UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
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(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ending June 30, 2002
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or
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number 0-25355
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PFSB BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
Missouri 31-1627743
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
123 W. Lafayette St., P.O. Box 72, Palmyra, MO 63461
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(Address of principal executive offices) (Zip Code)
573-769-2134
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(Issuer's telephone number)
As of August 14, 2002, there were 418,195 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
Transitional Small Business Disclosure Format
Yes No X
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PFSB BANCORP, INC. AND SUBSIDIARIES
FORM 10-QSB
JUNE 30, 2002
INDEX PAGE
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PART I - FINANCIAL INFORMATION
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ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 1
CONSOLIDATED STATEMENTS OF INCOME 2
CONSOLIDATED STATEMENTS OF CASH FLOWS 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4-6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7-10
PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 11
ITEM 2. CHANGES IN SECURITIES 11
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 5. OTHER INFORMATION 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES 12
PFSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
June 30, September 30,
2002 2001
---------------------------
(Unaudited) (Unaudited)
ASSETS
Cash (includes interest-bearing deposits of $5,013 and $3,883, respectively) $ 5,261 $ 4,185
Investment securities:
Available-for-sale, at fair value 8,346 6,036
Held-to-maturity (fair value of $256 and $912, respectively) 175 900
Mortgage-backed securities held-to-maturity (fair value of $5,709 and $7,061, respectively) 5,602 6,970
Stock in Federal Home Loan Bank of Des Moines ("FHLB") 509 427
Loans receivable, net (allowance for loan losses of $341 and $299 respectively) 50,128 49,901
Accrued interest receivable 499 538
Premises and equipment 968 1,030
Foreclosed Real Estate 57 --
Other assets 48 57
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TOTAL ASSETS $ 71,593 $ 70,044
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 62,060 $ 60,736
Advances from borrowers for property taxes and insurance 57 55
Dividends Payable 63 --
Other liabilities 187 117
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TOTAL LIABILITIES 62,367 60,908
STOCKHOLDERS' EQUITY
Common stock, $.01 par value per share; 5,000,000 authorized, 559,000 issued 6 6
Additional paid-in capital 4,950 4,937
Retained earnings-substantially restricted 6,301 6,317
Accumulated other comprehensive income 35 28
Unearned ESOP shares (302) (335)
Unearned SBIP shares (119) (157)
Treasury stock, at cost (140,805 and 142,048 shares of common stock, respectively) (1,645) (1,660)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 9,226 9,136
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 71,593 $ 70,044
======== ========
See accompanying notes to consolidated financial statements.
-1-
PFSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
----------------------------------------
(Unaudited)
INTEREST INCOME
Mortgage loans $ 916 $ 883 $ 2,774 $ 2,582
Consumer and other loans 6 9 18 32
Interest-bearing deposits 2 19 27 88
Investment securities 126 202 328 697
Mortgage-backed securities 86 57 285 155
------- ------- ------- -------
TOTAL INTEREST INCOME $ 1,136 $ 1,170 $ 3,432 $ 3,554
INTEREST EXPENSE
Deposits 573 763 1,855 2,321
Advances from FHLB -- 5 -- 93
------- ------- ------- -------
TOTAL INTEREST EXPENSE $ 573 $ 768 $ 1,855 $ 2,414
------- ------- ------- -------
NET INTEREST INCOME 563 402 1,577 1,140
PROVISION FOR LOAN LOSSES -- 8 41 8
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 563 394 1,536 1,132
NON-INTEREST INCOME
Service charges and other fees 19 17 69 49
Loss from foreclosed assets (10) (19) (17) (32)
Gain from sale of investments 1 8 3 10
Other income 1 12 11 28
------- ------- ------- -------
TOTAL NON-INTEREST INCOME 11 18 66 55
NON-INTEREST EXPENSE
Employee salaries and benefits 214 194 637 604
Occupancy costs 42 43 126 131
Advertising 12 11 34 33
Data processing 24 23 77 72
Federal insurance premiums 3 4 8 8
Professional fees 105 25 261 110
Directors' fees 20 19 55 52
Other expenses 82 49 204 158
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TOTAL NON-INTEREST EXPENSE 502 368 1,402 1,168
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INCOME BEFORE INCOME TAXES 72 44 200 19
INCOME TAXES (INCOME TAX BENEFIT) 58 9 90 (4)
------- ------- ------- -------
NET INCOME $ 14 $ 35 $ 110 $ 23
======= ======= ======= =======
BASIC INCOME PER SHARE $ 0.04 $ 0.10 $ 0.30 $ 0.06
======= ======= ======= =======
DILUTED INCOME PER SHARE $ 0.03 $ 0.09 $ 0.28 $ 0.06
======= ======= ======= =======
See accompanying notes to Consolidated Financial Statements
-2-
PFSB BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended
June 30
2002 2001
-------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 110 $ 23
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 66 63
Amortization of premiums and discounts 4 (1)
Provisions for loan losses 42 --
Gain on sale of investments (3) (10)
Loss on sale of foreclosed real estate 16 28
ESOP shares released 45 40
Amortization of SBIP 37 31
Stock Option Expense 3 --
Changes to assets and liabilities increasing (decreasing) cash flows
Accrued interest receivable 39 115
Other assets 11 90
Other liabilities 67 (106)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 437 273
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of investment securities, held-to-maturity 725 5,189
Purchase of investment securities, available-for-sale (8,045) (6,868)
Proceeds from maturities and calls of investment securities, available-for-sale 5,747 8,437
Purchase of mortgage-backed securities (978) (2,098)
Principal collected on mortgage-backed securities 2,340 437
Purchase of FHLB Stock (83) (24)
Loans originated, net of repayments 1,700 (807)
Purchase of mortgage loans (2,079) (2,071)
Proceeds from sale of education loans 37 41
Purchase of premises and equipment (4) (24)
Proceeds from sales of foreclosed real estate 1 76
Expenditures on foreclosed real estate 2
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NET CASH USED BY INVESTING ACTIVITIES $ (639) $ 2,290
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 1,325 2,911
Advances from FHLB
Borrowings -- --
Repayments -- (4,250)
Net increase in advances for taxes and insurance 2 4
Proceeds from exercise of stock options 13 --
Dividends paid (62) (68)
Purchase of treasury stock -- (422)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES $ 1,278 $(1,825)
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NET INCREASE IN CASH 1,076 738
CASH, BEGINNING OF PERIOD 4,185 3,792
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CASH, END OF PERIOD $ 5,261 $ 4,530
======= =======
See accompanying notes to Consolidated Financial Statements
-3-
PFSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--Basis of Presentation
The accompanying unaudited, consolidated financial statements have been prepared
by PFSB Bancorp, Inc. (the "Company") in accordance with instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation are reflected in
the June 30, 2002, interim financial statements.
The results of operations for the period ended June 30, 2002, are not
necessarily indicative of the operating results for the full year. The
accompanying consolidated financial statements and related notes of PFSB
Bancorp, Inc. should be read in conjunction with the audited financial
statements and related notes included in the Company's Annual Report for the
year ended September 30, 2001.
NOTE B--Formation of Holding Company and Conversion to Stock Form
On March 31, 1999, the Company became the holding company for Palmyra Savings
(the "Bank) upon the Bank's conversion from a federally chartered mutual savings
association to a federally chartered capital stock savings bank. The conversion
was accomplished through the sale and issuance by the Company of 559,000 shares
of common stock at $10 per share. Proceeds from the sale of common stock, net of
expenses incurred of $608,237, were $4,981,763, inclusive of $447,200 related to
shares held by Palmyra Savings' Employee Stock Ownership Plan ("ESOP").
NOTE C--Net Income (Loss) Per Share
Basic income per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted income per common share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock.
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
---------------------------------------------
(In thousands, except (In thousands, except
per share amounts) per share amounts)
Basic earnings per share:
Income (loss) available to common shareholders $ 14 $ 35 $ 110 $ 23
===== ======= ===== =======
Average common shares outstanding 375 367 370 381
===== ======= ===== =======
Basic income (loss) per share $0.04 $ 0.10 $0.30 $ 0.06
===== ======= ===== =======
Diluted income (loss) per share $0.03 $ 0.09 $0.28 $ 0.06
===== ======= ===== =======
-4-
PFSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE D--Employee Stock Ownership Plan
In connection with the conversion to stock form, Palmyra Savings established an
ESOP for the exclusive benefit of participating employees (all salaried
employees who have completed at least 1000 hours of service in a twelve-month
period and have attained the age of 21). The ESOP borrowed funds from the
Company in an amount sufficient to purchase 44,720 shares (8% of the Common
Stock issued in the stock offering). The loan is secured by the shares purchased
and will be repaid by the ESOP with funds from contributions made by Palmyra
Savings, dividends received by the ESOP and any other earnings on ESOP assets.
Contributions will be applied to repay interest on the loan first, and then the
remainder will be applied to principal. The loan is expected to be repaid in
approximately 10 years. Shares purchased with the loan proceeds are held in a
suspense account for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account are
allocated among participants in proportion to their compensation relative to
total compensation of all active participants. Participants will vest in their
accrued benefits under the employee stock ownership plan at the rate of 20% per
year, beginning upon the completion of two years of service. Vesting is
accelerated upon retirement, death or disability of the participant. Forfeitures
will be reallocated to remaining plan participants. Benefits may be payable upon
retirement, death, disability or separation from service. Since Palmyra Savings'
annual contributions are discretionary, benefits payable under the ESOP cannot
be estimated.
The Company accounts for its ESOP in accordance with Statement of Position
("SOP") 93-6, Employers Accounting for Employee Stock Ownership Plans.
Accordingly, the debt of the ESOP is eliminated in consolidation and the shares
pledged as collateral are reported as unearned ESOP shares in the consolidated
statements of financial condition. Contributions to the ESOP shall be sufficient
to pay principal and interest currently due under the loan agreement. As shares
are committed to be released from collateral, the Company reports compensation
expense equal to the average market price of the shares for the respective
period, and the shares become outstanding for earnings per share computations.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are recorded as a reduction of
debt and accrued interest.
A summary of ESOP shares at June 30, 2002 is as follows:
Shares committed for release 2,236
Shares released 12,298
Unreleased shares 30,186
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TOTAL 44,720
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Fair value of unreleased shares $ 617,606
=========
NOTE E--Stock Based Compensation Plans
The Board of Directors adopted, and the shareholders subsequently approved on
January 27, 2000, the PFSB Bancorp, Inc. 2000 Stock-Based Incentive Plan
("SBIP"). The purpose of the SBIP is to attract and retain qualified personnel
in key positions, provide officers, employees and non-employee directors of the
Company and Palmyra Savings, with a proprietary interest in the Company as an
incentive to contribute to the success of the Company, promote the attention of
management to other stockholder's concerns, and reward employees for outstanding
performance.
The SBIP authorizes the granting of options to purchase common stock of the
Company and awards of restricted shares of common stock. Subject to certain
adjustments to prevent dilution of awards to participants, the number of shares
of common stock reserved for awards under the SBIP is 78,260 shares, consisting
of 55,900 shares reserved for options and 22,360 shares reserved for restricted
stock awards. All employees and non-employee directors of the Company and its
affiliates are eligible to receive awards under the SBIP. The SBIP is
administered by a committee consisting of members of the Board of Directors who
are not employees of the Company or its affiliates.
-5-
PFSB BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On April 6, 2000, the Company granted options for 44,720 shares at $10.25 per
share and awarded the 22,360 shares of restricted stock pursuant to the SBIP.
The options will enable the recipient to purchase stock at the exercise price
above. The options vest over three years following the date of grant and are
exercisable for up to 10 years. As of June 30, 2002, options for 31,059 shares
had vested, and options for 2,461 shares were exercised.
The restricted stock awards do not require any payment by the recipient and vest
over five years following the date of the award. The Company funded the
restricted stock awards with Treasury Stock which was purchased at a price above
the fair market value of the Company's stock at the award date resulting in an
increase in additional paid-in capital of $50,310. Amortization of the awards
resulted in a charge to compensation and benefit expense of $10,478 for the
three month period ended June 30, 2002.
The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which
permits entities to recognize, as expense over the vesting period, the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 allows entities to disclose pro forma net income and income per share as if
the fair value-based method defined in SFAS No. 123 has been applied, while
continuing to apply the provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, under which
compensation expense is recorded on the date of grant only if the current market
price of the underlying stock exceeds the exercise price.
As permitted under SFAS No. 123, "Accounting for Stock-Based Compensation" the
Company has elected to apply the recognition provisions of Accounting Principles
Board Opinion No. 25, under which compensation expense is recorded on the date
of grant only if the current market price of the underlying stock exceeds the
exercise price. Accordingly, adoption of SFAS No. 123 will have no impact on the
Company's consolidated financial position or results of operations.
NOTE F--Comprehensive Income
On October 1, 1998 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", which
established standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. For the three and nine month periods ended
June 30, 2002 and 2001, unrealized holding gains and losses on investments in
debt and equity securities available-for-sale were the Company's only other
comprehensive income component.
Comprehensive income for the three and nine month periods ended June 30, 2002
and 2001 is summarized as follows:
Three Months Ended Nine Months Ended
June 30, June 30,
2002 2001 2002 2001
------------------------------------------------
(Dollars in thousands) (Dollars in thousands)
Net Income (loss) $ 14 $ 35 $ 110 $ 23
Other comprehensive income:
Net unrealized holding gains (losses) on investments
in debt and equity securities available-for-sale 162 (58) 10 151
Adjustments for net securities (gains) losses realized
in net income, net of applicable income taxes (1) (5) (3) (6)
----- ----- ----- -----
Total other comprehensive income (loss) $ 175 $ (28) $ 117 $ 168
===== ===== ===== =====
-6-
PFSB BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking Statements
This report contains forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts, rather they
are statements based on PFSB Bancorp, Inc.'s (the "Company's") current
expectations regarding its business strategies and their intended results and
its future performance. Forward-looking statements are preceded by terms such as
"expects," "believes," "anticipates," "intends," and similar expressions.
Forward-looking statements are not guarantees of future performance. Numerous
risks and uncertainties could cause or contribute to the Company's actual
results; performance and achievements to be materially different from those
expressed or implied by the forward-looking statements. Factors that may cause
or contribute to these differences include, without limitation, general economic
conditions, including changes in market interest rates and changes in monetary
and fiscal policies of the federal government; legislative and regulatory
changes; and other factors disclosed periodically in the Company's filings with
the Securities and Exchange Commission. Because of the risks and uncertainties
inherent in forward-looking statements, readers are cautioned not to place undue
reliance on them, whether included in this report or made elsewhere from time to
time by the Company or on its behalf. The Company assumes no obligation to
update any forward-looking statements.
General
The Company is a Missouri corporation that was organized for the purpose of
becoming the holding company for Palmyra Savings ("Bank") upon the Bank's
conversion from a federal mutual savings association to a federal stock savings
bank. The Bank's conversion was completed on March 31, 1999. The Bank's business
consists principally of attracting retail deposits from the general public and
using these funds to originate and purchase residential mortgage loans generally
located in Missouri.
The Company's operating results depend primarily on its net interest income,
which is the difference between the income it receives from its loans and
investments, and the interest paid on deposits and borrowings. Non-interest
income and expenses also affect the Company's operating results. Non-interest
income would include such items as loan service fees, service charges, and other
fees. Non-interest expense would include such items as salaries and benefits,
occupancy costs, data processing expenses, and other expenses.
The discussion and analysis included herein covers material changes in results
of operations during the three month periods ended June 30, 2002 and 2001 as
well as those material changes in liquidity and capital resources that have
occurred since September 30, 2001.
Merger
Pursuant to an Agreement and Plan of Merger dated as of June 4, 2002, by and
between the Company and First Federal Bancshares, Inc. ("First Federal
Bancshares"), the Company has agreed to merge with First Federal Bancshares with
First Federal Bancshares being the surviving corporation. As a result of this
transaction, the Company and Palmyra Savings will cease to exist. First Federal
Bancshares intends to operate Palmyra Savings' three locations as branches of
First Federal Bank, the sole subsidiary of First Federal Bancshares. Under the
terms of the merger agreement, shareholders of the Company will be entitled to
receive either $21.00 in cash, shares of First Federal Bancshares common stock,
or a combination of both in exchange for each share of the Company's common
stock.
Financial Condition at June 30, 2002 and September 30, 2001
Total assets increased $1.5 million to $71.6 million at June 30, 2002. There was
a $1.1 million increase in cash and interest bearing deposits, a $1.6 million
increase in investment securities, a $1.4 million decrease in mortgage-backed
securities, a $82,000 increase in FHLB Stock, a $227,000 increase in loans
receivable, a $39,000 decrease in accrued interest receivable, a $62,000
decrease in premises and equipment, a $57,000 increase in foreclosed real
estate, and a $9,000 decrease in other assets. There were $5.7 million in
securities which were called or matured in the period, $747,750 which were sold,
and $8.0 million in securities which were purchased. The increases in cash and
interest bearing deposits, investment securities, and loans receivable were
primarily funded by a $1.3 million increase in deposits. Five properties were
foreclosed and two were sold during the period.
-7-
PFSB BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Total liabilities increased $1.5 million to $62.4 million at June 30, 2002 as
compared to September 30, 2001. The increase was due to an increase in deposits
of $1.3 million, an increase in advances for taxes and insurance of $2,000, an
increase in dividends payable of $63,000, and an increase in other liabilities
of $70,000.
Stockholders' equity at June 30, 2002 increased $90,000 to $9.2 million or 12.9%
of total assets as compared to September 30, 2001. The majority of the $16,000
increase in retained earnings was due to earnings of $110,000 and dividends of
$125,000. Other components contributing to the change in stockholders' equity
were an increase in additional paid-in capital of $13,000, a decrease in
unrealized losses on securities of $7,000, a decrease in unearned ESOP and SBIP
shares of $71,000, and a decrease in treasury stock of $15,000 due to the
exercise of stock options.
Non-performing assets include non-accrual loans, loans 90 days or more
delinquent and still accruing interest, foreclosed real estate and other
repossessed assets. The following table presents non-performing assets at the
dates indicated.
June 30, September 30,
2002 2001
--------------------------
Non-accrual loans ............................................ $215 $339
Loans past due 90 days or more and still accruing interest ... -- 73
Foreclosed real estate and other repossessed assets .......... 57 --
---- ----
Total non-performing assets ............................. $272 $412
==== ====
Non-accrual loans at June 30, 2002 and September 30, 2001 consisted primarily of
residential real estate loans. All non-accrual loans are classified as
substandard. As of June 30, 2002, one current loan was classified as $92,000
substandard and $5,000 loss due to value of the collateral securing the loan.
Results of Operations for the Three Months Ended June 30, 2002 and 2001
Net Income - Net income decreased $21,000 to $14,000 for the quarter ended June
30, 2002 as compared to $35,000 for the quarter ended June 30, 2001. Diluted
income per share decreased from $0.09 for the 2001 quarter end to $0.03 for the
2002 quarter end.
Net Interest Income - Net interest income increased $161,000 to $563,000 for the
three months ended June 30, 2002. Interest income decreased $34,000 for the
three month period ended June 30, 2002 as compared to the three month period
ended June 30, 2001, while interest expense decreased $195,000, resulting in an
increase in net interest income of $161,000. The increase in interest income was
due to an increase in loans receivable of $2.8 million along with an increase in
mortgage-backed investments of $845,000, partially offset by a decrease in
investment securities of $1.3 million. Interest expense decreased $195,000 from
the three month period ended June 30, 2002 as compared to the same period ended
June 30, 2001. This was primarily due to the decrease in deposit expense of
$190,000 along with a decrease in interest expense on FHLB advances of $5,000.
Although there was a $2.8 million increase in deposits, primarily in
certificates of deposit, interest expense on deposits decreased $190,000 due to
a decrease in the cost of deposits from 5.11% to 3.67% from June 30, 2001 to
June 30, 2002. The decrease in interest on FHLB advances was due to the
repayment of all FHLB advances in the prior fiscal year.
Provision for Loan Losses - The provision for loan losses decreased $8,000 from
June 30, 2001 to June 30, 2002. The allowance for loan losses is maintained at a
level which, in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is based on
management's evaluation of the collectibility of the loan portfolio, including
the nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans and economic conditions. Allowances for
impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense, and reduced by charge-offs, net of
recoveries.
-8-
PFSB BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Management applies its normal loan review procedures in determining when a loan
is impaired. All nonaccrual loans are considered impaired except those
classified as small-balance homogeneous loans which are collectively evaluated
for impairment. The Company considers all one-to four-family residential
mortgage loans, residential construction loans, and all consumer and other loans
to be smaller homogeneous loans. Impaired loans are assessed individually and
impairment identified when the accrual of interest has been discontinued, loans
have been restructured or management has serious doubts about the future
collectibility of principal and interest, even though the loans are currently
performing. Factors considered in determining impairment include, but are not
limited to, expected future cash flow, the financial condition of the borrower
and current economic conditions. The Company measures each impaired loan based
on the fair value of its collateral and charges off those loans or portions of
loans deemed uncollectible. Management has elected to continue to use its
existing nonaccrual methods for recognizing interest income on impaired loans.
Noninterest Income - Total noninterest income decreased $7,000 to $11,000 for
June 30, 2002. Service charges and other fees increased $2,000 for the three
month period ended June 30, 2002 as compared to the three month period ended
June 30, 2001. Also contributing to this decrease was a decrease in loss from
foreclosed assets of $9,000, a decrease in gain from sale of investments of
$7,000, and a decrease in other income of $11,000.
Noninterest Expense - Total noninterest expense increased $134,000 to $502,000
for June 30, 2002. Of this increase, $80,000 was due to an increase in
professional fees primarily due to the pending merger, $20,000 was due to an
increase in employee's salaries and benefits, and $33,000 was due to an increase
in other expenses.
Income Taxes - Income taxes increased from $9,000 for the quarter ended June 30,
2001 to $58,000 for the quarter ended June 30, 2002 primarily due to $64,000 in
non tax deductible expenses relating to the pending merger.
Results of Operations for the Nine Months Ended June 30, 2002 and 2001
Net Income - Net income increased $87,000 to $110,000 for the nine month period
ended June 30, 2002 as compared to net income of $23,000 for the same period
ended June 30, 2001. Diluted income per share increased from $0.06 for the 2001
period end to $0.28 for the 2002 period end.
Net Interest Income - Net interest income increased $437,000 to $1.6 million for
the nine months ended June 30, 2002. Interest income decreased $122,000 for the
nine month period ended June 30, 2002 as compared to the nine month period ended
June 30, 2001, while interest expense decreased $559,000, resulting in the
increase net interest income of $437,000. The increase in interest income was
due to an increase in loans receivable of $2.8 million along with an increase in
mortgage-backed investments of $845,000, partially offset by a decrease in
investment securities of $1.3 million. Interest expense decreased $559,000 from
the nine month period ended June 30, 2002 as compared to the same period ended
June 30, 2001. This was primarily due to the decrease in deposit expense of
$466,000 along with a decrease in interest expense on FHLB advances of $93,000.
Although there was a $2.8 million increase in deposits, primarily certificates
of deposit, interest expense on deposits decreased $466,000 due to a decrease in
the cost of deposits from 5.11% to 3.67% from June 30, 2001 to June 30, 2002.
The decrease in interest on FHLB advances was due to the repayment of all FHLB
advances in the prior fiscal year.
Provision for Loan Losses - The provision for loan losses increased $33,000 from
June 30, 2001 to June 30, 2002. The majority of the increase was due to an
increase in 1-4 family non-owner occupied loans and commercial loans for the
nine month period ended June 30, 2002. The allowance for loan losses is
maintained at a level which, in management's judgment, is adequate to absorb
credit losses inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the loan portfolio,
including the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans and economic conditions.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. The allowance is increased
by a provision for loan losses, which is charged to expense, and reduced by
charge-offs, net of recoveries.
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PFSB BANCORP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Noninterest Income - Total noninterest income increased $11,000 to $66,000 for
June 30, 2002. Service charges and other fees increased $20,000 for the nine
month period ended June 30, 2002 as compared to the nine month period ended June
30, 2001. There was a decrease in loss from foreclosed assets of $15,000, offset
by a decrease in gain from sale of investments of $7,000 and a decrease in other
income of $17,000.
Noninterest Expense - Total noninterest expense increased $234,000 to $1.4
million for June 30, 2002. Of this increase, $33,000 was due to an increase in
employee salaries and benefits, $151,000 was due to an increase in professional
fees primarily relating to the pending merger, and $46,000 was due to an
increase in other expenses.
Income Taxes - Income taxes increased from a $4,000 tax benefit for the nine
months ended June 30, 2001 to a $90,000 tax expense for the same period ended
June 30, 2002 primarily due to $108,000 in non tax deductable expenses relating
to the pending merger.
Liquidity and Capital Resources
The Company's primary sources of funds are maturities and prepayments of
investment securities, customer deposits, proceeds from principal and interest
payments on loans and Federal Home Loan Bank of Des Moines advances. While
investment securities maturities and scheduled amortization of loans are a
predictable source of funds, deposit flows, investment securities prepayments
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
Palmyra Savings must maintain an adequate level of liquidity to ensure the
availability of sufficient funds to fund loan originations and deposit
withdrawals, to satisfy other financial commitments and to take advantage of
investment opportunities. Palmyra Savings generally maintains sufficient cash
and short-term investments to meet short-term liquidity needs. At June 30, 2002,
cash and interest-bearing deposits totaled $5.3 million, or 7.4% of total
assets. Investment securities classified as available-for-sale totaled $8.3
million at June 30, 2002.
The Bank's primary investing activity is the origination and purchase of one- to
four-family mortgage loans. At June 30, 2002, the Bank had outstanding loan
commitments totaling $1.5 million and had undisbursed loans in process totaling
$639,000. Certificates of deposit that are scheduled to mature in less than one
year from June 30, 2002 totaled $28.7 million. Historically, the Bank has been
able to retain a significant amount of its deposits as they mature. Management
believes it has adequate resources to fund all loan commitments from the cash
inflow from savings deposits, loan payments and maturities of investment
securities. Management also has the ability to obtain advances from the Federal
Home Loan Bank to supplement liquidity.
Office of Thrift Supervision regulations require Palmyra Savings to maintain
specific amounts of regulatory capital. As of June 30, 2002, Palmyra Savings
complied with all regulatory capital requirements stated below. The following
table summarizes Palmyra Savings' capital ratios and the ratios required by
regulation at June 30, 2002.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
As of June 30, 2002
Total Risk-Based Capital
(to Risk Weighted Assets) $8,981 24.22% $2,967 8.0% $3,708 10.0%
Tier 1 Capital
(to Risk Weighted Assets) $8,646 23.32% $1,483 4.0% $2,225 6.0%
Tier 1 Capital
(to Adjusted Assets) $8,646 12.07% $2,149 3.0% $3,581 5.0%
Tangible Capital
(to Adjusted Assets) $8,646 12.07% $1,074 1.5% N/A N/A
-10-
PFSB BANCORP, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Neither the Company nor Palmyra Savings is a party to any material legal
proceedings at this time. From time to time Palmyra Savings is involved in
various claims and legal actions arising in the ordinary course of business.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Articles of Incorporation of PFSB Bancorp, Inc.*
3.2 Bylaws of PFSB Bancorp, Inc.*
4.0 Form of Stock Certificate of PFSB Bancorp, Inc.*
10.1 Employment Agreement with Eldon R. Mette **
10.2 Employment Agreement with Ronald L. Nelson **
10.3 PFSB Bancorp, Inc. 2000 Stock-Based Incentive Plan ***
99.1 Chief Executive Officer Certification
99.2 Chief Financial Officer Certification
b. Reports on Form 8-K
On June 6, 2002, the Company filed a Current Report on Form 8-K
disclosing that it had entered into an Agreement and Plan of Merger
with First Federal Bancshares, Inc. pursuant to which the Company will
merge with and into First Federal Bancshares, Inc. The Agreement and
Plan of Merger and the press release announcing the merger were filed
as exhibits.
* Incorporated by reference from the Form SB-2 (Registration No. 333-69191),
as amended, as filed on December 18, 1998.
** Incorporated by reference from the Form 10-QSB for the quarter ended March
31, 1999, as filed on May 17, 1999.
*** Incorporated by reference from the Definitive Proxy Statement for the 2000
Annual Meeting of Stockholders, as filed on December 15, 1999.
-11-
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PFSB Bancorp, Inc.
Date: August 14, 2002 By: /s/ Eldon R. Mette
-----------------------------
Eldon R. Mette
President and Chief
Executive Officer
Date: August 14, 2002 By: /s/ Ronald L. Nelson
-----------------------------
Ronald L. Nelson
Vice President, Treasurer
and Secretary
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