SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
SEC File Number 0-33419
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PHSB Financial Corporation
--------------------------
(Exact Name of registrant as specified in its charter)
PENNSYLVANIA 25-1894708
- ------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification
Number)
744 Shenango Road
P.O. Box 1568
Beaver Falls, Pennsylvania 15010
(724) 846 - 7300
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(Address, including zip code, and
telephone number, including area
code of Principal Executive Offices)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes [X] No [ ]
As of May 1, 2002 there were 3,497,109 shares outstanding of the issuer's class
of common stock.
1
PHSB FINANCIAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-QSB
Page
Number
------
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet (unaudited) as of March 31, 2002
and December 31, 2001 3
Consolidated Statement of Income (unaudited) for the Three
Months ended March 31, 2002 and 2001 4
Consolidated Statement of Comprehensive Income (unaudited)
for the Three Months ended March 31, 2002 and 2001 5
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the Three Months ended March 31, 2002 6
Consolidated Statement of Cash Flows (unaudited) for the
Three Months ended March 31, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 13
Part II Other Information 14
Signatures 15
PHSB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, December 31,
2002 2001
------------- -------------
ASSETS
Cash and amounts due from other institutions $ 6,142,919 $ 5,988,187
Interest - bearing deposits with other institutions 7,580,054 28,195,161
Investment securities:
Available for sale 38,722,342 22,902,366
Held to maturity (market value $ 25,998,566
and $26,516,322) 25,819,600 26,259,684
Mortgage - backed securities:
Available for sale 59,604,963 54,603,622
Held to maturity (market value $ 38,724,423
and $30,444,092) 38,716,807 30,179,631
Loans (net of allowance for loan losses of $1,572,043
and $1,506,140) 142,521,042 137,000,743
Accrued interest receivable 1,897,839 1,679,032
Premises and equipment 4,983,040 5,029,993
Federal Home Loan Bank stock 3,016,300 2,614,800
Other assets 1,023,972 929,215
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TOTAL ASSETS $ 330,028,878 $ 315,382,434
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 215,259,240 $ 210,014,644
Advances from Federal Home Loan Bank 59,324,800 50,324,800
Accrued interest payable and other liabilities 2,408,948 2,208,161
------------- -------------
Total liabilities 276,992,988 262,547,605
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Preferred stock, 20,000,000 shares authorized, none issued - -
Common stock, $.10 par value 80,000,000 shares authorized,
3,497,109 shares issued 349,711 349,711
Additional paid in capital 32,243,832 32,229,027
Retained earnings - substantially restricted 22,367,875 21,985,576
Accumulated other comprehensive income 583,213 856,798
Unallocated ESOP shares (232,478 and 238,439 shares) (2,465,788) (2,529,013)
Unallocated RSP shares (4,785 and 6,380 shares) (42,953) (57,270)
------------- -------------
Total stockholders' equity 53,035,890 52,834,829
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 330,028,878 $ 315,382,434
============= =============
See accompanying notes to the unaudited consolidated financial statements.
3
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended March 31,
2002 2001
---------- ----------
INTEREST AND DIVIDEND INCOME
Loans $2,723,138 $2,621,437
Investment securities:
Taxable 374,829 485,296
Exempt from federal income tax 285,931 214,897
Mortgage - backed securities 1,450,762 1,364,564
Interest - bearing deposits with other institutions 68,024 87,068
---------- ----------
Total interest income 4,902,684 4,773,262
---------- ----------
INTEREST EXPENSE
Deposits 1,640,847 2,111,397
Advances from Federal Home Loan Bank 729,558 562,997
---------- ----------
Total interest expense 2,370,405 2,674,394
---------- ----------
Net interest income 2,532,279 2,098,868
PROVISION FOR LOAN LOSSES 180,000 120,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,352,279 1,978,868
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 144,249 141,275
Investment securities gains, net 5,399 58,118
Rental income, net 23,327 24,327
Other income 59,534 44,744
---------- ----------
Total noninterest income 232,509 268,464
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 909,116 808,687
Occupancy and equipment costs 351,590 356,523
Data processing costs 49,158 65,694
Other expenses 378,856 327,279
---------- ----------
Total noninterest expense 1,688,720 1,558,183
---------- ----------
Income before income taxes 896,068 689,149
Income taxes 234,000 174,500
---------- ----------
NET INCOME $ 662,068 $ 514,649
========== ==========
Earnings Per Share
Basic $ 0.20 $ 0.16
Diluted 0.20 0.16
Weighted average number of shares outstanding
Basic 3,254,892 3,176,605
Diluted 3,298,347 3,176,605
See accompanying notes to the unaudited consolidated financial statements.
4
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31,
2002 2001
-------------------------------------------
Net Income $ 662,068 $514,649
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities $(409,124) $594,132
Less: Reclassification adjustment for gain included in net income (5,399) (58,118)
--------------------- -------------------
Other comprehensive income (loss) before tax (414,523) 536,014
Income tax expense (benefit) related to other comprehensive income (loss) (140,938) 182,244
--------- --------
Other comprehensive income (loss), net of tax (273,585) 353,770
--------- --------
Comprehensive income $ 388,483 $868,419
========= ========
See accompanying notes to the unaudited consolidated financial statements.
5
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
Accumulated Total Compre-
Additional Other Unallocated Unallocated Stock- hensive
Common Paid in Retained Comprehensive Shares Held Shares Held holders' Income
Stock Capital Earnings Income (Loss) by ESOP by RSP Equity (Loss)
--------- ------------ ---------- ----------- ------------ ----------- ----------- --------
Balance,
December 31, 2001 349,711 32,229,027 21,985,576 856,798 (2,529,013) (57,270) 52,834,829
Net Income 662,068 662,068 $662,068
Other comprehensive
income :
Unrealized loss on
available for
sale securities (273,585) (273,585) (273,585)
--------
Comprehensive income $388,483
Cash dividends paid
($0.08 per share) (279,769) (279,769)
ESOP shares earned 14,805 63,225 78,030
RSP shares earned 14,317 14,317
------- ---------- ---------- ---------- ---------- ------- ----------
Balance, March 31, 2002 349,711 32,243,832 22,367,875 583,213 (2,465,788) (42,953) 53,035,890
======= ========== ========== ========== ========== ======= ==========
See accompanying notes to the unaudited consolidated financial statements.
6
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months ended March 31,
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net income $ 662,068 $ 514,649
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 180,000 120,000
Depreciation, amortization and accretion 169,282 165,672
Amortization of discounts, premiums and
loan origination fees 284,729 254,534
Gains on sale of investment securities, net (5,399) (58,118)
Increase in accrued interest receivable (218,807) (54,205)
Increase in accrued interest payable 156,196 86,765
Amortization of ESOP unearned compensation 78,030 27,335
Amortization of RSP unearned compensation 14,317 32,129
Other, net 15,998 (56,296)
------------ ------------
Net cash provided by operating activities 1,336,414 1,032,465
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INVESTING ACTIVITIES
Investment and mortgage-backed securities available for sale:
Proceeds from sales 74,999 1,862,276
Proceeds from maturities and principal repayments 5,249,577 2,005,306
Purchases (26,560,640) (21,288,146)
Investment and mortgage-backed securities held to maturity:
Proceeds from maturities and principal repayments 7,585,020 5,355,138
Purchases (15,695,819) (3,998,658)
Decrease (increase) in loans receivable, net (5,975,510) 1,281,893
Proceeds from sale of repossessed assets 84,586 140,179
Purchase of premises and equipment, net (122,329) (178,682)
Purchase of Federal Home Loan Bank Stock (401,500) -
------------ ------------
Net cash used for investing activities (35,761,616) (14,820,694)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 5,244,596 5,479,729
Advances from Federal Home Loan Bank 10,000,000 15,000,000
Repayment of Advances from Federal Home Loan Bank (1,000,000) -
Treasury stock purchased - (126,197)
Cash dividends paid (279,769) (255,725)
------------ ------------
Net cash provided by financing activities 13,964,827 20,097,807
------------ ------------
Increase (decrease) in cash and cash equivalents (20,460,375) 6,309,578
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,183,348 6,597,161
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,722,973 $ 12,906,739
============ ============
See accompanying notes to the unaudited consolidated financial statements.
7
PHSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of PHSB Financial Corporation (the
"Company) include it's wholly-owned subsidiary, Peoples Home Savings Bank (the
"Bank") and the Bank's wholly-owned subsidiary, HOMECO (the "Subsidiary"). All
significant intercompany balances and transactions have been eliminated. The
Company's business is conducted principally through the Bank.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions to Form 10-QSB and, therefore, do not
necessarily include all information which would be included in audited financial
statements. The information furnished reflects all normal recurring adjustments
which are, in the opinion of management, necessary for the fair statement of the
results of the period. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year or any
other future period. The unaudited consolidated financial statements should be
read in conjunction with Form 10-KSB for the year ended December 31, 2001.
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 three months ended March 31, 2002 and 2001, the Company made cash
payments for interest of $2,214,209 and $2,587,629, respectively. The Company
also made cash payments for income taxes of $37,236 and $23,625, respectively,
during these same periods.
NOTE 2 - 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.
All references to earnings per share have been retroactively adjusted to reflect
the conversion which was completed on December 20, 2001. As a result of the
conversion each common share of PHS Bancorp, Inc. was converted into 1.28123
shares of PHSB Financial Corporation common stock.
Shares outstanding do not include ESOP shares that were purchased and
unallocated in accordance with SOP 93-6, "Employers' Accounting for Stock
Ownership Plans."
8
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Private Securities Litigation Act of 1995 contains safe harbor provisions
regarding forward-looking statements. When used in this discussion, the words
"believes", "anticipates", "contemplates", "expects", and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from those projected. Those risks and uncertainties include changes
in interest rates, risks associated with the effect of opening a new branch, the
ability to control costs and expenses, and general economic conditions.
On December 20, 2001, PHSB Financial Corporation (the "Company") completed its
second step conversion from a mutual holding company structure to a full stock
company. As part of the mutual holding company reorganization, the shares
formerly held by the mutual holding company were cancelled, the Company sold
2,201,191 new shares to the public and the publicly held shares of PHS Bancorp,
Inc., the former middle tier holding company, were exchanged for 1,295,918
shares of the Company.
Unless the context otherwise indicates, all references to the Company include
its wholly owned subsidiary, Peoples Home Savings Bank (the "Bank"). Prior to
December 20, 2001, all references refer to the Bank and PHS Bancorp, Inc.
Financial Condition
Total assets at March 31, 2002 of $330.0 million represented an increase of
$14.6 million or 4.6% from December 31, 2001. This increase was primarily due to
increases in securities of $28.9 million and loans of $5.5 million, partially
offset by a decrease in cash and interest bearing deposits of $20.5 million.
Loans receivable,net at March 31, 2002, of $142.5 million represented an
increase of $5.5 million from $137.0 million at December 31, 2001. The increase
in the loan portfolio was primarily attributable to a loan to a local school
district for $4.3 million.
At March 31, 2001, investment securities (available for sale and held to
maturity) increased $15.3 million to $64.5 million from $49.2 million at
December 31, 2001. Mortgage-backed securities (available for sale and held to
maturity) increased $13.5 million to $98.3 million at March 31, 2002 from $84.8
million at December 31, 2001. The total increase of $28.9 million to the
investment and mortgage-backed securities portfolios (available for sale and
held to maturity) were the result of purchases of $42.3 million which were
funded by sales of $75,000, maturities of $5.6 million, and principal repayments
of $7.2 million along with a net increase in Federal Home Loan Bank advances of
$9.0 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 March 31, 2002 were $215.3 million, an
increase of $5.3 million or 2.5% from $210.0 million at December 31, 2001.
Advances from the Federal Home Loan Bank of Pittsburgh increased $9.0 million to
$59.3 million at March 31, 2002 from $50.3 million at December 31, 2001. This
increase was the result of additional borrowings to fund securities purchases as
discussed above.
9
Stockholders' equity increased $201,000 for the three month period ended March
31, 2002. This increase was due to net income of $662,000 along with decreases
in unallocated ESOP and RSP shares of $63,000 and $14,000 respectively. These
increases to stockholders' equity were partially offset by decreased accumulated
other comprehensive income of $274,000 and cash dividends paid of $280,000.
Results of Operations
Comparison of Operating Results for the Three Months Ended March 31, 2002 and
March 31, 2001.
General.
Net income for the three months ended March 31, 2002 increased by $147,000 to
$662,000, from $515,000 for the three months ended March 31, 2001. This increase
was primarily due to increased net interest income of $433,000, partially offset
by increases in non-interest expense, loan loss provisions and income tax
provisions of $131,000, $60,000 and $59,000, respectively, along with a decrease
in non-interest income of $35,000.
Net Interest Income.
Reported net interest income increased $433,000 or 20.6% for the three months
ended March 31, 2002. Net interest income on a tax equivalent basis increased by
$469,000 or 21.2% in a period when both average interest earning assets and
average interest-bearing liabilities increased (increased $50.0 million and
$26.1 million, respectively). The Company's net interest rate spread decreased 7
basis points to 2.88% for the three months ended March 31, 2002.
Interest Income.
Interest income on a tax equivalent basis totaled $5.1 million for the three
months ended March 31, 2002, an increase of $166,000 or 3.4% over the total of
$4.9 million for the three months ended March 31, 2001. This increase was
primarily due to an increase in the Company's average interest-earning assets of
$50.0 million for the three months ended March 31, 2002, partially offset by a
97 basis point decrease in the yield earned. Interest earned on loans increased
$102,000 or 3.9%, in 2002. This increase was due to a $14.8 million increase in
the average balance of loans partially offset by a 55 basis point decrease in
the yield earned. Interest earned on investment and mortgage-backed securities
(including securities held for sale) increased $64,000 or 2.8%, in 2002. This
increase was due to an increase in the average balance of securities of $35.2
million partially offset by a 124 basis point decrease in the yield earned.
Interest Expense.
Interest expense decreased $304,000 to $2.4 million for the three months ended
March 31, 2002. The decrease in interest expense was due to an 89 basis point
decrease in the average cost of interest-bearing liabilities to 3.57% partially
offset by a $26.1 million increase in the average balance of interest-bearing
liabilities. The $26.1 million increase in the average balance of
interest-bearing liabilities was the result of increased deposits of $12.0
million and increased average borrowings of $14.1 million.
10
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 the Bank;
o industry standards;
o the level and status of past due and non-performing loans;
o the general economic conditions in the Bank's lending area; and
o other factors affecting the collectibility of the loans in its portfolio.
The provision for loan losses increased by $60,000 to $180,000 for the three
months ended March 31, 2002, from $120,000 for the three months ended March 31,
2001. Increases in loans precipitated the increase in the provision for loan
losses. At both March 31, 2002 and December 31, 2001 the allowance for loan
losses represented 1.10% of loans. See "Risk Elements."
Non-interest Income.
Total non-interest income decreased $35,000 to $233,000 for the three months
ended March 31, 2002, from $268,000 for the three months ended March 31, 2001.
This decrease was primarily due to decreased investment security gains of
$53,000 from $58,000 for the three months ended March 31, 2001 to $5,000 for the
three months ended March 31, 2002.
Non-interest Expense.
Non-interest expense increased $131,000 to $1,689,000 for the three months ended
March 31, 2002, from $1,558,000 for the three months ended March 31, 2001. This
increase was primarily due to increased compensation and employee benefits of
$100,000 which was primarily the result of normal merit increases along with
increased ESOP expense due to additional ESOP shares acquired in connection with
the conversion and reorganization that was effective December 20, 2001.
11
Liquidity and Capital Requirements
Liquidity refers to the Company's ability to generate sufficient cash to meet
the funding needs of current loan demand, savings deposit withdrawals, and to
pay operating expenses. The Company has 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). The Company adjusts
liquidity as appropriate to meet its asset/liability objectives.
The Company's 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, the Company
invests excess funds in overnight deposits, which provide liquidity to meet
lending requirements
The Company has other sources of liquidity if a need for additional funds
arises, such as FHLB of Pittsburgh advances. At March 31, 2002 the Bank had
borrowed $59.3 million of it's $144.6 million maximum borrowing capacity with a
remaining borrowing capacity of approximately $85.3 million. Additional sources
of liquidity can be found in the Company's balance sheet, such as investment
securities and unencumbered mortgage-backed securities that are readily
marketable. Management believes that the Company has adequate resources to fund
all of its commitments.
At March 31, 2002, the Bank's Tier I risk-based and total risk-based capital
ratios were 29.7% and 30.9%, 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. The Bank's leverage ratio was 12.8% at March
31, 2002. Current regulations require a leveraged ratio 5% to be considered well
capitalized.
12
Risk Elements
Nonperforming Assets
The following schedule presents information concerning nonperforming assets
including nonaccrual loans, loans 90 days or more past due, and other real
estate owned at March 31, 2002 and December 31, 2001. A loan is classified as
nonaccrual when, in the opinion of management, there are serious doubts about
collectibility of interest and principal. At the time the accrual of interest is
discontinued, future income is recognized only when cash is received.
The allowance for loan losses was 338.8% of total non-performing assets at March
31, 2002 and 254.0% at December 31, 2001.
March 31, December 31,
2002 2001
---- ----
(Dollars in Thousands)
Loans on nonaccrual basis $418 $537
Loans past due 90 days or more 46 56
--- ---
Total non-performing loans 464 593
--- ---
Real estate owned 0 0
--- ---
Total non-performing assets $464 $593
==== ====
Total non-performing loans to
total loans 0.33% 0.43%
===== =====
Total non-performing loans to
total assets 0.14% 0.19%
===== =====
Total non-performing assets to
total assets 0.14% 0.19%
===== =====
13
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in rights of the Company's Security holders.
None.
Item 3. Defaults by the Company on its senior securities.
None.
Item 4. Results of Votes of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8 - K.
(a) The following exhibits are filed as part of this report.
3.1 Articles of Incorporation of PHSB Financial Corporation*
3.2 Bylaws of PHSB Financial Corporation*
4.0 Specimen Stock Certificate of PHSB Financial Corporation*
10.1 Employment Agreement between Peoples Home Savings Bank and
James P. Wetzel, Jr.*
10.2 1998 Restricted Stock Plan**
10.3 1998 Stock Option Plan**
10.4 Employment Agreement between Peoples Home Savings Bank
and Richard E. Canonge***
99.0 Review Report of Independent Accountants
(b) Reports on Form 8-K.
None
- --------------
* Incorporated by reference to Registrant's Registration Statement on Form
SB-2 initially filed with the Securities and Exchange Commission on
September 10, 2001 (File No. 333-69180).
** Incorporated by reference to the identically numbered exhibits to PHS
Bancorp, Inc.'s Form 10-Q for the quarter ended September 30, 1998 and
filed with the Securities and Exchange Commission on November 13, 1998
(File No. 0-23230).
*** Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001 and filed with the Securities and Exchange
Commission on March 28, 2002
14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 9, 2002
PHSB Financial Corporation
- --------------------------
(Registrant)
By: /s/James P. Wetzel, Jr.
-----------------------
James P. Wetzel, Jr.
President and Chief Executive Officer
By: /s/Richard E. Canonge
---------------------
Richard E. Canonge
Chief Financial Officer and Treasurer
15