SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
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
-----------------------
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
--------------------------------
(Address, including zip code, and telephone number, including area
code of Principal Executive Offices)
Indicate by 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 [ ]
Indicate by check whether the issuer is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 10, 2003 there were 2,905,531 shares outstanding of the issuer's
class of common stock.
1
PHSB FINANCIAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
Number
------
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet (unaudited) as of September 30, 2003
and December 31, 2002 3
Consolidated Statement of Income (unaudited) for the Three
and Nine Months ended September 30, 2003 and 2002 4
Consolidated Statement of Comprehensive Income (unaudited)
for the Three and Nine Months ended September 30, 2003 and 2002 5
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the Nine Months ended September 30, 2003 6
Consolidated Statement of Cash Flows (unaudited) for the
Nine Months ended September 30, 2003 and 2002 7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosure About Market Risk 19
Item 4. Controls and Procedures 20
Part II Other Information 21-22
2
PHSB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
2003 2002
------------- -------------
ASSETS
Cash and amounts due from other institutions $ 5,793,221 $ 6,938,217
Interest-bearing deposits with other institutions 3,249,152 1,283,752
------------- -------------
Cash and cash equivalents 9,042,373 8,221,969
Investment securities:
Available for sale 35,203,528 27,233,227
Held to maturity (market value $ 8,866,546
and $19,611,078) 8,581,797 19,274,753
Mortgage - backed securities:
Available for sale 55,355,595 44,137,225
Held to maturity (market value $ 62,198,528
and $71,826,914) 61,650,964 70,346,358
Loans (net of allowance for loan losses of $1,714,417
and $1,683,596) 159,006,348 165,668,214
Accrued interest receivable 1,426,436 1,998,773
Premises and equipment 4,316,246 4,604,005
Federal Home Loan Bank stock 3,808,900 3,620,300
Other assets 891,885 431,881
------------- -------------
TOTAL ASSETS $ 339,284,072 $ 345,536,705
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 231,731,211 $ 232,366,672
Advances from Federal Home Loan Bank 57,880,000 61,007,800
Accrued interest payable and other liabilities 2,421,701 2,802,061
------------- -------------
Total liabilities 292,032,912 296,176,533
------------- -------------
Preferred stock, 20,000,000 shares authorized, none issued - -
Common stock, $.10 par value 80,000,000 shares authorized,
3,519,711 and 3,497,109 shares issued 351,971 349,711
Additional paid in capital 32,614,979 32,329,518
Retained earnings - substantially restricted 24,590,063 23,571,132
Accumulated other comprehensive income 1,611,040 2,197,377
Unallocated ESOP shares (196,712 and 214,595 shares) (2,086,418) (2,276,111)
Unallocated RSP shares (37,510 shares) (581,780) -
Treasury stock, at cost (613,360 and 471,357 shares) (9,248,695) (6,811,455)
------------- -------------
Total stockholders' equity 47,251,160 49,360,172
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 339,284,072 $ 345,536,705
============= =============
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,
2003 2002 2003 2002
------------- ------------- ------------- -------------
INTEREST AND DIVIDEND INCOME
Loans:
Taxable $ 2,375,477 $ 2,662,025 $ 7,482,391 $ 7,875,638
Exempt from federal income tax 190,023 295,607 815,097 498,741
Investment securities:
Taxable 213,809 422,770 656,616 1,235,175
Exempt from federal income tax 128,671 208,221 466,907 795,409
Mortgage - backed securities 1,158,878 1,436,947 3,880,207 4,403,806
Interest - bearing deposits with other institutions 9,853 41,681 36,090 141,420
------------- ------------- ------------- -------------
Total interest and dividend income 4,076,711 5,067,251 13,337,308 14,950,189
------------- ------------- ------------- -------------
INTEREST EXPENSE
Deposits 1,328,128 1,762,409 4,484,958 4,993,419
Advances from Federal Home Loan Bank 743,667 792,655 2,197,886 2,316,652
------------- ------------- ------------- -------------
Total interest expense 2,071,795 2,555,064 6,682,844 7,310,071
------------- ------------- ------------- -------------
Net interest income 2,004,916 2,512,187 6,654,464 7,640,118
PROVISION FOR LOAN LOSSES 130,000 195,000 500,000 555,000
------------- ------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,874,916 2,317,187 6,154,464 7,085,118
------------- ------------- ------------- -------------
NONINTEREST INCOME
Service charges on deposit accounts 185,601 167,690 529,904 464,893
Investment securities gains, net 467,814 98,178 1,010,778 148,138
Rental income, net 26,400 25,500 77,400 66,983
Other income 73,094 63,459 209,681 194,396
------------- ------------- ------------- -------------
Total noninterest income 752,909 354,827 1,827,763 874,410
------------- ------------- ------------- -------------
NONINTEREST EXPENSE
Compensation and employee benefits 1,074,589 982,541 3,155,376 2,822,891
Occupancy and equipment costs 301,915 338,762 970,098 1,045,349
Data processing costs 46,050 51,116 144,717 149,134
Other expenses 394,485 378,602 1,230,967 1,157,067
------------- ------------- ------------- -------------
Total noninterest expense 1,817,039 1,751,021 5,501,158 5,174,441
------------- ------------- ------------- -------------
Income before income taxes 810,786 920,993 2,481,069 2,785,087
Income taxes 223,389 176,765 575,943 653,765
------------- ------------- ------------- -------------
NET INCOME $ 587,397 $ 744,228 $ 1,905,126 $ 2,131,322
============= ============= ============= =============
Earnings Per Share
Basic $ 0.22 $ 0.26 $ 0.71 $ 0.69
Diluted $ 0.21 $ 0.25 $ 0.68 $ 0.68
Weighted average number of shares outstanding
Basic 2,676,199 2,912,386 2,697,793 3,098,123
Diluted 2,768,214 2,965,714 2,783,525 3,147,222
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,
2003 2002 2003 2002
-------------------- ------------------- ---------------------- ---------------------
Net Income $587,397 $ 744,228 $1,905,126 $2,131,322
Other comprehensive income (loss):
Unrealized loss on available
for sale securities $ 69,989 $782,383 $ 122,389 $ 2,022,215
Less: Reclassification
adjustment for gain
included in net income (467,814) (98,178) (1,010,778) (148,138)
-------------------- ------------------- ---------------------- ---------------------
Other comprehensive income (loss)
before tax (397,825) 684,205 (888,389) 1,874,077
Income tax expense (benefit) related
to other comprehensive income (loss) (135,261) 232,630 (302,052) 637,186
--------- ---------- ---------- ----------
Other comprehensive income (loss), net of tax (262,564) 451,575 (586,337) 1,236,891
--------- ---------- ---------- ----------
Comprehensive income $ 324,833 $1,195,803 $1,318,789 $3,368,213
========= ========== ========== ==========
5
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
Accumulated Total
Additional Other Unallocated Unallocated Stock- Compre-
Common Paid in Retained Comprehensive Shares Held Shares Held Treasury holders' hensive
Stock Capital Earnings Income by ESOP by RSP Stock Equity Income
-------- ----------- ----------- ---------- ----------- --------- ----------- ----------- -----------
Balance,
December 31, 2002 $349,711 $32,329,518 $23,571,132 $2,197,377 ($2,276,111) $ - ($6,811,455) $49,360,172
Net Income 1,905,126 1,905,126 $1,905,126
Other comprehensive
income:
Unrealized loss
on available
for sale
securities (586,337) (586,337) (586,337)
----------
Comprehensive
income $1,318,789
==========
Cash dividends paid
($0.30 per share) (886,195) (886,195)
Treasury stock
purchased,
at cost (2,437,240) (2,437,240)
Common stock
acquired by RSP (76,568) (771,157) (847,725)
ESOP shares
earned 126,122 189,693 315,815
RSP shares
earned 189,377 189,377
Issuance of shares
for stock option
exercise 2,260 235,907 238,167
-------- ----------- ----------- ---------- ----------- --------- ----------- -----------
Balance,
September 30, 2003 $351,971 $32,614,979 $24,590,063 $1,611,040 ($2,086,418) ($581,780) ($9,248,695) $47,251,160
======== =========== =========== ========== =========== ========= =========== ===========
6
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months ended September 30,
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,905,126 $ 2,131,322
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 500,000 555,000
Depreciation, amortization and accretion 396,250 520,101
Amortization of discounts, premiums and
loan origination fees 1,425,610 959,318
Gains on sale of investment securities, net (1,010,778) (148,138)
(Increase) decrease in accrued interest receivable 572,337 (215,434)
Increase (decrease) in accrued interest payable (368,110) 534,159
Amortization of ESOP unearned compensation 315,815 248,935
Amortization of RSP unearned compensation 189,377 42,952
Other, net (375,132) (622,734)
------------ ------------
Net cash provided by operating activities 3,550,495 4,005,481
------------ ------------
INVESTING ACTIVITIES
Investment and mortgage-backed securities available for sale:
Proceeds from sales 7,210,238 9,728,254
Proceeds from maturities and principal repayments 34,665,508 17,107,760
Purchases (61,033,913) (32,502,574)
Investment and mortgage-backed securities held to maturity:
Proceeds from maturities and principal repayments 44,344,468 26,544,194
Purchases (25,366,693) (40,868,003)
(Increase) decrease in loans receivable, net 5,067,794 (28,546,205)
Proceeds from sale of repossessed assets 375,852 268,084
Purchase of premises and equipment (108,491) (228,341)
Purchase of Federal Home Loan Bank Stock (188,600) (351,500)
------------ ------------
Net cash provided by (used for) investing activities 4,966,163 (48,848,331)
------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (635,461) 24,173,446
Advances from Federal Home Loan Bank 5,000,000 10,000,000
Repayment of Advances from Federal Home Loan Bank (8,127,800) (3,000,000)
Proceeds from stock option exercise 238,167 -
Treasury stock purchased (2,437,240) (6,473,921)
Cash dividends paid (886,195) (847,952)
Common stock acquired by RSP (847,725) -
------------ ------------
Net cash provided by (used for) financing activities (7,696,254) 23,851,573
------------ ------------
Increase (decrease) in cash and cash equivalents 820,404 (20,991,277)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,221,969 34,183,348
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,042,373 $ 13,192,071
============ ============
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 its 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-Q 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, 2002.
Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("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
adoption of this statement, which was effective January 1, 2003, 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 is effective for exit or disposal
activities initiated after December 31, 2002. The adoption of this statement did
not have a material effect on the Company's financial position or results of
operations.
On December 31, 2002, the FASB issued FAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, which amends FAS No. 123, Accounting
for Stock-Based Compensation. FAS No. 148 amends the disclosure requirements of
FAS No. 123 to require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. Under the provisions
of FAS No. 123, companies that adopted the preferable, fair value based method
were required to apply that method prospectively for new stock option awards.
This contributed to a "ramp- up" effect on stock-based compensation expense in
the first few years following adoption, which caused concern for companies and
investors because of the lack of consistency in reported results. To address
that concern, FAS No. 148 provides two additional methods of transition that
reflect an entity's full complement of stock-based compensation expense
immediately upon adoption, thereby eliminating the
8
ramp-up effect. FAS No. 148 also improves the clarity and prominence of
disclosures about the pro forma effects of using the fair value based method of
accounting for stock-based compensation for all companies--regardless of the
accounting method used--by requiring that the data be presented more prominently
and in a more user-friendly format in the footnotes to the financial statements.
In addition, the statement improves the timeliness of those disclosures by
requiring that this information be included in interim as well as annual
financial statements. The transition guidance and annual disclosure provisions
of FAS No. 148 are effective for fiscal years ending after December 15, 2002,
with earlier application permitted in certain circumstances. The interim
disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002.
The following table represents the effect on net income and earnings per share
had the stock-based employee compensation expense been recognized:
Three months ended, Nine months ended,
September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income as reported $ 587,397 $ 744,228 $ 1,905,126 $ 2,131,322
Less pro forma expense related to options 36,829 42,530 73,658 127,590
------------ ------------ ------------ ------------
Pro forma net income 550,568 701,698 1,831,468 2,003,732
============ ============ ============ ============
Basic net income per common share:
As reported $ 0.22 $ 0.26 $ 0.71 $ 0.69
Pro forma 0.21 0.24 0.68 0.65
Diluted net income per common share:
As reported $ 0.21 $ 0.25 $ 0.68 $ 0.68
Pro forma 0.20 0.24 0.66 0.64
In April, 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under FAS
No. 133. The amendments set forth in FAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in FAS No. 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. FAS No. 149 amends certain other existing pronouncements. Those
changes will result in more consistent reporting of contracts that are
derivatives in their entirety or that contain embedded derivatives that warrant
separate accounting. This statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this statement that relate to FAS No. 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities or other securities that do not yet
exist, should be applied to existing contracts as well as new contracts entered
into after June 30, 2003. The adoption of this statement did not have a material
effect on the Company's financial position or results of operations.
In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
9
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Such instruments may have
been previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of this statement did not have a material effect on the
Company's reported equity.
In November, 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. This interpretation
clarifies that a guarantor is required to disclose (a) the nature of the
guarantee, including the approximate term of the guarantee, how the guarantee
arose, and the events or circumstances that would require the guarantor to
perform under the guarantee; (b) the maximum potential amount of future payments
under the guarantee; (c) the carrying amount of the liability, if any, for the
guarantor's obligations under the guarantee; and (d) the nature and extent of
any recourse provisions or available collateral that would enable the guarantor
to recover the amounts paid under the guarantee. This interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in issuing the
guarantee, including its ongoing obligation to stand ready to perform over the
term of the guarantee in the event that the specified triggering events or
conditions occur. The objective of the initial measurement of that liability is
the fair value of the guarantee at its inception. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of this interpretation did
not have a material effect on the Company's financial position or results of
operations.
In January, 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, in an effort to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The objective of this interpretation is not to restrict the use of variable
interest entities but to improve financial reporting by companies involved with
variable interest entities. Until now, one company generally has included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. This interpretation changes that by
requiring a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of this interpretation apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
this statement has not and is not expected to have a material effect on the
Company's financial position or results of operations. In October of 2003, the
FASB decided to defer the implementation date of interpretation No. 46 from the
third quarter to the fourth quarter. This deferral only applies to variable
interest entities that existed prior to February 1, 2003.
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, 2003 and 2002, the Company made cash
payments for interest
10
of $7,051,000 and $6,776,000 respectively. The Company also made cash payments
for income taxes of $308,000 and $734,000 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. Shares
outstanding do not include ESOP shares that were purchased and unallocated in
accordance with SOP 93-6, "Employers' Accounting for Stock Ownership Plans." The
following table sets forth the composition of the weighted average common shares
(denominator) used in the basic and diluted earnings per share computation.
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Weighted average common stock outstanding 3,278,216 3,269,975 3,268,037 3,262,494
Average treasury stock (602,017) (357,589) (570,244) (164,371)
---------- ---------- ---------- ----------
Weighted average common stock and
common stock equivalents used to calculate
basic earnings per share 2,676,199 2,912,386 2,697,793 3,098,123
Additional common stock equivalents (stock
options) used to calculate diluted earnings per
share 92,015 53,328 85,732 49,099
---------- ---------- ---------- ----------
Weighted average common stock and
common stock equivalents used to calculate
diluted earnings per share 2,768,214 2,965,714 2,783,525 3,147,222
========= ========= ========= =========
11
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Private Securities Reform 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, 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"). The Securities and Exchange Commission (the "SEC") has promulgated
new regulations pursuant to the Act, and additional regulations are expected to
be promulgated by the SEC. As a result of the passage of the Act and regulations
implemented by the SEC, publicly-registered companies, such as the Company, are
subject to additional and more cumbersome reporting regulations and disclosure.
These new regulations, which are intended to curtail corporate fraud, require
certain officers to personally certify certain SEC filings and financial
statements and require additional measures to be taken by our outside auditors,
officers and directors. The loss of investor confidence in the stock market
could adversely affect the prices of publicly-traded stocks, such as the
Company.
On December 20, 2001, PHSB Financial Corporation 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.
Financial Condition
Total assets at September 30, 2003 of $339.3 million represented a decrease of
$6.2 million or 1.8% from December 31, 2002. This decrease was primarily due to
decreases in loans of $6.7 million.
Loans receivable, net at September 30, 2003, of $159.0 million represented a
decrease of $6.7 million from $165.7 million at December 31, 2002. The decrease
in the loan portfolio was primarily attributable to decreases in mortgage and
automobile loans.
Total deposits after interest credited at September 30, 2003 were $231.7
million, a decrease of $636,000 or 0.3% from $232.4 million at December 31,
2002.
Advances from the Federal Home Loan Bank of Pittsburgh decreased $3.1 million to
$57.9 million at September 30, 2003 from $61.0 million at December 31, 2002.
Stockholders' equity decreased $2.1 million for the nine month period ended
September 30, 2003. This decrease was due to treasury stock and restricted stock
purchases of $2,437,000 and $848,000 along with a decrease in accumulated other
comprehensive income of $586,000 and cash dividends paid of $886,000. These
decreases to stockholders' equity were partially offset by net income of
$1,905,000 and the issuance of option shares of $238,000 along with decreases in
unallocated ESOP and RSP shares of $316,000 and $189,000 respectively.
12
Results of Operations
Comparison of Operating Results for the Three Months Ended September 30, 2003
and September 30, 2002.
General.
Net income for the three months ended September 30, 2003 decreased by $157,000
to $587,000, from $744,000 for the three months ended September 30, 2002. This
decrease was primarily due to a $507,000 decrease in net interest income along
with increases in noninterest expense and income tax provisions of $66,000 and
$46,000, respectively. These decreases to net income were partially offset by a
$398,000 increase in noninterest income and a $65,000 decrease in loan loss
provisions.
Net Interest Income.
Reported net interest income decreased $507,000 or 21.9% for the three months
ended September 30, 2003. Net interest income on a tax equivalent basis
decreased by $605,000 or 21.8% in a period when both average interest-earning
assets and average interest-bearing liabilities decreased (decreased $9.4
million, or 2.8%, and $6.7 million, or 2.3%, respectively). The Company's net
interest rate spread on a tax equivalent basis decreased 55 basis points to
2.28% for the three months ended September 30, 2003 as compared to the third
quarter of 2002. The tax equivalent basis is calculated utilizing the statutory
rate of 34%.
Interest Income.
Reported interest income decreased $990,000 to $4.1 million for the three month
period ended September 30, 2003, from $5.1 million for the third quarter of
2002. Interest income on a tax equivalent basis totaled $4.2 million for the
three months ended September 30, 2003, a decrease of $1,088,000, or 20.4%, from
$5.3 million for the three months ended September 30, 2002. This decrease was
primarily due to a 115 basis point decrease in the yield earned along with a
decrease in the Company's average interest-earning assets of $9.4 million, or
2.8%, for the three months ended September 30, 2003. Interest earned on loans
decreased $447,000, or 14.4%, in 2003. This decrease was due to a $3.1 million,
or 1.9%, decrease in the average balance of loans along with a 98 basis point
decrease in the yield earned. Interest earned on interest-bearing deposits and
investment and mortgage-backed securities (including securities available for
sale) decreased $641,000, or 28.9%, in 2003. This decrease was due to a decrease
in the average balance of securities of $6.4 million, or 3.7%, million along
with a 134 basis point decrease in the yield earned.
Interest Expense.
Interest expense decreased $483,000 to $2.1 million for the three months ended
September 30, 2003. The decrease in interest expense was due to a 60 basis point
decrease in the average cost of interest-bearing liabilities to 2.92% along with
a $6.7 million, or 2.3%, decrease in the average balance of interest-bearing
liabilities. The $6.7 million, or 2.3% decrease in the average balance of
interest-bearing liabilities was the result of a decrease in average deposits of
$5.4 million, or 2.3% along with a decrease in average borrowings of $1.2
million, or 2.1%.
13
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 estimate
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 decreased by $65,000 to $130,000 for the three
months ended September 30, 2003, from $195,000 for the three months ended
September 30, 2002. A decrease in loans precipitated the decrease in the
provision for loan losses. See "Risk Elements."
Noninterest Income.
Total noninterest income increased $398,000 to $753,000 for the three months
ended September 30, 2003, from $355,000 for the three months ended September 30,
2002. This increase was primarily due to an increase in gains on sales of
investment securities of $370,000 from $98,000 for the three months ended
September 30, 2002 to $468,000 for the three months ended September 30, 2003.
The $370,000 increase in security gains resulted from management reacting to the
opportunities available to sell securities without significantly impacting the
overall effective yield of the investment portfolio. Management continues to
closely monitor the investment portfolio for other similar opportunities which
may become available.
Noninterest Expense.
Noninterest expense increased $66,000 to $1.8 million for the three months ended
September 30, 2003, from $1.7 million for the three months ended September 30,
2002. This increase was primarily due to an increase in compensation and
employee benefits of $92,000 which was primarily the result of normal merit
increases along with increased RSP expense as a result of the 2002 Restricted
Stock Plan, which was ratified by the Company's stockholders at a special
meeting of stockholders on December 23, 2002.
Comparison of Operating Results for the Nine Months Ended September 30, 2003 and
September 30, 2002.
General.
Net income for the nine months ended September 30, 2003 decreased by $226,000 to
$1,905,000, from $2,131,000 for the nine months ended September 30, 2002. This
decrease was primarily due to a $986,000 decrease in net interest income along
with a $327,000 increase in noninterest expense. These decreases to net income
were partially offset by a $954,000 increase in noninterest income of $954,000
and decreases in loan loss and income tax provisions of $55,000 and $78,000,
respectively.
Net Interest Income.
Reported net interest income decreased $986,000, or 12.9%, for the nine months
ended September 30, 2003. Net interest income on a tax equivalent basis
decreased by $993,000, or 12.0%, in a period when both average interest earning
assets and average interest-bearing liabilities increased (increased $7.3
million, or 2.3% and $10.7 million, or 3.9%, respectively). The Company's net
interest rate spread on a tax equivalent basis decreased 38 basis points to
2.54% for the nine months ended September 30, 2003.
14
Interest Income.
Reported interest income decreased $1,613,000 to $13.3 million for the nine
month period ended September 30, 2003, from $14.9 million for the first nine
months of 2002. Interest income on a tax equivalent basis totaled $14.0 million
for the nine months ended September 30, 2003, a decrease of $1,620,000, or
10.4%, from $15.6 million for the nine months ended September 30, 2002. This
decrease was primarily due to a 79 basis point decrease in the yield earned,
partially offset by an increase in the Company's average interest-earning assets
of $7.3 million, or 2.3%, for the nine months ended September 30, 2003. Interest
earned on loans increased $86,000, or 1.0%, in 2003. This increase was due to a
$15.4 million, or 10.3% increase in the average balance of loans partially
offset by a 64 basis point decrease in the yield earned. Interest earned on
interest-bearing deposits and investment and mortgage-backed securities
(including securities available for sale) decreased $1.7 million, or 24.4%, in
2003. This decrease was due to a decrease in the average balance of securities
of $8.1 million, or 4.7%, along with a 111 basis point decrease in the yield
earned.
Interest Expense.
Interest expense decreased $627,000 to $6.7 million for the nine months ended
September 30, 2003. The decrease in interest expense was due to a 42 basis point
decrease in the average cost of interest-bearing liabilities to 3.09% partially
offset by a $10.7 million, or 3.9%, increase in the average balance of
interest-bearing liabilities. The $10.7 million, or 3.9% increase in the average
balance of interest-bearing liabilities was the result of increased average
deposits of $12.1 million, or 5.5%, partially offset by a decrease in average
borrowings of $1.4 million, or 2.4%.
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 estimate
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 decreased by $55,000 to $500,000 for the nine
months ended September 30, 2003, from $555,000 for the nine months ended
September 30, 2002. A decrease in loans precipitated the decrease in the
provision for loan losses. See "Risk Elements."
Noninterest Income.
Total noninterest income increased $954,000 to $1.8 million for the nine months
ended September 30, 2003, from $874,000 for the nine months ended September 30,
2002. This increase was primarily due to an increase in gains on sales of
investment securities of $863,000 from $148,000 for the nine months ended
September 30, 2002 to $1.0 million for the nine months ended September 30, 2003.
The $863,000 increase in security gains resulted from management reacting to the
opportunities available to sell securities without significantly impacting the
overall effective yield of the investment portfolio. Management continues to
closely monitor the investment portfolio for other similar opportunities which
may become available.
Noninterest Expense.
Noninterest expense increased $327,000 to $5.5 million for the nine months ended
September 30, 2003, from $5.2 million for the nine months ended September 30,
2002. This increase was primarily due to an increase in compensation and
employee benefits of $332,000 which was primarily the result of normal merit
increases along with increased RSP expense as a result of the 2002 Restricted
Stock Plan which was ratified by the Company's stockholders at a special meeting
of stockholders on December 23, 2002.
15
Liquidity and Capital Resources
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, 2003, the Bank had
borrowed $57.9 million of its $154.5 million maximum borrowing capacity and had
a remaining borrowing capacity of approximately $96.6 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.
Regulatory Capital Requirements
At September 30, 2003, the Bank's Tier I risk-based and total risk-based capital
ratios were 25.1% and 26.2%, 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 11.9% at
September 30, 2003. Current regulations require a leverage ratio 5% to be
considered well capitalized.
16
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, 2003 and December 31, 2002. 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 257.93% of total non-performing assets at
September 30, 2003 and 379.3% at December 31, 2002.
September 30, December 31,
2003 2002
---- ----
(Dollars in Thousands)
Loans on nonaccrual basis $557 $371
Loans past due 90 days or more 108 47
---- ----
Total non-performing loans 665 418
---- ----
Real estate owned 12 25
---- ----
Total non-performing assets $677 $443
==== ====
Total non-performing loans to total loans 0.41% 0.25%
==== ====
Total non-performing loans to total assets 0.20% 0.12%
==== ====
Total non-performing assets to total assets 0.20% 0.13%
==== ====
17
Item 3. Quantitative and Qualitative Disclosure about Market Risk
- ------- ---------------------------------------------------------
The Company, 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 the Company have historically emphasized the origination
of long-term, fixed rate loans secured by single family residences, and the
primary 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 the Company
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: (1) purchasing investment
securities with maturities that match specific deposit maturities; (2)
emphasizing origination of shorter-term consumer loans, which in addition to
offering more rate flexibility, typically bear higher interest rates than
residential mortgage loans; and (3) purchasing adjustable-rate mortgage-backed
securities as well as mortgage-backed securities with balloon payments which
have shorter maturities than typical mortgage- backed securities. Although
consumer loans generally possess an inherently higher credit risk than
residential mortgage loans, the Company has designed its underwriting standards
to minimize this risk as much as possible.
The Company also makes a significant effort to maintain its level of lower costs
deposits as a method of enhancing profitability. The Company has traditionally
had a high level of low-cost passbook, interest-bearing checking (NOW) 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 its deposits, the Company has been able to
offset the impact of rising rates in other deposit accounts.
Exposure to interest rate risk is actively monitored by management. The
Company's objective is to maintain a consistent level of profitability within
acceptable risk tolerances across a broad range of potential interest rate
environments. The Company uses the Olson Research Associates, Inc.'s, Columbia,
Maryland, A/L Benchmarks to monitor its exposure to interest rate risk, which
calculates changes in market value of portfolio equity and net interest income.
Reports generated from assumptions provided by Olson and 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
under the Federal Deposit Insurance Corporation Improvement Act. 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 September 30,
2003, management has assessed that the Bank's 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
(19.96)% and 19.73%, respectively. Net interest income decreased by $156,000 or
1.7% for a downward shift in rates of 200 basis points and decreased by $312,000
or 3.4%, for an upward shift of 200 basis points. Excess Net Interest Rate Risk
was within those limits outlined in the Bank's
18
Asset/Liability Management and Interest Rate Risk Policy. The Bank's calculated
(total) risk-based capital before the interest rate risk impact was 26.2 % and
21.1% after the interest rate risk impact. Results fall within policy limits for
all applicable tests.
Item 4. Controls and Procedures
- ------- -----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
--------------------------------------------------
evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")),
the Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures 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 control over financial reporting. During the
------------------------------------------------------
quarter under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
19
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.
(o) The following exhibits are filed as part of thi 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***
10.5 2002 Stock Option Plan****
10.6 2002 Restricted Stock Plan****
31.0 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.0 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.0 Review Report of Independent Accountants
- ------------------
* 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
20
**** Incorporated by reference to Registrant's Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on January 17, 2003
(File No. 333-102559).
(b) Reports on Form 8-K.
On October 10, 2003, PHSB Financial Corporation filed a form 8-K to report
under "Item 9. Regulation FD Disclosure" that PHSB Financial Corporation
issued a press release to announce a quarterly and special cash dividend.
On October 15, 2003, PHSB Financial Corporation filed a form 8-K to report
under "Item 9. Regulation FD Disclosure" that PHSB Financial Corporation
issued a press release to report earnings for the quarter ended 9/30/2003.
21
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 13, 2003
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
22