UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
----------------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _______________
Commission File Number: 033233
--------------
PFS BANCORP, INC.
______________________________________________________________________________
(Exact name of small business issuer as specified in its charter)
Indiana 35-2142534
_______________________________ __________________________________
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Second & Bridgeway Streets, Aurora, Indiana 47001
______________________________________________________________________________
(Address of principal executive offices)
(812) 926-0631
______________________________________________________________________________
(Issuer's telephone number)
______________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: August 12, 2003
- - 1,473,728 shares of common stock -----------------------------
- ----------------------------------
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Page 1 of 19
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
PART II - OTHER INFORMATION 18
SIGNATURES 19
2
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, December 31,
ASSETS 2003 2002
<s> <c> <c>
Cash and due from banks $ 1,132 $ 819
Interest-bearing deposits in other financial institutions 6,629 4,406
----- -----
Cash and cash equivalents 7,761 5,225
Investment securities designated as available for sale -
at market 13,216 15,142
Investment securities held to maturity - at amortized cost, which
approximates market 152 161
Loans receivable - net 93,892 95,702
Office premises and equipment - at depreciated cost 1,086 1,170
Real estate acquired through foreclosure 208 228
Federal Home Loan Bank stock - at cost 739 730
Accrued interest receivable 424 446
Prepaid expenses and other assets 184 176
Prepaid federal income taxes 66 -
Deferred federal income taxes 113 56
------- -------
Total assets $ 117,841 $ 119,036
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 90,307 $ 89,420
Advances from the Federal Home Loan Bank - 1,000
Advances by borrowers for taxes and insurance 67 80
Accrued interest payable 15 26
Other liabilities 1,020 883
Accrued federal income taxes - 30
------ ------
Total liabilities 91,409 91,439
Shareholders' equity
Preferred stock, 5,000,000 shares authorized, $.01 par value;
no shares issued - -
Common stock - 10,000,000 shares authorized, $.01 par value;
1,551,293 shares issued 16 16
Additional paid-in capital 14,971 14,971
Retained earnings - restricted 13,913 13,723
Less 77,565 shares of treasury stock - at cost (1,282) -
Shares acquired by stock benefit plans (1,994) (1,994)
Accumulated other comprehensive income - unrealized gains on
securities designated as available for sale, net of related tax effects 808 881
------ ------
Total shareholders' equity 26,432 27,597
------- -------
Total liabilities and shareholders' equity $ 117,841 $ 119,036
======= =======
3
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Six months ended Three months ended
June 30, June 30,
2003 2002 2003 2002
<s> <c> <c> <c> <c>
Interest income
Loans $2,729 $3,313 $1,317 $1,655
Investment securities 218 150 102 103
Interest-bearing deposits and other 49 118 28 45
----- ----- ----- -----
Total interest income 2,996 3,581 1,447 1,803
Interest expense
Deposits 1,068 1,538 506 746
Borrowings 2 - - -
----- ----- ----- -----
Total interest expense 1,070 1,538 506 746
----- ----- ----- -----
Net interest income 1,926 2,043 941 1,057
Provision for losses on loans 48 64 24 40
----- ----- ----- -----
Net interest income after provision for
losses on loans 1,878 1,979 917 1,017
Other operating income
Loss on sale of investment securities (28) - - -
Gain on sale of repossessed property 10 - 6 -
Other operating 193 165 106 85
----- ----- ----- -----
Total other income 175 165 112 85
General, administrative and other expense
Employee compensation and benefits 777 647 390 332
Occupancy and equipment 167 135 84 70
Data processing 103 179 53 109
Federal deposit insurance premiums 26 29 13 14
Other operating 273 307 149 162
----- ----- ----- -----
Total general, administrative and other expense 1,346 1,297 689 687
----- ----- ----- -----
Earnings before income taxes 707 847 340 415
Income taxes
Current 309 340 143 166
Deferred (20) 1 - 2
----- ----- ----- -----
Total income taxes 289 341 143 168
----- ----- ----- -----
NET EARNINGS $ 418 $ 506 $ 197 $ 247
===== ===== ===== ======
EARNINGS PER SHARE
Basic $.30 $.35 $.15 $.17
=== === === ===
Diluted $.30 $.35 $.15 $.17
=== === === ===
4
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Six months ended Three months ended
June 30, June 30,
2003 2002 2003 2002
<s> <c> <c> <c> <c>
Net earnings $418 $506 $197 $247
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during the period,
net of taxes (benefits) of $(47), $(22), $(6) and $1 for the
respective periods (91) (43) (11) 2
Reclassification adjustment for realized losses included in earnings,
net of tax benefits of $10 in 2003 18 - - -
--- --- --- ---
Comprehensive income $345 $463 $186 $249
=== === === ===
Accumulated comprehensive income $808 $839 $808 $839
=== === === ===
5
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
(In thousands)
2003 2002
<s> <c> <c>
Cash flows from operating activities:
Net earnings for the period $ 418 $ 506
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (33) (29)
Amortization of premiums and discounts on investment securities - net 44 25
Depreciation 87 59
Provision for losses on loans 48 64
Loss on sale of investment securities 28 -
Gain on sale of repossessed assets (10) -
Increase (decrease) in cash due to changes in:
Accrued interest receivable 22 (93)
Prepaid expenses and other assets (8) (112)
Other liabilities 137 192
Accrued interest payable (11) (6)
Income taxes
Current (96) 65
Deferred (20) 1
--- ---
Net cash provided by operating activities 606 672
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (17,445) (16,277)
Proceeds from maturities and repayment of investment securities 16,169 10,958
Proceeds from sale of investment securities 3,029 -
Loan principal repayments 17,521 15,384
Loan disbursements (15,696) (13,333)
Purchase of Federal Home Loan Bank stock (9) (31)
Purchase of office premises and equipment (3) (164)
Proceeds from sale of real estate acquired through foreclosure - 82
----- -----
Net cash provided by (used in) investing activities 3,566 (3,381)
Cash flows provided by (used in) financing activities:
Net increase in deposits 887 1,813
Proceeds from Federal Home Loan Bank advances 2,500 -
Repayment of Federal Home Loan Bank advances (3,500) -
Advances by borrowers for taxes and insurance (13) (1)
Purchase of treasury shares (1,282) -
Dividends on common shares (228) (77)
----- -----
Net cash provided by (used in) financing activities (1,636) 1,735
----- -----
Net increase (decrease) in cash and cash equivalents 2,536 (974)
Cash and cash equivalents at beginning of period 5,225 13,854
----- ------
Cash and cash equivalents at end of period $ 7,761 $ 12,880
===== ======
6
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended June 30,
(In thousands)
2003 2002
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 343 $ 205
===== =====
Interest on deposits and borrowings $1,081 $1,544
===== =====
Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available
for sale, net of related tax effects $ (73) $ (43)
===== =====
Transfers from loans to real estate acquired through
foreclosure $ - $ 259
===== =====
7
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three months ended June 30, 2003 and 2002
1. Basis of Presentation
---------------------
Mutual to Stock Conversion. On October 11, 2001, PFS Bancorp, Inc.
(the "Company") completed the mutual-to-stock conversion (the
"Conversion") of Peoples Federal Savings Bank ("Peoples" or the
"Savings Bank"), and the sale of 1,520,875 shares of Company common
stock, par value $0.01 per share, at $10.00 per share ("Company
Common Stock") for total gross proceeds of $15.2 million. The costs
of issuing the common stock were deducted from the sale proceeds of
the offering, resulting in total net proceeds from the offering
equaling approximately $14.6 million. As an integral part of the
Conversion and in furtherance of the Savings Bank's commitment to
the communities that it serves, Peoples and the Company have
established a charitable foundation known as PFS Community
Foundation (the "Foundation") and contributed 30,418 shares of
Company Common Stock to the Foundation. The Foundation provides
funding to support charitable causes and community development
activities which complement the Savings Bank's existing community
activities. In addition, the Company established an employee stock
ownership plan ("ESOP") for the employees of the Company and Peoples
which became effective with the completion of the Conversion.
Financial Statement Presentation. The Company was incorporated
under Indiana law in September, 2001 by Peoples in connection with
the Conversion. Upon consummation of the Conversion on October 11,
2001, the Company became the holding company for the Savings Bank.
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and,
therefore, do not include information or footnotes necessary for a
complete presentation of financial position, results of operations
and cash flows in conformity with accounting principles generally
accepted in the United States of America. Accordingly, these
financial statements should be read in conjunction with the
financial statements and notes thereto of the Company for the year
ended December 31, 2002. However, in the opinion of management, all
adjustments (consisting of only normal recurring accruals) which are
necessary for a fair presentation of the financial statements have
been included. The results of operations for the six and three
month periods ended June 30, 2003, are not necessarily indicative of
the results which may be expected for the entire year.
2. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary, the Savings
Bank. All significant intercompany items have been eliminated.
3. Earnings Per Share
------------------
Basic earnings per share is computed based upon the weighted-average
common shares outstanding during the period less shares in the ESOP
that are unallocated and not committed to be released. Weighted-
average common shares deemed outstanding gives effect to 97,336 and
109,503 unallocated ESOP shares as of June 30, 2003 and 2002,
respectively. Weighted-average common shares outstanding totaled
1,376,392 and 1,441,790 for the three month periods ended June 30,
2003 and 2002, respectively and 1,404,247 and 1,441,790 for the six
months ended June 30, 2003 and 2002, respectively.
Diluted earnings per share is computed taking into consideration
common shares outstanding and dilutive potential common share
equivalents. Weighted-average common shares outstanding for diluted
earnings per share totaled 1,404,247 and 1,376,392 for the six and three
month periods, respectively, ended June 30, 2003. The Company's stock
option plan had no dilutive effect for those periods. The Company had
no dilutive or potentially dilutive securities during the six and three
month periods ended June 30, 2002.
8
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three months ended June 30, 2003 and 2002
4. Effects of Recent Accounting Pronouncements
-------------------------------------------
In June 2002, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities."
SFAS No. 146 provides financial accounting and reporting guidance
for costs associated with exit or disposal activities, including one-
time termination benefits, contract termination costs other than for
a capital lease, and costs to consolidate facilities or relocate
employees. SFAS No. 146 is effective for exit or disposal
activities initiated after December 31, 2002. Management adopted
SFAS No. 146 effective January 1, 2003, without material effect on
the Company's financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to
provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of
the method used on reported results. SFAS No. 148 is effective for
fiscal years beginning after December 15, 2002. The interim
disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December
15, 2002. Management adopted the disclosure provisions of SFAS No. 148
effective June 30, 2003. SFAS No. 148 is not expected to have a
material effect on the Company's financial position or results of
operations.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities." FIN 46 requires
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. FIN 46 also
requires disclosures about variable interest entities that a company
is not required to consolidate, but in which it has a significant
variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to existing 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 Company adopted the
provisions of FIN 46 effective January 31, 2003, without material
effect on its financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" which
clarifies certain implementation issues raised by constituents and
amends SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," to include the conclusions reached by the FASB
on certain FASB Staff Implementation Issues that, while inconsistent
with Statement 133's conclusions, were considered by the Board to be
preferable; amends SFAS No. 133's discussion of financial guarantee
contracts and the application of the shortcut method to an interest-
rate swap agreement that includes an embedded option and amends
other pronouncements.
The guidance in Statement 149 is effective for new contracts entered
into or modified after June 30, 2003 and for hedging relationships
designated after that date, except for the following:
* guidance incorporated from FASB Staff Implementation Issues that
was effective for periods beginning prior to June 15, 2003 should
continue to be applied according to the effective dates in those
issues
* guidance relating to forward purchase and sale agreements
involving when-issued securities should be applied to both existing
contracts and new contracts entered into after June 30, 2003.
9
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three months ended June 30, 2003 and 2002
4. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------------------
Management does not expect SFAS No. 149 to have a material effect on
the Company's financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity", which changes the classification in the statement of
financial position of certain common financial instruments from
either equity or mezzanine presentation to liabilities and requires
an issuer of those financial statements to recognize changes in fair
value or redemption amount, as applicable, in earnings. SFAS No.
150 requires an issuer to classify certain financial instruments as
liabilities, including mandatorily redeemable preferred and common
stocks.
SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and, with one exception, is effective at
the beginning of the first interim period beginning after June 15,
2003 (July 1, 2003 as to the Company). The effect of adopting SFAS
No. 150 must be recognized as a cumulative effect of an accounting
change as of the beginning of the period of adoption. Restatement
of prior periods is not permitted. Management is continuing to
evaluate the effect of the provisions of SFAS No. 150 on the
Company's financial statements.
5. Stock Option Plan
-----------------
During June 2003, the Board of Directors adopted the PFS Bancorp,
Inc. Stock Option Plan (the "Plan") that provides for the issuance
of 152,088 shares of authorized but unissued shares of common stock
at fair value at the date of grant. Options granted in June 2003
totaled 62,228 at an exercise price equal to fair value of $16.85.
The Plan provides that one-fifth of the options granted become
exercisable on each of the first five anniversaries of the date of
grant.
The Company accounts for the Plan in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date
based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting
period. Alternatively, SFAS No. 123 permits entities to continue to
account for stock options and similar equity instruments under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Entities that continue to account for
stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net earnings and earnings per share, as if the
fair value-based method of accounting defined in SFAS No. 123 had
been applied.
10
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three months ended June 30, 2003 and 2002
5. Stock Option Plan (continued)
-----------------------------
The Company applies APB Opinion No. 25 and related Interpretations
in accounting for the Plan. Accordingly, no compensation cost had
been recognized for the Plan. Had compensation cost for the Plan
been determined based on the fair value at the grant date for awards
under the Plan consistent with the accounting method utilized in
SFAS No. 123, the Company's net earnings and earnings per share
would have been reported as the pro forma amounts indicated below:
Six months ended Three months ended
June 30, 2003 June 30, 2003
<s> <c> <c>
Net earnings (In thousands) As reported $418 $197
Stock-based compensation, net of tax - -
--- ---
Pro-forma $418 $197
=== ===
Earnings per share
Basic As reported $.30 $.15
Stock-based compensation, net of tax - -
--- ---
Pro-forma $.30 $.15
=== ===
Diluted As reported $.30 $.15
Stock-based compensation, net of tax - -
--- ---
Pro-forma $.30 $.15
=== ===
A summary of the status of the Plan as of and for the period ended June 30,
2003 is presented below:
Weighted-
average
exercise
Shares price
Outstanding at beginning of period - $ -
Granted 62,228 16.85
Exercised - -
Forfeited - -
------ -----
Outstanding at end of period 62,228 $16.85
====== =====
Options exercisable at period-end - $ -
====== =====
The following information applies to options outstanding at June 30, 2003:
Number outstanding 62,228
Range of exercise prices $16.85
Weighted-average exercise price $16.85
Weighted-average remaining contractual life 10.0 years
11
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from December 31, 2002 to
June 30, 2003
- -------------------------------------------------------------------
At June 30, 2003, the Company's assets totaled $117.8 million, a
decrease of $1.2 million, or 1.0%, compared to total assets at
December 31, 2002. The decrease in assets was used to fund the
Company's stock repurchase at the end of the first quarter of 2003 and
resulted in a $1.3 million decrease in shareholders' equity.
Liquid assets (i.e. cash and interest-bearing deposits) increased by
$2.5 million, or 48.5%, over December 31, 2002 levels, to a total of
$7.8 million at June 30, 2003. Investment securities totaled $13.4
million at June 30, 2003, a decrease of $1.9 million, or 12.6%, from
December 31, 2002 levels. The decrease resulted primarily from
maturities and sales of $19.2 million, which were partially offset by
purchases totaling $17.4 million during the six month period.
Loans receivable decreased by $1.8 million, or 1.9%, during the six
month period ended June 30, 2003, to a total of $93.9 million. Loan
disbursements amounted to $15.7 million and were offset by principal
repayments of $17.5 million. During the six months ended June 30,
2003, loan originations were comprised of $10.8 million in loans
secured by one- to four-family residential real estate, $2.6 million
in loans secured by commercial and nonresidential real estate and $2.3
million in consumer and other loans.
The allowance for loan losses totaled $759,000 and $764,000 at June
30, 2003 and December 31, 2002, respectively. Nonperforming and
impaired loans totaled $1.1 million and $901,000 at June 30, 2003 and
December 31, 2002, respectively. The allowance for loan losses
represented 71.0% and 84.8% of nonperforming and impaired loans as of
June 30, 2003 and December 31, 2002, respectively. The allowance
represented approximately .81% and .80% of the total loan portfolio at
June 30, 2003 and December 31, 2002, respectively. At June 30, 2003,
nonperforming and impaired loans were comprised of $1.0 million in
loans secured by one- to four-family residential real estate and
$61,000 in commercial, consumer and other loans. Management believes
such loans are adequately collateralized and does not presently expect
to incur any material losses on such loans. Although management
believes that its allowance for loan losses at June 30, 2003, was
sufficient to cover known and inherent losses in the loan portfolio
based upon the available facts and circumstances, there can be no
assurance that additions to such allowance will not be necessary in
future periods, which could adversely affect the Savings Bank's
results of operations.
Deposits totaled $90.3 million at June 30, 2003, an increase of
$887,000, or 1.0%, over December 31, 2002 levels. The growth in
deposits resulted primarily from management's efforts to achieve a
moderate rate of growth through marketing and pricing strategies.
Such increase was offset by the repayment of Federal Home Loan Bank
advances.
Shareholders' equity amounted to $26.4 million at June 30, 2003, a
decrease of $1.2 million, or 4.2%, from December 31, 2002 levels. The
decrease resulted primarily from the Company's $1.3 million repurchase
of its common stock for treasury through a 5% stock repurchase program
which was initiated and completed during the quarter ending March 31,
2003. The decrease was also attributed to a $73,000 decline in
unrealized gains on securities designated as available for sale and
payment of dividends of $228,000, which were partially offset by net
earnings of $418,000.
Peoples is required to meet minimum capital standards promulgated by
the Office of Thrift Supervision ("OTS"). At June 30, 2003, Peoples'
regulatory capital was well in excess of the minimum capital
requirements.
12
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended June
30, 2003 and 2002
- ----------------------------------------------------------------------
General
- -------
Net earnings for the three months ended June 30, 2003 amounted to
$197,000, a decrease of $50,000, or 20.2%, compared to the $247,000 in
net earnings reported for the three month period ended June 30, 2002.
The decrease in earnings was due primarily to a $116,000, or 11.0%,
decrease in net interest income, which was partially offset by a
$16,000, or 40.0%, decrease in the provision for loan losses, a
$27,000, or 31.8%, increase in other income, and a $25,000, or 14.9%,
decrease in the provision for income taxes.
Net Interest Income
- -------------------
Total interest income amounted to $1.4 million for the three-month
period ended June 30, 2003, a decrease of $356,000, or 19.7%, from the
same period in 2002. Interest income on loans totaled $1.3 million
during the 2003 period, a decrease of $338,000, or 20.4%, from the
2002 period. This decline was due primarily to a 140 basis point
decrease in the weighted-average yield quarter to quarter, to 5.63%
for the quarter ended June 30, 2003, and a $633,000 decrease in the
average balance of loans outstanding quarter to quarter.
Interest income on investment securities decreased by $1,000, or 1.0%,
for the three months ended June 30, 2003, compared to the same quarter
in 2002. This decline was due primarily to an 81 basis point decrease
in the weighted average yield quarter to quarter, to 3.35% for the
quarter ended June 30, 2003, which was offset by a $2.3 million, or
22.8%, increase in the average balance outstanding. Interest income
on other interest-bearing deposits decreased by $17,000, or 37.8%,
during the three months ended June 30, 2003, compared to the same
period in 2002, due primarily to a 15 basis point decrease in the
weighted-average yield, to 1.25% for the 2003 quarter and a $3.9
million, or 30.3%, decrease in the average balance outstanding for the
three months ended June 30, 2003.
Interest expense on deposits totaled $506,000 for the three month
period ended June 30, 2003, a decrease of $240,000, or 32.2%, from the
$746,000 recorded for the same period in 2002, due primarily to a 103
basis point decrease in the weighted-average cost of deposits, to
2.21% in the 2003 period. The decrease in the level of yields on
interest-earning assets and costs of interest-bearing liabilities was
due primarily to the overall decrease in interest rates in the
economy.
Provision for Losses on Loans
- -----------------------------
As a result of an analysis of historical experience, the volume and
type of lending conducted by the Savings Bank, the status of past due
principal and interest payments, general economic conditions,
particularly as such conditions relate to the Savings Bank's market
area, and other factors related to the collectibility of the Savings
Bank's loan portfolio, management elected to record a provision for
losses on loans totaling $24,000 for the three month period ended
June 30, 2003 compared to the provision of $40,000 for the three month
period ended June 30, 2002. The current period provision was
predicated primarily upon the change in the loan portfolio mix,
including an increase in loans secured by nonresidential real estate
and an increase in the level of nonperforming loans. The provision
for the three-month period ended June 30, 2002 was predicated upon the
level of nonaccrual consumer loans and charge-offs of loans during the
period. There can be no assurance that the loan loss allowance will
be sufficient to cover losses on nonperforming assets in the future.
13
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended June
30, 2003 and 2002 (continued)
- ----------------------------------------------------------------------
Other Income
- ------------
Other income totaled $112,000 for the three month period ended June
30, 2003, an increase of $27,000, or 31.8%, from the same period in
2002. The increase in other income was due primarily to a $6,000 gain
recorded on the sale of repossessed property during the quarter ended
June 30, 2003, and a $21,000, or 24.7%, increase in other operating
income. Other operating income is comprised primarily of service fees
on checking accounts and ATM transactions and late payment fees on
loans.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $689,000 for the
three months ended June 30, 2003, an increase of $2,000, or .3%,
compared to the same quarter in 2002. This increase was due primarily
to a $58,000, or 17.5%, increase in employee compensation and benefits
and a $14,000, or 20.0%, increase in occupancy and equipment expense,
which were partially offset by a $56,000, or 51.4%, decrease in data
processing expenses and a $13,000, or 8.0%, decrease in other
operating expenses. The increase in employee compensation and
benefits was due primarily to expense recognized in connection with
the Company's stock benefit plans, a 9.6% increase in medical
insurance premiums and normal merit increases. The increase in
occupancy and equipment expense was due to additional depreciation
recorded as a result of the upgrade to computer equipment during the
third quarter of 2002. The decrease in data processing expense was
due to the effects of the one-time conversion costs associated with
the upgrading of processing systems in 2002.
Income Taxes
- ------------
The income tax provision totaled $143,000 for the three month period
ended June 30, 2003, a decrease of $25,000, or 14.9%, compared to the
same quarter in 2002. The decrease was due primarily to a $75,000, or
18.1%, decrease in pre-tax earnings. The income tax provision
includes expense for federal and Indiana state income tax. The
effective tax rates were 42.1% and 40.5% for the three month periods
ended June 30, 2003 and 2002, respectively.
Comparison of Operating Results for the Six-Month Periods Ended June
30, 2003 and 2002
- --------------------------------------------------------------------
General
- -------
Net earnings for the six months ended June 30, 2003 amounted to
$418,000, a decrease of $88,000, or 17.4%, compared to the $506,000 in
net earnings reported for the six month period ended June 30, 2002.
The decrease in earnings was due primarily to a $117,000 decrease in
net interest income and a $49,000 increase in general, administrative
and other expense, which were partially offset by a $16,000 decrease
in the provision for losses on loans, a $10,000 increase in other
income, and a $52,000 decrease in the provision for income taxes.
Net Interest Income
- -------------------
Total interest income amounted to $3.0 million for the six month
period ended June 30, 2003, a decrease of $585,000, or 16.3%, from the
same period in 2002. Interest income on loans totaled $2.7 million
during the 2003 period, a decrease of $584,000, or 17.6%, from the
2002 period. This decline was due primarily to a 118 basis point
decrease in the weighted-average yield period to period, to 5.80% for
the six month period ended June 30, 2003, and an $855,000 decrease in
the average balance of loans outstanding period to period.
14
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods Ended June
30, 2003 and 2002 (continued)
- --------------------------------------------------------------------
Net Interest Income (continued)
- -------------------------------
Interest income on investment securities increased by $68,000, or
45.3%, for the six months ended June 30, 2003, compared to the same
period in 2002, due primarily to a $5.6 million, or 65.4%, increase in
the average balance outstanding period to period, which represented
management's investment of proceeds from the initial public offering.
Interest income on other interest-bearing deposits decreased by
$69,000, or 58.5%, during the six months ended June 30, 2003, compared
to the same period in 2002, due primarily to a 60 basis point decrease
in the weighted-average yield, to 1.31% for the 2003 period and a $4.9
million, or 39.6%, decrease in the average balance outstanding for the
six months ended June 30, 2003.
Interest expense totaled $1.1 million for the six month period ended
June 30, 2003, a decrease of $468,000, or 30.4%, from the $1.5 million
recorded for the same period in 2002. Interest expense on deposits
decreased by $470,000, or 30.6%, due primarily to a 99 basis point
decrease in the weighted-average cost of deposits, to 2.38% in the
2003 period. Interest expense on borrowings increased by $2,000, as
the Company had no borrowings outstanding during the 2002 period. The
decrease in the level of yields on interest-earning assets and costs
of interest-bearing liabilities was due primarily to the overall
decrease in interest rates in the economy.
Provision for Losses on Loans
- -----------------------------
As a result of an analysis of historical experience, the volume and
type of lending conducted by the Savings Bank, the status of past due
principal and interest payments, general economic conditions,
particularly as such conditions relate to the Savings Bank's market
area, and other factors related to the collectibility of the Savings
Bank's loan portfolio, management elected to record a provision for
losses on loans totaling $48,000 for the six-month period ended
June 30, 2003 compared to the $64,000 provision for the six month
period ended June 30, 2002. The current period provision was
predicated primarily upon a change in the loan portfolio mix,
including an increase in loans secured by nonresidential real estate
and the increase in the level of nonperforming loans during the
period. The provision for the six-month period ended June 30, 2002,
was predicated upon the level of nonaccrual consumer loans and related
charge-offs of loans during the period. There can be no assurance
that the loan loss allowance will be sufficient to cover losses on
nonperforming assets in the future.
Other Income
- ------------
Other income totaled $175,000 for the six month period ended June 30,
2003, an increase of $10,000, or 6.1%, over the same period in 2002.
The increase in other income was due primarily to a $10,000 gain
recorded on the sale of repossessed property during the six month
period ended June 30, 2003, and a $28,000, or 17.0%, increase in other
operating income. Other operating income is comprised primarily of
service fees on checking accounts and ATM transactions and late
payment fees on loans. These increases in other income were partially
offset by a $28,000 loss recorded on the sale of investment securities
during the six month period ended June 30, 2003.
15
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods Ended June
30, 2003 and 2002 (continued)
- --------------------------------------------------------------------
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $1.3 million for the
six months ended June 30, 2003, an increase of $49,000, or 3.8%,
compared to the same period in 2002. This increase was due primarily
to a $130,000, or 20.1%, increase in employee compensation and
benefits and a $32,000, or 23.7%, increase in occupancy and equipment
expense, which were partially offset by a $76,000, or 42.5%, decrease
in data processing expense and a $34,000, or 11.1%, decrease in other
operating expense. The increase in employee compensation and benefits
was due primarily to expense recognized in connection with the
Company's stock benefit plans, a 14.4% increase in medical insurance
premiums and normal merit increases. The increase in occupancy and
equipment expense was due to additional depreciation recorded as a
result of the upgrade to computer equipment during the third quarter
of 2002. The decrease in data processing expense was due to the
effects of the one-time conversion costs associated with the upgrading
of processing systems in 2002.
Income Taxes
- ------------
The income tax provision totaled $289,000 for the six month period
ended June 30, 2003, a decrease of $52,000, or 15.2%, compared to the
same period in 2002. The decrease was due primarily to a $140,000, or
16.5%, decrease in pre-tax earnings. The income tax provision
includes expense for federal and Indiana state income tax. The
effective tax rates were 40.9% and 40.3% for the six month periods
ended June 30, 2003 and 2002, respectively.
Impact of Inflation and Changing Prices
- ---------------------------------------
The financial statements and related financial data presented herein
have been prepared in accordance with instructions to Form 10-QSB,
which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in
relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Savings Bank's
assets and liabilities are monetary in nature. As a result, interest
rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
Forward-Looking Statements
- --------------------------
This Form 10-QSB contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of
management as well as assumptions made by and information currently
available to management. In addition, in those and other portions of
this document, the words "anticipate," "believe," "estimate,"
"except," "intend," "should" and similar expressions, or the negative
thereof, as they relate to the Company or the Company's management,
are intended to identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future
looking events and are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties
materialize or should underlying assumptions prove incorrect, actual
results may vary from those described herein as anticipated, believed,
estimated, expected or intended. The Company does not intend to
update these forward-looking statements.
16
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
ITEM 3: Controls and Procedures
- --------------------------------
Our management evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of
our disclosure controls and procedures (as defined under Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of
the end of the period covered by this report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures are
designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Securities and Exchange
Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and regulations and are
operating in an effective manner.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934) occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
17
PFS Bancorp, Inc.
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
EX-31.1 Certification of Chief Executive Officer
pursuant to Rule 13a-14(a)/15d-14(a)
EX-31.2 Certification of Chief Financial Officer
pursuant to Rule 13a-14(a)/15d-14(a)
EX-32.1 Section 1350 Certification of the Chief
Executive Officer
EX-32.2 Section 1350 Certification of the Chief
Financial Officer
(b) Reports on Form 8-K:
Date Items and Description
---- ---------------------
May 1, 2003 Item 9. On April 30, the issuer announced
its results of operations for the quarter ended
March 31, 2003 in a press release attached as
Exhibit 99.1.
18
PFS Bancorp, Inc.
SIGNATURES
----------
Pursuant to the requirements of the Securities 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 14, 2003 By: /s/Mel E. Green
--------------- -------------------------------------
Mel E. Green
President and Chief Executive Officer
Date: August 14, 2003 By: /s/Stuart M. Suggs
--------------- ---------------------------------------
Stuart M. Suggs
Chief Financial Officer, Vice President
and Corporate Treasurer
19