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As filed with the Securities and Exchange Commission on October 11, 1996
Registration No. 333-11211
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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PRE-EFFECTIVE AMENDMENT NO. TWO TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PS FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware 6035 36-4101473
(State or other jurisdiction of incorporation (Primary Standard Industrial (I.R.S. Employer Identification No.)
or organization) Classification Code Number)
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4800 South Pulaski Road, Chicago, Illinois 60632 (312)376-3800
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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Kimberly P. Rooney, President and Chief Executive Officer
PS Financial, Inc.
4800 South Pulaski Road
Chicago, Illinois 60632
(312)376-3800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Please send copies of all communications to:
Kip A. Weissman, P.C.
SILVER, FREEDMAN & TAFF, L.L.P.
(A limited liability partnership including professional corporations)
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, DC 20005
(202) 414-6100
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes effective.
^
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Prospectus
[LOGO]
PS FINANCIAL, INC.
(Proposed Holding Company for Preferred Savings Bank)
$10.00 Per Share
1,897,500 Shares of Common Stock
(Anticipated Maximum)
PS Financial, Inc. (the "Holding Company") is offering up to 1,897,500
shares of common stock, par value $0.01 per share (the "Common Stock"), in
connection with the conversion of Preferred Savings Bank ("Preferred Savings" or
the "Bank") from a federally chartered mutual savings bank to a federally
chartered stock savings bank and the issuance of all of Preferred Savings
outstanding stock to the Holding Company (the "Conversion"). Pursuant to the
Bank's plan of conversion (the "Plan of Conversion" or the "Plan"),
non-transferable rights to subscribe for the Common Stock ("Subscription
Rights") have been given to (i) Preferred Savings' depositors with account
balances of $50 or more as of March 31, 1995 ("Eligible Account Holders"), (ii)
tax-qualified employee plans of Preferred Savings and the Holding Company
("Tax-Qualified Employee Plans"), provided, however, that the Tax-Qualified
Employee Plans shall have first priority Subscription Rights to the extent that
the total number of shares of Common Stock sold in the Conversion exceeds the
maximum of the Estimated Valuation Range as defined below, (iii) Preferred
Savings' depositors with account balances of $50 or more as of September 30,
1996 ("Supplemental Eligible Account Holders"), (iv) certain of its other
members ("Other Members"), and (v) its employees, officers and directors (the
"Subscription Offering").(continued on next page)
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK
INFORMATION CENTER AT (312) ___-____.
FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED,
SEE "RISK FACTORS" AT PAGE __.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION OR THE FEDERAL DEPOSIT
INSURANCE CORPORATION, NOR HAS SUCH COMMISSION, OFFICE OR CORPORATION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON
STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
SAVINGS DEPOSITS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
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Estimated Underwriting Fees Estimated Net
Purchase Price(1) Commissions and Other Expenses(2) Conversion Proceeds(3)
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Per Share(4).................................... $10.00 $.32 $9.68
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Minimum Total................................... $14,025,000 $489,000 $13,536,000
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Midpoint Total.................................. $16,500,000 $520,000 $15,980,000
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Maximum Total................................... $18,975,000 $552,000 $18,423,000
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Maximum Total, As Adjusted(5)................... $21,821,250 $588,000 $21,233,000
===================================================================================================================================
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(1) Determined on the basis of an appraisal prepared by Keller & Company, Inc.
("Keller") dated August __, 1996, which states that the estimated pro forma
market value of the Common Stock ranged from $14,025,000 to $18,975,000 or
between 1,402,500 shares and 1,897,500 shares, of Common Stock at $10.00
per share. See "The Conversion - Stock Pricing and Number of Shares to be
Issued."
(2) Consists of the estimated costs to the Bank and the Holding Company arising
from the Conversion, including the payment to Charles Webb & Company, a
Division of Keefe, Bruyette & Woods, Inc. (" Webb") of estimated expenses
of $40,000 and estimated sales commissions ranging from $195,000 (at the
minimum) to $270,000 (at the maximum) in connection with the sale of shares
in the Offering. Such fees may be deemed to be underwriting fees. See "Use
of Proceeds" and "Pro Forma Data" for the assumptions used to arrive at
these estimates. The Holding Company has agreed to indemnify Webb against
certain liabilities, including liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"). See "The Conversion - Marketing
Arrangements" for a more detailed description of underwriting fees and
expenses.
(3) Net Conversion proceeds may vary from the estimated amounts, depending on
the Purchase Price, the number of shares issued and the number of shares
sold subject to commissions. The Purchase Price and the actual number of
shares of Common Stock to be issued in the Conversion will not be
determined until after the close of the Offering.
(4) Assumes the sale of the midpoint number of shares. If the minimum, maximum
or 15% above the maximum number of shares are sold, estimated expenses per
share would be $.35, $.28 or $.27, respectively, resulting in estimated net
Conversion proceeds per share of $9.65, ^ $9.71 or $9.73, respectively.
(5) As adjusted to give effect to the sale of up to an additional 284,625
shares (15% above the maximum of the Estimated Valuation Range) which may
be offered in the Conversion without the resolicitation of subscribers or
any right of cancellation, to reflect changes in market and financial
conditions following the commencement of the Offering. See "Pro Forma
Data," and "The Conversion - Stock Pricing and Number of Shares to be
Issued."
Charles Webb & Company
A Division of Keefe, Bruyette & Woods, Inc.
The date of this Prospectus is _______________, 1996
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(continued from prior page)
Subscription Rights are non-transferrable. Persons found to be selling or
otherwise transferring their right to purchase stock in the Subscription
Offering or purchasing Common Stock on behalf of another person will be subject
to forfeiture of such rights and possible further sanctions and penalties
imposed by the Office of Thrift Supervision (the "OTS"), an agency of the United
States Government. Subject to the prior rights of holders of Subscription Rights
and to market conditions, the Holding Company may also offer the Common Stock
for sale through Webb in a public offering to selected persons to whom this
prospectus is delivered (the "Public Offering" and when referred to together
with the Subscription Offering, the "Offering"). Depending on market conditions
and availability of shares, the shares of Common Stock may be offered for sale
in the Public Offering on a best-efforts basis by a selling group of selected
broker-dealers to be managed by Webb. The Bank and the Holding Company reserve
the right, in their absolute discretion, to accept or reject, in whole or in
part, any or all orders in the Public Offering.
The total number of shares to be issued in the Conversion will be based
upon an appraised valuation of the estimated aggregate pro forma market value of
the Holding Company and the Bank as converted. The purchase price per share
("Purchase Price") has been fixed at $10.00. Based on the current aggregate
valuation range of $14,025,000 to $18,975,000 (the "Estimated Valuation Range"),
the Holding Company is offering up to 1,897,500 shares. Depending upon the
market and financial conditions at the time of the completion of the Public
Offering, if any, the total number of shares to be issued in the Conversion may
be increased or decreased from the _________ shares offered hereby, provided
that the product of the total number of shares multiplied by the price per share
remains within, or does not exceed by more than 15% the maximum of the Estimated
Valuation Range. If the aggregate Purchase Price of the Common Stock sold in the
Conversion is below $14,025,000 or above $21,821,250, or if the Offering is
extended beyond __________________, subscribers will be permitted to modify or
cancel their subscriptions and to have their subscription funds returned
promptly with interest. Under such circumstances, if subscribers take no action,
their subscription funds will be promptly returned to them with interest. In all
other circumstances, subscriptions are irrevocable by subscribers. See "The
Conversion - Offering of Holding Company Common Stock."
With the exception of the Tax-Qualified Employee Plans, no Eligible Account
Holder, Supplemental Eligible Account Holder or Other Member may purchase in
their capacity as such in the Subscription Offering more than $150,000 of Common
Stock; no person, together with associates of and persons acting in concert with
such person, may purchase more than $150,000 of Common Stock in the Public
Offering and no person, together with associates of and persons acting in
concert with such person, may purchase more than $900,000 of Common Stock
offered in the Conversion based on the Estimated Valuation Range (as calculated
without giving effect to any increase in the Estimated Valuation Range
subsequent to the date hereof). Under certain circumstances, the maximum
purchase limitations may be increased or decreased at the sole discretion of the
Bank and the Holding Company up to 9.99% of the total number of shares of Common
Stock sold in the Conversion or to one percent of shares of Common Stock offered
in the Conversion. The minimum purchase is 25 shares. See "The Conversion -
Additional Purchase Restrictions." The Bank and the Holding Company have engaged
Webb as financial advisor and agent to consult, advise and assist in the
distribution of shares of Common Stock, on a best-efforts basis in the Offering
including, if necessary, managing selected broker-dealers to assist in selling
stock in the Public Offering. For such services, Webb will receive a marketing
fee of 1.5% of the total dollar amount of Common Stock sold in the Conversion,
excluding purchases by directors, officers, employees and their immediate family
members, and the employee stock ownership and benefit plans of the Bank and the
Holding Company. If selected dealers are used, the selected dealers will receive
a fee estimated to be up to ^ 4.5% of the aggregate Purchase Price for all
shares of Common Stock sold in the Offering through such selected dealers. Such
fees may be deemed to be underwriting commissions. Webb and the selected dealers
may be deemed to be underwriters. See "The Conversion - Marketing Arrangements"
and "The Conversion - Offering of Holding Company Common Stock."
To subscribe for shares of Common Stock in the Subscription Offering, the
Holding Company must receive an order form and certification form, together with
full payment at $10.00 per share (or appropriate instructions authorizing a
withdrawal from a deposit account at the Bank) for all shares for which
subscription is made, at any office of the Bank, by noon, Chicago, Illinois
time, on _____________, 1996, unless the Subscription Offering is extended, at
the discretion of the Board of Directors, up to an additional 45 days with the
approval of the OTS, if necessary, but without additional notice to subscribers
(the "Expiration Date"). The date by which orders must be received in the Public
Offering, if any, will be set by the Holding Company at the time of such
offering provided that, if the Offering is extended beyond __________________,
each subscriber will have the right to modify or rescind his or her
subscription. Subscription funds will be returned promptly with interest to each
subscriber unless he or she affirmatively indicates otherwise. See "The
Conversion - Offering of Holding Company Common Stock." Subscriptions paid by
check, bank draft or money order will be placed in a segregated account at the
Bank and will earn interest at the Bank's passbook rate from the date of receipt
until completion or termination of the Conversion. Payments authorized by
withdrawal from deposit accounts at the Bank will continue to earn interest at
the contractual rate until the Conversion is completed or terminated; these
funds will be otherwise unavailable to the depositor until such time. Authorized
withdrawals from certificate accounts for the purchase of Common Stock will be
permitted without the imposition of early withdrawal penalties or loss of
interest.
The Holding Company has received preliminary approval to have the Common
Stock listed on the Nasdaq National Market under the symbol "____." Prior to
this offering there has not been a public market for the Common Stock, and there
can be no assurance that an active and liquid trading market for the Common
Stock will develop or that resales of the Common Stock can be made at or above
the Purchase Price. See "Market for Common Stock" and "The Conversion - Stock
Pricing and Number of Shares to be Issued."
2
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[MAP TO COME]
3
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PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified
in its entirety by the de tailed information and Consolidated Financial
Statements appearing elsewhere herein.
PS Financial, Inc.
The Holding Company, PS Financial, Inc. was recently formed by
Preferred Savings under the laws of Delaware for the purpose of becoming a
savings and loan holding company which will own all of the outstanding capital
stock that Preferred Savings will issue in connection with the Conversion.
Immediately following the Conversion, the only significant assets of the Holding
Company will be the capital stock of Preferred Savings, a note evidencing the
Holding Company's loan to the ESOP and up to approximately 50% of the net
proceeds from the Conversion. See "Use of Proceeds." Upon completion of the
Conversion, the Holding Company's business initially will consist only of the
business of Preferred Savings. See "PS Financial, Inc."
Preferred Savings
General. Preferred Savings is a federally chartered mutual savings bank
headquartered in Chicago, Illinois. Preferred Savings was originally chartered
in 1891 as New City Savings and Loan Association. In 1969, the Bank changed its
name to Preferred Savings and Loan Association. In 1993 the Bank converted to a
state savings bank and changed its name to Preferred Savings Bank. And in August
1996, Preferred Savings converted to a federal charter. Preferred Savings
currently serves the financial needs of communities in its market area through
its office located at 4800 South Pulaski Road, Chicago, Illinois 60632-4195. Its
deposits are insured up to applicable limits by the Federal Deposit Insurance
Corporation ("FDIC"). At May 31, 1996, Preferred Savings had total assets of
$54.9 million, deposits of $41.9 million and total retained earnings of $12.0
million (or 21.9% of total assets).
Preferred Savings' business involves attracting deposits from the
general public and using such deposits, together with other funds, to originate
primarily one- to four-family residential mortgage and, to a much lesser extent,
multi-family, commercial real estate and consumer loans primarily in its market
area. At May 31, 1996, $26.2 million, or 71.8%, of the Bank's total loan
portfolio consisted of one-to four-family residential mortgage loans. The Bank
also invests in mortgage-backed and other securities and other permissible
investments. See "Business - Investment Activities - Securities" and "-
Mortgage-Backed and Related Securities."
Financial and operational highlights of the Bank include the following:
o Capital Strength. At May 31, 1996, the Bank had total equity of $12.0
million (21.9% of total assets) and substantially exceeded all of the
applicable regulatory capital requirements with tangible, core and
risk-based capital ratios of 22.1%, 22.1% and 57.1%, respectively.
Assuming on a pro forma basis that $16.5 million, the midpoint of the
Estimated Valuation Range, of shares were sold in the Conversion and
approximately 50% of the net proceeds were retained by the Holding
Company, as of May 31, 1996, the Bank's capital would have been $18.1
million (29.8% of assets). See "Pro Forma Regulatory Capital Analysis."
o Profitability. Preferred Savings recorded net income of $883,000 and
$1.0 million, respectively, and a return on assets of 1.74% and 1.96%,
respectively, for the years ended February 29, 1992 and February 28,
1993. The Bank recorded net income of $942,000 and a return on assets
of 1.83% for the ten months ended December 31, 1993, and net income of
$758,000 and $1.1 million, respectively, and a return on assets of
1.46% and 1.99%, respectively, for the years
4
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ended December 31, 1994 and 1995. For the five months ended May 31,
1996, the Bank had a net income of $440,000 which represents a return
on assets (annualized) of 1.94%. The Bank's net interest margin has
consistently exceeded its ratio of operating expense to average total
assets. During the five months ended May 31, 1996, the Bank's net
interest margin was 5.09% while its ratio of operating expense to
average total assets (annualized) was 1.56%, respectively.
In view of the Holding Company's very high post conversion capital
levels as well as its modest historical growth, the Holding Company's
ability to quickly leverage the conversion proceeds is likely to be
quite limited. Accordingly, for the near term, return on equity is
likely to decline from current levels. Since return on equity is
generally an important factor in determining an institution's stock
price, an unfavorable return on equity could adversely affect the
Holding Company's stock price and liquidity in the stock.
o Interest Rate Sensitivity. The Bank's profitability, like that of most
financial institutions, is dependent to a large extent upon its net
interest income, which is the difference between its interest income
and interest expense. In managing its asset/liability mix, Preferred
Savings often, depending on the relationship between long and
short-term interest rates, market conditions and consumer preference,
places greater emphasis on maximizing its net interest margin than on
matching the interest rate sensitivity of its assets and liabilities.
At May 31, 1996, the Bank's liabilities anticipated to reprice within
one year exceeded its assets anticipated to similarly reprice by $25.8
million or 47.1% of assets. At May 31, 1996, the net value of the
Bank's portfolio equity was projected to decline by 14% and 32% if
there were instantaneous increases in interest rates of 200 and 400
basis points, respectively. See "Risk Factors - Interest Rate Risk
Exposure" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Asset/Liability Management."
o Core Deposits. Management believes that the "core" portions of the
Bank's regular savings and money market accounts can have a lower cost
and be more resistant to interest rate changes than certificate
accounts. Accordingly, the Bank uses customer service initiatives in an
attempt to maintain and expand these accounts. However, the Bank's
regular savings and money market accounts decreased $1.7 million from
fiscal 1994 to fiscal 1995. Management believes that most of this
outflow represents the most interest rate sensitive portion of such
accounts (indeed, a substantial portion of the outflow is believed to
have been reinvested into certificates of deposit at the Bank) and that
a majority of the remaining balance represents the less interest rate
sensitive portion thereof. At May 31, 1996, $21.6 million, or 51.6%, of
the Bank's total deposits^ consisted of regular savings and money
market accounts.
o Limited Recent Growth. The Bank's net loans have grown from $31.7
million at February 29, 1992 to $35.7 million at May 31, 1996. Over the
same period, the Bank's deposit growth has been limited. While the Bank
intends to increase its marketing efforts somewhat in order to
stimulate loan and deposit growth, in view of the high level of
competition in the Bank's market area and the absence of a branch
office network as well as an adjustable rate residential mortgage loan
product and secondary market activities, the Board believes that future
internal growth can be effectively sustained only at modest levels. See
"Pro Forma Income and Equity Data" and "Use of Proceeds."
o Effect of the SAIF recapture on earnings. On September 30, 1996,
Federal legislation was enacted that requires the Savings Association
Insurance Fund (the "SAIF") to be recapitalized by a one-time
assessment equal to 65.7 basis points on all SAIF deposits as of March
31, 1995. As a result of the legislation, the Bank will incur a
one-time charge against earnings equal to approximately $162,000 after
taxes. This will result in a dramatic decline in the Bank's net income
for the quarter ended September 30, 1996. However, following the
special assessment, the Bank's deposit insurance premium will decrease
significantly for future periods. See "Risk Factors - Competitive
Disadvantage caused by the Disparity Between BIF and SAIF Insurance
Premiums."
The Conversion
The Offering is being made in connection with the conversion of Preferred
Savings from a federally chartered mutual savings bank to a federally chartered
stock savings bank and the formation of PS Financial, Inc. as the holding
company of Preferred Savings. The Conversion is subject to certain conditions,
including the prior approval of the Plan by the Bank's members at a Special
Meeting to be held on ____________, 1996. After the Conversion, the Bank's
current voting members (who
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include certain deposit account holders and borrowers) will have no voting
rights in Preferred Savings and will have no voting rights in the Holding
Company unless they become Holding Company stockholders. Eligible Account
Holders and Supplemental Eligible Account Holders, however, will have certain
liquidation rights in the Bank. See "The Conversion - Effects of Conversion to
Stock Form on Depositors and Borrowers of the Bank - Liquidation Rights."
The Offering. The shares of Common Stock to be issued in the Conversion
are being offered at a Purchase Price of $10.00 per share in the Subscription
Offering pursuant to nontransferable Subscription Rights in the following order
of priority: (i) Eligible Account Holders (i.e., depositors whose accounts in
the Bank totaled $50.00 or more on March 31, 1995); (ii) Tax-Qualified Employee
Plans; provided, however, that the Tax Qualified Employee Plans shall have first
priority Subscription Rights to the extent that the total number of shares of
Common Stock sold in the Conversion exceeds the maximum of the Estimated
Valuation Range; (iii) Supplemental Eligible Account Holders (i.e., depositors
whose accounts in the Bank totaled $50.00 or more on September 30, 1996); (iv)
Other Members (i.e., depositors of the Bank as of ___________, 1996); and (v)
employees, officers and directors of the Bank. Subscription Rights received in
any of the foregoing categories will be subordinated to the Subscription Rights
received by those in a prior category. Subscription Rights will expire if not
exercised by noon, Chicago, Illinois time, on _______________, 1996, unless
extended (the "Expiration Date").
Subject to the prior rights of holders of Subscription Rights and market
conditions at or near the completion of the Subscription Offering, any shares of
Common Stock not subscribed for in the Subscription Offering may be offered at
the same price in the Public Offering through Webb to selected persons to whom
this prospectus is delivered. To order Common Stock in connection with the
Public Offering, if any, an executed stock order and account withdrawal
authorization and certification must be received by Webb prior to the
termination of the Public Offering. The date by which orders must be received in
the Public Offering, if any, will be set by the Holding Company at the time of
such offering provided that if the Offering is extended beyond _______________,
1996, each subscriber will have the right to modify or rescind his or her
subscription. The Holding Company and the Bank reserve the absolute right to
accept or reject any orders in the Public Offering, in whole or in part.
If necessary, shares of Common Stock may also be offered in connection
with the Public Offering for sale on a best-efforts basis by selected dealers
managed by Webb. See "The Conversion - Public Offering."
The Bank and the Holding Company have engaged Webb to consult with and
advise the Holding Company and the Bank with respect to the Offering, and Webb
has agreed to solicit subscriptions and purchase orders for shares of Common
Stock in the Offering. Neither Webb nor any selected broker-dealers will have
any obligation to purchase shares of Common Stock in the Offering. Webb will
receive for its services a marketing fee of 1.5% of the total dollar amount of
Common Stock sold in the Conversion (excluding purchases by directors, officers,
employees and members of their immediate families and the employee benefit plans
of the Holding Company and for the Bank, and shares sold by selected
broker-dealers). To the extent selected broker-dealers are utilized in
connection with the sale of shares in the Public Offering, the selected dealers
will receive a fee of up to 4.5% and Webb will receive a fee of 1.0% of the
aggregate Purchase Price for all shares of Common Stock sold through such
broker-dealers. Webb will also receive certain expense reimbursements in
connection with the Offering. The Holding Company has agreed to indemnify Webb
against certain liabilities, including certain liabilities under the Securities
Act of 1933, as amended ("Securities Act"). See "The Conversion Marketing
Arrangements."
The Bank has established a Stock Information Center, which will be
managed by Webb, to coordinate the Offering, including tabulating orders and
answering questions about the Offering received
6
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by telephone. All subscribers will be instructed to mail payment to the Stock
Information Center or deliver payment directly to the Bank's office. Payment for
shares of Common Stock may be made by cash (if delivered in person), check or
money order or by authorization of withdrawal from deposit accounts maintained
with the Bank. Such funds will not be available for withdrawal and will not be
released until the Conversion is completed or terminated. See "The Conversion -
Method of Payment for Subscriptions."
Purchase Limitations. The Plan of Conversion places limitations on the
number of shares which may be purchased in the Conversion by various categories
of persons. With the exception of the Tax-Qualified Employee Plans, no Eligible
Account Holder, Supplemental Eligible Account Holder, Other Member or director,
officer or employee may purchase in their capacity as such in the Subscription
Offering more than $150,000 of Common Stock; no person, together with associates
of and persons acting in concert with such person, may purchase more than
$150,000 of Common Stock in the Public Offering; and no person or group of
persons acting in concert (other than the Tax-Qualified Employee Plans) may
purchase more than $900,000 of Common Stock in the Conversion. The minimum
purchase limitation is 25 shares of Common Stock. These purchase limits may be
increased or decreased consistent with the Office of Thrift Supervision ("OTS")
regulations at the sole discretion of the Holding Company and the Bank. See "The
Conversion - Offering of Holding Company Common Stock."
Restrictions on Transfer of Subscription Rights. Prior to the completion
of the Conversion, no person may transfer or enter into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Common Stock to be issued upon
their exercise. Persons found to be selling or otherwise transferring their
right to purchase stock in the Subscription Offering or purchasing Common Stock
on behalf of another person will be subject to forfeiture of such rights and
possible federal penalties and sanctions. See "The Conversion - Restrictions on
Transfer of Subscription Rights and Shares."
Stock Pricing and Number of Shares of Common Stock to be Issued in the
Conversion. The Purchase Price of the Common Stock is $10.00 per share and is
the same for all purchasers. The aggregate pro forma market value of the Holding
Company and Preferred Savings, as converted, was estimated by Keller, which is
experienced in appraising converting thrift institutions, to be the Estimated
Valuation Range. The Board of Directors has reviewed the Estimated Valuation
Range as stated in the appraisal and compared it with recent stock trading
prices as well as other recent pro forma market value estimates. The Board of
Directors has also reviewed the appraisal report, including the assumptions and
methodology utilized therein, and determined that it was not unreasonable.
Depending on market and financial conditions at the time of the
completion of the Offering, the total number of shares of Common Stock to be
issued in the Conversion may be increased or decreased significantly from the
1,897,500 shares offered hereby and the Purchase Price may be decreased.
However, subscribers will be permitted to modify or rescind their subscriptions
if the product of the total number of shares to be issued multiplied by the
price per share is less than $14,025,000 or more than $21,821,250. The appraisal
is not intended to be, and must not be interpreted as, a recommendation of any
kind as to the advisability of voting to approve the Conversion or of purchasing
shares of Common Stock. The appraisal considers Preferred Savings and the
Holding Company only as going concerns and should not be considered as any
indication of the liquidation value of Preferred Savings or the Holding Company.
Moreover, the appraisal is necessarily based on many factors which change from
time to time. There can be no assurance that persons who purchase shares in the
Conversion will be able to sell such shares at prices at or above the Purchase
Price. See "Pro Forma Data" and "The Conversion - Stock Pricing and Number of
Shares to be Issued" for a description of the manner in which such valuation was
made and the limitations on its use.
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Purchases by Directors and Executive Officers
The directors and executive officers of Preferred Savings intend to
purchase, for investment purposes and at the same price as the shares are sold
to other investors in the Conversion, approximately $950,000 of Common Stock, or
6.8%, 5.8% or 5.0% of the shares to be sold in the Conversion at the minimum,
midpoint and maximum of the Estimated Valuation Range, respectively. In
addition, an amount of shares equal to an aggregate of 8% of the shares to be
issued in the Conversion is anticipated to be purchased by the ESOP. See "The
Conversion - Participation by the Board and Executive Officers."
Potential Benefits of Conversion to Directors and Executive Officers
Employee Stock Ownership Plan. The Board of Directors of the Bank has
adopted an ESOP, a tax-qualified employee benefit plan for officers and
employees of the Holding Company and the Bank. The ESOP intends to buy up to 8%
of the Common Stock issued in the Conversion (approximately $1.1 million to $1.5
million of the Common Stock based on the issuance of the minimum and the maximum
of the Estimated Valuation Range and the $10.00 per share Purchase Price). The
ESOP will purchase the shares with funds borrowed from the Holding Company, and
it is anticipated that the ESOP will repay the loans through periodic
tax-deductible contributions from the Bank over a twelve-year period. These
contributions will increase the compensation expense of the Bank. See
"Management - Benefit Plans Employee Stock Ownership Plan" for a description of
this plan.
Stock Option and Incentive Plan and Recognition and Retention Plan. The
Board of Directors of the Holding Company intends to adopt a Stock Option and
Incentive Plan (the "Stock Option Plan") and a Recognition and Retention Plan
("RRP") to become effective upon ratification by stockholders following the
Conversion. Certain of the directors and executive officers of the Holding
Company and the Bank will receive awards under these plans. It is currently
anticipated that an amount of shares equal to 10% and 4% of the shares sold in
the Conversion will be reserved for issuance under the Stock Option Plan and
RRP, respectively. Depending upon market conditions in the future, the Holding
Company may purchase shares in the open market to fund these plans. See
"Management - Benefit Plans" for a description of these plans.
Under the proposed Stock Option Plan, it is presently intended that the
directors and executive officers be granted options to purchase, in addition to
the shares to be issued in the Conversion, an amount of shares equal to 8.3% of
the shares sold in the Conversion (or 116,407 and 157,492 shares, respectively,
of Common Stock based on the minimum and maximum of the Estimated Valuation
Range) at an exercise price equal to the market value per share of the Common
Stock on the date of grant. Such options will be awarded at no expense to the
recipients and pose no financial risk to the recipients until exercised. It is
presently anticipated that Kimberly P. Rooney, President and Chief Executive
Officer, will each receive an option to purchase an amount of shares equal to
2.5% of the shares sold in the Conversion (or 35,063 and 47,438 shares, assuming
the minimum and maximum of the Estimated Valuation Range). See "Management -
Benefit Plans - Stock Option and Incentive Plan."
The award and exercise of options pursuant to the Stock Option Plan will
not result in any expense to the Holding Company; however, when the options are
exercised, the per share earnings and book value of existing stockholders will
likely be diluted.
It is also intended that directors and executive officers be granted
(without any requirement of payment by the grantee) an amount of shares of
restricted stock awards equal to 3.35% of the shares sold in the Conversion (or
46,984 and 63,566 shares, respectively, based on the minimum and maximum of the
Estimated Valuation Range) which will vest over five years commencing one year
from stockholder
8
<PAGE>
ratification and which will have a total value of $518,930 and $702,080 based on
the Purchase Price of $10.00 per share at the minimum and maximum of the
Estimated Valuation Range, respectively. It is presently anticipated that
President Rooney and Chairman Ptak each will receive a restricted stock award
equal to 1.0% of the shares sold in the Conversion (or 14,025 and 18,975 shares,
assuming the minimum and maximum of the Estimated Valuation Range). The
restricted stock award to President Rooney and Chairman Ptak each would have an
aggregate value ranging from $140,250 to $189,750 (at the minimum and maximum of
the Estimated Valuation Range) based upon the original Purchase Price of $10.00
per share. See "Risk Factors - Takeover Defensive Provisions" and "Management -
Benefit Plans Recognition and Retention Plan."
Following stockholder ratification of the RRP, the RRP will be funded
either with shares purchased in the open market or with authorized but unissued
shares. Based upon the Purchase Price of $10.00 per share, the amount required
to fund the RRP through open-market purchases would range from approximately
$561,000 (based upon the sale of shares at the minimum of the Estimated
Valuation Range) to approximately $759,000 (based upon the sale of shares at the
maximum of the Estimated Valuation Range). In the event that the per share price
of the Common Stock increases above the $10.00 per share Purchase Price
following completion of the Offering, the amount necessary to fund the RRP would
also increase. The expense related to the cost of the RRP will be recognized
over the five-year vesting period of the awards made pursuant to such plan. The
use of authorized but unissued shares to fund the RRP would dilute the holdings
of stockholders who purchase Common Stock in the Conversion. See "Management -
Benefit Plans - Recognition and Retention Plan."
The Holding Company intends to submit the RRP and the Stock Option Plan
to stockholders for ratification following completion of the Offering, but in no
event prior to six months following the completion of the Conversion. These
plans will only be effective if ratified by the stockholders. In the event the
Stock Option Plan and the RRP are not ratified by stockholders, management may
consider the adoption of alternate incentive plans, although no such plans are
currently contemplated. While the Bank believes that the RRP and the Stock
Option Plan will provide important incentives for the performance and retention
of management, the Bank has no reason to believe that the failure to obtain
shareholder ratification of such plans would result in the departure of any
members of senior management.
Employment and Severance Agreements. The Bank intends to enter into
employment agreements with Chairman Ptak and President Rooney. It is anticipated
that the agreements will provide for a salary equal to the employee's current
salary, will have an initial term of three years, subject to annual extension
for an additional year following the Bank's annual performance review and will
become effective upon the completion of the Conversion. Under certain
circumstances including a change in control, as defined in the employment
agreements, the employee will be entitled to a severance payment in lieu of
salary equal to a percentage of his base amount of compensation, as defined. See
"Management - Executive Compensation."
The Bank also intends to enter into change in control severance
agreements with three other executive officers. Such agreements have initial
terms of 18 months and become effective upon completion of the Conversion. In
the event the officer is terminated following a "change in control" (as defined
in the agreements) such officer will be entitled to a severance payment equal to
$40,000. See "Management - Executive Compensation - Employment Agreements and
Severance Agreements" for the definition of "change in control" and a more
detailed description of these agreements.
Use of Proceeds
The net proceeds from the sale of Common Stock in the Conversion
(estimated at $13.5 million, $16.0 million, $18.4 million and $21.2 million
based on sales at the minimum, midpoint, maximum and
9
<PAGE>
15% above the maximum of the Estimated Valuation Range, respectively) will
substantially increase the capital of Preferred Savings. See "Pro Forma Data."
The Holding Company will utilize approximately 50% of the net proceeds from the
issuance of the Common Stock to purchase all of the common stock of Preferred
Savings to be issued upon Conversion and will retain approximately 50% of the
net proceeds. The proceeds retained by the Holding Company will be invested
initially in short-term investments similar to those currently in the Bank's
portfolio. Such proceeds will subsequently be invested in mortgage-backed
securities and investment securities and will be available for general corporate
purposes, including the possible repurchase of shares of the Common Stock, as
permitted by the OTS. The Holding Company currently has no specific plan to make
any such repurchases of any of its Common Stock. In addition, the Holding
Company intends to provide the funding for the ESOP loan. Based upon the initial
Purchase Price of $10.00 per share, the dollar amount of the ESOP loan would
range from $1.1 million (based upon the sale of shares at the minimum of the
Estimated Valuation Range) to $1.5 million (based upon the sale of shares at the
maximum of the Estimated Valuation Range). The interest rate to be charged by
the Holding Company on the ESOP loan will be based upon the Internal Revenue
Service ("IRS") prescribed applicable federal rate at the time of origination.
Finally, the Holding Company currently intends to use a portion of the
proceeds to fund a Recognition and Retention Plan ("RRP"), subject to
stockholder ratification although the ultimate payment for the RRP will be made
by the Bank through compensation expense. Following stockholder ratification of
the RRP, the RRP will be funded either with shares purchased in the open market
or with authorized but unissued shares. Based upon the Purchase Price of $10.00
per share, the amount required to fund the RRP through open-market purchases
would range from approximately $561,000 (based upon the sale of shares at the
minimum of the Estimated Valuation Range) to approximately $759,000 (based upon
the sale of shares at the maximum of the Estimated Valuation Range). In the
event that the per share price of the Common Stock increases above the $10.00
per share Purchase Price following completion of the Offering, the amount
necessary to fund the RRP would also increase. The use of authorized but
unissued shares to fund the RRP could dilute the holdings of stockholders who
purchase Common Stock in the Conversion. See "Management - Benefit Plans -
Recognition and Retention Plan."
The net proceeds received by Preferred Savings will become part of
Preferred Savings' general funds for use in its business and will be used to
support the Bank's existing operations, subject to applicable regulatory
restrictions. Immediately upon the completion of the Conversion, it is
anticipated that the Bank will invest such proceeds into short-term assets.
Subsequently, the Bank intends to redirect the net proceeds to the origination
of residential loans and, to a lesser extent, commercial real estate and
consumer loans, subject to market conditions. In addition, such proceeds will be
available for the acquisition of deposits or assets or both from other
institutions, although no such acquisitions are contemplated at this time.
See "Use of Proceeds" for additional information on the utilization of
the offering proceeds as well as OTS restrictions on repurchases of the Holding
Company's stock.
Dividends
After completion of the Conversion, the Board may consider a policy of
paying quarterly cash dividends on the Common Stock, although there can be no
assurance as to whether or when the Holding Company will pay a dividend. The
declaration and payment of dividends are subject to, among other things, the
Holding Company's financial condition and results of operations, Preferred
Savings' compliance with its regulatory capital requirements, including the
fully phased-in capital requirements, tax considerations, industry standards,
economic conditions, regulatory restrictions, general business practices and
other factors. See "Dividends."
10
<PAGE>
Market for Common Stock
The Holding Company has received preliminary approval to have the Common
Stock traded on the Nasdaq National Market System under the symbol "____." In
order to be traded on the Nasdaq National Market System, there must be at least
two market makers for the Common Stock. Keefe, Bruyette & Woods has indicated
its intention to make a market in the Holding Company's Common Stock following
completion of the Conversion, depending upon the volume of trading activity in
the Common Stock and subject to compliance with applicable laws and other
regulatory requirements. A second market marker has not yet been secured by the
Holding Company. The Holding Company anticipates that it will be able to secure
the two market makers necessary to enable the Common Stock to be traded on the
Nasdaq National Market System. A public market having the desirable
characteristics of depth, liquidity and orderliness, however, depends upon the
presence in the marketplace of both willing buyers and sellers of the Common
Stock at any given time, which is not within the control of the Holding Company,
Preferred Savings or any market maker. Further, no assurance can be given that
an investor will be able to resell the Common Stock at or above the Purchase
Price after the Conversion. See "Market for Common Stock" and "The Conversion -
Stock Pricing and Number of Shares to be Issued."
Risk Factors
See "Risk Factors" for information regarding certain factors which should
be considered by prospective investors, including the Bank's limited growth
potential, difficulty in fully leveraging capital, interest rate risk exposure,
loan concentration, competition, the competitive disadvantage resulting from the
insurance premium disparity, takeover defensive provisions contained in the
Holding Company's certificate of incorporation and bylaws, post-conversion
overhead expenses, regulatory oversight, the risk of a delayed offering, the
absence of an active market for the Common Stock and the possible consequences
of amendment of the Plan of Conversion.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Set forth below are selected consolidated financial and other data of the
Bank. Operating results for the interim periods are not necessarily indicative
of results of any other interim periods. The financial data is derived in part
from, and should be read in conjunction with, the Consolidated Financial
Statements and Notes of the Bank presented elsewhere in this Prospectus.
In the opinion of management, the unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial condition of
Preferred Savings Bank as of May 31, 1996 and for the five month period ended
May 31, 1996 and 1995.
<TABLE>
<CAPTION>
December 31,
May 31, --------------------------------------- February 28, February 29,
1996(1) 1995 1994 1993 1993 1992
------------- ------------ ------------- ------------ ------------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets................................ $54,853 $53,520 $51,619 $53,854 $49,974 $46,483
Cash and cash equivalents................... 2,871 3,754 1,429 5,874 2,445 5,697
Loans receivable, net(2).................... 35,702 34,525 32,890 30,821 32,716 31,706
Mortgage-backed securities(3):
Held to maturity......................... --- --- 1,792 2,026 --- ---
Available for sale....................... 3,884 4,220 1,694 --- --- ---
Securities(3):
Held to maturity......................... --- --- 201 403 855 607
Available for sale....................... 11,058 9,739 7,326 9,044 8,652 3,398
Deposits.................................... 41,945 41,047 40,057 41,139 40,363 37,950
Total equity................................ 12,029 11,724 10,512 9,645 8,833 7,898
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Five Months Year Ended 10 Months Year Ended
Ended May 31, December 31, Ended -------------------------
-------------------- --------------------- December 31, February 28, February 29,
1996 1995 1995 1994 1993 1993 1992
-------------------- --------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(In Thousands)
Selected Operations Data:
Total interest income................... $1,853 $1,758 $4,268 $3,854 $3,401 $4,183 $4,265
Total interest expense.................. 725 632 1,632 1,310 1,169 1,734 2,154
------- ------- ------ ------ ------ ------ ------
Net interest income.................. 1,128 1,126 2,636 2,544 2,232 2,449 2,111
Provision for loan losses............... 50 --- --- 42 27 24 24
------- -------- -------- ------- ------- ------- -------
Net interest income after provision
for loan losses....................... 1,078 1,126 2,636 2,502 2,205 2,425 2,087
Fees and service charges................ 27 24 58 76 40 39 46
Gain (loss) on sales of securities...... --- --- --- (365) (28) --- 89
Other non-interest income............... --- --- --- --- --- --- ---
-------- -------- -------- -------- -------- -------- --------
Total non-interest income............... 27 24 58 (289) 12 39 135
Total non-interest expense.............. 353 344 1,009 838 647 820 777
------- ------- ------ ------- ------- ------- -------
Income before taxes..................... 752 806 1,685 1,375 1,570 1,644 1,445
Income tax provision.................... 312 317 630 617 628 643 562
------- ------- ------- ------- ------- ------- -------
Net income.............................. $ 440 $ 489 $1,055 $ 758 $ 942 $1,001 $ 883
======= ======= ====== ====== ====== ====== ======
</TABLE>
(1) Financial information at May 31, 1996 and for the five month periods
ended May 31, 1996 is derived from unaudited financial data, but in the
opinion of management, reflects all adjustments (consisting only of
normal recurring adjustments) which are necessary to present fairly the
results for such interim periods. Interim results at and for the five
months ended May 31, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996.
(2) The allowance for loan losses at May 31, 1996, December 31, 1995, 1994
and 1993, February 28, 1993 and February 29, 1992 was $186,000,
$136,000, $136,000, $94,000, $67,000 and $43,000, respectively.
(3) The Bank adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective as of December 31, 1993. Prior to the adoption of SFAS No. 115,
investment securities and mortgage-backed securities held for sale were
carried at the lower of amortized cost or market value, as adjusted for
amortization of premiums and accretion of discounts over the remaining
terms of the securities from the dates of purchase.
13
<PAGE>
<TABLE>
<CAPTION>
Five Months Year Ended
Ended May 31, December 31,
------------------------ ------------------------
1996 1995 1995 1994
------------- --------- ------------ --------
Selected Financial Ratios and Other Data:
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net income to average total
assets)(1)........................................ 1.94% 2.25% 1.99% 1.46%
Return on equity (ratio of net income to average total
equity)(1)........................................ 8.88 10.84 9.42 7.53
Interest rate spread information:
Average during period(1)............................. 4.20 4.54 4.26 4.38
End of period........................................ 3.70 4.03 3.71 4.26
Net interest margin(2)(1).............................. 5.09 5.33 5.13 5.03
Efficiency Ratio(3).................................... 30.56 29.91 37.45 37.16
Ratio of operating expense to average total assets(1).. 1.56 1.58 1.91 1.61
Ratio of average interest-earning assets to average
interest-bearing liabilities...................... 127.58 127.06 127.21 125.08
Quality Ratios:
Non-performing assets to total assets at end of period. 1.09 0.43 1.45 0.65
Allowance for loan losses to non-performing loans...... 31.00 60.44 17.55 40.72
Allowance for loan losses to total loans............... 0.51 0.38 0.39 0.41
Capital Ratios:
Equity to total assets at end of period................ 21.93 21.07 21.91 20.36
Average equity to average assets....................... 21.86 20.75 21.18 19.32
Regulatory Capital Ratios:(4)
Total capital.......................................... 56.91 51.80 59.05 54.32
Tier 1 capital......................................... 56.28 51.19 58.37 52.79
Leverage ratio......................................... 22.34 21.90 22.19 20.29
Tangible capital....................................... --- --- --- ---
Core capital........................................... --- --- --- ---
Risk-based capital..................................... --- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
10 Months Year Ended
Ended --------------------------
December 31, February 28, February 29,
1993 1993 1992
------------ ------------ ------------
Selected Financial Ratios and Other Data:
<S> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net income to average total
assets)(1)........................................ 1.83% 1.96% 1.74%
Return on equity (ratio of net income to average total
equity)(1)........................................ 10.21 11.82 11.22
Interest rate spread information:
Average during period(1)............................. 4.78 3.96 2.58
End of period........................................ 3.92 3.79 3.17
Net interest margin(2)(1).............................. 5.39 4.88 4.25
Efficiency Ratio(3).................................... 28.83 32.96 34.59
Ratio of operating expense to average total assets(1).. 1.26 1.60 1.53
Ratio of average interest-earning assets to average
interest-bearing liabilities...................... 121.78 126.60 138.71
Quality Ratios:
Non-performing assets to total assets at end of period. 0.33 0.21 0.45
Allowance for loan losses to non-performing loans...... 53.41 63.21 20.77
Allowance for loan losses to total loans............... 0.30 0.20 0.13
Capital Ratios:
Equity to total assets at end of period................ 17.91 17.68 16.99
Average equity to average assets....................... 17.93 16.56 15.51
Regulatory Capital Ratios:(4)
Total capital.......................................... 38.93 31.37 ---
Tier 1 capital......................................... 37.74 30.85 ---
Leverage ratio......................................... 18.08 18.01 ---
Tangible capital....................................... --- --- 17.00
Core capital........................................... --- --- 17.00
Risk-based capital..................................... --- --- 35.90
</TABLE>
- -------------------
(1) Ratios for the five-month and ten month periods have been annualized.
(2) Net interest income divided by average interest earning assets.
14
<PAGE>
(3) The efficiency ratio represents noninterest expense as a percent of net
interest income and noninterest income before provision for loan losses.
(4) OTS regulatory capital ratios are shown for the years that the Bank was
under OTS regulation. Bank Capital ratios are shown for the years the
Bank was a state-chartered savings bank.
15
<PAGE>
RECENT FINANCIAL DATA
The selected financial and other data of the Bank set forth below at
and for the three months ended August 31, 1996 and 1995 were derived from
unaudited financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
the financial condition and results of operations for the unaudited periods
presented have been included. The results of operations and other data presented
for the three months ended August 31, 1996 are not necessarily indicative of the
results of operations which may be expected for the fiscal year ending December
31, 1996. The information presented below is qualified in its entirety by the
detailed information and financial statements included elsewhere in this
Prospectus and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business" and the
audited Financial Statements of the Bank and Notes thereto included elsewhere in
this Prospectus.
At At
August 31, May 31,
1996 1996
----------- -------
Selected Balance Sheet Data:
Total assets...................................... $ 54,856 $ 54,853
Cash and cash equivalents......................... 1,381 2,871
Securities available-for-sale..................... 15,309 14,942
Loans receivable, net............................. 36,177 35,702
Deposits.......................................... 41,899 41,945
Equity............................................ 12,332 12,029
Three Months Ended
--------------------------
August 31, May 31,
1996 1996
----------- -------
(In Thousands)
Selected Operating Data:
Interest income................................... $1,131 $1,046
Interest expense.................................. 434 422
------ -----
Net interest income before provision for loan
losses....................................... 697 624
Provision for loan losses......................... --- ---
------- -------
Net interest income after provision for loan
losses........................................ 697 624
Gain (loss) on sale of securities................. --- (11)
Other noninterest income.......................... 16 11
Noninterest expense............................... 228 208
------ -----
Income before income taxes........................ 485 416
Income taxes...................................... 194 168
------ -----
Net income...................................... $ 291 $ 248
====== =====
16
<PAGE>
At or For the
Three Months Ended
August 31, August 31,
1996 1995
---------- ----------
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets(1)....................... 2.77% 1.87%
Return on average equity(1)....................... 9.58 8.76
Average equity to average assets.................. 28.90 21.32
Equity to total assets at end of period........... 22.48 21.93
Average interest rate spread(1)................... 4.28 3.96
Net interest margin(1)(2)......................... 5.19 4.87
Average interest-earning assets to average
interest-bearing liabilities.................... 127.91 127.32
Efficiency ratio(3)............................... 31.97 33.33
Noninterest expense to average assets(1).......... 1.66 1.57
Regulatory Capital Ratios:
Total capital..................................... 56.91 59.05
Tier 1 capital.................................... 56.28 58.37
Leverage ratio.................................... 22.34 22.19
Asset Quality Ratios:
Allowance for loan losses as a percent of
gross loans receivable.......................... 0.50 0.39
Allowance for loan losses as a percent of non-
performing loans................................ 32.12% 35.98%
- -----------
(1) Ratios for the three month periods have been annualized.
(2) Net interest income divided by average interest earning assets.
(3) The efficiency ratio represents noninterest expense as a percent of
net interest income and noninterest income before provision for
loan losses.
<TABLE>
<CAPTION>
At August 31, At May 31, At August 31,
1996 1996 1995
------------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C>
Non-accruing loans over 90 days delinquent:
One- to four-family................................. $ 563 $ 584 $ 378
Multi-family........................................ --- --- ---
Commercial real estate.............................. --- --- ---
Commercial business................................. --- --- ---
----- ----- -----
Total............................................. 563 584 378
Accruing loans more than 90 days delinquent.......... 16 16 ---
Foreclosed assets.................................... --- --- ---
----- ----- -----
Total non-performing assets.......................... $ 579 $ 600 $ 378
===== ===== =====
Total as a percentage of total assets................ 1.06% 1.09% 0.72%
===== ===== =====
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RECENT RESULTS
Comparison of Financial Condition at August 31, 1996 and May 31, 1996
Total assets at August 31, 1996 remained virtually unchanged compared to
May 31, 1996. The Bank increased the amount of net loans receivable by $300,000
from $35.7 million at May 31, 1996 to $36.0 million at August 31, 1996. In
addition, mortgage-backed securities available-for-sale increased by $700,000
from $3.9 million at May 31, 1996 to $4.6 million at August 31, 1996. These
increases were offset by a decrease in cash and cash equivalents of $1.5 million
from $2.9 million at May 31, 1996 to $1.4 million at August 31, 1996.
Total liabilities at August 31, 1996 were $42.5 million compared to $42.8
million at May 31, 1996, a decrease of $300,000. The decrease in other
liabilities was primarily due to a $300,000 decrease in advance payments by
borrowers for taxes and insurance as a result of the payment of real estate
taxes in August.
Equity at August 31, 1996 was $12.3 million compared to $12.0 million at
May 31, 1996, an increase of $300,000, or 2.5%, due primarily to net earnings of
$291,000 and a decrease in the unrealized loss on securities available-for-sale
of $12,000.
Comparison of Operating Results for the Three Months Ended August 31, 1996 and
August 31, 1995
General. Net earnings for the three months ended August 31, 1996 were
$291,000, an increase of $43,000, or 17.3%, from net earnings of $248,000 for
the three months ended August 31, 1995. The increase in net earnings resulted
primarily from an increase in the Bank's net interest margin.
Interest Income. Interest income for the three months ended August 31,
1996 was $1.1 million compared to $1.0 million for the three months ended August
31, 1995, an increase of $85,000, or 8.5%. The increase in interest income was
the result of an increase in the average balance of interest-earning assets from
$51.2 million for the three months ended August 31, 1995 to $53.8 million for
the three months ended August 31, 1996 primarily due to an increase in the
average balance of net loans receivable. In addition, the yield on
interest-earning assets increased 24 basis points from 8.16% for the three
months ended August 31, 1995 to 8.40% for the three months ended August 31,
1996. This increase was primarily due to an increase in the yield on loans of 41
basis points and an increase in mortgage-backed securities of 58 basis points
offset by a decrease in securities of 30 basis points. The increase in the
yields on loans and mortgage-backed securities is reflective of the current rate
environment.
Interest Expense. Interest expense for the three months ended August 31,
1996 was $434,000 compared to $422,000 for the three months ended August 31,
1995, an increase of $22,000, or 5.2%. The increase of interest expense was
primarily due to the increase of $1.8 million in the average balance of
interest-bearing deposits from $40.2 million for the three months ended August
31, 1995 to $42.0 million for the three months ended August 31, 1996. The
increase in the average balance was offset by a decrease in the average cost of
funds for
18
<PAGE>
deposits from 4.20% for the three months ended August 31, 1995 to 4.12% for the
three months ended August 31, 1996. This 8 basis point decrease in the cost of
funds was primarily due to the higher rate certificates of deposit maturing and
repricing at slightly lower rates.
Provision for Loan Losses. The Bank's provision for loan losses was zero
for the three months ended August 31, 1996 and 1995. At August 31, 1996, the
Bank's allowance for loan losses totaled $186,000, or .51% of total loans and
32.12% of total non-performing loans. The amount of the provision and allowance
for estimated losses on loans is influenced by current economic conditions,
actual loss experience, industry trends and other factors, such as adverse
economic conditions, including declining real estate values, in the Bank's
market area. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to provide additions to the allowance
based upon judgments which differ from those of management. The absence of a
loan loss provision for the three months ended August 31, 1996 and 1995 is
indicative of management's assessment of the adequacy of the allowance for loan
losses, given the positive trends in historical loss experience of the portfolio
and strength of the local economy as well as the fact that the majority of loans
are single-family residential loans and the loan-to-values are generally less
than 80%. Although management uses the best information available, future
adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's control.
Noninterest Income. Noninterest income for the three months ended August
31, 1996 was $16,000 compared to zero for the three months ended August 31,
1995. This increase is primarily due to security losses of $11,000 for the three
months ended August 31, 1995 compared to zero for the three months ended August
31, 1996.
Noninterest Expense. Noninterest expense was $228,000 for the three months
ended August 31, 1996 compared to $208,000 for the three months ended August 31,
1995, an increase of $20,000, or 9.6%. The increase was primarily a result of
$8,000 increase in occupancy expense due to increased taxes and repairs and
maintenance and an increase of $4,000 in compensation expense due to normal
salary adjustments.
Income taxes. Income taxes were $194,000 for the three months ended August
31, 1996 compared to $168,000 for the three months ended August 31, 1995, an
increase of $26,000, or 15.5%. The increase was primarily a result of an
increase in pretax earnings of $69,000.
Subsequent Event. On September 30, 1996, federal legislation was enacted
that requires the Savings Association Insurance Fund (the "SAIF") to be
capitalized by a one-time assessment equal to 65.7 basis points on all SAIF
deposits as of March 31, 1995. As a result of the legislation, the Bank will
incur a one-time charge against earnings equal to approximately $162,000 after
taxes. This will result in a dramatic decline in the Bank's net income for the
quarter ended September 30, 1996. However, following the special assessment, the
Bank's deposit insurance premium will decrease significantly for future periods.
See "Risk Factors - Competitive Disadvantage Caused by the Disparity Between BIF
and SAIF Insurance Premiums."
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RISK FACTORS
The following factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors before deciding whether to
purchase the Common Stock offered in the Offering.
Limited Growth Potential; Difficulty in Fully Leveraging Capital; Possible
Unfavorable Impact on Post Conversion Stock Price
The Bank experiences strong competition in its local market area in both
originating loans and attracting depositor accounts. This competition arises
principally from savings institutions and commercial banks as well as other
types of financial service companies such as mortgage bankers, securities firms
and credit unions. See "Business - Lending Activities" and "Competition."
In view of the increasing cost and complexity of operating a financial
institution, the Board of Directors believes that moderate growth of the Bank's
assets and liabilities is important for maintaining profitability. In addition,
the Board of Directors believes that growth will be needed in the future to
leverage the new capital raised by the Conversion. See "Use of Proceeds."
The Bank's net loans have grown from $31.7 million at February 29, 1992 to
$35.7 million at May 31, 1996. Over the same period, the Bank's deposit growth
has been limited. While the Bank intends to increase its marketing efforts
somewhat in order to stimulate loan and deposit growth, in view of the high
level of competition in the Bank's market area and the absence of a branch
office network as well as an adjustable rate residential mortgage loan product
and secondary market activities, the Board believes that future internal growth
can be effectively sustained only at modest levels. As a result, the ^ Holding
Company's ability to quickly leverage the net proceeds from the Conversion is
likely to be limited. Accordingly, for the near term, return on equity will
decline from current levels. Since return on equity is generally an important
factor in determining an institution's stock price, an unfavorable return on
equity could adversely affect the Holding Company's stock price. See "Pro Forma
Income and Equity Data" and "Use of Proceeds."
Interest Rate Risk Exposure
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest income on
interest-earning assets, such as loans and investments, and its interest expense
on interest-bearing liabilities, such as deposits and borrowings. When interest
rates rise, the Bank's net interest income tends to be adversely impacted since
its liabilities tend to reprice more quickly than its assets. Conversely, in a
declining rate environment the Bank's net interest income is generally
positively impacted since its assets tend to reprice more slowly than its
liabilities. Changes in the level of interest rates also affect the amount of
loans originated by the Bank and, thus, the amount of loan and commitment fees,
as well as the market value of the Bank's interest-earning assets. Moreover,
increases in interest rates also can result in disintermediation, which is the
flow of funds away from savings institutions into direct investments, such as
corporate securities and other investment vehicles, which generally pay higher
rates of return than savings institutions.
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Finally, a flattening of the "yield curve" (i.e., a decline in the difference
between long and short term interest rates), as has occurred over the last
several months, could adversely impact net interest income to the extent that
the Bank's assets have a longer average term than its liabilities.
In managing its asset/liability mix, the Bank may, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference and in view of its substantial capital position, place more
emphasis on managing net interest margin than on better matching the interest
rate sensitivity of its assets and liabilities in an effort to enhance net
interest income. In particular, virtually all of the Bank's loans carry fixed
interest rates. Although the Board recently determined to reduce somewhat the
level of tolerated interest rate risk, it continues to believe that the
increased net interest income resulting from a mismatch in the maturity of its
asset and liability portfolios can, during periods of declining or stable
interest rates and periods in which there is a substantial positive difference
between long and short term interest rates (i.e., a "positively sloped yield
curve"), provide high enough returns to justify the increased exposure to sudden
and unexpected increases in interest rates. As a result, the Bank will continue
to be significantly vulnerable to changes in interest rates and to decreases in
the difference between long and short term interest rates.
At May 31, 1996, the total amount of interest-bearing liabilities
anticipated by the Bank, based on certain assumptions, to mature or reprice
within one year exceeded the total amount of interest-earning assets to mature
or reprice in the same period resulting in a negative cumulative one-year gap
equal to 47.1% of total assets. Because of various shortcomings inherent in
using repricing assumptions in calculating the Bank's gap position, the Banks's
negative gap ratio at May 31, 1996 may not fully reflect the Bank's
vulnerability to increases in interest rates as certain assets and liabilities
may react in different degrees to, or lag behind, changes in market interest
rates even though they have similar maturities or periods to repricing. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -Asset/Liability Management."
Loan Concentration in Single Market Area
At May 31, 1996, substantially all of the aggregate principal amount of
the Bank's real estate mortgage loans were secured by properties located in Cook
County, Illinois with a substantial majority of such loans located in the
southwest side of the City of Chicago. While the Bank currently believes that
its loans are sufficiently secured or adequately reserved, in the event that
real estate prices in Cook County substantially weaken or economic conditions in
Cook County decline, it is possible that the value of the real estate may be
insufficient to collateralize the Bank's loans, thus exposing the Bank to risk
of loss. See "Business - Market Area."
Competition
Preferred Savings experiences significant competition in its local market
area in both originating real estate and other loans and attracting deposits.
This competition arises from other savings institutions as well as commercial
banks, mortgage banks, credit unions and national and local securities firms.
The Bank's competitors include many significantly larger banks, including
several large regional banks with offices in the city of Chicago. Due to their
size, these large
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banks can achieve certain economies of scale and as a result offer a broader
range of products and services than are currently available at the Bank. The
Bank attempts to mitigate its lack of such an extensive product line by
emphasizing customer service. Such competition may limit Preferred Savings'
growth in the future. See "Business - Competition."
Competitive Disadvantage Caused by the Disparity Between BIF and SAIF Insurance
Premiums
Federal law requires that the FDIC maintain reserves at both the Savings
Association Insurance Fund ("SAIF") and the Bank Insurance Fund ("BIF") of at
least 1.25% of insured deposits. The reserves are funded through the payment of
insurance premiums by the insured institution members of each fund. The BIF
reached this level during 1995. Upon attainment of the required reserve level,
the FDIC may reduce insurance premiums applicable to BIF-insured institutions
while retaining the premiums applicable to SAIF members, such as the Bank, at
their current levels until the SAIF reaches its required reserve level.
In November 1995, the FDIC revised the premium schedule for BIF-insured
banks to provide for a range of 0% to .27% of deposits (as compared to the
current range of .23% to .31% of deposits for SAIF-insured institutions) with an
annual statutory minimum payment of $2,000. As a result of the BIF reaching the
required reserve ratio, the revised premium schedule took effect in January
1996. The FDIC action does not affect the premium rates currently applicable to
SAIF members, such as the Bank, which, as noted above, range from .23% to .31%
of deposits depending on the institution's capital level and other factors. As a
result, BIF members would generally pay lower premiums than SAIF members.
In order to help eliminate this disparity and any competitive disadvantage
due to disparate deposit insurance premium schedules, legislation to
recapitalize the SAIF was enacted in September 1996. The legislation provides
for a one-time assessment to be imposed on all deposits assessed at the SAIF
rates, as of March 31, 1995, in order to recapitalize the SAIF. It also provides
for the merger of the BIF and the SAIF on January 1, 1999 provided no savings
associations then exist. The special assessment rate is currently anticipated to
range between .65% and .70% and will be payable by November 29, 1996.
Accordingly, this special assessment will increase noninterest expense and
adversely affect the Bank's results of operations. The Bank's liability for the
special assessment, estimated to total approximately $162,000, net of taxes, has
been recorded in the third quarter of 1996. Following the special assessment,
and depending upon the Bank's capital level and supervisory rating, the Bank's
deposit insurance premiums could decrease significantly for future periods.
Prior to the enactment of the legislation a portion of the SAIF assessment
imposed on savings associations was used to repay obligations issued by a
federally chartered corporation to provide financing for resolving the thrift
crisis in the 1980s. Although the SAIF rates are expected to be reduced
significantly, in the near future the minimum assessment paid by SAIF-insured
institutions is not anticipated to be equalized with the minimum BIF rate as a
result of this continuing obligation. Although the legislation also now requires
assessments to be made on BIF-assessable deposits for this purpose, the
assessment will be limited to 20% of the rate imposed on SAIF assessable
deposits until the earlier of December 31, 1999 or when no savings association
continues to exist, thereby imposing a greater burden on SAIF member
institutions such as the Bank. Thereafter, however, assessments on BIF-member
institutions will be made on the same basis as SAIF-member institutions. The
rates to be established by the FDIC to implement this requirement for all
FDIC-insured institutions are uncertain at this time. See "Regulation --
Insurance of Accounts and Regulation by the FDIC."
Takeover Defensive Provisions
Holding Company and Bank Governing Instruments. Certain provisions of the
Holding Company's Certificate of Incorporation and Bylaws assist the Holding
Company in maintaining its status as an independent publicly owned corporation.
These provisions provide for, among other things, limiting voting rights of
beneficial owners of more than 10% of the Common Stock, staggered terms for
directors, noncumulative voting for directors, limits on the calling of special
meetings, a fair price/supermajority vote requirement for certain business
combinations and certain notice requirements. The 10% vote limitation would not
affect the ability of an individual who is not the beneficial owner of more than
10% of the Common Stock to solicit revocable proxies in a public solicitation
for proxies for a particular meeting of
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<PAGE>
stockholders and to vote such proxies. In addition, provisions in the Bank's
federal stock Charter that have an anti-takeover effect could also be applicable
to changes in control of the Holding Company as the sole shareholder of the
Bank. The Bank's Charter includes a provision applicable for five years which
prohibits acquisitions and offers to acquire, directly or indirectly, the
beneficial ownership of more than 10% of the Bank's securities. Any person
violating this restriction may not vote the Bank's securities in excess of 10%.
Any or all of these provisions may discourage potential proxy contests and other
takeover attempts, particularly those which have not been negotiated with the
Board of Directors. In addition, the Holding Company's certificate of
incorporation also authorize preferred stock with terms to be established by the
Board of Directors which may rank prior to the Common Stock as to dividend
rights, liquidation preferences, or both, may have full or limited voting rights
and may have a dilutive effect on the ownership interests of holders of the
Common Stock. See "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions."
Regulatory and Statutory Provisions. Federal regulations prohibit, for a
period of three years following the completion of the Conversion, any person
from offering to acquire or acquiring the beneficial ownership of more than 10%
of the stock of a converted savings institution or its holding company without
prior OTS approval. Federal law also requires OTS approval prior to the
acquisition of "control" (as defined in OTS regulations) of an insured
institution, including a holding company thereof. See "Restrictions on
Acquisitions of Stock and Related Takeover Defensive Provisions."
Employment Agreements, Severance Agreements and Other Benefit Plans. The
employment agreements, severance agreements, the proposed Stock Option Plan and
the proposed RRP also contain provisions that could have the effect of
discouraging takeover attempts of the Holding Company.
The Bank intends to enter into employment agreements with Chairman Ptak
and President Rooney and severance agreements with three other executive
officers. The employment agreements provide for an annual base salary in an
amount not less than the employee's current salary and an initial term of three
years. The agreements may be extended for an additional year on each annual
anniversary date, but only if such extensions are approved by the Board of
Directors. The employment agreements also provide for payment of the employee's
salary to the employee for the remainder of the term of the agreement, plus an
additional amount, the sum of which will not exceed a percentage of the
employee's base compensation, in the event there is a "change in control" of the
Bank (as defined in the agreement) where employment terminates involuntarily in
connection with such change in control or within 12 months thereafter.
The Bank also intends to enter into change in control severance agreements
with three other executive officers. Such agreements become effective upon
completion of the Conversion and have initial terms of 12 months. In the event
the officer is terminated following a change in control (as defined in the
agreements), such officer will be entitled to a severance payment of $40,000.
Currently, no officers have employment or severance agreements. For more
information regarding these agreements, see "Management - Executive Compensation
Employment Agreements and Severance Agreements."
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<PAGE>
Possible Dilutive Effects. The issuance of additional shares pursuant to
the proposed Stock Option Plan and RRP will result in a dilution in the
percentage of ownership of the Holding Company of those persons purchasing
Common Stock in the Conversion, assuming that the shares utilized to fund the
proposed Stock Option Plan and RRP awards come from authorized but unissued
shares. Assuming the exercise of all options available under the Stock Option
Plan and the award of all shares available under the RRP, and assuming the use
of authorized but unissued shares, the interest of stockholders will be diluted
by approximately 9.1% and 3.8%, respectively. See "Pro Forma Data," "Management
- - Benefit Plans - Stock Option and Incentive Plan," and "- Recognition and
Retention Plan" and "Restrictions on Acquisitions of Stock and Related Takeover
Defensive Provisions." For financial accounting purposes, certain incentive
grants under the proposed RRP will result in the recording of compensation
expense over the vesting period. See "Pro Forma Data."
Voting Control of Directors and Executive Officers. The directors and
executive officers of the Bank are anticipated to purchase an aggregate of
approximately $950,000 or approximately 6.8% of the shares offered in the
Conversion at the minimum of the Estimated Valuation Range, or 5.0% of the
shares offered in the Conversion at the maximum of the Estimated Valuation
Range. Directors and executive officers will also receive awards under the
proposed Stock Option Plan and the proposed RRP. Assuming the sale of shares at
the maximum of the Estimated Valuation Range and a market value of $10.00 per
share at the time of stockholder ratification of the RRP, the market value of
the stock to be awarded under the proposed RRP to President Rooney, Chairman
Ptak and to all directors and executive officers as a group (8 persons) would be
$189,750, $189,750 and $629,970. Assuming the purchase of $950,000 of Common
Stock in the Conversion by directors and executive officers in the aggregate (8
persons), the full vesting of the restricted stock to be awarded under the
proposed RRP and the issuance of shares from authorized but unissued shares in
connection with the exercise of all options intended to be awarded under the
proposed Stock Option Plan the Conversion and approval of the Stock Option Plan
and the RRP by the stockholders, the shares owned by the directors and executive
officers in the aggregate would be between 18.4% (at the maximum of the
Estimated Valuation Range) and 16.4% (at the minimum of the Estimated Valuation
Range) of the outstanding shares. In addition, the ESOP is expected to purchase
8% of the shares sold in the Conversion. This stock ownership, if voted as a
block, could defeat takeover attempts favored by other stockholders.
Post Conversion Overhead Expense
After completion of the Conversion, the Holding Company's noninterest
expense is likely to increase as a result of the financial accounting, legal and
tax expenses usually associated with operating as a public company. See
"Regulation - Federal and State Taxation" and "Additional Information." In
addition, it is currently anticipated that the Holding Company will record
additional expense based on the proposed RRP. See "Pro Forma Data" and
"Management - Benefit Plans - Recognition and Retention Plan." Finally, the
Holding Company will also record additional expense as a result of the adoption
of the ESOP. See "Management - Benefit Plans - Employee Stock Ownership Plan."
In November 1993, the American Institute of Certified Public Accountants
("AICPA") Accounting Standards Division issued Statement of Position 93-6
"Employers' Accounting for
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Employee Stock Ownership Plans" ("SOP 93-6"). SOP 93-6 requires an employer to
record compensation expense in an amount equal to the fair value of shares
committed to be released to employees from an employee stock ownership plan.
Assuming shares of Common Stock appreciate in value over time, the adoption of
SOP 93-6 may increase compensation expense relating to the ESOP to be
established in connection with the Conversion as compared with prior guidance
which required the recognition of compensation expense based on the cost of
shares acquired by the ESOP. It is impossible to determine at this time the
extent of such impact on future net income. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Impact of New
Accounting Standards" and "Pro Forma Data."
Regulatory Oversight
The Bank is subject to extensive regulation, supervision and examination
by the OTS as its chartering authority and primary federal regulator, and by the
FDIC, which insures its deposits up to applicable limits. The Bank is a member
of the Federal Home Loan Bank (the "FHLB") of Chicago and is subject to certain
limited regulation by the Board of Governors of the Federal Reserve System
("Federal Reserve Board"). As the savings and loan holding company of the Bank,
the Holding Company will be subject to regulation and oversight by the OTS. See
"Regulation." Such regulation and supervision governs the activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. Regulatory authorities have been granted
extensive discretion in connection with their supervisory and enforcement
activities which are intended to strengthen the financial condition of the
Banking industry, including the imposition of restrictions on the operation of
an institution, the classification of assets by the institution and the adequacy
of an institution's allowance for loan losses. See "Regulation - Federal
Regulation of Savings Associations" and "- Regulatory Capital Requirements." Any
change in such regulation and oversight, whether by the OTS, the Federal Reserve
Board, the FDIC or Congress, could have a material impact on the Holding
Company, the Bank and their respective operations.
Risk of Delayed Offering
The Subscription Offering will expire at noon, Chicago, Illinois time, on
_______________, 1996 unless extended by the Bank and the Holding Company.
Depending on the availability of shares and market conditions at or near the
completion of the Subscription Offering, the Holding Company may conduct a
Public Offering through Webb. If the Offering is extended beyond
_______________, 1996, all subscribers will have the right to modify or rescind
their subscriptions and to have their subscription funds returned with interest.
There can be no assurance that the Offering will not be extended as set forth
above.
A material delay in the completion of the sale of all unsubscribed shares
in the Public Offering or otherwise may result in a significant increase in the
costs in completing the Conversion. Significant changes in the Bank's operations
and financial condition, the aggregate market value of the shares to be issued
in the Conversion and general market conditions may occur during such material
delay. In the event the Conversion is not consummated within 24 months after the
date of the Special Meeting, OTS regulations would require the Bank to charge
accrued Conversion costs to then-current period operations. See "The Conversion
- - Risk of Delayed Offering."
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<PAGE>
Absence of Active Market for the Common Stock
The Holding Company, as a newly organized company, has never issued
capital stock. Consequently, there is not at this time any market for the Common
Stock. The Common Stock has received preliminary approval for listing on the
Nasdaq National Market under the symbol "____." Webb has agreed to act as a
market maker and to assist the Holding Company in securing a second market maker
to make a market in the Common Stock. However, there can be no assurance that at
least two market makers will be obtained, that the Bank will receive final
approval for listing on the Nasdaq National Market, that an active and liquid
market for the Common Stock will develop or be maintained or that resales of the
Common Stock can be made at or above the Purchase Price. See "Market for Common
Stock."
Possible Consequences of Amendment to Plan of Conversion
The Plan of Conversion provides that, if deemed necessary or desirable by
the Boards of Directors of the Bank and the Holding Company, the Plan of
Conversion may be substantively amended by a two-thirds vote of the respective
Boards of Directors of the Bank and the Holding Company, as a result of comments
from regulatory authorities or otherwise, at any time with the concurrence of
the Securities and Exchange Commission ("SEC") and the OTS. Moreover, if the
Plan of Conversion is amended, subscriptions which have been received prior to
such amendment will not be refunded unless otherwise required by the SEC or the
OTS. If the Plan of Conversion is amended in a manner that is deemed to be
material to the subscribers by the Holding Company, subscription funds will be
returned to subscribers with interest unless they affirmatively elect to
increase, decrease or maintain their subscriptions. No such amendments are
currently contemplated, although the Bank reserves the right to increase or
decrease purchase limitations without a subscriber resolicitation. See "The
Conversion - Approval, Interpretation, Amendment and Termination."
PS FINANCIAL, INC.
The Holding Company was formed at the direction of Preferred Savings in
July 1996 for the purpose of becoming a savings and loan holding company and
owning all of the outstanding stock of the Bank issued in the Conversion. The
Holding Company is incorporated under the laws of the State of Delaware. The
Holding Company is authorized to do business in the State of Illinois, and
generally is authorized to engage in any activity that is permitted by the
Delaware General Corporation Law. The business of the Holding Company initially
will consist only of the business of Preferred Savings. The holding company
structure will, however, provide the Holding Company with greater flexibility
than the Bank has to diversify its business activities, through existing or
newly formed subsidiaries, or through acquisitions or mergers of stock financial
institutions, as well as, other companies. Although there are no current
arrangements, understandings or agreements regarding any such activity or
acquisition, the Holding Company will be in a position after the Conversion,
subject to regulatory restrictions, to take advantage of any favorable
acquisition opportunities that may arise.
The assets of the Holding Company will consist initially of the stock of
Preferred Savings, a note evidencing the Holding Company's loan to the ESOP and
up to 50% of the net proceeds from the Conversion (less the amount used to fund
the ESOP loan). See "Use of Proceeds."
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Initially, any activities of the Holding Company are anticipated to be funded by
such retained proceeds and the income thereon and dividends from Preferred
Savings, if any. See "Dividends" and "Regulation - Holding Company Regulation."
Thereafter, activities of the Holding Company may also be funded through sales
of additional securities, through borrowings and through income generated by
other activities of the Holding Company. At this time, there are no plans
regarding such other activities other than the intended loan to the ESOP to
facilitate its purchase of Common Stock in the Conversion. See "Management -
Benefit Plans - Employee Stock Ownership Plan."
The executive office of the Holding Company is located at 4800 South
Pulaski Road, Chicago, Illinois 60632-4195. Its telephone number at that address
is (312) 376-3800.
PREFERRED SAVINGS
Preferred Savings serves the financial needs of communities in its market
area through its office located at 4800 South Pulaski Road, Chicago, Illinois.
Its deposits are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC"). At May 31, 1996, Preferred Savings had total
assets of $54.9 million, deposits of $41.9 million and retained earnings of
$12.0 million (or 21.9% of total assets).
Preferred Savings' business involves attracting deposits from the general
public and using such deposits, together with other funds, to originate one- to
four-family residential mortgage loans and, to a much lesser extent,
multi-family, commercial real estate, and consumer loans primarily in its market
area. At May 31, 1996, $26.2 million, or 71.8%, of the Bank's total loan
portfolio consisted of residential one- to four-family mortgage loans. See
"Business - Lending Activities."
The Bank also invests in mortgage-backed and other securities and other
permissible investments. See "Business - Investment Activities - Securities" and
"- Mortgage-Backed and Related Securities."
The executive office of the Bank is located at 4800 South Pulaski Road,
Chicago, Illinois 60632-4195. Its telephone number at that address is (312)
376-3800.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Conversion is completed, it is presently anticipated
that such net proceeds will be between $13.5 million and $18.4 million (or up to
$21.2 million in the event of an increase in the aggregate pro forma market
value of the Common Stock of up to 15% above the maximum of the Estimated
Valuation Range). See "Pro Forma Data" and "The Conversion - Stock Pricing and
Number of Shares to be Issued" as to the assumptions used to arrive at such
amounts.
In exchange for all of the common stock of Preferred Savings issued upon
conversion, the Holding Company will contribute approximately 50% of the net
proceeds from the sale of the Holding Company's Common Stock to Preferred
Savings. On an interim basis, the proceeds will be invested by the Holding
Company and Preferred Savings in short-term investments
27
<PAGE>
similar to those currently in the Bank's portfolio. The specific types and
amounts of short-term assets will be determined based on market conditions at
the time of the completion of the Conversion. In addition, the Holding Company
intends to provide the funding for the ESOP loan. Based upon the initial
Purchase Price of $10.00 per share, the dollar amount of the ESOP loan would
range from $1.1 million (based upon the sale of shares at the minimum of the
Estimated Valuation Range) to $1.5 million (based upon the sale of shares at the
maximum of the Estimated Valuation Range). The interest rate to be charged by
the Holding Company on the ESOP loan will be based upon the IRS prescribed
applicable federal rate at the time of origination.
The net proceeds received by Preferred Savings will become part of
Preferred Savings' general funds for use in its business and will be used to
support the Bank's existing operations, subject to applicable regulatory
restrictions. Immediately upon the completion of the Conversion, it is
anticipated that the Bank will invest such proceeds into short-term assets.
Subsequently, the Bank will redirect the net proceeds to the origination of
residential loans and, to a lesser extent, commercial real estate and consumer
loans, subject to market conditions.
After the completion of the Conversion, the Holding Company will redirect
the net proceeds invested by it in short-term assets into a variety of
mortgage-backed securities and other securities similar to those already held by
the Bank. Also, the Holding Company may use a portion of the proceeds to fund
the RRP, subject to shareholder approval of such plan. Following stockholder
ratification of the RRP, the RRP will be funded either with shares purchased in
the open market or with authorized but unissued shares. Based upon the initial
Purchase Price of $10.00 per share, the amount required to fund the RRP through
open-market purchases would range from approximately $561,000 (based upon the
sale of shares at the minimum of the Estimated Valuation Range) to approximately
$759,000 (based upon the sale of shares at the maximum of the Estimated
Valuation Range). In the event that the per share price of the Common Stock
increases above the $10.00 per share Purchase Price following completion of the
Offering, the amount necessary to fund the RRP would also increase. The use of
authorized but unissued shares to fund the RRP could dilute the holdings of
stockholders who purchase Common Stock in the Conversion. See "Business -
Lending Activities" and " - Investment Activities" and "Management - Benefit
Plans - Employee Stock Ownership Plan" and "- Recognition and Retention Plan."
The proceeds may also be utilized by the Holding Company to repurchase (at
prices which may be above or below the initial offering price) shares of the
Common Stock through an open market repurchase program subject to limitations
contained in OTS regulations, although the Holding Company currently has no
specific plan to repurchase any of its stock. In the future, the Board of
Directors of the Holding Company will make decisions on the repurchase of the
Common Stock based on its view of the appropriateness of the price of the Common
Stock as well as the Holding Company's and the Bank's investment opportunities
and capital needs. Under current OTS regulations, no repurchases may be made
within the first year following Conversion except with OTS approval under
"exceptional circumstances." During the second and third years following
Conversion, OTS regulations permit, subject to certain limitations, the
repurchase of up to five percent of the outstanding shares of stock during each
twelve-month period with a greater amount permitted with OTS approval. In
general, the OTS regulations do not restrict repurchases thereafter, other than
limits on the Bank's ability to pay dividends to the
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<PAGE>
Holding Company to fund the repurchase. For a description of the restrictions on
the Bank's ability to provide the Holding Company with funds through dividends
or other distributions, see "Dividends" and "The Conversion - Restrictions on
Repurchase of Stock."
The Holding Company or Preferred Savings might consider expansion through
the acquisition of other financial services providers (or branches, deposits or
assets thereof), although there are no specific plans, negotiations or written
or oral agreements regarding any acquisitions at this time.
DIVIDENDS
The Board of Directors may consider a policy of paying cash dividends on
the Common Stock. Dividends, when and if paid, will be subject to determination
and declaration by the Board of Directors at its discretion. They will take into
account the Holding Company's consolidated financial condition, the Bank's
regulatory capital requirements, including the fully phased-in capital
requirements, tax considerations, industry standards, economic conditions,
regulatory restrictions, general business practices and other factors.
It is not presently anticipated that the Holding Company will conduct
significant operations independent of those of Preferred Savings for some time
following the Conversion. As such, the Holding Company does not expect to have
any significant source of income other than earnings on the net proceeds from
the Conversion retained by the Holding Company (which proceeds are currently
estimated to range from $13.5 million to $18.4 million based on the minimum and
the maximum of the Estimated Valuation Range, respectively) and dividends from
Preferred Savings, if any. Consequently, the ability of the Holding Company to
pay cash dividends to its stockholders will be dependent upon such retained
proceeds and earnings thereon, and upon the ability of Preferred Savings to pay
dividends to the Holding Company. See "Description of Capital Stock - Holding
Company Capital Stock - Dividends." Preferred Savings, like all savings
associations regulated by the OTS, is subject to certain restrictions on the
payment of dividends based on its net income, its capital in excess of the
regulatory capital requirements and the amount of regulatory capital required
for the liquidation account to be established in connection with the Conversion.
See "The Conversion - Effects of Conversion to Stock Form on Depositors and
Borrowers of the Bank - Liquidation Rights in Proposed Converted Institution"
and "Regulation - Regulatory Capital Requirements" and "- Limitations on
Dividends and Other Capital Distributions." Earnings allocated to Preferred
Savings' "excess" bad debt reserves and deducted for federal income tax purposes
cannot be used by Preferred Savings to pay cash dividends to the Holding Company
without adverse tax consequences. See "Regulation - Federal and State Taxation."
MARKET FOR COMMON STOCK
Preferred Savings, as a mutual thrift institution, and the Holding
Company, as a newly organized company, have never issued capital stock.
Consequently, there is not at this time an existing market for the Common Stock.
The Common Stock has been preliminarily approved for trading on the NASDAQ
National Market System under the symbol "____" upon completion of the
Conversion. In order to be quoted on the Nasdaq National Market, among other
criteria, there must be at least two market makers for the Common Stock. Keefe,
Bruyette & Woods has
29
<PAGE>
agreed, subject to certain conditions, to act as a market maker for the Holding
Company's Common Stock following the Conversion, and assist in securing a second
market maker to do the same. A public trading market having the desirable
characteristics of depth, liquidity and orderliness depends upon the presence in
the marketplace of both willing buyers and sellers of the Common Stock at any
given time. Accordingly, there can be no assurance that an active and liquid
market for the Common Stock will develop or be maintained or that resales of the
Common Stock can be made at or above the Purchase Price. See "The Conversion -
Stock Pricing and Number of Shares to be Issued."
PRO FORMA DATA
The following table sets forth the historical net income, retained
earnings and per share data of Preferred Savings at and for the five months
ended May 31, 1996 and the fiscal year ended December 31, 1995, and after giving
effect to the Conversion, the pro forma net income, capital stock and
stockholders' equity and per share data of the Holding Company at and for the
five months ended May 31, 1996 and the fiscal year ended December 31, 1995. The
pro forma data has been computed on the assumptions that (i) the specified
number of shares of Common Stock was sold at the beginning of the specified
periods and yielded net proceeds to the Holding Company as indicated, (ii) 50%
of such net proceeds were retained by the Holding Company and the remainder were
used to purchase all of the stock of Preferred Savings, and (iii) such net
proceeds, less the amount of the ESOP and RRP funding, were invested by the Bank
and Holding Company at the beginning of the periods to yield a pre-tax return of
5.91% for the five months ended May 31, 1996 and 5.45% for the fiscal year ended
December 31, 1995. The assumed return is based upon the market yield rate of
one-year U.S. Government Treasury Securities as of August 15, 1996. The use of
this current rate is viewed to be more relevant in the current interest rate
environment than the use of an arithmetic average of the weighted average yield
earned by the Bank on its interest-earning assets and the weighted average rate
paid on its deposits during such periods. In calculating the underwriting fees,
the table assumes that (i) no commission was paid on $950,000 of shares sold to
directors, officers and employees, (ii) 8% of the total shares sold in the
Conversion were sold to the ESOP at no commission, and (iii) the remaining
shares were sold at a 1.5% commission. (These assumptions represent management's
estimate as to the distribution of stock orders in the Conversion. However,
there can be no assurance that such estimate will be accurate and that a greater
proportion of shares will not be sold at a higher commission, thus increasing
offering expenses.) Fixed expenses are estimated to be $310,000. Actual
Conversion expenses may be more or less than those estimated because the fees
paid to Webb and other brokers will depend upon the categories of purchasers,
the Purchase Price and market conditions and other factors. The pro forma net
income amounts derived from the assumptions set forth herein should not be
considered indicative of the actual results of operations of the Holding Company
that would have been attained for any period if the Conversion had been actually
consummated at the beginning of such period, and the assumptions regarding
investment yields should not be considered indicative of the actual yields
expected to be achieved during any future period.
The total number of shares to be issued in the Conversion may be increased
or decreased significantly, or the price per share decreased, to reflect changes
in market and financial conditions prior to the close of the Offering. However,
if the aggregate Purchase Price of the Common Stock sold in the Conversion is
below $14,025,000 (the minimum of the Estimated
30
<PAGE>
Valuation Range) or more than $21,821,250 (15% above the maximum of the
Estimated Valuation Range), subscribers will be offered the opportunity to
modify or cancel their subscriptions. See "The Conversion - Stock Pricing and
Number of Shares to be Issued."
31
<PAGE>
<TABLE>
<CAPTION>
At or For the Five Months Ended May 31, 1996
--------------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
1,402,500 1,650,000 1,897,500 2,182,125
Shares at Shares at Shares at Shares at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
---------- ---------- ---------- ----------
(Dollars in Thousands, Except Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds................................................ $ 14,025 $ 16,500 $ 18,975 $ 21,821
Less offering expenses and commissions........................ (489) (520) (552) (588)
--------- --------- --------- ----------
Estimated net conversion proceeds ........................... 13,536 15,980 18,423 21,233
Less ESOP shares.............................................. (1,122) (1,320) (1,518) (1,746)
Less RRP shares............................................... (561) (660) (759) (873)
--------- --------- --------- ----------
Estimated proceeds available for investment(1)............... $ 11,853 $ 14,000 $ 16,146 $ 18,614
========= ========= ========= ========
Net Income:
Historical.................................................. $ 440 $ 440 $ 440 $ 440
Pro Forma Adjustments:
Net earnings from proceeds(2).............................. 184 217 251 289
ESOP(3).................................................... (52) (61) (70) (81)
RRP(4)..................................................... (29) (35) (40) (45)
--------- --------- --------- ---------
Pro forma net income(5).................................. $ 543 $ 561 $ 581 $ 602
========= ========= ========= =========
Net Income Per Share:
Historical(6)............................................. $ 0.34 $ 0.29 $ 0.25 $ 0.22
Pro forma Adjustments:
Net earnings from proceeds............................... 0.14 0.14 0.14 0.14
ESOP(3).................................................. (0.04) (0.04) (0.04) (0.04)
RRP(4)................................................... (0.02) (0.02) (0.02) (0.02)
--------- --------- --------- ---------
Pro forma net income per share(4).................... $ 0.42 $ 0.37 $ 0.33 $ 0.30
========= ========= ========= =========
Ratio of offering price to pro forma net income per share
(annualized)........................................... 9.92x 11.26x 12.63x 13.89x
==== ===== ===== =====
Number of shares using 93-6............................... 1,294,198 1,522,584 1,750,972 2,013,618
Stockholders' Equity (Book Value)(7):
Historical.................................................. $ 12,029 $ 12,029 $ 12,029 $ 12,029
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 13,536 15,980 18,423 21,233
Less common stock acquired by:
ESOP(3).................................................... (1,122) (1,320) (1,518) (1,746)
RRP(4)..................................................... (561) (660) (759) (873)
--------- --------- --------- ---------
Pro forma stockholder's equity(4)...................... $ 23,882 $ 26,029 $ 28,175 $ 30,643
========= ========= ========= =========
Stockholders' Equity (Book Value)(7):
Per Share(6):
Historical.................................................. $ 8.58 7.29 6.34 $ 5.51
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 9.65 9.68 9.71 9.73
Less common stock acquired by:
ESOP(3).................................................... (0.80) (0.80) (0.80) (0.80)
RRP(4)..................................................... (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- ---------
Pro forma book value per share(5)...................... $ 17.03 $ 15.77 $ 14.85 $ 14.04
========= ========= ========= =========
Pro forma price to book value................................. 58.72% 63.41% 67.34% 71.23%
===== ===== ===== =====
Number of shares.............................................. 1,402,500 1,650,000 1,897,500 2,182,125
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
At or For the Five Months Ended May 31, 1996
--------------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
1,402,500 1,650,000 1,897,500 2,182,125
Shares at Shares at Shares at Shares at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
---------- ---------- ---------- ----------
(Dollars in Thousands, Except Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds................................................ $ 14,025 $ 16,500 $ 18,975 $ 21,821
Less offering expenses and commissions........................ (489) (520) (552) (588)
--------- --------- --------- ---------
Estimated net conversion proceeds........................... 13,536 15,980 18,423 21,233
Less ESOP shares.............................................. (1,122) (1,320) (1,518) (1,746)
Less RRP shares............................................... (561) (660) (759) (873)
--------- -------- --------- ---------
Estimated proceeds available for investment(1)............... $ 11,853 $14,000 $ 16,146 $ 18,614
========= ======= ========= =========
Net Income:
Historical.................................................. $ 1,055 $ 1,055 $ 1,055 $ 1,055
Pro Forma Adjustments:
Net earnings from proceeds(2).............................. 407 481 554 639
ESOP(3).................................................... (124) (146) (168) (193)
RRP(4)..................................................... (71) (83) (96) (110)
--------- ---------- ---------
Pro forma net income(5).................................. $ 1,267 $ 1,307 $ 1,345 $ 1,391
========= ======== ========= =========
Net Income Per Share:
Historical(6)............................................. $ 0.81 $ 0.69 $ 0.60 $ 0.52
Pro forma Adjustments:
Net earnings from proceeds............................... 0.31 0.31 0.32 0.32
ESOP(3).................................................. (0.10) (0.10) (0.10) (0.10)
RRP(4)................................................... (0.05) (0.05) (0.05) (0.05)
--------- --------- --------- ---------
Pro forma net income per share(4).................... $ 0.97 $ 0.85 $ 0.77 $ 0.69
========= ======== ========= =========
Ratio of offering price to pro forma net income per share. 10.31x 11.76x 12.99x 14.49x
===== ===== ===== =====
Number of shares using 93-6(3)..................... 1,299,650 1,529,000 1,758,350 2,022,103
Stockholders' Equity (Book Value)(7):
Historical.................................................. $ 11,724 $ 11,724 $ 11,724 $ 11,724
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 13,536 15,980 18,423 21,233
Less common stock acquired by:
ESOP(3).................................................... (1,122) (1,320) (1,518) (1,746)
RRP(4)..................................................... (561) (660) (759) (873)
--------- --------- --------- ---------
Pro forma book value(4)................................ $ 23,577 $ 25,724 $ 27,870 $ 30,338
========= ======== ========= =========
Stockholders' Equity (Book Value)(7):
Per Share(6):
Historical.................................................. $ 8.36 $ 7.11 $ 6.18 $ 5.37
Pro Forma Per Share Adjustments:
Estimated net Conversion proceeds........................... 9.65 9.68 9.71 9.73
Less common stock acquired by:
ESOP(3).................................................... (0.80) (0.80) (0.80) (0.80)
RRP(4)..................................................... (0.40) (0.40) (0.40) (0.40)
--------- -------- --------- ---------
Pro forma book value per share(5)...................... $ 16.81 $ 15.59 $ 14.69 $ 13.90
========= ======= ========= =========
Offering Price Per Share as a Percentage of Pro Forma
Stockholders' Equity Per Share............................. 59.49x 64.14x 68.07x 71.94x
===== ===== ===== =====
Number of shares.............................................. 1,402,500 1,650,000 1,597,500 2,182,125
</TABLE>
- --------------
(1) Reflects a reduction to net proceeds for the cost of the ESOP and the
RRP (which is subject to shareholder ratification) which it is assumed
will be funded from the net proceeds retained by the Holding Company.
33
<PAGE>
(2) No effect has been given to withdrawals from savings accounts for the
purpose of purchasing Common Stock in the Conversion. For purposes of
calculating pro forma net income, proceeds attributable to purchases by
the ESOP and RRP, which purchases are to be funded by the Holding
Company and the Bank, have been deducted from net proceeds.
(3) It is assumed that 8% of the shares of Common Stock offered in the
Conversion will be purchased by the ESOP. The funds used to acquire
such shares will be borrowed by the ESOP from the net proceeds from the
Conversion retained by the Holding Company. The Bank intends to make
contributions to the ESOP in amounts at least equal to the principal
and interest requirement of the debt. The Bank's payment of the ESOP
debt is based upon equal installments of principal and interest over a
12-year period. However, assuming the Holding Company makes the ESOP
loan, interest income earned by the Holding Company on the ESOP debt
will offset the interest paid by the Bank. Accordingly, only the
principal payments on the ESOP debt are recorded as an expense
(tax-effected) to the Holding Company on a consolidated basis. The
amount of ESOP debt is reflected as a reduction of stockholders'
equity. In the event that the ESOP were to receive a loan from an
independent third party, both ESOP expense and earnings on the proceeds
retained by the Holding Company would be expected to increase.
(4) Adjustments to both book value and net earnings have been made to give
effect to the proposed open market purchase (based upon an assumed
purchase price of $10.00 per share) following Conversion by the RRP
(subject to stockholder ratification of such plan) of an amount of
shares equal to 4% of the shares of Common Stock sold in the Conversion
for the benefit of certain directors, officers and employees. Funds
used by the RRP to purchase the shares will be contributed to the RRP
by the Holding Company if the RRP is ratified by stockholders following
the Conversion. Therefore, this funding is assumed to reduce the
proceeds available for reinvestment. For financial accounting purposes,
the amount of the contribution will be recorded as a compensation
expense (although not an actual expenditure of funds) over the period
of vesting. These grants are scheduled to vest in equal annual
installments over the five years following stockholder ratification of
the RRP. However, all unvested grants will be forfeited in the case of
recipients who fail to maintain continuous service with the Holding
Company or its subsidiaries. In the event the RRP is unable to purchase
a sufficient number of shares of Common Stock to fund the RRP, the RRP
may issue authorized but unissued shares of Common Stock from the
Holding Company to fund the remaining balance. In the event the RRP is
funded by the issuance of authorized but unissued shares in an amount
equal to 4% of the shares sold in the Conversion, the interests of
existing stockholders would be diluted by approximately 3.8%.
In the event that the RRP is funded through authorized but unissued
shares, for the five months ended May 31, 1996 and year ended December
31, 1995, pro forma net income per share would be $0.38, $0.33, $0.30,
and $0.27 and $0.95, $0.83, $0.74 and $0.67, respectively, and pro
forma stockholders' equity per share would be $16.76, $15.56, $14.66
and $13.89 and $15.78, $14.61, $13.74 and $12.98, respectively, in each
case at the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range.
(5) No effect has been given to the shares to be reserved for issuance
under the proposed Stock Option Plan which is expected to be adopted by
the Holding Company following the Conversion, subject to stockholder
approval. In the event the Stock Option Plan is funded by the issuance
of authorized but unissued shares in an amount equal to 10% of the
shares sold in the Conversion, at $10.00 per share, the interests of
existing stockholders would be diluted as follows: pro forma net income
per share for the five months ended May 31, 1996 and the year ended
December 31, 1995 would be $0.38, $0.33, $0.30, and $0.27, and $0.88,
$0.77, $0.69 and $0.62, respectively, and pro forma stockholders'
equity per share would be $16.39, $15.13, $14.41 and $13.68 and $16.19,
$15.08, $14.26 and $13.55, respectively, in each case at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range. In the alternative, the Holding Company may purchase shares in
the open market to fund the Stock Option Plan following stockholder
approval of such plan. To the extent, the entire 10% of the shares to
be reserved for issuance under the Stock Option Plan were funded
through open market purchases at the Purchase Price of $10.00 per
share, proceeds available for reinvestment would be reduced by
$1,402,500, $1,650,000, $1,897,500 and $2,182,125 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range. See "Management - Benefit Plans - Stock Option and Incentive
Plan."
(6) Historical pro forma per share amounts have been computed as if the
shares of Common Stock indicated had been outstanding at the beginning
of the periods or on the dates shown, but without any adjustment of
historical net income or historical equity to reflect the investment of
the estimated net proceeds of the sale of shares in the Conversion as
described above. All ESOP shares have been considered outstanding for
purposes of computing book value per share. Pro forma share amounts
have been computed by dividing the pro forma net income or
stockholders' equity (book value) by the number of shares indicated.
(7) "Book value" represents the difference between the stated amounts of
the Bank's assets (based on historical cost) and liabilities computed
in accordance with generally accepted accounting principles. The
amounts shown do not reflect the effect of the Liquidation Account
which will be established for the benefit of Eligible and Supplemental
Eligible Account Holders in the Conversion, or the federal income tax
consequences of the restoration to income of the Bank's special bad
debt reserves for income tax purposes which would be required in the
unlikely event of liquidation. See "The Conversion - Effects of
Conversion to Stock Form on Depositors and Borrowers of the Bank" and
"Regulation - Federal and State Taxation." The amounts shown for book
value do not represent fair market values or amounts, if any,
distributable to stockholders in the unlikely event of liquidation.
34
<PAGE>
PRO FORMA REGULATORY CAPITAL ANALYSIS
At May 31, 1996, the Bank would have exceeded each of the OTS capital
requirements on both a current and a fully phased-in basis. Set forth below is a
summary of the Bank's compliance with the OTS capital standards as of May 31,
1996 based on historical capital and also assuming that the indicated number of
shares were sold as of such date using the assumptions contained under the
caption "Pro Forma Data."
<TABLE>
<CAPTION>
Pro Forma at May 31, 1996
---------------------------------------------------
1,402,500 Shares 1,650,000 Shares
Historical Minimum Midpoint
---------------------- ---------------------- ----------------------
Amount Percent Amount Percent(1) Amount Percent(1)
-------- ------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital(2)............ $12,029 21.9% $17,114 28.6% $18,039 29.6%
Tangible Capital(3):
Capital level............ $12,107 22.1.% $17,192 28.7% $18,117 29.8%
Requirement.............. 823 1.5 899 1.5 913 1.5
-------- ----- -------- ----- -------- -----
Excess................... $11,284 20.6% $16,293 27.2% $17,204 28.3%
======= ==== ======= ===== ======= =====
Core Capital(3):
Capital level............ $12,107 22.1% $17,192 28.7% $18,117 29.8%
Requirement(4)........... 1,646 3.0 1,798 3.0 1,826 3.0
-------- ----- -------- ----- -------- -----
Excess................... $10,461 19.1% $15,394 25.7% $16,291 26.8%
======= ===== ======= ===== ======= =====
Risk-Based Capital(3):
Capital level(5)......... $12,293 57.1% $17,378 77.1% $18,303 80.6%
Requirement(6)........... 1,721 8.0 1,802 8.0 1,817 8.0
-------- ----- -------- ----- -------- -----
Excess................... $10,572 49.1% $15,576 69.1% $16,486 72.6%
======= ===== ======= ==== ======= ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro Forma at May 31, 1996
----------------------------------------------------
2,182,125 Shares
1,897,500 Shares 15% above
Maximum Maximum
----------------------- ----------------------
Amount Percent(1) Amount Percent(1)
------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
GAAP Capital(2)............ $18,964 30.7% $20,027 31.9%
Tangible Capital(3):
Capital level............ $19,042 30.8% $20,105 32.0%
Requirement.............. 927 1.5 943 1.5
-------- ----- -------- -----
Excess................... $18,115 29.3% $19,162 30.5%
======= ==== ======= ====
Core Capital(3):
Capital level............ $19,042 30.8% $20,105 32.0%
Requirement(4)........... 1,854 3.0 1,886 3.0
-------- ----- -------- -----
Excess................... $17,188 27.8% $18,219 29.0%
======= ===== ======= =====
Risk-Based Capital(3):
Capital level(5)......... $19,228 84.0% $20,291 87.8%
Requirement(6)........... 1,832 8.0 1,849 8.0
------- ----- ------- -----
Excess................... 17,396 76.0% $18,442 79.8%
====== ==== ======= ====
</TABLE>
- -----------
(1) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weight, such as short-term
interest-bearing deposits.
(2) Total retained earnings as calculated under generally accepted
accounting principles ("GAAP"). Assumes that the Bank receives 50% of
the net proceeds, offset in part, by the aggregate Purchase Price of
Common Stock acquired at a price of $10.00 per share by the ESOP in the
Conversion and the RRP (assuming stockholder ratification of such plan
following completion of the Conversion).
(3) Tangible and core capital figures are determined as a percentage of
adjusted total assets; risk-based capital figures are determined as a
percentage of risk-weighted assets. Unrealized gains and losses on debt
securities available for sale are excluded from tangible, core and
risk-based capital.
(4) In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that
became effective on November 30, 1990. This proposed core capital ratio
is 3% of total adjusted assets for thrifts that receive the highest
supervisory rating for safety and soundness ("CAMEL" rating), with a 4%
to 5% core capital requirement for all other thrifts. See "Regulation -
Regulatory Capital Requirements."
(5) Includes $186,000 of general valuation allowances, all of which
qualify as supplementary capital. See "Regulation - Regulatory Capital
Requirements."
35
<PAGE>
CAPITALIZATION
Set forth below is the capitalization, including deposits, of
Preferred Savings as of May 31, 1996, and the pro forma capitalization of the
Holding Company at the minimum, the midpoint, the maximum and 15% above the
maximum of the Estimated Valuation Range, after giving effect to the Conversion
and based on other assumptions set forth in the table and under the caption "Pro
Forma Data."
<TABLE>
<CAPTION>
Holding Company - Pro Forma Based
Upon Sale at $10.00 per share
---------------------------------------------------
15% Above
Minimum Midpoint Maximum Maximum
Existing 1,402,500 1,650,000 1,897,500 2,182,125
Capitalization Shares Shares Shares Shares
-------------- --------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits(1)................................. $41,945 $41,945 $41,945 $41,945 $41,945
======= ======= ======= ======= =======
Stockholders' Equity:
Serial Preferred Stock ($0.01 par value)
authorized - 100,000 shares; none to be
outstanding............................... $ --- $ --- $ --- $ --- $ ---
Common Stock ($0.01 par value authorized
- 2,500,000 shares to be outstanding (as
shown)(2)................................. --- 14 17 19 22
Additional paid-in capital................ --- 13,522 15,963 18,404 21,211
Retained earnings, substantially
restricted(3)............................. 12,107 12,107 12,107 12,107 12,107
Less:
Net unrealized loss on securities
available for sale...................... 78 78 78 78 78
Common Stock acquired by ESOP(4).......... --- 1,122 1,320 1,518 1,746
Common Stock acquired by RRP(4)........... --- 561 660 759 873
------- ------- ------- ------- -------
Total Stockholders' Equity.................. $12,029 $23,882 $26,029 $28,175 $30,643
======= ======= ======= ======= =======
</TABLE>
(1) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Stock in the Conversion. Any such
withdrawals will reduce pro forma deposits by the amount of such
withdrawals.
(2) Does not reflect the shares of Common Stock that may be reserved for
issuance pursuant to the Stock Option Plan.
(3) See "Dividends" and "Regulation - Limitations on Dividends and Other
Capital Distributions" regarding restrictions on future dividend
payments and "The Conversion - Effects of Conversion to Stock Form on
Depositors and Borrowers of the Bank" regarding the liquidation account
to be established upon Conversion.
(4) Assumes that 8% of the shares sold in the Conversion will be purchased
by the ESOP. The funds used to acquire the ESOP shares will be borrowed
from the Holding Company. The Bank intends to make contributions to the
ESOP sufficient to service and ultimately retire the ESOP's debt. Also
assumes that an amount of shares equal to 4% of the amount of shares
sold in the Conversion will be acquired by the RRP, following
shareholder ratification of such plan after completion of the
Conversion. In the event that the RRP is funded by the issuance of
authorized but unissued shares in an amount equal to 4% of the shares
sold in the Conversion, the interest of existing stockholders would be
diluted by approximately 3.8%. The amount to be borrowed by the ESOP
and the Common Stock acquired by the RRP is reflected as a reduction of
stockholders' equity. See "Management - Benefit Plans - Employee Stock
Ownership Plan" and "- Recognition and Retention Plan."
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Bank is a financial intermediary engaged primarily in attracting
deposits from the general public and using such deposits to originate one- to
four-family residential mortgage and, to a significantly lesser extent,
multi-family, commercial real estate, construction and consumer loans primarily
in its market area. The Bank's revenues are derived principally from interest
earned on loans and, to a lesser extent, from interest earned on investments and
mortgage-backed and related securities. The operations of the Bank are
influenced significantly by general economic conditions and by policies of
financial institution regulatory agencies, including the OTS and the FDIC. See
"Risk Factors - Regulatory Oversight" and "- Competitive Disadvantage Caused by
the Disparity Between BIF and SAIF Insurance Premiums." The Bank's cost of funds
is influenced by interest rates on competing investments and general market
interest rates. Lending activities are affected by the demand for financing of
real estate and other types of loans, which in turn is affected by the interest
rates at which such financings may be offered.
The Bank's net interest income is dependent primarily upon the
difference or spread between the average yield earned on loans receivable, net
and investments and the average rate paid on deposits, as well as the relative
amounts of such assets and liabilities. The Bank, like other thrift
institutions, is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice at different times, or on a
different basis, than its interest-earning assets.
Financial Condition
Comparison of Financial Condition at May 31, 1996 and December 31, 1995
Total assets at May 31, 1996 were $54.9 million compared to $53.5
million at December 31, 1995, an increase of $1.4 million, or 2.6%. The increase
in total assets was due primarily to increases in loans receivable and
securities available for sale, partially offset by decreases in cash and cash
equivalents and mortgage-backed securities available for sale. The increase in
loans receivable and securities available for sale was largely the result of an
increase in deposits as discussed below.
Total liabilities at May 31, 1996 were $42.8 million compared to $41.8
million at December 31, 1995, an increase of $1.0 million, or 2.4%. Total
deposits increased by $900,000 from $41.0 million at December 31, 1995 to $41.9
million at May 31, 1996 due to an increase in certificates of deposit of
$300,000 and an increase in passbook savings and money markets of $600,000 as a
result of local economic and competitive factors. In addition, other liabilities
increased by $128,000 as a result of an increase in accrued federal and state
income taxes of $83,000 and accrued interest payable on deposit accounts, which
is paid at quarter end, of $173,000.
Total equity at May 31, 1996 was $12.0 million compared to $11.7
million at December 31, 1995, an increase of $300,000, or 2.6% as a result of
$440,000 in net income
37
<PAGE>
for the period, offset by a change in unrealized gain (loss) on securities
available for sale from $57,000 at December 31, 1995 to ($78,000) at May 31,
1996.
Comparison of Financial Condition at December 31, 1995 and December 31, 1994
Total assets at December 31, 1995 were $53.5 million compared to $51.6
million at December 31, 1994, an increase of $1.9 million, or 3.7%. The Bank
increased the amount of net loans receivable by $1.6 million, from $32.9 million
at December 31, 1994 to $34.5 million at December 31, 1995, primarily due to
lower levels of mortgage interest rates in 1995, which spurred increased
customer demand. Securities available-for-sale increased by $5.0 million from
$9.0 million to $14.0 million as a result of the investment of funds from the
maturity of interest-bearing term deposits in other financial institutions and
securities held-to-maturity. The Bank also increased the amount of cash and cash
equivalents from $1.4 million at December 31, 1994 to $3.8 million at December
31, 1995 as a result of these maturities.
Total liabilities were $41.8 million at December 31, 1995 compared to
$41.1 million at December 31, 1994, an increase of $700,000, or 1.7%. Total
deposit accounts increased by $1.0 million from $40.0 million at December 31,
1994 to $41.0 million at December 31, 1995 largely as a result of higher
interest rates offered by the Bank in 1995. This increase was partially offset
by a decrease in advances from borrowers for taxes and insurance of $396,000 as
a result of changes in federal regulations which became effective during 1995
reducing the amount of escrowed funds required to be maintained by the Bank for
borrowers.
Equity at December 31, 1995 was $11.7 million compared to $10.5 million
at December 31, 1994, an increase of $1.1 million or 11.4%, reflecting income of
$1.1 million for the year and a change in unrealized gains (loss) on securities
available for sale from ($101,000) at December 31, 1994 to $57,000 at December
31, 1995.
Results of Operations
The Bank's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
its interest-earning assets such as loans and securities, and the costs of the
Bank's interest-bearing liabilities, primarily deposits and borrowings. Results
of operations are also dependent upon the level of the Bank's noninterest
income, including fee income and service charges, and affected by the level of
its noninterest expenses, including its general and administrative expenses. Net
interest income depends upon the volume of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
Comparison of Operating Results for the Five Months Ended May 31, 1996 and May
31, 1995
General. Net earnings for the five months ended May 31, 1996 were
$440,000, a decrease of $49,000 or 10.0%, from net earnings of $489,000 for the
five months ended May 31, 1995. The decrease was primarily a result of an
increase in the provision for loan losses.
38
<PAGE>
Interest Income. Interest income for the five months ended May 31, 1996
was $1.9 million compared to $1.8 million for the five months ended May 31,
1995, an increase of $100,000, or 5.6%. The increase in interest income was the
result of an increase in the average balance of interest-earning assets from
$50.7 million for the five months ended May 31, 1995 to $53.1 million for the
five months ended May 31, 1996. The increase in average balance of
interest-earning assets was largely the result of a $1.5 million increase in the
average balance of loans receivable. In addition, the average balance of other
interest-earning assets decreased by $2.8 million which was reinvested in
mortgage-backed securities and US government and federal agency obligations. The
average yield on interest-earning assets increased slightly to 8.38% for the
five months ending May 31, 1996 from 8.33% for the five months ending May 31,
1995. The average yield on mortgage-backed securities increased from 5.20% for
the five months ended May 31, 1995 to 5.95% for the five months ended May 31,
1996 as a result of the purchase of higher yielding mortgage-backed securities,
and the upward repricing of adjustable-rate mortgage-backed securities which
more than offset a decrease in the yield on securities from 6.95% to 6.73% for
the same period due to the redemption of higher yielding securities. In
addition, the yield on other interest-earning assets decreased from 6.13% to
6.00% due primarily to increased average balances of cash at the Federal Home
Loan Bank with lower yields combined with decreases in other interest-earning
assets with higher yields.
Interest Expense. Interest expense for the five months ended May 31,
1996 was $725,000 compared to $632,000 for the five months ended May 31, 1995,
an increase of $93,000, or 14.7%. The increase in interest expense was due in
part to an increase in the average balance of interest-bearing liabilities from
$39.9 million for the five months ended May 31,1995 to $41.6 million for the
five months ended May 31, 1996. The increase in interest expense also reflects
the higher interest rate environment, as the average cost of interest-bearing
liabilities increased 39 basis points from 3.79% for the five months ended May
31, 1995 to 4.18% for the five months ended May 31, 1996. This increase reflects
the increase in the cost of certificates of deposit from 4.74% for the five
months ended May 31, 1995 to 5.43% for the five months ended May 31, 1996. The
average balance of certificates of deposit increased from $18.0 million for the
five months ended May 31, 1995 to $20.3 million for the five months ended May
31, 1996. The increase in the average balance of certificate of deposit accounts
resulted from the increased customer demand arising from higher interest rates
paid by the Bank on these accounts, in response to higher market rates.
Net Interest Income. Net interest income remained stable at $1.1
million for the five months ended May 31, 1996 compared to the five months ended
May 31, 1995. The average net interest spread narrowed from 4.54% for the five
months ended May 31, 1995 to 4.20% for the five months ended May 31, 1996, due
to a higher average cost of interest-bearing liabilities.
Provision for Loan Losses. The Bank recorded a $50,000 provision for
loan losses for the five months ended May 31, 1996 compared to no provision for
the five months ended May 31, 1995. The increase was primarily a result of
increased delinquencies of multi-family and commercial real estate loans.
Management does not anticipate increased delinquencies to become a trend. At May
31, 1996, the Bank's allowance for loan losses totaled $186,000, or .51% of
total loans and 10.81% of total non-performing loans. The amount of the
provision and allowance for estimated losses on loans is influenced by current
economic conditions, actual loss experience, industry trends and other factors,
such as adverse economic conditions, including
39
<PAGE>
declining real estate values, in the Bank's market area. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for estimated losses on loans. Such
agencies may require the Bank to provide additions to the allowance based upon
judgments which differ from those of management. The absence of a loan loss
provision for the five months ended May 31, 1995 is indicative of management's
assessment of the adequacy of the allowance for loan losses, given the trends in
historical loss experience of the portfolio and current economic conditions, as
well as the fact that the majority of loans are single-family residential loans
and the loan-to-values are generally less than 80%. Although management uses the
best information available and maintains the Bank's allowance for loan losses at
a level it believes adequate to provide for losses, future adjustments to the
allowance may be necessary due to economic, operating, regulatory and other
conditions that may be beyond the Bank's control. In view of the Bank's focus on
one- to four-family lending, management does not expect the Bank's provision to
increase in the future at the rate it did for the most recent period, although
there can be no assurance that management's expectation will be accurate.
Noninterest Income. Noninterest income for the five months ended May
31, 1996 was $27,000 compared to $24,000 for the five months ended May 31, 1995,
an increase of $3,000, or 12.5%. The increase was primarily a result of an
increase in service fees collected.
Noninterest Expense. Noninterest expense was $353,000 for the five
months ended May 31, 1996 compared to $344,000 for the five months ended May 31,
1995, an increase of $9,000, or 2.6%. The increase was primarily a result of
increased loan expense of $10,000 due to the increase in the volume of loan
applications. Occupancy and equipment expense increase by $4,000 as a result of
increased property tax assessment and repairs and maintenance expenses. These
increases were partially offset by a decrease in compensation and benefits of
$10,000 as a result of an increase in the deferral of loan costs in accordance
with Statement of Financial Accounting Standards No. 91.
Management anticipates that non-interest expense will increase in the
future due to increased costs associated with operations as a public company,
including certain of the stock-based compensation plans proposed to be adopted
in connection with the Conversion and the hiring of additional support staff. In
addition, the deposits of savings associations such as the Bank are presently
insured by the SAIF, which, along with the BIF, is one of the two insurance
funds administered by the FDIC. Financial institutions which are members of the
BIF are experiencing substantially lower deposit insurance premiums because the
BIF has achieved its required level of reserves while the SAIF has not yet
achieved its required reserves. A recapitalization plan for the SAIF under
consideration by Congress reportedly provides for a special assessment of 0.85%
to 0.90% of deposits to be imposed on all SAIF-insured institutions to enable
the SAIF to achieve its required level of reserves. If the proposed assessment
of 0.90% was effected based on deposits as of March 31, 1995 (as proposed), the
Bank's special assessment would amount to approximately $238,000, after taxes.
Accordingly, this special assessment would significantly increase non-interest
expense and adversely affect the Holding Company's results of operations.
Conversely, depending upon the Bank's capital level and supervisory rating, and
assuming the insurance premium levels for BIF and SAIF members are again
equalized, future deposit insurance premiums are expected to decrease
significantly, to as low as $2,000 per year from the 0.23% of deposits currently
paid by the Bank, which would
40
<PAGE>
significantly reduce non-interest expense for future periods if enacted as
proposed. See "Risk Factors - Proposed Special Assessment on SAIF-Insured
Deposits."
Income Tax Expense. The provision for income taxes totalled $312,000
for the five months ended May 31, 1996 compared to $317,000, a decrease of
$5,000, or 1.6%. The decrease was due largely to a decrease in income before
income taxes of $54,000 and an increase interest income from U.S. Treasury
securities which is exempt from Illinois taxation.
Comparison of Operating Results for the Years Ended December 31, 1995 and
December 31, 1994
General. Net income for the year ended December 31, 1995 was $1.1
million compared to $758,000 for the year ended December 31, 1994, an increase
of $342,000, or 45.1%. The operating results were primarily affected by the
decrease in security losses and the provision for loan losses in 1995, partially
offset by an increase in noninterest expense.
Interest Income. Interest income for the year ended December 31, 1995
was $4.3 million compared to $3.9 million for the year ended December 31, 1994,
an increase of $400,000, or 10.3%. A contributing factor in the increase in
interest income was a $733,000 increase in the average balance of
interest-earning assets coupled with a 69 basis point increase in the yield on
average interest-earning assets from 7.62% for the year ended December 31, 1994
to 8.31% for the year ended December 31, 1995. The increase in the average
balance of interest-earning assets was due to increases in the average balance
of loans receivable of $2.4 million and securities of $1.9 million due to the
investment of proceeds from the repayment of maturing investment certificates of
deposit and excess cash at the FHLB. The average yield on loans decreased from
9.56% at December 31, 1994 to 9.25% at December 31, 1995 due to the general
decline in mortgage rates in 1995 as compared to 1994. The average yield on
investment securities increased from 4.46% to 7.05% during the same periods due
to the purchase of higher yielding securities and the maturity of lower yielding
securities. The average balance of other interest earning assets decreased $3.6
million due to the maturity of investment certificates of deposit while the
average yield on such assets increased from 4.28% to 6.22% due to the maturity
of lower yielding investment certificates of deposit.
Interest Expense. Interest expense for the year ended December 31, 1995
was $1.6 million compared to $1.3 million for the year ended December 31, 1994,
an increase of $300,000, or 23.1%. The increase in interest expense reflects a
higher interest rate environment, as the average cost of interest-bearing
liabilities increased by 81 basis points from 3.24% for the year ended December
31, 1994 to 4.05% for the year ended December 31, 1995. Although total average
interest-bearing liabilities remained relatively stable, customers shifted their
deposits from savings accounts to higher yielding certificates of deposit. The
average cost of savings accounts increased from 2.85% for the year ended
December 31, 1994 to 3.02% for the year ended December 31, 1995. The average
cost of certificates of deposit increased from 3.80% to 5.22% for the same
period.
Net Interest Income. Net interest income of $2.6 million for the year
ended December 31, 1995 represented a $100,000 increase from the $2.5 million
reported for the year ended December 31, 1994. This increase in net interest
income was a result of the increase in average interest-earning assets to
average interest-bearing liabilities from 125.08% for the year
41
<PAGE>
ended December 31, 1994 to 127.21% for the year ended December 31, 1995. This
increase was partially offset by a narrowing of the average net interest spread
from 4.38% for the year ended December 31, 1994 to 4.26% for the year ended
December 31, 1995. The narrowing of the net interest spread was a result of the
average cost of interest-bearing liabilities increasing more rapidly than the
average yield on interest-earning assets.
Provision for Loan Losses. The Bank's provision for loan losses on
loans for the year ended December 31, 1995 was zero compared to $42,000 for the
year December 31, 1994. The amount of the provision and allowance for estimated
losses on loans is influenced by current economic conditions, actual loss
experience, industry trends and other factors, such as adverse economic
conditions, including declining real estate values, in the Bank's market area.
The decrease in the provision for loan losses is indicative of management's
assessment of the adequacy of the allowance for loan losses, given the positive
trends in historical loss experience of the portfolio and the strength of the
local economy and current economic conditions, as well as the fact that the
majority of loans are single-family residential loans and the loan-to-values are
generally less than 80%. At December 31, 1995, the Bank's allowance for loan
losses totaled $136,000 or .39% of total loans and 6.49% of total non-performing
loans.
Noninterest Income. Noninterest income for the year ended December 31,
1995 was $58,000 compared to $(289,000) for the year ended December 31, 1994, an
increase of $347,000. The increase was primarily a result of a $365,000 decrease
in security losses in 1995 from 1994, partially offset by an $18,000 decrease in
other income in 1995.
Noninterest Expense. Noninterest expense for the year ended December
31, 1995 was $1.0 million compared to $838,000 for the year ended December 31,
1994, an increase of $162,000, or 19.3%. The increase was primarily a result of
a $199,000 increase in compensation and benefits, partially offset by a $9,000
decrease in occupancy and equipment expense and a $19,000 decrease in other
operating expenses. The primary increase in compensation and benefits was due to
the termination of the Bank's pension plan during 1995 which resulted in an
increase in pension expense of $132,000.
Income Taxes. Income tax expense was $630,000 for the year ended
December 31, 1995 compared to $617,000 for the year ended December 31, 1994, an
increase of $13,000. The increase was largely a result of an increase in income
before income taxes from $1.4 million for the year ended December 31, 1994 to
$1.7 million for the year ended December 31, 1995, partially offset by an
increase in the deferred tax valuation allowance of $89,000 in 1994. See Note 9
of the Notes to the Consolidated Financial Statements for additional information
on the Bank's income taxes.
42
<PAGE>
Comparison of Operating Results for the Year Ended December 31, 1994 and the Ten
Months Ended December 31, 1993
General. The Bank reported net income for the year ended December 31,
1994 of $758,000 compared to net income of $942,000 for the ten months ended
December 31, 1993, a decrease of $184,000, or 19.5%. The operating results were
primarily affected by losses on securities sales of $365,000 in 1994 compared to
$28,000 in 1993 and an increase in compensation and benefits of $110,000 of
which $63,000 was due to two additional months of expense in 1994. In addition,
net interest income increased by $311,000 of which $446,000 was due to two
additional months of operations in 1994 offset by a decrease of $134,000 as a
result of the decreasing rate environment.
Interest Income. Interest income for the year ended December 31, 1994
was $3.9 million compared to $3.4 million for the ten months ended December 31,
1993, an increase of $500,000, or 14.7%. This increase in interest income was
primarily the result of two additional months of operations during 1994 as
compared to 1993. Interest income for the year ended December 31, 1994 compared
to the annualized interest income for the ten months ended December 31, 1993
decreased by $200,000. A contributing factor in the decrease in interest income
on an annualized basis was the 59 basis point decline in the average yield on
interest-earning assets from 8.21% (annualized) for the ten months ended
December 31, 1993 to 7.62% for the year ended December 31, 1994. The decrease in
interest income due to lower interest rates was partially mitigated by an
increase in average interest-earning assets from $49.7 million for the ten
months ended December 31, 1993 to $50.6 million for the year ended December 31,
1994. The average yield on loans decreased by 65 basis points, from 10.21%
(annualized) for the ten months ended December 31, 1993 to 9.56% for the year
ended December 31, 1994, primarily as a result of higher yielding loans being
repaid and replaced by loans originated at lower prevailing rates.
Interest Expense. Interest expense for the year ended December 31, 1994
was $1.3 million compared to $1.2 million for the ten months ended December 31,
1993, an increase of $100,000, or 8.3%. This increase in interest expense was
due largely to the two additional months of operations during 1994 as compared
to 1993. Interest expense for the year ended December 31, 1994 compared to the
annualized interest expense for the ten months ended December 31, 1993 decreased
by $100,000. The decrease in interest expense on an annualized basis was due in
part to the 19 basis point decline in the average cost of interest-bearing
liabilities from 3.43% (annualized) for the ten months ended December 31, 1993
to 3.24% for the year ended December 31, 1994, as a result of the Bank's
decision to reduce the rates paid on its deposits in light of the lower rate
environment experienced during fiscal 1994.
Net Interest Income. Net interest income was $2.5 million for the year
ended December 31, 1994 compared to $2.2 million on an annualized basis for the
ten months ended December 31, 1993. The decrease in annualized net interest
income resulted primarily from the narrowing of the net interest spread from
4.78% (annualized) for the ten months ended December 31, 1993 to 4.38% for the
year ended December 31, 1994. The narrowing of the net interest spread was a
result of interest-earning assets repricing more rapidly than interest-bearing
liabilities in a declining rate environment during 1994.
43
<PAGE>
Provision for Loan Losses. The Bank's provision for loan losses on
loans was $42,000 for the year ended December 31, 1994 compared to $27,000 for
the ten months ended December 31, 1993. The amount of the provision and
allowance for estimated losses on loans is influenced by current economic
conditions, actual loss experience, industry trends and other factors, such as
adverse economic conditions, including declining real estate values, in the
Bank's market area. The increase in the provision for loan losses in 1994 is
indicative of management's assessment of the adequacy of the allowance for loan
losses, and specific delinquency situations.
Noninterest Income. Noninterest income was $(289,000) for the year
ended December 31, 1994 compared to $12,000 for the ten months ended December
31, 1993, a decrease of $301,000. The decrease in noninterest income was due to
a $365,000 loss on security sales for the year ended December 31, 1994 compared
to a $28,000 loss for the ten months ended December 31, 1993. The $365,000 loss
on securities in 1994 was the result of the sale of mutual funds in an effort to
restructure the portfolio. This decrease was partially offset by an increase in
other income of $36,000 due primarily to the increased service charges and
$8,000 due to two additional months of income in 1994.
Noninterest Expense. Noninterest expense was $838,000 for the year
ended December 31, 1994 compared to $647,000 for the ten months ended December
31, 1993, an increase of $191,000, or 29.5%. Compensation and benefits increased
by $110,000 of which $63,000 was due to two additional months of expense during
1994. The remaining increase of $47,000 was due to increased pension plan
expense and the addition of a Bank officer during 1994. In addition, occupancy
and equipment expense increased by $27,000 of which $18,000 was due to two
additional months of expense in 1994 and $9,000 was due to increased
expenditures on repairs and maintenance during 1994.
Income Taxes. The provision for income taxes was $617,000 for the year
ended December 31, 1994 compared to $628,000 for the ten months ended December
31, 1993, a decrease of $11,000, or 1.8%. The decrease in the provision for
income taxes was due to a decrease in pretax income of $195,000 partially offset
by an increase in the deferred tax valuation allowance in 1994.
Analysis of Net Interest Income
Net interest income represents the difference between interest earned
on interest-earning assets and interest paid on interest-bearing liabilities.
Net interest income depends on the volumes of interest-earning assets and
interest-bearing liabilities and the interest rates earned or paid on them.
44
<PAGE>
The following table presents for the periods indicated the total dollar
amount of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Five Months Ended May 31, Year Ended December 31,
----------------------------------------------------------- -----------------------------
1996(3) 1995(3) 1995
----------------------------- ---------------------------- ----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------ ----------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)............ $35,294 $1,377 9.36% $33,783 $1,313 9.32% $34,131 $3,156 9.25%
Securities(2).................. 10,807 303 6.73 7,735 224 6.95 9,250 652 7.05
Mortgage-backed securities..... 4,074 101 5.95 3,511 76 5.20 3,549 186 5.24
Other.......................... 2,879 72 6.00 5,674 145 6.13 4,407 274 6.22
------- ------ ------- ------ ------- ------
Total interest-earning
assets(1)(2) $53,054 1,853 8.38% $50,703 1,758 8.33% $51,337 4,268 8.31
======= ------ ======= ------ ======= ------
Interest-Earning Liabilities:
Passbook savings............... $21,334 267 3.00% $21,922 277 3.02% $21,512 649 3.02
Certificate accounts........... 20,250 458 5.43 17,982 355 4.74 18,843 983 5.22
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities $41,584 725 4.18 $39,904 632 3.79 $40,355 1,632 4.05
======= ------ ======= ------ ======= ------
Net interest income............. $1,128 $1,126 $2,636
====== ====== ======
Net interest rate spread........ 4.20% 4.54% 4.26%
==== ==== ====
Net earning assets.............. $11,470 $10,799 $10,982
======= ======= =======
Net yield on average interest-
earning assets................. 5.09% 5.33% 5.13%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities 127.58% 127.06% 127.21%
====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------- Ten Months Ended December 31,
1994 1993(3)
--------------------------- -----------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- ------- ------ ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)............ $31,685 $3,014 9.56% $32,708 $2,783 10.21%
Securities(2).................. 7,357 327 4.46 9,919 391 4.74
Mortgage-backed securities..... 3,600 172 4.78 184 2 1.30
Other.......................... 7,962 341 4.28 6,909 225 3.91
------- ------ ------- ------
Total interest-earning
assets(1)(2) $50,604 3,854 7.62 $49,720 3,401 8.21
======= ------ ======= ------
Interest-Earning Liabilities:
Passbook savings............... $23,882 680 2.85 $24,508 575 2.82
Certificate accounts........... 16,576 630 3.80 16,320 594 4.37
------- ------ ------- ------
Total interest-bearing
liabilities $40,458 1,310 3.24 $40,828 1,169 3.43
======= ------ ---- ======= ------
Net interest income............. $2,544 $2,232
====== ======
Net interest rate spread........ 4.38% 4.78%
==== ====
Net earning assets.............. $10,146 $8,892
======= ======
Net yield on average interest-
earning assets................. 5.03% 5.39%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 125.08% 121.78%
====== ======
</TABLE>
- -------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process
and loss reserves.
(2) Calculated based on amortized cost.
(3) Annualized yield/rate.
45
<PAGE>
The following table presents the weighted average yields earned on
loans, securities and other interest-earning assets, and the weighted average
rates paid on savings deposits and the resultant interest rate spreads at the
date indicated. Weighted average balances are based on monthly balances.
<TABLE>
<CAPTION>
At December 31,
At May 31, -----------------------------------
1996 1995 1994 1993
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average yield on:
Loans receivable............................................... 8.64% 8.75% 8.81% 9.15%
Mortgage-backed securities..................................... 6.08 6.08 5.51 6.00
Securities..................................................... 6.67 6.98 6.95 4.46
Other interest-earning assets.................................. 5.49 5.22 5.18 3.25
Combined weighted average yield on interest-earning
assets................................................... 7.84 7.98 7.87 7.07
Weighted average rate paid on:
Passbook savings deposits...................................... 3.02 3.02 3.05 2.81
Certificate accounts........................................... 5.33 5.58 4.33 3.67
Combined weighted average rate paid on interest-bearing
liabilities............................................... 4.14 4.27 3.61 3.15
Spread.......................................................... 3.70 3.71 4.26 3.92
</TABLE>
- ----------
(1) Excluding amortization of deferred loan fees.
46
<PAGE>
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes
related to outstanding balances and that due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Five Months Ended
May 31, Year Ended December 31,
1995 vs. 1996 1994 vs. 1995
----------------------------------- -----------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
------------------ Increase ------------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable.................................... $ 59 $ 5 $ 64 $228 $(86) $142
Mortgage-backed securities.......................... 13 12 25 (2) 16 14
Securities.......................................... 86 (7) 79 99 226 325
Other............................................... (70) (3) (73) (186) 119 (67)
----- ---- ---- ---- ---- ----
Total interest-earning assets..................... $ 88 $ 7 95 $139 $275 414
===== ==== ---- ==== ==== ----
Interest-bearing liabilities:
Passbook savings deposits........................... $ (8) $ (2) (10) $(70) $(39) (31)
Certificate accounts................................ 49 54 103 95 258 353
----- ---- ---- ---- ---- ----
Total interest-bearing liabilities................ $ 41 $ 52 93 $ 25 $297 322
===== ==== ---- ==== ==== ----
Net interest income.................................. $ 2 $ 92
==== ====
</TABLE>
<TABLE>
<CAPTION>
Ten Months Ended
December 31, 1993(1) vs.
Year Ended December 31, 1994
-----------------------------
Increase
(Decrease)
Due to Total
----------------- Increase
Volume Rate (Decrease)
------ ---- ----------
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable.................................... $ (102) $(225) $(327)
Mortgage-backed securities.......................... 144 26 170
Securities.......................................... (116) (26) (142)
Other............................................... 44 27 71
------ ----- -----
Total interest-earning assets..................... $ (30) $(198) (228)
====== ===== -----
Interest-bearing liabilities:
Passbook savings deposits........................... $ (18) $ 8 (10)
Certificate accounts................................ 11 (94) (83)
------ ----- -----
Total interest-bearing liabilities................ $ (7) $ (86) (93)
====== ===== -----
Net interest income.................................. $(135)
=====
</TABLE>
- --------------
(1) Ten months ended December 31, 1993 is annualized.
47
<PAGE>
Asset/Liability Management
The measurement and analysis of the exposure of the Bank to changes in
the interest rate environment is referred to as asset/liability management. One
method used to analyze the Bank's sensitivity to changes in interest rates is to
measure the difference between the amount of interest-earning assets which are
anticipated to mature or reprice within a given period of time as compared to
the amount of interest-bearing liabilities which are expected to mature or
reprice within the same period. This difference is known as the interest rate
sensitivity "gap". A gap is considered positive when the amount of interest rate
sensitive assets exceed the amount of interest rate sensitive liabilities in a
given period. A gap is considered negative when the amount of interest rate
sensitive liabilities exceed the amount of interest rate sensitive assets in a
given period.
In a period of declining interest rates, a negative gap would
theoretically be expected to enhance net interest income as maturing and/or
repricing liabilities can be replaced with lower rate liabilities more quickly
than the rate would decline on maturing assets. Conversely, a positive gap would
theoretically tend to adversely affect net interest income in a period of
declining rates. In a period of rising interest rates, a positive gap would
theoretically be expected to enhance net interest income as maturing and/or
repricing assets can be reinvested or repriced at higher rates more quickly than
maturing liabilities would increase in rate. A negative gap would tend to
adversely affect net interest income in a period of rising rates.
Historically, management of the Bank has pursued a strategy of
maintaining its net interest margin by investing in long-term fixed rate
mortgage loans which generally are higher yielding than adjustable-rate mortgage
loans. The Bank's yield on interest-earning assets has adjusted, and, management
believes will in the future continue to adjust, to changes in interest rates at
a slower rate than the cost of its interest-bearing liabilities. As a
consequence, any significant increase in interest rates will have an adverse
effect on the Bank's results of operations. Moreover, increases in interest
rates also can result in disintermediation, which is the flow of funds away from
savings institutions into direct investments, such as U.S. government and
corporate securities, and other investment vehicles which, because of the
absence of federal insurance premiums and reserve requirements, generally pay
higher rates of return than savings institutions. Although in periods of falling
interest rates the opposite effect on net interest income is expected, the Bank
has experienced prepayments of its fixed-rate mortgage loans, which has resulted
in the reinvestment of such proceeds at lower market rates. At May 31, 1996,
total interest-bearing liabilities maturing or repricing within one year
exceeded total interest-earning assets maturing or repricing in the same period
by $25.8 million, representing a negative cumulative one-year gap ratio of 47.1%
of total assets. Management believes that net interest income will be adversely
affected in the event of an increase in interest rates. See "Risk
Factors-Interest Rate Risk Exposure."
In an attempt to manage its exposure to changes in interest rates,
management monitors the Bank's interest rate risk. The Board of Directors meets
at least quarterly to review the Bank's interest rate risk position and
profitability. The Board of Directors also reviews the Bank's portfolio,
formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Bank's objectives in the most effective
manner. In addition, the Board anticipates reviewing on a quarterly basis the
Bank's asset/liability position, including simulations of the effect on the
Bank's capital of various interest rate scenarios.
48
<PAGE>
In managing its asset/liability mix, Preferred Savings, depending on
the relationship between long- and short-term interest rates, market conditions
and consumer preference, often places more emphasis on managing net interest
margin than on better matching the interest rate sensitivity of its assets and
liabilities in an effort to enhance net interest income. Management believes
that the increased net interest income resulting from a mismatch in the maturity
of its asset and liability portfolios can, during periods of declining or stable
interest rates, provide high enough returns to justify the increased exposure to
sudden and unexpected increases in interest rates.
Management has taken a number of steps to limit to some extent its
interest rate risk. First, the bank focuses its fixed rate loan originations on
loans with maturities of 15 years or less. At May 31, 1996, $23.0 million or
88.7% of the Bank's one- to four family residential loan portfolio consisted of
fixed rate loans having original terms to maturity of 15 years or less. Second,
the Bank offers balloon loans of 10 years or less in an attempt to decrease its
asset/liability mismatch. Third, the Bank maintains a portfolio of securities
and liquid assets with weighted average lives of three years or less. At May 31,
1996, the Bank had $14.8 million of securities and cash items with a remaining
average life of 2.66 years. Fourth, the Bank has maintained a mortgage-backed
securities portfolio with adjustable-rates. At May 31, 1996, adjustable rate
mortgage-backed securities totaled $1.7 million which represented 3.1% of
interest-earning assets. Finally, a substantial proportion of the Bank's
liabilities consists of passbook savings accounts which are believed by
management to be somewhat less sensitive to interest rate changes than
certificate accounts.
The primary objective of Preferred Savings' investment strategy is to
provide liquidity necessary to meet funding needs as well as to address daily,
cyclical and long-term changes in the asset/liability mix, while contributing to
profitability by providing a stable flow of dependable earnings. Investments
generally include interest-bearing deposits in other federally insured financial
institutions, FHLB stock and U.S. Government securities.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, to provide collateral for borrowings, and to fulfill the Bank's
asset/liability management policies.
Preferred Savings' cost of funds responds to changes in interest rates
due to the relatively short-term nature of its deposit portfolio. Consequently,
the results of operations are heavily influenced by the levels of short-term
interest rates. Preferred Savings offers a range of maturities on its deposit
products at competitive rates and monitors the maturities on an ongoing basis.
49
<PAGE>
The following table sets forth the interest rate sensitivity of the
Bank's assets and liabilities and certain associated weighted average yields and
costs at May 31, 1996 on the basis of the assumptions described below.
<TABLE>
<CAPTION>
Maturing or Repricing
--------------------------------------------------------------------------
Over 6
6 Months Months to Over 1 to Over 3 to Over No Stated
or less 1 Year 3 Years 5 Years 5 Years Maturity Total
-------- -------- -------- -------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest -Earning Assets
Loans receivable, gross:
Fixed-rate mortgages........... $ 1,200 $ 1,235 $ 5,163 $ 5,216 $23,348 $ --- $36,162
Adjustable-rate construction... 243 --- --- --- --- --- 243
Consumer....................... 14 1 2 --- --- --- 17
Securities available for sale:
Treasury and agency securities. 2,012 3,758 996 3,404 888 --- 11,058
Mortgage-backed securities..... 1,060 825 534 602 863 --- 3,884
Interest bearing term deposits in other
financial institutions............. --- 99 50 --- 99 --- 248
Interest earning accounts............... 2,871 --- --- --- --- --- 2,871
FHLB Stock.............................. --- --- --- --- --- 362 362
-------- -------- -------- -------- ------- ------- -------
Total interest-earning assets.. 7,400 5,918 6,745 9,222 25,198 362 54,845
Interest-Bearing Liabilities
Passbooks............................... 19,604 --- --- --- --- --- 19,604
Money Market accounts................... 1,998 --- --- --- --- --- 1,998
Certificates of Deposit................. 13,559 4,000 2,336 448 --- --- 20,343
-------- -------- -------- -------- ------- ------- -------
Total interest-bearing
liabilities................ 35,161 4,000 2,336 448 --- --- 41,945
-------- -------- -------- -------- ------- ------- -------
Interest-earning assets less interest-
bearing liabilities.................. $(27,761) $ 1,918 $ 4,409 $ 8,774 $25,198 $ 362 $12,900
======== ======== ======== ======== ======= ======= =======
Cumulative interest rate gap............ $(27,761) $(25,843) $(21,434) $(12,660) $12,538 $12,900 $12,900
======== ======== ======== ======== ======= ======= =======
Cumulative interest rate gap as a
percentage of total assets at
May 31, 1996......................... (50.56)% (47.07)% (39.04)% (23.06)% 22.84% 23.50% 23.50%
======== ======== ======== ======== ======= ======= =======
</TABLE>
The preceding table was prepared utilizing the following assumptions
regarding prepayment and decay ratios which were determined by management of the
Bank based upon its review of historical prepayment speeds and future prepayment
projections produced from industry data reflecting expected future prepayments
embedded in quarter end prices of mortgage-backed instruments actively traded in
financial markets. Fixed-rate loans were assumed to prepay monthly at annual
rates of between 8% and 55%, depending on the coupon and period to maturity.
Consumer loans were assumed to prepay monthly at an annual rate of 5% in each of
the periods. Savings accounts were assumed to decay in 6 months or less.
Finally, certificate accounts are assumed not to be withdrawn prior to maturity.
The effect of these assumptions is to quantify the dollar amount of
items that are interest-sensitive and that can be repriced within each of the
periods specified. Such repricing can occur in one of three ways: (1) the rate
of interest to be paid on an asset or liability may adjust periodically on the
basis of an interest rate index; (2) an asset or liability, such as a mortgage
loan, may amortize, permitting reinvestment of cash flows at the then-prevailing
interest rates; or (3) an asset or liability may mature, at which time the
proceeds can be reinvested at the current market rates. Management believes
these prepayment and erosion rates represent reasonable estimates based on
Preferred Savings' experience except that based upon historical
50
<PAGE>
experience management believes that its savings accounts are a relatively stable
source of funds.
Certain shortcomings are inherent in the method of analysis presented
in the foregoing table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rate. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the foregoing table. The ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.
Because of various shortcomings inherent in using repricing assumptions
in calculating the Bank's gap position, the Banks's negative gap ratio at May
31, 1996 may not fully reflect the Bank's vulnerability to increases in interest
rates as certain assets and liabilities may react in different degrees to, or
lag behind, changes in market interest rates even though they have similar
maturities or periods to repricing. See "Risk Factors - Interest Rate Risk
Exposure."
Another approach used by management to quantify interest rate risk is
the net portfolio value ("NPV") analysis. In essence, this approach calculates
the difference between the present value of liabilities, expected cash flows
from assets and cash flows from off balance sheet contracts. Under OTS
regulations, an institution's "normal" level of interest rate risk in the event
of an immediate and sustained 200 basis point change in interest rates is a
decrease in the institution's NPV in an amount not exceeding 2% of the present
value of its assets. Pursuant to this regulation, thrift institutions with
greater than "normal" interest rate exposure must take a deduction from their
total capital available to meet their risk-based capital requirement. The amount
of that deduction is one-half of the difference between (a) the institution's
actual calculated exposure to the 200 basis point interest rate increase or
decrease (whichever results in the greater pro forma decrease in NPV) and (b)
its "normal" level of exposure which is 2% of the present value of its assets.
Savings institutions, however, with less than $300 million in assets and a total
capital ratio in excess of 12%, will be exempt from this requirement unless the
OTS determines otherwise. The OTS has postponed the implementation of the rule
until further notice. Since the Bank was a state-chartered savings bank at May
31, 1996, information on its NPV was not computed by the OTS. Based upon its
asset size and capital level at May 31, 1996, the Bank would qualify for an
exemption from this rule; however, management believes that the Bank would be
required to make a deduction from capital if it were subject to this rule.
The Bank's asset/liability committee has established acceptable limits
in response to changes in interest rates.
51
<PAGE>
The following table sets forth, at May 31, 1996, an analysis of the
Bank's interest rate risk as measured by the estimated changes in NPV resulting
from instantaneous and sustained parallel shifts in the yield curve (+/-400
basis points, measured in 100 basis point increments).
<TABLE>
<CAPTION>
Ratio of Target Limit Under
Change in Interest Estimated NPV to Estimated Increase Asset Liability
Rates NPV Total (Decrease) in NPV Management
(Basis Points) Amount Assets Amount Percent Policy
- ------------------ --------- ------ ------ ------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 $ 9,172 16.72% $(4,329) (32)% (65)%
+300 10,327 18.83 (3,174) (24) (50)
+200 11,551 21.06 (1,950) (14) (35)
+100 12,746 23.24 (755) (6) (15)
--- 13,501 24.61 --- --- ---
-100 13,610 24.81 109 1 13
-200 13,671 24.92 170 1 26
-300 13,747 25.06 246 2 40
-400 14,214 25.91 713 5 50
</TABLE>
Certain assumptions utilized in assessing the interest rate risk of
thrift institutions were employed in preparing the preceding table. These
assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities would perform as set
forth above. In addition, a change in U.S. Treasury rates in the designated
amounts accompanied by a change in the shape of the Treasury yield curve would
cause significantly different changes to the NPV than indicated above.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and mortgage-backed and related
securities. While maturities and scheduled amortization of loans and securities
are predictable sources of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition. Preferred Savings generally manages the pricing of its deposits to
be competitive and increase core deposit relationships.
Federal regulations require Preferred Savings to maintain minimum
levels of liquid assets. The required percentage has varied from time to time
based upon economic conditions and savings flows and is currently 5% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U.S. Government, government agency
and corporate securities and other obligations generally having remaining
maturities of less than five years. Preferred Savings has historically
maintained its liquidity ratio for regulatory purposes at levels in excess of
those required. At May 31, 1996, Preferred Savings' liquidity ratio for
regulatory purposes was 30.5%.
52
<PAGE>
The Bank's cash flows are comprised of three primary classifications:
cash flows from operating activities, investing activities and financing
activities. Cash flows provided by operating activities were $718,000 and
$759,000 for the five months ended May 31, 1996 and May 31, 1995 respectively,
$1,218,000 and $1,143,000 for the years ended December 31, 1995 and December 31,
1994, respectively, and $937,000 for the ten months ended December 31, 1993. Net
cash from investing activities consisted primarily of disbursements for loan
originations and the purchase of investments and mortgage-backed securities,
offset by principal collections on loans, proceeds from maturation and sales of
securities and paydowns on mortgage-backed securities. Net cash from financing
activities consisted primarily of activity in deposit and escrow accounts. The
net increase (decrease) in deposits was $898,000, and $(269,000) for the five
months ended May 31, 1996 and May 31, 1995, respectively, $990,000 and
$(1,082,000) for the years ended December 31, 1995 and December 31, 1994,
respectively, and $776,000 for the ten months ended December 31, 1993.
The Bank's most liquid assets are cash and short-term investments. The
levels of these assets are dependent on the Bank's operating, financing, lending
and investing activities during any given period. At May 31, 1996, cash and
short-term investments totaled $2.9 million. The Bank has other sources of
liquidity if a need for additional funds arises, including securities maturing
within one year and the repayment of loans. The Bank may also utilize the sale
of securities available-for-sale and Federal Home Loan Bank advances as a source
of funds.
At May 31, 1996, the Bank had outstanding commitments to originate
loans of $537,000, all of which had fixed interest rates. These loans are to be
secured by properties located in its market area. The Bank anticipates that it
will have sufficient funds available to meet its current loan commitments.
Certificates of deposit which are scheduled to mature in one year or less from
May 31, 1996 totaled $17.6 million. Management believes that a significant
portion of such deposits will remain with the Bank.
Liquidity management is both a daily and long-term responsibility of
management. Preferred Savings adjusts its investments in liquid assets based
upon management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-earning overnight deposits
and short-and intermediate-term U.S. Government and agency obligations and
mortgage-backed securities of short duration. If Preferred Savings requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB of Chicago.
Preferred Savings is subject to various regulatory capital requirements
imposed by the OTS. At May 31, 1996, Preferred Savings was in compliance with
all applicable capital requirements on a fully phased-in basis. See "Regulation
- - Regulatory Capital Requirements" and "Pro Forma Regulatory Capital Analysis
and Note 8 of the Notes to the Consolidated Financial Statements.
Preferred Savings' principal sources of funds are deposits,
amortization and prepayment of loan principal and mortgage-backed securities,
maturities of investment securities and operations. While scheduled loan
repayments and maturing investments are relatively predictable, deposit flows
and early loan repayments are more influenced by interest rates, floors and caps
on loan rates, general economic conditions and competition. Preferred Savings
53
<PAGE>
generally manages the pricing of its deposits to be competitive and increase
core deposit relationships, but has from time to time decided not to pay deposit
rates that are as high as those of its competitors.
Federal regulations require Preferred Savings to maintain minimum
levels of liquid assets. The required percentage has varied from time to time
based upon economic conditions and savings flows and is currently 5% of net
withdrawable savings deposits and borrowings payable on demand or in one year or
less during the preceding calendar month. Liquid assets for purposes of this
ratio include cash, certain time deposits, U.S. Government, government agency
and corporate securities and other obligations generally having remaining
maturities of less than five years. Preferred Savings has historically
maintained its liquidity ratio for regulatory purposes at levels in excess of
those required. At May 31, 1996, Preferred Savings' liquidity ratio for
regulatory purposes was 30.5%. See "Regulation - Liquidity."
Impact of Inflation and Changing Prices
The consolidated 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. The primary impact of
inflation on the operations of the Bank is reflected in increased operating
costs. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates, generally, have a more significant impact on a financial
institution's performance than does inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
Impact of New Accounting Standards
In March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long Lived
Assets and for Long Lived Assets to be Disposed Of." SFAS No. 121 requires that
long lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or circumstances indicate that the carrying amount of
an asset may not be recoverable. However, SFAS No. 121 does not apply to
financial instruments, core deposit intangibles, mortgage and other servicing
rights or deferred tax assets. The adoption of SFAS No. 121 in 1996 did not have
a material impact on the results of operations or financial condition of the
Bank.
In May 1995, the FASB issued Statement of Financial Accounting
Standards No. 122 ("SFAS No. 122"), "Accounting for Mortgage Servicing Rights."
SFAS No. 122 requires an institution that purchases or originates mortgage loans
and sells or securitizes those loans with servicing rights retained to allocate
the cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values. In
addition, institutions are required to assess impairment of the capitalized
mortgage servicing portfolio based on the fair value of those rights. SFAS No.
122 is effective for fiscal years beginning after December 15, 1995. The Bank is
currently not originating mortgage loans for sale and therefore, the adoption of
this statement did not have a material impact on the results
54
<PAGE>
of operations or financial condition of the Bank. SFAS No. 122 will be
superseded by Statement of Financial Accounting Standards No. 125 after December
31, 1996.
In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123 ("SFAS No. 123"), "Accounting for Stock Based Compensation,"
("SFAS No. 123"). This statement establishes financial accounting standard for
stock-based employee compensation plans. SFAS No. 123 permits the Bank to choose
either a new fair value based method or the current APB Opinion 25 intrinsic
value based method or accounting for its stock-based compensation arrangements.
SFAS No. 123 requires pro forma disclosures of net earnings and earnings per
share computed as if the fair value based method had been applied in financial
statements of companies that continue to follow current practice in accounting
for such arrangements under Opinion 25. The disclosure provisions of SFAS No.
123 are effective for fiscal years beginning after December 15, 1995. Any effect
that this statement will have on the Bank will be applicable upon the
consummation of the Conversion.
In June 1996, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"),
"Accounting for Transfers and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS No. 125 requires a
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, and derecognizes liabilities when extinguished. SFAS No. 125 also
supersedes SFAS No. 122 and requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and requires assessment for asset
impairment or increases obligation based on their fair values. SFAS No. 125
applies to transfers and extinguishments occurring after December 31, 1996 and
early or retroactive application is not permitted. Management anticipates that
the adoption of SFAS No. 125 will not have a material impact on the financial
condition or operations of the Bank.
BUSINESS
General
As a community-oriented financial institution, Preferred Savings seeks
to serve the financial needs of communities in its market area. Preferred
Savings' business involves attracting deposits from the general public and using
such deposits, together with other funds, to originate primarily one- to
four-family residential mortgage loans and, to a lesser extent, multi-family,
commercial real estate and consumer loans in its market area. See "Risk
Factors." The Bank also invests in mortgage-backed and other securities and
other permissible investments.
The Bank offers a variety of accounts having a range of interest rates
and terms. The Bank's deposits include passbook accounts, money market accounts
and certificate accounts with terms of six months to five years. The Bank
solicits deposits only in its primary market area and does not accept brokered
deposits.
Market Area
55
<PAGE>
Preferred Savings serves primarily the southwest side of Chicago and
Cook County, Illinois through its office located at 4800 South Pulaski Road in
Chicago, Illinois. Preferred Savings' market area for loans includes primarily
Cook County, Illinois and, to a lesser extent, portions of DuPage and Will
Counties, Illinois. The market area for deposits includes primarily the
southwest side of the City of Chicago including the Garfield Ridge, Archer
Heights and Brighton Park areas of Chicago. The southwest side of Chicago
includes a diverse population of low- and moderate-income neighborhoods. The
housing in these neighborhoods consists primarily of two- to six-unit apartments
and single family residences.
The Bank's market area also includes small strip shopping centers,
small retail and medical offices, and small- to medium-size manufacturing
facilities as well as the Chicago Metropolitan area's second largest airport,
Midway Airport. Management believes the economic and demographic characteristics
of its market area to be generally stable.
Lending Activities
General. The principal lending activity of the Bank is originating for
its portfolio fixed rate mortgage loans secured by one- to four-family
residences located primarily in the Bank's market area. To a much lesser extent,
Preferred Savings also originates commercial real estate, multi-family and
consumer loans in its market area. At May 31, 1996, the Bank's total loans
receivable, net totaled $35.7 million. See "- Originations, Purchases and Sales
of Loans and Mortgage-Backed Securities" and "Use of Proceeds."
56
<PAGE>
Loan Portfolio Composition. The following table sets forth the
composition of the Bank's loan portfolio in dollar amounts and in percentages as
of the dates indicated.
<TABLE>
<CAPTION>
December 31,
May 31, -----------------------------------------------------------------
1996 1995 1994 1993
---------------- ------------------ ------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family............ $26,150 71.80% $25,858 73.44% $24,711 73.62% $23,403 74.45%
Multi-family................... 6,604 18.13 6,094 17.31 5,929 17.66 5,452 17.34
Commercial..................... 3,408 9.36 2,953 8.39 2,904 8.65 2,331 7.42
Construction................... 243 0.67 286 0.81 --- --- 215 0.68
------- ------- ------- ------- ------- ------- ------- -------
Total real estate loans..... 36,405 99.96 35,191 99.95 33,544 99.93 31,401 99.89
------- ------- ------- ------- ------- ------- ------- -------
Consumer Loans:
Deposit account................. 17 0.04 18 0.05 24 0.07 35 0.11
------- ------- ------- ------- ------- ------- ------- -------
Total loans................. 36,422 100.00% 35,209 100.00% 33,568 100.00% 31,436 100.00%
====== ====== ====== ======
Less:
Loans in process................ --- --- --- ---
Deferred fees and discounts..... 534 548 542 521
Allowance for loan losses....... 186 136 136 94
------- ------- ------- -------
Total loans receivable, net.. $35,702 $34,525 $32,890 $30,821
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
February 28, February 29,
1993 1992
------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family............ $25,411 76.32% $24,670 76.51%
Multi-family................... 6,157 18.49 6,046 18.75
Commercial..................... 1,681 5.05 1,424 4.42
Construction................... --- --- --- ---
------- ------- ------- -----
Total real estate loans..... 33,249 99.86 32,140 99.68
------- ------- ------- -----
Consumer Loans:
Deposit account................. 45 0.14 105 0.32
------- ------- ------- -----
Total loans................. 33,294 100.00% 32,245 100.00%
====== ======
Less:
Loans in process................ --- ---
Deferred fees and discounts..... 511 496
Allowance for loan losses....... 67 43
------- -------
Total loans receivable, net.. $32,716 $31,706
======= =======
</TABLE>
57
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
May 31, -----------------------------------------------------------------
1996 1995 1994 1993
---------------- ------------------ ------------------ -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate
One- to four-family............ $26,150 71.80% $25,858 73.44% $24,711 73.62% $23,403 74.45%
Multi-family................... 6,604 18.13 6,094 17.31 5,929 17.66 5,452 17.34
Commercial..................... 3,408 9.36 2,953 8.39 2,904 8.65 2,331 7.42
Construction................... --- --- --- --- --- --- 215 0.68
------- ------- ------- ------- ------- ------ ------- -------
Total real estate loans..... 36,162 99.29 34,905 99.14 33,544 99.93 31,401 99.89
Consumer loans.................. 15 0.04 16 0.04 15 0.05 19 0.06
------- ------- ------- ------- ------- ------ ------- -------
Total fixed-rate loans...... 36,177 99.33 34,921 99.18 33,559 99.98 31,420 99.95
------- ------- ------- -------
Adjustable-Rate Loans:
Real estate - construction...... 243 0.67 286 0.81 --- --- --- ---
Consumer loans.................. 2 --- 2 0.01 9 0.02 16 0.05
------- ------- ------- ------- ------- ------ ------- -------
Total adjustable-rate loans. 245 0.67 288 0.82 9 0.02 16 0.05
------- ------- ------- ------- ------- ------ ------- -------
Total loans................. 36,422 100.00% 35,209 100.00% 33,568 100.00% 31,436 100.00%
====== ====== ====== ======
Less
Loans in process................ --- --- --- ---
Deferred fees and discounts..... 534 548 542 521
Allowance for loan losses....... 186 136 136 94
------- ------- ------- -------
Total loans receivable, net.. $35,702 $34,525 $32,890 $30,821
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
February 28, February 29,
1993 1992
------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate
One- to four-family............ $25,411 76.32% $24,670 76.51%
Multi-family................... 6,157 18.49 6,046 18.75
Commercial..................... 1,681 5.05 1,424 4.42
Construction................... --- --- --- ---
------- ------- ------- -----
Total real estate loans..... 33,249 99.86 32,140 99.68
Consumer loans.................. 23 0.07 32 0.10
------- ------- ------- -----
Total fixed-rate loans...... 33,272 99.93 32,172 99.78
------- -------
Adjustable-Rate Loans:
Real estate - construction...... --- --- --- ---
Consumer loans.................. 22 0.07 73 0.22
------- ------- ------- -----
Total adjustable-rate loans. 22 0.07 73 0.22
------- ------- ------- -----
Total loans................. 33,294 100.00% 32,245 100.00%
====== ======
Less
Loans in process................ --- ---
Deferred fees and discounts..... 511 496
Allowance for loan losses....... 67 43
------- -------
Total loans receivable, net.. $32,716 $31,706
======= =======
</TABLE>
58
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at May 31, 1996. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
-----------------------------------------------------------------------
One- to Four-Family Multi-family Commercial
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- -------- ------ -------- ------ --------
(Dollars in Thousands)
Due During
Period Ending
May 31,
-------------
<C> <C> <C> <C> <C> <C> <C>
1997................... $ 31 7.43% $ 14 9.50% $ --- ---%
1998................... 323 8.37 --- --- --- ---
1999 and 2000.......... 281 9.50 269 9.91 164 10.60
2001 to 2005........... 3,676 8.78 2,981 8.85 1,857 9.47
2006 to 2020........... 21,839 8.32 3,340 9.27 1,387 9.37
2021 and following..... --- --- --- --- --- ---
-------- -------- --------
Total: $26,150 8.52% $ 6,604 9.11% $3,408 9.48%
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Real Estate
---------------------------------------------
Construction Consumer Total
-------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------- --------
(Dollars in Thousands)
Due During
Period Ending
May 31,
-------------
<C> <C> <C> <C> <C> <C> <C>
1997................... $ 243 9.25% $ 14 7.83% $ 302 9.01%
1998................... --- --- --- --- 323 8.37
1999 and 2000.......... --- --- 3 4.00 717 9.88
2001 to 2005........... --- --- --- --- 8,514 8.84
2006 to 2020........... --- --- --- --- 26,566 8.53
2021 and following..... --- --- --- --- --- ---
------- -------- -------
Total: $ 243 9.25% $ 17 7.18% $36,422 8.64%
======= ======== =======
</TABLE>
The total amount of loans due after May 31, 1997 which have
predetermined interest rates is $36.1 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is $0.
59
<PAGE>
Under federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At May
31, 1996, based on the above, the Bank's regulatory loans-to-one borrower limit
was approximately $1.8 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount. As of May 31, 1996, the largest
dollar amount outstanding or committed to be lent to one borrower or, group of
related borrowers, was 13 loans totaling $1.3 million secured by multi-family
and one- to four-family real estate. The second largest group of loans
outstanding to a group of related borrowers was 5 loans totaling $1.2 million
secured by multi-family real estate. At May 31, 1996, these loans were
performing in accordance with their terms.
All of the Bank's lending is subject to its written underwriting
standards and to loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations (consistent
with the Bank's appraisal policy). The loan applications are designed primarily
to determine the borrower's ability to repay and the more significant items on
the application are verified through use of credit reports, financial
statements, tax returns or confirmations. All loans originated by Preferred
Savings are approved by the full board.
The Bank requires title insurance or other evidence of title on its
mortgage loans, as well as fire and extended coverage casualty insurance in
amounts at least equal to the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. The Bank also
requires flood insurance to protect the property securing its interest when the
property is located in a flood plain.
One- to Four-Family Residential Real Estate Lending. The cornerstone of
the Bank's lending program is the origination of loans secured by mortgages on
owner-occupied one- to four-family residences. Historically, the Bank focused on
fixed rate loans with 15 year terms with 25 year amortization maturities.
Substantially all of the Bank's one- to four-family residential mortgage
originations are secured by properties located in its market area. All mortgage
loans originated by the Bank are retained and serviced by it.
As of May 31, 1996, $14.4 million or 54.9% the Bank's one- to
four-family residential loan portfolio was secured by properties with two or
more units. At that date, the average outstanding residential loan balance was
approximately $61,000.
The Bank currently offers fixed-rate mortgage loans with maturities
from 15 to 25 years and balloon loans with terms of up to 15 years with 25 year
amortization schedules. Interest rates and fees charged on these fixed-rate
loans are established on a regular basis according to market conditions.
See "- Originations, Purchases and Sales of Loans and Mortgage-Backed
Securities."
The Bank also originates a limited number of loans secured by
condominiums located in its market area. Condominium loans are made on
substantially the same terms as one- to four-family loans. At May 31, 1996, the
Bank had $1.3 million of condominium loans.
60
<PAGE>
Preferred Savings will generally lend up to 80% (or up to 85% on a
case-by-case basis) of the lesser of the sales price or appraised value of the
security property on owner occupied one- to four-family loans. The loan-to-value
ratio on non-owner occupied, one- to four-family loans is generally 80% of the
lesser of the sales price or appraised value of the security property. Non-owner
occupied one- to four-family loans may pose a greater risk to the Bank than
traditional owner occupied one- to four-family loans. In underwriting one- to
four-family residential real estate loans, the Bank currently evaluates both the
borrower's ability to make principal, interest and escrow payments, the value of
the property that will secure the loan and debt to income ratios.
Residential loans do not currently include prepayment penalties, are
non-assumable and do not produce negative amortization. Properties securing one-
to four-family residential real estate loans made by Preferred Savings are
appraised by independent appraisers.
Since under its current policy, the Bank originates all mortgage loans
for its portfolio, the Bank's loans are not underwritten to permit their sale in
the secondary market.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
Multi-family and Commercial Real Estate Lending. In recognition of the
many small apartment buildings and businesses in the Bank's market area and in
order to increase the interest rate sensitivity and yield of its loan portfolio
and to complement residential lending opportunities, the Bank has originated
permanent multi-family and commercial real estate loans. At May 31, 1996, the
Bank had $3.4 million in commercial real estate loans, representing 9.4% of the
total loan portfolio, and $6.6 million in multi-family loans, or 18.1% of the
Bank's total loan portfolio.
The Bank's multi-family and commercial real estate loan portfolio
includes loans secured by small apartment buildings, office buildings and other
income producing properties located in its market area.
The Bank's permanent multi-family and commercial real estate loans
generally carry a maximum term of 15 years and have fixed rates. These loans are
generally made in amounts of up to 80% of the lesser of the appraised value or
the purchase price of the property. Appraisals on properties securing
multi-family and commercial real estate loans are performed by an independent
appraiser designated by the Bank at the time the loan is made. All appraisals on
multi-family or commercial real estate loans are reviewed by the Bank's board.
In addition, the Bank's underwriting procedures require verification of the
borrower's credit history, income and financial statements, banking
relationships, references and income projections for the property. The Bank
obtains personal guarantees on these loans.
The table below sets forth, by type of security property, the number
and amount of Preferred Savings' multi-family and commercial real estate loans
at May 31, 1996. Substantially all of the loans referred to in the table below
are secured by properties located in the Bank's market area.
61
<PAGE>
<TABLE>
<CAPTION>
Outstanding Amount
Number of Principal Non-Performing
Loans Balance or of Concern
--------- ----------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Commercial real estate:
Small business facilities....................................... 18 $2,156 $211
Office buildings................................................ 5 659 ---
Apartment buildings............................................. 4 281 ---
Three flats..................................................... 3 312 ---
Multi-family........................................................ 44 6,604 299
----- ----- ------
Total multi-family and commercial real estate loans............. 74 $10,012 $ 510
===== ======= ======
</TABLE>
At May 31, 1996, the Bank's largest commercial real estate or
multi-family loan outstanding totaled $321,000 and was secured by a 15 unit
apartment complex located in Berwyn, Illinois.
Multi-family and commercial real estate loans may present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. At May 31, 1996, one
multi-family loan totaling $299,000 was delinquent 90 days or more. On the same
date, there were no commercial real estate loans delinquent 90 days or more.
Construction Lending. The Bank occasionally purchases participation
interests in construction loans to builders or developers for the construction
of small residential or commercial properties. Such properties are generally
located in Illinois. At May 31, 1996, the Bank's construction lending portfolio
consisted of a participation interest in a construction loan of $243,000 or .67%
of the Bank's real estate loan portfolio.
Consumer Lending. Federally chartered savings institutions may invest
up to 35% of assets in consumer loans (including any investment in investment
grade and commercial paper and corporate debt securities). The Bank originates
consumer loans secured by deposit accounts. At May 31, 1996, consumer loans
totaled $17,000, or 0.04% of the Bank's total loan portfolio. In order to
increase the yield and interest rate sensitivity of its loan portfolio,
management is also considering offering various types of home equity loans.
Originations and Purchases of Loans
Real estate loans are originated by Preferred Savings' staff through
referrals from existing customers or real estate agents.
The Bank's ability to originate loans is dependent upon customer demand
for loans in its market and to a limited extent, various marketing efforts.
Demand is affected by both the local economy and the interest rate environment.
See "- Market Area." Under current policy, all loans originated by Preferred
Savings are retained in the Bank's portfolio. See "Management's
62
<PAGE>
Discussion and Analysis of Financial Condition and Results of Operations -
Asset/Liability Management."
In the past, the Bank has purchased participation interests in
construction loans originated by a local financial institution. All such loans
are secured. At May 31, 1996, the Bank had $243,000 of participation interests
in construction loans. The Bank intends to continue to purchase such loans in
the future, subject to market conditions.
From time to time, in order to supplement loan originations, the Bank
has acquired mortgage-backed and other securities which are held, depending on
the investment intent, in the "held-to-maturity" or "available-for-sale"
portfolios. See "- Investment Activities - Mortgage-Backed Securities" and Note
2 to the Notes to Consolidated Financial Statements.
The following table shows the loan origination, purchase, sale and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Five Months Ended Year Ended 10 Months
May 31, December 31, Ended
------------------------ ----------------------- December 31,
1996 1995 1995 1994 1993
------------------------ ----------------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Originations by type:
Real estate - one- to four-family........... $ 2,499 $ 2,255 $ 5,162 $ 6,951 $ 6,050
- multi-family.................. 1,250 421 821 1,180 ---
- commercial.................... 1,031 445 1,270 1,315 1,080
Passbook.................................... 9 2 9 12 40
-------- -------- -------- -------- --------
Total loans originated................. 4,789 3,123 7,262 9,458 7,170
-------- -------- -------- -------- --------
Purchases:
Real estate - construction.................. --- --- 551 --- ---
Sales and Repayments:
Principal repayments........................ 3,576 1,784 6,172 7,327 9,028
Increase (decrease) in other items, net(1).. (36) 20 (6) (62) (37)
-------- -------- -------- -------- --------
Net increase (decrease)................ $ 1,177 $ 1,359 $ 1,635 $ 2,069 $(1,895)
======== ======== ======== ======== ========
</TABLE>
(1) Other items consist primarily of deferred fees and the allowance for loan
losses.
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cure the delinquency by contacting the
borrower. Generally, Bank personnel work with the delinquent borrower on a case
by case basis to solve the delinquency. Generally, a late notice is sent on all
delinquent loans over 20 days delinquent. Additional written and verbal contacts
may be made with the borrower between 30 and 60 days after the due date. If the
loan is contractually delinquent for 90 days, the Bank may institute appropriate
action to foreclose on the property. If a borrower agrees to a payment plan to
bring a delinquent loan current, a designated lending officer monitors the loan
for compliance with the payment agreement. If foreclosed, the property is sold
at public sale and may be purchased by the Bank.
63
<PAGE>
Real estate acquired by Preferred Savings as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired by foreclosure or deed in lieu of foreclosure,
it is recorded at the lower of cost or estimated fair value less estimated
selling costs. After acquisition, all costs incurred in maintaining the property
are expensed. Costs relating to the development and improvement of the property,
however, are capitalized. The Bank had no real estate acquired as a result of
foreclosure during the last five years.
64
<PAGE>
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at May 31, 1996.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
----------------------------- ---------------------------- -----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family........... 9 $ 707 2.70% 3 $ 217 0.83% 7 $ 600 2.29%
Multi-family.................. --- --- --- 1 299 4.53 --- --- ---
Commercial real estate........ 1 211 6.19 --- --- --- --- --- ---
Construction or development... --- --- --- --- --- --- --- --- ---
Consumer...................... --- --- --- --- --- --- --- --- ---
Commercial business........... --- --- --- --- --- --- --- --- ---
Consumer........................ --- --- --- --- --- --- --- --- ---
Commercial business............. --- --- --- --- --- --- --- --- ---
Total...................... 10 $ 918 2.27% 4 $ 516 1.42% 7 $ 600 1.65%
==== ====== ==== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
Total Delinquent Loans
--------------------------------
Percent
of Loan
Number Amount Category
------ ------ --------
<S> <C> <C> <C>
Real Estate:
One- to four-family........... 19 $ 1,524 5.83%
Multi-family.................. 1 299 4.53
Commercial real estate........ 1 211 6.19
Construction or development... --- --- ---
Consumer...................... --- --- ---
Commercial business........... --- --- ---
Consumer........................ --- --- ---
Commercial business............. --- --- ---
Total...................... 21 $2,034 7.78%
==== ======
</TABLE>
65
<PAGE>
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the Bank will sustain some
loss if the deficiencies are not corrected. Doubtful assets have the weaknesses
of Substandard assets, with the additional characteristics that the weaknesses
make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high possibility of loss. An
asset classified Loss is considered uncollectible and of such little value that
continuance as an asset on the balance sheet of the institution is not
warranted. Assets classified as Substandard or Doubtful require the institution
to establish prudent general allowances for loan losses. If an asset or portion
thereof is classified as a loss, the institution charges off such amount against
the loan loss allowance. If an institution does not agree with an examiner's
classification of an asset, it may appeal this determination to the District
Director of the OTS.
On the basis of management's review of its assets, at May 31, 1996, the
Bank had classified a total of $600,000 of its loans consisting of one- to
four-family residential real estate as follows:
May 31, 1996
(In Thousands)
------------
Substandard..................................... $600
Doubtful........................................ ---
Loss............................................ ---
----
Total...................................... $600
====
At May 31, 1996, Preferred Savings' classified assets consist of the
non-performing loans. As of the date hereof, these asset classifications are
materially consistent with those of the OTS and FDIC. When loans are classified
as a "loss," they are charged off against the loan loss allowance.
66
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. For all years
presented, the Bank has had no troubled debt restructurings (which involve
forgiving a portion of interest or principal on any loans or making loans at a
rate materially less than that of market rates). Foreclosed assets include
assets acquired in settlement of loans.
<TABLE>
<CAPTION>
December 31,
May 31, --------------------------------- February 28, February 29,
1996 1995 1994 1993 1993 1992
---------- ---------- ----------- ---------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans over 90 days delinquent:
One- to four-family....................... $ 584 $ 775 $ 334 $ 170 $ 106 $ 207
Multi-family.............................. --- --- --- --- --- ---
Commercial real estate.................... --- --- --- --- --- ---
Commercial business....................... --- --- --- --- --- ---
--------- --------- --------- --------- --------- ---------
Total.................................. 584 775 334 170 106 207
--------- --------- --------- --------- --------- ---------
Accruing loans delinquent more than 90 days. 16 --- --- 6 --- ---
Foreclosed assets........................... --- --- --- --- --- ---
Total non-performing assets................. $ 600 $ 775 $ 334 $ 176 $ 106 $ 207
======== ======== ========= ========= ========= =========
Total as a percentage of total assets....... 1.09% 1.45% 0.65% 0.33% 0.21% 0.45%
======= ======= ======== ======== ======== ========
</TABLE>
For the year ended December 31, 1995 and for the five months ended May
31, 1996, gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms amounted
to $69,000 and $22,000, respectively. The amounts that were included in interest
income on such loans were $58,000 and $14,000 for the year ended December 31,
1995, and for the five months ended May 31, 1996, respectively.
At May 31, 1996, the Bank's non-accruing loans greater than 90 days
included 7 loans secured by single-family real estate totaling $600,000.
Other Assets of Concern. In addition to the non-performing assets set
forth in the table above, as of May 31, 1996, there were $510,000 in loans or
other assets with respect to which known information about the possible credit
problems of the borrowers or the cash flows of the security properties have
caused management to have concerns as to the ability of the borrowers to comply
with present loan repayment terms and which may result in the future inclusion
of such items in the non-performing asset categories.
The following is a description of all other assets of concern over
$250,000.
In October 1992, the Bank originated a $322,000 loan secured by a 16
unit apartment building located in Cicero, Illinois. Due to financial
difficulties of the borrower, the loan became delinquent in December 1995. At
May 31, 1996, the loan was 75 days delinquent and had an outstanding balance of
$299,000. The Bank is continuing to closely monitor this loan.
Management considers the Bank's non-performing and "of concern" assets
in establishing its allowance for loan losses.
67
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Five Months Year Ended
Ended May 31, December 31,
---------------------- ---------------------
1996 1995 1995 1994
-------- -------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period....................... $136 $136 $136 $ 94
Charge-offs.......................................... --- --- --- ---
Recoveries........................................... --- --- --- ---
Net charge-offs...................................... --- --- --- ---
Additions charged to operations...................... 50 --- --- 42
------ ----- ----- -----
Balance at end of period............................. $186 $136 $136 $136
====== ===== ===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period......... ---% ---% ---% ---%
===== ==== ==== ====
Ratio of net charge-offs during the period to
average non-performing assets....................... ---% ---% ---% ---%
===== ==== ==== ====
Ratio of allowance for loan losses to total loans.... 0.51% 0.38% 0.39% 0.41%
===== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
10 Months Year Ended
Ended ----------------------------
December 31, February 28, February 29,
1993 1993 1992
-------------- ------------ -------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period....................... $ 67 $ 43 $ 19
Charge-offs.......................................... --- --- ---
Recoveries........................................... --- --- ---
Net charge-offs...................................... --- --- ---
Additions charged to operations...................... 27 24 24
----- ----- -----
Balance at end of period............................. $ 94 $ 67 $ 43
===== ===== =====
Ratio of net charge-offs during the period to
average loans outstanding during the period......... ---% ---% ---%
==== ==== ====
Ratio of net charge-offs during the period to
average non-performing assets....................... ---% ---% ---%
==== ==== ====
Ratio of allowance for loan losses to total loans.... 0.30% 0.20% 0.13%
==== ==== ====
</TABLE>
68
<PAGE>
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
May 31, 1996 1995
------------------------------------ ----------------------------------
Percent of Percent of
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- --------- --------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family... $ 26 $26,150 71.80% $ 26 $25,858 73.44%
Multi-family.......... 17 6,604 18.13 15 6,094 17.31
Commercial real estate 8 3,408 9.36 7 2,953 8.39
Construction.......... 1 243 .67 1 286 .81
Consumer.............. --- 17 .04 --- 18 .05
Unallocated........... 134 --- --- 87 --- ---
----- ------- ------ ---- ------- ------
Total............ $186 $36,422 100.00% $136 $35,209 100.00%
==== ======= ====== ==== ======= ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1994 1993
----------------------------------- ----------------------------------
Percent of Percent of
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family... $ 25 $24,711 73.62% $23 $23,403 74.45%
Multi-family.......... 15 5,929 17.66 14 5,452 17.34
Commercial real estate 7 2,904 8.65 6 2,546 8.10
Construction.......... --- --- --- --- --- ---
Consumer.............. --- 24 .07 --- 35 .11
Unallocated........... 89 --- --- 51 --- ---
---- ------- ------ --- ------- ------
Total............ $136 $33,568 100.00% $94 $31,436 100.00%
==== ======= ====== === ======= ======
</TABLE>
<TABLE>
<CAPTION>
February 28, 1993 February 29, 1992
----------------------------------- ----------------------------------
Percent of Percent of
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- -------- --------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family... $25 $25,411 76.32% $25 $24,670 76.51%
Multi-family.......... 15 6,157 18.49 15 6,046 18.75
Commercial real estate 4 1,681 5.05 3 1,424 4.42
Construction.......... --- --- --- --- --- ---
Consumer.............. --- 45 .14 --- 105 .32
Unallocated........... 23 --- --- --- --- ---
--- ------- ------ --- ------- ------
Total............ $67 $33,294 100.00% $43 $32,245 100.00%
=== ======= ====== === ======= ======
</TABLE>
69
<PAGE>
The allowance for loan losses is established through a provision for
loan losses charged to earnings based on management's evaluation of the risk
inherent in its entire loan portfolio. Such evaluation, which includes a review
of all loans of which full collectibility may not be reasonably assured,
considers the market value of the underlying collateral, growth and composition
of the loan portfolio, delinquency trends, adverse situations that may affect
the borrower's ability to repay, prevailing and projected economic conditions
and other factors that warrant recognition in providing for an adequate
allowance for loan losses. In determining the general reserves under these
policies, historical charge-offs and recoveries, changes in the mix and levels
of the various types of loans, net realizable values, the current and
prospective loan portfolio and current economic conditions are considered.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the final determination.
Investment Activities
General. Preferred Savings must maintain minimum levels of investments
and other assets that qualify as liquid assets under OTS regulations. Liquidity
may increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on loans.
Historically, Preferred Savings has maintained liquid assets at levels
significantly above the minimum requirements imposed by the OTS regulations and
above levels believed adequate to meet the requirements of normal operations,
including potential deposit outflows. At May 31, 1996, Preferred Savings'
liquidity ratio for regulatory purposes was 30.5%. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Asset/Liability
Management" and "- Liquidity and Capital Resources."
Generally, the investment policy of Preferred Savings is to invest
funds among categories of investments and maturities based upon the Bank's
asset/liability management policies, investment quality, loan and deposit
volume, liquidity needs and performance objectives. Prior to December 31, 1993,
the Bank recorded its investments in its investment securities portfolio at the
lower of cost or current market value if held for sale or at amortized cost if
held for investment. Unrealized declines in the market value of securities held
to maturity were not reflected in the financial statements; however, unrealized
losses in the market value of securities held for sale were recorded as a charge
to current earnings. Effective December 31, 1993, Preferred Savings adopted SFAS
115. As required by SFAS 115, securities are classified into three categories:
trading, held-to-maturity and available-for-sale. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and are reported at fair value with unrealized gains and
losses included in trading account activities in the statement of operations.
Securities that Preferred Savings has the positive intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost. All
other securities not classified as trading or held-to-maturity are classified as
available-for-sale. At May 31, 1996, Preferred Savings had no securities which
were classified as trading and no securities classified as held-to-maturity.
Available-for-sale securities are reported at fair value with unrealized gains
and losses included, on an after-tax basis, in a separate component of retained
earnings. At May 31, 1996, $11.1 million of securities and $3.9 million of
mortgage-backed securities were classified as available-for-sale.
70
<PAGE>
Securities. Federally chartered savings institutions have the authority
to invest in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers' acceptances,
repurchase agreements and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest their assets in
commercial paper, investment grade corporate debt securities and mutual funds
whose assets conform to the investments that a federally chartered savings
institution is otherwise authorized to make directly.
In order to supplement loan volume and to increase holding of its short
and medium term assets, the Bank invests in liquidity investments and in
high-quality investments, such as U.S. Treasury and agency obligations. At May
31, 1996 and December 31, 1995, the Bank's securities portfolio totaled $11.1
million and $9.7 million, respectively. At May 31, 1996, the Bank did not own
any investment securities of a single issuer which exceeded 10% of the Bank's
retained earnings, other than U.S. government securities and federal agency
obligations. See Note 2 of the Notes to the Consolidated Financial Statements
for additional information regarding the Bank's securities portfolio.
71
<PAGE>
The following table sets forth the composition of the Bank's securities
and other interest-earning assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------
May 31, 1996 1995
-------------------------- ----------------------------
Carrying % of Carrying % of
Value Total Value Total
--------- ------- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Securities held-to-maturity:
U.S. government securities......................... $ --- ---% $ --- ---%
Securities available-for-sale:
U.S. government securities......................... 2,511 22.71 3,527 36.22
Federal agency obligations......................... 8,547 77.29 6,212 63.78
Marketable equity securities....................... --- --- --- ---
------- ------ ------- ------
Total securities................................ $11,058 100.00% $9,739 100.00%
======= ====== ====== ======
Average remaining life of securities................. 2.66 yrs. 3.97 yrs.
Other interest-earning assets:
Interest-bearing deposits with other banks......... $ 2,758 88.40% $ 3,086 90.05%
Repurchase agreements.............................. --- --- --- ---
Money market mutual finds.......................... --- --- --- ---
Federal funds sold................................. --- --- --- ---
Federal Home Loan Bank Stock....................... 362 11.60 341 9.95
------- ------ ------- ------
Total........................................... $ 3,120 100.00% $ 3,427 100.00%
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1994 1993
------------------------ -----------------------
Carrying % of Carrying % of
Value Total Value Total
-------- ----- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Securities held-to-maturity:
U.S. government securities......................... $ 201 2.67% $ 403 4.27%
Securities available-for-sale:
U.S. government securities......................... 4,880 64.84 2,999 31.74
Federal agency obligations......................... 2,445 32.49 --- ---
Marketable equity securities....................... --- --- 6,045 63.99
------ ------ ------- ------
Total securities................................ $7,526 100.00% $ 9,447 100.00%
====== ====== ======= ======
Average remaining life of securities................. 2.00 yrs. 1.41 yrs.(1)
Other interest-earning assets:
Interest-bearing deposits with other banks......... $ 6,060 95.15% $ 7,151 72.13%
Repurchase agreements.............................. --- --- 750 7.57
Money market mutual finds.......................... --- --- 165 1.66
Federal funds sold................................. --- --- 1,500 15.13
Federal Home Loan Bank Stock....................... 309 4.85 348 3.51
------- ------ ------- ------
Total........................................... $ 6,369 100.00% $ 9,914 100.00%
======= ====== ======= ======
</TABLE>
72
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
May 31, 1996
-----------------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
-------------- -------------- -------------- -------------- --------------------------
Carrying Value Carrying Value Carrying Value Carrying Value Carrying Value Fair Value
-------------- -------------- -------------- -------------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities.... $ 1,515 $ 996 $ --- $ --- $ 2,511 $ 2,511
Federal agency obligations.... 4,255 3,405 887 --- 8,547 8,547
------- ------- ------- ------- -------- --------
Total investment securities... $ 5,770 $ 4,401 $ 887 $ --- $11,058 $11,058
======= ======= ====== ======= ======= =======
Weighted average yield........ 5.76% 5.61% 18.72% ---% 6.74%
</TABLE>
See Note 2 of the Notes to the Consolidated Financial Statements for a
discussion of the Bank's securities portfolio.
Mortgage-Backed Securities. In order to supplement loan and investment
activities, the Bank invests in mortgage-backed and related securities.
Consistent with its asset/liability management strategy, at May 31,
1996, $1.7 million, or 42.7% of Preferred Savings' mortgage-backed securities
have adjustable interest rates. For information regarding the Bank's
mortgage-backed securities portfolio, see Note 2 of the Notes to the
Consolidated Financial Statements.
As of May 31, 1996, all of the mortgage-backed securities owned by the
Bank were issued, insured or guaranteed either directly or indirectly by a
federal agency. As a result, the Bank did not have any mortgage-backed or
related securities in excess of 10% of retained earnings except for federal
agency obligations.
To assess price volatility, the Federal Financial Institutions
Examination Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of mortgage derivative securities. This policy, which has been
adopted by the OTS, requires the Bank to annually test its CMOs and other
mortgage-related securities to determine whether they are high-risk or
nonhigh-risk securities. Mortgage derivative products with an average life or
price volatility in excess of a benchmark 30-year, mortgage-backed, pass-through
security are considered high-risk mortgage securities. Under the policy, savings
institutions may generally only invest in high-risk mortgage securities in order
to reduce interest rate risk. In addition, all high-risk mortgage securities
acquired after February 9, 1992 which are classified as high risk at the time of
purchase must be carried in the institution's trading account or as assets held
for sale. At May 31, 1996, none of the Bank's mortgage-backed securities were
classified as "high-risk."
73
<PAGE>
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
May 31, 1996
--------------------------
Carrying % of
Value Total
-------- -----
<S> <C> <C>
Mortgage-backed securities held to maturity:
FNMA............................................. $ --- ---%
Mortgage-backed securities available for sale:
GNMA............................................. 706 18.18
FNMA............................................. 2,223 57.23
FHLMC............................................ 955 24.59
------ ------
Total mortgage-backed securities.............. $3,884 100.00%
====== ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------
1995 1994 1993
------------------------- -------------------------- ----------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------- ----- -------- ----- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities held to maturity:
FNMA............................................. $ --- ---% $1,792 51.41% $2,026 100.00%
Mortgage-backed securities available for sale:
GNMA............................................. 766 18.15 773 22.17 --- ---
FNMA............................................. 2,426 57.49 --- --- --- ---
FHLMC............................................ 1,028 24.36 921 26.42 --- ---
------ ------ ------ ------ ------ ------
Total mortgage-backed securities.............. $4,220 100.00% $3,486 100.00% $2,026 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
74
<PAGE>
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at May 31, 1996.
<TABLE>
<CAPTION>
Due In May 31,
----------------------------------------------------- 1996
Less than 1 to 5 to 10 Over Balance
1 Year 5 Years Years 10 Years Outstanding
------------- --------------------------------------- ------------
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation........... $ --- $ --- $ --- $ 955 $ 955
Federal National Mortgage Association............ --- 1,397 826 --- 2,223
Government National Mortgage Association......... --- 706 --- --- 706
------- ------- -------- -------- -------
Total....................................... $ --- $2,103 $ 826 $ 955 $3,884
======= ====== ====== ====== ======
</TABLE>
At May 31, 1996, the dollar amount of all mortgage-backed securities
due after May 31, 1997, which had fixed interest rates and floating or
adjustable rates totaled $2.2 million and $1.7 million, respectively.
The market values of a portion of the Bank's mortgage-backed securities
held-to-maturity have been from time to time lower than their carrying values.
However, for financial reporting purposes, such declines in value are considered
to be temporary in nature since they have been due to changes in interest rates
rather than credit concerns. See Note 2 of the Notes to the Consolidated
Financial Statements.
The following table shows mortgage-backed securities purchase, sale and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Five Months Ended Year Ended 10 Months
May 31, December 31, Ended
------------------------- ---------------------- December 31,
1996 1995 1995 1994 1993
----------- ------------ --------- ---------- ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Purchases:
Adjustable-rate(1)..................... $ --- $ --- $ 1,023 $ 2,047 $ ---
Fixed-rate(1).......................... --- --- 917 --- 2,026
----- ----- ------- ------- -------
Total purchases................. --- --- 1,940 2,047 2,026
Sales:
Adjustable-rate(1)..................... --- --- 814 --- ---
Repayments:
Principal repayments................... 295 200 476 437 ---
Other increase (decrease).............. (41) 95 84 (150) ---
----- ----- ------- ------- -------
Net increase (decrease)......... $(336) $(105) $ 734 $ 1,460 $ 2,026
===== ===== ======= ======= =======
</TABLE>
- ----------
(1) Consists of pass-through securities.
75
<PAGE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, payments
(including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations.
Deposits. Preferred Savings offers deposit accounts having a wide range
of interest rates and terms. The Bank's deposits consist of passbook, money
market and various certificate accounts. The Bank does not currently offer
transaction accounts but may consider offering such accounts in the future
depending on the level of consumer demand for such accounts in its market area.
The Bank only solicits deposits in its market area and does not currently use
brokers to obtain deposits.
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. As a result, as customers have become more interest rate
conscious, the Bank has become more susceptible to short-term fluctuations in
deposit flows. In the future, the Bank may offer transaction accounts to meet
the needs of changing customers as well as increase its deposit promotion and
advertising.
Management believes that the "core" portion of the Bank's regular
savings and money market accounts can have a lower cost and be more resistant to
interest rate changes than certificate accounts. These accounts decreased $1.7
million during fiscal 1995. Although a majority of such funds were believed by
management to have been reinvested in certificate accounts. However, management
believes that this outflow represents the most interest rate sensitive portion
of such accounts and that the majority of the remaining portion of the Bank's
regular savings and money market accounts are relatively stable sources of
deposits. The Bank continues to utilize customer service and marketing
initiatives in an effort to maintain and increase the volume of such deposits.
However, the ability of the Bank to attract and maintain these accounts (as well
as certificate accounts) has been and will be affected by market conditions.
76
<PAGE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Five Months Ended Year Ended 10 Months
May 31, December 31, Ended
----------------------- ------------------------- December 31,
1996 1995 1995 1994 1993
---------- ----------- ----------- ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Opening balance............................. $ 41,047 $ 40,057 $ 40,057 $ 41,139 $ 40,363
Deposits.................................... 11,721 9,566 24,295 24,604 15,841
Withdrawals................................. (11,322) (10,238) (24,759) (26,856) (16,193)
Interest credited........................... 499 403 1,454 1,170 1,128
-------- -------- -------- -------- --------
Ending balance.............................. $ 41,945 $ 39,788 $ 41,047 $ 40,057 $ 41,139
======== ======== ======== ======== ========
Net increase (decrease)..................... $ 898 $ (269) $ 990 $ (1,082) $ 776
======== ======== ======== ======== ========
Percent increase (decrease)................. 2.19% (0.67)% 2.47% (2.63)% 1.92%
-------- -------- -------- -------- --------
</TABLE>
77
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank as of the dates
indicated.
<TABLE>
<CAPTION>
May 31, December 31,
-------------------------- --------------------------
1996 1995
----------------------------------------------------------
Percent Percent
Amount of Total Amount of Total
-------- --------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Transactions and Savings Deposits:
Passbook Accounts - 3.00%(1)................ $19,604 46.74% $19,409 47.29%
Money Market Accounts - 3.25%(1)............ 1,998 4.76 1,601 3.90
------- ------ ------- ------
Total Non-Certificates...................... 21,602 51.50 21,010 51.19
------- ------ ------- ------
Certificates:
0.00 - 3.99%.............................. 4 0.01 49 0.12
4.00 - 5.99%.............................. 18,570 44.27 16,222 39.52
6.00 - 7.99%.............................. 1,769 4.22 3,766 9.17
8.00 and over.............................. --- --- --- ---
------- ------ ------- ------
Total Certificates.......................... 20,343 48.50 20,037 48.81
------- ------ ------- ------
Total Deposits.............................. $41,945 100.00% $41,047 100.00%
======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1994 1993
-------------------------------------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
<S> <C> <C> <C> <C>
Transactions and Savings Deposits:
Passbook Accounts - 3.00%(1)................ $20,750 51.80% $22,989 55.88%
Money Market Accounts - 3.25%(1)............ 1,924 4.80 2,029 4.93
------- ------ ------- ------
Total Non-Certificates...................... 22,674 56.60 25,018 60.81
------- ------ ------- ------
Certificates:
0.00 - 3.99%.............................. 5,130 12.81 12,935 31.44
4.00 - 5.99%.............................. 11,669 29.13 2,343 5.70
6.00 - 7.99%.............................. 494 1.23 668 1.62
8.00 and over.............................. 90 .23 175 .43
------- ------ ------- ------
Total Certificates.......................... 17,383 43.40 16,121 39.19
------- ------ ------- ------
Total Deposits.............................. $40,057 100.00% $41,139 100.00%
======= ====== ======= ======
</TABLE>
- ----------
(1) At May 31, 1996.
78
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of May 31, 1996.
<TABLE>
<CAPTION>
Less Than 1 to 2 2 to 3 3 to 4 4 to 5
1 Year Years Years Years Years Total
---------- ------- --------- --------- -------- ---------
(Dollars in Thousands)
<C> <C> <C> <C> <C> <C> <C>
3.00 - 3.99%.......... $ 4 $ --- $ --- $ --- $ --- $ 4
4.00 - 4.99%.......... 743 --- --- --- --- 743
5.00 - 5.99%.......... 15,752 1,079 847 11 138 17,827
6.00 - 6.99%.......... 900 410 --- 90 111 1,511
7.00 - 7.99%.......... 160 --- --- 98 --- 258
------- ------- -------- -------- -------- -------
$17,559 $ 1,489 $ 847 $ 199 $ 249 $20,343
======= ======= ======== ======== ======== =======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of May 31, 1996.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
-------- -------- --------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit of less than $100,000.... $ 6,266 $ 6,481 $ 3,899 $ 2,684 $19,330
Certificates of deposit of $100,000 or more...... 610 203 100 100 1,013
------- ------- ------- ------- -------
Total certificates of deposit.................... $ 6,876 $ 6,684 $ 3,999 $ 2,784 $20,343
======= ======= ======= ======= =======
</TABLE>
For additional information regarding the composition of the Bank's
deposits, see Note 6 of the Notes to the Consolidated Financial Statements.
Borrowings. In the past, the Bank has not utilized borrowings to fund
its operations. Preferred Savings' available sources of funds include advances
from the FHLB of Chicago and other borrowings. As a member of the FHLB of
Chicago, the Bank is required to own capital stock in the FHLB of Chicago and is
authorized to apply for advances from the FHLB of Chicago. Each FHLB credit
program has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB of Chicago may prescribe the acceptable uses for these
advances, as well as limitations on the size of the advances and repayment
provisions.
Subsidiary Activities
As a federally chartered savings bank, Preferred Savings is permitted
by OTS regulations to invest up to 2% of its assets in the stock of, or loans
to, service corporation subsidiaries, and may invest an additional 1% of its
assets in service corporations where such additional funds are used for
inner-city or community development purposes. In addition to investments in
service corporations, federal institutions are permitted to invest an unlimited
amount in operating
79
<PAGE>
subsidiaries engaged solely in activities which a federal savings association
may engage in directly.
At May 31, 1996, Preferred Savings had one wholly owned service
corporation, Preferred Service Corporation (the "Subsidiary"). The Subsidiary,
an Illinois corporation, was incorporated in 1969 and sells casualty, disability
and credit life insurance on an agency basis.
The Subsidiary had nominal net income for the five months ended May 31,
1996 and the year ended December 31, 1995, respectively. At May 31, 1996,
Preferred Savings' investment in the Subsidiary totaled $4,300.
Competition
Preferred Savings faces strong competition both in originating real
estate loans and in attracting deposits. Competition in originating loans comes
primarily from commercial banks, credit unions mortgage bankers and other
savings institutions, which also make loans secured by real estate located in
Cook County, Illinois. At May 31, 1996, there were 344 savings institutions, 551
commercial bank offices, 40 savings bank offices and 265 credit unions located
in Cook County, Illinois. Preferred Savings competes for loans principally on
the basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
Competition for those deposits is principally from commercial banks,
credit unions, mutual funds, securities firms and other savings institutions
located in the same communities. The ability of the Bank to attract and retain
deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk,
convenient locations and other factors. The Bank competes for these deposits by
offering competitive rates, convenient business hours and a customer oriented
staff. At May 31, 1996, Preferred Savings' share of deposits in its market area
was approximately .04%.
Employees
At May 31, 1996, the Bank had a total of 15 full-time employees. None
of the Bank's employees are represented by any collective bargaining agreement.
Management considers its employee relations to be good.
Properties
Preferred Savings conducts its business at its stand-alone office
located at 4800 South Pulaski Road, Chicago, Illinois. The Bank's 5,000 square
foot office was acquired in 1980 and had a net book value of $314,000 at May 31,
1996. At May 31, 1996, the total net book value of Preferred Savings' premises
and equipment (including land, building and leasehold improvements, and
furniture, fixtures and equipment) was approximately $457,000.
The Bank's depositor and borrower customer files are maintained by an
independent data processing company. The net book value of the data processing
and computer equipment utilized by the Bank at May 31, 1996 was approximately
$5,000.
80
<PAGE>
Legal Proceedings
From time to time, Preferred Savings is involved as plaintiff or
defendant in various legal proceedings arising in the normal course of its
business. While the ultimate outcome of these various legal proceedings cannot
be predicted with certainty, it is the opinion of management that the resolution
of these legal actions should not have a material effect on the Holding
Company's and Preferred Savings' financial position or results of operations.
REGULATION
General
Preferred Savings is a federally chartered savings bank, the deposits
of which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, Preferred Savings is subject to broad
federal regulation and oversight extending to all its operations. Preferred
Savings is a member of the FHLB of Chicago and is subject to certain limited
regulation by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). Prior to August, 1996, the Bank was a state chartered savings
bank and was subject to the regulation of the State of Illinois Office of Banks
and Real Estate (the "Illinois Office of Banks"). As the savings and loan
holding company of Preferred Savings, the Holding Company also is subject to
federal regulation and oversight. The purpose of the regulation of the Holding
Company and other holding companies is to protect subsidiary savings
associations. Preferred Savings is a member of the Savings Association Insurance
Fund ("SAIF") and the deposits of Preferred Savings are insured by the FDIC. As
a result, the FDIC has certain regulatory and examination authority over
Preferred Savings.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, Preferred Savings is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. Prior to its conversion to a federal charter in August 1996, the
Bank was examined and filed periodic reports with the Illinois Office of Banks.
The last regular Illinois Office of Banks, OTS and FDIC examinations of
Preferred Savings were as of May 1994, March 1992 and August 1995,
respectively. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS and the FDIC, the examiners may require Preferred Savings
to provide for higher general or specific loan loss reserves. All savings
associations are subject to a semi-annual assessment, based upon the savings
association's total assets, to fund the operations of the OTS.
The OTS also has extensive enforcement authority over all
savings institutions and their holding companies, including Preferred Savings
and the Holding Company. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and-desist
or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or
81
<PAGE>
unsound practices. Other actions or inactions may provide the basis for
enforcement action, including misleading or untimely reports filed with the OTS.
Except under certain circumstances, public disclosure of final enforcement
actions by the OTS is required.
In addition, the investment, lending and branching authority of
Preferred Savings is prescribed by federal laws and it is prohibited from
engaging in any activities not permitted by such laws. For instance, no savings
institution may invest in non-investment grade corporate debt securities. In
addition, the permissible level of investment by federal associations in loans
secured by non-residential real property may not exceed 400% of total capital,
except with approval of the OTS. Federal savings associations are also generally
authorized to branch nationwide. Preferred Savings is in compliance with the
noted restrictions.
Preferred Savings' general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired
capital and surplus (except for loans fully secured by certain readily
marketable collateral, in which case this limit is increased to 25% of
unimpaired capital and surplus). At May 31, 1996, Preferred Savings' lending
limit under this restriction was $1.8 million. Assuming the sale of the minimum
number of shares in the Conversion at May 31, 1996, that limit would be
increased to $2.9 million. Preferred Savings is in compliance with the
loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
institution to further enforcement action. The OTS and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC
Preferred Savings is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while
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institutions that are less than adequately capitalized (i.e., core or Tier 1
risk-based capital ratios of less than 4% or a risk-based capital ratio of less
than 8%) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions will be made by the
FDIC for each semi-annual assessment period. For the first six months of 1995,
the assessment schedule for Bank Insurance Fund ("BIF") members and SAIF members
ranged from .23% to .31% of deposits.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF-insured deposits.
As a result of the BIF reaching its statutory reserve ratio the FDIC revised the
premium schedule for BIF-insured institutions to provide a range of .04% to .31%
of deposits. The revisions became effective in the third quarter of 1995. In
addition, the BIF rates were further revised, effective January 1996, to provide
a range of 0% to .27% with a minimum annual assessment of $2,000. The SAIF
rates, however, were not adjusted. As a result of these revisions, BIF members
will generally pay lower premiums.
The SAIF is not expected to attain the designated reserve ratio until
the year 2002 due to the shrinking deposit base for SAIF assessments and the
requirement that SAIF premiums be used to make the interest payments on bonds
issued by the Financing Corporation ("FICO") in order to finance the costs of
resolving thrift failures in the 1980s. As a result, SAIF members will generally
be subject to higher deposit insurance premiums than BIF members until, all
things being equal, the SAIF attains the required reserve ratio.
In order to help eliminate this disparity and any competitive disadvantage
due to disparate deposit insurance premium schedules, legislation to
recapitalize the SAIF was enacted in September 1996. The legislation provides
for a one-time assessment to be imposed on all deposits assessed at the SAIF
rates, as of March 31, 1995, in order to recapitalize the SAIF. It also provides
for the merger of the BIF and the SAIF on January 1, 1999 provided no savings
associations then exist. The special assessment rate is currently anticipated to
range between .65% and .70% and will be payable by November 29, 1996.
Accordingly, this special assessment will increase noninterest expense and
adversely affect the Bank's results of operations. Following the special
assessment, and depending upon the Bank's capital level and supervisory rating,
the Bank's deposit insurance premiums could decrease significantly for future
periods.
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Regulatory Capital Requirements
Federally insured savings associations, such as Preferred Savings, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual Preferred Savings stock and related income. In addition,
all intangible assets, other than a limited amount of purchased mortgage
servicing rights, must be deducted from tangible capital for calculating
compliance with the requirement. At May 31, 1996, Preferred Savings did not have
any intangible assets recorded as assets on its financial statements.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
Assuming the Bank would have been subject to the OTS capital
requirements, at May 31, 1996, Preferred Savings had tangible capital of $12.1
million, or 22.1% of adjusted total assets, which is approximately $11.3 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date. On a pro forma basis, after giving effect to the sale of the minimum,
midpoint and maximum number of shares of Common Stock offered in the Conversion
and investment of 50% of the net proceeds in assets not excluded for tangible
capital purposes, Preferred Savings would have had tangible capital equal to
28.7%, 29.8% and 30.8%, respectively, of adjusted total assets at May 31, 1996,
which is $16.3 million, $17.2 million and $18.1 million, respectively, above the
requirement.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At May 31, 1996, Preferred
Savings had no intangibles which were subject to these tests.
At May 31, 1996, Preferred Savings had core capital equal to $12.1
million, or 22.1% of adjusted total assets, which is $10.5 million above the
minimum leverage ratio requirement of 3% as in effect on that date. On a pro
forma basis, after giving effect to the sale of the minimum, midpoint and
maximum number of shares of Common Stock offered in the Conversion and
investment of 50% of the net proceeds in assets not excluded from core capital,
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Preferred Savings would have had core capital equal to 28.7%, 29.8% and 30.8%,
respectively, of adjusted total assets at May 31, 1996, which is $15.4 million,
$16.3 million and $17.2 million, respectively, above the requirement.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At May 31, 1996, Preferred Savings
had $186,000 of general loss reserves that qualify as supplementary capital,
which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Preferred Savings had no
such exclusions from capital and assets at May 31, 1996.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. The rule will not become effective until the OTS evaluates the process
by which savings associations may appeal an interest rate risk deduction
determination. It is uncertain as to when this evaluation may be completed. Any
savings association with less than $300 million in assets and a total capital
ratio in excess of 12% is exempt from this requirement unless the OTS determines
otherwise. Based upon its capital level and assets size at May 31, 1996,
Preferred Savings would qualify for an exemption from the requirement.
On May 31, 1996, Preferred Savings had total capital of $12.3 million
(including $12.1 million in core capital and $186,000 in qualifying
supplementary capital) and risk-weighted assets of $21.5 million; or total
capital of 57.2% of risk-weighted assets. This amount was $10.6 million above
the 8% requirement in effect on that date. On a pro forma basis, after
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giving effect to the sale of the minimum, midpoint and maximum number of shares
of Common Stock offered in the Conversion, the infusion to Preferred Savings of
50% of the net Conversion proceeds and the investment of those proceeds to
Preferred Savings in 20% risk-weighted government securities, Preferred Savings
would have had total capital of 77.1%, 80.6% and 84.0%, respectively, of
risk-weighted assets, which is above the current 8% requirement by $15.6
million, $16.5 million and $17.4 million, respectively.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-
based capital ratio or an 8% risk-based capital ratio). Any such association
must submit a capital restoration plan and until such plan is approved by the
OTS may not increase its assets, acquire another institution, establish a branch
or engage in any new activities, and generally may not make capital
distributions. The OTS is authorized to impose the additional restrictions that
are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Preferred Savings may have a substantial adverse effect on Preferred Savings'
operations and profitability and the value of the Common Stock purchased in the
Conversion. Holding Company stockholders do not have preemptive rights, and
therefore, if the Holding Company is directed by the OTS or the FDIC to issue
additional shares of Common Stock, such issuance may result in the dilution in
the percentage of ownership of the Holding Company of those persons purchasing
shares in the Conversion.
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Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion. See "The
Conversion--Effects of Conversion to Stock Form on Depositors and Borrowers of
the Bank" and "-Restrictions on Repurchase of Stock."
Generally, savings associations, such as Preferred Savings, that before
and after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. Preferred Savings
may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association that is a
subsidiary of a holding company may make a capital distribution with notice to
the OTS provided that it has a CAMEL 1 or 2 rating, is not of supervisory
concern, and would remain adequately capitalized (as defined in the OTS prompt
corrective action regulations) following the proposed distribution. Savings
associations that would remain adequately capitalized following the proposed
distribution but do not meet the other noted requirements must notify the OTS 30
days prior to declaring a capital distribution. The OTS stated it will generally
regard as permissible that amount of capital distributions that do not exceed
50% of the institution's excess regulatory capital plus net income to date
during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
All savings associations, including Preferred Savings, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily
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balance of net withdrawable deposit accounts and borrowings payable in one year
or less. For a discussion of what Preferred Savings includes in liquid assets,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." This liquid asset ratio
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At May 31, 1996, Preferred Savings was in compliance with
both requirements, with an overall liquid asset ratio of 30.5% and a short-term
liquid assets ratio of 18.7%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held-to-maturity,
available-for-sale or trading) with appropriate documentation. Preferred Savings
is in compliance with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including Preferred Savings, are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. This test requires a savings association to have at least 65%
of its portfolio assets (as defined by regulation) in qualified thrift
investments on a monthly average for nine out of every 12 months on a rolling
basis. Such assets primarily consist of residential housing related loans and
investments. At May 31, 1996, Preferred Savings met the test with 91.12% of its
portfolio assets in qualified thrift investments and has always met the test
since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
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has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of
Preferred Savings, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch, by
Preferred Savings. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, Preferred Savings may be required to devote additional
funds for investment and lending in its local community. Preferred Savings was
examined for CRA compliance in March 1995 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of these
transactions, such as loans to an affiliate, are restricted to a percentage of
the association's capital. Affiliates of Preferred Savings include the Holding
Company and any company which is under common control with Preferred Savings. In
addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. Preferred Savings' subsidiary is not deemed an affiliate,
however; the OTS has the discretion to treat a subsidiary of savings
associations as an affiliate on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
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Holding Company Regulation
The Holding Company will be a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Holding Company is
required to register and file reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Holding Company and its non-savings association subsidiaries which also
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Holding Company
generally is not subject to activity restrictions. If the Holding Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Holding Company and any of its subsidiaries (other than Preferred Savings or
any other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If Preferred Savings fails the QTL test, the Holding Company must
obtain the approval of the OTS prior to continuing after such failure, directly
or through its other subsidiaries, any business activity other than those
approved for multiple savings and loan holding companies or their subsidiaries.
In addition, within one year of such failure the Holding Company must register
as, and will become subject to, the restrictions applicable to bank holding
companies. The activities authorized for a bank holding company are more limited
than are the activities authorized for a unitary or multiple savings and loan
holding company. See "- Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Holding Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
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Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At May 31, 1996, Preferred Savings was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "-Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
Preferred Savings is a member of the FHLB of Chicago, which is one of
12 regional FHLBs, that administers the home financing credit function of
savings associations. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing. The aggregate amount of advances cannot exceed 20 times the amount of
FHLB stock held by the institutions.
As a member, Preferred Savings is required to purchase and maintain
stock in the FHLB of Chicago. At May 31, 1996, Preferred Savings had $362,000 in
FHLB stock, which was in compliance with this requirement. In past years,
Preferred Savings has received substantial dividends on its FHLB stock. Over the
past five calendar years such dividends have averaged 6.1% and were 6.2% for
calendar year 1995. As a result of their holdings, the Bank could borrow up to
$7.2 million from the FHLB.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Preferred Savings' FHLB stock may result in a
corresponding reduction in Preferred Savings' capital.
For the year ended December 31, 1995, dividends paid by the FHLB of
Chicago to Preferred Savings totaled $22,000, which constitute a $3,000 increase
from the amount of dividends received in calendar year 1994. The $10,000
dividend received for the five months ended May 31, 1996 reflects an annualized
rate of 6.6%, or 0.4% below the rate for calendar 1995.
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Federal and State Taxation
Savings associations such as Preferred Savings that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are
permitted to establish reserves for bad debts and to make annual additions
thereto which may, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes. The amount of the bad
debt reserve deduction for "non-qualifying loans" is computed under the
experience method. The amount of the bad debt reserve deduction for "qualifying
real property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four year period. No representation
can be made as to whether Preferred Savings will meet the 60% test for
subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At May
31, 1996, the 6% limitation did not restrict the percentage bad debt deduction
available to Preferred Savings, however, the 12% limitation restricted the bad
debt deduction.
In August 1996, legislation was enacted that repeals the reserve method
of accounting used by many thrifts to calculate their bad debt reserve for
federal income tax purposes. As a result, small thrifts such as the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the experience method for post-1987 tax years. The legislation
also requires thrifts to account for bad debts for federal income tax purposes
on the same basis as commercial banks for tax years beginning after December 31,
1995. The
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recapture will occur over a six-year period, the commencement of which will be
delayed until the first taxable year beginning after December 31, 1997, provided
the institution meets certain residential lending requirements. The management
of the Company does not believe that the legislation will have a material impact
on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as Preferred Savings, generally are subject to a minimum tax.
An alternative minimum tax is imposed at a minimum tax rate of 20% on
alternative minimum taxable income, which is the sum of a corporation's regular
taxable income (with certain adjustments) and tax preference items, less any
available exemption. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax and net operating losses can offset
no more than 90% of alternative minimum taxable income. For taxable years
beginning after 1986 and before 1996, corporations, including savings
associations such as Preferred Savings, are also subject to an environmental tax
equal to 0.12% of the excess of alternative minimum taxable income for the
taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 1995, Preferred Savings' Excess for tax purposes
totaled approximately $1.6 million.
Preferred Savings and its subsidiary file consolidated federal income
tax returns on a fiscal year basis using the cash method of accounting. The
Holding Company intends to file consolidated federal income tax returns with
Preferred Savings and its subsidiary. Savings associations, such as Preferred
Savings, that file federal income tax returns as part of a consolidated group
are required by applicable Treasury regulations to reduce their taxable income
for purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings association members of the
consolidated group that are functionally related to the activities of the
savings association member.
Preferred Savings and its consolidated subsidiary have not been audited
by the IRS with respect to consolidated federal income tax returns in the past
five years. With respect to years examined by the IRS, either all deficiencies
have been satisfied or sufficient reserves have been established to satisfy
asserted deficiencies. In the opinion of management, any examination of still
open returns (including returns of subsidiary and predecessors of, or entities
merged into, Preferred Savings) would not result in a deficiency which could
have a material adverse effect on the financial condition of Preferred Savings
and its consolidated subsidiary.
Illinois Taxation. For Illinois income tax purposes, the Bank is taxed
at an effective rate equal to 7.18% of Illinois taxable income. For these
purposes, "Illinois Taxable Income" generally means federal taxable income,
subject to certain adjustments (including the addition of interest income on
state and municipal obligations and the exclusion of interest income on United
States Treasury obligations).
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Delaware Taxation. As a Delaware holding company, the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.
MANAGEMENT
Directors and Executive Officers of the Holding Company and the Bank
Directors and Executive Officers of the Holding Company. The Board of
Directors of the Holding Company currently consists of six members. The
directors of the Holding Company are currently comprised of the directors of the
Bank and Lorraine G. Ptak. See "- Directors of the Bank." Each Director of the
Holding Company has served as such since August 1996. Directors of the Holding
Company will serve three-year staggered terms so that one-third of the directors
will be elected at each annual meeting of stockholders. The terms of the current
directors of the Holding Company are the same as that of the Bank's board. The
term of Ms. Ptak expires in 1999. The Holding Company intends to pay directors a
fee for attendance at Board meetings of $250. See also "- Directors and
Executive Officers of the Bank." For information regarding stock options and
restricted stock proposed to be awarded to directors following stockholder
ratification of such plans, see "- Benefit Plans."
The business experience of L.G. Ptak, a director of the Holding Company
and an executive officer of the Bank, is set forth below.
L. G. Ptak, age 71. Ms. Ptak is currently serving as
Secretary-Treasurer of the Bank, a position she has held since 1975. Mrs. Ptak
is also a director of the Holding Company. Ms. Ptak is the wife of Chairman S.
J. Ptak and the mother of President Rooney.
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The following
table sets forth information regarding executive officers of the Holding
Company. Each executive officer of the Holding Company has held his or her
position since the incorporation of the Holding Company in July 1996.
Name Title
- ------------------------ -----------------------------------------------
S. J. Ptak Chairman of the Board
Kimberly P. Rooney President, Chief Executive Officer and Director
Jeffrey Przybyl Treasurer and Chief Financial Officer
L. G. Ptak Director and Secretary
The Holding Company does not initially intend to pay executive officers any fees
in addition to fees payable to such persons as executive officers of the Bank.
For information regarding compensation of directors and executive officers of
the Bank, see "Management - Director Compensation" and "- Executive
Compensation." For information regarding stock options and
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restricted stock proposed to be awarded to directors and executive officers
following stockholder ratification of the Holding Company's stock-based plans,
see "- Benefit Plans."
Board of Directors of the Bank. Prior to the Conversion, the direction
and control of the Bank, as a mutual savings institution, was vested in its
Board of Directors. Upon conversion of the Bank to stock form, each of the
directors of the Bank will continue to serve as a director of the converted
Bank. The Board of Directors of the Bank currently consists of five members. The
directors serve three-year staggered terms so that approximately one-third of
the directors are elected at each annual meeting of members. Because the Holding
Company will own all of the issued and outstanding shares of capital stock of
the Bank after the Conversion, directors of the Holding Company will elect the
directors of the Bank.
The following table sets forth certain information regarding the
directors of the Bank.
<TABLE>
<CAPTION>
Director Term
Name Position(s) Held With the Bank Age(1) Since Expires
- ---------------------- ------------------------------------------------ ------ -------- -------
<S> <C> <C> <C> <C>
S. J. Ptak Chairman of the Board 71 1969 1999
Kimberly P. Rooney President, Chief Executive Officer and Director 39 1989 1999
Edward Wolak Director 72 1969 1998
Jeanine M. McInerney Director 38 1996 1997
Rocco Di Iorio Director 64 1990 1997
</TABLE>
- ----------
(1) At May 31, 1996.
The business experience of each director of the Holding Company or the
Bank for at least the past five years is set forth below.
Sylvester J. Ptak. Mr. Ptak is the Chairman of the Board and Vice
President of the Bank, a position he has held since 1995. Mr. Ptak has been a
member of the Board of Directors of the Bank since 1969. He also served as
Secretary of the Bank from 1969 to 1975 and President and Chief Executive
Officer of the Bank from 1975 to 1995. Mr. Ptak is the father of President
Rooney and husband of Secretary-Treasurer Lorraine Ptak. As Chairman of the
Board and Vice President of the Bank, Mr. Ptak supervises the lending
department.
Kimberly P. Rooney. Ms. Rooney is currently serving as President and
Chief Executive Officer of the Bank, a position she has held since 1995. Prior
to joining the Bank as President, Ms. Rooney served as an attorney for the Bank.
From time to time, Ms. Rooney performs legal work for long-time clients. Ms.
Rooney is the daughter of Chairman Ptak and Secretary-Treasurer Lorraine Ptak.
Edward Wolak. Mr. Wolak is a retired plant engineer with Crown Stove,
Inc., a position he held for approximately 40 years. Mr. Wolak is the spouse of
Lorraine Ptak's sister.
Jeanine McInerny. Ms. McInerny is a clinical nurse consultant with
Healthpoint Medical. She has been employed as a nurse for approximately 15
years.
Rocco Di Iorio. Mr. Di Iorio is a retired sewer contractor.
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Executive Officers Who Are Not Directors. Each of the executive
officers of the Bank will retain his or her office in the converted Bank.
Officers are elected annually by the Board of Directors of the Bank. The
business experience of the executive officers who are not also directors is set
forth below. L. G. Ptak is also an executive officer of the Bank. Her business
experience is set forth on the preceding page.
Jeffrey Przybyl, age 30. Mr. Przybyl is currently serving as Chief
Financial Officer of the Bank, a position he has held since 1993. As Chief
Financial Officer, Mr. Przybyl is responsible for overseeing the accounting and
financial reporting functions of the Bank.
Marianne I. Maciejewski, age 58. Ms. Maciejewski is currently serving
as Vice President of the Bank, a position she has held since 1995. As Vice
President of the Bank, Ms. Maciejewski is responsible for overseeing the
compliance function of the Bank. Prior to serving as Vice President, Ms.
Maciejewski served in various capacities with the Bank since 1985. Marianne I.
Maciejewski is the mother of Linda Peterson.
Linda M. Peterson, age 38. Ms. Peterson is currently serving as Vice
President of the Bank. In that capacity, Ms. Peterson is responsible for
overseeing the mortgage lending functions of the Bank. Ms. Peterson joined the
Bank in 1987 as a loan officer. Linda Peterson is the daughter of executive
officer Maciejewski.
Indemnification
The Certificate of Incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the General Corporation Law of the
State of Delaware against all expenses, liability and loss reasonably incurred
or suffered by such person in connection with his activities as a director or
officer or as a director or officer of another company, if the director or
officer held such position at the request of the Holding Company. Delaware law
requires that such director, officer, employee or agent, in order to be
indemnified, must have acted in good faith and in a manner reasonably believed
to be not opposed to the best interests of the Holding Company, and, with
respect to any criminal action or proceeding, did not have reasonable cause to
believe his or her conduct was unlawful.
The Certificate of Incorporation and Delaware law also provide that the
indemnification provisions of such Certificate and the statute are not exclusive
of any other right which a person seeking indemnification may have or later
acquire under any statute, provision of the Certificate of Incorporation, Bylaws
of the Holding Company, agreement, vote of stockholders or disinterested
directors or otherwise.
These provisions may have the effect of deterring shareholder
derivative actions, since the Holding Company may ultimately be responsible for
expenses for both parties to the action. A similar effect would not be expected
for third-party claims.
In addition, the Certificate of Incorporation and Delaware law also
provide that the Holding Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Holding
Company or another corporation, partnership, joint
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venture, trust or other enterprise against any expense, liability or loss,
whether or not the Holding Company has the power to indemnify such person
against such expense, liability or loss under the Delaware General Corporation
Law. The Holding Company may obtain such insurance.
Meetings and Committees of Board of Directors
The Bank. The Bank's Board of Directors meets on a monthly basis. The
Board of Directors met 12 times during the fiscal year ended December 31, 1995.
During fiscal 1995, no director of the Bank attended fewer than 75% of the
aggregate of the total number of Board meetings and the total number of meetings
held by the committees of the Board of Directors on which he served.
The Bank has standing Loan, Proxy, Investment, Audit, CRA and Interest
Rate Risk Committees.
The Loan Committee meets to approve all loans originated by the Bank
and sets interest rates for all loan types. The entire Board of Directors
comprises the loan committee. This committee met approximately 12 times during
calendar year 1995.
The Proxy Committee is comprised of Chairman Ptak, President Rooney and
Secretary-Treasurer Ptak. This Committee meets to vote proxies at a special or
annual meeting of the Bank. This committee met one time during calendar year
1995.
The Investment Committee develops investment objectives and performance
standards consistent with the Bank's financial needs and reviews the Bank's
investment policies and recommends changes to the full Board. This committee is
comprised of Chairman Ptak, President Rooney and Chief Financial Officer Przybyl
and met 12 times during calendar year 1995.
The Audit Committee meets at least annually to review and recommend the
Bank's engagement of external auditors. Such committee reviews audit reports and
related matters and acts as the liaison between Preferred Savings' internal and
external auditors and the Board. Directors Di Iorio and Wolak currently comprise
the committee. This committee met one time in 1995.
The CRA Committee meets on a monthly basis to review compliance with
the Community Reinvestment Act. The CRA Committee is composed of the entire
Board of Directors and Executive Officer Maciejewski. This committee met 12
times during calendar year 1995.
The Interest Rate Risk Committee is comprised of Chairman Ptak,
Director Rooney and officer Przybyl. This committee meets quarterly to review
the Bank's interest rate risk position and product mix and make recommendations
for adjustments to the full Board. This committee met four times in fiscal 1995.
The Holding Company. In August 1996, the Board of Directors of the
Holding Company established standing Executive, Audit, Compensation and
Nominating Committees. These committees did not meet during fiscal 1995.
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Director Compensation
Directors of the Bank are paid a monthly fee of $300 for service on the
Board of Directors. Directors do not receive any additional compensation for
committee meetings attended.
Executive Compensation
The following table sets forth information concerning the compensation
for services in all capacities to Preferred Savings for the fiscal year ended
December 31, 1995 of the Bank's Chairman and its Chief Executive Officer. No
executive officer's aggregate annual compensation (salary plus bonus) exceeded
$100,000 in fiscal 1995.
Summary Compensation Table
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
Annual Compensation(1) Awards
------------------------------------ ----------------------------
Other Annual Restricted Stock Options/ All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Award ($)(2) SARs (#)(2) Compensation($)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Kimberly P. Rooney, President and
Chief Executive Officer 1995 $55,200 $24,000 $--- $ N/A N/A $---
S.J. Ptak, Chairman of the Board 1995 $36,000 $20,000 $--- $ N/A N/A $---
===================================================================================================================================
</TABLE>
- ----------
(1) In accordance with the transitional provisions applicable to the
revised rules on executive officer and director compensation disclosure
adopted by the SEC, as informally interpreted by the SEC's Staff,
Summary Compensation information is excluded for the fiscal years ended
December 31, 1994 and 1993.
(2) Pursuant to the proposed Stock Option Plan, the Holding Company intends
to grant Ms. Rooney and Mr. Ptak an option to purchase a number of
shares equal to 2.5% and 2.5%, respectively (35,063 and 35,063 shares
at the minimum and 47,438 and 47,438 shares at the maximum of the
Estimated Valuation Range) of the total number of shares of Common
Stock issued in the Conversion at an exercise price equal to the market
value per share of the Common Stock on the date of grant. See "- Stock
Option and Incentive Plan." In addition, pursuant to the proposed RRP,
the Holding Company intends to grant to Ms. Rooney and Mr. Ptak a
number of shares of restricted stock equal to 1% and 1%, respectively
(14,025 shares and 14,025 shares at the minimum and 18,975 and 18,975
shares at the maximum of the Estimated Valuation Range) of the total
number of shares of Common Stock sold in the Conversion. See "-
Management Recognition Plan."
Employment Agreements and Severance Agreements. The Bank intends to
enter into employment agreements with Chairman Ptak and President Rooney
providing for an initial term of three years. The agreements have been filed
with the OTS as part of the application of the Holding Company for approval to
become a savings and loan holding company. The employment agreements become
effective upon completion of the Conversion and provides for an annual base
salary in an amount not less than each individual's respective current salary
and provide for an annual extension subject to the performance of an annual
formal evaluation by disinterested members of the Board of Directors of the
Bank. The agreements also provide for termination upon the employee's death, for
cause or in certain events specified by OTS regulations. The employment
agreements are also terminable by the employee upon 90 days' notice to the Bank.
In addition, in the event of an "involuntary termination" in which the
employment of the employee is terminated without the written consent of the
employee and includes a material diminution of or interference with the
employees duties, responsibilities and benefits as specified in the agreements,
the employee will be entitled to the benefits under the agreement for the
remaining term of the agreement.
The employment agreements provide for payment to Chairman Ptak and
President Rooney of an amount equal to 299% of their five-year annual average
base compensation, respectively, in the event there is a "change in control" of
the Bank where employment involuntarily terminates in connection with such
change in control or within twelve months thereafter. For the purposes of the
employment agreements, a "change in control" is defined as any event which would
require the filing of an application for acquisition of control
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or notice of change in control pursuant to 12 C.F.R. ss. 574.3 or 4. Such events
are generally triggered prior to the acquisition or control of 25% of the
Holding Company's common stock. See "Restrictions on Acquisitions of Stock and
Related Takeover Defensive Provisions." If the employment of Chairman Ptak or
President Rooney had been terminated as of May 31, 1996 under circumstances
entitling them to severance pay as described above, they would have been
entitled to receive a lump sum cash payment of approximately $135,000 and
$225,000, respectively. The agreements also provide for the continued payment to
Chairman Ptak and President Rooney of health benefits for the remainder of the
term of their contract in the event such individual is involuntarily terminated
in the event of change in control.
The Bank intends to enter into change in control severance agreements
with Officers Jeffrey Przybyl, Marianne Maciejewski and Linda Peterson. The
agreements become effective upon completion of the Conversion and provide for an
initial term of 18 months. The agreements provide for extensions of one year,
on each anniversary of the effective date of the agreement, subject to a formal
performance evaluation performed by disinterested members of the Board of
Directors of the Bank. The agreement provides for termination for cause or in
certain events specified by OTS regulations.
The agreements provide for a lump sum payment to the employee of
$40,000 and the continued payment for the remaining term of the contract of life
and health insurance coverage maintained by the Bank in the event there is a
"change in control" of the Bank where employment terminates involuntarily in
connection with such change in control. This termination payment is subject to
reduction by the amount of all other compensation to the employee deemed for
purposes of the Code to be contingent on a "change in control," and may not
exceed one time the employee's average annual compensation over the most recent
five-year period or be non-deductible by the Bank for federal income tax
purposes. For the purposes of the agreements, a "change in control" is defined
as any event which would require the filing of an application for acquisition of
control or notice of change in control pursuant to 12 C.F.R. ss. 574.3 or 4 or
any successor regulation. Such events are generally triggered prior to the
acquisition of control of 10% of the Company's Common Stock. See "Restrictions
on Acquisitions of Stock and Related Takeover Defensive Provisions."
Benefit Plans
General. Preferred Savings currently provides insurance benefits to its
employees, including health and life insurance, subject to certain deductibles
and copayments.
Pension Plan. Prior to June 30, 1995, the Bank maintained a defined
benefit pension plan for the benefit of its employees. The Pension Plan was
terminated as of June 30, 1995. The noncontributory defined benefit pension plan
covered all employees who met certain minimum service requirements. See Note 7
to the Notes to Consolidated Financial Statements.
The benefits were distributed during the year.
Employee Stock Ownership Plan. The Boards of Directors of Preferred
Savings and the Holding Company have approved the adoption of an ESOP for the
benefit of employees of Preferred Savings. The ESOP is also designed to meet the
requirements of an employee stock ownership plan as described at Section
4975(e)(7) of the Code and Section 407(d)(6) of the
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Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and, as
such, the ESOP is empowered to borrow in order to finance purchases of the
Common Stock.
It is anticipated that the ESOP will be funded with a loan from the
Holding Company (not to exceed an amount equal to 8% of the gross Conversion
proceeds). The interest rate of the ESOP loan will be equal to the applicable
federal interest rate as determined by the Internal Revenue Service for the
month in which the loan is made, as calculated pursuant to Section 1274(d) of
the Code.
GAAP generally requires that any borrowing by the ESOP from an
unaffiliated lender be reflected as a liability in the Holding Company's
Consolidated Financial Statements, whether or not such borrowing is guaranteed
by, or constitutes a legally binding contribution commitment of, the Holding
Company or the Bank. The funds used to acquire the ESOP shares will be borrowed
from the Holding Company. Since the Holding Company will finance the ESOP debt,
the ESOP debt will be eliminated through consolidation and no liability will be
reflected on the Holding Company's consolidated financial statements. In
addition, shares purchased with borrowed funds will, to the extent of the
borrowings, be excluded from stockholders' equity, representing unearned
compensation to employees for future services not yet performed. Consequently,
if the ESOP purchases already-issued shares in the open market, the Holding
Company's consolidated liabilities will increase to the extent of the ESOP's
borrowings, and total and per share stockholders' equity will be reduced to
reflect such borrowings. If the ESOP purchases newly issued shares from the
Holding Company, total stockholders' equity would neither increase nor decrease,
but per share stockholders' equity and per share net income would decrease
because of the increase in the number of outstanding shares. In either case, as
the borrowings used to fund ESOP purchases are repaid, total stockholders'
equity will correspondingly increase.
All employees of the Bank are eligible to participate in the ESOP after
they attain age 21 and complete one year of service. The Bank's contribution to
the ESOP is allocated among participants on the basis of their relative
compensation. Each participant's account will be credited with cash and shares
of Holding Company Common Stock based upon compensation earned during the year
with respect to which the contribution is made. Contributions credited to a
participant's account become fully vested upon such participant's completing six
years of service. Credit will be given for prior years of service for vesting
purposes. ESOP participants are entitled to receive distributions from their
ESOP accounts only upon termination of service. Distributions will be made in
cash and in whole shares of the Holding Company's Common Stock. Fractional
shares will be paid in cash. Participants will not incur a tax liability until a
distribution is made.
Each participating employee is entitled to instruct the trustee of the
ESOP as to how to vote the shares allocated to his or her account. The trustee
will not be affiliated with the Holding Company or Preferred Savings.
The ESOP may be amended by the Board of Directors, except that no
amendment may be made which would reduce the interest of any participant in the
ESOP trust fund or divert any of the assets of the ESOP trust fund for purposes
other than the benefit of participants or their beneficiaries.
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Stock Option and Incentive Plan. Among the benefits to the Bank
anticipated from the Conversion is the ability to attract and retain personnel
through the prudent use of stock options and other stock-related incentive
programs. The Board of Directors of the Holding Company intends to adopt the
Stock Option Plan, subject to ratification by stockholders of the Holding
Company at a meeting to be held not earlier than six months after completion of
the Conversion. Under the terms of the proposed Stock Option Plan, stock options
covering shares representing an aggregate of up to 10% of the shares of Common
Stock issued in the Conversion may be granted to directors, officers and
employees of the Holding Company or its subsidiaries under the Stock Option
Plan.
Options granted under the Stock Option Plan may be either options that
qualify under the Code as "incentive stock options" (options that afford
preferable tax treatment to recipients upon compliance with certain restrictions
and that do not normally result in tax deductions to the employer) or options
that do not so qualify. The exercise price of stock options granted under the
Stock Option Plan is required to be at least equal to the fair market value per
share of the stock on the date of grant. All grants are made in consideration of
past and future services rendered to the Bank, and in an amount deemed necessary
to encourage the continued retention of the officers and directors who are
considered necessary for the continued success of the Bank. In this regard, all
options are intended to vest in five equal annual installments commencing one
year from the date of grant, subject to the continued service of the holder of
such option.
The proposed Stock Option Plan provides for the grant of stock
appreciation rights ("SARs") at any time, whether or not the participant then
holds stock options, granting the right to receive the excess of the market
value of the shares represented by the SARs on the date exercised over the
exercise price. SARs generally will be subject to the same terms and conditions
and exercisable to the same extent as stock options.
Limited SARs may be granted at the time of, and must be related to, the
grant of a stock option or SAR. The exercise of one will reduce to that extent
the number of shares represented by the other. Limited SARs will be exercisable
only for the 45 days following the expiration of the tender or exchange offer,
during which period the related stock option or SAR will be exercisable.
However, no SAR or Limited SAR will be exercisable by a 10% beneficial owner,
director or senior officer within six months of the date of its grant. The
Holding Company has no present intention to grant any SARs or Limited SARs.
The proposed Stock Option Plan will be administered by the Holding
Company's Compensation Committee which will consist of at least two
disinterested directors. The Compensation Committee will select the recipients
and terms of awards made pursuant to the Stock Option Plan. OTS regulations
limit the amount of shares that may be awarded pursuant to stock-based plans to
each individual officer, each non-employee director and all non-employee
directors of a group to 25%, 5% and 30%, respectively, of the total shares
reserved for issuance under each such stock-based plan.
The Compensation Committee, presently consisting of non-employee
Directors Wolak, McInerney and Di Iorio, intends to grant options in amounts
expressed as a percentage of the shares issued in the Conversion, as follows:
President Rooney - 2.5%, S.J. Ptak - 2.5%, and to all executive officers as a
group (6 persons) - 6.8%. In addition, under the terms of the Stock Option Plan,
each non-employee director of the Holding Company at the time of stockholder
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ratification of the Stock Option Plan will be granted an option to purchase
shares of Common Stock equal to .5% of the shares sold in the Conversion. The
remaining balance of the available awards is unallocated and reserved for future
use. All options will expire 10 years after the date such option was granted,
which, for the option grants listed above, is expected to be the date of
stockholder ratification of the Stock Option Plan. All proposed option grants to
officers are subject to modification by the Compensation Committee based upon
its performance evaluation of the option recipients at the time of stockholder
ratification of the Stock Option Plan following completion of the Conversion.
After stockholder ratification, the Stock Option Plan will be funded
either with shares purchased in the open market or with authorized but unissued
shares of Common Stock. The use of authorized but unissued shares to fund the
Stock Option Plan could dilute the holdings of stockholders who purchased Common
Stock in the Conversion. See "Pro Forma Data." In no event will the Stock Option
Plan acquire an amount of shares, which, in the aggregate, represent more than
10% of the shares issued in the Conversion.
Under SEC regulations, so long as certain criteria are met, an optionee
may be able to exercise the option at the Purchase Price and immediately sell
the underlying shares at the then-current market price without incurring
short-swing profit liability. This ability to exercise and immediately resell,
which under the SEC regulations applies to stock option plans in general, allows
the optionee to realize the benefit of an increase in the market price for the
stock without the market risk which would be associated with a required holding
period for the stock after payment of the exercise price. Under SEC regulations,
the short-swing liability period now runs for six months before and after the
option grant. All grants are subject to ratification of the Stock Option Plan by
stockholders of the Holding Company following completion of the Conversion.
Recognition and Retention Plan. The Holding Company intends to
establish the RRP in order to provide employees with a proprietary interest in
the Holding Company in a manner designed to encourage such persons to remain
with the Holding Company and the Bank. The RRP will be subject to ratification
by stockholders at a meeting to be held not earlier than six months after the
completion of the Conversion. The Holding Company will contribute funds to the
RRP to enable it to acquire in the open market or from authorized but unissued
shares (with the decision between open market or authorized but unissued shares
based on the Holding Company's future stock price, alternate investment
opportunities and capital needs), following stockholder ratification of such
plan, an amount of stock equal to 4% of the shares of Common Stock issued in the
Conversion.
The Compensation Committee of the Board of Directors of the Holding
Company will administer the proposed RRP. Under the terms of the proposed RRP,
awards ("Awards") can be granted to key employees in the form of shares of
Common Stock held by the RRP. Awards are non-transferable and non-assignable.
OTS regulations limit the amount of shares that may be awarded pursuant to
stock-based plans to each individual officer, each non-employee director and all
non-employee directors of a group to 25%, 5% and 30%, respectively, of the total
shares reserved for issuance under each such stock-based plan.
Recipients will earn (i.e., become vested in), over a period of time,
the shares of Common Stock covered by the Award. Awards made pursuant to the RRP
will vest in five
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equal annual installments commencing one year from the date of grant. Awards
will be 100% vested upon termination of employment due to death or disability.
In addition, no awards under the RRP to directors and executive officers shall
vest in any year in which the Bank is not meeting all of its fully phased-in
capital requirements. When shares become vested and are actually distributed in
accordance with the RRP, but in no event prior to such time, the participants
will also receive amounts equal to any accrued dividends with respect thereto.
Earned shares are distributed to recipients as soon as practicable following the
date on which they are earned.
The Compensation Committee presently intends to grant restricted stock
awards at the Purchase Price, in amounts expressed as a percentage of the shares
sold in the Conversion, as follows: to President Rooney - 1.0%, S.J. Ptak -1.0%,
and to all executive officers as a group (6 persons) - 2.75%. Pursuant to the
terms of the proposed RRP, each non-employee director of the Holding Company at
the time of stockholder ratification of the RRP will be awarded an amount of
shares equal to .2% of the shares sold in the Conversion. All proposed RRP
awards to officers of the Bank are subject to modification by the Compensation
Committee based upon its performance evaluation of the award recipients at the
time of stockholder ratification of the RRP following completion of the
Conversion.
After stockholder ratification, the RRP will be funded either with
shares purchased in the open market or with authorized but unissued shares of
Common Stock issued to the RRP by the Holding Company. The use of authorized but
unissued shares to fund the RRP could dilute the holdings of stockholders who
had purchased Common Stock in the Conversion. In the event the RRP purchases
stock in the open market at prices above the initial Purchase Price, the total
RRP expense may be above that disclosed under the caption "Pro Forma Data." In
no event will the RRP acquire an amount of shares which, in the aggregate,
represent more than 4% of the shares issued in the Conversion.
Certain Transactions
The Bank follows a policy of granting loans to the Bank's directors,
officers and employees. The loans to executive officers and directors are made
in the ordinary course of business and on the same terms and conditions as those
of comparable transactions prevailing at the time, in accordance with the Bank's
underwriting guidelines and do not involve more than the normal risk of
collectibility or present other unfavorable features. All loans to directors and
executive officers cannot exceed $25,000 or 5% of the Bank's capital and
unimpaired surplus, whichever is greater, unless a majority of the Board of
Directors approves the credit in advance and the individual requesting the
credit abstains from voting. Under the Bank's policy the Bank may make loans to
executive officers to finance a child's education or to finance the purchase,
construction, maintenance or improvement of the borrower's residence. Loans to
executive officers for other purposes are permitted as long as they qualify as
low or minimal risk loans and do not exceed 2.5% of the Bank's capital and
unimpaired surplus, or $25,000, whichever is greater up to a maximum of
$100,000. All loans by the Bank to its directors and executive officers are
subject to OTS regulations restricting loans and other transactions with
affiliated persons of the Bank. Federal law currently requires that all loans to
directors and executive officers be made on terms and conditions comparable to
those for similar transactions with non-affiliates. Loans to all directors and
executive officers and their associates, including outstanding balances and
commitments totaled $193,000 at May 31, 1996, which was 1.6% of
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the Bank's retained earnings at that date. At May 31, 1996, there were no loans
to any single director, executive officer or their affiliates made at
preferential rates or terms and there were no loans made to any single director,
executive officer or their affiliates, which in the aggregate exceeded $60,000
during the three years ended December 31, 1995.
THE CONVERSION
The Board of Directors of the Bank and the OTS have approved the Plan
of Conversion. OTS approval does not constitute a recommendation or endorsement
of the Plan of Conversion. Certain terms used in the following summary of the
material terms of the Conversion are defined in the Plan of Conversion, a copy
of which may be obtained by contacting Preferred Savings.
General
The Board of Directors of the Bank unanimously adopted the Plan,
subject to approval by the OTS and the members of the Bank. Pursuant to the
Plan, the Bank will convert from a federally chartered mutual savings bank to a
federally chartered stock savings bank, with the concurrent formation of a
holding company.
The Conversion will be accomplished through amendment of the Bank's
federal charter to authorize capital stock, at which time the Bank will become a
wholly owned subsidiary of the Holding Company. The Conversion will be accounted
for as a pooling of interests.
Subscription Rights have been granted to the Eligible Account Holders
as of March 31, 1995, Tax-Qualified Employee Plans of the Bank and Holding
Company, Supplemental Eligible Account Holders as of September 30, 1996, Other
Members, and officers, directors and employees of the Bank. Additionally,
subject to the availability of shares and market conditions at or near the
completion of the Subscription Offering, the Common Stock may be offered for
sale in a Public Offering to selected persons on a best-efforts basis through
Webb. See "- Offering of Holding Company Common Stock." Subscriptions for shares
will be subject to the maximum and minimum purchase limitations set forth in the
Plan of Conversion.
Business Purposes
Preferred Savings has several business purposes for the Conversion. The
sale of Holding Company Common Stock will have the immediate result of providing
the Bank with additional equity capital in order to support the expansion of its
existing operations, subject to market conditions. See "Business." The sale of
the Common Stock is the most effective means of increasing the Bank's permanent
capital and does not involve the high interest cost and repayment obligation of
subordinated debt. In addition, investment of that part of the net Conversion
proceeds paid by the Holding Company to the Bank is expected to provide
additional operating income to further increase the Bank's capital on a
continuing basis.
The Board of Directors of the Bank believes that a holding company
structure could facilitate the acquisition of both mutual and stock savings
institutions in the future as well as other companies. If a multiple holding
company structure is utilized in a future acquisition, the acquired savings
institution would be able to operate on a more autonomous basis as a wholly
owned subsidiary of the Holding Company rather than as a division of the Bank.
For example, the acquired savings institution could retain its own directors,
officers and corporate name as
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well as having representation on the Board of Directors of the Holding Company.
As of the date hereof, there are no plans or understandings regarding the
acquisition of any other institutions.
The Board of Directors of the Bank also believes that a holding company
structure can facilitate the diversification of the Bank's business activities.
While diversification will be maximized if a unitary holding company structure
is utilized because the types of business activities permitted to a unitary
holding company are broader than those of a multiple holding company, either
type of holding company may engage in a broader range of activities than may a
thrift institution directly. Currently, there are no plans that the Holding
Company engage in any material activities apart from holding the shares of the
Bank and investing the remaining net proceeds from the sale of Common Stock in
the Conversion.
The preferred stock and additional common stock of the Holding Company
being authorized in the Conversion will be available for future acquisitions and
for issuance and sale to raise additional equity capital, generally without
stockholder approval or ratification, but subject to market conditions. Although
the Holding Company currently has no plans with respect to future issuances of
equity securities, the more flexible operating structure provided by the Holding
Company and the stock form of ownership is expected to assist the Bank in
competing more aggressively with other financial institutions in its principal
market area.
The Conversion will structure the Bank in the stock form used in the
United States by all commercial banks, most major business corporations and an
increasing number of savings institutions. The Conversion will permit the Bank's
members to become stockholders of the Holding Company, thereby allowing members
to own stock in the financial organization in which they maintain deposit
accounts or with which they have a borrowing relationship. Such ownership should
encourage members to promote the Bank to others, thereby further contributing to
the Bank's earnings potential.
The Bank is also expected to benefit from its management and employees
owning stock, because stock ownership is viewed as an effective performance
incentive and a means of attracting, retaining and compensating personnel.
Effects of Conversion to Stock Form on Depositors and Borrowers of the Bank
Voting Rights. Deposit account holders will have no voting rights in
the converted Bank or the Holding Company and will therefore not be able to
elect directors of either entity or to control their affairs. These rights are
currently accorded to deposit account holders with regard to the Bank.
Subsequent to Conversion, voting rights will be vested exclusively in the
Holding Company as the sole stockholder of the Bank. Voting rights as to the
Holding Company will be held exclusively by its stockholders. Each purchaser of
Holding Company Common Stock shall be entitled to vote on any matters to be
considered by the Holding Company stockholders. A stockholder will be entitled
to one vote for each share of Common Stock owned, subject to certain limitations
applicable to holders of 10% or more of the shares of the Common Stock.
See "Description of Capital Stock."
Deposit Accounts and Loans. The general terms of the Bank's deposit
accounts, the balances of the individual accounts and the existing FDIC
insurance coverage will not be affected by the Conversion. Furthermore, the
Conversion will not affect the loan accounts,
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the balances of these accounts, or the obligations of the borrowers under their
individual contractual arrangements with the Bank.
Tax Effects. The Bank has received an opinion from Silver, Freedman &
Taff, L.L.P. with regard to federal income taxation, and an opinion from
Crowe, Chizek and Company LLP with regard to Illinois taxation, to the effect
that the adoption and implementation of the Plan of Conversion set forth herein
will not be taxable for federal or Illinois tax purposes to the Bank or the
Holding Company. See "- Income Tax Consequences."
Liquidation Rights. The Bank has no plans to liquidate, either before
or subsequent to the completion of the Conversion. However, if there should ever
be a complete liquidation, either before or after Conversion, deposit account
holders would receive the protection of insurance by the FDIC up to applicable
limits. Subject thereto, liquidation rights before and after Conversion would be
as follows:
Liquidation Rights in Present Mutual Institution. In addition to the
protection of FDIC insurance up to applicable limits, in the event of a
complete liquidation of the Bank, each holder of a deposit account in
the Bank in its present mutual form would receive his or her pro rata
share of any assets of the Bank remaining after payment of claims of
all creditors (including the claims of all depositors in the amount of
the withdrawal value of their accounts). Such holder's pro rata share
of such remaining assets, if any, would be in the same proportion of
such assets as the balance in his or her deposit account was to the
aggregate balance in all deposit accounts in the Bank at the time of
liquidation.
Liquidation Rights in Proposed Converted Institution. After Conversion,
each deposit account holder, in the event of a complete liquidation of
the Bank, would have a claim of the same general priority as the claims
of all other general creditors of the Bank in addition to the
protection of FDIC insurance up to applicable limits. Therefore, except
as described below, the deposit account holder's claim would be solely
in the amount of the balance in his or her deposit account plus accrued
interest. The holder would have no interest in the assets of the Bank
above that amount.
The Plan of Conversion provides that there shall be established, upon
the completion of the Conversion, a special "liquidation account" for
the benefit of Eligible Account Holders (i.e., eligible depositors at
March 31, 1995) and Supplemental Account Holders (eligible depositors
at September 30, 1996) in an amount equal to the net worth of the Bank
as of the date of its latest consolidated statement of financial
condition contained in the final prospectus relating to the sale of
shares of Holding Company Common Stock in the Conversion. Each Eligible
Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account
held in the Bank on the qualifying date. An Eligible Account Holder and
Supplemental Eligible Account Holder's interest as to each deposit
account would be in the same proportion of the total liquidation
account as the balance in his or her account on March 31, 1995 and
September 30, 1996, respectively, was to the aggregate balance in all
deposit accounts of Eligible Account Holders and
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Supplemental Eligible Account Holders on such dates. However, if the
amount in the deposit account of an Eligible Account Holder or
Supplemental Eligible Account Holder on any annual closing date of the
Bank is less than the lowest amount in such account on March 31, 1995
or September 30, 1996 and on any subsequent closing date, then the
account holder's interest in this special liquidation account would be
reduced by an amount proportionate to any such reduction, and the
account holder's interest would cease to exist if such deposit account
were closed.
In addition, the interest in the special liquidation account would
never be increased despite any increase in the balance of the account
holders' related accounts after Conversion, and would only decrease.
Any assets remaining after the above liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders were
satisfied would be distributed to the Holding Company as the sole
stockholder of the Bank.
No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transaction, whether
the Bank, as converted, or another SAIF-insured institution is the
surviving institution, is deemed to be a complete liquidation for
purposes of distribution of the liquidation account and, in any such
transaction, the liquidation account would be assumed to the full
extent authorized by regulations of the OTS as then in effect. The OTS
has stated that the consummation of a transaction of the type described
in the preceding sentence in which the surviving entity is not a
SAIF-insured institution would be reviewed on a case-by-case basis to
determine whether the transaction should constitute a "complete
liquidation" requiring distribution of any then remaining balance in
the liquidation account. While the Bank believes that such a
transaction should not constitute a complete liquidation, there can be
no assurance that the OTS will not adopt a contrary position.
Common Stock. For information as to the characteristics of the Common
Stock to be issued under the Plan of Conversion, see "Dividends" and
"Description of Capital Stock." Common Stock issued under the Plan of Conversion
cannot, and will not, be insured by the FDIC or any other governmental agency.
The Bank will continue, immediately after completion of the Conversion,
to provide its services to depositors and borrowers pursuant to its existing
policies and will maintain the existing management and employees of the Bank.
Other than for payment of certain expenses incident to the Conversion, no assets
of the Bank will be distributed in the Conversion. Preferred Savings will
continue to be a member of the FHLB System, and its deposit accounts will
continue to be insured by the FDIC. The affairs of Preferred Savings will
continue to be directed by the existing Board of Directors and management.
Offering of Holding Company Common Stock
Under the Plan of Conversion, 1,897,500 shares of Holding Company
Common Stock will be offered for sale, subject to certain restrictions described
below, initially through the
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Offering. Federal conversion regulations require, with certain exceptions,
that all shares offered in a conversion be sold in order for the conversion to
become effective.
The Subscription Offering will expire at noon, Chicago, Illinois time,
on _______________, 1996 (the "Subscription Expiration Date") unless extended by
the Bank and the Holding Company. Depending on the availability of shares and
market conditions at or near the completion of the Subscription Offering, the
Holding Company may effect a Public Offering of shares to selected persons
through Webb. To order Common Stock in connection with the Public Offering, if
any, an executed stock order and account withdrawal authorization and
certification must be received by Webb prior to the termination of the Public
Offering. The date by which orders must be received in the Public Offering, if
any, will be set by the Holding Company at the time of such offering. OTS
regulations require that all shares to be offered in the Conversion be sold
within a period ending not more than 45 days after the Subscription Expiration
Date (or such longer period as may be approved by the OTS) or, despite approval
of the Plan of Conversion by members, the Conversion will not be effected and
Preferred Savings will remain in mutual form. This period expires on
_______________, 1996, unless extended with the approval of the OTS. In
addition, if the Offering is extended beyond _______________, 1996, all
subscribers will have the right to modify or rescind their subscriptions and to
have their subscription funds returned promptly with interest. In the event that
the Conversion is not effected, all funds submitted and not previously refunded
pursuant to the Offering will be promptly refunded to subscribers with interest
at the Bank's current passbook rate and all withdrawal authorizations will be
terminated.
Stock Pricing and Number of Shares to be Issued
Federal regulations require that the aggregate purchase price of the
securities of a thrift institution sold in connection with its conversion must
be based on an appraised aggregate market value of the institution as converted
(i.e., taking into account the expected receipt of proceeds from the sale of the
securities in the conversion), as determined by an independent valuation.
Keller, which is experienced in the valuation and appraisal of business
entities, including thrift institutions involved in the conversion process, was
retained by the Bank to prepare an appraisal of the estimated pro forma market
value of the Bank and the Holding Company upon Conversion.
Keller will receive a fee of approximately $15,000 for its appraisal in
addition to its reasonable out-of-pocket expenses incurred in connection with
the appraisal. Keller has also agreed to assist in the preparation of the Bank's
business plan and to perform certain records management services for the Bank
for a separate fee of $5,000. The Bank has agreed to indemnify Keller under
certain circumstances against liabilities and expenses (including legal fees)
arising out of, related to, or based upon the Conversion.
Keller has prepared an appraisal of the estimated pro forma market
value of the Bank as converted. The Keller appraisal concluded that, at
September 29, 1996, an appropriate range for the estimated pro forma market
value of the Bank and the Holding Company was from a minimum of $14,025,000 to a
maximum of $18,975,000 with a midpoint of $16,500,000 million. Assuming that the
shares are sold at $10.00 per share in the Conversion, the estimated number of
shares to be issued in the Conversion is expected to be between 1,402,500 and
1,897,500. The Purchase Price of $18,975,000 was determined by discussion among
the Boards
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of Directors of the Bank, the Holding Company and Keller, taking into account,
among other factors, (i) the requirement under OTS regulations that the Common
Stock be offered on a manner that would achieve the widest distribution of
shares and (ii) liquidity in the Common Stock subsequent to the Conversion.
The appraisal involved a comparative evaluation of the operating and
financial statistics of the Bank with those of other thrift institutions. The
appraisal also took into account such other factors as the market for thrift
institution stocks generally, prevailing economic conditions, both nationally
and in Illinois, which affect the operations of thrift institutions, the
competitive environment within which the Bank operates and the effect of the
Bank becoming a subsidiary of the Holding Company. No detailed individual
analysis of the separate components of the Holding Company's and the Bank's
assets and liabilities was performed in connection with the evaluation. The Plan
of Conversion requires that all of the shares subscribed for in the Offering be
sold at the same price per share. The Board of Directors reviewed the appraisal,
including the methodology and the appropriateness of the assumptions utilized by
Keller and determined that in its opinion the appraisal was not unreasonable.
The Estimated Valuation Range may be amended with the approval of the OTS in
connection with changes in the financial condition or operating results of the
Bank or market conditions generally. As described below, an amendment to the
Estimated Valuation Range above $21,821,250 would not be made without a
resolicitation of subscriptions and/or proxies except in limited circumstances.
If, upon completion of the Offering, at least the minimum number of
shares are subscribed for, Keller, after taking into account factors similar to
those involved in its prior appraisal, will determine its estimate of the pro
forma market value of the Bank and the Holding Company upon Conversion, as of
the close of the Offering.
If, based on the estimate of Keller, the aggregate pro forma market
value is not within the Estimated Valuation Range, Keller, upon the consent of
the OTS, will determine a new Estimated Valuation Range ("Amended Valuation
Range"). If the aggregate pro forma market value of the Bank as converted and
the Holding Company has increased in the Amended Valuation Range to an amount
that does not exceed $21,821,250 (i.e., 15% above the maximum of the Estimated
Valuation Range), then the number of shares to be issued may be increased to
accommodate such increase in value without a resolicitation of subscriptions
and/or proxies. In such event the Bank and the Holding Company do not intend to
resolicit subscriptions and/or proxies unless the Bank and the Holding Company
then determine, after consultation with the OTS, that circumstances otherwise
require such a resolicitation. If, however, the aggregate pro forma market value
of the Holding Company and the Bank, as converted, at that time is less than
$14,025,000 or more than $21,821,250, a resolicitation of subscribers and/or
proxies may be made, the Plan of Conversion may be terminated or such other
actions as the OTS may permit may be taken. In the event that upon completion of
the Offering, the pro forma market value of the Holding Company and Bank, as
converted, is below $14,025,000 or above $21,821,250 (15% above the maximum of
the Estimated Valuation Range), the Holding Company intends to file the revised
appraisal with the SEC by post-effective amendment to its Registration Statement
on Form S-1. See "Additional Information." If the Plan of Conversion is
terminated, all funds would be returned promptly with interest at the rate of
the Bank's current passbook rate, and holds on funds authorized for withdrawal
from deposit accounts would be released. If there is a resolicitation of
subscriptions, subscribers will be given the opportunity to cancel or change
their subscriptions and to the extent subscriptions are so canceled or
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reduced, funds will be returned with interest at the Bank's current passbook
rate and holds on funds authorized for withdrawal from deposit accounts will be
released or reduced. Stock subscriptions received by the Holding Company and the
Bank may not be withdrawn by the subscriber and, if accepted by the Holding
Company and the Bank, are final. If the Conversion is not completed prior to
_______, 1998 (two years after the date of the Special Meeting), the Plan of
Conversion will automatically terminate.
Any increase in the total number of shares of Common Stock to be
offered in the Conversion will dilute a subscriber's percentage ownership
interest and will reduce the pro forma net income and net worth on a per share
basis. A decrease in the number of shares to be issued in the Conversion will
increase a subscriber's proportionate ownership interest and will increase both
pro forma net income and net worth on a per share basis while decreasing that
amount on an aggregate basis.
No sale of the shares will take place unless, prior thereto, Keller
confirms to the OTS that, to the best of Keller's knowledge and judgment,
nothing of a material nature has occurred which would cause Keller to conclude
that the actual Purchase Price on an aggregate basis is incompatible with its
estimate of the aggregate pro forma market value of the Holding Company and the
Bank as converted at the time of the sale. If, however, the facts do not justify
such a statement, the Offering or other sale may be canceled, a new Estimated
Valuation Range set and new offering held.
In preparing its valuation of the pro forma market value of the Bank
and the Holding Company upon Conversion, Keller relied upon and assumed the
accuracy and completeness of all financial and statistical information provided
by the Bank and the Holding Company. Keller also considered information based
upon other publicly available sources which it believes are reliable. However,
Keller does not guarantee the accuracy and completeness of such information and
did not independently verify the financial statements and other data provided by
the Bank and the Holding Company or independently value the assets or
liabilities of the Bank and the Holding Company. The appraisal is not intended
to be, and must not be interpreted as, a recommendation of any kind as to the
advisability of voting to approve the Conversion or of purchasing shares of
Common Stock. The appraisal considers Preferred Savings and the Holding Company
only as going concerns and should not be considered as any indication of the
liquidation value of Preferred Savings or the Holding Company. Moreover, the
appraisal is necessarily based on many factors which change from time to time.
There can be no assurance that persons who purchase shares in the Conversion
will be able to sell such shares at prices at or above the Purchase Price.
Subscription Offering
In accordance with OTS regulations, non-transferable Subscription
Rights have been granted under the Plan of Conversion to the following persons
in the following order of priority: (1) Eligible Account Holders (deposit
account holders of the Bank maintaining an aggregate balance of $50 or more as
of March 31, 1995), (2) Tax-Qualified Employee Plans; provided, however, that
the Tax-Qualified Employee Plans shall have first priority Subscription Rights
to the extent that the total number of shares of Common Stock sold in the
Conversion exceeds the maximum of the Estimated Valuation Range; (3)
Supplemental Eligible Accounts Holders (deposit account holders of the Bank
maintaining a balance of $50 or more as of September 30,
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1996), (4) Other Members (depositors and certain borrowers of the Bank at the
close of business on ___________, 1996, the voting record date for the Special
Meeting) and (5) officers, directors and employees of the Bank. All
subscriptions received will be subject to the availability of Holding Company
Common Stock after satisfaction of all subscriptions of all persons having prior
rights in the Subscription Offering, and to the maximum and minimum purchase
limitations set forth in the Plan of Conversion.
Category No. 1 is reserved for the Bank's Eligible Account Holders.
Subscription Rights to purchase shares under this category will be allocated
among Eligible Account Holders to permit each such depositor to purchase shares
in this Category in an amount equal to the greater of $150,000 of Common Stock,
one-tenth of one percent (.10%) of the total shares offered in the Conversion,
or 15 times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Common Stock to be issued by a
fraction of which the numerator is the amount of the qualifying deposits of the
Eligible Account Holder and the denominator is the total amount of the
qualifying deposit of the Eligible Account Holders in the Bank, in each case on
the Eligibility Record Date. To the extent shares are oversubscribed in this
category, shares shall be allocated first to permit each subscribing Eligible
Account Holder to purchase, to the extent possible, 100 shares and thereafter
among each subscribing Eligible Account Holder pro rata in the same proportion
that his Qualifying Deposit bears to the total Qualifying Deposits of all
subscribing Eligible Account Holders whose subscriptions remain unsatisfied.
Category No. 2 provides for the issuance of Subscription Rights to
Tax-Qualified Employee Plans to purchase up to 10% of the total amount of shares
of Common Stock issued in the Subscription Offering on a second priority basis.
However, such plans shall not, in the aggregate, purchase more than 10% of the
Holding Company Common Stock issued. The ESOP intends to purchase a total of 8%
of the Common Stock issued in the Conversion under this category. Subscription
Rights received pursuant to this category shall be subordinated to all rights
received by Eligible Account Holders to purchase shares pursuant to Category No.
1; provided, however, that notwithstanding any provision of the Plan of
Conversion to the contrary, the Tax-Qualified Employee Plans shall have first
priority Subscription Rights to the extent that the total number of shares of
Common Stock sold in the Conversion exceeds the maximum of the Estimated
Valuation Range.
Category No. 3 is reserved for the Bank's Supplemental Eligible Account
Holders. Subscription Rights to purchase shares under this category will be
allocated among Supplemental Eligible Account Holders to permit each such
depositor to purchase shares in this Category in an amount equal to the greater
of $150,000 of Common Stock, one-tenth of one percent (.10%) of the total shares
of Common Stock offered in the Conversion, or 15 times the product (rounded down
to the next whole number) obtained by multiplying the total number of shares of
Common Stock to be issued by a fraction of which the numerator is the amount of
the qualifying deposit of the Supplemental Eligible Account Holder and the
denominator is the total amount of the qualifying deposit of the Supplemental
Eligible Account Holders in the converting Bank in each case on September 30,
1996 (the "Supplemental Eligibility Record Date"), subject to the overall
purchase limitation after satisfying the subscriptions of Eligible Account
Holders and Tax Qualified Employee Plans. Any non-transferable Subscription
Rights received by an Eligible Account Holder shall reduce, to the extent
thereof, the subscription rights to be distributed to such person as a
Supplemental Eligible Account Holder. In the event of an
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oversubscription for shares, the shares available shall be allocated first to
permit each subscribing Supplemental Eligible Account Holder, to the extent
possible, to purchase a number of shares sufficient to make his total allocation
(including the number of shares, if any, allocated in accordance with Category
No. 1) equal to 100 shares, and thereafter among each subscribing Supplemental
Eligible Account Holder pro rata in the same proportion that his Qualifying
Deposit bears to the total Qualifying Deposits of all subscribing Supplemental
Eligible Account Holders whose subscriptions remain unsatisfied.
Category No. 4 provides, to the extent that shares are then available
after satisfying the subscriptions of Eligible Account Holders, Tax-Qualified
Employee Plans and Supplemental Eligible Account Holders, for the issuance of
Subscription Rights to Other Members to purchase in this Category up to the
greater of $150,000 of Common Stock, or one-tenth of one percent (.10%) of the
Common Stock offered in the Conversion. In the event of an oversubscription, the
shares available shall be allocated among the subscribing Other Members pro rata
in the same proportion that his number of votes on the Voting Record Date bears
to the total number of votes on the Voting Record Date of all subscribing Other
Members on such date. Such number of votes shall be determined based on the
Bank's mutual charter and bylaws in effect on the date of approval by members of
this Plan of Conversion.
Each depositor (including individual retirement accounts ("IRAs") and
Keogh account beneficiaries) as of ___________, 1996 and the date of the Special
Meeting is entitled at the Special Meeting to cast one vote for each $100 or
fraction thereof, of the aggregate withdrawal value of all of such depositor's
savings accounts in the Bank as of the applicable voting record date, up to a
maximum of 1,000 votes. However, no member may vote more than 1,000 votes. In
general, accounts held in different ownership capacities will be treated as
separate memberships for purposes of applying the 1,000 vote limitation. For
example, if two persons hold a $100,000 account in their joint names and each of
the persons also holds a separate account for $100,000 in his own name, each
person would be entitled to 1,000 votes for each separate account and they would
together be entitled to cast 1,000 votes on the basis of the joint account for a
total of 3,000 votes.
Category No. 5 provides for the issuance of Subscription Rights to
officers, directors and employees of the Bank, to purchase in this Category up
to $150,000 of the Common Stock to the extent that shares are available after
satisfying the subscriptions of eligible subscribers in preference Categories 1,
2, 3 and 4. In the event of an oversubscription, the available shares will be
allocated pro rata among all subscribers in this category based on the number of
shares ordered by each subscriber.
Public Offering
To the extent that shares remain available and subject to market
conditions at or near the completion of the Subscription Offering, the Holding
Company may offer shares pursuant to the Plan to selected persons in a Public
Offering on a best-efforts basis through Webb in such a manner as to promote a
wide distribution of the Common Stock. Any orders received in connection with
the Public Offering, if any, will receive a lower priority than orders properly
made in the Subscription Offering by persons properly exercising Subscription
Rights. In addition depending on market conditions, Webb may utilize selected
broker-dealers ("Selected Dealers") in connection with the sale of shares in the
Public Offering. Common Stock sold in
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the Public Offering will be sold at $10.00 per share and hence will be sold at
the same price as all other shares in the Conversion. The Holding Company and
the Bank have the right to reject orders, in whole or in part, in their sole
discretion in the Public Offering.
No person, together with any associate or group of persons acting in
concert, will be permitted to purchase more than $150,000 of Common Stock in the
Public Offering. To order Common Stock in connection with the Public Offering,
if any, an executed stock order and account withdrawal authorization and
certification must be received by Webb prior to the termination of the Public
Offering. The date by which orders must be received in the Public Offering will
be set by the Holding Company at the time of commencement of the Public
Offering; provided however, if the Offering is extended beyond _______________,
199_, each subscriber will have the opportunity to maintain, modify or rescind
his or her subscription. In such event, all subscription funds will be promptly
returned with interest to each subscriber unless he or she affirmatively
indicates otherwise.
It is estimated that the Selected Dealers will receive a negotiated
commission of up to 4.5% of the Common Stock sold by the Selected Dealers,
payable by the Holding Company, and Webb will also receive a fee of 1.0% of
Common Stock sold by such firms. Such fees in the aggregate will not exceed
5.5%. See "- Marketing Arrangements.
Webb may enter into agreements with Selected Dealers to assist in the
sale of shares in the Public Offering. Selected Dealers may only solicit
indications of interest from their customers to place orders with the Holding
Company as of a certain date ("Order Date") for the purchase of shares of
Conversion Stock with the authorization of Webb. When and if Webb and the
Holding Company believe that enough indications of interest and orders have been
received to consummate the Conversion, Webb will request, as of the Order Date,
Selected Dealers to submit orders to purchase shares for which they have
received indications of interest from their customers. Selected Dealers will
send confirmation of the orders to such customers on the next business day after
the Order Date. Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the closing date of the Conversion. On the closing date,
Selected Dealers will remit funds to the account that the Holding Company
established for each Selected Dealer. Each customer's funds so forwarded to the
Holding Company, along with all other accounts held in the same title, will be
insured up to the applicable legal limit. After payment has been received by the
Holding Company from Selected Dealers, funds will earn interest at the Bank's
passbook rate until the completion of the Offering. In the event the Conversion
is not consummated as described above, funds with interest will be returned
promptly to the Selected Dealers, who, in turn, will promptly credit their
customers' brokerage account.
In the event the Holding Company determines to conduct a Public
Offering, persons to whom a prospectus is delivered may subscribe for shares of
Common Stock by submitting a completed stock order and account withdrawal
authorization (provided by Webb) and an executed certification along with
immediately available funds (which may be obtained by debiting a Webb account)
to Webb by not later than the public offering expiration date (as established by
the Holding Company). Promptly upon receipt of available funds, together with a
properly executed stock order and account withdrawal authorization and
certification, Webb will forward such funds to Preferred Savings to be deposited
in a subscription escrow account.
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If a subscription in the Public Offering is accepted, promptly after
the completion of the Conversion, a certificate for the appropriate amount of
shares will be forwarded to Webb as nominee for the beneficial owner. In the
event that a subscription is not accepted or the Conversion is not consummated,
the Bank will promptly refund with interest the subscription funds to Webb which
will then return the funds to subscribers' accounts. If the aggregate pro forma
market value of the Company and the Bank, as converted, is less than $14.0
million or more than $21.8 million, each subscriber will have the right to
modify or rescind his or her subscription.
If a Public Offering is held, the opportunity to subscribe for shares
of Common Stock in the Public Offering is subject to the right of the Bank and
the Holding Company, in their sole discretion, to accept or reject any such
orders in whole or in part.
Additional Purchase Restrictions
The Plan also provides for certain additional limitations to be placed
upon the purchase of shares in the Conversion. Specifically, no person (other
than a Tax-Qualified Employee Plan) by himself or herself or with an associate,
and no group of persons acting in concert, may subscribe for or purchase more
than $900,000 of Common Stock. For purposes of this limitation, an associate of
a person does not include a Tax-Qualified Employee Plan or Non-Tax Qualified
Employee Plan in which the person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary capacity. Moreover, for purposes
of this paragraph, shares held by one or more Tax Qualified or Non-Tax Qualified
Employee Plans attributed to a person shall not be aggregated with shares
purchased directly by or otherwise attributable to that person except for that
portion of a plan which is self-directed by a person. See "- Stock Pricing and
Number of Shares to be Issued" regarding potential changes in Subscription
Rights in the event of a decrease in the number of shares to be issued in the
Conversion. Officers and directors and their associates may not purchase, in the
aggregate, more than 35% of the shares to be sold in the Conversion. For
purposes of the Plan, the members of the Board of Directors are not deemed to be
acting in concert solely by reason of their Board membership. For purposes of
this limitation, an associate of an officer or director does not include a
Tax-Qualified Employee Plan. Moreover, any shares attributable to the officers
and directors and their associates, but held by a Tax-Qualified Employee Plan
(other than that portion of a plan which is self-directed) shall not be included
in calculating the number of shares which may be purchased under the limitations
in this paragraph. Shares purchased by employees who are not officers or
directors of the Bank, or their associates, are not subject to this limitation.
The term "associate" is used above to indicate any of the following
relationships with a person: (i) any corporation or organization (other than the
Holding Company or the Bank or a majority-owned subsidiary of the Holding
Company or the Bank) of which a person is an officer or partner or is, directly
or indirectly, the beneficial owner of 10% or more of any class of equity
security; (ii) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in a similar
fiduciary capacity; and (iii) any relative or spouse of such person or any
relative of such spouse who has the same home as such person or who is a
director or officer of the Holding Company or the Bank or any subsidiary of the
Holding Company or the Bank.
The Boards of Directors of the Holding Company and the Bank, in their
sole discretion, may increase the maximum purchase limitations referred to above
up to 9.99% of the total
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shares to be offered in the Offering, provided that orders for shares exceeding
5.0% of the shares being offered in the Offering shall not exceed, in the
aggregate, 10% of the shares being offered in the Offering or decrease the
maximum purchase limitation to one percent of the Common Stock offered in the
Conversion. Requests to purchase additional shares of Common Stock under this
provision will be allocated by the Boards of Directors on a pro rata basis
giving priority in accordance with the priority rights set forth above.
Depending on market and financial conditions, the Boards of Directors of the
Holding Company and the Bank, with the approval of the OTS and without further
approval of the members, may increase or decrease any of the above purchase
limitations.
To the extent that shares are available, each subscriber must subscribe
for a minimum of 25 shares. In computing the number of shares to be allocated,
all numbers will be rounded down to the next whole number.
Common Stock purchased in the Conversion will be freely transferable
except for shares purchased by executive officers and directors of the Bank or
the Holding Company. See "- Restrictions on Transfer of Subscription Rights and
Shares."
Marketing Arrangements
Preferred Savings has retained Webb, a broker-dealer registered with
the Securities and Exchange Commission (the "SEC") and a member of the National
Association of Securities Dealers, Inc. (the "NASD"), to consult with and advise
the Bank and to assist in the distribution of shares in the Offering on a
best-efforts basis. Webb is headquartered in Dublin, Ohio and its phone number
is (614) 766-8400. Among the services Webb will perform are (i) training and
educating Preferred Savings employees, who will be performing certain
ministerial functions in the Offering, regarding the mechanics and regulatory
requirements of the stock sale process, (ii) keeping records of orders for
shares of Common Stock, (iii) targeting Preferred Savings' sales efforts
including preparation of marketing materials, (iv) assisting in the collection
of proxies from Members for use at the Special Meeting, and (v) providing its
registered stock representatives to staff the Stock Information Center and
meeting with and assisting potential subscribers. For its services, Webb will
receive a success fee of 1.5% of the aggregate Purchase Price of Common Stock
sold in the Subscription Offering, excluding Common Stock purchased by
directors, officers and employees of the Association, or members of their
immediate families and purchases by tax-qualified plans. A management fee of
$25,000, payable in four monthly installments of $6,250, is being applied
against this fee. If the Subscription and Community Offering is terminated
before completion, Webb will be entitled to retain such monthly payments already
accrued or received and shall be entitled to reimbursement for all reasonable
expenses (not to exceed $5,000).
To the extent registered broker-dealers are utilized, the Holding
Company will pay a fee (to be negotiated, but not to exceed 4.5% of the
aggregate Purchase Price of shares of Common Stock sold in the Public Offering)
to such Selected Dealers, including any sponsoring dealer fees. The Holding
Company will also pay Webb a fee of 1.0% of the aggregate Purchase Price of
shares of Common Stock sold in the Offering by Selected Dealers, which together
with the fee to be paid to Selected Dealers will result in an aggregate fee not
to exceed 5.5% of the Common Stock sold in the Offering. Fees paid to Webb and
to any other broker-dealer may be deemed to be underwriting fees, and Webb and
such other broker-dealers may be deemed to be
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underwriters. The Holding Company has agreed to reimburse Webb for its
reasonable out-of-pocket expenses (not to exceed $5,000), and its legal fees and
expenses (not to exceed $35,000) and to indemnify Webb against certain claims or
liabilities, including certain liabilities under the Securities Act.
In the event there is a Public Offering, procedures may be implemented
to permit a purchaser to pay for his or her shares with funds held by or
deposited with Webb or a "Selected Dealer." See "- Public Offering."
Directors and executive officers of the Holding Company and the Bank
may, to a limited extent, participate in the solicitation of offers to purchase
Common Stock. Sales will be made from a Stock Information Center located away
from the publicly accessible areas (including teller windows) of the Bank's
office. Other employees of the Bank may participate in the Offering in
administrative capacities, providing clerical work in effecting a sales
transaction or answering questions of a potential purchaser provided that the
content of the employee's responses is limited to information contained in this
Prospectus or other offering document. Other questions of prospective purchasers
will be directed to executive officers or registered representatives of Webb
Such other employees have been instructed not to solicit offers to purchase
Common Stock or provide advice regarding the purchase of Common Stock. To the
extent permitted under applicable law, directors and executive officers of the
Holding Company and the Bank may participate in the solicitation of offers to
purchase Common Stock, except in the State of Texas where only a representative
of Webb will be able to offer and sell securities to Texas residents. The
Holding Company will rely on Rule 3a4-1 under the Exchange Act and sales of
Common Stock will be conducted within the requirements of Rule 3a4-1, so as to
permit officers, directors and employees to participate in the sale of Common
Stock. No officer, director or employee of the Holding Company or the Bank will
be compensated in connection with his participation by the payment of
commissions or other remuneration based either directly or indirectly on the
transactions in the Common Stock.
The Bank and the Holding Company will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for shares pursuant to the Plan of Conversion reside.
However, no shares will be offered or sold under the Plan of Conversion to any
such person who (1) resides in a foreign country or (2) resides in a state of
the United States in which a small number of persons otherwise eligible to
subscribe for shares under the Plan of Conversion reside or as to which the Bank
and the Holding Company determine that compliance with the securities law of
such state would be impracticable for reasons of cost or otherwise, including,
but not limited to, a requirement that the Bank or the Holding Company or any of
their officers, directors or employees register, under the securities laws of
such state, as a broker, dealer, salesmen or agent. No payments will be made in
lieu of the granting of Subscription Rights to any such person.
Method of Payment for Subscriptions
To purchase shares in the Subscription Offering, an executed order form
and certification form with the required payment for each share subscribed for,
or with appropriate authorization for withdrawal from the Bank's deposit account
(which may be given by completing the appropriate blanks in the order form),
must be received by the Bank by noon, Chicago, Illinois time, on
_______________, 1996. Order forms which are not received by such time or are
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executed defectively or are received without full payment (or appropriate
withdrawal instructions) are not required to be accepted.
To order Common Stock in connection with the Public Offering, if any,
an executed stock order and account withdrawal authorization and certification
must be received by Webb prior to the termination of the Public Offering. The
date by which orders must be received in the Public Offering will be set by the
Holding Company at the time of commencement of the Public Offering; provided
however, if the Offering is extended beyond _______________, 1996, each
subscriber will have the opportunity to maintain, modify or rescind his or her
subscription. In such event, all subscription funds will be promptly returned
with interest to each subscriber unless he or she affirmatively indicates
otherwise. In addition, the Holding Company and the Bank are not obligated to
accept orders submitted on photocopies or facsimile order forms.
The Holding Company and the Bank have the right to waive or permit the
correction of incomplete or improperly executed forms, but do not represent that
they will do so. Once received, an executed order form or stock order and
account withdrawal authorization may not be modified, amended or rescinded
without the consent of the Holding Company and the Bank unless the Conversion
has not been completed by _________, 1996.
Payment for subscriptions in the Subscription Offering, may be made (i)
in cash if delivered in person at the office of the Bank, (ii) by check, bank
draft or money order or (iii) by authorization of withdrawal from deposit
accounts maintained with the Bank. Interest will be paid on payments made by
cash, check, bank draft or money order, whether or not the Conversion is
complete or terminated, at the Bank's current passbook rate from the date
payment is received until the completion or termination of the Conversion. If
payment is made by authorization of withdrawal from deposit or certificate
accounts, the funds authorized to be withdrawn from such account will continue
to accrue interest at the contractual rates until completion or termination of
the Conversion. Such funds will be unavailable to the depositor until completion
or termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
Purchase Price from his certificate account, the Bank will do so as of the
effective date of Conversion. The Bank will waive any applicable penalties for
early withdrawal from certificate accounts at Preferred Savings for the purpose
of purchasing Common Stock. If the remaining balance in a certificate account is
reduced below the applicable minimum balance requirement at the time that the
funds actually are transferred under the authorization, the rate paid on the
remaining balance of the certificate will earn interest the then-current
passbook rate.
Owners of self-directed IRAs may under certain circumstances use the
assets of such IRAs to purchase shares of Common Stock in the Offering, provided
that such IRAs are self- directed and are not maintained at the Bank. Persons
with IRAs maintained at the Bank must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of Common Stock in the
Offering. In addition, the provisions of the ERISA and Internal Revenue Service
regulations require that officers, directors and 10% stockholders who use
self-directed IRA funds to purchase shares of Common Stock in the Offering make
such purchases for the exclusive benefit of the IRAs.
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If the ESOP subscribes for shares during the Subscription Offering,
such plan will not be required to pay for the shares subscribed for at the time
it subscribes, but rather, may pay for such shares of Common Stock subscribed
for the Purchase Price upon consummation of the Conversion, provided that there
is in force from the time of its subscription until such time, a loan commitment
to lend to the ESOP, at such time, the aggregate Purchase Price of the shares
for which it subscribed.
For information regarding the submission of orders in connection with
the Public Offering, see "- Public Offering."
All refunds and any interest due will be paid after completion of the
Conversion. Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of the Bank, or to such other address as may be specified in properly
completed order forms, as soon as practicable following consummation of the sale
of all shares of Common Stock. Any certificates returned as undeliverable will
be disposed of in accordance with applicable law.
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 under the Exchange
Act, no prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
order form will confirm receipt or delivery in accordance with Rule 15c2-8.
Order forms will only be distributed with a prospectus. The Bank will accept for
processing only orders submitted on original order forms with the form of
certification. Photocopies or facsimile copies of order forms or certifications
will not be accepted. Payment by cash, check, money order, bank draft or debit
authorization to an existing account at the Bank must accompany the order form.
No wire transfers will be accepted.
In order to ensure that Eligible Account Holders, Supplemental Eligible
Account Holders and Other Members are properly identified as to their stock
purchase priorities, depositors as of the Eligibility Record Date (March 31,
1995), Supplemental Eligibility Record Date (September 30, 1996) and/or the
Voting Record Date (___________, 1996) and borrowers as of the Voting Record
Date must list all accounts on the stock order form giving all names on each
account and the account number as of the applicable record date.
In addition to the foregoing, if shares are offered through Selected
Dealers, a purchaser may pay for his shares with funds held by or deposited with
a Selected Dealer. If an order form is executed and forwarded to the Selected
Dealer or if the Selected Dealer is authorized to execute the order form on
behalf of a purchaser, the Selected Dealer is required to forward the order form
and funds to the Bank for deposit in a segregated account on or before noon of
the business day following receipt of the order form or execution of the order
form by the Selected Dealer. Alternatively, Selected Dealers may solicit
indications of interest from their customers who indicated an interest and seek
their confirmation as to their intent to purchase. Those indicating an intent to
purchase shall forward executed order forms and certifications to their Selected
Dealer or authorize the Selected Dealer to execute such forms. The Selected
Dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Bank for deposit in a
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segregated account. If such alternative procedure is employed, purchasers' funds
are not required to be in their accounts with Selected Dealers until the debit
date.
Restrictions on Transfer of Subscription Rights and Shares
Prior to the completion of the Conversion, the OTS conversion
regulations prohibit any person with subscription rights, including the Eligible
Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible Account
Holders, Other Members and employees, officers and directors, from transferring
or entering into any agreement or understanding to transfer the legal or
beneficial ownership of the subscription rights issued under the Plan or the
shares of Common Stock to be issued upon their exercise. Such rights may be
executed only by the person to whom they are granted and only for his account.
Each person exercising such subscription rights will be required to certify that
he is purchasing shares solely for his own account and that he has no agreement
or understanding regarding the sale or transfer of such shares. The OTS
regulations also prohibit any person from offering or making an announcement of
an offer or intent to make an offer to purchase such subscription rights or
shares of Common Stock prior to the completion of the Conversion.
The Bank and the Holding Company may pursue any and all legal and
equitable remedies in the event they become aware of the transfer of
subscription rights and will not honor orders known by them to involve the
transfer of such rights.
Except as to directors and executive officers of the Bank and the
Holding Company, the shares of Common Stock sold in the Conversion will be
freely transferable. Shares purchased by directors, executive officers or their
associates in the Conversion shall be subject to the restrictions that said
shares shall not be sold during the period of one year following the date of
purchase, except in the event of the death of the stockholder. Accordingly,
stock certificates issued by the Holding Company to directors, executive
officers and their associates shall bear a legend giving appropriate notice of
such restriction and, in addition, the Bank and the Holding Company will give
appropriate instructions to the transfer agent for the Common Stock with respect
to the applicable restriction upon transfer of any restricted shares. Any shares
issued at a later date as a stock dividend, stock split or otherwise, to holders
of restricted stock, shall be subject to the same restrictions that may apply to
such restricted stock. Holding Company stock (like the stock of most companies)
is subject to the requirements of the Securities Act. Accordingly, Holding
Company stock may be offered and sold only in compliance with registration
requirements or pursuant to an applicable exemption from registration.
Holding Company stock received in the Conversion by persons who are not
"affiliates" of the Holding Company may be resold without registration. Shares
received by affiliates of the Holding Company (primarily the directors, officers
and principal stockholders of the Holding Company) will be subject to the resale
restrictions of Rule 144 under the Securities Act, which are discussed below.
Rule 144 generally requires that there be publicly available certain
information concerning the Holding Company, and that sales thereunder be made in
routine brokerage transactions or through a market maker. If the conditions of
Rule 144 are satisfied, each affiliate (or group of persons acting in concert
with one or more affiliates) is entitled to sell in the public market, without
registration, in any three-month period, a number of shares which
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does not exceed the greater of (i) 1% of the number of outstanding shares of
Holding Company stock, or (ii) if the stock is admitted to trading on a national
securities exchange or reported through the automated quotation system of a
registered securities bank, the average weekly reported volume of trading during
the four weeks preceding the sale.
Participation by the Board and Executive Officers
The directors and executive officers of Preferred Savings have
indicated their intention to purchase in the Conversion an aggregate of $950,000
of Common Stock, equal to 6.8%, 5.8%, 5.0% or 4.4% of the number of shares to be
issued in the Offering, at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range, respectively. The following table sets
forth information regarding Subscription Rights to Common Stock intended to be
exercised by each of the directors of the Bank, including members of their
immediate family and their IRAs, and by all directors and executive officers as
a group. The following table assumes that 1,650,000 shares, the midpoint of the
Estimated Valuation Range, of Common Stock are issued at the Purchase Price of
$10.00 per share and that sufficient shares will be available to satisfy the
subscriptions indicated. The table does not include shares to be purchased
through the ESOP (8% of shares issued in the Conversion) or awarded under the
proposed RRP (an amount of shares which may be acquired after stockholder
ratification of such plan equal to 4% of the shares sold in the Conversion) or
proposed Stock Option Plan (an amount of shares which may be issued after
stockholder ratification of such plan equal to 10% of the shares sold in the
Conversion).
<TABLE>
<CAPTION>
Number of
Aggregate Shares at Percent of
Purchase $10.00 Shares at
Name Title Price per Share(1) Midpoint
- --------------------------- ------------------------------------------------ --------- ------------ ----------
<S> <C> <C> <C> <C>
Sylvester J. Ptak Chairman of the Board $350,000 35,000 2.1%
Kimberly P. Rooney President, Chief Executive Officer and Director $200,000 20,000 1.2
Edward Wolak Director $100,000 10,000 0.6
Jeanine M. McInerney Director $100,000 10,000 0.6
Rocco Di Iorio Director $100,000 10,000 0.6
All other executive $100,000 10,000 0.6
officers as a group
All directors and $950,000 95,000 5.8%
executive officers as a
group (8 persons)
</TABLE>
(1)Does not include subscriptions by the ESOP, or options which are intended to
be granted under the proposed Stock Option Plan or restricted stock awards
which are intended to be granted under the proposed RRP, subject to
stockholder ratification of such plans.
Risk of Delayed Offering
The completion of the sale of all unsubscribed shares in the Offering
will be dependent, in part, upon the Bank's operating results and market
conditions at the time of the Offering. Under the Plan of Conversion, all shares
offered in the Conversion must be sold within a period ending 24 months from the
date of the Special Meeting. While the Bank and the Holding
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Company anticipate completing the sale of shares offered in the Conversion
within this period, if the Board of Directors of the Bank and the Holding
Company are of the opinion that economic conditions generally or the market for
publicly traded thrift institution stocks make undesirable a sale of the Common
Stock, then the Offering may be delayed until such conditions improve.
A material delay in the completion of the sale of all unsubscribed
shares in the Public Offering or otherwise may result in a significant increase
in the costs of completing the Conversion. Significant changes in the Bank's
operations and financial condition, the aggregate market value of the shares to
be issued in the Conversion and general market conditions may occur during such
material delay. In the event the Conversion is not consummated within 24 months
after the date of the Special Meeting of Members, the Bank would charge accrued
Conversion costs to then current period operations.
Approval, Interpretation, Amendment and Termination
All interpretations of the Plan of Conversion, as well as the
completeness and validity of order forms and stock order and account withdrawal
authorizations, will be made by the Bank and the Holding Company and will be
final, subject to the authority of the OTS and the requirements of applicable
law. The Plan of Conversion provides that, if deemed necessary or desirable by
the Boards of Directors of the Bank and the Holding Company, the Plan of
Conversion may be substantively amended by the Boards of Directors of the Bank
and the Holding Company, as a result of comments from regulatory authorities or
otherwise, at any time with the concurrence of the OTS and the SEC. In the event
the Plan of Conversion is substantially amended, other than a change in the
maximum purchase limits set forth herein, the Holding Company intends to notify
subscribers of the change and to refund subscription funds with interest unless
subscribers affirmatively elect to increase, decrease or maintain their
subscriptions. The Plan of Conversion will terminate if the sale of all shares
is not completed within 24 months after the date of the Special Meeting of
Members. The Plan of Conversion may be terminated by the Boards of Directors of
the Holding Company and the Bank with the concurrence of the OTS, at any time. A
specific resolution approved by a two-thirds vote of the Boards of Directors of
the Holding Company and the Bank would be required to terminate the Plan of
Conversion prior to the end of such 24-month period.
Restrictions on Repurchase of Stock
For a period of three years following Conversion, the Holding Company
may not repurchase any shares of its capital stock, except in the case of an
offer to repurchase on a pro rata basis made to all holders of capital stock of
the Holding Company. Any such offer shall be subject to the prior approval of
the OTS. Furthermore, the Holding Company may not repurchase any of its stock
(i) if the result thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established pursuant
to OTS regulations and (ii) except in compliance with the requirements of the
OTS' capital distribution rule.
The above limitations are subject to the OTS conversion rules which
generally provide that the Holding Company may repurchase its capital stock
provided (i) no repurchases occur within one year following the Conversion
(subject to certain exceptions), (ii) repurchases during the second and third
year after conversion are part of an open market stock repurchase program
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that does not allow for a repurchase of more than 5% of the Holding Company's
outstanding capital stock during a 12-month period, (iii) the repurchases do not
cause the Bank to become undercapitalized, and (iv) the Holding Company provides
notice to the OTS at lease 10 days prior to the commencement of a repurchase
program and the OTS does not object to such regulations. In addition, the above
limitations do not preclude repurchases of capital stock by the Holding Company
in the event applicable federal regulatory limitations are subsequently
liberalized.
Income Tax Consequences
Consummation of the Conversion is expressly conditioned upon prior
receipt by the Bank of either a ruling from the IRS or an opinion of Silver,
Freedman & Taff, L.L.P. with respect to federal taxation, and an opinion of
Crowe, Chizek and Company LLP with respect to Illinois taxation, to the effect
that consummation of the Conversion will not be taxable to the converted Bank or
the Holding Company. The full text of the Silver, Freedman & Taff, L.L.P.
opinion, the Keller Letter (hereinafter defined) and the Crowe, Chizek and
Company LLP opinion, which opinions are summarized herein, were filed with the
SEC as exhibits to the Holding Company's Registration Statement on Form S-1. See
"Additional Information."
An opinion which is summarized below has been received from Silver,
Freedman & Taff, L.L.P. with respect to the proposed Conversion of the Bank to
the stock form. The Silver, Freedman Taff, L.L.P. opinion states that (i) the
Conversion will qualify as a reorganization under Section 368(a)(1)(F) of the
Internal Revenue Code of 1986, as amended, and no gain or loss will be
recognized to the Bank in either its mutual form or its stock form by reason of
the proposed Conversion, (ii) no gain or loss will be recognized to the Bank in
its stock form upon the receipt of money and other property, if any, from the
Holding Company for the stock of the Bank; and no gain or loss will be
recognized to the Holding Company upon the receipt of money for Common Stock of
the Holding Company; (iii) the assets of the Bank in either its mutual or its
stock form will have the same basis before and after the Conversion; (iv) the
holding period of the assets of the Bank in its stock form will include the
period during which the assets were held by the Bank in its mutual form prior to
Conversion; (v) gain, if any, will be realized by the depositors of the Bank
upon the constructive issuance to them of withdrawable deposit accounts of the
Bank in its stock form, nontransferable subscription rights to purchase Holding
Company Common Stock and/or interests in the Liquidation Account (any such gain
will be recognized by such depositors, but only in an amount not in excess of
the fair market value of the subscription rights and Liquidation Account
interests received); (vi) the basis of the account holder's savings accounts in
the Bank after the Conversion will be the same as the basis of his or her
savings accounts in the Bank prior to the Conversion; (vii) the basis of each
account holder's interest in the Liquidation Account is assumed to be zero;
(viii) based on the Keller Letter, as hereinafter defined, the basis of the
subscription rights will be zero; (ix) the basis of the Holding Company Common
Stock to its stockholders will be the purchase price thereof; (x) a
stockholder's holding period for Holding Company Common Stock acquired through
the exercise of subscription rights shall begin on the date on which the
subscription rights are exercised and the holding period for the Conversion
Stock purchased in the Offering will commence on the date following the date on
which such stock is purchased; (xi) the Bank in its stock form will succeed to
and take into account the earnings and profits or deficit in earnings and
profits, of the Bank, in its mutual form, as of the date of Conversion; (xii)
the Bank, immediately after Conversion, will succeed to and take into account
the bad debt reserve
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accounts of the Bank, in mutual form, and the bad debt reserves will have the
same character in the hands of the Bank after Conversion as if no Conversion had
occurred; and (xiii) the creation of the Liquidation Account will have no effect
on the Bank's taxable income, deductions or addition to reserve for bad debts
either in its mutual or stock form.
The opinion from Silver, Freedman & Taff, L.L.P. is based, among other
things, on certain assumptions, including the assumptions that the exercise
price of the Subscription Rights to purchase Holding Company Common Stock will
be approximately equal to the fair market value of that stock at the time of the
completion of the proposed Conversion. With respect to the Subscription Rights,
the Bank will receive a letter from Keller (the "Keller Letter") which, based on
certain assumptions, will conclude that the Subscription Rights to be received
by Eligible Account Holders, Supplemental Eligible Account Holders and other
eligible subscribers do not have any economic value at the time of distribution
or at the time the Subscription Rights are exercised, whether or not a Public
Offering takes place.
The Bank has also received an opinion of Silver, Freedman & Taff,
L.L.P. to the effect that, based in part on the Keller Letter: (i) no taxable
income will be realized by depositors as a result of the exercise of
non-transferable Subscription Rights to purchase shares of Holding Company
Common Stock at fair market value; (ii) no taxable income will be recognized by
borrowers, directors, officers and employees of the Bank on the receipt or
exercise of Subscription Rights to purchase shares of Holding Company Common
Stock at fair market value; and (iii) no taxable income will be realized by the
Bank or Holding Company on the issuance of Subscription Rights to eligible
subscribers to purchase shares of Holding Company Common Stock at fair market
value.
Notwithstanding the Keller Letter, if the Subscription Rights are
subsequently found to have a fair market value and are deemed a distribution of
property, it is Silver, Freedman & Taff, L.L.P.'s opinion that gain or income
will be recognized by various recipients of the Subscription Rights (in certain
cases, whether or not the rights are exercised) and the Bank and/or the Holding
Company may be taxable on the distribution of the Subscription Rights. In any
event, all recipients are encouraged to consult with their own tax advisors as
to the tax consequences which may result.
With respect to Illinois taxation, the Bank has received an opinion
from Crowe, Chizek and Company LLP to the effect that the Illinois tax
consequences to the Bank, in its mutual or stock form, the Holding Company,
eligible account holders, parties receiving Subscription Rights, parties
purchasing conversion stock, and other parties participating in the Conversion
will be the same as the federal income tax consequences described above.
Unlike a private letter ruling, the opinions of Silver, Freedman &
Taff, L.L.P. and Crowe, Chizek and Company LLP, as well as the Keller Letter,
have no binding effect or official status, and no assurance can be given that
the conclusions reached in any of those opinions would be sustained by a court
if contested by the IRS or the Delaware or Illinois tax authorities.
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RESTRICTIONS ON ACQUISITIONS OF STOCK AND
RELATED TAKEOVER DEFENSIVE PROVISIONS
Although the Boards of Directors of the Bank and the Holding Company
are not aware of any effort that might be made to obtain control of the Holding
Company after Conversion, the Board of Directors, as discussed below, believe
that it is appropriate to include certain provisions as part of the Holding
Company's certificate of incorporation to protect the interests of the Holding
Company and its stockholders from takeovers which the Board of Directors of the
Holding Company might conclude are not in the best interests of the Bank, the
Holding Company or the Holding Company's stockholders.
The following discussion is a general summary of material provisions of
the Holding Company's certificate of incorporation and bylaws and certain other
regulatory provisions which may be deemed to have an "anti-takeover" effect. The
following description of certain of these provisions is necessarily general and,
with respect to provisions contained in the Holding Company's certificate of
incorporation and bylaws and the Bank's proposed stock charter and bylaws,
reference should be made in each case to the document in question, each of which
is part of the Bank's Conversion Application filed with the OTS and the Holding
Company's Registration Statement filed with the SEC. See "Additional
Information."
Provisions of the Holding Company's Certificate of Incorporation and Bylaws
Directors. Certain provisions of the Holding Company's certificate of
incorporation and bylaws will impede changes in majority control of the Board of
Directors. The Holding Company's certificate of incorporation provides that the
Board of Directors of the Holding Company will be divided into three classes,
with directors in each class elected for three-year staggered terms except for
the initial directors. Thus, assuming a Board of eight directors, it would take
two annual elections to replace a majority of the Holding Company's Board. The
Holding Company's certificate of incorporation also provides that the size of
the Board of Directors may be increased or decreased only by a majority vote of
the whole Board or by a vote of 80% of the shares eligible to be voted at a duly
constituted meeting of stockholders called for such purpose. The bylaws also
provide that any vacancy occurring in the Board of Directors, including a
vacancy created by an increase in the number of directors, shall be filled for
the remainder of the unexpired term by a majority vote of the directors then in
office. Final ly, the bylaws impose certain notice and information requirements
in connection with the nomi nation by stockholders of candidates for election to
the Board of Directors or the proposal by stockholders of business to be acted
upon at an annual meeting of stockholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of 80% of the shares eligible to vote.
Restrictions on Call of Special Meetings. The certificate of
incorporation of the Holding Company provides that a special meeting of
stockholders may be called only pursuant to a resolution of the Board of
Directors and for only such business as directed by the Board.
Stockholders are not authorized to call a special meeting.
Absence of Cumulative Voting. The Holding Company's certificate of
incorporation does not provide for cumulative voting rights in the election of
directors.
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Authorization of Preferred Stock. The certificate of incorporation of
the Holding Company authorizes 100,000 shares of serial preferred stock, $.01
par value. The Holding Company is authorized to issue preferred stock from time
to time in one or more series subject to applicable provisions of law, and the
Board of Directors is authorized to fix the designations, powers, preferences
and relative participating, optional and other special rights of such shares,
including voting rights (which could be multiple or as a separate class) and
conversion rights. In the event of a proposed merger, tender offer or other
attempt to gain control of the Holding Company that the Board of Directors does
not approve, it might be possible for the Board of Directors to authorize the
issuance of a series of preferred stock with rights and preferences that would
impede the completion of such a transaction. If the Holding Company issued any
preferred stock which disparately reduced the voting rights of the Common Stock
within the meaning of Rule 19c-4 under the Exchange Act, the Common Stock could
be required to be delisted from the Nasdaq System. An effect of the possible
issuance of preferred stock, therefore, may be to deter a future takeover
attempt. The Board of Directors has no present plans or understandings for the
issuance of any preferred stock and does not intend to issue any preferred stock
except on terms which the Board deems to be in the best interests of the Holding
Company and its stockholders.
Limitation on Voting Rights. The certificate of incorporation of the
Holding Company provides that in no event shall any record owner of any
outstanding Common Stock which is beneficially owned, directly or indirectly, by
a person who beneficially owns in excess of 10% of the then outstanding shares
of Common Stock (the "Limit"), be entitled or permitted to any vote in respect
of the shares held in excess of the Limit. This limitation would not inhibit any
person from soliciting (or voting) proxies from other beneficial owners for more
than 10% of the Common Stock or from voting such proxies. Beneficial ownership
is to be determined pursuant to Rule 13d-3 of the General Rules and Regulations
of the Exchange Act, and in any event includes shares beneficially owned by any
affiliate of such person, shares which such person or his affiliates (as defined
in the certificate of incorporation) have the right to acquire upon the exercise
of conversion rights or options and shares as to which such person and his
affiliates have or share investment or voting power but shall not include shares
beneficially owned by directors, officers and employees of the Bank or the
Holding Company. This provision will be enforced by the Board of Directors to
limit the voting rights of persons beneficially owning more than 10% of the
stock and thus could be utilized in a proxy contest or other solicitation to
defeat a proposal that is desired by a majority of the stockholders.
Procedures for Certain Business Combinations. The Holding Company's
certificate of incorporation requires that certain business combinations
(including transactions initiated by management) between the Holding Company (or
any majority-owned subsidiary thereof) and a 10% or more stockholder either (i)
be approved by at least 80% of the total number of outstanding voting shares,
voting as a single class, of the Holding Company, (ii) be approved by two-thirds
of the continuing Board of Directors (i.e., persons serving prior to the 10%
stockholder becoming such) or (iii) involve consideration per share generally
equal to that paid by such 10% stockholder when it acquired its block of stock.
It should be noted that, since the Board and management intend to
purchase approximately $950,000 of the shares offered in the Conversion and may
control the voting of additional shares through the ESOP and proposed RRP and
Stock Option Plan, the Board and
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management may be able to block the approval of combinations requiring an 80%
vote even where a majority of the stockholders vote to approve such
combinations.
Amendment to Certificate of Incorporation and Bylaws. Amendments to the
Holding Company's certificate of incorporation must be approved by the Holding
Company's Board of Directors and also by a majority of the outstanding shares of
the Holding Company's voting stock, provided, however, that approval by at least
80% of the outstanding voting stock is generally required for certain provisions
(i.e., provisions relating to number, classification, election and removal of
directors; amendment of bylaws; call of special stockholder meetings; offers to
acquire and acquisitions of control; director liability; certain business
combinations; power of indemnification; and amendments to provisions relating to
the foregoing in the certificate of incorporation).
The bylaws may be amended by a majority vote of the Board of Directors
or the affirmative vote of at least 80% of the total votes eligible to be voted
at a duly constituted meeting of stockholders.
Purpose and Takeover Defensive Effects of the Holding Company's
Certificate of Incorporation and Bylaws. The Board of Directors of the Bank
believes that the provisions described above are prudent and will reduce the
Holding Company's vulnerability to takeover attempts and certain other
transactions which have not been negotiated with and approved by its Board of
Directors. These provisions will also assist the Bank in the orderly deployment
of the conversion proceeds into productive assets during the initial period
after the Conversion. The Board of Directors believes these provisions are in
the best interest of the Bank and of the Holding Company and its stockholders.
In the judgment of the Board of Directors, the Holding Company's Board will be
in the best position to determine the true value of the Holding Com pany and to
negotiate more effectively for what may be in the best interests of its
stockholders. Accordingly, the Board of Directors believes that it is in the
best interests of the Holding Company and its stockholders to encourage
potential acquirors to negotiate directly with the Board of Directors of the
Holding Company and that these provisions will encourage such negotiations and
discourage hostile takeover attempts. It is also the view of the Board of
Directors that these provisions should not discourage persons from proposing a
merger or other transaction at prices reflective of the true value of the
Holding Company and which is in the best interests of all stockholders.
Attempts to take over financial institutions and their holding
companies have recently become increasingly common. Takeover attempts which have
not been negotiated with and approved by the Board of Directors present to
stockholders the risk of a takeover on terms which may be less favorable than
might otherwise be available. A transaction which is negotiated and approved by
the Board of Directors, on the other hand, can be carefully planned and
undertaken at an opportune time in order to obtain maximum value for the Holding
Company and its stockholders, with due consideration given to matters such as
the management and business of the acquiring corporation and maximum strategic
development of the Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then
current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders
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may be presented with the alternative of partially liquidating their investment
at a time that may be disadvantageous, or retaining their investment in an
enterprise which is under different management and whose objectives may not be
similar to those of the remaining stockholders. The concentration of control,
which could result from a tender offer or other takeover attempt, could also
deprive the Holding Company's remaining stockholders of the benefits of certain
protective provisions of the Exchange Act, if the number of beneficial owners
becomes less than the 300 required for Exchange Act registration.
Despite the belief of the Bank and the Holding Company as to the
benefits to stock holders of these provisions of the Holding Company's
certificate of incorporation and bylaws, these provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
the Holding Company's Board, but pursuant to which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have any opportunity to do so. Such provisions will also render the removal
of the Holding Company's Board of Directors and of management more difficult.
The Board will enforce the voting limitation provisions of the charter in proxy
solicitations and accordingly could utilize these provisions to defeat proposals
that are favored by a majority of the stockholders. The Boards of Directors of
the Bank and the Holding Company, however, have concluded that the potential
benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Conversion, the Holding Company may adopt additional
charter provisions regarding the ac quisition of its equity securities that
would be permitted to a Delaware corporation. The Holding Company and the Bank
do not presently intend to propose the adoption of further restrictions on the
acquisition of the Holding Company's equity securities.
Other Restrictions on Acquisitions of Stock
Delaware Anti-Takeover Statute. The Delaware General Corporation Law
(the "DGCL") provides that buyers who acquire more than 15% of the outstanding
stock of a Delaware corporation, such as the Holding Company, are prohibited
from completing a hostile takeover of such corporation for three years. However,
the takeover can be completed if (i) the buyer, while acquiring the 15%
interest, acquires at least 85% of the corporation's outstanding stock (the 85%
requirement excludes shares held by directors who are also officers and certain
shares held under employee stock plans), or (ii) the takeover is approved by the
target corporation's board of directors and two-thirds of the shares of
outstanding stock of the corporation (excluding shares held by the bidder).
However, these provisions of the DGCL do not apply to Delaware
corporations with less than 2,000 stockholders or which do not have voting stock
listed on a national exchange or listed for quotation with a registered national
securities association. No prediction can be made as to whether the Holding
Company will be listed on Nasdaq National Market or have 2,000 stockholders.
Preferred Savings may exempt itself from the requirements of the statute by
adopting an amendment to its Certificate of Incorporation or Bylaws electing not
to be governed by this provision. At the present time, the Board of Directors
does not intend to propose any such amendment.
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Federal Regulation. A federal regulation prohibits any person prior to
the completion of a conversion from transferring, or entering into any agreement
or understanding to transfer, the legal or beneficial ownership of the
subscription rights issued under a plan of conversion or the stock to be issued
upon their exercise. This regulation also prohibits any person prior to the
completion of a conversion from offering, or making an announcement of an offer
or intent to make an offer, to purchase such subscription rights or stock. For
three years following conversion, this regulation prohibits any person, without
the prior approval of the OTS, from acquiring or making an offer to acquire (if
the offer is opposed by the savings association) more than 10% of the stock of
any converted savings institution if such person is, or after consummation of
such acquisition would be, the beneficial owner of more than 10% of such stock.
In the event that any person, directly or indirectly, violates this regulation,
the securities beneficially owned by such person in excess of 10% may not be
counted as shares entitled to vote and may not be voted by any person or counted
as voting shares in connection with any matter submitted to a vote of
stockholders. Like the charter provisions outlined above, these federal
regulations can make a change in control more difficult, even if desired by the
holders of the majority of the shares of the stock. The Board of Directors
reserves the right to ask the OTS or other federal regulators to enforce these
restrictions against persons seeking to obtain control of the Holding Company,
whether in a proxy solicitation or otherwise. The policy of the Board is that
these legal restrictions must be observed in every case, including instances in
which an acquisition of control of the Holding Company is favored by a majority
of the stockholders.
Federal law provides that no company, "directly or indirectly or acting
in concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition,
federal regulations require that, prior to obtaining control of a savings
association, a person, other than a company, must give 60 days' prior notice to
the OTS and have received no OTS objection to such acquisition of control. Any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Under federal law (as well as the regulations referred to
below) the term "savings association" includes state and federally chartered
SAIF- insured institutions and federally chartered savings banks whose accounts
are insured by the FDIC's BIF and holding companies thereof.
Control, as defined under federal law, in general means ownership,
control of or holding irrevocable proxies representing more than 25% of any
class of voting stock, control in any manner of the election of a majority of a
savings association's directors, or a determination by the OTS that the acquiror
has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of any class of a savings association's voting stock, if the
acquiror also is subject to any one of eight "control factors," constitutes a
rebuttable determination of control under the OTS regulations. Such control
factors include the acquiror being one of the two largest stockholders. The
determination of control may be rebutted by submission to the OTS, prior to the
acquisition of stock or the occurrence of any other circumstances giving rise to
such determination, of a statement setting forth facts and circumstances which
would support a finding that no control relationship will exist and containing
certain undertakings. The OTS regulations provide that persons or companies
which acquire beneficial ownership exceeding 10% or more of any class of a
savings association's stock must file with the OTS a certification that the
holder
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is not in control of such institution, is not subject to a rebuttable
determination of control and will take no action which would result in a
determination or rebuttable determination of control without prior notice to or
approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
Holding Company Capital Stock
The 2,600,000 shares of capital stock authorized by the Holding Company
certificate of incorporation are divided into two classes, consisting of
2,500,000 shares of Common Stock (par value $.01 per share) and 100,000 shares
of serial preferred stock (par value $.01 per share). The Holding Company
currently expects to issue between 1,402,500 and 1,897,500 shares (subject to
increase to 2,182,125) of Common Stock in the Conversion and no shares of serial
preferred stock. The aggregate par value of the issued shares will constitute
the capital account of the Holding Company on a consolidated basis. Upon payment
of the Purchase Price, all shares issued in the Conversion will be duly
authorized, fully paid and nonassessable. The balance of the purchase price of
Common Stock, less expenses of Conversion, will be reflected as paid-in capital
on a consolidated basis. See "Capitalization."
Each share of the Common Stock will have the same relative rights and
will be identical in all respects with each other share of the Common Stock. The
Common Stock of the Holding Company will represent non-withdrawable capital,
will not be of an insurable type and will not
be insured by the FDIC.
Under Delaware law, the holders of the Common Stock will possess
exclusive voting power in the Holding Company. Each stockholder will be entitled
to one vote for each share held on all matters voted upon by stockholders,
subject to the limitation discussed under "Restrictions on Acquisitions of Stock
and Related Takeover Defensive Provisions - Provisions of the Holding Company's
Certificate of Incorporation and Bylaws - Limitation on Voting Rights." If the
Holding Company issues preferred stock subsequent to the Conversion, holders of
the preferred stock may also possess voting powers.
Liquidation or Dissolution. In the event of any liquidation,
dissolution or winding up of the Bank, the Holding Company, as the sole holder
of the Bank's capital stock would be entitled to receive, after payment or
provision for payment of all debts and liabilities of the Bank (including all
deposit accounts and accrued interest thereon) and after distribution of the
balance in the special liquidation account to Eligible and Supplemental Account
Holders, all assets of the Bank available for distribution. In the event of
liquidation, dissolution or winding up of the Holding Company, the holders of
its Common Stock would be entitled to receive, after payment or provision for
payment of all its debts and liabilities, all of the assets of the Holding
Company available for distribution. See "The Conversion - Effects of Conversion
to Stock Form on Depositors and Borrowers of the Bank." If preferred stock is
issued subsequent to the Conversion, the holders thereof may have a priority
over the holders of Common Stock in the event of liquidation or dissolution.
No Preemptive Rights. Holders of the Common Stock will not be entitled
to preemptive rights with respect to any shares which may be issued. The Common
Stock will not be subject
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to call for redemption, and, upon receipt by the Holding Company of the full
purchase price therefor, each share of the Common Stock will be fully paid and
nonassessable.
Preferred Stock. After Conversion, the Board of Directors of the
Holding Company will be authorized to issue preferred stock in series and to fix
and state the voting powers, designations, preferences and relative,
participating, optional or other special rights of the shares of each such
series and the qualifications, limitations and restrictions thereof. Preferred
stock may rank prior to the Common Stock as to dividend rights, liquidation
preferences, or both, and may have full or limited voting rights. The holders of
preferred stock will be entitled to vote as a separate class or series under
certain circumstances, regardless of any other voting rights which such holders
may have.
Except as discussed above, the Holding Company has no present plans for
the issuance of the additional authorized shares of Common Stock or for the
issuance of any shares of preferred stock. In the future, the authorized but
unissued and unreserved shares of Common Stock will be available for general
corporate purposes, including but not limited to possible issuance as stock
dividends or stock splits, in future mergers or acquisitions, under a cash
dividend reinvestment and stock purchase plan, in a future underwritten or other
public offering, or under a stock based employee plan. The authorized but
unissued shares of preferred stock will similarly be available for issuance in
future mergers or acquisitions, in a future underwritten public offering or
private placement or for other general corporate purposes. Except as described
herein or as otherwise required to approve the transaction in which the
additional authorized shares of common stock or authorized shares of preferred
stock would be issued, no stockholder approval will be required for the issuance
of these shares. Accordingly, the Board of Directors of the Holding Company,
without stockholder approval, can issue preferred stock with voting and
conversion rights which could adversely affect the voting power of the holders
of Common Stock.
Restrictions on Acquisitions. See "Restrictions on Acquisitions of
Stock and Related Takeover Defensive Provisions" for a description of certain
provisions of the Holding Company's certificate of incorporation and bylaws
which may affect the ability of the Holding Company's stockholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company.
Dividends. The Holding Company's Board of Directors may consider a
policy of paying cash dividends on the Common Stock in the future. No decision
has been made, however, as to the amount or timing of such dividends, if any.
The declaration and payment of dividends are subject to, among other things, the
Holding Company's then current and projected consolidated operating results,
financial condition, regulatory restrictions, future growth plans and other
factors the Board deems relevant. Therefore, no assurance can be given that any
dividends will be declared.
The ability of the Holding Company to pay cash dividends to its
stockholders will be dependent, in part, upon the ability of the Bank to pay
dividends to the Holding Company. OTS regulations do not permit the Bank to
declare or pay a cash dividend on its stock or repurchase shares of its stock if
the effect thereof would be to cause its regulatory capital to be reduced below
the amount required for the liquidation account or to meet applicable regulatory
capital requirements. See "Regulation - Limitations on Dividends and Other
Capital Distributions" for
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information regarding OTS regulations governing the Bank's ability to pay
dividends to the Holding Company.
Delaware law generally limits dividends of the Holding Company to an
amount equal to the excess of its net assets over its paid-in capital or, if
there is no such excess, to its net earnings for the current and immediately
preceding fiscal year. In addition, as the Holding Company does not anticipate,
for the immediate future, engaging in activities other than (i) investing in
cash, short-term securities and investment and mortgage-backed securities
similar to those invested in by the Bank and (ii) holding the stock of Preferred
Savings, the Holding Company's ability to pay dividends will be limited, in
part, by the Bank's ability to pay dividends, as set forth above.
Earnings appropriated to the Bank's "Excess" bad debt reserves and
deducted for federal income tax purposes cannot be used by the Bank to pay cash
dividends to the Holding Company without adverse tax consequences. See
"Regulation - Federal and State Taxation."
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for Preferred Savings by the
firm of Silver, Freedman & Taff, L.L.P. (a limited liability partnership
including professional corporations), 7th Floor, East Tower, 1100 New York
Avenue, NW, Washington, DC 20005. Silver, Freedman & Taff, L.L.P. has consented
to the references herein to its opinions. The Illinois income tax consequences
of the Conversion will be passed upon by Crowe, Chizek and Company LLP. Crowe,
Chizek and Company LLP has consented to references herein to its opinion. Webb
has been represented in the Conversion by McDermott, Will & Emery, 227 West
Monroe Street, Chicago, IL 60606-5096.
EXPERTS
The consolidated financial statements of Preferred Savings and its
subsidiary as of December 31, 1995, 1994 and 1993 included in this Prospectus
have been audited by Crowe, Chizek and Company LLP, independent auditors, as
indicated in their report which is included herein and has been so included in
reliance upon such report, given the authority of that firm as experts in
accounting and auditing.
Keller has consented to the inclusion herein of the summary of its
letter to the Bank setting forth its opinion as to the estimated pro forma
market value of the Holding Company and the Bank as converted and to the
reference to its opinion that subscription rights received by Eligible Account
Holders, Supplemental Eligible Account Holders and other eligible subscribers do
not have any economic value.
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a Registration Statement
under the Securities Act with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, this Prospectus does not
contain all the information set forth in the Registration Statement. Such
information can be examined without charge at the public
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reference facilities of the SEC located at 450 Fifth Street, NW, Washington, DC
20549, and copies of such material can be obtained from the SEC at prescribed
rates. The statements contained herein as to the contents of any contract or
other document filed as an exhibit to the Registration Statement are, of
necessity, brief descriptions thereof which describe only the material
provisions of such documents; each such statement is qualified by reference to
such contract or document.
The Bank has filed an Application for Conversion with the OTS with
respect to the Conversion. Pursuant to the rules and regulations of the OTS,
this Prospectus omits certain information contained in that Application. The
Application may be examined at the principal offices of the OTS, 1700 G Street,
NW, Washington, DC 20552 and at the Chicago District Office of the OTS, Suite
1300, 200 West Madison Street, Chicago, Illinois 60606, without charge.
In connection with the Conversion, the Holding Company will register
the Common Stock with the SEC under Section 12(g) of the Exchange Act, and, upon
such registration, the Holding Company and the holders of its Common Stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and certain other
requirements of the Exchange Act. Under the Plan, the Holding Company has
undertaken that it will not terminate such registration for a period of at least
three years following the Conversion.
A copy of the Certificate of Incorporation and Bylaws of the Holding
Company are available without charge from the Bank.
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PREFERRED SAVINGS BANK
Chicago, Illinois
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED SAVINGS BANK
Chicago, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
CONTENTS
REPORT OF INDEPENDENT AUDITORS...................................... F-1
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION................. F-2
CONSOLIDATED STATEMENTS OF INCOME.............................. F-3
CONSOLIDATED STATEMENTS OF EQUITY.............................. F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS.......................... F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS..................... F-7
All schedules are omitted because the required information
is not applicable or is included in the Consolidated
Financial Statements and related notes.
Financial Statements of the Holding Company have not
been provided because PS Financial, Inc. has
not conducted any operations to date and
has not been capitalized.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Preferred Savings Bank
Chicago, Illinois
We have audited the accompanying consolidated statements of financial condition
of Preferred Savings Bank, and its wholly-owned subsidiary as of December 31,
1995 and 1994, and the related consolidated statements of income, equity and
cash flows for the years ended December 31, 1995 and 1994 and the ten months
ended December 31, 1993. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Preferred Savings
Bank and its wholly-owned subsidiary at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years ended December
31, 1995 and 1994 and the ten months ended December 31, 1993, in conformity with
generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Bank changed its method
of accounting for debt securities as of December 31, 1993 to adopt the
provisions of Statement of Financial Accounting Standards No. 115.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 1, 1996
<PAGE>
PREFERRED SAVINGS BANK
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1995 and 1994
May 31, 1996 (Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
May 31, -----December 31,-----
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
ASSETS
Cash on hand and in banks $ 361,740 $ 916,175 $ 619,979
Interest-bearing deposit accounts in other
financial institutions 2,509,564 2,837,617 808,702
-------------- -------------- --------------
Total cash and cash equivalents 2,871,304 3,753,792 1,428,681
Interest-bearing term deposits in other financial
institutions 248,000 248,000 5,250,818
Securities available-for-sale (Note 2) 11,058,390 9,738,928 7,325,698
Mortgage-backed securities
available-for-sale (Note 2) 3,883,734 4,220,095 1,694,349
Securities held-to-maturity (fair value:
1994 - $201,500) (Note 2) - - 200,899
Mortgage-backed securities
held-to-maturity (fair value: 1994 - $1,618,528)
(Note 2) - - 1,791,511
Loans receivable, net (Notes 3 and 4) 35,701,500 34,525,038 32,890,017
Federal Home Loan Bank stock 362,100 341,400 308,600
Premises and equipment, net (Note 5) 456,678 466,647 457,129
Accrued interest receivable 246,721 180,960 104,645
Other assets 24,324 45,456 166,424
-------------- -------------- --------------
Total assets $ 54,852,751 $ 53,520,316 $ 51,618,771
============== ============== ==============
LIABILITIES AND EQUITY
Liabilities
Deposits (Note 6) $ 41,944,953 $ 41,046,705 $ 40,057,209
Advances from borrowers for taxes and
insurance 409,356 459,105 854,801
Accrued interest payable 244,765 71,874 44,332
Deferred income taxes 5,794 126,974 68,206
Other liabilities 218,948 91,258 82,720
-------------- -------------- --------------
Total liabilities 42,823,816 41,795,916 41,107,268
Commitments and contingencies (Note 10)
Equity
Retained earnings, substantially restricted
(Notes 8 and 9) 12,106,999 11,666,976 10,612,445
Net unrealized gain (loss) on securities
available-for-sale, net of tax (Note 2) (78,064) 57,424 (100,942)
-------------- -------------- --------------
Total equity 12,028,935 11,724,400 10,511,503
-------------- -------------- --------------
Total liabilities and equity $ 54,852,751 $ 53,520,316 $ 51,618,771
============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
PREFERRED SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1995, 1994 and
Ten months ended December 31, 1993
Five months ended May 31, 1996 and 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----(Unaudited)-----
-----May 31,----- -----December 31,-----
------- ------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest income
Loans $ 1,377,206 $ 1,312,450 $ 3,156,211 $ 3,013,874 $ 2,782,592
Securities 302,747 224,079 651,687 327,052 391,551
Mortgage-backed securities 101,722 76,386 186,495 171,514 2,317
Other interest-earning assets 71,914 144,959 274,084 341,281 225,094
------------ ------------ ------------ ------------ ------------
1,853,589 1,757,874 4,268,477 3,853,721 3,401,554
Interest expense on deposits (Note 6) 725,297 631,544 1,632,593 1,310,243 1,169,110
------------ ------------ ------------ ------------ ------------
Net interest income 1,128,292 1,126,330 2,635,884 2,543,478 2,232,444
Provision for loan losses (Note 4) 50,000 - - 41,722 27,278
------------ ------------ ------------ ------------ ------------
Net interest income after provision for
loan losses 1,078,292 1,126,330 2,635,884 2,501,756 2,205,166
Noninterest income
Net loss on sale of securities - - (218) (365,331) (27,650)
Other 26,555 23,847 58,343 75,922 39,899
------------ ------------ ------------ ------------ ------------
26,555 23,847 58,125 (289,409) 12,249
Noninterest expense
Compensation and benefits 181,847 191,613 627,651 428,803 318,550
Occupancy and equipment expense 43,889 40,178 106,927 116,493 89,413
Data processing 19,462 18,130 42,800 39,730 33,887
Federal deposit insurance premiums 39,519 38,642 92,921 94,366 78,000
Other operating expenses 68,203 55,323 139,069 158,369 127,526
------------ ------------ ------------ ------------ ------------
352,920 343,886 1,009,368 837,761 647,376
------------ ------------ ------------ ------------ ------------
Income before income tax provision 751,927 806,291 1,684,641 1,374,586 1,570,039
Provision for income taxes (Note 9) 311,904 317,467 630,110 616,799 627,903
------------ ------------ ------------ ------------ ------------
Net income $ 440,023 $ 488,824 $ 1,054,531 $ 757,787 $ 942,136
============ ============ ============ ============ ============
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PREFERRED SAVINGS BANK
CONSOLIDATED STATEMENTS OF EQUITY
Years ended December 31, 1995 and 1994
Ten months ended December 31, 1993 Five
months ended May 31, 1996 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Retained Available-
Earnings for-Sale Total
-------- ------------- -----
<S> <C> <C> <C>
Balance at February 28, 1993 $ 8,912,522 $ (79,736) $ 8,832,786
Effect of adopting Statement of
Financial Accounting Standards
No. 115, as of December 31, 1993 (Note 2) - (1,262) (1,262)
Change in unrealized gain (loss) on
securities available-for-sale, net of tax - (128,934) (128,934)
Net income 942,136 - 942,136
--------------- ----------- --------------
Balance at December 31, 1993 9,854,658 (209,932) 9,644,726
Change in unrealized gain (loss) on
securities available-for-sale, net of tax - 108,990 108,990
Net income 757,787 - 757,787
--------------- ----------- --------------
Balance at December 31, 1994 10,612,445 (100,942) 10,511,503
Reclassification of securities from
held-to-maturity to available-for-
sale, net of tax of $12,626 (Note 2) - (19,966) (19,966)
Change in unrealized gain (loss) on
securities available-for-sale, net of tax - 178,332 178,332
Net income 1,054,531 - 1,054,531
--------------- ----------- --------------
Balance at December 31, 1995 11,666,976 57,424 11,724,400
Change in unrealized gain (loss) on
securities available-for-sale, net of tax - (135,488) (135,488)
Net income 440,023 - 440,023
--------------- ----------- --------------
Balance at May 31, 1996 (unaudited) $ 12,106,999 $ (78,064) $ 12,028,935
=============== =========== ==============
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PREFERRED SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995 and 1994
Ten months ended December 31, 1993 Five
months ended May 31, 1996 and 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----(Unaudited)-----
-----May 31,----- -----December 31,-----
------- ------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 440,023 $ 488,824 $ 1,054,531 $ 757,787 $ 942,136
Adjustments to reconcile net
income to net cash from
operating activities
Depreciation 12,787 13,979 34,570 34,188 27,625
Amortization of discounts and
premiums on securities 11,263 (13,180) 89,163 (29,971) 1,738
Provision for loan losses 50,000 - - 41,722 27,278
Net loss on sale of securities
available-for-sale - - 218 365,331 27,650
Stock dividends received on
Federal Home Loan Bank stock - (4,700) (4,700) - -
Change in
Deferred loan origination fees (13,999) 12,676 6,292 20,556 9,747
Accrued interest receivable
and other assets (44,629) (591,126) 44,653 (69,294) (895)
Other liabilities and deferred
income taxes 262,442 852,432 (6,251) 22,233 (98,011)
------------ ------------ ------------ ------------ ------------
Net cash provided by
operating activities 717,887 758,905 1,218,476 1,142,552 937,268
Cash flows from investing activities
Proceeds from sales of securities
available-for-sale - - 1,018,903 10,889,706 3,292,713
Proceeds from sale of mortgage-
backed securities available-for-sale - - 814,194 - -
Purchase of Federal Home Loan
Bank stock (20,700) (28,100) (28,100) - -
Proceeds from sale of Federal
Home Loan Bank stock - - - 39,000 -
Proceeds from repayments of
securities held-to-maturity - 95,053 238,070 226,271 -
Proceeds from repayment of
securities available-for-sale 295,388 105,265 238,257 210,905 -
Proceeds from maturities of
securities available-for-sale 3,000,000 2,300,000 4,900,000 3,000,000 200,000
Proceeds from maturity of
securities held-to-maturity - - - 200,000 -
Purchase of securities available-
for-sale (4,508,281) (3,770,156) (8,046,167) (12,312,033) (3,592,875)
Purchase of mortgage-backed
securities available-for-sale - - (1,939,739) (4,072,879) -
Net (increase) decrease in interest-
bearing term deposits in other
financial institutions - 2,329,460 5,002,818 (579,818) (374,000)
Net change in loans (1,212,463) (1,371,564) (1,641,313) (2,131,081) 1,858,072
Capital expenditures, net (2,818) (11,598) (44,088) (25,377) (32,787)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities (2,448,874) (351,640) 512,835 (4,555,306) 1,351,123
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-5
<PAGE>
PREFERRED SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995 and 1994
Ten months ended December 31, 1993
Five months ended May 31, 1996 and 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-----(Unaudited)-----
-----May 31,----- -----December 31,-----
------- ------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities
Net increase (decrease) in
deposits $ 898,248 $ (269,496) $ 989,496 $ (1,082,199) $ 776,010
Net increase (decrease) in
advances from borrowers for
taxes and insurance (49,749) (42,100) (395,696) 49,422 364,543
------------ ------------ ------------ ------------ ------------
Net cash provided by (used
in) financing activities 848,499 (311,596) 593,800 (1,032,777) 1,140,553
------------ ------------ ------------ ------------ ------------
Net change in cash and cash
equivalents (882,488) 95,669 2,325,111 (4,445,531) 3,428,944
Cash and cash equivalents,
beginning of period 3,753,792 1,428,681 1,428,681 5,874,212 2,445,268
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents,
end of period $ 2,871,304 $ 1,524,350 $ 3,753,792 $ 1,428,681 $ 5,874,212
============ ============ ============ ============ ============
Supplemental disclosures of cash
flow information
Cash paid during the year for
Interest $ 552,406 $ 445,449 $ 1,605,763 $ 1,301,692 $ 1,187,074
Income taxes 229,000 146,214 640,734 612,000 717,140
Supplemental schedule of noncash
investing activities
Amounts due to broker for
purchase of mortgage-
backed securities - - - - 2,025,625
Transfer of securities from
held-to-maturity to available-
for-sale on December 1, 1995 - - 1,571,423 - -
</TABLE>
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Preferred Savings Bank (the "Bank") is a
federally-chartered mutual savings bank. Through its main office, the Bank
offers a variety of financial services to customers on the southwestern side of
the city of Chicago, Illinois. Financial services consist primarily of consumer
loans secured by residential real estate and savings and certificate of deposit
accounts.
Principles of Consolidation: The accompanying financial statements include the
accounts of the Bank and its wholly-owned subsidiary, Preferred Service
Corporation, which engages in limited insurance activities. All significant
intercompany balances and transactions have been eliminated. The consolidated
financial statements for the five-month periods ended May 31, 1996 and 1995 are
unaudited but, in the opinion of management, reflect all necessary adjustments,
consisting only of normal recurring items necessary for fair presentation.
Use of Estimates in the Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Fiscal Year: During 1993, the Bank changed its fiscal year end from February 28
to December 31. Accordingly, the December 31, 1993 statements of income, equity,
and cash flows reflect operations from March 1, 1993 through December 31, 1993.
Allowance for Loan Losses: Because some loans may not be repaid in full, an
allowance for loan losses is maintained. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of the
loss and the amount of loss on any loan is necessarily subjective. Accordingly,
the allowance is maintained by management at a level considered adequate to
cover possible losses that are currently anticipated based on past loss
experience, general economic conditions, information about specific borrower
situations including their financial position and collateral values, and other
factors and estimates which are subject to change over time. While management
may periodically allocate portions of the allowance for specific problem loan
situations, including impaired loans discussed below, the whole allowance is
available for any charge-offs that occur. Loans are charged off in whole or in
part when management's estimate of the undiscounted cash flows from the loan are
less than the recorded investment in the loan, although collection efforts
continue and future recoveries may occur.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS No. 114). SFAS No. 114 (as modified by No. 118, effective for
the Bank beginning January 1, 1995, requires the measurement of impaired loans,
based on the present value of expected cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of collateral if the loan is collateral
dependent. Under this standard, loans considered to be impaired are reduced to
the present value of expected future cash flows or to the fair value of
collateral, by allocating a portion of the allowance for loan losses to such
loans. If these allocations cause the allowance for loan losses to require
increase, such increase is reported as a provision for loan losses. The effect
of adopting the Statement was not material to the Bank's consolidated financial
position or results of operations during 1995.
Smaller balance homogeneous loans are defined as residential first mortgage
loans secured by one-to-four family residences, residential construction loans,
and share loans and are evaluated collectively for impairment. Commercial real
estate loans are evaluated individually for impairment. Normal loan evaluation
procedures, as described in the second preceding paragraph, are used to identify
loans which must be evaluated for impairment. In general, loans classified as
doubtful or loss are considered impaired while loans classified as substandard
are individually evaluated for impairment. Depending on the relative size of the
credit relationship, late or insufficient payments of 30 to 90 days will cause
management to reevaluate the credit under its normal loan evaluation procedures.
While the factors which identify a credit for consideration for measurement of
impairment, or nonaccrual, are similar, the measurement considerations differ. A
loan is impaired when the economic value estimated to be received is less than
the value implied in the original credit agreement. A loan is placed in
nonaccrual when payments are more than 90 days past due unless the loan is
adequately collateralized and in the process of collection. Although impaired
loan and nonaccrual loan balances are measured differently, impaired loan
disclosures under SFAS Nos. 114 and 118 are not expected to differ significantly
from nonaccrual and renegotiated loan disclosures.
Interest Income: Interest on loans is accrued over the term of the loans based
upon the principal outstanding. Management reviews loans delinquent 90 days or
more to determine if the interest accrual should be discontinued. Under SFAS No.
114 as amended by SFAS No. 118, the carrying values of impaired loans are
periodically adjusted to reflect cash payments, revised estimates of future cash
flows, and increases in the present value of expected cash flows due to the
passage of time. Cash payments representing interest income are reported as
such. Other cash payments are reported as reductions in carrying value, while
increases or decreases due to changes in estimates of future payments and due to
the passage of time are reported as adjustments to the provision for loan
losses.
Loan Fees: Loan origination fees, net of certain direct loan origination costs,
are deferred and recognized over the contractual life of the loan as a yield
adjustment.
Securities: Securities are classified as held-to-maturity when the Bank has the
positive intent and ability to hold those securities to maturity. Accordingly,
they are stated at cost, adjusted for amortization of premiums and accretion of
discounts. All other securities are classified as available-for-sale since the
Bank may decide to sell those securities in response to changes in market
interest rates, liquidity needs, changes in yields or alternative investments
and for other reasons. These securities are carried at market value with
unrealized gains and losses charged or credited, net of income taxes, to a
valuation allowance included as a separate component of equity. Realized gains
and losses on disposition are based on the net proceeds and the adjusted
carrying amounts of the securities sold, using the specific identification
method.
- -------------------------------------------------------------------------------
(Continued)
F-7
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using principally the
straight-line method over the estimated useful lives of the assets. The cost and
accumulated depreciation of assets retired or sold are eliminated from the
financial statements, and the gain or loss on disposition is credited or charged
to operations when it is realized.
Income Taxes: The Bank and its subsidiary file a consolidated income tax return.
The provision for income taxes is based on an asset and liability approach in
accordance with Statement of Financial Accounting Standards No. 109. The asset
and liability approach requires the recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax bases of assets and liabilities.
Allowance for Losses on Loans: The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries). Estimating
the risk of loss is necessarily subjective. Accordingly, management maintains
the allowance at levels considered adequate to cover losses based on past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay, estimated value of any
underlying collateral, and current and prospective economic conditions.
Statement of Financial Accounting Standards No. 114 was adopted at January 1,
1995. Under this standard, loans considered to be impaired are reduced to the
present value of expected future cash flows or to the fair value of collateral
by allocating a portion of the allowance for loan losses to such loans. If these
allocations cause the allowance for loan losses to require increase, such
increase is reported as bad debt expense. Adoption of this statement did not
have a material effect on the Bank's earnings or financial condition.
Cash and Cash Equivalents: Cash and cash equivalents include cash on hand,
amounts due from banks, and federal funds sold. The Bank reports net cash flows
for customer loan transactions, deposit transactions, and time deposits in other
financial institutions.
Impact of New Accounting Standards: In March 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. However, SFAS No. 121 does not apply to financial instruments, core
deposit intangibles, mortgage and other servicing rights, or deferred tax
assets. The adoption of SFAS No. 121 has no material effect on the Bank's income
or financial condition.
- -------------------------------------------------------------------------------
(Continued)
F-8
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122
("SFAS No. 122"), "Accounting for Mortgage Servicing Rights." SFAS No. 122
requires an institution that purchases or originates mortgage loans and sells or
securitizes those loans with servicing rights retained to allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the mortgage servicing rights) based on their relative fair values. In
addition, institutions are required to assess impairment of the capitalized
mortgage servicing portfolio based on the fair value of those rights. SFAS No.
122 is effective for fiscal years beginning after December 31, 1995. The
adoption of this statement had no material impact on the Bank's earnings or
financial condition. As discussed below, SFAS No. 122 will be superseded by SFAS
No. 125 after December 31, 1996.
In November 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, ("SFAS No. 123"), "Accounting for Stock-Based Compensation." This
statement establishes financial accounting standards for stock-based employee
compensation plans. SFAS No. 123 permits the Bank to choose either a new fair
value-based method or the current APB Opinion 25 intrinsic value-based method of
accounting for its stock-based compensation arrangements. SFAS No. 123 requires
pro forma disclosures of net earnings and earnings per share computed as if the
fair value-based method has been applied in financial statements of companies
that continue to follow current practice in accounting for such arrangements
under APB Opinion 25. SFAS No. 123 applies to all stock-based employee
compensation plans in which an employer grants shares of its stock or other
equity instruments to employees except for employee stock ownership plans. Any
effect that this statement will have on the Bank will be applicable upon
consummation of the Conversion (See Note 12).
In June 1996, the FASB released Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Extinguishments of Liabilities". SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS No. 125 requires a
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, and derecognizes liabilities when extinguished. SFAS No. 125 also
supersedes SFAS No. 122 and requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and requires assessment for asset
impairment or increased obligation based on their fair values. SFAS No. 125
applies to transfers and extinguishments occurring after December 31, 1996 and
early or retroactive application is not permitted. Management anticipates that
the adoption of SFAS No. 125 will not have a material impact on the financial
condition or operations of the Bank.
- -------------------------------------------------------------------------------
(Continued)
F-9
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Effective December 31, 1993, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115"), "Accounting for Certain
Investment in Debt and Equity Securities." SFAS No. 115 requires corporations to
classify debt securities as either held-to-maturity, trading, or
available-for-sale. The net unrealized loss on securities available-for-sale at
December 31, 1993, due to the adoption of SFAS No. 115, is included as a
separate component of equity in the statement of financial condition and
represents primarily the effect of adjusting securities available-for-sale to
fair value.
Securities are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited)
-------------------------May 31, 1996------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury securities and
obligations of U.S. government agencies $ 11,138,455 $ 51,568 $ (131,633) $ 11,058,390
-------------- ----------- ----------- ---------------
Mortgage-backed securities available-for-sale
Federal Home Loan Mortgage Corporation 951,444 3,565 - 955,009
Federal National Mortgage Association 2,268,097 - (44,996) 2,223,101
Government National Mortgage Association 710,038 - (4,414) 705,624
-------------- ----------- ----------- ---------------
3,929,579 3,565 (49,410) 3,883,734
-------------- ----------- ----------- ---------------
$ 15,068,034 $ 55,133 $ (181,043) $ 14,942,124
============== =========== =========== ===============
-----------------------December 31, 1995---------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- -------
Securities available-for-sale
U.S. Treasury securities and
obligations of U.S. government agencies $ 9,633,725 $ 111,766 $ (6,563) $ 9,738,928
-------------- ----------- ----------- ---------------
Mortgage-backed securities available-for-sale
Federal Home Loan Mortgage Corporation 1,023,209 4,548 - 1,027,757
Federal National Mortgage Association 2,445,030 4,935 (23,986) 2,425,979
Government National Mortgage Association 764,440 1,919 - 766,359
-------------- ----------- ----------- ---------------
4,232,679 11,402 (23,986) 4,220,095
-------------- ----------- ----------- ---------------
$ 13,866,404 $ 123,168 $ (30,549) $ 13,959,023
============== =========== =========== ===============
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-10
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- -------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
----------------------December 31, 1994----------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Securities available-for-sale
U.S. Treasury securities and
obligations of U.S. government agencies $ 7,364,125 $ 11,441 $ (49,868) $ 7,325,698
-------------- ----------- ----------- ---------------
Mortgage-backed securities available-for-sale
Federal Home Loan Mortgage Corporation 982,757 - (61,773) 920,984
Government National Mortgage Association 840,011 - (66,646) 773,365
-------------- ----------- ----------- ---------------
1,822,768 - (128,419) 1,694,349
-------------- ----------- ----------- ---------------
$ 9,186,893 $ 11,441 $ (178,287) $ 9,020,047
============== =========== =========== ===============
----------------------December 31, 1994----------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- -------
Securities held-to-maturity
U.S. Treasury securities $ 200,899 $ 601 $ - $ 201,500
-------------- ----------- ----------- ---------------
Mortgage-backed securities
held-to-maturity
Federal National
Mortgage Association 1,791,511 - (172,983) 1,618,528
-------------- ----------- ----------- ---------------
$ 1,992,410 $ 601 $ (172,983) $ 1,820,028
============== =========== =========== ===============
</TABLE>
The Bank holds $1,750,000, $1,000,000, and $499,274 of U.S. government agency
bonds which are structured notes issued by the Federal Home Loan Bank at May 31,
1996 (unaudited), December 31, 1995, and December 31, 1994, respectively.
Mortgage-backed securities included gross premiums of $35,307 at May 31, 1996
(unaudited). Mortgage-backed securities at December 31, 1995 and 1994 included
gross premiums of $43,019 and $46,171, respectively.
Sales of securities are summarized as follows:
<TABLE>
<CAPTION>
(Unaudited) For the ten
For the five months ended For the year ended months ended
-----May 31,----- ---December 31,--- December 31,
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Proceeds from sales $ - $ - $ 1,833,097 $ 10,889,706 $ 3,292,713
Gross realized gains - - 11,799 - 19,376
Gross realized losses - - 12,017 365,331 47,026
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-11
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
On December 1, 1995, the Bank reclassified its only held-to-maturity security as
available-for-sale in accordance with "A Guide to Implementation of Statement
115 on Accounting for Certain Investments in Debt and Equity Securities." The
amortized cost and unrealized loss on the security transferred were $1,571,423
and $32,592, respectively.
The amortized cost and estimated market value of debt securities, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
(Unaudited)
May 31, 1996 December 31, 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----------- ---------- -------
<S> <C> <C> <C> <C>
Securities available-for-sale
Due in less than one year $ 5,747,406 $ 5,769,922 $ 3,982,357 $ 4,030,449
Due after one year through five years 4,491,049 4,400,624 4,247,543 4,300,385
Due after five years 900,000 887,844 1,403,825 1,408,094
------------- -------------- ------------- --------------
11,138,455 11,058,390 9,633,725 9,738,928
Mortgage-backed securities 3,929,579 3,883,734 4,232,679 4,220,095
------------- -------------- ------------- --------------
$ 15,068,034 $ 14,942,124 $ 13,866,404 $ 13,959,023
============= ============== ============= ==============
</TABLE>
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following at:
<TABLE>
<CAPTION>
(Unaudited)
May 31, -----December 31,-----
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
First mortgage loans
Principal balances
Secured by one to four family residences $ 26,150,250 $ 25,858,435 $ 24,711,361
Secured by other properties 6,603,873 6,094,352 5,928,557
Secured by commercial real estate 3,407,374 2,951,752 2,903,347
Construction loans 243,361 286,076 -
-------------- -------------- --------------
36,404,858 35,190,615 33,543,265
Less net deferred loan origination fees (534,038) (548,037) (541,745)
------------- -------------- --------------
First mortgage loans, net 35,870,820 34,642,578 33,001,520
Share loans 16,680 18,460 24,497
Less allowance for loan losses (186,000) (136,000) (136,000)
-------------- -------------- --------------
$ 35,701,500 $ 34,525,038 $ 32,890,017
============== ============== ==============
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-12
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
The principal balance of loans greater than 90 days delinquent on nonaccrual
status at May 31, 1996, December 31, 1995, and December 31, 1994 was
approximately $584,000 (unaudited), $775,000, and $334,000, respectively. The
interest income that would have been recorded under the original terms of such
loans approximated $22,000 (unaudited) for the five months ended May 31, 1996,
and $69,000 and $80,000 for the years ended December 31, 1995 and 1994,
respectively.
The Bank did not have any impaired loans for the five months ended May 31, 1996
(unaudited), or for the year ended December 31, 1995.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
(Unaudited) For the ten
For the five months ended For the year ended months ended
-----May 31,----- ---December 31,--- December 31,
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 136,000 $ 136,000 $ 136,000 $ 94,278 $ 67,000
Provision for loan losses 50,000 - - 41,722 27,278
----------- ----------- ----------- ----------- -----------
Balance, end of period $ 186,000 $ 136,000 $ 136,000 $ 136,000 $ 94,278
=========== =========== =========== =========== ===========
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following at:
<TABLE>
<CAPTION>
(Unaudited)
May 31, -----December 31,-----
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Land $ 95,052 $ 95,052 $ 95,052
Building and improvements 506,239 504,590 495,660
Furniture and equipment 287,732 286,563 289,992
------------- ------------ ------------
Total cost 889,023 886,205 880,704
Accumulated depreciation 432,345 419,558 423,575
------------- ------------ ------------
$ 456,678 $ 466,647 $ 457,129
============= ============ ============
</TABLE>
Depreciation expense was $12,787 and $13,977 for the five months ending May 31,
1996 and 1995, respectively (unaudited), $34,570, and $34,188, for the years
ending December 31, 1995 and 1994, respectively, and $27,625 for the ten months
ended December 31, 1993.
- -------------------------------------------------------------------------------
(Continued)
F-13
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
Deposits are summarized as follows at:
<TABLE>
<CAPTION>
(Unaudited)
Weighted
Average
Rate at (Unaudited) -----------------December 31,-----------------
May 31, ---May 31, 1996--- ---------1995--------- ---------1994---------
1996 Amount Percent Amount Percent Amount Percent
---- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Money market 3.25% $ 1,998,331 4.8% $ 1,601,293 3.9% $ 1,923,676 4.8%
Passbook savings 3.00 19,603,599 46.7 19,408,484 47.3 20,750,087 51.8
--------------- ----- ------------- ------ ------------- -------
21,601,930 51.5 21,009,777 51.2 22,673,763 56.6
Certificate of deposit
3.00% to 3.99% 4,298 - 49,267 .1 5,129,652 12.8
4.00 to 4.99 743,303 1.8 949,999 2.3 9,785,657 24.5
5.00 to 5.99 17,827,011 42.5 15,271,374 37.2 1,883,633 4.7
6.00 to 6.99 1,510,760 3.6 3,383,343 8.2 200,460 .5
7.00 to 7.99 257,651 .6 382,945 1.0 293,644 .7
8.00 to 8.99 - - - 90,400 .2
--------------- ----- ------------- ------ ------------- -------
5.33 20,343,023 48.5 20,036,928 48.8 17,383,446 43.4
--------------- ----- ------------- ------ ------------- -------
$ 41,944,953 100.0% $ 41,046,705 100.0% $ 40,057,209 100.0%
=============== ===== ============= ====== ============= =====
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $1,013,000 at May 31, 1996
(unaudited) and $1,052,000 and $1,049,000 at December 31, 1995 and 1994,
respectively. Deposits greater than $100,000 are not insured.
At May 31, 1996 (unaudited), scheduled maturities of certificates of deposit are
as follows:
<TABLE>
<CAPTION>
Less than One to Two to Three to Four to
One year Two years Three years Four years Five years Total
--------- --------- ----------- ---------- ---------- -----
<C> <C> <C> <C> <C> <C> <C>
3.00 to 3.99% $ 4,298 $ - $ - $ - $ - $ 4,298
4.00 to 4.99 743,303 - - - - 743,303
5.00 to 5.99 15,752,009 1,078,951 846,873 10,996 138,182 17,827,011
6.00 to 6.99 899,594 410,539 - 90,063 110,564 1,510,760
7.00 to 7.99 159,721 - - 97,930 - 257,651
------------- ------------ ------------ ------------- ------------- ----------------
$ 17,558,925 $ 1,489,490 $ 846,873 $ 198,989 $ 248,746 $ 20,343,023
============= ============ ============ ============= ============= ================
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-14
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 6 - DEPOSITS (Continued)
At December 31, 1995, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
Less than One to Two to Three to Four to
One year Two years Three years Four years Five years Total
--------- --------- ----------- ---------- ---------- -----
<C> <C> <C> <C> <C> <C> <C>
3.00 to 3.99% $ 49,267 $ - $ - $ - $ - $ 49,267
4.00 to 4.99 949,999 - - - - 949,999
5.00 to 5.99 13,012,057 1,286,300 716,336 219,374 37,307 15,271,374
6.00 to 6.99 2,665,465 520,126 - 83,810 113,942 3,383,343
7.00 to 7.99 276,538 - - - 106,407 382,945
------------- ------------ ------------ ------------- ------------- ----------------
$ 16,953,326 $ 1,806,426 $ 716,336 $ 303,184 $ 257,656 $ 20,036,928
============= ============ ============ ============= ============= ================
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
(Unaudited) For the ten
For the five months ended For the year ended months ended
-----May 31,----- ---December 31,--- December 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C>
Money market $ 23,321 $ 25,060 $ 57,075 $ 62,903 $ 49,016
Passbook savings 243,665 251,348 592,841 617,344 526,248
Certificate of deposit 458,311 355,136 982,677 629,996 593,846
------------- ------------- ------------- ------------- --------------
$ 725,297 $ 631,544 $ 1,632,593 $ 1,310,243 $ 1,169,110
============= ============= ============= ============= ==============
</TABLE>
NOTE 7 - RETIREMENT BENEFITS
During 1995, The Board of Directors authorized the termination of the Bank's
defined benefit pension plan which covered substantially all full time
employees. The termination was effective June 30, 1995, and participants in the
plan became fully vested on that date. Accordingly, the Bank recorded a pretax
curtailment loss of $62,715. The settlement of the vested accumulated benefit
obligation by the purchase of annuity contracts for, or lump-sum payments to,
each covered employee will be completed during 1996.
The following table sets forth the Plan's funded status and amounts recognized
in the Bank's consolidated statements of financial condition at December 31,
1995 and 1994.
- -------------------------------------------------------------------------------
(Continued)
F-15
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 7 - RETIREMENT BENEFITS (Continued)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation
Vested $ (463,184) $ (307,551)
Nonvested - (279)
------------ ------------
$ (463,184) $ (307,830)
============ ============
Projected benefit obligation $ (463,184) $ (391,223)
Plan assets at fair value, primarily certificates
of deposit at Preferred Savings Bank and
mutual funds 463,184 438,858
------------ ------------
Plan assets in excess of (less than) projected
benefit obligation - 47,635
Unrecognized net loss from past experience
different from that assumed and effects of
changes in assumptions - 19,603
Unrecognized net transition obligation at
February 18, 1989 being recognized over 23
years - 61,534
Unrecognized prior service cost at July 1, 1993 arising from plan
amendment being recognized
over 23 years - 3,365
------------ ------------
Prepaid pension cost $ - $ 132,137
============ ============
</TABLE>
Net pension cost consists of the following:
<TABLE>
<CAPTION>
Ten
Months
Year Ended Ended
-------December 31,------- December 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service costs - benefits earned during the period $ 10,077 $ 17,104 $ 9,044
Interest cost on projected benefit obligation 33,118 29,929 30,371
Actual return on plan assets (17,930) (17,303) (20,558)
Net amortization and deferral (10,720) (7,178) (9,712)
Curtailment loss 62,715 - -
----------- ----------- -----------
$ 77,260 $ 22,552 $ 9,145
=========== =========== ===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-16
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 7 - RETIREMENT BENEFITS (Continued)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Assumptions used to develop the net periodic pension cost were:
Discount rate 7.00% 8.00% 7.25%
Expected long-term rate of return on assets 7.00 6.50 7.50
Rate of increase in compensation levels through
date of curtailment 4.00 4.00 4.00
</TABLE>
NOTE 8 - REGULATORY MATTERS
The Bank is required to maintain minimum amounts of capital to total "risk
weighted" assets, as defined by the banking regulators. At May 31, 1996 and
December 31, 1995, the Bank is required to have a minimum Tier 1 capital
(retained earnings, excluding valuation allowance on securities
available-for-sale) ratio to "risk weighted" assets of 4.00% and a total capital
ratio (retained earnings plus general loan loss allowance, excluding valuation
allowance on securities available-for-sale to "risk weighted" assets) of 8.00%,
respectively. The Bank's actual ratios on May 31, 1996 (unaudited) were 56.28%
and 56.91%, respectively. The Bank's actual ratios on December 31, 1995 were
58.37% and 59.05%, respectively. The Bank's leverage ratio (retained earnings,
excluding valuation allowance on securities available-for-sale, as a percent of
total average assets) at May 31, 1996 (unaudited) and December 31, 1995 was
22.34% and 22.19%, respectively, compared to minimum required amounts of 4.00%
to 5.00%.
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(Unaudited) For the ten
For the five months ended For the year ended months ended
-----May 31,----- ---December 31,--- December 31,
1996 1995 1995 1994 1993
---- ---- ---- ---- ------------
<S> <C> <C> <C> <C> <C>
Current
Federal $ 313,623 $ 341,955 $ 582,286 $ 528,090 $ 513,793
State 36,420 42,502 90,155 95,347 117,960
------------ ------------ ----------- ----------- -----------
350,043 384,457 672,441 623,437 631,753
Deferred (38,139) (66,990) (42,331) (95,393) (3,850)
Change in valuation allowance - - - 88,755 -
------------ ------------ ----------- ----------- -----------
$ 311,904 $ 317,467 $ 630,110 $ 616,799 $ 627,903
============ ============ =========== =========== ===========
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
F-17
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
The net deferred tax liability included in other liabilities in the accompanying
statements of financial condition consists of the following at:
<TABLE>
<CAPTION>
(Unaudited)
May 31, ----------December 31,-------
1996 1995 1994
---------- ---- ----
<S> <C> <C> <C>
Gross deferred tax liabilities
Deferred loan fees $ (33,153) $ (33,928) $ (42,812)
Accrual to cash (20,260) (40,098) (25,047)
Accumulated depreciation (58,493) (56,649) (55,778)
Accrued pension expense - - (51,190)
FHLB stock dividend (13,790) (13,790) (11,969)
Net unrealized gain on securities
available-for-sale - (35,195) -
------------- ------------ ------------
(125,696) (179,660) (186,796)
Gross deferred tax assets
Loan loss reserve 72,056 52,686 52,686
Capital loss carryforward 103,225 103,225 103,225
Net unrealized loss on
securities available-for-sale 47,846 - 65,904
Other - -
------------- ------------ ------------
223,127 155,911 221,815
Valuation allowance (103,225) (103,225) (103,225)
------------- ------------ ------------
Net deferred tax liability $ (5,794) $ (126,974) $ (68,206)
============= ============ ============
</TABLE>
The income tax provision differs from the amounts determined by applying the
statutory U.S. federal income tax rate as a result of the following items:
- -------------------------------------------------------------------------------
(Continued)
F-18
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
<TABLE>
<CAPTION>
(Unaudited)
--------------------May 31,-------------------
1 9 9 6 1 9 9 5
------- -------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Income tax computed at the
statutory rate $ 272,655 34.0% $ 274,139 34.0%
Other 15,211 1.9 15,276 1.9
----------- ------ ----------- ------
Total federal income tax 287,866 35.9 289,415 35.9
State income tax, net of
federal tax benefit 24,038 3.0 28,052 3.5
----------- ------ ----------- ------
$ 311,904 38.9% $ 317,467 39.4%
=========== ====== =========== ======
</TABLE>
<TABLE>
<CAPTION>
Ten
Months
Year Ended Ended
---------------December 31,----------------- ------December 31,----
1 9 9 5 1 9 9 4 1 9 9 3
------- ------- -------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Income tax computed at the
statutory rate $ 572,778 34.0% $ 467,359 34.0% $ 533,813 34.0%
Deferred tax valuation allowance - - 88,755 6.5 - -
Other 1,522 0.1 (54) - 45,693 2.9
----------- ------ ----------- ----- ----------- ------
Total federal income tax 574,300 34.1 556,060 40.5 579,506 36.9
State income tax, net of
federal tax benefit 55,810 3.3 60,739 4.4 48,397 3.1
----------- ------ ----------- ------ ----------- ------
$ 630,110 37.4% $ 616,799 44.9% $ 627,903 40.0%
=========== ====== =========== ====== =========== ======
</TABLE>
Under the Internal Revenue Code, the Bank may, for tax purposes, deduct a
provision for bad debts in excess of such provisions recorded in the financial
statements. Accordingly, retained earnings at May 31, 1996 (unaudited) and
December 31, 1995 include approximately $1,591,000 on which no provision for
federal income taxes has been made. These amounts represent an allocation of
income to bad-debt deductions for tax purposes alone. Reduction of amounts so
allocated for purposes other than tax bad-debt losses or adjustments from
carryback of net operating losses would create income for tax purposes only,
which would be subject to current tax. The related amount of unrecognized
deferred tax liability was approximately $620,000.
- -------------------------------------------------------------------------------
(Continued)
F-19
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 10 - FINANCIAL INSTRUMENTS AND COMMITMENTS
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet financing needs of its customers. These
financial instruments include commitments to fund loans and previously approved
unused lines of credit. The Bank's exposure to credit loss in the event of
nonperformance by the parties to these financial instruments is represented by
the contractual amount of the instruments. The Bank uses the same credit policy
for commitments as it uses for on-balance-sheet items. At May 31, 1996
(unaudited), these financial instruments consist of commitments to extend credit
totaling $537,000. At December 31, 1995 and 1994, these financial instruments
consist of commitments to extend credit totaling $612,000 and $634,000,
respectively. All 1996 (unaudited) and 1995 commitments had fixed rates ranging
from 8.0% to 8.5% and terms up to 30 days.
Since many commitments expire without being used, the amount above does not
necessarily represent a future cash commitment. Collateral may be obtained upon
exercise of a commitment. The amount of collateral is determined by management
and may include residential real estate.
The primary financial instruments where concentrations of credit risk may exist
are securities and loans. Securities are discussed in Note 2. The Bank's
principal loan customers are located in Chicago and the southwest portion of
Cook County including Cicero and Berwyn. Most loans are secured by specific
collateral, including residential and commercial real estate.
The deposits of savings associations such as the Bank are presently insured by
the Savings Association Insurance Fund (SAIF), which, along with the Bank
Insurance Fund (BIF), is one of the two insurance funds administered by the
Federal Deposit Insurance Corporation (FDIC). It is anticipated that SAIF will
not be adequately capitalized until 2002, absent a substantial increase in
premium rates or the imposition of special assessments or other significant
developments, such as a merger of SAIF and the BIF. Accordingly, a
recapitalization plan was signed into law on September 30, 1996 which provides
for a special assessment of an estimated .65% to .70% of all SAIF-insured
deposit balances as of March 31, 1995. The Bank's liability for the special
assessment, estimated to total approximately $162,000, net of taxes, has been
recorded in the third quarter of 1996 (unaudited).
NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 defines the fair value of a
financial instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced or
liquidation sale. The methods and assumptions used to determine fair values for
each class of financial instruments are presented below:
- -------------------------------------------------------------------------------
(Continued)
F-20
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
<TABLE>
<CAPTION>
(Unaudited)
---May 31, 1996--- ---December 31, 1995---
Approximate Estimated Approximate Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----------- --------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Financial Assets
Cash on hand and in banks $ 362 $ 362 $ 916 $ 916
Interest-bearing deposits in other
financial institutions 2,510 2,510 2,838 2,838
Interest-bearing term deposits in other
financial institutions 248 248 248 248
Securities available-for-sale 14,942 14,942 13,959 13,959
Loans receivable, net 35,702 36,593 34,525 35,280
Federal Home Loan Bank stock 362 362 341 341
Accrued interest receivable 247 247 181 181
Financial Liabilities
Money market and passbook savings (21,602) (21,602) (21,010) (21,010)
Certificates of deposits (20,343) (20,806) (20,037) (20,076)
Accrued interest payable (245) (245) (72) (72)
</TABLE>
For purposes of the above, the following assumptions were used. The estimated
fair value for cash, interest bearing deposits with financial institutions,
Federal Home Loan Bank stock, accrued interest receivable, money market and
savings deposits, and accrued interest payable are considered to approximate
their carrying values. The estimated fair value for securities
available-for-sale is based on quoted market values for the individual
securities or for equivalent securities. The estimated fair value for loans is
based on estimates of the rate the Bank would charge for similar loans at May
31, 1996 and December 31, 1995, applied for the time period until estimated
payment. The estimated fair value of certificates of deposit is based on
estimates of the rate the Bank would pay on such deposits at May 31, 1996 and
December 31, 1995, applied for the time period until maturity. Loan commitments
are not included in the table above as their estimated fair value is immaterial.
Other assets and liabilities of the Bank that are not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures. Also not included are nonfinancial instruments typically not
recognized in the financial statements, such as loan servicing rights, customer
goodwill, and similar items.
- -------------------------------------------------------------------------------
(Continued)
F-21
<PAGE>
PREFERRED SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
May 31, 1996 and 1995 (Unaudited)
- ------------------------------------------------------------------------------
NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that were the Bank to have disposed
of these items on May 31, 1996 and December 31, 1995, the fair values would have
been achieved, because the market value may differ depending on the
circumstances. The estimated fair values at May 31, 1996 and December 31, 1995
should not necessarily be considered to apply at subsequent dates.
NOTE 12 - ADOPTION OF PLAN OF CONVERSION (UNAUDITED)
On May 21, 1996, the Board of Directors of the Bank, subject to regulatory
approval and approval by the members of the Bank, adopted a Plan of Conversion
to convert from a state mutual savings bank to a federal stock savings bank with
the concurrent formation of a holding company and the adoption of a federal
thrift charter. The conversion is expected to be accomplished through the
amendment of the Bank's charter and the sale of the holding company's common
stock in an amount equal to the consolidated pro forma market value of the
holding company and the Bank after giving effect to the conversion. A
subscription offering of the shares of common stock will be offered initially to
the Bank's eligible deposit account holders, then to other members of the Bank.
Any shares of the holding company's common stock not sold in the subscription
offering will be offered for sale to the general public, giving preference to
the Bank's market area.
The Board of Directors of the Bank or the holding company intend to adopt an
Employee Stock Ownership Plan and various stock option and incentive plans,
subject to ratification by the stockholders of the holding company after
conversion, if such stockholder approval is required by any regulatory body
having jurisdiction to require such approval. In addition, the Board of
Directors is authorized to enter into employment contracts with key employees.
At the time of conversion, the Bank will establish a liquidation account in an
amount equal to its total net worth as of the latest statement of financial
condition appearing in the final prospectus. The liquidation account will be
maintained for the benefit of eligible depositors who continue to maintain their
accounts at the Bank after the conversion. The liquidation account will be
reduced annually to the extent that eligible depositors have reduced their
qualifying deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible depositor will be entitled to receive a distribution
from the liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The liquidation account balance is
not available for payment of dividends.
Conversion costs will be deferred and deducted from the proceeds of the shares
sold in the conversion. If the conversion is not completed, all costs will be
charged to expense. At May 31, 1996 , no costs have been deferred.
- -------------------------------------------------------------------------------
F-22
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus in connection with the
offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having been authorized by the Holding
Company or the Bank. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so, or to any person to whom it is unlawful to make such offer or solicitation
in such jurisdiction. Neither the delivery of this Prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Holding Company or the Bank since any of
the dates as of which information is furnished herein or since the date hereof.
--------------
TABLE OF CONTENTS
Page
----
Prospectus Summary........................................ 4
Selected Consolidated Financial Information............... 12
Risk Factors.............................................. 14
PS Financial, Inc......................................... 19
Preferred Savings......................................... 20
Use of Proceeds........................................... 20
Dividends................................................. 22
Market for Common Stock................................... 22
Pro Forma Data............................................ 22
Pro Forma Regulatory Capital Analysis..................... 27
Capitalization............................................ 28
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 29
Business ................................................. 46
Regulation................................................ 71
Management ............................................... 81
The Conversion............................................ 90
Restrictions on Acquisitions of Stock and Related
Takeover Defensive Provisions.......................... 107
Description of Capital Stock.............................. 112
Legal and Tax Matters..................................... 113
Experts................................................... 114
Additional Information.................................... 114
Index to Consolidated Financial Statements................ F-1
Until the later of _______________, 1996 or 25 days after commencement of
the offering of Common Stock, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
================================================================================
<PAGE>
================================================================================
1,897,500 Shares
PS FINANCIAL, INC.
(Proposed Holding Company for Preferred Savings)
COMMON STOCK
----------
PROSPECTUS
----------
CHARLES WEBB & COMPANY
A Division of Keefe, Bruyette & Woods, Inc.
_______, 1996
================================================================================
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number in
Sequentially Numbered
Registration
Statement
Exhibits: ----------------------
<S> <C> <C>
1.1 Letter Agreement regarding marketing and consulting services*
1.2 Form of Agency Agreement*
2 Plan of Conversion*
3.1 Certificate of Incorporation of the Holding Company*
3.2 Bylaws of the Holding Company*
3.3 Charter of Preferred Savings in stock form*
3.4 Bylaws of Preferred Savings in stock form*
4 Form of Stock Certificate of the Holding Company*
5 Opinion of Silver, Freedman & Taff, L.L.P. with Respect to Legality
of Stock*
8.1 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Federal
income tax consequences of the Conversion*
8.2 Opinion of Crowe, Chizek and Company LLP with respect to Illinois
income tax consequences of the Conversion*
8.3 Opinion of Keller & Company, Inc. with respect to Subscription
Rights*
10.1 Amended Stock Option and Incentive Plan*
10.2 Amended Recognition and Retention Plan*
10.3 Employee Stock Ownership Plan*
10.4 Form of Employment Agreement with Kimberly P. Rooney*
10.5 Form of Employment Agreement with Sylvester J. Ptak*
10.6 Form of Change in Control Severance Agreement*
22 Subsidiaries*
24.1 Consent of Silver, Freedman & Taff, L.L.P.*
24.2 Consent of Crowe, Chizek and Company LLP
24.3 Consent of Keller & Company, Inc.*
25 Power of Attorney (set forth on signature page)
99.1 Appraisal*
99.2 Proxy Statement and form of proxy to be furnished to Preferred
Savings account holders*
99.3 Stock Order Form, Order Form Instructions and Certification*
99.4 Question and Answer Brochure*
99.5 Advertising, Training and Community Informational Meeting
Materials*
99.6 Letter Agreement regarding Appraisal Services and Business Plan
Preparation*
</TABLE>
* Previously filed.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the amount of fees and expenses
(other than underwriting discounts and commissions) to be incurred in connection
with the issuance of the shares.
SEC registration fees............................................. $ 7,525
NASD fee.......................................................... 5,000
Nasdaq registration fee........................................... 15,000
OTS filing fees................................................... 8,400
Counsel fees and expenses......................................... 95,000
Accounting fees and expenses...................................... 60,000
Appraisal and business plan fees and expenses..................... 22,000
Conversion agent fees and expenses................................ 15,000
Marketing agent's expenses........................................ 5,000
Marketing agent's counsel fees and expenses....................... 35,000
Printing, postage and mailing..................................... 30,000
Blue sky fees and expenses........................................ 5,000
Other expenses.................................................... 7,075
TOTAL........................................................ $310,000
- -------------------
(1) Based on maximum of Estimated Valuation Range and assumptions set forth
under "Pro Forma Data" in the Prospectus.
Item 14. Indemnification of Directors and Officers
Article Eleventh of the Holding Company's Certificate of Incorporation
provides for indemnification of directors and officers of the Holding Company
against any and all liabilities, judgments, fines and reasonable settlements,
costs, expenses and attorneys' fees incurred in any actual, threatened or
potential proceeding, except to the extent that such indemnification is limited
by Delaware law and such law cannot be varied by contract or bylaw. Article
Eleventh also provides for the authority to purchase insurance with respect
thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation's Board of Directors to grant indemnity under certain
circumstances to directors and officers, when made, or threatened to be made,
parties to certain proceedings by reason of such status with the corporation,
against judgments, fines, settlements and expenses, including
II-1
<PAGE>
attorneys' fees. In addition, under certain circumstances such persons may be
indemnified against expenses actually and reasonably incurred in defense of a
proceeding by or on behalf of the corporation. Similarly, the corporation, under
certain circumstances, is authorized to indemnify directors and officers of
other corporations or enterprises who are serving as such at the request of the
corporation, when such persons are made, or threatened to be made, parties to
certain proceedings by reason of such status, against judgments, fines,
settlements and expenses, including attorneys' fees; and under certain
circumstances, such persons may be indemnified against expenses actually and
reasonably incurred in connection with the defense or settlement of a proceeding
by or in the right of such other corporation or enterprise. Indemnification is
permitted where such person (i) was acting in good faith; (ii) was acting in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation or other corporation or enterprise, as appropriate; (iii) with
respect to a criminal proceeding, has no reasonable cause to believe his conduct
was unlawful; and (iv) was not adjudged to be liable to the corporation or other
corporation or enterprise (unless the court where the proceeding was brought
determines that such person is fairly and reasonably entitled to indemnity).
Unless ordered by a court, indemnification may be made only following a
determination that such indemnification is permissible because the person being
indemnified has met the requisite standard of conduct. Such determination may be
made (i) by the Board of Directors of the Holding Company by a majority vote of
a quorum consisting of directors not at the time parties to such proceeding; or
(ii) if such a quorum cannot be obtained or the quorum so directs, then by
independent legal counsel in a written opinion; or (iii) by the stockholders.
Section 145 also permits expenses incurred by directors and officers in
defending a proceeding to be paid by the corporation in advance of the final
disposition of such proceedings upon the receipt of an undertaking by the
director or officer to repay such amount if it is ultimately determined that he
is not entitled to be indemnified by the corporation against such expenses.
Item 15. Recent Sales of Unregistered Securities
The Registrant is newly incorporated, solely for the purpose of acting
as the holding company of Preferred Savings Bank pursuant to the Plan of
Conversion (filed as Exhibit 2 herein), and no sales of its securities have
occurred to date; except for the sale of one share to the incorporator which was
required in order to register the Registrant as a foreign corporation in
Illinois. The sale was made in a transaction not involving a public offering in
reliance upon Section 4(2) of the Securities Act of 1933. The sale was made to
Ms. Rooney who as an officer of the Registrant has access to the type of
information that could be obtained through the registration process and based
upon her background and position with the Registrant had the knowledge and the
experience in financial and business matters of the Registrant to enable her to
evaluate the merits and risks of the investment. Such share will be redeemed by
the Registrant upon completion of the initial public offering.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
1.1 Letter Agreement regarding marketing and consulting services*
1.2 Form of Agency Agreement*
2 Plan of Conversion*
3.1 Certificate of Incorporation of the Holding Company*
3.2 Bylaws of the Holding Company*
3.3 Charter of Preferred Savings in stock form*
3.4 Bylaws of Preferred Savings in stock form*
4 Form of Stock Certificate of the Holding Company*
5 Opinion of Silver, Freedman & Taff, L.L.P. with respect to legality of
stock*
8.1 Opinion of Silver, Freedman & Taff, L.L.P. with respect to Federal
income tax consequences of the Conversion*
8.2 Opinion of Crowe, Chizek and Company LLP with respect to Illinois
income tax consequences of the Conversion*
8.3 Opinion of Keller & Company, Inc. with respect to Subscription Rights*
10.1 Form of Proposed Stock Option and Incentive Plan*
10.2 Form of Proposed Recognition and Retention Plan*
10.3 Employee Stock Ownership Plan*
10.4 Form of Employment Agreement with Kimberly P. Rooney*
10.5 Form of Employment Agreement with Sylvester J. Ptak*
10.6 Form of Change in Control Severance Agreement*
22 Subsidiaries*
24.1 Consent of Silver, Freedman & Taff, L.L.P.*
24.2 Consent of Crowe, Chizek and Company, LLP
24.3 Consent of Keller & Company, Inc.*
25 Power of Attorney (set forth on signature page)
99.1 Appraisal*
99.2 Proxy Statement and form of proxy to be furnished to Preferred Savings
account holders*
99.3 Stock Order Form, Order Form Instructions and Certification*
99.4 Question and Answer Brochure*
99.5 Advertising, Training and Community Informational Meeting Materials*
99.6 Letter Agreement regarding Appraisal Services and Business Plan
Preparation*
- ----------
* Previously filed.
II-3
<PAGE>
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant
II-4
<PAGE>
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Chicago,
Illinois on October 10, 1996.
PS FINANCIAL, INC.
By: /s/ Kimberly P. Rooney
------------------------------------
Kimberly P. Rooney, President,
Chief Executive Officer and
Director
(Duly Authorized Representative)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kimberly P. Rooney or Sylvester J. Ptak
as his or her true and lawful attorney-in-fact and agent, with full power of
substitution and re-substitution, for her and in her name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming said attorney-in-
fact and agent or her substitute or substitutes may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Kimberly P. Rooney /s/ Sylvester J. Ptak
- ------------------------------------------- -----------------------------
Kimberly P. Rooney, President, Chief Sylvester J. Ptak
Executive Officer and Director Chairman
(Principal Executive and Operating Officer)
Date: October 10, 1996 Date: October 10, 1996
II-6
<PAGE>
/s/ Rocco Di Iorio /s/ Edward S. Wolak
- --------------------------------- ---------------------------------------
Rocco Di Iorio, Director Edward S. Wolak, Director
Date: October 10, 1996 Date: October 10, 1996
/s/ Jeanine M. McInerney /s/ Jeffrey Przybyl
- --------------------------------- ----------------------------------------
Jeanine M. McInerney, Director Jeffrey Przybyl, Treasurer and Chief
Financial Officer (Principal Financial and
Accounting Officer)
Date: October 10, 1996 Date: October 10, 1996
/s/ Lorraine G. Ptak
- ----------------------------------------
Lorraine G. Ptak, Director and Secretary
Date: October 10, 1996
II-7
<PAGE>
As filed with the Securities and Exchange Commission on October 10, 1996
Registration No. 333-11211
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
EXHIBITS TO
PRE-EFFECTIVE AMENDMENT NO. TWO
TO THE
FORM S-1
UNDER
THE SECURITIES ACT OF 1933
PS FINANCIAL, INC.
4800 South Pulaski Road
Chicago, Illinois 60632
================================================================================
<PAGE>
Exhibit 24.2
Consent of Crowe, Chizek and Company LLP
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Preferred Savings Bank
Chicago, Illinois
We consent to the use in this Registration Statement on Form S-1 filed with the
Securities and Exchange Commission and Form AC filed with the Office of Thrift
Supervision on October 11, 1996 of our report dated March 1, 1996 on the
financial statements of Preferred Savings Bank. We also consent to the reference
to us under the headings "The Conversion - Tax Effects", "The Conversion -
Income Tax Consequences", "Experts", and "Legal and Tax Matters" in this
Registration Statement on Forms S-1 and AC.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
October 10, 1996
Oak Brook, Illinois
