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 September 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)
N/A
______________________________________________________________________________
(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:
November 10, 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
Page 2 of 19
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, December 31,
ASSETS 2003 2002
<s> <c> <c>
Cash and due from banks $ 966 $ 819
Interest-bearing deposits in other financial institutions 5,125 4,406
------- -------
Cash and cash equivalents 6,091 5,225
Investment securities designated as available for sale - at market 11,872 15,142
Investment securities held to maturity - at amortized cost, which
approximates market 152 161
Loans receivable - net 96,720 95,702
Office premises and equipment - at depreciated cost 1,066 1,170
Real estate acquired through foreclosure 169 228
Federal Home Loan Bank stock - at cost 748 730
Accrued interest receivable 402 446
Prepaid expenses and other assets 150 176
Prepaid federal income taxes 139 -
Deferred federal income taxes 116 56
------- -------
Total assets $117,625 $119,036
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 89,837 $ 89,420
Advances from the Federal Home Loan Bank - 1,000
Advances by borrowers for taxes and insurance 111 80
Accrued interest payable 13 26
Other liabilities 1,074 883
Accrued federal income taxes - 30
------- -------
Total liabilities 91,035 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 14,007 13,723
Less 77,565 shares of treasury stock - at cost (1,282) -
Shares acquired by stock benefit plans (1,923) (1,994)
Accumulated other comprehensive income - unrealized gains on
securities designated as available for sale, net of related
tax effects 801 881
------- -------
Total shareholders' equity 26,590 27,597
------- -------
Total liabilities and shareholders' equity $117,625 $119,036
======= =======
3
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Nine months ended Three months ended
September 30, September 30,
2003 2002 2003 2002
<s> <c> <c> <c> <c>
Interest income
Loans $4,022 $4,819 $1,293 $1,506
Investment securities 313 265 95 115
Interest-bearing deposits and other 63 162 14 44
----- ----- ----- -----
Total interest income 4,398 5,246 1,402 1,665
Interest expense
Deposits 1,517 2,264 449 726
Borrowings 2 - - -
----- ----- ----- -----
Total interest expense 1,519 2,264 449 726
----- ----- ----- -----
Net interest income 2,879 2,982 953 939
Provision for losses on loans 48 88 - 24
----- ----- ----- -----
Net interest income after provision for
losses on loans 2,831 2,894 953 915
Other operating income
Loss on sale of investment securities (28) - - -
Gain on sale of repossessed property 10 - - -
Other operating 304 250 111 85
----- ----- ----- -----
Total other operating income 286 250 111 85
General, administrative and other expense
Employee compensation and benefits 1,152 1,059 375 377
Occupancy and equipment 257 212 90 77
Data processing 167 289 64 110
Federal deposit insurance premiums 39 43 13 14
Other operating 405 404 132 132
Provision for losses on real estate acquired through foreclosure 39 - 39 -
----- ----- ----- -----
Total general, administrative and other expense 2,059 2,007 713 710
----- ----- ----- -----
Earnings before income taxes 1,058 1,137 351 290
Income taxes
Current 455 517 146 177
Deferred (19) (36) 1 (37)
----- ----- ----- -----
Total income taxes 436 481 147 140
----- ----- ----- -----
NET EARNINGS $ 622 $ 656 $ 204 $ 150
===== ===== ===== =====
EARNINGS PER SHARE
Basic $.45 $.45 $.15 $.10
===== ===== ===== =====
Diluted $.45 $.45 $.15 $.10
===== ===== ===== =====
4
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Nine months ended Three months ended
September 30, September 30,
2003 2002 2003 2002
<s> <c> <c> <c> <c>
Net earnings $622 $656 $204 $150
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during the period,
net of taxes (benefits) of $(50), $(41), $(4) and $19 for the
respective periods (98) (79) (7) 36
Reclassification adjustment for realized losses included in earnings,
net of tax benefits of $10 in 2003 18 - - -
--- --- --- ---
Comprehensive income $542 $577 $197 $186
=== === === ===
Accumulated comprehensive income $801 $803 $801 $803
=== === === ===
5
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands)
2003 2002
<c> <c> <c>
Cash flows from operating activities:
Net earnings for the period $ 622 $ 656
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (48) (51)
Amortization of premiums and discounts on investment securities - net 62 46
Depreciation 133 100
Provision for losses on loans 48 88
Provision for losses on real estate acquired through foreclosure 39 -
Amortization expense of stock benefit plan 71 -
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 44 (56)
Prepaid expenses and other assets 26 (80)
Other liabilities 191 216
Accrued interest payable (13) (7)
Income taxes
Current (169) 50
Deferred (19) (36)
----- ---
Net cash provided by operating activities 1,005 926
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (23,630) (23,503)
Proceeds from maturities and repayment of investment securities 23,669 15,271
Proceeds from sale of investment securities 3,029 -
Loan principal repayments 27,266 21,527
Loan disbursements (28,254) (19,076)
Purchase of Federal Home Loan Bank stock (18) (31)
Purchase of office premises and equipment (29) (334)
Proceeds from sale of real estate acquired through foreclosure - 82
----- -----
Net cash provided by (used in) investing activities 2,033 (6,064)
Cash flows provided by (used in) financing activities:
Net increase in deposits 417 2,520
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 31 42
Shares acquired by stock benefit plan - (1,021)
Purchase of treasury shares (1,282) -
Dividends on common shares (338) (155)
----- -----
Net cash provided by (used in) financing activities (2,172) 1,386
----- -----
Net increase (decrease) in cash and cash equivalents 866 (3,752)
Cash and cash equivalents at beginning of period 5,225 13,854
----- ------
Cash and cash equivalents at end of period $ 6,091 $10,102
===== ======
6
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(In thousands)
2003 2002
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 649 $ 458
===== =====
Interest on deposits and borrowings $ 1,532 $ 2,271
===== =====
Supplemental disclosure of noncash investing activities:
Unrealized losses on securities designated as available
for sale, net of related tax effects $ (80) $ (79)
===== =====
Transfers from loans to real estate acquired through
foreclosure $ - $ 259
===== =====
7
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three months ended September 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 nine and three
month periods ended September 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 September 30, 2003 and 2002,
respectively. Diluted earnings per share is computed taking into
consideration common shares outstanding and the dilutive effect of
additional potential common shares issuable under the Company's
stock option plan. The computations are as follows:
8
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2003 and 2002
3. Earnings Per Share (continued)
------------------------------
For the nine months ended For the three months ended
September 30, September 30,
2003 2002 2003 2002
<s> <c> <c> <c> <c>
Weighted-average common shares
outstanding (basic) 1,394,860 1,441,790 1,376,392 1,441,790
Dilutive effect of assumed exercise
of stock options 1,793 - 1,793 -
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 1,396,653 1,441,790 1,378,185 1,441,790
========= ========= ========= =========
4. Effects of Recent Accounting Pronouncements
-------------------------------------------
In September 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 condition 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.
9
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2003 and 2002
4. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------------------
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.
Management adopted SFAS No. 149 effective July 1, 2003, as required,
without 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 adopted SFAS No. 150
effective July 1, 2003, as required, without material effect on the
Company's financial statements.
5. Stock Option Plan
-----------------
In April 2002, 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. No options were granted in 2002.
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 nine and three months ended September 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:
Nine months ended Three months ended
September 30, 2003 September 30, 2003
Net earnings (In thousands)
As reported $622 $204
Stock-based compensation, net of tax (7) (7)
--- ---
Pro-forma $615 $197
=== ===
Earnings per share
Basic As reported $.45 $.15
Stock-based compensation, net of tax (.01) (.01)
--- ---
Pro-forma $.44 $.14
=== ===
Diluted As reported $.45 $.15
Stock-based compensation, net of tax (.01) (.01)
--- ---
Pro-forma $.44 $.14
=== ===
A summary of the status of the Plan as of and for the period ended September
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 - $ -
====== =====
Weighted-average fair value of options granted
during the period $ 3.82
=====
The following information applies to options outstanding at September 30, 2003:
Number outstanding 62,228
Range of exercise prices $16.85
Weighted-average exercise price $16.85
Weighted-average remaining contractual life 9.75 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
September 30, 2003
- --------------------------------------------------------------------
At September 30, 2003, the Company's assets totaled $117.6 million, a
decrease of $1.4 million, or 1.2%, compared to total assets at
December 31, 2002. The decrease in assets was comprised primarily of
a $3.3 million decrease in investment securities. Proceeds from
maturities, sales and repayments of investment securities were used to
purchase other investment securities, fund the Company's stock repurchase
and to repay borrowings.
Liquid assets (i.e. cash and interest-bearing deposits) increased by
$866,000, or 16.6%, over December 31, 2002 levels, to a total of $6.1
million at September 30, 2003. Investment securities totaled $12.0
million at September 30, 2003, a decrease of $3.3 million, or 21.4%,
from December 31, 2002 levels. The decrease resulted primarily from
maturities and sales of $23.7 million and $3.0 million, respectively,
which were partially offset by purchases totaling $23.6 million during
the nine month period.
Loans receivable increased by $1.0 million, or 1.1%, during the nine
month period ended September 30, 2003, to a total of $96.7 million.
Loan disbursements amounted to $28.3 million and were partially offset
by principal repayments of $27.3 million. During the nine months ended
September 30, 2003, loan originations were comprised of $19.2 million
in loans secured by one- to four-family residential real estate, $4.5
million in loans secured by commercial and nonresidential real estate
and $4.6 million in consumer and other loans.
The allowance for loan losses totaled $748,000 and $764,000 at
September 30, 2003 and December 31, 2002, respectively. Nonperforming
and impaired loans totaled $1.1 million and $901,000 at September 30,
2003 and December 31, 2002, respectively. The allowance for loan
losses represented 68.6% and 84.8% of nonperforming and impaired loans
as of September 30, 2003 and December 31, 2002, respectively. The
allowance represented approximately .77% and .80% of the total loan
portfolio at September 30, 2003 and December 31, 2002, respectively.
At September 30, 2003, nonperforming and impaired loans were comprised
of $1.0 million in loans secured by one- to four-family residential
real estate and $47,000 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
September 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 Company's results of operations.
Deposits totaled $89.8 million at September 30, 2003, an increase of
$417,000, or .5%, 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 net reduction in Federal Home Loan Bank
advances of $1.0 million.
Shareholders' equity amounted to $26.6 million at September 30, 2003,
a decrease of $1.0 million, or 3.6%, 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 attributable to
an $80,000 decline in unrealized gains on securities designated as
available for sale and payment of dividends of $338,000, which were
partially offset by net earnings of $622,000 and $71,000 of
amortization related to a distribution of shares in connection with
the Company's Recognition & Retention Plan.
Peoples is required to meet minimum capital standards promulgated by
the Office of Thrift Supervision ("OTS"). At September 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
September 30, 2003 and 2002
- -----------------------------------------------------------------
General
- -------
Net earnings for the three months ended September 30, 2003 amounted to
$204,000, an increase of $54,000, or 36.0%, compared to the $150,000
in net earnings reported for the three month period ended September
30, 2002. The increase in earnings was due primarily to a $14,000, or
1.5%, increase in net interest income, a $26,000 increase in other
income and a $24,000 decrease in the provision for losses on loans,
which were partially offset by a $3,000 increase in general,
administrative and other expense and a $7,000 increase in the
provision for income taxes.
Net Interest Income
- -------------------
Total interest income amounted to $1.4 million for the three-month
period ended September 30, 2003, a decrease of $263,000, or 15.8%,
from the same period in 2002. Interest income on loans totaled $1.3
million during the 2003 period, a decrease of $213,000, or 14.1%, from
the 2002 period. This decline was due primarily to a 97 basis point
decrease in the weighted-average yield quarter to quarter, to 5.47%
for the quarter ended September 30, 2003, which was partially offset
by a $1.0 million increase in the average balance of loans outstanding
quarter to quarter.
Interest income on investment securities decreased by $20,000, or
17.4%, for the three months ended September 30, 2003, compared to the
same quarter in 2002. This decline was due primarily to a 61 basis
point decrease in the weighted-average yield quarter to quarter, to
2.99% for the quarter ended September 30, 2003, and a $74,000, or .6%,
decrease in the average balance outstanding. Interest income on other
interest-bearing deposits decreased by $30,000, or 68.2%, during the
three months ended September 30, 2003, compared to the same period in
2002, due primarily to a 68 basis point decrease in the weighted-
average yield, to .95% for the 2003 quarter and a $4.9 million, or
45.5%, decrease in the average balance outstanding for the three
months ended September 30, 2003. Such decrease in the average balance
was primarily due to the use of such funds to originate loans.
Interest expense on deposits totaled $449,000 for the three month
period ended September 30, 2003, a decrease of $277,000, or 38.2%,
from the $726,000 recorded for the same period in 2002, due primarily
to a 114 basis point decrease in the weighted-average cost of
deposits, to 1.99% 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 concluded that the allowance was
adequate and therefore did not record a provision for losses on loans
for the three month period ended September 30, 2003. 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 $111,000 for the three month period ended
September 30, 2003, an increase of $26,000, or 30.6%, over the same
period in 2002. The increase in other income was due primarily to an
increase in service fees on checking accounts and ATM transactions and
late payment fees on loans.
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
September 30, 2003 and 2002 (continued)
- -----------------------------------------------------------------
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $713,000 for the
three months ended September 30, 2003, an increase of $3,000, or .4%,
compared to the same quarter in 2002. This increase was due primarily
to a $39,000 provision for losses on real estate acquired through
foreclosure and a $13,000, or 16.9%, increase in occupancy and
equipment, which were partially offset by a $46,000, or 41.8%,
decrease in data processing expense. The decrease in data processing
expense was directly related to increased costs associated with the
core system conversion in the third quarter ended September 30, 2002.
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 increase in the provision was
due to decreased values of acquired properties as a result of updated
appraisals.
Income Taxes
- ------------
The income tax provision totaled $147,000 for the three month period
ended September 30, 2003, an increase of $7,000, or 5.0%, compared to
the same quarter in 2002. The income tax provision includes expense
for federal and Indiana state income tax. The effective tax rates
were 41.9% and 48.3% for the three month periods ended September 30,
2003 and 2002, respectively.
Comparison of Operating Results for the Nine-Month Periods Ended
September 30, 2003 and 2002
- ----------------------------------------------------------------
General
- -------
Net earnings for the nine months ended September 30, 2003, amounted to
$622,000, a decrease of $34,000, or 5.2%, compared to the $656,000 in
net earnings reported for the nine month period ended September 30,
2002. The decrease in earnings was due primarily to a $103,000
decrease in net interest income and a $52,000 increase in general,
administrative and other expense, which were partially offset by a
$40,000 decrease in the provision for losses on loans, a $36,000
increase in other income, and a $45,000 decrease in the provision for
income taxes.
Net Interest Income
- -------------------
Total interest income amounted to $4.4 million for the nine month
period ended September 30, 2003, a decrease of $848,000, or 16.2%,
from the same period in 2002. Interest income on loans totaled $4.0
million during the 2003 period, a decrease of $797,000, or 16.5%, from
the 2002 period. This decline was due primarily to a 117 basis point
decrease in the weighted-average yield period to period, to 5.62% for
the nine month period ended September 30, 2003, which was partially
offset by a $777,000 increase in the average balance of loans
outstanding period to period.
Interest income on investment securities increased by $48,000, or
18.1%, for the nine months ended September 30, 2003, compared to the
same period in 2002, due primarily to a $3.5 million, or 34.6%,
increase in the average balance outstanding period to period.
Interest income on other interest-bearing deposits decreased by
$99,000, or 61.1%, during the nine months ended September 30, 2003,
compared to the same period in 2002, due primarily to a 70 basis point
decrease in the weighted-average yield, to 1.22% for the 2003 period
and a $4.4 million, or 38.9%, decrease in the average balance
outstanding for the nine months ended September 30, 2003. The increase
in the average balance of investment securities was primarily due
to the use of excess funds from interest-bearing deposits.
14
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended
September 30, 2003 and 2002 (continued)
- ----------------------------------------------------------------
Net Interest Income (continued)
- -------------------------------
Interest expense totaled $1.5 million for the nine month period ended
September 30, 2003, a decrease of $745,000, or 32.9%, from the $2.3
million recorded for the same period in 2002. Interest expense on
deposits decreased by $747,000, or 33.0%, due primarily to a 103 basis
point decrease in the weighted-average cost of deposits, to 2.26% 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 nine-month period ended
September 30, 2003 compared to the $88,000 provision for the nine
month period ended September 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 nine-month period ended September 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 $286,000 for the nine month period ended
September 30, 2003, an increase of $36,000, or 14.4%, 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
nine month period ended September 30, 2003, and a $54,000, or 21.6%,
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 nine month period ended September 30,
2003.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense totaled $2.1 million for the
nine months ended September 30, 2003, an increase of $52,000, or 2.6%,
compared to the same period in 2002. This increase was due primarily
to a $93,000, or 8.8%, increase in employee compensation and benefits,
a $45,000, or 21.2%, increase in occupancy and equipment expense and a
$39,000 provision for losses on real estate acquired through
foreclosure, which were partially offset by a $122,000, or 42.2%,
decrease in data processing expense. The increase in employee
compensation and benefits was due primarily to expense recognized in
connection with the Company's stock benefit plans, a 12.6% 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. The increase in the
provision was due to decreased values of acquired properties as a
result of updated appraisals.
15
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended
September 30, 2003 and 2002 (continued)
- ----------------------------------------------------------------
Income Taxes
- ------------
The income tax provision totaled $436,000 for the nine month period
ended September 30, 2003, a decrease of $45,000, or 9.4%, compared to
the same period in 2002. The decrease was due primarily to a $79,000,
or 6.9%, decrease in pre-tax earnings. The income tax provision
includes expense for federal and Indiana state income tax. The
effective tax rates were 41.2% and 42.3% for the nine month periods
ended September 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
---- ---------------------
July 29, 2003 Item 9. On July 29, 2003 the issuer
announced its results of operations for
the quarter ended June 30, 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: November 13, 2003 By: /s/ Mel E. Green
----------------- -------------------------------------
Mel E. Green
President and Chief Executive Officer
Date: November 13, 2003 By: /s/ Stuart M. Suggs
----------------- -------------------------------------
Stuart M. Suggs
Chief Financial Officer, Vice
President and Corporate Treasurer
19