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, 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:
November 14, 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)
September 30, December 31,
ASSETS 2005 2004
(Unaudited)
Cash and due from banks $ 968 $ 995
Interest-bearing deposits in other financial institutions 2,810 6,489
------- -------
Cash and cash equivalents 3,778 7,484
Investment securities designated as available for sale -
at market 2,904 5,014
Investment securities held to maturity - at amortized cost, which
approximates market 133 143
Loans receivable - net 120,976 114,673
Office premises and equipment - at depreciated cost 839 940
Federal Home Loan Bank stock - at cost 1,086 975
Accrued interest receivable 488 441
Prepaid expenses and other assets 414 64
Prepaid income taxes 108 20
Deferred income taxes 173 -
------- -------
Total assets $130,899 $129,754
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 89,356 $ 86,939
Advances from the Federal Home Loan Bank 19,500 17,500
Note payable - 3,500
Advances by borrowers for taxes and insurance 52 201
Accrued interest payable 14 11
Other liabilities 1,256 1,061
Deferred income taxes - 13
------- -------
Total liabilities 110,178 109,225
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 15,178 15,106
Retained earnings - restricted 7,601 7,298
Less 77,565 shares of treasury stock - at cost (1,282) (1,282)
Shares acquired by stock benefit plans (1,537) (1,608)
Accumulated other comprehensive income - unrealized gains on
securities designated as available for sale, net of related tax effects 745 999
------- -------
Total shareholders' equity 20,721 20,529
------- -------
Total liabilities and shareholders' equity $130,899 $129,754
======= =======
3
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
(Unaudited)
Nine months ended Three months ended
September 30, September 30,
2005 2004 2005 2004
Interest income
Loans $4,797 $3,923 $1,646 $1,365
Investment securities 149 238 43 73
Interest-bearing deposits and other 71 34 21 15
----- ----- ----- -----
Total interest income 5,017 4,195 1,710 1,453
Interest expense
Deposits 1,402 1,052 513 343
Borrowings 550 128 183 72
----- ----- ----- -----
Total interest expense 1,952 1,180 696 415
----- ----- ----- -----
Net interest income 3,065 3,015 1,014 1,038
Provision for losses on loans 72 72 24 24
----- ----- ----- -----
Net interest income after provision for
losses on loans 2,993 2,943 990 1,014
Other operating income
Gain on sale of investment securities 51 - - -
Gain (loss) on sale of repossessed property - (1) - 4
Service charges 240 253 84 88
Other operating 136 122 45 40
----- ----- ----- -----
Total other operating income 427 374 129 132
General, administrative and other expense
Employee compensation and benefits 1,329 1,281 440 452
Occupancy and equipment 233 248 69 85
Data processing 214 195 73 71
Federal deposit insurance premiums 39 38 13 13
Other operating 420 426 105 136
----- ----- ----- -----
Total general, administrative and other expense 2,235 2,188 700 757
----- ----- ----- -----
Earnings before income taxes 1,185 1,129 419 389
Income taxes
Current 438 421 32 125
Deferred 41 40 138 34
----- ----- ----- -----
Total income taxes 479 461 170 159
----- ----- ----- -----
NET EARNINGS $ 706 $ 668 $ 249 $ 230
===== ===== ===== =====
EARNINGS PER SHARE
Basic $.51 $.48 $.18 $.16
=== === === ===
Diluted $.49 $.47 $.17 $.16
=== === === ===
4
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Nine months ended Three months ended
September 30, September 30,
2005 2004 2005 2004
Net earnings $706 $668 $249 $230
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during the period,
net of taxes (benefits) of $(148), $22, $(67) and $17 for the
respective periods (288) 45 (130) 33
Reclassification adjustment for realized gains included in earnings,
net of related taxes of $17 in 2005 34 - - -
--- --- --- ---
Comprehensive income $452 $713 $119 $263
=== === === ===
Accumulated comprehensive income $745 $904 $745 $904
=== === === ===
5
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30,
(In thousands)
(Unaudited)
2005 2004
Cash flows from operating activities:
Net earnings for the period $ 706 $ 668
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of deferred loan origination fees (29) (29)
Amortization of premiums and discounts on investment securities - net 25 43
Federal Home Loan Bank stock dividends (21) (27)
Depreciation 111 119
Provision for losses on loans 72 72
Amortization expense of stock benefit plan 72 71
Gain on sale of investment securities (51) -
Loss on sale of repossessed property - 1
Increase (decrease) in cash due to changes in:
Accrued interest receivable (47) (75)
Prepaid expenses and other assets (350) 23
Other liabilities 161 329
Accrued interest payable 3 (1)
Deferred compensation liability 34 -
Income taxes
Current (185) (70)
Deferred 41 40
------ ------
Net cash provided by operating activities 542 1,164
Cash flows used in investing activities:
Purchase of investment securities designated as available for sale - (17,933)
Proceeds from maturities and repayments on investment securities 1,710 19,613
Proceeds from sale of investment securities 51 -
Loan principal repayments 24,942 21,168
Loan disbursements (31,288) (33,586)
Purchase of Federal Home Loan Bank stock (90) (40)
Purchase of office premises and equipment (10) (35)
Proceeds from sale of real estate acquired through foreclosure - 218
------ ------
Net cash used in investing activities (4,685) (10,595)
Cash flows provided by financing activities:
Net increase (decrease) in deposits 2,417 (6,511)
Repayment of note payable (3,500) -
Proceeds from Federal Home Loan Bank advances 10,000 16,500
Repayment of Federal Home Loan Bank advances (8,000) (2,000)
Advances by borrowers for taxes and insurance (149) 102
Dividends on common shares (331) (331)
------ ------
Net cash provided by financing activities 437 7,760
------ ------
Net decrease in cash and cash equivalents (3,706) (1,671)
Cash and cash equivalents at beginning of period 7,484 5,187
------ ------
Cash and cash equivalents at end of period $ 3,778 $ 3,516
====== ======
6
PFS Bancorp, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended September 30,
(In thousands)
(Unaudited)
2005 2004
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 639 $ 470
===== =====
Interest on deposits and borrowings $1,949 $1,181
===== =====
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (254) $ 45
===== =====
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, 2005 and 2004
Forward-Looking Statements
--------------------------
This Form 10-QSB contains certain forward-looking statements and
information relating to PFS Bancorp, Inc. (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 nine
and three month periods ended September 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 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 75,597 and
86,632 unallocated ESOP shares as of September 30, 2005 and 2004,
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:
Nine months ended Three months ended
September 30, September 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 30,088 10,269 32,899 11,986
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 1,428,219 1,397,365 1,431,030 1,399,082
========= ========= ========= =========
8
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 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 a $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:
Nine months ended Three months ended
September 30, September 30,
2005 2004 2005 2004
Net earnings (In thousands) As reported $706 $668 $249 $230
Stock-based compensation, net of tax (27) (21) (9) (7)
--- --- --- ---
Pro-forma $679 $647 $240 $223
=== === === ===
Earnings per share
Basic As reported $.51 $.48 $.18 $.16
Stock-based compensation, net of tax (.02) (.01) (.01) -
--- --- --- ---
Pro-forma $.49 $.47 $.17 $.16
=== === === ===
Diluted As reported $.49 $.47 $.17 $.16
Stock-based compensation, net of tax (.01) (.01) - -
--- --- --- ---
Pro-forma $.48 $.46 $.17 $.16
=== === === ===
9
PFS Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three months ended September 30, 2005 and 2004
4. Stock Option Plan (continued)
-----------------
A summary of the status of the Plan as of September 30, 2005 and December 31,
2004 and 2003 is presented below:
September 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 September
30, 2005:
Number outstanding 79,316
Exercise price $13.22
Weighted-average exercise price $13.22
Weighted-average remaining contractual life 7.75 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
relates to determining the amount of 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
September 30, 2005
-------------------------------------------------------------------
At September 30, 2005, the Company's assets totaled $130.9 million, an
increase of $1.1 million, or .9%, compared to total assets at December
31, 2004. The increase in assets was comprised primarily of a $6.3
million, or 5.5%, increase in loans receivable which was principally
funded by an increase in deposits of $2.4 million, or 2.8%, to $89.4
million at September 30, 2005 and a $3.7 million decrease in cash and
interest-bearing deposits in other financial institutions.
Liquid assets (i.e. cash and interest-bearing deposits) decreased by
$3.7 million, or 49.5%, from December 31, 2004 levels, to a total of
$3.8 million at September 30, 2005. Investment securities available
for sale totaled $2.9 million at September 30, 2005, a decrease of
$2.1 million, or 42.1%, from December 31, 2004 levels. The decrease
in investment securities was due to sales and maturities of securities
totaling $1.8 million and a decrease of $385,000 in the market value
of the investment securities during the 2005 nine month period.
As previously stated, loans receivable increased by $6.3 million, or
5.5%, during the nine month period ended September 30, 2005, to a
total of $121.0 million. Loan disbursements amounted to $31.3 million
and were partially offset by principal repayments of $24.9 million.
During the nine months ended September 30, 2005, loan originations
were comprised of $15.2 million in loans secured by one- to four-
family residential real estate, $7.6 million in loans secured by
commercial and nonresidential real estate, and $8.5 million in
consumer and other loans.
The allowance for loan losses totaled $895,000 and $833,000 at
September 30, 2005 and December 31, 2004, respectively. Nonperforming
and impaired loans totaled $730,000 and $816,000 at September 30, 2005
and December 31, 2004, respectively. The allowance for loan losses
represented 122.6% and 102.1% of nonperforming and impaired loans as
of September 30, 2005 and December 31, 2004, respectively. The
allowance represented approximately .72% and .70% of the total loan
portfolio at September 30, 2005 and December 31, 2004, respectively.
At September 30, 2005, nonperforming and impaired loans were comprised
of $610,000 in loans secured by one- to four-family residential real
estate and $120,000 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 September 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 $89.4 million at September 30, 2005, an increase of
$2.4 million, or 2.8%, 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 $2.0 million, or 11.4%, to $19.5 million at
September 30, 2005. The increase in advances along with the funds
from the maturities of investment securities were used to pay off the
outstanding balance of a $3.5 million note payable.
Shareholders' equity amounted to $20.7 million at September 30, 2005,
an increase of $192,000, or .9% from December 31, 2004 levels. The
increase resulted primarily from the net earnings of $706,000 and
$72,000 of amortization related to a distribution of shares in
connection with the Company's recognition and retention plan, which
was reduced by a $254,000 decline in unrealized gains on securities
designated as available for sale and by the payment of dividends of
$331,000.
The Saving Bank is required to meet minimum capital standards
promulgated by the Office of Thrift Supervision ("OTS"). At September
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
September 30, 2005 and 2004
-----------------------------------------------------------------
General
-------
Net earnings for the three months ended September 30, 2005 amounted to
$249,000, an increase of $19,000, or 8.3%, compared to the $230,000 in
net earnings reported for the three month period ended September 30,
2004. The increase in earnings was due primarily to a $57,000, or
7.5%, decrease in general, administrative and other expense, which was
partially offset by a $24,000, or 2.3%, decrease in net interest
income, a $3,000, or 2.3%, decrease in other income and an $11,000, or
6.9%, increase in income taxes.
Net Interest Income
-------------------
Total interest income amounted to $1.7 million for the three-month
period ended September 30, 2005, an increase of $257,000, or 17.7%,
from the same period in 2004. Interest income on loans totaled $1.6
million during the 2005 period, an increase of $281,000, or 20.6%,
from the 2004 period. This increase was due primarily to a $11.0
million, or 9.9%, increase in the average balance of loans outstanding
quarter to quarter, coupled with a 48 basis point increase in the
weighted-average yield to 5.38% for the quarter ended September 30,
2005. The increase in the average balance was due to the growth in
the loan portfolio, in particular, residential and nonresidential real
estate loans. The increase in yield was due to the upward repricing
of our adjustable rate mortgages, reflecting a continuing increase in
market interest rates.
Interest income on investment securities decreased by $30,000, or
41.1%, for the three months ended September 30, 2005, compared to the
same quarter in 2004. This decline was due primarily to a $4.8
million, or 49.3%, decrease in the average balance outstanding which
was partially offset by a 49 basis point increase in the weighted-
average yield to 3.51% for the quarter ended September 30, 2005. The
decrease in the 2005 average balance of investment securities was
primarily due to the maturity of investment securities which were used
to partially pay a $5.00 per share special dividend in October 2004.
Interest income on other interest-bearing deposits increased by $6,000
during the three months ended September 30, 2005, compared to the same
period in 2004, due primarily to a 161 basis point increase in the
weighted-average yield, to 3.09% for the 2005 quarter, partially
offset by a $1.3 million, or 32.7%, 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
continuing rise in short term interest rates.
Interest expense on deposits totaled $513,000 for the three month
period ended September 30, 2005, an increase of $170,000, or 49.6%,
from the $343,000 recorded for the same period in 2004. The increase
in interest on deposits was due primarily to a 67 basis point increase
in the weighted-average cost of deposits in the 2005 period, coupled
with a $6.1 million, or 7.6%, increase in the average balance
outstanding quarter to quarter. Interest expense on borrowings
increased by $111,000 to $183,000 for the three month period ended
September 30, 2005, as compared to $72,000 in borrowing costs in the
2004 quarter. The increase in borrowing costs was due to a $6.5
million increase in the average balance of borrowings outstanding
quarter to quarter, as well as an increase in the weighted-average
interest cost of borrowings. 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
September 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 September 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 $129,000 for the three month period ended
September 30, 2005, a decrease of $3,000, or 2.3%, from the same
period in 2004. The decrease in other income was due primarily to the
absence of a $4,000 gain on the sale of repossessed property
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 $5,000, or 12.5%, increase in
other operating income which was partially offset by a $4,000, or
4.5%, decrease in service charge fees.
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense totaled $700,000 for the
three months ended September 30, 2005, a decrease of $57,000, or 7.5%,
compared to the same quarter in 2004. This decrease was due primarily
to a $12,000, or 2.7%, decrease in employee compensation and benefits,
a $16,000, or 18.8%, decrease in occupancy and equipment expense, and
a $31,000, or 22.8%, decrease in other operating expenses. The
decrease in occupancy and equipment expense is attributable to a
reduction in equipment expense and equipment depreciation expense
quarter to quarter. The decrease in other operating expenses is
principally related to cost reductions as a result of the pending
merger with Peoples Community Bancorp, Inc.
Income Taxes
------------
The income tax provision totaled $170,000 for the three month period
ended September 30, 2005, an increase of $11,000, or 6.9%, 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 40.6% and 40.9% for the three month periods ended
September 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 Nine-Month Periods Ended
September 30, 2005 and 2004
----------------------------------------------------------------
General
-------
Net earnings for the nine months ended September 30, 2005 amounted to
$706,000, an increase of $38,000, or 5.7%, compared to the $668,000 in
net earnings reported for the nine month period ended September 30,
2004. The increase in earnings was due primarily to a $50,000, or
1.7%, increase in net interest income and a $53,000, or 14.2%,
increase in other income, which were partially offset by a $47,000, or
2.1%, increase in general, administrative and other expense and an
$18,000, or 3.9%, increase in income taxes.
Net Interest Income
-------------------
Total interest income amounted to $5.0 million for the nine-month
period ended September 30, 2005, an increase of $822,000, or 19.6%,
from the same period in 2004. Interest income on loans totaled $4.8
million during the 2005 period, an increase of $874,000, or 22.3%,
from the 2004 period. This increase was due primarily to a $14.1
million, or 13.1%, increase in the average balance of loans
outstanding period to period, coupled with a 40 basis point increase
in the weighted-average yield to 5.27% for the nine months ended
September 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
continuing increases in market interest rates.
Interest income on investment securities decreased by $89,000, or
37.4%, for the nine months ended September 30, 2005, compared to the
same period in 2004. This decline was due primarily to a $4.5 million,
or 44.4%, decrease in the average balance outstanding which was
partially offset by a 39 basis point increase in the weighted-average
yield to 3.53% for the period ended September 30, 2005. The decrease
in the 2005 average balance of investment securities was primarily due
to the maturity of investment securities which were used to partially
pay a $5.00 per share special dividend in October 2004. Interest
income on other interest-bearing deposits increased by $37,000 during
the nine months ended September 30, 2005, compared to the same period
in 2004, due primarily to a 140 basis point increase in the weighted-
average yield, to 2.63% for the 2005 period, partially offset by a
$85,000, or 2.3%, decrease in the average balance outstanding for the
nine month period. The increase in the weighted average yield of
interest-bearing deposits was primarily due to the continuing rise in
short term interest rates.
Interest expense on deposits totaled $1.4 million for the nine month
period ended September 30, 2005, an increase of $350,000, or 33.3%,
from the $1.1 million recorded for the same period in 2004. The
increase in interest on deposits was due primarily to a 44 basis point
increase in the weighted-average cost of deposits in the 2005 period,
coupled with a $5.0 million, or 6.2%, increase in the average balance
outstanding period to period. Interest expense on borrowings
increased by $422,000 to $550,000 for the nine month period ended
September 30, 2005, as compared to $128,000 in borrowing costs in the
2004 period. The increase in borrowing costs is due to a $12.2
million increase in the average borrowings outstanding period to
period, as well as an increase in the weighted-average cost of
borrowings. 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 Nine-Month Periods Ended
September 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 $72,000 for each of the nine month periods ending
September 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 $427,000 for the nine month period ended
September 30, 2005, an increase of $53,000, or 14.2%, 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 $1,000 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 $376,000 and
$375,000 for the nine month periods ended September 30, 2005 and 2004,
respectively. A $14,000, or 11.5%, increase in other operating income
was offset by a $13,000, or 5.1%, decrease in service charge fees.
General, Administrative and Other Expense
-----------------------------------------
General, administrative and other expense totaled $2.2 million for the
nine months ended September 30, 2005, an increase of $47,000, or 2.1%,
compared to the same period in 2004. This increase was due primarily
to a $48,000, or 3.7%, increase in employee compensation and benefits
and a $19,000, or 9.7%, increase in data processing expenses which
were partially offset by a $15,000, or 6.0%, decrease in occupancy and
equipment expense and a $6,000, or 1.4%, decrease in other operating
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 decreased $3,000, or
.2%, period to period.
Income Taxes
------------
The income tax provision totaled $479,000 for the nine month period
ended September 30, 2005, an increase of $18,000, or 3.9%, 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 nine month periods ended
September 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
was subject to shareholder and regulatory approval with a tentative
closing date in the fourth quarter of calendar 2005 or the first
quarter of calendar 2006. PFS Bancorp, Inc. shareholders approved the
merger on October 14, 2005 by an affirmative vote of 64% of shares
eligible to vote.
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: November 14, 2005 By: /s/Mel E. Green
-------------------------------------
Mel E. Green
President and Chief Executive Officer
Date: November 14, 2005 By: /s/Stuart M. Suggs
--------------------------------------
Stuart M. Suggs
Corporate Treasurer, Chief Operating
Officer, and Chief Financial Officer
18