UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 0-24935
-------
SERVICE BANCORP, INC.
---------------------
(Exact name of registrant 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) (Zip Code)
(508) 533-4343
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last year.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practical date.
At February 5, 2001, there were 1,612,254 shares of common stock
outstanding, par value $0.01 per share.
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, 2000 and June 30, 2000 ........................ 1
Consolidated Statements of Income for the three and
six months ended December 31, 2000 and 1999 ...................... 2
Consolidated Statements of Changes in Stockholders' Equity
for the six months ended December 31, 2000 and 1999 .............. 3
Consolidated Statements of Cash Flows for the six months
ended December 31, 2000 and 1999 ................................. 5
Notes to Consolidated Financial Statements ....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 17
Item 2. Changes in Securities ............................................ 17
Item 3. Defaults upon Senior Securities .................................. 17
Item 4. Submission of Matters to a Vote of Security Holders .............. 17
Item 5. Other Information ................................................ 18
Item 6. Exhibits and Reports on Form 8-K ................................. 18
Signature Page ................................................... 19
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for per share amounts)
December 31, June 30,
ASSETS 2000 2000
------ --------------------- ---------------------
Cash and due from banks $9,195 $8,133
Short-term investments 9,499 6,112
--------------------- ---------------------
Total cash and cash equivalents 18,694 14,245
--------------------- ---------------------
Certificates of deposit 100 100
Securities available for sale, at fair cost 78,828 81,596
Securities held to maturity, at amortized cost 5,171 4,771
Federal Home Loan Bank stock, at cost 1,588 1,588
Loans 112,609 107,224
Less allowance for loan losses (883) (802)
--------------------- ---------------------
Loans, net 111,726 106,422
--------------------- ---------------------
Banking premises and equipment, net 4,247 4,223
Accrued interest receivable 2,040 2,007
Bank-owned life insurance 2,104 2,070
Other assets 1,734 2,411
--------------------- ---------------------
Total assets $226,232 $219,433
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $183,006 $176,345
Federal Home Loan Bank advances 24,373 26,350
Other liabilities 1,418 1,560
--------------------- ---------------------
Total liabilities 208,797 204,255
--------------------- ---------------------
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 7,414 7,426
Retained earnings 12,082 11,630
Accumulated other comprehensive loss (880) (2,638)
Treasury stock, at cost - 68,506 shares at December 31, 2000
and June 30, 2000 (560) (560)
Unearned ESOP shares - 40,434 shares at December 31, 2000
and 43,662 shares at June 30, 2000 (405) (436)
Unearned RRP Stock - 32,587 shares at December 31, 2000
and 36,482 shares at June 30, 2000 (233) (261)
--------------------- ---------------------
Total stockholders' equity 17,435 15,178
--------------------- ---------------------
Total liabilities and stockholders' equity $226,232 $219,433
===================== =====================
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 Mos. Ended Dec. 31, Six Mos. Ended Dec. 31,
2000 1999 2000 1999
--------- --------- --------- ---------
Interest and dividend income:
Interest and fees on loans $2,307 $1,839 $4,517 $3,597
Interest and dividends on securities 1,513 1,400 3,100 2,642
Interest on short-term investments
and certificates of deposit 115 51 175 124
--------- --------- --------- ---------
Total interest and dividend income 3,935 3,290 7,792 6,363
--------- --------- --------- ---------
Interest expense:
Interest on deposits 1,736 1,202 3,439 2,361
Interest on FHLB advances 384 373 755 684
--------- --------- --------- ---------
Total interest expense 2,120 1,575 4,194 3,045
--------- --------- --------- ---------
Net interest income 1,815 1,715 3,598 3,318
Provision for loan losses 62 35 118 80
--------- --------- --------- ---------
Net interest income, after provision for loan losses 1,753 1,680 3,480 3,238
--------- --------- --------- ---------
Other income:
Customer service fees 257 196 503 376
Gain on sales of securities available for sale, net 214 214 290 233
Miscellaneous 42 27 77 43
--------- --------- --------- ---------
Total other income 513 437 870 652
--------- --------- --------- ---------
Operating expenses:
Salaries and benefits 1,011 811 1,912 1,567
Occupancy and equipment expenses 380 345 760 673
Data processing expenses 129 97 261 189
Professional fees 79 89 132 151
Advertising expenses 79 57 130 126
Other general and administrative expenses 249 195 472 393
--------- --------- --------- ---------
Total operating expenses 1,927 1,594 3,667 3,099
--------- --------- --------- ---------
Income before income taxes 339 523 683 791
Provision for income taxes 112 189 231 289
--------- --------- --------- ---------
Net income $227 $334 $452 $502
========= ========= ========= =========
Weighted average common shares
outstanding during the period -
Basic 1,569,561 1,606,478 1,567,627 1,624,743
========= ========= ========= =========
Diluted 1,569,561 1,606,478 1,567,627 1,626,678
========= ========= ========= =========
Earnings per common share(Basic and Diluted) $0.14 $0.21 $0.29 $0.31
========= ========= ========= =========
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, 2000 AND 1999
(DOLLARS IN THOUSANDS)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Loss
--------- --------- --------- ----------
Balance at June 30, 2000 $17 $7,426 $11,630 ($2,638)
Comprehensive income:
Net Income -- -- 452 --
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- 1,758
Total comprehensive income 2,210
Common stock held by ESOP released
and committed to be released
(3,228 shares) -- (12) -- --
Amortization of RRP stock -- -- -- --
(3,895 shares)
--------- --------- --------- ----------
Balance at December 31, 2000 $17 $7,414 $12,082 ($880)
========= ========= ========= ==========
Unearned Unearned
Treasury ESOP RRP
Stock Shares Stock Total
-------- ------- ------- -------
Balance at June 30, 2000 ($560) ($436) ($261) $15,178
Comprehensive income:
Net Income -- -- -- 452
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- 1,758
Total comprehensive income
Common stock held by ESOP released
and committed to be released
(3,228 shares) -- 31 -- 19
Amortization of RRP stock -- -- 28 28
(3,895 shares)
-------- ------- ------- -------
Balance at December 31, 2000 ($560) ($405) ($233) $17,435
======== ------- ------- -------
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, 2000 AND 1999 (CONCLUDED)
Additional
Common Paid-in Retained Comprehensive
Stock Capital Earnings Loss
--------- --------- --------- ----------
Balance at June 30, 1999 $17 $7,444 $10,784 ($1,182)
Comprehensive loss:
Net income -- -- 502 --
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- (1,395)
Total comprehensive loss
Common stock held by ESOP released
and committed to be released
(3,222 shares) -- (7) -- --
Purchase of treasury stock
(58,500 shares) -- -- -- --
Purchase of RRP stock
(10,800 shares) -- -- -- --
----- ------- ------- -------
Balance at December 31, 1999 $17 $7,437 $11,286 ($2,577)
===== ======= ======= =======
Accumulated
Other Unearned Unearned
Treasury ESOP RRP
Stock Shares Stock Total
-------- ------- ------- -------
Balance at June 30, 1999 ($83) ($501) $-- $16,479
Comprehensive loss:
Net income -- -- -- 502
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- (1,395)
--------
Total comprehensive loss (893)
--------
Common stock held by ESOP released
and committed to be released
(3,222 shares) -- 32 -- 25
Purchase of treasury stock
(58,500 shares) (477) -- -- (477)
Purchase of RRP stock
(10,800 shares) -- -- (82) (82)
----- ----- ---- --------
Balance at December 31, 1999 ($560) ($469) ($82) $15,052
===== ===== ==== ========
See accompanying notes to consolidated financial statements
4
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
(DOLLARS IN THOUSANDS)
Dec. 31, Dec. 31,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 452 $ 502
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Provision for loan losses 118 80
Gain on sales of securities available for sale, net (290) (233)
Amortization of unearned loan income 87 29
Accretion of securities, net of amortization (99) (60)
Depreciation and amortization expense 329 299
Decrease in accrued interest receivable (33) (81)
Deferred tax benefit (110) (78)
Other, net (328) (1,060)
-------- --------
Net cash provided (used) by operating activities 126 (602)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of
securities available for sale 8,082 3,346
Proceeds from maturities of and
principal payments on securities
available for sale 914 3,691
Purchase of securities available for sale (3,151) (14,645)
Purchase of securities held to maturity (400) --
Net increase in loans (5,509) (10,744)
Purchase of banking premises and equipment (353) (288)
-------- --------
Net cash used by investing activities (417) (18,640)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 6,661 16,024
Proceeds from Federal Home Loan Bank
advances 16,089 20,740
Repayment of Federal Home Loan Bank
advances (18,066) (18,463)
Release of common stock held by ESOP 19 25
Purchase of RRP stock -- (82)
Increase in mortgagors' escrow deposits 9 27
Amortization of RRP stock 28 --
Purchase of treasury stock -- (477)
-------- --------
Net cash provided by financing activities 4,740 17,794
-------- --------
Net change in cash and cash equivalents 4,449 (1,448)
Cash and cash equivalents at beginning of period 14,245 13,390
-------- --------
Cash and cash equivalents at end of period $ 18,694 $ 11,942
======== ========
SUPPLEMENTARY INFORMATION:
Interest paid on deposits $ 3,454 $ 2,375
Interest paid on Federal Home Loan
Bank advances 765 643
Income taxes paid 261 376
Decrease in due from broker -- 521
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 Corp. and Franklin Village Security Corp.,
both of which engage solely in the purchase and sale of investment
securities. All significant intercompany balances and transactions have
been eliminated in consolidation.
These financial statements have been prepared in accordance with generally
accepted accounting principles ("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 2000 annual report to stockholders and is incorporated herein
by reference.
(2) REORGANIZATION AND STOCK OFFERING
The Company is a Massachusetts corporation that was organized in August
1998 at the direction of the Board of Directors of the Bank and the Board
of Trustees of Service Bancorp, MHC (the "MHC"), the mutual holding company
parent of the Bank, for the purpose of owning all of the outstanding
capital stock of the Bank. The Company offered for sale 47% of the shares
of its outstanding common stock in a public offering to eligible
depositors, employees, and members of the general public (the "Offering").
The remaining 53% of the Company's shares of common stock were issued to
the MHC. The Offering was completed on October 7, 1998. Prior to that date,
the Company had no assets or liabilities.
Completion of the Offering resulted in the issuance of 1,712,630 shares of
common stock, 907,694 shares of which were issued to the MHC and 804,936
shares of which were sold to eligible depositors, employees, and the
general public at $10.00 per share. The Company began trading on the OTC
Bulletin Board under the symbol "SERC" on October 7, 1998. Costs related to
the Offering (primarily marketing fees paid to an underwriting firm,
professional fees, registration fees, and printing and mailing costs)
aggregated $569,000. These costs together with funds loaned to purchase
shares for the Bank's Employee Stock Ownership Plan (the "ESOP") were
deducted to arrive at net proceeds of $6.8 million. The Company contributed
50% of the net proceeds of the Offering to the Bank for general corporate
use. On October 7, 1998, the Company loaned approximately $644,000 to the
ESOP to fund its purchase of 64,394 shares of common stock of the Company.
(3) EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares
outstanding during the period. The Company's "basic" and "diluted" earnings
per share are identical as there were no material common stock equivalents
outstanding during the periods covered by the report
6
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) COMMITMENTS
At December 31, 2000, the Company had outstanding commitments to originate
loans of $3.0 million. Unused lines of credit available to customers
amounted to $9.9 million, $9.0 million of which were equity lines of
credit.
(5) SECURITIES
The following table sets forth the Company's securities at the dates
indicated.
December 31, 2000 June 30, 2000
--------------------------------------------------------------
(Dollars in thousands) Amortized Fair Amortized Fair
COST VALUE COST VALUE
---- ----- ---- -----
AVAILABLE FOR SALE SECURITIES:
Federal agency obligations $41,203 $40,871 $45,667 $43,633
Mortgage-backed securities 15,961 15,784 16,876 16,028
Other debt securities 19,739 19,367 19,359 18,621
------------------------------ -------------------------------
Total debt securities 76,903 76,022 81,902 78,282
Marketable equity securities 3,267 2,806 3,724 3,314
------------------------------ -------------------------------
Total available for sale securities $80,170 $78,828 $85,626 $81,596
============================== ===============================
HELD TO MATURITY SECURITIES:
Other debt securities $5,171 $5,304 $4,771 $4,738
============================== ===============================
(6) 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, 2000 June 30, 2000
------------------------------ -------------------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
REAL ESTATE LOANS:
Residential $62,419 55.45% $61,689 57.56%
Commercial 26,685 23.71% 25,035 23.36%
Construction 4,178 3.71% 2,742 2.56%
-------------- --------------- --------------- ---------------
Total real estate loans 93,282 82.87% 89,466 83.47%
7
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000 June 30, 2000
------------------------------ -------------------------------
(Dollars in thousands) AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
OTHER LOANS:
Consumer loans:
Collateral 753 0.67% 634 0.59%
Home equity 8,949 7.95% 7,685 7.17%
Other 1,806 1.60% 1,629 1.52%
------------------------------ -------------------------------
Total consumer loans 11,508 10.22% 9,948 9.28%
Commercial business loans 7,776 6.91% 7,763 7.24%
------------------------------ -------------------------------
Total other loans 19,284 17.13% 17,711 16.53%
------------------------------ -------------------------------
Total loans 112,566 100.00% 107,177 100.00%
=============== ===============
Net deferred loan costs 28 37
Deferred premium 15 10
Allowance for loan losses (883) (802)
--------------- ----------------
Total loans, net $111,726 $106,422
=============== ================
(7) DEPOSITS AND BORROWED FUNDS
The following tables indicate types and balances in deposit accounts at
the dates indicated.
December 31, 2000 June 30, 2000
------------------------------ -------------------------------
(Dollars in thousands) AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Demand $24,208 13.23% $19,684 11.16%
NOW 20,411 11.15% 22,521 12.77%
Money market deposits 14,798 8.09% 12,992 7.37%
Regular and other savings 32,853 17.95% 28,998 16.44%
------------------------------ -------------------------------
Total non-certificate accounts 92,270 50.42% 84,195 47.74%
Term certificates 90,736 49.58% 92,150 52.26%
------------------------------ -------------------------------
Total deposits $183,006 100.00% $176,345 100.00%
============================== ===============================
The following is a list of advances from the Federal Home Loan Bank of
Boston by maturity date.
December 31, 2000 June 30, 2000
------------------------------ -------------------------------
(Dollars in thousands): AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Maturities:
Less than one year $113 0.46% $85 0.32%
One to three years $2,000 8.21% $2,000 7.59%
Three to five years $1,000 4.10% $7,000 26.57%
Greater than five years 21,260 87.23% 17,265 65.52%
-------------- -------------- --------------- ---------------
Total borrowed funds $24,373 100.00% $26,350 100.00%
============== ============== =============== ===============
8
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, 2000 AND JUNE 30, 2000
Assets increased by $6.8 million, or 3.1%, from $219.4 million at June
30, 2000 to $226.2 million at December 31, 2000. The increase was primarily
funded by the $6.7 million, or 3.8%, increase in total deposits since June
30, 2000. Over that same timeframe, the Company reduced its borrowing
position with the Federal Home Loan Bank ("FHLB") by $2.0 million, or 7.5%.
The funds provided during the six months ended December 31, 2000 were
invested in net loans, which increased $5.3 million, or 5.0%. All loan
categories increased during this period, with residential mortgages,
commercial mortgages, and construction loans increasing $730,000, $1.7
million, and $1.4 million, respectively. In addition, home equity loans
increased $1.3 million since June 30, 2000.
It is the Bank's continued objective to increase the residential fixed
and variable loans by originating loans within the area serviced by its
branch network. The purchase of loan packages from other financial
institutions will be considered as opportunities present themselves. During
the six months ended December 31, 2000, the Bank purchased 22 loans totaling
$4.0 million. The Bank considers many factors when deciding to purchase a
loan package, including but not limited to the loan pricing, loan
underwriting, interest rate risk, and the geographical location of the real
estate securing the loans. In addition, the Bank continues to emphasize
growth in its commercial loan portfolio, which generally provides higher
yields than residential and consumer loans, and potentially improves the
Bank's core deposit base. The Bank frequently receives commercial checking
and money market accounts from the Bank's commercial borrowers.
During this same timeframe, securities available for sale and held to
maturity decreased $2.4 million, or 2.7%. While corporate debt securities
increased $1.1 million, or 4.9%, through purchases, federal agency
obligations and marketable equity securities decreased $2.8 million, or
6.3%, and $508,000, or 15.3%, respectively, primarily due to security sales
and/or bond calls.
9
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(CONTINUED)
The increase of $6.7 million in deposits was primarily attributable to
increases of $4.5 million, or 23.0%, $3.9 million, or 13.3%, and $1.8
million, or 13.9%, in demand deposits, regular and other savings, and money
market deposits, respectively. During this same timeframe NOW accounts,
primarily Interest Only Lawyers Trust Accounts ("IOLTA") and term
certificates decreased $2.1 million, or 9.4%, and $1.4 million, or 1.5%,
respectively. The Bank has reduced its emphasis on term certificate
deposits, which generally have a high cost of funds, and has increased its
focus on NOW accounts, demand deposit accounts, and money market deposit
accounts which generally allows the Bank to develop increased relationships
with its customers and pay a lower cost of funds. In addition, borrowings
decreased $2.0 million, or 7.5% since June 30, 2000, primarily due to the
paydown and maturity of certain borrowings. The borrowings are primarily
utilized to fund certain investment and loan opportunities that allow the
Bank to manage its interest rate margin.
Stockholders' equity increased from $15.2 million, or 6.92% of total
assets at June 30, 2000 to $17.5 million, or 7.71% of total assets at
December 31, 2000. This increase resulted primarily from an improvement of
$1.8 million in the unrealized losses in the Company's securities available
for sale portfolio from June 30, 2000 to December 31, 2000 and the
Company's earnings 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.
Dec. 31, June 30,
(Dollars in thousands) 2000 2000
------------------ -----------------
Non-accrual loans:
One-to-four family real estate loans $158 $160
Commercial loans 18 117
Commercial business loans 160 153
Consumer loans 21 2
------------------ -----------------
Total non-accrual loans 357 432
Other real estate owned - -
------------------ -----------------
Total non-performing assets $357 $432
================== =================
Allowance for loan losses $883 $802
================== =================
Allowance for loan losses as a percent
of total loans, net 0.79% 0.75%
================== =================
Allowance for loan losses as a percent
of non-accrual loans 247.34% 185.65%
================== =================
Non-accrual loans as a percent of
total loans, net 0.32% 0.41%
================== =================
Non-performing assets as a percent of
total assets 0.16% 0.20%
================== =================
10
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(CONTINUED)
During the six months ended December 31, 2000, the Bank added $118,000 to
the loan loss provision due to the growth of the commercial loan portfolio
which generally present a greater risk of loss than residential loans.
During this period, there were $64,000 in loan charge-offs and $27,000 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 Company's loan portfolio at this time, no assurances can be given that
the level of the allowance will be sufficient to cover future 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,
2000 AND 1999
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 investment 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 investment 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, 2000 was $227,000 as
compared to $334,000 for the three months ended December 31, 1999, a
decrease of $107,000, or 32.0%. This decrease was primarily attributable to
increases of $333,000, or 20.9%, and $27,000, or 77.1%, in total operating
expenses and the provision for loan losses, respectively. Partially
offsetting these were increases of $100,000, or 5.8%, and $61,000, or
31.1%, respectively, in net interest income and customer service fees.
The Bank's interest rate spread (the difference between yields earned
on earning assets and rates paid on deposits and borrowings) decreased from
3.57% for the three months ended December 31, 1999 to 3.06% for the three
months ended December 31, 2000. In addition, interest rate margin (net
interest income divided by average earning assets) decreased from 3.96% to
3.59%. The interest rate spread and margin decreased primarily as a result
of the increase of 69 basis points in funding costs for both deposits and
borrowings between periods due to Federal Reserve interest rate increases
since June 1999. Partially offsetting the increase in funding costs was an
increase of 18 basis points in the yield on earning assets between periods.
The Bank's emphasis on commercial loans assisted in this improvement as
loan yields improved 24 basis points between periods.
While core-based deposit growth will be emphasized, past experience
indicates that such growth is achieved through a greater increase in
higher-cost retail certificates than lower-cost core deposits. An 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.
11
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS(CONTINUED)
The interest rate spread and margin for the periods indicated are as
follows:
Three months ended
December 31,
---------------------------
2000 1999
---- ----
Weighted average yield earned on:
Short-term investments 6.75% 5.34%
Securities 6.99% 6.98%
Total loans, net 8.48% 8.24%
------------- -------------
All earning assets 7.78% 7.60%
Weighted average rate paid on:
Deposits 4.50% 3.74%
Borrowed funds 6.08% 5.35%
------------- -------------
All interest-bearing liabilities 4.72% 4.03%
------------- -------------
Weighted average rate spread 3.06% 3.57%
============= =============
Net interest margin 3.59% 3.96%
============= =============
Earnings per share data for the three months ended December 31, 2000 was
$0.14 for both "basic" and "diluted" calculations as compared to $0.21 per
share for both "basic" and "diluted" calculations for the three months ended
December 31, 1999.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased by $645,000, or 19.6%,
from $3.3 million for the three months ended December 31, 1999 to $3.9
million for the comparable period in 2000. This increase was primarily
attributable to a $29.0 million, or 16.8%, increase in average earning
assets between the two periods as well as a 19 basis point increase in the
yield on average earning assets between the two periods. The average
balances in net loans increased $19.6 million, or 21.9%, while total loan
yield increased by 24 basis points to 8.48%. The average loan balance
within the residential loan portfolio increased by $11.1 million, while
commercial loans and other loan types grew by $8.5 million.
The average investment portfolio balance increased $5.8 million or 7.2 %
over this same period and the portfolio yield improved by 1 basis point to
6.99%. Corporate debt securities increased by $12.0 million during this
timeframe, while federal agency obligations and pass-through securities
declined due to security sales and paydowns. In addition, the average
balance in short-term investments increased by $3.6 million, or 111.9%,
while the portfolio yield improved by 141 basis points to 6.75 . This yield
increase reflects the Federal Reserve System's increase in short-term
interest rates from June 1999 through the end of the period.
12
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
INTEREST EXPENSE
Interest expense on deposits increased $534,000, or 44.4%, from $1.2
million for the three months ended December 31, 1999, to $1.7 million for
the three months ended December 31, 2000. This increase was attributable to
a $25.8 million, or 20.1%, increase in average interest-bearing deposit
balances between periods, while deposit rates increased from 3.74% to 4.50%
over the same period. The increase in the interest rates was primarily
attributable to the growth of $17.8 million, or 24.3%, in higher-priced
certificate accounts during the period due to increases in interest rates
by the Federal Reserve System.
The Bank decreased its use of borrowings from the FHLB to put its
emphasis on the lower cost retail deposit products. Average balances in
these advances were $25.2 million during the three months ended December
31, 2000, a decrease of $2.7 million, or 9.5% from the three months ended
December 31, 1999. Over this same timeframe, borrowing rates increased from
5.35% to 6.08%. Interest expense on FHLB advances increased $11,000, or
3.0%, from $373,000 for the three months ended December 31, 1999 to
$384,000 for the three months ended December 31, 2000.
OTHER INCOME
Total other income increased $76,000, or 17.4 %, from $437,000 for the
three months ended December 31, 1999 to $513,000 for the same period in
2000. This change was caused primarily by an increase of $61,000, or 31.1%,
in customer service fees between periods. These service fees increased
primarily due to increases in Visa Debit Card income, ATM surcharge income,
and NOW account and NSF ("Non-sufficient funds") fees between periods. The
net gains on securities available for sale was constant at $214,000 in both
reporting periods.
OPERATING EXPENSE
Total operating expense increased $333,000, or 20.9%, from $1.6 million
for the three months ended December 31, 1999 to $1.9 million for the three
months ended December 31, 2000. Salaries and benefits, occupancy and
equipment, and data processing expenses increased $200,000, or 24.7%,
$35,000, or 10.1%, and $32,000, or 33.0%, respectively, between periods. No
other individual expense category increased materially between periods.
Much of the increase in operating expense was attributed to the Company's
asset growth as management added staff and incurred costs to service the
full range of retail and loan products added to the Bank's product lines.
INCOME TAXES
Income tax expense decreased not only because of the decline in pretax
income, but also because of the decrease in the effective tax rates between
periods. The effective income tax rates were 33.0% and 36.1% for the three
months ended December 31, 2000 and 1999, 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.
13
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
AND 1999
GENERAL
Net income for the six months ended December 31, 2000 was $452,000 as
compared to $502,000 for the six months ended December 31, 1999, a decrease
of $50,000, or 10.0%. This decrease was primarily attributable to increases
of $568,000, or 18.3%, and $38,000, or 47.5%, in total operating expenses
and the loan loss provision, respectively. This decrease in net income was
partially offset by increases of $280,000, or 8.4%, $127,000, or 33.8%, and
$57,000, or 24.5% in net interest income, customer service fees, and net
gains on securities available for sale, respectively.
The interest rate spread and margin for the periods indicated are as
follows:
Six months ended
December 31,
---------------------------
2000 1999
---- ----
Weighted average yield earned on:
Short-term investments 6.66% 5.18%
Securities 7.06% 6.88%
Total loans, net 8.39% 8.19%
------------- -------------
All earning assets 7.76% 7.52%
Weighted average rate paid on:
Deposits 4.46% 3.74%
Borrowed funds 5.99% 5.27%
------------- -------------
All interest-bearing liabilities 4.68% 3.97%
------------- -------------
Weighted average rate spread 3.08% 3.52%
============= =============
Net interest margin 3.58% 3.92%
============= =============
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased by $1.4 million, or 22.5%,
from $6.4 million for the six months ended December 31, 1999 to $7.8
million for the comparable period in 2000. This increase was primarily
attributable to a $31.5 million, or 18.6%, increase in average earning
assets between the two periods and a 24 basis point increase in the average
yield on earning assets. The average balances in net loans increased $19.9
million, or 22.6%, and total loan yield increased by 20 basis points to
8.39%. The average balance for residential mortgages increased by $12.4
million, 26.0%,while commercial and home equity loan increased $4.1
million, or 13.0%, and $2.9 million, or 52.0%, respectively.
14
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The average investment portfolio balance increased $10.6 million, or
13.7 %, over this same timeframe and its portfolio yield improved by 18
basis points to 7.06%. Most of the increase in the investment portfolio
balance was in corporate debt obligations. In addition, the average balance
in short-term investments increased $1.1 million, or 26.1%, between periods
while the portfolio yield increased by 148 basis points.
INTEREST EXPENSE
Interest expense on deposits increased $1.1 million, or 45.7%, from
$2.4 million for the six months ended December 31, 1999, to $3.4 million
for the six months ended December 31, 2000. This increase was attributable
to a $27.7 million, or 21.9%, increase in average interest-bearing deposit
balances between periods, and an increase in average deposit rates over the
same period from 3.74% to 4.46%. The increase in deposit interest rates was
primarily due to the increase in interest rates by the Federal Reserve
System between the two periods.
The Bank decreased its use of borrowings from the FHLB as part of its
management of interest rate risk. Average balances in these advances were
$25.2 million during the six months ended December 31, 2000, a decrease of
$761,000, or 2.9% from the six months ended December 31, 1999. Over this
same timeframe, average borrowing rates increased from 5.27% to 5.99%.
Interest expense on FHLB advances increased $71,000, or 10.4%, from
$684,000 for the six months ended December 31, 1999 to $755,000 for the six
months ended December 31, 2000.
OTHER INCOME
Total other income increased $218,000, or 33.4%, from $652,000 for
the six months ended December 31, 1999 to $870,000 for the same period in
2000. This change was caused primarily by increases of $57,000, or 24.5%,
and $127,000, or 33.8%, respectively, in the net gains on sales of
securities and customer service fees. Customer service fees increased
primarily due to increases in Visa Debit Card income, ATM surcharge income,
and NOW account and NSF fees between periods.
OPERATING EXPENSE
Total operating expense increased $568,000, or 18.3%, from $3.1 million
for the six months ended December 31, 1999 to $3.7 million for the six
months ended December 31, 2000. Salaries and benefits occupancy and
equipment expenses, and data processing expenses increased $345,000 , or
22.0%, $87,000, or 12.9%, and $72,000, or 38.1%, respectively. No other
individual expense category increased materially between periods. Much of
the increase in operating expense was attributed to the Company's asset
growth as management added staff and incurred costs to service the full
range of retail and loan products added to the Bank's product lines. In
addition, the Bank installed a "Wide Area Network" (WAN) in order to
centralize at one location the installation and monitoring of the bank's
application software from one location.
15
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
INCOME TAXES
Income tax expense decreased not only because of the decline in pretax
income, but also because of the decrease in the effective tax rates between
periods. The effective income tax rates were 33.8% and 36.5% for the six
months ended December 31, 2000 and 1999, 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
members of senior management 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 investments,
maturities and early calls of investments, and funds provided from
operations. While scheduled repayments of loans and maturities of
investments are predictable sources of
16
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION(CONTINUED)
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, 2000
amounted to $24.4 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 securities guaranteed by the
U.S. government or a government agency. As of December 31, 2000, the Bank's
total borrowing capacity was $73.6 million.
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, 2000, the Bank had $3.0 million of outstanding
commitments to originate loans. The Bank anticipates that it will have
sufficient funds available to meet these commitments. Certificates of
deposit, which are scheduled to mature in one year or less, totaled $82.8
million at December 31, 2000. Based upon historical experience, management
believes that a significant portion of such deposits will remain with the
Bank.
At December 31, 2000, 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, in the aggregate, involved amounts which are believed by management
to be immaterial to the financial condition and operations of the Company.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
17
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SERVICE BANCORP, INC.
Date: February 13, 2001 By: /s/ Pamela J. Mozynski
---------------------------
Pamela J. Mozynski
President and Chief Executive Officer
Date: February 13, 2001 By: /s/ Warren W. Chase, Jr.
---------------------------
Warren W. Chase, Jr.
Senior Vice President and Treasurer
19