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 September 30, 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
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(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
--------------------------------
(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 November 8, 2002 there were 3,028,339 shares outstanding of the issuer's
class of common stock.
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 September 30, 2002
and December 31, 2001 3
Consolidated Statement of Income (unaudited) for the Three
and Nine Months ended September 30, 2002 and 2001 4
Consolidated Statement of Comprehensive Income (unaudited)
for the Three and Nine Months ended September 30, 2002 and 2001 5
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the Nine Months ended September 30, 2002 6
Consolidated Statement of Cash Flows (unaudited) for the
Nine Months ended September 30, 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 - 15
Item 3. Controls and Procedures 15
Part II Other Information 16
Signatures 17
PHSB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
2002 2001
------------ ------------
ASSETS
Cash and amounts due from other institutions $ 7,259,048 $ 5,988,187
Interest - bearing deposits with other institutions 5,933,023 28,195,161
Investment securities:
Available for sale 32,363,452 22,902,366
Held to maturity (market value $ 28,036,159
and $26,516,322) 27,646,129 26,259,684
Mortgage - backed securities:
Available for sale 52,718,132 54,603,622
Held to maturity (market value $ 44,240,893
and $30,444,092) 43,070,166 30,179,631
Loans (net of allowance for loan losses of $1,677,772
and $1,506,140) 164,167,839 137,000,743
Accrued interest receivable 1,894,466 1,679,032
Premises and equipment 4,738,233 5,029,993
Federal Home Loan Bank stock 2,966,300 2,614,800
Other assets 197,108 929,215
------------ ------------
TOTAL ASSETS $342,953,896 $315,382,434
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $234,188,090 $210,014,644
Advances from Federal Home Loan Bank 57,324,800 50,324,800
Accrued interest payable and other liabilities 2,267,950 2,208,161
------------ ------------
Total liabilities 293,780,840 262,547,605
------------ ------------
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 32,288,287 32,229,027
Retained earnings - substantially restricted 23,268,946 21,985,576
Accumulated other comprehensive income 2,093,689 856,798
Unallocated ESOP shares (220,556 and 238,439 shares) -2,339,338 -2,529,013
Unallocated RSP shares (1,595 and 6,380 shares) -14,318 -57,270
Treasury stock, at cost (448,710 shares) -6,473,921 -
------------ ------------
Total stockholders' equity 49,173,056 52,834,829
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $342,953,896 $315,382,434
============= ============
See accompanying notes to the unaudited consolidated financial statements.
3
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
Loans:
Taxable $ 2,662,025 $ 2,645,156 $ 7,875,638 $ 7,771,974
Exempt from federal income tax 295,607 62,196 498,741 191,771
Investment securities:
Taxable 422,770 387,436 1,235,175 1,315,584
Exempt from federal income tax 208,221 208,424 795,409 632,539
Mortgage - backed securities 1,436,947 1,526,416 4,403,806 4,420,763
Interest - bearing deposits with other institutions 41,681 58,824 141,420 214,979
----------- ----------- ----------- -----------
Total interest income 5,067,251 4,888,452 14,950,189 14,547,610
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 1,762,409 1,967,131 4,993,419 6,094,250
Advances from Federal Home Loan Bank 792,655 695,622 2,316,652 1,935,134
----------- ----------- ----------- -----------
Total interest expense 2,555,064 2,662,753 7,310,071 8,029,384
----------- ----------- ----------- -----------
Net interest income 2,512,187 2,225,699 7,640,118 6,518,226
PROVISION FOR LOAN LOSSES 195,000 130,000 555,000 370,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,317,187 2,095,699 7,085,118 6,148,226
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 167,690 147,663 464,893 439,189
Investment securities gains, net 98,178 - 148,138 58,118
Rental income, net 25,500 24,827 66,983 74,481
Other income 63,459 84,574 194,396 181,055
----------- ----------- ----------- -----------
Total noninterest income 354,827 257,064 874,410 752,843
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 982,541 854,983 2,822,891 2,483,910
Occupancy and equipment costs 338,762 316,574 1,045,349 992,720
Data processing costs 51,116 43,162 149,134 147,514
Other expenses 378,602 346,095 1,157,067 1,041,262
----------- ----------- ----------- -----------
Total noninterest expense 1,751,021 1,560,814 5,174,441 4,665,406
----------- ----------- ----------- -----------
Income before income taxes 920,993 791,949 2,785,087 2,235,663
Income taxes 176,765 221,926 653,765 602,108
----------- ----------- ----------- -----------
NET INCOME $ 744,228 $ 570,023 $ 2,131,322 $ 1,633,555
=========== =========== =========== ===========
Earnings Per Share
Basic $ 0.26 $ 0.18 $ 0.69 $ 0.52
Diluted $ 0.25 $ 0.18 $ 0.68 $ 0.52
Weighted average number of shares outstanding
Basic 2,912,386 3,156,386 3,098,123 3,165,481
Diluted 2,965,714 3,162,466 3,147,222 3,166,120
See accompanying notes to the unaudited consolidated financial statements.
4
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
2002 2001 2002 2001
--------------------- ---------------------- ---------------------- ----------------------
Net Income $ 744,228 $ 570,023 $2,131,322 $1,633,555
Other comprehensive income:
Unrealized gain
on available for
sale securities $782,383 $1,678,559 $2,022,215 $1,869,703
Less: Reclassification
adjustment for gain
included in net income -98,178 - -148,138 -58,118
--------------------- ----------------------- ---------------------- ----------------------
Other comprehensive income
before tax 684,205 1,678,559 1,874,077 1,811,585
Income tax expense related to
other comprehensive income 232,630 570,711 637,186 635,699
---------- ---------- ---------- ----------
Other comprehensive income,
net of tax 451,575 1,107,848 1,236,891 1,175,886
---------- ---------- ---------- ----------
Comprehensive income $1,195,803 $1,677,871 $3,368,213 $2,809,441
========== ========== ========== ==========
See accompanying notes to the unaudited consolidated financial statements.
5
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
Accumulated
Additional Other Unallocated Unallocated Total Compre-
Common Paid in Retained Comprehensive Shares Held Shares Held Treasury Stockholders' hensive
Stock Capital Earnings Income by ESOP by RSP Stock Equity Income
----- ------- -------- ------ ------- ------ ----- ------ ------
Balance,
December 31, 2001 $349,711 $32,229,027 $21,985,576 $ 856,798 -$2,529,013 -$57,270 - $52,834,829
Net Income 2,131,322 2,131,322 $2,131,322
Other comprehensive
income :
Unrealized gain on
available
for sale
securities 1,236,891 1,236,891 1,236,891
----------
Comprehensive income $3,368,213
==========
Cash dividends paid
($0.25 per share) -847,952 -847,952
Treasury stock
purchased, at cost -6,473,921 -6,473,921
ESOP shares earned 59,260 189,675 248,935
RSP shares earned 42,952 42,952
-------- ----------- ----------- ---------- ---------- ------- ---------- -----------
Balance,
September 30, 2002 $349,711 $32,288,287 $23,268,946 $2,093,689 -$2,339,338 -$14,318 -$6,473,921 $49,173,056
======== =========== =========== ========== ========== ======= ========== ===========
See accompanying notes to the unaudited consolidated financial statements.
6
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months ended September 30,
2002 2001
---------- ----------
OPERATING ACTIVITIES
Net income $2,131,322 $1,633,555
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 555,000 370,000
Depreciation, amortization and accretion 520,101 491,918
Amortization of discounts, premiums and
loan origination fees 959,318 848,460
Gains on sale of investment securities, net -148,138 -58,118
(Increase) decrease in accrued interest receivable -215,434 5,481
Increase in accrued interest payable 534,159 1,776
Amortization of ESOP unearned compensation 248,935 93,456
Amortization of RSP unearned compensation 42,952 96,385
Other, net -622,734 -465,580
---------- ----------
Net cash provided by operating activities 4,005,481 3,017,333
---------- ----------
INVESTING ACTIVITIES
Investment and mortgage-backed securities available for sale:
Proceeds from sales 9,728,254 1,862,276
Proceeds from maturities and principal repayments 17,107,760 17,445,821
Purchases -32,502,574 -30,949,366
Investment and mortgage-backed securities held to maturity:
Proceeds from maturities and principal repayments 26,544,194 13,048,938
Purchases -40,868,003 -11,699,383
Increase in loans receivable, net -28,546,205 -6,453,806
Proceeds from sale of repossessed assets 268,084 333,875
Purchase of premises and equipment, net -228,341 -753,855
Purchase of Federal Home Loan Bank Stock -351,500 -
---------- ----------
Net cash used for investing activities -48,848,331 -17,165,500
---------- ----------
FINANCING ACTIVITIES
Net increase in deposits 24,173,446 8,339,661
Advances from Federal Home Loan Bank 10,000,000 20,000,000
Repayment of Advances from Federal Home Loan Bank -3,000,000 -7,000,000
Treasury stock purchased -6,473,921 -325,197
Cash dividends paid -847,952 -762,145
---------- ----------
Net cash provided by financing activities 23,851,573 20,252,319
---------- ----------
Increase (decrease) in cash and cash equivalents -20,991,277 6,104,152
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,183,348 6,597,161
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $13,192,071 $12,701,313
=========== ===========
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.
Recent Accounting Standards
- ---------------------------
In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) 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. FAS No. 141 also specifies criteria which
must be met for intangible assets acquired in a purchase method business
combination to be recognized and reported apart from goodwill. The adoption of
FAS No. 141 did not have a material effect on the Company's financial position
or results of operations.
On January 1, 2002, the Company adopted FAS No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15, 2001.
This 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. However, this new statement did not amend FAS No. 72, Accounting
for Certain Acquisitions of Banking or Thrift Institutions, which requires
recognition and amortization of unidentified intangible assets relating to the
acquisition of financial institutions or branches thereof. The FASB has
undertaken a limited scope project to reconsider the provisions of FAS No. 72 in
2002 and has issued an exposure draft of a proposed statement, Acquisitions of
Certain Financial Institutions, that would remove acquisitions of financial
institutions from the scope of FAS No. 72. The adoption of this proposed
statement would require all goodwill originating from acquisitions that meet the
definition of a business combination as defined in Emerging Issues Task Force
Issue ("EITF") No. 98-3 to be discontinued. The adoption of FAS No. 142 did not
have a material effect on the Company's financial position or results of
operations.
In August 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement
Obligations, which requires that the fair value of a liability be recognized
when incurred for the retirement of a long-lived asset and the value of the
asset be increased by that amount. The statement also requires that the
liability be maintained at its present value in subsequent periods and outlines
certain disclosures for such obligations. The new statement takes effect for
fiscal years beginning after June 15, 2002. The adoption of this statement,
which is effective January 1, 2003, is not expected to have a material effect on
the Company `s financial statements.
8
On January 1, 2002, the Company adopted FAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. FAS 144 supercedes FAS 121 and
applies to all long-lived assets (including discontinued operations) and
consequently amends APB Opinion No. 30, Reporting Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business. FAS 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value less costs to sell. The adoption of FAS
No. 144 did not have a material effect on the Company's financial statements.
In April 2002, the FASB issued FAS No. 145, "Recission of FASB Statement No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". FAS
No. 145 rescinds FAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in Opinion 30 will now be used to classify those gains and losses. This
statement also amends FASB FAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. This
statement also makes technical corrections to existing pronouncements, which are
not substantive but in some cases may change accounting practice. FAS No. 145 is
effective for transactions occurring after May 15, 2002. The adoption of FAS No.
145 did not have a material effect on the Company's financial position or
results of operations.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. This statement replaces
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred
in a Restructuring). The new statement will be effective for exit or disposal
activities initiated after December 31, 2002, the adoption of which is not
expected to have a material effect on the Company's financial statements.
On October 1, 2002, the FASB issued FAS No. 147, Acquisitions of Certain
Financial Institutions, effective for all business combinations initiated after
October 1, 2002. This Statement addresses the financial accounting and reporting
for the acquisition of all or part of a financial institution, except for a
transaction between two or more mutual enterprises. This Statement removes
acquisitions of financial institutions, other than transactions between two or
more mutual enterprises, from the scope of FAS No. 72, Accounting for Certain
Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9,
Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a
Similar Institution Is Acquired in a Business Combination Accounted for by the
Purchase Method. The acquisition of all or part of a financial institution that
meets the definition of a business combination shall be accounted for by the
purchase method in accordance with FAS No. 141, Business Combinations, and FAS
No. 142, Goodwill and Other Intangible Assets. This Statement also provides
guidance on the accounting for the impairment or disposal of acquired long-term
customer-relationship intangible assets (such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible
assets), including those acquired in transactions between two or more mutual
enterprises. Adoption of this statement is not expected to have a material
effect on the Companys financial statements.
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 nine months ended September 30, 2002 and 2001, the Company made cash
payments for interest of $6,775,912 and $8,027,608 respectively. The Company
also made cash payments for income taxes of $733,977 and $606,925 respectively,
during these same periods.
9
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."
10
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 July 30, 2002 the President signed into law the Sarbanes-Oxley Act of 2002
(the "Act"), following an investigative order proposed by the SEC on chief
financial officers and chief executive officers of 947 large public companies on
June 27, 2002. Additional regulations are expected to be promulgated by the SEC.
As a result of the accounting restatements by large public companies, the
passage of the Act and regulations expected to be implemented by the SEC,
publicly-registered companies, such as the Company, will be subject to
additional and more cumbersome reporting regulations and disclosure. These new
regulations, which are intended to curtail corporate fraud, will require certain
officers to personally certify certain SEC filings and financial statements and
will require additional measures to be taken by our outside auditors, officers
and directors. The loss of investor confidence in the stock market and the new
laws and regulations will increase non-interest expenses of the Company and
could adversely affect the prices of publicly-traded stocks, such as the
Company.
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 September 30, 2002 of $343.0 million represented an increase of
$27.6 million or 8.8% from December 31, 2001. This increase was primarily due to
increases in loans of $27.2 and securities of $21.8 million, partially offset by
a decrease in cash and interest bearing deposits of $21.0 million.
Loans receivable, net at September 30, 2002, of $164.2 million represented an
increase of $27.2 million from $137.0 million at December 31, 2001. The increase
in the loan portfolio was primarily attributable to seven loans to local school
districts for a total of $19.9 million made in 2002. These loans are the result
of the Bank's increased focus on serving the financial needs of local
municipalities and school districts.
At September 30, 2002, investment securities (available for sale and held to
maturity) increased $10.8 million to $60.0 million from $49.2 million at
December 31, 2001. Mortgage-backed securities (available for sale and held to
maturity) increased $11.0 million to $95.8 million at September 30, 2002 from
$84.8 million at December 31, 2001. The total increase of $21.8 million to the
investment and mortgage-backed securities portfolios (available for sale and
held to maturity) were the result of purchases of $73.4 million which were
funded by sales of $9.7 million, maturities of $22.2 million, and principal
repayments of $21.4 million along with a net increase in Federal Home Loan Bank
advances of $7.0 million. The securities sold were primarily municipal
securities. The sales were precipitated by the increase in municipal loans
previously mentioned as the Company desires to maximize the tax benefits of
these loans and securities. The purchases funded by advances from the Federal
Home Loan Bank of Pittsburgh were part of Peoples Home Savings' leverage
strategy.
11
Total deposits after interest credited at September 30, 2002 were $234.2
million, an increase of $24.2 million or 11.5% from $210.0 million at December
31, 2001. This increase in deposits was primarily due to $15.9 million in one
year certificates of deposit from local school districts issued in 2002.
Advances from the Federal Home Loan Bank of Pittsburgh increased $7.0 million to
$57.3 million at September 30, 2002 from $50.3 million at December 31, 2001.
This increase was the result of additional borrowings to fund securities
purchases as discussed above.
Stockholders' equity decreased $3.6 million for the nine month period ended
September 30, 2002. This decrease was due to treasury stock purchases of $6.5
million and cash dividends paid of $848,000. These decreases to stockholders'
equity were partially offset by net income of $2.1 million along with decreases
in unallocated ESOP and RSP shares of $190,000 and $43,000 respectively along
with increased accumulated other comprehensive income of $1.2 million.
Results of Operations
Comparison of Operating Results for the Three Months Ended September 30, 2002
and September 30, 2001.
General.
Net income for the three months ended September 30, 2002 increased $174,000 to
$744,000, from $570,000 for the three months ended September 30, 2001. This
increase was primarily due to increases in net interest income of $286,000 and
non-interest income of $98,000 along with a decrease in income tax provisions of
$45,000.These increases to net income were partially offset by increases in
non-interest expense and loan loss provisions of $190,000 and $65,000,
respectively.
Net Interest Income.
Reported net interest income increased $286,000 or 12.8% for the three months
ended September 30, 2002. Net interest income on a tax equivalent basis
increased by $405,000 or 17.1%, in a period when both average interest earning
assets and average interest-bearing liabilities increased (increased $57.2
million and $37.0 million, respectively). The Company's net interest rate spread
decreased 20 basis points to 2.83% for the three months ended September 30,
2002.
Interest Income.
Interest income on a tax equivalent basis totaled $5.3 million for the three
months ended September 30, 2002, an increase of $298,000 or 5.9% over the total
of $5.0 million for the three months ended September 30, 2001. This increase was
primarily due to an increase in the Company's average interest-earning assets of
$57.2 million for the three months ended September 30, 2002, partially offset by
an 88 basis point decrease in the yield earned. Interest earned on loans
increased $369,000 or 13.5%, in 2002. This increase was due to a $29.4 million
increase in the average balance of loans, partially offset by a 59 basis point
decrease in the yield earned. Interest earned on investment and mortgage-backed
securities (including securities held for sale) decreased $71,000 or 3.1%, in
2002. This decrease was due to a 117 basis point decrease in the yield earned
partially offset by an increase in the average balance of securities of $27.8
million.
Interest Expense.
Interest expense decreased $108,000 to $2.6 million for the three months ended
September 30, 2002. The decrease in interest expense was due to a 68 basis point
decrease in the average cost of interest-bearing liabilities to 3.52%, partially
offset by a $37 million increase in the average balance of interest-bearing
liabilities. The $37.0 million increase in the average balance of
interest-bearing liabilities was the result of increased deposits of $28.9
million and increased average borrowings of $8.1 million.
12
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 $65,000 to $195,000 for the three
months ended September 30, 2002, from $130,000 for the three months ended
September 30, 2001. Increases in loans precipitated the increase in the
provision for loan losses. At September 30, 2002 and December 31, 2001 the
allowance for loan losses represented 1.01% and 1.09%, of loans, respectively.
See "Risk Elements."
Non-interest Income.
Total non-interest income increased $98,000 to $355,000 for the three months
ended September 30, 2002, from $257,000 for the three months ended September 30,
2001. This increase was primarily due to investment security gains of $98,000
for the three months ended September 30, 2002. There were no investment security
gains for the three months ended September 30, 2001.
Non-interest Expense.
Non-interest expense increased $190,000 to $1,751,000 for the three months ended
September 30, 2002, from $1,561,000 for the three months ended September 30,
2001. This increase was primarily due to increased compensation and employee
benefits of $128,000 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.
Income Tax Expense
Income tax expense decreased $45,000 to $177,000 for the three months ended
September 30, 2002, from $222,000 for the three months ended September 30, 2001.
This decrease was primarily due to the increase in tax exempt loans previously
mentioned, partially offset by increased pre-tax income.
Comparison of Operating Results for the Nine Months Ended September 30, 2002 and
September 30, 2001.
General.
Net income for the Nine months ended September 30, 2002 increased by $497,000 to
$2.1 million from $1.6 million for the nine months ended September 30, 2001.
This increase was primarily due to increased net interest income of $1.1 million
along with increased non-interest income of $121,000. These increases to net
income were partially offset by increases in non-interest expense, loan loss
provisions and income tax provisions of $509,000, $185,000 and $52,000,
respectively.
Net Interest Income.
Reported net interest income increased $1.1 million or 17.2% for the nine months
ended September 30, 2002. Net interest income on a tax equivalent basis
increased by $1.4 million or 19.6%, in a period when both average interest
earning assets and average interest-bearing liabilities increased (increased
$51.4 million and $29.2 million, respectively). The Company's net interest rate
spread decreased 9 basis points to 2.92% for the nine months ended September 30,
2002.
Interest Income.
Interest income on a tax equivalent basis totaled $15.6 million for the nine
months ended September 30, 2002, an increase of $644,000 or 4.3% over the total
of $15.0 million for the nine months ended September 30, 2001. This increase was
primarily due to an increase in the Company's average interest-earning assets of
$51.4 million for the nine months ended September 30, 2002, partially offset by
a 90 basis point decrease in the yield earned. Interest earned on loans
increased $568,000 or 7.0%, in 2002. This increase was due to a $20.0 million
increase in the average balance of loans, partially offset by a 60 basis point
decrease in the yield earned. Interest earned on investment and mortgage-backed
securities (including securities held for sale) increased $76,000 or 1.1%, in
2002. This increase was due to an increase in the average balance of securities
of $31.5 million, partially offset by a 111 basis point decrease in the yield
earned.
13
Interest Expense.
Interest expense decreased $719,000 to $7.3 million for the nine months ended
September 30, 2002. The decrease in interest expense was due to an 80 basis
point decrease in the average cost of interest-bearing liabilities to 3.51%,
partially offset by a $29.2 million increase in the average balance of
interest-bearing liabilities. The $29.2 million increase in the average balance
of interest-bearing liabilities was the result of increased deposits of $18.6
million and increased average borrowings of $10.6 million.
Provision for Losses on Loans.
The provision for loan losses increased by $185,000 to $555,000 for the nine
months ended September 30, 2002, from $370,000 for the nine months ended
September 30, 2001. Increases in loans precipitated the increase in the
provision for loan losses. At September 30, 2002 and December 31, 2001 the
allowance for loan losses represented 1.01% and 1.09% of loans, respectively.
See "Comparison of Operating Results for the Three Months Ended September 30,
2002 and September 30, 2001- Provision for Losses on Loans and Risk Elements."
Non-interest Income. Total non-interest income increased $121,000 to $874,000
for the nine months ended September 30, 2002, from $753,000 for the nine months
ended September 30, 2001.This increase was primarily due to increased Investment
securities gains, net of $90,000 for the nine months ended September 30, 2002.
Non-interest Expense.
Non-interest expense increased $509,000 to $5,174,000 for the nine months ended
September 30, 2002, from $4,665,000 for the nine months ended September 30,
2001. This increase was primarily due to increased compensation and employee
benefits of $339,000 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.
Income Tax Expense
Income tax expense increased $52,000 to $654,000 for the nine months ended
September 30, 2002, from $602,000 for the nine months ended September 30, 2001.
This increase was primarily due to increased pre-tax income, partially offset by
the increase in tax exempt loans previously mentioned.
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 September 30, 2002 the Bank had
borrowed $57.3 million of it's $164.8 million maximum borrowing capacity with a
remaining borrowing capacity of approximately $107.5 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 September 30, 2002, the Bank's Tier I risk-based and total risk-based capital
ratios were 27.1% and 28.2%, 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 12.1% at
September 30, 2002. Current regulations require a leveraged ratio 5% to be
considered well capitalized.
14
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 September 30, 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 260.2% of total non-performing assets at
September 30, 2002 and 254.0% at December 31, 2001.
September 30, December 31,
2002 2001
------------- ------------
(Dollars in Thousands)
Loan on nonaccrual basis $448 $537
Loans past due 90 days or more 197 56
---- ----
Total non-performing loans 645 593
---- ----
Real estate owned 0 0
---- ----
Total non-performing assets $645 $593
==== ====
Total non-performing loans to total loans 0.39% 0.43%
==== ====
Total non-performing loans to total assets 0.19% 0.19%
==== ====
Total non-performing assets to total assets 0.19% 0.19%
==== ====
Item 3. Controls and Procedures
- ------- -----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
--------------------------------------------------
evaluation as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-QSB, the Registrant's principal executive officer and
principal financial officer have concluded that the Registrant's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act")) are effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms.
(b) Changes in internal controls. There were no significant changes in
----------------------------
the Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
15
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.
(h) 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
99.1 Certification
- --------------------
* 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
(b) Reports on Form 8-K.
None
16
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: November 14, 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
17
SECTION 302 CERTIFICATION
I, James P. Wetzel, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of PHSB Financial
Corporation,;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/James P. Wetzel, Jr.
----------------------- -------------------------------------
James P. Wetzel, Jr.
President and Chief Executive Officer
SECTION 302 CERTIFICATION
I, Richard E. Canonge, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of PHSB Financial
Corporation,;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/Richard E. Canonge
-------------------- -------------------------------------
Richard E. Canonge
Chief Financial Officer and Treasurer