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 June 30, 2004
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 August 9, 2004 there were 2,903,353 shares outstanding of the issuer's
class of common stock.
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 June 30, 2004
and December 31, 2003 3
Consolidated Statement of Income (unaudited) for the Three
and Six Months ended June 30, 2004 and 2003 4
Consolidated Statement of Comprehensive Income (unaudited)
for the Three and Six Months ended June 30, 2004 and 2003 5
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the Six Months ended June 30, 2004 6
Consolidated Statement of Cash Flows (unaudited) for the
Six Months ended June 30, 2004 and 2003 7
Notes to (unaudited) Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Item 4. Controls and Procedures 19
Part II Other Information 20 - 21
Signatures 22
2
PHSB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
June 30, December 31,
2004 2003
------------- -------------
ASSETS
Cash and amounts due from other institutions $ 6,091,858 $ 6,795,068
Interest-bearing deposits with other institutions 1,744,840 753,727
------------- -------------
Cash and cash equivalents 7,836,698 7,548,795
Investment securities:
Available for sale 41,583,201 28,718,832
Held to maturity (market value $ 6,856,088
and $8,203,053) 6,722,392 7,952,211
Mortgage - backed securities:
Available for sale 78,309,876 75,910,915
Held to maturity (market value $ 44,302,109
and $56,194,217) 44,694,108 55,843,363
Loans (net of allowance for loan losses of $1,590,230
and $1,647,886) 131,503,422 153,584,123
Accrued interest receivable 1,308,554 1,573,295
Premises and equipment 4,094,732 4,227,498
Federal Home Loan Bank stock 3,723,700 3,606,600
Other assets 3,226,570 1,003,979
------------- -------------
TOTAL ASSETS $ 323,003,253 $ 339,969,611
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 220,987,454 $ 231,519,432
Advances from Federal Home Loan Bank 54,130,000 58,880,000
Accrued interest payable and other liabilities 2,460,562 2,920,291
------------- -------------
Total liabilities 277,578,016 293,319,723
------------- -------------
Preferred stock, 20,000,000 shares authorized, none issued - -
Common stock, $.10 par value 80,000,000 shares authorized,
3,519,711 shares issued 351,971 351,971
Additional paid in capital 32,877,508 32,750,510
Retained earnings - substantially restricted 24,251,306 23,857,117
Accumulated other comprehensive income (457,702) 1,540,849
Unallocated ESOP shares (178,829 and 190,751 shares) (1,896,725) (2,023,187)
Unallocated RSP shares (25,300 and 33,440 shares) (392,403) (518,654)
Treasury stock, at cost ( 616,358 shares) (9,308,718) (9,308,718)
------------- -------------
Total stockholders' equity 45,425,237 46,649,888
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 323,003,253 $ 339,969,611
============= =============
See accompanying notes to the unaudited consolidated financial statements.
3
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
INTEREST AND DIVIDEND INCOME
Loans:
Taxable $2,072,027 $2,506,679 $4,255,845 $5,106,914
Exempt from federal income tax 226,001 314,660 453,231 625,074
Investment securities:
Taxable 222,410 203,899 432,414 442,807
Exempt from federal income tax 55,831 149,640 129,311 338,236
Mortgage - backed securities 1,444,314 1,280,670 2,912,843 2,721,329
Interest - bearing deposits with other institutions 8,189 16,068 17,684 26,237
---------- ---------- ---------- ----------
Total interest and dividend income 4,028,772 4,471,616 8,201,328 9,260,597
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 1,203,110 1,555,383 2,445,147 3,156,830
Advances from Federal Home Loan Bank 713,005 717,378 1,442,293 1,454,219
---------- ---------- ---------- ----------
Total interest expense 1,916,115 2,272,761 3,887,440 4,611,049
---------- ---------- ---------- ----------
Net interest income 2,112,657 2,198,855 4,313,888 4,649,548
PROVISION FOR LOAN LOSSES 90,000 180,000 210,000 370,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,022,657 2,018,855 4,103,888 4,279,548
---------- ---------- ---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 195,141 184,083 379,478 344,303
Investment securities gains, net 474,799 366,820 1,278,961 542,964
Rental income, net 20,800 25,500 46,820 51,000
Other income 50,864 68,206 89,326 136,587
---------- ---------- ---------- ----------
Total noninterest income 741,604 644,609 1,794,585 1,074,854
---------- ---------- ---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,062,261 1,016,776 2,183,032 2,080,787
Occupancy and equipment costs 310,453 309,265 655,178 668,183
Data processing costs 43,716 50,657 86,361 98,667
Other expenses 399,189 434,307 807,372 836,482
---------- ---------- ---------- ----------
Total noninterest expense 1,815,619 1,811,005 3,731,943 3,684,119
---------- ---------- ---------- ----------
Income before income taxes 948,642 852,459 2,166,530 1,670,283
Income taxes 245,000 186,554 611,000 352,554
---------- ---------- ---------- ----------
NET INCOME $ 703,642 $ 665,905 $1,555,530 $1,317,729
========== ========== ========== ==========
Earnings Per Share
Basic $ 0.26 $ 0.25 $ 0.58 $ 0.49
Diluted $ 0.25 $ 0.24 $ 0.55 $ 0.47
Weighted average number of shares outstanding
Basic 2,692,647 2,671,320 2,687,631 2,708,768
Diluted 2,802,394 2,757,061 2,804,123 2,784,040
See accompanying notes to the unaudited consolidated financial statements.
4
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
----------------------- ------------------ -------------------------- -----------------------
Net Income $ 703,642 $665,905 $ 1,555,530 $1,317,729
Other comprehensive
income (loss):
Unrealized gain (loss)
on available for sale
securities $2,816,862) $ 341,344 $(1,749,147) $ 52,400
Less: Reclassification
adjustment for gain
included in net income (474,799) (366,820) (1,278,961) (542,964)
----------------------- ------------------ -------------------------- -----------------------
Other comprehensive loss
before tax (3,291,661) (25,476) (3,028,108) (490,564)
Income tax benefit related
to other comprehensive
income (loss) (1,119,165) (8,662) (1,029,557) (166,792)
------------ --------- ----------- -----------
Other comprehensive loss,
net of tax (2,172,496) (16,814) (1,998,551) (323,772)
------------ --------- ----------- -----------
Comprehensive income (loss) $(1,468,854) $649,091 $ (443,021) $ 993,957
============ ========= =========== ===========
See accompanying notes to the unaudited consolidated financial statements.
5
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED)
Accumulated
Additional Other Unallocated Unallocated Total
Common Paid in Retained Comprehensive Shares Held Shares Held Treasury Stockholders' Comprehensive
Stock Capital Earnings Income by ESOP by RSP Stock Equity Income (Loss)
----- ------- -------- ------ ------- ------ ----- ------ -------------
Balance,
December 31, 2003 $351,971 $32,750,510 $23,857,117 $1,540,849 ($2,023,187) ($518,654) ($9,308,718) $46,649,888
Net Income 1,555,530 1,555,530 $ 1,555,530
Other comprehensive
income (loss) :
Unrealized gain
(loss) on available
for sale securities,
net of tax (1,998,551) (1,998,551) (1,998,551)
-----------
Comprehensive
income (loss) ($443,021)
===========
Cash dividends paid
($0.40 per share) (1,161,341) (1,161,341)
ESOP shares earned 126,998 126,462 253,460
RSP shares earned 126,251 126,251
-------- ----------- ----------- --------- ----------- --------- ----------- -----------
Balance, June 30, 2004 $351,971 $32,877,508 $24,251,306 ($457,702) ($1,896,725) ($392,403) ($9,308,718) $45,425,237
======== =========== =========== ========= =========== ========= =========== ===========
See accompanying notes to the unaudited consolidated financial statements.
6
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Six Months ended June 30,
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net income $ 1,555,530 $ 1,317,729
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 210,000 370,000
Depreciation, amortization and accretion 221,407 281,869
Amortization of discounts, premiums and
loan origination fees 802,103 893,997
Gains on sale of investment securities, net (1,278,961) (542,964)
Decrease in accrued interest receivable 264,741 704,905
Decrease in accrued interest payable (321,799) (564,270)
Amortization of ESOP unearned compensation 253,460 205,600
Amortization of RSP unearned compensation 126,251 126,252
Other, net (97,289) (37,901)
------------ ------------
Net cash provided by operating activities 1,735,443 2,755,217
------------ ------------
INVESTING ACTIVITIES
Investment and mortgage-backed securities available for sale:
Proceeds from sales 8,379,975 3,928,509
Proceeds from maturities and principal repayments 22,323,789 23,973,581
Purchases (47,832,220) (20,381,191)
Investment and mortgage-backed securities held to maturity:
Proceeds from maturities and principal repayments 12,215,712 29,781,578
Purchases - (25,366,693)
Investment in Beaver Village Apartments (1,450,464) -
Decrease in loans receivable, net 21,392,380 16,754,651
Proceeds from sale of repossessed assets 172,348 231,067
Purchase of premises and equipment (88,641) (90,988)
(Purchase) redemption of Federal Home Loan Bank Stock (117,100) 239,700
------------ ------------
Net cash provided by (used for) investing activities 14,995,779 29,070,214
------------ ------------
FINANCING ACTIVITIES
Net decrease in deposits (10,531,978) (14,199,246)
Repayment of Advances from Federal Home Loan Bank (4,750,000) (8,127,800)
Proceeds from stock option exercise - 183,421
Treasury stock purchased - (2,082,958)
Cash dividends paid (1,161,341) (594,230)
Common stock acquired by RSP - (847,726)
------------ ------------
Net cash used for financing activities (16,443,319) (25,668,539)
------------ ------------
Increase in cash and cash equivalents 287,903 6,156,892
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,548,795 8,221,969
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,836,698 $ 14,378,861
============ ============
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-K for the year ended December 31, 2003.
Recent Accounting Standards
In December 2003, the FASB issued a revision to Interpretation 46,
Consolidation of Variable Interest Entities, which established
standards for identifying a variable interest entity ("VIE") and for
determining under what circumstances a VIE should be consolidated with
its primary beneficiary. The Interpretation requires consolidation of
entities in which an enterprise absorbs a majority of the entity's
expected losses, receives a majority of the entity's residual returns,
or both, as a result of ownership, contractual or other financial
interests in the entity. Prior to the interpretation, entities were
generally consolidated by an enterprise when it had a controlling
financial interest through ownership of a majority voting interest in
the entity. The adoption of this Interpretation has not and is not
expected to have a material effect on the Company's financial position
or results of operations.
In December 2003, the Financial Accounting Standards Board ("FASB")
revised FAS No. 132, Employers' Disclosures about Pension and Other
Postretirement Benefit. This statement retains the disclosures required
by FAS No. 132, which standardized the disclosure requirements for
pensions and other postretirement benefits to the extent practicable
and requires additional information on changes in the benefit
obligations and fair value of plan assets. Additional disclosures
include information describing the types of plan assets, investment
strategy, measurement date(s), plan obligations, cash flows, and
components of net periodic benefit cost recognized during interim
periods. This statement retains reduced disclosure requirements for
nonpublic entities from FAS No. 132, and it includes reduced disclosure
for certain of the new requirements. This statement is effective for
financial statements with fiscal years ending after December 15, 2003.
The interim disclosures required by this statement are effective for
interim periods beginning after December 15, 2003. The adoption of this
statement did not have a material effect on the Company's disclosure
requirements. The Company has adopted the revised disclosure provisions
8
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 six months ended June 30, 2004 and 2003, the Company made cash payments
for interest of $4,209,000 and $5,175,000 respectively. The Company also made
cash payments for income taxes of $488,000 and $159,000 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 June 30, Six months ended June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Weighted average common stock outstanding 3,309,005 3,257,913 3,303,989 3,262,863
Average treasury stock (616,358) (586,593) (616,358) (554,095)
---------- ---------- ---------- ----------
Weighted average common stock and common stock
equivalents used to calculate basic earnings per
share 2,692,647 2,671,320 2,687,631 2,708,768
Additional common stock equivalents (stock options)
used to calculate diluted earnings per share 109,747 85,741 116,492 75,272
---------- ---------- ---------- ----------
Weighted average common stock and common stock
equivalents used to calculate diluted earnings
per share 2,802,394 2,757,061 2,804,123 2,784,040
========== ========== ========== ==========
9
NOTE 3 - ACCOUNTING FOR STOCK BASED COMPENSATION
The Company does not recognize certain stock-based employee compensation in the
financial statements. 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, Six months ended,
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ------------- -------------
Net income as reported $ 703,642 $ 665,905 $ 1,555,530 $ 1,317,729
Less pro forma expense related to options 20,321 36,814 40,643 73,658
----------- ----------- ------------- -------------
Pro forma net income 683,321 629,091 1,514,887 1,244,071
=========== =========== ============= =============
Basic net income per common share:
As reported $ 0.26 $ 0.25 $ 0.58 $ 0.49
Pro forma 0.25 0.24 0.56 0.46
Diluted net income per common share:
As reported $ 0.25 $ 0.24 $ 0.55 $ 0.47
Pro forma 0.24 0.23 0.54 0.45
NOTE 4 - NET PERIODIC BENEFIT COST - DEFINED BENEFIT PLANS
For a detailed disclosure on the Company's pension and employee benefits plans,
please refer to Note 13 of the Company's Consolidated Financial Statements
included in the 2003 Annual Report to Stockholders.
The following sets forth the components of net periodic benefit cost of the
trusteed, non-contributory defined benefit pension plan for the three and six
months ended June 30, 2004.
Interim Net Periodic Pension Cost for the Three and
Six Months ended June 30, 2004
Three Months ended Six Months ended
June 30, 2004 June 30, 2004
------------- --------
Service Costs $70,409 $140,817
Interest Cost 98,048 196,096
Expected Return on Plan Assets (94,374) (188,748)
Amortization of Net Transition Asset (5,204) (10,407)
Amortization of Net Loss 8,258 16,515
------- --------
Net Periodic Pension Cost $77,137 $154,273
======= ========
10
Employer Contributions
The Company previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $308,544 to its pension plan
in 2004. As of June 30, 2004, total contributions of $345,445 have been made and
there are no anticipated statutory funding requirements for the remainder of
2004.
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.
Financial Condition
Total assets at June 30, 2004 of $323.0 million represented a decrease of $17.0
million or 5.0% from December 31, 2003. This decrease was primarily due to a
decrease in loans of $22.1 million partially offset by increases in securities
and other assets of $2.9 million and $2.2 million, respectively.
At June 30, 2004, investment securities (available for sale and held to
maturity) increased $11.6 million to $48.3 million from $36.7 million at
December 31, 2003. Mortgage-backed securities (available for sale and held to
maturity) decreased $8.7 million to $123.0 million at June 30, 2004 from $131.7
million at December 31, 2003. The total increase of $2.9 million to the
investment and mortgage-backed securities portfolios (available for sale and
held to maturity) was the result of purchases of $47.8 million, partially offset
by sales of $8.3 million, maturities of $15.4 million, and principal repayments
of $19.2 million.
Loans receivable, net at June 30, 2004 of $131.5 million represented a decrease
of $22.1 million from $153.6 million at December 31, 2003. The decrease in the
loan portfolio was primarily attributable to the maturity of loans to local
school districts on June 30, 2004 of $15.6 million along with a decrease in
automobile loans of $6.0 million. The Company anticipates that during the third
quarter, a majority of these school districts will borrow funds for their next
fiscal year from the Company. The decrease in automobile loans was due to weaker
loan demand as a result of several manufacturers offering discounted financing.
Other assets increased $2.2 million to $3.2 million at June 30, 2004 from $1.0
million at December 31, 2003. This increase was primarily due to the Bank's
investment in Beaver Village Apartments Limited Partnership. Beaver Village
Apartments are low income housing units for senior citizens located in Beaver,
Pennsylvania. The Bank anticipates to receive tax credits over a ten year period
beginning in 2004 for its investment in this limited partnership.
Total deposits after interest credited at June 30, 2004 were $221.0 million, a
decrease of $10.5 million or 4.5% from $231.5 million at December 31, 2003. This
decrease was primarily due to outflows of deposits of the previously mentioned
school districts which also matured on June 30, 2004.
Advances from the Federal Home Loan Bank of Pittsburgh decreased $4.8 million to
$54.1 million at June 30, 2004 from $58.9 million at December 31, 2003.
Stockholders' equity decreased $1.2 million for the six month period ended June
30, 2004. This decrease was due to a decrease in accumulated other comprehensive
income of $2.0 million and cash dividends paid of $1.2 million. These decreases
to stockholders' equity were partially offset by net income of $1.6
12
million along with decreases in unallocated ESOP and RSP shares of $126,000 and
$126,000,respectively.
Results of Operations
Comparison of Operating Results for the Three Months Ended June 30, 2004 and
June 30, 2003.
General.
Net income for the three months ended June 30, 2004 increased by $38,000 to
$704,000, from $666,000 for the three months ended June 30, 2003. This increase
was primarily due to an increase in non-interest income of $97,000 along with a
decrease in provisions for loan losses of $90,000. These increases to net income
were partially offset by a decrease in net interest income of $86,000 along with
increases in non-interest expense and income tax provisions of $5,000 and
$58,000, respectively.
Net Interest Income.
Reported net interest income decreased $86,000 or 3.9% for the three months
ended June 30, 2004. Net interest income on a tax equivalent basis decreased by
$180,000 or 7.4% in a period when both average interest-earning assets and
average interest-bearing liabilities increased (increased $0.8 million, or 0.2%,
and $3.7 million, or 1.3%, respectively). The Company's net interest rate spread
on a tax equivalent basis decreased 13 basis points to 2.40% for the three
months ended June 30, 2004 as compared to the second quarter of 2003. The tax
equivalent basis is calculated utilizing the statutory rate of 34%.
Interest Income.
Reported interest income decreased $443,000 to $4.0 million for the three month
period ended June 30, 2004, from $4.5 million for the second quarter of 2003.
Interest income on a tax equivalent basis totaled $4.2 million for the three
months ended June 30, 2004, a decrease of $537,000, or 11.4%, from $4.7 million
for the three months ended June 30, 2003. This decrease was primarily due to a
66 basis point decrease in the yield earned partially offset by an increase in
the Company's average balance of interest-earning assets of $0.8 million, or
0.2%, for the three months ended June 30, 2004. Interest earned on loans
decreased $570,000, or 19.1%, in 2004. This decrease was due to a $19.4 million,
or 11.5%, decrease in the average balance of loans along with a 61 basis point
decrease in the yield earned. Interest earned on interest-bearing deposits and
investment and mortgage-backed securities (including securities available for
sale) increased $33,000, or 1.9%, in 2004. This increase was due to an increase
in the average balance of securities of $20.2 million partially offset by a 40
basis point decrease in the yield earned.
Interest Expense.
Interest expense decreased $357,000 to $1.9 million for the three months ended
June 30, 2004. The decrease in interest expense was due to a 53 basis point
decrease in the average cost of interest-bearing liabilities to 2.61% partially
offset by a $3.7 million, or 1.3%, increase in the average balance of
interest-bearing liabilities. The $3.7 million, or 1.3% increase in the average
balance of interest-bearing liabilities was the result of an increase in average
deposits of $1.3 million, or 0.6%, along with an increase in average borrowings
of $2.4 million, or 4.5%.
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:
13
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 $90,000 to $90,000 for the three
months ended June 30, 2004, from $180,000 for the three months ended June 30,
2003. Decreases in loans along with a decrease in non-performing loans
precipitated the decrease in the provision for loan losses. See "Risk Elements."
Noninterest Income.
Total noninterest income increased $97,000 to $742,000 for the three months
ended June 30, 2004, from $645,000 for the three months ended June 30, 2003.
This increase was primarily due to an increase in gains on sales of investment
securities of $108,000 from $367,000 for the three months ended June 30, 2003 to
$475,000 for the three months ended June 30, 2004. The $108,000 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 $5,000 to $1,816,000 for the three months ended
June 30, 2004, from $1,811,000 for the three months ended June 30, 2003.
Comparison of Operating Results for the Six Months Ended June 30, 2004 and June
30, 2003.
General.
Net income for the six months ended June 30, 2004 increased by $238,000 to $1.6
milliom, from $1.3 million for the six months ended June 30, 2003. This increase
was primarily due to an increase in non-interest income of $720,000 along with a
decrease in provisions for loan losses of $160,000. These increases to net
income were partially offset by a decrease in net interest income of $336,000
along with increases in non-interest expense and income tax provisions of
$48,000 and $258,000, respectively.
Net Interest Income.
Reported net interest income decreased $336,000 or 7.2% for the six months ended
June 30, 2004. Net interest income on a tax equivalent basis decreased by
$532,000 or 10.3% in a period when average interest-earning assets decreased
$1.0 million or 0.3% and average interest-bearing liabilities increased $1.0
million, or 0.3%. The Company's net interest rate spread on a tax equivalent
basis decreased 23 basis points to 2.44% for the six months ended June 30, 2004
as compared to the first six months of 2003. The tax equivalent basis is
calculated utilizing the statutory rate of 34%.
14
Interest Income.
Reported interest income decreased $1.1 million to $8.2 million for the six
month period ended June 30, 2004, from $9.3 million for the six month period
ended June 30, 2003. Interest income on a tax equivalent basis totaled $8.5
million for the six months ended June 30, 2004, a decrease of $1.3 million, or
13.3%, from $9.8 million for the six months ended June 30, 2003. This decrease
was primarily due to a 74 basis point decrease in the yield earned along with a
decrease in the Company's average balance of interest-earning assets of $1.0
million, or 0.3%, for the six months ended June 30, 2004. Interest earned on
loans decreased $1.1 million, or 18.0%, in 2004. This decrease was due to a
$17.1 million, or 10.1%, decrease in the average balance of loans along with a
66 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 $144,000, or 3.9%, in 2004. This decrease was due
to a 56 basis point decrease in the yield earned partially offset by an increase
in the average balance of securities of $16.0 million.
Interest Expense.
Interest expense decreased $724,000 to $3.9 million for the six months ended
June 30, 2004. The decrease in interest expense was due to a 51 basis point
decrease in the average cost of interest-bearing liabilities to 2.67% partially
offset by a $1.1 million, or 0.4%, increase in the average balance of
interest-bearing liabilities. The $1.1 million, or 0.4% increase in the average
balance of interest-bearing liabilities was the result of an increase in average
deposits of $173,000, or 0.1% along with an increase in average borrowings of
$2.4 million, or 4.5%.
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 $160,000 to $210,000 for the six
months ended June 30, 2004, from $370,000 for the six months ended June 30,
2003. Decreases in loans along with a decrease in non-performing loans
precipitated the decrease in the provision for loan losses. See "Risk Elements."
Noninterest Income.
Total noninterest income increased $720,000 to $1.8 million for the six months
ended June 30, 2004, from $1.1 million for the six months ended June 30, 2003.
This increase was primarily due to an increase in gains on sales of investment
securities of $736,000 from $543,000 for the six months ended June 30, 2003 to
$1,279,000 for the six months ended June 30, 2004. The $736,000 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.
15
Noninterest Expense.
Noninterest expense increased $48,000 to $3,732,000 for the six months ended
June 30, 2004, from $3,684,000 for the six months ended June 30, 2003.
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 June 30, 2004, the Bank had
borrowed $54.1 million of its $166.3 million maximum borrowing capacity and had
a remaining borrowing capacity of approximately $112.2 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 June 30, 2004, the Bank's Tier I risk-based and total risk-based capital
ratios were 25.6% and 27.0%, respectively. Current regulations require Tier I
risk-based capital of 6% and total risk-based capital of 10% of risk-based
assets to be considered well capitalized. The Bank's leverage ratio was 11.4% at
June 30, 2004. Current regulations require a leverage ratio of 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 June 30, 2004 and December 31, 2003. 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 526.49% of total non-performing assets at June
30, 2004 and 377.7% at December 31, 2003.
June 30, December 31,
2004 2003
---- ----
(Dollars in Thousands)
Loans on nonaccrual basis $236 $374
Loans past due 90 days or more 32 27
---- ----
Total non-performing loans 268 401
---- ----
Real estate owned 34 34
---- ----
Total non-performing assets $302 $435
==== ====
Total non-performing loans to
total loans 0.20% 0.26%
==== ====
Total non-performing loans to
total assets 0.08% 0.12%
==== ====
Total non-performing assets to
total assets 0.09% 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.
18
From analysis and discussion of the aforementioned reports as of June 30, 2004,
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 as of June 30, 2004 for an upward and downward shift of
200 basis points are (23.37%) and 18.22%, respectively. Net interest income
decreased by $235,000 or 2.61% for a downward shift in rates of 200 basis points
and decreased by $456,000 or 5.06%, for an upward shift of 200 basis points.
Excess Net Interest Rate Risk was within those limits outlined in the Bank's
Asset/Liability Management and Interest Rate Risk Policy. The Bank's calculated
(total) risk-based capital before the interest rate risk impact was 27.0 % and
21.13% 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 Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.
ISSUER PURCHASES OF EQUITY SECURITIES
-------------- ----------------- -------------- ------------------------- -----------------------------------
(a) Total (c) Total Number of (d) Maximum Number (or
Number of (b) Average Shares (or Units) Approximate Dollar Value) of
Shares (or Price Paid Purchased as Part of Shares (or Units) that May Yet
Units) per Share Publicly Announced Purchased Under the Plans or
Period Purchased (or Unit) Plans or Programs Programs (1)
-------------- ----------------- -------------- ------------------------- -----------------------------------
April
1-30, 2004 0 N/A 0 40,222
-------------- ----------------- -------------- ------------------------- -----------------------------------
May
1-31, 2004 0 N/A 0 40,222
-------------- ----------------- -------------- ------------------------- -----------------------------------
June
1-30, 2004 0 N/A 0 40,222
-------------- ----------------- -------------- ------------------------- -----------------------------------
Total 0 N/A 0 40,222
-------------- ----------------- -------------- ------------------------- -----------------------------------
(1) On February 20, 2003 the Company announced that the Board of Directors has
approved a plan to repurchase up to 149,500 of the outstanding shares of
the Company. This plan has no stated expiration date.
Item 3. Defaults by the Company on its senior securities.
None.
Item 4. Results of Votes of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8 - K.
(a) The following exhibits are filed as part of this report.
3.1 Articles of Incorporation of PHSB Financial Corporation*
3.2 Bylaws of PHSB Financial Corporation*
4.0 Specimen Stock Certificate of PHSB Financial Corporation*
20
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
**** 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 July 14, 2004, 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 June
30,2004.
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: August 13, 2004
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