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 September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
SEC File Number 0-33419
-----------------------
PHSB Financial Corporation
--------------------------
(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA 25-1894708
- ------------------------------ ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
744 Shenango Road
P.O. Box 1568
Beaver Falls, Pennsylvania 15010
(724) 846 - 7300
(Address, including zip code, and
telephone number, including area
code of Principal Executive Offices)
Indicate by check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirement for the past 90 days.
Yes [X] No [ ]
Indicate by check whether the issuer is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 1, 2004 there were 2,906,353 shares outstanding of the issuer's
class of common stock.
PHSB FINANCIAL CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
Number
------
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet (unaudited) as of September 30, 2004
and December 31, 2003 3
Consolidated Statement of Income (unaudited) for the Three
and Nine Months ended September 30, 2004 and 2003 4
Consolidated Statement of Comprehensive Income (unaudited)
for the Three and Nine Months ended September 30, 2004 and 2003 5
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the Nine Months ended September 30, 2004 6
Consolidated Statement of Cash Flows (unaudited) for the
Nine Months ended September 30, 2004 and 2003 7
Notes to (unaudited) Consolidated Financial Statements 8 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 17
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Item 4. Controls and Procedures 19
Part II Other Information 20 - 21
Signatures 22
2
PHSB FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
2004 2003
------------- -------------
ASSETS
Cash and amounts due from other institutions $ 5,819,492 $ 6,795,068
Interest-bearing deposits with other institutions 4,549,973 753,727
------------- -------------
Cash and cash equivalents 10,369,465 7,548,795
Investment securities:
Available for sale 17,628,110 28,718,832
Held to maturity (market value $ 6,617,442
and $8,203,053) 6,472,876 7,952,211
Mortgage - backed securities:
Available for sale 102,846,374 75,910,915
Held to maturity (market value $ 38,132,384
and $56,194,217) 38,148,602 55,843,363
Loans (net of allowance for loan losses of $1,538,521
and $1,647,886) 150,025,782 153,584,123
Accrued interest receivable 1,388,172 1,573,295
Premises and equipment 3,986,207 4,227,498
Federal Home Loan Bank stock 3,723,700 3,606,600
Other assets 2,882,775 1,003,979
------------- -------------
TOTAL ASSETS $ 337,472,063 $ 339,969,611
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 234,806,593 $ 231,519,432
Advances from Federal Home Loan Bank 54,130,000 58,880,000
Accrued interest payable and other liabilities 2,207,539 2,920,291
------------- -------------
Total liabilities 291,144,132 293,319,723
------------- -------------
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 32,956,031 32,750,510
Retained earnings - substantially restricted 24,321,467 23,857,117
Accumulated other comprehensive income 169,951 1,540,849
Unallocated ESOP shares (172,868 and 190,751 shares) (1,833,494) (2,023,187)
Unallocated RSP shares (21,230 and 33,440 shares) (329,277) (518,654)
Treasury stock, at cost ( 616,358 shares) (9,308,718) (9,308,718)
------------- -------------
Total stockholders' equity 46,327,931 46,649,888
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 337,472,063 $ 339,969,611
============= =============
See accompanying notes to the unaudited consolidated financial statements.
3
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
Loans:
Taxable $ 2,059,466 $ 2,375,477 $ 6,315,311 $ 7,482,391
Exempt from federal income tax 225,302 190,023 678,533 815,097
Investment securities:
Taxable 238,043 213,809 670,457 656,616
Exempt from federal income tax 35,400 128,671 164,711 466,907
Mortgage - backed securities 1,428,696 1,158,878 4,341,539 3,880,207
Interest - bearing deposits with other institutions 24,634 9,853 42,318 36,090
----------- ----------- ----------- -----------
Total interest and dividend income 4,011,541 4,076,711 12,212,869 13,337,308
----------- ----------- ----------- -----------
INTEREST EXPENSE
Deposits 1,192,765 1,328,128 3,637,912 4,484,958
Advances from Federal Home Loan Bank 708,279 743,667 2,150,572 2,197,886
----------- ----------- ----------- -----------
Total interest expense 1,901,044 2,071,795 5,788,484 6,682,844
----------- ----------- ----------- -----------
Net interest income 2,110,497 2,004,916 6,424,385 6,654,464
PROVISION FOR LOAN LOSSES 90,000 130,000 300,000 500,000
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,020,497 1,874,916 6,124,385 6,154,464
----------- ----------- ----------- -----------
NONINTEREST INCOME
Service charges on deposit accounts 184,544 185,601 564,022 529,904
Investment securities gains, net 492,686 467,814 1,771,647 1,010,778
Rental income, net 10,570 26,400 57,390 77,400
Other income 65,559 73,094 154,885 209,681
----------- ----------- ----------- -----------
Total noninterest income 753,359 752,909 2,547,944 1,827,763
----------- ----------- ----------- -----------
NONINTEREST EXPENSE
Compensation and employee benefits 1,072,051 1,074,589 3,255,083 3,155,376
Occupancy and equipment costs 297,879 301,915 953,057 970,098
Data processing costs 52,090 46,050 138,451 144,717
Other expenses 488,459 394,485 1,295,831 1,230,967
----------- ----------- ----------- -----------
Total noninterest expense 1,910,479 1,817,039 5,642,422 5,501,158
----------- ----------- ----------- -----------
Income before income taxes 863,377 810,786 3,029,907 2,481,069
Income taxes 212,545 223,389 823,545 575,943
----------- ----------- ----------- -----------
NET INCOME $ 650,832 $ 587,397 $ 2,206,362 $ 1,905,126
=========== =========== =========== ===========
Earnings Per Share
Basic $ 0.24 $ 0.22 $ 0.82 $ 0.71
Diluted $ 0.23 $ 0.21 $ 0.78 $ 0.68
Weighted average number of shares outstanding
Basic 2,702,640 2,676,199 2,692,671 2,697,793
Diluted 2,835,327 2,768,214 2,815,179 2,783,525
See accompanying notes to the unaudited consolidated financial statements.
4
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended September 30,
2004 2003
------------------------- ----------------------------
Net Income $ 650,832 $ 587,397
Other comprehensive income:
Unrealized gain (loss) on available for sale securities $ 1,443,675 $ 69,989
Less: Reclassification adjustment for gain included in net income (492,686) (467,814)
------------------------- --------------------------
Other comprehensive income (loss) before tax 950,989 (397,825)
Income tax expense (benefit) related to other comprehensive income (loss) 323,336 (135,261)
---------- -----------
Other comprehensive income (loss), net of tax 627,653 (262,564)
---------- -----------
Comprehensive income $1,278,485 $ 324,833
========== ===========
Nine Months Ended September 30,
2004 2003
--------------------------- --------------------------
Net Income $ 2,206,362 $ 1,905,126
Other comprehensive income:
Unrealized gain (loss) on available for sale securities $ (305,471) $ 122,389
Less: Reclassification adjustment for gain included in net income (1,771,647) (1,010,778)
--------------------------- --------------------------
Other comprehensive income (loss) before tax (2,077,118) (888,389)
Income tax expense (benefit) related to other comprehensive income (loss) (706,220) (302,052)
------------ -----------
Other comprehensive income (loss), net of tax (1,370,898) (586,337)
------------ -----------
Comprehensive income $ 835,464 $ 1,318,789
============ ===========
See accompanying notes to the unaudited consolidated financial statements.
5
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED)
Accumulated
Other Total
Additional Compre- Unallocated Unallocated Stock- Compre-
Common Paid in Retained hensive Shares Held Shares Held Treasury holders' hensive
Stock Capital Earnings Income by ESOP by RSP Stock Equity Income
--------- ----------- ----------- ---------- ------------ --------- ------------ ----------- -----------
Balance,
December 31, 2003 $ 351,971 $32,750,510 $23,857,117 $1,540,849 $(2,023,187) $(518,654) $ (9,308,718) $46,649,888
Net Income 2,206,362 2,206,362 $ 2,206,362
Other comprehensive
income:
Unrealized loss
on available
for sale
securities,
net of tax (1,370,898) (1,370,898) (1,370,898)
-----------
Comprehensive
income $ 835,464
===========
Cash dividends paid
($0.60 per share) (1,742,012) (1,742,012)
ESOP shares
earned 205,521 189,693 395,214
RSP shares
earned 189,377 189,377
--------- ----------- ----------- ---------- ----------- --------- ------------ -----------
Balance,
September 30, 2004 $ 351,971 $32,956,031 $24,321,467 $ 169,951 $(1,833,494) $(329,277) $ (9,308,718) $46,327,931
========= =========== =========== ========== =========== ========= ============ ===========
See accompanying notes to the unaudited consolidated financial statements.
6
PHSB FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months ended September 30,
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net income $ 2,206,362 $ 1,905,126
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300,000 500,000
Depreciation, amortization and accretion 329,932 396,250
Amortization of discounts, premiums and
loan origination fees 1,201,297 1,425,610
Gains on sale of investment securities, net (1,771,647) (1,010,778)
Decrease in accrued interest receivable 185,123 572,337
Decrease in accrued interest payable (230,422) (368,110)
Amortization of ESOP unearned compensation 395,214 315,815
Amortization of RSP unearned compensation 189,377 189,377
Other, net (489,089) (375,132)
------------ ------------
Net cash provided by operating activities 2,316,147 3,550,495
------------ ------------
INVESTING ACTIVITIES
Investment and mortgage-backed securities available for sale:
Proceeds from sales 32,113,840 7,210,238
Proceeds from maturities and principal repayments 31,102,022 34,665,508
Purchases (79,641,395) (61,033,913)
Investment and mortgage-backed securities held to maturity:
Proceeds from sales 2,164,467 -
Proceeds from maturities and principal repayments 16,861,120 44,344,468
Purchases - (25,366,693)
Investment in Beaver Village Apartments (1,450,464) -
Decrease in loans receivable, net 2,497,145 5,067,794
Proceeds from sale of repossessed assets 268,380 375,852
Purchase of premises and equipment (88,641) (108,491)
Purchase of Federal Home Loan Bank Stock (117,100) (188,600)
------------ ------------
Net cash provided by (used for) investing activities 3,709,374 4,966,163
------------ ------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits 3,287,161 (635,461)
Advances from Federal Home Loan Bank 8,000,000 5,000,000
Repayment of Advances from Federal Home Loan Bank (12,750,000) (8,127,800)
Proceeds from stock option exercise - 238,167
Treasury stock purchased - (2,437,240)
Cash dividends paid (1,742,012) (886,195)
Common stock acquired by RSP - (847,725)
------------ ------------
Net cash used for financing activities (3,204,851) (7,696,254)
------------ ------------
Increase in cash and cash equivalents 2,820,670 820,404
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,548,795 8,221,969
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,369,465 $ 9,042,373
============ ============
See accompanying notes to the unaudited consolidated financial statements.
7
PHSB FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of PHSB Financial Corporation (the
"Company") include its wholly-owned subsidiary, Peoples Home Savings Bank (the
"Bank") and the Bank's wholly-owned subsidiary, HOMECO (the "Subsidiary"). All
significant intercompany balances and transactions have been eliminated. The
Company's business is conducted principally through the Bank.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions to Form 10-Q and, therefore, do not necessarily
include all information which would be included in audited financial statements.
The information furnished reflects all normal recurring adjustments which are,
in the opinion of management, necessary for the fair statement of the results of
the period. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year or any
other future period. The unaudited consolidated financial statements should be
read in conjunction with Form 10-K for the year ended December 31, 2003.
Recent Accounting Standards
In December 2003, the FASB issued a revision to Interpretation 46,
Consolidation of Variable Interest Entities, which established
standards for identifying a variable interest entity ("VIE") and for
determining under what circumstances a VIE should be consolidated with
its primary beneficiary. The Interpretation requires consolidation of
entities in which an enterprise absorbs a majority of the entity's
expected losses, receives a majority of the entity's residual returns,
or both, as a result of ownership, contractual or other financial
interests in the entity. Prior to the interpretation, entities were
generally consolidated by an enterprise when it had a controlling
financial interest through ownership of a majority voting interest in
the entity. The adoption of this Interpretation has not and is not
expected to have a material effect on the Company's financial position
or results of operations.
In December 2003, the Financial Accounting Standards Board ("FASB")
revised FAS No. 132, Employers' Disclosures about Pension and Other
Postretirement Benefit. This statement retains the disclosures required
by FAS No. 132, which standardized the disclosure requirements for
pensions and other postretirement benefits to the extent practicable
and requires additional information on changes in the benefit
obligations and fair value of plan assets. Additional disclosures
include information describing the types of plan assets, investment
strategy, measurement date(s), plan obligations, cash flows, and
components of net periodic benefit cost recognized during interim
periods. This statement retains reduced disclosure requirements for
nonpublic entities from FAS No. 132, and it includes reduced disclosure
for certain of the new requirements. This statement is effective for
financial statements with fiscal years ending after December 15, 2003.
The interim disclosures required by this statement are effective for
interim periods beginning after December 15, 2003. The adoption of this
statement did not have a material effect on the Company's disclosure
requirements. The Company has adopted the revised disclosure
provisions.
8
In March 2004, the Financial Accounting Standards Board ("FASB")
reached consensus on the guidance provided by Emerging Issues Task
Force Issue 03-1 ("EITF 03-1"), The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments. The guidance is
applicable to debt and equity securities that are within the scope of
FASB Statement of Financial Accounting Standard ("SFAS") No. 115,
Accounting for Certain Investments In Debt and Equity Securities and
certain other investments. EITF 03-1 specifies that an impairment would
be considered other-than-temporary unless (a) the investor has the
ability and intent to hold an investment for a reasonable period of
time sufficient for the recovery of the fair value up to (or beyond)
the cost of the investment and (b) evidence indicating the cost of the
investment is recoverable within a reasonable period of time outweighs
evidence to the contrary. EITF 03-1 cost method investment and
disclosure provisions were effective for reporting periods ending after
June 15, 2004. The measurement and recognition provisions relating to
debt and equity securities have been delayed until the FASB issues
additional guidance. The Company adopted cost method investment and
disclosure provisions of EITF 03-1 on June 30, 2004. The adoption did
not have a material impact on the consolidated financial statements,
results of operations or liquidity of the Company
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 nine months ended September 30, 2004 and 2003, the Company made cash
payments for interest of $6,019,000 and $7,051,000 respectively. The Company
also made cash payments for income taxes of $628,000 and $308,000 respectively,
during these same periods.
NOTE 2 - EARNINGS PER SHARE
The Company provides dual presentation of basic and diluted earnings per share.
Basic earnings per share is calculated utilizing net income as reported as the
numerator and average shares outstanding as the denominator. The computation of
diluted earnings per share differs in that the dilutive effects of any options,
warrants, and convertible securities are adjusted for in the denominator. Shares
outstanding do not include ESOP shares that were purchased and unallocated in
accordance with SOP 93-6, "Employers' Accounting for Stock Ownership Plans." The
following table sets forth the composition of the weighted average common shares
(denominator) used in the basic and diluted earnings per share computation.
9
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Weighted average common stock outstanding 3,318,998 3,278,216 3,309,029 3,268,037
Average treasury stock (616,358) (602,017) (616,358) (570,244)
--------- --------- --------- ---------
Weighted average common stock and common stock
equivalents used to calculate basic earnings per
share 2,702,640 2,676,199 2,692,671 2,697,793
Additional common stock equivalents (stock options)
used to calculate diluted earnings per share 132,687 92,015 122,508 85,732
--------- --------- --------- ---------
Weighted average common stock and common stock
equivalents used to calculate diluted earnings per
share 2,835,327 2,768,214 2,815,179 2,783,525
========= ========= ========= =========
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 Nine months ended
September 30, September 30,
----------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income as reported $ 650,832 $ 587,397 $ 2,206,362 $ 1,905,126
Less pro forma expense related to options 20,321 36,814 60,965 110,487
----------- ----------- ------------- -------------
Pro forma net income 630,511 550,583 2,145,397 1,794,639
=========== =========== ============= =============
Basic net income per common share:
As reported $ 0.24 $ 0.22 $ 0.82 $ 0.71
Pro forma 0.23 0.21 0.80 0.67
Diluted net income per common share:
As reported $ 0.23 $ 0.21 $ 0.78 $ 0.68
Pro forma 0.22 0.20 0.76 0.64
10
NOTE 4 - NET PERIODIC BENEFIT COST - DEFINED BENEFIT PLANS
For a detailed disclosure on the Company's pension and employee benefits plans,
please refer to Note 13 of the Company's Consolidated Financial Statements
included in the 2003 Annual Report to Stockholders.
The following sets forth the components of net periodic benefit cost of the
trusteed, non-contributory defined benefit pension plan for the three and nine
months ended September 30, 2004.
Interim Net Periodic Pension Cost for the Three and Nine Months ended September
30, 2004
Three Months ended Nine Months ended
September 30, 2004 September 30, 2004
------------------ ------------------
Service Costs $70,409 $211,225
Interest Cost 98,048 294,144
Expected Return on Plan Assets (94,374) (283,122)
Amortization of Net Transition Asset (5,204) (15,611)
Amortization of Net Loss 8,258 24,772
------- --------
Net Periodic Pension Cost $77,137 $231,408
======= ========
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 September 30, 2004, total contributions of $345,445 have been
made and there are no anticipated statutory funding requirements for the
remainder of 2004.
NOTE 5 - PROPOSED MERGER WITH ESB FINANCIAL CORPORATION
On August 12, 2004, the Company signed a definitive merger agreement with ESB
Financial Corporation ("ESB"). Under the terms of the agreement, upon
consummation of the merger of PHSB into ESB, each outstanding share of PHSB
common stock will be converted into the right to receive either $27.00 in cash
or ESB common stock, at the election of the holder, subject to an overall
requirement that 50% of the total outstanding PHSB common stock be exchanged for
stock. The total value of the acquisition is approximately $82.6 million and is
conditioned upon the receipt of the necessary regulatory and shareholder
approvals by both PHSB and ESB, and other customary conditions. The merger is
anticipated to be consummated in the first quarter of 2005.
11
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Private Securities Reform Litigation Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, the ability to control costs and expenses, the costs
associated with the proposed merger with ESB Financial Corporation ("ESB"),
successful integration of the Company's operations into ESB in the event the
merger is consummated, and general economic conditions.
Financial Condition
Total assets at September 30, 2004 of $337.5 million represented a decrease of
$2.5 million or 0.7% from December 31, 2003. This decrease was primarily due to
decrease in loans and securities of $3.6 million and $3.3 million, respectively.
These decreases were partially offset by increases in cash and cash equivalents
and other assets of $2.8 million and $1.9 million, respectively.
At September 30, 2004, investment securities (available for sale and held to
maturity) decreased $12.6 million to $24.1 million at September 30, 2004 from
$36.7 million at December 31, 2003. Mortgage-backed securities (available for
sale and held to maturity) increased $9.3 million to $141.0 million from $131.7
million at December 31, 2003. The total decrease of $3.3 million to the
investment and mortgage-backed securities portfolios (available for sale and
held to maturity) was the result of sales of $34.3 million, maturities of $20.6
million, and principal repayments of $27.4 million, partially offset by
purchases of $79.6 million.
Loans receivable, net at September 30, 2004 of $150.0 million represented a
decrease of $3.6 million from $153.6 million at December 31, 2003. The decrease
in the loan portfolio was primarily attributable to a decrease in automobile
loans of $7.8 million partially offset by an increase in tax exempt loans of
$3.3 million. The decrease in automobile loans was due to weaker loan demand as
a result of several manufacturers offering discounted financing.
Other assets increased $1.9 million to $2.9 million at September 30, 2004 from
$1.0 million at December 31, 2003. This increase was primarily due to the Bank's
investment in Beaver Village Apartments Limited Partnership. Beaver Village
Apartments are low income housing units for senior citizens located in Beaver,
Pennsylvania. The Bank anticipates to receive tax credits over a ten year period
beginning in 2004 for its investment in this limited partnership.
Total deposits after interest credited at September 30, 2004 were $234.8
million, an increase of $3.3 million or 1.4% from $231.5 million at December 31,
2003.
Advances from the Federal Home Loan Bank of Pittsburgh decreased $4.8 million to
$54.1 million at September 30, 2004 from $58.9 million at December 31, 2003.
Stockholders' equity decreased $0.3 million for the nine month period ended
September 30, 2004. This decrease was due to a decrease in accumulated other
comprehensive income of $1.4 million and cash dividends paid of $1.7 million.
These decreases to stockholders' equity were partially offset by net
12
income of $2.2 million along with decreases in unallocated ESOP and RSP shares
of $190,000 and $189,000, respectively.
Results of Operations
Comparison of Operating Results for the Three Months Ended September 30, 2004
and September 30, 2003.
General.
Net income for the three months ended September 30, 2004 increased by $64,000 to
$651,000, from $587,000 for the three months ended September 30, 2003. This
increase was primarily due to an increase in net interest income of $105,000
along with decreases in provisions for loan losses and income taxes of $40,000
and $10,000, respectively. These increases to net income were partially offset
by an increase in non-interest expense of $93,000.
Net Interest Income.
Reported net interest income increased $105,000 or 5.2% for the three months
ended September 30, 2004. Net interest income on a tax equivalent basis
increased by $76,000 or 3.5% in a period when both average interest-earning
assets and average interest-bearing liabilities increased (increased $3.5
million, or 1.1%, and $6.4 million, or 2.2%, respectively). The Company's net
interest rate spread on a tax equivalent basis increased 13 basis points to
2.41% for the three months ended September 30, 2004 as compared to the third
quarter of 2003. The tax equivalent basis is calculated utilizing the statutory
rate of 34%.
Interest Income.
Reported interest income decreased $65,000 to $4.0 million for the three month
period ended September 30, 2004, from $4.1 million for the third quarter of
2003. Interest income on a tax equivalent basis totaled $4.1 million for the
three months ended September 30, 2004, a decrease of $94,000, or 2.2%, from $4.2
million for the three months ended September 30, 2003. This decrease was
primarily due to a 17 basis point decrease in the yield earned partially offset
by an increase in the Company's average balance of interest-earning assets of
$3.5 million, or 1.1%, for the three months ended September 30, 2004. Interest
earned on loans decreased $262,000, or 9.8%, in 2004. This decrease was due to a
$10.5 million, or 6.6%, decrease in the average balance of loans along with a 23
basis point decrease in the yield earned. Interest earned on interest-bearing
deposits and investment and mortgage-backed securities (including securities
available for sale) increased $168,000, or 10.7%, in 2004. This increase was due
to an increase in the average balance of securities of $14.0 million along with
an 8 basis point increase in the yield earned.
Interest Expense.
Interest expense decreased $171,000 to $1.9 million for the three months ended
September 30, 2004. The decrease in interest expense was due to a 30 basis point
decrease in the average cost of interest-bearing liabilities to 2.62% partially
offset by a $6.4 million, or 2.3%, increase in the average balance of
interest-bearing liabilities. The $6.4 million, or 2.3% increase in the average
balance of interest-bearing liabilities was the result of an increase in average
deposits of $9.1 million, or 4.0%, partially offset by a decrease in average
borrowings of $2.7 million, or 4.8%.
Provision for Losses on Loans.
The provision for loan losses is charged to operations to bring the total
allowance for loan losses to a level that represents management's best estimate
of the losses inherent in the portfolio, based on:
13
o historical experience;
o volume;
o type of lending conducted by the Bank;
o industry standards;
o the level and status of past due and non-performing loans;
o the general economic conditions in the Bank's lending area; and
o other factors affecting the collectibility of the loans in its portfolio.
The provision for loan losses decreased by $40,000 to $90,000 for the three
months ended September 30, 2004, from $130,000 for the three months ended
September 30, 2003. Decreases in loans along with a decrease in non-performing
assets precipitated the decrease in the provision for loan losses. See "Risk
Elements."
Noninterest Income.
Total noninterest income was $753,000 for both of the three months ended
September 30, 2004 and 2003. An increase in gains on sales of investment
securities of $25,000 from $468,000 for the three months ended September 30,
2003 to $493,000 for the three months ended September 30, 2004 was offset by
decreases in rental and other income. The $25,000 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 $93,000 to $1,910,000 for the three months ended
September 30, 2004, from $1,817,000 for the three months ended September 30,
2003. This increase was primarily due to the merger related expenses and is
expected to continue to increase until the consummation of the proposed merger
with ESB.
Comparison of Operating Results for the Nine Months Ended September 30, 2004 and
September 30, 2003.
General.
Net income for the nine months ended September 30, 2004 increased by $301,000 to
$2.2 million, from $1.9 million for the nine months ended September 30, 2003.
This increase was primarily due to an increase in non-interest income of
$720,000 along with a decrease in provisions for loan losses of $200,000. These
increases to net income were partially offset by a decrease in net interest
income of $230,000 along with increases in non-interest expense and income tax
provisions of $141,000 and $248,000, respectively.
Net Interest Income.
Reported net interest income decreased $230,000 or 3.5% for the nine months
ended September 30, 2004. Net interest income on a tax equivalent basis
decreased by $456,000 or 6.2% in a period when both average interest-earning
assets and average interest-bearing liabilities increased, increased $0.5
million or 0.2% and $2.8 million, or 1.0%, respectively. The Company's net
interest rate spread on a tax equivalent basis decreased 11 basis points to
2.43% for the nine months ended September 30, 2004 as compared to the first nine
months of 2003. The tax equivalent basis is calculated utilizing the statutory
rate of 34%.
14
Interest Income.
Reported interest income decreased $1.1 million to $12.2 million for the nine
month period ended September 30, 2004, from $13.3 million for the nine month
period ended September 30, 2003. Interest income on a tax equivalent basis
totaled $12.6 million for the nine months ended September 30, 2004, a decrease
of $1.4 million, or 9.6%, from $14.0 million for the nine months ended September
30, 2003. This decrease was primarily due to a 56 basis point decrease in the
yield earned partially offset by an increase in the Company's average balance of
interest-earning assets of $0.5 million, or 0.2%, for the nine months ended
September 30, 2004. Interest earned on loans decreased $1.4 million, or 15.8%,
in 2004. This decrease was due to a $14.9 million, or 9.0%, decrease in the
average balance of loans along with a 52 basis point decrease in the yield
earned. Interest earned on interest-bearing deposits and investment and
mortgage-backed securities (including securities available for sale) increased
$24,000, or 0.5%, in 2004. This increase was due to an increase in the average
balance of securities of $15.3 million partially offset by a 35 basis point
decrease in the yield earned.
Interest Expense.
Interest expense decreased $895,000 to $5.8 million for the nine months ended
September 30, 2004. The decrease in interest expense was due to a 44 basis point
decrease in the average cost of interest-bearing liabilities to 2.65% partially
offset by a $2.8 million, or 1.0%, increase in the average balance of
interest-bearing liabilities. The $2.8 million, or 1.0% increase in the average
balance of interest-bearing liabilities was the result of an increase in average
deposits of $3.2 million, or 1.4% partially offset by a decrease in average
borrowings of $0.3 million, or 0.5%.
Provision for Losses on Loans.
The provision for loan losses is charged to operations to bring the total
allowance for loan losses to a level that represents management's best estimate
of the losses inherent in the portfolio, based on:
o historical experience;
o volume;
o type of lending conducted by the Bank;
o industry standards;
o the level and status of past due and non-performing loans;
o the general economic conditions in the Bank's lending area; and
o other factors affecting the collectibility of the loans in its portfolio.
The provision for loan losses decreased by $200,000 to $300,000 for the nine
months ended September 30, 2004, from $500,000 for the nine months ended
September 30, 2003. Decreases in loans along with a decrease in non-performing
assets precipitated the decrease in the provision for loan losses. See "Risk
Elements."
Noninterest Income.
Total noninterest income increased $720,000 to $2.5 million for the nine months
ended September 30, 2004, from $1.8 million for the nine months ended September
30, 2003. This increase was primarily due to an increase in gains on sales of
investment securities of $761,000 from $1,011,000 for the nine months ended
September 30, 2003 to $1,772,000 for the nine months ended September 30, 2004.
The $761,000 increase in security gains resulted from management reacting to the
opportunities available to sell securities without significantly impacting the
overall effective yield of the investment portfolio. Management continues to
closely monitor the investment portfolio for other similar opportunities which
may become available.
15
Noninterest Expense.
Noninterest expense increased $141,000 to $5.6 million for the nine months ended
September 30, 2004, from $5.5 million for the nine months ended September 30,
2003. This increase was due to an increase in compensation and employee benefits
of $100,000 along with merger related expenses which are expected to continue to
increase until the consummation of the proposed merger with ESB. The increase in
compensation and employee benefits was primarily due to an increase in expense
related to the Employee Stock Ownership Plan (ESOP). The ESOP expense is
calculated using the average market value of the Company's stock.
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 September 30, 2004, the Bank had
borrowed $54.1 million of its $170.7 million maximum borrowing capacity and had
a remaining borrowing capacity of approximately $116.6 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 September 30, 2004, the Bank's Tier I risk-based and total risk-based capital
ratios were 23.2% and 24.1%, 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 11.6% at
September 30, 2004. Current regulations require a leverage ratio of 5% to be
considered well capitalized.
16
Risk Elements
Nonperforming Assets
The following schedule presents information concerning nonperforming assets
including nonaccrual loans, loans 90 days or more past due, and other real
estate owned at September 30, 2004 and December 31, 2003. A loan is classified
as nonaccrual when, in the opinion of management, there are serious doubts about
collectibility of interest and principal. At the time the accrual of interest is
discontinued, future income is recognized only when cash is received.
The allowance for loan losses was 367.45% of total non-performing assets at
September 30, 2004 and 377.7% at December 31, 2003.
September 30, December 31,
2004 2003
---- ----
(Dollars in Thousands)
Loans on nonaccrual basis $356 $374
Loans past due 90 days or more 63 27
---- ----
Total non-performing loans 419 401
---- ----
Real estate owned 0 34
---- ----
Total non-performing assets $419 $435
==== ====
Total non-performing loans to
total loans 0.28% 0.26%
==== ====
Total non-performing loans to
total assets 0.12% 0.12%
==== ====
Total non-performing assets to
total assets 0.12% 0.13%
==== ====
17
Item 3. Quantitative and Qualitative Disclosure about Market Risk
- ------- ---------------------------------------------------------
The Company, like many other financial institutions, is vulnerable to an
increase in interest rates to the extent that interest-bearing liabilities
generally mature or reprice more rapidly than interest-earning assets. The
lending activities of the Company have historically emphasized the origination
of long-term, fixed rate loans secured by single family residences, and the
primary source of funds has been deposits with substantially shorter maturities.
While having interest-bearing liabilities that reprice more frequently than
interest-earning assets is generally beneficial to net interest income during a
period of declining interest rates, such an asset/liability mismatch is
generally detrimental during periods of rising interest rates.
To reduce the effect of interest rate changes on net interest income the Company
has adopted various strategies to enable it to improve matching of
interest-earning asset maturities to interest-bearing liability maturities. The
principal elements of these strategies include: (1) purchasing investment
securities with maturities that match specific deposit maturities; (2)
emphasizing origination of shorter-term consumer loans, which in addition to
offering more rate flexibility, typically bear higher interest rates than
residential mortgage loans; and (3) purchasing adjustable-rate mortgage-backed
securities as well as mortgage-backed securities with balloon payments which
have shorter maturities than typical mortgage-backed securities. Although
consumer loans generally possess an inherently higher credit risk than
residential mortgage loans, the Company has designed its underwriting standards
to minimize this risk as much as possible.
The Company also makes a significant effort to maintain its level of lower costs
deposits as a method of enhancing profitability. The Company has traditionally
had a high level of low-cost passbook, interest-bearing checking (NOW) and Money
Market Demand Accounts. Although its base of such deposits has increased as a
result of the current interest rate environment, such deposits have
traditionally remained relatively stable and would be expected to reduce to
normal levels in a period of rising interest rates. Because of this relative
stability in a significant portion of its deposits, the Company has been able to
offset the impact of rising rates in other deposit accounts.
Exposure to interest rate risk is actively monitored by management. The
Company's objective is to maintain a consistent level of profitability within
acceptable risk tolerances across a broad range of potential interest rate
environments. The Company uses the Olson Research Associates, Inc.'s, Columbia,
Maryland, A/L Benchmarks to monitor its exposure to interest rate risk, which
calculates changes in market value of portfolio equity and net interest income.
Reports generated from assumptions provided by Olson and modified by management
are reviewed by the Interest Rate Risk and Asset Liability Management Committee
and reported to the Board of Directors quarterly. The Balance Sheet Shock Report
shows the degree to which balance sheet line items and the market value of
portfolio equity are potentially affected by a 200 basis point upward and
downward parallel shift (shock) in the Treasury yield curve. Exception tests are
conducted as recommended under federal law to determine if the bank qualifies as
low risk and may therefore be exempt from supplemental reporting. In addition,
the possible impact on risk-based capital is assessed using the methodology
under the Federal Deposit Insurance Corporation Improvement Act. An Income Shock
Report shows the degree to which income statement line items and net income are
potentially affected by a 200 basis point upward and downward parallel shift in
the Treasury yield curve.
18
From analysis and discussion of the aforementioned reports as of September 30,
2004, management has assessed that the Bank's level of interest rate risk is
appropriate for current market conditions. The percentage change in market value
of the portfolio equity as of September 30, 2004 for an upward and downward
shift of 200 basis points are (23.44%) and 17.07%, respectively. Net interest
income decreased by $191,000 or 2.13% for a downward shift in rates of 200 basis
points and decreased by $342,000 or 3.80%, 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
24.1 % and 18.3% after the interest rate risk impact. Results fall within policy
limits for all applicable tests.
Item 4. Controls and Procedures
- ------- -----------------------
(a) Evaluation of disclosure controls and procedures. Based on their
--------------------------------------------------
evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")),
the Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-Q such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
(b) Changes in internal control over financial reporting. During the
------------------------------------------------------
quarter under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
19
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
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)
---------------------------------------------------------------------------------------------------------
July
1-31, 2004 0 N/A 0 40,222
---------------------------------------------------------------------------------------------------------
August
1-31, 2004 0 N/A 0 40,222
---------------------------------------------------------------------------------------------------------
September
1-30, 2004 0 N/A 0 40,222
---------------------------------------------------------------------------------------------------------
Total 0 N/A 0 40,222
---------------------------------------------------------------------------------------------------------
(1) On February 20, 2003 the Company announced that the Board of Directors has
approved a plan to repurchase up to 149,500 of the outstanding shares of
the Company. This plan has no stated expiration date.
Item 3. Defaults by the Company on its senior securities.
None.
Item 4. Results of Votes of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8 - K.
(a) The following exhibits are filed as part of this report.
3.1 Articles of Incorporation of PHSB Financial Corporation*
3.2 Bylaws of PHSB Financial Corporation*
4.0 Specimen Stock Certificate of PHSB Financial Corporation*
20
10.1 Employment Agreement between Peoples Home Savings Bank and
James P. Wetzel, Jr.*
10.2 1998 Restricted Stock Plan**
10.3 1998 Stock Option Plan**
10.4 Employment Agreement between Peoples Home Savings Bank and Richard E. Canonge***
10.5 2002 Stock Option Plan****
10.6 2002 Restricted Stock Plan****
31.0 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.0 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.0 Review Report of Independent Accountants
* Incorporated by reference to Registrant's Registration Statement on Form
SB-2 initially filed with the Securities and Exchange Commission on
September 10, 2001 (File No. 333-69180).
** Incorporated by reference to the identically numbered exhibits to PHS
Bancorp, Inc.'s Form 10-Q for the quarter ended September 30, 1998 and
filed with the Securities and Exchange Commission on November 13, 1998
(File No. 0-23230).
*** Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 2001 and filed with the Securities and Exchange
Commission on March 28, 2002
**** Incorporated by reference to Registrant's Registration Statement on Form
S-8 filed with the Securities and Exchange Commission on January 17, 2003
(File No. 333-102559).
(b) Reports on Form 8-K.
On August 12, 2004, PHSB Financial Corporation filed a form 8-K to report
under "Item 5. Other Events" that PHSB Financial Corporation issued a joint
press release with ESB Financial Corporation announcing the proposed
merger.
On October 15, 2004, PHSB Financial Corporation filed a form 8-K to report
under "Item 2.02. Results of Operations and Financial Condition" that PHSB
Financial Corporation issued a press release to report earnings for the
quarter ended September 30,2004.
21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Date: November 4, 2004
PHSB Financial Corporation
- --------------------------
(Registrant)
By: /s/James P. Wetzel, Jr.
-------------------------------------
James P. Wetzel, Jr.
President and Chief Executive Officer
By: /s/Richard E. Canonge
-------------------------------------
Richard E. Canonge
Chief Financial Officer and Treasurer
22