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 March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
SEC File Number 0-33419
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PHSB Financial Corporation
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(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA 25-1894708
- ------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
744 Shenango Road
P.O. Box 1568
Beaver Falls, Pennsylvania 15010
(724) 846 - 7300
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(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 May 5, 2003 there were 2,924,505 shares outstanding of the issuer's class
of common stock.
1
PHSB FINANCIAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
Number
------
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet (unaudited) as of March 31, 2003
and December 31, 2002 3
Consolidated Statement of Income (unaudited) for the Three
Months ended March 31, 2003 and 2002 4
Consolidated Statement of Comprehensive Income (unaudited)
for the Three Months ended March 31, 2003 and 2002 5
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the Three Months ended March 31, 2003 6
Consolidated Statement of Cash Flows (unaudited) for the
Three Months ended March 31, 2003 and 2002 7
Notes to Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
Item 4. Controls and Procedures 18
Part II Other Information 19 - 20
Signatures 21
2
PHSB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, December 31,
2003 2002
------------- ------------
ASSETS
Cash and amounts due from other institutions $ 8,195,465 $ 6,938,217
Interest-bearing deposits with other institutions 2,116,696 1,283,752
------------ ------------
Cash and cash equivalents 10,312,161 8,221,969
Investment securities:
Available for sale 19,218,944 27,233,227
Held to maturity (market value $ 14,020,460
and $19,611,078) 13,689,778 19,274,753
Mortgage - backed securities:
Available for sale 36,182,303 44,137,225
Held to maturity (market value $ 87,345,531
and $71,826,914) 85,923,044 70,346,358
Loans (net of allowance for loan losses of $1,703,691
and $1,683,596) 167,013,612 165,668,214
Accrued interest receivable 2,237,790 1,998,773
Premises and equipment 4,502,177 4,604,005
Federal Home Loan Bank stock 3,874,300 3,620,300
Other assets 565,276 431,881
------------ ------------
TOTAL ASSETS $343,519,385 $345,536,705
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $237,410,353 $232,366,672
Advances from Federal Home Loan Bank 56,257,800 61,007,800
Accrued interest payable and other liabilities 2,977,312 2,802,061
------------ ------------
Total liabilities 296,645,465 296,176,533
------------ ------------
Preferred stock, 20,000,000 shares authorized, none issued - -
Common stock, $.10 par value 80,000,000 shares authorized,
3,497,109 shares issued 349,711 349,711
Additional paid in capital 32,289,744 32,329,518
Retained earnings - substantially restricted 23,920,381 23,571,132
Accumulated other comprehensive income 1,890,419 2,197,377
Unallocated ESOP shares (208,634 and 214,595 shares) (2,212,880) (2,276,111)
Unallocated RSP shares (45,650 shares) (708,032) -
Treasury stock, at cost (580,560 and 471,357 shares) (8,655,423) (6,811,455)
------------ ------------
Total stockholders' equity 46,873,920 49,360,172
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $343,519,385 $345,536,705
============ ============
See accompanying notes to the unaudited consolidated financial statements.
3
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended March 31,
2003 2002
---------- ----------
INTEREST AND DIVIDEND INCOME
Loans:
Taxable $2,600,235 $2,623,227
Exempt from federal income tax 310,414 99,911
Investment securities:
Taxable 238,908 374,829
Exempt from federal income tax 188,596 285,931
Mortgage - backed securities 1,440,659 1,450,762
Interest - bearing deposits with other institutions 10,169 68,024
---------- ----------
Total interest and dividend income 4,788,981 4,902,684
---------- ----------
INTEREST EXPENSE
Deposits 1,601,447 1,640,847
Advances from Federal Home Loan Bank 736,841 729,558
---------- ----------
Total interest expense 2,338,288 2,370,405
---------- ----------
Net interest income 2,450,693 2,532,279
PROVISION FOR LOAN LOSSES 190,000 180,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,260,693 2,352,279
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 160,220 144,249
Investment securities gains, net 176,144 5,399
Rental income, net 25,500 23,327
Other income 68,381 59,534
---------- ----------
Total noninterest income 430,245 232,509
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,064,011 909,116
Occupancy and equipment costs 358,918 351,590
Data processing costs 48,010 49,158
Other expenses 402,175 378,856
---------- ----------
Total noninterest expense 1,873,114 1,688,720
---------- ----------
Income before income taxes 817,824 896,068
Income taxes 166,000 234,000
---------- ----------
NET INCOME $ 651,824 $ 662,068
========== ==========
Earnings Per Share
Basic $ 0.24 $ 0.20
Diluted $ 0.23 $ 0.20
Weighted average number of shares outstanding
Basic 2,746,632 3,254,892
Diluted 2,823,985 3,298,347
See accompanying notes to the unaudited consolidated financial statements.
4
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31,
2003 2002
---------------------- ----------------------
Net Income $ 651,824 $ 662,068
Other comprehensive income (loss):
Unrealized loss on available for sale securities $(288,944) $(409,124)
Less: Reclassification adjustment for gain included in net income (176,144) (5,399)
--------------------- ---------------------
Other comprehensive loss before tax (465,088) (414,523)
Income tax benefit related to other comprehensive loss (158,130) (140,938)
--------- ---------
Other comprehensive loss, net of tax (306,958) (273,585)
--------- ---------
Comprehensive income $ 344,866 $ 388,483
========= =========
See accompanying notes to the unaudited consolidated financial statements.
5
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
Accumu-
lated
Other
Additional Compre- Unallocated Unallocated Total Compre-
Common Paid in Retained hensive Shares Held Shares Held Treasury Stockholders' hensive
Stock Capital Earnings Income by ESOP by RSP Stock Equity Income
-------- ----------- ----------- ---------- ------------- ---------------------- ------------- ------
Balance,
December
31, 2002 2 $349,711 $32,329,518 $23,571,132 $2,197,377 ($2,276,111) $ - ($6,811,455) $49,360,172
Net Income 651,824 651,824 $651,824
Other
comprehensive
income:
Unrealized loss
on available
for sale
securities (306,958) (306,958) (306,958)
--------
Comprehensive
income $344,866
========
Cash dividends paid
($0.10 per share) (302,575) (302,575)
Treasury stock
purchased, at cost (1,843,968) (1,843,968)
Common stock acquired
by RSP (76,568) (771,158) (847,726)
ESOP shares earned 36,794 63,231 100,025
RSP shares earned 63,126 63,126
-------- ----------- ----------- ---------- ----------- --------- ----------- -----------
Balance,
March 31, 2003 $349,711 $32,289,744 $23,920,381 $1,890,419 ($2,212,880) ($708,032) ($8,655,423) $46,873,920
======== =========== =========== ========== =========== ========= =========== ===========
See accompanying notes to the unaudited consolidated financial statements.
6
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months ended March 31,
2003 2002
------------ ------------
OPERATING ACTIVITIES
Net income $ 651,824 $ 662,068
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 190,000 180,000
Depreciation, amortization and accretion 151,148 169,282
Amortization of discounts, premiums and
loan origination fees 408,299 284,729
Gains on sale of investment securities, net (176,144) (5,399)
Increase in accrued interest receivable (239,017) (218,807)
Increase in accrued interest payable 148,701 156,196
Amortization of ESOP unearned compensation 100,025 78,030
Amortization of RSP unearned compensation 63,126 14,317
Other, net (41,243) 15,998
------------ ------------
Net cash provided by operating activities 1,256,719 1,336,414
------------ ------------
INVESTING ACTIVITIES
Investment and mortgage-backed securities available for sale:
Proceeds from sales 1,322,391 74,999
Proceeds from maturities and principal repayments 15,555,827 5,249,577
Purchases (1,215,825) (26,560,640)
Investment and mortgage-backed securities held to maturity:
Proceeds from maturities and principal repayments 15,290,652 7,585,020
Purchases (25,366,693) (15,695,819)
Increase in loans receivable, net (1,876,150) (5,975,510)
Proceeds from sale of repossessed assets 127,179 84,586
Purchase of premises and equipment (49,320) (122,329)
Purchase of Federal Home Loan Bank Stock (254,000) (401,500)
------------ ------------
Net cash provided by (used for) investing activities 3,534,061 (35,761,616)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 5,043,681 5,244,596
Advances from Federal Home Loan Bank - 10,000,000
Repayment of Advances from Federal Home Loan Bank (4,750,000) (1,000,000)
Treasury stock purchased (1,843,968) -
Cash dividends paid (302,575) (279,769)
Common stock acquired by RSP (847,726) -
------------ ------------
Net cash provided by (used for) financing activities (2,700,588) 13,964,827
------------ ------------
Increase (decrease) in cash and cash equivalents 2,090,192 (20,460,375)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,221,969 34,183,348
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,312,161 $ 13,722,973
============ ============
See accompanying notes to the unaudited consolidated financial statements.
7
PHSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of PHSB Financial Corporation (the
"Company") include its wholly-owned subsidiary, Peoples Home Savings Bank (the
"Bank") and the Bank's wholly-owned subsidiary, HOMECO (the "Subsidiary"). All
significant intercompany balances and transactions have been eliminated. The
Company's business is conducted principally through the Bank.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions to Form 10-Q and, therefore, do not necessarily
include all information which would be included in audited financial statements.
The information furnished reflects all normal recurring adjustments which are,
in the opinion of management, necessary for the fair statement of the results of
the period. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year or any
other future period. The unaudited consolidated financial statements should be
read in conjunction with Form 10-KSB for the year ended December 31, 2002.
Recent Accounting Standards
In August 2001, the Financial Accounting Standards Board ("FASB") issued FAS No.
143, Accounting for Asset Retirement Obligations, which requires that the fair
value of a liability be recognized when incurred for the retirement of a
long-lived asset and the value of the asset be increased by that amount. The
statement also requires that the liability be maintained at its present value in
subsequent periods and outlines certain disclosures for such obligations. The
adoption of this statement, which was effective January 1, 2003, did not have a
material effect on the Company's financial position or results of operations.
In April 2002, the FASB issued FAS No. 145, Rescission of FASB Statement No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. FAS
No. 145 rescinds FAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the criteria
in APB Opinion No. 30 will now be used to classify those gains and losses. This
statement also amends FAS No. 13 to require that certain lease modifications
that have economic effects similar to sale-leaseback transactions be accounted
for in the same manner as sale-leaseback transactions. This statement also makes
technical corrections to existing pronouncements, which are not substantive but
in some cases may change accounting practice. The provisions of this statement
related to the rescission of FAS No. 4 shall be applied in fiscal years
beginning after May 15, 2002. Any gain or loss on extinguishments of debt that
was classified as an extraordinary item in prior periods presented that does not
meet the criteria in APB Opinion No. 30 for classification as an extraordinary
item shall be reclassified. Early adoption of the provisions of this statement
related to FAS No. 13 shall be effective for transactions occurring after May
15, 2002. All other provisions of this statement shall be effective for
financial statements issued on or after May 15, 2002. The adoption of this
statement did not have a material effect on the Company's financial position or
results of operations.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which requires companies to recognize costs
associated with exit or disposal activities when
8
they are incurred rather than at the date of a commitment to an exit or disposal
plan. This statement replaces EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring). The new statement is
effective for exit or disposal activities initiated after December 31, 2002. The
adoption of this statement did not have a material effect on the Company's
financial position or results of operations. On December 31, 2002, the FASB
issued FAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, which amends FAS No. 123, Accounting for Stock-Based Compensation.
FAS No. 148 amends the disclosure requirements of FAS No. 123 to require more
prominent and more frequent disclosures in financial statements about the
effects of stock-based compensation. Under the provisions of FAS No. 123,
companies that adopted the preferable, fair value based method were required to
apply that method prospectively for new stock option awards. This contributed to
a "ramp- up" effect on stock-based compensation expense in the first few years
following adoption, which caused concern for companies and investors because of
the lack of consistency in reported results. To address that concern, FAS No.
148 provides two additional methods of transition that reflect an entity's full
complement of stock-based compensation expense immediately upon adoption,
thereby eliminating the ramp-up effect. FAS No. 148 also improves the clarity
and prominence of disclosures about the pro forma effects of using the fair
value based method of accounting for stock-based compensation for all
companies--regardless of the accounting method used--by requiring that the data
be presented more prominently and in a more user-friendly format in the
footnotes to the financial statements. In addition, the statement improves the
timeliness of those disclosures by requiring that this information be included
in interim as well as annual financial statements. The transition guidance and
annual disclosure provisions of FAS No. 148 are effective for fiscal years
ending after December 15, 2002, with earlier application permitted in certain
circumstances. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002.
The following table represents the effect on net income and earnings per share
had the stock-based employee compensation expense been recognized:
Three months ended, March 31,
2003 2002
------------- -----------
Net income as reported $651,824 $662,068
Less pro forma expense related to options 36,844 46,840
------------- -----------
Pro forma net income $614,980 $615,228
============= ===========
Basic net income per common share:
As reported $ 0.24 $ 0.20
Pro forma 0.22 0.19
Diluted net income per common share:
As reported $ 0.23 $ 0.20
Pro forma 0.22 0.19
In April, 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under FAS
No. 133. The amendments set forth in FAS No. 149 improve financial reporting by
requiring that contracts with comparable characteristics be accounted for
similarly. In particular, this statement clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative
as discussed in FAS No. 133. In addition, it clarifies when a derivative
contains a financing component that warrants special reporting in the statement
of cash flows. FAS No. 149 amends certain other existing
9
pronouncements. Those changes will result in more consistent reporting of
contracts that are derivatives in their entirety or that contain embedded
derivatives that warrant separate accounting. This statement is effective for
contracts entered into or modified after June 30, 2003, except as stated below
and for hedging relationships designated after June 30, 2003. The guidance
should be applied prospectively. The provisions of this statement that relate to
FAS No. 133 Implementation Issues that have been effective for fiscal quarters
that began prior to June 15, 2003, should continue to be applied in accordance
with their respective effective dates. In addition, certain provisions relating
to forward purchases or sales of when- issued securities or other securities
that do not yet exist, should be applied to existing contracts as well as new
contracts entered into after June 30, 2003.
In November, 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. This interpretation
clarifies that a guarantor is required to disclose (a) the nature of the
guarantee, including the approximate term of the guarantee, how the guarantee
arose, and the events or circumstances that would require the guarantor to
perform under the guarantee; (b) the maximum potential amount of future payments
under the guarantee; (c) the carrying amount of the liability, if any, for the
guarantor's obligations under the guarantee; and (d) the nature and extent of
any recourse provisions or available collateral that would enable the guarantor
to recover the amounts paid under the guarantee. This interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the obligations it has undertaken in issuing the
guarantee, including its ongoing obligation to stand ready to perform over the
term of the guarantee in the event that the specified triggering events or
conditions occur. The objective of the initial measurement of that liability is
the fair value of the guarantee at its inception. The initial recognition and
initial measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
irrespective of the guarantor's fiscal year-end. The disclosure requirements in
this interpretation are effective for financial statements of interim or annual
periods ending after December 15, 2002. The adoption of this interpretation did
not have a material effect on the Company's financial position or results of
operations.
In January, 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, in an effort to expand upon and strengthen existing
accounting guidance that addresses when a company should include in its
financial statements the assets, liabilities and activities of another entity.
The objective of this interpretation is not to restrict the use of variable
interest entities but to improve financial reporting by companies involved with
variable interest entities. Until now, one company generally has included
another entity in its consolidated financial statements only if it controlled
the entity through voting interests. This interpretation changes that by
requiring a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. The consolidation requirements of this interpretation apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The adoption of
this statement has not and is not expected to have a material effect on the
Company's financial position or results of operations.
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.
10
For the three months ended March 31, 2003 and 2002, the Company made cash
payments for interest of $2,190,000 and $2,214,000 respectively. The Company
also made cash payments for income taxes of $37,000 and $37,000 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."
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, risks associated with the effect of opening a new
branch, the ability to control costs and expenses, and general economic
conditions.
On July 30, 2002 the President signed into law the Sarbanes-Oxley Act of 2002
(the Act@). The Securities and Exchange Commission (the "SEC") has promulgated
new regulations pursuant to the Act, and additional regulations are expected to
be promulgated by the SEC. As a result of the accounting restatements by large
public companies, the passage of the Act and regulations implemented by the SEC,
publicly-registered companies, such as the Company, are subject to additional
and more cumbersome reporting regulations and disclosure. These new regulations,
which are intended to curtail corporate fraud, require certain officers to
personally certify certain SEC filings and financial statements and require
additional measures to be taken by our outside auditors, officers and directors.
The loss of investor confidence in the stock market and the new laws and
regulations may increase noninterest expenses of the Company and could adversely
affect the prices of publicly-traded stocks, such as the Company.
On December 20, 2001, PHSB Financial Corporation (the "Company") completed its
second step conversion from a mutual holding company structure to a full stock
company. As part of the mutual holding company reorganization, the shares
formerly held by the mutual holding company were cancelled, the Company sold
2,201,191 new shares to the public and the publicly held shares of PHS Bancorp,
Inc., the former middle tier holding company, were exchanged for 1,295,918
shares of the Company.
Financial Condition
Total assets at March 31, 2003 of $343.5 million represented a decrease of $2.0
million or 0.6% from December 31, 2002. This decrease was primarily due to a
decrease in securities of $6.0 million, partially offset by decreases in cash
and interest bearing deposits of $2.1 million and loans , net of allowance of
$1.3 million.
At March 31, 2003, investment securities (available for sale and held to
maturity) decreased $13.6 million to $32.9 million from $46.5 million at
December 31, 2002. Mortgage-backed securities (available for sale and held to
maturity) increased $7.6 million to $122.1 million at March 31, 2003 from $114.5
million at December 31, 2002. The total decrease of $6.0 million to the
investment and mortgage-backed securities portfolios (available for sale and
held to maturity) was the result of sales of $1.3 million, maturities of $15.6
million, and principal repayments of $15.3 million, partially offset by
purchases of $26.6 million.
Loans receivable,net at March 31, 2003, of $167.0 million represented an
increase of $1.3 million from $165.7 million at December 31, 2002. The increase
in the loan portfolio was primarily attributable to automobile and commercial
lending.
12
Total deposits after interest credited at March 31, 2003 were $237.4 million, an
increase of $5.0 million or 2.2% from $232.4 million at December 31, 2002.
Advances from the Federal Home Loan Bank of Pittsburgh decreased $4.7 million to
$56.3 million at March 31, 2003 from $61.0 million at December 31, 2002.
Stockholders' equity decreased $2.5 million for the three month period ended
March 31, 2003. This decrease was due to treasury stock and restricted stock
purchases of $1.8 million and $848,000 along with decreased accumulated other
comprehensive income of $307,000 and cash dividends paid of $303,000. These
decreases to stockholders' equity were partially offset by net income of
$652,000 along with decreases in unallocated ESOP and RSP shares of $100,000 and
$63,000 respectively.
Results of Operations
Comparison of Operating Results for the Three Months Ended March 31, 2003 and
March 31, 2002.
General.
Net income for the three months ended March 31, 2003 decreased by $10,000 to
$652,000, from $662,000 for the three months ended March 31, 2002. This decrease
was primarily due to decreased net interest income of $81,000 along with
increases in provisions for loan losses and noninterest expense of $10,000 and
$184,000, respectively. These decreases to net income were partially offset by
increased noninterest income of $197,000 and a decrease in income tax provisions
of $68,000.
Net Interest Income.
Reported net interest income decreased $81,000 or 3.2% for the three months
ended March 31, 2003. Net interest income on a tax equivalent basis decreased by
$22,000 or 0.8% in a period when both average interest earning assets and
average interest-bearing liabilities increased (increased $21.7 million and
$25.5 million, respectively). The Company's net interest rate spread on a tax
equivalent basis decreased 13 basis points to 2.81% for the three months ended
March 31, 2003.
Interest Income.
Reported interest income decreased $114,000 to $4.8 million for the quarter
ended March 31, 2003, from $4.9 million for the first quarter of 2002. Interest
income on a tax equivalent basis totaled $5.0 million for the three months ended
March 31, 2003, a decrease of $55,000 or 1.1% from $5.1 million for the three
months ended March 31, 2002. This decrease was primarily due to a 49 basis point
decrease in the yield earned, partially offset by an increase in the Company's
average interest-earning assets of $21.7 million for the three months ended
March 31, 2003. Interest earned on loans increased $296,000 or 10.7%, in 2003.
This increase was due to a $25.1 million increase in the average balance of
loans partially offset by a 44 basis point decrease in the yield earned.
Interest earned on interest-bearing deposits and investment and mortgage-backed
securities (including securities held for sale) decreased $351,000 or 15.1%, in
2003. This decrease was due to a decrease in the average balance of securities
of $3.4 million along with a 73 basis point decrease in the yield earned.
Interest Expense.
Interest expense decreased $32,000 to $2.3 million for the three months ended
March 31, 2003. The decrease in interest expense was due to a 36 basis point
decrease in the average cost of interest-bearing liabilities to 3.21% partially
offset by a $25.5 million increase in the average balance of interest-bearing
13
liabilities. The $25.5 million increase in the average balance of
interest-bearing liabilities was the result of increased average deposits of
$22.4 million and increased average borrowings of $3.1 million.
Provision for Losses on Loans.
The provision for loan losses is charged to operations to bring the total
allowance for loan losses to a level that represents management's best estimates
of the losses inherent in the portfolio, based on:
o historical experience;
o volume;
o type of lending conducted by the Bank;
o industry standards;
o the level and status of past due and non-performing loans;
o the general economic conditions in the Bank's lending area; and
o other factors affecting the collectibility of the loans in its portfolio.
The provision for loan losses increased by $10,000 to $190,000 for the three
months ended March 31, 2003, from $180,000 for the three months ended March 31,
2002. An increase in total loans as well as an increase in non-performing loans
precipitated the increase in the provision for loan losses. At both March 31,
2003 and December 31, 2002 the allowance for loan losses represented 1.01% of
loans. See "Risk Elements."
Noninterest Income.
Total noninterest income increased $197,000 to $430,000 for the three months
ended March 31, 2003, from $233,000 for the three months ended March 31, 2002.
This increase was primarily due to increased investment security gains of
$171,000 from $5,000 for the three months ended March 31, 2002 to $176,000 for
the three months ended March 31, 2003.
Noninterest Expense.
Noninterest expense increased $184,000 to $1,873,000 for the three months ended
March 31, 2003, from $1,689,000 for the three months ended March 31, 2002. This
increase was primarily due to increased compensation and employee benefits of
$155,000 which was primarily the result of normal merit increases along with
increased RSP expense as a result of the 2002 RSP plan which was ratified by the
Company's stockholders at a special meeting of stockholders on December 23,
2002.
14
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 March 31, 2003, the Bank had
borrowed $56.3 million of it's $155.8 million maximum borrowing capacity with a
remaining borrowing capacity of approximately $99.5 million. Additional sources
of liquidity can be found in the Company's balance sheet, such as investment
securities and unencumbered mortgage-backed securities that are readily
marketable. Management believes that the Company has adequate resources to fund
all of its commitments.
Regulatory Capital Requirements
At March 31, 2003, the Bank's Tier I risk-based and total risk-based capital
ratios were 24.5% and 25.6%, respectively. Current regulations require Tier I
risk-based capital of 6% and total risk - based capital of 10% risk-based assets
to be considered well capitalized. The Bank's leverage ratio was 11.5% at March
31, 2003. Current regulations require a leveraged ratio 5% to be considered well
capitalized.
15
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 March 31, 2003 and December 31, 2002. A loan is classified as
nonaccrual when, in the opinion of management, there are serious doubts about
collectibility of interest and principal. At the time the accrual of interest is
discontinued, future income is recognized only when cash is received.
The allowance for loan losses was 278.4% of total non-performing assets at March
31, 2003 and 379.3% at December 31, 2002.
March 31, December 31,
2003 2002
---- ----
(Dollars in Thousands)
Loans on nonaccrual basis $557 $371
Loans past due 90 days or more 55 47
---- ----
Total non-performing loans 612 418
---- ----
Real estate owned 0 25
---- ----
Total non-performing assets $612 $443
==== ====
Total non-performing loans to
total loans 0.36% 0.25%
==== ====
Total non-performing loans to
total assets 0.18% 0.12%
==== ====
Total non-performing assets to
total assets 0.18% 0.13%
==== ====
16
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 inherently generally possess a higher credit risk than
residential mortgage loans, the Company has designed its underwriting standards
to minimize this risk as much as possible.
The Company also makes a significant effort to maintain its level of lower costs
deposits as a method of enhancing profitability. The Company has traditionally
had a high level of low-cost passbook, interest-bearing checking (NOW) and Money
Market Demand Accounts. Although its base of such deposits has increased as a
result of the current interest rate environment, such deposits have
traditionally remained relatively stable and would be expected to reduce to
normal levels in a period of rising interest rates. Because of this relative
stability in a significant portion of its deposits, the Company has been able to
offset the impact of rising rates in other deposit accounts.
Exposure to interest rate risk is actively monitored by management. The
Company's objective is to maintain a consistent level of profitability within
acceptable risk tolerances across a broad range of potential interest rate
environments. The Company uses the Olson Research Associates, Inc.'s, Columbia,
Maryland, A/L Benchmarks to monitor its exposure to interest rate risk, which
calculates changes in market value of portfolio equity and net interest income.
Reports generated from assumptions provided by Olson and modified by management
are reviewed by the Interest Rate Risk and Asset Liability Management Committee
and reported to the Board of Directors quarterly. The Balance Sheet Shock Report
shows the degree to which balance sheet line items and the market value of
portfolio equity are potentially affected by a 200 basis point upward and
downward parallel shift (shock) in the Treasury yield curve. Exception tests are
conducted as recommended under federal law to determine if the bank qualifies as
low risk and may therefore be exempt from supplemental reporting. In addition,
the possible impact on risk-based capital is assessed using the methodology
under the Federal Deposit Insurance Corporation Improvement Act. An Income Shock
Report shows the degree to which income statement line items and net income are
potentially affected by a 200 basis point upward and downward parallel shift in
the Treasury yield curve.
From analysis and discussion of the aforementioned reports as of March 31, 2003,
management has assessed that the Bank's level of interest rate risk is
appropriate for current market conditions. The percentage change in market value
of the portfolio equity for an upward and downward shift of 200 basis points are
(19.02)% and 17.51%, respectively. Net interest income decreased by $96,000 or
0.9% for a downward shift in rates of 200 basis points and decreased by $224,000
or 2.2%, for an upward shift of
17
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 25.55 % and 20.55% 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 as of a date within 90 days of the filing date of this Quarterly
Report on Form 10-Q, the Registrant's principal executive officer and principal
financial officer have concluded that the Registrant's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal controls. There were no significant changes in
----------------------------
the Registrant's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
18
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in rights of the Company's Security holders.
None.
Item 3. Defaults by the Company on its senior securities.
None.
Item 4. Results of Votes of Security Holders.
On April 24, 2003, the Company held its annual meeting of stockholders and the
following items were presented:
Election of Directors John C. Kelly and John M. Rowse. for terms of
three years ending in 2006. Mr. Kelly received 2,574,929 votes in
favor and 38,002 votes were withheld.. Mr. Rowse received 2,575,913
votes in favor and 37,018 votes were withheld.
Ratification of the appointment of S.R. Snodgrass, A.C. as the
Company's independent accountants for the 2003 fiscal year with
2,595,142 votes for, 12,115 votes against, and 5,674 abstentions.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8 - K.
(h) The following exhibits are filed as part of thi report.
3.1 Articles of Incorporation of PHSB Financial Corporation*
3.2 Bylaws of PHSB Financial Corporation*
4.0 Specimen Stock Certificate of PHSB Financial Corporation*
10.1 Employment Agreement between Peoples Home Savings Bank and
James P. Wetzel, Jr.*
10.2 1998 Restricted Stock Plan**
10.3 1998 Stock Option Plan**
10.4 Employment Agreement between Peoples Home Savings Bank and
Richard E. Canonge***
10.5 2002 Stock Option Plan****
10.6 2002 Restricted Stock Plan****
99.0 Review Report of Independent Accountants
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
19
- ------------
* 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 Annua 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 February 3, 2003, PHSB Financial Corporation filed a form 8-K to report
under "Item 5. Other Events" that PHSB Financial Corporation issued a press
release as a correction to it's January 15, 2003 earnings release.
On April 11, 2003, PHSB Financial Corporation filed a form 8-K to report
under "Item 9. Regulation FD Disclosure" that PHSB Financial Corporatio
issued a press release to report earnings for the quarter ended 3/31/2003
and to announce a quarterly dividend.
20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Ac of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2003
PHSB Financial Corporation
- --------------------------
(Registrant)
By:/s/James P. Wetzel, Jr.
-----------------------
James P. Wetzel, Jr.
President and Chief Executive Officer
By:/s/Richard E. Canonge
- ------------------------
Richard E. Canonge
Chief Financial Officer and Treasurer
21
SECTION 302 CERTIFICATION
I, James P. Wetzel, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of PHSB Financial
Corporation,;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedure to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
22
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/James P. Wetzel, Jr.
----------------------------------------
James P. Wetzel, Jr.
President and Chief Executive Officer
23
SECTION 302 CERTIFICATION
I, Richard E. Canonge, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PHSB Financial
Corporation,;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedure to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
24
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/Richard E. Canonge
-------------------------------------
Richard E. Canonge
Chief Financial Officer and Treasurer
25