SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number
PS FINANCIAL, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-4101473
- --------------------------------------------- ------------------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification
or Organization Number)
4800 South Pulaski Road, Chicago, Illinois 60632-4195
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (773) 376-3800
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-K. [X]
State issuers' revenues for its most recent fiscal year: $4.7 million
As of March 25, 1997, the Registrant had 2,182,125 shares of Common
Stock issued and outstanding.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the average of the bid and asked
price of such stock as of February 1, 1997, was $24.4 million. (The exclusion
from such amount of the market value of the shares owned by any person shall not
be deemed an admission by the Registrant that such person is an affiliate of the
Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal
year ended December 31, 1996.
Part III of Form 10-KSB - Portions of The Proxy Statement for Annual
Meeting of Stockholders to be held in 1996.
<PAGE>
PART I
Item 1. Description of Business
Forward Looking Statements
When used in this Form 10-KSB or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be",
"will allow", "intends to", "will likely result", "are expected to", "will
continue", "is anticipated", "estimate", "project", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurences or
unanticipated events or circumstances after the date of such statements.
General
PS Financial, Inc. (the "Company"), a Delaware corporation, was
organized to act as the holding company for Preferred Savings Bank ("Preferred
Savings" or the "Bank") upon completion of the Bank's conversion from the mutual
to the stock form or organization (the "Conversion"). The Company received
approval from the Office of Thrift Supervision (the "OTS") to acquire all of the
Common Stock of the Bank to be outstanding upon completion of the Conversion.
The Conversion was completed on November 26, 1996. All references to the
Company, unless otherwise indicated, at or before November 26, 1996 refer to the
Bank and its subsidiary on a consolidated basis. The Company's Common Stock is
quoted on the National Association of Securities Dealers Automated Quotation
("Nasdaq") National Market System under the symbol "PSFI."
At December 31, 1996, the Company had total assets of $75.1 million,
deposits of $42.2 million and stockholders' equity of $32.1 million. the
executive offices of the Company are located at 4800 South Pulaski Road,
Chicago, Illinois 60632, and its telephone number at that address is (773)
376-3800.
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. 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
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 December 31, 1996, the Bank's total loans
receivable, net totaled $35.9 million. See "- Originations and Purchases of
Loans" and "Use of Proceeds."
1
<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,
----------------------------------------------------------------------------- February 28,
1996 1995 1994 1993 1993
----------------------------------------------------------------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Real Estate Loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family............ $26,998 73.72% $25,858 73.44% $24,711 73.62% $23,403 74.45% $25,411 76.32%
Multi-family................... 6,088 16.62 6,094 17.31 5,929 17.66 5,452 17.34 6,157 18.49
Commercial..................... 3,183 8.69 2,953 8.39 2,904 8.65 2,546 8.10 1,681 5.05
Construction................... 336 0.92 286 0.81 --- --- --- --- --- ---
-------- ------ -------- ------- --------- ------- ------- ------- ------- ------
Total real estate loans..... 36,605 99.95 35,191 99.95 33,544 99.93 31,401 99.89 33,249 99.86
------- ------- ------- ------- ------- ------- ------- ------- ------
Consumer Loans:
Deposit account................. 17 0.05 18 0.05 24 0.07 35 0.11 45 0.14
-------- ------- --------- ------- --------- ------- -------- ------- --------- ------
Total loans................. 36,622 100.00% 35,209 100.00% 33,568 100.00% 31,436 100.00% 33,294 100.00%
====== ====== ====== ====== ======
Less:
Deferred fees and discounts..... 493 548 542 521 511
Allowance for loan losses....... 186 136 136 94 67
------- -------- -------- -------- ---------
Total loans receivable, net.. $35,943 $34,525 $32,890 $30,821 $32,716
======= ======= ======= ======== =======
</TABLE>
2
<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,
------------------------------------------------------------------------------ February 28,
1996 1995 1994 1993 1993
-------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family........... $26,998 73.72% $25,858 73.44% $24,711 73.62% $23,403 74.45% $25,411 76.32%
Multi-family.................. 6,088 16.62 6,094 17.31 5,929 17.66 5,452 17.34 6,157 18.49
Commercial.................... 3,183 8.69 2,953 8.39 2,904 8.65 2,546 8.10 1,681 5.05
Construction.................. --- --- --- --- --- --- --- --- --- ---
------- ------- ------ ------ ------- ------- ------- ------- ------- ------
Total real estate loans...... 36,269 99.03 34,905 99.14 33,544 99.93 31,401 99.89 33,249 99.86
Consumer loans.................. 17 0.05 16 0.04 15 0.05 19 0.06 23 0.07
------- ------- ------ ------- ------- ------- ------- ------- ------- -------
Total fixed-rate loans....... 36,286 99.08 34,921 99.18 33,559 99.98 31,420 99.95 33,272 99.93
------- ------ ------ ------- -------
Adjustable-Rate Loans:
Real estate - construction..... 336 0.92 286 0.81 --- --- --- --- --- ---
Consumer loans................. --- --- 2 0.01 9 0.02 16 0.05 22 0.07
------- -------- ------ ------- --------- ------- ------- ------- -------- -------
Total adjustable-rate loans.. 336 0.92 288 0.82 9 0.02 16 0.05 22 0.07
------- -------- ------ ------- --------- ------- ------- ------- -------- -------
Total loans.................. 36,622 100.00% 35,209 100.00% 33,568 100.00% 31,436 100.00% 33,294 100.00%
======== ======= ======= ====== =======
Less
Deferred fees and discounts.... 493 548 542 521 511
Allowance for loan losses...... 186 136 136 94 67
------- ------- ------- ------- -------
Total loans receivable, net.. $35,943 $34,525 $32,890 $30,821 $32,716
======= ======= ======= ======= =======
</TABLE>
3
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 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 Construction
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Due During
Period Ending
December 31,
- -----------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1997................... $ 87 8.30% $ 5 9.50% $ --- ---% $ 336 9.25%
1998................... 358 7.60 --- --- --- --- --- ---
1999 and 2000.......... 398 9.00 688 9.25 156 10.81 --- ---
2001 to 2005........... 3,355 8.79 2,630 8.86 1,791 9.47 --- ---
2006 to 2020........... 22,800 8.34 2,765 8.90 1,236 9.62 --- ---
2021 and following..... --- --- --- --- --- --- --- ---
------- ------ ------ ------ ------ ------ ------ -----
Total: $26,998 8.39% $6,088 8.92% $3,183 9.59% $ 336 9.25%
======= ====== ====== ======
Consumer Total
--------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
--------------------------------------------------
Due During
Period Ending
December 31,
- -----------------------
1997................... $ 7 7.00% $ 435 9.00%
1998................... 10 6.98 368 7.58
1999 and 2000.......... --- --- 1,242 9.36
2001 to 2005........... --- --- 7,776 8.97
2006 to 2020........... --- --- 26,801 8.45
2021 and following..... --- --- --- ---
------ ------ ------- ------
Total: $ 17 6.99% $36,622 8.59%
====== =======
</TABLE>
The total amount of loans due after December 31, 1997 which have
predetermined interest rates is $36.2 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is $0.
4
<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
December 31, 1996, based on the above, the Bank's regulatory loans-to-one
borrower limit was approximately $4.8 million. On the same date, the Bank had no
borrowers with outstanding balances in excess of this amount. As of December 31,
1996, the largest dollar amount outstanding or committed to be lent to one
borrower or, group of related borrowers, was 11 loans totaling $847,000 secured
by multi-family, commercial and one- to four-family real estate. The second
largest group of loans outstanding to a group of related borrowers was 3 loans
totaling $748,000 secured by multi-family real estate. At December 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 December 31, 1996, $7.6 million or 28.1% 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 $64,000.
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 and Purchases of Loans."
5
<PAGE>
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 December 31, 1996,
the Bank had $1.1 million of condominium loans.
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 December 31, 1996,
the Bank had $3.2 million in commercial real estate loans, representing 8.7% of
the total loan portfolio, and $6.1 million in multi-family loans, or 16.7% 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,
6
<PAGE>
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 December 31, 1996. Substantially all of the loans referred to in the table
below are secured by properties located in the Bank's market area.
<TABLE>
<CAPTION>
Outstanding Amount
Number of Principal Non-Performing
Loans Balance or of Concern
------------------------------------------
(Dollars in Thousands)
Commercial real estate:
<S> <C> <C> <C>
Small business facilities....................................... 19 $2,230 $ --
Office buildings................................................ 5 631 --
Three flats..................................................... 4 322 --
Multi-family........................................................ 41 6,088 --
------ -------- --------
Total multi-family and commercial real estate loans............. 69 $9,271 $ --
====== ======== ========
</TABLE>
At December 31, 1996, the Bank's largest commercial real estate or
multi-family loan outstanding totaled $334,000 and was secured by a 16 unit
apartment complex located in Cicero, 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 December 31, 1996, there were
no multi-family loans or 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 December 31, 1996, the Bank's construction lending
portfolio consisted of a participation interest in a construction loan of
$336,000 or 0.9% 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 December 31, 1996, consumer loans
totaled $17,000, or 0.05% 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.
7
<PAGE>
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.
In the past, the Bank has purchased participation interests in
construction loans originated by a local financial institution. All such loans
are secured. At December 31, 1996, the Bank had $336,000 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>
Year Ended 10 Months
December 31, Ended
----------------------------------- December 31,
1996 1995 1994 1993
-------------------------------------------------
(In Thousands)
Originations by type:
<S> <C> <C> <C> <C>
Real estate - one- to four-family........... $6,351 $ 5,162 $ 6,951 $ 6,050
- multi-family.................. 2,678 821 1,180 ---
- commercial.................... 1,077 1,270 1,315 1,080
Passbook.................................... 15 9 12 40
------- -------- -------- --------
Total loans originated................. 10,121 7,262 9,458 7,170
------ ------- ------- -------
Purchases:
Real estate - construction.................. 574 551 --- ---
Sales and Repayments:
Principal repayments........................ 9,282 6,172 7,326 9,028
Increase (decrease) in other items, net(1).. 5 (6) (63) (37)
------- -------- -------- --------
Net increase (decrease)................ $1,418 $ 1,635 $ 2,069 $(1,895)
====== ======= ======= =======
<FN>
(1) Other items consist primarily of deferred fees and the allowance for loan
losses.
</FN>
</TABLE>
8
<PAGE>
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.
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.
9
<PAGE>
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at December 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)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family........... 10 $793 2.94% 4 $404 1.50% 5 $282 1.04%
Multi-family.................. --- --- --- --- --- --- --- --- ---
Commercial real estate........ 2 288 9.05 --- --- --- --- --- ---
Construction or development... --- --- --- --- --- --- --- --- ---
Consumer...................... --- --- --- --- --- --- --- --- ---
Commercial business........... --- --- --- --- --- --- --- --- ---
Consumer........................ --- --- --- --- --- --- --- --- ---
---- ------- ------ ---- ----- ----- ---- ----- -----
Total...................... 12 $1,081 2.95% 4 $404 1.10% 5 $282 0.78%
=== ====== ==== ==== ==== ====
Total Delinquent Loans
--------------------------------
Percent
of Loan
Number Amount Category
--------------------------------
Real Estate:
One- to four-family........... 19 $1,479 5.48%
Multi-family.................. --- --- ---
Commercial real estate........ 2 288 9.05
Construction or development... --- --- ---
Consumer...................... --- --- ---
Commercial business........... --- --- ---
Consumer........................ --- --- ---
----- ------- ------
Total...................... 21 $1,767 4.82%
==== ======
</TABLE>
10
<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 December 31,
1996, the Bank had classified a total of $268,000 of its loans consisting of
one- to four-family residential real estate as follows:
December 31, 1996
-----------------
(In Thousands)
Substandard................................................... $282
Doubtful...................................................... ---
Loss.......................................................... ---
-----
Total.................................................... $282
====
At December 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.
11
<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,
---------------------------------------- February 28,
1996 1995 1994 1993 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans over 90 days delinquent:
<S> <C> <C> <C> <C> <C>
One- to four-family....................... $ 268 $ 775 $ 334 $ 170 $ 106
Multi-family.............................. --- --- --- --- ---
Commercial real estate.................... --- --- --- --- ---
Commercial business....................... --- --- --- --- ---
------- -------- ------- -------- --------
Total.................................. 268 775 334 170 106
------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days. 14 --- --- 6 ---
Foreclosed assets........................... --- --- --- --- ---
------- -------- --------- -------- --------
Total non-performing assets................. $ 282 $ 775 $ 334 $ 176 $ 106
===== ====== ======= ====== ======
Total as a percentage of total assets....... 0.37% 1.45% 0.65% 0.33% 0.21%
====== ====== ======== ======= =======
</TABLE>
For the year ended December 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 $23,000. The amounts that were included in
interest income on such loans were $18,000.
At December 31, 1996, the Bank's non-accruing loans greater than 90
days included four loans secured by single-family real estate totaling $268,000.
Other Assets of Concern. In addition to the non-performing assets set
forth in the table above, as of December 31, 1996, there were no 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.
12
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
10 Months Year Ended
Year Ended December 31, Ended -----------
--------------------------------------- December 31, February 28,
1996 1995 1994 1993 1993
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period....................... $136 $136 $ 94 $ 67 $ 43
Charge-offs.......................................... --- --- --- --- ---
Recoveries........................................... --- --- --- --- ---
------ ----- ------ ------ ------
Net charge-offs...................................... --- --- --- --- ---
Additions charged to operations...................... 50 --- 42 27 24
----- ------ ----- ----- -----
Balance at end of period............................. $186 $136 $136 $ 94 $ 67
==== ==== ==== ==== ====
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% 0.39% 0.41% 0.30% 0.20%
==== ==== ==== ==== ====
</TABLE>
13
<PAGE>
The distribution of the Bank's allowance for losses on loans
at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to
Allowance Category Loans Allowance Category Loans Allowance Category Loans
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family... $ 27 $26,998 73.72% $ 26 $25,858 73.44% $ 25 $24,711 73.62%
Multi-family.......... 15 6,088 16.62 15 6,094 17.31 15 5,929 17.66
Commercial real estate 8 3,183 8.69 7 2,953 8.39 7 2,904 8.65
Construction.......... 1 336 0.92 1 286 .81 --- --- ---
Consumer.............. --- 17 0.05 --- 18 .05 --- 24 .07
Unallocated........... 135 --- --- 87 --- --- 89 --- ---
---- --------- ---- ----- -------- ---- ------ --------- ----
Total............ $186 $36,622 100.00% $136 $35,209 100.00% $136 $33,568 100.00%
==== ======= ====== ==== ======= ====== ==== ======= ======
December 31,
-------------------------------
1993 February 28, 1993
------------------------------- ---------------------------------
Percent Percent
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
<S> <C> <C> <C> <C> <C> <C>
One- to four-family... $23 $23,403 74.45% $25 $25,411 76.32%
Multi-family.......... 14 5,452 17.34 15 6,157 18.49
Commercial real estate 6 2,546 8.10 4 1,681 5.05
Construction.......... --- --- --- --- --- ---
Consumer.............. --- 35 .11 --- 45 .14
Unallocated........... 51 --- --- 23 --- ---
---- -------- ---- ---- -------- ----
Total............ $94 $31,436 100.00% $67 $33,294 100.00%
=== ======= ====== === ======= ======
</TABLE>
14
<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 December 31, 1996, the Company's
liquidity ratio for regulatory purposes was 30.5%.
Generally, the investment policy of the Company is to invest funds
among categories of investments and maturities based upon the Company'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 December 31, 1996, the Company had no securities
which were classified as trading and no securities classified as
held-to-maturity. Available-for-sale securities
15
<PAGE>
are reported at fair value with unrealized gains and losses included, on an
after-tax basis, in a separate component of retained earnings. At December 31,
1996, $24.1 million of securities and $4.7 million of mortgage-backed securities
were classified as available-for-sale.
Securities. In order to supplement loan volume, invest excess liquidity
and increase holdings of short and medium term assets, the Company invests in
liquidity investments and in high-quality investments, such as U.S. Treasury and
agency obligations. At December 31, 1996 and December 31, 1995, the Company's
securities portfolio totaled $24.1 million and $9.7 million, respectively. At
December 31, 1996, the Company did not own any investment securities of a single
issuer which exceeded 10% of the Company'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
Company's securities portfolio.
16
<PAGE>
The following table sets forth the composition of the Company's
securities and other interest-earning assets at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993
---------------------------------------------------------------------------------
Carrying % of Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total Value Total
(Dollars in Thousands)
Securities held-to-maturity:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government securities................... $ --- ---% $ --- ---% $ 201 2.67% $ 403 4.27%
Securities available-for-sale:
U.S. government securities................... 13,993 58.11 3,527 36.22 4,880 64.84 2,999 31.74
Federal agency obligations................... 10,087 41.89 6,212 63.78 2,445 32.49 --- ---
Marketable equity securities................. --- --- --- --- --- --- 6,045 63.99
---------- -------- -------- ------- ------- ------- ------- ------
Total securities.......................... $24,080 100.00% $ 9,739 100.00% $ 7,526 100.00% $ 9,447 100.00%
======= ====== ====== ====== ====== ====== ====== ======
Average remaining life of securities........... 3.97 yrs. 2.00 yrs. 1.41 yrs.(1)
Other interest-earning assets:
Interest-bearing deposits with other banks... $ 8,427 95.88% $ 3,086 90.05% $ 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................. 362 4.12 341 9.95 309 4.85 348 3.51
-------- ------- -------- ------- -------- ------- ------- -------
Total..................................... $ 8,789 100.00% $ 3,427 100.00% $ 6,369 100.00% $ 9,914 100.00%
======= ====== ======= ====== ======= ====== ======= ======
<FN>
(1) Excludes marketable equity securities.
</FN>
</TABLE>
17
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
December 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.... $6,013 $ 7,980 $ --- $ --- $13,993 $13,993
Federal agency obligations.... 2,755 3,948 3,384 --- 10,087 10,087
------- ------- ------- --------- -------- --------
Total investment securities... $8,768 $11,928 $3,384 $ --- $24,080 $24,080
====== ======= ====== ======== ======= =======
Weighted average yield........ 5.88% 5.85% 7.17% ---% 6.05%
</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 Company invests in mortgage-backed securities.
Consistent with its asset/liability management strategy, at December
31, 1996, $1.5 million, or 31.9% of the Company's mortgage-backed securities
have adjustable interest rates. For information regarding the Company's
mortgage-backed securities portfolio, see Note 2 of the Notes to the
Consolidated Financial Statements.
As of December 31, 1996, all of the mortgage-backed securities owned by
the Company were issued, insured or guaranteed either directly or indirectly by
a federal agency. As a result, the Company did not have any mortgage-backed
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 December 31, 1996, none of the Company's mortgage-backed securities
were classified as "high-risk."
18
<PAGE>
The following table sets forth the composition of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993
---------------------------------------------------------------------------------
Carrying % of Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total Value Total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Mortgage-backed securities held to maturity:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA........................................... $ --- ---% $ --- ---% $1,792 51.41% $2,026 100.00%
Mortgage-backed securities available for sale:
GNMA........................................... 662 14.08 766 18.15 773 22.17 --- ---
FNMA........................................... 1,736 36.92 2,426 57.49 --- --- --- ---
FHLMC.......................................... 2,304 49.00 1,028 24.36 921 26.42 --- ---
------ ----- ------- ------ ------ ------ ------ ------
Total mortgage-backed securities............ $4,702 100.00% $4,220 100.00% $3,486 100.00% $2,026 100.00%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
19
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at December 31, 1996.
<TABLE>
<CAPTION>
Due In December 31,
----------------------------------------------- 1996
Less than 1 to 5 to 10 Over Balance
1 Year 5 Years Years 10 Years Outstanding
-------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation........... $ --- $ --- $ --- $2,304 $2,304
Federal National Mortgage Association............ --- 761 975 --- 1,736
Government National Mortgage Association......... --- --- --- 662 662
------- ------- ------ ------ ------
Total....................................... $ --- $ 761 $ 975 $2,966 $4,702
======= ===== ===== ====== ======
</TABLE>
At December 31, 1996, the dollar amount of all mortgage-backed
securities due after December 31, 1997, which had fixed interest rates and
floating or adjustable rates totaled $3.2 million and $1.5 million,
respectively.
The market values of a portion of the Company'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 Company for the periods indicated.
<TABLE>
<CAPTION>
10 Months
Year Ended December 31, Ended
----------------------------------- December 31,
1996 1995 1994 1993
---- ---- ---- ----
(In Thousands)
Purchases:
<S> <C> <C> <C> <C>
Adjustable-rate(1)..................... $ --- $ 1,023 $ 2,047 $ ---
Fixed-rate(1).......................... 2,458 917 --- 2,026
------- --------- --------- -------
Total purchases................. 2,458 1,940 2,047 2,026
Sales:
Adjustable-rate(1)..................... 1,283 814 --- ---
Repayments:
Principal repayments................... 673 476 437 ---
Other increase (decrease).............. (20) 84 (150) ---
------ -------- -------- --------
Net increase (decrease)......... $ 482 $ 734 $ 1,460 $ 2,026
===== ======== ======= =======
<FN>
(1) Consists of pass-through securities.
</FN>
</TABLE>
20
<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. 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.
21
<PAGE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
10 Months
Year Ended December 31, Ended
------------------------------------ December 31,
1996 1995 1994 1993
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Opening balance............................. $ 41,047 $ 40,057 $ 41,139 $ 40,363
Deposits.................................... 51,120 24,295 24,604 15,841
Withdrawals................................. (51,599) (24,759) (26,856) (16,193)
Interest credited........................... 1,635 1,454 1,170 1,128
------- -------- -------- --------
Ending balance.............................. $42,203 $ 41,047 $ 40,057 $ 41,139
======= ======== ======== ========
Net increase (decrease)..................... $ 1,156 $ 990 $ (1,082) $ 776
======= ========= ======== =========
Percent increase (decrease)................. 2.82% 2.47% (2.63)% 1.92%
---- ------ ------ ------
</TABLE>
22
<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>
December 31,
------------------------------------------------------------------------------------
1996 1995 1994 1993
------------------------------------------------------------------------------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transactions and Savings Deposits:
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook Accounts - 3.00%(1)....... $20,492 48.56% $19,409 47.29% $20,750 51.80% $22,989 55.88%
Money Market Accounts - 3.25%(1)... 1,495 3.54 1,601 3.90 1,924 4.80 2,029 4.93
-------- ------ ------ ------ -------- ------ -------- ------
Total Non-Certificates............. 21,987 52.10 21,010 51.19 22,674 56.60 25,018 60.81
-------- ----- ------ ------ -------- ------ -------- ------
Certificates:
0.00 - 3.99%..................... --- --- 49 0.12 5,130 12.81 12,935 31.44
4.00 - 5.99%..................... 19,231 45.57 16,222 39.52 11,669 29.13 2,343 5.70
6.00 - 7.99%..................... 985 2.33 3,766 9.17 494 1.23 668 1.62
8.00 and over..................... --- --- --- --- 90 .23 175 .43
--------- -------- -------- -------- ------- ------- --------- -------
Total Certificates................. 20,216 47.90 20,037 48.81 17,383 43.40 16,121 39.19
------ ------ ------- ------ -------- ------ -------- ------
Total Deposits..................... $42,203 100.00% $41,047 100.00% $40,057 100.00% $41,139 100.00%
======= ====== ======= ====== ======= ====== ======= ======
<FN>
(1) At December 31, 1996.
</FN>
</TABLE>
23
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 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)
<S> <C> <C> <C> <C> <C> <C>
5.00 - 5.99%.......... $16,619 $ 1,994 $ 478 $ 32 $ 107 $19,230
6.00 - 6.99%.......... 505 --- 88 119 171 883
7.00 - 7.99%.......... --- --- --- 103 --- 103
---------- --------- -------- ------ -------- --------
$17,124 $ 1,994 $ 566 $ 254 $ 278 $20,216
======= ======= ====== ====== ====== =======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of December 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.... $6,796 $5,462 $4,060 $2,887 $19,205
Certificates of deposit of $100,000 or more...... 300 206 300 205 1,011
------ ------- ------- ------ ------
Total certificates of deposit.................... $7,096 $5,668 $4,360 $3,092 $20,216
====== ====== ====== ====== =======
</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
24
<PAGE>
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal savings
association may engage in directly.
At December 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 year ended December 31,
1996. At December 31, 1996, Preferred Savings' investment in the Subsidiary
totaled $4,601.
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 December 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 December 31, 1996, Preferred Savings' share of deposits in its market
area was approximately .04%.
Employees
At December 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.
25
<PAGE>
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 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.
26
<PAGE>
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 December 31, 1996, Preferred Savings'
lending limit under this restriction was $4.8 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 institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios
27
<PAGE>
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.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. 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%. 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.
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
28
<PAGE>
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 December 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.
At December 31, 1996, Preferred Savings had tangible capital of $22.1
million, or 32.8% of adjusted total assets, which is approximately $21.1 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.
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 December 31, 1996,
Preferred Savings had no intangibles which were subject to these tests.
At December 31, 1996, Preferred Savings had core capital equal to $22.1
million, or 32.8% of adjusted total assets, which is $20.1 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
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 December 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.
29
<PAGE>
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 December 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 December 31, 1996,
Preferred Savings would qualify for an exemption from the requirement.
On December 31, 1996, Preferred Savings had total capital of $22.3
million (including $22.1 million in core capital and $186,000 in qualifying
supplementary capital) and risk-weighted assets of $24.0 million; or total
capital of 92.9% of risk-weighted assets. This amount was $20.4 million above
the 8% requirement in effect on that date.
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.
30
<PAGE>
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.
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
31
<PAGE>
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 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
32
<PAGE>
ratio requirement. At December 31, 1996, Preferred Savings was in compliance
with both requirements, with an overall liquid asset ratio of 49.2% and a
short-term liquid assets ratio of 48.6%.
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 December 31, 1996, Preferred Savings met the test with 79.3% 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
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."
33
<PAGE>
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.
Holding Company Regulation
The Holding Company is 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
34
<PAGE>
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.
35
<PAGE>
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 December 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 December 31, 1996, Preferred Savings had
$362,100 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 6.11% and were
6.75% for calendar year 1996. As a result of their holdings, the Bank could
borrow up to $7.24 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.
36
<PAGE>
For the year ended December 31, 1996, dividends paid by the FHLB of
Chicago to Preferred Savings totaled $24,199, which constitute a $2,215 increase
from the amount of dividends received in calendar year 1995.
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 is computed under the experience method. 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.
In August 1996, federal legislation was enacted that changed the manner
in which the bad debt deduction is calculated by thrift institutions, including
the Bank. Formerly the Bank had been allowed to calculate its deduction under
the experience of percentage of taxable income methods and deduct the higher
amount. The percentage of taxable income method was repealed effective for the
1996 tax year. The legislation effectively required 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.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, 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
the Bank, 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.
37
<PAGE>
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.
38
<PAGE>
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).
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.
Executive Officers of the Holding Company and the Bank Who Are Not Directors
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. Ms. Maciejewski was married to the
late brother of Lorraine Ptak.
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.
39
<PAGE>
Item 2. 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 $307,000 at
December 31, 1996. At December 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 believes that its current facilities are adequate to meet the present
and foreseeable future needs of the Bank and the Company.
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 December 31, 1996 was
approximately $9,000.
Item 3. 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.
Item 4. Submissions of Matters to a Vote of Securities Holders
No matter was submitted to a vote of Security holders, through the
solicitation of proxies or otherwise during the quarter ended December 31, 1996.
40
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 43 of the Company's 1996 Annual Report to stockholders attached
hereto as Exhibit 13 is herein incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pages 5 through 18 of the Company's 1996 Annual Report to stockholders
attached hereto as Exhibit 13 is herein incorporated by reference.
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended December 31, 1996, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.
Pages in
Annual Report Section Annual Report
- --------------------- -------------
Selected Consolidated Financial Information..................... 2-3
Management's Discussion and Analysis of Financial
Condition and Results of Operation............................ 5-18
Independent Auditors' Report.................................... 19
Consolidated Statements of Financial Condition as of December 31,
1996 and 1995................................................. 20
Consolidated Statements of Income for the Years
Ended December 31, 1996, 1995 and 1994........................ 21
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1996,
1995 and 1994................................................. 22
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1996, 1995 and 1994.................. 23-24
Notes to Consolidated Financial Statements...................... 25-42
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended December 31, 1996, is not
deemed filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There has been no current report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change in
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure nor has there been a change of accountants
within the past 24 months.
41
<PAGE>
PART III
Item 9. Directors, Promoters and Control Persons; Compliance with Section 16(a)
of the Exchange Act
Directors
Information concerning directors of the Company is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders for the fiscal year ended December 31, 1996, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Executive Officers
Information regarding the business experience of the executive officers
of the Company and the Bank contained in Part I of this 10-KSB is incorporated
herein by reference.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the fiscal year
ended December 31, 1996, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy Statement for the fiscal year ended December 31, 1996, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders for the fiscal year ended
December 31, 1996, a copy of which will be filed not later than 120 days after
the close of the fiscal year.
42
<PAGE>
PART IV
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C> <C>
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
-----------------------------------------------------------------------------------------
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(a) Articles of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of security holders, *
including debentures
9 Voting Trust Agreement None
10 Material contracts None
11 Statement regarding computation of per share None
earnings
13 Annual Report to Security Holders 13
16 Letter regarding change in certifying accountants None
18 Letter regarding change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote None
of security holders
23 Consents of Experts and Counsel None
24 Power of Attorney None
27 Financial Data Schedule 27
28 Information from reports furnished to state insurance None
regulatory authorities
99 Additional Exhibits None
<FN>
- ------------
* Filed as exhibits to the Company's S-1 registration statement filed on
August 30, 1996 (file No. 333-11211) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with item 601 of regulation
S-B,
</FN>
</TABLE>
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PS FINANCIAL, INC.
Date: March 28, 1997 By: Kimberly P. Rooney
-------------- ---------------------------
Kimberly P. Rooney (Duly
Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: Kimberly P. Rooney By: S. J. Ptak
------------------------------- ---------------------------------
Kimberly P. Rooney, President, S. J. Ptak, Chairman of the Board
Chief Executive Officer and
Director (Principal Executive
and Operating Officer)
Date: March 28, 1997 Date: March 28, 1997
-------------- --------------
By: Edward Wolak By: L. G. Ptak
------------------------------- ---------------------------------
Edward Wolak, Director L.G. Ptak, Director and Secretary
Date: March 28, 1997 Date: March 28, 1997
-------------- --------------
By: Rocco Di Iorio By: Jeanine M. McInerney
------------------------------- ---------------------------------
Rocco Di Iorio Director Jeanine M. McInerney, Director
Date: March 28, 1997 Date: March 28, 1997
-------------- --------------
By: Jeffrey Przybyl
-----------------------------------
Jeffrey Przybyl, Treasurer and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: March 28, 1997
--------------
EXHIBIT 13
- --------------------------------------------------------------------------------
1996 ANNUAL REPORT
- --------------------------------------------------------------------------------
[LOGO]
PS FINANCIAL, INC.
Chicago, Illinois
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
President's Message ....................................................... 1
Selected Consolidated Financial Information ............................... 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................... 5
Independent Auditors' Report............................................... 19
Consolidated Financial Statements ......................................... 20
Corporate Information...................................................... 43
i
<PAGE>
- --------------------------------------------------------------------------------
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Set forth below are selected consolidated financial and other data of
the Company. 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 Annual Report.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------- February 28,
1996 1995 1994 1993 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ----------------------------------
Total assets.............................................. $75,133 $53,520 $51,619 $53,854 $49,974
Cash and cash equivalents................................. 8,758 3,754 1,429 5,874 2,445
Loans receivable, net(2).................................. 35,943 34,525 32,890 30,821 32,716
Mortgage-backed securities(3):
Held to maturity....................................... --- --- 1,792 2,026 ---
Available for sale..................................... 4,702 4,220 1,694 --- ---
Securities(3):
Held to maturity....................................... --- --- 201 403 855
Available for sale..................................... 24,080 9,739 7,326 9,044 8,652
Deposits.................................................. 42,203 41,047 40,057 41,139 40,363
Total stockholders' equity................................ 32,147 11,724 10,512 9,645 8,833
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Year Ended 10 Months Year Ended
December 31, Ended ------------
---------------------------------- December 31, February 28,
1996 1995 1994 1993 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
- -------------------------
Total interest income..................................... $4,664 $4,268 $3,854 $3,401 $4,183
Total interest expense.................................... 1,781 1,632 1,310 1,169 1,734
------ ------ ------ ------ ------
Net interest income.................................... 2,883 2,636 2,544 2,232 2,449
Provision for loan losses(1).............................. 50 --- 42 27 24
------ ------ ------ ------ ------
Net interest income after provision for loan losses....... 2,833 2,636 2,502 2,205 2,425
Fees and service charges.................................. 69 58 76 40 39
Gain (loss) on sales of securities(2)..................... (38) --- (365) (28) ---
------ ------ ------ ------ ------
Total non-interest income................................. 31 58 (289) 12 39
Total non-interest expense................................ 1,233 1,009 838 647 820
------ ------ ------ ------ ------
Income before taxes....................................... 1,631 1,685 1,375 1,570 1,644
Income tax provision...................................... 629 630 617 628 643
------ ------ ------ ------ ------
Net income................................................ $1,002 $1,055 $ 758 $ 942 $1,001
====== ====== ====== ====== ======
<FN>
- -------------
(1) The allowance for loan losses at December 31, 1996, 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.
(2) 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.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
10 Months Year Ended
Year Ended December 31, Ended ----------
------------------------------- December 31, February 28,
1996 1995 1994 1993 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- -----------------------------------------
Performance Ratios:
Return on assets (ratio of net income to average
total assets)(1) ............................................. 1.71% 1.99% 1.46% 1.83% 1.96%
Return on equity (ratio of net income to average
total equity)(1) ............................................. 6.55 9.42 7.53 10.21 11.82
Interest rate spread information:
Average during period(1) ..................................... 3.89 4.26 4.38 4.78 3.96
End of period ................................................ 3.30 3.71 4.26 3.92 3.79
Net interest margin(2)(1) ...................................... 5.03 5.13 5.03 5.39 4.88
Efficiency Ratio(3) ............................................ 42.30 37.45 37.16 28.83 32.96
Ratio of operating expense to average total assets(1) .......... 2.10 1.91 1.61 1.26 1.60
Ratio of average interest-earning assets to average
interest-bearing liabilities .............................. 136.86 127.21 125.08 121.78 126.60
Quality Ratios:
Non-performing assets to total assets at end
of period .................................................... 0.37 1.45 0.65 0.33 0.21
Allowance for loan losses to non-performing loans .............. 65.96 17.55 40.72 53.41 63.21
Allowance for loan losses to total loans ....................... 0.51 0.39 0.41 0.30 0.20
Capital Ratios:
Equity to total assets at end of period ........................ 42.79 21.91 20.36 17.91 17.68
Average equity to average assets ............................... 26.06 21.18 19.32 17.93 16.56
Regulatory Capital Ratios:(4)
Total capital .................................................. -- 59.05 54.32 38.93 31.37
Tier 1 capital ................................................. -- 58.37 52.79 37.74 30.85
Leverage ratio ................................................. -- 22.19 20.29 18.08 18.01
Tangible capital ............................................... 32.77 -- -- -- --
Core capital ................................................... 32.77 -- -- -- --
Risk-based capital ............................................. 92.91 -- -- -- --
<FN>
- -------------
(1) Ratios for the ten month period has 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.
(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.
</FN>
</TABLE>
4
<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. 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.
Comparison of Financial Condition at December 31, 1996 and December 31, 1995
Total assets at December 31, 1996 were $75.1 million compared to $53.5
million at December 31, 1995, an increase of $21.6 million, or 40.4%. The
increase was primarily the result of net proceeds (less ESOP shares) of $19.4
million from the sale of common stock as a result of the conversion from a
federal mutual savings bank to a federal stock savings bank. The net proceeds
were invested primarily in securities available-for-sale and interest-bearing
deposits in other financial institutions. Securities available-for-sale
increased $14.4 million from $9.7 million at December 31, 1995 to $24.1 million
at December 31, 1996. Interest-bearing deposits increased $5.4 million from $2.8
million at December 31, 1995 to $8.2 million at December 31, 1996.
Total liabilities at December 31, 1996 were $43.0 million compared to
$41.8 million at December 31, 1995, an increase of $1.2 million, or 2.9%. Total
deposits increased slightly by $1.2 million from $41.0 million at December 31,
1995 to $42.2 million at December 31, 1996 due to an increase in passbook
savings and money market accounts as a result of local economic and competitive
factors.
Total equity at December 31, 1996 was $32.1 million compared to $11.7
million at December 31, 1995, an increase of $20.4 million, or 174.4% as a
result of the issuance of common stock in the Conversion. The Company sold
2,182,125 shares of common stock at $10 per share and received proceeds of $19.4
million net of conversion expenses and ESOP shares.
5
<PAGE>
Approximately 50% of the gross proceeds were used by the Company to acquire all
of the capital stock of the Bank.
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 Years Ended December 31, 1996
and December 31, 1995
General. Net income for the year ended December 31, 1996 was $1.0
million, a decrease of $52,000, or 4.9%, from net income of $1.1 million for the
year ended December 31, 1995. The decrease was primarily a result of a special
Savings Association Insurance Fund ("SAIF") assessment of approximately .65% of
all SAIF-insured deposit balances as of March 31, 1995 which totaled $245,000
combined with an increase in the provision for loan losses of $50,000. This was
partially offset by an increase in net interest income of $247,000.
Interest Income. Interest income for the year ended December 31, 1996
was $4.7 million compared to $4.3 million for the year ended December 31, 1995,
an increase of $396,000, or 9.2%. The increase in interest income was the result
of an increase in the average balance of interest-earning assets from $51.3
million for the year ended December 31, 1995 to $57.3 million for the year ended
December 31, 1996. The increase in the average balance of interest-earning
assets was largely a result of a $1.5 million increase in loans receivable and a
$2.6 million increase in the average balance of securities. The average yield on
interest-earning assets decreased from 8.31% for the year ended December 31,
1995 to 8.14% for the year ended December 31, 1996. This was largely a result of
a decrease in the yield on securities from 7.05% for the year ended December 31,
1995 to 6.54% for the year ended December 31, 1996 due to securities with higher
interest rates being called during 1996 combined with a decrease in the yield on
other earning assets of 99 basis points.
Interest Expense. Interest expense for the year ended December 31, 1996
was $1.8 million compared to $1.6 million for the year ended December 31, 1995,
an increase of $147,000, or 9.0%. The increase in interest expense was a result
of an increase in average interest-bearing liabilities from $40.4 million for
the year ended December 31, 1995 to $41.9 million for the year ended December
31, 1996 combined with an increase in the average cost of funds from 4.05% for
the year ended December 31, 1995 to 4.25% for the year ended December 31, 1996.
The increase in the cost of funds was a result of an increase in interest rates
paid on certificates by the Bank in response to higher market rates. The
increased rates paid also resulted in increased average balances of certificates
of deposit.
6
<PAGE>
Net Interest Income. Net interest income for the year ended December
31, 1996 was $2.9 million compared to $2.6 million for the year ended December
31, 1995, an increase of $247,000, or 9.4%. The increase in net interest income
was a result of an increase in the ratio of average interest-earning assets to
average interest-bearing liabilities from 127.21% for the year ended December
31, 1995 to 136.86% for the year ended December 31, 1996.
Provision for Loan Losses. The Bank recorded a $50,000 provision for
loan losses for the year ended December 31, 1996 compared to no provision for
the year ended December 31, 1995. The increase was primarily a result of
increased delinquencies of multi-family and commercial real estate loans. At
December 31, 1996, the Bank's allowance for losses totaled $186,000, or .51% of
total loans and 65.96% 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
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 loan loss provision for the year ended December 31, 1996 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 year ended December 31,
1996 was $32,000 compared to $58,000 for the year ended December 31, 1995, a
decrease of $26,000, or 44.8%. The decrease was primarily a result of losses on
sales of securities of $38,000 for the year ended December 31, 1996 compared to
no losses for the year ended December 31, 1995. This was partially offset by an
increase in service fees collected of $12,000.
Noninterest Expense. Noninterest expense was $1.2 million for the year
ended December 31, 1996 compared to $1.0 million for the year ended December 31,
1995, an increase of $224,000, or 22.2%. The increase was primarily a result of
the one-time special SAIF assessment of $245,000 on all SAIF-insured deposits.
This was partially offset by a decrease in compensation and benefits resulting
from the termination of the Bank's pension plan during 1996. However, the Bank
expects that noninterest expense will increase in the future due to the
implementation of new benefit plans such as the ESOP.
Income Tax Expense. The provision for income taxes totalled $629,000
for the year ended December 31, 1996 compared to $630,000 for the year ended
December 31, 1995. The slight decrease was a result of a slight decrease in
income before income taxes of $53,000.
7
<PAGE>
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 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.
8
<PAGE>
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, 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 17.55% 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.
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.
9
<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>
Year Ended December 31,
---------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- ----------------------- -----------------------------------
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)............ $35,608 $3,331 9.35% $34,131 $3,156 9.25% $31,685 $3,014 9.56%
Securities(2).................. 11,947 781 6.54 9,250 652 7.05 7,357 327 4.46
Mortgage-backed securities..... 4,460 275 6.17 3,549 186 5.24 3,600 172 4.78
Other.......................... 5,295 277 5.23 4,407 274 6.22 7,962 341 4.28
-------- ------ -------- ------ -------- ------
Total interest-earning
assets(1)(2)................ $57,310 4,664 8.14% $51,337 4,268 8.31 $50,604 3,854 7.62
======= ----- ======= ----- ======= -----
Interest-Earning Liabilities:
Passbook savings............... $21,559 690 3.20 $21,512 649 3.02 $23,882 680 2.85
Certificate accounts........... 20,317 1,091 5.36 18,843 983 5.22 16,576 630 3.80
-------- ----- -------- ------ -------- ------
Total interest-bearing
liabilities................. $41,876 1,781 4.25 $40,355 1,632 4.05 $40,458 1,310 3.24
======= ----- ---- ======= ------ ---- ======= ----- ----
Net interest income............. $2,883 $2,636 $2,544
===== ====== ======
Net interest rate spread........ 3.89 4.26% 4.38%
==== ==== ====
Net earning assets.............. $15,434 $10,982 $10,146
======= ======= =======
Net yield on average interest-
earning assets................ 5.03% 5.13% 5.03%
==== ==== ====
Average interest-earning assets
to average interest-bearing
liabilities................... 136.86% 127.21% 125.08%
====== ====== ======
</TABLE>
Ten Months Ended
December 31,
1993(3)
-------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable(1)............. $32,708 $2,783 10.21%
Securities(2)................... 9,919 391 4.74
Mortgage-backed securities...... 184 2 1.30
Other........................... 6,909 225 3.91
-------- ------
Total interest-earning
assets(1)(2)................. $49,720 3,401 8.21
======= -----
Interest-Earning Liabilities:
Passbook savings................ $24,508 575 2.82
Certificate accounts............ 16,320 594 4.37
-------- ------
Total interest-bearing
liabilities.................. $40,828 1,169 3.43
======= ----- ----
Net interest income.............. $2,232
======
Net interest rate spread......... 4.78%
====
Net earning assets............... $8,892
======
Net yield on average interest-
earning assets................. 5.39%
====
Average interest-earning assets
to average interest-bearing
liabilities.................... 121.78%
======
- --------------
(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.
10
<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.
At December 31,
--------------------------
1996 1995 1994
---- ---- ----
Weighted average yield on:
Loans receivable ............................. 8.57% 8.75% 8.81%
Mortgage-backed securities ................... 6.84 6.08 5.51
Securities ................................... 6.05 6.98 6.95
Other interest-earning assets ................ 6.53 5.22 5.18
Combined weighted average yield
on interest-earning assets ............... 7.41 7.98 7.87
Weighted average rate paid on:
Passbook savings deposits .................... 3.01 3.00 3.05
Certificate accounts ......................... 5.31 5.58 4.33
Combined weighted average rate paid
on interest-bearing liabilities .......... 4.11 4.27 3.61
Spread ........................................ 3.30 3.71 4.26
- ----------------
(1) Excluding amortization of deferred loan fees.
11
<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>
Year Ended December 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 ................................... $138 $ 37 $175 $ 228 $ (86) $ 142
Mortgage-backed securities ......................... 53 36 89 (2) 16 14
Securities ......................................... 179 (50) 129 99 226 325
Other .............................................. 50 (47) 3 (186) 119 (67)
---- ---- ---- ----- ----- -----
Total interest-earning assets .................... $420 $(24) 396 $ 139 $ 275 414
==== ==== ---- ===== ===== -----
Interest-bearing liabilities:
Passbook savings deposits .......................... $ 1 $ 40 $ 41 $ (70) $ 39 (31)
Certificate accounts ............................... 79 29 108 95 258 353
---- ---- ---- ----- ----- -----
Total interest-bearing liabilities ............... $ 80 $ 69 149 $ 25 $ 297 322
==== ==== ---- ===== ===== -----
Net interest income ................................. $247 $ 92
==== =====
</TABLE>
12
<PAGE>
Asset/Liability Management
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.
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 December 31, 1996, $25.8 million
or 95.3% 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 December 31, 1996, the Bank had $24.1 million of securities with a remaining
average life of 3.19 years. Fourth, the Bank has maintained a mortgage-backed
securities portfolio with adjustable-rates. At December 31, 1996, adjustable
rate mortgage-backed securities totaled $1.5 million which represented 2.0% 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
13
<PAGE>
maturities on its deposit products at competitive rates and monitors the
maturities on an ongoing basis.
An 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. Based upon its asset size and capital level at December
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 following table sets forth, at December 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) as compared to
tolerance limits under the Bank's current policy.
Target Limit
Under
Change in Interest Estimated Ratio of NPV Estimated Increase Asset/Liability
Rates NPV to (Decrease) in NPV Management
(Basis Points) Amount Total Assets Amount Percent Policy
-------------- ------ ------------ ------ ------- ------
(Dollars in Thousands)
+400 $27,785 37% $(5,315) (16)% (65)%
+300 29,043 39 (4,059) (12) (50)
+200 30,401 40 (2,700) (8) (35)
+100 31,824 42 (1,277) (4) (15)
--- 33,101 44 --- --- ---
-100 34,037 45 937 3 13
-200 34,182 45 1,081 3 26
-300 34,856 46 1,255 4 40
-400 34,729 46 1,628 5 50
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
14
<PAGE>
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 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 December 31, 1996, Preferred Savings' liquidity ratio for
regulatory purposes was 49.2%.
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 $868,000, $1.2
million and $1.1 million for the years ended December 31, 1996, 1995 and 1994,
respectively. 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 $1.2
million, $990,000 and $(1,082,000) for the years ended December 31, 1996, 1995
and 1994, respectively.
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 December 31, 1996, cash and
short-term investments totaled $8.8 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 December 31, 1996, the Bank had outstanding commitments to originate
loans of $401,000, 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
December 31, 1996 totaled $17.1 million. Management believes that a significant
portion of such deposits will remain with the Bank.
15
<PAGE>
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 December 31, 1996, Preferred Savings was in compliance
with all applicable capital requirements on a fully phased-in basis. See 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
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 December 31, 1996, Preferred Savings' liquidity ratio for
regulatory purposes was 49.2%.
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.
16
<PAGE>
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 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.
17
<PAGE>
Management anticipates that the adoption of SFAS No. 125 will not have a
material impact on the financial condition or operations of the Bank. Because
the volume and variety of certain transactions will make it difficult for some
entities to comply, some provisions have been delayed by SFAS No. 127.
Management anticipates that the adoption of SFAS No. 125 will not have a
material impact on the financial condition or operations of the Bank.
In March 1997, the accounting requirements for calculating earnings per
share were revised. Basic earnings per share for 1997 and later will be
calculated solely on average common shares outstanding. Diluted earnings per
share will reflect the potential dilution of stock options and other common
stock equivalents. All prior calculations will be restated to be comparable to
the new methods. As the Bank has not had significant dilution from stock
options, the new calculation methods will not significantly affect future basic
earnings per share and diluted earnings per share.
18
<PAGE>
PS FINANCIAL, INC.
Chicago, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
CONTENTS
REPORT OF INDEPENDENT AUDITORS............................................ 1
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION....................... 2
CONSOLIDATED STATEMENTS OF INCOME.................................... 3
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY............................................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS................................ 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................... 7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
PS Financial, Inc.
Chicago, Illinois
We have audited the accompanying consolidated statements of financial condition
of PS Financial, Inc. and its wholly-owned subsidiaries as of December 31, 1996
and 1995 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 PS Financial, Inc.
and its wholly-owned subsidiaries at December 31, 1996 and 1995 and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 31, 1997
1.
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 579,271 $ 916,175
Interest-bearing deposit accounts in other
financial institutions 8,178,521 2,837,617
----------- -----------
Total cash and cash equivalents 8,757,792 3,753,792
Interest-bearing term deposits in other financial
institutions 248,000 248,000
Securities available-for-sale (Note 2) 24,080,360 9,738,928
Mortgage-backed securities
available-for-sale (Note 2) 4,702,065 4,220,095
Loans receivable, net (Notes 3 and 4) 35,943,469 34,525,038
Federal Home Loan Bank stock 362,100 341,400
Premises and equipment, net (Note 5) 460,840 466,647
Accrued interest receivable 476,526 180,960
Other assets 101,722 45,456
----------- -----------
Total assets $75,132,874 $53,520,316
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits (Note 6) $42,203,144 $41,046,705
Advances from borrowers for taxes and
insurance 476,623 459,105
Deferred income taxes 109,456 126,974
Accrued interest payable and other liabilities 196,456 163,132
----------- -----------
Total liabilities 42,985,679 41,795,916
Commitments and contingencies (Note 11)
Stockholders' equity
Common stock $ 0.01 par value per share, 2,500,000 shares
authorized; 2,182,125 shares issued and outstanding 21,821 --
Additional paid-in capital 21,169,750 --
Retained earnings, substantially restricted
(Note 8) 12,669,386 11,666,976
Unearned ESOP shares (Note 10) (1,690,716) --
Unrealized appreciation (depreciation) on securities
available-for-sale, net of income taxes (Note 2) (23,046) 57,424
----------- -----------
Total stockholders' equity 32,147,195 11,724,400
----------- -----------
Total liabilities and stockholders' equity $75,132,874 $53,520,316
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2.
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Interest income
Loans $3,331,305 $3,156,211 $3,013,874
Securities 780,821 651,687 327,052
Mortgage-backed securities 274,649 186,495 171,514
Other interest-earning assets 276,935 274,084 341,281
---------- ---------- ----------
Total interest income 4,663,710 4,268,477 3,853,721
Interest expense on deposits 1,780,483 1,632,593 1,310,243
---------- ---------- ----------
Net interest income 2,883,227 2,635,884 2,543,478
Provision for loan losses (Note 4) 50,000 -- 41,722
---------- ---------- ----------
Net interest income after provision for
loan losses 2,833,227 2,635,884 2,501,756
Noninterest income
Net loss on sale of securities (Note 2) (37,903) (218) (365,331)
Other 69,438 58,343 75,922
---------- ---------- ----------
Total noninterest income 31,535 58,125 (289,409)
Noninterest expense
Compensation and benefits 550,323 627,651 428,803
Occupancy and equipment expense 112,891 106,927 116,493
Data processing 47,078 42,800 39,730
Federal deposit insurance premiums 89,668 92,921 94,366
SAIF special assessment 245,241 -- --
Other operating expenses 187,809 139,069 158,369
---------- ---------- ----------
Total noninterest expense 1,233,010 1,009,368 837,761
---------- ---------- ----------
Income before income tax provision 1,631,752 1,684,641 1,374,586
Provision for income taxes (Note 9) 629,342 630,110 616,799
---------- ---------- ----------
Net income $1,002,410 $1,054,531 $ 757,787
========== ========== ==========
Earnings per share $ .06
=====
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3.
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITY
Years ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
Unrealized
Gain
Retained (Loss) on
Additional Earnings, Unearned Securities Total
Common Paid-in Substantially ESOP Available- Stockholders'
Stock Capital Restricted Shares for-Sale Equity
----- ------- ---------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ -- $ -- $ 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
Issuance of common stock,
net of conversion costs
of $639,301 21,821 21,160,128 -- (1,745,700) -- 19,436,249
ESOP shares released -- 9,622 -- 54,984 -- 64,606
Change in unrealized gain
(loss) of securities available-
for-sale, net of tax of $142,313 -- -- -- -- (80,470) (80,470)
Net income -- -- 1,002,410 -- -- 1,002,410
------- ----------- ----------- ----------- --------- -----------
Balance at December 31, 1996 $21,821 $21,169,750 $12,669,386 $(1,690,716) $ (23,046) $32,147,195
======= =========== =========== =========== ========= ===========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4.
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,002,410 $ 1,054,531 $ 757,787
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 32,784 34,570 34,188
Amortization of discounts and
premiums on securities 22,239 89,163 (29,971)
Provision for loan losses 50,000 -- 41,722
Net loss on sale of securities available-
for-sale 37,903 218 365,331
Stock dividends received on Federal Home
Loan Bank stock -- (4,700) --
ESOP compensation expense 64,606 -- --
Change in
Deferred loan origination fees (54,915) 6,292 20,556
Accrued interest receivable and
other assets (351,832) 44,653 (69,294)
Other liabilities and deferred
income taxes 65,126 (6,251) 22,233
------------ ----------- ------------
Net cash provided by operating activities 868,321 1,218,476 1,142,552
Cash flows from investing activities
Proceeds from sales of securities available-
for-sale -- 1,018,903 10,889,706
Proceeds from sale of mortgage-backed
securities available-for-sale 1,282,899 814,194 --
Purchase of Federal Home Loan Bank stock (20,700) (28,100) --
Proceeds from sale of Federal Home Loan
Bank stock -- -- 39,000
Proceeds from repayments of securities
held-to-maturity -- 238,070 226,271
Proceeds from repayments of securities
available-for-sale 672,792 238,257 210,905
Proceeds from maturities of securities
available-for-sale 6,500,000 4,900,000 3,000,000
Proceeds from maturity of securities
held-to-maturity -- -- 200,000
Purchase of securities available-for-sale (21,011,040) (8,046,167) (12,312,033)
Purchase of mortgage-backed securities
available-for-sale (2,457,985) (1,939,739) (4,072,879)
Net (increase) decrease in interest-bearing
term deposits in other financial institutions -- 5,002,818 (579,818)
Net change in loans (1,413,516) (1,641,313) (2,131,081)
Capital expenditures, net (26,977) (44,088) (25,377)
------------ ----------- ------------
Net cash provided by (used in) investing
activities (16,474,527) 512,835 (4,555,306)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
5.
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Net increase (decrease) in deposits $ 1,156,439 $ 989,496 $(1,082,199)
Net increase (decrease) in advances from
borrowers for taxes and insurance 17,518 (395,696) 49,422
Net proceeds from stock issuance 19,436,249 -- --
----------- ----------- -----------
Net cash provided by (used in)
financing activities 20,610,206 593,800 (1,032,777)
----------- ----------- -----------
Net change in cash and cash equivalents 5,004,000 2,325,111 (4,445,531)
Cash and cash equivalents, beginning of year 3,753,792 1,428,681 5,874,212
----------- ----------- -----------
Cash and cash equivalents, end of year $ 8,757,792 $ 3,753,792 $ 1,428,681
=========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 1,788,739 $ 1,605,763 $ 1,301,692
Income taxes 631,233 640,734 612,000
Supplemental schedule of noncash investing activities
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.
6.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of PS Financial, Inc. (the Company), its wholly-owned
subsidiary Preferred Savings Bank (the Bank) and the Bank's wholly-owned
subsidiary, Preferred Service Corporation, which engages in limited insurance
activities. All significant intercompany balances and transactions have been
eliminated.
Business: The only business of the Company is the ownership of the Bank. The
Bank is a federally-chartered stock savings bank. Through its main office, the
Bank offers a variety of financial services to customers in Chicago, Illinois.
Financial services consist primarily of consumer loans secured by residential
real estate and savings and certificate of deposit accounts.
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
income and expenses during the reporting period. Actual results could differ
from those estimates The collectibility of loans, fair value of financial
instruments, and status of contingencies are particularly subject to change.
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.
In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan". SFAS No. 114, as modified by SFAS 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
- --------------------------------------------------------------------------------
(Continued)
7.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
these standards, 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
these Statements was not material to the Company's consolidated financial
position or results of operations during 1996 and 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
- --------------------------------------------------------------------------------
(Continued)
8.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 Company and its subsidiaries file a consolidated income tax
return. The provision for income taxes is based on an asset and liability
approach in accordance with SFAS 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.
Employee Stock Ownership Plan: The Company accounts for its employee stock
ownership plan (ESOP) in accordance with American Institute of Certified Public
Accountants (AICPA) Statement of Position 93-6. The cost of shares issued to the
ESOP but not yet allocated to participants are presented in the consolidated
balance sheet as a reduction of stockholders' equity. Compensation expense is
recorded based on the market price of the shares as they are committed to be
released for allocation to participant accounts. The difference between the
market price and the costs of shares committed to be released is recorded as an
adjustment to paid-in capital. Dividends on allocated ESOP shares are recorded
as a reduction of retained earnings; dividends on unallocated ESOP shares are
reflected as a reduction of debt.
Shares are considered outstanding for earnings per share calculations as they
are committed to be released; unallocated shares are not considered outstanding.
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.
Earnings Per Common Share: Earnings per share is calculated by dividing the net
earnings by the weighted average number of common shares outstanding and common
stock equivalents attributable to outstanding stock options, when dilutive. In
1996, earnings per share is computed using net earnings from November 26, 1996,
the date that the Bank converted to stock ownership. The weighted average number
of the Company's shares of common stock used to calculate the 1996 earnings per
share was 2,010,304.
- --------------------------------------------------------------------------------
(Continued)
9.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
Securities are summarized as follows:
<TABLE>
<CAPTION>
December 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 $24,132,467 $ 28,151 $(80,258) $24,080,360
----------- -------- -------- -----------
Mortgage-backed securities available-for-sale
Federal Home Loan Mortgage Corporation 2,301,466 11,412 (8,432) 2,304,446
Federal National Mortgage Association 1,726,046 11,238 (1,493) 1,735,791
Government National Mortgage Association 659,618 2,210 -- 661,828
----------- -------- -------- -----------
4,687,130 24,860 (9,925) 4,702,065
----------- -------- -------- -----------
$28,819,597 $ 53,011 $(90,183) $28,782,425
=========== ======== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------
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 $ 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>
The Bank holds $1,500,000 and $1,000,000 of U.S. government agency bonds which
are structured notes issued by the Federal Home Loan Bank at December 31, 1996
and 1995, respectively.
Sales of securities are summarized as follows:
For the Year Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
Proceeds from sales $1,282,899 $1,833,097 $10,889,706
Gross realized gains -- 11,799 --
Gross realized losses 37,903 12,017 365,331
- --------------------------------------------------------------------------------
(Continued)
10.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
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.
December 31, 1996
---------------------------
Amortized Fair
Cost Value
---- -----
Securities available-for-sale
Due in less than one year $ 8,761,136 $ 8,767,985
Due after one year through five years 11,972,062 11,928,594
Due after five years 3,399,269 3,383,781
----------- -----------
24,132,467 24,080,360
Mortgage-backed securities 4,687,130 4,702,065
----------- -----------
$28,819,597 $28,782,425
=========== ===========
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following at:
December 31,
----------------------------
1996 1995
---- ----
First mortgage loans
Principal balances
Secured by one-to-four family residences $26,998,328 $25,858,435
Secured by other properties 6,088,322 6,094,352
Secured by commercial real estate 3,182,716 2,951,752
Construction loans 335,830 286,076
----------- -----------
36,605,196 35,190,615
Less net deferred loan origination fees (493,122) (548,037)
----------- -----------
First mortgage loans, net 36,112,074 34,642,578
Share loans 17,395 18,460
Less allowance for loan losses (186,000) (136,000)
----------- -----------
$35,943,469 $34,525,038
=========== ===========
- --------------------------------------------------------------------------------
(Continued)
11.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE
The principal balance of loans greater than 90 days delinquent on nonaccrual
status at December 31, 1996 and 1995 was approximately $282,000 and $775,000,
respectively. The interest income that would have been recorded under the
original terms of such loans approximated $23,000 and $69,000 for the years
ended December 31, 1996 and 1995, respectively.
The Bank did not have any impaired loans for the years ended December 31, 1996
or 1995.
The Company has granted loans to certain bank officers, directors, and other
related interests. Related party loans are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. All loans are current in their contractual
payments for both principal and interest.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
For the Year Ended
.............December 31,..........
1996 1995 1994
---- ---- ----
Balance, beginning of period ......... $136,000 $136,000 $ 94,278
Provision for loan losses ............ 50,000 -- 41,722
-------- -------- --------
Balance, end of period ........... $186,000 $136,000 $136,000
======== ======== ========
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following at:
........December 31,.......
1996 1995
---- ----
Land ....................................... $ 95,052 $ 95,052
Building and improvements .................. 508,557 504,590
Furniture and equipment .................... 307,618 286,563
-------- --------
Total cost ............................. 911,227 886,205
Accumulated depreciation ................... 450,387 419,558
-------- --------
$460,840 $466,647
======== ========
- --------------------------------------------------------------------------------
(Continued)
12.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $1,011,000 at December 31, 1996 and
$1,052,000 at December 31, 1995. Deposits greater than $100,000 are not insured.
At December 31, 1996, scheduled maturities of certificates of deposit are as
follows:
1997 $17,123,625
1998 1,994,209
1999 566,264
2000 253,319
Thereafter 278,424
-----------
$20,215,841
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 was completed during 1996.
- --------------------------------------------------------------------------------
(Continued)
13.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 7 - RETIREMENT BENEFITS (Continued)
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated statement of financial condition at December 31,
1995.
Actuarial present value of benefit obligations:
Accumulated benefit obligation
Vested ............................................... $(463,184)
Nonvested ............................................ --
---------
$(463,184)
=========
Projected benefit obligation .................................. $(463,184)
Plan assets at fair value, primarily certificates
of deposit at PS Financial, Inc. and mutual funds ........... 463,184
-------
Plan assets in excess of (less than) projected
benefit obligation .......................................... --
---------
Prepaid pension cost .................................... $ --
=========
Net pension cost consists of the following:
Year Ended
.......December 31,......
1995 1994
---- ----
Service costs - benefits earned during
the period ................................... $ 10,077 $ 17,104
Interest cost on projected benefit
obligation ................................... 33,118 29,929
Actual return on plan assets ................... (17,930) (17,303)
Net amortization and deferral .................. (10,720) (7,178)
Curtailment loss ............................... 62,715 --
-------- --------
$ 77,260 $ 22,552
======== ========
Year Ended
.......December 31,......
1995 1994
---- ----
Assumptions used to develop the net periodic
pension cost were:
Discount rate ....................................... 7.00% 8.00%
Expected long-term rate of return on assets ......... 7.00 6.50
Rate of increase in compensation levels
through date of curtailment ....................... 4.00 4.00
- --------------------------------------------------------------------------------
(Continued)
14.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 8 - REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as are asset growth and
expansion, and plans for capital restoration are required.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Total and Tier I
capital as defined in the regulations to risk-weighted assets as defined and of
Tier I capital to average assets as defined. As of December 31, 1996, the most
recent notification from the Office of Thrift Supervision categorized the Bank
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Bank must maintain minimum Total
risk-based, Tier I risk-based, and Tier I leverage ratios. There are no
conditions or events since that notification that management believes have
changed the institution's category.
At December 31, 1996, 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%.
The Bank's actual ratios on December 31, 1996 were 92.15% and 92.92%. The Bank's
leverage ratio (retained earnings, excluding valuation allowance on securities
available-for-sale, as a percent of total average assets) at December 31, 1996
was 33.53%, compared to minimum required amounts of 4.00% to 5.00%.
Current regulations also require savings institutions to have minimum regulatory
tangible capital equal to 1.5% of total assets, a core capital ratio of 3.0%,
and a risk-based capital ratio equal to 8.0% of risk-adjusted assets as defined
by regulation. The following is a summary of regulatory capital at December 31,
1996.
- --------------------------------------------------------------------------------
(Continued)
15.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 8 - REGULATORY CAPITAL (Continued)
<TABLE>
<CAPTION>
% of % of
% of Adjusted Risk- Risk-
Tangible Tangible Core Tangible Based Adjusted
Capital Assets Capital Assets Capital Assets
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital $ 22,105 32.77% $ 22,105 32.77% $ 22,288 92.91%
Adequacy capital
requirement 1,012 1.50 2,023 3.00 1,919 8.00
--------- ------- ---------- ------- --------- -------
Excess over
regulatory capital $ 21,093 31.27% $ 20,082 29.77% $ 20,369 84.91%
========= ======= ========== ======= ========= ======
</TABLE>
Accordingly, management considers the capital requirements to have been met.
Regulations also include restrictions on loans to one borrower; certain types of
investments and loans; loans to officers, directors, and principal stockholders;
brokered deposits; and transactions with affiliates.
Federal regulations require the Company to comply with a Qualified Thrift Lender
(QTL) test which requires that 65% of assets be maintained in housing-related
finance and other specified assets. If the QTL is not met, limits are placed on
growth, branching, new investment, FHLB advances, and dividends or the
institution must covert to a commercial bank charter. Management considers the
QTL test to have been met.
On May 21, 1996, the Board of Directors of the Bank adopted a Plan of Conversion
to convert from a federal mutual savings bank to a federal stock savings bank
with the concurrent formation of a holding company. On November 26, 1996 the
Company sold 2,182,125 shares of common stock at $10 per share and received
proceeds of $19,436,249 net of conversion expenses and ESOP shares.
Approximately 50% of the gross proceeds were used by the Company to acquire all
of the capital stock of the Bank.
At the time of conversion, the Bank established 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 balance as of that date was
$12,332,000. 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.
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES
The provision for income taxes consists of the following:
For the Year Ended
...............December 31,.............
1996 1995 1994
---- ---- ----
Current
Federal ...................... $ 536,629 $ 582,286 $ 528,090
State ........................ 60,910 90,155 95,347
--------- --------- ---------
597,539 672,441 623,437
Deferred .......................... 33,957 (42,331) (95,393)
Change in valuation allowance ..... (2,154) -- 88,755
--------- --------- ---------
$ 629,342 $ 630,110 $ 616,799
========= ========= =========
The net deferred tax liability included in other liabilities in the accompanying
consolidated statements of financial condition consists of the following at:
........December 31,......
1996 1995
---- ----
Gross deferred tax liabilities
Deferred loan fees ........................ $ (11,789) $ (33,928)
Accrual to cash ........................... (106,887) (40,098)
Accumulated depreciation .................. (60,601) (56,649)
FHLB stock dividend ....................... (13,790) (13,790)
Net unrealized gain on securities
available-for-sale ...................... -- (35,195)
--------- ---------
(193,067) (179,660)
Gross deferred tax assets
Loan loss reserve ......................... 65,091 52,686
Capital loss carryforward ................. 101,071 103,225
Net unrealized loss on securities
available-for-sale ...................... 14,126 --
Other ..................................... 4,394 --
--------- ---------
184,682 155,911
Valuation allowance ....................... (101,071) (103,225)
--------- ---------
Net deferred tax liability ............ $(109,456) $(126,974)
========= =========
- --------------------------------------------------------------------------------
(Continued)
17.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 9 - INCOME TAXES (Continued)
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:
Year Ended
..December 31, 1996...
Amount Percent
------ -------
Income tax computed at the statutory rate ........... $ 554,795 34.0%
Deferred tax valuation .............................. (2,154) (0.1)
Other ............................................... 36,501 2.2
--------- ----
Total federal income tax ....................... 589,142 36.1
State income tax, net of federal tax benefit ........ 40,200 2.5
--------- ----
$ 629,342 38.6%
========= ====
Year Ended
..............December 31,.............
1995 1994
------------------- -------------------
Amount Percent Amount Percent
Income tax computed at the
statutory rate ..................... $572,778 34.0% $ 467,359 34.0%
Deferred tax valuation allowance ..... -- -- 88,755 6.5
Other ................................ 1,522 0.1 (54) --
-------- ---- --------- ----
Total federal income tax ......... 574,300 34.1 556,060 40.5
State income tax, net of
federal tax benefit ................ 55,810 3.3 60,739 4.4
-------- ---- --------- ----
$630,110 37.4% $ 616,799 44.9%
======== ==== ========= ====
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. Tax legislation passed in August 1996 now requires all thrift
institutions to deduct a provision for bad debts for tax purposes based on
actual loss experience and recapture the excess bad debt reserve accumulated in
the tax years after 1987. The related amount of deferred tax liability which
must be recaptured is $6,965 and is payable over a six-year period beginning in
1996. Retained earnings at December 31, 1996 includes approximately $1,514,000,
consisting of bad debt deductions accumulated prior to 1988, on which no
provision for federal income taxes has been made. The related amount of
unrecognized deferred tax liability was approximately $587,000.
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 10 - STOCK-BASED COMPENSATION PLANS
As part of the conversion transaction, the Company established an employee stock
ownership plan (ESOP) for the benefit of substantially all employees. The ESOP
borrowed $1,745,700 from the Company and used those funds to acquire 174,570
shares of the Company's stock at $10 per share.
Shares issued to the ESOP are allocated to ESOP participants based on principal
and interest repayments made by the ESOP on the loan from the Company. The loan
is secured by shares purchased with the loan proceeds and will be repaid by the
ESOP with funds from the Company's discretionary contributions to the ESOP and
earnings on ESOP assets. Principal payments are scheduled to occur over a
twenty-year period. However, in the event the Company's contributions exceed the
minimum debt service requirements, additional principal payments will be made.
During 1996, 5,498 shares of stock with a fair value of $11.75 per share were
committed to be released, resulting in ESOP compensation expense of $64,606.
Shares held by the ESOP at December 31, 1996 are as follows:
Allocated shares ........................ 5,498
Unallocated shares ...................... 169,072
-------
Total ESOP shares ................... 174,570
=======
Fair value of unallocated shares ........ $1,986,596
==========
NOTE 11 - 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 December 31, 1996 and
1995, these financial instruments consist of commitments to extend credit
totaling $401,250 and $612,000, respectively. All 1996 commitments had variable
rates of prime plus one 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.
- --------------------------------------------------------------------------------
(Continued)
19.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 11 - FINANCIAL INSTRUMENTS AND COMMITMENTS (Continued)
Interest-bearing deposit accounts in other financial institutions potentially
subject the Bank to concentrations of credit risk. At December 31, 1996, the
Bank had a deposit account at the Federal Home Loan Bank of Chicago with a
balance totaling approximately $8,735,000. At December 31, 1995, the balance was
approximately $2,838,000.
Other 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). Due to the inadequate
capitalization of the SAIF, a recapitalization plan was signed into law on
September 30, 1996 which required a special assessment of approximately .65% of
all SAIF-insured deposit balances as of March 31, 1995. The Bank's assessment
totaled $150,235, net of taxes.
NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 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.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In thousands)
Financial Assets
<S> <C> <C> <C> <C>
Cash on hand and in banks ............. $ 579 $ 579 $ 916 $ 916
Interest-bearing deposits in other
financial institutions .............. 8,179 8,179 2,838 2,838
Interest-bearing term deposits in other
financial institutions .............. 248 248 248 248
Securities available-for-sale ......... 28,782 28,782 13,959 13,959
Loans receivable, net ................. 35,943 36,228 34,525 35,280
Federal Home Loan Bank stock .......... 362 362 341 341
Accrued interest receivable ........... 477 477 181 181
Financial Liabilities
Money market and passbook savings ..... (21,987) (21,987) (21,010) (21,010)
Certificates of deposits .............. (20,216) (20,230) (20,037) (20,076)
Accrued interest payable .............. (63) (63) (72) (72)
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
20.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 12 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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
December 31, 1996 and 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 December 31, 1996 and 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.
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 December 31, 1996 and 1995, the fair values would have been
achieved, because the market value may differ depending on the circumstances.
The estimated fair values at December 31, 1996 and 1995 should not necessarily
be considered to apply at subsequent dates.
- --------------------------------------------------------------------------------
(Continued)
21.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed statement of financial condition, statement of
income, and statement of cash flows for PS Financial, Inc. The Company was
formed on November 26, 1996. Accordingly, the statements of income and cash
flows reflect the period November 26, 1996 through December 31, 1996.
CONDENSED STATEMENT OF FINANCIAL CONDITION
December 31, 1996
ASSETS
Cash and cash equivalents ...................................... $ 2,226,099
Securities available-for-sale .................................. 5,989,000
ESOP loan ...................................................... 1,702,058
Investment in bank subsidiary .................................. 22,086,459
Accrued interest receivable and other assets ................... 151,182
------------
$ 32,154,798
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities ......................... $ 7,603
Stockholders' equity
Common stock .............................................. 21,821
Additional paid-in capital ................................ 21,169,750
Retained earnings ......................................... 12,669,386
Unearned ESOP shares ...................................... (1,690,716)
Unrealized depreciation on securities available-for-sale .. (23,046)
------------
$ 32,154,798
============
- --------------------------------------------------------------------------------
(Continued)
22.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF INCOME For the
period November 26, 1996 to December 31, 1996
Income
Securities ...................................................... $ 27,604
ESOP loan ....................................................... 11,711
Interest-bearing deposits with other financial institutions ..... 15,935
--------
Total income ................................................ 55,250
Other expenses .................................................... 9,611
-----
Income before income taxes and equity in
undistributed earnings of bank subsidiary ....................... 45,639
Income taxes ...................................................... 18,269
------
Income before equity in undistributed earnings
of bank subsidiary .............................................. 27,370
Equity in undistributed earnings of bank subsidiary ............... 94,074
--------
Net income ........................................................ $121,444
========
- --------------------------------------------------------------------------------
(Continued)
23.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
NOTE 13 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENT OF CASH FLOWS For
the period November 26, 1996 to December 31, 1996
Operating activities
Net income ................................................ $ 121,444
Adjustments to reconcile net income to net cash
provided by operating activities
Amortization of discounts and premiums on securities .. 139
Equity in undistributed earnings of bank subsidiary ... (94,074)
Change in
Other assets ..................................... (148,480)
Other liabilities ................................ 7,603
-----
Net cash used in operating activities ........ (113,368)
Investing activities
Purchase of bank subsidiary stock ......................... (11,144,174)
Purchase of securities available-for-sale ................. (5,996,250)
----------
Net cash used in investing activities ................. (17,140,424)
Financing activities
Net proceeds from sale of common stock .................... 19,436,249
Payment received on loan to ESOP .......................... 43,642
------
Net cash provided by financing activities ............. 19,479,891
------------
Net change in cash and cash equivalents ........................ 2,226,099
Cash and cash equivalents at beginning of period ............... --
------------
Cash and cash equivalents at end of period ..................... $ 2,226,099
============
- --------------------------------------------------------------------------------
24.
<PAGE>
PS FINANCIAL, INC.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on May 28, 1997 at the
main office of PS Financial, Inc., 4800 South Pulaski Road, Chicago, Illinois
60632.
STOCK LISTING
PS Financial, Inc. common stock is traded on the National Association
of Securities Dealers, Inc. National Market under the symbol "PSFI."
PRICE RANGE OF COMMON STOCK
The per share price range of the common stock for each quarter since
the common stock began trading on November 26, 1996 was as follows:
FISCAL 1996 HIGH LOW DIVIDENDS
- ----------- ---- --- ---------
Fourth Quarter(1) $12.50 $11.25 $ ---
- -------
(1) Reflects the period from November 26, 1996 through December 31, 1996.
The stock price information set forth in the table above was provided
by the National Association of Securities Dealers, Inc. Automated Quotation
System. The average of the bid and asked prices of PS Financial, Inc. common
stock on March 25, 1997 was $14.00.
At March 25, 1997, there were 2,182,125 shares of PS Financial, Inc.
common stock issued and outstanding (including unallocated ESOP shares).
43
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage of Incorporation
Parent Subsidiary Ownership or Organization
- ------ ---------- --------- ---------------
PS Financial, Inc. Preferred Savings Bank 100% Federal
Preferred Savings Bank Preferred Service Corporation 100% Illinois
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Dec-31-1996
<CASH> 579,271
<INT-BEARING-DEPOSITS> 8,735,014
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,782,425
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 35,943,469
<ALLOWANCE> 186,000
<TOTAL-ASSETS> 75,689,367
<DEPOSITS> 42,759,637
<SHORT-TERM> 0
<LIABILITIES-OTHER> 159,721
<LONG-TERM> 0
0
0
<COMMON> 21,821
<OTHER-SE> 32,125,374
<TOTAL-LIABILITIES-AND-EQUITY> 75,689,367
<INTEREST-LOAN> 3,331,305
<INTEREST-INVEST> 1,055,470
<INTEREST-OTHER> 276,935
<INTEREST-TOTAL> 4,663,710
<INTEREST-DEPOSIT> 1,780,483
<INTEREST-EXPENSE> 1,780,483
<INTEREST-INCOME-NET> 2,883,227
<LOAN-LOSSES> 50,000
<SECURITIES-GAINS> (37,903)
<EXPENSE-OTHER> 1,233,010
<INCOME-PRETAX> 1,631,751
<INCOME-PRE-EXTRAORDINARY> 1,631,751
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,002,409
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 0
<LOANS-NON> 282,495
<LOANS-PAST> 1,767,090
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 186,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 186,000
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
