFORMATION: Interest paid on deposits $ 3,454 $ 2,375 Interest paid on Federal Home Loan Bank advances 765 643 Income taxes paid 261 376 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, Strata Bank (the "Bank"), and the Bank's wholly-owned subsidiaries, Medway Securities Corp. and Franklin Village Security Corp., both of which engage solely in the purchase and sale of 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. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with GAAP have been omitted. A summary of significant accounting policies followed by the Company is set forth in the Notes to Consolidated Financial Statements of the Company's 2000 annual report to stockholders and is incorporated herein by reference. (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. The Company's "basic" and "diluted" earnings per share are identical as there were no material common stock equivalents outstanding during the periods covered by the report 6 SERVICE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (4) COMMITMENTS At December 31, 2000, the Company had outstanding commitments to originate loans of $3.0 million. Unused lines of credit available to customers amounted to $9.9 million, $9.0 million of which were equity lines of credit. (5) SECURITIES The following table sets forth the Company's securities at the dates indicated.
December 31, 2000 June 30, 2000 -------------------------------------------------------------- (Dollars in thousands) Amortized Fair Amortized Fair COST VALUE COST VALUE ---- ----- ---- ----- AVAILABLE FOR SALE SECURITIES: Federal agency obligations $41,203 $40,871 $45,667 $43,633 Mortgage-backed securities 15,961 15,784 16,876 16,028 Other debt securities 19,739 19,367 19,359 18,621 ------------------------------ ------------------------------- Total debt securities 76,903 76,022 81,902 78,282 Marketable equity securities 3,267 2,806 3,724 3,314 ------------------------------ ------------------------------- Total available for sale securities $80,170 $78,828 $85,626 $81,596 ============================== =============================== HELD TO MATURITY SECURITIES: Other debt securities $5,171 $5,304 $4,771 $4,738 ============================== ===============================
(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.
(Dollars in thousands) December 31, 2000 June 30, 2000 ------------------------------ ------------------------------- AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- REAL ESTATE LOANS: Residential $62,419 55.45% $61,689 57.56% Commercial 26,685 23.71% 25,035 23.36% Construction 4,178 3.71% 2,742 2.56% -------------- --------------- --------------- --------------- Total real estate loans 93,282 82.87% 89,466 83.47%
7 SERVICE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 June 30, 2000 ------------------------------ ------------------------------- (Dollars in thousands) AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- OTHER LOANS: Consumer loans: Collateral 753 0.67% 634 0.59% Home equity 8,949 7.95% 7,685 7.17% Other 1,806 1.60% 1,629 1.52% ------------------------------ ------------------------------- Total consumer loans 11,508 10.22% 9,948 9.28% Commercial business loans 7,776 6.91% 7,763 7.24% ------------------------------ ------------------------------- Total other loans 19,284 17.13% 17,711 16.53% ------------------------------ ------------------------------- Total loans 112,566 100.00% 107,177 100.00% =============== =============== Net deferred loan costs 28 37 Deferred premium 15 10 Allowance for loan losses (883) (802) --------------- ---------------- Total loans, net $111,726 $106,422 =============== ================
(7) DEPOSITS AND BORROWED FUNDS The following tables indicate types and balances in deposit accounts at the dates indicated.
December 31, 2000 June 30, 2000 ------------------------------ ------------------------------- (Dollars in thousands) AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- Demand $24,208 13.23% $19,684 11.16% NOW 20,411 11.15% 22,521 12.77% Money market deposits 14,798 8.09% 12,992 7.37% Regular and other savings 32,853 17.95% 28,998 16.44% ------------------------------ ------------------------------- Total non-certificate accounts 92,270 50.42% 84,195 47.74% Term certificates 90,736 49.58% 92,150 52.26% ------------------------------ ------------------------------- Total deposits $183,006 100.00% $176,345 100.00% ============================== ===============================
The following is a list of advances from the Federal Home Loan Bank of Boston by maturity date.
December 31, 2000 June 30, 2000 ------------------------------ ------------------------------- (Dollars in thousands): AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- Maturities: Less than one year $113 0.46% $85 0.32% One to three years $2,000 8.21% $2,000 7.59% Three to five years $1,000 4.10% $7,000 26.57% Greater than five years 21,260 87.23% 17,265 65.52% -------------- -------------- --------------- --------------- Total borrowed funds $24,373 100.00% $26,350 100.00% ============== ============== =============== ===============
8 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL This quarterly report on Form 10-QSB contains forward-looking statements. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believe", "anticipates", "plans", "expects" and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the Company's actual results to differ materially from those contemplated by such forward-looking statements. These important factors include, without limitation, the Bank's continued ability to originate quality loans, fluctuation in interest rates, real estate conditions in the Bank's lending areas, general and local economic conditions, the Bank's continued ability to attract and retain deposits, the Company's ability to control costs, new accounting pronouncements, and changing regulatory requirements. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2000 AND JUNE 30, 2000 Assets increased by $6.8 million, or 3.1%, from $219.4 million at June 30, 2000 to $226.2 million at December 31, 2000. The increase was primarily funded by the $6.7 million, or 3.8%, increase in total deposits since June 30, 2000. Over that same timeframe, the Company reduced its borrowing position with the Federal Home Loan Bank ("FHLB") by $2.0 million, or 7.5%. The funds provided during the six months ended December 31, 2000 were invested in net loans, which increased $5.3 million, or 5.0%. All loan categories increased during this period, with residential mortgages, commercial mortgages, and construction loans increasing $730,000, $1.7 million, and $1.4 million, respectively. In addition, home equity loans increased $1.3 million since June 30, 2000. It is the Bank's continued objective to increase the residential fixed and variable loans by originating loans within the area serviced by its branch network. The purchase of loan packages from other financial institutions will be considered as opportunities present themselves. During the six months ended December 31, 2000, the Bank purchased 22 loans totaling $4.0 million. The Bank considers many factors when deciding to purchase a loan package, including but not limited to the loan pricing, loan underwriting, interest rate risk, and the geographical location of the real estate securing the loans. In addition, the Bank continues to emphasize growth in its commercial loan portfolio, which generally provides higher yields than residential and consumer loans, and potentially improves the Bank's core deposit base. The Bank frequently receives commercial checking and money market accounts from the Bank's commercial borrowers. During this same timeframe, securities available for sale and held to maturity decreased $2.4 million, or 2.7%. While corporate debt securities increased $1.1 million, or 4.9%, through purchases, federal agency obligations and marketable equity securities decreased $2.8 million, or 6.3%, and $508,000, or 15.3%, respectively, primarily due to security sales and/or bond calls. 9 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED) The increase of $6.7 million in deposits was primarily attributable to increases of $4.5 million, or 23.0%, $3.9 million, or 13.3%, and $1.8 million, or 13.9%, in demand deposits, regular and other savings, and money market deposits, respectively. During this same timeframe NOW accounts, primarily Interest Only Lawyers Trust Accounts ("IOLTA") and term certificates decreased $2.1 million, or 9.4%, and $1.4 million, or 1.5%, respectively. The Bank has reduced its emphasis on term certificate deposits, which generally have a high cost of funds, and has increased its focus on NOW accounts, demand deposit accounts, and money market deposit accounts which generally allows the Bank to develop increased relationships with its customers and pay a lower cost of funds. In addition, borrowings decreased $2.0 million, or 7.5% since June 30, 2000, primarily due to the paydown and maturity of certain borrowings. The borrowings are primarily utilized to fund certain investment and loan opportunities that allow the Bank to manage its interest rate margin. Stockholders' equity increased from $15.2 million, or 6.92% of total assets at June 30, 2000 to $17.5 million, or 7.71% of total assets at December 31, 2000. This increase resulted primarily from an improvement of $1.8 million in the unrealized losses in the Company's securities available for sale portfolio from June 30, 2000 to December 31, 2000 and the Company's earnings during the same 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.
Dec. 31, June 30, (Dollars in thousands) 2000 2000 ------------------ ----------------- Non-accrual loans: One-to-four family real estate loans $158 $160 Commercial loans 18 117 Commercial business loans 160 153 Consumer loans 21 2 ------------------ ----------------- Total non-accrual loans 357 432 Other real estate owned - - ------------------ ----------------- Total non-performing assets $357 $432 ================== ================= Allowance for loan losses $883 $802 ================== ================= Allowance for loan losses as a percent of total loans, net 0.79% 0.75% ================== ================= Allowance for loan losses as a percent of non-accrual loans 247.34% 185.65% ================== ================= Non-accrual loans as a percent of total loans, net 0.32% 0.41% ================== ================= Non-performing assets as a percent of total assets 0.16% 0.20% ================== =================
10 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED) During the six months ended December 31, 2000, the Bank added $118,000 to the loan loss provision due to the growth of the commercial loan portfolio which generally present a greater risk of loss than residential loans. During this period, there were $64,000 in loan charge-offs and $27,000 in recoveries from previously charged-off loans. While management believes that, based on information currently available, the allowance for loan losses is sufficient to cover losses in the Company's loan portfolio at this time, no assurances can be given that the level of the allowance will be sufficient to cover future loan losses or that future adjustments to the allowance will not be necessary if economic and/or other conditions differ substantially from the economic and other conditions considered by management in evaluating the adequacy of the current level of the allowance. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999 GENERAL Operating results are primarily dependent on the Bank's net interest income, which is the difference between the interest earned on the Bank's earning assets (short-term investments, loans, and investment securities) and the interest paid on deposits and borrowings. Operating results are also affected by provisions for loan losses, the level of income from non-interest sources such as fees and sales of investment securities and other assets, operating expenses and income taxes. Operating results are also significantly affected by general economic conditions, particularly changes in interest rates, as well as government policies and actions of regulatory authorities. Net income for the three months ended December 31, 2000 was $227,000 as compared to $334,000 for the three months ended December 31, 1999, a decrease of $107,000, or 32.0%. This decrease was primarily attributable to increases of $333,000, or 20.9%, and $27,000, or 77.1%, in total operating expenses and the provision for loan losses, respectively. Partially offsetting these were increases of $100,000, or 5.8%, and $61,000, or 31.1%, respectively, in net interest income and customer service fees. The Bank's interest rate spread (the difference between yields earned on earning assets and rates paid on deposits and borrowings) decreased from 3.57% for the three months ended December 31, 1999 to 3.06% for the three months ended December 31, 2000. In addition, interest rate margin (net interest income divided by average earning assets) decreased from 3.96% to 3.59%. The interest rate spread and margin decreased primarily as a result of the increase of 69 basis points in funding costs for both deposits and borrowings between periods due to Federal Reserve interest rate increases since June 1999. Partially offsetting the increase in funding costs was an increase of 18 basis points in the yield on earning assets between periods. The Bank's emphasis on commercial loans assisted in this improvement as loan yields improved 24 basis points between periods. While core-based deposit growth will be emphasized, past experience indicates that such growth is achieved through a greater increase in higher-cost retail certificates than lower-cost core deposits. An increase in interest rates and continued competition from other financial institutions together with the aforementioned growth in retail certificates could cause future tightening in the interest rate spread. 11 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(CONTINUED) The interest rate spread and margin for the periods indicated are as follows:
Three months ended December 31, --------------------------- 2000 1999 ---- ---- Weighted average yield earned on: Short-term investments 6.75% 5.34% Securities 6.99% 6.98% Total loans, net 8.48% 8.24% ------------- ------------- All earning assets 7.78% 7.60% Weighted average rate paid on: Deposits 4.50% 3.74% Borrowed funds 6.08% 5.35% ------------- ------------- All interest-bearing liabilities 4.72% 4.03% ------------- ------------- Weighted average rate spread 3.06% 3.57% ============= ============= Net interest margin 3.59% 3.96% ============= =============
Earnings per share data for the three months ended December 31, 2000 was $0.14 for both "basic" and "diluted" calculations as compared to $0.21 per share for both "basic" and "diluted" calculations for the three months ended December 31, 1999. INTEREST AND DIVIDEND INCOME Total interest and dividend income increased by $645,000, or 19.6%, from $3.3 million for the three months ended December 31, 1999 to $3.9 million for the comparable period in 2000. This increase was primarily attributable to a $29.0 million, or 16.8%, increase in average earning assets between the two periods as well as a 19 basis point increase in the yield on average earning assets between the two periods. The average balances in net loans increased $19.6 million, or 21.9%, while total loan yield increased by 24 basis points to 8.48%. The average loan balance within the residential loan portfolio increased by $11.1 million, while commercial loans and other loan types grew by $8.5 million. The average investment portfolio balance increased $5.8 million or 7.2 % over this same period and the portfolio yield improved by 1 basis point to 6.99%. Corporate debt securities increased by $12.0 million during this timeframe, while federal agency obligations and pass-through securities declined due to security sales and paydowns. In addition, the average balance in short-term investments increased by $3.6 million, or 111.9%, while the portfolio yield improved by 141 basis points to 6.75 . This yield increase reflects the Federal Reserve System's increase in short-term interest rates from June 1999 through the end of the period. 12 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INTEREST EXPENSE Interest expense on deposits increased $534,000, or 44.4%, from $1.2 million for the three months ended December 31, 1999, to $1.7 million for the three months ended December 31, 2000. This increase was attributable to a $25.8 million, or 20.1%, increase in average interest-bearing deposit balances between periods, while deposit rates increased from 3.74% to 4.50% over the same period. The increase in the interest rates was primarily attributable to the growth of $17.8 million, or 24.3%, in higher-priced certificate accounts during the period due to increases in interest rates by the Federal Reserve System. The Bank decreased its use of borrowings from the FHLB to put its emphasis on the lower cost retail deposit products. Average balances in these advances were $25.2 million during the three months ended December 31, 2000, a decrease of $2.7 million, or 9.5% from the three months ended December 31, 1999. Over this same timeframe, borrowing rates increased from 5.35% to 6.08%. Interest expense on FHLB advances increased $11,000, or 3.0%, from $373,000 for the three months ended December 31, 1999 to $384,000 for the three months ended December 31, 2000. OTHER INCOME Total other income increased $76,000, or 17.4 %, from $437,000 for the three months ended December 31, 1999 to $513,000 for the same period in 2000. This change was caused primarily by an increase of $61,000, or 31.1%, in customer service fees between periods. These service fees increased primarily due to increases in Visa Debit Card income, ATM surcharge income, and NOW account and NSF ("Non-sufficient funds") fees between periods. The net gains on securities available for sale was constant at $214,000 in both reporting periods. OPERATING EXPENSE Total operating expense increased $333,000, or 20.9%, from $1.6 million for the three months ended December 31, 1999 to $1.9 million for the three months ended December 31, 2000. Salaries and benefits, occupancy and equipment, and data processing expenses increased $200,000, or 24.7%, $35,000, or 10.1%, and $32,000, or 33.0%, respectively, between periods. 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. INCOME TAXES Income tax expense decreased not only because of the decline in pretax income, but also because of the decrease in the effective tax rates between periods. The effective income tax rates were 33.0% and 36.1% for the three months ended December 31, 2000 and 1999, respectively. The effective tax rates are below the statutory combined state and federal income tax rates because the Bank's two security corporations take advantage of the lower state tax rate afforded to these types of entities and additional tax preference items which are nontaxable. 13 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2000 AND 1999 GENERAL Net income for the six months ended December 31, 2000 was $452,000 as compared to $502,000 for the six months ended December 31, 1999, a decrease of $50,000, or 10.0%. This decrease was primarily attributable to increases of $568,000, or 18.3%, and $38,000, or 47.5%, in total operating expenses and the loan loss provision, respectively. This decrease in net income was partially offset by increases of $280,000, or 8.4%, $127,000, or 33.8%, and $57,000, or 24.5% in net interest income, customer service fees, and net gains on securities available for sale, respectively. The interest rate spread and margin for the periods indicated are as follows:
Six months ended December 31, --------------------------- 2000 1999 ---- ---- Weighted average yield earned on: Short-term investments 6.66% 5.18% Securities 7.06% 6.88% Total loans, net 8.39% 8.19% ------------- ------------- All earning assets 7.76% 7.52% Weighted average rate paid on: Deposits 4.46% 3.74% Borrowed funds 5.99% 5.27% ------------- ------------- All interest-bearing liabilities 4.68% 3.97% ------------- ------------- Weighted average rate spread 3.08% 3.52% ============= ============= Net interest margin 3.58% 3.92% ============= =============
INTEREST AND DIVIDEND INCOME Total interest and dividend income increased by $1.4 million, or 22.5%, from $6.4 million for the six months ended December 31, 1999 to $7.8 million for the comparable period in 2000. This increase was primarily attributable to a $31.5 million, or 18.6%, increase in average earning assets between the two periods and a 24 basis point increase in the average yield on earning assets. The average balances in net loans increased $19.9 million, or 22.6%, and total loan yield increased by 20 basis points to 8.39%. The average balance for residential mortgages increased by $12.4 million, 26.0%,while commercial and home equity loan increased $4.1 million, or 13.0%, and $2.9 million, or 52.0%, respectively. 14 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The average investment portfolio balance increased $10.6 million, or 13.7 %, over this same timeframe and its portfolio yield improved by 18 basis points to 7.06%. Most of the increase in the investment portfolio balance was in corporate debt obligations. In addition, the average balance in short-term investments increased $1.1 million, or 26.1%, between periods while the portfolio yield increased by 148 basis points. INTEREST EXPENSE Interest expense on deposits increased $1.1 million, or 45.7%, from $2.4 million for the six months ended December 31, 1999, to $3.4 million for the six months ended December 31, 2000. This increase was attributable to a $27.7 million, or 21.9%, increase in average interest-bearing deposit balances between periods, and an increase in average deposit rates over the same period from 3.74% to 4.46%. The increase in deposit interest rates was primarily due to the increase in interest rates by the Federal Reserve System between the two periods. The Bank decreased its use of borrowings from the FHLB as part of its management of interest rate risk. Average balances in these advances were $25.2 million during the six months ended December 31, 2000, a decrease of $761,000, or 2.9% from the six months ended December 31, 1999. Over this same timeframe, average borrowing rates increased from 5.27% to 5.99%. Interest expense on FHLB advances increased $71,000, or 10.4%, from $684,000 for the six months ended December 31, 1999 to $755,000 for the six months ended December 31, 2000. OTHER INCOME Total other income increased $218,000, or 33.4%, from $652,000 for the six months ended December 31, 1999 to $870,000 for the same period in 2000. This change was caused primarily by increases of $57,000, or 24.5%, and $127,000, or 33.8%, respectively, in the net gains on sales of securities and customer service fees. Customer service fees increased primarily due to increases in Visa Debit Card income, ATM surcharge income, and NOW account and NSF fees between periods. OPERATING EXPENSE Total operating expense increased $568,000, or 18.3%, from $3.1 million for the six months ended December 31, 1999 to $3.7 million for the six months ended December 31, 2000. Salaries and benefits occupancy and equipment expenses, and data processing expenses increased $345,000 , or 22.0%, $87,000, or 12.9%, and $72,000, or 38.1%, 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. In addition, the Bank installed a "Wide Area Network" (WAN) in order to centralize at one location the installation and monitoring of the bank's application software from one location. 15 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) INCOME TAXES Income tax expense decreased not only because of the decline in pretax income, but also because of the decrease in the effective tax rates between periods. The effective income tax rates were 33.8% and 36.5% for the six months ended December 31, 2000 and 1999, respectively. The effective tax rates are below the statutory combined state and federal income tax rates because the Bank's two security corporations take advantage of the lower state tax rate afforded to these types of entities and additional tax preference items which are nontaxable. 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 16 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION(CONTINUED) funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, economic conditions, and competition. The Bank uses its liquidity resources primarily to fund existing and future loan commitments, to fund net deposit outflows, to invest in other interest-earning assets, to maintain liquidity, and to pay operating expenses. From time to time, the Bank utilizes advances from the FHLB primarily in connection with its management of the interest rate sensitivity of its assets and liabilities. Total advances outstanding at December 31, 2000 amounted to $24.4 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 securities guaranteed by the U.S. government or a government agency. As of December 31, 2000, the Bank's total borrowing capacity was $73.6 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 December 31, 2000, the Bank had $3.0 million of outstanding commitments to originate loans. The Bank anticipates that it will have sufficient funds available to meet these commitments. Certificates of deposit, which are scheduled to mature in one year or less, totaled $82.8 million at December 31, 2000. Based upon historical experience, management believes that a significant portion of such deposits will remain with the Bank. At December 31, 2000, the Company and the Bank exceeded all regulatory capital requirements. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involved amounts which are believed by management to be immaterial to the financial condition and operations of the Company. ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable 17 SERVICE BANCORP, INC. AND SUBSIDIARY ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K There were no reports filed on Form 8-K. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SERVICE BANCORP, INC. Date: February 13, 2001 By: /s/ Pamela J. Mozynski --------------------------- Pamela J. Mozynski President and Chief Executive Officer Date: February 13, 2001 By: /s/ Warren W. Chase, Jr. --------------------------- Warren W. Chase, Jr. Senior Vice President and Treasurer 19 -----END PRIVACY-ENHANCED MESSAGE-----