UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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:
November 12, 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 11
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)
September 30, December 31,
ASSETS 2004 2003
Cash and due from banks $ 1,106 $ 855
Interest-bearing deposits in other financial institutions 2,410 4,332
------- -------
Cash and cash equivalents 3,516 5,187
Investment securities designated as available for sale -
at market 8,369 10,016
Investment securities held to maturity - at amortized cost, which
approximates market 143 152
Loans receivable - net 112,618 100,293
Office premises and equipment - at depreciated cost 981 1,065
Real estate acquired through foreclosure - 169
Federal Home Loan Bank stock - at cost 825 758
Accrued interest receivable 470 395
Prepaid expenses and other assets 103 126
Prepaid income taxes 90 20
Deferred income taxes 30 92
------- -------
Total assets $127,145 $118,273
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 81,817 $ 88,328
Advances from the Federal Home Loan Bank 16,500 2,000
Advances by borrowers for taxes and insurance 165 63
Accrued interest payable 11 12
Other liabilities 1,277 948
------- -------
Total liabilities 99,770 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 14,438 14,101
Less: 77,565 shares of treasury stock at September 30, 2004 and
December 31, 2003 (1,282) (1,282)
Shares acquired by stock benefit plans (1,730) (1,801)
Accumulated other comprehensive income - unrealized gains on
securities designated as available for sale, net of related tax effects 904 859
------- -------
Total shareholders' equity 27,375 26,922
------- -------
Total liabilities and shareholders' equity $127,145 $118,273
======= =======
3
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Nine months ended Three months ended
September 30, September 30,
2004 2003 2004 2003
Interest income
Loans $3,923 $4,022 $1,365 $1,293
Investment securities 238 313 73 95
Interest-bearing deposits and other 34 63 15 14
----- ----- ----- -----
Total interest income 4,195 4,398 1,453 1,402
Interest expense
Deposits 1,052 1,517 343 449
Borrowings 128 2 72 -
----- ----- ----- -----
Total interest expense 1,180 1,519 415 449
----- ----- ----- -----
Net interest income 3,015 2,879 1,038 953
Provision for losses on loans 72 48 24 -
----- ----- ----- -----
Net interest income after provision for
losses on loans 2,943 2,831 1,014 953
Other operating income
Loss on sale of investment securities - (28) - -
Gain (loss) on sale of repossessed property (1) 10 4 -
Other operating 375 304 128 111
----- ----- ----- -----
Total other operating income 374 286 132 111
General, administrative and other expense
Employee compensation and benefits 1,281 1,152 452 375
Occupancy and equipment 248 257 85 90
Data processing 195 167 71 64
Federal deposit insurance premiums 38 39 13 13
Other operating 426 405 136 132
Provision for losses on real estate acquired through foreclosure - 39 - 39
----- ----- ----- -----
Total general, administrative and other expense 2,188 2,059 757 713
----- ----- ----- -----
Earnings before income taxes 1,129 1,058 389 351
Income taxes
Current 421 455 125 146
Deferred 40 (19) 34 1
----- ----- ----- -----
Total income taxes 461 436 159 147
----- ----- ----- -----
NET EARNINGS $ 668 $ 622 $ 230 $ 204
===== ===== ===== =====
EARNINGS PER SHARE
Basic $.48 $.45 $.16 $.15
=== === === ===
Diluted $.47 $.45 $.16 $.15
=== === === ===
4
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Nine months ended Three months ended
September 30, September 30,
2004 2003 2004 2003
Net earnings $668 $622 $230 $204
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during the period,
net of taxes (benefits) of $22, $(50), $17 and $(4) for the
respective periods 45 (98) 33 (7)
Reclassification adjustment for realized losses included in earnings,
net of tax benefits of $10 in 2003 - 18 - -
--- --- --- ---
Comprehensive income $713 $542 $266 $197
=== === === ===
Accumulated comprehensive income $904 $803 $904 $803
=== === === ===
5
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands)
2004 2003
Cash flows from operating activities:
Net earnings for the period $ 668 $ 622
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of deferred loan origination fees (29) (48)
Amortization of premiums and discounts on investment securities - net 43 62
Federal Home Loan Bank stock dividends (27) -
Depreciation 119 133
Provision for losses on loans 72 48
Provision for losses on real estate acquired through foreclosure - 39
Amortization expense of stock benefit plan 71 71
Loss on sale of investment securities - 28
Loss (gain) on sale of repossessed assets 1 (10)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (75) 44
Prepaid expenses and other assets 23 26
Other liabilities 329 191
Accrued interest payable (1) (13)
Income taxes
Current (70) (169)
Deferred 40 (19)
------ ------
Net cash provided by operating activities 1,164 1,005
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (17,933) (23,630)
Proceeds from maturities and repayment of investment securities 19,613 23,669
Proceeds from sale of investment securities - 3,029
Loan principal repayments 21,168 27,266
Loan disbursements (33,586) (28,254)
Purchase of Federal Home Loan Bank stock (40) (18)
Purchase of office premises and equipment (35) (29)
Proceeds from sale of real estate acquired through foreclosure 218 -
------ ------
Net cash provided by (used in) investing activities (10,595) 2,033
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits (6,511) 417
Proceeds from Federal Home Loan Bank advances 16,500 2,500
Repayment of Federal Home Loan Bank advances (2,000) (3,500)
Advances by borrowers for taxes and insurance 102 31
Purchase of treasury shares - (1,282)
Dividends on common shares (331) (338)
------ ------
Net cash provided by (used in) financing activities 7,760 (2,172)
------ ------
Net increase (decrease) in cash and cash equivalents (1,671) 866
Cash and cash equivalents at beginning of period 5,187 5,225
------ ------
Cash and cash equivalents at end of period $ 3,516 $ 6,091
====== ======
6
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(In thousands)
2004 2003
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 470 $ 649
===== =====
Interest on deposits and borrowings $ 1,181 $ 1,532
===== =====
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 45 $ (80)
===== =====
Transfers from loans to real estate acquired through
foreclosure $ 50 $ -
===== =====
7
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three months ended September 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 year 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 nine and three month periods ended September
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 gives effect to 86,632 and
97,336 unallocated ESOP shares as of September 30, 2004 and 2003,
respectively. Diluted earnings per share is computed taking into
consideration common shares outstanding and the dilutive effect of
additional potential common shares issuable under the Company's
stock option plan. The computations are as follows:
For the nine months ended For the three months ended
September 30, September 30,
2004 2003 2004 2003
Weighted-average common shares
outstanding (basic) 1,387,096 1,394,860 1,387,096 1,376,392
Dilutive effect of assumed exercise
of stock options 10,269 1,793 11,986 1,793
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 1,397,365 1,396,653 1,399,082 1,378,185
========= ========= ========= =========
8
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 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:
Nine months ended Three months ended
September 30, September 30,
2004 2003 2004 2003
Net earnings (In thousands) As reported $668 $622 $230 $204
Stock-based compensation, net of tax (21) (7) (7) (7)
--- --- --- ---
Pro-forma $647 $615 $223 $197
=== === === ===
Earnings per share
Basic As reported $.48 $.45 $.16 $.15
Stock-based compensation, net of tax (.01) (.01) - (.01)
--- --- --- ---
Pro-forma $.47 $.44 $.16 $.14
=== === === ===
Diluted As reported $.47 $.45 $.16 $.15
Stock-based compensation, net of tax (.01) (.01) - (.01)
--- --- --- ---
Pro-forma $.46 $.44 $.16 $.14
=== === === ===
9
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2004 and 2003
4. Stock Option Plan (continued)
-----------------
A summary of the status of the Plan as of September 30, 2004 and December
31, 2003 is presented below:
Nine months ended Year ended
September 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 September 30, 2004:
Number outstanding 62,228
Range of exercise prices $16.85
Weighted-average exercise price $16.85
Weighted-average remaining contractual life 8.75 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 primarily focuses on determining the allowance for loan
losses. 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 10-KSB 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.
10
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
September 30, 2004
-------------------------------------------------------------------
At September 30, 2004, the Company's assets totaled $127.1 million, an
increase of $8.9 million, or 7.5%, compared to total assets at
December 31, 2003. The increase in assets was comprised primarily of
a $12.3 million, or 12.3%, increase in loans receivable which was
principally funded by additional advances from the Federal Home Loan
Bank, which increased by $14.5 million.
Liquid assets (i.e. cash and interest-bearing deposits) decreased by
$1.7 million, or 32.2%, from December 31, 2003 levels, to a total of
$3.5 million at September 30, 2004. Investment securities available
for sale totaled $8.4 million at September 30, 2004, a decrease of
$1.6 million, or 16.4%, from December 31, 2003 levels. The decrease
resulted primarily from investment maturities of $19.6 million, which
were partially offset by security purchases totaling $17.9 million
during the nine month period.
As previously stated, loans receivable increased by $12.3 million, or
12.3%, during the nine month period ended September 30, 2004, to a
total of $112.6 million. Loan disbursements amounted to $33.6 million
and were partially offset by principal repayments of $21.2 million.
During the nine months ended September 30, 2004, loan originations
were comprised of $18.5 million in loans secured by one- to four-
family residential real estate, $1.1 million in loans secured by
multifamily residential real estate, $9.0 million in loans secured by
commercial and nonresidential real estate and $5.0 million in consumer
and other loans.
The allowance for loan losses totaled $809,000 and $771,000 at
September 30, 2004 and December 31, 2003, respectively. Nonperforming
and impaired loans totaled $434,000 and $1.1 million at September 30,
2004 and December 31, 2003, respectively. The allowance for loan
losses represented 186.4% and 67.7% of nonperforming and impaired
loans as of September 30, 2004 and December 31, 2003, respectively.
The allowance represented approximately .71% and .76% of the total
loan portfolio at September 30, 2004 and December 31, 2003,
respectively. At September 30, 2004, nonperforming and impaired loans
were comprised of $426,000 in loans secured by one- to four-family
residential real estate and $8,000 in commercial, consumer and other
loans. Management believes such loans are adequately collateralized
and does not presently expect to incur any material losses on such
loans. Although management believes that its allowance for loan
losses at September 30, 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 $81.8 million at September 30, 2004, a decrease of
$6.5 million, or 7.4%, from December 31, 2003 levels. The decline was
due primarily to a withdrawal from one municipality account. 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 a $14.5 million increase in advances from the Federal
Home Loan Bank.
Shareholders' equity amounted to $27.4 million at September 30, 2004,
an increase of $453,000, or 1.7%, from December 31, 2003 levels. The
increase resulted primarily from the net earnings of $668,000, a
$45,000 increase in unrealized gains on securities designated as
available for sale, and $71,000 of amortization related to a
distribution of shares in connection with the Company's recognition
and retention plan, which were partially offset by the payment of
dividends of $331,000.
Peoples is required to meet minimum capital standards promulgated by
the Office of Thrift Supervision ("OTS"). At September 30, 2004,
Peoples' regulatory capital was well in excess of the minimum capital
requirements.
11
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended
September 30, 2004 and 2003
-----------------------------------------------------------------
General
-------
Net earnings for the three months ended September 30, 2004 amounted to
$230,000, an increase of $26,000, or 12.7%, compared to the $204,000
in net earnings reported for the three month period ended September
30, 2003. The increase in earnings was due primarily to an $85,000,
or 8.9%, increase in net interest income and a $21,000, or 18.9%,
increase in other income which were partially offset by a $24,000
increase in the provision for losses on loans, a $44,000, or 6.2%,
increase in general, administrative and other expense, and a $12,000,
or 8.2%, increase in income taxes.
Net Interest Income
-------------------
Total interest income amounted to $1.5 million for the three-month
period ended September 30, 2004, an increase of $51,000, or 3.6%, from
the same period in 2003. Interest income on loans totaled $1.4
million during the 2004 period, an increase of $72,000, or 5.6%, from
the 2003 period. This increase was due primarily to a $15.3 million,
or 15.9%, increase in the average balance of loans outstanding quarter
to quarter, which was partially offset set by a 48 basis point
decrease in the weighted-average yield quarter to quarter, to 4.90%
for the quarter ended September 30, 2004. The decline in yield is due
to the repricing of our adjustable mortgages.
Interest income on investment securities decreased by $22,000, or
23.2%, for the three months ended September 30, 2004, compared to the
same quarter in 2003. This decline was due primarily to a $3.8
million, or 28.0%, decrease in the average balance outstanding,
partially offset by a 19 basis point increase in the weighted-average
yield to 3.02% for the quarter ended September 30, 2004. Interest
income on other interest-bearing deposits increased by $1,000, or
7.1%, during the three months ended September 30, 2004, compared to
the same period in 2003, due primarily to a 53 basis point increase
in the weighted-average yield, to 1.48% for the 2004 quarter which was
offset by a $1.8 million, or 31.2%, decrease in the average balance
outstanding for the three month period. The decline in the average
balance of investment securities and interest-bearing deposits was
primarily due to the use of such funds to fund loan growth.
Interest expense on deposits totaled $343,000 for the three month
period ended September 30, 2004, a decrease of $106,000, or 23.6%,
from the $449,000 recorded for the same period in 2003. The reduction
in interest on deposits was due primarily to a 40 basis point decline
in the weighted-average cost of deposits in the 2004 period, coupled
with a $5.2 million, or 6.1%, decrease in the average balance
outstanding quarter to quarter. This decline in average outstanding
deposits is primarily due to withdrawals from one municipality
account. Interest expense on borrowings increased by $72,000 for the
three month period ended September 30, 2004, as compared to no
borrowing costs in the 2003 quarter.
12
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three-Month Periods Ended
September 30, 2004 and 2003 (continued)
-----------------------------------------------------------------
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 the quarter ending September 30,
2004, compared to no provision for losses on loans for the same period
in 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 an increase
in the size of the loan portfolio and 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 $132,000 for the three month period ended
September 30, 2004, an increase of $21,000, or 18.9%, over the same
period in 2003. The increase in other income was due primarily to a
$17,000, or 15.3%, increase in service fees and fee income as a result
of return check fees and ATM fees. In addition, there was a $4,000
gain on the sale of repossessed property for the 2004 quarter compared
to no gain or loss on the sale of repossessed property in the 2003
quarter.
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense totaled $757,000 for the
three months ended September 30, 2004, an increase of $44,000, or
6.2%, compared to the same quarter in 2003. This increase was due
primarily to a $77,000, or 20.5%, increase in employee compensation
and benefits, a $7,000, or 10.9%, increase in data processing
expenses, and a $4,000, or 3.0%, increase in other operating expenses
which were partially offset by a $5,000, or 5.6% decrease in occupancy
and equipment expense and a $39,000 decrease in the provision for
losses on real estate acquired through foreclosure. 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.
Income Taxes
------------
The income tax provision totaled $159,000 for the three month period
ended September 30, 2004, an increase of $12,000, or 8.2%, 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 40.9% and 41.9% for the three month periods ended
September 30, 2004 and 2003, respectively.
13
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended
September 30, 2004 and 2003
----------------------------------------------------------------
General
-------
Net earnings for the nine months ended September 30, 2004 amounted to
$668,000, an increase of $46,000, or 7.4%, compared to the $622,000 in
net earnings reported for the nine month period ended September 30,
2003. The increase in earnings was due primarily to an $136,000, or
4.7%, increase in net interest income and an $88,000, or 30.8%,
increase in other income, which were partially offset by a $24,000, or
50.0%, increase in the provision for losses on loans, an $129,000, or
6.3%, increase in general, administrative and other expense and a
$25,000, or 5.7%, increase in income taxes.
Net Interest Income
-------------------
Total interest income amounted to $4.2 million for the nine-month
period ended September 30, 2004, a decrease of $203,000, or 4.6%, from
the same period in 2003. Interest income on loans totaled $3.9
million during the 2004 period, a decrease of $99,000, or 2.5%, from
the 2003 period. This decline was due primarily to a 65 basis point
decrease in the weighted-average yield period to period, to 4.88% for
the nine month period ended September 30, 2004, which was partially
offset by a $10.3 million, or 10.6%, increase in the average balance
of loans outstanding period to period. The decrease in the average-
yield was due to the repricing of our adjustable mortgages. The
increase in the average balance was due to increased origination
activity.
Interest income on investment securities decreased by $75,000, or
24.0%, for the nine months ended September 30, 2004, compared to the
same period in 2003. This decline was due primarily to a $4.3 million,
or 29.7%, decrease in the average balance outstanding, partially
offset by a 23 basis point increase in the weighted-average yield to
3.13% for the nine month period ended September 30, 2004. Interest
income on other interest-bearing deposits decreased by $29,000, or
46.0%, during the nine months ended September 30, 2004, compared to
the same period in 2003, due primarily to a $3.2 million, or 46.3%,
decrease in the average balance outstanding for the nine month
period. The decline in the average balance of investment securities
and interest-bearing deposits was primarily due to the use of such
funds to fund loan growth.
Interest expense on deposits totaled $1.1 million for the nine month
period ended September 30, 2004, a decrease of $465,000, or 30.7%,
from the $1.5 million recorded for the same period in 2003. The
reduction in interest on deposits was due primarily to a 63 basis
point decline in the weighted-average cost of deposits in the 2004
period and a $4.8 million, or 5.7%, decrease in the average balance
outstanding for the nine month period. This decline in average
outstanding balance of deposits was primarily due to withdrawals from
the deposit account of one municipality. Interest expense on
borrowings increased by $126,000 to $128,000 for the nine month period
ended September 30, 2004 compared to the $2,000 borrowing cost
recorded for the same period in 2003. This increase in interest
expense on borrowings was due to an increase in the average balance of
borrowings during 2004, which was used to fund loan growth.
14
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine-Month Periods Ended
September 30, 2004 and 2003 (continued)
----------------------------------------------------------------
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 $72,000 for the nine month period ending
September 30, 2004 compared to $48,000 for the same period in 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 an increase in
the size of the loan portfolio and 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 $374,000 for the nine month period ended
September 30, 2004, an increase of $88,000, or 30.8%, over the same
period in 2003. The increase in other income was due primarily to a
$71,000, or 23.4%, increase in service fees and fee income as a result
of return check fees and ATM fees. In addition, there was a $28,000
net loss resulting from the sale of investment securities in the 2003
nine month period. The Company did not incur any comparable loss
during the 2004 period.
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense totaled $2.2 million for the
nine months ended September 30, 2004, an increase of $129,000, or
6.3%, compared to the same period in 2003. This increase was due
primarily to an $129,000, or 11.2%, increase in employee compensation
and benefits, a $28,000, or 16.8%, increase in data processing
expenses, and a $21,000, or 5.2%, increase in other operating expense
which were partially offset by a $9,000, or 3.5%, decrease in
occupancy and equipment expense and a $39,000 decrease in the
provision for losses on real estate acquired through foreclosure. 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.
Income Taxes
------------
The income tax provision totaled $461,000 for the nine month period
ended September 30, 2004, an increase of $25,000, or 5.7%, 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 41.2% for the nine month periods ended
September 30, 2004 and 2003, respectively.
15
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Subsequent Events
-----------------
Subsequent to September 30, 2004, it came to management's attention
that a commercial real estate loan in which the Savings Bank has a 50%
participation interest will be taken into real estate acquired through
foreclosure. Control of the property was surrendered to the lead
lender. The Savings Bank is carrying its participation interest at
$403,000. The real estate collateral will be appraised in the near-
term and the asset will be recorded at the lower of cost or fair value
at the time it is classified as real estate acquired through
foreclosure.
In October 2004, the Board of Directors declared a $5.00 per share
special dividend. In order to finance payment of the dividend, the
Company borrowed $3.5 million from another financial institution
secured by the stock of the Savings Bank and certain mortgage loans.
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 Purchases 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
--------
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
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: November 12, 2004 By: /s/Mel E. Green
----------------- ----------------------------------
Mel E. Green
President and Chief Executive Officer
Date: November 12, 2004 By: /s/Stuart M. Suggs
----------------- ----------------------------------
Stuart M. Suggs
Corporate Treasurer, Chief Operating Officer,
and Chief Financial Officer
18