Table of Contents
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 December 31, 2007
| ¨ | 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)
(888) 578-7282
(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 January 31, 2008, there were 1,652,193 shares of common stock outstanding, par value $0.01 per share.
Transitional Small Business Disclosure Format (Check one): YES ¨ NO x
Table of Contents
SERVICE BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
Index
Table of Contents
| ITEM 1. | Financial Statements |
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in thousands, except share amounts)
| December 31, 2007 | June 30, 2007 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 6,221 | $ | 8,434 | ||||
Short-term investments | 1,810 | 951 | ||||||
Total cash and cash equivalents | 8,031 | 9,385 | ||||||
Securities available for sale, at fair value | 47,235 | 52,346 | ||||||
Securities held to maturity, at amortized cost | 1,331 | 1,480 | ||||||
Federal Home Loan Bank stock, at cost | 6,299 | 5,871 | ||||||
Loans | 337,561 | 333,164 | ||||||
Less allowance for loan losses | (3,466 | ) | (3,144 | ) | ||||
Loans, net | 334,095 | 330,020 | ||||||
Premises and equipment, net | 5,175 | 5,365 | ||||||
Accrued interest receivable | 1,696 | 1,939 | ||||||
Bank-owned life insurance | 5,118 | 5,026 | ||||||
Net deferred tax asset | 1,743 | 1,782 | ||||||
Other real estate owned | 769 | 306 | ||||||
Other assets | 1,700 | 1,539 | ||||||
Total assets | $ | 413,192 | $ | 415,059 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits | $ | 259,594 | $ | 274,165 | ||||
Borrowings | 118,818 | 106,417 | ||||||
Subordinated debentures | 3,093 | 3,093 | ||||||
Other liabilities | 2,140 | 2,076 | ||||||
Total liabilities | 383,645 | 385,751 | ||||||
Commitments and contingencies (Note 3) | ||||||||
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 | 8,422 | 8,475 | ||||||
Retained earnings | 22,354 | 22,598 | ||||||
Accumulated other comprehensive income (loss) | 5 | (427 | ) | |||||
Treasury stock, at cost – (60,437 shares at December 31, 2007 and 63,737 shares at | (1,184 | ) | (1,203 | ) | ||||
Unearned restricted stock – (5,760 shares at December 31, 2007 and 5,952 shares at | (67 | ) | (152 | ) | ||||
Total stockholders’ equity | 29,547 | 29,308 | ||||||
Total liabilities and stockholders’ equity | $ | 413,192 | $ | 415,059 | ||||
See accompanying notes to consolidated financial statements.
-1-
Table of Contents
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(Dollars in thousands, except share amounts)
| Three Months Ended December, 31, | Six Months Ended December, 31, | |||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||
Interest and dividend income: | ||||||||||||||
Interest and fees on loans | $ | 5,220 | $ | 5,304 | $ | 10,390 | $ | 10,482 | ||||||
Interest and dividends on securities and Federal Home Loan Bank stock | 756 | 757 | 1,541 | 1,577 | ||||||||||
Interest on short-term investments | 14 | 12 | 28 | 13 | ||||||||||
Total interest and dividend income | 5,990 | 6,073 | 11,959 | 12,072 | ||||||||||
Interest expense: | ||||||||||||||
Interest on deposits | 1,871 | 1,812 | 3,766 | 3,526 | ||||||||||
Interest on borrowings | 1,416 | 1,433 | 2,906 | 2,794 | ||||||||||
Interest on subordinated debentures | 64 | 66 | 129 | 132 | ||||||||||
Total interest expense | 3,351 | 3,311 | 6,801 | 6,452 | ||||||||||
Net interest income | 2,639 | 2,762 | 5,158 | 5,620 | ||||||||||
Provision for loan losses | 340 | 228 | 860 | 528 | ||||||||||
Net interest income, after provision for loan losses | 2,299 | 2,534 | 4,298 | 5,092 | ||||||||||
Non-interest income: | ||||||||||||||
Customer service fees | 321 | 258 | 641 | 524 | ||||||||||
Mortgage banking gains, net | 6 | 24 | 10 | 79 | ||||||||||
Securities sales gains, net | 109 | 196 | 200 | 231 | ||||||||||
Other income | 127 | 136 | 281 | 251 | ||||||||||
Total non-interest income | 563 | 614 | 1,132 | 1,085 | ||||||||||
Non-interest expense: | ||||||||||||||
Salaries and employee benefits | 1,376 | 1,406 | 2,909 | 2,935 | ||||||||||
Occupancy | 377 | 262 | 755 | 530 | ||||||||||
Data processing | 351 | 231 | 628 | 457 | ||||||||||
Equipment | 118 | 83 | 233 | 167 | ||||||||||
Professional fees | 210 | 112 | 359 | 229 | ||||||||||
Advertising | 72 | 80 | 158 | 171 | ||||||||||
Other general and administrative | 424 | 377 | 844 | 716 | ||||||||||
Total non-interest expense | 2,928 | 2,551 | 5,886 | 5,205 | ||||||||||
Income (loss) before income taxes | (66 | ) | 597 | (456 | ) | 972 | ||||||||
Provision (benefit) for income taxes | (46 | ) | 191 | (212 | ) | 317 | ||||||||
Net income (loss) | $ | (20 | ) | $ | 406 | $ | (244 | ) | $ | 655 | ||||
Weighted average shares outstanding—basic | 1,645,385 | 1,642,093 | 1,644,483 | 1,640,829 | ||||||||||
Weighted average shares outstanding—diluted | 1,645,385 | 1,663,941 | 1,644,483 | 1,662,362 | ||||||||||
Earnings (loss) per share—basic | $ | (0.01 | ) | $ | 0.25 | $ | (0.15 | ) | $ | 0.40 | ||||
Earnings (loss) per share—diluted | $ | (0.01 | ) | $ | 0.24 | $ | (0.15 | ) | $ | 0.39 | ||||
See accompanying notes to consolidated financial statements.
-2-
Table of Contents
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)
SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006
(Dollars in thousands, except share amounts)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Unearned Restricted Stock | Total | |||||||||||||||||||||
Balance at June 30, 2007 | $ | 17 | $ | 8,475 | $ | 22,598 | $ | (427 | ) | $ | (1,203 | ) | $ | (152 | ) | $ | 29,308 | ||||||||||
Comprehensive income: | |||||||||||||||||||||||||||
Net income (loss) | — | — | (244 | ) | — | — | — | (244 | ) | ||||||||||||||||||
Net change in unrealized gain/loss on securities available for sale, net of tax and reclassification adjustment | — | — | — | 432 | — | — | 432 | ||||||||||||||||||||
Total comprehensive income | 188 | ||||||||||||||||||||||||||
Purchase of treasury stock (3,200 shares) | — | — | — | — | (81 | ) | — | (81 | ) | ||||||||||||||||||
Forfeiture of restricted stock (3,000 shares) | — | — | — | — | (81 | ) | 61 | (20 | ) | ||||||||||||||||||
Stock option exercises (9,500 shares) | — | (57 | ) | — | — | 181 | — | 124 | |||||||||||||||||||
Income tax benefit on options exercised | — | 2 | — | — | — | — | 2 | ||||||||||||||||||||
Amortization of restricted stock (939 shares) | — | 2 | — | — | — | 24 | 26 | ||||||||||||||||||||
Balance at December 31, 2007 | $ | 17 | $ | 8,422 | $ | 22,354 | $ | 5 | $ | (1,184 | ) | $ | (67 | ) | $ | 29,547 | |||||||||||
| 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, 2006 | $ | 17 | $ | 8,319 | $ | 21,350 | $ | (721 | ) | $ | (1,023 | ) | $ | (51 | ) | $ | (221 | ) | $ | 27,670 | ||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||
Net income | — | — | 655 | — | — | — | — | 655 | ||||||||||||||||||||||
Net change in unrealized gain/loss on securities available for sale, net of tax and reclassification adjustment | — | — | — | 599 | — | — | — | 599 | ||||||||||||||||||||||
Total comprehensive income | 1,254 | |||||||||||||||||||||||||||||
Common stock held by ESOP released and committed to be released (3,219 shares) | — | 64 | — | — | — | 33 | — | 97 | ||||||||||||||||||||||
Purchase of treasury stock (1,200 shares) | — | — | — | — | (37 | ) | — | — | (37 | ) | ||||||||||||||||||||
Stock option exercises (400 shares) | — | (1 | ) | — | — | 7 | — | — | 6 | |||||||||||||||||||||
Income tax benefit on options exercised | — | 3 | — | — | — | — | — | 3 | ||||||||||||||||||||||
Amortization of restricted stock (2,405 shares) | — | 11 | — | — | — | — | 39 | 50 | ||||||||||||||||||||||
Stock option compensation | — | 21 | — | — | — | — | 21 | |||||||||||||||||||||||
Balance at December 31, 2006 | $ | 17 | $ | 8,417 | $ | 22,005 | $ | (122 | ) | $ | (1,053 | ) | $ | (18 | ) | $ | (182 | ) | $ | 29,064 | ||||||||||
See accompanying notes to consolidated financial statements.
-3-
Table of Contents
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in thousands)
| Six Months Ended December 31, | ||||||||
| 2007 | 2006 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | (244 | ) | $ | 655 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 860 | 528 | ||||||
Securities sales gains, net | (200 | ) | (231 | ) | ||||
Portfolio loan sales gains, net | — | (5 | ) | |||||
Loans originated for sale | (2,533 | ) | (8,860 | ) | ||||
Sales of loans originated for sale | 2,353 | 8,415 | ||||||
Net amortization (accretion) of securities | (150 | ) | 14 | |||||
Depreciation and amortization expense | 232 | 161 | ||||||
Stock-based compensation | 26 | 71 | ||||||
Decrease (increase) in accrued interest receivable | 243 | (201 | ) | |||||
Net amortization of deferred loan costs and premiums | 84 | 70 | ||||||
Bank-owned life insurance income | (92 | ) | (89 | ) | ||||
Deferred tax benefit | (193 | ) | (233 | ) | ||||
Other, net | (78 | ) | 196 | |||||
Net cash provided by operating activities | 308 | 491 | ||||||
Cash flows from investing activities: | ||||||||
Activity in securities available for sale: | ||||||||
Sales | 14,783 | 2,900 | ||||||
Maturities, prepayments and calls | 3,002 | 2,523 | ||||||
Purchases | (11,658 | ) | (5,274 | ) | ||||
Activity in securities held to maturity: | ||||||||
Maturities, prepayments and calls | 147 | 667 | ||||||
Net increase in loans, excluding loan purchases and sales | (5,608 | ) | (9,786 | ) | ||||
Sale of portfolio loans | — | 807 | ||||||
Sale of other real estate owned | 306 | — | ||||||
Purchase of banking premises and equipment | (79 | ) | (602 | ) | ||||
Purchase of Federal Home Loan Bank stock | (428 | ) | (413 | ) | ||||
Net cash provided by (used in) investing activities | 465 | (9,178 | ) | |||||
Cash flows from financing activities: | ||||||||
Net decrease in deposits | (14,571 | ) | (6,280 | ) | ||||
Proceeds from long term borrowings | 43,500 | 10,000 | ||||||
Repayment of long term borrowings | (24,049 | ) | (2,048 | ) | ||||
Net (decrease) increase in short-term borrowings | (7,050 | ) | 5,800 | |||||
Purchase of treasury stock | (81 | ) | (37 | ) | ||||
Stock option exercises | 124 | 6 | ||||||
Net cash (used in) provided by financing activities | (2,127 | ) | 7,441 | |||||
Net change in cash and cash equivalents | (1,354 | ) | (1,246 | ) | ||||
Cash and cash equivalents at beginning of period | 9,385 | 8,763 | ||||||
Cash and cash equivalents at end of period | $ | 8,031 | $ | 7,517 | ||||
Supplementary information: | ||||||||
Interest paid on deposits | $ | 3,766 | $ | 3,491 | ||||
Interest paid on borrowings and subordinated debentures | 2,916 | 2,864 | ||||||
Loan transferred to other real estate owned | 769 | — | ||||||
Income taxes paid | 26 | 453 | ||||||
See accompanying notes to consolidated financial statements.
-4-
Table of Contents
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, 2007.
| (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 December 31, | Six Months Ended December 31, | |||||||
| 2007 | 2006 | 2007 | 2006 | |||||
Weighted average shares outstanding | 1,645,385 | 1,642,093 | 1,644,483 | 1,640,829 | ||||
Effect of dilutive stock options | — | 21,159 | — | 20,842 | ||||
Effect of unvested shares of restricted stock | — | 689 | — | 691 | ||||
Weighted average diluted shares outstanding | 1,645,385 | 1,663,941 | 1,644,483 | 1,662,362 | ||||
For the quarter and six months ended December 31, 2007, as a result of the company reporting a net loss, all outstanding stock options and unvested shares of restricted stock were deemed anti-dilutive. For the quarter and six months ended December 31, 2006, an average of 735 and 867 stock options, respectively, were anti-dilutive and therefore excluded from the earnings per share calculations. For the quarter and six months ended December 31, 2006 there were no unvested shares of restricted stock that were anti-dilutive and therefore excluded from the earnings per share calculations.
| (3) | Commitments |
At December 31, 2007, the Company had outstanding commitments to originate loans of $3.1 million. Unused lines of credit and open commitments available to customers at December 31, 2007 amounted to $57.1 million, of which $33.7 million were home equity lines of credit.
-5-
Table of Contents
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.
| December 31, 2007 | June 30, 2007 | |||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||
| (Dollars in thousands) | ||||||||||||
Securities available for sale: | ||||||||||||
Government sponsored enterprise obligations | $ | 10,294 | $ | 10,508 | $ | 16,280 | $ | 16,110 | ||||
Government sponsored enterprise mortgage-backed securities | 16,824 | 16,915 | 22,182 | 21,706 | ||||||||
Other debt securities | 11,452 | 11,256 | 10,156 | 10,100 | ||||||||
Municipal securities | 1,798 | 1,785 | 1,797 | 1,753 | ||||||||
Total debt securities available for sale | 40,368 | 40,464 | 50,415 | 49,669 | ||||||||
Marketable equity securities | 6,855 | 6,771 | 2,583 | 2,677 | ||||||||
Total securities available for sale | $ | 47,223 | $ | 47,235 | $ | 52,998 | $ | 52,346 | ||||
Securities held to maturity: | ||||||||||||
Government sponsored enterprise mortgage-backed securities | $ | 1,331 | $ | 1,367 | $ | 1,480 | $ | 1,498 | ||||
| (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.
| December 31, 2007 | June 30, 2007 | |||||||||||||
| Amount | Percent | Amount | Percent | |||||||||||
| (Dollars in thousands) | ||||||||||||||
Real estate loans: | ||||||||||||||
One-to four-family residential | $ | 161,662 | 48.01 | % | $ | 149,147 | 44.88 | % | ||||||
Residential construction | 1,575 | 0.47 | % | 4,542 | 1.37 | % | ||||||||
Residential loans held for sale | 597 | 0.18 | % | 417 | 0.13 | % | ||||||||
Commercial and multi-family | 92,087 | 27.35 | % | 96,728 | 29.11 | % | ||||||||
Commercial construction | 25,501 | 7.57 | % | 24,462 | 7.36 | % | ||||||||
Total real estate loans | 281,422 | 83.58 | % | 275,296 | 82.85 | % | ||||||||
Commercial loans | 31,269 | 9.29 | % | 32,360 | 9.74 | % | ||||||||
Consumer loans: | ||||||||||||||
Home equity | 16,749 | 4.98 | % | 17,808 | 5.36 | % | ||||||||
Second mortgages | 6,114 | 1.82 | % | 5,814 | 1.75 | % | ||||||||
Passbook secured | 257 | 0.08 | % | 216 | 0.07 | % | ||||||||
Other | 839 | 0.25 | % | 778 | 0.23 | % | ||||||||
Total consumer loans | 23,959 | 7.13 | % | 24,616 | 7.41 | % | ||||||||
Total gross loans | 336,650 | 100.00 | % | 332,272 | 100.00 | % | ||||||||
Net deferred loan costs and premiums | 911 | 892 | ||||||||||||
Allowance for loan losses | (3,466 | ) | (3,144 | ) | ||||||||||
Total loans, net | $ | 334,095 | $ | 330,020 | ||||||||||
-6-
Table of Contents
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)(continued)
| (6) | Deposits |
The following table indicates types and balances in deposit accounts at the dates indicated.
| December 31, 2007 | June 30, 2007 | |||||||||||
| Amount | Percent | Amount | Percent | |||||||||
| (Dollars in thousands) | ||||||||||||
Demand | $ | 37,962 | 14.62 | % | $ | 39,181 | 14.29 | % | ||||
NOW | 24,306 | 9.36 | % | 29,319 | 10.69 | % | ||||||
Money market deposits | 10,989 | 4.23 | % | 13,893 | 5.07 | % | ||||||
Regular and other savings | 53,011 | 20.43 | % | 56,068 | 20.45 | % | ||||||
Total non-certificate accounts | 126,268 | 48.64 | % | 138,461 | 50.50 | % | ||||||
Term certificates of $100,000 or greater | 45,737 | 17.62 | % | 43,802 | 15.98 | % | ||||||
Term certificates less than $100,000 | 77,289 | 29.77 | % | 77,902 | 28.41 | % | ||||||
Brokered term deposits | 10,300 | 3.97 | % | 14,000 | 5.11 | % | ||||||
Total certificate accounts | 133,326 | 51.36 | % | 135,704 | 49.50 | % | ||||||
Total deposits | $ | 259,594 | 100.00 | % | $ | 274,165 | 100.00 | % | ||||
| (7) | Borrowings |
As of December 31, 2007 there were no overnight borrowings with the Federal Home Loan Bank of Boston (“FHLB”), compared to federal funds purchased of $1.1 million at June 30, 2007. 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.
| December 31, 2007 | June 30, 2007 | |||||||||||
| Amount | Percent | Amount | Percent | |||||||||
| (Dollars in thousands) | ||||||||||||
Less than one year | $ | 51,000 | 42.92 | % | $ | 42,500 | 40.34 | % | ||||
One to three years | 60,081 | 50.57 | % | 56,121 | 53.26 | % | ||||||
Greater than three years | 7,737 | 6.51 | % | 6,746 | 6.40 | % | ||||||
Total | $ | 118,818 | 100.00 | % | $ | 105,367 | 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 $3.1 million of trust preferred securities and reinvested the proceeds in a 30-year $3.1 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.
-7-
Table of Contents
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (unaudited)(concluded)
| (9) | 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 December 31, 2007.
| 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 | ||||
October 1, 2007 – October 31, 2007 | — | — | 8,097 | |||||
November 1, 2007 – November 30, 2007 | — | — | 8,097 | |||||
December 1, 2007 – December 31, 2007 | — | — | 8,097 | |||||
Total | — | — | 8,097 | |||||
-8-
Table of Contents
| 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 December 31, 2007 and June 30, 2007
Total assets were $413.2 million at December 31, 2007, a decrease of $1.9 million, or 0.4%, from the $415.1 million at June 30, 2007. Net loans increased $4.1 million, or 1.2%, to $334.1 million. The investment securities portfolio decreased $4.8 million, or 8.1%, since June 30, 2007 to $54.9 million as of December 31, 2007. Short-term investments, which consists mostly of money market mutual fund investments and overnight federal funds sold, increased $859,000. Total deposits decreased $14.6 million, or 5.3%, since June 30, 2007 to $259.6 million at December 31, 2007. The Company increased borrowings by $12.4 million, or 11.6%, since June 30, 2007, which provided funding for the decrease in deposits.
Total investment securities, excluding FHLB stock, were $48.6 million at December 31, 2007, a decrease of $5.3 million since June 30, 2007. Purchases of government-sponsored enterprise obligations totaled $1.0 million, equity securities purchased totaled $6.2 million and $4.4 million in corporate bonds were purchased. These purchases were more than offset by reductions in investment securities due to amortization and prepayment on mortgage-backed securities, and sales in equity securities totaling $2.0 million and $11.5 million in government-sponsored enterprise mortgage-backed securities. The Company’s investment in FHLB stock increased $428,000 to $6.3 million at December 31, 2007 consistent with the requirements for 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 six months ended December 31, 2007, the Strata Mortgage Center originated $19.9 million in residential real estate loans, which was $3.4 million, or 20.7%, higher than the same period last year. Also during the six months ended December 31, 2007, the Bank sold $2.3 million in residential loans compared with residential loan sales of $9.2 million during the same period last year. At December 31, 2007 residential loans held for sale totaled $597,000, compared to $417,000 as of June 30, 2007. Total residential mortgage loans, net of principal payments, increased $9.7 million, or 6.3%, since June 30, 2007 to $163.8 million at December 31, 2007. The Company expects to increase the amount of loans held in portfolio and have a reduction in residential loan sales compared to the year ended June 30, 2007. Home equity and second mortgage loans decreased $759,000, or 3.2%, since June 30, 2007 to $22.9 million at December 31, 2007.
The Bank originated $6.9 million in commercial, commercial real estate and construction loans and lines of credit since June 30, 2007, which was $15.1 million, or 68.9%, lower than the $21.9 million originated during the same period last year. The lower level of commercial originations reflects the slower commercial real estate and construction loan market due to declining new home sales and an increase in the residential construction loan inventory in the market area. In addition commercial lending remains price sensitive due to competitive pressures to offer lower interest rates in order to retain and increase our borrowing relationships. The net decrease in the total commercial loan portfolio since June 30, 2007 was $4.7 million, or 3.1%.
Total deposits decreased $14.6 million, or 5.3%, since June 30, 2007 to $259.6 million at December 31, 2007. Demand deposits decreased $1.2 million since June 30, 2007 to $38.0 million. NOW deposits decreased $5.0 million due almost entirely to lower balances in certain NOW accounts used by attorneys in connection with residential loan closings. Money market and savings deposits decreased $2.9 million and $3.0 million, respectively. Certificates of deposit decreased $2.4 million, or 1.8%, to $133.3 million, due to a reduction in higher costing brokered certificates of deposit totaling $3.7 million.
Borrowings increased $12.4 million, or 11.7%, since June 30, 2007 to $118.8 million at December 31, 2007, 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.
-9-
Table of Contents
Stockholders’ equity increased from $29.3 million, or 7.06% of total assets at June 30, 2007, to $29.5 million, or 7.15% of total assets at December 31, 2007. Book value per share was $17.95 at December 31, 2007 compared to $17.84 at June 30, 2007. The increase in stockholders’ equity was due to the change in accumulated other comprehensive income offset by the current period net loss. Accumulated other comprehensive income, which consists almost entirely of unrealized gains and losses on securities available for sale, increased $432,000 during the six months ended December 31, 2007 due mostly to a decrease in market interest rates and resulting increase in the market value of debt securities.
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.
| December 31, 2007 | June 30, 2007 | |||||||
| (Dollars in thousands) | ||||||||
Non-accrual loans: | ||||||||
One-to-four family residential | $ | 475 | $ | — | ||||
Commercial and multi-family real estate | 8,884 | 2,378 | ||||||
Consumer | — | — | ||||||
Commercial business loans | 933 | 854 | ||||||
Total | 10,292 | 3,232 | ||||||
Accruing loans more than 90 days past due | 297 | 1,548 | ||||||
Other real estate owned | 769 | 306 | ||||||
Total non-performing assets | $ | 11,358 | $ | 5,086 | ||||
Total as a percentage of total assets | 2.75 | % | 1.23 | % | ||||
For the six months ended December 31, 2007, the Bank’s provision for loan losses was $860,000, compared to $528,000 recorded for the same period last year. The allowance for loan losses as a percentage of loans was 1.03% at December 31, 2007, compared to 0.94% at June 30, 2007. This year’s higher loan loss provision and increase in allowance as a percentage of total loans were due mostly to a required allowance for loan losses allocation during the six months ended December 31, 2007. These loan loss provisions were based primarily on management’s assessment of several key factors, including internal loan review classifications reflecting commercial relationships deemed by the Company to be impaired, historical loss experience, changes in portfolio size and composition, and current economic conditions. During the six months ended December 31, 2007, recoveries from previously charged-off loans of $39,000 were received and $577,000 of loans were charged-off. For a further discussion of the allowance refer to the Company’s Annual Report on Form 10-KSB for the year ended June 30, 2007 under “Allowance for Loan Losses”. Nonperforming assets at December 31, 2007 were $11.4 million, or 2.75% of total assets, compared to $5.1 million or 1.23% at June 30, 2007. Non-accrual loans at December 31, 2007 included two commercial real estate loans, which required a corresponding valuation allowance of $408,000, and seven commercial loan relationships that required a corresponding valuation allowance of $341,000. Other real estate owned at December 31, 2007 included one foreclosed commercial construction property.
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.
Comparison of Operating Results for the Quarter and Six Months Ended December 2007 and 2006
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 residential loans, 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.
The net loss for the quarter ended December 31, 2007 was $20,000 compared to net income of $406,000 for the quarter ended December 31, 2006, a decrease of $426,000, or 104.9%. The decrease in net income was the result of lower net interest income of $123,000, or 4.5%, a higher loan loss provision of $112,000, lower non-interest income of $51,000 or 8.3%, and higher operating expenses of $376,000, or 14.8%. The net loss for the six months ended December 31, 2007 was $244,000 compared to net income of $655,000 for the six months ended December 31, 2006, a decrease of $899,000, or 137.3%. The decrease in net income was due to lower net interest income of $462,000, or 8.2%, a higher loan loss provision of $332,000, and higher operating expenses of $681,000, or 13.1%. Partially offsetting these decreases to income was higher other operating income of $47,000, or 4.3%.
-10-
Table of Contents
Earnings (loss) per share for the quarter ended December 31, 2007 was ($0.01) per share basic and diluted, compared to $0.25 per share (basic) and $0.24 (diluted) for the quarter ended December 31, 2006. Earnings (loss) per share for the six months ended December 31, 2007 was ($0.15) per share basic and diluted compared to $0.40 per share (basic) and $0.39 per share (diluted) for the six months ended December 31, 2006.
Interest and Dividend Income
Total interest and dividend income for the quarter ended December 31, 2007 was $6.0 million, which was $83,000, or 1.4%, lower than the same quarter a year ago. Total interest and dividend income for the six months ended December 31, 2007 was $12.0 million, which was $113,000, or 9.4%, lower than the same period a year ago. The yields on earning assets for the quarter and six months ended December 31, 2007 were 6.15% and 6.11%, 7 and 14 basis points lower, respectively, than the same periods last year.
Interest and fees on loans decreased $84,000, or 1.6%, and $92,000, or 0.9%, for the quarter and six months ended December 31, 2007, respectively, compared to the same periods last year. Average net loans for the quarter increased $4.7 million, or 1.4%, to $332.3 million, while the yield on loans decreased 19 basis points to 6.25%. Average net loans for the six-month period increased $6.6 million, or 2.0%, while the yield on loans decreased 19 basis points to 6.24%. The decrease in yield on loans this quarter and the six-month period reflects the decrease 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.
Interest and dividends on securities decreased $1,000, or 0.1%, and $21,000, or 1.3%, for the quarter and six months ended December 31, 2007, respectively, compared to the same periods last year. The average securities portfolio balance decreased $5.6 million, or 9.3%, this quarter, and the yield on the securities portfolio increased 51 basis points to 5.55%. Average securities for the six-month period decreased $2.1 million, or 3.6%, and the yield on investment securities increased 7 basis points to 5.37%.
Interest Expense
Total interest expense increased $40,000, or 1.2%, for the quarter ended December 31, 2007 to $3.4 million compared to the same quarter last year due to an increase in average interest-bearing liabilities of $3.4 million, or 1.0%, to $342.6 million and an increase in the cost of interest-bearing liabilities of 1 basis point to 3.86%. Total interest expense increased $349,000, or 5.4%, for the six-months ended December 31, 2007 to $6.8 million compared to the same period last year due to an increase in average interest-bearing liabilities of $7.8 million, or 2.3%, to $344.4 million and an increase in the cost of interest-bearing liabilities of 11 basis points to 3.89%.
Interest expense on deposits increased $59,000, or 3.3%, to $1.9 million for the quarter ended December 31, 2007 and increased $240,000, or 6.8%, to $3.8 million for the six months ended December 31, 2007 compared with the same periods last year due to higher cost of deposits. Average interest-bearing deposits decreased $3.8 million and $1.4 million for the quarter and six months ended December 31, 2007, respectively, compared with the same periods last year. The average cost of deposits increased 16 basis points to 3.40% and 24 basis points to 3.39% for the quarter and six-months ended December 31 2007 compared with the same periods last year. The higher cost of deposits reflects the combination of the competitive market that the Bank operates in for certain deposits and increased use of higher cost certificates of deposit as a source of funding.
Interest expense on borrowings and subordinated debt decreased $19,000, or 1.3%, to $1.5 million for the quarter ended December 31, 2007 and increased $109,000, or 3.7%, to $3.0 million for the six months ended December 31, 2007 compared with the same periods last year due mainly to an increased level of FHLB borrowings in support of funding for loan growth and deposit outflow. Average borrowings increased $7.2 million and $9.1 million for the quarter and six months ended December 31, 2007, respectively, compared with the same periods last year. The average cost of borrowings decreased 35 basis points to 4.66% and 19 basis points to 4.79% for the quarter and six months ended December 31, 2007, compared to the same periods last year.
Net Interest Income
Net interest income for the quarter and six months ended December 31, 2007 decreased $123,000, or 4.5%, and $462,000, or 8.2%, respectively, compared with the same periods last year. The positive effect on interest income from loan portfolio growth was more than offset by lower earning asset yields, reductions in the securities portfolio, and the increase in interest expense due to the increase in interest-bearing liabilities and the related rates. The interest rate spread (the difference between yields earned on earning assets and rates paid on deposits and borrowings) decreased 8 basis points to 2.29% and 25 basis points to 2.22% for the quarter and six months ended December 31, 2007, respectively, compared to the same periods last year. The net interest rate margin (net interest income divided by average earning assets) decreased 12 basis points to 2.74% and 27 basis points to 2.67% for the quarter and six months ended December 31, 2007, respectively, compared to the same periods last year.
-11-
Table of Contents
Although the Bank would prefer to rely primarily on, and intends to continue to seek, growth in core deposits to fund future loan growth, management expects that during the current fiscal year the Bank will need to rely more on higher-cost certificates of deposit and borrowings from the FHLB to meet its future funding requirements. However, declining market interest rates have begun to result in widening of the Bank’s net interest spread and margin, as the Bank’s interest-bearing liabilities reprice into lower rates faster than its interest earning assets, as evidenced by the net interest spread for the quarter ended December 31, 2007 being greater than the net interest spread for the six months ended December 31, 2007. The Bank expects that this widening of its net interest rate spread and margin will continue for at least the next several quarters, though no assurances can be given that the widening will occur at the same rate if at all.
The interest rate spread and margin for the periods indicated are as follows:
| Quarter Ended December 31, | Six Months Ended December 31, | |||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
Weighted average yield earned on: | ||||||||||||
Short-term investments | 4.42 | % | 5.21 | % | 4.85 | % | 5.19 | % | ||||
Securities | 5.55 | % | 5.04 | % | 5.37 | % | 5.30 | % | ||||
Total loans, net | 6.25 | % | 6.44 | % | 6.24 | % | 6.43 | % | ||||
All interest-earning assets | 6.15 | % | 6.22 | % | 6.11 | % | 6.25 | % | ||||
Weighted average rate paid on: | ||||||||||||
Deposits | 3.40 | % | 3.24 | % | 3.39 | % | 3.15 | % | ||||
Borrowed funds | 4.66 | % | 5.01 | % | 4.79 | % | 4.98 | % | ||||
All interest-bearing liabilities | 3.86 | % | 3.85 | % | 3.89 | % | 3.78 | % | ||||
Weighted average rate spread | 2.29 | % | 2.37 | % | 2.22 | % | 2.47 | % | ||||
Net interest margin | 2.74 | % | 2.86 | % | 2.67 | % | 2.94 | % | ||||
Non-interest Income
Total non-interest income decreased $51,000, or 8.3%, to $563,000 for the quarter ended December 31, 2007 from $614,000 for the same quarter last year. For the six months ended December 31, 2007, non-interest income increased $47,000, or 4.3%, to $1.1 million from the same period last year. Non-interest income in the current year periods reflected higher customer service fee income, lower gains from mortgage banking activities as a result of reduced residential loan sales, and lower gains from sales of investment securities than the same periods last year.
Non-interest Expense
Total non-interest expense for the quarter ended December 31, 2007 increased $377,000, or 14.8%, to $2.9 million compared to the same quarter last year, primarily due to increases in occupancy and equipment expenses of $150,000, technology costs of $120,000, and professional fees and other operating expenses of $137,000. For the six months ended December 31, 2007, non-interest expense increased $681,000, or 13.1%, to $5.9 million from the same period last year, primarily due to increases in occupancy and equipment expenses of $291,000, technology costs of $171,000, and professional fees and other operating expenses of $245,000. The increases in occupancy and equipment expenses were the result of the consolidation of the executive and operations center to a central location within the Company’s market area during the last quarter of fiscal year 2007. The increases in technology costs are primarily related to increased data processing and computer software costs that support the Company’s growth in operations. The increases in professional fees and other operating expenses were due in large part to expenses associated with problem loans and foreclosed properties.
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 December 31, 2007 was 91.4% compared with 75.6% for the same quarter a year ago. The operating efficiency ratio for the six months ended December 31, 2007 was 93.6% compared with 77.6% for the same six-month period a year ago.
Income Taxes
Income tax expense (benefit) decreased $237,000 to a tax benefit of $46,000 for the quarter ended December 31, 2007. For the six months ended December 31, 2007 income tax expense (benefit) decreased $529,000. The effective income tax benefit rates were
-12-
Table of Contents
69.7% and 46.5% for the quarter and six months ended December 31, 2007, respectively, compared with effective income tax rates of 32.0% and 32.6%, 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. Due to this year’s pre-tax loss, tax preference items as a percentage of pre-tax loss has increased, which has resulted in the higher effective tax benefit rates for the quarter and six months ended December 31, 2007 compared with effective tax rates for the same periods last year.
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 seeking to mitigate 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, 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, which is performed quarterly with the assistance of an outside advisor, 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 December 31, 2007 amounted to $118.1 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 and certain investment securities. As of December 31, 2007, the Bank had a borrowing capacity with the FHLB to borrow an additional $22.1 million, for a total of $141.4 million. The Bank also has additional capacity to borrow federal funds from other banks.
A significant portion of the Bank’s liquidity consists of cash and cash equivalents, short-term investments and investment securities. The level of these assets is dependent upon the Bank’s operating, lending, and financing activities during any given period.
At December 31, 2007, the Company had outstanding commitments to originate loans of $3.1 million. Unused lines of credit and open commitments available to customers at December 31, 2007 amounted to $57.1 million, of which $33.7 million were home equity lines of credit. Certificates of deposit, which are scheduled to mature in one year or less, totaled $114.9 million at December 31, 2007. Based upon historical experience, management believes that a significant portion of such deposits will remain with the Bank.
At December 31, 2007, the Company continued to exceed all regulatory capital requirements with Tier I capital of $32.5 million and a Tier I capital to average assets ratio of 7.95%, which was above the required level of $16.3 million or 4.00%. The
-13-
Table of Contents
Tier I capital to risk-weighted assets ratio was 10.16%, which was above the required level of $12.8 million or 4.00%. In addition, with total capital of $36.0 million, the total capital to risk-weighted assets ratio was 11.25%, which was above the required level of $25.6 million, or 8.00%.
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 December 31, 2007, 57,828 shares of the Company’s common stock had been repurchased under the Stock Purchase Plan at an average price of $25.49 per share.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, “Fair Value Measurements.” This Statement defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement is effective for the Company on July 1, 2008, with earlier adoption permitted for fiscal 2008, and is not expected to have a material impact on the Company’s consolidated financial statements.
On February 15, 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which provides companies with an option to report selected financial assets and liabilities at fair value. Statement No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. This Statement is effective for the Company’s 2009 fiscal year, with early adoption permitted for the Company’s 2008 fiscal year, provided that the Company also adopts Statement No. 157 for fiscal 2008.
In December 2007, the FASB issued Statement No. 141 (revised), “Business Combinations.” This Statement replaces FASB Statement No. 141, and applies to all business entities, including mutual entities that previously used the pooling-of-interests method of accounting for certain business combinations. Under Statement No. 141 (revised) an acquirer is required to recognize at fair value the assets acquired, liabilities assumed, and any non-controlling interest in the acquired at the acquisition date. This replaces the cost-allocation process under Statement No. 141, which resulted in the non-recognition of some assets and liabilities at the acquisition date and in measuring some assets and liabilities at amounts other than their fair values at the acquisition date. This Statement requires that acquisition costs and expected restructuring costs be recognized separately from the acquisition, and that the acquirer in a business combination achieved in stages recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquired, at the full amounts of their fair values. This Statement also requires an acquirer to recognize assets acquired and liabilities assumed arising from contractual contingencies as of the acquisition date, while Statement 141 allowed for the deferred recognition of pre-acquisition contingencies until certain recognition criteria were met, and an acquirer is only required to recognize assets or liabilities arising from all other contingencies if it is more likely than not that they meet the definition of an asset or a liability. Under this Statement, an acquirer is required to recognize contingent consideration at the acquisition date, whereas contingent consideration obligations usually were not recognized at the acquisition date under Statement 141. Further, this Statement eliminates the concept of negative goodwill and requires gain recognition in instances in which the total acquisition-date fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any non-controlling interest in the acquired. This Statement makes significant amendments to other Statements and other authoritative guidance, and applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date.
In December 2007, the FASB issued Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51.” This Statement establishes accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. This Statement is effective for fiscal years beginning on or after December 15, 2008.
-14-
Table of Contents
| 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 December 31, 2007 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.
As reported on the Company’s Form 8-K filing dated October 9, 2007, the Company’s former Chief Financial Officer resigned from employment with the Company and resigned from his position as Chief Financial Officer effective as of October 11, 2007.
-15-
Table of Contents
| ITEM 1. | Legal Proceedings |
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) | There were no repurchases made under the Company’s Stock Purchase Plan during the quarter ended December 31, 2007. |
| ITEM 3. | Defaults Upon Senior Securities |
Not applicable.
| ITEM 4. | Submission of Matters to a Vote of Security Holders |
On October 23, 2007, the Company held its annual meeting of stockholders for the purposes of (i) electing five Directors for three and one-year terms and (ii) ratifying Wolf & Company, P.C. as the Company’s independent auditors for the fiscal year ending June 30, 2008.
The number of votes cast at the meeting as to each matter acted upon was as follows:
| NO. OF VOTES FOR | NO. OF VOTES WITHHELD | |||||
1. | Election of Directors: | |||||
| John E. Brabazon (one-year term) | 1,304,610 | 37,743 | ||||
| John J. Burns | 1,304,610 | 37,743 | ||||
| Kenneth C.A. Isaacs | 1,305,210 | 37,143 | ||||
| David L. Porter | 1,304,610 | 37,743 | ||||
| Kelly A. Verdolino | 1,305,130 | 37,223 |
The continuing directors whose terms expire beyond the October 23, 2007 Annual Meeting date are:
| Term Expires | ||
Richard Giusti | 2008 | |
Eugene R. Liscombe | 2008 | |
Pamela J. Montpelier | 2008 | |
Paul V. Kenney | 2009 | |
Stephen B. Lincoln | 2009 | |
Lawrence E. Novick | 2009 |
| NO. OF VOTES FOR | NO. OF VOTES AGAINST | NO. OF VOTES ABSTAINING | ||||||
2. | Ratification of the Appointment of Wolf & Company, P.C. as the Company’s independent registered public accounting firm | 1,342,153 | 0 | 200 |
-16-
Table of Contents
| ITEM 5. | Other Information |
Not applicable.
| ITEM 6. | Exhibits |
Exhibits | ||
| 10.1 | Amended and Restated Employment Agreement dated as of October 23, 2007 by and between Pamela J. Montpelier, Strata Bank, Service Bancorp, Inc. and Service Bancorp, MHC | |
| 10.2 | Amended and Restated Supplemental Retirement Agreement dated as of October 23, 2007 by and between Pamela J. Montpelier, Strata Bank, Service Bancorp, Inc. and Service Bancorp, MHC | |
| 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. | |
-17-
Table of Contents
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: February 14, 2008 | By: | /s/ PAMELA J. MONTPELIER | ||||
| Pamela J. Montpelier | ||||||
| President and Chief Executive Officer | ||||||
| Date: February 14, 2008 | By: | /s/ MARK L. ABBATE | ||||
| Mark L. Abbate | ||||||
| Chief Financial Officer | ||||||
-18-