UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
______________________________
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _______________
Commission File Number: 033233
____________
PFS BANCORP, INC.
______________________________________________________________________________
(Exact name of small business issuer as specified in its charter)
Indiana 35-2142534
_______________________________ ___________________________________
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Second & Bridgeway Streets, Aurora, Indiana 47001
______________________________________________________________________________
(Address of principal executive offices)
(812) 926-0631
______________________________________________________________________________
(Issuer's telephone number)
______________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the issuer was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date:
August 11, 2004 - 1,473,728 shares of common stock
__________________________________________________
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Page 1 of 18
INDEX
Page
-----
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Controls and Procedures 16
PART II - OTHER INFORMATION 17
SIGNATURES 18
2
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, December 31,
ASSETS 2004 2003
Cash and due from banks $ 814 $ 855
Interest-bearing deposits in other financial institutions 3,815 4,332
------- -------
Cash and cash equivalents 4,629 5,187
Investment securities designated as available for sale -
at market 9,098 10,016
Investment securities held to maturity - at amortized cost, which
approximates market 143 152
Loans receivable - net 108,437 100,293
Office premises and equipment - at depreciated cost 990 1,065
Real estate acquired through foreclosure - 169
Federal Home Loan Bank stock - at cost 776 758
Accrued interest receivable 411 395
Prepaid expenses and other assets 125 126
Prepaid income taxes 89 20
Deferred income taxes 86 92
------- -------
Total assets $124,784 $118,273
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 86,330 $ 88,328
Advances from the Federal Home Loan Bank 10,000 2,000
Advances by borrowers for taxes and insurance 129 63
Accrued interest payable 10 12
Other liabilities 1,164 948
------- -------
Total liabilities 97,633 91,351
Commitments - -
Shareholders' equity
Preferred stock, 5,000,000 shares authorized, $.01 par value;
no shares issued - -
Common stock - 10,000,000 shares authorized, $.01 par value;
1,551,293 shares issued 16 16
Additional paid-in capital 15,029 15,029
Retained earnings - restricted 14,318 14,101
Less: 77,565 shares of treasury stock at June 30, 2004 and
December 31, 2003 (1,282) (1,282)
Shares acquired by stock benefit plans (1,801) (1,801)
Accumulated other comprehensive income - unrealized gains on
securities designated as available for sale, net of related tax effects 871 859
------- -------
Total shareholders' equity 27,151 26,922
------- -------
Total liabilities and shareholders' equity $124,784 $118,273
======= =======
3
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Six months ended Three months ended
June 30, June 30,
2004 2003 2004 2003
Interest income
Loans $2,558 $2,729 $1,281 $1,317
Investment securities 165 218 80 102
Interest-bearing deposits and other 19 49 9 28
----- ----- ----- -----
Total interest income 2,742 2,996 1,370 1,447
Interest expense
Deposits 709 1,068 340 506
Borrowings 56 2 33 -
----- ----- ----- -----
Total interest expense 765 1,070 373 506
----- ----- ----- -----
Net interest income 1,977 1,926 997 941
Provision for losses on loans 48 48 24 24
----- ----- ----- -----
Net interest income after provision for
losses on loans 1,929 1,878 973 917
Other operating income
Loss on sale of investment securities - (28) - -
Gain (loss) on sale of repossessed property (5) 10 (5) 6
Other operating 247 193 129 106
----- ----- ----- -----
Total other income 242 175 124 112
General, administrative and other expense
Employee compensation and benefits 829 777 402 390
Occupancy and equipment 163 167 79 84
Data processing 124 103 62 53
Federal deposit insurance premiums 25 26 12 13
Other operating 290 273 169 149
----- ----- ----- -----
Total general, administrative and other expense 1,431 1,346 724 689
----- ----- ----- -----
Earnings before income taxes 740 707 373 340
Income taxes
Current 296 309 138 143
Deferred 6 (20) 14 -
----- ----- ----- -----
Total income taxes 302 289 152 143
----- ----- ----- -----
NET EARNINGS $ 438 $ 418 $ 221 $ 197
===== ===== ===== =====
EARNINGS PER SHARE
Basic $.32 $.30 $.16 $.15
=== === === ===
Diluted $.31 $.30 $.15 $.15
=== === === ===
4
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Six months ended Three months ended
June 30, June 30,
2004 2003 2004 2003
Net earnings $438 $418 $221 $197
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during the period,
net of taxes (benefits) of $6, $(47), $(2) and $(6) for the
respective periods 12 (91) (4) (11)
Reclassification adjustment for realized losses included in earnings,
net of tax benefits of $10 in 2003 - 18 - -
--- --- --- ---
Comprehensive income $450 $345 $217 $186
=== === === ===
Accumulated comprehensive income $871 $808 $871 $808
=== === === ===
5
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
(In thousands)
2004 2003
Cash flows from operating activities:
Net earnings for the period $ 438 $ 418
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (21) (33)
Amortization of premiums and discounts on investment securities - net 33 44
Federal Home Loan Bank stock dividends (18) (9)
Depreciation 79 87
Provision for losses on loans 48 48
Loss on sale of investment securities - 28
(Gain) loss on sale of repossessed assets 5 (10)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (16) 22
Prepaid expenses and other assets 1 (8)
Other liabilities 216 137
Accrued interest payable (2) (11)
Income taxes
Current (75) (96)
Deferred 6 (20)
------ ------
Net cash provided by operating activities 694 597
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (11,932) (17,445)
Proceeds from maturities and repayment of investment securities 12,844 16,169
Proceeds from sale of investment securities - 3,029
Loan principal repayments 12,542 17,521
Loan disbursements (20,763) (15,696)
Purchase of office premises and equipment (4) (3)
Proceeds from sale of real estate acquired through foreclosure 214 -
------ ------
Net cash provided by (used in) investing activities (7,099) 3,575
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits (1,998) 887
Proceeds from Federal Home Loan Bank advances 8,000 2,500
Repayment of Federal Home Loan Bank advances - (3,500)
Advances by borrowers for taxes and insurance 66 (13)
Purchase of treasury shares - (1,282)
Dividends on common shares (221) (228)
------ ------
Net cash provided by (used in) financing activities 5,847 (1,636)
------ ------
Net increase (decrease) in cash and cash equivalents (558) 2,536
Cash and cash equivalents at beginning of period 5,187 5,225
------ ------
Cash and cash equivalents at end of period $ 4,629 $ 7,761
====== ======
6
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended June 30,
(In thousands)
2004 2003
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 390 $ 343
==== =====
Interest on deposits and borrowings $ 767 $1,081
==== =====
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 12 $ (73)
==== =====
Transfers from loans to real estate acquired through
foreclosure $ 50 $ -
==== =====
7
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three months ended June 30, 2004 and 2003
Forward-Looking Statements
--------------------------
This Form 10-QSB contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of
management as well as assumptions made by and information currently
available to management. In addition, in those and other portions
of this document, the words "anticipate," "believe," "estimate,"
"except," "intend," "should" and similar expressions, or the
negative thereof, as they relate to the Company or the Company's
management, are intended to identify forward-looking statements.
Such statements reflect the current views of the Company with
respect to future looking events and are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize or should underlying assumptions prove
incorrect, actual results may vary from those described herein as
anticipated, believed, estimated, expected or intended. The Company
does not intend to update these forward-looking statements.
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and,
therefore, do not include information or footnotes necessary for a
complete presentation of financial position, results of operations
and cash flows in conformity with accounting principles generally
accepted in the United States of America. Accordingly, these
financial statements should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of the Company
for the period ended December 31, 2003. However, in the opinion of
management, all adjustments (consisting of only normal recurring
accruals) which are necessary for a fair presentation of the
consolidated financial statements have been included. The results
of operations for the six and three month periods ended June 30,
2004, are not necessarily indicative of the results which may be
expected for the entire year.
2. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of PFS Bancorp, Inc. (the "Company") and its wholly-owned
subsidiary, Peoples Federal Savings Bank (the "Savings Bank"). All
significant intercompany items have been eliminated.
3. Earnings Per Share
------------------
Basic earnings per share is computed based upon the weighted-average
common shares outstanding during the period less shares in the ESOP
that are unallocated and not committed to be released. Weighted-
average common shares deemed outstanding, which gives effect to
86,632 and 97,336 unallocated ESOP shares at June 30, 2004 and 2003,
respectively. Diluted earnings per share is computed by taking into
consideration common shares outstanding and the dilutive effect of
additional potential common shares issuable under the Company's
stock option plan. The computations are as follows:
For the six months ended For the three months ended
June 30, June 30,
2004 2003 2004 2003
Weighted-average common shares
outstanding (basic) 1,387,096 1,404,247 1,387,096 1,376,392
Dilutive effect of assumed exercise
of stock options 9,325 - 9,218 -
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 1,396,421 1,404,247 1,396,314 1,376,392
========= ========= ========= =========
The Company had no dilutive or potentially dilutive securities
during either the three or six month periods ended June 30, 2003.
8
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three months ended June 30, 2004 and 2003
4. Stock Option Plan
-----------------
The Board of Directors had previously adopted the PFS Bancorp, Inc.
Stock Option Plan (the "Plan") which provides for the issuance of
152,088 shares of authorized but unissued shares of common stock at
fair value at the date of grant. The initial options granted in
June 2003 totaled 62,228 at an exercise price equal to fair value of
$16.85. The Plan provides that one-fifth of the options granted
become exercisable on each of the first five anniversaries of the
date of grant.
The Company accounts for the Plan in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that
entities may use, which measures compensation cost at the grant date
based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting
period. Alternatively, SFAS No. 123 permits entities to continue to
account for stock options and similar equity instruments under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Entities that continue to account for
stock options using APB Opinion No. 25 are required to make pro
forma disclosures of net earnings and earnings per share, as if the
fair value-based method of accounting defined in SFAS No. 123 had
been applied.
The Company applies APB Opinion No. 25 and related Interpretations
in accounting for the Plan. Accordingly, no compensation cost has
been recognized for the Plan. Had compensation cost for the Plan
been determined based on the fair value at the grant date for awards
under the Plan consistent with the accounting method utilized in
SFAS No. 123, the Company's net earnings and earnings per share
would have been reported as the pro forma amounts indicated below:
Six months ended Three months ended
June 30, June 30,
2004 2003 2004 2003
Net earnings (In thousands) As reported $438 $418 $221 $197
Stock-based compensation, net of tax (14) - (7) -
--- --- --- ---
Pro-forma $424 $418 $214 $197
=== === === ===
Earnings per share
Basic As reported $.32 $.30 $.16 $.15
Stock-based compensation, net of tax (.01) - (.01) -
--- --- --- ---
Pro-forma $.31 $.30 $.15 $.15
=== === === ===
Diluted As reported $.31 $.30 $.15 $.15
Stock-based compensation, net of tax (.01) - - -
--- --- --- ---
Pro-forma $.30 $.30 $.15 $.15
=== === === ===
9
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six three months ended June 30, 2004 and 2003
4. Stock Option Plan (continued)
-----------------
A summary of the status of the Plan as of June 30, 2004 and December
31, 2003 is presented below:
Six months ended Year ended
June 30, 2004 December 31, 2003
Weighted- Weighted-
average average
exercise exercise
Shares price Shares price
Outstanding at beginning of period 62,228 $16.85 - $ -
Granted - - 62,228 16.85
Exercised - - - -
Forfeited - - - -
------ ----- ------ -----
Outstanding at end of period 62,228 $16.85 62,228 $16.85
====== ===== ====== =====
Options exercisable at period-end 12,446 $16.85 - $ -
====== ===== ====== =====
Weighted-average fair value of options granted
during the period $ - $ 3.82
===== =====
The following information applies to options outstanding at June 30, 2004:
Number outstanding 62,228
Range of exercise prices $16.85
Weighted-average exercise price $16.85
Weighted-average remaining contractual life 9 years
5. Critical Accounting Policies
----------------------------
Certain of the Company's accounting policies are important to the
portrayal of the Company's financial condition, since they require
management to make difficult, complex or subjective judgments, some
of which may relate to matters that are inherently uncertain.
Estimates associated with these policies are susceptible to material
changes as a result of changes in facts and circumstances. Facts
and circumstances which could affect these judgments include, but
without limitation, changes in interest rates, changes in the
performance of the economy or changes in the financial condition of
borrowers. Management believes that its critical accounting
policies include determining the allowance for loan losses and
determining the carrying value of mortgage servicing rights. The
Company's critical accounting policies are discussed in detail in
its Annual Report for the year ended December 31, 2003 (incorporated
by reference into the Company's 10K filing) in Note A of the Notes
to the Consolidated Financial Statements under "Allowance for Loan
Losses." If management were to underestimate the allowance for loan
losses, earnings could be reduced in the future as a result of
greater than expected net loan losses. Overestimations of the
required allowance could result in future increases in income, as
loan loss recoveries increase or provisions for losses on loans
decrease.
Mortgage servicing rights are accounted for pursuant to the
provisions of SFAS No. 140. "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities," which
requires that the Company recognize as separate assets, rights to
service mortgage loans for others, regardless of how those servicing
rights are acquired. An institution that acquires mortgage
servicing rights through either the purchase or origination of
mortgage loans and sells those loans with servicing rights retained
must allocate some of the cost of the loans to the mortgage
servicing rights.
10
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six three months ended June 30, 2004 and 2003
5. Critical Accounting Policies (continued)
----------------------------
SFAS No. 140 requires that capitalized mortgage servicing rights and
capitalized excess servicing receivables be assessed for impairment.
Impairment is measured based on fair value. The mortgage servicing
rights recorded by the Company, calculated in accordance with the
provisions of SFAS No. 140, were segregated into pools for valuation
purposes, using as pooling criteria the loan term and coupon rate.
Once pooled, each grouping of loans was evaluated on a discounted
earnings basis to determine the present value of future earnings
that a purchaser could expect to realize from each portfolio.
Earnings were projected from a variety of sources including loan
servicing fees, interest earned on float, net interest earned on
escrows, miscellaneous income, and costs to service the loans. The
present value of future earnings is the "economic" value of the
pool, i.e., the net realizable present value to an acquiror of the
acquired servicing. Fluctuations in the fair value of mortgage
servicing rights may affect net earnings, as this asset is carried
at the lower of amortized cost or fair value.
11
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from December 31, 2003 to
June 30, 2004
--------------------------------------------------------------------
At June 30, 2004, the Company's assets totaled $124.8 million, an
increase of $6.5 million, or 5.5%, compared to total assets at
December 31, 2003. The increase in assets was comprised primarily of
an $8.1 million, or 8.1%, increase in loans receivable which was
principally funded by additional advances from the Federal Home Loan
Bank, which increased by $8.0 million.
Liquid assets (i.e. cash and interest-bearing deposits) decreased by
$558,000, or 10.8%, from December 31, 2003 levels, to a total of $4.6
million at June 30, 2004. Investment securities available for sale
totaled $9.1 million at June 30, 2004, a decrease of $918,000, or
9.2%, from December 31, 2003 levels. The decrease resulted primarily
from investment maturities of $12.8 million, which were partially
offset by security purchases totaling $11.9 million during the six
month period.
As previously stated, loans receivable increased by $8.1 million, or
8.1%, during the six month period ended June 30, 2004, to a total of
$108.4 million. Loan disbursements amounted to $20.8 million and were
partially offset by principal repayments of $12.5 million. During the
six months ended June 30, 2004, loan originations were comprised of
$11.2 million in loans secured by one- to four-family residential real
estate, $1.1 million in loans secured by multifamily residential real
estate, $5.4 million in loans secured by commercial and nonresidential
real estate and $3.1 million in consumer and other loans.
The allowance for loan losses totaled $782,000 and $771,000 at June
30, 2004 and December 31, 2003, respectively. Nonperforming and
impaired loans totaled $477,000 and $1.1 million at June 30, 2004 and
December 31, 2003, respectively. The allowance for loan losses
represented 163.9% and 67.7% of nonperforming and impaired loans as of
June 30, 2004 and December 31, 2003, respectively. The allowance
represented approximately .72% and .76% of the total loan portfolio at
June 30, 2004 and December 31, 2003, respectively. At June 30, 2004,
nonperforming and impaired loans were comprised of $468,000 in loans
secured by one- to four-family residential real estate and $9,000 in
commercial, consumer and other loans. Management believes such loans
are adequately collateralized and does not presently expect to incur
any material losses on such loans. Although management believes that
its allowance for loan losses at June 30, 2004, was sufficient to
cover known and inherent losses in the loan portfolio based upon the
available facts and circumstances, there can be no assurance that
additions to such allowance will not be necessary in future periods,
which could adversely affect the Company's results of operations.
Deposits totaled $86.3 million at June 30, 2004, a decrease of $2.0
million, or 2.3%, compared to December 31, 2003 levels. While
management generally strives to maintain a moderate level of growth in
deposits through marketing and pricing strategies, the current low
interest rate environment contributed to the reduction in deposits as
depositors sought alternative investments. The decline in deposits
was offset by an $8.0 million increase in advances from the Federal
Home Loan Bank.
Shareholders' equity amounted to $27.2 million at June 30, 2004, an
increase of $229,000, or .9%, from December 31, 2003 levels. The
increase resulted primarily from the net earnings of $438,000 and a
$12,000 increase in unrealized gains on securities designated as
available for sale, which were partially offset by the payment of
dividends of $221,000.
Peoples is required to meet minimum capital standards promulgated by
the Office of Thrift Supervision ("OTS"). At June 30, 2004, Peoples'
regulatory capital was well in excess of the minimum capital
requirements.
12
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended June
30, 2004 and 2003
----------------------------------------------------------------------
General
-------
Net earnings for the three months ended June 30, 2004 amounted to
$221,000, an increase of $24,000, or 12.2%, compared to the $197,000
in net earnings reported for the three month period ended June 30,
2003. The increase in earnings was due primarily to a $56,000, or
6.0%, increase in net interest income and a $12,000, or 10.7%,
increase in other income which were partially offset by a $35,000, or
5.1%, increase in general, administrative and other expense, and a
$9,000, or 6.3% increase in income taxes.
Net Interest Income
-------------------
Total interest income amounted to $1.4 million for the three-month
period ended June 30, 2004, a decrease of $77,000, or 5.3%, from the
same period in 2003. Interest income on loans totaled $1.3 million
during the 2004 period, a decrease of $36,000, or 2.7%, from the 2003
period. This decline was due primarily to a 74 basis point decrease
in the weighted-average yield quarter to quarter, to 4.80% for the
quarter ended June 30, 2004, which was partially offset by an $11.6
million, or 12.2%, increase in the average balance of loans
outstanding quarter to quarter.
Interest income on investment securities decreased by $22,000, or
21.6%, for the three months ended June 30, 2004, compared to the same
quarter in 2003. This decline was due primarily to a 5 basis point
decrease in the weighted-average yield to 3.08% for the quarter ended
June 30, 2004, coupled with a $2.7 million, or 20.4%, decrease in the
average balance outstanding. Interest income on other interest-
bearing deposits decreased by $19,000, or 67.9%, during the three
months ended June 30, 2004, compared to the same period in 2003, due
primarily to a 35 basis point decrease in the weighted-average yield,
to .90% for the 2004 quarter and a $5.0 million, or 55.4%, decrease in
the average balance outstanding for the three month period. The
decline in the average balance of interest-bearing deposits was
primarily due to the use of such funds to fund loan growth.
Interest expense on deposits totaled $340,000 for the three month
period ended June 30, 2004, a decrease of $166,000, or 32.8%, from the
$506,000 recorded for the same period in 2003. The reduction in
interest on deposits was due primarily to a 65 basis point decline in
the weighted-average cost of deposits in the 2004 period. Interest
expense on borrowings increased by $33,000, or 100%, for the three
month period ended June 30, 2004 compared to no borrowing cost
recorded for the same period in 2003. This increase was due to an
increase in the average balance of borrowings which was used to fund
loan growth.
The reduction in the level of yields on interest-earning assets and
costs of interest-bearing liabilities was due primarily to the overall
decline in interest rates in the general economy.
Provision for Losses on Loans
-----------------------------
As a result of an analysis of historical experience, the volume and
type of lending conducted by the Savings Bank, the status of past due
principal and interest payments, general economic conditions,
particularly as such conditions relate to the Savings Bank's market
area, and other factors related to the collectibility of the Savings
Bank's loan portfolio, management elected to record a provision for
losses on loans totaling $24,000 for each of the quarters ending June
30, 2004 and 2003. The current period provision was predicated
primarily upon the continuing change in the loan portfolio mix,
including an increase in loans secured by nonresidential real estate,
as well as the general condition of the local economy. There can be no
assurance that the loan loss allowance will be sufficient to cover
losses on nonperforming assets in the future.
13
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended June
30, 2004 and 2003 (continued)
----------------------------------------------------------------------
Other Income
------------
Other income totaled $124,000 for the three month period ended June
30, 2004, an increase of $12,000, or 10.7%, over the same period in
2003. The increase in other income was due primarily to a $23,000, or
21.7% increase in service fees and fee income. In addition, there was
$5,000 loss on the sale of real estate for the 2004 quarter compared
to a $6,000 gain on the sale of real estate in the 2003 quarter.
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense totaled $724,000 for the
three months ended June 30, 2004, an increase of $35,000, or 5.1%,
compared to the same quarter in 2003. This increase was due primarily
to a $12,000, or 3.1%, increase in employee compensation and benefits,
a $9,000, or 17.0%, increase in data processing expenses, and a
$20,000, or 13.4% increase in other operating expenses which were
partially offset by a $5,000, or 6.0% decrease in occupancy and
equipment expense. The increase in employee compensation and benefits
was attributable to increased costs associated with the Company's
stock benefit plans, retirement plan and insurance premiums, as well
as normal merit increases quarter to quarter. Of the $20,000 increase
in other operating expenses, $9,000 is attributable to legal expense
related to the on-going compliance costs of being a stock company.
Income Taxes
------------
The income tax provision totaled $152,000 for the three month period
ended June 30, 2004, an increase of $9,000, or 6.3%, compared to the
same quarter in 2003. The income tax provision includes expense for
federal and Indiana state income taxes. The combined effective tax
rates were 40.8% and 42.1% for the three month periods ended June 30,
2004 and 2003, respectively.
Comparison of Operating Results for the Six-Month Periods Ended June
30, 2004 and 2003
--------------------------------------------------------------------
General
-------
Net earnings for the six months ended June 30, 2004 amounted to
$438,000, an increase of $20,000, or 4.8%, compared to the $418,000 in
net earnings reported for the six month period ended June 30, 2003.
The increase in earnings was due primarily to a $51,000, or 2.6%,
increase in net interest income, and a $67,000, or 38.3%, increase in
other income, which were partially offset by an $85,000, or 6.3%,
increase in general, administrative and other expense, and a $13,000,
or 4.5%, increase in income taxes.
Net Interest Income
-------------------
Total interest income amounted to $2.7 million for the six-month
period ended June 30, 2004, a decrease of $254,000, or 8.5%, from the
same period in 2003. Interest income on loans totaled $2.6 million
during the 2004 period, a decrease of $171,000, or 6.3%, from the 2003
period. This decline was due primarily to a 84 basis point decrease
in the weighted-average yield period to period, to 4.87% for the six
month period ended June 30, 2004, which was partially offset by a $9.6
million, or 10.0%, increase in the average balance of loans
outstanding period to period.
14
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods Ended June
30, 2004 and 2003 (continued)
--------------------------------------------------------------------
Net Interest Income (continued)
-------------------
Interest income on investment securities decreased by $53,000, or
24.3%, for the six months ended June 30, 2004, compared to the same
period in 2003. This decline was due primarily to a 26 basis point
increase in the weighted-average yield to 3.15% for the six month
period ended June 30, 2004, coupled with a $4.6 million, or 30.5%,
decrease in the average balance outstanding. Interest income on other
interest-bearing deposits decreased by $30,000, or 61.2%, during the
six months ended June 30, 2004, compared to the same period in 2003,
due primarily to a 38 basis point decrease in the weighted-average
yield, to .93% for the 2004 period and a $3.4 million, or 45.4%,
decrease in the average balance outstanding for the six month period.
The decline in the average balance of interest-bearing deposits was
primarily due to the use of such funds to fund loan growth.
Interest expense on deposits totaled $709,000 for the six month period
ended June 30, 2004, a decrease of $359,000, or 33.6%, from the $1.1
million recorded for the same period in 2003. The reduction in
interest on deposits was due primarily to a 75 basis point decline in
the weighted-average cost of deposits in the 2004 period. Interest
expense on borrowings increased by $54,000 to $56,000 for the six
month period ended June 30, 2004 compared to the $2,000 borrowing cost
recorded for the same period in 2003 as a result of an increase in the
average borrowings outstanding period to period in order to fund loan
growth.
The reduction in the level of yields on interest-earning assets and
costs of interest-bearing liabilities was due primarily to the overall
decline in interest rates in the general economy.
Provision for Losses on Loans
-----------------------------
As a result of an analysis of historical experience, the volume and
type of lending conducted by the Savings Bank, the status of past due
principal and interest payments, general economic conditions,
particularly as such conditions relate to the Savings Bank's market
area, and other factors related to the collectibility of the Savings
Bank's loan portfolio, management elected to record a provision for
losses on loans totaling $48,000 for each of the six month periods
ending June 30, 2004 and 2003. The current period provision was
predicated primarily upon the continuing change in the loan portfolio
mix, including an increase in loans secured by nonresidential real
estate, as well as the general condition of the local economy. There
can be no assurance that the loan loss allowance will be sufficient to
cover losses on nonperforming assets in the future.
Other Income
------------
Other income totaled $242,000 for the six month period ended June 30,
2004, an increase of $67,000, or 38.3%, over the same period in 2003.
The increase in other income was due primarily to a $54,000, or 28.0%
increase in service fees and fee income. In addition, there was a
$5,000 loss on the sale of real estate for the six month period in
2004 compared to an $18,000 net loss resulting from the sale of
investment securities and gain on sale of real estate in the 2003
period.
15
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six-Month Periods Ended June
30, 2004 and 2003 (continued)
--------------------------------------------------------------------
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense totaled $1.4 million for the
six months ended June 30, 2004, an increase of $85,000, or 6.3%,
compared to the same period in 2003. This increase was due primarily
to a $52,000, or 6.7%, increase in employee compensation and benefits,
a $21,000, or 20.4%, increase in data processing expenses, and a
$17,000, or 6.2% increase in other operating expense. The increase in
employee compensation and benefits was attributable to increased costs
associated with the Company's stock benefit plans, retirement plan and
insurance premiums, as well as normal merit increases period to
period. Of the $17,000 increase in other operating expenses, $14,000
is attributable to legal expense related to the on-going compliance
costs of being a stock company.
Income Taxes
------------
The income tax provision totaled $302,000 for the six month period
ended June 30, 2004, an increase of $13,000, or 4.5%, compared to the
same period in 2003. The income tax provision includes expense for
federal and Indiana state income taxes. The combined effective tax
rates were 40.8% and 40.9% for the six month periods ended June 30,
2004 and 2003, respectively.
Impact of Inflation and Changing Prices
---------------------------------------
The financial statements and related financial data presented herein
have been prepared in accordance with instructions to Form 10-QSB,
which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in
relative purchasing power over time due to inflation.
Unlike most industrial companies, virtually all of the Savings Bank's
assets and liabilities are monetary in nature. As a result, interest
rates generally have a more significant impact on a financial
institution's performance than does the effect of inflation.
ITEM 3: Controls and Procedures
-----------------------
Our management evaluated, with the participation of our Chief
Executive Officer and Chief Financial Officer, the effectiveness of
our disclosure controls and procedures (as defined under Rules 13a-
15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of
the end of the period covered by this report. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures are
designed to ensure that information required to be disclosed by us in
the reports that we file or submit under the Securities and Exchange
Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and regulations and are
operating in an effective manner.
No change in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934) occurred during the most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
16
PFS Bancorp, Inc.
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable
ITEM 2. Changes in Securities and Small Business Issuer Purchase of
Equity Securities
-----------------------------------------------------------
Not applicable
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable
ITEM 5. Other Information
-----------------
None.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
EX-31.1 Certification of Chief Executive Officer
pursuant to Rule 13a-14(a)/15d-14(a)
EX-31.2 Certification of Chief Financial Officer
pursuant to Rule 13a-14(a)/15d-14(a)
EX-32.1 Section 1350 Certification of the Chief
Executive Officer
EX-32.2 Section 1350 Certification of the Chief
Financial Officer
(b) Reports on Form 8-K:
Date Items and Description
---- ---------------------
April 27, 2004 Item 9. On April 27, 2004 the issuer
announced its results of operations for the
quarter ended March 31, 2004 in a press
release attached as Exhibit 99.1.
17
PFS Bancorp, Inc.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 2004 By: /s/Mel E. Green
--------------- -----------------------------------
Mel E. Green
President and Chief Executive Officer
Date: August 11, 2004 By: /s/Stuart M. Suggs
--------------- -----------------------------------
Stuart M. Suggs
Chief Financial Officer, Vice President
and Corporate Treasurer
18