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, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
SEC File Number 0-33419
PHSB FINANCIAL CORPORATION
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA 25-1894708
- ------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
744 SHENANGO ROAD
P.O. BOX 1568
BEAVER FALLS, PENNSYLVANIA 15010
(724) 846-7300
----------------------------------
(Address, including zip code, and
telephone number, including area
code of Principal Executive Offices)
Indicate by check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirement for the past 90 days. Yes [X] No
[ ]
Indicate by check whether the issuer is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 10, 2004 there were 2,903,353 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, 2004
and December 31, 2003 3
Consolidated Statement of Income (unaudited) for the Three
Months ended March 31, 2004 and 2003 4
Consolidated Statement of Comprehensive Income (unaudited)
for the Three Months ended March 31, 2004 and 2003 5
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the Three Months ended March 31, 2004 6
Consolidated Statement of Cash Flows (unaudited) for the
Three Months ended March 31, 2004 and 2003 7
Notes to (unaudited) Consolidated Financial Statements 8 - 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11 - 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 16
ITEM 4. CONTROLS AND PROCEDURES 17
PART II OTHER INFORMATION 18 - 19
SIGNATURES 20
2
PHSB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, December 31,
2004 2003
------------- -------------
ASSETS
Cash and amounts due from other institutions $ 5,310,474 $ 6,795,068
Interest-bearing deposits with other institutions 6,186,671 753,727
------------- -------------
Cash and cash equivalents 11,497,145 7,548,795
Investment securities:
Available for sale 31,559,171 28,718,832
Held to maturity (market value $ 7,810,451
and $8,203,053) 7,582,772 7,952,211
Mortgage - backed securities:
Available for sale 78,082,148 75,910,915
Held to maturity (market value $ 51,863,331
and $56,194,217) 51,297,334 55,843,363
Loans (net of allowance for loan losses of $1,607,804
and $1,647,886) 149,727,759 153,584,123
Accrued interest receivable 1,767,360 1,573,295
Premises and equipment 4,167,653 4,227,498
Federal Home Loan Bank stock 3,525,400 3,606,600
Other assets 2,475,635 1,003,979
------------- -------------
TOTAL ASSETS $ 341,682,377 $ 339,969,611
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 235,709,001 $ 231,519,432
Advances from Federal Home Loan Bank 55,130,000 58,880,000
Accrued interest payable and other liabilities 3,553,880 2,920,291
------------- -------------
Total liabilities 294,392,881 293,319,723
------------- -------------
Preferred stock, 20,000,000 shares authorized, none issued -- --
Common stock, $.10 par value 80,000,000 shares authorized,
3,519,711 shares issued 351,971 351,971
Additional paid in capital 32,818,599 32,750,510
Retained earnings -- substantially restricted 24,128,335 23,857,117
Accumulated other comprehensive income 1,714,794 1,540,849
Unallocated ESOP shares (184,790 and 190,751 shares) (1,959,956) (2,023,187)
Unallocated RSP shares (29,370 and 33,440 shares) (455,529) (518,654)
Treasury stock, at cost ( 616,358 shares) (9,308,718) (9,308,718)
------------- -------------
Total stockholders' equity 47,289,496 46,649,888
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 341,682,377 $ 339,969,611
============= =============
See accompanying notes to the unaudited consolidated financial statements.
3
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended March 31,
2004 2003
---------- ----------
INTEREST AND DIVIDEND INCOME
Loans:
Taxable $2,183,818 $2,600,235
Exempt from federal income tax 227,230 310,414
Investment securities:
Taxable 210,004 238,908
Exempt from federal income tax 73,480 188,596
Mortgage - backed securities 1,468,529 1,440,659
Interest - bearing deposits with other institutions 9,495 10,169
---------- ----------
Total interest and dividend income 4,172,556 4,788,981
---------- ----------
INTEREST EXPENSE
Deposits 1,242,037 1,601,447
Advances from Federal Home Loan Bank 729,288 736,841
---------- ----------
Total interest expense 1,971,325 2,338,288
---------- ----------
Net interest income 2,201,231 2,450,693
PROVISION FOR LOAN LOSSES 120,000 190,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,081,231 2,260,693
---------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 184,337 160,220
Investment securities gains, net 804,162 176,144
Rental income, net 26,020 25,500
Other income 38,462 68,381
---------- ----------
Total noninterest income 1,052,981 430,245
---------- ----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,120,771 1,064,011
Occupancy and equipment costs 344,725 358,918
Data processing costs 42,645 48,010
Other expenses 408,183 402,175
---------- ----------
Total noninterest expense 1,916,324 1,873,114
---------- ----------
Income before income taxes 1,217,888 817,824
Income taxes 366,000 166,000
---------- ----------
NET INCOME $ 851,888 $ 651,824
========== ==========
Earnings Per Share
Basic $ 0.32 $ 0.24
Diluted $ 0.30 $ 0.23
Weighted average number of shares outstanding
Basic 2,682,616 2,746,632
Diluted 2,805,551 2,823,985
See accompanying notes to the unaudited consolidated financial statements.
4
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 31,
2004 2003
------------------------- -------------------------
Net Income $ 851,888 $ 651,824
Other comprehensive income (loss):
Unrealized gain (loss) on available for sale securities $ 1,067,715 $ (288,944)
Less: Reclassification adjustment for gain included in net income (804,162) (176,144)
------------------------- -------------------------
Other comprehensive income (loss) before tax 263,553 (465,088)
Income tax expense (benefit) related to other comprehensive loss 89,608 (158,130)
----------- -----------
Other comprehensive income (loss), net of tax 173,945 (306,958)
----------- -----------
Comprehensive income $ 1,025,833 $ 344,866
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
5
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED)
Accumulated
Additional Other Unallocated
Common Paid in Retained Comprehensive Shares Held
Stock Capital Earnings Income by ESOP
--------- ------------ ------------ ----------- -----------
Balance, December 31, 2003 $ 351,971 $ 32,750,510 $ 23,857,117 $ 1,540,849 $(2,023,187)
Net Income 851,888
Other comprehensive income:
Unrealized gain on available
for sale securities, net of tax 173,945
Comprehensive income
Cash dividends paid ($0.20 per share) (580,670)
ESOP shares earned 68,089 63,231
RSP shares earned
--------- ------------ ------------ ----------- -----------
Balance, March 31, 2004 $ 351,971 $ 32,818,599 $ 24,128,335 $ 1,714,794 $(1,959,956)
========= ============ ============ =========== ===========
Unallocated Total
Shares Held Treasury Stockholders' Comprehensive
by RSP Stock Equity Income
---------- ------------ ------------- -------------
Balance, December 31, 2003 $(518,654) $(9,308,718) $ 46,649,888
Net Income 851,888 $ 851,888
Other comprehensive income:
Unrealized gain on available
for sale securities, net of tax 173,945 173,945
----------
Comprehensive income $1,025,833
==========
Cash dividends paid ($0.20 per share) (580,670)
ESOP shares earned 131,320
RSP shares earned 63,125 63,125
--------- ----------- -------------
Balance, March 31, 2004 $(455,529) $(9,308,718) $ 47,289,496
========= =========== ============
See accompanying notes to the unaudited consolidated financial statements.
6
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Three Months ended March 31,
2004 2003
------------ -----------
OPERATING ACTIVITIES
Net income $ 851,888 $ 651,824
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 120,000 190,000
Depreciation, amortization and accretion 111,375 151,148
Amortization of discounts, premiums and
loan origination fees 372,297 408,299
Gains on sale of investment securities, net (804,162) (176,144)
Increase in accrued interest receivable (194,065) (239,017)
Increase in accrued interest payable 140,769 148,701
Amortization of ESOP unearned compensation 131,320 100,025
Amortization of RSP unearned compensation 63,125 63,126
Other, net 247,720 (41,243)
------------ -----------
Net cash provided by operating activities 1,040,267 1,256,719
------------ -----------
INVESTING ACTIVITIES
Investment and mortgage-backed securities available for sale:
Proceeds from sales 4,428,491 1,322,391
Proceeds from maturities and principal repayments 11,560,077 15,555,827
Purchases (19,966,700) (1,215,825)
Investment and mortgage-backed securities held to maturity:
Proceeds from maturities and principal repayments 4,836,485 15,290,652
Purchases -- (25,366,693)
Investment in Subsidiary (1,450,464) --
Decrease (Increase) in loans receivable, net 3,506,490 (1,876,150)
Proceeds from sale of repossessed assets 105,135 127,179
Purchase of premises and equipment (51,530) (49,320)
Redemption (Purchase) of Federal Home Loan Bank Stock 81,200 (254,000)
------------ -----------
Net cash provided by (used for) investing activities 3,049,184 3,534,061
------------ -----------
FINANCING ACTIVITIES
Net increase in deposits 4,189,569 5,043,681
Repayment of Advances from Federal Home Loan Bank (3,750,000) (4,750,000)
Treasury stock purchased -- (1,843,968)
Cash dividends paid (580,670) (302,575)
Common stock acquired by RSP -- (847,726)
------------ -----------
Net cash used for financing activities (141,101) (2,700,588)
------------ -----------
Increase in cash and cash equivalents 3,948,350 2,090,192
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,548,795 8,221,969
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,497,145 $ 10,312,161
============ ===========
See accompanying notes to the unaudited consolidated financial statements.
7
PHSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of PHSB Financial Corporation (the
"Company") include its wholly-owned subsidiary, Peoples Home Savings Bank (the
"Bank") and the Bank's wholly-owned subsidiary, HOMECO (the "Subsidiary"). All
significant intercompany balances and transactions have been eliminated. The
Company's business is conducted principally through the Bank.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions to Form 10-Q and, therefore, do not necessarily
include all information which would be included in audited financial statements.
The information furnished reflects all normal recurring adjustments which are,
in the opinion of management, necessary for the fair statement of the results of
the period. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year or any
other future period. The unaudited consolidated financial statements should be
read in conjunction with Form 10-K for the year ended December 31, 2003.
RECENT ACCOUNTING STANDARDS
In December 2003, the FASB issued a revision to Interpretation 46, Consolidation
of Variable Interest Entities, which established standards for identifying a
variable interest entity (VIE) and for determining under what circumstances a
VIE should be consolidated with its primary beneficiary. Application of this
Interpretation is required in financial statements of public entities that have
interests in special-purpose entities for periods ending after December 15,
2003. Application by public entities, other than small business issuers, for all
other types of VIEs is required in financial statements for periods ending after
March 15, 2004. Small business issuers must apply this Interpretation to all
other types of VIEs at the end of the first reporting period ending after
December 15, 2004. The adoption of this interpretation has not and is not
expected to have a material effect on the Company's financial position or
results of operations.
CASH FLOW INFORMATION
The Company has defined cash and cash equivalents as cash and amounts due from
depository institutions and interest-bearing deposits with other institutions.
For the three months ended March 31, 2004 and 2003, the Company made cash
payments for interest of $1,831,000 and $2,190,000 respectively. The Company
also made cash payments for income taxes of $65,000 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'
8
Accounting for Stock Ownership Plans." The following table sets forth the
composition of the weighted average common shares (denominator) used in the
basic and diluted earnings per share computation.
Three months ended March 31,
2004 2003
---- ----
Weighted average common stock outstanding 3,298,974 3,267,868
Average treasury stock (616,358) (521,236)
--------- ---------
Weighted average common stock and common stock
equivalents used to calculate basic earnings per share 2,682,616 2,746,632
Additional common stock equivalents (stock options) used to
calculate diluted earnings per share 122,935 77,353
--------- ---------
Weighted average common stock and common stock
equivalents used to calculate diluted earnings per share 2,805,551 2,823,985
========= ---------
NOTE 3 - ACCOUNTING FOR STOCK BASED COMPENSATION
The Company does not recognize certain stock-based employee compensation in the
financial statements. The following table represents the effect on net income
and earnings per share had the stock-based employee compensation expense been
recognized:
Three months ended March 31,
2004 2003
----------- ----------
Net income as reported $ 851,888 $ 651,824
Less pro forma expense related to options 20,322 36,844
----------- ----------
Pro forma net income 831,566 614,980
=========== ==========
Basic net income per common share:
As reported $ 0.32 $ 0.24
Pro forma 0.30 0.22
Diluted net income per common share:
As reported $ 0.30 $ 0.23
Pro forma 0.30 0.22
NOTE 4 - NET PERIODIC BENEFIT COST - DEFINED BENEFIT PLANS
For a detailed disclosure on the Company's pension and employee benefits plans,
please refer to Note 13 of the Company's Consolidated Financial Statements
included in the 2003 Annual Report on Form 10-K.
The following sets forth the components of net periodic benefit cost of the
trusteed, non-contributory defined benefit pension plan for the three months
ended March 31, 2004.
9
INTERIM NET PERIODIC PENSION COST FOR THE THREE MONTHS ENDED MARCH 31, 2004
Service Costs $70,408
Interest Cost 98,048
Expected Return on Plan Assets (94,374)
Amortization of Net Transition Asset (5,203)
Amortization of Prior Service Cost 0
Amortization of Net Loss 8,257
-------
Net Periodic Pension Cost $77,136
=======
EMPLOYER CONTRIBUTIONS
The Company previously disclosed in its financial statements for the year ended
December 31, 2003, that it expected to contribute $308,544 to its pension plan
in 2004. As of March 31, 2004, total contributions of $345,445 have been made
and there are no anticipated statutory funding requirements for the remainder of
2004.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Private Securities Reform Litigation Act of 1995 contains safe harbor
provisions regarding forward- looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, the ability to control costs and expenses, and
general economic conditions.
FINANCIAL CONDITION
Total assets at March 31, 2004 of $341.7 million represented an increase of $1.7
million or 0.5% from December 31, 2003. This increase was primarily due to
increases in cash and interest-bearing deposits and other assets of $4.0 million
and $1.5 million, respectively. These increases were partially offset by a
decrease in net loans of $3.9 million.
Net loans receivable at March 31, 2004, of $149.7 million represented a decrease
of $3.9 million from $153.6 million at December 31, 2003. The decrease in the
loan portfolio was primarily attributable to a decrease in automobile loans.
Other assets increased $1.5 million to $2.5 million at March 31, 2004 from $1.0
million at December 31, 2003. This increase was primarily due to the Bank's
investment in Beaver Village Apartments Limited Partnership. Beaver Village
Apartments are low income housing units for senior citizens located in Beaver,
Pennsylvania. The Bank anticipates to receive tax credits over a ten year period
beginning in 2004 for its investment in this limited partnership.
Total deposits after interest credited at March 31, 2004 were $235.7 million, an
increase of $4.2 million or 1.8% from $231.5 million at December 31, 2003.
Advances from the Federal Home Loan Bank of Pittsburgh decreased $3.8 million to
$55.1 million at March 31, 2004 from $58.9 million at December 31, 2003.
Stockholders' equity increased $640,000 for the three month period ended March
31, 2004. This increase was due to net income of $852,000 and an increase in
accumulated other comprehensive income of $174,000 along with decreases in
unallocated ESOP and RSP shares of $63,000 and $63,000 respectively. These
increases to stockholders' equity were partially offset by cash dividends paid
of $581,000.
11
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND
MARCH 31, 2003.
GENERAL.
Net income for the three months ended March 31, 2004 increased by $200,000 to
$852,000, from $652,000 for the three months ended March 31, 2003. This increase
was primarily due to an increase in non-interest income of $623,000 along with a
decrease in provisions for loan losses of $70,000. These increases to net income
were partially offset by a decrease in net interest income of $250,000 along
with increases in non- interest expense and income tax provisions of $43,000 and
$200,000, respectively.
NET INTEREST INCOME.
Reported net interest income decreased $250,000 or 10.2% for the three months
ended March 31, 2004. Net interest income on a tax equivalent basis decreased by
$352,000 or 13.0% in a period when both average interest-earning assets and
average interest-bearing liabilities decreased (decreased $2.9 million, or 0.9%,
and $1.7 million, or 0.6%, respectively). The Company's net interest rate spread
on a tax equivalent basis decreased 32 basis points to 2.49% for the three
months ended March 31, 2004 as compared to the first quarter of 2003. The tax
equivalent basis is calculated utilizing the statutory rate of 34%.
INTEREST INCOME.
Reported interest income decreased $616,000 to $4.2 million for the three month
period ended March 31, 2004, from $4.8 million for the first quarter of 2003.
Interest income on a tax equivalent basis totaled $4.3 million for the three
months ended March 31, 2004, a decrease of $719,000, or 14.2%, from $5.0 million
for the three months ended March 31, 2003. This decrease was primarily due to an
81 basis point decrease in the yield earned along with a decrease in the
Company's average interest-earning assets of $2.9 million, or 0.9%, for the
three months ended March 31, 2004. Interest earned on loans decreased $542,000,
or 17.7%, in 2004. This decrease was due to a $14.7 million, or 8.7%, decrease
in the average balance of loans along with a 72 basis point decrease in the
yield earned. Interest earned on interest-bearing deposits and investment and
mortgage-backed securities (including securities available for sale) decreased
$177,000, or 9.0%, in 2004. This decrease was due to a 71 basis point decrease
in the yield earned partially offset by an increase in the average balance of
securities of $11.8 million, or 7.1%.
INTEREST EXPENSE.
Interest expense decreased $367,000 to $2.0 million for the three months ended
March 31, 2004. The decrease in interest expense was due to a 49 basis point
decrease in the average cost of interest-bearing liabilities to 2.72% along with
a $1.7 million, or 0.6%, decrease in the average balance of interest-bearing
liabilities. The $1.7 million, or 0.6% decrease in the average balance of
interest-bearing liabilities was the result of a decrease in average deposits of
$1.0 million, or 0.4% along with a decrease in average borrowings of $0.7
million, or 1.2%.
12
PROVISION FOR LOSSES ON LOANS.
The provision for loan losses is charged to operations to bring the total
allowance for loan losses to a level that represents management's best estimate
of the losses inherent in the portfolio, based on:
o historical experience;
o volume;
o type of lending conducted by the Bank;
o industry standards;
o the level and status of past due and non-performing loans;
o the general economic conditions in the Bank's lending area; and
o other factors affecting the collectibility of the loans in its
portfolio.
The provision for loan losses decreased by $70,000 to $120,000 for the three
months ended March 31, 2004, from $190,000 for the three months ended March 31,
2003. Decreases in loans along with a decrease in non-performing loans
precipitated the decrease in the provision for loan losses. See "Risk Elements."
NONINTEREST INCOME.
Total noninterest income increased $623,000 to $1.1 million for the three months
ended March 31, 2004, from $430,000 for the three months ended March 31, 2003.
This increase was primarily due to an increase in gains on sales of investment
securities of $628,000 from $176,000 for the three months ended March 31, 2003
to $804,000 for the three months ended March 31, 2004. The $628,000 increase in
security gains resulted from management reacting to the opportunities available
to sell securities without significantly impacting the overall effective yield
of the investment portfolio. Management continues to closely monitor the
investment portfolio for other similar opportunities which may become available.
NONINTEREST EXPENSE.
Noninterest expense increased $43,000 to $1,916,000 for the three months ended
March 31, 2004, from $1,873,000 for the three months ended March 31, 2003. This
increase was primarily due to an increase in compensation and employee benefits
of $57,000 which was primarily the result of normal merit increases.
13
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, 2004, the Bank had
borrowed $55.1 million of its $162.6 million maximum borrowing capacity and had
a remaining borrowing capacity of approximately $107.5 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, 2004, the Bank's Tier I risk-based and total risk-based capital
ratios were 23.0% and 24.0%, respectively. Current regulations require Tier I
risk-based capital of 6% and total risk-based capital of 10% of risk-based
assets to be considered well capitalized. The Bank's leverage ratio was 11.3% at
March 31, 2004. Current regulations require a leverage ratio of 5% to be
considered well capitalized.
14
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, 2004 and December 31, 2003. A loan is classified as
nonaccrual when, in the opinion of management, there are serious doubts about
collectibility of interest and principal. At the time the accrual of interest is
discontinued, future income is recognized only when cash is received.
The allowance for loan losses was 583.36% of total non-performing assets at
March 31, 2004 and 377.7% at December 31, 2003.
March 31, December 31,
2004 2003
---- ----
(Dollars in Thousands)
Loans on nonaccrual basis $222 $374
Loans past due 90 days or more 19 27
---- ----
Total non-performing loans 241 401
---- ----
Real estate owned 34 34
---- ----
Total non-performing assets $275 $435
==== ====
Total non-performing loans to
total loans 0.16% 0.26%
==== ====
Total non-performing loans to
total assets 0.07% 0.12%
==== ====
Total non-performing assets to
total assets 0.08% 0.13%
==== ====
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ------------------------------------------------------------------
The Company, like many other financial institutions, is vulnerable to an
increase in interest rates to the extent that interest-bearing liabilities
generally mature or reprice more rapidly than interest-earning assets. The
lending activities of the Company have historically emphasized the origination
of long-term, fixed rate loans secured by single family residences, and the
primary source of funds has been deposits with substantially shorter maturities.
While having interest-bearing liabilities that reprice more frequently than
interest-earning assets is generally beneficial to net interest income during a
period of declining interest rates, such an asset/liability mismatch is
generally detrimental during periods of rising interest rates.
To reduce the effect of interest rate changes on net interest income the Company
has adopted various strategies to enable it to improve matching of
interest-earning asset maturities to interest-bearing liability maturities. The
principal elements of these strategies include: (1) purchasing investment
securities with maturities that match specific deposit maturities; (2)
emphasizing origination of shorter-term consumer loans, which in addition to
offering more rate flexibility, typically bear higher interest rates than
residential mortgage loans; and (3) purchasing adjustable-rate mortgage-backed
securities as well as mortgage-backed securities with balloon payments which
have shorter maturities than typical mortgage-backed securities. Although
consumer loans generally possess an inherently higher credit risk than
residential mortgage loans, the Company has designed its underwriting standards
to minimize this risk as much as possible.
The Company also makes a significant effort to maintain its level of lower costs
deposits as a method of enhancing profitability. The Company has traditionally
had a high level of low-cost passbook, interest-bearing checking (NOW) and Money
Market Demand Accounts. Although its base of such deposits has increased as a
result of the current interest rate environment, such deposits have
traditionally remained relatively stable and would be expected to reduce to
normal levels in a period of rising interest rates. Because of this relative
stability in a significant portion of its deposits, the Company has been able to
offset the impact of rising rates in other deposit accounts.
Exposure to interest rate risk is actively monitored by management. The
Company's objective is to maintain a consistent level of profitability within
acceptable risk tolerances across a broad range of potential interest rate
environments. The Company uses the Olson Research Associates, Inc.'s, Columbia,
Maryland, A/L Benchmarks to monitor its exposure to interest rate risk, which
calculates changes in market value of portfolio equity and net interest income.
Reports generated from assumptions provided by Olson and modified by management
are reviewed by the Interest Rate Risk and Asset Liability Management Committee
and reported to the Board of Directors quarterly. The Balance Sheet Shock Report
shows the degree to which balance sheet line items and the market value of
portfolio equity are potentially affected by a 200 basis point upward and
downward parallel shift (shock) in the Treasury yield curve. Exception tests are
conducted as recommended under federal law to determine if the bank qualifies as
low risk and may therefore be exempt from supplemental reporting. In addition,
the possible impact on risk-based capital is assessed using the methodology
under the Federal Deposit Insurance Corporation Improvement Act. An Income Shock
Report shows the degree to which income statement line items and net income are
potentially affected by a 200 basis point upward and downward parallel shift in
the Treasury yield curve.
From analysis and discussion of the aforementioned reports as of March 31, 2004,
management has assessed that the Bank's level of interest rate risk is
appropriate for current market conditions. The percentage change in market value
of the portfolio equity for an upward and downward shift of 200 basis points are
(22.42)% and 15.27%, respectively. Net interest income decreased by $408,000 or
4.67% for a downward shift in rates of 200 basis points and decreased by
$173,000 or 1.99%, for an upward shift of 200 basis points. Excess Net Interest
Rate Risk was within those limits outlined in the Bank's Asset/Liability
Management and Interest Rate Risk Policy. The Bank's calculated (total)
risk-based capital before the interest rate risk impact was 24.0 % and 19.0%
after the interest rate risk impact. Results fall within policy limits for all
applicable tests.
16
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")),
the Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal control over financial reporting. During the
quarter under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
17
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities.
ISSUER PURCHASES OF EQUITY SECURITIES
- ------------------------------------------------------------------------------------------------------------------
(A) TOTAL (C) TOTAL NUMBER OF (D) MAXIMUM NUMBER (OR
NUMBER OF (B) AVERAGE SHARES (OR UNITS) APPROXIMATE DOLLAR VALUE) OF
SHARES (OR PRICE PAID PURCHASED AS PART OF SHARES (OR UNITS) THAT MAY YET
UNITS) PER SHARE PUBLICLY ANNOUNCED BE PURCHASED UNDER THE PLANS
PERIOD PURCHASED (OR UNIT) PLANS OR PROGRAMS OR PROGRAMS (1)
- ------------------------------------------------------------------------------------------------------------------
January 0 N/A 0 40,222
1-31, 2004
February 0 N/A 0 40,222
1-29, 2004
March 0 N/A 0 40,222
1-31, 2004
0 N/A 0 40,222
Total
- ------------------------------------------------------------------------------------------------------------------
(1) On February 20, 2003 The Company announced that the Board of
Directors has approved a plan to repurchase up to an additional 149,500
of the outstanding shares of the Company. This plan has no stated
expiration date.
Item 3. Defaults by the Company on its senior securities.
None.
Item 4. Results of Votes of Security Holders.
On April 22, 2004, the Company held its annual meeting of stockholders and the
following items were presented:
Election of Directors Douglas K. Brooks and Emlyn Charles. for terms
of three years ending in 2007. Mr. Brooks received 2,418,832 votes in
favor and 33,659 votes were withheld.. Mr. Charles received 2,418,149
votes in favor and 34,342 votes were withheld.
Ratification of the appointment of S.R. Snodgrass, A.C. as the
Company's independent accountants for the 2004 fiscal year with
2,395,028 votes for, 53,313 votes against, and 4,150 abstentions.
Item 5. Other Information.
None.
18
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****
31.0 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.0 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.0 Review Report of Independent Accountants
_______________
* Incorporated by reference to Registrant's Registration Statement on Form
SB-2 initially filed with the Securities and Exchange Commission on
September 10, 2001 (File No. 333- 69180).
** Incorporated by reference to the identically numbered exhibits to PHS
Bancorp, Inc.'s Form 10-Q for the quarter ended September 30, 1998 and
filed with the Securities and Exchange Commission on November 13, 1998
(File No. 0- 23230).
*** Incorporated by reference to Registrant's 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 April 12, 2004, 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 March
31,2004 and to announce a quarterly dividend.
19
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 13, 2004
PHSB Financial Corporation
(Registrant)
By: /s/ James P. Wetzel, Jr.
-------------------------------------
James P. Wetzel, Jr.
President and Chief Executive Officer
By: /s/ Richard E. Canonge
-------------------------------------
Richard E. Canonge
Chief Financial Officer and Treasurer
20