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 March 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
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 May 7, 2001, there were 1,614,405 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 March 31, 2001 and June 30, 2000 1
Consolidated Statements of Income for the three and
nine months ended March 31, 2001 and 2000 2
Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended March 31, 2001 and 2000 3
Consolidated Statements of Cash Flows for the nine months
ended March 31, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 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 20
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, June 30,
ASSETS 2001 2000
------- --------- ---------
Cash and due from banks $ 6,173 $ 8,133
Short-term investments 28,917 6,112
--------- ---------
Total cash and cash equivalents 35,090 14,245
--------- ---------
Certificates of deposit 100 100
Securities available for sale, at fair value 47,993 81,596
Securities held to maturity, at amortized cost 32,484 4,771
Federal Home Loan Bank stock, at cost 1,588 1,588
Loans 114,542 107,224
Less allowance for loan losses (924) (802)
--------- ---------
Loans, net 113,618 106,422
--------- ---------
Banking premises and equipment, net 4,195 4,223
Accrued interest receivable 1,728 2,007
Bank-owned life insurance 2,149 2,070
Other assets 1,556 2,411
--------- ---------
Total assets $ 240,501 $ 219,433
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 186,441 $ 176,345
Federal Home Loan Bank advances 30,258 26,350
Due to broker 4,055 --
Other liabilities 1,635 1,560
--------- ---------
Total liabilities 222,389 204,255
--------- ---------
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 7,409 7,426
Retained earnings 12,307 11,630
Accumulated other comprehensive loss (455) (2,638)
Treasury stock, at cost - 68,506 shares at March 31, 2001
and June 30, 2000 (560) (560)
Unearned ESOP shares - 38,832 shares at March 31, 2001
and 43,662 shares at June 30, 2000 (388) (436)
Unearned RRP Stock - 30,436 shares at March 31, 2001
and 36,482 shares at June 30, 2000 (218) (261)
--------- ---------
Total stockholders' equity 18,112 15,178
--------- ---------
Total liabilities and stockholders' equity $ 240,501 $ 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 March 31, Nine Mos. Ended March 31,
2001 2000 2001 2000
--------------------------------- -------------------------------
Interest and dividend income:
Interest and fees on loans $2,345 $1,976 $6,862 $5,573
Interest and dividends on securities
and certificates of deposit 1,444 1,389 4,549 4,031
Interest on short-term investments 144 52 314 176
--------- --------- ---------- ---------
Total interest and dividend income 3,933 3,417 11,725 9,780
--------- --------- ---------- ---------
Interest expense:
Interest on deposits 1,685 1,338 5,124 3,699
Interest on FHLB advances 396 399 1,151 1,083
--------- --------- ---------- ---------
Total interest expense 2,081 1,737 6,275 4,782
--------- --------- ---------- ---------
Net interest income 1,852 1,680 5,450 4,998
Provision for loan losses 45 60 163 140
--------- --------- ---------- ---------
Net interest income, after provision for loan losses 1,807 1,620 5,287 4,858
--------- --------- ---------- ---------
Other income:
Customer service fees 247 198 750 574
Gain on sales of securities available for sale, net 80 33 370 266
Miscellaneous 61 27 138 70
--------- --------- ---------- ---------
Total other income 388 258 1,258 910
--------- --------- ---------- ---------
Operating expenses:
Salaries and benefits 969 877 2,881 2,444
Occupancy and equipment expenses 404 387 1,164 1,060
Data processing expenses 159 97 420 286
Professional fees 77 57 209 208
Advertising expenses 46 47 176 173
Other general and administrative expenses 225 220 697 613
--------- --------- ---------- ---------
Total operating expenses 1,880 1,685 5,547 4,784
--------- --------- ---------- ---------
Income before income taxes 315 193 998 984
Provision for income taxes 90 62 321 351
--------- --------- ---------- ---------
Net income $225 $131 $677 $633
========= ========= ========== =========
Weighted average common shares
outstanding during the period -
Basic 1,572,399 1,573,120 1,569,218 1,607,535
========= ========= ========== =========
Diluted 1,572,399 1,573,120 1,569,218 1,607,535
========= ========= ========== =========
Earnings per common share (Basic and Diluted) $0.14 $0.08 $0.43 $0.39
========= ========= ========== =========
See accompanying notes to consolidated financial statements.
2
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2001 AND 2000
(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 -- -- 677 --
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- 2,183
Total comprehensive income 2,860
Common stock held by ESOP released
and committed to be released
(4,830 shares) -- (17) -- --
Amortization of RRP stock
(6,046 shares) -- -- -- --
------- ------- ------- -------
Balance at March 31, 2001 $ 17 $ 7,409 $12,307 ($ 455)
======= ======= ======= =======
Unearned Unearned
Treasury ESOP RRP
Stock Shares Stock Total
----- ------ ----- -----
Balance at June 30, 2000 ($ 560) ($ 436) ($ 261) $15,178
Comprehensive income:
Net income -- -- -- 677
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- 2,183
-------
Total comprehensive income
-------
Common stock held by ESOP released
and committed to be released
(4,830 shares) -- 48 -- 31
Amortization of RRP stock
(6,046 shares) -- -- 43 43
------- ------- ------- -------
Balance at March 31, 2001 ($ 560) ($ 388) ($ 218) $18,112
======= ======= ======= =======
See accompanying notes to consolidated financial statements
3
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2001 AND 2000(CONCLUDED)
(Dollars in thousands)
Accumulated
Additional Other
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 -- -- 633 --
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- (1,423)
Total comprehensive loss (790)
Common stock held by ESOP released
and committed to be released
(4,833 shares) -- (12) -- --
Purchase of treasury stock
(58,500 shares) -- -- -- --
Purchase of RRP stock
(10,800 shares) -- -- -- --
Amortization of RRP stock
(1,656 shares) -- -- -- --
------- ------- ------- -------
Balance at March 31, 2000 $ 17 $ 7,432 $11,417 ($2,605)
======= ======= ======= =======
Unearned Unearned
Treasury ESOP RRP
Stock Shares Stock Total
----- ------ ----- -----
Balance at June 30, 1999 ($83) ($501) $ -- $ 16,479
Comprehensive loss:
Net income -- -- -- 633
Change in net unrealized loss
on securities available for sale,
net of tax and reclassification
adjustment -- -- -- (1,423)
--------
Total comprehensive loss 790
--------
Common stock held by ESOP released
and committed to be released
(4,833 shares) -- 49 -- 37
Purchase of treasury stock
(58,500 shares) (477) -- -- (477)
Purchase of RRP stock
(10,800 shares) -- -- (270) (270)
Amortization of RRP stock
(1,656 shares) -- -- 11 11
-------- -------- -------- --------
Balance at March 31, 2000 ($ 560) ($ 452) ($ 259) $ 14,990
======== ======== ======== ========
See accompanying notes to consolidated financial statements
4
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
(Dollars in thousands)
March 31, March 31,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 677 $ 633
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Provision for loan losses 163 140
Gain on sales of securities available for sale, net (370) (266)
Amortization of unearned loan income 23 42
Accretion of securities, net of amortization (142) (91)
Depreciation and amortization expense 492 468
(Increase) decrease in accrued interest receivable 279 (64)
Deferred tax benefit (146) (87)
Other, net (122) (1,094)
-------- --------
Net cash provided (used) by operating activities 854 (319)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of
securities available for sale 28,592 3,425
Proceeds from maturities of and
principal payments on securities
available for sale and held to maturity 1,427 3,927
Purchase of securities available for sale (7,432) (20,779)
Purchase of securities held to maturity (8,794) (4,736)
Purchase of FHLB stock -- (264)
Net increase in loans (7,462) (13,382)
Purchase of bank-owned life insurance -- (2,037)
Purchase of banking premises and equipment (464) (736)
-------- --------
Net cash provided (used) by investing activities 5,867 (34,582)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 10,096 30,327
Proceeds from Federal Home Loan Bank
advances 27,720 37,009
Repayment of Federal Home Loan Bank
advances (23,812) (35,734)
Release of common stock held by ESOP 31 37
Purchase of RRP stock -- (270)
Increase in mortgagors' escrow deposits 46 90
Amortization of RRP stock 43 --
Purchase of treasury stock -- (477)
-------- --------
Net cash provided by financing activities 14,124 30,982
-------- --------
Net change in cash and cash equivalents 20,845 (3,919)
Cash and cash equivalents at beginning of period 14,245 13,390
-------- --------
Cash and cash equivalents at end of period $ 35,090 $ 9,471
======== ========
5
SERVICE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED (CONCLUDED)
(Dollars in thousands)
March 31, March 31,
2001 2000
---- ----
SUPPLEMENTARY INFORMATION:
Interest paid on deposits $ 5,144 $ 3,718
Interest paid on Federal Home Loan
Bank advances 1,135 1,048
Income taxes paid 410 599
(Increase) decrease in due to broker 4,055 (521)
Transfer from securities available for sale to
held to maturity 15,100 --
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 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 unaudited financial statements have been prepared in accordance with
generally accepted accounting principles 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 2000 annual
report to stockholders and is incorporated herein by reference.
(2)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.
(3)COMMITMENTS
At March 31, 2001, the Company had outstanding commitments to originate loans of
$4.8 million. Unused lines of credit available to customers amounted to $12.0
million, $7.1 million of which were equity lines of credit.
7
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4)SECURITIES
The following table sets forth the Company's securities at the dates
indicated.
March 31, 2001 June 30, 2000
--------------------------------------------------------------
(Dollars in thousands) Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
AVAILABLE FOR SALE SECURITIES:
Federal agency obligations $21,737 $21,768 $45,667 $43,633
Mortgage-backed securities 437 445 16,876 16,028
Other debt securities 22,949 23,072 19,359 18,621
---------------- ------------- -------------------------------
Total debt securities 45,123 45,285 81,902 78,282
Marketable equity securities 3,565 2,708 3,724 3,314
---------------- ------------- -------------------------------
Total available for sale securities $48,688 $47,993 $85,626 $81,596
================ ============= ===============================
HELD TO MATURITY SECURITIES:
Other debt securities $5,181 $5,465 $4,771 $4,738
Mortgage-backed securities 27,303 27,313 -- --
------------------------------ -------------------------------
Total held to maturity securities $32,484 $32,778 $4,771 $4,738
================ ============= ===============================
During the quarter ended March 31, 2001, the Company transferred $15.1 million
of previously classified available for sale securities to held to maturity.
These securities had an unrealized loss of $28,000 on that date, which will be
amortized over the remaining life of these securities.
(5)LOANS
The following table presents data relating to the composition of the Company's
loan portfolio by type of loan at the dates indicated.
(Dollars in thousands) March 31, 2001 June 30, 2000
------------------------------ -------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
REAL ESTATE LOANS:
Residential $62,429 54.53% $61,689 57.56%
Commercial 27,230 23.78% 25,035 23.36%
Construction 5,081 4.44% 2,742 2.56%
------------------------------ -------------------------------
Total real estate loans 94,740 82.75% 89,466 83.47%
8
SERVICE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) March 31, 2001 June 30, 2000
------------------------------ -------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
OTHER LOANS:
Consumer loans:
Collateral 596 0.52% 634 0.59%
Home equity 8,983 7.85% 7,685 7.17%
Other 1,712 1.50% 1,629 1.52%
--------------- --------------- --------------- ---------------
Total consumer loans 11,291 9.86% 9,948 9.28%
Commercial business loans 8,463 7.39% 7,763 7.24%
--------------- --------------- --------------- ---------------
Total other loans 19,754 17.25% 17,711 16.53%
--------------- --------------- --------------- ---------------
Total loans 114,494 100.00% 107,177 100.00%
=============== ===============
Net deferred loan fees 26 37
Deferred premium 22 10
Allowance for loan losses (924) (802)
--------------- ----------------
Total loans, net $113,618 $106,422
=============== ================
(6) DEPOSITS AND BORROWED FUNDS
The following tables indicate types and balances in deposit accounts at the
dates indicated.
March 31, 2001 June 30, 2000
------------------------------ -------------------------------
(Dollars in thousands) Amount Percent Amount Percent
------ ------- ------ -------
Demand $24,117 12.94% $19,684 11.16%
NOW 25,150 13.49% 22,521 12.77%
Money market deposits 16,462 8.83% 12,992 7.37%
Regular and other savings 32,646 17.51% 28,998 16.44%
---------------- -------------- ---------------- -------------
Total non-certificate accounts 98,375 52.76% 84,195 47.74%
Term certificates 88,066 47.24% 92,150 52.26%
---------------- -------------- ---------------- -------------
Total deposits $186,441 100.00% $176,345 100.00%
================ ============== ================ =============
The following is a list of advances from the Federal Home Loan Bank of
Boston by maturity date.
March 31, 2001 June 30, 2000
------------------------------ -------------------------------
(Dollars in thousands): AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Maturities:
Less than one year $ -- -- $85 0.32%
One to three years 2,000 6.61% 2,000 7.59%
Three to five years 1,000 3.30% 7,000 26.57%
Greater than five years 27,258 90.09% 17,265 65.52%
----------------- ------------- ---------------- -------------
Total borrowed funds $30,258 100.00% $26,350 100.00%
================= ============= ================ =============
9
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 MARCH 31, 2001 AND JUNE 30, 2000
Assets increased by $21.1 million, or 9.6%, from $219.4 million at June 30,
2000 to $240.5 million at March 31, 2001. The increase was primarily funded by
the $10.1 million, or 5.7%, increase in total deposits since June 30, 2000. Over
that same timeframe, the Company increased its borrowings with the Federal Home
Loan Bank ("FHLB") by $3.9 million, or 14.8%.
The funds provided during the nine months ended March 31, 2001 were
invested in net loans, which increased $7.2 million, or 6.8%. All loan
categories increased during this period, with residential mortgages, commercial
mortgages, and construction loans increasing $740,000, $2.2 million, and $2.3
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. To achieve this objective, the Bank is opening a new mortgage center in
mid-May. With loan originators located in two key branch locations, mortgage
activity within the Bank's branch network should increase. Most of the growth in
residential mortgages during the nine months ended March 31, 2001 has been
achieved through the purchase of loan packages from other financial
institutions. During this timeframe, the Bank purchased 34 loans totaling $5.8
million. 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, overnight fund balances increased by $22.8
million, or 373.1%. Since early January, 2001, the Federal Reserve has lowered
interest rates. As of December 31, 2000, over $40 million of the Bank's
investments were in callable obligations. $18.5 million of these obligations
were called during this past quarter. The Bank deployed some of these funds
during the quarter through security purchases and loan originations. Senior
management's plan is to reinvest the remaining funds over the next few months
through the purchase of corporate bond, federal agency, and mortgage-backed
security obligations and through the origination of residential and commercial
loans.
10
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(CONTINUED)
During the nine month period ended March 31, 2001, mortgage-backed
securities and corporate bond obligations increased $11.7 million, or 73.1%, and
$4.9 million, or 20.8%, while federal agency obligations and equity securities
decreased $21.9 million, or 50.1% and $606,000, or 18.3%, respectively.
In addition, on March 31, 2001, the Bank reclassified $15.1 million of
mortgage-backed securities from the available for sale to held to maturity
classifications to minimize the impact of future interest rate risk through
potential unrealized security losses when interest rates move upward. These
securities have a remaining life of over 20 years.
The increase of $10.1 million in deposits was primarily attributable to
increases of $4.4 million, or 22.5%, $3.6 million, or 12.6%, $3.5 million, or
26.7%, and $2.6 million, or 11.7%, in demand deposits, regular and other
savings, money market deposits, and NOW accounts, respectively. During this same
timeframe term certificates decreased $4.1 million, or 4.4%.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 increased $3.9 million, or 14.8% since June 30, 2000, to
take advantage of the reduced borrowing rates to fund loan originations and
security purchases to help 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 $18.1 million, or 7.53% of total assets at March 31, 2001.
This increase resulted primarily from an improvement of $2.2 million in the
unrealized losses in the Company's securities available for sale portfolio from
June 30, 2000 to March 31, 2001 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.
(Dollars in thousands) March 31, June 30,
2001 2000
------------------ -----------------
Non-accrual loans:
One-to-four family real estate loans $80 $160
Commercial loans 16 117
Commercial business loans 7 153
Consumer loans - 2
------------------ -----------------
Total non-accrual loans 103 432
Other real estate owned 79 -
------------------ -----------------
Total non-performing assets $182 $432
================== =================
Allowance for loan losses $924 $802
================== =================
Allowance for loan losses as a percent
of total loans, net 0.81% 0.75%
================== =================
11
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(CONTINUED)
March 31, June 30,
2001 2000
------------------ -----------------
Allowance for loan losses as a percent
of non-accrual loans 897.09% 185.65%
================== =================
Non-accrual loans as a percent of
total loans, net 0.09% 0.41%
================== =================
Non-performing assets as a percent of
total assets 0.08% 0.20%
================== =================
During the nine months ended March 31, 2001, the Bank's provision for loan
losses was $163,000 loan due to the growth of the commercial loan portfolio
which generally presents a greater risk of loss than residential loans. During
this period, there were $70,000 in loan charge-offs and $29,000 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 MARCH 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 March 31, 2001 was $225,000 as
compared to $131,000 for the three months ended March 31, 2000, an increase of
$94,000, or 71.8%. This increase was primarily attributable to increases of
$172,000 or 10.2 %, $49,000, or 24.8%,and $47,000, or 142.4% in net interest
income, customer service fees, and gain on sales of securities, respectively.
Partially offsetting these was an increase of $195,000, or 11.6% in total
operating expenses.
12
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS(CONTINUED)
The Bank's interest rate spread (the difference between yields earned on earning
assets and rates paid on deposits and borrowings) decreased from 3.38% for the
three months ended March 31, 2000 to 3.00% for the three months ended March 31,
2001. In addition, interest rate margin (net interest income divided average
earning assets) decreased from 3.74% to 3.56%. The interest rate spread and
margin decreased primarily as a result of the increase of 32 basis points in
funding costs for both deposits and borrowings between periods due to Federal
Reserve interest rate increases since June 1999. In addition, the yield on
earning assets decreased 6 basis points during the same period.
While core-based deposit growth will be emphasized, past experience
indicates that deposit growth is achieved through a greater increase in
higher-cost retail certificates than lower-cost core deposits. 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.
The interest rate spread and margin for the periods indicated are as
follows:
Three months ended
March 31,
---------------------------
2001 2000
---- ----
Weighted average yield earned on:
Short-term investments 5.24% 5.67%
Securities and certificates of deposit 6.83% 7.05%
Total loans, net 8.32% 8.14%
------------- -------------
All earning assets 7.55% 7.61%
Weighted average rate paid on:
Deposits 4.34% 3.96%
Borrowed funds 5.81% 5.47%
------------- -------------
All interest-bearing liabilities 4.55% 4.23%
------------- -------------
Weighted average rate spread 3.00% 3.38%
============= =============
Net interest margin 3.56% 3.74%
============= =============
Earnings per share data for the three months ended March 31, 2001 was $0.14 for
both "basic" and "diluted" calculations as compared to $0.08 per share for both
"basic" and "diluted" calculations for the three months ended March 31, 2000.
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased by $516,000, or 15.1%, from
$3.4 million for the three months ended March 31, 2000 to $3.9 million for the
comparable period in 2001. This increase was primarily attributable to a $28.8
million, or 16.0%, increase in average earning assets, which was
13
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
partially offset by a 6 basis point reduction in yield on earning assets between
the two periods. The average balances in net loans increased $15.7 million, or
16.1%, while total loan yield increased by 18 basis points to 8.32%. The average
loan balance within the residential loan portfolio increased by $7.5 million,
while commercial loans and other loan types increased by $8.2 million.
The average investment portfolio balance increased $5.7 million or 7.3 % over
this same period and the portfolio yield declined by 22 basis point to
6.83%.This decrease in investment yield was directly attributable to the impact
of the Federal Reserve interest rate reductions during this past quarter. This
rate reduction was directly responsible for the calling of $18.5 million in bond
obligations. The proceeds from these calls were reinvested within the portfolio
in lower yielding obligations. The average balance in corporate debt securities
and mortgage-backed securities increased by $10.2 million, or 61.0%, and $2.9
million, or 17.0%, during this timeframe, while federal agency obligations
declined by $11.6 million, or 26.0%. In addition, the average balance in
short-term investments increased by $7.4 million, or 205.4%, while the portfolio
yield declined by 43 basis points to 5.24% . This short-term investment yield
decrease reflects the Federal Reserve's increase in short-term interest rates
from June 1999 through the end of the period.
INTEREST EXPENSE
Interest expense on deposits increased $347,000, or 25.9%, from $1.3
million for the three months ended March 31, 2000, to $1.7 million for the three
months ended March 31, 2001. This increase was attributable to a $20.4 million,
or 15.1%, increase in average interest-bearing deposit balances between periods,
while deposit rates increased from 3.96% to 4.34%, or 38 basis points over the
same period. The increase in the interest rates was primarily attributable to
the growth of $8.3 million, or 10.1%, in higher-priced certificate accounts
during the period.
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 $27.3 million during the three months ended March 31, 2001, a decrease of
$1.9 million, or 6.6% from the three months ended March 31, 2000. Over this same
timeframe, borrowing rates increased from 5.47% to 5.81%. Interest expense on
FHLB advances decreased $3,000, or 0.8%, from $399,000 for the three months
ended March 31, 2000 to $396,000 for the three months ended March 31, 2001.
OTHER INCOME
Total other income increased $130,000, or 50.4 %, from $258,000 for the
three months ended March 31, 2000 to $388,000 for the same period in 2001. This
change was caused primarily by an increase of $49,000, or 24.8%, in customer
service fees between periods. These service fees increased primarily due to
increases in Visa Debit Card income, service charge and NSF ("Non-sufficient
funds") fees between periods. The net gains on securities available for sale
increased by $47,000, or 142.4%, between reporting periods.
14
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OPERATING EXPENSE
Total operating expense increased $195,000, or 11.6%, from $1.7 million for
the three months ended March 31, 2000 to $1.9 million for the three months ended
March 31, 2001. Salaries and benefits and data processing expenses increased
$92,000, or 10.5%, and $62,000, or 63.9%, respectively, between periods. No
other individual expense category increased materially between periods. Much of
the increase in operating expense was attributed to the Company's asset growth
as management added staff and incurred costs to service the full range of retail
and loan products added to the Bank's product lines.
INCOME TAXES
Income tax expense increased by $28,000, or 45.2% between reporting
periods, primarily due to the increase of $122,000 in pretax income between
periods. The effective income tax rates were 28.6% and 32.1% for the three
months ended March 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.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 2001 AND
2000
GENERAL
Net income for the nine months ended March 31, 2001 was $677,000 as
compared to $633,000 for the nine months ended March 31, 2000, an increase of
$44,000, or 7.0%. This increase was primarily attributable to increases of
$452,000, or 9.0 %, $176,000, or 30.7%, and $104,000, or 39.1 %, in net interest
income, customer service fees, and the gain on sales of securities,
respectively. This increase in net income was partially offset by increases of
$763,000, or 16.0%, and $23,000, or 16.4% in total operating expenses income and
the loan loss provision, respectively.
15
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:
Nine months ended
March 31,
---------------------------
2001 2000
---- ----
Weighted average yield earned on:
Short-term investments 5.56% 5.44%
Securities and certificates of deposit 6.95% 6.94%
Total loans, net 8.37% 8.18%
------------- -------------
All earning assets 7.66% 7.55%
Weighted average rate paid on:
Deposits 4.39% 3.82%
Borrowed funds 5.93% 5.34%
------------- -------------
All interest-bearing liabilities 4.61% 4.08%
------------- -------------
Weighted average rate spread 3.05% 3.47%
============= =============
Net interest margin 3.56% 3.86%
============= =============
INTEREST AND DIVIDEND INCOME
Total interest and dividend income increased by $1.9 million, or 19.9%,
from $9.8 million for the nine months ended March 31, 2000 to $11.7 million for
the comparable period in 2001. This increase was primarily attributable to a
$31.4 million, or 18.2%, increase in average earning assets between the two
periods and a 11 basis point increase in the average yield on earning assets.
The average balances in net loans increased $18.4 million, or 20.3%, and total
loan yield increased by 19 basis points to 8.37%. The average balance for
residential mortgages increased by $10.8 million, 21.0%,while commercial and
home equity loans increased $4.5 million, or 14.0%, and $2.8 million, or 47.0%,
respectively.
The average investment portfolio balance increased $9.8 million, or 12.7 %,
over this same timeframe and its portfolio yield improved by 1 basis point to
6.95%. Most of the increase in the investment portfolio balance was in corporate
debt obligations. In addition, the average balance in short-term investments
increased $3.2 million, or 74.5%, between periods while the portfolio yield
increased by 12 basis points.
16
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 $1.4 million, or 38.5 %, from $3.7
million for the nine months ended March 31, 2000, to $5.1 million for the nine
months ended March 31, 2001. This increase was attributable to a $26.6 million,
or 20.6 %, increase in average interest-bearing deposit balances between
periods, and an increase in average deposit rates over the same period from
3.82% to 4.39%. The increase in deposit interest rates was primarily due to the
$16.3 million average balance increase between periods in certificates which
have a higher cost of funds than the non-certificate deposits.
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 $25.9
million during the nine months ended March 31, 2001, a decrease of $1.1 million,
or 4.3% from the nine months ended March 31, 2000. Over this same timeframe,
average borrowing rates increased from 5.34% to 5.93%. Interest expense on FHLB
advances increased $68,000, or 6.3%, from $1.1 million for the nine months ended
March 31, 2000 to $1.2 million for the nine months ended March 31, 2001.
OTHER INCOME
Total other income increased $348,000, or 38.2 %, from $910,000 for the
nine months ended March 31, 2000 to $1.3 million for the same period in 2001.
This change was caused primarily by increases of $176,000, or 30.7%, and
$104,000, or 39.1%, respectively, in customer service fees and gains on sales of
securities. Customer service fees increased primarily due to increases in Visa
Debit Card income, service charge and NSF fees between periods.
OPERATING EXPENSE
Total operating expense increased $763,000, or 16.0%, from $4.8 million for
the nine months ended March 31, 2000 to $5.5 million for the nine months ended
March 31, 2001. Salaries and benefits, occupancy and equipment expenses, and
data processing expenses increased $437,000 , or 17.9%, $104,000, or 9.8%, and
$134,000, or 46.8%, 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.
INCOME TAXES
Income tax expense decreased because of the decrease in the effective tax
rates between periods. The effective income tax rates were 32.2% and 35.7 % for
the nine months ended March 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.
17
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION(CONTINUED)
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 funds, deposit flows and loan prepayments are greatly influenced by
the general level of interest rates, economic conditions, and competition. The
Bank uses its liquidity resources primarily to fund existing and future loan
commitments, to fund net deposit outflows, to invest in other interest-earning
assets, to maintain liquidity, and to pay operating expenses.
From time to time, the Bank utilizes advances from the FHLB primarily in
connection with its management of the interest rate sensitivity of its assets
and liabilities. Total advances outstanding at March 31, 2001 amounted to $30.3
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 March 31, 2001, the Bank's total borrowing capacity was
$79.5 million.
18
SERVICE BANCORP, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION(CONTINUED)
A major portion of the Bank's liquidity consists of cash and cash
equivalents, short-term investments, U.S. Government and federal agency
obligations, mortgage-backed securities, and other debt securities. The level of
these assets is dependent upon the Bank's operating, lending, and financing
activities during any given period.
At March 31, 2001, the Bank had $4.8 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 $77.4 million at March 31,
2001. Based upon historical experience, management believes that a significant
portion of such deposits will remain with the Bank.
At March 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, 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
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
There were no reports filed on Form 8-K.
19
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: May 11, 2001 By: /s/ Pamela J. Mozynski
----- ------------ --------------------------
Pamela J. Mozynski
President and Chief Executive
Officer
Date: May 11, 2001 By: /s/ Warren W. Chase, Jr.
----- ------------ ---------------------------
Warren W. Chase, Jr.
Senior Vice President and
20