PROSPECTUS
PHSB FINANCIAL CORPORATION
(Holding Company for Peoples Home Savings Bank)
Up to 3,140,937 shares of common stock and Exchange of [LOGO]
up to 1,849,430 shares of common stock
We are offering common stock. The shares we are offering will represent
a 62.94% ownership interest in PHS Bancorp, Inc. which, after certain
adjustments are made, represents the ownership of PHS Bancorp, M.H.C., the
mutual holding company of PHS Bancorp, Inc. PHS Bancorp, Inc. is the
middle-tier stock holding company parent of Peoples Home Savings Bank. The
existing publicly held shares of PHS Bancorp, Inc. which, as adjusted,
represent the remaining 37.06% ownership in PHS Bancorp, Inc., will be
exchanged for shares of PHSB Financial Corporation.
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If you are a current or former depositor of Peoples Home Savings Bank as of the
eligibility dates:
o You may have priority rights to purchase shares at $10.00 per share.
o You may not purchase fewer than 25 shares.
o You may be eligible to purchase up to 10,000 shares individually, and you,
together, with associates or persons acting in concert with you, may not
purchase more than 20,000 shares.
o You will not pay a commission to buy any shares.
o Our offering will end at 12:00 p.m., eastern time on December 12, 2001,
unless extended.
If you are currently a stockholder of PHS Bancorp, Inc.:
o Your shares will be exchanged automatically for shares of PHSB Financial
Corporation
o After the exchange of shares, your percentage ownership interest in PHSB
Financial Corporation will be approximately equivalent to your current
percentage ownership interest in PHS Bancorp, Inc.
o You may also be eligible to purchase additional shares at $10.00 per share
in the community offering, which will be subject to certain purchase
limitations.
o You will not pay a commission to buy any shares or to exchange existing
shares.
If you fit none of the above categories, but are interested in purchasing shares
of our common stock:
o Subject to our right to reject orders in part or in whole, you may be
eligible to purchase shares in the community offering at $10.00 per share
after priority orders are filled.
o You may not purchase fewer than 25 shares.
o You may be eligible to purchase up to 10,000 shares individually, and you,
together, with associates or persons acting in concert with you, may not
purchase more than 20,000 shares.
o You will not pay a commission to buy any shares.
MINIMUM MAXIMUM
Number of Shares 2,018,750 2,731,250
Total Underwriting Commissions and Expenses $ 791,480 $ 896,360
Net Proceeds $19,396,020 $26,416,140
Net Proceeds Per Share $ 9.61 $ 9.67
The maximum number of shares offered may be increased up to 3,140,937
shares, because of changes in the market and general financial and economic
conditions. If we increase the number of shares offered, prospective purchasers
will not be notified. Additionally, we may terminate the offering and the
exchange of shares if we do not sell the minimum number of shares.
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For a discussion of risks you should consider, see "Risk Factors"
beginning on page 10 of this prospectus.
Our common stock will continue to trade on the Nasdaq National Market
under the same symbol "PHSB."
We are offering the common stock on a best efforts basis. Trident
Securities will assist us in the sale of the common stock, though they are not
required to purchase any of the common stock that is being offered.
These securities are not deposits or savings accounts and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission, the Federal Deposit
Insurance Corporation nor any state securities regulator has approved or
disapproved these securities or determined if this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
Funds received prior to the completion of the offering will be held in
an escrow account at Peoples Home Savings Bank which will bear interest at its
passbook rate. If the offering is terminated, all funds received from
prospective purchasers will be promptly returned with interest. This offering is
expected to expire on December 12, 2001, at 12:00 p.m., eastern time, unless it
is extended, up to January 26, 2002.
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For assistance, please contact the stock information center at (724) 846-6020.
Trident Securities
A Division of McDonald Investments, Inc.
The Date of this Prospectus is November 13, 2001
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the financial statements of PHS
Bancorp, Inc.
The Companies
PHSB Financial Corporation 744 Shenango Road, Beaver Falls, Pennsylvania 15010
We are a Pennsylvania corporation. We were formed to own all of Peoples
Home Savings Bank's capital stock upon completion of the conversion and stock
offering. We have applied to the Federal Reserve for approval to become a bank
holding company.
PHS Bancorp, M.H.C. 744 Shenango Road, Beaver Falls, Pennsylvania 15010
PHS Bancorp, M.H.C. is currently the mutual holding company of PHS
Bancorp, Inc. As of June 30, 2001, PHS Bancorp, M.H.C.'s sole business activity
consisted of its ownership of 1,518,000 shares of PHS Bancorp, Inc.'s common
stock, which represented approximately 60% of its outstanding shares, as well as
approximately $1.2 million in cash and $1.3 million in other investments. Upon
consummation of the conversion, PHS Bancorp, M.H.C. will cease to exist and the
assets of PHS Bancorp, M.H.C. will be contributed to the capital of either PHSB
Financial or Peoples Home Savings Bank. See "-- How The Ownership Structure Will
Change After The Conversion," and "-- The Exchange of PHS Bancorp Common Stock."
PHS Bancorp, Inc. 744 Shenango Road, Beaver Falls, Pennsylvania 15010
PHS Bancorp is currently the mid-tier stock holding company of Peoples
Home Savings Bank. PHS Bancorp owns all of the outstanding common stock of
Peoples Home Savings Bank. PHS Bancorp, M.H.C. owns 1,518,000 shares of PHS
Bancorp's outstanding common stock. The remaining 1,011,600 shares of common
stock are held by the public. See "-- How The Ownership Structure Will Change
After The Conversion," and "-- The Exchange of PHS Bancorp Common Stock." At
June 30, 2001, PHS Bancorp had consolidated assets totaling $282.9 million,
deposits of $201.3 million and consolidated stockholders' equity of $29.3
million.
Peoples Home Savings Bank 1427 Seventh Ave., Beaver Falls, Pennsylvania 15010
Peoples Home Savings is a Pennsylvania-chartered stock savings bank
headquartered in Beaver Falls, Pennsylvania. Peoples Home Savings is a
community-oriented financial institution offering traditional financial services
to its local community. It conducts operations through its administrative office
and main office in Beaver Falls, Pennsylvania and its eight branch offices
located in the counties of Beaver and Lawrence, Pennsylvania.
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How The Ownership Structure Will Change After The Conversion
The following chart shows our current structure which is commonly
referred to as a "two-tier" mutual holding company structure:
------------------------ ---------------------------
| | | PHS Bancorp |
| PHS Bancorp, M.H.C. | | Minority Stockholders |
------------------------ ---------------------------
| 60% 40% |
|-----------------------------------------|
PHS Bancorp
|-----------------------------------------|
| 100%
|-----------------------------------------|
| Peoples Home Savings |
|-----------------------------------------|
The following chart reflects the adjusted ownership interest of PHS
Bancorp. As required by Federal Deposit Insurance Corporation policy, the
aggregate ownership interest of PHS Bancorp's public stockholders has been
adjusted downward from 40% to 37.06% to reflect approximately $2.76 million of
assets held by PHS Bancorp, M.H.C. Such assets of PHS Bancorp, M.H.C. are held
solely for the benefit of depositors of Peoples Home Savings.
------------------------ ---------------------------
| | | PHS Bancorp |
| PHS Bancorp, M.H.C. | | Minority Stockholders |
------------------------ ---------------------------
| 62.94% 37.06% |
|-----------------------------------------|
PHS Bancorp
|-----------------------------------------|
| 100%
|-----------------------------------------|
| Peoples Home Savings |
|-----------------------------------------|
The following chart reflects our ownership structure after the
conversion.
|-----------------------------------------|
| Public Stockholders |
|-----------------------------------------|
| 100%
|-----------------------------------------|
| PHSB Finanical Corporation |
|-----------------------------------------|
| 100%
|-----------------------------------------|
| Peoples Home Savings |
|-----------------------------------------|
The Conversion
The Offering
We are selling common stock which represents the ownership interest in
PHS Bancorp now owned by PHS Bancorp, M.H.C. in the following order of priority.
First: Depositors with $50 or more on deposit as of June 30, 2000.
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Second: Peoples Home Savings' employee stock ownership plan. If
depositors in the first category subscribe to all of the
shares in the Offering, the employee stock ownership plan
may purchase stock after the conversion in the open market.
Third: Depositors with $50 or more on deposit as of September 30,
2001.
Fourth: Current Depositors with $50 or more on deposit as of October
31, 2001.
We are selling between 2,018,750 and 2,731,250 shares of common stock.
The number of shares to be sold may be increased to 3,140,937. All shares will
be sold at a price of $10.00 per share. The actual amount of shares we sell will
depend on an independent appraisal performed by RP Financial, an independent
appraisal firm. See, "$10.00 Per Share Stock Pricing And The Number Of Shares To
Be Issued In The Conversion," at page 7.
The subscription offering expires at 12:00 p.m., eastern time, on
December 12, 2001, but may be extended to January 16, 2002. You cannot transfer
your subscription rights. If you attempt to transfer your rights, you may lose
the right to purchase shares and may be subject to criminal prosecution and, or,
other sanctions.
During the subscription offering, we may also offer shares of common
stock in a community offering. In this part of the offering, people who reside
in Beaver and Lawrence Counties, Pennsylvania will have first preference and
current stockholders of PHS Bancorp will have second preference. This part of
the offering may terminate at any time without notice but no later than January
26, 2002.
Shares not sold in the subscription or community offering may be
offered for sale in a syndicated community offering, which would be an offering
to the general public on a best efforts basis by a syndicate of broker dealers
managed by Trident Securities.
You will not pay a commission to buy shares in the offerings.
We have the right to reject any orders of stock, in whole or in part,
in the subscription offering, the community offering, and the syndicated
community offering.
We have described the offering in greater detail beginning at page 24
of this prospectus.
The Exchange Of PHS Bancorp Common Stock
If you are now a stockholder of PHS Bancorp, your shares will be
cancelled and exchanged for our shares. The number of shares you will receive
will be based on an exchange ratio. The actual number of shares you receive will
depend upon the number of shares we sell in our offering and the final appraised
value of our stock. As required by the Federal Deposit Insurance Corporation,
the aggregate ownership interest of PHS Bancorp's public stockholders has been
adjusted downward from approximately 40% to 37.06% to reflect approximately
$2.76 million of assets held by PHS Bancorp, M.H.C. Such assets of PHS Bancorp,
M.H.C. are held solely for the benefit of depositors of Peoples Home Savings.
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The following table shows how the exchange ratio will adjust based on
the number of shares sold in our offering. The table also shows how many shares
an owner of PHS Bancorp common stock would receive in the exchange, adjusted for
the number of shares sold in the offering.
100 Shares of
PHS Bancorp
would be
Shares to be Exchanged Total Shares exchanged for
for PHSB Financial of Common PHSB Financial
Shares to be Sold Corporation Stock to be Exchange Corporation
in the Offering Common Stock Outstanding Ratio Common Stock
---------------------- ----------------------- ----------- -------- --------------
Number Percent Number Percent
------ ------- ------ -------
Minimum.............. 2,018,750 62.94% 1,188,669 37.06% 3,207,419 1.17504 117
Midpoint............. 2,375,000 62.94 1,398,435 37.06 3,773,435 1.38240 138
Maximum.............. 2,731,250 62.94 1,608,200 37.06 4,339,450 1.58976 158
Adjusted maximum..... 3,140,937 62.94 1,849,430 37.06 4,990,367 1.82822 182
If you own your shares of PHS Bancorp in "street name," the exchange
will occur automatically and you need take no action. Shares held in "street
name" means that shares are not held in your name but are held on your behalf by
your broker or financial advisor. If you have shares in your name, you will
receive a transmittal form with instructions to surrender your stock
certificates after the offering is completed. You will receive new certificates
for our common stock within five business days after we receive properly
executed transmittal forms.
No fractional shares of our common stock will be issued to any public
stockholder of PHS Bancorp upon consummation of the conversion. If you do not
hold your shares in "street name," payment for fractional shares will be made as
soon as practicable after the receipt by the exchange agent of surrendered PHS
Bancorp stock certificates.
We have described the exchange in greater detail beginning at page 19
of this prospectus.
Reasons For The Conversion
We are pursuing the conversion for the following reasons:
o After conversion, the proceeds we will receive from the sale
of our common stock will enable us to continue to expand our
banking franchise, and offer new products and banking
services. We will be in a better position to increase our
market presence in our market areas of Beaver and Lawrence
Counties, Pennsylvania.
o The larger capital base resulting from the conversion will
allow us to increase our earning assets, which should permit
us to continue to increase our earnings.
o After conversion, our common stock will continue to be listed
on the Nasdaq National Market with a greater number of
outstanding shares held by public stockholders. This will
provide additional liquidity and visibility for our common
stock.
o As a fully converted holding company, we will have greater
strategic flexibility in connection with merger and
acquisition transactions. Unlike a mutual holding company, we
can use stock as a form of payment for acquisitions and merge
with any other stock institution or its holding company.
Currently, we have no plans, agreements or understandings
regarding any merger or acquisition transactions.
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Conditions To Complete The Conversion
We cannot complete our conversion and our offering unless:
(1) It is ratified by a majority vote of Current Depositors of
Peoples Home Savings;
(2) It is approved by a two-thirds vote of stockholders of PHS
Bancorp;
(3) It is approved by a majority vote of stockholders of PHS
Bancorp, not including those shares held by PHS Bancorp,
M.H.C.; and
(4) At least the minimum number of shares are sold in the
offering.
We have described the conditions to complete the conversion in greater
detail at page 23 of this prospectus.
$10.00 Per Share Stock Pricing And The Number Of Shares To Be Issued In The
Conversion
The number of shares offered is based on an independent appraisal of
the pro forma estimated market value of our stock performed by RP Financial,
Inc. divided by the purchase price of $10.00 and multiplied by 62.94%, the
percentage of PHS Bancorp, M.H.C. shares being offered to the public after
adjusting the ownership interests, in accordance with the Federal Deposit
Insurance Corporation policy, to reflect approximately $2.76 million of PHS
Bancorp, M.H.C. assets. Such assets of PHS Bancorp, M.H.C. are held solely for
the benefit of depositors of Peoples Home Savings. The $10.00 per share price
was determined by our board of directors. RP Financial will receive a fee of
$20,000 for its appraisal services.
RP Financial has determined that as of October 12, 2001, our estimated
aggregate pro forma market value was $37.7 million, the mid-point of the
valuation range. Pursuant to regulations, this value must be within a minimum
valuation range of $32.1 million and a maximum valuation range of $43.4 million.
Based on this valuation and the ownership of PHS Bancorp, M.H.C., an offering
range between 2,018,750 shares and 2,731,250 shares are being offered. This
offering range means that the $10.00 per share purchase price for our shares
will range from 12.50x to 16.67x of our pro forma net income per share using the
financial data for the annualized six month period ended June 30, 2001, of
similar thrift institutions used by RP Financial.
The ratios we have presented are commonly requested by a prospective
investor in order to determine whether or not the stock meets his or her
investment criteria. Because of possible differences and important factors such
as operating characteristics, financial performance, asset size, capital
structure, and business prospects between us and other fully converted
institutions, you should not rely solely on these comparative valuation ratios
as an indication as to whether or not the stock is an appropriate investment for
you. See "Risk Factors -- "You may not be able to sell your shares when you
desire, or for $10.00 or more per share." and "Pro Forma Data" and "The Offering
- -- Stock Pricing and the Number of Shares To Be Offered."
The Amount Of Stock You May Purchase
The minimum number of shares that you may purchase is 25.
Any person or group of persons may not purchase more than 10,000 shares
individually.
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For further discussion of the purchase limits and definitions of
"associate" and "acting in concert," see "The Offering--Limitations on Purchases
of Common Stock" at page 29 of this prospectus.
Our Use Of The Proceeds Raised From The Sale Of Stock
We estimate that we will receive net proceeds from the sale of the
common stock of between $19.4 million at the minimum of the offering range and
$26.4 million at the maximum of the offering range.
Minimum Maximum
Shares Shares
------ ------
(In Thousands)
Working capital........................................ $ 9,698 $13,208
Funds loaned to the employee stock ownership plan...... 1,615 2,185
Investment in short-term securities.................... 8,083 11,023
------- -------
$19,396 $26,416
======= =======
See "Use of Proceeds."
Benefits Of The Conversion to Management
In order to link our officers', employees' and directors' interests
closer to our stockholders' interests, we intend to establish certain benefit
plans that use our stock as compensation. Officers, directors, and employees
will not be required to pay cash in exchange for certain stock benefits.
The following table presents information regarding the employee stock
ownership plan and stock-based incentive plans. The stock-based incentive plans
may not be adopted for at least six months after the offering and must be
approved by a majority vote of the stockholders. The table below assumes the
sale of 2,731,250 shares in the offering. It is assumed that the value of the
stock is $10 per share. Options to acquire shares of the stock are given no
value because their exercise price will be equal to the fair market value of the
stock on the day the options are granted. As a result, anyone who receives an
option will only benefit from the option if the price of the stock rises in the
future above the exercise price.
Percentage of
Estimated Total Shares Sold
Participants Shares Value of Shares in the Offering
------------ ------ --------------- ---------------
Employee Stock Ownership Plan....... Officers and
Employees 218,500 $2,185,000 8.0%
Stock-Based Incentive Plans:
Restricted Stock Awards.......... Directors,
Officers and
Employees 109,250 1,092,500 4.0
Stock Options.................... Directors,
Officers and
Employees 273,125 -- 10.0
------- ---------- ----
Total................. 600,875 $3,277,500 22.0%
======= ========== ====
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We will also convert employee stock ownership shares, restricted stock
awards, and stock options previously awarded to officers, employees and
directors of PHS Bancorp and Peoples Home Savings. Employee stock ownership
shares and restricted stock awards will be adjusted based upon the exchange
ratio and the other terms and the vesting period will remain unchanged. The
number of stock options received and the exercise price will be adjusted based
on the exchange ratio and the other terms and the vesting period will remain
unchanged.
Market For Common Stock
We will list the common stock on the Nasdaq National Market under the
symbol "PHSB," which is the same symbol currently used for PHS Bancorp common
stock. Trident Securities has advised us that it intends to be a market maker in
the common stock and will assist us in obtaining additional market makers.
Dividend Policy
PHS Bancorp has paid a cash dividend of $.10 per share per quarter
during fiscal 2001, or $.40 per share per year. After the conversion, depending
upon the number of shares sold in the offering, as adjusted for the exchange
ratio, we expect to continue to pay a dividend rate ranging from $.06 to $.09
per share per quarter, at the adjusted maximum to the minimum of the offering
range, based upon a price of $10 per share. The dividend rate and the continued
payment of dividends will depend on a number of factors including our capital
requirements, our financial condition and results of operations, tax
considerations, statutory and regulatory limitations, and general economic
conditions. No assurance can be given that we will continue to pay dividends or
that they will not be reduced in the future.
Effects Of Conversion On Rights of Stockholders
After the conversion, the stockholders of PHS Bancorp will become our
stockholders and their rights as stockholders will be governed by our articles
of incorporation, bylaws and Pennsylvania law. For a discussion of material
differences in the rights of stockholders and an explanation of possible
anti-takeover effects of provisions in our articles of incorporation and bylaws,
see "Effects of Conversion Rights of Stockholders" beginning at page 99 of this
prospectus.
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RISK FACTORS
In addition to the other information in this document, you should consider
carefully the following risk factors in evaluating an investment in our stock.
Recent terrorist attacks in the United States have affected the stock market and
the general economy.
On September 11, 2001, terrorists carried out attacks that destroyed
the World Trade Center in New York and badly damaged the Pentagon outside
Washington, D.C. In the wake of these attacks, all stock prices broadly declined
from the prices that existed prior to the attacks. In addition to affecting the
stock markets, the terrorist attacks may affect the national and international
economies because of the uncertainties that exist as to how the United States
will respond and to whether additional attacks will be carried out against the
United States. These uncertainties contributed to a slowdown in economic
activity in the United States and as a result the economy has weakened. The
weakened economy could decrease our loan demand and increase our loan
delinquencies.
We originate a large amount of indirect automobile loans and commercial business
loans which have a higher degree of credit risk than traditional one- to- four
family lending.
Peoples Home Savings actively originates indirect automobile loans and
commercial business loans. At June 30, 2001, such loans approximated $54.8
million, or 42.1%, of the total loan portfolio. Of this amount, $44.5 million
consist of indirect automobile loans. Though we have not recently experienced a
greater degree of default or an inability to resell the collateral of these
loans, indirect automobile loans and commercial business loans are generally
considered to have a greater degree of credit risk than traditional one- to-
four family residential lending. Indirect automobile loans are secured by new or
used automobiles, which depreciate rapidly. Additionally, there is generally no
recourse against the automobile dealer in the event of a default by the
borrower. The repayment of commercial business loans typically is dependent upon
the income stream of the borrower, which could be significantly affected by
economic conditions. Because of these risks, we could experience an increase in
non-performing loans and provisions for loan losses. See "Business of Peoples
Home Savings - Lending Activities -- Consumer Loans, -- Commercial Loans."
You may not be able to profit from the sale or a merger of us because of
provisions in our charter documents and other laws and regulation.
Our articles of incorporation and bylaws contain provisions that may
make it difficult for someone to acquire control of us. These provisions may
discourage takeover attempts and prevent you from receiving a premium over the
market price of your shares as part of a takeover. See "Comparison of
Stockholders' Rights" and "Restrictions on Acquisitions of PHSB Financial."
Our low return on equity after the conversion may negatively impact the value of
our common stock.
We will not be able to deploy the increased capital from this offering
into higher-yielding earning loans and other assets immediately. Our ability to
profitably deploy our new capital will be significantly affected by industry
competition for loans and deposits. Initially, we intend to invest the net
proceeds in short-term investments which generally have lower yields than loans.
Until we can invest our new increased capital on a long-term basis at a higher
rate and increase our portfolio of loans and deposits, we expect our return on
equity to be less than what it has been in recent years, which may negatively
impact the value of our stock. For the six months ended June 30, 2001, and the
year ended December 31, 2000, our average return on equity was 7.32% and 7.95%,
respectively.
10
You may not be able to sell your shares when you desire, or for $10.00 or more
per share.
Publicly traded stocks have recently experienced substantial market
price volatility. This is due, in part, to investors' shifting perceptions of
the effect on various industry sectors of changes and potential changes in the
economy. Volatility, therefore, may be unrelated to the current operating
performance of particular companies whose shares are traded. The purchase price
of common stock sold in conversion transactions, including mutual-to-stock
conversion transactions of mutual holding companies, is based on an independent
appraisal. Independent appraisals are not intended, and should not be construed
as a recommendation as to the advisability of purchasing shares. After our
common stock begins to trade, the trading price will be determined by the
marketplace. The trading price will fluctuate because it will be influenced by
many factors, including prevailing interest rates, other economic conditions,
our operating performance and investor perceptions of the outlook for us and the
banking industry in general. We cannot assure you that if you choose to sell
shares you purchased in the stock offering, you will be able to sell them at or
above the $10 per share offering price.
The implementation of certain stock-based benefit plans may increase our future
compensation expense and may reduce our earnings.
We intend to adopt a stock option plan that will provide for the
granting of options to purchase common stock, a restricted stock plan that will
provide for awards of restricted stock to our eligible officers, employees and
directors and an employee stock ownership plan that will distribute stock to all
of our qualifying employees over a period of time. The restricted stock plan and
the employee stock ownership plan will increase our future costs of compensating
our directors, officers, and employees. The cost of the employee stock ownership
plan will vary based on our stock price over time, while the cost of the
restricted stock plan will be based on our stock price when the awards are first
granted.
Increases in market rates of interest could adversely affect our stockholders'
equity.
At June 30, 2001, PHS Bancorp owned approximately $83.7 million of
marketable securities available for sale, which consisted of $22.9 million of
investment securities and $60.8 million of mortgage-backed securities. Generally
accepted accounting principles require that these securities be carried at fair
value on the consolidated balance sheet. Unrealized gains or losses on these
securities, that is, the difference between the fair value and the amortized
cost of these securities, is reflected in stockholders' equity, net of deferred
taxes. Recently, market rates of interest have decreased which caused the fair
value of PHS Bancorp marketable securities to increase and stockholders' equity
to also increase. As of June 30, 2001, PHS Bancorp's available for sale
marketable securities portfolio had an unrealized gain, net of taxes, of
$68,000, which resulted in an increase in stockholders' equity by the same
amount. However, when interest rates increase, the fair value of PHS Bancorp's
available for sale marketable securities generally decreases, which also
decreases stockholders' equity. If market interest rates increase, our
stockholders' equity could be adversely affected.
A downturn in our local economy and increased competition may adversely affect
our profitability.
Our business of attracting deposits and making loans is primarily
conducted within our market area. A downturn in our local economy could reduce
the amount of funds available for deposit and the ability of borrowers to repay
their loans. Over the past 20 years due to a large loss of manufacturing jobs,
our market areas of Beaver and Lawrence Counties have experienced no growth in
population and periodic increases in unemployment. As of 2000, our market area
contained a total population of 275,000, with Beaver County containing 67% of
the population base. Between 1990 and 2000, Beaver County reported an annual
population loss of .3% and Lawrence County reported an annual population loss of
.2%. Additionally, unemployment in our market areas has also increased during
the past year.
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At June 30, 2001, the unemployment rate for Beaver and Lawrence Counties was
5.0% and 5.8%, respectively, up from 4.5% and 5.2%, respectively, at June 30,
2000. As a result of decreased population and increased unemployment, the number
of prospective customers has decreased. Additionally, we have substantial
competition for deposits and loans. Many competitors have greater resources than
we do and as a result we may have to decrease the rates we charge for loans and
increase the rates we pay on deposits either of which could hurt our profits.
Possible dilutive effect of restricted stock plan shares and stock option
shares.
If the conversion is completed and shareholders approve the restricted
stock plan and stock option plan, we may issue stock to our officers and
directors through these plans. If the shares for the restricted stock plan and
stock options are issued from our authorized but unissued stock, your ownership
percentage could be diluted by up to approximately 7.0% and the trading price of
our stock may be reduced. See "Pro Forma Data," "Management of Peoples Home
Savings -- Stock Benefits -- Benefits To Be Considered Following Completion of
the Conversion."
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RECENT DEVELOPMENTS
The information set forth below at or for the periods ended September
30, 2001 and 2000, is unaudited and, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results for the unaudited periods have been made. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements contained elsewhere in this prospectus.
On October 23, 2001, PHS Bancorp announced to the public its third
quarter earnings for the nine months ended September 30, 2001. Net income for
the nine months ended September 30, 2001 remained relatively unchanged from the
comparable 2000 period. For the nine months ended September 30, 2001, net income
was $1,634,000, or $.66 basic and diluted earnings per share, compared to
$1,659,000 or $.66 basic and diluted earnings per share for the comparable 2000
period. Net income for the nine months ended September 30, 2001 was affected by
the decreases in short-term interest rates by the Federal Reserve over the past
several months. For the nine months ended September 30, 2001, net interest
margin decreased 14 basis points to 3.19% from 3.33% for the comparable 2000
period.
Total assets at September 30, 2001 increased $23,292,000 to
$288,622,000 from $265,330,000 at December 31, 2000. This increase was primarily
due to increases in cash and interest-bearing deposits of $6,100,000, investment
securities and mortgage-backed securities of $12,100,000 and loans of
$5,300,000.
Please refer below to the unaudited financial information for further
information.
13
PHS BANCORP
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
------------------ ------------------
2001 2000
------------------ ------------------
ASSETS
Cash and amounts due from other institutions $ 1,399,498 $ 1,502,757
Interest-bearing deposits with other institutions 11,301,815 5,094,404
Investment securities:
Available for sale 18,561,051 24,814,065
Held to maturity (market value $23,031,712 and $17,917,570) 22,655,060 17,776,486
Mortgage-backed securities:
Available for sale 58,137,471 38,415,158
Held to maturity (market value $33,231,668 and $38,471,164) 32,498,167 38,779,775
Loans (net of allowance for loan losses of $1,479,443 and $1,454,618) 134,341,911 129,017,057
Accrued interest receivable 1,619,939 1,625,420
Premises and equipment 4,899,311 4,637,374
Federal Home Loan Bank stock 2,614,800 2,614,800
Other assets 592,869 1,052,375
------------------ ------------------
TOTAL ASSETS $ 288,621,892 $ 265,329,671
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 206,581,362 $ 198,241,701
Advances from Federal Home Loan Bank 49,194,800 36,194,800
Other borrowings 40,303 75,315
Accrued interest payable and other liabilities 2,043,253 1,967,621
------------------ ------------------
Total liabilities 257,859,718 236,479,437
------------------ ------------------
Preferred stock, 5,000,000 shares authorized, non issued - -
Common stock, $.10 par value 10,000,000 shares authorized,
2,760,000 shares issued 276,000 276,000
Additional paid in capital 10,461,756 10,480,215
Retained earnings - substantially restricted 21,627,684 20,756,274
Accumulated other comprehensive income 1,632,854 456,968
Unallocated ESOP shares (51,060 and 58,260 shares) (805,368) (917,283)
Unallocated RSP shares (7,774 and 16,155 shares) (89,398) (185,783)
Treasury stock, at cost (230,400 and 202,750 shares) (2,341,354) (2,016,157)
------------------ ------------------
Total stockholders' equity 30,762,174 28,850,234
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 288,621,892 $ 265,329,671
================== ==================
September 30, December 31,
2000 2000
------------------ ------------------
Other Financial Condition Data:
Tangible net worth $ 30,762,174 $ 28,850,234
Stockholders' equity to total assets 10.66% 10.87%
Book value per share $ 12.16 $ 11.28
Tangible book value per share 12.16 11.28
Non-performing assets 550,207 665,074
Non-performing loans to total loans 0.41% 0.52%
14
PHS BANCORP
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
INTEREST AND DIVIDEND INCOME
Loans $ 2,707,352 $ 2,614,672 $ 7,963,745 $ 7,542,159
Investment securities:
Taxable 387,436 501,373 1,315,584 1,527,526
Exempt from federal income tax 208,424 253,697 632,539 795,831
Mortgage-backed securities 1,526,416 1,396,696 4,420,763 4,273,816
Interest-bearing deposits
with other institutions 58,824 29,839 214,979 115,591
--------------- --------------- --------------- ---------------
Total interest income 4,888,452 4,796,277 14,547,610 14,254,923
--------------- --------------- --------------- ---------------
INTEREST EXPENSE
Deposits 1,966,571 2,045,914 6,092,140 5,912,298
Advances from Federal Home Loan Bank 695,622 593,012 1,935,134 1,847,444
Other borrowings 560 1,125 2,110 3,785
--------------- --------------- --------------- ---------------
Total interest expense 2,622,753 2,640,051 8,029,384 7,763,527
--------------- --------------- --------------- ---------------
Net interest income 2,225,699 2,156,226 6,518,226 6,491,396
PROVISION FOR LOAN LOSSES 130,000 150,000 370,000 405,000
--------------- --------------- --------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,095,699 2,006,226 6,148,226 6,086,396
--------------- --------------- --------------- ---------------
NONINTEREST INCOME
Service charges on deposit accounts 147,663 142,263 439,189 393,763
Investment securities gains, net - 7,315 58,118 7,315
Rental income, net 24,827 22,717 74,481 64,649
Other income 84,574 87,688 181,055 173,422
--------------- --------------- --------------- ---------------
Total noninterest income 257,064 259,983 752,843 639,149
--------------- --------------- --------------- ---------------
NONINTEREST EXPENSE
Compensation and employee benefits 854,983 835,301 2,483,910 2,446,257
Occupancy and equipment costs 316,574 302,223 992,720 873,926
Data processing costs 43,162 78,194 147,514 235,296
Other expenses 346,095 313,367 1,041,262 952,579
--------------- --------------- --------------- ---------------
Total noninterest expense 1,560,814 1,529,085 4,665,406 4,508,058
--------------- --------------- --------------- ---------------
Income before income taxes 791,949 737,124 2,235,663 2,217,487
Income taxes 221,926 166,500 602,108 558,624
--------------- --------------- --------------- ---------------
NET INCOME $ 570,023 $ 570,624 $ 1,633,555 $ 1,658,863
=============== =============== =============== ===============
EARNINGS PER SHARE
Basic $ 0.23 $ 0.23 $ 0.66 $ 0.66
Diluted 0.23 0.23 0.66 0.66
Weighted average number of shares outstanding
Basic 2,463,559 2,516,971 2,470,658 2,524,691
Diluted 2,468,305 2,516,971 2,471,157 2,524,691
Financial ratios (annualized)
Return on average assets 0.80% 0.85% 0.78% 0.83%
Return on average equity 7.65 8.27 7.43 8.19
Net interest margin 3.20 3.31 3.19 3.33
Other Data (In Thousands)
Average assets $ 285,488 $ 267,892 $ 279,759 $ 267,690
Average equity 29,811 27,593 29,315 26,999
Average earning assets 278,307 260,202 272,526 259,789
15
Selected Financial Highlights
At or for the
six months
ended
June 30, At or for the year ended December 31,
--------- -------------------------------------------------------------
2001 2000 1999 1998 1997 1996(1)
--------- --------- --------- --------- --------- ---------
(In thousands, except per share data)
Selected Financial Data:
Assets.............................................. $ 282,906 $ 265,330 $ 268,640 $ 244,253 $ 217,735 $ 202,216
Loans............................................... 127,692 129,017 118,745 99,914 99,691 95,773
Mortgage-backed securities held to maturity......... 34,620 38,780 44,141 48,287 40,234 31,138
Mortgage-backed securities available for sale....... 60,831 38,415 37,426 32,878 30,159 25,794
Investment securities held to maturity.............. 18,037 17,776 15,540 18,146 10,015 10,768
Investment securities available for sale............ 22,837 24,814 27,595 25,197 24,253 26,688
Interest-bearing deposits with other institutions... 7,562 5,094 11,417 9,332 3,308 3,004
Federal Home Loan Bank stock........................ 2,615 2,615 2,615 1,545 1,020 972
Deposits............................................ 201,250 198,242 189,345 181,113 174,286 175,925
Other borrowings.................................... 52 75 120 1,388 1,116 -
Advances from Federal Home Loan Bank................ 50,195 36,195 50,295 30,895 12,117 8,100
Stockholders' equity................................ 29,269 28,850 26,751 29,184 28,609 16,645(2)
Selected Consolidated Operating Data:
Interest income..................................... $ 9,659 $ 19,035 $ 17,511 $ 16,112 $ 14,950 $ 14,584
Interest expense.................................... 5,366 10,448 9,284 8,523 7,857 7,882
Net interest income............................... 4,293 8,587 8,227 7,589 7,093 6,702
Provision for loan losses........................... 240 555 410 365 555 455
Net interest income after provision............... 4,053 8,032 7,817 7,224 6,538 6,247
Total non-interest income........................... 496 854 764 914 937 781
Total non-interest expense.......................... 3,105 6,000 6,094 6,245 5,687 6,638(3)
Income before income taxes.......................... 1,444 2,886 2,487 1,893 1,788 390
Income taxes........................................ 380 714 629 391 150 (319)
Net income........................................ $ 1,064 $ 2,172 $ 1,858 $ 1,502 $ 1,638 $ 709
Basic earnings per share............................ $ .43 $ .86 $ .71 $ .56 $ .33 N/A
Diluted earnings per share.......................... $ .43 $ .86 $ .71 $ .56 $ .33 N/A
- ------------------
(1) Prior to July 10, 1997, there was no common stock outstanding.
(2) Represents retained earnings (substantially restricted).
(3) Includes a one-time special assessment of $1.1 million to recapitalize
the Savings Association Insurance Fund.
16
Selected Financial Ratios
At or For the Six
Months Ended At or For the Year Ended
June 30, December 31,
---------------- ------------------------------------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
Performance Ratios:
Return on average assets (net income
divided by average total assets)............ 0.77% 0.81% 0.81% 0.73% 0.65% 0.79% 0.35%(1)
Return on average equity (net
income divided by average equity)............ 7.32 8.15 7.95 6.68 5.24 7.33 4.37(1)
Net interest rate spread........................ 2.96 3.21 3.14 3.15 3.21 3.48 3.50
Non-interest expense to average assets.......... 2.24 2.23 2.24 2.38 2.72 2.75 3.30(1)
Net yield on interest-earning assets............ 3.35 3.55 3.51 3.51 3.65 3.86 3.77
Dividend payout ratio........................... 47.88 43.17 42.02 40.03 46.34 --(2) --(2)
Asset Quality Ratios:
Non-performing assets to total assets........... 0.18% 0.18% 0.25% 0.19% 0.22% 0.40% 0.63%
Non-performing loans to total loans, net........ 0.39 0.37 0.51 0.42 0.52 0.87% 1.33
Allowance for loan losses to total loans........ 1.12 1.11 1.12 1.14 1.28 1.39% 1.49
Allowance for loan losses to
non-performing loans......................... 283.2 314.1 218.8 273.6 244.2 154.4% 108.2
Capital Ratios:
Average equity to average assets
(average equity divided by
average total assets)........................ 10.50% 9.98% 10.22% 10.86% 12.50% 10.81% 8.06%
Equity to assets at period end.................. 10.35 10.17 10.87 9.96 11.95 13.14 8.23
- ---------------
(1) Includes a one-time special assessment of $1.1 million to recapitalize the
Savings Association Insurance Fund.
(2) Prior to July 10, 1997, there was no common stock outstanding and dividends
were not paid until the beginning of the December 31, 1998 fiscal year.
17
The Conversion
The Boards of Trustees of PHS Bancorp, M.H.C. and Peoples Home Savings
and the Board of Directors of PHS Bancorp have approved a plan authorizing the
conversion. The plan is subject to approval of the stockholders of PHS Bancorp,
the ratification of the depositors of Peoples Home Savings and the satisfaction
of certain other conditions. The Plan has been approved by the Pennsylvania
Department of Banking. Regulatory approval does not constitute a recommendation
or endorsement of the plan.
General
On August 16, 2001, the Boards of Trustees of PHS Bancorp, M.H.C. and
Peoples Home Savings and the Board of Directors of PHS Bancorp adopted a plan of
conversion. In accordance with the plan, PHS Bancorp, M.H.C. will convert from a
mutual holding company to a full stock corporation. Public stockholders
currently own 40% of PHS Bancorp and the remaining 60% is owned by PHS Bancorp,
M.H.C. Upon consummation of the conversion, PHS Bancorp, M.H.C. will cease to
exist. The stock held by the public stockholders of PHS Bancorp will be
converted into our shares. Peoples Home Savings will be our wholly owned
subsidiary. For a detailed description of the reorganization structure, see "--
Federal and State Tax Consequences of the Conversion."
Reasons for the Conversion
PHS Bancorp, M.H.C., as a state-chartered mutual holding company, does
not have stockholders and has no authority to issue capital stock. As a result
of the conversion, we will be structured in the form used by holding companies,
commercial banks, many business entities and a number of savings institutions.
An important distinction between the mutual holding company form of organization
and the fully public form is that, a mutual holding company must always own over
50% of the common stock of its savings institution subsidiary. Only a minority
of the subsidiary's outstanding stock can be sold to investors.
Through the conversion, we will become the stock holding company of
Peoples Home Savings, which will complete the transition to full public
ownership. The stock holding company form of organization will provide us with
the ability to diversify our business and Peoples Home Savings' business
activities through acquisition of or mergers with both stock savings
institutions and commercial banks, as well as other companies. There has been
significant consolidation in the financial services area in Pennsylvania where
Peoples Home Savings conducts its operations, and although there are no current
arrangements, understandings or agreements regarding any such opportunities, we
will be in a position, subject to regulatory limitations and our financial
condition, to take advantage of any such opportunities that may arise because of
the increase in its capital after the conversion.
The conversion will be important to our future growth and performance
and to that of Peoples Home Savings, by providing a larger capital base to
support our operations and the operations of Peoples Home Savings, enhancing our
future access to capital markets, the ability to diversify into other financial
services related activities, and the ability to provide services to the public.
The conversion will result in increased funds being available for lending
purposes, greater resources for expansion of services, and better opportunities
for attracting and retaining qualified personnel. Although PHS Bancorp currently
has the ability to raise additional capital through the sale of additional
shares of its common stock, that ability is limited by the mutual holding
company structure which, among other things, requires that the mutual holding
company always hold a majority of the outstanding shares of PHS Bancorp's common
stock.
18
The conversion will also result in an increase in the number of
outstanding shares of common stock following the conversion, as compared to the
number of outstanding shares held by the public stockholders of PHS Bancorp
prior to the conversion, which will increase the likelihood of the development
of an active and liquid trading market for the common stock. See "Market for the
Common Stock."
Our Board of Directors, the Boards of Trustees of PHS Bancorp, M.H.C.
and Peoples Home Savings, and the Board of Directors of PHS Bancorp, believe
that the conversion is in the best interests of such companies and their
respective stockholders and depositors.
Share Exchange Ratio
The regulations and policies governing mutual holding companies provide
that in a conversion of a mutual holding company to stock form, the minority
stockholders of PHS Bancorp will be entitled to exchange their shares of common
stock for common stock of the converted holding company, provided that Peoples
Home Savings and PHS Bancorp, M.H.C. demonstrate to the satisfaction of the
Pennsylvania Department of Banking that the basis for the exchange is fair and
reasonable. The Board of Trustees of Peoples Home Savings and the Board of
Directors of PHS Bancorp have determined that each publicly-held share of PHS
Bancorp common stock will, on the effective date of the conversion, be
automatically converted into and become the right to receive a number of
exchange shares determined pursuant to the exchange ratio. The public
stockholders of PHS Bancorp common stock will own approximately the same
percentage of our common stock after the conversion as they hold in PHS Bancorp,
subject to additional purchases, or the receipt of cash in lieu of fractional
shares. At June 30, 2001, there were 2,529,600 shares of PHS Bancorp common
stock outstanding, 1,011,600, or 40%, of which were publicly held. As required
by Federal Deposit Insurance Corporation policy, the aggregate ownership
interest of PHS Bancorp's public stockholders has been adjusted downward from
40% to 37.06% to reflect approximately $2.76 million of assets held by PHS
Bancorp, M.H.C. Such assets of PHS Bancorp, M.H.C. are held solely for the
benefit of depositors of Peoples Home Savings.
Based on the independent valuation, the 62.94%, as adjusted, of the
outstanding shares of PHS Bancorp common stock held by PHS Bancorp, M.H.C. as of
the date of the independent valuation and the 37.06%, as adjusted, public
ownership interest of PHS Bancorp, the following table sets forth, at the
minimum, mid-point, maximum, and adjusted maximum of the offering range:
o the total number of subscription shares and exchange shares to be issued in
the conversion;
o the total shares of common stock outstanding after the conversion;
o the exchange ratio; and
o the number of shares an owner of PHS Bancorp would receive in the exchange,
adjusted for the number of shares sold in the offering.
100 Shares of
PHS Bancorp
would be
Shares to be Exchanged Total Shares exchanged for
for PHSB Financial of Common PHSB Financial
Shares to be Sold Corporation Stock to be Exchange Corporation
in the Offering Common Stock Outstanding Ratio Common Stock
---------------------- ----------------------- ----------- -------- --------------
Number Percent Number Percent
------ ------- ------ -------
Minimum.............. 2,018,750 62.94% 1,188,669 37.06% 3,207,419 1.17504 117
Midpoint............. 2,375,000 62.94 1,398,435 37.06 3,773,435 1.38240 138
Maximum.............. 2,731,250 62.94 1,608,200 37.06 4,339,450 1.58976 158
Adjusted maximum..... 3,140,937 62.94 1,849,430 37.06 4,990,367 1.82822 182
19
Options to purchase shares of PHS Bancorp common stock will be
converted into options to purchase our shares of common stock. Additionally,
restricted stock awards of PHS Bancorp will also be converted into our shares of
common stock. At June 30, 2001, there were outstanding options to purchase
124,200 shares of PHS Bancorp common stock, of which 99,200 shares were vested,
and there were 16,155 unvested restricted stock awards of PHS Bancorp common
stock outstanding. The number of shares of common stock to be received upon
exercise of these options and restricted stock plan shares will be determined
pursuant to the exchange ratio. The aggregate exercise price, duration, and
vesting schedule of these options and restricted stock plan shares will not be
affected.
Effect of the Conversion on Minority Stockholders
Effect on Stockholders' Equity Per Share of the Shares Exchanged. The
conversion will increase the stockholders' equity per share of the public
stockholders of PHS Bancorp common stock. At June 30, 2001, the stockholders'
equity per share of PHS Bancorp common stock was $11.57, including shares held
by PHS Bancorp, M.H.C. As adjusted at June 30, 2001 for the exchange ratio,
stockholders' equity per share would be $9.85, $8.37, $7.28 and $6.33 at the
minimum, midpoint, maximum, and adjusted maximum, of the offering range. Based
on the pro forma information set forth for June 30, 2001, in "Pro Forma Data,"
pro forma stockholders' equity per share following the conversion will be
$15.23, $13.76, $12.68 and $11.73 at the minimum, midpoint, maximum and adjusted
maximum, respectively, of the offering range.
Effect on Earnings per Share of the Shares Exchanged. The conversion
will also affect the public stockholders of PHS Bancorp common stock pro forma
earnings per share. For the six months ended June 30, 2001, basic and diluted
earnings per share of PHS Bancorp common stock was $.43 including shares held by
PHS Bancorp, M.H.C. As adjusted for the six months ended June 30, 2001 for the
exchange ratio, earnings per share would be $.37, $.31, $.27, and $.24, at the
minimum, midpoint, maximum, and adjusted maximum, of the offering range. Based
on the pro forma information set forth for the six months ended June 30, 2001 in
"Pro Forma Data", earnings per share of common stock following the conversion
will range from $.40 to $.27, for the minimum to the adjusted maximum of the
offering range.
Dissenters' Rights of Appraisal. To the extent required by Pennsylvania
corporate law, the public stockholders of PHS Bancorp will have dissenters'
rights of appraisal in connection with the exchange of publicly held shares of
PHS Bancorp common stock for our shares of common stock. See "The Offering -
Dissenters' Rights of Appraisal."
Effects of Conversion on Depositors
General. Each depositor in Peoples Home Savings has both a deposit
account in Peoples Home Savings and a pro rata ownership interest in the net
worth of PHS Bancorp, M.H.C. based upon the balance in his account. This
interest may only be realized in the highly unlikely event of a liquidation of
PHS Bancorp, M.H.C. However, this ownership interest is tied to the depositor's
account and has no tangible market value separate from the deposit account. Any
depositor who opens a deposit account with Peoples Home Savings obtains a pro
rata ownership interest in PHS Bancorp, M.H.C. without any additional payment
beyond the amount of the deposit. A depositor who reduces or closes his account
receives a portion or all of the balance in the account, but nothing for his
ownership interest in the net worth of PHS Bancorp, M.H.C., which is lost to the
extent that the balance in the account is reduced or closed.
20
Consequently, depositors in a stock subsidiary of a mutual holding
company normally have no way of realizing the value of their ownership interest,
which has realizable value only in the unlikely event that PHS Bancorp, M.H.C.
is liquidated. If this occurs, the depositors of record at that time, as owners,
would share pro rata in any residual surplus and reserves of PHS Bancorp, M.H.C.
after other claims, including claims of depositors to the amounts of their
deposits, are paid.
When a mutual holding company converts to stock form, permanent
nonwithdrawable capital stock is created in the stock holding company to
represent the ownership of the subsidiary institution's net worth. The common
stock is separate and apart from deposit accounts and cannot be and is not
insured by the Federal Deposit Insurance Corporation or any other governmental
agency. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable and, therefore, the stock may be sold or
traded, if a purchaser is available, with no effect on any account the seller
may hold in Peoples Home Savings.
Continuity. While the conversion is being accomplished, the normal
business of Peoples Home Savings of accepting deposits and making loans will
continue without interruption. Peoples Home Savings will continue to be
regulated by the Pennsylvania Department of Banking and the Federal Deposit
Insurance Corporation. After the conversion, Peoples Home Savings will continue
to provide services for depositors and borrowers under current policies by its
present management and staff. The Trustees serving Peoples Home Savings and
directors serving PHS Bancorp at the time of the conversion will serve on our
Board of Directors after the conversion.
Effect on Deposit Accounts. Each depositor in Peoples Home Savings at
the time of the conversion will automatically continue as a depositor after the
conversion, and each of the deposit accounts will remain the same with respect
to deposit balance, interest rate and other terms. Each such account will be
insured by the Federal Deposit Insurance Corporation to the same extent as
before the conversion. Depositors will continue to hold their existing
certificates, passbooks and other evidences of their accounts.
Effect on Loans. No loan outstanding from Peoples Home Savings will be
affected by the conversion, and the amount, interest rate, maturity and security
for each loan will remain as they were contractually fixed prior to the
conversion.
Voting Rights. Presently, depositors of Peoples Home Savings who have a
liquidation interest in PHS Bancorp, M.H.C. have no voting rights in the mutual
holding company. Upon completion of the conversion, we will be the sole
stockholder of Peoples Home Savings and have all voting rights in Peoples Home
Savings. Our stockholders will have exclusive voting rights in us.
Tax Effects. PHS Bancorp has received opinions of counsel with regard
to federal and state income taxation to the effect that the adoption and
implementation of the plan of conversion will not be taxable for federal or
state income tax purposes to PHS Bancorp, PHS Bancorp, M.H.C., the minority
stockholders, the interim savings bank to be formed to facilitate the
conversion, eligible and supplemental account holders and current depositors of
Peoples Home Savings. See "--Federal and State Tax Consequences of the
Conversion."
Effect on Liquidation Rights. If Peoples Home Savings were to liquidate
prior to the conversion, all claims of creditors of Peoples Home Savings,
including those of depositors to the extent of their deposit balances, would be
paid first. Thereafter, if there were any assets of Peoples Home Savings
remaining, these assets would be distributed to PHS Bancorp, M.H.C., to the
extent of its stock ownership interest in PHS Bancorp. If PHS Bancorp, M.H.C.
were to liquidate, all claims of creditors would be paid first. Thereafter, if
there were any assets of PHS Bancorp, M.H.C. remaining, depositors of Peoples
Home Savings would have liquidation rights in PHS Bancorp, M.H.C. and
21
would receive the remaining assets, pro rata, based upon the deposit balances in
their deposit account in Peoples Home Savings immediately prior to liquidation.
In the unlikely event that Peoples Home Savings were to liquidate after the
conversion, all claims of creditors, including those of depositors, would also
be paid first, followed by distribution of the "liquidation account" to
depositors as of June 30, 2000 and September 30, 2001, respectively, with any
assets remaining thereafter distributed to us as the holder of Peoples Home
Savings' capital stock. Pursuant to the rules and regulations of the
Pennsylvania Department of Banking, a post-conversion merger, consolidation,
sale of bulk assets or similar combination or transaction with another insured
savings institution would not be considered a liquidation and, in such a
transaction, the liquidation account would be assumed by the surviving
institution.
Federal and State Tax Consequences of the Conversion
Completion of the conversion is expressly conditioned upon the prior
receipt of a ruling letter from the Internal Revenue Service or an opinion of
counsel or tax advisor with respect to the federal and state income taxation
effects of the conversion, indicating that the conversion will not be a taxable
transaction to PHS Bancorp, M.H.C., PHS Bancorp, Peoples Home Savings, Eligible
Account Holders, Supplemental Eligible Account Holders, and, or, Current
Depositors of Peoples Home Savings having a liquidation interest in PHS Bancorp,
M.H.C. Unlike private letter rulings, opinions of counsel or tax advisors are
not binding on the IRS or any state taxing authority, and such authorities could
disagree with such opinions. In the event of such disagreement, there can be no
assurance that PHSB Financial or Peoples Home Savings would prevail in a
judicial proceeding.
PHSB Financial, PHS Bancorp, M.H.C., PHS Bancorp and Peoples Home
Savings have received an opinion of counsel, Malizia Spidi & Fisch, PC,
regarding the federal income tax consequences of the conversion which includes,
but is not limited to, the following opinions:
1. The merger of PHS Bancorp, M.H.C. with and into Peoples Home Savings
qualifies as a tax-free reorganization within the meaning of Code Section
368(a)(1)(A). The merger of PHS Bancorp with and into Peoples Home Savings
qualifies as a tax-free reorganization within the meaning of Code Section
368(a)(1)(A). PHS Bancorp, M.H.C., PHS Bancorp and Peoples Home Savings will
each be a party to a reorganization as defined in Code Section 368(b).
2. PHS Bancorp, M.H.C. will not recognize any gain or loss on the
transfer of its assets to Peoples Home Savings in exchange for the transfer of
the interest in a liquidation account established in Peoples Home Savings for
the benefit of depositors of Peoples Home Savings who previously held a
liquidation interest in PHS Bancorp, M.H.C. and who remain depositors of Peoples
Home Savings.
3. No gain or loss will be recognized by Peoples Home Savings upon the
receipt of the assets of PHS Bancorp, M.H.C. in exchange for the transfer of
the liquidation interests in PHS Bancorp, M.H.C. of depositors of Peoples Home
Savings for an interest in the liquidation account in Peoples Home Savings.
4. Depositors of Peoples Home Savings with a liquidation interest in
PHS Bancorp, M.H.C. will recognize no gain or loss upon the receipt of an
interest in the liquidation account in Peoples Homes Savings in exchange for
their liquidation interests in PHS Bancorp, M.H.C.
5. Current stockholders of PHS Bancorp will not recognize any gain or
loss upon their exchange of PHS Bancorp common stock solely for shares of PHSB
Financial common stock.
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6. Each stockholder's aggregate basis in shares of PHSB Financial
common stock received in the exchange will be the same as the aggregate basis of
PHS Bancorp common stock surrendered in the exchange before giving effect to any
payment of cash in lieu of fractional shares.
7. No gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders or Current Depositors of Peoples Home
Savings upon distribution to them of subscription rights to purchase shares of
PHSB Financial common stock, provided that the amount to be paid for PHSB
Financial common stock is equal to the fair market value of PHSB Financial
common stock.
8. No gain or loss will be recognized by PHSB Financial on the receipt
of money in exchange for PHSB Financial common stock sold in the offering.
In the view of RP Financial, which view is not binding on the Internal
Revenue Service, the subscription rights to purchase shares of PHSB Financial
common stock do not have any value, based on the fact that these rights are
acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the common stock
at a price equal to its estimated fair market value, which will be the same
price as the subscription price for the unsubscribed shares of common stock. If
the subscription rights are determined to have an economic value, Eligible
Account Holders, Supplemental Eligible Account Holders and Current Depositors of
Peoples Home Savings may be determined to have taxable income based upon that
value.
PHSB Financial, PHS Bancorp, M.H.C., PHS Bancorp and Peoples Home
Savings have also received an opinion from Malizia Spidi & Fisch, PC, concerning
certain Pennsylvania tax matters. Based on certain facts and assumptions
contained in such opinion, such opinion provides, among other things that:
o Peoples Home Savings will not recognize any net income or net loss for
purposes of the Pennsylvania Mutual Thrift Institutions Tax solely as a
result of the conversion, provided Peoples Home Savings does not
recognize any net income or net loss under generally accepted
accounting principles, applied as required by the law imposing such
tax; and
o Eligible Account Holders, Supplemental Eligible Account Holders and
Current Depositors of Peoples Home Savings and PHSB Financial will not
recognize any gain or loss for Pennsylvania income tax purposes solely
as a result of the conversion, provided they do not recognize any gain
or loss for federal income tax purposes solely as a result of such
transactions.
Stockholders of PHS Bancorp, Eligible Account Holders, Supplemental
Eligible Account Holders and Current Depositors of Peoples Home Savings are
encouraged to consult with their own tax advisers as to the tax consequences of
the conversion.
The federal and state tax opinion has been filed with the Securities
and Exchange Commission as an exhibit to PHSB Financial's registration
statement.
Conditions to Completion of the Conversion
In order to consummate the conversion, the plan of conversion must be
approved by the Pennsylvania Department of Banking. In addition, consummation of
the conversion is subject to approval by the Pennsylvania Department of Banking
and the Federal Deposit Insurance Corporation of the applications with respect
to the merger of PHS Bancorp, M.H.C. and PHS Bancorp into Peoples Home Savings,
with Peoples Home Savings being the surviving entity. Applications for these
23
approvals, including an application with the Federal Reserve to form us as the
bank holding company for Peoples Home Savings, have been filed. We have received
all requisite regulatory approvals.
We cannot complete our conversion and our offering unless:
(1) It is ratified by a majority vote of Current Depositors of
Peoples Homes Savings Bank;
(2) It is approved by a two-thirds vote of stockholders of PHS
Bancorp;
(3) It is approved by a majority vote of stockholders of PHS
Bancorp, not including those shares held by PHS Bancorp,
M.H.C., and
(4) At least, the minimum number of shares are sold in the
offering.
PHS Bancorp, M.H.C. intends to vote its 60% ownership interest in favor
of the conversion. In addition, as of June 30, 2001, directors and executive
officers of PHS Bancorp and their associates beneficially own 164,515 shares of
PHS Bancorp, or 16.3% of the outstanding shares other than those held by PHS
Bancorp, M.H.C. Such shares do not include 98,863 shares of unexercised vested
stock options. They intend to vote those shares in favor of the conversion.
Certain directors who serve as the trustee committee for Peoples Home Savings'
restricted stock plan may direct the voting of 16,155 shares held in the plan
trust. Additionally, certain directors who serve as Peoples Home Savings'
employee stock ownership plan trustees may vote approximately 58,260 unallocated
shares of the employee stock ownership plan and may vote, in the trustees'
fiduciary capacity, allocated shares of the employee stock ownership plan for
which no timely voting directions have been received from plan participants.
Amendment or Termination of the Plan of Conversion
If deemed necessary or desirable by the Boards of Trustees and the
Board of Directors, this plan may be substantively amended, as a result of
comments from regulatory authorities or otherwise, at any time prior to the
solicitation of proxies from current depositors and stockholders to vote on the
plan and at any time thereafter with the concurrence of the Pennsylvania
Department of Banking. Any amendment to this plan made after approval by the
stockholders and ratification of current depositors with the concurrence of the
Pennsylvania Department of Banking shall not necessitate further approval by the
stockholders or current depositors unless otherwise required by the Pennsylvania
Department of Banking. This plan shall terminate if the sale of all shares of
conversion stock is not completed within 24 months from the date of the special
meeting of current depositors. Prior to the earlier of the special meeting of
current depositors and the stockholders' meeting, this plan may be terminated by
the Boards of Trustees and the Board of Directors without approval of the
Pennsylvania Department of Banking; after the special meeting or the
stockholders' meeting, the Boards of Directors may terminate this plan only with
the approval of the Pennsylvania Department of Banking.
The Offering
General
We are offering between a minimum of 2,018,750 shares and an
anticipated maximum of 2,731,250 shares of common stock in the offering. The
number of shares that will be offered may increase up to 3,140,937 shares if our
estimated pro forma market value has increased at the conclusion of the
offering. The offering will expire at 12:00 p.m., eastern time, on December 12,
2001 unless extended. The shares of common stock that will be sold in the
offering will constitute no more than 62.94% of the shares that will be
outstanding after completion of the offering. The
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minimum purchase is 25 shares of common stock or a minimum investment of $250.
Our common stock is being offered at a fixed price of $10 per share in the
offering.
Subscription funds may be held by Peoples Home Savings for up to 45
days after the last day of the subscription offering in order to consummate the
conversion and offering and thus, unless waived by us, all orders will be
irrevocable until January 26, 2002. In addition, the conversion may not be
completed until we receive approvals from the Pennsylvania Department of
Banking, the Federal Deposit Insurance Corporation and the Federal Reserve
Board. Regulatory approvals do not constitute a recommendation of the conversion
or offering. Consummation of the conversion and offering will be delayed, and
resolicitation will be required, if the Pennsylvania Department of Banking does
not issue a letter of approval within 45 days after the last day of the
subscription offering, or in the event the Pennsylvania Department of Banking
requires a material change to the offering prior to the issuance of its
approval. If the conversion and offering are not completed by January 26, 2002,
subscribers will have the right to maintain, modify, or rescind their
subscriptions and to have their subscription funds returned with interest at
Peoples Home Savings' passbook rate and all withdrawal authorizations will be
canceled.
We may cancel the offering at any time, and orders for common stock
which have been submitted are subject to cancellation under such circumstances.
Conduct of the Offering
Subject to the limitations of the plan, shares of common stock are
being offered in descending order of priority in the subscription offering to:
o Eligible Account Holders;
o The Employee Stock Ownership Plan;
o Supplemental Eligible Account Holders; and
o Current Depositors.
To the extent that shares remain available and subject to market
conditions at or near the completion of the subscription offering, we will
conduct one or more of a community and syndicated community offering.
Subscription Offering
Subscription Rights. Non-transferable subscription rights to subscribe
for the purchase of common stock have been granted under the plan of conversion
in the following order of priority:
First: Eligible Account Holders. Each depositor with aggregate deposit
account balances of $50 or more as of June 30, 2000 is an Eligible Account
Holder. Additionally, each Eligible Account Holder, or group of persons through
a single account, shall generally be given the opportunity to purchase such
number of shares of our common stock, that shall not exceed 10,000 shares, or
$100,000 of common stock offered in the subscription offering, subject to the
overall limitations on purchases of common stock.
If there are insufficient shares available to satisfy all subscriptions
of Eligible Account Holders, shares will be allocated to Eligible Account
Holders so as to permit each subscribing Eligible Account Holder to purchase a
number of shares sufficient to make his total allocation equal to the lesser of
100 shares or the number of shares ordered. Thereafter, unallocated shares will
be allocated to remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the same proportion that each such subscriber's
qualifying deposit bears to the total amount of qualifying deposits of all
25
subscribing Eligible Account Holders, in each case on June 30, 2000, whose
subscriptions remain unfilled. See "-- Limitations on Purchases of Common
Stock."
To ensure proper allocation of stock, each Eligible Account Holder must
list on his order form all accounts in which he had an ownership interest as of
the Eligibility Record Date. Subscription rights received by officers and
directors, based on their increased deposits in Peoples Home Savings in the one
year preceding the eligibility record date will be subordinated to the
subscription rights of other eligible account holders.
Second: The Employee Stock Ownership Plan. The employee stock ownership
plan may be given the opportunity to purchase in the aggregate up to 8% of the
common stock issued in the subscription offering. It is expected that the
employee stock ownership plan will purchase up to 8% of the common stock issued
in the offering. If an oversubscription occurs in the offering by Eligible
Account Holders, the employee stock ownership plan may, in whole or in part,
fill its order through open market purchases or through the use of authorized
but unissued shares subsequent to the closing of the offering.
Third: Supplemental Eligible Account Holders. Each depositor, who is
not an Eligible Account Holder, with aggregate deposit account balances of $50
or more as of September 30, 2001 is a Supplemental Eligible Account Holder. If
any stock is available after satisfaction of subscriptions by Eligible Account
Holders and the employee stock ownership plan and other tax-qualified employee
stock benefit plans, if any, each Supplemental Eligible Account Holder, or group
of persons through a single account shall generally have the opportunity to
purchase such number of shares of our common stock that shall not exceed 10,000
shares, or $100,000 of common stock offered in the subscription offering,
subject to the overall limitations on purchases of common stock.
If Supplemental Eligible Account Holders subscribe for a number of
shares which, when added to the shares subscribed for by Eligible Account
Holders and the employee stock ownership plan and other tax-qualified employee
stock benefit plans, if any, is in excess of the total number of shares offered
in the offering, the shares of common stock will be allocated among subscribing
Supplemental Eligible Account Holders first so as to permit each subscribing
Supplemental Eligible Account Holder to purchase a number of shares sufficient
to make his total allocation equal to the lesser of 100 shares or the number of
shares ordered. Thereafter, unallocated shares will be allocated to each
subscribing Supplemental Eligible Account Holder whose subscription remains
unfilled in the same proportion that such subscriber's qualifying deposits bear
to the total amount of qualifying deposits of all subscribing Supplemental
Eligible Account Holders, in each case on September 30, 2001, whose
subscriptions remain unfilled. See "-- Limitations on Purchases of Common
Stock."
To ensure proper allocation of stock, each Supplemental Eligible
Account Holder must list on his order form all accounts in which he had an
ownership interest as of the Supplemental Eligibility Record Date.
Fourth: Current Depositors. If any stock is available after
satisfaction of all subscriptions by the Eligible Account Holders, the
tax-qualified employee stock benefit plans, and Supplemental Eligible Account
Holders, each Current Depositor, with aggregate account balances of $50 or more
as of October 31, 2001, or group of persons through a single account, who is not
an Eligible or Supplemental Eligible Account Holder shall generally have the
opportunity to purchase such number of shares of our common stock that, when
combined with shares received by existing stockholders in exchange for our
common stock, shall not exceed 10,000 shares, or $100,000 of common stock
offered in the subscription offering, subject to the overall limitations on
purchases of common stock. If Current Depositors subscribe for a number of
shares which, when added to the shares subscribed for
26
by Eligible Account Holders, the tax-qualified employee stock benefit plans and
Supplemental Eligible Account Holder, is in excess of the total number of shares
offered in the offering, the subscriptions of Current Depositors will be
allocated among subscribing Current Depositors so as to permit each subscribing
Current Depositor, to the extent possible, to purchase a number of shares
sufficient to make his total allocation of common stock equal to the lesser of
100 shares or the number of shares subscribed for by Current Depositors. Any
remaining available shares shall be allocated among subscribing Current
Depositors on a pro rata basis in the same proportion as each such Current
Depositors' subscription bears to the total subscriptions of all such
subscribing Current Depositors whose orders are unfilled, provided that no
fractional shares shall be issued. See "-- Limitations on Purchases of Common
Stock."
The above is a summary of the purchase limitation contained in the
plan of conversion. The plan should be examined for the actual limitations.
See "Where You Can Find Additional Information."
State Securities Laws. In our sole discretion, we may make reasonable
efforts to comply with the securities laws of any state in the United States in
which certain eligible deposit holders reside, and will only offer and sell the
common stock in states in which the offers and sales comply with state
securities laws. However, no person will be offered or allowed to purchase any
common stock under the plan if he resides in a foreign country or in a state of
the United States with respect to which any of the following apply:
o a small number of persons otherwise eligible to purchase shares under
the plan reside in such state;
o the offer or sale of shares of common stock to such persons would
require us, Peoples Home Savings, PHS Bancorp or PHS Bancorp, M.H.C. or
our employees to register, under the securities laws of such state or
foreign country, as a broker or dealer or to register or otherwise
qualify its securities for sale in such state or foreign country and
such registration or qualification would be impracticable for reasons
of cost or otherwise; or
o such registration, qualification, or filing would be impracticable or
unduly burdensome for reasons of costs or otherwise.
Restrictions on Transfer of Subscription Rights and Shares. The plan
prohibits any person with subscription rights, including Eligible Account
Holders, Supplemental Eligible Account Holders, and Current Depositors, from
transferring or entering into any agreement or understanding to transfer the
legal or beneficial ownership of the subscription rights issued under the plan
or the shares of common stock to be issued when they are exercised. Such rights
may be exercised only by the person to whom they are granted and only for his or
her account. Each person subscribing for shares will be required to certify that
such person is purchasing shares solely for his or her own account and that such
person has no agreement or understanding regarding the sale or transfer of such
shares. The regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of common stock before the completion of the
offering.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
which we determine involve the transfer of such rights.
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Expiration Date. The subscription offering will expire at 12:00 p.m.,
eastern time, on December 12, 2001, unless it is extended, up to an additional
45 days with the approval of the Pennsylvania Department of Banking, if
necessary, but without additional notice to subscribers. Subscription rights
will become void if not exercised prior to the expiration date.
Community Offering
If less than the total number of shares of common stock to be
subscribed for in the offering are sold in the subscription offering, shares
remaining unsubscribed may be made available for purchase in the community
offering to certain members of the general public. The maximum amount of common
stock that any person may purchase in the community offering is 10,000 shares,
or $100,000. In the community offering, if any, shares will be available for
purchase by the general public with preference given first to people who reside
in Beaver and Lawrence Counties, Pennsylvania and second to current stockholders
of PHS Bancorp. We will attempt to issue common stock in such a manner as to
promote a wide distribution of common stock.
If purchasers in the community offering, whose orders would otherwise
be accepted, subscribe for more shares than are available for purchase, the
shares available to them will be allocated among persons submitting orders in
the community offering first so that each person receives 100 shares and the
remainder in such equitable manner as we determine.
The community offering, if any, may commence simultaneously with,
during or subsequent to the completion of the subscription offering. The
community offering, if any, must be completed within 45 days after the
completion of the subscription offering unless otherwise extended by the
Pennsylvania Department of Banking.
We, in our absolute discretion, reserve the right to reject any or all
orders in whole or in part which are received in the community offering, at the
time of receipt or as soon as practicable following the completion of the
community offering.
Syndicated Community Offering
All of the stock is expected to be sold in subscription and community
offering. However, depending upon market conditions at or near the completion of
the subscription offering, we may offer for sale all shares of common stock not
subscribed for or purchased in a subscription or community offering to selected
persons. Trident Securities may form a group of broker-dealers to offer shares
on a best-efforts basis to selected persons in such a manner as to achieve a
wide distribution of the common stock. This type of offering is called a
"syndicated community offering."
Orders received in connection with the syndicated community offering,
if any, will receive a lower priority than orders received in the subscription
offering and community offering. Common stock sold in the syndicated community
offering will be sold at the same price as all other shares in the subscription
offering and community offering. We have the right to reject orders, in whole or
in part, in our sole discretion in the syndicated community offering. No person
will be permitted to purchase more than 10,000 shares, or $100,000, of common
stock in the syndicated community offering.
If a group of broker-dealers is formed to assist in the syndicated
community offering, a purchaser may pay for his shares with funds held or
deposited with a selected broker-dealer. If an order form is executed and
forwarded to the selected broker-dealer or if the selected broker-dealer is
authorized to execute the order form on behalf of a purchaser, the selected
broker-dealer is required to
28
forward the order form and funds to Peoples Home Savings for deposit in a
segregated account on or before noon of the business day following receipt of
the order form or execution of the order form by the selected broker-dealer.
Alternatively, selected broker-dealers may solicit indications of interest from
their customers to place orders for shares. Such selected broker-dealers shall
subsequently contact their customers who indicated an interest and seek their
confirmation as to their intent to purchase. Those indicating an intent to
purchase shall execute order forms and forward them to their selected
broker-dealer or authorize the selected broker-dealer to execute such forms. The
selected broker-dealer will acknowledge receipt of the order to its customer in
writing on the following business day and will debit such customer's account on
the third business day after the customer has confirmed his intent to purchase
(the "debit date") and on or before noon of the next business day following the
debit date will send order forms and funds to Peoples Home Savings for deposit
in a segregated account. Although purchasers' funds are not required to be in
their accounts with selected broker- dealers until the debit date in the event
that such alternative procedure is employed once a confirmation of an intent to
purchase has been received by the selected broker-dealer, the purchaser has no
right to rescind his order.
The date by which orders must be received in the syndicated community
offering will be set by us at the time of commencement of the syndicated
community offering; provided however, if the syndicated community offering is
extended beyond January 26, 2002, each purchaser will have the opportunity to
maintain, modify, or rescind his order.
If an order in the syndicated community offering is accepted, promptly
after the completion of the conversion, a certificate for the appropriate amount
of shares will be forwarded to Trident Securities as nominee for the beneficial
owner. If an order is not accepted or the conversion is not consummated, Peoples
Home Savings will promptly refund with interest at our passbook rate, the funds
received to Trident Securities which will then return the funds to subscribers'
accounts. If the aggregate pro forma market value of PHSB Financial as converted
is less than $32.1 million or more than $49.9 million, each purchaser will have
the right to maintain, modify, or rescind his or her order.
Limitations on Purchases of Common Stock
The following is a summary of the limitations contained in the plan of
conversion which have been imposed on purchases of shares of common stock:
1. The maximum number of shares of common stock which may be
purchased in the subscription offering by any person or group
of persons through a single account, in the first priority,
third priority and fourth priority shall not exceed 10,000
shares, or $100,000.
2. The maximum number of shares of common stock which may be
subscribed for or purchased by any person or groups of persons
through a single or multiple accounts together with any
associate or group of persons acting in concert with them
shall not exceed 20,000 shares, or $200,000, except for our
employee plans, which in the aggregate may subscribe for up to
8% of the common stock issued in the offering.
3. The maximum number of shares of common stock which may be
purchased in all categories in the offering by officers,
directors, and associates in the aggregate shall not exceed
30% of the total number of shares of common stock issued in
the offering.
4. A minimum of 25 shares of common stock must be purchased by
each person purchasing shares in the offering to the extent
those shares are available.
29
5. If the number of shares of common stock otherwise allocable to
any person or that person's associates would be in excess of
the maximum number of shares permitted as set forth above, the
number of shares of common stock allocated to each such person
shall be reduced to the lowest limitation applicable to that
person, and then the number of shares allocated to each group
consisting of a person and that person's associates shall be
reduced so that the aggregate allocation to that person and
his associates complies with the above maximums, and such
maximum number of shares shall be reallocated among that
person and his associates in proportion to the shares
subscribed by each, after first applying the maximums
applicable to each person, separately.
6. Depending on market or financial conditions, the Boards of
Directors, without further approval of the members and
stockholders, may decrease or increase the purchase
limitations in the plan, provided that the maximum purchase
limitations may not be increased to a percentage in excess of
5% of the offering. However, the maximum purchase limitation
may be increased up to 9.9% provided that orders for more than
5% of the shares being offered shall not exceed, in the
aggregate, 10% of the total offering. If the Boards of
Directors increase the maximum purchase limitations, then
we are only required to resolicit persons who subscribed for
the maximum purchase amount and may, in our sole discretion,
resolicit certain other large subscribers.
7. If the total number of shares offered increases in the
offering due to an increase in the maximum of the estimated
valuation range of up to 15%, or 3,140,937 shares, then the
additional shares will be used in the following order of
priority:
o if there is an oversubscription at the Eligible
Account Holder level, to fill unfilled subscriptions
of Eligible Account Holders;
o to fill the employee benefit plans subscription up to
8%;
o if there is an oversubscription at the Supplemental
Eligible Account Holder level, to fill unfilled
subscriptions of Supplemental Eligible Account
Holders;
o if there is an oversubscription at the current
depositor level, to fill unfilled subscriptions of
current depositors; and
o to fill unfilled subscriptions in the community
offering, with preference given to people who reside
in Beaver and Lawrence Counties, Pennsylvania and
then to current stockholders of PHS Bancorp.
8. No person shall be entitled to purchase any common stock to
the extent such purchase would be illegal under any federal
law or state law or regulation or would violate regulations or
policies of the National Association of Securities Dealers,
particularly those regarding free riding and withholding. We
or our agents may ask for an acceptable legal opinion from any
purchaser as to the legality of such purchase and may refuse
to honor any purchase order if such opinion is not timely
furnished.
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9. The Boards of Directors and Trustees have the right to reject
any order submitted by a person whose representations the
Boards of Directors and Trustees believe to be false or who
they otherwise believe, either alone or acting in concert with
others, is violating, circumventing, or intends to violate,
evade, or circumvent the terms and conditions of the plan.
10. The restrictions on purchases by any person also apply to
purchases by persons acting in concert under applicable
regulations of the Pennsylvania Department of Banking. Under
regulations of the Pennsylvania Department of Banking, the
Boards of Directors and Trustees are not deemed to be
affiliates or a group acting in concert with other directors
or trustees solely as a result of their membership on the
Boards of Directors and Trustees.
The term "acting in concert" includes:
o knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an
express agreement;
o a combination or pooling of voting or other interests in the securities
of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether
written or otherwise;
o accounts having the same address on the records of Peoples Home
Savings;
o persons filing jointly any reports with the Securities and Exchange
Commission or any banking agency.
A person or company which acts in concert with another person or
company ("other party") shall also be deemed to be acting in concert with any
person or company who is also acting in concert with that other party, except
that any tax-qualified employee stock benefit plan will not be deemed to be
acting in concert with its trustee or a person who serves in a similar capacity
solely for the purpose of determining whether stock held by the trustee and
stock held by the plan will be aggregated.
The term "associate" of a person is defined in the plan to mean:
o any corporation or organization (other than us, PHS Bancorp, M.H.C.,
PHS Bancorp, or Peoples Home Savings) or a majority-owned subsidiary of
theirs of which such person is an officer or partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of equity
securities; For example, a corporation of which a person serves as an
officer would be an associate of such person, and therefore, all shares
purchased by such corporation would be included with the number of
shares which such person individually could purchase under the above
limitations.
o any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in
a similar fiduciary capacity, excluding tax-qualified employee stock
benefit plans or tax-qualified employee stock benefit plans in which a
person has a substantial beneficial interest or serves as a trustee or
in a similar fiduciary capacity and except that, for purposes of
aggregating total shares that may be held by officers and directors,
the term "associate" does not include any tax-qualified employee stock
benefit plan; and
31
o any relative or spouse of such person or any relative of such spouse,
who has the same home as such person or who is a director or officer of
PHS Bancorp, M.H.C., PHS Bancorp or Peoples Home Savings, or any of its
parents or subsidiaries.
Each person purchasing shares of the common stock in the offering will
be deemed to confirm that such purchase does not conflict with the maximum
purchase limitation. If this purchase limitation is violated by any person or
any associate or group of persons affiliated or otherwise acting in concert with
such persons, we will have the right to purchase from such person at the $10.00
purchase price per share all shares acquired by such person in excess of such
purchase limitation or, if such excess shares have been sold by such person, to
receive the difference between the $10.00 purchase price per share paid for such
excess shares and the price at which such excess shares were sold by such
person.
We have the right, in our sole discretion, to determine whether
prospective purchasers are associates or acting in concert. All such
determinations are in our sole discretion and may be based on whatever evidence
we believe to be relevant.
Common stock purchased pursuant to the offering will be freely
transferable, except for shares purchased by our directors and officers. In
addition, under guidelines of the National Association of Securities Dealers,
members of the National Association of Securities Dealers and their associates
may be subject to certain restrictions on the transfer of securities purchased
in the offering and to certain reporting requirements after the purchase of such
securities. For certain restrictions on the common stock purchased by directors
and officers, see " -- Restrictions on Transferability of Common Stock by
Directors and Officers."
Ordering and Receiving Common Stock
Use of Order Forms. Rights to subscribe may only be exercised by
completion of an order form. Any person receiving an order form who desires to
subscribe for shares of common stock must do so prior to the applicable
expiration date by delivering by mail or in person to Peoples Home Savings a
properly executed and completed order form, together with full payment of the
purchase price for all shares for which subscription is made. All subscription
rights under the plan will expire on the expiration date, whether or not we have
been able to locate each person entitled to such subscription rights. We shall
have the right, in our sole discretion, to permit institutional investors to
submit contractually irrevocable orders in the syndicated community offering at
any time before completing the syndicated community offering. Once tendered,
subscription orders cannot be revoked without our consent unless the conversion
is not completed within 45 days of the expiration date.
The subscription rights for the person to whom such rights have been
granted will lapse as though such person failed to return the completed order
form within the time period specified, if a stock order form:
o is not delivered and is returned to us by the U.S. Postal Service or we
are unable to locate the addressee;
o is not received or is received by us after the applicable expiration
date;
o is not completed correctly or executed;
o is not accompanied by the full required payment for the shares
subscribed for including instances where a deposit account or
certificate balance from which withdrawal is authorized is insufficient
to fund the amount of such required payment, but excluding
subscriptions by the
32
employee stock-benefit plans or, in the case of an institutional
investor in the syndicated community offering, by delivering
irrevocable orders together with a legally binding commitment to pay
the full purchase price prior to 48 hours before the conversion is
completed; or
o is not mailed pursuant to a "no mail" order placed in effect by the
account holder.
We will not accept orders received on photocopies or facsimile order
forms, or whose payment is to be made by wire transfer or payment from private
third parties. Our interpretation of the terms and conditions of the plan and of
the acceptability of the order forms will be final, subject to the authority of
the Pennsylvania Department of Banking.
To ensure that each purchaser receives a prospectus at least 48 hours
before the applicable expiration date, in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to such date or hand delivered any later than two days prior to
such date. Execution of the order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Order forms will only be distributed with a
prospectus.
Payment for Shares. For subscriptions to be valid, payment for all
subscribed shares will be required to accompany all properly completed order
forms, on or prior to the expiration date specified on the order form unless we
extend the date. Employee plans subscribing for shares during the subscription
offering may pay for such shares after the offering. Payment for shares of
common stock may be made
o in cash, if delivered in person,
o by check or money order, or
o for shares of common stock subscribed for in the subscription offering,
by authorization of withdrawal from a deposit account maintained with
Peoples Home Savings.
Appropriate means by which such withdrawals may be authorized are
provided in the order form. Once such a withdrawal has been authorized, none of
the designated withdrawal amount may be used by a subscriber for any purpose
other than to purchase the common stock for which a subscription has been made
until the offering has been completed or terminated. In the case of payments
authorized to be made through withdrawal from deposit accounts, all sums
authorized for withdrawal will continue to earn interest at the contract rate
until the offering has been completed or terminated. Interest penalties for
early withdrawal applicable to certificate accounts will not apply to
withdrawals authorized for the purchase of shares, however, if a partial
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate, at the discretion of
Peoples Home Savings, shall either be canceled at the time of withdrawal,
without penalty, or the remaining balance will earn interest at the passbook
rate subsequent to the withdrawal. In the case of payments made in cash or by
check or money order, such funds will be placed in a segregated account and
interest will be paid by Peoples Home Savings at the passbook rate from the date
payment is received until the offering is completed or terminated. An executed
order form, once we receive it, may not be modified, amended, or rescinded
without our consent, unless the offering is not completed within 45 days after
the conclusion of the subscription offering, in which event subscribers may be
given the opportunity to increase, decrease, or rescind their subscription for a
specified period of time. If the offering is not completed for any reason, all
funds submitted pursuant to the offerings will be promptly refunded with
interest as described above.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of common stock in the offerings, provided that such IRAs are
not maintained on deposit at Peoples Home Savings. Persons with IRAs maintained
at Peoples Home Savings must have their accounts transferred
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to an unaffiliated institution or broker to purchase shares of common stock in
the offerings. There is no early withdrawal or IRS interest penalties for such
transfers. Instructions on how to transfer self- directed IRAs maintained at
Peoples Home Savings can be obtained from the stock information center.
Depositors interested in using funds in a Peoples Home Savings IRA to purchase
common stock should contact the stock information center as soon as possible,
since additional forms may be necessary.
Federal regulations prohibit Peoples Home Savings from lending funds or
extending credit to any person to purchase the common stock in the conversion.
Stock Information Center. The stock information center is located at
110 McMillen Avenue, Chippewa Township, Beaver Falls, Pennsylvania 15010. The
phone number is (724) 846-6020.
Exchange of Stock Certificates of Minority Stockholders
Until the effective date of the conversion, publicly-held shares of PHS
Bancorp common stock will continue to be available for trading on the Nasdaq
National Market. The conversion of PHS Bancorp common stock into our common
stock will occur automatically on the effective date of the conversion. After
the effective date of the conversion, former holders of PHS Bancorp common stock
will have no further equity interest in PHS Bancorp, other than as stockholders
of us, and there will be no further transfers of PHS Bancorp common stock on the
stock transfer records of PHS Bancorp.
As soon as practicable after the effective date of the conversion, our
transfer agent, Registrar & Transfer Company, in the capacity of exchange agent,
will send a transmittal form to each public stockholder of PHS Bancorp who holds
a stock certificate. The transmittal forms are expected to be mailed within five
business days after the effective date of the conversion and will contain
instructions with respect to the surrender of certificates representing PHS
Bancorp common stock to be exchanged into our common stock. It is expected that
certificates for shares of our common stock will be distributed within five
business days after the receipt of properly executed transmittal forms and other
required documents. If you own your shares of PHS Bancorp in street name, the
exchange will occur automatically and you need take no action.
PHS Bancorp's stockholders should not forward their stock certificates
to us, or the stock information center. Further, PHS Bancorp stockholders should
not forward their stock certificates to the exchange agent until they have
received transmittal forms.
Until the certificates representing PHS Bancorp common stock are
surrendered for exchange after consummation of the conversion, upon compliance
with the terms of the transmittal form, holders of such certificates will not
receive our shares and will not be paid dividends on our shares of common stock
into which these shares have been converted. When certificates are surrendered,
any unpaid dividends will be paid without interest. For all other purposes,
however, each certificate which represents shares of PHS Bancorp common stock
outstanding at the effective date of the conversion will be deemed to evidence
ownership of our shares of common stock into which those shares have been
converted by virtue of the conversion.
All shares of our common stock issued upon exchange of shares of PHS
Bancorp common stock shall be deemed to have been issued in full satisfaction of
all rights pertaining to these shares of PHS Bancorp common stock, subject,
however, to our obligation to pay any dividends or make any other distributions
with a record date prior to the effective date which may have been declared or
made by PHS Bancorp on shares of PHS Bancorp common stock on or prior to the
effective date and which remain unpaid at the effective date.
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No fractional shares of our common stock will be issued to any public
stockholder of PHS Bancorp upon consummation of the conversion. For each
fractional share that would otherwise be issued, we will pay by check an amount
equal to the product obtained by multiplying the fractional share interest to
which the holder would otherwise be entitled by $10.00. Payment for fractional
shares will be made as soon as practicable after the receipt by the exchange
agent of surrendered PHS Bancorp stock certificates. Stockholders' whose shares
are held in street name will automatically receive cash in lieu of fractional
shares.
If a certificate for PHS Bancorp common stock has been lost, stolen or
destroyed, the exchange agent will issue the consideration properly payable upon
receipt of appropriate evidence as to the loss, theft or destruction,
appropriate evidence as to the ownership of the certificate by the claimant, and
appropriate and customary indemnification.
Delivery of Stock Certificates of Conversion Stock. Certificates
representing common stock issued in the offering, to all persons other than
minority stockholders of PHS Bancorp, will be mailed to the persons entitled
thereto at the address noted on the order form, as soon as practicable following
consummation of the offering. Any certificates returned as undeliverable will be
held until claimed by persons legally entitled thereto or otherwise disposed of
in accordance with applicable law. Until certificates for the common stock are
available and delivered to subscribers, subscribers may not be able to sell the
shares of stock for which they subscribed.
Dissenters' Rights of Appraisal
The following discussion is not a complete statement of the law
pertaining to dissenters' rights under Pennsylvania Business Corporation Law,
and is qualified in its entirety by the full text of section 1930 and Subchapter
D of Chapter 15 of the Pennsylvania Business Corporation Law, which is referred
to as Subchapter D. Subchapter D is reprinted in its entirety as Appendix A to
the proxy statement for PHS Bancorp shareholders. Any PHS Bancorp shareholder
who desires to exercise his or her dissenters' rights should review carefully
Subchapter D and is urged to consult a legal advisor before electing or
attempting to exercise their rights. All references in Subchapter D to a
"shareholder" and in this summary to a "PHS Bancorp shareholder" or a "holder of
PHS Bancorp stock" are to the record holder of shares as to which dissenters'
rights are asserted.
Subject to the exceptions stated below, holders of PHS Bancorp stock
who comply with the applicable procedures summarized below will be entitled to
dissenters' rights under Subchapter D. Voting against, abstaining from voting or
failing to vote on approval and adoption of the proposed conversion will not
constitute a demand for appraisal within the meaning of Subchapter D.
PHS Bancorp shareholders electing to exercise dissenters' rights under
Subchapter D must not vote for approval of the proposed conversion. A vote by a
shareholder against the proposed conversion is not required to exercise
dissenters' rights. However, if a shareholder returns a signed proxy but does
not specify a vote against the proposed conversion or a direction to abstain,
the proxy, if not revoked prior to the special meeting of shareholders, will be
voted for approval of the proposed conversion, which will have the effect of
waiving that shareholder's dissenters' rights.
What Are Dissenters' Rights of Appraisal?
PHS Bancorp shareholders who follow the procedures of Subchapter D will
be entitled to receive from PHS Bancorp the fair value of their shares,
immediately before the completion of the conversion. Fair value takes into
account all relevant factors but excludes any appreciation or depreciation in
anticipation of the conversion. PHS Bancorp shareholders who elect to exercise
their dissenters' rights must comply with all of the procedures to preserve
those rights.
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Shares Eligible for Dissenters' Rights. Generally, if you chose to
assert your dissenters' rights, you must dissent as to all of the shares you
own. Pennsylvania Business Corporation Law distinguishes between record holders
and beneficial owners. You may assert dissenters' rights as to fewer than all
the shares registered in your name only if you are not the beneficial owner of
the shares with respect to which you do not exercise dissenters' rights.
Record Holder Who is Not the Beneficial Owner. A record holder may
assert dissenters' rights on behalf of the beneficial owner. If you are a
registered owner and you wish to exercise dissenters' rights on behalf of the
beneficial owner, you must disclose the name and address of the person or
persons on whose behalf you dissent. In that event, your rights shall be
determined as if the dissenting shares and the other shares were registered in
the names of the beneficial holders.
Beneficial Owner Who is Not the Record Holder. A beneficial owner of
PHS Bancorp common stock who is not also the record holder, may assert
dissenters' rights. If you are a beneficial owner who is not the record holder
and you wish to assert your dissenters' rights you must submit a written consent
of the record holder to the Secretary of PHS Bancorp prior to the vote, but in
no event later than the PHS Bancorp special meeting. You may not dissent with
respect to some but less than all shares you own.
Dissenters' Rights of Appraisal Procedures
Notice of Intention to Dissent. If you wish to exercise your
dissenters' rights, you must follow the procedures set forth in Appendix A in
your proxy statement. You must file a written notice of intention to demand the
fair value of your shares with the Secretary of PHS Bancorp prior to the vote,
but in no event later than the PHS Bancorp special meeting. You must not make
any change in your beneficial ownership of PHS Bancorp shares from the date you
file the notice until the effective time of the conversion. You must refrain
from voting your shares for the adoption of the conversion.
Notice of Approval. If the PHS Bancorp shareholders approve the
conversion, PHS Bancorp will mail a notice to all dissenters who filed a notice
of intention to dissent prior to the vote on the conversion proposal and who
refrained from voting for the adoption of the conversion. PHS Bancorp expects to
mail the notice of approval promptly after the conversion. The notice of
approval will state where and when a demand for payment must be sent and where
the certificates for eligible shares must be deposited in order to obtain
payment. The notice of approval will also supply a form for demanding payment
which includes a request for certification of the date on which the holder, or
the person on whose behalf the holder dissents, acquired beneficial ownership of
the shares. The demand form will be accompanied by a copy of Subchapter D.
If you assert your dissenters' rights, you must ensure that PHS Bancorp
receives your demand form and your certificates on or before the demand
deadline. All mailings to PHS Bancorp are at your risk. Accordingly, PHS Bancorp
recommends that your notice of intention to dissent, demand form and stock
certificates be sent by certified mail, by overnight courier or by hand
delivery.
If you fail to file a notice of intention to dissent, fail to complete
and return the demand form, or fail to deposit stock certificates with PHS
Bancorp , each within the specified time periods, you will lose your dissenters'
rights under Subchapter D. You will retain all rights of a shareholder, or
beneficial owner, until those rights are modified by completion of the
conversion.
Payment of Fair Value by PHS Bancorp. Upon timely receipt of the
completed demand form, the Pennsylvania Business Corporation Law requires PHS
Bancorp to either: remit to dissenters who complied with the procedures, the
amount PHS Bancorp estimates to be the fair value for such dissenting shares; or
give written notice that no such remittance will be made.
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PHS Bancorp will determine whether to make such a remittance or to
defer payment for such shares until completion of the necessary appraisal
proceedings. PHS Bancorp may consider the number of shares, if any, with respect
to which shareholders dissented and any objections that may be raised with
respect to the standing of the dissenting shareholder.
The remittance or notice will be accompanied by:
o the closing balance sheet and statement of income of PHS Bancorp for
the fiscal year ended December 31, 2000 and the latest available
interim financial statements;
o a statement of PHS Bancorp's estimate of the fair value of the shares;
and
o notice of the right of the dissenter to demand payment or supplemental
payment, as the case may be, accompanied by a copy of Subchapter D.
Return of Deposited Certificates. If PHS Bancorp does not remit the
amount of its estimate of the fair value of the shares, it will return any
deposited certificates with a notation that a demand for payment in accordance
with Subchapter D has been made. If shares carrying this notation are
transferred after that, each new certificate issued may bear a similar notation,
together with the name of the original dissenting holder or owner of such
shares. A transferee of such shares will not acquire by this transfer any rights
in PHS Bancorp other than those which the original dissenter had after making
demand for payment of their fair value.
Dissenting Shareholders Estimate of Fair Value. If PHS Bancorp gives
notice of its estimate of the fair value of your shares, without remitting this
amount, or remits payment of its estimate of the fair value of your shares and
you believe that the amount remitted or stated is less than the fair value of
such shares, you may send to PHS Bancorp your own estimate of the fair value of
the shares. Such estimate shall be deemed a demand for payment of the amount of
the deficiency. If you do not file a holder's estimate within 30 days after the
mailing by PHS Bancorp of its remittance or notice, you will only be entitled to
the amount stated in the notice or remitted to you by PHS Bancorp.
Resort to Court for Relief. If demands remain unpaid after the later of
60 days after the completion of the conversion or after the timely receipt of
any holder's estimate, PHS Bancorp may file an application for relief,
requesting the court determine the fair value of the shares. We cannot assure
you that PHS Bancorp will file this application.
In the court proceeding, all dissenters, wherever residing, whose
demands have not been settled will be made parties to any such appraisal
proceeding. The court may appoint an appraiser to receive evidence and recommend
a decision on the issue of fair value. Each dissenter made a party will be
entitled to recover an amount equal to the fair value of the dissenter's shares,
plus interest, or if PHS Bancorp previously remitted any amount to the
dissenter, any amount by which the fair value of the dissenter's shares is found
to exceed the amount previously remitted, plus interest.
If PHS Bancorp fails to file an application for relief, any dissenter
who made a demand and who has not already settled his or her claim against PHS
Bancorp may file an application for relief in the name of PHS Bancorp any time
within 30 days after the later of the expiration of the 60-day period after the
conversion or the timely receipt of any holder's estimate. If a dissenter does
not file an application within the 30-day period, each dissenter entitled to
file an application shall be paid PHS Bancorp's estimate of the fair value of
the shares and no more, and may bring an action to recover any amount not
previously remitted.
Costs and Expenses of Court Proceedings. The costs and expenses of the
court proceedings, including the reasonable compensation and expenses of the
appraiser appointed by the court, will be determined by the court and assessed
against PHS Bancorp. The court may, however, apportion and
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assess any part of the costs and expenses of court proceedings as it deems
appropriate against all or some of the dissenters who are parties and whose
action in demanding supplemental payment the court finds to be in bad faith. If
PHS Bancorp fails to comply substantially with the requirements of Subchapter D,
the court may assess fees and expenses of counsel and of experts for the parties
as it deems appropriate against PHS Bancorp and in favor of any or all
dissenters. The court may assess fees and expenses of counsel and experts
against either PHS Bancorp or a dissenter, if the court finds that a party acted
in bad faith. If the court finds that the services of counsel for any dissenter
substantially benefitted other dissenters' similarly situated and should not be
assessed against PHS Bancorp, it may award counsel reasonable fees to be paid
out of the amounts awarded to the dissenters' who benefitted.
No Right to an Injunction. Under Pennsylvania corporate law, a PHS
Bancorp shareholder has no right to obtain, in the absence of fraud or
fundamental unfairness, an injunction against the conversion proposal, nor any
right to valuation and payment of the fair value of the holder's shares because
of the conversion proposal, except to the extent provided by the dissenters'
rights provisions of Subchapter D. Pennsylvania corporate law also provides
that, absent fraud or fundamental unfairness, the rights and remedies provided
by Subchapter D are exclusive.
Restriction on Sales Activities
Our directors and executive officers may participate in the
solicitation of offers to purchase common stock in jurisdictions where such
participation is not prohibited. Other employees of Peoples Home Savings may
participate in the offering in ministerial capacities. Such other employees have
been instructed not to solicit offers to purchase common stock or provide advice
regarding the purchase of common stock. Questions of prospective purchasers will
be directed to executive officers of Peoples Home Savings or registered
representatives of Trident Securities. No officer, director or employee of
Peoples Home Savings will be compensated in connection with such person's
solicitations or other participation in the offering by the payment of
commissions or other remuneration based either directly or indirectly on
transactions in the common stock.
Restrictions on Repurchase of Shares
The Securities Act of 1933 rules govern the method, time, price, and
number of shares of common stock that may be repurchased by us and affiliated
purchasers. The Federal Deposit Insurance Corporation generally does not permit
stock to be repurchased within one year of a stock conversion.
Stock Pricing and the Number of Shares to be Offered
RP Financial, which is experienced in the valuation and appraisal of
business entities, including savings institutions, has been retained to prepare
an appraisal of the estimated pro forma market value of the common stock. This
independent valuation expresses our pro forma market value in terms of an
aggregate dollar amount. RP Financial will receive fees of $20,000 for its
appraisal services, including the independent valuation and subsequent updates,
and up to $6,500 for assistance in preparation of our business plan, plus its
reasonable out-of-pocket expenses incurred in connection with the independent
valuation and business plan. We have agreed to indemnify RP Financial under
certain circumstances against liabilities and expenses arising out of or based
on any misstatement or untrue statement of a material fact contained in the
information supplied by us to RP Financial, except where RP Financial is
determined to have been negligent or failed to exercise due diligence in the
preparation of the independent valuation.
The independent valuation considered the following factors, among
others: the present and projected operating results and financial condition of
us and Peoples Home Savings; the economic and
38
demographic conditions in Peoples Home Savings' existing marketing area; certain
historical, financial and other information relating to Peoples Home Savings, a
comparative evaluation of the operating and financial statistics of Peoples Home
Savings with those of other publicly traded savings institutions located in
Peoples Home Savings' region and on a national basis; the aggregate size of the
offering of the common stock; the impact of the conversion on Peoples Home
Savings stockholders' equity and earnings potential; our proposed dividend
policy and the dividend policy of Peoples Home Savings; and the trading market
for securities of comparable institutions and general conditions in the market
for the securities. A copy of RP Financial's opinion regarding the appraisal
valuation has been filed as exhibit 99.3 to this registration statement.
RP Financial has determined that as of October 12, 2001, our estimated
aggregate pro forma market value was $37.7 million, the mid-point of the
valuation range. Pursuant to regulations, this estimate must be included within
a minimum valuation range of $32.1 million and a maximum valuation range of
$43.4 million. We have determined to offer shares of common stock in the
offering at a price of $10 per share. Based on the 62.94% ownership interest, as
adjusted, of PHS Bancorp, M.H.C., the midpoint of our offering is $23.8 million,
with a range based on a minimum offering of $20.2 million and a maximum offering
of $27.3 million. We are offering a maximum of 2,731,250 shares in the offering,
subject to adjustment. In determining the offering range, the Board of Directors
reviewed RP Financial's appraisal and in particular, considered:
o PHS Bancorp's consolidated financial condition and results of
operations for the six months ended June 30, 2001 and for the year
ended December 31, 2000;
o financial comparisons of PHS Bancorp in relation to other selected peer
thrift institutions of similar size; and
o stock market conditions generally and in particular for thrift
institutions, all of which are set forth in the appraisal.
The Board also reviewed the methodology and the assumptions used by RP
Financial in preparing its appraisal. The number of shares are subject to change
if the independent valuation changes at the conclusion of the offering.
The number of shares and price per share of common stock was determined
by the Board of Directors based on the independent valuation. The actual number
of shares to be sold in the offering may be increased or decreased before
completion of the offering, subject to approval and conditions that may be
imposed by the Pennsylvania Department of Banking, to reflect any change in our
estimated pro forma market value.
Depending on market and financial conditions at the time of the
completion of the offering, we may increase or decrease the number of shares to
be issued in the conversion and offering. No resolicitation of purchasers will
be made and purchasers will not be permitted to modify or cancel their purchase
orders unless the change in the number of shares to be issued in the offering
results in fewer than 2,018,750 shares or more than 3,140,937 shares being sold
in the offering at the purchase price of $10, in which event we may also elect
to terminate the offering. If we terminate the offering, purchasers will receive
a prompt refund of their purchase orders, together with interest earned thereon
from the date of receipt to the date of termination of the offering.
Furthermore, any account withdrawal authorizations will be terminated. If we
receive orders for less than 2,018,750 shares, at the discretion of the Board of
Directors and subject to approval of the Pennsylvania Department of Banking, we
may establish a new offering range and resolicit purchasers. If we resolicit,
purchasers will be allowed to modify or cancel their purchase orders. Any
adjustments in our pro forma market value as a result of market and financial
conditions or a resolicitation of prospective purchasers must be approved by the
Pennsylvania Department of Banking.
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The independent valuation is not intended, and must not be construed,
as a recommendation of any kind as to the advisability of purchasing the common
stock. In preparing the independent valuation, RP Financial has relied on and
assumed the accuracy and completeness of financial and statistical information
provided by PHS Bancorp and Peoples Home Savings. RP Financial did not
independently verify the financial statements and other information provided by
PHS Bancorp and Peoples Homes Savings, nor did RP Financial value independently
the assets and liabilities of PHS Bancorp. The independent valuation considers
PHS Bancorp only as a going concern and should not be considered as a indication
of the liquidation value of PHS Bancorp. Moreover, because such independent
valuation is based on estimates and projections on a number of matters, all of
which are subject to change from time to time, no assurance can be given that
persons purchasing the common stock will be able to sell such shares at a price
equal to or greater than the purchase price.
No sale of shares of common stock may be consummated unless RP
Financial confirms that, to the best of its knowledge, nothing of a material
nature has occurred that, taking into account all relevant factors, would cause
RP Financial to conclude that the independent valuation is incompatible with its
estimate of our pro forma market value at the conclusion of the offering. Any
change that would result in an aggregate value that is below $32.1 million or
above $49.9 million would be subject to Pennsylvania Department of Banking
approval and non-objection of the Federal Deposit Insurance Corporation. If
confirmation from RP Financial is not received, we may extend the offering,
reopen or commence a new offering, request a new Independent Valuation,
establish a new offering range and commence a resolicitation of all purchasers
with the approval of the Pennsylvania Department of Banking, or take such other
action as permitted by the Pennsylvania Department of Banking in order to
complete the offering.
Plan of Distribution and Marketing Arrangements
The common stock will be offered in the offering principally by the
distribution of this prospectus and through activities conducted at the stock
information center. It is expected that a registered representative employed by
Trident Securities will be working at, and supervising the operation of, the
stock information center. Trident Securities will assist Peoples Home Savings in
responding to questions regarding the conversion and the offering and processing
order forms.
We have entered into an agency agreement with Trident Securities under
which Trident Securities will provide advisory assistance and assist, on a best
efforts basis, in the solicitation of subscriptions and purchase orders for the
common stock in the offering. Trident Securities is a Division of McDonald
Investments, Inc., which is a broker-dealer registered with the Securities and
Exchange Commission and a member of the National Association of Securities
Dealers, Inc. Specifically, Trident Securities will assist in the offering in
the following manner:
o assisting in the design and implementation of a marketing strategy for
the offering;
o assisting Peoples Home Savings' management in scheduling and preparing
for meetings with potential investors and broker-dealers; and
o providing such other general advice and assistance as may be requested
to promote the successful completion of the offering.
Trident Securities will receive, as compensation, an advisory and
marketing fee of 1.6% of the aggregate amount of common stock sold in the
subscription and community and syndicated community offerings, excluding shares
sold to Peoples Home Savings' employee benefit plan, any of the directors,
officers, or employees or any of their associates. If common stock is sold
through licensed brokers under a selected dealers agreement, we will pay the
sales commission payable to the selected sales agent pursuant to the agreement,
any sponsoring dealer's fees and a managing dealer's fee to Trident
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Securities. Trident Securities will also be reimbursed for its legal fees and
out-of-pocket expenses, not to exceed $50,000. We have agreed to indemnify
Trident Securities, to the extent allowed by law, for reasonable costs and
expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act of 1933. Additionally, Trident Securities
received a non-refundable management fee of $25,000 at the time it was retained.
Restrictions on Transferability of Common Stock by Directors and Officers
Shares of the common stock purchased by our directors or officers
cannot be sold for a period of one year following completion of the conversion,
except for a disposition of shares after the death of a stockholder or a merger
approved by the Pennsylvania Department of Banking. Accordingly, shares of the
common stock issued to directors and officers will bear a legend restricting
their sale. Any shares issued to directors and officers as a stock dividend,
stock split, or otherwise with respect to restricted stock will be subject to
the same restriction.
Restrictions on Agreements or Understandings Regarding Transfer of Common Stock
to be Purchased in the Offering
Before the completion of the conversion, no depositor may transfer or
enter into an agreement or understanding to transfer any subscription rights or
the legal or beneficial ownership of the shares of common stock to be purchased
by such person in the offering. Depositors who submit an order form will be
required to certify that their purchase of common stock is solely for their own
account and there is no agreement or understanding regarding the sale or
transfer of their shares. We intend to pursue any and all legal and equitable
remedies after we become aware of any such agreement or understanding, and will
not honor orders we reasonably believe to involve such an agreement or
understanding.
PHSB Financial
We were organized in August 2001 for the purpose of acquiring all of
the outstanding shares of capital stock of Peoples Home Savings. We will serve
as a bank holding company for Peoples Home Savings after we buy all of Peoples
Home Savings' stock in the conversion. We have applied to the Federal Reserve
Board for approval to acquire control of Peoples Home Savings. We have not yet
engaged in any business and will initially have no significant liabilities. Our
cash flow will depend on earnings from the investment of the portion of net
proceeds retained in the conversion and any dividends received from Peoples Home
Savings. See "Use of Proceeds."
Management believes that the holding company structure will provide
flexibility for possible diversification of business activities through existing
or newly-formed subsidiaries, or through acquisitions of or mergers with both
savings institutions and commercial banks, as well as other financial services
related companies. Although there are no current arrangements, understandings,
or agreements regarding any such opportunities, we will be in a position after
the conversion, subject to regulatory limitations and our financial condition,
to take advantage of any such acquisition and expansion opportunities that may
arise. However, some of these activities could be deemed to entail a greater
risk than the activities permissible for state-chartered savings institutions
such as Peoples Home Savings. Our initial activities are anticipated to be
funded by the portion of the net proceeds retained by us and earnings received
from such activities.
Peoples Home Savings
On July 9, 1997, we reorganized from a Pennsylvania mutual savings bank
into a mutual holding company structure and formed PHS Bancorp, M.H.C. As part
of the reorganization, we
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became a Pennsylvania chartered stock savings bank and issued shares in a public
offering to certain of our depositors and to PHS Bancorp, M.H.C. Additionally,
on November 9, 1998, we reorganized into a stock holding company and formed PHS
Bancorp. As part of this reorganization, our public shareholders and PHS
Bancorp, M.H.C. exchanged their shares of common stock of us for PHS Bancorp
shares of common stock.
Through our eight offices and an administrative office in Beaver and
Lawrence Counties, Pennsylvania, we offer a broad range of deposits and loan
products to individual, families, and small businesses. See "Business of Peoples
Home Savings."
Use of Proceeds
The net proceeds will depend on the total number of shares of stock
sold in the offering, which will depend on the independent valuation and
marketing considerations, and the expenses incurred by us in connection with the
offering. We estimate that we will receive net proceeds from the sale of the
common stock of between $19.4 million at the minimum of the offering range and
$26.4 million at the maximum of the offering range.
We intend to use the net proceeds as follows:
Minimum Maximum
Shares Shares
------- -------
(In Thousands)
Working capital...................................... $ 9,698 $13,208
Funds loaned to the employee stock ownership plan.... 1,615 2,185
Investment in short-term securities.................. 8,083 11,023
------- -------
$19,396 $26,416
======= =======
The loan to the employee stock ownership plan will enable it to
purchase up to 8.0% of the shares of our common stock issued in the offering.
The plan will pay interest to us at the prime rate of interest either on a fixed
or adjustable rate basis. The terms of interest will not be determined until
just prior to the closing of the conversion.
Peoples Home Savings will use the working capital to:
o support asset growth through investments in:
- commercial loans;
- consumer loans;
- real estate mortgage loans;
- U.S. government and agency securities; and
- marketable securities.
o open additional branches in its market areas; and for
o general corporate purposes; and
o purchase of restricted stock plan shares.
42
Peoples Home Savings has not determined the approximate amount of net
proceeds to be used for each of the purposes mentioned above.
If the employee stock ownership plan does not purchase common stock in
the offering, it may purchase shares of common stock in the market after the
conversion. If the purchase price of the common stock is higher than $10 per
share, the amount of proceeds required for the purchase by the employee stock
ownership plan will increase and the resulting stockholders' equity will
decrease.
The net proceeds may vary because total expenses of the conversion may
be significantly more or less than those estimated. The net proceeds will also
vary if the number of shares to be issued in the conversion are adjusted to
reflect a change in the estimated pro forma market value of Peoples Home
Savings. Payments for shares made through withdrawals from existing Peoples Home
Savings deposit accounts will not result in the receipt of new funds for
investment by Peoples Home Savings but will result in a reduction of Peoples
Home Savings' deposits and interest expense as funds are transferred from
interest-bearing certificates or other deposit accounts.
Dividend Policy
PHS Bancorp has paid a cash dividend of $.10 per share per quarter for
fiscal 2001, or $.40 per share per year. After the conversion, depending upon
the number of shares we sell in the offering, as adjusted for the exchange
ratio, we expect to continue to pay a dividend rate ranging from $.06 to $.09
per share per quarter, at the adjusted maximum to the minimum of the offering
range, based upon a price of $10 per share. Dividends will be subject to
determination and declaration by our Board of Directors. In making its decision,
the Board of Directors will consider several factors, including:
o our financial condition;
o results of operations;
o tax considerations;
o industry standards; and
o economic conditions.
Our ability to pay dividends could also depend on the receipt of
dividends from Peoples Home Savings which is subject to a variety of regulatory
limitations on the payment of dividends.
In addition, earnings of Peoples Home Savings appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by Peoples Home Savings on the amount of
earnings deemed to be removed from the reserves for such distribution. See
"Taxation" and Note 11 to the Consolidated Financial Statements. Peoples Home
Savings does not contemplate any distribution out of its bad debt reserve which
would cause such tax liability.
43
Market for the Common Stock
There is an established market for PHS Bancorp common stock which is
currently listed on the Nasdaq National Market under the symbol, "PHSB." At June
30, 2001 PHS Bancorp had approximately 5 market makers, including Trident
Securities. As a newly formed company, however, we have not issued capital
stock. It is expected that our common stock will be more liquid than PHS Bancorp
common stock since there will be significantly more outstanding shares owned by
the public. We will continue to have our common stock listed on the Nasdaq
National Market under the symbol "PHSB." However, there can be no assurance that
an active and liquid trading market for the common stock will develop or, if
developed, will be maintained. The shares of PHS Bancorp common stock owned by
the public will automatically, without further action by those holders, be
converted into and become a right to receive a number of shares of our common
stock that is determined pursuant to the exchange ratio. See "The
Conversion--Share Exchange Ratio."
The development of a public market having the desirable characteristics
of depth, liquidity and orderliness depends on the existence of willing buyers
and sellers, the presence of which is not within the control of us, PHS Bancorp
or any market maker. In the event that institutional investors buy a relatively
large proportion of the offering, the number of active buyers and sellers of the
common stock at any particular time may be limited. There can be no assurance
that persons purchasing the common stock will be able to sell their shares at or
above the purchase price of $10 per share. Therefore, purchasers of the common
stock should have a long-term investment intent and should recognize that there
may be a limited trading market in the common stock. This may make it difficult
to sell the common stock after the conversion and may have an adverse effect on
the price at which the common stock can be sold.
The following table sets forth the high and low bid quotes for PHS
Bancorp common stock and the adjusted cash dividends per share declared for the
periods indicated. PHS Bancorp's stock was issued on November 9, 1998. These
quotations represent prices between dealers and, therefore, may not include
retail markups, markdowns, or commissions and may not reflect actual
transactions. As of June 30, 2001 there were 1,011,600 publicly-held shares of
PHS Bancorp common stock outstanding. In connection with the conversion, each
share of PHS Bancorp's common stock will be converted into shares of our common
stock, based upon the exchange ratio that is described in other parts of this
prospectus. Accordingly, the information in this table should be reviewed in
conjunction with the exchange ratio at various levels of the offering range.
Cash Dividends
High Low Per Share Declared
---- --- ------------------
Fiscal 2001
- -----------
First Quarter............................. $12.06 $10.31 $.10
Second Quarter............................ 13.75 11.00 .10
Third Quarter............................. 18.25 13.05 .10
Fourth Quarter (up to November 9, 2001)... 16.50 14.90 .10
Fiscal 2000
- -----------
First Quarter............................. 8.63 7.25 .09
Second Quarter............................ 8.75 7.63 .09
Third Quarter............................. 11.38 8.38 .09
Fourth Quarter............................ 11.00 10.25 .09
44
At August 16, 2001, immediately preceding the public announcement of
the conversion, and at November 5, 2001, the last sale of PHS Bancorp common
stock as reported on the Nasdaq National Market was at a price of $15.00 per
share and $15.80 per share, respectively. At June 30, 2001, PHS Bancorp had
approximately 600 stockholders of record. All publicly-held shares of PHS
Bancorp common stock, including shares held by PHS Bancorp's officers and
directors, will on the effective date of the conversion be automatically
converted into and become the right to receive a number of shares of our common
stock determined pursuant to the exchange ratio. Additionally, options held by
officers and directors of PHS Bancorp and Peoples Home Savings will be converted
into options to purchase our shares of common stock determined pursuant to the
exchange ratio, for the same aggregate exercise price. See "Management of
Peoples Home Savings -- Beneficial Ownership of PHS Bancorp Common Stock."
45
Capitalization
Set forth below is the historical capitalization of PHS Bancorp as of
June 30, 2001, and the pro forma capitalization of us after giving effect to the
offering. The table also gives affect to the assumptions set forth under "Pro
Forma Data." A change in the number of shares sold in the offering may
materially affect the pro forma capitalization.
Pro Forma Capitalization at June 30, 2001
--------------------------------------------------------------------
3,207,419 3,773,435 4,339,450 4,990,367
Minimum Midpoint Maximum Maximum shares,
shares shares shares as adjusted
outstanding, outstanding, outstanding, outstanding,
2,018,750 2,375,000 2,731,250 3,140,937
Actual, at shares sold at shares sold at shares sold at shares sold at
June 30, $10.00 $10.00 $10.00 $10.00
2001 per share per share per share per share(1)
--------- --------- --------- --------- ---------
(In thousands)
Deposits(2) ................................ $ 201,250 $ 201,250 $ 201,250 $ 201,250 $ 201,250
Borrowed funds ............................. 50,247 50,247 50,247 50,247 50,247
--------- --------- --------- --------- ---------
Total deposits and borrowed funds .......... $ 251,497 $ 251,497 $ 251,497 $ 251,497 $ 251,497
========= ========= ========= ========= =========
Stockholders' equity:
Preferred stock, no par value, 20,000,000
shares authorized (post conversion); none
to be issued ............................ $ -- $ -- $ -- $ -- $ --
Common stock, $0.10 par value, 80,000,000
shares authorized (post conversion),
assuming shares outstanding as shown(3) . 276 321 377 434 499
Additional paid-in capital(3)(4)(7) ........ 10,463 27,473 30,927 34,381 38,351
Treasury shares(3) ......................... (2,341) -- -- -- --
Retained earnings(7) ....................... 21,311 23,905 23,905 23,905 23,905
Accumulated other comprehensive income ..... 525 525 525 525 525
Less:
Unallocated common stock acquired by
ESOP(5) ............................... (843) (2,458) (2,743) (3,028) (3,356)
Unallocated common stock acquired by
stock programs(6) ...................... (122) (929) (1,072) (1,214) (1,378)
--------- --------- --------- --------- ---------
Total equity/stockholders' equity(7) ....... $ 29,269 $ 48,837 $ 51,919 $ 55,003 $ 58,546
========= ========= ========= ========= =========
- ----------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the independent valuation and a
commensurate increase in the offering range of up to 15% to reflect
changes in market and financial conditions.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
stock in the offering. Such withdrawals would reduce pro forma deposits
by the amount of such withdrawals.
(3) PHS Bancorp has 5,000,000 authorized shares of preferred stock, no par
value, and 10,000,000 authorized shares of common stock, par value $.10
per share. PHS Bancorp common stock and additional paid-in capital have
been reclassified to reflect the number of shares of PHSB Financial
common stock to be outstanding. Treasury shares will be cancelled.
(4) No effect has been given to the issuance of additional shares of stock
pursuant to any stock option plans that may be adopted by us and
presented for approval by the stockholders after the offering. An
amount equal to 10% of the shares of stock sold in the offering would
be reserved for issuance upon the exercise of options to be granted
under the stock option plans within one year following the conversion.
See "Risk Factors -- The implementation of certain stock-based benefit
plans may increase our future compensation expense and may reduce our
earnings" and "Management of Peoples Home Savings -- Stock Benefits --
Benefits To Be Considered Following Completion Of The Conversion
--Stock Option Plan."
(5) Assumes that 8.0% of the shares sold in the offering will be purchased
by the employee stock ownership plan in addition to the shares already
owned by the employee stock ownership plan, and that the funds used to
acquire these shares will be borrowed from us. For an estimate of the
impact of the loan on net income, see "Pro Forma Data." Peoples Home
Savings intends to make scheduled discretionary contributions to the
employee stock ownership plan sufficient to enable the employee stock
ownership plan to service and repay its debt over a ten year period.
The amount of shares to be acquired by the employee stock ownership
plan is reflected as a reduction of stockholders' equity. See
"Management of Peoples Home Savings -
(footnotes continued on next page)
46
Executive Compensation - Employee Stock Ownership Plan." If the
employee stock ownership plan is unable to purchase stock in the
conversion due to an oversubscription in the offering by Eligible
Account Holders, and the purchase price in the open market is greater
than the original $10 price per share, there will be a corresponding
reduction in stockholders' equity.
(6) Assumes that an amount equal to 4% of the shares of stock sold in the
offering is purchased by stock programs within one year following the
conversion. Also, assumes stock to be acquired by existing restricted
stock plan after completion of the conversion. The stock purchased by
the stock programs and the existing restricted stock plan is reflected
as a reduction of stockholders' equity. See footnotes (2) and (3) to
the table under "Pro Forma Data." See "Risk Factors -- The
implementation of certain stock-based benefit plans may increase our
future compensation expense and may reduce our earnings" and
"Management of Peoples Home Savings -- Benefits To Be Considered
Following The Completion Of The Conversion."
(7) Pro forma additional paid-in capital reflects consolidation of
approximately $2.76 million of capital from PHS Bancorp, M.H.C. The
earnings of Peoples Home Savings will be substantially restricted after
the conversion, see "Regulation -- Regulation of PHSB Financial --
Restrictions on Dividends."
47
Pro Forma Data
The actual net proceeds from the sale of the stock cannot be determined
until the offering is completed. However, net proceeds are currently estimated
to be between $19.4 million and $26.4 million (or $30.5 million if the
independent valuation is increased by 15%) based on the following assumptions:
o Trident Securities will receive an advisory and marketing fee equal to
1.6% of the aggregate purchase price of the shares of stock sold in the
offerings to the public, excluding any shares purchased by any employee
benefit plan of Peoples Home Savings, and any director, officer or
employee of PHS Bancorp, M.H.C., PHS Bancorp, and Peoples Home Savings
or members of their immediate families; and
o other expenses of the offering are estimated to be $500,000 (which
include a non-refundable management fee of $25,000 paid to Trident
Securities).
We have prepared the following tables, which set forth our historical
consolidated net income and stockholders' equity prior to the conversion and our
pro forma consolidated net income and stockholders' equity following the
conversion. In preparing these tables and in calculating pro forma data, we have
made the following assumptions:
o Pro forma earnings have been calculated assuming the stock had been
sold at the beginning of the period and the net proceeds had been
invested at an average yield of 3.72% for the six months ended June 30,
2001 which approximates the yield on the one-year U.S. Treasury bill
on June 30, 2001, and 5.34% for the year ended December 31, 2000, which
approximates the yield on a one-year U.S. Treasury bill on December 31,
2000. The yield on a one-year U.S. Treasury bill, rather than an
arithmetic average of the average yield on interest-earning assets and
average rate paid on deposits, has been used to estimate income on net
proceeds because it is believed that the one-year U.S. Treasury bill
rate is a more accurate estimate of the rate that would be obtained on
an investment of net proceeds from the offering.
o The pro forma after-tax yield on the net proceeds is assumed to be
2.79% for the six months ended June 30, 2001 and 4.00% for the year
ended December 31, 2000, based on an effective tax rate of 25%,
respectively.
o We did not include any withdrawals from deposit accounts to purchase
shares in the offering.
o Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of
shares of stock, as adjusted in the pro forma net income per share to
give effect to the purchase of shares by the employee stock ownership
plan.
o Pro forma stockholders' equity amounts have been calculated as if the
stock had been sold on June 30, 2001 and December 31, 2000,
respectively, and, accordingly, no effect has been given to the assumed
earnings effect of the transactions.
The following pro forma data relies on the assumptions we outlined
above, and this data does not represent the fair market value of the common
stock, the current value of assets or liabilities, or the amount of money that
would be distributed to stockholders if we were liquidated. The pro forma data
does not predict how much we will earn in the future.
48
The following tables summarize historical data of PHS Bancorp and pro
forma data of us at or for the six months ended June 30, 2001 and the year ended
December 31, 2000, based solely on the assumptions set forth above and in the
tables and should not be used as a basis for projections of market value of the
stock following the conversion. No effect has been given in the tables to the
possible issuance of additional stock reserved for future issuance pursuant to a
stock option plan that may be adopted by the Board of Directors within one year
following the conversion, nor does book value give any effect to the liquidation
account to be established for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders or the bad debt reserve in liquidation.
See "The Conversion -- Effects of Conversion on Depositors", "-- Effect on
Liquidation Rights", and "Management of Peoples Home Savings -- Benefits To Be
Considered Following Completion Of The Conversion."
49
At or For the Six Months Ended June 30, 2001
------------------------------------------------------------
2,018,750 2,375,000 2,731,250 3,140,937
Shares Shares Shares Shares
Minimum Midpoint Maximum Maximum, as
of of of adjusted of
Independent Independent Independent Independent
Valuation Valuation Valuation Valuation
(Dollars in thousands, except per share amounts)
Gross proceeds ................................... $ 20,187 $ 23,750 $ 27,312 $ 31,409
Less expenses .................................... 791 844 896 957
----------- ----------- -- --------- -----------
Estimated net proceeds ........................ 19,396 22,906 26,416 30,452
Less: ESOP funded by PHSB Financial ............. (1,615) (1,900) (2,185) (2,513)
Less: Stock program adjustment .................. (807) (950) (1,092) (1,256)
Add: MHC Capital addition(1)...................... 2,594 2,594 2,594 2,594
----------- ----------- -- --------- -----------
Estimated investable net proceeds ............. $ 19,568 $ 22,650 $ 25,733 $ 29,277
=========== =========== =========== ===========
Net Income:
Historical .................................... $ 1,064 $ 1,064 $ 1,064 $ 1,064
Pro forma income on net proceeds .............. 273 316 359 408
Pro forma ESOP adjustments(2) ................. (61) (71) (82) (94)
Pro forma stock program adjustment(3) ......... (61) (71) (82) (94)
----------- ----------- -- --------- -----------
Pro forma net income(2)(4)(5) ................. $ 1,215 $ 1,238 $ 1,259 $ 1,284
=========== =========== =========== ===========
Per share net income
Historical .................................... $ .35 $ .30 $ .26 $ .22
Pro forma income on net proceeds .............. .09 .08 .08 .09
Pro forma ESOP adjustments(2) ................. (.02) (.02) (.02) (.02)
Pro forma stock program adjustment(3) ......... (.02) (.02) (.02) (.02)
----------- ----------- -- --------- -----------
Pro forma net income per share(2)(4)(5) ....... $ .40 $ .34 $ .30 $ .27
=========== =========== =========== ===========
Shares used in calculation of income per share(2) 3,053,994 3,592,935 4,131,875 4,751,656
----------- ----------- -- --------- -----------
Stockholders' equity:
Historical .................................... $ 29,269 $ 29,269 $ 29,269 $ 29,269
Estimated net proceeds ........................ 19,396 22,906 26,416 30,452
MHC Capital Addition .......................... 2,594 2,594 2,594 2,594
Less: Common stock acquired by the ESOP(2) .... (1,615) (1,900) (2,185) (2,513)
Less: Common stock acquired by stock program(3) (807) (950) (1,092) (1,256)
----------- ----------- -- --------- -----------
Pro forma stockholders' equity(2)(4)(5) ....... $ 48,837 $ 51,919 $ 55,003 $ 58,546
=========== =========== =========== ===========
Stockholders' equity per share:
Historical .................................... $ 9.13 $ 7.76 $ 6.74 $ 5.87
Estimated net proceeds ........................ 6.04 6.06 6.09 6.09
MHC Capital Addition .......................... .81 .69 .60 .52
Less: Common Stock acquired by the ESOP(2) .... (.50) (.50) (.50) (.50)
Less: Common Stock acquired by stock program(3) (.25) (.25) (.25) (.25)
----------- ----------- -- --------- -----------
Pro forma stockholders' equity per share(5) ... $ 15.23 $ 13.76 $ 12.68 $ 11.73
=========== =========== =========== ===========
Offering price as a percentage of pro forma
stockholders' equity per share ................. 65.66% 72.67% 78,86% 85.25%
=========== =========== =========== ===========
Offering price to pro forma
net income per share ........................... 12.50x 14.71x 16.67x 18.52x
=========== =========== =========== ===========
Shares used in calculation of proforma
stockholders' equity per share (5) ............. 3,207,419 3,773,435 4,339,450 4,990,367
----------- ----------- -- --------- -----------
- -----------
(1) Reflects the consolidation of approximately $2.76 million of capital
from PHS Bancorp, M.H.C.
(footnotes continued on next page)
50
(2) Assumes that 8% of the shares of stock sold in the offering will be
purchased by the employee stock ownership plan in addition to the
shares already held by the plan, and that the plan will borrow funds
from us. The stock acquired by the employee stock ownership plan is
reflected as a reduction of stockholders' equity. Peoples Home Savings
intends to make annual contributions to this plan in an amount at least
equal to the principal and interest requirement of the loan. This table
assumes a 10 year amortization period. See "Management of Peoples Home
Savings -- Executive Compensation -- Employee Stock Ownership Plan."
The pro forma net income assumes: (i) that Peoples Home Savings'
contribution to the employee stock ownership plan for the principal
portion of the debt service requirement for the six months ended June
30, 2001 were made at the end of the period; (ii) that 8,075, 9,500,
10,925 and 12,564 shares at the minimum, midpoint, maximum, and 15%
above the maximum of the range, respectively, were committed to be
released during the six months ended June 30, 2001 at an average fair
value of $10 per share and were accounted for as a charge to expense in
accordance with Statement of Position ("SOP") No. 93-6; and (iii) only
the employee stock ownership plan shares committed to be released were
considered outstanding for purposes of the net income per share
calculations, while all employee stock ownership plan shares were
considered outstanding for purposes of the stockholders' equity per
share calculations. See also "Risk Factors -- The implementation of
certain stock-based benefit plans may increase our future compensation
expense and may reduce our earnings" for a discussion of possible added
costs for the employee stock ownership plan.
(3) Gives effect to the stock program that we may adopt following the
conversion and presented for approval at a meeting of stockholders to
be held within one year after completion of the conversion. If the
stock program is approved by the stockholders, the stock program would
be expected to acquire an amount of stock equal to 4% of the shares of
stock sold in the offering, or 80,750, 95,000, 109,250, and 125,637
shares of stock respectively at the minimum, midpoint, maximum and 15%
above the maximum of the range through open market purchases. We will
contribute funds used by the stock program to purchase the shares. In
calculating the pro forma effect of the stock program, it is assumed
that the required stockholder approval has been received, that the
shares were acquired by the stock program at the beginning of the six
months ended June 30, 2001 through open market purchases, at $10 per
share, and that 10% of the amount contributed was amortized to expense
during the six months ended June 30, 2001. The issuance of authorized
but unissued shares of stock to the stock plan instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 2.5% and pro forma net income per share would be $.39,
$.34, $.30 and $.26 at the minimum, midpoint, maximum and 15% above the
maximum of the range, respectively, and pro forma stockholders' equity
per share would be $15.10, $13.67, $12.61, and $11.69 at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively.
There can be no assurance that stockholder approval of the stock
program will be obtained, or the actual purchase price of the shares
will be equal to $10.00 per share. See "Management of Peoples Home
Savings -- Benefits To Be Completed Following Completion Of The
Conversion - Restricted Stock Plan."
(4) Our retained earnings will continue to be substantially restricted
after the conversion. See "Dividend Policy," "The Conversion -- Effects
of Conversion on Depositors -- Effects on Liquidation Rights" and
"Regulation - Regulation of PHSB Financial -- Restrictions on
Dividends."
(5) No effect has been given to the issuance of additional shares of stock
pursuant to the stock option plan that may be adopted by us following
the conversion which, in turn, would be presented for approval at a
meeting of stockholders to be held within one year after the completion
of the conversion. If the stock option plan is presented and approved
by stockholders, an amount equal to 10% of the stock sold in the
offering, or 201,875, 237,500, 273,125, and 314,094 shares at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the stock option plan. The issuance of
authorized but unissued shares of stock to the stock plan instead of
open market purchases would dilute the voting interests of existing
stockholders by approximately 5.9%. Assuming stockholder approval of
the stock option plan and the exercise of all options at the end of the
period at an exercise price of $10 per share, the pro forma net income
per share would be $.38, $.33, $.29, and $.26, respectively at the
minimum, midpoint, maximum and 15% above the maximum of the range for
the six months ended June 30, 2001; pro forma stockholders' equity per
share would be $14.92, $13.54, $12.52, and $11.63, respectively at the
minimum, midpoint, maximum and 15% above the maximum of the range at
June 30, 2001. See "Management of Peoples Home Savings -- Benefits To
Be Considered Following Completion Of The Conversion -- Stock Option
Plan."
51
At or For the Year Ended December 31, 2000
--------------------------------------------------------------
2,018,750 2,375,000 2,731,250 3,140,937
Shares Shares Shares Shares
Minimum Midpoint Maximum Maximum, as
of of of adjusted of
Independent Independent Independent Independent
Valuation Valuation Valuation Valuation
(Dollars in thousands, except per share amounts)
Gross proceeds ................................... $ 20,187 $ 23,750 $ 27,312 $ 31,409
Less expenses .................................... 791 844 896 957
----------- ----------- ----------- -----------
Estimated net proceeds ........................ 19,396 22,906 26,416 30,452
Less ESOP funded by PHSB Financial ............... (1,615) (1,900) (2,185) (2,513)
Less stock program adjustment .................... (807) (950) (1,092) (1,256)
Add: MHC Capital Addition(1) ..................... 2,594 2,594 2,594 2,594
----------- ----------- ----------- -----------
Estimated investable net proceeds ............. $ 19,568 $ 22,650 $ 25,733 $ 29,277
=========== =========== =========== ===========
Net Income:
Historical .................................... $ 2,172 $ 2,172 $ 2,172 $ 2,172
Pro forma income on net proceeds .............. 784 907 1,031 1,173
Pro forma ESOP adjustments(2) ................. (121) (142) (164) (188)
Pro forma stock program adjustment(3) ......... (121) (142) (164) (188)
----------- ----------- ----------- -----------
Pro forma net income(2)(4)(5) ................. $ 2,714 $ 2,795 $ 2,875 $ 2,969
=========== =========== =========== ===========
Per share net income
Historical .................................... $ .71 $ .60 $ .52 $ .46
Pro forma income on net proceeds .............. .26 .26 .25 .24
Pro forma ESOP adjustments(2) ................. (.04) (.04) (.04) (.04)
Pro forma stock program adjustment(3) ......... (.04) (.04) (.04) (.04)
----------- ----------- ----------- -----------
Pro forma net income per share(2)(4)(5) ....... $ .89 $ .78 $ .69 $ .62
=========== =========== =========== ===========
Shares used in calculation of income per share(2) 3,062,069 3,602,435 4,142,800 4,764,220
----------- ----------- ----------- -----------
Stockholders' equity:
Historical .................................... $ 28,850 $ 28,850 $ 28,850 $ 28,850
Estimated net proceeds ........................ 19,396 22,906 26,416 30,452
MHC Capital Addition .......................... 2,594 2,594 2,594 2,594
Less: Common stock acquired by the ESOP(2) .... (1,615) (1,900) (2,185) (2,513)
Less: Common stock acquired by stock program(3) (807) (950) (1,092) (1,256)
----------- ----------- ----------- -----------
Pro forma stockholders' equity(2)(4)(5) ....... $ 48,418 $ 51,500 $ 54,584 $ 58,127
=========== =========== =========== ===========
Stockholders' equity per share:
Historical .................................... $ 8.99 $ 7.65 $ 6.65 $ 5.78
Estimated net proceeds ........................ 6.05 6.06 6.08 6.10
MHC Capital Addition .......................... .81 .69 .60 .52
Less: Common Stock acquired ESOP(2) ........... (.50) (.50) (.50) (.50)
Less: Common Stock acquired by stock program(3) (.25) (.25) (.25) (.25)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share(5) ... $ 15.10 $ 13.65 $ 12.58 $ 11.65
=========== =========== =========== ===========
Offering price as a percentage of pro forma
stockholders' equity per share ................. 66.23% 73.26% 79.49% 85.84%
=========== =========== =========== ===========
Offering price to pro forma
net income per share ........................... 11.24x 12.82x 14.49x 16.13x
=========== =========== =========== ===========
Shares used in calculation of proforma
stockholders' equity per share(5) .............. 3,207,419 3,773,435 4,339,450 4,990,367
----------- ----------- ----------- -----------
- ---------------
(1) Reflects the consolidation of approximately $2.76 million of capital of
PHS Bancorp, M.H.C.
(footnotes continued on next page)
52
(2) Assumes that 8% of the shares of stock sold in the offering will be
purchased by the employee stock ownership plan in addition to the
shares already held by the plan, and that the plan will borrow funds
from us. The stock acquired by the employee stock ownership plan is
reflected as a reduction of stockholders' equity. Peoples Home Savings
intends to make annual contributions to this plan in an amount at least
equal to the principal and interest requirement of the loan. This table
assumes a 10 year amortization period. See "Management of Peoples Home
Savings -- Executive Compensation -- Employee Stock Ownership Plan."
The pro forma net income assumes: (i) that Peoples Home Savings'
contribution to the employee stock ownership plan for the principal
portion of the debt service requirement for the year ended December 31,
2000 was made at the end of the period; (ii) that 16,150, 19,000,
21,850, and 25,127 shares at the minimum, midpoint, maximum, and 15%
above the maximum of the range, respectively, were committed to be
released during the year ended December 31, 2000 at an average fair
value of $10 per share and were accounted for as a charge to expense in
accordance with SOP No. 93-6; and (iii) only the employee stock
ownership plan shares committed to be released were considered
outstanding for purposes of the net income per share calculations,
while all employee stock ownership plan shares were considered
outstanding for purposes of the stockholders' equity per share
calculations. See also "Risk Factors -- The implementation of certain
stock-based benefit plans may increase our future compensation expense
and may reduce our earnings" for a discussion of possible added costs
for the employee stock ownership plan.
(3) Gives effect to the stock program that we may adopt following the
conversion and presented for approval at a meeting of stockholders to
be held within one year after completion of the conversion. If the
stock program is approved by the stockholders, the stock program would
be expected to acquire an amount of stock equal to 4% of the shares of
stock sold in the offering, or 80,750, 95,000, 109,250, and 125,637
shares of stock respectively at the minimum, midpoint, maximum and 15%
above the maximum of the range through open market purchases. We will
contribute funds used by the stock program to purchase the shares. In
calculating the pro forma effect of the stock program, it is assumed
that the required stockholder approval has been received, that the
shares were acquired by the stock program at the beginning of the year
ended December 31, 2000 through open market purchases, at $10 per
share, and that 20% of the amount contributed was amortized to expense
during the year ended December 31, 2000. The issuance of authorized but
unissued shares of stock to the stock plan instead of open market
purchases would dilute the voting interests of existing stockholders by
approximately 2.5% and pro forma net income per share would be $.87,
$.76, $.68, and $.61 at the minimum, midpoint, maximum and 15% above
the maximum of the range, respectively, and pro forma stockholders'
equity per share would be $14.97, $13.56, $12.52, and $11.61 at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that stockholder approval of
the stock program will be obtained, or the actual purchase price of the
shares will be equal to $10.00 per share. See "Management of Peoples
Home Savings -- Benefits To Be Completed Following Completion Of The
Conversion -- Restricted Stock Plan."
(4) Our retained earnings will continue to be substantially restricted
after the conversion. See "Dividend Policy," "The Conversion -- Effects
of Conversion on Depositors -- Effects on Liquidation Rights" and
"Regulation -- Regulation of PHSB Financial -- Restrictions on
Dividends."
(5) No effect has been given to the issuance of additional shares of stock
pursuant to the stock option plan that may be adopted by us following
the conversion which, in turn, would be presented for approval at a
meeting of stockholders to be held within one year after the completion
of the conversion. If the stock option plan is presented and approved
by stockholders, an amount equal to 10% of the stock sold in the
offering, or 201,875, 237,500, 273,125, and 314,094 shares at the
minimum, midpoint, maximum and 15% above the maximum of the range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the stock option plan. The issuance of
authorized but unissued shares of stock to the stock plan instead of
open market purchases would dilute the voting interests of existing
stockholders by approximately 5.9%. Assuming stockholder approval of
the stock option plan and the exercise of all options at the end of the
period at an exercise price of $10 per share, the pro forma net income
per share would be $.85, $.75, $.67 and $.60, respectively at the
minimum, midpoint, maximum and 15% above the maximum of the range for
the year ended December 31, 2000; pro forma stockholders' equity per
share would be $14.79, $13.43, $12.43 and $11.55, respectively at the
minimum, midpoint, maximum and 15% above the maximum of the range at
December 31, 2000. See "Management of Peoples Home Savings -- Benefits
To Be Considered Following Completion Of The Conversion -- Stock Option
Plan."
53
Historical and Pro Forma Capital Compliance
The following table presents Peoples Home Savings' historical and pro
forma capital position relative to its capital requirements as of June 30, 2001.
Pro forma capital levels assume receipt by Peoples Home Savings of the proceeds
from the offering. Pro forma capital levels are then reduced by employee stock
ownership plan purchases of stock and the stock programs to be adopted. For a
discussion of the assumptions underlying the pro forma capital calculations
presented below, see "Use of Proceeds," "Capitalization" and "Pro Forma Data."
The definitions of the terms used in the table are those provided in the capital
regulations issued by the Federal Deposit Insurance Corporation. For a
discussion of the capital standards applicable to Peoples Home Savings, see
"Regulation - Regulation of Peoples Home Savings - Regulatory Capital
Requirements."
Pro Forma at June 30, 2001(1)
------------------- -----------------------------------------------------------------------------------------
Actual, at $20,187,500 $23,750,000 $27,312,500 $31,409,370
June 30, 2001 Offering Offering Offering Offering(1)
------------------- -------------------- --------------------- -------------------- -------------------
Percentage Percentage Percentage Percentage Percentage
Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2) Amount of Assets(2)
------ ------------ ------ ------------ ------ ------------ ------ ------------ ------ ------------
(Dollars in thousands)
GAAP Capital(2).... $28,176 9.96% $35,452 12.22% $36,779 12.61% $38,107 13.01% $39,633 13.46%
Tier 1 Leverage:
Actual or
Pro Forma...... $27,651 9.78% $34,927 12.05% $36,254 12.45% $37,582 12.85% $39,108 13.30%
Required......... 11,306 4.00 11,597 4.00 11,650 4.00 11,703 4.00 11,764 4.00
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess........... $16,345 5.78% $23,330 8.05% $24,603 8.45% $25,879 8.85% $27,343 9.30%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Tier 1 Capital:
Actual or
Pro Forma...... $27,651 22.93% $34,927 28.62% $36,254 29.64% $37,582 30.66% $39,108 31.83%
Required(3)...... 4,823 4.00 4,881 4.00 4,892 4.00 4,903 4.00 4,915 4.00
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess........... $22,828 18.93% $30,045 24.62% $31,362 25.64% $32,679 26.66% $34,193 27.83%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Risk-Based
Capital:
Actual or Pro $29,104 24.14% $36,380 29,81% $37,707 30.83% $39,035 31.85% $40,561 33.01%
Forma(4)(5)........
Required(3)...... 9,646 8.00 9,763 8.00 9,784 8.00 9,805 8.00 9,830 8.00
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess........... $19,458 16.14% $26,617 21.81% $27,923 22.83% $29,229 23.85% $30,731 25.01%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- ----------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the offering range of up to 15% as a
result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
subscription and community offerings.
(2) GAAP Capital includes unrealized loss on available-for-sale securities,
net, which is not included as regulatory capital.
(3) Tier 1 Capital is shown as a percent of average adjusted assets and
risk-weighted assets. Risk-based capital is shown as a percent of
risk-weighted assets. Required capital levels reflect amounts needed
to be classified as "adequately capitalized."
(4) Assumes net proceeds are invested in assets that carry a 20%
risk-weighting.
(5) The difference between equity under GAAP and regulatory risk-based
capital is attributable to the addition of the general valuation
allowance of $1.45 million at June 30, 2001.
54
PHS BANCORP
Consolidated Statement of Income
(Dollars in thousands, except per share data)
The statement of income for the six months ended June 30, 2001 and 2000
are unaudited and have been prepared in accordance with the requirements for a
presentation of interim financial statements and are in accordance with
generally accepted accounting principles in the United States of America. In the
opinion of management, all adjustments consisting of normal recurring
adjustments, that are necessary for a fair presentation of the interim periods
have been reflected. The amounts for the two years ended December 31, 2000 have
been derived from statements audited by S.R. Snodgrass, A.C., whose report
appears elsewhere in this Prospectus.
Six Months Ended June 30, Year Ended December 31,
2001 2000 2000 1999
----------- ----------- ------------ ------------
(Unaudited)
INTEREST INCOME
Loans $ 5,256,393 $ 4,927,487 $ 10,205,593 $ 8,926,063
Investment securities:
Taxable 928,148 1,026,153 2,072,906 1,905,686
Exempt from federal income tax 424,115 542,134 1,002,398 972,907
Mortgage-backed securities 2,894,347 2,877,120 5,620,716 5,513,483
Interest-bearing deposits
with other institutions 156,155 85,752 133,703 192,749
----------- ----------- ----------- -----------
Total interest income 9,659,158 9,458,646 19,035,316 17,510,888
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 4,125,569 3,866,384 8,036,700 6,988,338
Advances from Federal Home Loan Bank 1,239,512 1,254,432 2,407,253 2,239,940
Other borrowings 1,550 2,660 4,771 55,411
----------- ----------- ----------- -----------
Total interest expense 5,366,631 5,123,476 10,448,724 9,283,689
----------- ----------- ----------- -----------
Net interest income 4,292,527 4,335,170 8,586,592 8,227,199
PROVISION FOR LOAN LOSSES 240,000 255,000 555,000 410,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 4,052,527 4,080,170 8,031,592 7,817,199
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 291,526 251,500 540,762 453,497
Investment securities gains, net 58,118 -- 7,315 19,095
Rental income, net 49,654 41,932 88,179 92,402
Other income 96,481 85,734 217,729 199,064
----------- ----------- ------------ ------------
Total noninterest income 495,779 379,166 853,985 764,058
----------- ----------- ------------ ------------
NONINTEREST EXPENSE
Compensation and employee benefits 1,628,927 1,610,956 3,232,703 3,241,692
Occupancy and equipment costs 676,146 571,703 1,174,330 1,129,482
Deposit insurance premium 18,726 19,407 39,073 106,263
Data processing costs 104,352 157,102 319,434 297,990
Other expenses 676,441 619,805 1,234,067 1,318,338
----------- ----------- ----------- -----------
Total noninterest expense 3,104,592 2,978,973 5,999,607 6,093,765
----------- ----------- ----------- -----------
Income before income taxes 1,443,714 1,480,363 2,885,970 2,487,492
Income taxes 380,182 392,124 714,033 629,602
----------- ----------- ----------- -----------
NET INCOME $ 1,063,532 $ 1,088,239 $ 2,171,937 $ 1,857,890
============ =========== =========== ===========
EARNINGS PER SHARE
Basic $ 0.43 $ 0.43 $ 0.86 $ 0.71
Diluted 0.43 0.43 0.86 0.71
See accompanying notes to the consolidated financial statements beginning on
page F-5.
55
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the
Selected Financial Highlights and Selected Financial Ratios and the Consolidated
Financial Statements and related Notes appearing elsewhere in this prospectus.
In addition to historical information, the following discussion contains
forward-looking statements as a result of certain factors, including those
discussed in "Risk Factors" contained elsewhere in this prospectus.
General
PHS Bancorp is the holding company for Peoples Home Savings. We will
become and will operate as the holding company of Peoples Home Savings following
the conversion and stock offering. PHS Bancorp's business operations is
conducted primarily through Peoples Home Savings and our business operations
will also be conducted primarily through Peoples Home Savings. We have no
business activities or results of operations. As a result, the following is a
discussion and analysis of the financial condition and results of operations of
PHS Bancorp. Any references to PHS Bancorp in the following discussion generally
refer to the consolidated operations of PHS Bancorp.
PHS Bancorp's results of operations primarily depend on its net
interest income. Net interest income is a function of the balances of loans and
investments outstanding in any one period, the yields earned on such loans and
investments and the interest paid on deposits and borrowed funds that were
outstanding in that same period. PHS Bancorp's noninterest income consists
primarily of fees and service charges. The results of operations are
significantly impacted by the amount of provisions for loan losses which, in
turn, depend on, among other things, the size and makeup of the loan portfolio,
loan quality and loan trends. The noninterest expenses consist primarily of
employee compensation and benefits, occupancy and equipment expenses, data
processing costs, marketing costs, professional fees and federal deposit
insurance premiums. PHS Bancorp's results of operations are affected by general
economic and competitive conditions, including changes in prevailing interest
rates and the policies of regulatory agencies.
Forward-Looking Statements
This prospectus contains forward-looking statements that are based on
assumptions and describe future plans, strategies, and expectations of PHS
Bancorp. These forward-looking statements are generally identified by use of the
words "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar expressions. PHS Bancorp's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors that could
have a material adverse effect on the operations of us and our subsidiaries
include, but are not limited to, changes in interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality and composition of the loan and investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
our market area, and changes in relevant accounting principles. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.
Market Risk Analysis
Peoples Home Savings, like many other financial institutions, is
vulnerable to an increase in interest rates to the extent that interest-bearing
liabilities generally mature or reprice more rapidly than interest-earning
assets. The lending activities of Peoples Home Savings have historically
emphasized the origination of long-term, fixed rate loans secured by single
family residences, and the primary
56
source of funds has been deposits with substantially shorter maturities. While
having interest-bearing liabilities that reprice more frequently than
interest-earning assets is generally beneficial to net interest income during a
period of declining interest rates, such an asset/liability mismatch is
generally detrimental during periods of rising interest rates.
To reduce the effect of interest rate changes on net interest income
Peoples Home Savings has adopted various strategies to enable it to improve
matching of interest-earning asset maturities to interest-bearing liability
maturities. The principal elements of these strategies include:
o purchasing investment securities with maturities that match specific
deposit maturities;
o emphasizing origination of shorter-term automobile and consumer loans,
and commercial business loans, which in addition to offering more rate
flexibility, typically bear higher interest rates than residential
mortgage loans; and
o purchasing adjustable-rate mortgage-backed securities.
Although consumer loans inherently generally possess a higher credit
risk than residential mortgage loans, Peoples Home Savings believes that its
underwriting standards will minimize this risk.
Peoples Home Savings has also made a significant effort to maintain its
level of lower costs deposits as a method of enhancing profitability. Peoples
Home Savings have traditionally had a high level of low-cost passbook,
interest-bearing checking and Money Market Demand Accounts. Although its base of
such deposits has increased as a result of the current interest rate
environment, such deposits have traditionally remained relatively stable and
would be expected to reduce to normal levels in a period of rising interest
rates. Because of this relative stability in a significant portion of our
deposits, Peoples Home Savings have been able to offset the impact of rising
rates in other deposit accounts.
Exposure to interest rate risk is actively monitored by management. Our
objectives are to maintain a consistent level of profitability within acceptable
risk tolerances across a broad range of potential interest rate environments.
Management uses an independent consultant to monitor Peoples Home Savings
exposure to interest rate risk. The independent consultant uses a financial
model that calculates changes in market value of portfolio equity and net
interest income. Reports generated from assumptions provided by the independent
consultant, which are modified by management, are reviewed by the Interest Rate
Risk and Asset Liability Management Committee and reported to the Board of
Directors quarterly. The Balance Sheet Shock Report shows the degree to which
balance sheet line items and the market value of portfolio equity are
potentially affected by a 200 basis point upward and downward parallel shift
(shock) in the Treasury yield curve. Exception tests are conducted as
recommended under federal law to determine if the bank qualifies as low risk and
may therefore be exempt from supplemental reporting. In addition, the possible
impact on risk-based capital is assessed using the methodology of the Federal
Deposit Insurance Corporation. An Income Shock Report shows the degree to which
income statement line items and net income are potentially affected by a 200
basis point upward and downward parallel shift in the Treasury yield curve.
From analysis and discussion of the aforementioned reports as of June
30, 2001, management has assessed that Peoples Home Savings' level of interest
rate risk is appropriate for current market conditions. The percentage change in
market value of the portfolio equity for an upward and downward shift of 200
basis points are (28.8)% and 27.0%, respectively. Net interest income decreased
by $362,000 or 3.8% for an upward shift in rates of 200 basis points and
increased by $304,000 or 3.2%, for a downward shift of 200 basis points. Excess
Net Interest Rate Risk was within those limits outlined in the Peoples Home
Savings Asset/Liability Management and Interest Rate Risk
57
Policy. Total risk-based capital before the interest rate risk impact was 24.1%
and 18.3% after the interest rate risk impact. Results fall within policy limits
for all applicable tests.
Comparison of Financial Condition at June 30, 2001 and December 31, 2000
Total assets at June 30, 2001 of $282.9 million represented an increase
of $17.6 million or 6.6%, from $265.3 million at December 31, 2000. Increases in
total assets at June 30, 2001 primarily reflected increases in cash of $53,000,
increases in interest-bearing deposits at other institutions of $2.5 million and
net increases in investment and mortgage backed securities of $16.5 million.
Such increases in total assets at June 30, 2001 were partially offset by a
decrease in loans of $1.3 million.
Loans receivable at June 30, 2001, of $127.7 million represented a
decrease of $1.3 million from $129.0 million at December 31, 2000. The decrease
in the loan portfolio was primarily attributable to decreases in automobile
loans.
At June 30, 2001, investment securities (available for sale and held to
maturity) decreased $1.8 million to $40.8 million from $42.6 million at December
31, 2000. Additionally, at June 30, 2001, mortgage-backed securities (available
for sale and held to maturity) increased $18.3 million to $95.5 million from
$77.2 million at December 31, 2000. The net increase of $16.5 million primarily
reflected net increases to the available for sale mortgage-backed securities
portfolio. The increases to the investment and mortgage-backed securities
portfolios (available for sale and held to maturity) were the result of
purchases of $35.5 million which were funded by sales of $1.9 million,
maturities of $8.9 million, and principal repayments of $8.3 million along with
increased Federal Home Loan Bank advances of $14.0 million. The purchases funded
by advances from the Federal Home Loan Bank of Pittsburgh were part of Peoples
Home Savings' leverage strategy.
Total deposits after interest credited at June 30, 2001 were $201.2
million, an increase of $3.0 million or 1.5% from $198.2 million at December 31,
2000.
Advances from the Federal Home Loan Bank of Pittsburgh increased $14.0
million to $50.2 million at June 30, 2001 from $36.2 million at December 31,
2000. This increase was the result of additional borrowings to fund securities
purchases as discussed above.
Stockholders' equity increased $419,000 for the six month period ended
June 30, 2001. This increase was due to net income of $1,064,000 and an increase
in accumulated other comprehensive income of $68,000 along with decreases in
unallocated Employee Stock Ownership Plan and Restricted Stock Plan shares of
$75,000 and $64,000, respectively. These increases to stockholders' equity were
partially offset by an increase in treasury stock of $325,000 and cash dividends
paid of $509,000.
Comparison of Financial Condition at December 31, 2000 and 1999
Total assets at December 31, 2000 of $265.3 million represented a
decrease of $3.3 million or 1.2% from December 31, 1999. Decreases in cash and
interest-bearing deposits with other financial institutions of $8.4 million
along with decreases in investment and mortgage-backed securities of $4.9
million were partially offset by increases in loans of $10.3 million.
Loans receivable at December 31, 2000, of $129.0 million represented an
increase of $10.3 million, or 8.7% from $118.7 million at December 31, 1999.
Mortgage, commercial and consumer loans increased by $4.8 million, $5.1 million
and $1.0 million, respectively. The increases in mortgage and commercial
business loans were primarily due to increased loan demand for these types of
loans due to the current interest rate environment. Additionally, Peoples Home
Savings originated two large
58
municipal loans totaling $3.5 million to local municipalities which accounted
for some of the growth in commercial loans.
Investment and mortgage-backed securities decreased $4.9 million to
$119.8 million at December 31, 2000, from $124.7million at December 31, 1999.
This decrease was the result of purchases of $10.9 million, sales of $1.3
million, maturities of $6.9 million, principal repayments of $9.7 million and an
increase in the market value of securities available for sale of $2.1 million.
The sales of securities, which were municipal securities, were made in
consideration of income tax planning.
Total deposits at December 31, 2000, were $198.2 million, an increase
of $8.9 million or 4.7% from $189.3 million at December 31, 1999. Total deposits
increased $2.0 million net of interest credited of $6.9 million for the year
ended December 31, 2000.
Advances from the Federal Home Loan Bank of Pittsburgh decreased $14.1
million to $36.2 million at December 31, 2000 from $50.3 million at December 31,
1999. This decrease was primarily the result of the repayment of short-term
advances that were acquired to fund year 2000 liquidity at year end 1999.
Stockholders' equity increased $2.1 million for the year ended December
31, 2000. This increase was due to net income of $2.2 million along with an
unrealized gain of $457,000 in PHS Bancorp's securities available for sale
portfolio at December 31, 2000 as compared to an unrealized loss of $914,000 at
December 31, 1999, and decreases in unallocated Employee Stock Ownership Shares
and Restricted Stock Shares of $149,000 and $129,000 respectively. These
increases to stockholders' equity were partially offset by and cash dividends
paid of $913,000 and an increase in treasury stock of $748,000. During the year
ended December 31, 2000, PHS Bancorp repurchased 78,750 shares of it's common
stock at an average price of $9.49 per share.
Liquidity and Capital Requirements
Liquidity refers to our ability to generate sufficient cash to meet the
funding needs of current loan demand, savings deposit withdrawals, and to pay
operating expenses. We have historically maintained a level of liquid assets in
excess of regulatory requirements. Maintaining a high level of liquid assets
tends to decrease earnings, as liquid assets tend to have a lower yield than
other assets with longer terms (e.g. loans). We adjust liquidity requirements as
appropriate to meet our asset/liability objectives.
Our primary sources of funds are deposits, amortization and prepayment
of loans and mortgage-backed securities, maturities of investment securities and
funds provided from operations. While scheduled loan and mortgage-backed
securities repayments are a relatively predictable source of funds, deposit
flows and loan and mortgage-backed securities prepayments are greatly influenced
by interest rates, economic conditions and competition. In addition, we invest
excess funds in overnight deposits, which provide liquidity to meet lending
requirements
Our short term liquid assets consist of cash and amounts due from
banks, interest bearing deposits with other institutions, and investment
securities with maturities of one year or less. Our total liquid assets totaled
$18,400,000 and $11,000,000 at June 30, 2001 and December 31, 2000,
respectively.
We have other sources of liquidity if a need for additional funds
arises on a short term or long term basis, such as Federal Home Loan Bank of
Pittsburgh advances. At June 30, 2001, Peoples Home Savings had borrowed
$50,200,000, at an average interest rate of 5.52%, of its $149,100,000
59
maximum borrowing capacity with a remaining borrowing capacity of approximately
$98,900,000. Currently, none of the borrowings have adjustable rates of
interest. Management believes that we have adequate resources to fund all of our
commitments on a short and long term basis.
At June 30, 2001, certificate of deposit accounts scheduled to mature
within one year were $58,800,000. We anticipate based upon our experience that a
high percentage of these certificates of deposit will remain on deposit,
although there can be no assurance that this will be the case. Also, the cost of
such deposits could be significantly higher. The loss of these deposits or their
retention at a higher rate, could hurt our profits unless we are able to replace
these deposits at the same rates of interest. However, due to our substantial
funding sources, we do not believe the loss of such deposits will affect our
liquidity.
At June 30, 2001, Peoples Home Savings' Tier 1 risk-based and total
risk-based capital ratios were 22.9% and 24.1%, respectively. Current
regulations require Tier I risk-based capital of 6% and total risk - based
capital of 10% risk-based assets to be considered well capitalized. Peoples Home
Savings' leverage ratio was 9.8% at June 30, 2001. Current regulations require a
leveraged ratio 5% to be considered well capitalized.
Analysis of Net Interest Income
Historically, PHS Bancorp's earnings have depended primarily on its net
interest income, which is the difference between interest income earned on its
loans and investments ("interest-earning assets") and interest paid on its
deposits and any borrowed funds ("interest-bearing liabilities"). Net interest
income is affected by:
o the interest rate spread - the difference between rates of interest
earned on interest-earning assets and rates paid on its interest-
bearing liabilities; and
o the aggregate amounts of its interest-earning assets and interest-
bearing liabilities.
60
Average Balance Sheet and Interest Analysis. The following tables set
forth certain information relating to PHS Bancorp for the periods indicated. The
average yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from average daily balances. Management
does not believe that the use of month-end balances instead of average daily
balances has caused any material differences in the information presented.
At June 30, Six Months Ended June 30,
-------------------- -------------------------------------------------------------------
2001 2001 2000
-------------------- --------------------------------- -----------------------------
Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Cost Balance Interest Cost
------- ---- ------- -------- ---- ------- -------- ----
ASSETS (Dollars in Thousands)
Interest-earning assets:
Loans(1)................................ $129,146 8.14% $128,981 $ 5,256 8.15% $122,488 $ 4,927 8.04%
Mortgage-backed securities.............. 34,620 6.98 37,024 1,209 6.53 43,148 1,436 6.66
Investment securities(2) (4)............ 25,599 6.33 30,382 810 5.33 26,273 785 5.98
Securities held for sale (4)(5)......... 83,668 6.22 73,200 2,602 7.11 67,670 2,589 7.65
-------- -------- --------
Total interest-earning assets.......... 273,033 7.24 269,587 9,877 7.33 259,579 9,737 7.50
Noninterest-earning assets............... 9,873 7,255 8,008
-------- -------- --------
Total assets........................... $282,906 $276,842 $267,587
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings(3)............................. $ 29,208 1.94 $ 28,697 284 1.98 $ 30,078 289 1.92
NOW and money markets.................. 63,119 2.05 60,957 646 2.12 55,898 624 2.23
Time deposits.......................... 108,923 5.87 111,042 3,195 5.75 108,791 2,953 5.43
Advances from FHLB..................... 50,195 4.94 44,941 1,240 5.52 43,899 1,254 5.71
Other borrowings....................... 52 7.69 65 2 6.15 111 3 5.41
-------- -------- --------
Total interest-bearing liabilities..... 251,497 4.27 245,702 5,367 4.37 238,777 5,123 4.29
------- -------
Non-interest bearing liabilities......... 2,140 2,077 2,113
-------- -------- --------
Total liabilities....................... 253,637 247,779 240,890
Stockholders' equity..................... 29,269 29,063 26,697
-------- -------- --------
Total liabilities and retained
earnings.............................. $282,906 $276,842 $267,587
======== ======== ========
Net interest income, interest rate
spread(4).............................. 2.97% $ 4,510 2.96 % $ 4,614 3.21%
====== ======= ====== ======= ======
Net yield on interest-earning assets..... 3.30% 3.35 % 3.55%
====== ====== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities........................... 108.56% 109.72% 108.71%
====== ====== ======
- -------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Includes advances by borrowers for taxes and insurance.
(4) Interest income is shown on a fully tax equivalent basis assuming a 34%
federal income tax rate.
(5) At June 30, 2001, includes $60.8 million of mortgage-backed securities
available for sale. For the six months ended June 30, 2001 and 2000,
includes average mortgage-backed securities available for sale of
approximately $48.9 million and $39.5 million, respectively.
61
Average Balance Sheet and Interest Analysis
Year Ended December 31,
---------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
ASSETS (Dollars in Thousands)
Interest-earning assets:
Loans(1)............................. $125,964 $ 10,206 8.10% $111,050 $ 8,926 8.04% $ 99,253 $ 8,378 8.44%
Mortgage-backed securities........... 41,755 2,785 6.67 47,241 3,032 6.42 41,906 2,729 6.51
Investment securities(2) (4)......... 25,858 1,572 6.08 26,920 1,410 5.24 22,271 1,244 5.59
Securities held for sale (4)......... 65,843 4,988 7.58 63,156 4,644 7.35 58,339 4,272 7.32
-------- -------- -------- ------- -------- -------
Total interest-earning assets....... 259,420 19,551 7.54 248,367 18,012 7.25 221,769 16,623 7.50
Noninterest-earning assets............ 7,887 7,775 7,576
-------- -------- --------
Total assets........................ $267,307 $256,142 $229,345
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Savings(3).......................... $ 29,710 576 1.94% $ 29,649 564 1.90% $ 29,863 637 2.13%
NOW and money markets............... 57,161 1,352 2.37 54,295 1,105 2.04 45,876 954 2.08
Time deposits....................... 109,158 6,109 5.60 101,986 5,320 5.22 102,289 5,673 5.55
Advances from FHLB.................. 41,692 2,407 5.77 39,829 2,240 5.62 19,435 1,145 5.89
Other borrowings.................... 100 5 5.00 738 55 7.45 1,457 114 7.82
-------- -------- -------- ------- -------- -------
Total interest-bearing liabilities.. 237,821 10,449 4.39 226,497 9,284 4.10 198,920 8,523 4.28
-------- ------- -------
Non-interest bearing liabilities...... 2,176 1,823 1,747
Total liabilities.................... 239,997 228,320 200,667
Stockholders' equity.................. 27,310 27,822 28,678
-------- -------- --------
Total liabilities and retained
earnings........................... $267,307 $256,142 $229,345
======== ======== ========
Net interest income, interest rate
spread(4)........................... $ 9,102 3.14% $ 8,728 3.15% $ 8,100 3.21%
======= ====== ======= ====== ======= ======
Net yield on interest-earning assets.. 3.51% 3.51% 3.65%
====== ====== ======
Ratio of average interest-earning
assets to average interest-bearing
liabilities......................... 109.08% 109.66% 111.49%
====== ====== ======
- -------------------
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Includes advances by borrowers for taxes and insurance.
(4) Interest income is shown on a fully tax equivalent basis assuming a
34% federal income tax rate.
62
Rate/Volume Analysis. The relationship between the volume and rates of
PHS Bancorp's interest-earning assets and interest-bearing liabilities affects
its net interest income. The following table reflects the sensitivity of PHS
Bancorp's interest income and interest expense to changes in volume and in
prevailing interest rates during the periods indicated. Each category reflects
the:
o changes in volume (changes in volume multiplied by old rate);
o changes in rate (changes in rate multiplied by old volume); and
o net change.
The net change is attributable to the combined impact of volume and rate has
been allocated proportionally to the absolute dollar amounts of change in each.
Six Months Ended June 30, Year Ended December 31,
----------------------------- --------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999 1999 vs. 1998
----------------------------- ----------------------------- -----------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
Volume Rate Net Volume Rate Net Volume Rate Net
------- ------- ------- ------- ------- ------- ------- ------- -------
(In Thousands)
Interest income:
Loans........................ $ 261 $ 68 $ 329 $ 1,199 $ 81 $ 1,280 $ 996 $ (448) $ 548
Mortgage-backed securities... (204) (23) (227) (352) 105 (247) 347 (44) 303
Investment securities (1).... 123 (98) 25 (56) 218 162 260 (94) 166
Securities available for
sale (1)................... 212 (199) 13 198 146 344 353 19 372
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning
assets.................... 392 (252) 140 989 550 1,539 1,956 (567) 1,389
------- ------- ------- ------- ------- ------- ------- ------- -------
Interest expense:
Savings..................... (14) 9 (5) 1 11 12 (5) (68) (73)
NOW and money markets....... 57 (35) 22 58 189 247 175 (24) 151
Time deposits............... 61 181 242 374 415 789 (17) (336) (353)
Advances from FHLB.......... 30 (44) (14) 105 62 167 1,201 (106) 1,095
Other borrowings............ (1) 0 (1) (48) (2) (50) (56) (3) (59)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities.............. 133 111 244 490 675 1,165 1,298 (537) 761
------- ------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest
income...................... $ 259 $ (363) $ (104) $ 499 $ (125) $ 374 $ 658 $ (30) $ 628
======= ======= ======= ======= ======= ======= ======= ======= =======
(1) Income and yields derived from state and political subdivisions
securities are shown on a fully tax equivalent basis assuming a 34%
federal income tax rate.
63
Comparison of Operating Results for the Six Months Ended June 30, 2001 and June
30, 2000
General. Net income for the six months ended June 30, 2001 decreased by
$24,000 to $1,064,000, from $1,088,000 for the six months ended June 30, 2000.
This decrease was primarily due to a decrease in net interest income of $42,000
along with an increase in non-interest expense of $126,000. These decreases to
net income were partially offset by increases in non-interest income of $117,000
and decreases in loan loss and income tax provisions of $15,000 and $12,000,
respectively.
Net Interest Income. Reported net interest income decreased $42,000 or
1.0% for the six months ended June 30, 2001. Net interest income on a tax
equivalent basis decreased by $104,000 or 2.3% in a period when both average
interest-earning assets and average interest-bearing liabilities increased
(increased $10.0 million and $6.9 million, respectively). The reasons for the
decrease in net interest income for the six months ended June 30, 2001 are
discussed below. See "-- Interest Income," and "-- Interest Expense."
Interest Income. Interest income on a tax equivalent basis totaled $9.9
million for the six months ended June 30, 2001, an increase of $140,000 or 1.4%
over the total of $9.7 million for the six months ended June 30, 2000. This
increase was mainly due to an increase in PHS Bancorp's average interest-earning
assets of $10.0 million for the six months ended June 30, 2001, partially offset
by a 17 basis point decrease in the yield earned. Interest earned on loans
increased $329,000 or 6.7%, in 2001. The increase was due to a $6.5 million
increase in the average balance of loans along with an 11 basis point increase
in the yield earned. Interest earned on investment and mortgage-backed
securities (including securities held for sale) decreased $189,000 or 3.9%, in
2001. The decrease was due to a 45 basis point decrease in the yield earned
partially offset by an increase in the average balance of securities of $3.5
million. Details are contained in the tables at pages 59 and 61.
Interest Expense. Interest expense increased $244,000 to $5.4 million
for the six months ended June 30, 2001. The increase in interest expense was due
to a $6.9 million increase in the average balance of interest-bearing
liabilities along with an 8 basis point increase in the average cost of
interest-bearing liabilities to 4.37%. The $6.9 million increase in the average
balance of interest- bearing liabilities was primarily due to increased deposits
of $ 5.9 million and increased average borrowings of $1.0 million. Details are
contained in the tables at pages 59 and 61.
Provision for Losses on Loans. The provision for loan losses is charged
to operations to bring the total allowance for loan losses to a level that
represents management's best estimates of the losses inherent in the portfolio,
based on:
o historical experience;
o volume;
o type of lending conducted by PHS Bancorp;
o industry standards;
o the level and status of past due and non-performing loans;
o the general economic conditions in PHS Bancorp's lending area; and
o other factors affecting the collectibility of the loans in its
portfolio.
See the Table on page 73 which shows how the level of our allowance for
loan losses compares with our historical loss experience.
64
For the six months ended June 30, 2001, the provision for loan losses decreased
$15,000 to $240,000 from $255,000 for the comparable 2000 period. Decreases in
non-performing loans precipitated the decrease in the provision for loan losses.
At June 30, 2001, non-performing loans decreased $152,000 to $513,000 from
$665,000 at December 31, 2000. See "Business of Peoples Home Savings --
Allowance for Loan Losses and -- Non-Performing Loans and Problem Assets."
Non-interest Income. Total non-interest income increased $117,000 to
$496,000 for the six months ended June 30, 2001, from $379,000 for the six
months ended June 30, 2000. This increase was primarily due to investment
security gains of $58,000 in 2001 coupled with increased service charges on
deposit accounts of $40,000, due to an increase in the number of transaction
accounts. The investment securities gains were the result of sales of
mortgage-backed securities which had higher coupon rates. These securities tend
to repay much faster during periods of lower interest rates and management felt
that selling these securities was the most beneficial course of action.
Non-interest Expense. Non-interest expense increased $126,000 to
$3,105,000 for the six months ended June 30, 2001, from $2,979,000 for the six
months ended June 30, 2000. This increase was primarily due to increases in
compensation and employee benefits and occupancy and equipment costs of $18,000
and $104,000 for the six months ended June 30, 2001. The increase in occupancy
and equipment costs was primarily due to technology and equipment improvements.
Data processing costs decreased $53,000 to $104,000 for the six months ended
June 30, 2001, from $157,000 for the six months ended June 30, 2000 while other
expenses increased $56,000 to $695,000 for the six months ended June 30, 2001
from $639,000 for the six months ended June 30, 2000. These changes were
primarily due to PHS Bancorp's internally performing some data processing that
was previously outsourced.
Comparison of Operating Results for the Years Ended December 31, 2000 and 1999
General. Net income for the year ended December 31, 2000 increased by
$314,000 to $2,172,000, from $1,858,000 for the year ended December 31, 1999.
This increase was primarily due to increases in net interest income of $359,000
and non-interest income of $90,000 along with a decrease in non-interest expense
of $94,000. These increases to net income were partially offset by increases in
loan loss and income tax provisions of $145,000 and $84,000, respectively.
Net Interest Income. Reported net interest income increased $ 359,000
or 4.4% for the year ended December 31, 2000. Net interest income on a tax
equivalent basis increased by $374,000 or 4.3% in a period when both average
interest earning assets and average interest-bearing liabilities increased
(increased $11.1 million and $11.3 million, respectively). The increase in
average interest- earning assets of $11.1 million was primarily due to increases
of $14.9 in average loans partially offset by a decrease in average investment
and mortgage-backed securities of $3.9 million. PHS Bancorp's net interest rate
spread decreased 1basis point (with 100 basis points being equal to 1%) to 3.14%
for the year ended December 31, 2000. Due to the volume of obligations of state
and political subdivision in PHS Bancorp's investment portfolio, net interest
income and interest income are presented on a tax equivalent basis. See "--
Interest Income" and "-- Interest Expense" below.
Interest Income. Interest income on a fully tax equivalent basis
totaled $19.6 million for the year ended December 31, 2000, an increase of $1.6
million or 8.5% over the total of $18.0 million for the year ended December 31,
1999. This increase was mainly due to an increase in PHS Bancorp's average
interest-earning assets of $11.1 million for the year ended December 31, 2000.
Interest earned on loans increased $1.3 million or 14.3%, in 2000. The increase
was due to a $14.9 million increase in the average balance of loans along with a
6 basis point increase in the yield earned. Interest earned on
65
investment and mortgage-backed securities (including securities held for sale)
increased $259,000 or 2.9%, in 2000. The increase was due to a 38 basis point
increase in the yield earned partially offset by a $3.9 million decrease in the
average balance of investment and mortgage-backed securities. Details are
contained in the tables at pages 60 and 61.
Interest Expense. Interest expense increased $1.1 million to $10.4
million for the year ended December 31, 2000. The increase in interest expense
was due to an $11.3 million increase in the average balance of interest-bearing
liabilities due to increased average deposits and borrowings of $10.1 and $1.2
million, respectively along with a 29 basis point increase in the average cost
of interest-bearing liabilities. Details are contained in the tables at pages 60
and 61.
Provision for Losses on Loans. The provision for loan losses is charged
to operations to bring the total allowance for loan losses to a level that
represents management's best estimates of the losses inherent in the portfolio,
based on:
o historical experience;
o volume;
o type of lending conducted by PHS Bancorp;
o industry standards;
o the level and status of past due and non-performing loans;
o the general economic conditions in PHS Bancorp's lending area; and
o other factors affecting the collectibility of the loans in its
portfolio.
See the Table on page 73 which shows how the level of our allowance for
loan losses compares with our historical loss experience.
For the year ended December 31, 2000, the provision for loan losses increased
$145,000 to $555,000 compared to $410,000 for the comparable 1999 period. The
allowance for loan losses at December 31, 2000 increased $95,000 to $1,455,000
from $1,360,000 at December 31, 1999. The increase in the provision for loan
losses was precipitated by higher net charge-offs, increase non-performing loans
and increased consumer loans. Non-performing loans increased $168,000 to
$665,000 from $497,000 at December 31, 1999. Consumer loans also increased in
the aggregate to approximately $5.1 million from December 31, 1999.
Additionally, for the year ended December 31, 2000 net loan charge-off increased
$123,000 to $460,000 from $337,000 for the comparable 1999 period. See "Business
of Peoples Home Savings -- Allowance for Loan Losses and -- Non-Performing Loans
and Problem Assets."
Non-interest Income. Non-interest income increased $90,000 to $854,000
for the year ended December 31, 2000, from $764,000 for the year ended December
31, 1999. This increase was primarily due to increased service charges on
deposit accounts of $87,000, due to increases in fees which commenced in the
third quarter of 1999 coupled with an increase in the number of transaction
accounts.
Non-interest Expense. Non-interest expense decreased $94,000 to $6.0
million for the year ended December 31, 2000, from $6.1 million for the year
ended December 31, 1999. This decrease was primarily due to decreases in deposit
insurance premiums of $67,000 for the year ended December 31, 2000. The decrease
in deposit insurance premiums was due to the Federal Deposit Insurance
Corporation's assessment rate change in January 2000.
66
Income Tax Expense. Income tax expense increased $84,000 to $714,000
for the year ended December 31, 2000, from $630,000 for the year ended December
31, 1999.
Impact of Inflation and Changing Prices.
The consolidated financial statements and accompanying notes presented
elsewhere in this prospectus have been prepared in accordance with GAAP which
generally requires the measurement of financial position and operating results
in terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of our operations. As a result,
interest rates have a greater impact on our performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or, to the same extent, as prices of goods and services.
Business of PHSB Financial
After the conversion, we will own all of the stock of Peoples Home
Savings. We have not yet engaged in any significant business. Before the
conversion, we will not transact any material business. We will invest our
initial capital as discussed in the "Use of Proceeds" section. In the future, we
may pursue other business activities, including mergers and acquisitions,
investment alternatives and diversification of operations. There are, however,
no current plans for such activities. Initially, we will not maintain offices
separate from those of Peoples Home Savings or employ any persons other than
their officers. Our officers will not be separately compensated for their
service.
Business of Peoples Home Savings
General
We offer a broad range of deposits and loan products to individuals,
families and small businesses in our market area of Beaver and Lawrence
Counties, Pennsylvania. The loan products we offer are traditional mortgage loan
products, commercial business loans, and consumer loans, which primarily consist
of automobile loans. In addition, Peoples Home Savings has offered telephone
banking since 1998 and internet banking services since 2000. The internet
banking services include disclosure of account balances, transferring money
between accounts and bill paying.
We attract deposits from the general public and use these deposits
primarily to originate loans and to purchase investment securities. The
principal sources of funds for our lending and investing activities are
deposits, Federal Home Loan Bank advances, the repayment and maturity of loans
and sale, maturity, and call of securities. The principal sources of our income
is interest on loans and investment securities. The principal expense is
interest paid on deposits and Federal Home Loan Bank advances.
Market Area and Competition
We are one of the many financial institutions servicing our market area
which consists of the counties of Beaver, Lawrence, Allegheny and Butler,
Pennsylvania. The competition for deposit products comes from other insured
financial institutions such as commercial banks, thrift institutions, credit
unions, and multi-state regional banks in our market area. Deposit competition
also includes a number of insurance products sold by local agents and investment
products such as mutual funds and
67
other securities sold by local and regional brokers. Loan competition varies
depending upon market conditions and comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions,
multi-state regional banks, and mortgage bankers.
Lending Activities
General. We primarily originate one- to- four family residential real
estate loans, and automobile loans, as well as commercial business loans,
commercial real estate loans, and other consumer loans. Consumer loans consist
primarily of direct and indirect automobile loans, home equity loans and lines
of credit, and other consumer purpose loans. Our commercial real estate loans
consist primarily of mortgage loans secured by small commercial office/retail
space, warehouses and small and medium sized apartment buildings.
68
Loan Portfolio Composition. The following table present the composition of
our loan portfolio by loan category at the dates indicated.
At June 30, At December 31,
---------------- ------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996
---------------- ----------------- ----------------- ---------------- ----------------- ---------------
$ % $ % $ % $ % $ % $ %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ ------- ------
(Dollars in Thousands)
Mortgage loans:
One-to-four
family (1)........ $ 60,351 46.42% $ 57,999 44.58% $ 53,184 44.62% $ 49,084 48.88% $ 45,108 44.94% $41,279 42.93%
Multi-family ....... 273 .21 308 .24 388 .33 554 .55 217 .22 353 .37
Construction........ 2,193 1.69 1,778 1.37 1,614 1.36 326 .32 304 .30 150 .16
Commercial.......... 411 .31 481 .37 541 .45 941 .94 1,378 1.37 1,573 1.64
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Total Mortgage
loans............... 63,228 48.63 60,566 46.56 55,727 46.76 50,905 50.69 47,007 46.83 43,355 45.10
Commercial loans...... 10,266 7.89 9,815 7.54 4,728 3.97 3,617 3.60 2,464 2.46 1,967 2.04
Consumer loans:
Automobile.......... 44,500 34.23 48,361 37.18 48,026 40.29 36,618 36.47 39,569 39.42 39,215 40.79
Consumer credit
line.............. 6,007 4.62 6,130 4.71 5,547 4.65 5,288 5.27 5,468 5.45 5,250 5.46
Other(2)............ 6,016 4.63 5,216 4.01 5,161 4.33 3,990 3.97 5,859 5.84 6,352 6.61
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Total Consumer
loans............... 56,523 43.48 59,707 45.90 58,734 49.27 45,896 45.71 50,896 50.71 50,817 52.86
Lease financing
receivables......... - - - - - - - - - - 4 -
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Total loans......... 130,017 100.00% 130,088 100.00% 119,189 100.00% 100,418 100.00% 100,367 100.00% 96,143 100.00%
====== ====== ====== ====== ====== ======
Less:
Loans in process.... 2,378 1,204 707 219 370 105
Deferred loan
fees.............. (1,506) (1,588) (1,623) (1,002) (1,088) (1,169)
Allowance for
losses on loans... 1,453 1,455 1,360 1,287 1,394 1,434
-------- -------- -------- -------- -------- -------
Total loans, net.. $127,692 $129,017 $118,745 $ 99,914 $ 99,691 $95,773
======== ======== ======== ======== ======== =======
- -----------------
(1) Includes home equity and junior lien mortgage loans.
(2) Consists primarily of student loans held for sale and secured and
unsecured personal loans.
69
Loan Maturity Tables. The following table sets forth the maturity of
PHS Bancorp's loan portfolio at June 30, 2001. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totaled $27.9 million for the period ended June
30, 2001. Adjustable-rate mortgage loans are shown as maturing based on
contractual maturities.
Due Due after
within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In Thousands)
One- to- four family..... $ 69 $ 7,099 $ 55,376 $ 62,544
Other mortgage loans..... - 279 405 684
Commercial............... 346 5,536 4,384 10,266
Consumer................. 6,530 35,178 14,815 56,523
------- -------- -------- ---------
Total.................... $ 6,945 $ 48,092 $ 74,980 $ 130,017
======= ======== ======== =========
The following table sets forth as of June 30, 2001, the dollar amount
of all loans due after June 30, 2002, based upon fixed rates of interest or
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
One- to- four family...... $ 61,029 $ 1,446 $ 62,475
Other mortgage loans...... 684 - 684
Commercial................ 7,520 2,400 9,920
Consumer.................. 49,993 - 49,993
-------- ------- --------
Total................. $119,226 $ 3,846 $123,072
======== ======= ========
One- to- Four Family Loans. We originate one- to- four family loans
with fixed rates of interest for terms of 15 to 30 years and also offer a
one-year adjustable rate loan with an interest rate indexed to the one-year
Treasury, with a cap on interest rate increases of 2% per year and 6% over the
life of the loan. The original contractual loan repayment period on residential
mortgage loans generally averages 20 years. However, the average life based upon
our experience has been approxi mately 10 to 12 years.
Pursuant to underwriting guidelines adopted by the Board of Directors,
our maximum loan to value ratio is 95% of the lower of sales price or appraised
value. Private mortgage insurance must be obtained on all residential loans for
which loan-to-value ratios exceed 80%. Property appraisals on the real estate
and improvements securing single-family residential loans are made by a
qualified independ-
70
ent appraiser approved by the Board of Directors. Appraisals are performed in
accordance with applicable regulations and policies. We obtain title insurance
policies on all first mortgage real estate loans originated.
The majority of our one- to- four family residential loans are
underwritten in accordance with the Freddie Mac and Fannie Mae guidelines to
facilitate their sale in the secondary market (although we usually retain
residential mortgages for portfolio). Substantially all of our residential
mortgages include "due on sale" clauses, which are provisions giving us the
right to declare a loan immediately payable if the borrower sells or otherwise
transfers an interest in the property to a third party.
Included in our one- to- four family loan portfolio are home equity
loans and second mortgage loans. Home equity and second mortgage loans are
generally fixed rate with interest rates based on market rates. In most
instances, we hold the first lien on a second mortgage. At June 30, 2001, such
loans totaled $20.8 million, or 34% of our one- to- four family portfolio.
Multi-Family Residential Real Estate. Multi-family residential real
estate loans are permanent loans primarily secured by apartment buildings.
Multi-family residential real estate loans can be originated in amounts up to
75% of the appraised value of the mortgaged property. We make both adjustable
and fixed-rate multi-family residential real estate loans. The adjustable rate
loans have terms of up to 15 years, the rate of interest is tied to the Wall
Street Journal prime rate.
Construction. We will occasionally originate loans to finance the
construction of one- to four- family residences. Constructions loans typically
are originated directly to the owners of pre-sold single-family houses that are
being built, and generally convert to a permanent loan upon completion of
construction. Construction loans require payment of interest only during the
construction period and are offered at rates comparable to our one- to
four-family permanent mortgage loan rates.
Commercial Real Estate. Commercial real estate loans are permanent
loans secured by improved property such as office buildings, retail stores, and
other non-residential buildings. Essentially all originated commercial real
estate loans are within our market area. Commercial real estate loans can be
originated in amounts up to 75% of the appraised value of the mortgaged
property. We make both adjustable and fixed-rate commercial real estate loans.
Commercial real estate loans are primarily adjustable rate loans with terms of
up to 15 years, with the rate tied to the Wall Street Journal prime rate.
Commercial Loans. Commercial business loans generally are deemed to
entail significantly greater risk than that which is involved with real estate
lending. The repayment of commercial business loans typically is dependent on
the successful operations and income stream of the borrower. Such risks can be
significantly affected by economic conditions. In addition, commercial lending
generally requires substantially greater oversight efforts compared to
residential real estate lending.
Commercial business loans are generally provided to various types of
closely-held businesses located principally in our primary market area. Our
business loans may be structured as term loans or as revolving lines of credit.
Commercial business loans generally have terms of seven years or less and
interest rates which are fixed or float in accordance with the prime rate.
Commercial business loans generally are secured by equipment, machinery or other
corporate assets and we generally obtain personal guarantees from the principals
of the borrower.
71
Consumer Loans. Consumer loans primarily consist of indirect automobile
loans. Indirect automobile loans are generally originated with terms of up to 6
years depending on the age of the automobiles. Indirect automobile loans are
underwritten by us and a fee is remitted to the automobile dealer upon the
successful underwriting and closing of the loan. The fee is rebated to us, on a
pro rata basis, if the loan is repaid within the first six months. We generally
do not have recourse against the automobile dealer in the event of a default by
the borrower. Each indirect auto loan is originated in accordance with our
underwriting standards and procedures, which are intended to assess the
applicant's ability to repay the amounts due on the loan and the adequacy of the
financed vehicle as collateral. Indirect automobile loans are secured by the new
or used automobile. Loans secured by assets that depreciate rapidly, such as
automobiles, are generally considered to entail greater risks than one-to
four-family residential loans.
Our other consumer loans include credit card loans, student loans, and
secured and unsecured personal loans. Secured consumer loans are generally
collateralized by secondary liens on real estate. Unsecured consumer loans are
only made up to $20,000.
Loan Solicitation and Processing. Our primary source of mortgage loan
applications is referrals from existing or past customers. We also solicit loan
applications from real estate brokers, contractors, and call-ins and walk-ins to
our offices. We advertise in local newspapers for first mortgage and home equity
loans.
Upon receipt of any loan application from a prospective borrower, a
credit report and verifications are ordered to confirm specific information
relating to the loan applicant's employment, income and credit standing. An
appraisal of the real estate intended to secure the proposed loan is undertaken
by an independent fee appraiser. In connection with the loan approval process,
the Bank's loan officers analyze the loan applications and the property
involved. All residential, home equity, multi-family, construction and
commercial real estate loans are processed at our main office by our loan
servicing department. The Board of Directors approves all loans over $50,000.
Loan applicants are promptly notified of our decision by a letter
setting forth the terms and conditions of the decision. If approved, these terms
and conditions include the amount of the loan, interest rate basis, amortization
term, a brief description of real estate to be mortgaged by us, tax escrow and
the notice of requirement of insurance coverage to be maintained to protect our
interest. We require title insurance on first mortgage loans and fire and
casualty insurance on all properties securing loans, which insurance must be
maintained during the entire term of the loan.
Loan Commitments. We generally grant commitments to fund fixed-rate
single-family mortgage loans for periods of up to 90 days at a specified term
and interest rate. At June 30, 2001, total aggregate commitments to extend
credit were $22.5 million.
Non-performing Loans and Problem Assets
Loan Delinquencies. When a mortgage loan becomes 15 days past due, a
notice of nonpay ment is sent to the borrower. If such payment is not received
within 15 days after the initial notice has been sent, an additional notice of
nonpayment is sent to the borrower. After 60 days, if payment is still
delinquent, a notice of right to cure default is sent to the borrower giving 30
additional days to bring the loan current before foreclosure is commenced. If
the loan continues in a delinquent status for 90 days past due and no repayment
plan is in effect, foreclosure proceedings will be initiated. The customer will
be notified when foreclosure is commenced.
72
Loans are reviewed on a monthly basis and are placed on a non-accrual
status when the loan becomes more than 90 days delinquent or when, in our
opinion, the collection of additional interest is doubtful. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged against
interest income. Subsequent interest payments, if any, are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan.
Non-performing Assets. The following table sets forth information
regarding nonaccrual loans and non-performing loans, as of the dates indicated.
We have no loans categorized as troubled debt restructurings within the meaning
of the Statement of Financial Accounting Standards ("SFAS") 15 and no impaired
loans within the meaning of SFAS 114, as amended by SFAS 118. Interest income
that would have been recorded on loans accounted for on a nonaccrual basis under
the original terms of such loans was $23,000 and $66,000 for the six months
ended June 30, 2001 and year ended December 31, 2000, respectively. Of such
amounts $5,000 and $30,000 were collected for the six months ended June 30, 2001
and the year ended December 31, 2000, respectively.
At June 30, At December 31,
---------------- --------------------------------------
2001 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ----
(Dollars in Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
One- to -four family ................ $ 143 $ 201 $ 214 $ 204 $ 347 $ 769
All other mortgage loans ............ -- -- -- -- -- --
Non-mortgage loans:
Commercial .......................... 136 206 -- 20 33 17
Consumer ............................ 149 175 210 168 377 367
------ ------ ------ ------ ------ ------
Total .................................. $ 428 $ 582 $ 424 $ 392 $ 757 $1,153
====== ====== ====== ====== ====== ======
Accruing loans which are contractually
past due 90 days or more:
Mortgage loans:
One- to -four family ................ $ -- $ -- $ -- $ 10 $ 61 $ 65
All other mortgage loans ............ -- -- -- -- -- --
Non-mortgage loans:
Commercial .......................... -- -- -- -- -- --
Consumer ............................ 85 83 73 125 52 65
------ ------ ------ ------ ------ ------
Total .................................. $ 85 $ 83 $ 73 $ 135 $ 113 $ 130
====== ====== ====== ====== ====== ======
Total non-performing loans ................ $ 513 $ 665 $ 497 $ 527 $ 870 $1,283
====== ====== ====== ====== ====== ======
Real estate owned ......................... $ -- $ -- $ -- $ -- $ 33 $ 42
====== ====== ====== ====== ====== ======
Total non-performing assets ............... $ 513 $ 665 $ 497 $ 527 $ 903 $1,325
====== ====== ====== ====== ====== ======
Total non-performing loans to total loans . 0.39% 0.51% 0.42% 0.52% 0.87% 1.33%
====== ====== ====== ====== ====== ======
Total non-performing loans to total assets 0.18% 0.25% 0.19% 0.22% 0.40% 0.63%
====== ====== ====== ====== ====== ======
Classified Assets. Management, in compliance with regulatory
guidelines, has instituted an internal loan review program whereby loans are
classified as special mention, substandard, doubtful or loss. When a loan is
classified as substandard or doubtful, management is required to establish a
73
valuation allowance for loan losses in an amount that is deemed prudent. When
management classifies a loan as a loss asset, an allowance equal to 100% of the
loan balance is required to be established or the loan is to be charged-off.
This allowance for loan losses is composed of an allowance for both inherent
risk associated with lending activities and particular problem assets.
An asset is considered substandard if it is inadequately protected by
the paying capacity and net worth of the obligor or the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard, with the added characteristic that the weaknesses
present make collection or liquidation in full, highly questionable and
improbable, on the basis of currently existing facts, conditions, and values.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets without the establishment of a loss
allowance is not warranted. Assets which do not currently expose the insured
institution to a sufficient degree of risk to warrant classification in one of
the aforementioned categories but possess credit deficiencies or potential
weaknesses are required to be designated special mention by management. In
addition, each loan that exceeds $500,000 and each group of loans to one
borrower that exceeds $500,000 is monitored more closely due to the potentially
greater losses from such loans.
Management's evaluation of the classification of assets and the
adequacy of the allowance for loan losses is reviewed by the Board on a regular
basis and by the regulatory agencies as part of their examination process. At
June 30, 2001 the classified assets were (in Thousands):
Special mention......... $ 499
Substandard............. 596
Doubtful................ 32
Loss.................... --
------
Total.............. $1,127
======
Allowance for Loan Losses. A provision for loan losses is charged to
operations based on management's evaluation of the losses incurred in our loan
portfolio. Such evaluation, which includes a review of all loans of which full
collectibility of interest and principal may not be reasonably assured,
considers our past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral, and current economic conditions.
See "Management's Discussion and Analysis Of Financial Condition and Results of
Operations - Comparison of Operating Results for the Six Months Ended June 30,
2001 and June 30, 2000 - Provision for Loan Losses" and "-- -Comparison of
Operating Results for the Years Ended December 31, 2000 and 1999 -Provision for
Loan Losses".
The allowance for loan losses is based upon estimates of probable
losses inherent in the loan portfolio. The amount actually observed in respect
to the losses can vary significantly from the estimated amounts. Our methodology
includes several features that are intended to reduce the differences between
estimated and actual losses. The historical loss experience model that is used
to establish the loan loss factors for problem graded loans is designed to be
self-correcting by taking into account our recent loss experience. Similarly, by
basing the past graded loss factors on historical loss experience, the
methodology is further designed to take our recent loss experience into account.
74
Pooled loan loss factors are adjusted quarterly, if necessary, based upon the
level of net charge-offs expected by management. Furthermore, our methodology
permits adjustments to any loss factor used in the computation of the formula
allowance in the event that, in management's judgment, significant conditions
which affect the collectibility of the portfolio as of the evaluation date are
not reflected in the loss factors. By assessing the probable estimated losses
inherent in the loan portfolio on a quarterly basis, we are able to adjust
specific and inherent loss estimates based upon any more recent information that
becomes available.
The allowance also incorporates the results of measuring impaired loans
as provided in Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting
by Creditors for Impairment of a Loan- Income Recognition and Disclosures."
These accounting standards prescribe the measurement methods, income recognition
and disclosure related to impaired loans. A loan is considered impaired when we
determine that it is probable that we will be unable to collect all amounts due
according to the original contractual terms of the loan agreement. Impairment is
measured by the difference between the recorded investment in the loan
(including accrued interest, net deferred loan fees or costs and amortized
premium or discount) and the estimated present value of the collateral, if the
loan is collateral dependent. Impairment is recognized by adjusting an
allocation of the existing allowance for loan losses. See Note 1 to the Notes to
Consolidated Statements.
The allowance for loan losses is maintained at a level that represents
management's best estimates of losses in the loan portfolio at the balance sheet
date. However, there can be no assurance that the allowance for losses will be
adequate to cover losses which may be realized in the future and that additional
provisions for losses will not be required.
75
The following table sets forth information with respect to our
allowance for loan losses at or for the periods ended on the dates indicated:
At June 30, At December 31,
-------------------- --------------------------------------------
2001 2000 1999 1998 1997 1996
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Total loans outstanding .................. $130,017 $130,088 $119,189 $100,418 $100,367 $ 96,143
======== ======== ======== ======== ======== ========
Average loans outstanding ................ $128,981 $125,964 $111,050 $ 99,253 $ 99,594 $ 92,834
======== ======== ======== ======== ======== ========
Allowance balance (at beginning of period) $ 1,455 $ 1,360 $ 1,287 $ 1,394 $ 1,434 $ 1,274
Provision for loan losses ................ 240 555 410 365 555 455
Charge-offs:
Mortgage loans (except
commercial) .......................... -- 8 15 23 119 12
Commercial mortgages ................... -- -- -- -- -- 21
Commercial ............................. -- -- -- 9 -- 4
Consumer ............................... 264 503 373 495 533 270
-------- -------- -------- -------- -------- --------
Sub-total ........................... 264 511 388 527 652 307
-------- -------- -------- -------- -------- --------
Recoveries
Mortgage loans (except commercial) .... -- 1 1 12 8 1
Commercial mortgage loans ............. -- -- -- -- 6 --
Commercial ............................ -- -- -- -- -- --
Consumer .............................. 22 50 50 43 43 11
-------- -------- -------- -------- -------- --------
Sub-total ........................... 22 51 51 55 57 12
-------- -------- -------- -------- -------- --------
Net loans charged-off .................... 242 460 337 472 595 295
-------- -------- -------- -------- -------- --------
Allowance balance, at end of period ...... $ 1,453 $ 1,455 $ 1,360 $ 1,287 $ 1,394 $ 1,434
======== ======== ======== ======== ======== ========
Allowance for loan losses as a percent
of total loans outstanding ............. 1.12% 1.12% 1.14% 1.28% 1.39% 1.49%
======== ======== ======== ======== ======== ========
Net loans charged-off as a percent of
average loans outstanding .............. 0.19% 0.37% 0.30% 0.48% 0.60% 0.32%
======== ======== ======== ======== ======== ========
76
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of our allowance for loan losses by loan category and the percent
of loans in each category to total loans receivable, net, at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation allowance applicable to the entire loan portfolio.
At June 30, At December 31,
------------------ -------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ---------------- ------------------ -----------------
% of % of % of % of % of % of
loans in loans in loans in loans in loans in loans in
each each each each each each
category category category category category category
to total to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Mortgage
loans....... $ 259 48.63% $ 260 46.56% $ 266 46.76% $ 285 50.69% $ 397 46.83% $ 462 45.10%
Commercial
loans and
lease
financing
receivables. 227 7.90 197 7.54 122 3.97 72 3.60 71 2.46 61 2.04
Consumer
loans....... 967 43.47 998 45.90 972 49.27 930 45.71 926 50.71 911 52.86
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$1,453 100.00% $1,455 100.00% $1,360 100.00% $1,287 100.00% $1,394 100.00% $1,434 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
77
Investment Activities
Peoples Home Savings is required under federal regulation to maintain a
sufficient level of liquid assets (including specified short-term securities and
certain other investments), as determined by management and defined and reviewed
for adequacy by the Federal Deposit Insurance Corporation during its regular
examinations. The Federal Deposit Insurance Corporation, however, does not
prescribe by regulation a minimum amount or percentage of liquid assets. The
level of liquid assets varies depending upon several factors, including:
o the yields on investment alternatives;
o management's judgment as to the attractiveness of the yields then
available in relation to other opportunities;
o expectation of future yield levels; and
o management's projections as to the short-term demand for funds to be
used in loan origination and other activities.
Investment securities, including mortgage-backed securities, are
classified at the time of purchase, based upon management's intentions and
abilities, as securities held to maturity or securities available for sale. Debt
securities acquired with the intent and ability to hold to maturity are
classified as held to maturity and are stated at cost and adjusted for
amortization of premium and accretion of discount, which are computed using the
level yield method and recognized as adjustments of interest income. All other
debt securities are classified as available for sale to serve principally as a
source of liquidity. At June 30, 2001, we had no securities of a single issuer,
excluding U.S. government and agency securities, that exceeded 10% of
stockholder's equity.
Current regulatory and accounting guidelines regarding investment
securities (including mortgage backed securities) require us to categorize
securities as "held to maturity," "available for sale" or "trading." As of June
30, 2001, we had securities classified as "held to maturity" and "available for
sale" in the amount of $52.7 million and $83.7 million, respectively and had no
securities classified as "trading." Securities classified as "available for
sale" are reported for financial reporting purposes at the fair market value
with net changes in the market value from period to period included as a
separate component of stockholders' equity, net of income taxes. At June 30,
2001, our securities available for sale had an amortized cost of $82.9 million
and market value of $83.7 million. The changes in market value in our available
for sale portfolio reflect normal market conditions and vary, either positively
or negatively, based primarily on changes in general levels of market interest
rates relative to the yields of the portfolio. Additionally, changes in the
market value of securities available for sale do not affect our income nor does
it affect Peoples Home Savings' regulatory capital requirements or its
loan-to-one borrower limit.
At June 30, 2001, PHS Bancorp's investment portfolio policy allowed
investments in instruments such as:
o U.S. Treasury obligations;
o U.S. federal agency or federally sponsored agency obligations;
o municipal obligations;
78
o mortgage-backed securities;
o banker's acceptances;
o certificates of deposit;
o investment grade corporate bonds and commercial paper;
o real estate mortgage investment conduits; and
o equity securities.
The Board of Directors may authorize additional investments.
As a source of liquidity and to supplement our lending activities, we
have invested in residential mortgage-backed securities. Mortgage-backed
securities can serve as collateral for borrowings and, through repayments, as a
source of liquidity. Mortgage-backed securities represent a participation
interest in a pool of single-family or other type of mortgages. Principal and
interest payments are passed from the mortgage originators, through
intermediaries (generally quasi- governmental agencies) that pool and repackage
the participation interests in the form of securities, to investors, like us.
The quasi-governmental agencies, which include Ginnie Mae, Freddie Mac, and
Fannie Mae, guarantee the payment of principal and interest to investors.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate or adjustable
rate mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed rate
or adjustable rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages. Expected maturities will differ from contractual
maturities due to scheduled repayments and because borrowers may have the right
to call or prepay obligations with or without prepayment penalties.
Mortgage-backed securities issued by Ginnie Mae, Freddie Mac, and Fannie Mae
make up a majority of the pass-through certificates market.
PHS Bancorp also invests in mortgage-related securities, primarily
collateralized mortgage obligations, issued or sponsored by Ginnie Mae, Freddie
Mac, and Fannie Mae, as well as private issuers. Collateralized mortgage
obligations are a type of debt security that aggregates pools of mortgages and
mortgage-backed securities and creates different classes of collateralized
mortgage obligations securities with varying maturities and amortization
schedules as well as a residual interest with each class having different risk
characteristics. The cash flows from the underlying collateral are usually
divided into "tranches" or classes whereby tranches have descending priorities
with respect to the distribution of principal and interest repayment of the
underlying mortgages and mortgage backed securities as opposed to pass through
mortgage backed securities where cash flows are distributed pro rata to all
security holders. Unlike mortgage backed-securities from which cash flow is
received and prepayment risk is shared pro rata by all securities holders, cash
flows from the mortgages and mortgage backed securities underlying
collateralized mortgage obligations are paid in accordance with a predetermined
priority to investors holding various tranches of such securities or
obligations. A particular tranche or class may carry prepayment risk which may
be different from that of the underlying collateral and other tranches.
Collateralized mortgage obligations attempt to moderate reinvestment risk
associated with conventional mortgage-backed securities resulting from
unexpected prepayment activity.
79
Investment and Mortgage-Backed Securities Portfolio
The following tables sets forth the carrying value of our investment
securities held to maturity, securities available for sale, Federal Home Loan
Bank stock, and interest-bearing deposits and overnight investments at the dates
indicated.
At June 30, At December 31,
------------ ------------------------------------------
2001 2000 1999 1998
-------- -------- -------- --------
(In Thousands)
Investment and mortgage-backed
securities held to maturity:
U.S. Government agency securities......................... $ 15,481 $ 15,221 $ 12,554 $ 13,927
Corporate obligations..................................... - - - 2,981
Obligations of states and political
subdivisions........................................... 2,556 2,555 2,986 1,238
Mortgage-backed securities................................ 34,620 38,780 44,141 48,287
------- ------- ------- -------
Total investment and mortgage-backed securities........ 52,657 56,556 59,681 66,433
Interest-bearing deposits................................. 7,562 5,094 11,417 9,332
Federal Home Loan Bank stock.............................. 2,615 2,615 2,615 1,545
------- ------- ------- -------
Total investments...................................... $62,834 $64,265 $73,713 $77,310
======= ======= ======= =======
At June 30, At December 31,
----------- -----------------------------------------
2001 2000 1999 1998
------- ------- ------- -------
(In Thousands)
Investment and mortgage-backed
securities available for sale:
U.S. Government treasury securities....................... $1,021 $ 2,005 $ 4,959 $ 9,132
U.S. Government agency securities......................... 7,041 7,035 6,000 -
Real estate mortgage investment conduits.................. 40 45 59 102
Obligations of states and political
subdivisions............................................ 14,674 15,622 16,577 15,963
Equity Securities......................................... 61 107 - -
Mortgage-backed securities................................ 60,831 38,415 37,426 32,878
------- ------- ------- -------
Total.................................................. $83,668 $63,229 $65,021 $58,075
======= ======= ======= =======
80
Investment and Mortgage-Backed Securities Maturities
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of our investment and
mortgage-backed securities portfolio at June 30, 2001. The table does not
include interest-bearing deposits or Federal Home Loan Bank stock and does not
take into consideration the effects of scheduled repayments or the effects of
possible prepayments.
Total Investment and
One Year or Less One to Five Years Five to Ten Years More than Ten Years Mortgage-backed Securities
---------------- ----------------- ----------------- ------------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1) Value Yield(1) Value
----- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
(Dollars in Thousands)
Held to Maturity:
U.S. Government agency
securities................. $6,999 5.30% $4,975 6.02% $3,507 4.66% $ -- --% $15,481 5.39% $15,737
Obligations of states and
political subdivisions..... 292 8.71 - - 245 7.58 2,019 7.73 2,556 7.83 2,552
Mortgage-backed securities... - - - - - - 34,620 6.92 34,620 6.92 34,536
------ ------ ------ ------- ------- -------
Total.................... $7,291 5.44% $4,975 6.02% $3,752 4.85% $36,639 6.96% $52,657 6.51% $52,825
====== ==== ====== ==== ====== ==== ======= ==== ======= ==== =======
Available for Sale:
U.S. Government treasury..... $ -- --% $1,021 5.61% $ -- --% $ -- --% $ 1,021 5.61% $ 1,021
U.S. Government agency
securities................. -- -- 1,060 7.29 5,981 5.16 -- -- 7,041 5.48 7,041
Obligations of states and
political subdivisions..... 1,929 8.82 2,879 8.68 104 8.08 9,762 8.20 14,674 8.37 14,674
Real estate mortgage
investment conduits....... -- -- -- - - - 40 4.83 40 4.83 40
Equity securities............ 61 3.76 -- - -- - -- - 61 3.76 61
Mortgage-backed securities... 1 6.50 34 8.33 1,906 7.68 58,890 7.00 60,831 7.02 60,831
------ ------ ------ ------- ------- -------
Total.................... $1,991 8.66% $4,994 7.75% $7,991 5.80% $68,692 7.17% $83,668 7.11% $83,668
====== ==== ====== ==== ====== ==== ======= ==== ======= ==== =======
(1) Average yields on tax exempt obligations have been computed on a tax
equivalent basis of 34%.
81
Sources of Funds
Deposits are our major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and maturities of investment and mortgage-backed
securities and, to a much lesser extent, borrowings and operations. Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions.
Deposits. Consumer and commercial deposits are attracted principally
from within our primary market area through the offering of a selection of
deposit instruments including regular savings accounts, money market accounts,
and term certificate accounts. IRA accounts are also offered. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit, and the interest rate. The interest rates paid by us on
deposits are set weekly at the direction of the Board of Directors. Interest
rates are determined based on our liquidity requirements, interest rates paid by
our competitors, and our growth goals and applicable regulatory restrictions and
requirements. At June 30, 2001, we had no brokered deposits. For further
information, please see Note 8 to the Consolidated Financial Statements on page
F-18.
The following table indicates the amount of our certificates of deposit
of $100,000 or more by time remaining until maturity as of June 30, 2001.
Certificates
Maturity Period of Deposits
(In Thousands)
Within three months $ 1,213
Three through six months 1,426
Six through twelve months 3,558
Over twelve months 4,797
-------
$10,994
=======
Borrowings
We may obtain advances from the Federal Home Loan Bank of Pittsburgh to
supplement our supply of lendable funds. Advances from the Federal Home Loan
Bank of Pittsburgh are typically secured by a pledge of our stock in the Federal
Home Loan Bank of Pittsburgh and a portion of our first mortgage loans and
certain other assets. Each Federal Home Loan Bank credit program has its own
interest rate, which may be fixed or variable, and range of maturities. If the
need arises, we may also access the Federal Reserve Bank discount window to
supplement our supply of lendable funds and to meet deposit withdrawal
requirements.
82
The following table sets forth information concerning Federal Home Loan
Bank advances during the periods indicated (includes both short- and long-term
advances).
At or For the
Six Months Ended At or For the Years
June 30, Ended December 31,
2001 2000 1999 1998
------- ------- ------- -------
(Dollars in Thousands)
FHLB advances:
Average outstanding ................ $44,941 $41,692 $39,829 $19,435
Maximum amount outstanding at any
month-end during the period .... 51,195 44,295 50,295 30,895
Weighted average interest rate
during the period ............... 5.52% 5.77% 5.62% 5.89%
Total FHLB advances at end of period $50,195 $36,195 $50,295 $30,895
Weighted Period End Rate ........... 5.45% 5.72% 5.62% 5.59%
Personnel
As of June 30, 2001 we had 73 full-time employees and 12 part-time
employees. The employees are not represented by a collective bargaining unit. We
believe our relationship with our employees is satisfactory.
Legal Proceedings
From time to time, we are a party to routine litigation, which arises
in the normal course of business, such as claims to enforce liens, condemnation
proceedings on properties in which we hold security interests, claims involving
the making and servicing of real property loans, and other issues incident to
our business. There were no lawsuits pending or known to be contemplated against
us at June 30, 2001 that would have a material effect on our financial
condition, income, or operations.
Properties
We operate from our main office, eight branch offices and an
administrative office located in the counties of Beaver and Lawrence,
Pennsylvania. All offices are owned except for one branch office. The lease has
an initial term of 10 years, with a renewal option for additional years. We
purchased property located in Center Township, Pennsylvania for the purpose of
construction of a new branch office. We have obtained all necessary regulatory
approvals related to the new branch and expect to open the branch in the fourth
quarter of 2001.
Regulation
Set forth below is a brief description of certain laws relating to the
regulation of PHSB Financial and Peoples Home Savings after the proposed
conversion. This description does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
83
Regulation of PHSB Financial
General. Upon completion of the conversion, we will register as a bank
holding company under the Bank Holding Company Act of 1956, as amended, and we
will be subject to regulation and supervision by the Board of Governors of the
Federal Reserve System and by the Pennsylvania Department of Banking. We will
also be required to file annually a report of our operations with, and will be
subject to examination by, the Federal Reserve and the Pennsylvania Department
of Banking. This regulation and oversight is generally intended to ensure that
we limit our activities to those allowed by law and that we operate in a safe
and sound manner without endangering the financial health of our subsidiary
bank.
Under the Bank Holding Company Act, we must obtain the prior approval
of the Federal Reserve before we may acquire control of another bank or bank
holding company, merge or consolidate with another bank holding company, acquire
all or substantially all of the assets of another bank or bank holding company,
or acquire direct or indirect ownership or control of any voting shares of any
bank or bank holding company if, after such acquisition, the bank holding
company would directly or indirectly own or control more than 5% of such shares.
Federal statutes impose restrictions on the ability of a bank holding
company and its nonbank subsidiaries to obtain extensions of credit from its
subsidiary bank, on the subsidiary bank's investments in the stock or securities
of the holding company, and on the subsidiary bank's taking of the holding
company's stock or securities as collateral for loans to any borrower. A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property, or furnishing of services by the subsidiary bank.
A bank holding company is required to serve as a source of financial
and managerial strength to its subsidiary banks and may not conduct its
operations in an unsafe or unsound manner. In addition, it is the policy of the
Federal Reserve that a bank holding company should stand ready to use available
resources to provide adequate capital to its subsidiary banks during periods of
financial stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks will generally be
considered by the Federal Reserve to be an unsafe and unsound banking practice
or a violation of the Federal Reserve regulations, or both.
Non-Banking Activities. The business activities of PHSB Financial, as a
bank holding company, are restricted by the Bank Holding Company Act. Under the
Bank Holding Company Act and the Federal Reserve's bank holding company
regulations, we may only engage in, or acquire or control voting securities or
assets of a company engaged in,
o banking or managing or controlling banks and other subsidiaries
authorized under the Bank Holding Company Act; and
o any Bank Holding Company Act activity the Federal Reserve has
determined to be so closely related to banking or managing or
controlling banks to be a proper incident thereto.
These include any incidental activities necessary to carry on those activities,
as well as a lengthy list of activities that the Federal Reserve has determined
to be so closely related to the business of banking.
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Financial Modernization. The Gramm-Leach-Bliley Act, which became
effective in March 2000, permits greater affiliation among banks, securities
firms, insurance companies, and other companies under a new type of financial
services company known as a "financial holding company." A financial holding
company essentially is a bank holding company with significantly expanded
powers. Financial holding companies are authorized by statute to engage in a
number of financial activities previously impermissible for bank holding
companies, including securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; and merchant banking activities. The act also permits the Federal
Reserve and the Treasury Department to authorize additional activities for
financial holding companies if they are "financial in nature" or "incidental" to
financial activities. A bank holding company may become a financial holding
company if each of its subsidiary banks is well capitalized, well managed, and
has at least a "satisfactory" CRA rating. A financial holding company must
provide notice to the Federal Reserve within 30 days after commencing activities
previously determined by statute or by the Federal Reserve and Department of the
Treasury to be permissible. We have not submitted notice to the Federal Reserve
of our intent to be deemed a financial holding company.
Regulatory Capital Requirements. The Federal Reserve has adopted
capital adequacy guidelines pursuant to which it assesses the adequacy of
capital in examining and supervising a bank holding company and in analyzing
applications to it under the Bank Holding Company Act. The Federal Reserve's
capital adequacy guidelines are similar to those imposed on Peoples Home Savings
by the Federal Deposit Insurance Corporation. See "Regulation of the Bank -
Regulatory Capital Requirements."
Restrictions on Dividends. The Pennsylvania Banking Code states, in
part, that dividends may be declared and paid only out of accumulated net
earnings and may not be declared or paid unless surplus (retained earnings) is
at least equal to contributed capital. Peoples Home Savings has not declared or
paid any dividends that have caused its retained earnings to be reduced below
the amount required. Finally, dividends may not be declared or paid if Peoples
Home Savings is in default in payment of any assessment due the Federal Deposit
Insurance Corporation.
The Federal Reserve has issued a policy statement on the payment of
cash dividends by bank holding companies, which expresses the Federal Reserve's
view that a bank holding company should pay cash dividends only to the extent
that the holding company's net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is consistent with
the holding company's capital needs, asset quality and overall financial
condition. The Federal Reserve also indicated that it would be inappropriate for
a company experiencing serious financial problems to borrow funds to pay
dividends. Furthermore, under the federal prompt corrective action regulations,
the Federal Reserve may prohibit a bank holding company from paying any
dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Regulation of Peoples Home Savings
General. As a Pennsylvania chartered savings bank with deposits insured
by the Savings Association Insurance Fund of the Federal Deposit Insurance
Corporation, Peoples Home Savings is subject to extensive regulation and
examination by the Pennsylvania Department of Banking and by the Federal Deposit
Insurance Corporation, which insures its deposits to the maximum extent
permitted by law. The federal and state laws and regulations applicable to banks
regulate, among other things, the scope of their business, their investments,
the reserves required to be kept against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. The laws and regulations governing Peoples Home Savings generally
have been promulgated to protect
85
depositors and not for the purpose of protecting stockholders. This regulatory
structure also gives the federal and state banking agencies extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Pennsylvania Department of Banking,
the Federal Deposit Insurance Corporation or the United States Congress, could
have a material impact on us and our operations.
Federal law provides the federal banking regulators, including the
Federal Deposit Insurance Corporation and the Federal Reserve, with substantial
enforcement powers. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and- desist or removal
orders, and to initiate injunctive actions against banking organizations and
institution- affiliated parties, as defined. In general, these enforcement
actions may be initiated for violations of laws and regulations and unsafe or
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with
regulatory authorities.
Pennsylvania Savings Bank Law. The Pennsylvania Banking Code contains
detailed provisions governing the organization, location of offices, rights and
responsibilities of trustees, officers, and employees, as well as corporate
powers, savings and investment operations and other aspects of Peoples Home
Savings and its affairs. The code delegates extensive rule-making power and
administrative discretion to the Pennsylvania Department of Banking so that the
supervision and regulation of state-chartered savings banks may be flexible and
readily responsive to changes in economic conditions and in savings and lending
practices.
The code also provides state-chartered savings banks with all of the
powers enjoyed by federal savings and loan associations, subject to regulation
by the Pennsylvania Department of Banking. The Federal Deposit Insurance
Corporation Act, however, prohibits a state-chartered bank from making new
investments, loans, or becoming involved in activities as principal and equity
investments which are not permitted for national banks unless:
o the Federal Deposit Insurance Corporation determines the activity or
investment does not pose a significant risk of loss to the Savings
Association Insurance Fund; and
o the bank meets all applicable capital requirements.
Accordingly, the additional operating authority provided to us by the code is
significantly restricted by the Federal Deposit Insurance Act.
Federal Deposit Insurance. The Federal Deposit Insurance Corporation is
an independent federal agency that insures the deposits, up to prescribed
statutory limits, of federally insured banks and savings institutions and
safeguards the safety and soundness of the banking and savings industries. The
Federal Deposit Insurance Corporation administers two separate insurance funds,
the Bank Insurance Fund, which generally insures commercial bank and state
savings bank deposits, and the Savings Association Insurance Fund, which
generally insures savings association deposits. Peoples Homes Savings, which was
previously a state savings association, remains a member of the Savings
Association Insurance Fund and its deposit accounts are insured by the Federal
Deposit Insurance Corporation, up to prescribed limits.
The Federal Deposit Insurance Corporation is authorized to establish
separate annual deposit insurance assessment rates for members of the Bank
Insurance Fund and the Savings Association
86
Insurance Fund, and to increase assessment rates if it determines such increases
are appropriate to maintain the reserves of either insurance fund. In addition,
the Federal Deposit Insurance Corporation is authorized to levy emergency
special assessments on Bank Insurance Fund and Savings Association Insurance
Fund members. The Federal Deposit Insurance Corporation's deposit insurance
premiums are assessed through a risk-based system under which all insured
depository institutions are placed into one of nine categories and assessed
insurance premiums based upon their level of capital and supervisory evaluation.
The Federal Deposit Insurance Corporation has set the deposit insurance
assessment rates for Savings Association Insurance Fund member institutions for
the first six months of 2001 at 0% to .027% of insured deposits on an annualized
basis, with the assessment rate for most institutions set at 0%.
In addition, all institutions with deposits insured by the Federal
Deposit Insurance Corporation are required to pay assessments to fund interest
payments on bonds issued by the Financing Corporation, an agency of the Federal
government established to recapitalize the predecessor to the Savings
Association Insurance Fund. The assessment rate for 2001 is approximately .019%
of insured deposits. These assessments will continue until the Financing
Corporation bonds mature in 2017.
Regulatory Capital Requirements. The Federal Deposit Insurance
Corporation has promulgated capital adequacy requirements for state-chartered
banks that, like us, are not members of the Federal Reserve System. At June 30,
2001, we exceeded all regulatory capital requirements and were classified as
"well capitalized."
The Federal Deposit Insurance Corporation's capital regulations
establish a minimum 3% Tier 1 leverage capital requirement for the most highly
rated state-chartered, non-member banks, with an additional cushion of at least
100 to 200 basis points for all other state-chartered, non-member banks, which
effectively increases the minimum Tier 1 leverage ratio for such other banks to
4% to 5% or more. Under the Federal Deposit Insurance Corporation's regulation,
the highest-rated banks are those that the Federal Deposit Insurance Corporation
determines are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization, rated composite 1 under the Uniform
Financial Institutions Rating System. Tier 1 or core capital is defined as the
sum of common stockholders' equity (including retained earnings), noncumulative
perpetual preferred stock and related surplus, and minority interests in
consolidated subsidiaries, minus all intangible assets other than certain
purchased mortgage servicing rights and purchased credit card relationships.
The Federal Deposit Insurance Corporation's regulations also require
that state-chartered, non- member banks meet a risk-based capital standard. The
risk-based capital standard requires the maintenance of total capital (which is
defined as Tier 1 capital and supplementary (Tier 2) capital) to risk weighted
assets of 8%. In determining the amount of risk-weighted assets, all assets,
plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to
100%, based on the risks the Federal Deposit Insurance Corporation believes are
inherent in the type of asset or item. The components of Tier 1 capital for the
risk-based standards are the same as those for the leverage capital requirement.
The components of supplementary (Tier 2) capital include cumulative perpetual
preferred stock, mandatory subordinated debt, perpetual subordinated debt,
intermediate-term preferred stock, up to 45% of unrealized gains on equity
securities and a bank's allowance for loan and lease losses. Allowance for loan
and lease losses includable in supplementary capital is limited to a maximum of
1.25% of risk-weighted assets. Overall, the amount of supplementary capital that
may be included in total capital is limited to 100% of Tier 1 capital.
87
A bank that has less than the minimum leverage capital requirement is
subject to various capital plan and activities restriction requirements. The
Federal Deposit Insurance Corporation's regulations also provide that any
insured depository institution with a ratio of Tier 1 capital to total assets
that is less than 2.0% is deemed to be operating in an unsafe or unsound
condition pursuant to Section 8(a) of the Federal Deposit Insurance Act and
could be subject to potential termination of deposit insurance.
We are also subject to minimum capital requirements imposed by the
Pennsylvania Department of Banking on Pennsylvania-chartered depository
institutions. Under the Pennsylvania Department of Banking's capital
regulations, a Pennsylvania bank or savings bank must maintain a minimum
leverage ratio of Tier 1 capital (as defined under the Federal Deposit Insurance
Corporation's capital regulations) to total assets of 4%. In addition, the
Pennsylvania Department of Banking has the supervisory discretion to require a
higher leverage ratio for any institutions based on the institution's
substandard performance in any of a number of areas. We were in compliance with
both the Federal Deposit Insurance Corporation and the Pennsylvania Department
of Banking capital requirements as of June 30, 2001.
Affiliate Transaction Restrictions. Federal laws strictly limit the
ability of banks to engage in transactions with their affiliates, including
their bank holding companies. Such transactions between a subsidiary bank and
its parent company or the nonbank subsidiaries of the bank holding company are
limited to 10% of a bank subsidiary's capital and surplus and, with respect to
such parent company and all such nonbank subsidiaries, to an aggregate of 20% of
the bank subsidiary's capital and surplus. Further, loans and extensions of
credit generally are required to be secured by eligible collateral in specified
amounts. Federal law also requires that all transactions between a bank and its
affiliates be on terms as favorable to the bank as transactions with
non-affiliates.
Federal Home Loan Bank System. We are a member of the Federal Home Loan
Bank of Pittsburgh, which is one of 12 regional Federal Home Loan Banks. Each
Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
member institutions and proceeds from the sale of consolidated obligations of
the Federal Home Loan Bank system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the board of trustees of
the Federal Home Loan Bank.
As a member, we are required to purchase and maintain stock in the
Federal Home Loan Bank of Pittsburgh in an amount equal to the greater of 1% of
its aggregate unpaid residential mortgage loans, home purchase contracts or
similar obligations at the beginning of each year or 5% of our outstanding
advances from the Federal Home Loan Bank. At June 30, 2001, we were in
compliance with this requirement.
Federal Reserve System. The Federal Reserve requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking and NOW accounts) and
non-personal time deposits. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve may be used to satisfy the liquidity
requirements that are imposed by the Department. At June 30, 2001, we met its
reserve requirements.
Loans to One Borrower. Under Pennsylvania and federal law, savings
banks have, subject to certain exemptions, lending limits to one borrower in an
amount equal to 15% of the institution's capital accounts. An institution's
capital account includes the aggregate of all capital, surplus, undivided
profits, capital securities and general reserves for loan losses. As of June 30,
2001, our loans-to-one borrower limitation was $4.4 million and we were in
compliance with such limitation.
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Taxation
Federal Taxation
Savings institutions are subject to the Internal Revenue Code of 1986,
as amended, in the same general manner as other corporations. Prior to certain
changes to the code in 1996, thrift institutions enjoyed a tax advantage over
banks with respect to determining additions to its bad debt reserves. All thrift
institutions, prior to 1996, were generally allowed a deduction for additions to
a reserve for bad debts. In contrast, only "small banks," the average adjusted
bases of all assets of such institution equals $500 million or less were allowed
a similar deduction for additions to their bad debt reserves. In addition, while
small banks were only allowed to use the experience method in determining their
annual addition to a bad debt reserve, all thrift institutions generally enjoyed
a choice between
o the percentage of taxable income method; and
o the experience method, for determining the annual addition to their
bad debt reserve.
This choice of methods provided a distinct advantage to thrift institutions that
continually experienced little or no losses from bad debts, over small banks in
a similar situation, because thrift institutions in comparison to small banks
were generally allowed a greater tax deduction by using the percentage of
taxable income method rather than the experience method to determine their
deductible addition to their bad debt reserves.
The code was revised in August 1996 to equalize the taxation of thrift
institutions and banks, effective for taxable years beginning after 1995. All
thrift institutions are now subject to the same provisions as banks with respect
to deductions for bad debts. Now only thrift institutions that are treated as
small banks under the code may continue to account for bad debts under the
reserve method; however, such institutions may only use the experience method
for determining additions to their bad debt reserve. Thrift institutions that
are not treated as small banks may no longer use the reserve method to account
for their bad debts but must now use the specific charge-off method.
The revisions to the code in 1996 also provided that all thrift
institutions must generally recapture any "applicable excess reserves" into
their taxable income, over a six year period beginning in 1996; however, such
recapture may be delayed up to two years if a thrift institution meets a
residential-lending test. Generally, a thrift institution's applicable excess
reserves equals the difference between
o the balance of its bad debt reserves as of the close of its taxable
year beginning before January 1, 1996; and
o the balance of such reserves as of the close of its last taxable year
beginning before January 1, 1988, the pre-1988 reserves.
Peoples Home Savings does not have excess reserves for which recapture
income was required to be reported in its federal income tax return for calendar
year 1996 and future years. See note 11 to our consolidated financial
statements.
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In addition, all thrift institutions must continue to keep track of
their pre-1988 reserves because this amount remains subject to recapture in the
future under the Code. A thrift institution such as Peoples Home Savings, would
generally be required to recapture into its taxable income its pre-1988 reserves
in the case of certain excess distributions to, and redemptions of Peoples Homes
Savings stockholders and in the case of a reduction in Peoples Homes Savings
outstanding loans when comparing loans currently outstanding to loans
outstanding at the end of the base year. For taxable years after 1995,Peoples
Homes Savings will continue to account for its bad debts under the reserve
method. The balance of Peoples Homes Savings pre-1988 reserves equaled $2.5
million.
PHSB Financial may exclude from its income 100% of dividends received
from Peoples Home Savings a member of the same affiliated group of corporations.
A 70% dividends received deduction generally applies with respect to dividends
received from corporations that are not members of such affiliated group.
The federal income tax returns of PHS Bancorp for the last five tax
years have not been audited by the IRS.
State Taxation
Peoples Home Savings is subject to the Mutual Thrift Institutions Tax
of the Commonwealth of Pennsylvania based on its financial net income determined
in accordance with generally accepted accounting principles with certain
adjustments. Peoples Home Savings' tax rate under the Mutual Thrift Institution
Tax is 11.5%. Interest on state and federal obligations is excluded from net
income. An allocable portion of net interest expense incurred to carry the
obligations is disallowed as a deduction. Three year carryforwards of losses are
allowed.
Upon consummation of the conversion, PHSB Financial will also be
subject to the Corporate Net Income Tax and the Capital Stock Tax of the
Commonwealth of Pennsylvania.
Peoples Home Savings' state tax returns have not been audited for the
past five years.
Management of PHSB Financial
Our directors consist of the same individuals who serve as directors of
Peoples Home Savings. Our articles of incorporation and bylaws require that
directors be divided into three classes, as nearly equal in number as possible.
Each class of directors serves for a three-year period, with approximately
one-third of the directors elected each year. Our officers will be elected
annually by the board and serve at the board's discretion.
Management of Peoples Home Savings
Directors and Executive Officers
The Bylaws requires that directors be divided into three classes, as
nearly equal in number as possible, each class to serve for a three year period,
with approximately one-third of the directors elected each year. The Board of
Directors currently consists of eight members, each of whom also serves as a
director of PHS Bancorp, M.H.C. and PHS Bancorp.
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The following table sets forth information with respect to the
directors and executive officers, all of whom will continue to serve in their
same capacities after the conversion.
Age at Current
June 30, Director Term
Name 2001 Position Since(1) Expires
- -------------------- -------- -------------------------- -------- -------
James P. Wetzel, Jr. 56 President, Chief Executive 1986 2002
Officer and Director
Joseph D. Belas 54 Director 2000 2002
Howard B. Lenox 69 Director 1977 2002
John C. Kelly 71 Director 1973 2003
Earl F. Klear 78 Director 1968 2003
John M. Rowse 53 Director and Secretary 1976 2003
Douglas K. Brooks 73 Director 1972 2004
Emlyn Charles 75 Director 1977 2004
Richard E. Canonge 39 Vice President - Finance, -- --
C.F.O. and Treasurer
David E. Ault 53 Vice President - Community -- --
Banking, Assistant Secretary
Joseph R. Pollock, III 45 Vice President - Lending -- --
Paul W. Jewell 56 Vice president - Human -- --
Resources and Business
Development
- -------------------------------
(1) Refers to the year the individual directors became a director of Peoples
Home Savings or PHS Bancorp.
The business experience for the past five years of each of the
directors and executive officers is as follows:
James P. Wetzel, Jr., has been President and Chief Executive Officer of
Peoples Home Savings since 1986. He served as Vice President - Operations prior
to being appointed to his current position. Mr. Wetzel has been employed by
Peoples Home Savings since 1977.
Joseph D. Belas is currently a self-employed consultant. From July 1969
to March 1999, Mr. Belas was Senior Vice President of Economy Savings Bank,
Aliquippa, Pennsylvania. Economy Savings Bank was acquired by Penn First
Bancorp, Ellwood City, Pennsylvania, in March 1994 and merged out of existence
in March 1995.
Howard B. Lenox is the retired manager and a former partner of
ComputerLand of Beaver, Pennsylvania, a computer products retailer.
John C. Kelly is the manager and 100% owner of Kelly's, Beaver Falls,
Pennsylvania, a hardware, paint and gasoline retailer.
Earl F. Klear retired as Executive Vice President of Peoples Home
Savings in 1985.
John M. Rowse has been a pharmacist at the Medical Center, Beaver,
Pennsylvania, since June 1992. Prior to the Medical Center, Mr. Rowse was a
pharmacist at the Beaver Valley Geriatric Center, Beaver, Pennsylvania.
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Douglas K. Brooks is retired as President and Chief Administrative
Officer of both John H. Brooks & Sons, Inc., Beaver Falls, Pennsylvania, a
construction and excavation equipment rental company and D&T Brooks, Inc.,
Beaver Falls, Pennsylvania, an industrial and commercial general contracting
firm.
Emlyn Charles retired as president of P.M. Moore Company, Aliquippa,
Pennsylvania, a building materials company, in July, 1993.
Certain Other Executive Officers Who Are Not Directors
Richard E. Canonge has been employed by Peoples Home Savings since 1987
and as Vice President-Finance, Treasurer and Chief Financial Officer since
January 1990. Prior to his current positions, Mr. Canonge, a certified public
accountant, was employed with S.R. Snodgrass, A.C., Wexford, Pennsylvania.
David E. Ault has been Vice President-Community Banking Officer in
charge of community banking and Assistant Secretary of Peoples Home Savings
since September, 1996. Mr. Ault has been a vice president of Peoples Home
Savings since December 1985.
Joseph R. Pollock, III has been Vice President-Lending of Peoples Home
Savings since September 1, 1997. Prior to September 1997, Mr. Pollock was
employed by Peoples Home Savings as the Consumer Loan Officer.
Paul W. Jewell has been Vice President-Human Resources and Business
Development in charge of personnel and savings since 1986. He has been employed
with Peoples Home Savings in various capacities since 1976.
Meetings and Committees of the Board of Directors of Peoples Home Savings
The board of directors conducts its business through meetings of the
board and through activities of its committees. During the year ended December
31, 2000, the board of directors held 14 regular meetings. No director attended
fewer than 75% of the total meetings of the board of directors and committees on
which such director served during the year ended December 31, 2000. In addition
to other committees, as of December 31, 2000, Peoples Home Savings had a
Nominating Committee, a Salary Committee, and an Audit Committee. The committees
of Peoples Home Savings will become our committees.
The Nominating Committee consists of Directors Belas, Lenox, Kelly and
Wetzel. The Nominating Committee, which is not a standing committee, met once
during the 2000 fiscal year.
The Salary Committee is comprised of Directors Belas, Brooks, Charles,
Kelly and Lenox. This standing committee meets annually to review the
compensation of the officers and employees. The Committee met twice during the
2000 fiscal year.
The Audit Committee consists of Directors Belas, Brooks, Charles, Lenox
and Kelly. The Audit Committee meets with its independent certified public
accountants to review the results of the annual audit and other related matters.
The audit committee met six times during the year ended December 31, 2000.
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Director Compensation
Non-employee members of Peoples Home Savings' Board of Directors were
paid an annual retainer of $17,266 during the year ended December 31, 2000 and
are permitted 12 paid excused absences. In the year ended December 31, 2000,
Peoples Home Savings held 47 meetings. Members of the board's committees receive
$100 per meeting attended. Directors do not currently receive compensation for
their service on the Board of PHS Bancorp. For the year ended December 31, 2000,
total fees paid by the Peoples Home Savings to directors were approximately
$125,000.
Peoples Home Savings sponsors a Trustees Retirement Plan to provide
retirement benefits to directors who were formerly trustees of Peoples Home
Savings in mutual form. Any director who has served as a trustee of the bank in
mutual form is a participant in the plan and payments under the plan commence
once the trustee ceases being a director of Peoples Home Savings. The plan
provides a retirement benefit based on the number of years of service to Peoples
Home Savings. Trustees receive 70% of the final average board compensation, as
defined in the plan, for a period of 120 months following retirement (after not
less than 15 years of Board service) or upon a termination of service following
a change in control of Peoples Home Savings. At June 30, 2001, there were no
payments made under the plan.
Under the 1998 Stock Option Plan, and the Peoples Home Savings
Restrictive Stock Plan, all directors, except Mr. Belas, were granted stock
options and awarded restricted stock plan shares. As of June 30, 2000, all
shares awarded under the Stock Option Plan have been vested. Restricted stock
plan shares are exercisable at the rate of 25% per year commencing one year from
the effective date of grant. The remaining unvested restricted stock plan shares
will vest on October 22, 2001. Under the Stock Option Plan and Restricted Stock
Plan, Mr. Wetzel received 24,840 options and 9,936 restricted stock plan shares.
The non-employee directors, except Mr. Belas, each received 6,210 option shares
and 2,484 restricted stock plan shares. Mr. Belas became a director after the
grant of stock options and awards of restricted stock plan shares. Additionally,
directors who were granted stock options and awarded restricted stock plan
shares also receive dividends on the restricted stock plan shares and dividend
equivalent payments on options.
Executive Compensation
The following table sets forth the cash and non-cash compensation
awarded or earned by the President and Chief Executive Officer of Peoples Home
Savings. Except as set forth below, no other executive officer of Peoples Home
Savings had salary and bonus during the year ended December 31, 2000 which
exceeded $100,000 for services rendered in all capacities to Peoples Home
Savings.
Long Term
Annual Compensation Compensation Awards
--------------------- ---------------------------------------
Name and Fiscal Restricted Stock Securities Underlying All Other
Principal Position Year Salary($) Bonus($) Award(s) ($) Options(#) Compensation ($)
- --------------------- ---- --------- -------- --------------- ---------- ----------------
James P. Wetzel, Jr. 2000 154,500 15,850 -- -- 52,860(3)
President and Chief 1999 154,500 -- -- -- 54,095
Executive Officer 1998 154,500 -- 139,725(1) 24,840(2) 56,640
- ------------------
(1) Represents awards of 9,936 shares of Common Stock under the Restricted
Stock Plan based upon the value of such stock of $14.065 per share as
of the date of such award. As of December 31, 2000, value of unvested
shares of restricted stock (2,484 shares) was $10.25 per share or
$25,461 in the aggregate. Such stock awards become non- forfeitable at
the rate of 2,484 shares per year commencing on December 15, 1998.
Dividends are paid for all shares awarded.
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(2) Represents award of options exercisable at the rate of 331/3% per year
commencing on October 22, 1998. The exercise price equals the market
value of Common Stock on the date of grant of $11.8125. Dividend
equivalent payments are received on the option owned. See " -- Stock
Awards."
(3) Represents $6,800 employer contributions to Peoples Home Savings'
401(k) Profit Sharing Plan, $24,000 Supplemental Retirement Plan
contributions during 2000, $10,731 of dividends paid on stock options,
and 729 shares allocated under the Employee Stock Ownership Plan
("ESOP"), at an average cost of $15.54 per share. At December 31,
2000, the market value of such ESOP shares was $7,472.
Stock Awards. The following table sets forth information with respect
to previously awarded stock options to purchase the Common Stock granted in 1998
to Mr. Wetzel and held by him as of December 31, 2000. PHS Bancorp has not
granted to Mr. Wetzel any stock appreciation rights.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
-------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying In-The-Money
Unexercised Options Options
at Fiscal Year-End (#) at Fiscal Year-End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized($)(1) Unexercisable Unexercisable(1)
- ---- --------------- -------------------- ------------- ----------------
James P. Wetzel, Jr. -- -- 24,840/0 $ -- / $ --
- ------------
(1) Based upon an exercise price of $11.8125 per share and estimated price
of $10.25 at December 31, 2000.
Employment Agreement. Peoples Home Savings has entered into a
three-year employment agreement with James P. Wetzel, Jr., its President and
Chief Executive Officer. The agreement provides that Mr. Wetzel may be
terminated by Peoples Home Savings for "just cause" as defined in the agreement.
If Peoples Home Savings terminates Mr. Wetzel without just cause, he will be
entitled to a continuation of salary from the date of termination through the
remaining term of the agreement. The employment agreement also contains a
provision stating that in the event of involuntary termination of employment in
connection with any change in control of Peoples Home Savings, Mr. Wetzel will
be paid a lump sum amount equal to 2.99 times his prior five year average
compensation. In the event of a change of control as of June 30, 2001, Mr.
Wetzel would have received approximately $429,000.
Supplemental Executive Retirement Plan. Effective January 1, 1995,
Peoples Home Savings adopted an unfunded supplemental executive retirement plan,
referred to as the SERP, for the benefit of Mr. Wetzel, President. The purpose
of the SERP is to attract and retain executives by providing additional
retirement benefits to supplement the other retirement benefits provided to all
employees. The targeted level of retirement benefits under the SERP are
calculated as 2.25% of the final average compensation (as defined in the SERP)
times years of service, reduced by payments under Peoples Home Savings' defined
benefit pension plan. Benefits payable prior to age 65 are reduced by 2.5% for
each year of payment prior to age 65. The SERP provides that Peoples Home
Savings will pay the benefits under the SERP for a period of 120 months.
Benefits under the SERP are immediately payable upon death or disability of the
participant, or upon the termination of the participant (other than for cause),
after obtaining age 55. For the year ended December 31, 2000, Mr. Wetzel had an
accrued SERP benefit of approximately $150,000, and such benefit under the SERP
was vested.
Employee Stock Ownership Plan. Peoples Home Savings maintains an
employee stock ownership plan as part of its retirement benefit program. The
employee stock ownership plan holds 58,260 shares of common stock for allocation
to employees over the next 6 years. Presently, the employee stock ownership plan
has a debt of $911,000 payable to PHS Bancorp related to the
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purchase of such common stock. As part of the conversion, the plan anticipates
purchasing an additional 190,000 shares representing 8.0% of the shares to be
offered for sale at the mid-point of the range. Such stock purchase will be
financed with a loan from us in the amount of $1.9 million, in addition to our
refinancing the existing plan debt of $911,000. The stock held by the employee
stock ownership plan will be allocated to plan participants over the next 10
years as contributions are made by Peoples Home Savings to this retirement plan.
At present, Peoples Home Savings anticipates contributing approximately $190,000
annually plus interest to the plan. Benefits under the plan will vest
immediately upon a change of control of us or Peoples Home Savings.
Stock Benefits
Stock Option Plan. On October 22, 1998, the stockholders of PHS Bancorp
approved a plan authorizing the issuance of up to 124,200 shares of common stock
upon the exercise of stock options that may be granted to directors, officers
and employees. At June 30, 2001, 99,200 option shares were vested. Such options
shall be adjusted for the Exchange Ratio.
Restricted Stock Plan. On October 22, 1998, the stockholders of PHS
Bancorp approved a restricted stock plan authorizing the issuance of up to
49,608 shares of common stock to directors, officers and employees. At June 30,
2001, 16,155 restricted stock plan shares remain unvested. Such unvested
restricted stock plan shares shall be adjusted for the Exchange Ratio.
Benefits To Be Considered Following Completion Of The Conversion
Stock Option Plan. We intend to submit for stockholder approval, no
earlier than six months to one year after the completion of the conversion, the
stock option plan for directors, officers and employees of us and Peoples Home
Savings. If approved by the stockholders, the stock option plan will reserve 10%
of the shares sold in the offering to be issued when options granted to
directors, officers, and employees are exercised. Ten percent of the shares
issued in the offering would amount to 201,875 shares, 237,500 shares, 273,125
shares or 314,094 shares at the minimum, mid-point, maximum and adjusted maximum
of the offering range, respectively. No options would be granted under the stock
option plan until the date on which stockholder approval is received.
The exercise price of the options granted under the stock option plan
will be equal to the fair market value of the shares on the date of grant of the
stock options. If the stock option plan is adopted within one year following the
offering, options will vest at a rate of 20% at the end of each 12 months of
service with Peoples Home Savings after the date of grant. Options granted under
the stock option plan would be adjusted for capital changes such as stock splits
and stock dividends. Awards will be 100% vested upon termination of employment
due to death or disability or a change in control of us or Peoples Home Savings.
The stock option plan would be administered by a committee of
nonemployee members of our board of directors. Options granted under the stock
option plan to employees may be "incentive" stock options, designed to result in
a beneficial tax treatment to the employee but no tax deduction to us.
Non-qualified stock options may also be granted to employees under the stock
option plan, and will be granted to the nonemployee directors who receive stock
options. In the event an option recipient terminated his employment or service
as an employee or director, the options would terminate during certain specified
periods.
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Restricted Stock Plan. We also intend to submit for stockholder
approval, no earlier than six months to one year after the completion of the
conversion, the restricted stock plan. The restricted stock plan is designed to
encourage directors, officers and employees to continue their service with
Peoples Home Savings by giving them an ownership interest in us. If approved by
stockholders, the restricted stock plan will reserve 4% of the shares sold in
the offering or 80,750 shares, 95,000 shares, 109,250 shares or 125,637 shares
at the minimum, midpoint, maximum and adjusted maximum of the offering range,
respectively. In the event the restricted stock plan is adopted more than one
year following the completion of the conversion, it would reserve up to 4% of
the shares sold in the offering for awards to officers, directors, and
employees. The officers, directors, and employees will be awarded common stock
under the restricted stock plan without having to pay cash for the shares. No
awards would be made under the restricted stock plan until the date on which
stockholder approval is received.
Awards under the restricted stock plan would be nontransferable and
nonassignable, and during the lifetime of the recipient could only be earned by
him. Awards would be adjusted for capital changes such as stock dividends and
stock splits. Awards would be 100% vested upon termination of employment or
service due to death or disability, and if the restricted stock plan is adopted
more than one year after the conversion, awards would be 100% vested upon normal
retirement or a change in control of us or Peoples Home Savings. If employment
or service were to terminate for other reasons, the award recipient would
forfeit any nonvested award. If employment or service is terminated for cause,
as defined in the restricted stock plan, shares not already delivered would be
forfeited.
The recipient of an award will recognize income equal to the fair
market value of the stock earned, determined as of the date of vesting, unless
the recipient makes an election under Section 83(b) of the Code to be taxed
earlier. The amount of income recognized by the recipient would be a deductible
expense for our tax purposes. If the restricted stock plan is adopted within one
year following the conversion, dividends and other earnings will accrue and be
payable to the award recipient when the shares vest. If the restricted stock
plan is adopted within one year following the conversion, shares not yet vested
will be voted by the trustee of the restricted stock plan, taking into account
the best interests of the award recipients. If the restricted stock plan is
adopted more than one year following the conversion, dividends declared on
unvested shares will be distributed to the recipient when paid, and the
recipient will be entitled to vote the unvested shares.
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Beneficial Ownership of PHS Bancorp Common Stock
The following table includes, as of June 30, 2001, information as to
PHS Bancorp common stock beneficially owned by all directors and executive
officers of PHS Bancorp, and by all directors and executive officers as a group.
The business address of PHS Bancorp, M.H.C. and each of the directors and
executive officers is 744 Shenango Road, Beaver Falls, Pennsylvania.
Number of Shares Owned and Percent of Shares
Name and Address Nature of Beneficial of Common Stock
of Beneficial Owners Ownership(4) Outstanding
- -------------------- -------------------------- -----------------
PHS Bancorp, M.H.C. 1,518,000 60.0%(1)
Directors:
Joseph D. Belas 13,700 1.4 (2)
Douglas K. Brooks 24,573 2.4 (2)
Emlyn Charles 18,074 1.8 (2)
Howard B. Lenox 31,673(3) 3.1 (2)
John C. Kelly 47,104(3) 4.6 (2)
Earl F. Klear 11,573(3) 1.1 (2)
John M. Rowse 7,331(3) * (2)
James P. Wetzel, Jr. 61,542 5.9 (2)
Executive Officers Who Are Not
Directors:
Richard E. Canonge 23,450 2.3 (2)
David E. Ault 17,521 1.7 (2)
Joseph R. Pollock 9,609 * (2)
Paul W. Jewell 6,146 * (2)
Total shares beneficially owned by
all directors and executive officers
as a group (12 persons) 272,296 24.5%(2)
- -----------------
(1) Based on 2,529,600 shares outstanding.
(2) Based on 1,011,600 shares held by persons other than PHS Bancorp,
M.H.C.
(3) Excludes 67,860 unallocated shares held by the ESOP and also excludes
6,210 shares previously awarded but subject to forfeiture held by the
Bank's restricted stock plan over which such directors, as trustees to
the ESOP and the restricted stock plan, respectively, exercise shared
voting and investment power. Such individuals serving as trustees
disclaim beneficial ownership with respect to such shares. For Mr.
Lenox, excludes only 6,210 shares previously awarded under the
restricted stock plan.
(4) The share amounts include shares of common stock that the following
persons may acquire through the exercise of stock options under the
stock option plan within 60 days of the June 30, 2001: Douglas K.
Brooks: 6,210, Emlyn Charles: 6,210, Howard B. Lenox: 6,210, John C.
Kelly: 6,210, Earl F. Klear: 6,210, John M. Rowse: 6,210, James P.
Wetzel, Jr.: 24,840, Richard E. Canonge: 12,917, David E. Ault: 11,923,
Joseph R. Pollock: 7,949, and Paul W. Jewell: 3,974.
* Less than 1% of the outstanding common stock.
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Certain Relationships And Related Transactions
No directors, executive officers or immediate family members of such
individuals were engaged in transactions with us or any subsidiary involving
more than $60,000, other than through a loan, during the six months ended June
30, 2001 and the year ended December 31, 2000. Furthermore, Peoples Home Savings
had no "interlocking" relationships in which:
o any executive officer is a member of the board of directors of another
entity, one of whose executive officers are a member of Peoples Home
Savings board of directors; or where
o any executive officer is a member of the compensation committee of
another entity, one of whose executive officers is a member of Peoples
Home Savings board of directors.
Peoples Home Savings has followed the policy of offering residential
mortgage loans for the financing of personal residences and consumer loans to
its officers, directors and employees. Loans are made in the ordinary course of
business and also made on substantially the same terms and conditions, including
interest rate and collateral, as those of comparable transactions prevailing at
the time with other persons, and do not include more than the normal risk of
collectibility or present other unfavorable features.
Subscriptions By Executive Officers And Directors
The table below sets forth, for each of our directors and executive
officers, the following information:
(1) the number of exchange shares to be held upon consummation of
the conversion, based upon their beneficial ownership of PHS
Bancorp common stock as of June 30, 2001;
(2) the proposed purchases of subscription shares, assuming
sufficient shares are available to satisfy their
subscriptions; and
(3) the total amount of our common stock to be held upon
consummation of the conversion.
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In each case, it is assumed that subscription shares are sold at the midpoint of
the offering range. Because of limitations on the purchase of subscription
shares, directors and executive officers may be precluded from purchasing
subscription shares if the offering is sold at the maximum or the maximum, as
adjusted, of the offering range. See "The Offering--Limitations on Purchases of
Common Stock."
Proposed Purchases of Total Common Stock
Conversion Stock(1) Held
--------------------- ------------------
Number
of
Exchange
Shares to be Number of Number of % of
Name Held(2)(3) Shares Amount($) Shares Total
- -------------------- ---------- ------ --------- ------ -----
Joseph D. Belas 18,939 10,000 100,000 28,939 *
Douglas K. Brooks 33,970 7,500 75,000 41,470 1.1
Emlyn Charles 24,985 4,000 40,000 28,985 *
Howard B. Lenox 43,785 5,000 50,000 48,785 1.3
John C. Kelly 65,117 10,000 100,000 75,117 2.0
Earl F. Klear 15,999 500 5,000 16,499 *
John M. Rowse 10,134 500 5,000 10,634 *
James P. Wetzel, Jr. 85,076 5,000 50,000 90,076 2.4
Richard E. Canonge 32,417 2,000 20,000 34,417 *
David E. Ault 24,221 -- -- 24,221 *
Joseph R. Pollock 13,283 500 5,000 13,783 *
Paul W. Jewell 8,496 -- -- 8,496 *
------- ------ ------- ------- ----
Total 376,422 45,000 500,000 421,422 10.8%
======= ====== ======= ======= ====
- ---------------
(1) Includes proposed subscriptions, if any, by associates. Does not
include the subscription order by the employee stock ownership plan.
Purchases by the employee stock ownership plan are expected to be 8% of
the shares sold in the offering.
(2) Include shares underlying options and shares of restricted stock. Such
option shares and restricted stock are not exercisable within 60 days
of June 30, 2001. See "-- Beneficial Ownership of PHS Bancorp Common
Stock."
(3) Does not include stock options and awards that may be granted under our
stock option plan and restricted stock plan if these plans are approved
by stockholders at an annual meeting or special meeting of stockholders
at least six months following the conversion. No determinations have
been made with respect to the plans.
* Less than 1.0% of the total common shares outstanding, at the midpoint
of the offering range.
Effects of Conversion on Rights of Stockholders
General
We and PHS Bancorp are both business corporations incorporated in
Pennsylvania under the Pennsylvania Business Corporation Law. The rights of PHS
Bancorp stockholders are governed by Pennsylvania corporate law and the articles
of incorporation and bylaws of PHS Bancorp. Upon the
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completion of the conversion, each PHS Bancorp stockholder who converts his
shares to our common stock will become a stockholder of us. Accordingly, after
the conversion, the rights of such stockholders will be governed by our articles
of incorporation and bylaws, in addition to Pennsylvania corporate law. Since we
and PHS Bancorp are both Pennsylvania corporations, the differences in the
rights of us and PHS Bancorp stockholders generally will consist of differences
found in their respective articles of incorporation and bylaws.
Anti-Takeover Provisions
Generally. Our articles of incorporation and bylaws contain certain
provisions designed to assist our board of directors in playing a role if any
group or person attempts to acquire control of us so that our board of directors
can further protect the interests of us and our stockholders under the
circumstances. These provisions may help our interests of our stockholders or
enhance our board of directors' ability to maximize the value to be received by
the stockholders upon a sale of control of us.
Although our management believes that these provisions are beneficial
to our stockholders, they may also tend to discourage some takeover bids. As a
result, our stockholders may be deprived of opportunities to sell some or all of
their shares at prices that represent a premium over prevailing market prices.
On the other hand, defeating undesirable acquisition offers can be a very
expensive and time-consuming process. To the extent that these provisions
discourage undesirable proposals, we may be able to avoid those expenditures of
time and money.
These provisions may also discourage open market purchases by a company
that may desire to acquire us. Those purchases may increase the market price of
our common stock temporarily, and enable stockholders to sell their shares at a
price higher than they might otherwise obtain. In addition, these provisions may
decrease the market price of our common stock by making the stock less
attractive to persons who invest in securities in anticipation of price
increases from potential acquisition attempts. The provisions may also make it
more difficult and time consuming for a potential acquiror to obtain control of
us through replacing the board of directors and management. Furthermore, the
provisions may make it more difficult for our stockholders to replace the board
of directors or management, even if a majority of the stockholders believe that
replacing the board of directors or management is in the best interests of us.
Because of these factors, these provisions may tend to perpetuate the incumbent
board of directors and management.
Our articles of incorporation and bylaws and those of PHS Bancorp
contain anti-takeover provisions that are described below. These provisions may
discourage or prevent tender or exchange offers by a corporation or group that
intends to use the acquisition of a substantial number of shares of the
respective company to initiate a takeover culminating in a merger or other
business combination. These provisions may also have the effect of making the
removal of management more difficult.
Following the conversion, pursuant to applicable law and if required,
following the approval by stockholders, we may adopt additional anti-takeover
provisions or other devices regarding the acquisition of our equity securities
that would be permitted under Pennsylvania corporate law.
The following summary is not intended to be complete and is qualified
in its entirety by reference to the Pennsylvania Business Corporation Law and
the articles of incorporation and bylaws of us and PHS Bancorp. See "Where You
Can Find Additional Information" for procedures for obtaining a copy of our
articles and bylaws.
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Matters With Significant Differences
Authorized Capital Stock. Our authorized capital stock consists of
80,000,0000 shares of common stock, par value $.10 per share, and 20,000,000
shares of preferred stock, no par value. PHS Bancorp's authorized capital stock
consists of 10,000,000 shares of common stock, par value $.10 per share and
5,000,000 shares of preferred stock, no par value. The shares of our common
stock and preferred stock were authorized in an amount greater than that to be
issued in the conversion to provide our Board of Directors with flexibility to
effect, among other transactions, financing, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by our Board of Directors, consistent with their
fiduciary duty, to deter future attempts to gain control of us. Our Board of
Directors also has sole authority to determine the terms of any one or more
series of preferred stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of preferred stock, the Board of Directors has the power, to the extent
consistent with its fiduciary duty, to issue a series of preferred stock to
persons friendly to management in order to attempt to block a post tender offer
merger or other transaction by which a third party seeks control, and thereby
assist management to retain its position. Our Board of Directors currently has
no plans for the issuance of additional shares, other than the issuance of
additional shares pursuant to stock benefit plans.
Issuance of Capital Stock. While in the mutual holding company
structure, PHS Bancorp, M.H.C. was required to own at least a majority of the
outstanding PHS Bancorp common stock. There will be no such restriction
applicable to the ownership of our common stock following consummation of the
conversion.
Our articles of incorporation and those of PHS Bancorp do not contain
restrictions on the issuance of shares of capital stock to directors, officers
or controlling persons of us or PHS Bancorp. Thus, stock-related compensation
plans, such as stock option plans, could be adopted by us without stockholder
approval and shares of our capital stock could be issued directly to directors
or officers without stockholder approval. However, corporations like ours and
that of PHS Bancorp whose securities are quoted on the Nasdaq National Market
System generally must obtain stockholder approval of most stock compensation
plans for directors, officers and key employees of the corporation. Moreover,
although generally not required, stockholder approval of stock-related
compensation plans may be sought in certain instances in order to qualify such
plans for favorable federal income tax and securities law treatment under
current laws and regulations.
Board of Directors. Our articles of incorporation and bylaws and those
of PHS Bancorp each requires that the Board of Directors shall be divided into
three classes as nearly equal in number as possible and that the members of each
class shall be elected for a term of three years and until their successors are
elected and qualified, with one class being elected annually. Additionally, any
vacancy occurring on our board of directors or that of PHS Bancorp, including
any vacancy created by reason of an increase in the number of directors, may be
filled by the remaining directors, and any director so chosen shall hold office
for the remainder of the term to which the director has been elected and until
his or her successor is elected and qualified.
Our bylaws also contain numerous provisions which may prevent a hostile
stockholder from nominating and electing a person to our board of directors.
Such provisions include:
o Number and Power (Article 4.1) - Each director must reside in
a county, city or town within the Commonwealth of Pennsylvania
not more than thirty-five (35) miles in distance from the main
branch or nearest branch office location of Peoples Home
Savings;
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o Resignation (Article 4.3). This section provides for the
immediate involuntary resignation of a director in the event a
board member has more than three consecutive and unexcused
absences from regular meetings of the board of directors;
o Minimum Share Requirement (Article 4.15). Each of our
directors must be a shareholder of us and own at least 1,000
shares of our common stock;
o Affiliations with other Depository Institutions (Article
4.16). A person is prohibited from serving as a director if
such person is also a director or officer of another
depository institution;
o Eligibility Requirement (Article 4.17). A person is prohibited
from serving as a director, if he or she has been indicted or
convicted of an offense involving dishonesty or breach of
trust, or is under a cease and desist order by federal or
state regulators for committing such a violation, or has been
nominated by a person who has committed such violations. In
this regard, Article 2.14 (notice for nominations and
proposals) requires that nominations for directors be
accompanied by a certification that such nominee meets the
eligibility requirements set forth in this Article 4.17.
The bylaws of PHS Bancorp do not contain any of the provisions
described above.
Provisions Affecting Business Combinations and Control Share
Acquisitions. Pennsylvania law contains four anti-takeover sections that
apply to Pennsylvania corporations relating to
o control share acquisitions;
o the disgorgement of profits by certain controlling persons;
o business combination transactions with interested stockholders; and
o the ability of stockholders to put their stock following a control
transaction.
Pennsylvania law allows Pennsylvania corporations to opt-out of these
anti-takeover sections and PHS Bancorp has elected to do so with respect to
"control share acquisitions," while we have not opted out of any of the four
"anti-takeover" sections.
Under Pennsylvania law, unless a corporation has opted out of certain
statutory provisions, shares of a corporation whose shares are registered under
the Securities Exchange Act of 1934 acquired in a "control share acquisition" do
not have voting rights unless restored by a resolution approved by a vote of the
disinterested shareholders. Under Pennsylvania law a "control share acquisition"
means an acquisition by any person of voting power of a corporation that would,
when added to all other voting power of such person, entitle such person to cast
for the first time, the amount of voting power in any of the following ranges:
o at least 20% but less than 331/3%;
o at least 331/3% but less than 50%; or
o more than 50%;
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Our articles of incorporation and those of PHS Bancorp also require the
approval of the holders of at least 80% of ours or that of PHS Bancorp
outstanding shares of voting stock to approved certain business combinations
involving an interested shareholder except in cases where the proposed
transaction has been approved in advance by two-thirds of those members of our
board of directors or that of PHS Bancorp who are unaffiliated with the
interested shareholder and were directors prior to the time when the interested
shareholder became an interested shareholder. The term "interested shareholder"
is defined to include any individual, corporation, partnership or other entity
(other than us or our subsidiary or that of PHS Bancorp or its subsidiary) which
owns beneficially or controls, directly or indirectly, 20% or more of ours or
that of PHS Bancorp outstanding shares of voting stock or an affiliate of such
person or entity. This provision of our articles of incorporation and those of
PHS Bancorp applies to any "business combination," which is defined to include:
o any merger or consolidation of us or PHS Bancorp with or into
any interested shareholder;
o any sale, lease, exchange, mortgage, transfer, or other
disposition of 10% or more of ours (or that of PHS Bancorp)
assets, or combined assets or ours (or that of PHS Bancorp),
and our subsidiaries (or that of PHS Bancorp), to an
interested shareholder;
o the issuance of ours or that of PHS Bancorp shares or any
subsidiary of ours (or that of PHS Bancorp) with a market
value of 5% or more of the aggregate market value of all of
ours (or that of PHS Bancorp's) outstanding shares;
o the adoption of a plan of liquidation by us (or PHS Bancorp)
due to any agreement or understanding with an interested
shareholder;
o the reclassification of any securities of ours (or that of PHS
Bancorp) or any of ours (or that of PHS Bancorp's)
subsidiaries or recapitalization of us (or PHS Bancorp) or
other transaction which increases the interested shareholder's
proportionate ownership of us (or PHS Bancorp); or
o any loan, guarantee, advance or other financial assistance by
us to the interested shareholder. PHS Bancorp articles of
incorporation do not include this provision.
Amendment of Articles of Incorporation and Bylaws. Under Pennsylvania
law, no amendment to a corporation's articles of incorporation may be made
unless it is first proposed by the board of directors, or, unless otherwise
provided in the articles of incorporation, by petition of stockholders entitled
to cast at least 10% of the votes that all stockholders are entitled to cast.
Our articles of incorporation provide that no amendment may be made
unless it is first approved by our board of directors and thereafter is approved
by the holders of a majority of the shares of our common stock entitled to vote
generally in an election of directors, voting together as a single class, as
well as such additional vote of the preferred stock as may be required, with the
exception of Article 7 (directors), Article 8 (preemptive rights), Article 9
(elimination of director's liability), Article 10 (indemnification, etc. of
officers, directors, employees and agents), Article 11 (meetings of stockholders
and stockholder proposals), Article 12 (certain limitations on voting rights),
Articles 13 and 15 (stockholders approval of business combinations), and Article
14 (evaluation of offers), which may not be amended without the affirmative vote
of the holders of at least 80% of the directors as well as such additional vote
of the preferred stock as may be required. Our board of directors also has the
103
authority to amend our articles of incorporation without shareholder vote in
certain circumstances in accordance with Pennsylvania corporate law.
PHS Bancorp has comparable amendment language in its articles of
incorporation except that its board of directors does not have the authority to
amend its articles of incorporation.
Our articles of incorporation and those of PHS Bancorp provide that our
bylaws and those of PHS Bancorp may be amended by a majority vote of our
directors or that of PHS Bancorp then in office or by the affirmative vote of
the holders of 80% of the shares of common stock of us or that of PHS Bancorp
entitled to vote generally in an election of directors, voting together as a
single class, as well as such additional vote of the preferred stock as may be
required.
Matters With No Significant Differences
Voting Rights. Neither our articles of incorporation or bylaws nor PHS
Bancorp's articles of incorporation or bylaws currently provide for cumulative
voting in elections of directors. For additional information regarding voting
rights, see "--Limitations on Acquisitions of Voting Stock and Voting Rights"
below.
Payment of Dividends. Under Pennsylvania corporate law, a corporation
is prohibited from making a distribution to shareholders if:
o that corporation would be unable to pay its debts as they
become due in the usual course of business; or
o the total assets of that corporation would be less than the
sum of its total liabilities plus the amount that would be
needed, if that corporation were then dissolved, to satisfy
the rights of shareholders having superior preferential rights
upon dissolution to the shareholders receiving such
distribution. For the purpose of valuing the assets of the
corporation, the board of directors may base its determination
on one or more of the following: the book value, or the
current value, of the corporation's assets and liabilities,
unrealized appreciation and depreciation of the corporation's
assets and liabilities or any other method that is reasonable
in the circumstances.
Our bylaws and those of PHS Bancorp similarly provide that dividends
may be declared by the board and paid by out of its unreserved and unrestricted
earned surplus or out of the unrestricted capital surplus, subject to
Pennsylvania corporate law. However, there are various statutory limitations
that will limit the ability of Peoples Home Savings to pay dividends to us or
PHS Bancorp.
Limitations on Liability. Our articles of incorporation and those of
PHS Bancorp each provides that our directors and those of PHS Bancorp shall not
be personally liable for monetary damages to us or PHS Bancorp for certain
actions as directors, except for liabilities that involve a director's willful
misconduct or the director's conscious disregard for the best interest of us or
PHS Bancorp, the authorization of unlawful distributions, a director's receipt
of an improper personal benefit from his or her position as a director or a
violation of criminal law, unless the director had reasonable cause to believe
that his or her conduct was lawful. This provision might, in certain instances,
discourage or deter stockholders or management from bringing a lawsuit against
directors for a breach of their duties even though such an action, if
successful, might have benefitted us or PHS Bancorp.
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Indemnification of Directors, Officers, Employees and Agents. Our
officers, directors, agents and employees and those of PHS Bancorp are
indemnified with respect to certain actions pursuant to our articles of
incorporation and those of PHS Bancorp, which complies with Pennsylvania
corporate law regarding indemnification. Pennsylvania corporate law allows us
and PHS Bancorp to indemnify the aforementioned persons for expenses,
settlements, judgments and fines in suits in which such person has been made a
party by reason of the fact that he or she is or was an agent of us or PHS
Bancorp. No such indemnification may be given if such person is liable to the
corporation for an unlawful distribution, if such person personally received a
benefit to which he or she was not entitled, if such person acted with willful
misconduct or a conscious disregard for the corporation's best interests in a
action by the corporation or in a stockholder derivative action, or if the
person's acts or omissions constituted a violation of the criminal law, unless
such person had reasonable cause to believe his or her conduct was lawful or had
no reasonable cause to believe his or her conduct was unlawful.
Special Meetings of Stockholders. Our articles of incorporation provide
that special meetings of our stockholders may only be called by the board of
directors pursuant to a resolution approved by the affirmative vote of a
majority of directors then in office. PHS Bancorp's articles of incorporation
provides that special meetings of PHS Bancorp's stockholders may be called by
the Chairman, the President or by the board of directors pursuant to a
resolution approved by the affirmative vote of a majority of the directors then
in office.
Stockholder Nominations and Proposals. Our articles of incorporation
and those of PHS Bancorp provide that notice of any stockholder proposal and
nomination that are to be presented at any annual meeting of stockholders must
be sent so it is received by us or PHS Bancorp not less than 60 days in advance
of the anniversary date of the previous year's annual meeting.
Stockholder Action Without a Meeting. Our articles of incorporation and
those of PHS Bancorp specifically deny the authority of stockholders to act
without a meeting.
Stockholders' Right to Examine Books and Records. Pennsylvania
corporate law provides that a stockholder may inspect books and records if the
stockholder makes a written demand in good faith and for a proper purpose that
describes the requested records and the stockholders' purpose and if the records
requested are directly connected to the stockholders' stated purpose.
Limitations on Acquisitions of Voting Stock and Voting Rights. Our
articles of incorporation provide that until five years from the completion of
the conversion of PHS Bancorp, M.H.C. no person shall directly or indirectly
offer to acquire or acquire the beneficial ownership of more than 10% of the
issued and outstanding shares of any class of our equity securities. In the
event a person acquires our shares in violation of this provision, all shares
owned by such person in excess of 10% will be considered "excess shares" and
will not be able to be voted. PHS Bancorp's articles of incorporation are
substantially the same.
Restrictions on Acquisition of PHSB Financial
Under applicable Federal and Pennsylvania law, no company may acquire
control of a bank or bank holding company without the prior approval of the
Federal Reserve or the Pennsylvania Department of Banking, and no individual,
acting directly or indirectly or through or in concert with one or more other
persons, may acquire control of a bank holding company unless the Federal
Reserve and the Pennsylvanial Department of Banking has been given at least 60
days prior written notice. Any
105
company that acquires control becomes a "bank holding company" subject to
registration, examination and regulation by the Federal Reserve and the
Pennsylvania Deparment of Banking.
Pursuant to federal regulations, control is considered to have been
acquired when an entity, among other things, has acquired more than 25 percent
of any class of voting stock of the institution or the ability to control the
election of a majority of the directors of an institution. Moreover, control is
presumed to have occurred, subject to rebuttal, upon the acquisition of more
than 10 percent of any class of voting stock, or of more than 25 percent of any
class of stock, of a bank or bank holding company, where certain enumerated
control factors are also present in the acquisition. The Federal Reserve may
prohibit an acquisition of control if:
o it would result in a monopoly or substantially lessen competition;
o the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
o the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or of
the public to permit the acquisition of control by that person.
Pennsylvania law has a similar statute except, that control is
considered to have been acquired when a person, among other things, has acquired
more than 10 percent (or 5 percent in certain circumstances) of any class of the
outstanding shares of the institution or corporation or the ability to control
the election of a majority of the directors of an institution or corporation.
Description of Capital Stock of PHSB Financial
We are authorized to issue 80,000,000 shares of common stock, par value
$0.10 per share, and 20,000,000 shares of preferred stock, no par value. We
currently expect to issue in the conversion between 2,018,750 and 3,140,937
shares of common stock, subject to adjustment, and between 1,188,670 and
1,849,430, subject to adjustment, in exchange for our publicly held shares. See
"Capitalization." Upon payment of the purchase price shares of common stock
issued in the offering will be fully paid and non-assessable. The common stock
will represent nonwithdrawable capital, will not be an account of insurable type
and will not be insured by the Federal Deposit Insurance Corporation or any
other governmental agency. See also "Dividend Policy."
Voting Rights
The holders of common stock will possess exclusive voting rights in us.
The holder of shares of common stock will be entitled to one vote for each share
held on all matters subject to stockholder vote. See "The Conversion - Effects
on Voting Rights of Members."
Liquidation Rights
In the event of any liquidation, dissolution, or winding-up of us, the
holders of the common stock generally would be entitled to receive, after
payment of all our debts and liabilities, including all debts and liabilities of
Peoples Home Savings, all of our assets available for distribution. See also
"The Conversion - Effects on Liquidation Rights."
106
Preemptive Rights; Redemption
Because the holders of the common stock do not have any preemptive
rights with respect to any shares we may issue, the Board of Directors may sell
shares of our capital stock without first offering such shares to our existing
stockholders. The common stock will not be subject to any redemption provisions.
Preferred Stock
We are authorized to issue up to 20,000,000 shares of preferred stock
and to fix and state voting powers, designations, preferences, or other special
rights of preferred stock and the qualifications, limitations and restrictions
of those shares as the Board of Directors may determine in its discretion.
Preferred stock may be issued in distinctly designated series, may be
convertible into common stock and may rank prior to the common stock as to
dividends rights, liquidation preferences, or both, and may have full or limited
voting rights. The issuance of preferred stock could adversely affect the voting
and other rights of holders of common stock.
The authorized but unissued shares of preferred stock and the
authorized but unissued and unreserved shares of common stock will be available
for issuance in future mergers or acquisitions, in future public offerings or
private placements. Except as otherwise required to approve the transaction in
which the additional authorized shares of preferred stock would be issued, no
stockholder approval generally would be required for the issuance of these
shares.
Legal and Tax Opinions
The legality of the issuance of the common stock being offered and
certain matters relating to the conversion and federal and state taxation will
be passed upon for us by Malizia Spidi & Fisch, PC., Washington, D.C. Certain
legal matters will be passed upon for Trident Securities by Luse Lehman Gorman
Pomerenk & Schick, P.C., Washington, D.C.
Experts
The consolidated financial statements of PHS Bancorp as of December 31,
2000 and 1999 and for each of the years in the two year period ended December
31, 2000 have been included in this prospectus in reliance upon the report of
S.R. Snodgrass, A.C., independent certified public accountants, appearing
elsewhere in this prospectus, and upon the authority of said firm as experts in
accounting and auditing.
RP Financial has consented to the publication in this document of a
summary of its letter to us setting forth its belief as to the estimated pro
forma market value of the common stock upon the conversion and stock offering
and its letter setting forth the value of subscription rights and to the use of
its name and statements with respect to it appearing in this document.
107
Registration Requirements
Our common stock will be registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934. Since our stock will be registered under this
section, we will be subject to the information, proxy solicitation, insider
trading restrictions, tender offer rules, periodic reporting and other
requirements of these rules. We will not deregister our common stock for a
period of at least three years following the conversion.
Where You Can Find Additional Information
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and must file reports and other information with the SEC.
We have filed with the SEC a registration statement on Form SB-2 under
the Securities Act of 1933, with respect to the common stock offered in this
document. As permitted by the rules and regulations of the SEC, this document
does not contain all the information set forth in the registration statement.
Such information can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates.
You may obtain information on the operation of the Public Reference Room by
calling 1-800-SEC-0330. The SEC also maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants,
including us, that file electronically with the SEC. The address for this Web
site is "http://www.sec.gov." The statements contained in this document as to
the contents of any contract or other document filed as an exhibit to the Form
SB-2 are, of necessity, brief descriptions and are not necessarily complete;
each such statement is qualified by reference to such contract or document.
A copy of the plan of conversion is available without charge from
Peoples Home Savings.
108
Index to Financial Statements
PHS Bancorp
Report of Independent Auditors..................................................................................F-1
Consolidated Balance Sheet at June 30, 2001 (unaudited),
and December 31, 2000 and 1999.............................................................................F-2
Consolidated Statement of Income for the six months ended June 30, 2001 and 2000
(unaudited) and Consolidated Statement of Income for each
of the years in the two-year period ended December 31, 2000.................................................55
Consolidated Statement of Changes in Stockholders' Equity for each of the years
in the two-year period ended December 31, 2000
and for the six months ended June 30, 2001 (unaudited).....................................................F-3
Consolidated Statement of Cash Flows for the six months ended June 30, 2001 and
2000 (unaudited) and for each of the years in the two-year period
ended December 31, 2000....................................................................................F-4
Notes to Consolidated Financial Statements...............................................................F-5 - F-35
Other schedules are omitted as they are not required or are not applicable or
the required information is shown in the financial statements or related notes.
PHSB Financial Statements have not been provided since it has not commenced
operations.
109
Snodgrass
Certified Public Accountants and Consultants
[LOGO]
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors and Stockholders
PHS Bancorp, Inc.
We have audited the accompanying consolidated balance sheet of PHS Bancorp, Inc.
and subsidiary as of December 31, 2000 and 1999, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the two years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of PHS
Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/S.R. Snodgrass, A.C.
Wexford, PA
January 12, 2001, except as to the third and fourth paragraphs of Note 17 as to
which the date is August 16, 2001
S.R. Snodgrass, A.C.
1000 Stonewood Drive, Suite 200, Wexford, PA. 15090-8399. Phone 724-934-0344
Facsimile 724-934-0345
F-1
PHS BANCORP, INC.
CONSOLIDATED BALANCE SHEET
June 30, December 31,
2001 2000 1999
---------------- ----------------- -----------------
(Unaudited)
ASSETS
Cash and amounts due from other institutions $ 1,556,061 $ 1,502,757 $ 3,533,452
Interest-bearing deposits with other institutions 7,562,181 5,094,404 11,416,781
Investment securities:
Available for sale 22,837,473 24,814,065 27,594,897
Held to maturity (market value $18,289,217,
$17,917,570, and $15,268,634) 18,036,869 17,776,486 15,539,866
Mortgage-backed securities:
Available for sale 60,830,680 38,415,158 37,426,028
Held to maturity (market value $34,536,428,
$38,471,164, and $42,263,705) 34,619,668 38,779,775 44,141,386
Loans (net of allowance for loan losses of $1,453,312
$1,454,618, and $1,359,900) 127,692,486 129,017,057 118,745,043
Accrued interest receivable 1,662,603 1,625,420 1,538,163
Premises and equipment 4,545,561 4,637,374 4,295,194
Federal Home Loan Bank stock 2,614,800 2,614,800 2,614,885
Other assets 947,559 1,052,375 1,794,646
---------------- ---------------- ----------------
TOTAL ASSETS $ 282,905,941 $ 265,329,671 $ 268,640,341
================ ================ ================
LIABILITIES
Deposits $ 201,249,510 $ 198,241,701 $ 189,344,552
Advances from Federal Home Loan Bank 50,194,800 36,194,800 50,294,800
Other borrowings 52,117 75,315 120,039
Accrued interest payable and other liabilities 2,140,385 1,967,621 2,129,613
---------------- ---------------- ----------------
TOTAL LIABILITIES 253,636,812 236,479,437 241,889,004
---------------- ---------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock, no par value; 5,000,000 shares
authorized; none issued and outstanding - - -
Common stock, par value $.10 per share; 10,000,000
shares authorized; 2,760,000 issued 276,000 276,000 276,000
Additional paid-in capital 10,463,055 10,480,215 10,541,960
Retained earnings - substantially restricted 21,310,621 20,756,274 19,496,887
Accumulated other comprehensive income (loss) 525,006 456,968 (914,110)
Unallocated shares held by Employee Stock
Ownership Plan (ESOP) (842,673) (917,283) (1,066,503)
Unallocated shares held by Restricted Stock Plan (RSP) (121,526) (185,783) (314,295)
Treasury stock, at cost (230,400, 202,750, and
124,000 shares) (2,341,354) (2,016,157) (1,268,602)
---------------- ---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 29,269,129 28,850,234 26,751,337
---------------- ---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 282,905,941 $ 265,329,671 $ 268,640,341
================ ================ ================
See accompanying notes to the consolidated financial statements.
F-2
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Retained Accumulated Unallocated Unallocated Total Compre-
Additional Earnings Other Shares Shares Stock- hensive
Common Paid-in Substantially Comprehensive Held by Held by Treasury holders' Income
Stock Capital Restricted Income (Loss) ESOP RSP Stock Equity (Loss)
-------- ----------- ------------ ------------- ----------- ------------ ----------- ------------ -----------
Balance,
December 31, 1998 $276,000 $10,588,940 $18,489,177 $ 1,088,415 $(1,215,723) $ (42,700) $ - $29,184,109
Net income 1,857,890 1,857,890 $ 1,857,890
Other comprehensive
loss:
Unrealized loss
on available for
sale securities,
net of tax benefit
of $1,031,604 (2,002,525) (2,002,525) (2,002,525)
-----------
Comprehensive loss $ (144,635)
===========
Cash dividends
declared
($.30 per share) (743,785) (743,785)
ESOP shares released (46,980) 149,220 102,240
Treasury stock
purchased, at cost (1,268,602) (1,268,602)
Common stock
acquired by RSP (106,395) (400,107) (506,502)
RSP shares released 128,512 128,512
-------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Balance,
December 31, 1999 276,000 10,541,960 19,496,887 (914,110) (1,066,503) (314,295) (1,268,602) 26,751,337
Net income 2,171,937 2,171,937 $ 2,171,937
Other comprehensive
income:
Unrealized gain on
available for sale
securities, net of
tax of $706,313 1,371,078 1,371,078 1,371,078
-----------
Comprehensive income $ 3,543,015
===========
Cash dividends declared
($.36 per share) (912,550) (912,550)
ESOP shares released (61,745) 149,220 87,475
Treasury stock
purchased, at cost (747,555) (747,555)
RSP shares released 128,512 128,512
-------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Balance,
December 31, 2000 276,000 10,480,215 20,756,274 456,968 (917,283) (185,783) (2,016,157) 28,850,234
Net income 1,063,532 $ 1,063,532 $ 1,063,532
Other comprehensive
income:
Unrealized gain on
available for sale
securities, net of
tax of $35,050 68,038 68,038 68,038
-----------
Comprehensive income $ 1,131,570
===========
Cash dividends declared
($.20 per share) (509,185) (509,185)
ESOP shares released (17,160) 74,610 57,450
Treasury stock
purchased, at cost (325,197) (325,197)
RSP shares released 64,257 64,257
-------- ----------- ----------- ----------- ----------- ---------- ----------- -----------
Balance,
June 30, 2001
(Unaudited) $276,000 $10,463,055 $21,310,621 $ 525,006 $ (842,673) $ (121,526) $(2,341,354)$29,269,129
======== =========== =========== =========== =========== ========== =========== ===========
Six Months Ended June 30, Year Ended December 31,
2001 2000 2000 1999
----------- ---------- ----------- -----------
(Unaudited)
Components of comprehensive income (loss):
Change in net unrealized gain (loss) on investments held for sale $ 106,396 $ 289,903 $ 1,375,906 $(1,989,922)
Realized gains included in net income, net of tax of
$19,766, $ -, $2,487, $6,492, and $39,732 (38,358) - (4,828) (12,603)
----------- ---------- ----------- -----------
Total $ 68,038 $ 289,903 $ 1,371,078 $(2,002,525)
=========== ========= =========== ===========
See accompanying notes to the consolidated financial statements.
F-3
PHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30, Year Ended December 31,
2001 2000 2000 1999
------------ ----------- ----------- -----------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 1,063,532 $ 1,088,239 $ 2,171,937 $ 1,857,890
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 240,000 255,000 555,000 410,000
Provision for depreciation 328,945 277,038 594,029 518,874
Amortization of discounts, premiums,
and loan origination fees 543,083 500,995 1,044,622 865,746
Investment securities gains, net (58,118) - (7,315) (19,095)
Decrease in loans held for sale - - - 48,080
Increase in accrued interest receivable (37,183) (96,500) (87,257) (21,486)
Increase (decrease) in accrued interest
payable 5,081 212,310 (108,195) 208,050
Amortization of ESOP unearned
compensation 57,450 38,545 87,475 102,240
Amortization of RSP unearned compensation 64,257 64,256 128,512 128,512
Other, net (47,449) (199,071) (389,421) 15,846
------------ ------------ ------------ ------------
Net cash provided by operating
activities 2,159,598 2,140,812 3,989,387 4,114,657
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Investment and mortgage-backed
securities available for sale:
Proceeds from sales 1,862,276 - 1,337,950 2,142,314
Proceeds from maturities and
principal repayments 7,337,854 6,678,978 10,494,500 11,514,770
Purchases (29,469,367) (7,779,468) (7,886,766) (23,578,542)
Investment and mortgage-backed securities held to maturity:
Proceeds from maturities and
principal repayments 9,859,674 2,549,873 6,052,587 33,467,106
Purchases (5,997,258) (2,963,389) (2,963,389) (26,634,757)
Decrease (increase) in loans, net 559,370 (9,347,057) (11,834,673) (20,320,123)
Proceeds from sales of repossessed assets 295,837 175,051 301,221 312,962
Purchase of premises and equipment (237,132) (134,062) (936,209) (312,409)
Purchase of Federal Home Loan Bank stock - - - (1,070,085)
------------ ------------ ------------ ------------
Net cash used for investing
activities (15,788,746) (10,820,074) (5,434,779) (24,478,764)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Increase in deposits, net 3,007,809 7,201,176 8,897,149 8,231,988
Proceeds from advances from Federal
Home Loan Bank 20,000,000 - 13,500,000 19,400,000
Repayment of advances from Federal
Home Loan Bank (6,000,000) (6,000,000) 27,600,000) -
Repayment of other borrowings (23,198) (22,088) (44,724) (1,267,579)
Common stock acquired by RSP - - - (506,502)
Cash dividends paid (509,185) (469,837) (912,550) (743,785)
Purchase of treasury stock (325,197) (220,809) (747,555) (1,268,602)
------------ ------------ ------------ ------------
Net cash provided by (used for)
financing activities 16,150,229 488,442 (6,907,680) 23,845,520
------------ ------------ ------------ ------------
Increase (decrease) in cash and
cash equivalents 2,521,081 (8,190,820) (8,353,072) 3,481,413
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 6,597,161 14,950,233 14,950,233 11,468,820
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 9,118,242 $ 6,759,413 $ 6,597,161 $ 14,950,233
============ ============ ============ ============
See accompanying notes to the consolidated financial statements.
F-4
PHS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(ALL DATA RELATED TO JUNE 30, 2001 AND THE SIX MONTHS ENDED
JUNE 30, 2001 AND 2000 ARE UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting and reporting policies applied in the
presentation of the accompanying financial statements follows:
Nature of Operations and Basis of Presentation
- ----------------------------------------------
PHS Bancorp, Inc. (the "Company") is a Pennsylvania corporation and is
registered under the Bank Holding Company Act. The Company was organized to be
the holding company of Peoples Home Savings Bank (the "Bank"). The Company's and
the Bank's principal sources of revenue emanate from investment and
mortgage-backed securities, and mortgage, commercial, and consumer loan
portfolios as well as a variety of deposit services provided to Bank customers
through nine locations. The Company is supervised by the Federal Reserve Board,
while the Bank is a state-chartered savings bank supervised by the Federal
Deposit Insurance Corporation and the Pennsylvania Department of Banking.
The consolidated financial statements of the Company include the accounts of the
Bank and its wholly-owned subsidiary, HOMECO. All intercompany transactions have
been eliminated in consolidation. The investment in the subsidiary on the parent
company financial statement is carried at the parent company's equity in the
underlying assets of the Bank.
The accounting principles followed by the Company and the methods of applying
these principles conform with generally accepted accounting principles and with
general practice within the banking industry. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the balance sheet date and
related revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Investment and Mortgage-backed Securities
- -----------------------------------------
Investment and mortgage-backed securities are classified at the time of
purchase, based upon management's intentions and ability, as securities held to
maturity or securities available for sale. Debt securities, including
mortgage-backed securities, acquired with the intent and ability to hold to
maturity are classified as held to maturity and are stated at cost and adjusted
for amortization of premium and accretion of discount which are computed using a
level yield method and recognized as adjustments of interest income. Certain
other debt securities have been classified as available for sale to serve
principally as a source of liquidity. Unrealized holding gains and losses on
available for sale securities are reported as a separate component of
stockholders' equity, net of tax, until realized. Realized securities gains and
losses are computed using the specific identification method. Interest and
dividends on investment securities are recognized as income when earned.
Common stock of the Federal Home Loan Bank ("FHLB") represents ownership in an
institution which is wholly-owned by other financial institutions. This equity
security is accounted for at cost and reported separately on the accompanying
consolidated balance sheet.
Loans
- -----
Loans are stated at the principal amount outstanding net of deferred loan fees
and the allowance for loan losses. Interest income on loans is recognized on the
accrual method. Accrual of interest on loans is generally discontinued after 90
days when it is determined that a reasonable doubt exists as to the
collectibility of principal, interest, or both. When a loan is placed on
non-accrual status, unpaid interest is charged against income. Interest
F-5
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
- -----
received on non-accrual loans is either applied to principal or reported as
interest income, according to management's judgment as to the collectibility of
principal. Loans are returned to accrual status when past due interest is
collected, and the collection of principal is probable.
Loan origination and commitment fees as well as certain direct loan origination
costs are being deferred and the net amount amortized as an adjustment to the
related loan's yield. These amounts are being amortized over the contractual
lives of the related loans.
Allowance for Loan Losses
- -------------------------
The allowance for loan losses represents the amount which management estimates
is adequate to provide for potential losses in its loan portfolio. The allowance
method is used in providing for loan losses. Accordingly, all loan losses are
charged to the allowance, and all recoveries are credited to it. The allowance
for loan losses is established through a provision for loan losses charged to
operations. The provision for loan losses is based on management's periodic
evaluation of individual loans, economic factors, past loan loss experience,
changes in the composition and volume of the portfolio, and other relevant
factors. The estimates used in determining the adequacy of the allowance for
loan losses, including the amounts and timing of future cash flows expected on
impaired loans, are particularly susceptible to changes in the near term.
Impaired loans are commercial and commercial real estate loans for which it is
probable the Company will not be able to collect all amounts due according to
the contractual terms of the loan agreement. The Company individually evaluates
such loans for impairment and does not aggregate loans by major risk
classifications. The definition of "impaired loans" is not the same as the
definition of "nonaccrual loans," although the two categories overlap. The
Company may choose to place a loan on nonaccrual status due to payment
delinquency or uncertain collectibility, while not classifying the loan as
impaired. Factors considered by management in determining impairment include
payment status and collateral value. The amount of impairment for these types of
impaired loans is determined by the difference between the present value of the
expected cash flows related to the loan, using the original interest rate, and
its recorded value, or as a practical expedient in the case of collateralized
loans, the difference between the fair value of the collateral and the recorded
amount of the loans. When foreclosure is probable, impairment is measured based
on the fair value of the collateral.
Mortgage loans on one-to-four family properties and all consumer loans are large
groups of smaller-balance homogeneous loans and are measured for impairment
collectively. Loans that experience insignificant payment delays, which are
defined as 90 days or less, generally are not classified as impaired. Management
determines the significance of payment delays on a case-by-case basis taking
into consideration all circumstances surrounding the loan and the borrower
including the length of the delay, the borrower's prior payment record, and the
amount of shortfall in relation to the principal and interest owed.
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the useful lives
of the related assets. Expenditures for maintenance and repairs are charged to
operations as incurred. Costs of major additions and improvements are
capitalized.
Real Estate Owned
- -----------------
Real estate acquired in settlement of loans is stated at the lower of the
recorded investment in the property or its fair value minus estimated costs of
sale. Prior to foreclosure the value of the underlying collateral is written
down by a charge to the allowance for loan losses if necessary. Any subsequent
write-downs are charged against operating expenses. Operating expenses of such
properties, net of related income and losses on their disposition, are included
in other expenses.
F-6
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
- ------------
The Company and its subsidiary file a consolidated federal income tax return.
Deferred tax assets or liabilities are computed based on the difference between
financial statement and the income tax basis of assets and liabilities using the
enacted marginal tax rates. Deferred income tax expenses or benefits are based
on the changes in the deferred tax asset or liability from period to period.
Earnings Per Share
- ------------------
The Company provides dual presentation of basic and diluted earnings per share.
Basic earnings per share is calculated utilizing net income as reported as the
numerator and average shares outstanding as the denominator. The computation of
diluted earnings per share differs in that the dilutive effects of any options,
warrants, and convertible securities are adjusted for in the denominator.
Employee Benefit Plans
- ----------------------
The Bank sponsors a trusteed, deferred benefit pension plan covering all
eligible employees. The Bank's funding policy is to make annual contributions,
as needed, based upon the funding formula developed by the plan's actuary.
Stock Options
- -------------
The Company maintains a stock option plan for the directors, officers, and
employees. When the exercise price of the Company's stock options is greater
than or equal to the market price of the underlying stock on the date of the
grant, no compensation expense is recognized in the Company's financial
statements. Pro forma net income and earnings per share are presented to reflect
the impact of the stock option plan assuming compensation expense had been
recognized based on the fair value of the stock options granted under this plan.
Comprehensive Income
- --------------------
The Company is required to present comprehensive income in a full set of general
purpose financial statements for all periods presented. Other comprehensive
income is comprised exclusively of unrealized holding gains (losses) on the
available for sale securities portfolio. The Company has elected to report the
effects of other comprehensive income as part of the Statement of Changes in
Stockholders' Equity.
Cash Flow Information
- ---------------------
The Company has defined cash and cash equivalents as cash and amounts due from
depository institutions and interest-bearing deposits with other institutions.
For the years ended December 31, 2000 and 1999, the Company made cash payments
for interest of $10,556,919, and $9,075,639, respectively. The Company also made
cash payments for income taxes of $797,748, and $334,500, respectively, during
these same periods.
For the six month periods ended June 30, 2001 and 2000, the Company made cash
payments for interest of $5,361,550 and $4,911,166, respectively. The Company
also made cash payments for income taxes of $252,500 and $520,748, respectively,
during these same periods.
F-7
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
- --------------------------------
Financial Accounting Standards Board (FASB) Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (Statement No. 133), as amended
by FASB Statement No. 138, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of Statement No. 133" (Statement No.
138), is effective in 2001, and requires measuring and recording the change in
fair value of derivative instruments. Statement No. 133 is not expected to
materially affect the Company's financial position or results of operations.
In September 2000, the FASB issued Statement No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." The
Statement replaces FASB Statement No. 125 and provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings based on a control-oriented "financial-components"
approach. Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and liabilities it has
incurred, derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. The provisions of Statement No. 140
are effective for transactions occurring after March 31, 2001. This Statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization trans-actions and collateral for fiscal years ending
after December 15, 2000. The adoption of the provisions of Statement No. 140 is
not expected to have a material impact on financial position or results of
operations.
In July 2001, the FASB issued Statement No. 141, "Business Combinations,"
effective for all business combinations initiated after June 30, 2001, as well
as all business combinations accounted for by the purchase method that are
completed after June 30, 2001. The new statement requires that the purchase
method of accounting be used for all business combinations and prohibits the use
of the pooling-of-interests method. The adoption of Statement No. 141 is not
expected to have a material effect on the Company's financial position or
results of operations.
In July 2001, the FASB issued Statement No. 142, "Goodwill and Other Intangible
Assets," effective for fiscal years beginning after December 15, 2001. The new
statement changes the accounting for goodwill from an amortization method to an
impairment-only approach. Thus, amortization of goodwill, including goodwill
recorded in past business combinations, will cease upon adoption of this
Statement. The adoption of Statement No. 142 is not expected to have a material
effect on the Company's financial position or results of operations.
Reclassification
- ----------------
Certain items in the prior year financial statements have been reclassified to
conform to the current year presentation. Such reclassifications did not affect
net income or stockholders' equity.
2. EARNINGS PER SHARE
There are no convertible securities which would affect the numerator in
calculating basic and diluted earnings per share; therefore, net income as
presented on the Consolidated Statement of Income will be used as the numerator.
The following table sets forth the composition of the weighted-average common
shares (denominator) used in the basic and diluted earnings per share
computation.
F-8
2. EARNINGS PER SHARE (Continued)
June 30, December 31,
2001 2000 2000 1999
---------- ---------- ---------- ----------
Weighted-average common shares
outstanding 2,760,000 2,760,000 2,760,000 2,760,000
Average treasury stock shares (217,554) (138,584) (157,255) (43,705)
Average unearned ESOP and
RSP shares (70,073) (90,863) (85,645) (104,629)
---------- ---------- ---------- ----------
Weighted-average common shares
and common stock equivalents
used to calculate basic earnings
per share 2,472,373 2,530,553 2,517,100 2,611,666
Additional common stock
equivalents (stock options)
used to calculate diluted
earnings per share
13 - - -
---------- ---------- ---------- ----------
Weighted-average common shares
and common stock equivalents
used to calculate diluted
earnings per share 2,472,386 2,530,553 2,517,100 2,611,666
========== ========== ========== ==========
F-9
3. INVESTMENT SECURITIES
The amortized cost and estimated market value of investment securities are
summarized as follows:
June 30, 2001
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------- ------------
Available for Sale
U.S. Treasury securities $ 998,490 $ 22,140 $ - $ 1,020,630
U.S. Government agency
securities 6,995,084 64,606 (18,720) 7,040,970
Obligations of states and
political subdivisions 14,254,877 438,398 (19,090) 14,674,185
Real estate mortgage
investment conduits 39,991 175 - 40,166
----------- ------------ ------------ ------------
Total debt securities 22,288,442 525,319 (37,810) 22,775,951
Equity Securities 61,522 - - 61,522
----------- ------------ ------------ ------------
Total $22,349,964 $ 525,319 $ (37,810) $ 22,837,473
=========== ============ ============ ============
December 31, 2000
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------- ------------
Available for Sale
U.S. Treasury securities $ 1,997,755 $ 9,153 $ (2,218) $ 2,004,690
U.S. Government agency
securities 6,994,398 55,912 (15,000) 7,035,310
Obligations of states and
political subdivisions 15,251,581 406,975 (37,100) 15,621,456
Real estate mortgage
investment conduits 45,247 64 - 45,311
----------- ------------ ------------ ------------
Total debt securities 24,288,981 472,104 (54,318) 24,706,767
Equity Securities 107,298 -- -- 107,298
----------- ------------ ------------ ------------
Total $24,396,279 $ 472,104 $ (54,318) $ 24,814,065
=========== ============ ============ ============
F-10
INVESTMENT SECURITIES (Continued)
December 31, 1999
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------- ------------
Available for Sale
U.S. Treasury securities $ 4,994,727 $ 678 $ (36,335) $ 4,959,070
U.S. Government agency
securities 6,000,000 - - 6,000,000
Obligations of states and
political subdivisions 16,809,617 203,633 (436,079) 16,577,171
Real estate mortgage
investment conduits 58,443 213 - 58,656
----------- -------- --------- -----------
Total $27,862,787 $204,524 $(472,414) $27,594,897
=========== ======== ========= ===========
June 30, 2001
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------- ------------
Held to Maturity
U.S. Government agency
securities $15,481,179 $ 255,672 $ - $15,736,851
Obligations of states and
political subdivisions 2,555,690 15,848 (19,172) 2,552,366
----------- ----------- ------------- -----------
Total $18,036,869 $ 271,520 $ (19,172) $18,289,217
=========== =========== ============= ===========
December 31, 2000
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------- ------------
Held to Maturity
U.S. Government agency
securities $15,221,187 $ 177,166 $ (32,670) $15,365,683
Obligations of states and
political subdivisions 2,555,299 13,920 (17,332) 2,551,887
----------- ---------- --------------- ----------
Total $17,776,486 $ 191,086 $ $ (50,002) 17,917,570
=========== ========== =============== ==========
F-11
3. INVESTMENT SECURITIES (Continued)
December 31, 1999
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------- ------------
Held to Maturity
U.S. Government agency
securities $12,553,752 $ 128,493 $ (235,416) $12,446,829
Obligations of states and
political subdivisions 2,986,114 17,617 (181,926) 2,821,805
----------- ----------- ----------- -----------
Total $15,539,866 $ 146,110 $ (417,342) $15,268,634
=========== =========== =========== ===========
The amortized cost and estimated market value of debt securities at June 30,
2001, by contractual maturity, are shown below.
Available for Sale Held to Maturity
------------------------------------ ------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------------- ---------------- ---------------- ----------------
Due in one year or less $ 1,882,998 $ 1,928,836 $ 7,290,390 $ 7,353,205
Due after one year through
five years 4,691,702 4,958,989 4,975,069 5,084,090
Due after five years through
ten years 6,101,433 6,085,672 3,752,400 3,843,134
Due after ten years 9,612,309 9,802,454 2,019,010 2,008,788
---------------- ---------------- ---------------- ----------------
Total $ 22,288,442 $ 22,775,951 $ 18,036,869 $ 18,289,217
================ ================ ================ ================
The amortized cost and estimated market value of debt securities at December 31,
2000, by contractual maturity, are shown below.
Available for Sale Held to Maturity
------------------------------------ -------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------------- ---------------- ---------------- ----------------
Due in one year or less $ 2,097,016 $ 2,115,349 $ 2,291,571 $ 2,292,540
Due after one year through
five years 6,475,398 6,714,626 9,571,755 9,625,940
Due after five years through
ten years 6,101,329 6,089,503 3,894,432 3,987,235
Due after ten years 9,615,238 9,787,289 2,018,728 2,011,855
---------------- ---------------- ---------------- ----------------
Total $ 24,288,981 $ 24,706,767 $ 17,776,486 $ 17,917,570
================ ================ ================ ================
F-12
3. INVESTMENT SECURITIES (Continued)
The following is a summary of proceeds received, gross gains, and gross losses
realized on the sale of investment securities available for sale:
For the Six Months Ended For the Year Ended
June 30, December 31,
2001 2000 2000 1999
--------------- --------------- -------------- ---------------
Proceeds from sales $ 1,862,276 $ - $ 1,337,950 $ 2,142,314
Gross gains 58,118 - 14,461 21,088
Gross losses - - 7,146 1,993
Investment securities with an amortized cost of $3,288,700 and $2,289,326 and an
estimated market value of $3,345,385 and $2,299,690 were pledged to secure
public deposits at June 30, 2001 and December 31, 2000, respectively. There were
no investment securities pledged at December 31, 1999.
4. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated market value of mortgage-backed securities are
summarized as follows:
June 30, 2001
--------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- --------------- ----------------
Available for Sale
Government National Mortgage
Association securities $ 60,513,069 $ 560,041 $ (252,433) $ 60,820,677
Federal Home Loan Mortgage
Corporation securities 9,655 348 - 10,003
---------------- ---------------- --------------- ----------------
Total $ 60,522,724 $ 560,389 $ (252,433) $ 60,830,680
================ ================ =============== ================
December 31, 2000
--------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- --------------- ----------------
Available for Sale
Government National Mortgage
Association securities $ 38,128,786 $ 427,220 $ (153,007) $ 38,402,999
Federal Home Loan Mortgage
Corporation securities
11,783 376 - 12,159
---------------- ---------------- --------------- ----------------
Total $ 38,140,569 $ 427,596 $ (153,007) $ 38,415,158
================ ================ =============== ================
F-13
4. MORTGAGE-BACKED SECURITIES (Continued)
December 31, 1999
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- ----------------- ----------------
Available for Sale
Government National Mortgage
Association securities $ 38,524,820 $ 114,723 $ (1,232,306) $ 37,407,237
Federal Home Loan Mortgage
Corporation securities
18,333 470 (12) 18,791
---------------- ---------------- --------------- ----------------
Total $ 38,543,153 $ 115,193 $ (1,232,318) $ 37,426,028
================ ================ =============== ================
June 30, 2001
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- ----------------- ----------------
Held to Maturity
Government National Mortgage
Association securities $ 30,523,037 $ 146,940 $ (352,864) $ 30,317,113
Federal Home Loan Mortgage
Corporation securities 1,973,766 50,347 - 2,024,113
Federal National Mortgage
Association securities 2,122,865 72,337 - 2,195,202
---------------- ---------------- --------------- ----------------
Total $ 34,619,668 $ 269,624 $ (352,864) $ 34,536,428
================ ================ =============== ================
December 31, 2000
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- ----------------- -----------------
Held to Maturity
Government National Mortgage
Association securities $ 33,720,679 $ 58,147 $ (450,388) $ 33,328,438
Federal Home Loan Mortgage
Corporation securities 2,545,206 39,932 (1,747) 2,583,391
Federal National Mortgage
Association securities 2,513,890 46,135 (690) 2,559,335
---------------- ---------------- ----------------- -----------------
Total $ 38,779,775 $ 144,214 $ (452,825) $ 38,471,164
================ ================ ================= =================
December 31, 1999
--------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------- ---------------- --------------- ----------------
Held to Maturity
Government National Mortgage
Association securities $ 37,623,016 $ 1,710 $ (1,902,028) $ 35,722,698
Federal Home Loan Mortgage
Corporation securities 3,020,242 25,370 (7,321) 3,038,291
Federal National Mortgage
Association securities 3,498,128 18,994 (14,406) 3,502,716
---------------- ---------------- --------------- ----------------
Total $ 44,141,386 $ 46,074 $ (1,923,755) $ 42,263,705
================ ================ =============== ================
F-14
4. MORTGAGE-BACKED SECURITIES (Continued)
The amortized cost and estimated market value of mortgage-backed securities at
June 30, 2001, by contractual maturity, are shown below. Expected maturities of
securities could differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without prepayment penalties.
Available for Sale Held to Maturity
----------------------------------- ------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------------- ---------------- ---------------- ----------------
Due in one year or less $ 700 $ 708 $ - $ -
Due after one year through
five years 32,624 34,009 - -
Due after five years through
ten years 1,818,470 1,905,921 - -
Due after ten years 58,670,930 58,890,042 34,619,668 34,536,428
---------------- ---------------- ---------------- ----------------
Total $ 60,522,724 $ 60,830,680 $ 34,619,668 $ 34,536,428
================ ================ ================ ================
The amortized cost and estimated market value of mortgage-backed securities at
December 31, 2000, by contractual maturity, are shown below. Expected maturities
of securities could differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without prepayment
penalties.
Available for Sale Held to Maturity
----------------------------------- ------------------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---------------- ---------------- ---------------- ----------------
Due in one year or less $ 11 $ 11 $ - $ -
Due after one year through
five years 31,676 32,519 - -
Due after five years through
ten years 2,040,177 2,103,222 - -
Due after ten years 36,068,705 36,279,406 38,779,775 38,471,164
---------------- ---------------- ---------------- ----------------
Total $ 38,140,569 $ 38,415,158 $ 38,779,775 $ 38,471,164
================ ================ ================ ================
Mortgage-backed securities with an amortized cost of $1,528,469 and $1,621,073
and an estimated market value of $1,539,628 and $1,626,248 were pledged to
secure public deposits at June 30, 2001 and December 31, 2000, respectively.
There were no mortgage-backed securities pledged at December 31, 1999.
F-15
5. LOANS
Loans consist of the following:
June 30, December 31,
2001 2000 1999
---------------- ---------------- ----------------
Mortgage loans:
Residential $ 60,351,337 $ 57,998,525 $ 53,183,648
Multi-family units 273,082 308,252 388,317
Construction 2,193,122 1,777,861 1,613,995
Commercial real estate 411,101 481,042 540,695
---------------- ---------------- ----------------
63,228,642 60,565,680 55,726,655
---------------- ---------------- ----------------
Commercial loans 10,265,692 9,814,834 4,728,297
---------------- ---------------- ----------------
Consumer:
Consumer credit line 6,007,223 6,129,699 5,547,534
Automobile 44,500,096 48,361,011 48,025,794
Other 6,016,270 5,216,121 5,161,230
---------------- ---------------- ----------------
56,523,589 59,706,831 58,734,558
---------------- ---------------- ----------------
Less:
Loans in process 2,377,691 1,203,921 707,469
Deferred loan costs, net (1,505,566) (1,588,251) (1,622,902)
Allowance for loan losses 1,453,312 1,454,618 1,359,900
---------------- ---------------- ----------------
2,325,437 1,070,288 444,467
---------------- ---------------- ----------------
Total $ 127,692,486 $ 129,017,057 $ 118,745,043
================ ================ ================
Total nonaccrual loans and the related interest are as follows. In management's
opinion, these loans did not meet the definition of impaired loans.
Six Months Ended Year Ended
June 30, December 31,
2001 2000 2000 1999
---------- ---------- --------- ----------
Principal outstanding $ 427,864 $ 389,396 $ 581,706 $ 424,244
Contractual interest due 23,200 25,233 66,356 54,285
Interest income recognized 4,632 8,344 29,705 29,522
F-16
5. LOANS (Continued)
Activity in the allowance for loan losses for the periods ended, is as follows:
Six Months Ended Year Ended
June 30, December 31,
2001 2000 2000 1999
---------- ---------- ---------- ----------
Balance, January 1, $1,454,618 $1,359,900 $1,359,900 $1,287,496
Add:
Provisions charged
to operations 240,000 255,000 555,000 410,000
Loan recoveries 22,021 30,110 51,016 50,941
Less loans charged off 263,327 215,619 511,298 388,537
---------- ---------- ---------- ----------
Balance, period end $1,453,312 $1,429,391 $1,454,618 $1,359,900
========== ========== ========== ==========
The Company's loan portfolio is predominantly made up of one-to-four family
first mortgage loans and consumer loans in the areas of Beaver and Lawrence
Counties. These loans have been granted in compliance with regulatory guidelines
relating to collateral requirements and credit policies. Although the Company
has a diversified loan portfolio at June 30, 2001, December 31, 2000, and
December 31, 1999, loans outstanding to individuals and businesses are dependent
upon the local conditions in its immediate trade area.
6. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following:
June 30, December 31,
2001 2000 1999
--------- ----------- ----------
Interest-bearing deposits with other institutions $ 14,003 $ 14,346 $ 37,261
Investment securities 531,308 560,409 503,855
Mortgage-backed securities 563,699 468,734 495,337
Loans 553,593 581,931 501,710
---------- ---------- ----------
Total $1,662,603 $1,625,420 $1,538,163
========== ========== ==========
F-17
7. PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
June 30, December 31,
2001 2000 1999
---------------- ---------------- ----------------
Land $ 900,624 $ 841,109 $ 515,726
Office buildings 4,415,347 4,345,357 4,227,265
Furniture, fixtures, and equipment 3,148,425 3,040,798 2,910,239
Leasehold improvements 403,403 403,403 405,798
---------------- ---------------- ----------------
8,867,799 8,630,667 8,059,028
Less accumulated depreciation and amortization 4,322,238 3,993,293 3,763,834
---------------- ---------------- ----------------
Total $ 4,545,561 $ 4,637,374 $ 4,295,194
================ ================ ================
Depreciation expense for the years ended December 31, 2000 and 1999 was
$594,029, and $518,874, respectively. Depreciation expense for the six months
ended June 30, 2001 and 2000 was $328,945 and $277,038, respectively.
8. DEPOSITS
Comparative details of deposit accounts follow:
June 30, December 31,
2001 2000 1999
------------------------------ ------------------------------ --------------------------------
Percent of Percent of Percent of
Amount Portfolio Amount Portfolio Amount Portfolio
--------------- ---------- ---------------- ----------- ---------------- ------------
DDA and NOW
accounts $ 33,596,503 16.7 % $ 31,251,502 15.8 % $ 26,934,968 14.2 %
Money market
demand accounts 29,521,499 14.7 28,358,712 14.3 27,499,163 14.6
Savings accounts 29,208,617 14.5 27,082,955 13.6 28,006,240 14.8
--------------- ---------- ---------------- ---------- ---------------- ---------
92,326,619 45.9 86,693,169 43.7 82,440,371 43.6
--------------- ---------- ---------------- ---------- ---------------- ---------
Time certificates
of deposit:
2.01% - 4.00% 11,784,257 5.9 156,898 0.1 7,652,299 4.0
4.01% - 6.00% 59,004,680 29.3 52,665,440 26.6 81,270,806 42.9
6.01% - 8.00% 38,133,954 18.9 58,726,194 29.6 17,981,076 9.5
--------------- ---------- ---------------- ---------- ---------------- ---------
108,922,891 54.1 111,548,532 56.3 106,904,181 56.4
--------------- ---------- ---------------- ---------- ---------------- ----------
Total $ 201,249,510 100.0 % $ 198,241,701 100.0 % $ 189,344,552 100.0 %
=============== ========== ================ ========== ================ =========
Time deposits include certificates of deposit in denominations of $100,000 or
more. Such deposits aggregated $10,993,828, $10,909,799 and $9,798,141 at June
30, 2001, December 31, 2000, and December 31, 1999, respectively, with
maturities at June 30, 2001 and December 31, 2000 as follows:
F-18
8. DEPOSITS (Continued)
June 30, 2001 December 31, 2000
Within three months $ 1,212,964 $ 794,503
Beyond three but within six months 1,425,755 2,943,914
Beyond six but within twelve months 3,558,334 1,532,742
Beyond one year 4,796,775 5,638,640
-------------- -------------
Total $ 10,993,828 $ 10,909,799
============== =============
Interest expense by deposit category for the periods ended, is as follows:
Six Months Ended Year Ended
June 30, December 31,
2001 2000 2000 1999
-------------- ------------- -------------- --------------
Savings accounts $ 284,185 $ 289,344 $ 576,060 $ 563,778
NOW and money market
deposit accounts 646,234 624,156 1,352,279 1,104,444
Time certificates of deposit 3,195,150 2,952,884 6,108,361 5,320,116
-------------- ------------- -------------- --------------
Total $ 4,125,569 $ 3,866,384 $ 8,036,700 $ 6,988,338
============== ============= ============== ==============
9. ADVANCES FROM FEDERAL HOME LOAN BANK
The following table sets forth information concerning both short and long-term
advances from FHLB:
June 30, December 31,
2001 2000 1999
---------------- ---------------- ----------------
Balance at year-end $ 50,194,800 $ 36,194,800 $ 50,294,800
Average balance outstanding 44,940,656 41,692,341 39,829,047
Maximum month-end balance 51,194,800 44,294,800 50,294,800
Weighted-average rate at period-end 5.45% 5.72% 5.62%
Weighted-average rate during the period 5.52% 5.77% 5.62%
The scheduled maturities of advances outstanding are as follows:
June 30, December 31,
2001 2000 1999
---------------------------- --------------------------- ----------------------------
Weighted- Weighted- Weighted-
Year Ending average average average
December 31, Amount Rate Amount Rate Amount Rate
- ------------------------ --------------- ---------- -------------- ---------- --------------- -----------
2000 $ - - % $ - - % $ 21,600,000 5.84 %
2001 2,000,000 5.77 8,000,000 6.46 2,000,000 5.77
2002 5,317,000 5.41 3,317,000 5.99 3,317,000 5.99
2003 2,377,800 5.77 1,377,800 6.28 1,377,800 6.28
2004 and thereafter 40,500,000 5.43 23,500,000 5.39 22,000,000 5.31
--------------- -------------- ---------------
Total $ 50,194,800 5.45 % $ 36,194,800 5.72 % $ 50,294,800 5.62 %
=============== ============== ===============
F-19
9. ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
Borrowing capacity consists of credit arrangements with the FHLB of Pittsburgh.
FHLB borrowings are subject to annual renewal, incur no service charges, and are
secured by a blanket security agreement on certain investment and
mortgage-backed securities, outstanding residential mortgages, and the Bank's
investment in FHLB stock. As of December 31, 2000, the Bank's maximum borrowing
capacity with the FHLB was approximately $133 million.
10. OTHER BORROWINGS
Other borrowings at June 30, 2001, December 31, 2000, and December 31, 1999
consists of a loan to finance an equipment lease for $52,117, $75,315, and
$120,039. Terms for the equipment loan call for a five-year term at a rate of
4.90 percent with equal monthly payments.
11. INCOME TAXES
The provision for income taxes for the periods ended, consists of:
Six Months Ended Year Ended
June 30, December 31,
2001 2000 1999
------------------- ---------------- ----------------
Currently payable:
Federal $ 235,231 $ 551,803 $ 479,198
State 69,932 112,222 89,226
------------------- ---------------- ----------------
305,163 664,025 568,424
Deferred 75,019 50,008 61,178
------------------- ---------------- ----------------
Total $ 380,182 $ 714,033 $ 629,602
=================== ================ ================
The tax effects of deductible and taxable temporary differences that gave rise
to significant portions of the net deferred tax assets and liabilities, are as
follows:
June 30, December 31,
2001 2000 1999
----------------- ----------------- -----------------
Deferred tax assets:
Allowance for loan losses $ 494,126 $ 494,570 $ 462,366
Net unrealized loss on securities - - 470,905
Premises and equipment 43,972 22,417 3,713
Accrued employee benefits 251,464 279,202 266,418
Alternative minimum tax credit 29,859 96,210 205,817
Other 11,091 13,132 17,225
---------------- ---------------- ----------------
Total gross deferred tax assets 830,512 905,531 1,426,444
---------------- ---------------- ----------------
Deferred tax liabilities:
Net unrealized gain on securities 270,458 235,408 -
---------------- ---------------- ----------------
Total gross deferred tax liabilities 270,458 235,408 -
---------------- ---------------- ----------------
Net deferred tax assets $ 560,054 $ 670,123 $ 1,426,444
================ ================ ================
No valuation allowance was established at June 30, 2001, December 31, 2000, and
December 31, 1999 in view of certain tax strategies coupled with the anticipated
future taxable income as evidenced by the Company's earnings potential.
F-20
11. INCOME TAXES (Continued)
The following is a reconciliation between the actual provision for income taxes
and the amount of income taxes which would have been provided at statutory rates
for the periods ended:
Six Months Ended Year Ended
June 30, December 31,
2001 2000 1999
---------------------- ----------------------- ----------------------
% of % of % of
Pre-tax Pre-tax Pre-tax
Amount Income Amount Income Amount Income
------------ ------- ------------ -------- ------------ -------
Provision at
statutory rate $ 490,863 34.0 % $ 981,230 34.0 % $ 845,747 34.0 %
State income tax
expense, net of
federal tax benefit 46,155 3.2 74,067 2.7 58,889 2.4
Tax-exempt interest (188,255) (13.0) (402,284) (13.9) (342,447) (13.8)
Other, net 31,419 2.1 61,020 1.9 67,413 2.7
------------ ------- ------------ -------- ------------ -------
Actual expense and
effective rate $ 380,182 26.3 % $ 714,033 24.7 % $ 629,602 25.3 %
============ ======= ============ ======== ============ =======
The Bank is subject to the Pennsylvania Mutual Thrift Institutions Tax which is
calculated at 11.5 percent of earnings based on accounting principles generally
accepted in the United States of America with certain adjustments.
12. EMPLOYEE BENEFITS
Pension Plan
- ------------
The Bank sponsors a trusteed, defined benefit pension plan covering all eligible
Bank employees and officers. The plan calls for benefits to be paid to eligible
employees at retirement based primarily upon years of service and compensation
rates near retirement. The Bank's funding policy is to make annual
contributions, if needed, based upon the funding formula developed by the plan's
actuary.
F-21
12. EMPLOYEE BENEFITS (Continued)
Pension Plan (Continued)
The following table sets forth the change in plan assets and benefit obligation
at December 31:
2000 1999
-------------- ----------------
Plan assets at fair value, beginning of year $ 3,641,427 $ 3,328,834
Actual return on plan assets 251,452 228,319
Employer contribution 178,765 168,061
Benefits paid (86,619) (83,787)
-------------- ----------------
Plan assets at fair value, end of year 3,985,025 3,641,427
-------------- ----------------
Benefit obligation, beginning of year 3,879,242 3,915,765
Service cost 189,965 197,002
Interest cost 281,366 264,483
Actuarial gains (91,747) (414,221)
Benefits paid (86,619) (83,787)
-------------- ----------------
Benefit obligation, end of year 4,172,207 3,879,242
-------------- ----------------
Funded status (187,182) (237,815)
Transition adjustment (180,001) (200,815)
Unrecognized net loss from past experience
different from that assumed 195,079 250,939
-------------- ----------------
Accrued pension liability $ (172,104) $ (187,691)
============== ================
The plan assets are invested primarily in bonds, stocks, and mortgages under the
control of the plan's trustees as of December 31, 2000.
Assumptions used in determining net periodic pension cost are as follows:
2000 1999
-------------- ---------------
Discount rate 7.00% 7.00%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 5.00% 5.00%
The plan utilizes the straight-line method of amortization for unrecognized
gains and losses.
F-22
12. EMPLOYEE BENEFITS (Continued)
Pension Plan (Continued)
- ------------
Net periodic pension cost includes the following components:
2000 1999
------------- --------------
Service cost of the current
period $ 189,965 $ 197,002
Interest cost on projected
benefit obligation 281,366 264,483
Actual return on plan assets (251,452) (228,319)
Net amortization and deferral (56,701) (40,539)
------------- --------------
Net periodic pension cost $ 163,178 $ 192,627
============= ==============
Supplemental Retirement Plans
- -----------------------------
Board of Directors
- ------------------
The Bank maintains a Directors' Consultation and Retirement Plan to provide
post-retirement payments over a ten-year period to non-officer members of the
Board of Directors who have completed twenty or more years of service. The plan
was amended on November 6, 1996, to provide post-retirement payments to members
who have completed fifteen or more years of service. Expenses for the years
ended December 31, 2000, and 1999, amounted to $24,000 and $38,580,
respectively, and are included as a component of other operating expenses.
Expenses for the six month periods ended June 30, 2001 and 2000 amounted to
$15,000 and $14,700, respectively, and are included as a component of other
operating expenses.
President
- ---------
The Bank maintains a Supplemental Retirement Plan for the President of the Bank
for the purpose of providing the President with supplemental post-retirement
benefits for life in addition to those provided under the Bank's pension plan
for all eligible employees. Expenses for the years ended December 31, 2000, and
1999, amounted to $29,400, and $31,215, respectively, and are included as a
component of compensation and employee benefits. Expenses for the six month
periods ended June 30, 2001 and 2000 amounted to $24,400 and $12,000,
respectively, and are included as a component of compensation and employee
benefits.
The assumptions of 7.50 percent and 5.00 percent for the discount rate and rate
of compensation increase, respectively, were used in determining net periodic
post-retirement costs for the Directors' Consultation and Retirement Plans and
Supplemental Retirement Plan for the President.
Profit Sharing Plan
- -------------------
The Bank maintains a profit sharing plan covering all employees. Contributions
to the plan are made annually at the discretion of the Board of Directors.
Contributions for the years ended December 31, 2000, and 1999, amounted to
$73,582, and $69,739, respectively. Contributions for the six month periods
ended June 30, 2001 and 2000 amounted to $38,137 and $35,991, respectively.
F-23
12. EMPLOYEE BENEFITS (Continued)
Stock Option Plan
- -----------------
On October 22, 1998, the Board of Directors approved and stockholders ratified
the formation of a stock option plan. The plan provides for granting incentive
stock options and nonstatutory stock options for executive officers and
non-employee directors of the Company. A total of 124,200 shares of authorized
but unissued common stock are reserved for issuance under the plan, which
expires ten years from the date of shareholder ratification. The per share
exercise price of an option granted will not be less than the fair value of a
share of common stock on the date the option is granted.
On October 22, 1998, non-statutory stock options for non-employee directors were
granted for the purchase of 37,260 shares. The recipients of these stock options
vest over a four-year period of time. Also, incentive stock options for officers
and employees were granted for the purchase of 86,940 shares. The recipients of
these stock options vest over a four or five-year period of time.
The following table presents share data related to the outstanding options:
Weighted- Weighted- Weighted-
average average average
June 30, Exercise Exercise Exercise
2001 Price 2000 Price 1999 Price
----------- ----------- ----------- ----------- ----------- ------------
Outstanding, beginning 124,200 $ 11.81 124,200 $ 11.81 124,200 $ 11.81
Granted - - - - - -
Exercised - - - - - -
Forfeited - - - - - -
----------- ----------- -----------
Outstanding, ending 124,200 $ 11.81 124,200 $ 11.81 124,200 $ 11.81
=========== =========== ===========
Exercisable at period-end 97,807 $ 11.81 83,835 $ 11.81 55,890 $ 11.81
=========== =========== ===========
The following table summarizes the characteristics of stock options at December
31, 2000:
Outstanding Exercisable
----------------------------------------------- -------------------------------
Average Average
Average Exercise Exercise
Exercise price Shares Life Price Shares Price
---------------------- --------------- ------------ ------------ ---------------- ------------
11.81 124,200 7.33 11.81 83,835 11.81
For purposes of computing pro forma results, the Company estimated fair values
of stock options using the Black-Scholes option-pricing model. The model
requires use of subjective assumptions that can materially effect fair value
estimates. Therefore, the pro forma results are estimates of results of
operation as if compensation expense had been recognized for the stock option
plans. The fair value of each stock option granted was estimated using the
following weighted-average assumptions for grants in 2001: (1) expected dividend
yield of 1.03 percent; (2) risk-free interest rate of 4.95 percent; (3) expected
volatility of 14 percent; and (4) expected life of eight years.
The Company accounts for its stock option plans under provisions of APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Under this Opinion, no compensation expense has been recognized with respect to
the plans because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the grant date. No options
were granted in 2001, 2000, or 1999.
F-24
12. EMPLOYEE BENEFITS (Continued)
Stock Option Plan (Continued)
- -----------------
Had compensation expense for the stock option plans been recognized in
accordance with the fair value accounting provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-based Compensation," net
income applicable to common stock, basic and diluted net income per common share
for the year ended December 31, would have been as follows:
Six Months Ended Year Ended
June 30, December 31,
2001 2000 2000 1999
-------------- --------------- -------------- --------------
Net income applicable to
common stock:
As reported $ 1,063,532 $ 1,088,236 $ 2,171,937 $ 1,857,890
Pro forma 996,858 1,068,214 2,131,893 1,768,978
Basic net income per
common share:
As reported $ 0.43 $ 0.43 $ 0.86 $ 0.71
Pro forma 0.40 0.42 0.85 0.68
Diluted net income per
common share:
As reported $ 0.43 $ 0.43 $ 0.86 $ 0.71
Pro forma 0.40 0.42 0.85 0.68
Employee Stock Ownership Plan ("ESOP")
- --------------------------------------
The Company has an ESOP for the benefit of employees who meet the eligibility
requirements which include having completed one year of service with the Company
or its subsidiaries and attained age 21. The ESOP trust purchased 96,000 shares
of common stock since the date of conversion with proceeds from a loan from an
independent third party. During 1999, the Company paid off the loan to the third
party and internally financed the remaining loan balance. The Bank makes cash
contributions to the ESOP on an annual basis sufficient to enable the ESOP to
make the required loan payments to the Company. The loan bears interest at 8.00
percent with interest payable quarterly and principal payable in equal annual
installments over ten years. The loan is secured by the shares of the stock
purchased.
As the debt is repaid, shares are released from the collateral and allocated to
qualified employees based on the proportion of debt service paid in the year.
Accordingly, the shares pledged as collateral are reported as unallocated ESOP
shares in the consolidated balance sheet. As shares are released from
collateral, the Company reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. Compensation expense for the ESOP was $57,450 and $38,545 for the
six month periods ended June 30, 2001 and 2000 and $87,475, and $102,240, for
the years ended December 31, 2000, and 1999, respectively.
F-25
12. EMPLOYEE BENEFITS (Continued)
Employee Stock Ownership Plan ("ESOP") (Continued)
- --------------------------------------------------
The following table presents the components of the ESOP shares:
June 30, December 31,
2001 2000 2000 1999
------------- ------------- -------------- -------------
Allocated shares 32,940 23,340 28,140 18,540
Shares released for allocation 9,600 9,600 9,600
Unreleased shares 53,460 63,060 58,260 67,860
------------- ------------- -------------- -------------
Total ESOP shares 96,000 96,000 96,000 96,000
============= ============= ============== =============
Fair value of unreleased
shares $ 702,999 $ 536,010 $ 597,165 $ 559,845
============= ============= ============== =============
Restricted Stock Plan ("RSP")
- -----------------------------
In 1998, the Board of Directors adopted a RSP for directors, officers, and
employees which was approved by stockholders at a special meeting held on
October 22, 1998. The objective of this plan is to enable the Company and the
Bank to retain its corporate officers, key employees, and directors who have the
experience and ability necessary to manage these entities. Directors, officers,
and key employees who are selected by members of a Board-appointed committee are
eligible to receive benefits under the RSP. The non-employee directors of the
Company and the Bank serve as trustees for the RSP, and have the responsibility
to invest all funds contributed by the Bank to the Trust created for the RSP.
The Company acquired and granted a total of 49,680 shares of common stock, of
which 11,175 shares became immediately vested under the plan with the remaining
shares vesting over a four-year period for directors and five years for officers
and employees beginning October 22, 1999. A total of 33,525 shares were vested
as of December 31, 2000. The RSP shares purchased initially will be excluded
from stockholders' equity. The Company recognizes compensation expense in the
amount of fair value of the common stock at the grant date, pro rata, over the
years during which the shares are payable and recorded as an addition to the
stockholders' equity. Directors, officers, and key employees who terminate their
association with the Company shall forfeit the right to any shares which were
awarded but not earned.
Net compensation expense attributable to the RSPs amounted to $64,256 for the
six month periods ended June 30, 2001 and 2000 and $128,513 for the years ended
December 31, 2000, and 1999.
13. COMMITMENTS
In the normal course of business, there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, financial
guarantees, and letters of credit, which are not reflected in the accompanying
consolidated financial statements. The Company does not anticipate any losses as
a result of these transactions. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in the particular
classes of financial instruments.
F-26
13. COMMITMENTS (Continued)
These commitments represent financial instruments with off-balance sheet risk.
Outstanding commitments for the periods ended are as follows:
June 30, December 31,
2001 2000 1999
------------- ------------- -------------
Fixed rate commitments $ 15,949,337 $ 12,278,071 $ 12,442,414
Variable rate commitments 6,517,350 6,179,593 6,233,398
------------- ------------- -------------
Total $ 22,466,687 $ 18,457,664 $ 18,675,812
============= ============= =============
The range of interest rate residential mortgage loan commitments was 6.75
percent to 7.50 percent at June 30, 2001, 7.50 percent to 8.00 percent at
December 31, 2000, and 7.625 percent to 8.00 percent at December 31, 1999.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
14. REGULATORY MATTERS
Loans
- -----
Federal law prevents the Company from borrowing from the Bank unless the loans
are secured by specific collateral. Further, such secured loans are limited in
amount to ten percent of the Bank's common stock and capital surplus.
Dividend Restrictions
- ---------------------
The Bank is subject to legal limitations on the amount of dividends that can be
paid to the Company. The Pennsylvania Banking Code restricts the availability of
surplus for dividend purposes. At June 30, 2001, surplus funds of $10,581,437
were not available for dividends.
15. REGULATORY CAPITAL REQUIREMENTS
Federal regulations require the Company and the Bank to maintain minimum amounts
of capital. Specifically, each is required to maintain certain minimum dollar
amounts and ratios of Total and Tier I capital to risk-weighted assets and of
Tier I capital to average total assets.
In addition to the capital requirements, the Federal Deposit Insurance
Corporation Improvement Act ("FDICIA") established five capital categories
ranging from "well capitalized" to "critically undercapitalized." Should any
institution fail to meet the requirements to be considered "adequately
capitalized," it would become subject to a series of increasingly restrictive
regulatory actions.
As of June 30, 2001, December 31, 2000, and December 31, 1999, the Federal
Deposit Insurance Corporation categorized the Company as well capitalized under
the regulatory framework for prompt corrective action. To be classified as a
well capitalized financial institution, Total risk-based, Tier 1 risk-based and
Tier 1 Leverage capital ratios must be at least ten percent, six percent, and
five percent, respectively.
F-27
15. REGULATORY CAPITAL REQUIREMENTS (Continued)
The Company's actual capital ratios are presented in the following tables, which
shows the Company met all regulatory capital requirements. The capital position
of the Bank does not differ significantly from the Company's.
June 30, December 31,
2001 2000 1999
------------------------ ----------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------- -------- --------------- ------- --------------- --------
Total Capital
(to Risk-weighted Assets)
- ---------------------------
Actual $ 30,176,140 25.02 % $ 29,822,330 23.37 % $ 28,991,275 23.91 %
For Capital Adequacy Purposes 9,648,104 8.00 10,210,604 8.00 9,698,726 8.00
To Be Well Capitalized 12,060,130 10.00 12,763,255 10.00 12,123,407 10.00
Tier I Capital
(to Risk-weighted Assets)
- ---------------------------
Actual $ 28,722,828 23.82 % $ 28,367,712 22.23 % $ 27,631,375 22.79 %
For Capital Adequacy Purposes 4,824,052 4.00 5,105,302 4.00 4,849,363 4.00
To Be Well Capitalized 7,236,078 6.00 7,657,953 6.00 7,274,044 6.00
Tier I Capital
(to Average Assets)
- ---------------------
Actual $ 28,722,828 10.18 % $ 28,367,712 10.67 % $ 27,631,375 10.34 %
For Capital Adequacy Purposes 11,284,680 4.00 10,635,641 4.00 10,684,884 4.00
To Be Well Capitalized 14,105,850 5.00 13,294,552 5.00 13,356,106 5.00
Prior to the enactment of the Small Business Job Protection Act, the Company
accumulated approximately $2,485,000 of retained earnings, which represent
allocations of income to bad debt deductions for tax purposes only. Since there
is no amount that represents the accumulated bad debt reserves subsequent to
1987, no provision for federal income tax has been made for such amount. If any
portion of this amount is used other than to absorb loan losses (which is not
anticipated), the amount will be subject to federal income tax at the current
corporate rate.
F-28
16. FAIR VALUE DISCLOSURE
The estimated fair values of the Company's financial instruments are as
follows:
June 30, December 31,
2001 2000 1999
------------------------------- ------------------------------ ------------------------------
Carrying Fair Carrying Fair Carrying Fair
Value Value Value Value Value Value
-------------- -------------- -------------- -------------- -------------- --------------
Financial assets:
Cash and amounts due
from other institutions $ 1,556,061 $ 1,556,061 $ 1,502,757 $ 1,502,757 $ 3,533,452 $ 3,533,452
Interest-bearing deposits
with other institutions 7,562,181 7,562,181 5,094,404 5,094,404 11,416,781 11,416,781
Investment securities:
Available for sale 22,837,473 22,837,473 24,814,065 24,814,065 27,594,897 27,594,897
Held to maturity 18,036,869 18,289,217 17,776,486 17,917,570 15,539,866 15,268,634
Mortgage-backed securities:
Available for sale 60,830,680 60,830,680 38,415,158 38,415,158 37,426,028 37,426,028
Held to maturity 34,619,668 34,536,428 38,779,775 38,471,164 44,141,386 42,263,705
Loans, net 127,692,486 131,105,486 129,017,057 128,167,057 118,745,043 114,749,043
Federal Home Loan Bank
stock 2,614,800 2,614,800 2,614,800 2,614,800 2,614,885 2,614,885
Accrued interest receivable 1,662,603 1,662,603 1,625,420 1,625,420 1,538,163 1,538,163
------------- ------------- ------------- ------------- ------------- -------------
Total $ 277,412,821 $ 280,994,929 $ 259,639,922 $ 258,622,395 $ 262,550,501 $ 256,405,588
============= ============== ============= ============= ============= =============
Financial liabilities:
Deposits $ 201,249,510 $ 204,261,510 $ 198,241,701 $ 199,475,701 $ 189,344,552 $ 189,000,319
Advances from Federal
Home Loan Bank 50,194,800 51,241,800 36,194,800 36,182,800 50,294,800 49,245,206
Other borrowings 52,117 52,117 75,315 75,315 120,039 120,039
Advances from borrowers
for taxes and insurance 753,326 753,326 584,723 584,723 585,332 585,332
Accrued interest payable 394,684 394,684 389,603 389,603 497,798 497,798
------------- ------------- ------------- ------------- ------------- -------------
Total $ 252,644,437 $ 256,703,437 $ 235,486,142 $ 236,708,142 $ 240,842,521 $ 239,448,694
============= ============== ============= ============= ============= =============
F-29
16. FAIR VALUE DISCLOSURE (Continued)
Fair value is defined as the amount at which a financial instrument could be
exchanged in a current transaction between willing parties other than in a
forced or liquidation sale. If a quoted market price is available for a
financial instrument, the estimated fair value would be calculated based upon
the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments are based upon manage-ment's judgment regarding current economic
conditions, interest rate risk, expected cash flows, future estimated losses,
and other factors as determined through various option pricing formulas or
simulation modeling. As many of these assumptions result from judgments made by
management based upon estimates which are inherently uncertain, the resulting
estimated values may not be indicative of the amount realizable in the sale of a
particular financial instrument. In addition, changes in the assumptions on
which the estimated values are based may have a significant impact on the
resulting estimated values.
As certain assets and liabilities, such as deferred tax assets, premises and
equipment, and many other operational elements of the Company, are not
considered financial instruments but have value, this estimated fair value of
financial instruments would not represent the full market value of the Company.
The Company employed simulation modeling in determining the estimated fair value
of financial instruments for which quoted market prices were not available based
upon the following assumptions:
Cash and Amounts Due from Depository Institutions, Interest-bearing Deposits
- --------------------------------------------------------------------------------
with Other Institutions, Accrued Interest Receivable, Advance Payments by
- --------------------------------------------------------------------------------
Borrowers for Taxes and Insurance, and Accrued Interest Payable
- ---------------------------------------------------------------
The fair value approximates the current book value.
Investment Securities, Mortgage-backed Securities, and Federal Home Loan Bank
- --------------------------------------------------------------------------------
Stock
- -----
The fair value of securities held as investments, mortgage-backed securities,
and securities available for sale is equal to the available quoted market price.
If no quoted market price is available, fair value is estimated using the quoted
market price for similar securities. Since the FHLB stock is not actively traded
on a secondary market and held exclusively by member financial institutions, the
estimated fair market value approximates the carrying amount.
Loans, Deposits, Advances from the FHLB, and Other Borrowings
- -------------------------------------------------------------
The estimated fair values for loans are estimated by discounting contractual
cash flows and adjusting for prepayment estimates. Discount rates are based upon
rates generally charged for such loans with similar characteristics. Demand,
savings, and money market deposit accounts are valued at the amount payable on
demand as of year-end. Fair values for time deposits, advances from the FHLB,
and other borrowings are estimated using a discounted cash flow calculation that
applies contractual costs currently being offered in the existing portfolio to
current market rates being offered for deposits and notes of similar remaining
maturities.
Commitments to Extend Credit
- ----------------------------
These financial instruments are generally not subject to sale, and estimated
fair values are not readily available. The carrying value, represented by the
net deferred fee arising from the unrecognized commitment, and the fair value,
determined by discounting the remaining contractual fee over the term of the
commitment using fees currently charged to enter into similar agreements with
similar credit risk, are not considered material for disclosure. The contractual
amounts of unfunded commitments are presented in Note 13.
F-30
17. CORPORATE REORGANIZATION AND STOCK ISSUANCE
On July 10, 1997, the Bank adopted a plan of reorganization into a
Pennsylvania-chartered mutual holding company. The Bank received the approval of
the Federal Reserve, the Department of Banking, and the FDIC for transactions
contemplated by the plan of reorganization, which authorized the Bank to offer
stock in one or more public stock offerings up to a maximum of 49.9 percent of
the issued and outstanding shares of its common stock. As a result of the
offering in July 1997, PHS Bancorp, M.H.C. (mutual holding company) received
1,518,000 shares (55 percent) of the Bank stock. Also as a result of the stock
offering, the Bank received gross proceeds of $12,420,000. Expenses associated
with the offering totaled $592,267, resulting in net capital additions to the
Bank of $11,827,733. The Bank recorded common stock at par of $276,000 and
additional paid-in capital of $11,551,733 from the stock issuance.
On May 21, 1998, the Bank adopted an Agreement and Plan of Reorganization (the
"Plan") whereby the Bank formed the Company, an intermediate stock holding
company under Pennsylvania law. The Plan received stockholder approval as of
October 22, 1998, and subsequently received all regulatory approvals. The
reorganization was completed on November 9, 1998. Upon completion of the
reorganization, the Bank became a wholly-owned subsidiary of the Company and the
Company became a majority-owned subsidiary of the M.H.C. The common stock of the
Company replaced the Bank's stock.
On August 16, 2001, the Bank adopted a plan of reorganization whereas the Bank
will form a new state stock holding company, PHSB Financial Corporation ("PHSB")
and the existing shares of the Company owned by Public Stockholders will be
converted pursuant to an exchange ratio into shares of PHSB. In connection with
the conversion, PHSB will offer stock in a subscription offering to acquire the
ownership interest of the mutual holding company.
As a result of the transaction the mutual holding company and the Company will
cease to exist and a liquidation account will be established for the benefit of
depositors as of specific dates. The Bank will become a wholly-owned subsidiary
of PHSB. This Plan is subject to approval of the Pennsylvania Department of
Banking and the non-objection of the FDIC and also must be ratified by the
current depositors of the Bank and approved by the holders of at least
two-thirds of the shares of the Company's common stock.
F-31
18. PARENT COMPANY
The following are condensed financial statements for the parent company. The
investment in the subsidiary on the parent company financial statement is
carried at the parent company's equity in the underlying asset of the Bank.
CONDENSED BALANCE SHEET
June 30, December 31,
2001 2000 1999
---------------- ---------------- -----------------
ASSETS
Cash and due from banks $ 135,085 $ 133,657 $ 469,689
Investment securities - available for sale 61,522 107,298 -
Investment in subsidiary bank 28,176,579 27,879,419 25,512,528
Loans receivable - ESOP 910,843 910,843 1,060,930
Other assets 120,437 25,554 34,072
---------------- ---------------- -----------------
TOTAL ASSETS $ 29,404,466 $ 29,056,771 $ 27,077,219
================ ================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 135,338 $ 206,537 $ 325,882
Stockholders' equity 29,269,128 28,850,234 26,751,337
----------------- ----------------- ------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 29,404,466 $ 29,056,771 $ 27,077,219
================= ================= ==================
CONDENSED STATEMENT OF INCOME
For the Six Months Ended For the Year Ended
June 30, December 31,
2001 2000 2000 1999
-------------- -------------- -------------- --------------
INCOME
Dividends from subsidiary bank $ 828,000 $ 496,800 $ 1,158,100 $ 2,566,800
Interest income 38,133 47,334 92,005 53,370
-------------- -------------- -------------- --------------
866,133 544,134 1,250,105 2,620,170
EXPENSES 31,723 38,067 73,981 36,520
-------------- -------------- -------------- --------------
Income before equity in undistributed
earnings of subsidiary 834,410 506,067 1,176,124 2,583,650
Equity in undistributed earnings
of subsidiary 229,122 582,172 995,813 (725,760)
-------------- -------------- -------------- --------------
NET INCOME $ 1,063,532 $ 1,088,239 $ 2,171,937 $ 1,857,890
============== ============== ============== ==============
F-32
18. PARENT COMPANY (Continued)
CONDENSED STATEMENT OF CASH FLOWS
For the Six Months Ended For the Year Ended
June 30, December 31,
2001 2000 2000 1999
-------------- -------------- -------------- --------------
OPERATING ACTIVITIES
Net income $ 1,063,532 $ 1,088,239 $ 2,171,937 $ 1,857,890
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary (229,122) (582,172) (995,813) 725,760
Other, net (44,376) (8,851) 105,160 385,517
-------------- -------------- -------------- --------------
Net cash provided by operating activities 790,034 497,216 1,281,284 2,969,167
-------------- -------------- -------------- --------------
INVESTING ACTIVITIES
Purchases of investment securities (61,522) (73,421) (107,298) -
Sales of investment securities 107,298 - - -
Decrease (increase) in loan to ESOP, net - - 150,087 (958,690)
-------------- -------------- -------------- --------------
Net cash provided by (used for)
investing activities 45,776 (73,421) 42,789 (958,690)
-------------- -------------- -------------- --------------
FINANCING ACTIVITIES
Common stock acquired by RSP - - - (506,502)
Cash dividends paid (509,185) (469,837) (912,550) (743,785)
Purchase of treasury stock (325,197) (220,809) (747,555) (1,268,602)
-------------- -------------- -------------- --------------
Net cash (used for) investing activities (834,382) (690,646) (1,660,105) (2,518,889)
-------------- -------------- -------------- --------------
Increase (decrease) in cash 1,428 (266,851) (336,032) (508,412)
CASH AT BEGINNING OF PERIOD 133,657 469,689 469,689 978,101
-------------- -------------- -------------- --------------
CASH AT END OF PERIOD $ 135,085 $ 202,838 $ 133,657 $ 469,689
============== ============== ============== ==============
F-33
19. SELECTED QUARTERLY FINANCIAL DATA (unaudited)
Three Months Ended
----------------------------------------------------------------
March June September December
2000 2000 2000 2000
------------- ------------- ------------- -------------
Total interest income $ 4,660,622 $ 4,798,024 $ 4,796,277 $ 4,780,393
Total interest expense 2,515,933 2,607,543 2,640,051 2,685,197
------------- ------------- ------------- -------------
Net interest income 2,144,689 2,190,481 2,156,226 2,095,196
Provision for loan losses 115,000 140,000 150,000 150,000
------------- ------------- ------------- -------------
Net interest income after
provision for loan losses 2,029,689 2,050,481 2,006,226 1,945,196
Investment securities
gains, net - - 7,315 -
Total noninterest income 181,070 198,096 252,668 214,836
Total noninterest expense 1,487,911 1,491,062 1,529,085 1,491,549
------------- ------------- ------------- -------------
Income before income
taxes 722,848 757,515 737,124 668,483
Income taxes 192,100 200,024 166,500 155,409
------------- ------------- ------------- -------------
Net income $ 530,748 $ 557,491 $ 570,624 $ 513,074
============= ============= ============= =============
Per share data:
Net income
Basic $ 0.21 $ 0.22 $ 0.23 0.21
Diluted 0.21 0.22 0.23 0.21
Weighted-average
shares outstanding
Basic 2,536,898 2,522,978 2,516,971 2,498,170
Diluted 2,536,898 2,522,978 2,516,971 2,498,170
F-34
19. SELECTED QUARTERLY FINANCIAL DATA (unaudited) (Continued)
Three Months Ended
---------------------------------------------------------------
March June September December
1999 1999 1999 1999
------------- ------------- ------------- -------------
Total interest income $ 4,178,515 $ 4,309,672 $ 4,447,759 $ 4,574,942
Total interest expense 2,195,307 2,278,937 2,324,419 2,485,026
------------- ------------- ------------- -------------
Net interest income 1,983,208 2,030,735 2,123,340 2,089,916
Provision for loan losses 95,000 90,000 120,000 105,000
------------- ------------- ------------- -------------
Net interest income after
provision for loan losses 1,888,208 1,940,735 2,003,340 1,984,916
Investment securities
gains, net 19,095
- - -
Total noninterest income 157,713 159,350 232,844 195,056
Total noninterest expense 1,530,518 1,521,176 1,519,653 1,522,418
------------- ------------- ------------- -------------
Income before income
taxes 515,403 578,909 716,531 676,649
Income taxes 129,747 158,755 190,500 150,600
------------- ------------- ------------- -------------
Net income $ 385,656 $ 420,154 $ 526,031 $ 526,049
============= ============= ============= =============
Per share data:
Net income
Basic $ 0.15 $ 0.16 $ 0.20 $ 0.20
Diluted 0.15 0.16 0.20 0.20
Weighted-average
shares outstanding
Basic 2,648,697 2,678,207 2,621,054 2,570,781
Diluted 2,655,168 2,678,207 2,621,054 2,570,781
F-35
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You should rely only on the information contained in this document. We have not
authorized anyone to provide you with information that is different. This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which such offer or solicitation would be unlawful. The affairs of PHSB [LOGO]
Financial Corporation may change after the date of this prospectus. Delivery of
this document and the sales of shares made hereunder does not mean otherwise.
TABLE OF CONTENTS
Page
Summary ......................................................................3
Risk Factors ................................................................10
Recent Developments..........................................................13
Selected Financial Highlights ...............................................16
The Conversion ..............................................................18 PHSB FINANCIAL CORPORATION
The Offering ................................................................24
PHSB Financial ..............................................................41
Peoples Home Savings ........................................................41
Use of Proceeds .............................................................42
Dividend Policy .............................................................43 --------------------
Market for the Common Stock .................................................44
Capitalization ..............................................................46 PROSPECTUS
Pro Forma Data ..............................................................48
Historical and Pro Forma Capital Compliance .................................54 --------------------
PHS Bancorp Consolidated Statement of Income ................................55
Management's Discussion and Analysis of
Financial Condition and Results of Operations ..............................56
Business of PHSB Financial ..................................................67
Business of Peoples Home Savings ............................................67 Trident Securities
Regulation ..................................................................83 A Division of McDonald Investments, Inc.
Taxation ....................................................................89
Management of PHSB Financial ................................................90
Management of Peoples Home Savings ..........................................90
Effect of Conversion on Rights of Stockholders...............................99
Restrictions on Acquisition of PHSB Financial .............................105
Description of Capital Stock of PHSB Financial .............................106
Legal and Tax Opinions .....................................................107 November 13, 2001
Experts ....................................................................107
Registration Requirements ..................................................108
Where You Can Find Additional Information ..................................108
Index to Financial Statements ..............................................109
Until the later of December 15, 2001 or 25 days after commencement of the
offering, all dealers effecting transactions in these securities, whether or not THESE SECURITIES ARE NOT DEPOSITS OR SAVINGS
participating in this offering, may be required to deliver a prospectus. This is ACCOUNTS AND ARE NOT FEDERALLY INSURED OR
in addition to the dealers' obligation to deliver a prospectus when acting as GUARANTEED.
underwriters and with respect to their unsold allotments or subscriptions.
================================================================================ ==================================================