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 March 31, 2002
[_] 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
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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
--------------------------------------
(Address of Principal Executive Offices)
(508) 533-4343
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(Issuer's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal
year, if changed since last year.)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date: At April 30, 2002, 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 Page
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and June 30, 2001 1
Consolidated Statements of Income for the three and nine
months ended March 31, 2002 and 2001 2
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended March 31, 2002 and 2001 3
Consolidated Statements of Cash Flows for the nine months
ended March 31, 2002 and 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature Page 17
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS March 31, June 30,
- ------ 2002 2001
-------- --------
Cash and due from banks $ 8,017 $ 9,599
Short-term investments 12,967 21,052
-------- --------
Total cash and cash equivalents 20,984 30,651
-------- --------
Certificates of deposit 100 100
Securities available for sale, at fair value 59,466 43,135
Securities held to maturity, at amortized cost 37,140 36,236
Federal Home Loan Bank stock, at cost 1,948 1,613
Loans 146,636 123,896
Less allowance for loan losses (1,165) (974)
-------- --------
Loans, net 145,471 122,922
------- --------
Banking premises and equipment, net 3,811 4,080
Accrued interest receivable 1,658 1,734
Bank-owned life insurance 2,715 2,193
Other assets 1,966 1,433
-------- --------
Total assets $275,259 $244,097
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits $213,970 $191,826
Federal Home Loan Bank advances 38,921 32,255
Other liabilities 3,239 1,650
-------- --------
Total liabilities 256,130 225,731
-------- --------
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 issued 17 17
Additional paid-in capital 7,424 7,409
Retained earnings 13,482 12,588
Accumulated other comprehensive loss (754) (514)
Treasury stock, at cost - 68,506 shares at March 31, 2002 and June 30, 2001 (560) (560)
Unearned ESOP shares - 32,393 shares at March 31, 2002 and 37,223
shares at June 30, 2001 (324) (372)
Unearned RRP stock - 21,831 shares at March 31, 2002 and 28,284 shares
at June 30, 2001 (156) (202)
-------- --------
Total stockholders' equity 19,129 18,366
-------- --------
Total liabilities and stockholders' equity $275,259 $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 Nine Months Ended
March 31, March 31,
-------------------- ------------------
2002 2001 2002 2001
---- ---- ---- ----
Interest and dividend income:
Interest and fees on loans $ 2,524 $ 2,345 $ 7,558 $ 6,862
Interest and dividends on securities and certificates 1,457 1,444 4,312 4,549
of deposit
Interest on short-term investments 39 144 252 314
---------- ----------- ---------- ----------
Total interest and dividend income 4,020 3,933 12,122 11,725
---------- ----------- ---------- ----------
Interest expense:
Interest on deposits 1,269 1,685 4,199 5,124
Interest on FHLB advances 486 396 1,426 1,151
---------- ----------- ---------- ----------
Total interest expense 1,755 2,081 5,625 6,275
---------- ----------- ---------- ----------
Net interest income 2,265 1,852 6,497 5,450
Provision for loan losses 90 45 225 163
---------- ----------- ---------- ----------
Net interest income, after provision for loan losses 2,175 1,807 6,272 5,287
---------- ----------- ---------- ----------
Other income:
Customer service fees 263 247 803 750
Gain on sales of securities available for sale, net 94 80 376 370
Impairment loss on securities available for sale (351) -- (351) --
Miscellaneous 85 61 238 138
---------- ----------- ---------- ----------
Total other income 91 388 1,066 1,258
---------- ----------- ---------- ----------
Operating expenses:
Salaries and benefits 996 969 2,973 2,881
Occupancy and equipment expenses 414 404 1,216 1,164
Data processing expenses 169 159 491 420
Professional fees 74 77 252 209
Advertising expenses 51 46 144 176
Other general and administrative expenses 264 225 896 697
---------- ----------- ---------- ----------
Total operating expenses 1,968 1,880 5,972 5,547
---------- ----------- ---------- ----------
Income before income taxes 298 315 1,366 998
Provision for income taxes 100 90 472 321
---------- ----------- ---------- ----------
Net income $ 198 $ 225 $ 894 $ $677
========== =========== ========== ==========
Weighted average common shares
outstanding during the period -
Basic 1,587,447 1,572,399 1,583,652 1,569,218
========= ========= ========= =========
Diluted 1,611,588 1,572,399 1,607,733 1,569,218
========= ========= ========= =========
Earnings per common share - Basic $0.13 $0.14 $0.57 $0.43
===== ===== ===== =====
Earnings per common share - Diluted $0.12 $0.14 $0.56 $0.43
===== ===== ===== =====
See accompanying notes to consolidated financial statements.
-2-
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2002 AND 2001
(Dollars in thousands)
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive Treasury ESOP RRP
Stock Capital Earnings Loss Stock Shares Stock Total
----- ------- -------- ---- ----- ------ ----- -----
Balance at June 30, 2001 $17 $7,409 $12,588 ($514) ($560) ($372) ($202) $18,366
Comprehensive income:
Net income - - 894 - - - - 894
Change in net unrealized
loss on securities
available for sale,
net of tax and
reclassification adjustment - - - (240) - - - (240)
----
Total comprehensive incom 654
---
Common stock held by ESOP
released and committed
to be released
(4,830 shares) - 15 - - - 48 - 63
Amortization of RRP stock
(6,453 shares) - - - - - - 46 46
--- ------ ------- ----- ----- ----- ----- -------
Balance at March 31, 2002 $17 $7,424 $13,482 ($754) ($560) ($324) ($156) $19,129
=== ====== ======= ===== ===== ===== ===== =======
See accompanying notes to consolidated financial statements.
-3-
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2002 AND 2001 (concluded)
(Dollars in thousands)
Accumulated
Additional Other Unearned Unearned
Common Paid-in Retained Comprehensive Treasury ESOP RRP
Stock Capital Earnings Loss Stock Shares Stock Total
----- ------- -------- ---- ----- ------ ----- -----
Balance at June 30, 2000 $17 $7,426 $11,630 ($2,638) ($560) ($436) ($261) $15,178
Comprehensive income:
Net income - - 677 - - - - 677
Change in net unrealized
loss on securities
available for sale,
net of tax and
reclassification adjustment - - - 2,183 - - - 2,183
-----
Total comprehensive income 2,860
-----
Common stock held by
ESOP released and
committed to be released
(4,830 shares) - (17) - - - 48 - 31
Amortization of RRP stock
(6,046 shares) - - - - - - 43 43
--- ------ ------- ----- ------ ------ ------ -------
Balance at March 31, 2001 $17 $7,409 $12,307 ($455) ($560) ($388) ($218) $18,112
=== ====== ======= ===== ====== ====== ====== =======
See accompanying notes to consolidated financial statements.
-4-
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended
-----------------------------
March 31, March 31,
2002 2001
--------- --------
Cash flows from operating activities:
Net income $ 894 $ 677
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 225 163
Gain on securities available for sale, net (25) (370)
Net amortization (accretion) of securities 6 (142)
Depreciation and amortization expense 567 492
Increase in accrued interest receivable 76 279
Bank-owned life insurance income (90) (86)
Deferred tax provision (benefit) 84 (146)
Other, net (6) (13)
-------- --------
Net cash provided by operating activities 1,731 854
-------- --------
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale 46,244 28,592
Proceeds from maturities of and principal payments on securities
available for sale and held to maturity 10,214 1,427
Purchase of securities available for sale (62,556) (7,432)
Purchase of securities held to maturity (10,486) (8,794)
Purchase of FHLB stock (335) --
Net increase in loans (22,849) (7,462)
Purchase of bank-owned life insurance (432) --
Purchase of banking premises and equipment (298) (464)
-------- ---------
Net cash (used) provided by investing activities (40,498) 5,867
-------- --------
Cash flows from financing activities:
Net increase in deposits 22,144 10,096
Proceeds from Federal Home Loan Bank advances 7,012 27,720
Repayment of Federal Home Loan Bank advances (346) (23,812)
Increase in mortgagors' escrow deposits 181 46
Release of common stock held by ESOP 63 31
Amortization of RRP stock 46 43
-------- --------
Net cash provided by financing activities 29,100 14,124
-------- --------
Net change in cash and cash equivalents (9,667) 20,845
Cash and cash equivalents at beginning of period 30,651 14,245
-------- --------
Cash and cash equivalents at end of period $ 20,984 $ 35,090
======== ========
Supplementary information:
Interest paid on deposits $ 4,220 $ 5,144
Interest paid on Federal Home Loan Bank advances 1,399 1,135
Income taxes paid 528 410
Increase in due to broker 1,000 3,109
Transfer from securities available for sale to held to maturity -- 15,100
See accompanying notes to consolidated financial statements.
-5-
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(1) Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the
accounts of Service Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Strata Bank (the "Bank"), and the Bank's wholly-owned subsidiaries,
Medway Securities 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 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 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 March 31, 2002, the Company had outstanding commitments to originate loans of
$6.9 million. Unused lines of credit and open commitments available to customers
at March 31, 2002 amounted to $24.6 million, of which $8.3 million were equity
lines of credit.
-6-
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) March 31, 2002 June 30, 2001
-------------------------------- ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ----- -------------- -----
Available for Sale Securities:
Federal agency obligations $28,906 $28,519 $19,241 $19,165
Mortgage-backed securities 2,859 2,825 167 167
Other debt securities 26,718 26,238 21,025 21,054
------- ------- ------- -------
Total debt securities 58,483 57,582 40,433 40,386
Marketable equity securities 2,109 1,884 3,457 2,749
------- ------- ------- -------
Total available for sale securities $60,592 $59,466 $43,890 $43,135
======= ======= ======= =======
Held to Maturity Securities:
Other debt securities $5,217 $5,466 $5,190 $5,446
Mortgage-backed securities 31,923 31,770 31,046 30,825
------- ------- ------- -------
Total held to maturity securities $37,140 $37,236 $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) March 31, 2002 June 30, 2001
-------------------------------- ------------------------
Amount Percent Amount Percent
------ ------- ------ -------
Real estate loans:
Residential $ 77,672 53.14% $ 66,392 53.62%
Commercial 38,264 26.18% 31,109 25.12%
Construction 6,698 4.58% 4,713 3.81%
------- ------- -------- -------
Total real estate loans 122,634 83.89% 102,214 82.55%
-------- --------
Other loans:
Consumer loans:
Collateral 536 0.37% 626 0.51%
Home equity 9,862 6.75% 9,132 7.37%
Other 1,413 0.97% 1,688 1.36%
-------- ------- -------- -------
Total consumer loans 11,811 8.08% 11,446 9.24%
Commercial business loans: 11,732 8.03% 10,167 8.21%
-------- ------- -------- -------
Total other loans 23,543 16.11% 21,613 17.45%
-------- ------- -------- -------
Total loans 146,177 100.00% 123,827 100.00%
======= -------
Net deferred loan costs and premium 459 69
Allowance for loan losses (1,165) (974)
-------- --------
Total loans, net $145,471 $122,922
======== ========
-7-
SERVICE BANCORP, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (Concluded)
(6) Deposits and Federal Home Loan Bank Advances
The following tables indicate types and balances in deposit accounts at the
dates indicated.
(Dollars in thousands) March 31, 2002 June 30, 2001
-------------------------------- -----------------------
Amount Percent Amount Percent
------ ------- ------ -------
Demand $27,988 13.08% $25,912 13.51%
NOW 26,508 12.39% 29,066 15.15%
Money market deposits 20,826 9.73% 16,064 8.37%
Regular and other savings 38,938 18.20% 34,869 18.18%
------ ------ ------ ------
Total non-certificate accounts 114,260 53.40% 105,911 55.21%
Term certificates 99,710 46.60% 85,915 44.79%
------ ------ ------ ------
Total deposits $213,970 100.00% $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.
(Dollars in thousands) March 31, 2002 June 30, 2001
-------------------------------- -----------------------
Amount Percent Amount Percent
------ ------- ------ -------
Less than one year $32,000 82.22% $25,500 79.06%
One to three years 6,174 15.86% 6,000 18.60%
Greater than three years 747 1.92% 755 2.34%
-------- ------- ------- -----
Total borrowed funds $38,921 100.00% $32,255 100.00%
======= ======= ======= =======
-8-
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 March 31, 2002 and June 30, 2001
- ---------------------------------------------------------------------
Assets increased by $31.2 million, or 12.8%, from $244.1 million at June 30,
2001 to $275.3 million at March 31, 2002. The increase was primarily
attributable to an increase of $22.5 million, or 18.3%, in net loans since June
30, 2001 and a $16.3 million, or 37.9%, increase in securities available for
sale. These increases were partially offset by a $9.7 million or 31.5% decrease
in the Company's cash and cash equivalents. Funding for the growth in loans and
securities was also provided by a $22.1 million, or 11.5%, increase in deposits
and a $6.7 million, or 20.7%, increase in borrowings from the Federal Home Loan
Bank ("FHLB") since June 30, 2001.
Between June 30, 2001 and March 31, 2002, federal agency obligations, corporate
bonds, and mortgage-backed securities increased $9.4 million, $5.2 million, and
$3.6 million, respectively, while equity securities decreased by $865,000. In
addition to sales of equity securities since June 30, 2001, the decrease in
equity securities includes the recognition of a $351,000 impairment charge. The
Company reviews its available for sale investment securities with unrealized
depreciation to assess whether a decline in fair value is temporary or
other-than-temporary. The Company judges whether the decline in value is from
company-specific events, industry developments, general economic conditions or
other reasons. Once the estimated reasons for the decline are identified,
further judgments are required as to whether those conditions are likely to
reverse and, if so, whether that reversal is likely to result in a recovery of
the fair value of the investment in the near term. As part of the Company's
quarterly review of the investment securities portfolio, it was determined that
the decline in the fair value of certain equity investment securities was
other-than-temporary. As a result, the Company recorded an impairment charge
this quarter of $351,000 related to these securities.
The Company's continued objective is to prudently increase its loan portfolio,
primarily in residential and commercial loans. For the nine month period ended
March 31, 2002, the Strata Mortgage Center, with its affiliation with Marathon
Mortgage Company, originated $22.9 million in residential loans. In addition,
the Bank purchased $14.1 million of residential loans directly from Marathon
Mortgage Company over the same timeframe. With this activity, the Bank's
residential mortgages had a net increase of $11.3 million, or 17.0%, since June
30, 2001. Net deferred loan costs also increased since June 30, 2001 to
$459,000, largely due to costs associated with residential loan originations and
purchases through Marathon Mortgage Company. The Bank originated $22.0 million
for all commercial loans for the nine month period ended March 31, 2002, which
is a $4.3 million volume increase over the nine month period ending March 31,
2001. After loan paydowns, the total commercial real estate loan portfolio
increased by $7.2 million, or 23.0%, since June 30, 2001. In addition to these
loan originations, the Bank frequently receives commercial checking and money
market deposits from new commercial customers. Since June 30, 2001, total
commercial deposits have increased by $1.9 million or 8.1%, and as of March 31,
2002 represented 12.2% of total deposits.
As of March 31, 2002, the Bank had $13.0 million invested in overnight funds,
representing 4.7% 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.
-9-
The increase of $22.1 million in deposits since June 30, 2001 was primarily
attributable to increases of $13.8 million, or 16.1%, in term certificates, $4.8
million, or 29.6%, in money market deposits, $4.1 million, or 11.7%, in regular
and other savings, and $2.1 million, or 8.0%, in demand deposits. During this
same timeframe, NOW deposits decreased $2.6 million, or 8.8%. Certificates with
maturity terms of 18 months and longer increased $24.0 million between
June 30, 2001 and March 31, 2002, and as of March 31, 2002 represent 53.1% of
the Bank's total term certificates. In addition, the Bank increased borrowings
by $6.7 million, or 20.7%, 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 6.9% of total assets at March 31, 2002. The
increase in stockholders' equity resulted primarily from the Company's earnings
during this nine month period, while the decrease as a percentage of total
assets reflects the growth in assets during the same period.
Non-Performing Assets and Allowance for Loan Losses
The following indicates the non-performing assets and related allowance for loan
loss ratios at the dates indicated.
(Dollars in thousands) March 31, 2002 June 30, 2001
-------------- -------------
Non-accrual loans:
One- to four-family real estate loans $121 $121
Commercial loans 180 --
Commercial business loans -- 16
Consumer loans 0 12
---- -----
Total non-accrual loans 301 149
Other real estate owned -- --
----- -----
Total non-performing assets $301 $149
==== ====
Allowance for loan losses $1,165 $974
====== ====
Allowance for loan losses as a percent of total loans, net 0.79% 0.79%
===== =====
Non-accrual loans as a percent of total loans, net 0.21% 0.12%
===== =====
Non-performing assets as a percent of total assets 0.11% 0.06%
===== =====
For the nine months ended March 31, 2002, the Bank's provision for loan losses
was $225,000 compared with $163,000 for the same period last year. The increase
is due principally to the growth of the commercial loan portfolio, which
generally presents a greater risk of loss than residential loans. During the
nine-months ended March 31, 2002, there were $92,000 in loan charge-offs and
$58,000 in recoveries from previously charged-off loans.
While management believes that, based on information currently available, the
allowance for loan losses is sufficient to cover losses in the 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.
-10-
Comparison of Operating Results for the Three Months Ended March 31, 2002 and
- -----------------------------------------------------------------------------
2001
- ----
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 March 31, 2002 was $198,000 as compared to
$225,000 for the three months ended March 31, 2001, a decrease of $27,000, or
12%. This quarter's net income includes an impairment charge of $351,000,
pre-tax, relating to the other-than-temporary decline in the fair market value
of certain investment securities.
The Bank's interest rate spread (the difference between yields earned on earning
assets and rates paid on deposits and borrowings) increased from 3.00% for the
three months ended March 31, 2001 to 3.30% for the three months ended March 31,
2002. The net interest margin (net interest income divided by average earning
assets) increased from 3.56% to 3.69% over the same time period. The interest
rate spread increased primarily as a result of the decrease of 130 basis points
in funding costs for both deposits and borrowings between periods due to the
lower interest rate environment this year led by the Federal Reserve interest
rate reductions. These interest rate reductions also had an impact on the
pricing of the loan products, especially on those products that are prime or
treasury indexed-based. In addition, certain investments within the Bank's
securities portfolio that matured, were sold or called, were reinvested in lower
yielding investments. These factors were the primary reason for the decline of
100 basis points on the yield on earning assets. The Bank reduced deposit rates
to minimize the impact of the Federal Reserve interest rate reductions on the
Bank's interest margin during this 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.
The interest rate spread and margin for the periods indicated are as follows:
Three months ended
March 31
-------------------------------------------
2002 2001
---- ----
Weighted average yield earned on:
Short-term investments 1.76% 5.24%
Securities 6.08% 6.83%
Total loans, net 7.15% 8.32%
----- -----
All interest-earning assets 6.55% 7.55%
----- -----
Weighted average rate paid on:
Deposits 2.87% 4.34%
Borrowed funds 5.21% 5.81%
----- -----
All interest-bearing liabilities 3.25% 4.55%
----- -----
Weighted average rate spread 3.30% 3.00%
===== =====
Net interest margin 3.69% 3.56%
===== =====
Earnings per share data for the three months ended March 31, 2002 was $0.13 per
share (basic) and $0.12 per share (diluted) as compared to $0.14 per share for
both "basic" and "diluted" calculations for the three months ended March 31,
2001.
-11-
Interest and Dividend Income
- ----------------------------
Total interest and dividend income increased by $87,000, or 2.2%, from $3.9
million for the three months ended March 31, 2001 to $4.0 million for the
comparable period in 2002. This increase was primarily attributable to a $37.6
million increase in average earning assets, which was partially offset by a 100
basis point reduction in yield on earning assets between the two periods.
Average net loans increased $28.4 million, or 25.2%, while total loan yield
decreased by 117 basis points to 7.15%. 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 decreased $2.1 million, or 19.1%, between periods, and
experienced a sharp reduction in yield going from 5.24% for the quarter ending
March 31, 2001 to 1.76% for the quarter ending March 31, 2002. The yield
reduction reflects the lower interest rate environment this year. The yield on
the securities portfolio was also lower and declined by 75 basis points to
6.08%, while the average securities portfolio balance increased $11.2 million,
or 13.2%, over this same period.
Interest Expense
- ----------------
Interest expense on deposits decreased $416,000, or 24.7%, from $1.7 million for
the three months ended March 31, 2001, to $1.3 million for the three months
ended March 31, 2002. This decrease was primarily attributable to a 151 basis
point reduction in deposit rates, which was influenced by the Federal Reserve
interest rate decreases and the increase of $14.7 million in lower-priced
non-certificate deposit average balances between periods. Over this same
timeframe, the higher-priced term certificate balances increased by $9.3
million.
The Bank increased its use of borrowings from the FHLB since in many cases it
proved to be a less expensive source of funding than term certificates. Average
balances in these advances were $37.0 million during the three months ended
March 31, 2002, an increase of $9.7 million, or 35.6% from the three months
ended March 31, 2001. Over this same timeframe, average borrowing rates
decreased from 5.74% to 5.21%. Because of the increase in average borrowings,
interest expense on FHLB advances increased $90,000, or 22.7%, to $486,000 for
the three months ended March 31, 2002.
Other Income
- ------------
Total other income decreased $297,000, or 76.5%, from $388,000 for the three
months ended March 31, 2001 to $91,000 for the same period in 2002. This change
was caused principally by the impairment charge of $351,000 related to a decline
in the fair value of certain of the Company's investment securities. This
decrease was partially offset by increases in fees collected from the Financial
Service Center at Strata Bank (Securities offered through Linsco/Private Ledger,
Member NASD, SIPC), and loan processing fees generated by the Strata Mortgage
Center. In addition, the net gains on sales of securities available for sale and
customer service fees increased by $14,000, or 17.5%, and $16,000, or 6.5%,
respectively, between reporting periods.
Operating Expenses
- ------------------
Total operating expenses increased $88,000, or 4.7%, from $1.9 million for the
three months ended March 31, 2001 to $2.0 million for the three months ended
March 31, 2002. Salary and benefits, occupancy and equipment expenses, and data
processing expenses, increased $27,000, or 2.8%, $10,000, or 2.5% and $10,000,
or 6.3%, respectively, between periods. No other individual expense category
increased materially between periods. The operating efficiency ratio for the
three months ended March 31, 2002, excluding the securities impairment charge,
was 72.7%, which is a reduction from 83.9% for the three months ended March 31,
2001.
Income Taxes
- ------------
Income tax expense increased by $10,000, or 11.1%, between reporting periods.
The effective income tax rates were 33.6% and 28.6% for the three months ended
March 31, 2002 and 2001, respectively. The effective tax rates are
-12-
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 that are
nontaxable.
Comparison of Operating Results for the Nine Months Ended March 31, 2002 and
- ----------------------------------------------------------------------------
2001
- ----
General
- -------
Net income for the nine months ended March 31, 2002 was $894,000 as compared to
$677,000 for the nine months ended March 31, 2001, an increase of $217,000, or
32.1%. This increase was primarily attributable to increases of $1.0 million, or
19.2%, in net interest income. This increase in net income was partially offset
by the impairment charge relating to the other-than-temporary decrease in the
fair value of certain of the Company's investment securities and an increase of
$425,000, or 7.7%, in total operating expenses.
The Bank's interest rate spread (the difference between yields earned on earning
assets and rates paid on deposits and borrowings) increased from 3.05% for the
nine months ended March 31, 2001 to 3.18% for the nine months ended
March 31, 2002. The net interest margin (net interest income divided by average
earning assets) increased slightly from 3.56% to 3.63% over the same time
period.
The interest rate spread and margin for the periods indicated are as follows:
Nine months ended
March 31,
-------------------------
2002 2001
---- ----
Weighted average yield earned on:
Short-term investments 2.68% 5.56%
Investments 6.19% 6.95%
Total loans, net 7.60% 8.37%
----- -----
All interest-earning assets 6.78% 7.66%
Weighted average rate paid on:
Deposits 3.23% 4.39%
Borrowed funds 5.42% 5.93%
----- -----
All interest-bearing liabilities 3.60% 4.61%
----- -----
Weighted average rate spread 3.18% 3.05%
===== =====
Net interest margin 3.63% 3.56%
===== =====
Interest and Dividend Income
- ----------------------------
Total interest and dividend income increased by $397,000, or 3.4%, from $11.7
million for the nine months ended March 31, 2001 to $12.1 million for the
comparable period ended March 31, 2002. This increase was primarily attributable
to a $696,000, or 10.1%, increase in interest and fees on loans between the two
periods. Average net loans increased $23.3 million, or 21.3%, while total loan
yield decreased by 77 basis points to 7.60%. The average balance for residential
mortgages increased by $9.6 million, or 15.5%, while commercial loans increased
$13.5 million, or 36.2%.
The average investment portfolio balance increased $6.1 million, or 7.0%, over
this same timeframe while its portfolio yield declined by 76 basis points to
6.19%. Most of the increase in the investment portfolio balance was in federal
agency obligations and corporate bonds. In addition, the average balance in
short-term investments increased $5.4 million, or 76.0%, between periods while
the portfolio yield decreased by 319 basis points.
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Interest Expense
- ----------------
Interest expense on deposits decreased $925,000, or 18.1%, from $5.1 million for
the nine months ended March 31, 2001, to $4.2 million for the nine months ended
March 31, 2002. This decrease was attributable to a 116 basis point reduction in
deposit rates between periods, which was partially offset by an increase of
$19.4 million, or 12.6%, in average interest-bearing deposit balances between
periods.
The Bank increased its use of borrowings from the FHLB to fund certain
investments and loans at rates in many cases lower than longer-term deposit
products. Average balances in these advances were $34.7 million during the nine
months ended March 31, 2002, an increase of $8.8 million, or 34.0% from the nine
months ended March 31, 2001. Over this same timeframe, average borrowing rates
decreased from 5.93% to 5.42%. As a result of the increased borrowing activity,
interest expense on FHLB advances increased $275,000, or 23.9%, from $1.2
million for the nine months ended March 31, 2001 to $1.4 million for the nine
months ended March 31, 2002.
Other Income
- ------------
Total other income decreased $192,000, or 15.3%, from $1.3 million for the nine
months ended March 31, 2001 to $1.1 million for the nine months ended
March 31, 2002. This change was caused primarily by the impairment charge of
$351,000 relating to the other-than-temporary decrease in the fair value of
certain of the Company's investment securities. This decrease was partially
offset by increases in customer service fees collected from the Financial
Service Center at Strata Bank (securities offered through Linsco/Private Ledger,
NASD, SIPC), and loan processing fees generated by the Strata Mortgage Center.
Both the Financial Service Center and Strata Mortgage Center were opened during
June, 2001.
Operating Expenses
- ------------------
Total operating expenses increased $425,000, or 7.7%, from $5.5 million for the
nine months ended March 31, 2001 to $6.0 million for the nine months ended
March 31, 2002. Salaries and benefits, occupancy and equipment expenses, data
processing expenses, and professional fees increased $92,000, or 3.2%, $52,000,
or 4.5%, $71,000, or 16.9%, and $43,000 or 20.6% respectively. In addition, the
Bank incurred a one-time charge of $150,000 for the settlement of a lease
cancellation. No other individual expense category increased materially between
periods. The operating efficiency ratio for the nine months ended
March 31, 2002, excluding the securities impairment and lease cancellation
charges, was 73.6%, which is a reduction from 82.7% for the nine months ended
March 31, 2001.
Income Taxes
- ------------
Income tax expense increased by $151,000, or 47%, between reporting periods,
primarily due to the increase of $368,000 in pretax income between periods. The
effective income tax rates were 34.6% and 32.1% for the nine months ended
March 31, 2002 and 2001, 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,
and senior vice president of bank administration to assess the asset/liability
mix and recommend strategies
-14-
that will enhance income while managing the Bank's vulnerability to changes in
interest rate. This committee meets regularly to discuss interest rate
conditions and potential product lines that would enhance the Bank's income
performance.
Certain strategies have been implemented to improve the match between interest
rate sensitive assets and liabilities. These strategies include, but are not
limited to: daily monitoring of the Bank's cash requirements, originating
adjustable and fixed rate mortgage loans, both residential and commercial, for
the Bank's own portfolio, managing the cost and structure of deposits, and
generally using the matched borrowings to fund specific purchases of loan
packages and large loan originations. Occasionally, management may choose to
deviate from specific matching of maturities of assets and liabilities if an
attractive opportunity to enhance yield becomes available.
Quarterly, ALCO modeling is performed with the assistance of an outside 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 March 31, 2002 amounted to $38.9
million. The Bank's ability to borrow from the FHLB is dependent upon the amount
and type of collateral the Bank has to secure the loans. Such collateral
consists of, but is not limited to, one-to-four family owner-occupied
residential property. As of March 31, 2002, the Bank's total borrowing capacity
through the Federal Home Loan Bank was $96.0 million. The Bank has additional
capacity to borrow through such instruments as repurchase agreements if the
situation arises utilizing federal agency obligations and mortgage-backed
securities as collateral.
A major portion of the Bank's liquidity consists of cash and cash equivalents,
short-term investments, U.S. Government and federal agency obligations,
mortgage-backed securities, and other debt securities. The level of these assets
is dependent upon the Bank's operating, lending, and financing activities during
any given period.
At March 31, 2002, the Bank had $6.9 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 $88.7 million at
March 31, 2002. Based upon historical experience, management believes that a
significant portion of such deposits will remain with the Bank.
At March 31, 2002, the Company and the Bank exceeded all regulatory capital
requirements.
-15-
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 management
believes, in the aggregate, involved amounts to be immaterial to the financial
condition and operations of the Company.
Item 2. Changes in Securities
- -----------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
Not applicable.
Item 5. Other Information
- -------------------------
None.
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
(incorporated herein by reference to the Company's Form 10-QSB for the
quarterly period ended September 30, 2001)
(b) Reports on Form 8-K
None
-16-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SERVICE BANCORP, INC.
Date: May 15, 2002 By: /s/ Pamela J. Montpelier
- ---- -----------------------------------
Pamela J. Montpelier
President and Chief Executive
Officer
Date: May 15, 2002 By: /s/ Dana S. Philbrook
- ---- -----------------------------------
Dana S. Philbrook
Chief Financial Officer
-17-