UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- -------------
Commission file number 0-24935
SERVICE BANCORP, INC.
---------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Massachusetts 04-3430806
------------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
81 Main Street, Medway, Massachusetts 02053
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(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 |_|
At October 31, 2001, there were 1,644,124 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
Index
PART I FINANCIAL INFORMATION...........................................1
ITEM 1. Financial Statements............................................1
Consolidated Balance Sheets.....................................1
Consolidated Statements Of Income...............................2
Consolidated Statements Of Changes In Stockholders' Equity......3
Consolidated Statements Of Cash Flows...........................4
Notes To Consolidated Financial Statements......................5
ITEM 2. Management's Discussion And Analysis Or Plan Of Operation.......8
PART II OTHER INFORMATION..............................................14
ITEM 1. Legal Proceedings..............................................14
ITEM 2. Changes In Securities..........................................14
ITEM 3. Defaults Upon Senior Securities................................14
ITEM 4. Submission Of Matters To A Vote Of Security Holders............14
ITEM 5. Other Information..............................................14
ITEM 6. Exhibits And Reports On Form 8-K...............................15
Signature Page.................................................16
PART I -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, June 30,
ASSETS 2001 2001
------------- --------
Cash and due from banks $ 8,896 $ 9,599
Short-term investments 14,511 21,052
-------- --------
Total cash and cash equivalents 23,407 30,651
-------- --------
Certificate of deposit 100 100
Securities available for sale, at fair value 64,682 43,135
Securities held to maturity, at amortized cost 34,493 36,236
Federal Home Loan Bank stock, at cost 1,661 1,613
Loans 128,629 123,896
Less allowance for loan losses (1,038) (974)
-------- --------
Loans, net 127,591 122,922
-------- --------
Banking premises and equipment, net 3,929 4,080
Accrued interest receivable 1,793 1,734
Bank-owned life insurance 2,223 2,193
Other assets 983 1,433
-------- --------
Total assets $260,862 $244,097
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $203,507 $191,826
Federal Home Loan Bank advances 33,173 32,255
Due to broker 3,109 --
Other liabilities 1,930 1,650
-------- --------
Total liabilities 241,719 225,731
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value; 12,000,000 shares
authorized, 1,712,630 shares issued 17 17
Additional paid-in capital 7,413 7,409
Retained earnings 12,897 12,588
Accumulated other comprehensive loss (81) (514)
Treasury stock, at cost - 68,506 shares at September 30, 2001
and June 30, 2001 (560) (560)
Unearned ESOP shares - 35,613 shares at September 30, 2001
and 37,223 shares at June 30, 2001 (356) (372)
Unearned RRP Stock - 26,133 shares at September 30, 2001
and 28,284 shares at June 30, 2001 (187) (202)
-------- --------
Total stockholders' equity 19,143 18,366
-------- --------
Total liabilities and stockholders' equity $260,862 $244,097
======== ========
See accompanying notes to consolidated financial statements.
-1-
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except for per share amounts)
Three Months Ended
September 30,
--------------------------
2001 2000
---------- ----------
Interest and dividend income:
Interest and fees on loans $ 2,525 $ 2,210
Interest and dividends on securities
and certificates of deposit 1,391 1,595
Interest on short-term investments 130 52
---------- ----------
Total interest and dividend income 4,046 3,857
---------- ----------
Interest expense:
Interest on deposits 1,527 1,703
Interest on FHLB advances 459 371
---------- ----------
Total interest expense 1,986 2,074
---------- ----------
Net interest income 2,060 1,783
Provision for loan losses 60 56
---------- ----------
Net interest income, after provision for loan losses 2,000 1,727
---------- ----------
Other income:
Customer service fees 264 246
Gain on sales of securities available for sale, net 52 76
Miscellaneous 75 35
---------- ----------
Total other income 391 357
---------- ----------
Operating expenses:
Salaries and benefits 980 901
Occupancy and equipment expenses 396 380
Data processing expenses 160 132
Professional fees 88 53
Advertising expenses 41 51
Other general and administrative expenses 248 223
---------- ----------
Total operating expenses 1,913 1,740
---------- ----------
Income before income taxes 478 344
Provision for income taxes 169 119
---------- ----------
Net income $ 309 $ 225
========== ==========
Weighted average common shares
outstanding during the period -
Basic 1,579,908 1,565,694
========== ==========
Diluted 1,605,076 1,565,694
========== ==========
Earnings per common share:
Basic $ 0.20 $ 0.14
========== ==========
Diluted $ 0.19 $ 0.14
========== ==========
See accompanying notes to consolidated financial statements.
-2-
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Three Months Ended September 30, 2001 and 2000
(Dollars in thousands)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Loss Stock
---------- ------------ ---------- ---------------- ------------
Balance at June 30, 2001 $ 17 $7,409 $12,588 ($514) ($560)
Comprehensive income:
Net income -- -- 309 -- --
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- 433 --
Total comprehensive income
Common stock held by ESOP released
and committed to be released
(1,610 shares) -- 4 -- -- --
Amortization of RRP stock
(2,151 shares) -- -- -- -- --
---- ------ ------- ----- -----
Balance at September 30, 2001 $ 17 $7,413 $12,897 ($ 81) ($560)
==== ====== ======= ===== =====
(Dollars in thousands)
Unearned Unearned
ESOP RRP
Shares Stock Total
----------- ------------ ----------
Balance at June 30, 2001 ($372) ($202) $18,366
Comprehensive income:
Net income -- -- 309
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- 433
-------
Total comprehensive income 742
-------
Common stock held by ESOP released
and committed to be released
(1,610 shares) 16 -- 20
Amortization of RRP stock
(2,151 shares) -- 15 15
----- ----- -------
Balance at September 30, 2001 ($356) ($187) $19,143
===== ===== =======
Accumulated
Additional Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Loss Stock
---------- ------------ ---------- ---------------- ------------
Balance at June 30, 2000 $ 17 $ 7,426 $11,630 ($2,638) ($560)
Comprehensive income:
Net income -- -- 225 -- --
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- 885 --
Total comprehensive income
Common stock held by ESOP released
and committed to be released
(1,610 shares) -- (5) -- -- --
Amortization of RRP stock
(3,404 shares) -- -- -- -- --
------ ------- ------- ------- -----
Balance at September 30, 2000 $ 17 $ 7,421 $11,855 ($1,753) ($560)
====== ======= ======= ======= =====
Unearned Unearned
ESOP RRP
Shares Stock Total
----------- ------------ ----------
Balance at June 30, 2000 ($436) ($261) $15,178
Comprehensive income:
Net income -- -- 225
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- 885
-------
Total comprehensive income 1,110
-------
Common stock held by ESOP released
and committed to be released
(1,610 shares) 15 -- 10
Amortization of RRP stock
(3,404 shares) -- 25 25
----- ----- -------
Balance at September 30, 2000 ($421) ($236) $16,323
===== ===== =======
See accompanying notes to consolidated financial statements.
-3-
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended
September 30,
-----------------------------
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 309 $ 225
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Provision for loan losses 60 56
Gain on sales of securities available for sale, net (52) (76)
Accretion of securities, net of amortization (20) (51)
Depreciation and amortization expense 161 167
(Increase) decrease in accrued interest receivable (59) 113
Bank-owned life insurance income (30) (17)
Deferred tax benefit (49) (71)
Other, net 491 (954)
------- -------
Net cash provided (used) by operating activities 811 (608)
------- -------
Cash flows from investing activities:
Proceeds from sales and calls of
securities available for sale 4,885 317
Proceeds from maturities of and
principal payments on securities
available for sale and held to maturity 1,931 381
Purchase of securities available for sale (22,780) (1,705)
Purchase of securities held to maturity -- (391)
Purchase of FHLB stock (48) --
Net increase in loans (4,746) (1,385)
Purchase of banking premises and equipment (10) (205)
------- -------
Net cash (used) by investing activities (20,768) (2,988)
------- -------
Cash flows from financing activities:
Net increase in deposits 11,681 3,576
Proceeds from Federal Home Loan Bank
advances 1,000 5,976
Repayment of Federal Home Loan Bank
advances (82) (7,063)
Increase in mortgagors' escrow deposits 94 62
Release of common stock held by ESOP 20 10
------- -------
Net cash provided by financing activities 12,713 2,561
------- -------
Net change in cash and cash equivalents (7,244) (1,035)
Cash and cash equivalents at beginning of period 30,651 14,245
------- -------
Cash and cash equivalents at end of period $23,407 $13,210
======= =======
Supplementary information:
Interest paid on deposits $ 1,530 $ 1,712
Interest paid on Federal Home Loan Bank advances 454 384
Income taxes paid 15 27
Increase in due to broker 3,109 --
See accompanying notes to consolidated financial statements.
-4-
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Service Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Strata Bank (the "Bank"), and the Bank's wholly-owned subsidiaries,
Medway 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 Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation have been included. Interim results
are not necessarily indicative of the results that may be expected for the
entire year. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with GAAP have been omitted. A
summary of significant accounting policies followed by the Company is set forth
in the Notes to Consolidated Financial Statements of the Company's 2001 annual
report to stockholders.
(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 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 stock granted under the
Recognition and Retention Plan ("RRP") and are determined using the treasury
stock method. Assumed conversion of the outstanding dilutive stock options and
unvested RRP stock would increase the shares outstanding, but would not require
an adjustment to income as a result of the conversion.
(3) Commitments
At September 30, 2001, the Company had outstanding commitments to
originate loans of $5.0 million. Unused lines of credit and open commitments
available to customers at September 30, 2001 amounted to $21.1 million, of which
$6.9 million were equity lines of credit.
-5-
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(4) Securities
The following table sets forth the Company's securities at the dates
indicated.
(Dollars in thousands) September 30, 2001 June 30, 2001
---------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Available for Sale Securities:
Federal agency obligations $32,228 $32,709 $19,241 $19,165
Mortgage-backed securities 3,135 3,112 167 167
Other debt securities 26,079 26,556 21,025 21,054
------- ------- ------- -------
Total debt securities 61,442 62,377 40,433 40,386
Marketable equity securities 3,338 2,305 3,457 2,749
------- ------- ------- -------
Total available for sale securities $64,780 $64,682 $43,890 $43,135
======= ======= ======= =======
Held to Maturity Securities:
Other debt securities $ 5,199 $ 5,604 $ 5,190 $ 5,446
Mortgage-backed securities 29,294 29,975 31,046 30,825
------- ------- ------- -------
Total held to maturity securities $34,493 $35,579 $36,236 $36,271
======= ======= ======= =======
(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.
(Dollars in thousands) September 30, 2001 June 30, 2001
--------------------- ------------------------
Amount Percent Amount Percent
Real estate loans:
Residential $ 67,967 52.88% $ 66,392 53.62%
Commercial 33,885 26.37 31,109 25.12
Construction 4,921 3.83 4,713 3.81
-------- ----- -------- -----
Total real estate loans 106,773 83.08 102,214 82.55
Other loans:
Consumer loans:
Collateral 635 0.49 626 0.51
Home equity 9,219 7.18 9,132 7.37
Other 1,671 1.30 1,688 1.36
-------- ----- -------- -----
Total consumer loans 11,525 8.97 11,446 9.24
Commercial business loans 10,223 7.95 10,167 8.21
-------- ----- -------- -----
Total other loans 21,748 16.92 21,613 17.45
-------- ----- -------- -----
Total loans 128,521 100.00% 123,827 100.00%
====== ======
Net deferred loan costs and premium 108 69
Allowance for loan losses (1,038) (974)
-------- --------
Total loans, net $127,591 $122,922
======== ========
-6-
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(6) Deposits and Federal Home Loan Bank Advances
The following tables indicate types and balances in deposit accounts at
the date indicated.
September 30, 2001 June 30, 2001
---------------------- ----------------------
(Dollars in thousands) Amount Percent Amount Percent
Demand $25,872 12.71% $25,912 13.51%
NOW 27,369 13.45 29,066 15.15
Money market deposits 18,213 8.95 16,064 8.37
Regular and other savings 35,672 17.53 34,869 18.18
-------- ------ -------- ------
Total non-certificate accounts 107,126 52.64 105,911 55.21
Term certificates 96,381 47.36 85,915 44.79
-------- ------ -------- ------
Total deposits $203,507 100.00% $191,826 100.00%
======== ====== ======== ======
The following is a list of advances from the Federal Home Loan Bank of
Boston by the earlier of the maturity date or the date callable by the FHLB.
September 30, 2001 June 30, 2001
--------------------- -------------------------
(Dollars in thousands) Amount Percent Amount Percent
Less than one year $26,500 79.88% $25,500 79.06%
One to three years 5,920 17.85 6,000 18.60
Greater than three years 753 2.27 755 2.34
------- ------ ------- ------
Total borrowed funds $33,173 100.00% $32,255 100.00%
======= ====== ======= ======
-7-
ITEM 2. Management's Discussion and Analysis or Plan of Operation.
General
This quarterly report on Form 10-QSB contains forward-looking statements.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believe", "anticipates", "plans", "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause the Company's actual results
to differ materially from those contemplated by such forward-looking statements.
These important factors include, without limitation, the Bank's continued
ability to originate quality loans, fluctuation in interest rates, real estate
conditions in the Bank's lending areas, general and local economic conditions,
the Bank's continued ability to attract and retain deposits, the Company's
ability to control costs, new accounting pronouncements, and changing regulatory
requirements. The Company undertakes no obligation to publicly release the
results of any revisions to those forward-looking statements which may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
Comparison of Financial Condition at September 30, 2001 and June 30, 2001
Assets increased by $16.8 million, or 6.9%, from $244.1 million at June
30, 2001 to $260.9 million at September 30, 2001. The increase was primarily
funded by an $11.7 million, or 6.1%, increase in total deposits since June 30,
2001. Over that same period, the Company increased its borrowings with the
Federal Home Loan Bank ("FHLB") by $918,000, or 2.9%, from $32.3 million to
$33.2 million.
Total investments and net loans increased $19.9 million, or 24.5%, and
$4.7 million, or 3.8%, respectively, between June 30, 2001 and September 30,
2001. The funds used to purchase investments and originate loans were provided
primarily from deposits and borrowings but were supplemented by overnight funds
(short-term investments). Short-term term investments decreased by $6.5 million,
or 31.1%, between June 30, 2001 and September 30, 2001.
During the quarter, federal agency obligations, corporate bonds, and
mortgage-backed securities increased $13.5 million, $5.5 million, and $1.2
million, respectively, while equity securities decreased by $444,000. The net
interest rate margin was positively impacted by the investment purchases during
the quarter because the weighted average composite yields of these purchases
were over 5.50%, which was a 200 basis point yield increase over the overnight
fund rates over the same period for the preceding year.
The Strata Mortgage Center, with its affiliation with Marathon Mortgage,
was formed in the quarter ending June 30, 2001, and originated $2.7 million
residential loans during the quarter ended September 30, 2001 with another $4.5
million in the pipeline at September 30, 2001. In addition, the Bank purchased
$5.7 million of residential loans directly from Marathon Mortgage during the
quarter ended September 30, 2001. With this activity, residential mortgages had
a net increase of $1.6 million, or 2.4%, since June 30, 2001 from $66.4 million
to $68.0 million. The Bank originated $8.1 million of commercial loans during
the quarter. After loan paydowns, the total commercial real estate loan
portfolio increased by $2.8 million, or 8.9%, since June 30, 2001 from $31.1
million to $33.9 million. In addition to these loan originations, the Bank
occasionally receives commercial checking and money market deposits from new
commercial customers. Since June 30, 2001, total commercial deposits have
increased by $1.6 million, or 7.4%, and as of September 30, 2001 represented
11.3% of total deposits.
As of September 30, 2001, the Bank had $14.5 million invested in overnight
funds, representing 5.6% of total assets, which is a reduction from 8.6% of
total assets as of June 30, 2001. These funds will be utilized to fund the
purchase of securities and the origination of loans.
-8-
The increase of $11.7 million in deposits since June 30, 2001 was
primarily attributable to increases of $10.5 million, or 12.2%, $2.1 million, or
13.4%, $803,000, or 2.3%, in term certificates, money market deposits, and
regular and other savings, respectively. During this same period, NOW deposits
and demand deposits decreased $1.7 million, or 5.8%, and $40,000, or 0.2%,
respectively. With the several interest rate reductions taken by Federal Reserve
Board since January 2001, the current certificate rates are the lowest they have
been in several years. Therefore, to achieve the best return possible, customers
are extending the terms of their certificates to 18 months and longer. In fact,
18 month and longer certificates increased $14.6 million between June 30, 2001
and September 30, 2001, and as of September 30, 2001 represent 45.2% of the
Bank's total term certificates. In addition, the Bank increased borrowings by
$918,000, or 2.9%, since June 30, 2001 to take advantage of the reduced
borrowing rates to fund loan originations and security purchases and assist the
Bank in managing its interest rate margin.
Stockholders' equity increased from $18.4 million, or 7.52% of total
assets at June 30, 2001 to $19.1 million, or 7.34% of total assets at September
30, 2001. This increase resulted primarily from a decrease of $433,000 in the
unrealized losses booked for the Company's securities available for sale and an
increase in the Company's net income from June 30, 2001 to September 30, 2001.
Non-Performing Assets and Allowance for Loan Losses
The following indicates the non-performing assets and related allowance
for loan loss ratios at the dates indicated.
September 30, June 30,
(Dollars in thousands) 2001 2001
--------------- -----------
Non-accrual loans:
One-to-four family real estate loans $ 122 $122
Commercial real estate loans 183 --
Commercial business loans -- 16
Consumer loans 6 11
------ ------
Total non-accrual loans 311 149
Other real estate owned -- --
------ ------
Total non-performing assets $ 311 $149
====== ======
Allowance for loan losses $1,038 $974
====== ======
Allowance for loan losses as a percent
of total loans, net 0.81% 0.79%
====== ======
Allowance for loan losses as a percent
of non-accrual loans 333.76% 653.69%
====== ======
Non-accrual loans as a percent of
total loans, net 0.24% 0.12%
====== ======
Non-performing assets as a percent of
total assets 0.12% 0.06%
====== ======
During the three months ended September 30, 2001, the Bank's provision for
loan losses was $60,000 due to the growth of the commercial loan portfolio,
which generally presents a greater credit risk than residential loans. During
this period, there were $4,000 in loan charge-offs and $8,000 in recoveries from
previously charged-off loans.
-9-
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 Three Months Ended September 30,
2001 and 2000
General
Operating results are primarily dependent on the Bank's net interest
income, which is the difference between the interest earned on the Bank's
earning assets (short-term investments, loans, and 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 three months ended September 30, 2001 was $309,000 as
compared to $225,000 for the three months ended September 30, 2000, an increase
of $84,000, or 37.3%. This increase was primarily attributable to increases of
$277,000 or 15.5% in net interest income and $58,000, or 20.6%, in customer
service fees and miscellaneous income, respectively. Partially offsetting these
was an increase of $173,000, or 9.9% in total operating expenses, and a
decrease of $24,000, or 31.6%, in the net gain on sales of securities.
The Bank's interest rate spread (the difference between yields earned on
earning assets and rates paid on deposits and borrowings) increased from 3.10%
for the three months ended September 30, 2000 to 3.15% for the three months
ended September 30, 2001. In addition, interest rate margin (net interest income
divided average earning assets) increased from 3.58% to 3.64%. The interest rate
spread and margin increased primarily as a result of the decrease of 64 basis
points in funding costs for both deposits and borrowings between periods due to
Federal Reserve Board interest rate reductions since January, 2001. In addition,
the yield on earning assets decreased 59 basis points during the same period.
While core-based deposit growth will be emphasized, past experience
indicates that deposit growth is achieved through a greater increase in
higher-cost retail certificates than lower-cost core deposits. Any increase in
interest rates and continued competition from other financial institutions
together with the aforementioned growth in retail certificates could cause
future tightening in the interest rate spread.
-10-
The interest rate spread and margin for the periods indicated are as
follows:
Three months ended
September 30,
--------------------
2001 2000
------ ------
Weighted average yield earned on:
Short-term investments 3.53% 5.63%
Securities 6.49 7.16
Total loans, net 8.03 8.30
---- ----
All earning assets 7.15 7.74
---- ----
Weighted average rate paid on:
Deposits 3.69 4.45
Borrowed funds 5.61 5.88
---- ----
All interest-bearing liabilities 4.00 4.64
---- ----
Weighted average rate spread 3.15% 3.10%
==== ====
Net interest margin 3.64% 3.58%
==== ====
Earnings per share data for the three months ended September 30, 2001 was
$0.20 and $0.19 for "basic" and "diluted" calculations, respectively, as
compared to $0.14 per share for both "basic" and "diluted" calculations for the
three months ended September 30, 2000.
Interest and Dividend Income
Total interest and dividend income increased by $189,000, or 4.9%, from
$3.9 million for the three months ended September 30, 2000 to $4.1 million for
the comparable period in 2001. This increase was primarily attributable to a
$26.9 million, or 13.5%, increase in average earning assets, which was partially
offset by a 59 basis point reduction in yield on earning assets between the two
periods. The average balance in net loans increased $19.4 million, or 18.2%,
while total loan yield decreased by 27 basis points to 8.03%. The reduction in
the prime rate and the indexed rates used to set interest rates in loan
repricing periods was the primary reason for the reduction in loan yield between
periods.
Short-term investments, while increasing $11.0 million, or 299.1%, between
periods, had a sharp reduction in yield from 5.63% for the quarter ending
September 30, 2000 to 3.53% for the quarter ending September 30, 2001. The yield
reduction was caused by the numerous interest rate reductions by the Federal
Reserve Board since January 2001. These rate reductions also impacted the yield
in the securities portfolio, which declined by 67 basis points to 6.49%. In
addition, the average securities portfolio balance decreased $3.5 million, or
3.9%, over this same period primarily due to the calling of $28.0 million in
corporate bond and federal agency obligations, which offset the securities
purchases during the period.
Interest Expense
Interest expense on deposits decreased $176,000, or 10.3%, from $1.7
million for the three months ended September 30, 2000, to $1.5 million for the
three months ended September 30, 2001. This decrease was primarily attributable
to a 76 basis point reduction in deposit rates, which was influenced by the
Federal Reserve Board interest rate decreases and the increase of $12.4 million
in lower-priced non-certificate deposit average balances between periods. Over
this same timeframe, the higher-priced term certificate balances decreased
$504,000.
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The Bank increased its use of borrowings from the FHLB which was generally
a less expensive source of funding than term certificates. Average balances in
FHLB advances were $32.7 million during the three months ended September 30,
2001, an increase of $7.5 million, or 30.0% from the three months ended
September 30, 2000. Over this same timeframe, borrowing rates decreased from
5.88% to 5.61%. Because of the increase in average borrowings, interest expense
on FHLB advances increased $88,000, or 23.7%, from $371,000 for the three months
ended September 30, 2000 to $459,000 for the three months ended September 30,
2001.
Other Income
Total other income increased $34,000, or 9.5%, from $357,000 for the three
months ended September 30, 2000 to $391,000 for the same period in 2001. This
change was caused primarily by an increase of $40,000, or 114.3%, in
miscellaneous income between periods primarily due to increases in fees
collected from the newly formed financial service center and loan processing
fees generated by the Strata Mortgage Center. Conversely, the net gains on
securities available for sale decreased by $24,000, or 31.6%, between reporting
periods.
Operating Expense
Total operating expense increased $173,000, or 9.9%, from $1.7 million for
the three months ended September 30, 2000 to $1.9 million for the three months
ended September 30, 2001. Salaries and benefits, professional fees, and data
processing expenses increased $79,000, or 8.8%, $35,000, or 66.0 %, and $28,000,
or 21.2%, respectively, between periods. No other individual expense category
increased materially between periods. Much of the increase in operating expense
was attributed to the Company's asset growth as management added staff and
incurred costs to service the full range of retail and loan products added to
the Bank's product lines.
Income Taxes
Income tax expense increased by $50,000, or 42.0%, between reporting
periods, primarily due to the increase of $134,000 in pretax income between
periods. The effective income tax rates were 35.4% and 34.6% for the three
months ended September 30, 2001 and 2000, respectively. The effective tax rates
are below the statutory combined state and federal income tax rates because the
Bank's two security corporations take advantage of the lower state tax rate
afforded to these types of entities and additional tax preference items which
are nontaxable.
Asset/Liability Management
A principal operating objective of the Bank is to produce stable earnings
by achieving a favorable interest rate spread that can be sustained during
fluctuations in prevailing interest rates. Since the Bank's principal
interest-earning assets generally have longer terms to maturity than its primary
source of funds, i.e., deposit liabilities, increases in general interest rates
will generally result in an increase in the Bank's cost of funds before the
yield on its asset portfolio adjusts upward. Financial institutions have
generally sought to reduce their exposure to adverse changes in interest rates
by attempting to achieve a closer match between the repricing periods of
interest rate sensitive assets and liabilities. Such matching, however, is
carefully monitored so as not to sacrifice net interest margin performance for
the perfect matching of these interest rate sensitive instruments. The Bank has
established an Asset/Liability Management Committee ("ALCO") made up of the
chief executive officer, the chief financial officer, the senior loan officer,
the vice president of retail banking and the director of marketing to assess the
asset/liability mix and recommend strategies that will enhance income while
managing the Bank's
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vulnerability to changes in interest rate. This committee meets regularly to
discuss interest rate conditions and potential product lines that would enhance
the Bank's income performance.
Certain strategies have been implemented to improve the match between
interest rate sensitive assets and liabilities. These strategies include, but
are not limited to: daily monitoring of the Bank's cash requirements,
originating adjustable and fixed rate mortgage loans, both residential and
commercial, for the Bank's own portfolio, managing the cost and structure of
deposits, and generally using the matched borrowings to fund specific purchases
of loan packages and large loan originations. Occasionally, management may
choose to deviate from specific matching of maturities of assets and liabilities
if an attractive opportunity to enhance yield becomes available.
ALCO modeling is performed quarterly with the assistance of an outside
investment advisor which projects the Bank's financial performance over the next
twenty four months using loan and deposit projections, projections of changes in
interest rates, and anticipated changes in other income and operating expenses
to reveal the full impact of the Bank's operating strategies on financial
performance. The results of the ALCO process are reported to the Board at least
on a quarterly basis.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans, sales of loans and 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 uses its
liquidity resources primarily to fund existing and future loan commitments, to
fund net deposit outflows, to invest in other interest-earning assets, to
maintain liquidity, and to pay operating expenses.
From time to time, the Bank utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. Total advances outstanding at September 30, 2001 amounted to
$33.2 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 securities guaranteed by the U.S. Government or a
government agency. As of September 30, 2001, the Bank's total borrowing capacity
through the Federal Home Loan Bank was $50.1 million. However, the Bank has
additional capacity to borrow through such instruments as repurchase agreements
if the situation arises utilizing an additional $48.6 million of value from
federal agency obligations and mortgage-backed securities.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, short-term investments, U.S. Government and federal agency
obligations, mortgage-backed securities, and other debt securities. The level of
these assets is dependent upon the Bank's operating, lending, and financing
activities during any given period.
At September 30, 2001, the Bank had $5.0 million of outstanding
commitments to originate loans. The Bank anticipates that it will have
sufficient funds available to meet these commitments. Certificates of deposit,
which are scheduled to mature in one year or less, totaled $68.2 million at
September 30, 2001. Based upon historical experience, management believes that a
significant portion of such deposits will remain with the Bank.
At September 30, 2001, the Company and the Bank exceeded all regulatory
capital requirements.
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PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involved amounts believed by management to be immaterial to the
financial condition and operations of the Company.
ITEM 2. Changes in Securities
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
On October 23, 2001, the Company held its annual meeting of stockholders
for the purpose of the election of three Directors to three year terms and the
ratification of Wolf & Company, P.C. as the Company's independent auditors for
the fiscal year ending June 30, 2002.
The number of votes cast at the meeting as to each matter acted upon was
as follows:
NO. OF VOTES
NO. OF VOTES FOR WITHHELD
1. Election of Directors:
William L. Casey 1,429,188 1,500
John Hasenjaeger 1,414,740 15,948
Lawrence E. Novick 1,426,755 3,933
NO. OF VOTES NO. OF VOTES
NO. OF VOTES FOR AGAINST ABSTAINING
2. Ratification of the Appointment of Wolf
& Company, P.C. as the Company's
Independent Auditors for the fiscal
year ending June 30, 2002 1,428,428 640 1,620
Item 5. Other Information
In September 2001, the Issuer, Strata Bank and Service Bancorp, MHC, on
the one hand, and Pamela J. Montpelier, on the other, entered into an
employment agreement which is attached as Exhibit 10.4 hereto. The employment
agreement provides, in part, that Ms. Montpelier shall serve as President and
Chief Executive Officer for a period of three (3) years with automatic renewal
of successive one (1) year terms unless notice is given otherwise. Ms.
Montpelier's annual base salary is $160,000 which is subject to certain upward
adjustment in the discretion of the Board of Directors.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Stock Holding Company Charter of Service Bancorp, Inc. (incorporated
herein by reference to the Company's registration statement on SB-2,
file No. 333-156851 (the "SB-2"))
3.2 By-laws of Service Bancorp, Inc. (incorporated herein by reference
to the Company's SB-2)
4. Form of Stock Certificate of Service Bancorp, Inc. (incorporated
herein by reference to the SB-2)
10.1 Deferred Compensation and Income Continuation Agreement
(incorporated herein by reference to the Company's SB-2)
10.2 Employee Stock Ownership Plan (incorporated herein by reference to
the Company's SB-2)
10.3 Supplemental Executive Retirement Plan (incorporated herein by
reference to the Company's SB-2)
10.4 Employment Agreement dated as of September 19, 2001 by and among
Pamela J. Montpelier, on the one hand, and Strata Bank, Service
Bancorp, MHC and Service Bancorp, Inc., on the other hand.
(b) Reports on Form 8-K
None.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SERVICE BANCORP, INC.
Date: November 14, 2001 By: /s/ Pamela J. Montpelier
----------------- ----------------------------------------
Pamela J. Montpelier
President and Chief Executive Officer
Date: November 14, 2001 By: /s/ Warren W. Chase, Jr.
----------------- ----------------------------------------
Warren W. Chase, Jr.
Senior Vice President and Treasurer
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