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 December 31, 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
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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
-----------------------------------------------
(Issuer's telephone number, including area code)
Not Applicable
-------------------------------------------------------------------------
(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 January 31, 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
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SERVICE BANCORP, INC. AND SUBSIDIARY
FORM 10-QSB
Index
PART I FINANCIAL INFORMATION Page
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets
as of December 31, 2001 and June 30, 2001 1
Consolidated Statements of Income for the three and six
months ended December 31, 2001 and 2000 2
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended December 31, 2001 and 2000 3
Consolidated Statements of Cash Flows for the six months
ended December 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan of Operation 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signature Page 21
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, June 30,
ASSETS 2001 2001
------ --------------------- ---------------------
Cash and due from banks $ 8,925 $ 9,599
Short-term investments 11,499 21,052
--------------------- ---------------------
Total cash and cash equivalents 20,424 30,651
--------------------- ---------------------
Certificates of deposit 100 100
Securities available for sale, at fair value 57,729 43,135
Securities held to maturity, at amortized cost 40,863 36,236
Federal Home Loan Bank stock, at cost 1,757 1,613
Loans 134,913 123,896
Less allowance for loan losses (1,098) (974)
--------------------- ---------------------
Loans, net 133,815 122,922
--------------------- ---------------------
Banking premises and equipment, net 3,888 4,080
Accrued interest receivable 1,834 1,734
Bank-owned life insurance 2,253 2,193
Other assets 1,478 1,433
--------------------- ---------------------
Total assets $264,141 $244,097
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $208,614 $191,826
Federal Home Loan Bank advances 35,060 32,255
Other liabilities 1,361 1,650
--------------------- ---------------------
Total liabilities 245,035 225,731
--------------------- ---------------------
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 7,418 7,409
Retained earnings 13,284 12,588
Accumulated other comprehensive loss (541) (514)
Treasury stock, at cost - 68,506 shares at December 31, 2001
and June 30, 2001 (560) (560)
Unearned ESOP shares - 34,003 shares at December 31, 2001
and 37,223 shares at June 30, 2001 (340) (372)
Unearned RRP stock - 23,983 shares at December 31, 2001
and 28,284 shares at June 30, 2001 (172) (202)
--------------------- ---------------------
Total stockholders' equity 19,106 18,366
--------------------- ---------------------
Total liabilities and stockholders' equity $264,141 $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 Six Months Ended
December 31, December 31,
2001 2000 2001 2000
--------------- --------------- -------------- --------------
Interest and dividend income:
Interest and fees on loans $ 2,510 $ 2,307 $ 5,035 $ 4,517
Interest and dividends on securities
and certificates of deposit 1,463 1,513 2,854 3,105
Interest on short-term investments 83 115 213 170
--------------- --------------- -------------- --------------
Total interest and dividend income 4,056 3,935 8,102 7,792
--------------- --------------- -------------- --------------
Interest expense:
Interest on deposits 1,409 1,736 2,930 3,439
Interest on FHLB advances 476 384 941 755
--------------- --------------- -------------- --------------
Total interest expense 1,885 2,120 3,871 4,194
--------------- --------------- -------------- --------------
Net interest income 2,171 1,815 4,231 3,598
Provision for loan losses 75 62 135 118
--------------- --------------- -------------- --------------
Net interest income, after provision for loan losses 2,096 1,753 4,096 3,480
--------------- --------------- -------------- --------------
Other income:
Customer service fees 276 257 540 503
Gain on sales of securities available for sale, net 228 214 280 290
Miscellaneous 80 42 155 77
--------------- --------------- -------------- --------------
Total other income 584 513 975 870
--------------- --------------- -------------- --------------
Operating expenses:
Salaries and benefits 996 1,011 1,976 1,912
Occupancy and equipment expenses 406 380 802 760
Data processing expenses 162 129 322 261
Professional fees 130 79 218 132
Advertising expenses 52 79 93 130
Other general and administrative expenses 344 249 592 472
--------------- --------------- -------------- --------------
Total operating expenses 2,090 1,927 4,003 3,667
--------------- --------------- -------------- --------------
Income before income taxes 590 339 1,068 683
Provision for income taxes 203 112 372 231
--------------- --------------- -------------- --------------
Net income $ 387 $ 227 $ 696 $ 452
=============== =============== ============== ==============
Weighted average common shares
outstanding during the period -
Basic 1,583,684 1,569,561 1,581,796 1,567,627
=============== =============== ============== ==============
Diluted 1,611,419 1,569,561 1,608,306 1,567,627
=============== =============== ============== ==============
Earnings per common share - Basic $ 0.24 $ 0.14 $ 0.44 $ 0.29
=============== =============== ============== ==============
Earnings per common share - Diluted $ 0.24 $ 0.14 $ 0.43 $ 0.29
=============== =============== ============== ==============
See accompanying notes to consolidated financial statements.
2
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
(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 - - 696 - - - - 696
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment - - - (27) - - - (27)
-------
Total comprehensive income 669
-------
Common stock held by ESOP released
and committed to be released
(3,220 shares) - 9 - - - 32 - 41
Amortization of RRP stock
(4,301 shares) - - - - - - 30 30
------- ---------- -------- ------------- -------- -------- -------- -------
Balance at December 31, 2001 $ 17 $ 7,418 $ 13,284 ($541) ($560) ($340) ($172) $19,106
======= ========== ======== ============= ======== ======== ======== =======
See accompanying notes to consolidated financial statements.
3
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000 (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 - - 452 - - - - 452
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment - - - 1,758 - - - 1,758
---------
Total comprehensive income 2,210
---------
Common stock held by ESOP released
and committed to be released
(3,228 shares) - (12) - - - 31 - 19
Amortization of RRP stock
(3,895 shares) - - - - - - 28 28
-------- ------------ ---------- --------------- ---------- ----------- ---------- ---------
Balance at December 31, 2000 $17 $7,414 $12,082 ($880) ($560) ($405) ($233) $17,435
======== ============ ========== =============== ========== =========== ========== =========
See accompanying notes to consolidated financial statements.
4
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six Months Ended
December 31, December 31,
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 696 $ 452
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 135 118
Gain on sales of securities available for sale, net (280) (290)
Accretion of securities, net of amortization (5) (99)
Depreciation and amortization expense 319 329
Increase in accrued interest receivable (100) (34)
Bank-owned life insurance income (60) (34)
Deferred tax provision 4 (110)
Other, net (359) (160)
---------- ---------
Net cash provided by operating activities 350 172
---------- ---------
Cash flows from investing activities:
Proceeds from sales and calls of
securities available for sale 25,726 8,082
Proceeds from maturities of and
principal payments on securities
available for sale and held to maturity 6,358 914
Purchase of securities available for sale (40,578) (3,151)
Purchase of securities held to maturity (10,486) (400)
Purchase of FHLB stock (144) --
Net increase in loans (11,061) (5,509)
Purchase of banking premises and equipment (127) (353)
---------- ---------
Net cash by investing activities (30,312) (417)
---------- ---------
Cash flows from financing activities:
Net increase in deposits 16,788 6,661
Proceeds from Federal Home Loan Bank advances 3,012 16,089
Repayment of Federal Home Loan Bank advances (207) (18,066)
Increase (decrease) in mortgagors' escrow deposits 101 (8)
Release of common stock held by ESOP 41 19
---------- ---------
Net cash provided by financing activities 19,735 4,695
---------- ---------
Net change in cash and cash equivalents (10,227) 4,450
Cash and cash equivalents at beginning of period 30,651 14,245
---------- ---------
Cash and cash equivalents at end of period $ 20,424 $ 18,695
========== =========
See accompanying notes to consolidated financial statements (Continued)
5
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Concluded)
(Dollars in thousands)
Six Months Ended
December 31, December 31,
2001 2000
---- ----
Supplementary information:
Interest paid on deposits $2,947 $3,454
Interest paid on Federal Home Loan Bank advances 926 765
Income taxes paid 381 261
See accompanying notes to consolidated financial statements.
6
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 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 December 31, 2001, the Company had outstanding commitments to originate loans
of $5.6 million. Unused lines of credit and open commitments available to
customers at December 31, 2001 amounted to $22.2 million, of which $7.6 million
were equity lines of credit.
7
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) December 31, 2001 June 30, 2001
----------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Available for Sale Securities:
Federal agency obligations $26,984 $27,219 $19,241 $19,165
Mortgage-backed securities 2,999 2,960 167 167
Other debt securities 25,612 25,388 21,025 21,054
-------------- --------------- ------------- -------------
Total debt securities 55,595 55,567 40,433 40,386
Marketable equity securities 2,933 2,162 3,457 2,749
-------------- --------------- ------------- -------------
Total available for sale securities $58,528 $57,729 $43,890 $43,135
============== =============== ============= =============
Held to Maturity Securities:
Other debt securities $5,208 $5,445 $5,190 $5,446
Mortgage-backed securities 35,655 35,717 31,046 30,825
-------------- --------------- ------------- -------------
Total held to maturity securities $40,863 $41,162 $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) December 31, 2001 June 30, 2001
----------------------------- ----------------------------
Amount Percent Amount Percent
------ ------- ------ -------
Real estate loans:
Residential $70,119 52.08% $66,392 53.62%
Commercial 37,263 27.68% 31,109 25.12%
Construction 4,849 3.60% 4,713 3.81%
-------------- -------------- -------------- -------------
Total real estate loans 112,231 83.36% 102,214 82.55%
Other loans:
Consumer loans:
Collateral 594 0.44% 626 0.51%
Home equity 9,165 6.81% 9,132 7.37%
Other 1,488 1.11% 1,688 1.36%
-------------- -------------- -------------- -------------
Total consumer loans 11,247 8.35% 11,446 9.24%
Commercial business loans 11,162 8.29% 10,167 8.21%
-------------- -------------- -------------- -------------
Total other loans 22,409 16.64% 21,613 17.45%
-------------- -------------- -------------- -------------
Total loans 134,640 100.00% 123,827 100.00%
============== =============
Net deferred loan costs and premium 273 69
Allowance for loan losses (1,098) (974)
-------------- --------------
Total loans, net $133,815 $122,922
============== ==============
8
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.
December 31, 2001 June 30, 2001
------------------------------- ------------------------------
(Dollars in thousands) Amount Percent Amount Percent
------ ------- ------ -------
Demand $26,113 12.52% $25,912 13.51%
NOW 28,572 13.70% 29,066 15.15%
Money market deposits 19,639 9.41% 16,064 8.37%
Regular and other savings 35,629 17.08% 34,869 18.18%
---------------- ------------- -------------- ------------
Total non-certificate accounts 109,953 52.71% 105,911 55.21%
Term certificates 98,661 47.29% 85,915 44.79%
---------------- ------------- -------------- ------------
Total deposits $208,614 100.00% $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.
December 31, 2001 June 30, 2001
------------------------------- ------------------------------
(Dollars in thousands) Amount Percent Amount Percent
------ ------- ------ -------
Less than one year $28,512 81.32% $25,500 79.06%
One to three years 5,798 16.54% 6,000 18.60%
Greater than three years 750 2.14% 755 2.34%
---------------- ------------- -------------- ------------
Total borrowed funds $35,060 100.00% $32,255 100.00%
================ ============= ============== ============
9
SERVICE BANCORP, INC. AND SUBSIDIARY
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 December 31, 2001 and June 30, 2001
- ------------------------------------------------------------------------
Assets increased by $20.0 million, or 8.2%, from $244.1 million at June 30,
2001 to $264.1 million at December 31, 2001. The increase was primarily funded
by the $16.8 million, or 8.8%, increase in total deposits since June 30, 2001.
Over that same timeframe, the Company increased its borrowings with the Federal
Home Loan Bank ("FHLB") by $2.8 million, or 8.7%.
Total investments and net loans increased $19.2 million, or 24.2%, and
$10.9 million, or 8.9%, respectively, between June 30, 2001 and December 31,
2001. The funds to purchase investments and originate loans were provided
primarily from deposits, borrowings, and loan repayments and payoffs, and were
supplemented by $9.6 million of overnight funds.
Between June 30, 2001 and December 31, 2001, federal agency obligations,
corporate bonds, and mortgage-backed securities increased $8.1 million, $4.3
million, and $7.4 million, respectively, while equity securities decreased by
$587,000. The net interest rate margin was positively impacted by the investment
purchases because the weighted average composite yields of these purchases were
a 300 basis point yield improvement over the overnight fund rates during the
same period.
The Bank's continued objective is to prudently increase its loan portfolio,
primarily in residential and commercial loans. For the six month period ended
December 31, 2001, the Strata Mortgage Center, with its affiliation with
Marathon Mortgage Company, originated $11.5 million residential loans. In
addition, the Bank purchased $8.6 million of residential loans directly from
Marathon Mortgage Company over the same timeframe. This loan volume is a $14.1
million increase over the six month period ended December 31, 2000. With this
activity, the Bank's residential mortgages had a net increase of $3.7 million,
or 5.6%, since June 30, 2001. The Bank originated $14.1 million for all
commercial loans for the six month period ended December 31, 2001, which is a
$2.1 million volume increase over the same period in 2000. After loan paydowns,
the total commercial real estate loan portfolio increased by $6.2 million, or
19.8%, 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 $934,000, or 3.9%, and as of December 31, 2001 represented 11.9% of
total deposits.
10
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis or Plan of Operation (Continued)
As of December 31, 2001, the Bank had $11.5 million invested in overnight
funds, representing 4.4% 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.
The increase of $16.8 million in deposits since June 30, 2001 was primarily
attributable to increases of $12.7 million, or 14.8%, in term certificates, $3.6
million, or 22.3%, in money market deposits, $760,000, or 2.2%, in regular and
other savings, and $201,000, or 0.8%, in demand deposits. During this same
timeframe, NOW deposits decreased $494,000, or 1.7%. Certificates with maturity
terms of 18 months and longer increased $20.1 million between June 30, 2001 and
December 31, 2001, and as of December 31, 2001 represent 49.8% of the Bank's
total term certificates. In addition, the Bank increased borrowings by $2.8
million, or 8.7%, 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 7.23% of total assets at December 31,
2001. This increase resulted primarily from the Company's earnings during this
six month 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) December 31, June 30,
2001 2001
------------- ------------
Non-accrual loans:
One- to four-family real estate loans $ -- $ 121
Commercial loans 50 --
Commercial business loans -- 16
Consumer loans 20 12
------------- ------------
Total non-accrual loans 70 149
Other real estate owned -- --
------------- ------------
Total non-performing assets $ 70 $ 149
============= ============
Allowance for loan losses $ 1,098 $ 974
============= ============
Allowance for loan losses as a percent
of total loans, net 0.82% 0.79%
============= ============
11
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis or Plan of Operation (Continued)
December 31, June 30,
2001 2001
-------------- --------------
Allowance for loan losses as a percent
of non-accrual loans 1,568.57% 653.69%
============== ==============
Non-accrual loans as a percent of
total loans, net 0.05% 0.12%
============== ==============
Non-performing assets as a percent of
total assets 0.03% 0.06%
============== ==============
At December 31, 2001, the Bank's provision for loan losses was $135,000 due
to the growth of the commercial loan portfolio, which generally presents a
greater risk of loss than residential loans. During the six-months ended
December 31, 2001, there were $62,000 in loan charge-offs and $51,000 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.
Comparison of Operating Results for the Three Months Ended December 31, 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 December 31, 2001 was $387,000 as
compared to $227,000 for the three months ended December 31, 2000, an increase
of $160,000, or 70.5 %. This increase was primarily attributable to increases of
$356,000 or 19.6%, in net interest income, $57,000, or 9.8%, in customer service
fees and miscellaneous income, and $14,000, or 6.5%, in the net gain on the
sales of securities. Partially offsetting these was an increase of $163,000, or
8.5%, in total operating expenses.
12
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis or Plan of Operation (Continued)
The Bank's interest rate spread (the difference between yields earned on
earning assets and rates paid on deposits and borrowings) increased from 3.04%
for the three months ended December 31, 2000 to 3.13% for the three months ended
December 31, 2001. The interest rate margin (net interest income divided by
average earning assets) decreased slightly from 3.59% to 3.58% over the same
time period. The interest rate spread increased primarily as a result of the
decrease of 117 basis points in funding costs for both deposits and borrowings
between periods due to Federal Reserve interest rate reductions since January
2001. 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 security
portfolio were called and were reinvested in lower yielding investments. These
factors were the primary reason for the decline of 108 basis points on the yield
on earning assets. The Bank's reduced deposit rates over 25 times within the
last 18 months to minimize the impact of these Fed interest rate reductions on
the Bank's interest margin.
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
December 31,
---------------------
2001 2000
---- ----
Weighted average yield earned on:
Short-term investments 2.38% 6.75%
Securities 6.03% 6.99%
Total loans, net 7.65% 8.48%
--------- ----------
All interest-earning assets 6.70% 7.78%
--------- ----------
Weighted average rate paid on:
Deposits 3.19% 4.52%
Borrowed funds 5.52% 6.10%
--------- ----------
All interest-bearing liabilities 3.57% 4.74%
--------- ----------
Weighted average rate spread 3.13% 3.04%
========= ==========
Net interest margin 3.58% 3.59%
========= ==========
Earnings per share data for the three months ended December 31, 2001 was
$0.24 for both the "basic" and "diluted" calculations as compared to $0.14 per
share for both "basic" and "diluted" calculations for the three months ended
December 31, 2000.
13
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis or Plan of Operation (Continued)
Interest and Dividend Income
- ----------------------------
Total interest and dividend income increased by $121,000, or 3.1%, from
$3.9 million for the three months ended December 31, 2000 to $4.1 million for
the comparable period in 2001. This increase was primarily attributable to a
$40.0 million, or 19.8%, increase in average earning assets, which was partially
offset by a 108 basis point reduction in yield on earning assets between the two
periods. The average balance in net loans increased $22.3 million, or 20.5%,
while total loan yield decreased by 83 basis points to 7.65%. 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 $7.1 million, or 104.8%, between
periods, had a sharp reduction in yield going from 6.75% for the quarter ending
December 31, 2000 to 2.38% for the quarter ending December 31, 2001. The yield
reduction was caused by the numerous interest rate reductions by the Federal
Reserve since January 2001. These rate reductions also impacted the yield in the
securities portfolio, which declined by 96 basis points to 6.03%, while the
average securities portfolio balance increased $10.5 million, or 12.2%, over
this same period.
Interest Expense
- ----------------
Interest expense on deposits decreased $327,000, or 18.8%, from $1.7
million for the three months ended December 31, 2000, to $1.4 million for the
three months ended December 31, 2001. This decrease was primarily attributable
to a 133 basis point reduction in deposit rates, which was influenced by the
Federal Reserve interest rate decreases and the increase of $18.1 million in
lower-priced non-certificate deposit average balances between periods. Over this
same timeframe, the higher-priced term certificate balances increased by $5.0
million.
The Bank increased its use of borrowings from the FHLB since in many cases
it proved to be less expensive source of funding than term certificates. Average
balances in these advances were $34.5 million during the three months ended
December 31, 2001, an increase of $9.3 million, or 36.9% from the three months
ended December 31, 2000. Over this same timeframe, borrowing rates decreased
from 6.10% to 5.52%. Because of the increase in average borrowings, interest
expense on FHLB advances increased $92,000, or 24.0%, from $384,000 for the
three months ended December 31, 2000 to $476,000 for the three months ended
December 31, 2001.
Other Income
- ------------
Total other income increased $71,000, or 13.8%, from $513,000 for the three
months ended December 31, 2000 to $584,000 for the same period in 2001. This
change was caused principally by an increase of $38,000, or 90.5%, in
miscellaneous income between periods primarily due to increases in fees
collected from the financial service center and loan processing fees generated
by the Strata Mortgage Center. In addition, the net gains on securities
available for sale and customer service fees increased by $14,000, or 6.5%, and
$19,000, or 7.4%, respectively, between reporting periods.
14
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis or Plan of Operation (Continued)
Operating Expense
- -----------------
Total operating expense increased $163,000, or 8.5%, from $1.9 million for
the three months ended December 31, 2000 to $2.1 million for the three months
ended December 31, 2001. Occupancy and equipment expenses, data processing
expenses, and professional fees increased $26,000, or 6.8%, $33,000, or 25.6%,
and $51,000, or 64.6%, respectively, between periods. No other individual
expense category increased materially between periods. In addition, the Bank
incurred a one-time charge of $110,000 for the settlement of a lease
cancellation. The operating efficiency ratio for the three months ended December
31, 2001 was 75.9%, which is a reduction from 82.8% for the three months ended
December 31, 2000.
Income Taxes
- ------------
Income tax expense increased by $91,000, or 81.3%, between reporting
periods, primarily due to the increase of $251,000 in pretax income between
periods. The effective income tax rates were 34.4% and 33.0% for the three
months ended December 31, 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 that are
nontaxable.
Comparison of Operating Results for the Six Months Ended December 31, 2001 and
- ------------------------------------------------------------------------------
2000
- ----
General
- -------
Net income for the six months ended December 31, 2001 was $696,000 as
compared to $452,000 for the six months ended December 31, 2000, an increase of
$244,000, or 54.0%. This increase was primarily attributable to increases of
$633,000, or 17.6%, in net interest income, $78,000, or 101.3%, in miscellaneous
income, and $37,000, or 7.4%, in customer service fees. This increase in net
income was partially offset by an increase of $336,000, or 9.2%, in total
operating expenses and a decrease of $10,000 in net gains on securities
available for sale.
The Bank's interest rate spread (the difference between yields earned on
earning assets and rates paid on deposits and borrowings) increased from 3.08%
for the six months ended December 31, 2000 to 3.14% for the six months ended
December 31, 2001. The interest rate margin (net interest income divided by
average earning assets) increased slightly from 3.58% to 3.61% over the same
time period.
15
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis or Plan of Operation (Continued)
The interest rate spread and margin for the periods indicated are as follows:
Six months ended
December 31,
---------------------------
2001 2000
---- ----
Weighted average yield earned on:
Short-term investments 2.97% 6.47%
Investments 6.25% 7.07%
Total loans, net 7.83% 8.39%
------------ ------------
All interest-earning assets 6.92% 7.76%
Weighted average rate paid on:
Deposits 3.42% 4.46%
Borrowed funds 5.60% 5.99%
------------ ------------
All interest-bearing liabilities 3.78% 4.68%
------------ ------------
Weighted average rate spread 3.14% 3.08%
============ ============
Net interest margin 3.61% 3.58%
============ ============
Interest and Dividend Income
- ----------------------------
Total interest and dividend income increased by $310,000, or 4.0%, from
$7.8 million for the six months ended December 31, 2000 to $8.1 million for the
comparable period in 2001. This increase was primarily attributable to a $33.5
million, or 16.7%, increase in average earning assets between the two periods,
which was partially offset by a 84 basis point reduction in the yield on earning
assets between periods. This decrease in yield was impacted by the Federal
Reserve's numerous interest rate reductions over the last year. The average
balances in net loans increased $20.9 million, or 19.4%, while total loan yield
decreased by 56 basis points to 7.83%. The average balance for residential
mortgages increased by $8.2 million, or 13.0%, while commercial loans increased
$12.4 million, or 34.0%.
The average investment portfolio balance increased $3.5 million, or 4.0%,
over this same timeframe while its portfolio yield declined by 82 basis points
to 6.25%. Most of the increase in the investment portfolio balance was in
mortgage-backed securities. In addition, the average balance in short-term
investments increased $9.1 million, or 173.1%, between periods while the
portfolio yield decreased by 350 basis points.
Interest Expense
- ----------------
Interest expense on deposits decreased $509,000, or 14.8%, from $3.4
million for the six months ended December 31, 2000, to $2.9 million for the six
months ended December 31, 2001. This decrease was attributable to a 104 basis
point reduction in deposit rates between periods, which was partially offset by
an increase of $17.1 million, or 11.1%, increase in average interest-bearing
deposit balances between periods. The decrease in deposit interest rates was
primarily due to the decrease in interest rates by the Federal Reserve System
between the two periods.
16
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis or Plan of Operation (Continued)
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 $33.6 million during the six
months ended December 31, 2001, an increase of $8.4 million, or 33.3% from the
six months ended December 31, 2000. Over this same timeframe, average borrowing
rates decreased from 5.99% to 5.60%. As a result of the increased borrowing
activity, interest expense on FHLB advances increased $186,000, or 24.6%, from
$755,000 for the six months ended December 31, 2000 to $941,000 for the six
months ended December 31, 2001.
Other Income
- ------------
Total other income increased $105,000, or 12.1%, from $870,000 for the six
months ended December 31, 2000 to $975,000 for the same period in 2001. This
change was caused primarily by increases of $78,000, or 101.3%, and $37,000, or
7.4%, respectively, in miscellaneous income and customer service fee income.
Miscellaneous income increased primarily due to fees collected from the
financial service center 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 Expense
- -----------------
Total operating expense increased $336,000, or 9.2%, from $3.7 million for
the six months ended December 31, 2000 to $4.0 million for the six months ended
December 31, 2001. Salaries and benefits occupancy and equipment expenses, data
processing expenses, and professional fees increased $64,000, or 3.4%, $42,000,
or 5.5%, $61,000, or 23.4%, and $86,000, or 65.2%, respectively. In addition,
the Bank incurred a one-time charge of $110,000 for the settlement of a lease
cancellation. No other individual expense category increased materially between
periods. The operating efficiency ratio for the six months ended December 31,
2001 was 76.9%, which is a reduction from 82.1% for the six months ended
December 31, 2000.
Income Taxes
- ------------
Income tax expense increased by $141,000, or 61.0%, between reporting
periods, primarily due to the increase of $385,000 in pretax income between
periods. The effective income tax rates were 34.8% and 33.8% for the six months
ended December 31, 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
17
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis or Plan of Operation (Continued)
Management Committee ("ALCO") made up of the chief executive officer, the chief
financial officer, the senior loan officer, the senior vice president of retail
banking, and senior vice president of bank administration to assess the
asset/liability mix and recommend strategies that will enhance income while
managing the Bank's vulnerability to changes in interest rate. This committee
meets regularly to discuss interest rate conditions and potential product lines
that would enhance the Bank's income performance.
Certain strategies have been implemented to improve the match between
interest rate sensitive assets and liabilities. These strategies include, but
are not limited to: daily monitoring of the Bank's cash requirements,
originating adjustable and fixed rate mortgage loans, both residential and
commercial, for the Bank's own portfolio, managing the cost and structure of
deposits, and generally using the matched borrowings to fund specific purchases
of loan packages and large loan originations. Occasionally, management may
choose to deviate from specific matching of maturities of assets and liabilities
if an attractive opportunity to enhance yield becomes available.
Quarterly, ALCO modeling is performed with the assistance of an outside
investment advisor which projects the Bank's financial performance over the next
twenty four months using loan and deposit projections, projections of changes in
interest rates, and anticipated changes in other income and operating expenses
to reveal the full impact of the Bank's operating strategies on financial
performance. The results of the ALCO process are reported to the Board at least
on a quarterly basis.
Liquidity and Capital Resources
- -------------------------------
The Bank's primary sources of funds consist of deposits, borrowings,
repayment and prepayment of loans, sales of loans and 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 December 31, 2001 amounted to
$35.1 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. As of December 31, 2001, the Bank's total borrowing
capacity through the Federal Home Loan Bank was $50.7 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 December 31, 2001, the Bank had $5.6 million of outstanding commitments
to originate loans. The Bank anticipates that it will have sufficient funds
available to meet these commitments. Certificates
18
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. Management's Discussion and Analysis or Plan of Operation (Concluded)
of deposit, which are scheduled to mature in one year or less, totaled $66.4
million at December 31, 2001. Based upon historical experience, management
believes that a significant portion of such deposits will remain with the Bank.
At December 31, 2001, the Company and the Bank exceeded all regulatory
capital requirements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which
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)
19
SERVICE BANCORP, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION (Concluded)
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.
20
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: February 13, 2002 By: /s/ Pamela J. Montpelier
- ----- ----------------- ----------------------------
Pamela J. Montpelier
President and Chief Executive Officer
Date: February 13, 2002 By: /s/ Warren W. Chase, Jr.
- ----- ----------------- ---------------------------
Warren W. Chase, Jr.
Senior Vice President and Treasurer
21