SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
SEC File Number 000-23230
-------------------------
PHS Bancorp, Inc.
-----------------
(Exact Name of registrant as specified in its charter)
PENNSYLVANIA 23-2744266
- ------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
744 Shenango Road
P.O. Box 1568
Beaver Falls, Pennsylvania 15010
(724) 846 - 7300
(Address, including zip code, and
telephone number, including area
code of Principal Executive Offices)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirement for the past 90 days. Yes [X] No [ ]
As of October 26, 1999 there were 2,656,842 shares outstanding of the issuer's
class of common stock.
<PAGE>
PHS BANCORP, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
Number
------
Part I Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet (unaudited) as of September 30, 1999
and December 31, 1998 3
Consolidated Statement of Income (unaudited) for the Nine
Months ended September 30, 1999 and 1998 4
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) for the Nine Months ended September 30, 1999 5
Consolidated Statement of Cash Flows (unaudited) for the
Nine Months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 15
Part II Other Information 16
Signatures 17
2
<PAGE>
PHS BANCORP, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- ------------------
<S> <C> <C>
ASSETS
Cash and amounts due from other institutions $ 2,284,310 $ 2,136,601
Interest - bearing deposits with other institutions 2,836,247 9,332,219
Investment securities:
Available for sale 32,728,312 25,197,294
Held to maturity (market value $ 15,475,142
and $18,581,867) 15,609,948 18,145,662
Mortgage - backed securities:
Available for sale 35,796,022 32,877,841
Held to maturity (market value $ 44,225,393
and $48,767,611) 45,605,747 48,287,244
Loans (net of allowance for loan losses of $1,347,014
and $1,287,496) 116,968,236 99,913,716
Accrued interest receivable 1,665,731 1,516,677
Premises and equipment 4,419,192 4,501,659
Federal Home Loan Bank stock 2,344,885 1,544,800
Other assets 1,580,396 798,957
------------------- ------------------
TOTAL ASSETS $ 261,839,026 $ 244,252,670
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 185,736,239 $ 181,112,564
Advances from Federal Home Loan Bank 46,894,800 30,894,800
Other borrowings 130,881 1,387,618
Accrued interest payable and other liabilities 1,866,072 1,673,579
------------------- ------------------
Total liabilities 234,627,992 215,068,561
------------------- ------------------
Preferred stock, 2,000,000 shares authorized, none issued - -
Common stock, $.10 par value 10,000,000 shares authorized,
2,760,000 shares issued 276,000 276,000
Additional paid in capital 10,556,155 10,588,940
Retained earnings - substantially restricted 19,137,753 18,489,177
Accumulated other comprehensive income (loss) (400,238) 1,088,415
Unallocated ESOP shares (70,260 and 77,460 shares) (1,103,808) (1,215,723)
Unallocated RSP shares (30,124 and 3,713 shares) (346,423) (42,700)
Treasury stock, at cost (88,158 shares) (908,405) -
------------------- ------------------
Total stockholders' equity 27,211,034 29,184,109
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 261,839,026 $ 244,252,670
=================== ==================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
PHS BANCORP, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
1999 1998 1999 1998
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans $ 2,319,708 $ 2,121,501 $ 6,554,016 $ 6,282,458
Investment securities:
Taxable 462,353 358,694 1,389,154 932,599
Exempt from federal income tax 252,983 243,899 725,803 748,748
Mortgage - backed securities 1,390,815 1,272,484 4,145,345 3,784,766
Interest - bearing deposits with other institutions 21,900 80,991 121,628 228,873
----------- ------------ ----------- ------------
Total interest income 4,447,759 4,077,569 12,935,946 11,977,444
----------- ------------ ----------- ------------
INTEREST EXPENSE
Deposits 1,739,094 1,810,437 5,191,963 5,464,224
Advances from Federal Home Loan Bank 583,662 279,481 1,552,821 749,830
Other borrowings 1,663 30,190 53,879 83,915
----------- ------------ ----------- ------------
Total interest expense 2,324,419 2,120,108 6,798,663 6,297,969
----------- ------------ ----------- ------------
Net interest income 2,123,340 1,957,461 6,137,283 5,679,475
PROVISION FOR LOAN LOSSES 120,000 95,000 305,000 275,000
----------- ------------ ----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,003,340 1,862,461 5,832,283 5,404,475
----------- ------------ ----------- ------------
NONINTEREST INCOME
Service charges on deposit accounts 124,689 110,856 329,670 333,394
Investment securities gains, net - - - 116,858
Gain on sale of loans, net - - - 27,765
Rental income, net 22,135 26,145 66,574 67,254
Other income 86,020 89,565 153,663 167,044
----------- ------------ ----------- ------------
Total noninterest income 232,844 226,566 549,907 712,315
----------- ------------ ----------- ------------
NONINTEREST EXPENSE
Compensation and employee benefits 830,557 966,137 2,476,848 2,584,355
Occupancy and equipment costs 281,834 265,009 851,759 775,408
Deposit insurance premium 26,328 26,254 79,261 79,909
Data processing costs 66,194 89,591 214,043 280,170
Other expenses 314,740 331,460 949,436 962,743
----------- ------------ ----------- ------------
Total noninterest expense 1,519,653 1,678,451 4,571,347 4,682,585
----------- ------------ ----------- ------------
Income before income taxes 716,531 410,576 1,810,843 1,434,205
Income taxes 190,500 93,000 479,002 306,677
----------- ------------ ----------- ------------
NET INCOME $ 526,031 $ 317,576 $ 1,331,841 $ 1,127,528
=========== ============ =========== ============
Earnings Per Share
Basic $ $0.20 $0.12 $ $0.50 $0.42
Diluted $ $0.20 $ N/A $ $0.50 $ N/A
Weighted average number of shares outstanding
Basic 2,621,054 2,678,646 2,661,134 2,680,311
Diluted 2,621,054 N/A 2,661,134 N/A
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
PHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Accumulated Compre-
Additional Other Unallocated Unallocated Total hensive
Common Paid in Retained Comprehensive Shares Held Shares Held Treasury Stockholders' Income
Stock Capital Earnings Income (Loss) by ESOP by RSP Stock Equity (Loss)
--------- ----------- --------------- ------------ ----------- ------------------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December
31, 1998 $276,000 $10,588,940 $18,489,177 $1,088,415 $(1,215,723) -$42,700 - $29,184,109
Net Income 1,331,841 1,331,841 $1,331,841
Other
comprehensive
income (loss):
Unrealized
loss on
available
for sale
securities (1,488,653) (1,488,653) (1,488,653)
----------
Comprehensive
loss $(156,812)
=========
Cash
dividends
paid (576,870) (576,870)
Treasury stock
purchased,
at cost (908,405) (908,405)
ESOP shares
earned (32,785) 111,915 79,130
Common stock
acquired
by RSP (106,395) (400,107) (506,502)
RSP shares
earned 96,384 96,384
--------- ----------- ----------- --------- ----------- ----------------------------------
Balance,
September
30, 1999 $276,000 $10,556,155 $19,137,753 $(400,238) $(1,103,808) $(346,423) $(908,405) $27,211,034
========= =========== =========== ========= =========== ========== ========== ============
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
PHS BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended Sept.30,
1999 1998
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $1,331,841 $1,127,528
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 305,000 275,000
Depreciation, amortization and accretion 385,701 373,125
Amortization of discounts, premiums and
loan origination fees 567,905 777,122
Gains on sale of investment securities, net - (116,858)
Gains on sale of loans, net - (27,765)
Increase (decrease) in loans held for sale (21,278) 1,051,051
Increase in accrued interest receivable (149,054) (283,975)
Increase in accrued interest payable 68,164 45,672
Amortization of ESOP unearned compensation 79,130 133,997
Amortization of RSP unearned compensation 96,384 -
Other, net (99,269) (278,049)
---------------- ----------------
Net cash provided by operating activities 2,564,524 3,076,848
---------------- ----------------
INVESTING ACTIVITIES
Investment and mortgage-backed securities available for sale:
Proceeds from sales - 2,259,493
Proceeds from maturities and principal repayments 6,624,194 4,845,300
Purchases (19,309,977) (13,617,911)
Investment and mortgage-backed securities held to maturity:
Proceeds from maturities and principal repayments 31,943,408 11,275,748
Purchases (26,634,757) (22,780,366)
Increase in loans receivable, net (18,052,561) (578,337)
Proceeds from sale of repossessed assets 245,064 306,784
Purchase of premises and equipment, net (303,234) (466,093)
Purchase of Federal Home Loan Bank Stock (800,085) (355,300)
---------------- ----------------
Net cash used for investing activities (26,287,948) (19,110,682)
---------------- ----------------
FINANCING ACTIVITIES
Net increase in deposits 4,623,675 2,627,281
Advances from Federal Home Loan Bank 16,000,000 15,377,800
Proceeds from other borrowings - 448,512
Repayment of other borrowings (1,256,737) (30,223)
Common stock acquired by ESOP - (448,512)
Common stock acquired by RSP (506,502) -
Cash dividends paid (576,870) (524,400)
Treasury stock purchased (908,405) -
---------------- ----------------
Net cash provided by financing activities 17,375,161 17,450,458
---------------- ----------------
Increase (decrease) in cash and cash equivalents (6,348,263) 1,416,624
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,468,820 5,696,236
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,120,557 $7,112,860
================ ================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
PHS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements of PHS Bancorp, Inc. (the "Company")
include the accounts of Peoples Home Savings Bank (the "Bank") and its
wholly-owned subsidiary, HOMECO (the "Subsidiary"). All significant intercompany
balances and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with instructions to Form 10-Q and, therefore, do not necessarily
include all information which would be included in audited financial statements.
The information furnished reflects all normal recurring adjustments which are,
in the opinion of management, necessary for the fair statement of the results of
the period. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year or any
other period. The unaudited consolidated financial statements should be read in
conjunction with the audited financial statements and the notes thereto for the
year ended December 31, 1998.
NOTE 2 - EARNINGS PER SHARE
The Company provides dual presentation of basic and diluted earnings per share.
Basic earnings per share utilizes net income as reported as the numerator, and
the actual average shares outstanding as the denominator. Diluted earnings per
share includes any dilutive effects of options, warrants, and convertible
securities.
Shares outstanding do not include ESOP shares that were purchased and
unallocated in accordance with SOP 93-6, "Employers' Accounting for Stock
Ownership Plans."
7
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Private Securities Litigation Act of 1995 contains safe harbor provisions
regarding forward-looking statements. When used in this discussion, the words
"believes," "anticipates," "contemplates," "expects," and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from those projected. Those risks and uncertainties include changes
in interest rates, risks associated with the effect of opening a new branch, the
ability to control costs and expenses, and general economic conditions. The Bank
and the Company undertake no obligation to publicly release the results of any
revisions to those forward looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Financial Condition
Total assets at September 30, 1999 increased $17.6 million or 7.2% from December
31, 1998. Increases in investment and mortgage-backed securities of $5.2 million
and loans receivable of $17.1 million were partially offset by a decrease in
interest-bearing deposits with other institutions of $6.5 million.
Loans receivable at September 30, 1999, of $117.0 million represented an
increase of $17.1 million or 17.1% from $99.9 million at December 31, 1998. The
growth in the loan portfolio was primarily attributable to an increase in
automobile loans of $9.8 million. The increase in automobile loans was primarily
due to one of the Bank's primary competitors terminating this type of lending.
Investment and mortgage-backed securities increased $5.2 million to $129.7
million at September 30, 1999, from $124.5 million at December 31, 1998. This
increase was the result of purchases of $45.9 million which were funded by
maturities of $26.3 million, principal repayments of $12.2 million and increased
Federal Home Loan Bank advances and deposits of $16.0 million and $4.6 million
respectively. The purchases funded by Federal Home Loan Bank advances were part
of the Bank's leverage strategy.
Total deposits after interest credited at September 30, 1999 were $185.7
million, an increase of $4.6 million or 2.5% from $181.1 million at December 31,
1998.
Advances from the Federal Home Loan Bank of Pittsburgh increased $16.0 million
to $46.9 million at September 30, 1999 from $30.9 million at December 31, 1998.
This increase was the result of additional borrowings to fund securities
purchases and increased loan demand, as discussed above.
Other borrowings decreased $1.3 million or 90.6% to 131,000 at September 30,
1999. This decrease was the result of the Company acquiring the loan on the
Bank's Employee Stock Ownership Plan (ESOP). At December 31, 1998, the ESOP loan
was an obligation to an unaffiliated third party.
Stockholders' equity decreased $2.0 million for the nine month period ended
September 30, 1999. This decrease was due to an unrealized loss of $400,000 in
the Company?s securities available for sale portfolio at September 30, 1999 as
compared to an unrealized gain of $1.1 million at December 31, 1998 along with
increases in unallocated RSP and treasury shares of $304,000 and $908,000,
respectively and cash dividends paid of $577,000. During the nine months ended
September 30, 1999, the Company repurchased 88,158 shares of it's common stock
at an average price of $10.30 per share. These decreases to stockholders' equity
were partially offset by net income of $1.3 million.
8
<PAGE>
Results of Operations
Comparison of Operating Results for the Three Months Ended September 30, 1999
and September 30, 1998.
General.
Net income for the three months ended September 30, 1999 increased by $208,000
to $526,000, from $318,000 for the three months ended September 30, 1998. This
increase was primarily due to an increase in net interest income of $166,000
along with a decrease in non-interest expense of $159,000. These increases to
net income were partially offset by increases in loan loss and income tax
provisions of $25,000 and $98,000, respectively.
Net Interest Income.
Reported net interest income increased $166,000 or 8.5% for the three months
ended September 30, 1999. Net interest income on a tax equivalent basis
increased by $162,000 or 7.8% in a period when both average interest earning
assets and average interest-bearing liabilities increased (increased $27.8
million and $28.5 million, respectively). The Bank's net interest rate spread
decreased 8 basis points (with 100 basis points being equal to 1%) to 3.26% for
the three months ended September 30, 1999. The increase in average earning
assets of $27.8 million was primarily due to a $16.8 million increase in average
loans along with a $11.0 million increase in average investment and
mortgage-backed securities.
Interest Income.
Interest income on a tax equivalent basis totaled $4.6 million for the three
months ended September 30, 1999, an increase of $365,000 or 8.7% over the total
of $4.2 million for the three months ended September 30, 1998. This increase was
mainly due to an increase in the Bank's average interest-earning assets of $27.8
million for the three months ended September 30, 1999. Interest earned on loans
increased $199,000 or 9.4%, in 1999. The increase was due to an $16.8 million
increase in the average balance of loans partially offset by a 57 basis point
decrease in the yield. Interest earned on investment and mortgage-backed
securities (including securities held for sale) increased $166,000 or 8.0%, in
1999. The increase was due to a $11.0 million increase in the average balance of
investment and mortgage-backed securities along with a 6 basis point increase in
the yield earned.
Interest Expense.
Interest expense increased $203,000 to $2.3 million for the three months ended
September 30, 1999. The increase in interest expense was due to a $28.5 million
increase in the average balance of interest-bearing liabilities due to increased
borrowings pursuant to the Bank's leverage strategy partially offset by an 18
basis point decrease in the average cost of interest-bearing liabilities.
Provision for Losses on Loans.
The provision for loan losses increased $25,000 to $120,000 for the three months
ended September 30, 1999 from $95,000 for the three months ended September 30,
1998. While management believes that the allowance for loan losses is
sufficient, there can be no assurance that regulators, in reviewing the Bank's
loan portfolio, will not request the Bank to significantly increase its
allowance for loan losses, or that a deteriorating real estate market or general
downturn in the economy will cause the Bank to significantly increase its
allowance for loans losses, therefore negatively effecting the Bank's financial
condition and earnings.
9
<PAGE>
Non-interest Income.
Non-interest income increased $6,000 to $233,000 for the three months ended
September 30, 1999, from $227,000 for the three months ended September 30, 1998.
Non-interest Expense.
Non-interest expense decreased $158,000 to $1,520,000 for the three months ended
September 30, 1999, from $1,678,000 for the three months ended September 30,
1998. This decrease was primarily due to decreases in compensation and employee
benefits of $135,000 and data processing costs of $23,000 for the three months
ended September 30, 1999. The decrease in compensation and employee benefits was
primarily due to the adoption of the 1998 Restricted Stock Plan and the Company
recognizing nine months of related expenses during the third quarter of 1998.
Income Tax Expense.
Income tax expense increased $98,000 to $191,000 for the three months ended
September 30, 1999, from $93,000 for the three months ended September 30, 1998.
Comparison of Operating Results for the Nine Months Ended September 30, 1999 and
September 30, 1998.
General.
Net income for the nine months ended September 30, 1999 increased by $204,000 to
$1,332,000, from $1,128,000 for the nine months ended September 30, 1998. This
increase was primarily due to an increase in net interest income of $458,000
along with a decrease in non-interest expense of $111,000. These increases to
net income were partially offset by a decrease in non-interest income of
$162,000 along with increases in loan loss and income tax provisions of $30,000
and $172,000, respectively.
Net Interest Income.
Reported net interest income increased $458,000 or 8.1% for the nine months
ended September 30, 1999. Net interest income on a tax equivalent basis
increased by $445,000 or 7.3% in a period when both average interest earning
assets and average interest-bearing liabilities increased (increased $27.3
million and $27.6 million, respectively). The Bank's net interest rate spread
decreased 9 basis points to 3.17% for the nine months ended September 30, 1999.
The increase in average earning assets of $27.3 million was primarily due to a
$18.1 million increase in average investment and mortgage-backed securities
along with a $9.2 million increase in average loans.
Interest Income.
Interest income on a tax equivalent basis totaled $13.3 million for the nine
months ended September 30, 1999, an increase of $946,000 or 7.7% over the total
of $12.4 million for the nine months ended September 30, 1998. This increase was
mainly due to an increase in the Bank=s average interest-earning assets of $27.3
million for the nine months ended September 30, 1999. Interest earned on loans
increased $272,000 or 4.3%, in 1999. The increase was due to a $9.2 million
increase in the average balance of loans partially offset by a 38 basis point
decrease in the yield earned. Interest earned on investment and mortgage-backed
securities (including securities held for sale) increased $674,000 or 11.1%, in
1999. The increase was due to a $18.1 million increase in the average balance of
investment and mortgage-backed securities partially offset by a 24 basis point
decrease in the yield earned.
Interest Expense.
Interest expense increased $501,000 to $6.8 million for the nine months ended
September 30, 1999. The
10
<PAGE>
increase in interest expense was due to a $27.6 million increase in the average
balance of interest-bearing liabilities due to increased borrowings pursuant to
the Bank's leverage strategy partially offset by a 23 basis point decrease in
the average cost of interest-bearing liabilities.
Provision for Losses on Loans.
The provision for loan losses increased by $30,000 to $305,000 for the nine
months ended September 30, 1999, from $275,000 for the nine months ended
September 30, 1998. While management believes that the allowance for loan losses
is sufficient, there can be no assurance that regulators, in reviewing the
Bank's loan portfolio, will not request the Bank to significantly increase its
allowance for loan losses, or that a deteriorating real estate market or general
downturn in the economy will cause the Bank to significantly increase its
allowance for loans losses, therefore negatively effecting the Bank's financial
condition and earnings.
Non-interest Income.
Non-interest income decreased $162,000 to $550,000 for the nine months ended
September 30, 1999, from $712,000 for the nine months ended September 30, 1998.
This decrease was primarily due to gains on the sale of securities and loans of
$117,000 and $28,000 for the nine months ended September 30, 1998.
Non-interest Expense.
Non-interest expense decreased $111,000 to $4.6 million for the nine months
ended September 30, 1999, from $4.7 million for the nine months ended September
30, 1998. This decrease was primarily due to decreases in compensation and
employee benefits of $107,000 and data processing costs of $66,000 for the nine
months ended September 30, 1999. The decrease in compensation and employee
benefits was primarily due to a reduction in ESOP expense due to the lower
average market price during the nine months ended September 30, 1999. These
decreases were partially offset by an increase in occupancy and equipment costs
of $77,000. The decrease in data processing expense and the increase in
occupancy and equipment costs were primarily the result of the in-house computer
system which the Bank converted to during the first quarter of 1998.
Income Tax Expense.
Income tax expense increased $172,000 to $479,000 for the nine months ended
September 30, 1999, from $307,000 for the nine months ended September 30, 1998.
Liquidity and Capital Requirements
Liquidity refers to the Company's ability to generate sufficient cash to meet
the funding needs of current loan demand, savings deposit withdrawals, and to
pay operating expenses. The Company has historically maintained a level of
liquid assets in excess of regulatory requirements. Maintaining a high level of
liquid assets tends to decrease earnings, as liquid assets tend to have a lower
yield than other assets with longer terms (e.g. loans). The Company adjusts
liquidity as appropriate to meet its asset/liability objectives.
The Company's primary sources of funds are deposits, amortization and prepayment
of loans and mortgage-backed securities, maturities of investment securities and
funds provided from operations. While scheduled loan and mortgage-backed
securities repayments are a relatively predictable source of funds, deposit
flows and loan and mortgage-backed securities prepayments are greatly influenced
by interest rates, economic conditions and competition. In addition, the Company
invests excess funds in overnight deposits, which provide liquidity to meet
lending requirements
The primary activity of the Company is originating loans and purchasing
investment and mortgage-backed securities. During the nine month periods ended
September 30, 1999, and 1998, the Company originated
11
<PAGE>
loans in the amounts of $53.7 and $36.1 million, respectively. The Company also
purchases investment and mortgage-backed securities to invest excess liquidity
and to supplement local loan demand. During the nine month periods ended
September 30, 1999, and 1998, the Company purchased investment and
mortgage-backed securities in the amounts of $45.9 and $36.4 million,
respectively.
The Company has other sources of liquidity if a need for additional funds
arises, such as FHLB of Pittsburgh advances. At September 30, 1999 the Bank had
borrowed $46.9 million of its $133.1 million maximum borrowing capacity with a
remaining borrowing capacity of approximately $86.2 million. Additional sources
of liquidity can be found in the Company's balance sheet, such as investment
securities and unencumbered mortgage-backed securities that are readily
marketable. Management believes that the Company has adequate resources to fund
all of its commitments.
The Bank may not declare or pay a cash dividend on any of its stock if the
effect thereof would cause the Bank's regulatory capital to be reduced below (1)
the amount required for the liquidation account established in connection with
the Bank's mutual holding company reorganization and stock issuance, or (2) the
regulatory capital requirements imposed by the Pennsylvania Department of
Banking (the "Department") and the Federal Deposit Insurance Corporation
("FDIC").
Regulatory Capital Requirements. As a condition of deposit insurance, current
FDIC regulations require that the Bank calculate and maintain a minimum
regulatory capital level on a quarterly basis and satisfy such requirement at
the calculation date and throughout the ensuing quarter.
At June 30, 1999, the Bank's Tier I risk-based and total risk-based capital
ratios were 22.1% and 23.2%, respectively. Current regulations require Tier I
risk-based capital of 6% and total risk - based capital of 10% risk-based assets
to be considered well capitalized. The Bank's leverage ratio was 10.1% at June
30, 1999. Current regulations require a leveraged ratio 5% to be considered well
capitalized.
Impact of Inflation and Changing Prices
The Company's financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike industrial companies, virtually all
of the assets and liabilities of a financial institution are monetary in nature.
As a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or with the same
magnitude as the prices of goods and services.
Inflation can have a more direct impact on categories of non-interest expenses
such as salaries and wages, supplies and employee benefit costs. These expenses
normally fluctuate more in line with changes in the general price level and are
very closely monitored by management for both the effects of inflation and
increases related to such items as staffing levels, usage of supplies and
occupancy costs.
Year 2000 Compliance
The following discussion of the implications of the year 2000 problem for the
Bank, contains numerous forward looking statements based on inherently uncertain
information. The cost of the project and the completion of the internal year
2000 modifications are based on management's best estimates, which are derived
utilizing a number of assumptions of future events including the availability of
internal and external resources, third party modifications and other factors.
However, there can be no guarantee
12
<PAGE>
that these statements will be achieved and actual results could differ.
Moreover, although management believes it will be able to make the necessary
modifications in advance, there can be no guarantee that failure to modify the
systems would not have a material adverse effect on the Bank or the Company.
During fiscal 1998, the Company adopted a Year 2000 Compliance Plan (the "Plan")
and established a Year 2000 Compliance Committee (the "Committee"). The
objectives of the Plan and the Committee are to prepare the Company for the new
millennium. As recommended by the Federal Financial Institutions Examination
Council, the Plan encompasses the following phases: Awareness, Assessment,
Renovation, Validation and Implementation. These phases enabled the Company to
identify risks, develop an action plan, perform adequate testing and complete
certification that its processing systems will be Year 2000 ready. Execution of
the plan is currently on schedule. The Company has substantially completed all
phases of this plan. Prioritization of the most critical applications has been
addressed, along with contract and service agreements.
The primary operating software for the Company is obtained and maintained by an
external provider of software (the "External Provider"). The Company has
maintained ongoing contact with this vendor so that modification of the software
is a top priority and has been completed. The Company has contacted all other
material vendors and suppliers regarding their Year 2000 readiness. Each of
these third parties has delivered written assurance to the Company that they
expect to be Year 2000 compliant prior to the Year 2000. The Company has
completed testing of the software provided by the External provider and material
third party providers. During the course of this testing, no material problems
or exceptions were encountered, however, if the External Provider or a material
third party provider is unable to resolve the potential problem in time, the
Company would likely experience significant data processing delays, mistakes or
failures. These delays, mistakes or failures could have a significant adverse
impact on the financial statements of the Company. No contracts, written
assurances, or oral assurances with the Bank's External Provider, material
vendors, and suppliers include any type of remedy or penalty for breach of
contract in the event that any of these parties are not year 2000 compliant.
The Company has contacted material customers and non-information technology
suppliers (i.e., utility systems, telephone systems and security systems)
regarding their Year 2000 state of readiness. The Company is unable to test the
Year 2000 readiness of its significant suppliers of utilities and is relying on
the utility companies' internal testing and representations to provide the
required services that drive the Bank's data systems. Any prolonged disruption
in utility service could disrupt the ability of the Company to service its
customers on a timely basis.
As a practical matter, individual mortgage loan, consumer loan and small
commercial loan customers were not contacted regarding their Year 2000
readiness. It was deemed to be beyond the scope of our testing parameters to
contact these borrowers. Further, most of these are individuals with adequate
collateral for their loans.
The Company expects to incur internal staffing costs as well as consulting and
other expenses related to testing and enhancements to prepare the systems for
the Year 2000. The Company does not anticipate that the related costs will be
material in any single year. In total, the Company estimates that it's cost for
compliance will amount to approximately $140,000 over the two year period from
1998 - 1999. A significant portion of these costs are not likely to be
incremental costs to the Company, but rather the redeployment of existing
resources. As of September 30, 1999 the Company estimates that approximately
$120,000 of these costs have been incurred. No assurance can be given that the
Year 2000 Compliance Plan will be completed successfully by the Year 2000, in
which event the Company could incur significant costs.
13
<PAGE>
The Bank is currently verifying contingency plans that address the Year 2000
issues of the Bank which could negatively affect the Bank or necessitate
transacting business manually. Among other things, failure of utility companies
to provide necessary service, failure of the primary software and other third
party providers is addressed in the plan. The Bank will attempt to monitor these
uncertainties by continuing to request updates on all critical providers
throughout the remainder of 1999. If the Bank identifies any concern related to
any critical application, the contingency plans will be implemented immediately
to assure continued service to the Bank's customers.
Despite the best efforts of management to address this issue, the vast number of
external entities that have direct and indirect business relationships with the
Bank, such as customers, vendors, payment system providers and other financial
institutions, makes it impossible to assure that a failure to achieve compliance
by one of these entities would not have a material impact on the operations of
the Bank.
Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about market risk are presented at
December 31, 1998 in the Company's 1998 Annual Report. See "Market Risk
Analysis". Management believes there have been no material changes in the Bank's
market risk since the data presented in its Annual Report to stockholders for
the year ended December 31, 1998.
14
<PAGE>
Risk Elements
Nonperforming Assets
The following schedule presents information concerning nonperforming assets
including nonaccrual loans, loans 90 days or more past due, and other real
estate owned at June 30, 1999 and December 31, 1998. A loan is classified as
nonaccrual when, in the opinion of management, there are serious doubts about
collectibility of interest and principal. At the time the accrual of interest is
discontinued, future income is recognized only when cash is received.
September 30, December 31,
1999 1998
---- ----
(Dollars in Thousands)
Loan on nonaccrual basis $427 $392
Loans past due 90 days or more 79 135
-- ---
Total non-performing loans 506 527
--- ---
Real estate owned 0 0
- -
Total non-performing assets $506 $527
==== ====
Total non-performing loans to
total loans 0.43% 0.52%
==== ====
Total non-performing loans to
total assets 0.19% 0.22%
==== ====
Total non-performing assets to
total assets 0.19% 0.22%
==== ====
Combined non-performing loans and other non-performing assets at September 30,
1999, represented 0.43% of total loans which was down from 0.52% at year-end
1998. The allowance for loan losses was 266.3% of total non-performing assets at
September 30, 1999 and 244.6% at December 31, 1998. The allowance for loan
losses was 1.14% of total loans at September 30, 1999 and 1.27% at December 31,
1998.
15
<PAGE>
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Changes in rights of the Company's Security holders.
None.
Item 3. Defaults by the Company on its senior securities.
None.
Item 4. Results of Votes of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8 - K.
(a) The following exhibits are filed as part of this report.
2.0 Agreement and Plan of Reorganization *
3.1 Articles of Incorporation of PHS Bancorp, Inc. *
3.2 Bylaws of PHS Bancorp, Inc. *
4.0 Stock Certificate of PHS Bancorp, Inc. *
10.1 Amended employment agreement between Peoples Home Savings Bank and
James P.Wetzel, Jr. *
10.2 1998 Restricted Stock Plan *
10.3 1998 Stock Option Plan *
11.0 Statement regarding computation of earnings per share
(see Note 2 to the Notes to
Unaudited Consolidated Financial Statements in the Form 10-Q)
20.1 Dividend Reinvestment Plan**
27.0 Financial Data Schedule (in electronic filing only)
Reports on Form 8-K.
None.
---------------------------
* Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the Quarter Ended September 30, 1998 and filed with the Securities and
Exchange Commission on November 13, 1998.
** Incorporated by reference to Registrant's Quarterly Report on Form 10-Q for
the Quarter Ended June 30, 1999 and filed with the Securities and Exchange
Commission on July 23, 1999.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 26, 1999
PHS Bancorp, Inc.
(Registrant)
By: /s/James P. Wetzel, Jr.
------------------------------------
James P. Wetzel, Jr.
President and Chief Executive Officer
By: /s/Richard E. Canonge
------------------------------------
Richard E. Canonge
Chief Financial Officer and Treasurer
17
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,284
<INT-BEARING-DEPOSITS> 2,836
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,524
<INVESTMENTS-CARRYING> 61,216
<INVESTMENTS-MARKET> 59,701
<LOANS> 116,968
<ALLOWANCE> 1,347
<TOTAL-ASSETS> 261,839
<DEPOSITS> 185,736
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 1,866
<LONG-TERM> 42,026
0
0
<COMMON> 276
<OTHER-SE> 26,935
<TOTAL-LIABILITIES-AND-EQUITY> 261,839
<INTEREST-LOAN> 6,554
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<INTEREST-TOTAL> 12,936
<INTEREST-DEPOSIT> 5,192
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<NET-INCOME> 1,332
<EPS-BASIC> 0.50
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<LOANS-NON> 427
<LOANS-PAST> 79
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<CHARGE-OFFS> 287
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