UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
| ¨ | TRANSITION REPORT UNDER 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 small business issuer as specified in its charter)
| Massachusetts | 04-3430806 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
81 Main Street,
Medway, Massachusetts 02053
(Address of principal executive offices)
(508) 533-4343
(Issuer’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ¨ NO x
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: At April 28, 2006, there were 1,653,179 shares of common stock outstanding, par value $0.01 per share.
Transitional Small Business Disclosure Format (Check one): YES ¨ NO x
SERVICE BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands, except share amounts)
March 31, 2006 | June 30, 2005 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 6,691 | $ | 7,307 | ||||
Short-term investments | 3 | 2,454 | ||||||
Total cash and cash equivalents | 6,694 | 9,761 | ||||||
Securities available for sale, at fair value | 53,941 | 46,500 | ||||||
Securities held to maturity, at amortized cost | 2,529 | 4,155 | ||||||
Federal Home Loan Bank stock, at cost | 5,066 | 3,908 | ||||||
Loans | 309,192 | 277,104 | ||||||
Less allowance for loan losses | (2,784 | ) | (2,506 | ) | ||||
Loans, net | 306,408 | 274,598 | ||||||
Banking premises and equipment, net | 3,654 | 3,794 | ||||||
Accrued interest receivable | 1,769 | 1,465 | ||||||
Bank-owned life insurance | 4,805 | 4,683 | ||||||
Net deferred tax asset | 1,463 | 836 | ||||||
Other assets | 1,522 | 902 | ||||||
Total assets | $ | 387,851 | $ | 350,602 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits | $ | 261,605 | $ | 254,805 | ||||
Borrowings | 93,888 | 64,557 | ||||||
Subordinated debentures | 3,093 | 3,093 | ||||||
Other liabilities | 1,946 | 1,632 | ||||||
Total liabilities | 360,532 | 324,087 | ||||||
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 | 8,256 | 7,930 | ||||||
Retained earnings | 20,895 | 19,480 | ||||||
Accumulated other comprehensive income (loss) | (519 | ) | 480 | |||||
Treasury stock, at cost – (59,451 and 77,345 shares, respectively) | (1,023 | ) | (1,250 | ) | ||||
Unearned ESOP shares – (6,636 and 11,466 shares, respectively) | (67 | ) | (115 | ) | ||||
Unearned restricted stock – (10,761 and 4,744 shares, respectively) | (240 | ) | (27 | ) | ||||
Total stockholders’ equity | 27,319 | 26,515 | ||||||
Total liabilities and stockholders’ equity | $ | 387,851 | $ | 350,602 | ||||
See accompanying notes to consolidated financial statements.
-1-
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(Dollars in thousands, except per share amounts)
Quarter Ended March 31, | Nine Months Ended March 31, | |||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||
Interest and dividend income: | ||||||||||||
Interest and fees on loans | $ | 4,561 | $ | 3,706 | $ | 13,094 | $ | 10,565 | ||||
Interest and dividends on securities and Federal Home Loan Bank stock | 698 | 682 | 2,054 | 2,067 | ||||||||
Interest on short-term investments | 1 | 4 | 3 | 26 | ||||||||
Total interest and dividend income | 5,260 | 4,392 | 15,151 | 12,658 | ||||||||
Interest expense: | ||||||||||||
Interest on deposits | 1,238 | 796 | 3,249 | 2,273 | ||||||||
Interest on borrowings | 1,103 | 671 | 2,913 | 1,901 | ||||||||
Interest on subordinated debentures | 58 | 43 | 164 | 118 | ||||||||
Total interest expense | 2,399 | 1,510 | 6,326 | 4,292 | ||||||||
Net interest income | 2,861 | 2,882 | 8,825 | 8,366 | ||||||||
Provision for loan losses | 88 | 89 | 288 | 300 | ||||||||
Net interest income, after provision for loan losses | 2,773 | 2,793 | 8,537 | 8,066 | ||||||||
Non-interest income: | ||||||||||||
Customer service fees | 253 | 260 | 785 | 780 | ||||||||
Gain on loan sales, net | 14 | — | 44 | 32 | ||||||||
Gain on securities sales, net | 72 | 37 | 319 | 88 | ||||||||
Other income | 111 | 105 | 344 | 364 | ||||||||
Total non-interest income | 450 | 402 | 1,492 | 1,264 | ||||||||
Non-interest expense: | ||||||||||||
Salaries and employee benefits | 1,459 | 1,319 | 4,522 | 3,919 | ||||||||
Occupancy | 279 | 271 | 805 | 753 | ||||||||
Equipment | 85 | 106 | 268 | 323 | ||||||||
Data processing | 220 | 201 | 631 | 591 | ||||||||
Professional fees | 116 | 98 | 336 | 302 | ||||||||
Advertising | 89 | 75 | 266 | 225 | ||||||||
Other general and administrative expense | 346 | 315 | 1,016 | 942 | ||||||||
Total non-interest expense | 2,594 | 2,385 | 7,844 | 7,055 | ||||||||
Income before income taxes | 629 | 810 | 2,185 | 2,275 | ||||||||
Provision for income taxes | 222 | 270 | 770 | 740 | ||||||||
Net income | $ | 407 | $ | 540 | $ | 1,415 | $ | 1,535 | ||||
Weighted average shares outstanding (basic) | 1,634,786 | 1,643,332 | 1,625,568 | 1,640,548 | ||||||||
Weighted average shares outstanding (diluted) | 1,656,234 | 1,666,301 | 1,647,392 | 1,664,770 | ||||||||
Earnings per share (basic) | $ | 0.25 | $ | 0.33 | $ | 0.87 | $ | 0.94 | ||||
Earnings per share (diluted) | $ | 0.25 | $ | 0.32 | $ | 0.86 | $ | 0.92 | ||||
See accompanying notes to consolidated financial statements.
-2-
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)
NINE MONTHS ENDED MARCH 31, 2006 AND 2005
(Dollars in thousands, except share amounts)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Unearned ESOP Shares | Unearned Restricted Stock | Total | |||||||||||||||||||||||
Balance at June 30, 2005 | $ | 17 | $ | 7,930 | $ | 19,480 | $ | 480 | $ | (1,250 | ) | $ | (115 | ) | $ | (27 | ) | $ | 26,515 | |||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||
Net income | — | — | 1,415 | — | — | — | — | 1,415 | ||||||||||||||||||||||
Net unrealized loss on securities available for sale, net of tax and reclassification adjustment | — | — | — | (999 | ) | — | — | — | (999 | ) | ||||||||||||||||||||
Total comprehensive income | 416 | |||||||||||||||||||||||||||||
Common stock held by ESOP released and committed to be released (4,830 shares) | — | 85 | — | — | — | 48 | — | 133 | ||||||||||||||||||||||
Purchase of treasury stock (5,606 shares) | — | — | — | — | (157 | ) | — | — | (157 | ) | ||||||||||||||||||||
Stock option exercises (3,500 shares) | — | (17 | ) | — | — | 58 | — | — | 41 | |||||||||||||||||||||
Income tax benefit on options exercised | — | 20 | — | — | — | — | — | 20 | ||||||||||||||||||||||
Amortization of restricted stock (14,883 shares) | — | 24 | — | — | — | — | 327 | 351 | ||||||||||||||||||||||
Restricted stock grants (20,000 shares) | — | 214 | — | — | 326 | — | (540 | ) | — | |||||||||||||||||||||
Balance at March 31, 2006 | $ | 17 | $ | 8,256 | $ | 20,895 | $ | (519 | ) | $ | (1,023 | ) | $ | (67 | ) | $ | (240 | ) | $ | 27,319 | ||||||||||
See accompanying notes to consolidated financial statements.
-3-
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)
NINE MONTHS ENDED MARCH 31, 2006 AND 2005 (concluded)
(Dollars in thousands, except share amounts)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Treasury Stock | Unearned ESOP Shares | Unearned Restricted Stock | Total | |||||||||||||||||||||||
Balance at June 30, 2004 | $ | 17 | $ | 7,760 | $ | 17,363 | $ | 553 | $ | (527 | ) | $ | (179 | ) | $ | (65 | ) | $ | 24,922 | |||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||
Net income | — | — | 1,535 | — | — | — | — | 1,535 | ||||||||||||||||||||||
Net unrealized loss on securities available for sale, net of tax and reclassification adjustment | — | — | — | (341 | ) | — | — | — | (341 | ) | ||||||||||||||||||||
Total comprehensive income | 1,194 | |||||||||||||||||||||||||||||
Common stock held by ESOP released and committed to be released (4,829 shares) | — | 84 | — | — | — | 48 | — | 132 | ||||||||||||||||||||||
Purchase of treasury stock (3,394 shares) | — | — | — | — | (91 | ) | — | — | (91 | ) | ||||||||||||||||||||
Stock option exercises (5,000 shares) | — | (13 | ) | — | — | 50 | — | — | 37 | |||||||||||||||||||||
Income tax benefit on stock option exercises | — | 31 | — | — | — | — | — | 31 | ||||||||||||||||||||||
Amortization of restricted stock (4,607 shares) | — | 13 | — | — | — | — | 33 | 46 | ||||||||||||||||||||||
Balance at March 31, 2005 | $ | 17 | $ | 7,875 | $ | 18,898 | $ | 212 | $ | (568 | ) | $ | (131 | ) | $ | (32 | ) | $ | 26,271 | |||||||||||
See accompanying notes to consolidated financial statements.
-4-
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
| Nine Months Ended March 31, | ||||||||
| 2006 | 2005 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,415 | $ | 1,535 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 288 | 300 | ||||||
Gain on securities sales, net | (319 | ) | (88 | ) | ||||
Gain on loan sales, net | (44 | ) | (32 | ) | ||||
Net amortization of securities | 33 | 93 | ||||||
Depreciation and amortization expense | 270 | 323 | ||||||
Increase in accrued interest receivable | (304 | ) | (77 | ) | ||||
Net amortization of deferred loan costs and premiums | 151 | 203 | ||||||
Bank-owned life insurance income | (122 | ) | (142 | ) | ||||
Deferred tax benefit | (91 | ) | (144 | ) | ||||
Other, net | 403 | 493 | ||||||
Net cash provided by operating activities | 1,680 | 2,464 | ||||||
Cash flows from investing activities: | ||||||||
Activity in securities available for sale: | ||||||||
Sales | 4,874 | 4,543 | ||||||
Maturities, prepayments and calls | 2,810 | 6,161 | ||||||
Purchases | (16,617 | ) | (9,420 | ) | ||||
Activity in securities held to maturity: | ||||||||
Maturities, prepayments and calls | 1,618 | 4,715 | ||||||
Net increase in loans, excluding loan purchases and sales | (37,622 | ) | (30,416 | ) | ||||
Sale of loans | 5,417 | 2,308 | ||||||
Purchase of loans | — | (200 | ) | |||||
Purchase of banking premises and equipment | (132 | ) | (544 | ) | ||||
Purchase of Federal Home Loan Bank stock | (1,158 | ) | (542 | ) | ||||
Net cash used by investing activities | (40,810 | ) | (23,395 | ) | ||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 6,800 | 9,308 | ||||||
Proceeds from term borrowings | 65,000 | 13,300 | ||||||
Repayment of term borrowings | (45,069 | ) | (2,019 | ) | ||||
Net increase in overnight borrowings | 9,400 | — | ||||||
Purchase of treasury stock | (157 | ) | (91 | ) | ||||
Stock option exercises | 41 | 37 | ||||||
Repayment of ESOP loan | 48 | 48 | ||||||
Net cash provided by financing activities | 36,063 | 20,583 | ||||||
Net change in cash and cash equivalents | (3,067 | ) | (348 | ) | ||||
Cash and cash equivalents at beginning of period | 9,761 | 13,202 | ||||||
Cash and cash equivalents at end of period | $ | 6,694 | $ | 12,854 | ||||
Supplementary information: | ||||||||
Interest paid on deposits | $ | 3,332 | $ | 2,289 | ||||
Interest paid on borrowings and subordinated debentures | 2,953 | 1,975 | ||||||
Income taxes paid | 758 | 727 | ||||||
Net unsettled securities available for sale transactions | (252 | ) | — | |||||
See accompanying notes to consolidated financial statements.
-5-
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)
| (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”), a Massachusetts chartered savings bank, and the Bank’s wholly-owned subsidiaries, Medway Security Corporation and Franklin Village Security Corporation, both of which engage solely in the purchase and sale of securities. All significant intercompany balances and transactions have been eliminated in consolidation.
These unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions for Form 10-QSB and Item 310(b) of Regulation S-B. 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 Annual Report on Form 10-KSB for the year ended June 30, 2005.
| (2) | Earnings per Share |
Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects additional common shares (common stock equivalents) that would have been outstanding if dilutive potential shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and unvested restricted stock and are determined using the treasury stock method. Assumed conversion of the outstanding dilutive stock options and unvested restricted stock would increase the shares outstanding, but would not require an adjustment to income as a result of the conversion.
Weighted average diluted shares outstanding have been calculated based on the following:
Quarter Ended March 31, | Nine Months Ended March 31, | |||||||
| 2006 | 2005 | 2006 | 2005 | |||||
Weighted average shares outstanding | 1,634,786 | 1,643,332 | 1,625,568 | 1,640,548 | ||||
Effect of dilutive stock options | 20,565 | 21,146 | 20,865 | 21,797 | ||||
Effect of unvested shares of restricted stock | 883 | 1,823 | 959 | 2,425 | ||||
Weighted average diluted shares outstanding | 1,656,234 | 1,666,301 | 1,647,392 | 1,664,770 | ||||
For the quarter and nine months ended March 31, 2006 and 2005, an average of 1,000 stock options and no unvested shares of restricted stock were anti-dilutive and therefore excluded from the earnings per share calculations.
| (3) | Commitments |
At March 31, 2006, the Company had outstanding commitments to originate loans of $25.3 million. Unused lines of credit and open commitments available to customers at March 31, 2006 amounted to $71.9 million, of which $33.7 million were home equity lines of credit.
-6-
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)(continued)
| (4) | Securities |
The following table sets forth the Company’s securities at the dates indicated.
| March 31, 2006 | June 30, 2005 | |||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||
| (Dollars in thousands) | ||||||||||||
Securities available for sale: | ||||||||||||
Federal agency securities | $ | 15,921 | $ | 15,625 | $ | 11,934 | $ | 11,966 | ||||
Federal agency mortgage-backed securities | 18,054 | 17,729 | 12,637 | 12,633 | ||||||||
Other debt securities | 17,222 | 16,996 | 19,219 | 19,815 | ||||||||
Municipal securities | 1,797 | 1,727 | — | — | ||||||||
Total debt securities available for sale | 52,994 | 52,077 | 43,790 | 44,414 | ||||||||
Marketable equity securities | 1,741 | 1,864 | 1,969 | 2,086 | ||||||||
Total securities available for sale | $ | 54,735 | $ | 53,941 | $ | 45,759 | $ | 46,500 | ||||
Securities held to maturity: | ||||||||||||
Federal agency mortgage-backed securities | $ | 2,121 | $ | 2,151 | $ | 3,253 | $ | 3,349 | ||||
Other debt securities | 408 | 411 | 902 | 927 | ||||||||
Total securities held to maturity | $ | 2,529 | $ | 2,562 | $ | 4,155 | $ | 4,276 | ||||
| (5) | Loans |
The following table presents data relating to the composition of the Company’s loan portfolio by type of loan at the dates indicated.
| March 31,2006 | June 30, 2005 | |||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||
| (Dollars in thousands) | ||||||||||||||
Real estate loans: | ||||||||||||||
One-to four-family residential | $ | 149,036 | 48.35 | % | $ | 143,045 | 51.82 | % | ||||||
Residential construction | 4,259 | 1.38 | % | 4,029 | 1.46 | % | ||||||||
Commercial and multi-family | 80,197 | 26.01 | % | 68,182 | 24.69 | % | ||||||||
Commercial construction | 20,154 | 6.54 | % | 12,249 | 4.44 | % | ||||||||
Total real estate loans | 253,646 | 82.28 | % | 227,505 | 82.41 | % | ||||||||
Commercial loans | 30,001 | 9.73 | % | 25,733 | 9.31 | % | ||||||||
Consumer loans: | ||||||||||||||
Home equity | 17,555 | 5.69 | % | 14,786 | 5.35 | % | ||||||||
Second mortgages | 5,986 | 1.94 | % | 7,020 | 2.54 | % | ||||||||
Passbook secured | 310 | 0.10 | % | 363 | 0.13 | % | ||||||||
Other | 795 | 0.26 | % | 712 | 0.26 | % | ||||||||
Total consumer loans | 24,646 | 7.99 | % | 22,881 | 8.28 | % | ||||||||
Total gross loans | 308,293 | 100.00 | % | 276,119 | 100.00 | % | ||||||||
Net deferred loan costs and premiums | 899 | 985 | ||||||||||||
Allowance for loan losses | (2,784 | ) | (2,506 | ) | ||||||||||
Total loans, net | $ | 306,408 | $ | 274,598 | ||||||||||
-7-
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)(continued)
| (6) | Deposits |
The following tables indicate types and balances in deposit accounts at the dates indicated.
| March 31, 2006 | June 30, 2005 | |||||||||||
| Amount | Percent | Amount | Percent | |||||||||
| (Dollars in thousands) | ||||||||||||
Demand | $ | 34,686 | 13.26 | % | $ | 39,547 | 15.52 | % | ||||
NOW | 35,519 | 13.58 | % | 35,222 | 13.82 | % | ||||||
Money market deposits | 24,390 | 9.32 | % | 33,478 | 13.14 | % | ||||||
Regular and other savings | 56,147 | 21.46 | % | 44,083 | 17.30 | % | ||||||
Total non-certificate accounts | 150,742 | 57.62 | % | 152,330 | 59.78 | % | ||||||
Term certificates of $100,000 or greater | 33,976 | 12.99 | % | 31,871 | 12.51 | % | ||||||
Term certificates less than $100,000 | 76,887 | 29.39 | % | 70,604 | 27.71 | % | ||||||
Total certificate accounts | 110,863 | 42.38 | % | 102,475 | 40.22 | % | ||||||
Total deposits | $ | 261,605 | 100.00 | % | $ | 254,805 | 100.00 | % | ||||
| (7) | Borrowings |
Borrowings included overnight borrowings with the Federal Home Loan Bank of Boston (“FHLB”) of $9.4 million as of March 31, 2006, while there were no overnight borrowings as of June 30, 2005. In addition, borrowings included the following advances from the FHLB. The advances are presented by the earlier of the maturity date or the date callable by the FHLB.
| March 31, 2006 | June 30, 2005 | |||||||||||
| Amount | Percent | Amount | Percent | |||||||||
| (Dollars in thousands) | ||||||||||||
Less than one year | $ | 42,500 | 50.30 | % | $ | 35,500 | 54.99 | % | ||||
One to three years | 20,000 | 23.67 | % | 13,000 | 20.14 | % | ||||||
Greater than three years | 21,988 | 26.03 | % | 16,057 | 24.87 | % | ||||||
Total | $ | 84,488 | 100.00 | % | $ | 64,557 | 100.00 | % | ||||
| (8) | Subordinated Debentures |
In March 2004, Service Capital Trust I (“Trust I”), a newly formed trust sponsored by the Company, participated in a pooled offering of trust preferred securities. In connection with this offering, Trust I issued $3.0 million of trust preferred securities and reinvested the proceeds in a 30-year $3.0 million junior subordinated debenture issued by the Company. Interest is calculated on the subordinated debenture and trust preferred securities at a rate equal to the three-month London Interbank Offering Rate plus 285 basis points. The junior subordinated debenture represents the sole asset of Trust I. The Company has guaranteed, on a subordinated basis, distribution and other payments due on the trust preferred securities (the “Guarantee”). The Guarantee, when taken together with the Company’s obligations under (i) the junior subordinated debenture; (ii) the indenture pursuant to which the junior subordinated debentures was issued; and (iii) the Amended and Restated Declaration of Trust governing Trust I, constitutes a full and unconditional guarantee of Trust I’s obligations under the trust preferred securities.
Under regulatory capital guidelines, trust preferred securities, within certain limitations, qualify as regulatory capital. Trust I, consistent with the Financial Accounting Standards Board Interpretation No. 46, “Variable Interest Entities”, is not consolidated in the consolidated financial statements of the Company. Therefore, the Company presents in its consolidated financial statements junior subordinated debt as a liability and its investment in Trust I as a component of other assets.
-8-
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)(continued)
| (9) | Stock Option Plan |
The Company has a stock option plan, which is described more fully in Note 12 of the Company’s annual report on Form 10-KSB for the year ended June 30, 2005. The Company measures compensation cost for its stock option plan using the intrinsic value based method of accounting, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company’s stock option plan have no intrinsic value at the grant date and no compensation cost is recognized for them.
Had compensation cost for the Company’s stock option plan been determined using the fair value method based on the Black-Scholes option-pricing model, the Company’s net income and earnings per share for the quarter and nine months ended March 31, 2006 and 2005, would have been reduced to the following pro forma amounts:
| Quarter Ended March 31, | Nine Months Ended March 31, | |||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||
(Dollars in thousands, except per share amounts) | ||||||||||||
Net income, as reported | $ | 407 | $ | 540 | $ | 1,415 | $ | 1,535 | ||||
Deduct: Total stock-based compensation expense determined under the fair value method, net of taxes | 5 | 7 | 20 | 31 | ||||||||
Pro forma net income | $ | 402 | $ | 533 | $ | 1,395 | $ | 1,504 | ||||
Earnings per share (basic): | ||||||||||||
As reported | $ | 0.25 | $ | 0.33 | $ | 0.87 | $ | 0.94 | ||||
Pro forma | $ | 0.25 | $ | 0.33 | $ | 0.86 | $ | 0.92 | ||||
Earnings per share (diluted): | ||||||||||||
As reported | $ | 0.25 | $ | 0.32 | $ | 0.86 | $ | 0.92 | ||||
Pro forma | $ | 0.24 | $ | 0.32 | $ | 0.85 | $ | 0.90 | ||||
| (10) | Stock Repurchase Plan |
In February 2003, the Board of Directors of the Company approved a Stock Repurchase Plan under which the Company is authorized to acquire up to 4% of the outstanding common stock, or up to approximately 65,925 shares of the issued and outstanding shares of its common stock in the open market or in private transactions. Under the Stock Repurchase Plan, shares may be repurchased from time to time and in such amounts as market conditions warrant, subject to regulatory considerations. The following table provides information on the purchases of common stock under the Stock Repurchase Plan for the quarter ended March 31, 2006.
| Repurchase Plan Information | |||||||||
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plan | Maximum number of shares that may yet be purchased under the plan | |||||
January 1, 2006 – January 31, 2006 | — | — | — | 23,689 | |||||
February 1, 2006 – February 28, 2006 | 4,706 | $ | 27.81 | 4,706 | 18,983 | ||||
March 1, 2006 – March 31, 2006 | — | — | — | 18,983 | |||||
Total | 4,706 | $ | 27.81 | 4,706 | 18,983 | ||||
-9-
| ITEM 2. | Management’s Discussion and Analysis |
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, competitive conditions in the Bank’s marketplace generally, the Bank’s continued ability to originate quality loans, fluctuation in interest rates including fluctuations which may affect the Bank’s interest rate spread, real estate conditions in the Bank’s lending areas, changes in the securities or financial markets, changes in loan defaults and charge-off rates, general and local economic conditions, the Bank’s continued ability to attract and retain deposits, the Company’s and the Bank’s ability to control costs, new accounting pronouncements, and changing regulatory requirements. The Company undertakes no obligation to publicly release the results of any revisions to those forward-looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Comparison of Financial Condition at March 31, 2006 and June 30, 2005
Total assets were $387.9 million at March 31, 2006, an increase of $37.3 million, or 10.6%, from the $350.6 million at June 30, 2005. Net loans increased $31.8 million, or 11.6%, to $306.4 million. The investment securities portfolio increased $7.0 million, or 12.8%, since June 30, 2005 to $61.5 million as of March 31, 2006. Total deposits increased $6.8 million, or 2.7%, since June 30, 2005 to $261.6 million at March 31, 2006. The Company increased borrowings from the Federal Home Loan Bank of Boston (“FHLB”) by $29.3 million, or 45.4%, since June 30, 2005, which provided further funding for loan growth.
Total investment securities, excluding FHLB stock, were $56.5 million at March 31, 2006, an increase of $5.8 million since June 30, 2005. Purchases of federal agency bonds totaling $4.0 million, mortgage-backed securities of $10.0 million and $1.8 million in municipal securities were only partially offset by reductions in investment securities due to amortization and prepayment on mortgage-backed securities, sales of mortgage-backed securities, and a corporate bond sale and maturity. The Company’s investment in FHLB stock increased $1.2 million to $5.1 million at March 31, 2006 consistent with the requirement of additional borrowings from the FHLB.
Residential real estate loans are originated through the residential mortgage division of the Bank, the Strata Mortgage Center. During the nine months ended March 31, 2006, the Strata Mortgage Center originated $31.3 million in residential real estate loans, which was $1.3 million, or 4.0%, lower than the same period last year. Also during the nine months ended March 31, 2006, the Bank sold $5.4 million in residential loans compared with residential loan sales of $2.3 million during the same period last year. As a result of this year’s originations and sales, the Bank’s total residential mortgage loans, net of principal payments, increased $6.2 million, or 4.2%, since June 30, 2005 to $153.3 million at March 31, 2006. The Company expects that the combination of a slower residential loan market and continued residential loan sales to result in lower net residential loan growth during the last quarter of fiscal year 2006. Home equity and second mortgage loans increased $1.7 million, or 8.0%, since June 30, 2005 to $23.5 million at March 31, 2006.
Commercial lending continues to be an area of opportunity and leading growth area for the Bank. The Bank originated $57.7 million in commercial, commercial real estate and construction loans and lines of credit since June 30, 2005, which was $20.1 million, or 53.5%, higher than the $37.6 million originated during the same period last year. The net increase in the total commercial loan portfolio since June 30, 2005 was $24.2 million, or 22.8%. In addition to commercial loan originations, the Bank emphasizes cross-selling of commercial checking and money market deposits from new commercial customers.
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Total deposits increased $6.8 million, or 2.7%, since June 30, 2005 to $261.6 million at March 31, 2006. Regular savings increased $12.1 million, or 27.4%, due to the recent Generations Gold deposit account promotion. Generations Gold is a checking account combined with a savings account that also includes a value club program, which provides customers with discounted banking, travel and other consumer services. Certificates of deposit increased $8.4 million, or 8.2%, since June 30, 2005 to $110.9 million at March 31, 2006. Included in the increase in certificates of deposit were $7.0 million in brokered certificates. NOW deposits totaled $35.5 million at March 31, 2006, slightly ahead of the $35.2 million at June 30, 2005. Partially offsetting these increases to deposits was a decrease in demand deposits of $4.9 million, or 12.3%, due mostly to volatility in large commercial accounts. Money market deposits decreased $9.1 million, or 27.1% due in part to customer transfers to the Generation Gold accounts and certificates of deposit.
Borrowings from the FHLB increased $29.3 million, or 45.4%, since June 30, 2005 to $93.9 million at March 31, 2006, and provided the additional funding for this year’s loan growth. The Company expects to utilize several sources of funds to support loan growth, including, but not limited to, running aggressive promotional campaigns for both core deposits and certificates of deposit, additional borrowings from the FHLB and correspondent banks as well as brokered certificates of deposit.
Stockholders’ equity increased from $26.5 million, or 7.56% of total assets at June 30, 2005, to $27.3 million, or 7.04% of total assets at March 31, 2006. The increase in stockholders’ equity was due principally to the Company’s retained earnings since the beginning of the fiscal year, partially offset by a decrease in accumulated other comprehensive income. Accumulated other comprehensive income, which consists almost entirely of unrealized gains or losses on securities available for sale, decreased $999,000 during the nine months ended March 31, 2006 due mostly to an increase in market interest rates and resulting decrease in the market value of debt securities and due to the sale of certain securities and recognition of related securities gains. The decrease in the equity to assets ratio was the result of asset growth since June 30, 2005.
Non-Performing Assets and Allowance for Loan Losses – Critical Accounting Estimate
The following table sets forth the Company’s non-performing assets at the dates indicated.
| March 31, 2006 | June 30, 2005 | |||||||
| (Dollars in thousands) | ||||||||
Non-accrual loans: | ||||||||
Residential real estate | $ | — | $ | — | ||||
Commercial and multi-family real estate | — | — | ||||||
Consumer | — | — | ||||||
Commercial | 317 | 90 | ||||||
Total | 317 | 90 | ||||||
Accruing loans more than 90 days past due | 1,173 | — | ||||||
Foreclosed assets | — | — | ||||||
Total non-performing assets | $ | 1,490 | $ | 90 | ||||
Total as a percentage of total assets | 0.38 | % | 0.03 | % | ||||
For the nine months ended March 31, 2006, the Bank’s provision for loan losses was $288,000, which was slightly lower than the $300,000 recorded for the same period last year. Nonperforming assets at March 31, 2006 were $1.5 million, or 0.38% of total assets, compared to $90,000 or 0.03% at June 30, 2005. The increase in non-performing assets was due mostly to two accruing loans that were more than 90 days past due as of March 31, 2006. The two loans are well collateralized and full collection of past due amounts is expected. The allowance for loan losses as a percentage of loans was 0.90% at March 31, 2006, the same as the 0.90% at June 30, 2005. For a further discussion of the allowance refer to the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2005 under “Allowance for Loan Losses”. During the nine months ended March 31, 2006, recoveries from previously charged-off loans of $21,000 were received and $31,000 of loans were charged-off.
While management believes that, based on information currently available, the allowance for loan losses is sufficient to cover losses in the Bank’s loan portfolio at this time, no assurances can be given that the level of the allowance will be sufficient to cover 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.
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Comparison of Operating Results for the Quarter and Nine Months Ended March 31, 2006 and 2005
Overview
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 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 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 quarter ended March 31, 2006 was $407,000 compared with $540,000 for the quarter ended March 31 2005, a decrease of $133,000, or 24.6%. The decrease in net income was largely due to an increase in non-interest expense of $209,000, or 8.8%, during the quarter. Net interest income decreased $21,000, or 0.7%, compared to the same quarter a year ago. Partially offsetting these reductions to income was higher non-interest income of $48,000, or 11.9%, and a lower loan loss provision by $1,000. Net income for the nine months ended March 31, 2006 was $1.4 million compared with $1.5 million for the nine months ended March 31, 2005, a decrease of $120,000, or 7.8%. Net interest income increased $459,000, or 5.5%, and non-interest income increased $228,000, or 18.0%, while the provision for loan losses was $12,000 lower compared to the same period a year ago. Partially offsetting these increases to income was higher non-interest expense of $789,000, or 11.2%.
Earnings per share for the quarter ended March 31, 2006 were $0.25 per share (basic and diluted) compared with $0.33 per share (basic) and $0.32 per share (diluted) for the quarter ended March 31, 2005. Earnings per share for the nine months ended March 31, 2006 were $0.87 per share (basic) and $0.86 per share (diluted) compared with $0.94 per share (basic) and $0.92 per share (diluted) for the nine months ended March 31, 2005.
Interest and Dividend Income
Total interest and dividend income for the quarter ended March 31, 2006 was $5.3 million, which was $868,000, or 19.8%, higher than the same quarter a year ago. Total interest and dividend income for the nine months ended March 31, 2006 was $15.2 million, which was $2.5 million, or 19.7%, higher than the same period a year ago. Increases in average earning-assets of $36.2 million and $37.6 million to $353.4 million and $345.1 million for the quarter and nine-month periods, respectively, were major contributors to the higher interest and dividend income. The yields on earning assets for the quarter and nine months ended March 31, 2006 were 5.99% and 5.85%, 42 and 36 basis points higher, respectively, than the same periods last year.
Interest and fees on loans increased $855,000, or 23.1%, and $2.5 million, or 23.9%, for the quarter and nine months ended March 31, 2006, respectively, compared to the same periods last year. Average net loans for the quarter increased $35.8 million, or 13.7%, to $297.0 million, while yield on loans increased 47 basis points to 6.19%. Average net loans for the nine-month period increased $39.6 million, or 15.8%, while yield on loans increased 39 basis points to 6.02%. The increase in yield on loans this quarter and the nine-month period reflects the increase over the past year in index rates used to set interest rates for new loans and for loan re-pricing, particularly home equity and certain commercial loans which are tied to prime and re-price daily or monthly.
The average securities portfolio balance increased $860,000 this quarter, and the yield on the securities portfolio increased 4 basis points to 4.96%, which resulted in an increase in interest income on securities of $16,000, or 2.3%. Average securities for the nine-month period were level with the same period last year while the yield on investment securities decreased 2 basis points to 4.94%, which resulted in a decrease in interest income on securities of $13,000, or 0.6%. The decrease in yield on securities reflects the replacement of matured or sold securities over the past year with slightly lower yielding securities.
Interest Expense
Total interest expense increased $889,000, or 58.9%, for the quarter ended March 31, 2006 to $2.4 million compared to the same quarter last year due to an increase in average interest-bearing liabilities of $37.1 million, or 13.7%, to $308.0 million and an increase in the cost of interest-bearing liabilities of 89 basis points to 3.14%. Total interest expense increased $2.0 million, or 47.4%, for the nine months ended March 31, 2006 to $6.3 million compared to the same period last year due to an increase in average interest-bearing liabilities of $36.4 million, or 13.9%, to $297.8 million and an increase in the cost of interest-bearing liabilities of 64 basis points to 2.81%.
Interest expense on deposits increased $442,000, or 55.5%, to $1.2 million for the quarter ended March 31, 2006 and increased $976,000, or 42.9%, to $3.2 million for the nine months ended March 31, 2006 compared to the same periods last year due to higher average deposits and cost of deposits. Average interest-bearing deposits increased $3.8 million and $8.0 million for the quarter and nine months ended March 31, 2006, respectively, compared to the same periods last year. The average cost of deposits increased 84 basis points to 2.41% and 56 basis points to 2.07% for the quarter and nine-month periods, respectively. The higher cost of deposits reflects the combination of the rising short-term market interest rate environment and the competitive market that the Bank operates in for certain deposits.
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Interest expense on borrowings and subordinated debt increased $447,000, or 62.6%, to $1.2 million for the quarter ended March 31, 2006 and increased $1.1 million, or 52.4%, to $3.1 million for the nine months ended March 31, 2006 compared to the same periods last year due mainly to an increased level of borrowings in support of funding for loan growth. Average borrowings increased $33.3 million and $28.4 million for the quarter and nine months ended March 31, 2006, respectively, compared to the same periods last year. The average cost of borrowings increased 34 basis points to 4.68% and 17 basis points to 4.54% for the quarter and nine months ended March 31, 2006, respectively, compared to last year.
Net Interest Income
Net interest income for the quarter ended March 31, 2006 decreased $21,000, or less than 1.0%, compared with the same period last year. The positive effect on interest income from the earning asset growth and higher asset yield was more than offset by the increase in interest expense due to an increase in interest bearing liabilities, an increase in the cost of liabilities as well as a change in the mix of liabilities, reflecting increased reliance upon borrowings and higher-cost certificates of deposit. While a rising rate environment over the past year resulted in the increases in earning asset yield and cost of liabilities, this change in market interest rates disproportionately affected the Company’s interest expense, as certain of the Company’s liability costs have risen faster than yields on earning assets. The effect of the rising rate environment, together with the Company’s greater reliance on higher cost funding resulted in a decline in interest rate spread (the difference between yields earned on earning assets and rates paid on deposits and borrowings) of 47 basis points to 2.85% and a decrease in interest rate margin (net interest income divided by average earning assets) of 39 basis points to 3.26% for the quarter ended March 31, 2006, compared to the same quarter last year.
Net interest income for the nine months ended March 31, 2006 increased $459,000, or 5.5%, over the same period last year. The increase in net interest income was due mainly to an increase in total average earning assets and higher yield on earning assets exceeding the effect of an increase in average interest-bearing liabilities and a change in the mix of liabilities to higher-cost borrowings and certificates of deposit. The Bank’s interest rate spread decreased 28 basis points to 3.04% for the nine months ended March 31, 2006 compared to the same period last year. The net interest margin decreased 22 basis points to 3.42% for nine months ended March 31, 2006.
The Bank intends to continue to emphasize core-based deposit growth for future funding requirements. Based on management’s expectations for future loan growth, particularly commercial loans, the Bank is expected to rely more on higher-cost certificates and borrowings from the FHLB to meet its future funding requirements. An increase in market interest rates and continued competition from other financial institutions together with the aforementioned growth in retail certificates and borrowings would likely cause further tightening in the Bank’s interest rate spread for at least the next several quarters. The unfavorable effect on the Bank’s net interest income from a decline in its interest rate spread may more than offset the positive impact effect on the Bank’s net interest income from expected future loan growth.
The interest rate spread and margin for the periods indicated are as follows:
| Quarter Ended March 31, | Nine Months Ended March 31, | |||||||||||
| 2006 | 2005 | 2006 | 2005 | |||||||||
Weighted average yield earned on: | ||||||||||||
Short-term investments | 5.06 | % | 2.79 | % | 3.70 | % | 1.73 | % | ||||
Securities | 4.96 | % | 4.92 | % | 4.94 | % | 4.96 | % | ||||
Total loans, net | 6.19 | % | 5.72 | % | 6.02 | % | 5.63 | % | ||||
All interest-earning assets | 5.99 | % | 5.57 | % | 5.85 | % | 5.49 | % | ||||
Weighted average rate paid on: | ||||||||||||
Deposits | 2.41 | % | 1.57 | % | 2.07 | % | 1.51 | % | ||||
Borrowed funds | 4.68 | % | 4.34 | % | 4.54 | % | 4.37 | % | ||||
All interest-bearing liabilities | 3.14 | % | 2.25 | % | 2.81 | % | 2.17 | % | ||||
Weighted average rate spread | 2.85 | % | 3.32 | % | 3.04 | % | 3.32 | % | ||||
Net interest margin | 3.26 | % | 3.65 | % | 3.42 | % | 3.64 | % | ||||
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Non-interest Income
Total non-interest income for the quarter and nine months ended March 31, 2006 increased $48,000, or 11.9%, and $228,000, or 18.0%, respectively, over the same periods last year. The increases in non-interest income were due mainly to higher gains from the sale of securities of $35,000, and $231,000, compared to the same periods last year as the Company took advantage of favorable market prices for certain securities. Gains from the sale of residential loans for the quarter and nine-month period ended March 31, 2006, increased $14,000, and $12,000, respectively.
Non-interest Expense
Total non-interest expense increased $209,000, or 8.8%, to $2.6 million for the quarter ended March 31, 2006 and increased $789,000, or 11.2%, for the nine months ended March 31, 2006 compared with the same periods last year. Salary and benefits expense increased $140,000 and $603,000 for the quarter and nine-month period, respectively. Included in non-interest expense for the nine months ended March 31, 2006 was a charge of $307,000 related to restricted stock awards of the Company’s common stock granted as of December 1, 2005 to executive officers and members of the Board of Directors of the Company. The expense associated with the awards is recognized over the vesting periods of the awards. These awards are more fully described in the Company’s Form 8-K report filed with the Securities and Exchange Commission on October 25, 2005. Beginning with the current quarter ended March 31, 2006 and concluding in the quarter ended December 31, 2009, the Company will include a charge for equity compensation expense related to the December 1, 2005 awards of $16,000 per quarter. Salaries and benefit expense were also higher in both periods due to increased benefit expenses and higher compensation levels due to annual merit increases. Occupancy expense increased $8,000, or 3.0%, and $52,000, or 6.9%, for the quarter and nine months ended March 31, 2006, respectively, compared to the same periods last year, due to increases in contractual rent obligations, higher real estate taxes and utilities expenses. Equipment expense was lower by $21,000, or 19.8%, and $55,000, or 17.0%, compared to the same periods last year due mostly to lower depreciation expense as older capital assets reached their depreciation lives. Increases in the other operating expense categories including data processing, professional fees and advertising were consistent with the expanded operations of the Company since last year.
The operating efficiency ratio (total non-interest expense divided by the sum of net interest income plus total non-interest income) for the quarter ended March 31, 2006 was 78.3% compared with 72.6% for the same quarter a year ago. The operating efficiency ratio for the nine months ended March 31, 2006 was 76.0% compared with 73.3% for the same nine-month period a year ago.
Income Taxes
Income tax expense decreased by $48,000 to $222,000 for the quarter ended March 31, 2006 compared with the same quarter last year as the effect this quarter of a lower level of pre-tax income was only partially offset by a higher effective tax rate. Income tax expense increased by $30,000 to $770,000 for the nine months ended March 31, 2006 compared with the same period last year as the effect of a lower level of pre-tax income was more than offset by a higher effective tax rate. The effective income tax rates were 35.3% and 35.2% for the quarter and nine months ended March 31, 2006, respectively, compared with 33.3% and 32.5%, respectively, for the same periods last year. The effective tax rates reflect the utilization by the Company of certain tax preference items such as bank-owned life insurance, dividends received deductions and security corporation subsidiaries to reduce the statutory corporate tax rates. The increase in effective tax rates reflects the increase in loans held by the Bank and resulting increase in interest income at the Bank, while a reduction in investment securities held by the security corporations has decreased interest income at the security corporations. Since the Bank and the security corporations file separate state tax returns and the Bank’s statutory state tax rate is 10.50% compared to 1.32% for the security corporations, the result of the shift in income to the Bank was an increase in the overall effective tax rate for the Company. In addition, the increases in effective tax rates reflect changes in tax laws regarding the deductibility of certain expenses.
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 the chief executive officer, the chief financial officer, the senior loan officer, and others 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.
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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, selling loans, managing the cost and structure of deposits, short and long-term borrowings and using 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.
ALCO modeling is performed quarterly with the assistance of an outside 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 of Directors 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 securities, maturities and early calls of securities, and funds provided from operations. While scheduled repayments of loans and maturities of securities 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 primarily uses its liquidity resources 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.
The Bank utilizes advances from the FHLB primarily in connection with its management of the interest rate sensitivity of its assets and liabilities. Total advances outstanding at March 31, 2006 amounted to $93.9 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. As of March 31, 2006, the Bank had a borrowing capacity with the FHLB to borrow an additional $17.3 million, for a total of $111.2 million. The Bank also has additional capacity to borrow federal funds from other banks and through such instruments as repurchase agreements utilizing federal agency obligations and mortgage-backed securities as collateral.
A major portion of the Bank’s liquidity consists of cash and cash equivalents, short-term investments, U.S. Government and federal agency obligations, mortgage-backed securities, and other debt securities. The level of these assets is dependent upon the Bank’s operating, lending, and financing activities during any given period.
At March 31, 2006, the Bank had $25.3 million of outstanding commitments to originate loans and unused lines of credit and open commitments available to customers totaling $71.9 million. 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 $86.6 million at March 31, 2006. Based upon historical experience, management believes that a significant portion of such deposits will remain with the Bank.
At March 31, 2006, the Company and the Bank continued to exceed all regulatory capital requirements.
In February 2003, the Board of Directors of the Company approved a Stock Repurchase Plan under which the Company is authorized to acquire up to 4% of the outstanding common stock, or up to approximately 65,925 shares of the issued and outstanding shares of its common stock in the open market or in private transactions. Under the Stock Purchase Plan, shares may be repurchased from time to time and in such amounts as market conditions warrant, and subject to regulatory considerations. The repurchased shares are expected to be used by the Company for general corporate purposes. As of March 31, 2006, 46,942 shares of the Company’s common stock had been repurchased under the Stock Purchase Plan at an average price of $24.52 per share.
Recent Accounting Pronouncement
In March 2006, the Financial Accounting Standards Board issued Statement No. 156, Accounting for Servicing of Financial Assets, which amends FASB Statement No. 140. This Statement requires that all separately recognized servicing rights be initially measured at fair value, if practicable. For each class of separately recognized servicing assets and liabilities, this Statement permits an entity to choose either of the following subsequent measurement methods: (1) amortize servicing assets or liabilities in proportion to and over the period of estimated net servicing income or net servicing loss, or (2) report servicing assets or liabilities at fair value at each reporting date and report changes in fair value in earnings in the period in which the changes occur. This Statement also requires additional disclosures for all separately recognized servicing rights, is effective for new transactions occurring and for subsequent measurement at the beginning of an entity’s first fiscal year that begins after September 15, 2006. This Statement is not expected to have a material effect on the Company’s consolidated financial statements.
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ITEM 3. Controls and Procedures
| (a) | Evaluation of disclosure controls and procedures. |
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal quarter. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that they believe the Company’s disclosure controls and procedures were effective as of March 31, 2006 to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.
| (b) | Changes in internal controls over financial reporting. |
There were no changes in the Company’s internal controls over financial reporting identified in connection with the Company’s evaluation of its disclosure controls and procedures that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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The Company is not involved in any pending legal proceedings other than legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts believed by management to be immaterial to the financial condition and operations of the Company.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
| (a) | Not applicable. |
| (b) | Not applicable. |
| (c) | A description of the Company’s Stock Repurchase Plan is included herein by reference to Note 10 of the Consolidated Financial Statements, included in Part I, Item 1 of this report. |
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Not applicable.
| Exhibits | ||
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934. | |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| SERVICE BANCORP, INC. | ||||
| Date: May 12, 2006 | By: | /s/ PAMELA J. MONTPELIER | ||
| Pamela J. Montpelier | ||||
| President and Chief Executive Officer | ||||
| Date: May 12, 2006 | By: | /s/ DANA S. PHILBROOK | ||
| Dana S. Philbrook | ||||
| Chief Financial Officer | ||||
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