10-Q 1 f10q_063004-0033.txt FORM 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 June 30, 2004 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 0-33419 PHSB Financial Corporation -------------------------- (Exact Name of Registrant as Specified in its Charter) PENNSYLVANIA 25-1894708 ------------------------------- ------------- (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) Indicate by 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 [ ] Indicate by check whether the issuer is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of August 9, 2004 there were 2,903,353 shares outstanding of the issuer's class of common stock. PHSB FINANCIAL CORPORATION INDEX TO QUARTERLY REPORT ON FORM 10-Q Page Number ------ Part I Financial Information Item 1. Financial Statements Consolidated Balance Sheet (unaudited) as of June 30, 2004 and December 31, 2003 3 Consolidated Statement of Income (unaudited) for the Three and Six Months ended June 30, 2004 and 2003 4 Consolidated Statement of Comprehensive Income (unaudited) for the Three and Six Months ended June 30, 2004 and 2003 5 Consolidated Statement of Changes in Stockholders' Equity (unaudited) for the Six Months ended June 30, 2004 6 Consolidated Statement of Cash Flows (unaudited) for the Six Months ended June 30, 2004 and 2003 7 Notes to (unaudited) Consolidated Financial Statements 8 - 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 17 Item 3. Quantitative and Qualitative Disclosure About Market Risk 18 Item 4. Controls and Procedures 19 Part II Other Information 20 - 21 Signatures 22 2 PHSB FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET (UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements. 3 PHSB FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements. 4 PHSB FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements. 5 PHSB FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements. 6 PHSB FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

See accompanying notes to the unaudited consolidated financial statements. 7 PHSB FINANCIAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements of PHSB Financial Corporation (the "Company") include its wholly-owned subsidiary, Peoples Home Savings Bank (the "Bank") and the Bank's wholly-owned subsidiary, HOMECO (the "Subsidiary"). All significant intercompany balances and transactions have been eliminated. The Company's business is conducted principally through the Bank. 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 future period. The unaudited consolidated financial statements should be read in conjunction with Form 10-K for the year ended December 31, 2003. Recent Accounting Standards In December 2003, the FASB issued a revision to Interpretation 46, Consolidation of Variable Interest Entities, which established standards for identifying a variable interest entity ("VIE") and for determining under what circumstances a VIE should be consolidated with its primary beneficiary. The Interpretation requires consolidation of entities in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Prior to the interpretation, entities were generally consolidated by an enterprise when it had a controlling financial interest through ownership of a majority voting interest in the entity. The adoption of this Interpretation has not and is not expected to have a material effect on the Company's financial position or results of operations. In December 2003, the Financial Accounting Standards Board ("FASB") revised FAS No. 132, Employers' Disclosures about Pension and Other Postretirement Benefit. This statement retains the disclosures required by FAS No. 132, which standardized the disclosure requirements for pensions and other postretirement benefits to the extent practicable and requires additional information on changes in the benefit obligations and fair value of plan assets. Additional disclosures include information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods. This statement retains reduced disclosure requirements for nonpublic entities from FAS No. 132, and it includes reduced disclosure for certain of the new requirements. This statement is effective for financial statements with fiscal years ending after December 15, 2003. The interim disclosures required by this statement are effective for interim periods beginning after December 15, 2003. The adoption of this statement did not have a material effect on the Company's disclosure requirements. The Company has adopted the revised disclosure provisions 8 Cash Flow Information The Company has defined cash and cash equivalents as cash and amounts due from depository institutions and interest-bearing deposits with other institutions. For the six months ended June 30, 2004 and 2003, the Company made cash payments for interest of $4,209,000 and $5,175,000 respectively. The Company also made cash payments for income taxes of $488,000 and $159,000 respectively, during these same periods. NOTE 2 - EARNINGS PER SHARE The Company provides dual presentation of basic and diluted earnings per share. Basic earnings per share is calculated utilizing net income as reported as the numerator and average shares outstanding as the denominator. The computation of diluted earnings per share differs in that the dilutive effects of any options, warrants, and convertible securities are adjusted for in the denominator. Shares outstanding do not include ESOP shares that were purchased and unallocated in accordance with SOP 93-6, "Employers' Accounting for Stock Ownership Plans." The following table sets forth the composition of the weighted average common shares (denominator) used in the basic and diluted earnings per share computation.

9 NOTE 3 - ACCOUNTING FOR STOCK BASED COMPENSATION The Company does not recognize certain stock-based employee compensation in the financial statements. The following table represents the effect on net income and earnings per share had the stock-based employee compensation expense been recognized:

NOTE 4 - NET PERIODIC BENEFIT COST - DEFINED BENEFIT PLANS For a detailed disclosure on the Company's pension and employee benefits plans, please refer to Note 13 of the Company's Consolidated Financial Statements included in the 2003 Annual Report to Stockholders. The following sets forth the components of net periodic benefit cost of the trusteed, non-contributory defined benefit pension plan for the three and six months ended June 30, 2004. Interim Net Periodic Pension Cost for the Three and Six Months ended June 30, 2004 Three Months ended Six Months ended June 30, 2004 June 30, 2004 ------------- -------- Service Costs $70,409 $140,817 Interest Cost 98,048 196,096 Expected Return on Plan Assets (94,374) (188,748) Amortization of Net Transition Asset (5,204) (10,407) Amortization of Net Loss 8,258 16,515 ------- -------- Net Periodic Pension Cost $77,137 $154,273 ======= ======== 10 Employer Contributions The Company previously disclosed in its financial statements for the year ended December 31, 2003, that it expected to contribute $308,544 to its pension plan in 2004. As of June 30, 2004, total contributions of $345,445 have been made and there are no anticipated statutory funding requirements for the remainder of 2004. 11 Management's Discussion and Analysis of Financial Condition and Results of Operations The Private Securities Reform 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, the ability to control costs and expenses, and general economic conditions. Financial Condition Total assets at June 30, 2004 of $323.0 million represented a decrease of $17.0 million or 5.0% from December 31, 2003. This decrease was primarily due to a decrease in loans of $22.1 million partially offset by increases in securities and other assets of $2.9 million and $2.2 million, respectively. At June 30, 2004, investment securities (available for sale and held to maturity) increased $11.6 million to $48.3 million from $36.7 million at December 31, 2003. Mortgage-backed securities (available for sale and held to maturity) decreased $8.7 million to $123.0 million at June 30, 2004 from $131.7 million at December 31, 2003. The total increase of $2.9 million to the investment and mortgage-backed securities portfolios (available for sale and held to maturity) was the result of purchases of $47.8 million, partially offset by sales of $8.3 million, maturities of $15.4 million, and principal repayments of $19.2 million. Loans receivable, net at June 30, 2004 of $131.5 million represented a decrease of $22.1 million from $153.6 million at December 31, 2003. The decrease in the loan portfolio was primarily attributable to the maturity of loans to local school districts on June 30, 2004 of $15.6 million along with a decrease in automobile loans of $6.0 million. The Company anticipates that during the third quarter, a majority of these school districts will borrow funds for their next fiscal year from the Company. The decrease in automobile loans was due to weaker loan demand as a result of several manufacturers offering discounted financing. Other assets increased $2.2 million to $3.2 million at June 30, 2004 from $1.0 million at December 31, 2003. This increase was primarily due to the Bank's investment in Beaver Village Apartments Limited Partnership. Beaver Village Apartments are low income housing units for senior citizens located in Beaver, Pennsylvania. The Bank anticipates to receive tax credits over a ten year period beginning in 2004 for its investment in this limited partnership. Total deposits after interest credited at June 30, 2004 were $221.0 million, a decrease of $10.5 million or 4.5% from $231.5 million at December 31, 2003. This decrease was primarily due to outflows of deposits of the previously mentioned school districts which also matured on June 30, 2004. Advances from the Federal Home Loan Bank of Pittsburgh decreased $4.8 million to $54.1 million at June 30, 2004 from $58.9 million at December 31, 2003. Stockholders' equity decreased $1.2 million for the six month period ended June 30, 2004. This decrease was due to a decrease in accumulated other comprehensive income of $2.0 million and cash dividends paid of $1.2 million. These decreases to stockholders' equity were partially offset by net income of $1.6 12 million along with decreases in unallocated ESOP and RSP shares of $126,000 and $126,000,respectively. Results of Operations Comparison of Operating Results for the Three Months Ended June 30, 2004 and June 30, 2003. General. Net income for the three months ended June 30, 2004 increased by $38,000 to $704,000, from $666,000 for the three months ended June 30, 2003. This increase was primarily due to an increase in non-interest income of $97,000 along with a decrease in provisions for loan losses of $90,000. These increases to net income were partially offset by a decrease in net interest income of $86,000 along with increases in non-interest expense and income tax provisions of $5,000 and $58,000, respectively. Net Interest Income. Reported net interest income decreased $86,000 or 3.9% for the three months ended June 30, 2004. Net interest income on a tax equivalent basis decreased by $180,000 or 7.4% in a period when both average interest-earning assets and average interest-bearing liabilities increased (increased $0.8 million, or 0.2%, and $3.7 million, or 1.3%, respectively). The Company's net interest rate spread on a tax equivalent basis decreased 13 basis points to 2.40% for the three months ended June 30, 2004 as compared to the second quarter of 2003. The tax equivalent basis is calculated utilizing the statutory rate of 34%. Interest Income. Reported interest income decreased $443,000 to $4.0 million for the three month period ended June 30, 2004, from $4.5 million for the second quarter of 2003. Interest income on a tax equivalent basis totaled $4.2 million for the three months ended June 30, 2004, a decrease of $537,000, or 11.4%, from $4.7 million for the three months ended June 30, 2003. This decrease was primarily due to a 66 basis point decrease in the yield earned partially offset by an increase in the Company's average balance of interest-earning assets of $0.8 million, or 0.2%, for the three months ended June 30, 2004. Interest earned on loans decreased $570,000, or 19.1%, in 2004. This decrease was due to a $19.4 million, or 11.5%, decrease in the average balance of loans along with a 61 basis point decrease in the yield earned. Interest earned on interest-bearing deposits and investment and mortgage-backed securities (including securities available for sale) increased $33,000, or 1.9%, in 2004. This increase was due to an increase in the average balance of securities of $20.2 million partially offset by a 40 basis point decrease in the yield earned. Interest Expense. Interest expense decreased $357,000 to $1.9 million for the three months ended June 30, 2004. The decrease in interest expense was due to a 53 basis point decrease in the average cost of interest-bearing liabilities to 2.61% partially offset by a $3.7 million, or 1.3%, increase in the average balance of interest-bearing liabilities. The $3.7 million, or 1.3% increase in the average balance of interest-bearing liabilities was the result of an increase in average deposits of $1.3 million, or 0.6%, along with an increase in average borrowings of $2.4 million, or 4.5%. Provision for Losses on Loans. The provision for loan losses is charged to operations to bring the total allowance for loan losses to a level that represents management's best estimate of the losses inherent in the portfolio, based on: 13 o historical experience; o volume; o type of lending conducted by the Bank; o industry standards; o the level and status of past due and non-performing loans; o the general economic conditions in the Bank's lending area; and o other factors affecting the collectibility of the loans in its portfolio. The provision for loan losses decreased by $90,000 to $90,000 for the three months ended June 30, 2004, from $180,000 for the three months ended June 30, 2003. Decreases in loans along with a decrease in non-performing loans precipitated the decrease in the provision for loan losses. See "Risk Elements." Noninterest Income. Total noninterest income increased $97,000 to $742,000 for the three months ended June 30, 2004, from $645,000 for the three months ended June 30, 2003. This increase was primarily due to an increase in gains on sales of investment securities of $108,000 from $367,000 for the three months ended June 30, 2003 to $475,000 for the three months ended June 30, 2004. The $108,000 increase in security gains resulted from management reacting to the opportunities available to sell securities without significantly impacting the overall effective yield of the investment portfolio. Management continues to closely monitor the investment portfolio for other similar opportunities which may become available. Noninterest Expense. Noninterest expense increased $5,000 to $1,816,000 for the three months ended June 30, 2004, from $1,811,000 for the three months ended June 30, 2003. Comparison of Operating Results for the Six Months Ended June 30, 2004 and June 30, 2003. General. Net income for the six months ended June 30, 2004 increased by $238,000 to $1.6 milliom, from $1.3 million for the six months ended June 30, 2003. This increase was primarily due to an increase in non-interest income of $720,000 along with a decrease in provisions for loan losses of $160,000. These increases to net income were partially offset by a decrease in net interest income of $336,000 along with increases in non-interest expense and income tax provisions of $48,000 and $258,000, respectively. Net Interest Income. Reported net interest income decreased $336,000 or 7.2% for the six months ended June 30, 2004. Net interest income on a tax equivalent basis decreased by $532,000 or 10.3% in a period when average interest-earning assets decreased $1.0 million or 0.3% and average interest-bearing liabilities increased $1.0 million, or 0.3%. The Company's net interest rate spread on a tax equivalent basis decreased 23 basis points to 2.44% for the six months ended June 30, 2004 as compared to the first six months of 2003. The tax equivalent basis is calculated utilizing the statutory rate of 34%. 14 Interest Income. Reported interest income decreased $1.1 million to $8.2 million for the six month period ended June 30, 2004, from $9.3 million for the six month period ended June 30, 2003. Interest income on a tax equivalent basis totaled $8.5 million for the six months ended June 30, 2004, a decrease of $1.3 million, or 13.3%, from $9.8 million for the six months ended June 30, 2003. This decrease was primarily due to a 74 basis point decrease in the yield earned along with a decrease in the Company's average balance of interest-earning assets of $1.0 million, or 0.3%, for the six months ended June 30, 2004. Interest earned on loans decreased $1.1 million, or 18.0%, in 2004. This decrease was due to a $17.1 million, or 10.1%, decrease in the average balance of loans along with a 66 basis point decrease in the yield earned. Interest earned on interest-bearing deposits and investment and mortgage-backed securities (including securities available for sale) decreased $144,000, or 3.9%, in 2004. This decrease was due to a 56 basis point decrease in the yield earned partially offset by an increase in the average balance of securities of $16.0 million. Interest Expense. Interest expense decreased $724,000 to $3.9 million for the six months ended June 30, 2004. The decrease in interest expense was due to a 51 basis point decrease in the average cost of interest-bearing liabilities to 2.67% partially offset by a $1.1 million, or 0.4%, increase in the average balance of interest-bearing liabilities. The $1.1 million, or 0.4% increase in the average balance of interest-bearing liabilities was the result of an increase in average deposits of $173,000, or 0.1% along with an increase in average borrowings of $2.4 million, or 4.5%. Provision for Losses on Loans. The provision for loan losses is charged to operations to bring the total allowance for loan losses to a level that represents management's best estimate of the losses inherent in the portfolio, based on: o historical experience; o volume; o type of lending conducted by the Bank; o industry standards; o the level and status of past due and non-performing loans; o the general economic conditions in the Bank's lending area; and o other factors affecting the collectibility of the loans in its portfolio. The provision for loan losses decreased by $160,000 to $210,000 for the six months ended June 30, 2004, from $370,000 for the six months ended June 30, 2003. Decreases in loans along with a decrease in non-performing loans precipitated the decrease in the provision for loan losses. See "Risk Elements." Noninterest Income. Total noninterest income increased $720,000 to $1.8 million for the six months ended June 30, 2004, from $1.1 million for the six months ended June 30, 2003. This increase was primarily due to an increase in gains on sales of investment securities of $736,000 from $543,000 for the six months ended June 30, 2003 to $1,279,000 for the six months ended June 30, 2004. The $736,000 increase in security gains resulted from management reacting to the opportunities available to sell securities without significantly impacting the overall effective yield of the investment portfolio. Management continues to closely monitor the investment portfolio for other similar opportunities which may become available. 15 Noninterest Expense. Noninterest expense increased $48,000 to $3,732,000 for the six months ended June 30, 2004, from $3,684,000 for the six months ended June 30, 2003. Liquidity and Capital Resources 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 Company has other sources of liquidity if a need for additional funds arises, such as FHLB of Pittsburgh advances. At June 30, 2004, the Bank had borrowed $54.1 million of its $166.3 million maximum borrowing capacity and had a remaining borrowing capacity of approximately $112.2 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. Regulatory Capital Requirements At June 30, 2004, the Bank's Tier I risk-based and total risk-based capital ratios were 25.6% and 27.0%, respectively. Current regulations require Tier I risk-based capital of 6% and total risk-based capital of 10% of risk-based assets to be considered well capitalized. The Bank's leverage ratio was 11.4% at June 30, 2004. Current regulations require a leverage ratio of 5% to be considered well capitalized. 16 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, 2004 and December 31, 2003. 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. The allowance for loan losses was 526.49% of total non-performing assets at June 30, 2004 and 377.7% at December 31, 2003. June 30, December 31, 2004 2003 ---- ---- (Dollars in Thousands) Loans on nonaccrual basis $236 $374 Loans past due 90 days or more 32 27 ---- ---- Total non-performing loans 268 401 ---- ---- Real estate owned 34 34 ---- ---- Total non-performing assets $302 $435 ==== ==== Total non-performing loans to total loans 0.20% 0.26% ==== ==== Total non-performing loans to total assets 0.08% 0.12% ==== ==== Total non-performing assets to total assets 0.09% 0.13% ==== ==== 17 Item 3. Quantitative and Qualitative Disclosure about Market Risk ------- --------------------------------------------------------- The Company, like many other financial institutions, is vulnerable to an increase in interest rates to the extent that interest-bearing liabilities generally mature or reprice more rapidly than interest-earning assets. The lending activities of the Company have historically emphasized the origination of long-term, fixed rate loans secured by single family residences, and the primary source of funds has been deposits with substantially shorter maturities. While having interest-bearing liabilities that reprice more frequently than interest-earning assets is generally beneficial to net interest income during a period of declining interest rates, such an asset/liability mismatch is generally detrimental during periods of rising interest rates. To reduce the effect of interest rate changes on net interest income the Company has adopted various strategies to enable it to improve matching of interest-earning asset maturities to interest-bearing liability maturities. The principal elements of these strategies include: (1) purchasing investment securities with maturities that match specific deposit maturities; (2) emphasizing origination of shorter-term consumer loans, which in addition to offering more rate flexibility, typically bear higher interest rates than residential mortgage loans; and (3) purchasing adjustable-rate mortgage-backed securities as well as mortgage-backed securities with balloon payments which have shorter maturities than typical mortgage-backed securities. Although consumer loans generally possess an inherently higher credit risk than residential mortgage loans, the Company has designed its underwriting standards to minimize this risk as much as possible. The Company also makes a significant effort to maintain its level of lower costs deposits as a method of enhancing profitability. The Company has traditionally had a high level of low-cost passbook, interest-bearing checking (NOW) and Money Market Demand Accounts. Although its base of such deposits has increased as a result of the current interest rate environment, such deposits have traditionally remained relatively stable and would be expected to reduce to normal levels in a period of rising interest rates. Because of this relative stability in a significant portion of its deposits, the Company has been able to offset the impact of rising rates in other deposit accounts. Exposure to interest rate risk is actively monitored by management. The Company's objective is to maintain a consistent level of profitability within acceptable risk tolerances across a broad range of potential interest rate environments. The Company uses the Olson Research Associates, Inc.'s, Columbia, Maryland, A/L Benchmarks to monitor its exposure to interest rate risk, which calculates changes in market value of portfolio equity and net interest income. Reports generated from assumptions provided by Olson and modified by management are reviewed by the Interest Rate Risk and Asset Liability Management Committee and reported to the Board of Directors quarterly. The Balance Sheet Shock Report shows the degree to which balance sheet line items and the market value of portfolio equity are potentially affected by a 200 basis point upward and downward parallel shift (shock) in the Treasury yield curve. Exception tests are conducted as recommended under federal law to determine if the bank qualifies as low risk and may therefore be exempt from supplemental reporting. In addition, the possible impact on risk-based capital is assessed using the methodology under the Federal Deposit Insurance Corporation Improvement Act. An Income Shock Report shows the degree to which income statement line items and net income are potentially affected by a 200 basis point upward and downward parallel shift in the Treasury yield curve. 18 From analysis and discussion of the aforementioned reports as of June 30, 2004, management has assessed that the Bank's level of interest rate risk is appropriate for current market conditions. The percentage change in market value of the portfolio equity as of June 30, 2004 for an upward and downward shift of 200 basis points are (23.37%) and 18.22%, respectively. Net interest income decreased by $235,000 or 2.61% for a downward shift in rates of 200 basis points and decreased by $456,000 or 5.06%, for an upward shift of 200 basis points. Excess Net Interest Rate Risk was within those limits outlined in the Bank's Asset/Liability Management and Interest Rate Risk Policy. The Bank's calculated (total) risk-based capital before the interest rate risk impact was 27.0 % and 21.13% after the interest rate risk impact. Results fall within policy limits for all applicable tests. Item 4. Controls and Procedures ------- ----------------------- (a) Evaluation of disclosure controls and procedures. Based on their -------------------------------------------------- evaluation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")), the Company's principal executive officer and principal financial officer have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q such disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) Changes in internal control over financial reporting. During the ------------------------------------------------------ quarter under report, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 19 PART II. - OTHER INFORMATION Item 1. Legal Proceedings. None. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. ISSUER PURCHASES OF EQUITY SECURITIES

(1) On February 20, 2003 the Company announced that the Board of Directors has approved a plan to repurchase up to 149,500 of the outstanding shares of the Company. This plan has no stated expiration date. 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.

* Incorporated by reference to Registrant's Registration Statement on Form SB-2 initially filed with the Securities and Exchange Commission on September 10, 2001 (File No. 333-69180). ** Incorporated by reference to the identically numbered exhibits to PHS Bancorp, Inc.'s Form 10-Q for the quarter ended September 30, 1998 and filed with the Securities and Exchange Commission on November 13, 1998 (File No. 0-23230). *** Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 and filed with the Securities and Exchange Commission on March 28, 2002 **** Incorporated by reference to Registrant's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on January 17, 2003 (File No. 333-102559). (b) Reports on Form 8-K. On July 14, 2004, PHSB Financial Corporation filed a form 8-K to report under "Item 9. Regulation FD Disclosure" that PHSB Financial Corporation issued a press release to report earnings for the quarter ended June 30,2004. 21 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: August 13, 2004 PHSB Financial Corporation -------------------------- (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 22

PHSB FINANCIAL CORP 10-Q