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, 2005
_______________________________________________
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 12, 2005 - 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)
June 30, December 31,
ASSETS 2005 2004
(unaudited)
Cash and due from banks $ 1,381 $ 995
Interest-bearing deposits in other financial institutions 4,219 6,489
------- -------
Cash and cash equivalents 5,600 7,484
Investment securities designated as available for sale -
at market 4,054 5,014
Investment securities held to maturity - at amortized cost, which
approximates market 133 143
Loans receivable - net 121,210 114,673
Office premises and equipment - at depreciated cost 871 940
Federal Home Loan Bank stock - at cost 1,086 975
Accrued interest receivable 560 441
Prepaid expenses and other assets 299 64
Prepaid income taxes 19 20
Deferred income taxes 148 -
------- -------
Total assets $133,980 $129,754
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 90,539 $ 86,939
Advances from the Federal Home Loan Bank 21,500 17,500
Note payable - 3,500
Advances by borrowers for taxes and insurance 152 201
Accrued interest payable 11 11
Other liabilities 1,137 1,061
Deferred income taxes - 13
------- -------
Total liabilities 113,339 109,225
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 15,106 15,106
Retained earnings - restricted 7,534 7,298
Less 77,565 shares of treasury stock - at cost (1,282) (1,282)
Shares acquired by stock benefit plans (1,608) (1,608)
Accumulated other comprehensive income - unrealized gains on
securities designated as available for sale, net of related tax effects 875 999
------- -------
Total shareholders' equity 20,641 20,529
------- -------
Total liabilities and shareholders' equity $133,980 $129,754
======= =======
3
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Six months ended Three months ended
June 30, June 30,
2005 2004 2005 2004
(Unaudited)
Interest income
Loans $3,151 $2,558 $1,620 $1,281
Investment securities 106 165 53 80
Interest-bearing deposits and other 50 19 26 9
----- ----- ----- -----
Total interest income 3,307 2,742 1,699 1,370
Interest expense
Deposits 889 709 468 340
Borrowings 367 56 188 33
----- ----- ----- -----
Total interest expense 1,256 765 656 373
----- ----- ----- -----
Net interest income 2,051 1,977 1,043 997
Provision for losses on loans 48 48 24 24
----- ----- ----- -----
Net interest income after provision for
losses on loans 2,003 1,929 1,019 973
Other operating income
Gain on sale of investment securities 51 - - -
Loss on sale of repossessed property - (5) - (5)
Service charges 156 165 83 85
Other operating 91 82 47 44
----- ----- ----- -----
Total other income 298 242 130 124
General, administrative and other expense
Employee compensation and benefits 889 829 417 402
Occupancy and equipment 164 163 80 79
Data processing 141 124 69 62
Federal deposit insurance premiums 26 25 13 12
Other operating 315 290 174 169
----- ----- ----- -----
Total general, administrative and other expense 1,535 1,431 753 724
----- ----- ----- -----
Earnings before income taxes 766 740 396 373
Income taxes
Current 405 296 324 138
Deferred (96) 6 (164) 14
----- ----- ----- -----
Total income taxes 309 302 160 152
----- ----- ----- -----
NET EARNINGS $ 457 $ 438 $ 236 $ 221
===== ===== ===== =====
EARNINGS PER SHARE
Basic $.33 $.32 $.17 $.16
=== === === ===
Diluted $.32 $.31 $.16 $.15
=== === === ===
4
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Six months ended Three months ended
June 30, June 30,
2005 2004 2005 2004
(Unaudited)
Net earnings $457 $438 $236 $221
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during the period,
net of taxes (benefits) of $(81), $6, $17 and $(2) for the
respective periods (158) 12 34 (4)
Reclassification adjustment for realized gains included in earnings,
net of taxes of $17 in 2005 34 - - -
--- --- --- ---
Comprehensive income $333 $450 $270 $217
=== === === ===
Accumulated comprehensive income $875 $871 $875 $871
=== === === ===
5
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30,
(In thousands)
2005 2004
(Unaudited)
Cash flows from operating activities:
Net earnings for the period $ 457 $ 438
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of deferred loan origination fees (23) (21)
Amortization of premiums and discounts on investment securities - net 21 33
Dividends on Federal Home Loan Bank stock (21) (18)
Depreciation 79 79
Provision for losses on loans 48 48
Gain on sale of investment securities (51) -
Loss on sale of repossessed property - 5
Deferred compensation liability 23 -
Increase (decrease) in cash due to changes in:
Accrued interest receivable (119) (16)
Prepaid expenses and other assets (235) 1
Other liabilities 53 216
Accrued interest payable - (2)
Income taxes
Current 1 (75)
Deferred (96) 6
------ ------
Net cash provided by operating activities 137 694
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale - (11,932)
Proceeds from maturities and repayment of investment securities 760 12,844
Proceeds from sale of investment securities 51 -
Loan principal repayments 16,461 12,542
Loan disbursements (23,023) (20,763)
Purchase of office premises and equipment (10) (4)
Proceeds from sale of real estate acquired through foreclosure - 214
Purchase of FHLB Stock (90) -
------ ------
Net cash used in investing activities (5,851) (7,099)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 3,600 (1,998)
Repayment of note payable (3,500) -
Proceeds from Federal Home Loan Bank advances 6,000 8,000
Repayment of Federal Home Loan Bank advances (2,000) -
Advances by borrowers for taxes and insurance (49) 66
Dividends paid on common stock (221) (221)
------ ------
Net cash provided by financing activities 3,830 5,847
------ ------
Net decrease in cash and cash equivalents (1,884) (558)
Cash and cash equivalents at beginning of period 7,484 5,187
------ ------
Cash and cash equivalents at end of period $ 5,600 $ 4,629
====== ======
6
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended June 30,
(In thousands)
2005 2004
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 420 $390
===== ===
Interest on deposits and borrowings $ 1,256 $767
===== ===
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (124) $ 12
===== ===
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, 2005 and 2004
Forward-Looking Statements
--------------------------
This Form 10-QSB contains certain forward-looking statements and
information relating to the Company that is 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, 2004. 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, 2005, 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 75,597
and 86,632 unallocated ESOP shares at June 30, 2005 and 2004,
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:
Six months ended Three months ended
June 30, June 30,
2005 2004 2005 2004
Weighted-average common shares
outstanding (basic) 1,398,131 1,387,096 1,398,131 1,387,096
Dilutive effect of assumed exercise
of stock options 29,856 9,325 31,502 9,218
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 1,427,987 1,396,421 1,429,633 1,396,314
========= ========= ========= =========
8
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three months ended June 30, 2005 and 2004
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. Stock options were granted in June
2003 for 79,316 shares at an exercise price equal to fair value of
$13.22 (adjusted for the $5.00 special dividend in 2004). The Plan
provides that one-fifth of the options granted become exercisable on
each of the first five anniversaries of the date of grant and each
option has an exercise period of ten years from the grant date.
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,
2005 2004 2005 2004
Net earnings (In thousands) As reported $457 $438 $236 $221
Stock-based compensation, net of tax (18) (14) (9) (7)
--- --- --- ---
Pro-forma $439 $424 $227 $214
=== === === ===
Earnings per share
Basic As reported $.33 $.32 $.17 $.16
Stock-based compensation, net of tax (.02) (.01) (.01) (.01)
--- --- --- ---
Pro-forma $.31 $.31 $.16 $.15
=== === === ===
Diluted As reported $.32 $.31 $.16 $.15
Stock-based compensation, net of tax (.01) (.01) - -
--- --- --- ---
Pro-forma $.31 $.30 $.16 $.15
=== === === ===
9
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three months ended June 30, 2005 and 2004
4. Stock Option Plan (continued)
-----------------
A summary of the status of the Plan as of June 30, 2005 and December
31, 2004 and 2003 is presented below:
June 30, December 31,
2005 2004 2003
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of period 79,316 $13.22 79,316 $13.22 - $ -
Granted - - - - 79,316 13.22
Exercised - - - - - -
Forfeited - - - - - -
------ ----- ------ ----- ------ -----
Outstanding at end of period 79,316 $13.22 79,316 $13.22 79,316 $13.22
====== ===== ====== ===== ====== =====
Options exercisable at period-end 31,726 $13.22 15,863 $13.22 - $ -
====== ===== ====== ===== ====== =====
Weighted-average fair value of
options granted during the period N/A N/A $ 3.82
=== === ====
The following information applies to options outstanding at June 30, 2005:
Number outstanding 79,316
Exercise price $13.22
Weighted-average exercise price $13.22
Weighted-average remaining contractual life 8 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, 2004 (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, 2004 to
June 30, 2005
-------------------------------------------------------------------
At June 30, 2005, the Company's assets totaled $134.0 million, an
increase of $4.2 million, or 3.3%, compared to total assets at
December 31, 2004. The increase in assets was comprised primarily of
a $6.5 million, or 5.7%, increase in loans receivable which was
principally funded by an increase in deposits of $3.6 million, or
4.1%, to $90.5 million at June 30, 2005 and a $1.9 million decrease in
cash and interest-bearing deposits in other financial institutions.
Liquid assets (i.e. cash and interest-bearing deposits) decreased by
$1.9 million, or 25.2%, from December 31, 2004 levels, to a total of
$5.6 million at June 30, 2005. Investment securities available for
sale totaled $4.1 million at June 30, 2005, a decrease of $1.0
million, or 19.1%, from December 31, 2004 levels. The decrease in
investment securities was due to sales and maturities of securities
totaling $811,000 and a decrease of $239,000 in the market value of
the investment securities during the 2005 six month period.
As previously stated, loans receivable increased by $6.5 million, or
5.7%, during the six month period ended June 30, 2005, to a total of
$121.2 million. Loan disbursements amounted to $23.0 million and were
partially offset by principal repayments of $16.5 million. During the
six months ended June 30, 2005, loan originations were comprised of
$11.6 million in loans secured by one- to four-family residential real
estate, $6.3 million in loans secured by commercial and nonresidential
real estate, and $5.1 million in consumer and other loans.
The allowance for loan losses totaled $874,000 and $833,000 at June
30, 2005 and December 31, 2004, respectively. Nonperforming and
impaired loans totaled $261,000 and $816,000 at June 30, 2005 and
December 31, 2004, respectively. The decrease in nonperforming and
impaired loans was primarily due to the repayment in full of a
$500,000 nonperforming loan during the six month period ended June 30,
2005. The allowance for loan losses represented 334.9% and 102.1% of
nonperforming and impaired loans as of June 30, 2005 and December 31,
2004, respectively. The allowance represented approximately .71% and
.70% of the total loan portfolio at June 30, 2005 and December 31,
2004, respectively. At June 30, 2005, nonperforming and impaired
loans were comprised of $251,000 in loans secured by one- to four-
family residential real estate and $10,000 in commercial, consumer and
other loans. Management believes such loans are adequately
collateralized and does not presently expect to incur any additional
material losses on such loans. Although management believes that its
allowance for loan losses at June 30, 2005 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 $90.5 million at June 30, 2005, an increase of $3.6
million, or 4.1%, from December 31, 2004 levels. While management
generally strives to maintain a moderate level of growth in deposits
through marketing and pricing strategies, the recent rise in interest
rates has contributed to the increase in deposits as depositors are
attracted by the higher yields. The increase in deposits was used to
fund increased loan demand. Federal Home Loan Bank advances increased
by $4.0 million to $21.5 million at June 30, 2005. The increase in
advances was used to pay off the outstanding balance of the $3.5
million note payable.
Shareholders' equity amounted to $20.6 million at June 30, 2005, an
increase of $112,000, or .5% from December 31, 2004 levels. The
increase resulted primarily from the net earnings of $457,000, which
was reduced by a $124,000 decline in unrealized gains on securities
designated as available for sale and by the payment of dividends of
$221,000.
The Saving Bank is required to meet minimum capital standards
promulgated by the Office of Thrift Supervision ("OTS"). At June 30,
2005, the Savings Bank's 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 June
30, 2005 and 2004
----------------------------------------------------------------------
General
-------
Net earnings for the three months ended June 30, 2005 amounted to
$236,000, an increase of $15,000, or 6.8%, compared to the $221,000 in
net earnings reported for the three month period ended June 30, 2004.
The increase in earnings was due primarily to a $46,000, or 4.6%,
increase in net interest income and a $6,000, or 4.8%, increase in
other income, which were partially offset by a $29,000, or 4.0%,
increase in general, administrative and other expense and an $8,000,
or 5.3%, increase in income taxes.
Net Interest Income
-------------------
Total interest income amounted to $1.7 million for the three-month
period ended June 30, 2005, an increase of $329,000, or 24.0%, from
the same period in 2004. Interest income on loans totaled $1.6
million during the 2005 period, an increase of $339,000, or 26.5%,
from the 2004 period. This increase was due primarily to a $14.8
million, or 13.9%, increase in the average balance of loans
outstanding quarter to quarter, coupled with a 53 basis point increase
in the weighted-average yield to 5.33% for the quarter ended June 30,
2005. The increase in the average balance was due to the growth in
the loan portfolio, in particular, residential and nonresidential real
estate. The increase in yield was due to the upward repricing of our
adjustable rate mortgages reflecting recent increases in market
interest rates.
Interest income on investment securities decreased by $27,000, or
33.8%, for the three months ended June 30, 2005, compared to the same
quarter in 2004. This decline was due primarily to a $4.4 million, or
42.5%, decrease in the average balance outstanding which was partially
offset by a 47 basis point increase in the weighted-average yield to
3.55% for the quarter ended June 30, 2005. The decrease in the
average balance of investment securities was primarily due to the
maturity of investment securities from which the funds were used to
partially pay a $5.00 per share special dividend in October 2004.
Interest income on other interest-bearing deposits increased by
$17,000 during the three months ended June 30, 2005, compared to the
same period in 2004, due primarily to a 197 basis point increase in
the weighted-average yield, to 2.87% for the 2005 quarter, partially
offset by a $385,000, or 9.6%, decrease in the average balance
outstanding for the three month period. The increase in the weighted
average yield of interest-bearing deposits was primarily due to the
rise in short term interest rates.
Interest expense on deposits totaled $468,000 for the three month
period ended June 30, 2005, an increase of $128,000, or 37.6%, from
the $340,000 recorded for the same period in 2004. The increase in
interest on deposits was due primarily to a 53 basis point increase in
the weighted-average cost of deposits in the 2005 period, coupled with
a $3.8 million, or 4.7%, increase in the average balance outstanding
quarter to quarter. Interest expense on borrowings increased by
$155,000 to $188,000 for the three month period ended June 30, 2005,
as compared to $33,000 in borrowing costs in the 2004 quarter. The
increase in borrowing costs was due to a $13.5 million increase in the
average balance of borrowings outstanding quarter to quarter. The
increase in borrowings was used to fund increased loan demand.
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, 2005 and 2004 (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 recorded a provision for losses on
loans totaling $24,000 for each of the quarters ending June 30, 2005
and 2004. 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. There can be no assurance that the
loan loss allowance will be sufficient to cover estimated loan losses
in the future.
Other Income
------------
Other income totaled $130,000 for the three month period ended June
30, 2005, an increase of $6,000, or 4.8%, over the same period in
2004. The increase in other income was due primarily to the absence
of a $5,000 loss on the sale of real estate recognized in the 2004
quarter. Excluding the loss on repossessed property, other income
would have increased by $1,000 from quarter to quarter. This increase
is a result of a $3,000, or 6.8%, increase in other operating income
which was partially offset by a $2,000, or 2.4%, decrease in service
charge fees.
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense totaled $753,000 for the
three months ended June 30, 2005, an increase of $29,000, or 4.0%,
compared to the same quarter in 2004. This increase was due primarily
to a $15,000, or 3.7%, increase in employee compensation and benefits,
a $7,000, or 11.3%, increase in data processing expenses, and a
$5,000, or 3.0%, increase in other operating expenses. The increase in
employee compensation and benefits was attributable to increased costs
associated with the Company's stock benefit plan and insurance
premiums, as well as normal merit increases quarter to quarter. The
increase in data processing expenses and other operating expenses is
primarily due to increased check processing costs and legal expense
related to the on-going compliance costs of being a stock company.
Income Taxes
------------
The income tax provision totaled $160,000 for the three month period
ended June 30, 2005, an increase of $8,000, or 5.3%, compared to the
same quarter in 2004. The income tax provision includes expense for
federal and Indiana state income taxes. The combined effective tax
rates were 40.4% and 40.8% for the three month periods ended June 30,
2005 and 2004, respectively.
13
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, 2005 and 2004
--------------------------------------------------------------------
General
-------
Net earnings for the six months ended June 30, 2005 amounted to
$457,000, an increase of $19,000, or 4.3%, compared to the $438,000 in
net earnings reported for the six month period ended June 30, 2004.
The increase in earnings was due primarily to a $74,000, or 3.7%,
increase in net interest income and a $56,000, or 23.1%, increase in
other income, which were partially offset by an $104,000, or 7.3%,
increase in general, administrative and other expense and a $7,000, or
2.3%, increase in income taxes.
Net Interest Income
-------------------
Total interest income amounted to $3.3 million for the six-month
period ended June 30, 2005, an increase of $565,000, or 20.6%, from
the same period in 2004. Interest income on loans totaled $3.2
million during the 2005 period, an increase of $593,000, or 23.2%,
from the 2004 period. This increase was due primarily to a $14.8
million, or 14.1%, increase in the average balance of loans
outstanding period to period, coupled with a 39 basis point increase
in the weighted-average yield to 5.25% for the six months ended June
30, 2005. The increase in the average balance was due to the growth
in the loan portfolio, in particular, residential and nonresidential
real estate. The increase in yield was due to the upward repricing of
our adjustable rate mortgages reflecting recent increases in market
interest rates.
Interest income on investment securities decreased by $59,000, or
35.8%, for the six months ended June 30, 2005, compared to the same
period in 2004. This decline was due primarily to a $4.5 million, or
42.6%, decrease in the average balance outstanding which was partially
offset by a 38 basis point increase in the weighted-average yield to
3.53% for the period ended June 30, 2005. The decrease in the average
balance of investment securities was primarily due to the maturity of
investment securities from which the funds were used to partially pay
a $5.00 per share special dividend in October 2004. Interest income
on other interest-bearing deposits increased by $31,000 during the six
months ended June 30, 2005, compared to the same period in 2004, due
primarily to a 153 basis point increase in the weighted-average yield,
to 2.47% for the 2005 period, partially offset by a $20,000, or .5%,
decrease in the average balance outstanding for the six month period.
The increase in the weighted average yield of interest-bearing
deposits was primarily due to the rise in short term interest rates.
Interest expense on deposits totaled $889,000 for the six month period
ended June 30, 2005, an increase of $180,000, or 25.4%, from the
$709,000 recorded for the same period in 2004. The increase in
interest on deposits was due primarily to a 37 basis point increase in
the weighted-average cost of deposits in the 2005 period, coupled with
a $2.7 million, or 3.3%, increase in the average balance outstanding
period to period. Interest expense on borrowings increased by
$311,000 to $367,000 for the six month period ended June 30, 2005, as
compared to $56,000 in borrowing costs in the 2004 period. The
increase in borrowing costs is due to a $15.4 million increase in the
average borrowings outstanding period to period. The increase in
borrowings was used to fund increased loan demand.
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, 2005 and 2004 (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 recorded a provision for losses on
loans totaling $48,000 for each of the six month periods ending June
30, 2005 and 2004. 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. There can be
no assurance that the loan loss allowance will be sufficient to cover
estimated loan losses in the future.
Other Income
------------
Other income totaled $298,000 for the six month period ended June 30,
2005, an increase of $56,000, or 23.1%, over the same period in 2004.
The increase in other income was due primarily to a $51,000 gain from
the sale of investment securities in 2005 as well as the absence of a
$5,000 loss on the sale of repossessed property in 2004. Excluding
the investment securities gain and the loss on sale of repossessed
property, other income would have been $247,000 for each of the six
month periods. A $9,000, or 11.0%, increase in other operating income
was offset by a $9,000, or 5.5%, decrease in service charge fees.
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense totaled $1.5 million for the
six months ended June 30, 2005, an increase of $104,000, or 7.3%,
compared to the same period in 2004. This increase was due primarily
to a $60,000, or 7.2%, increase in employee compensation and benefits,
a $25,000, or 8.6%, increase in other operating expenses and a
$17,000, or 13.7%, increase in data processing expenses. The growth
in employee compensation and benefits was primarily due to increased
pension costs totaling $51,000. Excluding pension costs, employee
compensation and benefits increased $9,000, or 1.1%, period to period.
The increase in other operating expenses is primarily due to increased
check processing costs and legal expense related to the on-going
compliance costs of being a stock company.
Income Taxes
------------
The income tax provision totaled $309,000 for the six month period
ended June 30, 2005, an increase of $7,000, or 2.3%, compared to the
same quarter in 2004. The income tax provision includes expense for
federal and Indiana state income taxes. The combined effective tax
rates were 40.3% and 40.8% for the six month periods ended June 30,
2005 and 2004, respectively.
15
PFS Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Other Events
------------
On May 4, 2005, the Company announced that it entered into an
agreement and plan of merger with Peoples Community Bancorp, Inc.
(Peoples Community), whereby Peoples Community will pay $23.00 per
share in cash, or approximately $33.8 million in the aggregate, for
100% of the outstanding common shares of the Company. The transaction
is subject to shareholder and regulatory approval with a tentative
closing date in the fourth quarter of calendar 2005.
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.
16
PFS Bancorp, Inc.
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
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: August 15, 2005 By: /s/Mel E. Green
--------------- ----------------------------------
Mel E. Green
President and Chief Executive Officer
Date: August 15, 2005 By: /s/Stuart M. Suggs
--------------- ----------------------------------
Stuart M. Suggs
Corporate Treasurer, Chief Operating
Officer, and Chief Financial Officer
18