<PAGE>
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, 1997
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)
<TABLE>
<CAPTION>
<S> <C>
Delaware 36-4101473
- --------------------------------------------------------------------------- ------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization (I.R.S. Employer Identification Number)
4800 South Pulaski Road, Chicago, Illinois 60632-4195
- --------------------------------------------------------------------------- ------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
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: $6.1 million
As of March 16, 1998, the Registrant had 2,050,429 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 March 16, 1998, was $24.3 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, 1997.
Part III of Form 10-KSB - Portions of The Proxy Statement for Annual
Meeting of Stockholders to be held in 1998.
<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 occurrences 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 Company'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 Company 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, 1997, the Company had total assets of $87.9 million,
deposits of $41.3 million and stockholders' equity of $23.1 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, PS Financial seeks to
serve the financial needs of communities in its market area. PS Financial,
Inc.'s 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 Company also
invests in mortgage-backed and other securities and other permissible
investments.
The Company offers a variety of accounts having a range of interest
rates and terms. The Company's deposits include savings accounts, checking
accounts, money market accounts and certificate accounts with terms of six
months to five years. The Company solicits deposits only in its primary market
area and does not accept brokered deposits.
Market Area
PS Financial serves primarily the southwest side of Chicago and Cook
County, Illinois through its office located at 4800 South Pulaski Road in
Chicago, Illinois. PS Financial's 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 Company'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 Company is originating
for its portfolio fixed rate mortgage loans secured by one-to four-family
residences located primarily in the Company's market area. To a much lesser
extent, PS Financial also originates commercial real estate, multi-family and
consumer loans in its market area. At December 31, 1997, the Company's total
loans receivable, net totaled $37.2 million. See "- Originations and Purchases
of Loans".
1
<PAGE>
Loan Portfolio Composition. The following table sets forth the
composition of the Company's loan portfolio in dollar amounts and in percentages
as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Real Estate Loans: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family $29,129 77.07% $26,998 73.72% $25,858 73.44% $24,711 73.62% 23,403 74.45%
Multi-Family 5,636 14.91 6,088 16.62 6,094 17.31 5,929 17.66 5,452 17.34
Commercial 2,953 7.81 3,183 8.69 2,953 8.39 2,904 8.65 2,546 8.10
Construction 67 0.18 336 0.92 286 0.81 -- -- -- --
------- ----- ------- ----- ------- ---- ------- ----- ------ ------
Total real estate loans 37,785 99.97 36,605 99.95 35,191 99.95 33,544 99.93 31,401 99.89
------- ------- ------- ------- ------
Consumer Loans:
Deposit Account 11 0.03 17 0.05 18 0.05 24 0.07 35 0.11
------- ----- ------- ----- ------- ---- ------- ----- ------ ------
Total loans 37,796 100.00% 36,622 100.00% 35,209 100.00% 33,568 100.00% 31,436 100.00%
====== ====== ====== ====== =======
Less:
Deferred fees and discounts 443 493 548 542 521
Allowance for loan losses 186 186 136 136 94
------- ------- ------- ------- ------
Total loansreceivable,
net $37,167 $35,943 $34,525 $32,890 $30,821
======= ======= ======= ======= =======
</TABLE>
2
<PAGE>
The following table shows the composition of the Company's loan
portfolio by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
Fixed Rate Loans: (Dollars in Thousands)
Real Estate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family $29,129 77.07% $26,998 73.82% $25,858 73.44% $24,711 73.61% $23,403 74.45%
Multi-family 5,636 14.91 6,088 16.65 6,094 17.31 5,929 17.66 5,452 17.34
Commercial 2,953 7.81 3,183 8.7 2,953 8.39 2,904 8.65 2,546 8.1
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Total real estate loans 37,718 99.79 36,269 99.17 34,905 99.14 33,544 99.93 31,401 99.89
Consumer loans 11 0.03 17 0.04 16 0.04 15 0.04 19 0.06
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Total fixed-rate loans 37,729 99.82 36,286 99.21 34,921 99.18 33,559 99.97 31,420 99.95
------- ------- ------ ------ ------
Adjustable-Rate Loans:
Real estate - construction 67 0.18 336 0.92 286 0.81 -- -- -- --
Consumer loans - -- - -- 2 -- 9 .03 16 0.05
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Total adjustable-rate loans 67 0.18 336 0.92 288 0.81 9 .03 16 0.05
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Total loans 37,796 100.00% 36,622 100.00% 35,209 100.00% 33,568 100.00% 31,436 100.00%
====== ====== ====== ====== ======
Less:
Deferred fees and discounts 443 493 548 542 521
Allowance for loan losses 186 186 136 136 94
------- ------- ------- ------- -------
Total loans receivable, net $37,167 $35,943 $34,525 $32,890 $30,821
======= ======= ======= ======= =======
</TABLE>
3
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at December 31, 1997. 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>
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
------------------------------------------------------------------------------------------------------------
Due During (Dollars in Thousands)
Period Ending
December 31,
- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $158 8.70% $ -- --% $ -- --% $67 9.50%
1999 90 9.56 89 10.27 127 11.00 -- --
2000 and 2001 1,491 8.90 571 8.93 738 9.14 -- --
2002 to 2006 5,020 8.51 2,965 8.64 1,913 9.63 -- --
2007 to 2021 22,370 8.22 2,011 8.99 175 10.45 -- --
2022 and following -- -- -- -- -- -- -- --
------- ------ ------ ---
$29,129 8.31% $5,636 8.81% $2,953 9.61% $67 9.50%
======= ====== ====== ===
</TABLE>
<TABLE>
<CAPTION>
Consumer Total
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------------------------------------------------------------------------
Due During
Period Ending
December 31,
- --------------------
<S> <C> <C> <C> <C>
1998 $11 6.85% $236 8.39%
1999 -- -- 306 10.36
2000 and 2001 -- -- 2,800 8.97
2002 to 2006 -- -- 9,898 8.77
2007 to 2021 -- -- 24,556 8.30
2022 and following -- -- -- --
--- -------
Total $11 6.85% $37,796 8.49%
=== =======
</TABLE>
The total amount of loans due after December 31, 1998 which have
predetermined interest rates is $37.6 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 Company 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, 1997, based on the above, the Company's regulatory loans-to-one
borrower limit was approximately $3.1 million. On the same date, the Company had
no borrowers with outstanding balances in excess of this amount. As of December
31, 1997, the largest dollar amount outstanding or committed to be lent to one
borrower or, group of related borrowers, was 7 loans totaling $940,000 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 10 loans
totaling $794,000 secured by multi-family and one- to four-family real estate.
At December 31, 1997, these loans, except for one $374,000 loan on a commercial
property consisting of 9 stores and 11 apartments which was two months
delinquent, were performing in accordance with their terms.
All of the Company'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 Company'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 PS Financial
are approved by the full board.
The Company 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 Company 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 Company's lending program is the origination of loans secured by mortgages
on owner-occupied one- to four-family residences. Historically, the Company
focused on fixed rate loans with 15 year terms with 25 year amortization
maturities. Substantially all of the Company's one- to four-family residential
mortgage originations are secured by properties located in its market area. All
mortgage loans originated by the Company are retained and serviced by it.
As of December 31, 1997, $7.8 million or 26.8% the Company'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 $68,000.
The Company 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 Company 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, 1997,
the Company had $1.7 million of condominium loans.
PS Financial 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 Company than
traditional owner occupied one- to four-family loans. In underwriting one- to
four-family residential real estate loans, the Company 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 PS Financial are appraised
by independent appraisers.
Since under its current policy, the Company originates all mortgage
loans for its portfolio, the Company's loans are not underwritten to permit
their sale in the secondary market.
The Company's residential mortgage loans customarily include
due-on-sale clauses giving the Company 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 Company'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 Company has
originated permanent multi-family and commercial real estate loans. At December
31, 1997, the Company had $3.0 million in commercial real estate loans,
representing 7.8% of the total loan portfolio, and $5.6 million in multi-family
loans, or 14.9% of the Company's total loan portfolio.
The Company'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 Company'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 Company at the time the loan is made. All appraisals
on multi-family or commercial real estate loans are reviewed by the Company's
board.
6
<PAGE>
In addition, the Company'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 Company
obtains personal guarantees on these loans.
The table below sets forth, by type of security property, the number
and amount of the Company's multi-family and commercial real estate loans at
December 31, 1997. Substantially all of the loans referred to in the table below
are secured by properties located in the Company's market area.
<TABLE>
<CAPTION>
Outstanding Amount
Number of Principal Non-Performing
Loans Balance or of Concern
-----------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Commercial Real Estate
Small business facilities 18 $2,559 $207
Office Buildings 5 613 --
Three Flats 3 144 --
Multi-family 39 5,636 --
-- ------ ----
Total multi-family and commercial real estate loans 65 $8,952 $207
== ====== ====
</TABLE>
At December 31, 1997, the Company's largest commercial real estate or
multi-family loan outstanding totaled $ 374,000 and was secured by a 9 store and
11 unit apartment complex located in Berwyn, Illinois.
Multi-family and commercial real estate loans may present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. At December 31, 1997, there were
no multi-family loans delinquent 90 days or more, and one commercial real estate
loan delinquent 90 days or more.
Construction Lending. The Company 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, 1997, the Company's construction lending
portfolio consisted of a participation interest in a construction loan of
$67,000, or 0.18% of the Company'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 Company
originates consumer loans secured by deposit accounts. At December 31, 1997,
consumer loans totaled $11,000, or 0.03% of the Company'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 PS Financial's staff through
referrals from existing customers or real estate agents.
The Company'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
PS Financial are retained in the Company's portfolio.
In the past, the Company has purchased participation interests in
construction loans originated by a local financial institution. All such loans
are secured. At December 31, 1997, the Company had $67,000 of participation
interests in construction loans. The Company 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
Company 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 in the
Annual Report included herein as exhibit 13.
The following table shows the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------------------------------------------------------
1997 1996 1995 1994
--------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Originations by type:
Real estate - one- to four-family $8,207 $6,351 $5,162 $6,951
- multi-family 460 2,678 821 1,180
- commercial 955 1,077 1,270 1,315
Passbook -- 15 9 12
----- ------ ----- -----
Total loans originated 9,622 10,121 7,262 9,458
----- ------ ----- -----
Purchases
Real estate - construction 8 574 551 --
Sales and Repayments
Principal repayment 8,456 9,282 6,172 7,326
Increase (decrease) in other items, net (1) 50 5 (6) (63)
------ ------ ------ ------
$1,224 $1,418 $1,635 $2,069
====== ====== ====== ======
</TABLE>
Footnotes
(1) Other items consist primarily of deferred fees and the allowance for loan
losses.
8
<PAGE>
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, the Company attempts to cure the delinquency by contacting
the borrower. Generally, Company 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 Company 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
Company.
Real estate acquired by PS Financial 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 Company had no real estate acquired as a result of
foreclosure during the last five years.
9
<PAGE>
The following table sets forth the Company's loan delinquencies by
type, by amount and by percentage of type at December 31, 1997.
<TABLE>
<CAPTION>
Loans Delinquent For:
------------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
------------------------------------------------------------------------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to Four-Family 10 $793 2.72% 6 $599 2.06% 7 $642 2.21%
Multi-family 1 138 2.45 -- -- -- -- -- --
Commercial real estate -- -- -- 2 509 17.23 1 207 7.00
Construction or development -- -- -- -- -- -- -- -- --
Consumer -- -- -- -- -- -- -- -- --
Commercial Business -- -- -- -- -- -- -- -- --
Consumer -- -- -- -- -- -- -- -- --
--- ---- --- ------ --- ----
Total 11 $931 2.46% 8 $1,108 2.93% 8 $849 2.24%
=== ==== === ====== === ====
</TABLE>
<TABLE>
<CAPTION>
Total Delinquent Loans
----------------------------------
Percent
of Loan
Number Amount Category
----------------------------------
<S> <C> <C> <C>
Real Estate:
One- to Four-Family 23 $2,034 6.98%
Multi-family 1 138 2.45
Commercial real estate 3 716 24.23
Construction or -- -- --
development
Consumer -- -- --
Commercial Business -- -- --
Consumer -- -- --
--- ------
Total 27 $2,888 7.64
=== ======
</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 Company 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,
1997, the Company had classified a total of $458,000 of its loans consisting of
one- to four-family residential real estate as follows:
December 31, 1997
-----------------
(In Thousands)
Substandard................................................... $458
Doubtful...................................................... --
Loss.......................................................... --
-----
Total.................................................... $458
====
At December 31, 1997, PS Financial's 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 Company's loan portfolio. For all
years presented, the Company 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,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans over 90 days delinquent:
One- to four-family $264 $268 $775 $334 $170
Multi-family -- -- -- -- --
Commercial real estate -- -- -- -- --
Commercial business 207 -- -- -- --
--- --- --- --- ---
Total 471 268 775 334 170
--- --- --- --- ---
Accruing loans delinquent more than 90 days
378 14 -- -- 6
Foreclosed assets -- -- -- -- --
---- ---- ---- ---- ----
Total non-performing assets $849 $282 $775 $334 $176
==== ==== ==== ==== ====
Total as a percentage of total assets 0.97% 0.37% 1.45% 0.65% 0.33%
==== ==== ==== ==== ====
</TABLE>
For the year ended December 31, 1997, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $40,000. The amounts that were included in
interest income on such loans were $18,000.
At December 31, 1997, the Company's non-accruing loans greater than 90
days included three loans secured by single-family real estate totaling $264,000
and one loan secured by a commercial building totaling $207,000.
Other Assets of Concern. In addition to the non-performing assets set
forth in the table above, as of December 31, 1997, 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 Company's allowance
for loan losses.
<TABLE>
<CAPTION>
10 Months
Year Ended December 31, Ended
------------------------------------------------------------ December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
December 31,
<S> <C> <C> <C> <C> <C>
Balance at beginning of period 186 136 136 94 67
Charge-offs -- -- -- -- --
Recoveries -- -- -- -- --
-- -- -- -- --
Net charge-offs -- -- -- -- --
Additions charged to operations -- 50 -- 42 27
---- ---- ---- ---- ---
Balance at end of period $186 $186 $136 $136 $94
==== ==== ==== ==== ===
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.00% 0.00% 0.00% 0.00% 0.00%
==== ==== ==== ==== ====
Ratio of net charge-offs during the period to
average non-performing assets 0.00% 0.00% 0.00% 0.00% 0.00%
==== ==== ==== ==== ====
Ratio of allowance for loan losses to total loans 0.50% 0.51% 0.39% 0.41% 0.30%
==== ==== ==== ==== ====
</TABLE>
13
<PAGE>
The distribution of the Company's allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------------------
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 Total
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 $30 $29,129 77.07% $27 $26,998 73.72% $26 $25,858 73.44%
Multi-family 15 5,636 14.91 15 6,088 16.62 15 6,094 17.31
Commercial real estate 7 2,953 7.81 8 3,183 8.69 7 2,953 8.39
Construction 1 67 0.18 1 336 0.92 1 286 0.81
Consumer - 11 0.03 1 17 0.05 -- 18 0.05
Unallocated 133 -- -- 135 -- -- 87 -- --
---- ------- ------ ---- -------- ------ ---- ------- -------
Total $186 $37,796 100.00% $186 $36,622 100.00% $136 $35,209 100.00%
==== ======= ====== ==== ======== ====== ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1994 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
--------- -------- -------- --------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family $25 $24,711 73.62% $23 $23,403 74.45%
Multi-family 15 5,929 17.66 14 5,452 17.34
Commercial real estate 7 2,904 8.65 6 2,546 8.10
Construction -- -- -- -- -- --
Consumer -- 24 0.07 -- 35 0.11
Unallocated 89 -- -- 51 -- --
---- ------- ------ ---- ------- ------
Total $136 $33,568 100.00% $94 $31,436 100.00%
==== ======= ====== === ======= ======
</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. PS Financial 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, PS
Financial 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, 1997, the Company's liquidity ratio for regulatory
purposes was 31.0%.
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 Company 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, PS Financial
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 PS Financial 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, 1997, the
Company had no securities which were classified as trading and no securities
classified as held-to-maturity. Available-for-sale securities are reported at
fair value with unrealized gains and losses included, on an after-tax basis, in
a separate component of retained earnings. At December 31, 1997, $33.5 million
of securities and $8.1 million of mortgage-backed securities were classified as
available-for-sale.
15
<PAGE>
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, 1997 and December 31, 1996, the Company's
securities portfolio totaled $33.5 million and $24.1 million, respectively. At
December 31, 1997, 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 in the Annual Report attached hereto as
Exhibit 13 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,
-----------------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Securities held-to-maturity:
U.S. government securities $ -- --% $ -- --% $ -- --%
Securities available-for-sale
U.S. government securities 2,999 8.96 13,993 58.11 3,527 36.22
Federal agency obligations 30,460 91.04 10,087 41.89 6,212 63.78
------ ----- ------ ----- ----- -----
Total securities $33,459 100.00% $24,080 100.00% $9,739 100.00%
======= ====== ======= ====== ====== ======
Average remaining life of securities 6.53 yrs. 3.19 yrs. 3.97 yrs.
Other interest-earning assets:
Interest-bearing deposits with other banks $6,059 89.64% $8,427 95.88% $3,086 90.05%
Federal funds sold -- -- -- -- -- --
Federal Home Loan Bank Stock 700 10.36 362 4.12 341 9.95
------ ------ ------ ------ ------ ------
Total $6,759 100.00% $8,789 100.00% $3,427 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
17
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------------------------------------------
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 $2,999 $ -- $ -- $ -- $ 2,999 $ 2,999
Federal agency securities -- 5,995 18,926 5,539 30,460 30,460
------ ------ ------- ------ ------- -------
Total investment securities $2,999 $5,995 $18,926 $5,539 $33,459 $33,459
====== ====== ======= ====== ======= =======
Weighted average yield 5.67% 6.54% 7.10% 8.04% 7.02%
</TABLE>
See Note 2 of the Notes to the Consolidated Financial Statements in the
Annual Report attached hereto as Exhibit 13 for a discussion of the Company'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, 1997, $3.7 million, or 46.3% 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 in the Annual Report attached hereto as
Exhibit 13.
As of December 31, 1997, 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 Company 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, 1997, 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,
----------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------- ----- -------- ----- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities held to maturity:
FNMA $ -- --% $ -- --% $ -- --%
Mortgage-backed securities available for sale:
GNMA 567 7.00 662 14.08 766 18.15
FNMA 3,704 45.76 1,736 36.92 2,426 57.49
FHLMC 3,824 47.24 2,304 49.00 1,028 24.36
----- ----- ------ ------ ----- -----
Total mortgage-backed securities $8,095 100.00% $4,702 100.00% $4,220 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
19
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at December 31, 1997.
<TABLE>
<CAPTION>
Due In December 31,
-------------------------------------------------------------- 1997
Less Than 1 to 5 to 10 Over Amortized
1 Year 5 Years Years 10 Years Cost
----------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation $-- $-- $961 $2,820 $3,781
Federal National Mortgage Association -- -- 851 2,789 3,640
Government National Mortgage Association -- -- -- 557 557
--- --- ------ ------ ------
Total $ 0 $ 0 $1,812 $6,166 $7,978
=== === ====== ====== ======
</TABLE>
At December 31, 1997, the dollar amount of all mortgage-backed
securities due after December 31, 1997, which had fixed interest rates and
floating or adjustable rates totaled $4.3 million and $3.7 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>
Year Ended December 31,
-------------------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Purchases:
Adjustable-rate (1) $2,982 $ -- $1,023
Fixed-rate (1) 3,197 2,458 917
----- ----- ------
Total purchases 6,179 2,458 1,940
Sales:
Adjustable-rate (1) 1,671 1,283 814
Repayments:
Principal repayments 1,186 673 476
Other increase (decrease) 71 (20) 84
------ ------ ------
Net increase (decrease) $3,393 $ 482 $ 734
====== ====== ======
</TABLE>
Footnotes
(1) Consists of pass-through securities.
20
<PAGE>
Sources of Funds
General. The Company'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. PS Financial offers deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of savings, money
market, non-interest bearing checking, and various certificate accounts. The
Company only solicits deposits in its market area and does not currently use
brokers to obtain deposits.
The variety of deposit accounts offered by the Company 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 Company has become more susceptible to short-term fluctuations in
deposit flows.
Management believes that the "core" portion of the Company's regular
savings and money market accounts can have a lower cost and be more resistant to
interest rate changes than certificate accounts. The Company 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 Company 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 Company during
the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance $42,203 $41,047 $40,057
Deposits 33,220 51,120 24,295
Withdrawals (35,634) (51,599) (24,759)
Interest Credited 1,486 1,635 1,454
------- ------- -------
Ending balance $41,275 $42,203 $41,047
======= ======= =======
Net increase (decrease) ($928) $1,156 $990
======= ======= =======
Percent increase (decrease) (2.20)% 2.82% 2.47%
------- ------- -------
</TABLE>
22
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Company as of the dates
indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits
Savings Accounts - 3.00% (1) $18,799 45.55 % $20,492 48.56% $19,409 47.28%
Transaction Accounts - 0.00% (1) 24 0.05 -- -- -- --
Money Market Accounts - 3.25% (1) 1,575 3.82 1,495 3.54 1,601 3.90
------- ----- ------ ----- ------ -----
Total Non-Certificates 20,398 49.42 21,987 52.10 21,010 51.19
------ ----- ------ ----- ------ -----
Certificates
0.00 - 3.99% -- -- -- -- 49 0.12
4.00 - 5.99% 19,856 48.11 19,231 45.57 16,222 39.52
6.00 - 7.99% 1,021 2.47 985 2.33 3,766 9.17
8.00 and over -- -- -- -- -- --
-- -- -- -- -- --
Total Certificates 20,877 50.58 20,216 47.90 20,037 48.81
------ ----- ------ ----- ------ -----
Total Deposits $41,275 100.00% $42,203 100.00% $41,047 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
Footnotes
(1) At December 31, 1997.
23
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of December 31, 1997.
<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% $17,632 $1,396 $645 $113 $70 $19,856
6.00 - 6.99% 499 64 161 171 27 922
7.00 - 7.99% -- -- 99 -- -- 99
------- ------ ---- ---- --- -------
$18,131 $1,460 $905 $284 $97 $20,877
======= ====== ==== ==== === =======
</TABLE>
The following table indicates the amount of the Company's certificates
of deposit and other deposits by time remaining until maturity as of December
31, 1997.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
------- ------ ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit of less than $100,000 $6,458 $5,704 $5,053 $2,335 $19,550
Certificates of deposit of $100,000 or more 301 415 200 411 1,327
------ ------ ------ ------ -------
Total certificates of deposit $6,759 $6,119 $5,253 $2,746 $20,877
====== ====== ====== ====== =======
</TABLE>
For additional information regarding the composition of the Company's
deposits, see Note 6 of the Notes to the Consolidated Financial Statements in
the Annual Report attached hereto as Exhibit 13.
24
<PAGE>
Borrowings. PS Financial's available sources of funds include advances
from the FHLB of Chicago and other borrowings. The Bank's FHLB advances to date
have primarily consisted of borrowings to fund security purchases. As a member
of the FHLB of Chicago, the Company 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. See Note 7 of the Notes to Consolidated
Financial Statements.
The following table set forth the maximum month-end balance and average
balance of FHLB advances as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Maximum Balance
FHLB Advances $13,750 -- -- -- --
Average Balance:
FHLB Advances $5,673 -- -- -- --
Weighted average interest rate of
FHLB Advances 6.05% --% --% --% --%
</TABLE>
25
<PAGE>
Subsidiary Activities
As a federally chartered savings bank, PS Financial is permitted by OTS
regulations to invest up to 2% of its assets in the stock of, or loans to,
service corporation subsidiaries, and may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes. In addition to investments in service
corporations, federal institutions are permitted to invest an unlimited amount
in operating subsidiaries engaged solely in activities which a federal savings
association may engage in directly.
At December 31, 1997, PS Financial 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,
1997. At December 31, 1997, PS Financial's investment in the Subsidiary totaled
$4,560.
Competition
PS Financial 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. PS Financial 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 Company 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 Company competes for these deposits
by offering competitive rates, convenient business hours and a customer oriented
staff.
Employees
At December 31, 1997, the Company had a total of 15 full-time
employees. None of the Company's employees are represented by any collective
bargaining agreement. Management considers its employee relations to be good.
26
<PAGE>
REGULATION
General
PS Financial 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, PS Financial is subject to broad federal
regulation and oversight extending to all its operations. PS Financial 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 Company 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. PS Financial is
a member of the Savings Association Insurance Fund ("SAIF") and the deposits of
PS Financial are insured by the FDIC. As a result, the FDIC has certain
regulatory and examination authority over PS Financial.
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, PS Financial 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
Company was examined and filed periodic reports with the Illinois Office of
Banks. The last regular Illinois Office of Banks, OTS and FDIC examinations of
Ps financial were as of May 1994, January 1997, 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 Ps financial 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.
27
<PAGE>
In addition, the investment, lending and branching authority of PS Financial 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. PS Financial is in compliance with the noted restrictions.
PS Financial's 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, 1997, PS Financial's lending
limit under this restriction was $3.1 million. PS Financial 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
PS Financial 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 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.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF-insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio
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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. At the time the FDIC revised the BIF
premium schedule, it noted that, absent legislative action (as discussed below),
the SAIF would not attain its designated reserve ratio until the year 2002. As a
result of these revisions, SAIF insured members would continue to be generally
subject to higher deposit insurance premiums than BIF insured institutions
until, all things being equal, the SAIF attains its 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 provided
for a one-time assessment to be imposed on all deposits assessed at the SAIF
rates, as of March 31, 1995, in order to recapitalize the SAIF. It also provides
for the merger of the BIF and the SAIF on January 1, 1999 provided no savings
associations then exist. The special assessment rate was established at .657% of
deposits and the assessment was paid in November 1996. Based on Preferred
Savings' level of SAIF deposits at March 31, 1995, Preferred Savings' assessment
was approximately $245,000 on a pre-tax basis. This special assessment
significantly increased noninterest expense and adversely affected the Company's
results of operations for the year ended December 31, 1996.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as Ps financial. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions are a 6.5 basis points assessment
on SAIF deposits and 1.5 basis points on BIF deposits until BIF insured
institutions participate fully in the assessment.
Regulatory Capital Requirements
Federally insured savings associations, such as PS Financial, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement, a
leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital requirements
must be generally as stringent as the comparable capital requirements for
national banks. The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred 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, 1997, PS Financial 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
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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, 1997, PS Financial had tangible capital of $20.6
million, or 25.8% of adjusted total assets, which is approximately $19.4 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, 1997, PS
Financial had no intangibles which were subject to these tests.
At December 31, 1997, PS Financial had core capital equal to $20.6
million, or 25.8% of adjusted total assets, which is $18.1 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, 1997, PS Financial
had $186,000 of general loss reserves that qualify as supplementary capital,
which was less than 1.25% of risk-weighted assets.
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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. PS Financial had no such
exclusions from capital and assets at December 31, 1997.
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, 1997, PS
Financial would qualify for an exemption from the requirement.
On December 31, 1997, PS Financial had total capital of $20.8 million
(including $20.6 million in core capital and $186,000 in qualifying
supplementary capital) and risk-weighted assets of $31.7 million; or total
capital of 65.4% of risk-weighted assets. This amount was $18.2 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.
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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 PS
Financial may have a substantial adverse effect on PS Financial 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 PS Financial, that before and
after the proposed distribution meet their capital requirements, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. PS Financial 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 the 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
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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 PS Financial, 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 PS Financial
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 4%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At December 31, 1997, PS Financial was in compliance with
both requirements, with an overall liquid asset ratio of 31.0% and a short-term
liquid assets ratio of 30.0%.
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. PS Financial 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 PS Financial, 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, 1997, PS Financial met the test with 74.0% 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
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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."
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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 Ps
financial, 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 Ps
financial. 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, PS Financial may be required to devote additional funds
for investment and lending in its local community. PS Financial was examined for
CRA compliance in July 1997 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 PS Financial include the Holding
Company and any company which is under common control with PS Financial. 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. PS Financial's 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 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.
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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 PS financial 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 PS Financial fails the QTL test, the Holding Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Holding Company must register as, and will
become subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "-- Qualified Thrift Lender Test."
The Holding Company must obtain approval from the OTS before acquiring
control of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Holding Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Holding
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Holding Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Holding Company may not
be resold without registration or unless sold in accordance with certain resale
restrictions. If the Holding Company meets specified current public information
requirements, each affiliate of the Holding Company is able to sell in the
public market, without registration, a limited number of shares in any
three-month period.
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Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1997, PS Financial 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
PS Financial 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, PS Financial is required to purchase and maintain stock in
the FHLB of Chicago. At December 31, 1997, PS Financial had $700,000 in FHLB
stock, which was in compliance with this requirement. In past years, PS
Financial has received substantial dividends on its FHLB stock. Over the past
five calendar years such dividends have averaged 6.40% and were 6.84% for
calendar year 1997. As a result of their holdings, the Company could borrow up
to $14.0 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 PS Financial's capital.
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For the year ended December 31, 1997, dividends paid by the FHLB of
Chicago to Ps financial totaled $30,462, which constitute a $6,263 increase from
the amount of dividends received in calendar year 1996.
Federal and State Taxation
Savings associations such as PS Financial are permitted to establish
reserves for bad debts using an experience method 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. 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 Company. Formerly the Company had been allowed to calculate its deduction
under the experience or percentage of taxable income method 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 Company, 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. The Company does not expect to
be subject to the alternative minimum tax.
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To the extent earnings appropriated to a savings association's bad debt
reserves for federal income tax purposes exceed the allowable amount of such
reserves computed under the experience method ("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, PS Financial's Excess for tax purposes totaled
approximately $1.6 million.
PS Financial and its subsidiary file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting.
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PS Financial 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, PS Financial) would not result in a deficiency which could have a material
adverse effect on the financial condition of PS Financial and its consolidated
subsidiary.
Illinois Taxation. For Illinois income tax purposes, the Company 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 31. Mr. Przybyl is currently serving as Chief
Financial Officer of the Company, 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 Company.
Marianne I. Maciejewski, age 59. 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. Ms.
Maciejewski was married to the late brother of Lorraine Ptak.
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Item 2. Properties
PS Financial conducts its business at its stand-alone office located at
4800 South Pulaski Road, Chicago, Illinois. The Company's 5,000 square foot
office was acquired in 1980 and had a net book value of $298,000 at December 31,
1997. At December 31, 1997, the total net book value of PS Financial's premises
and equipment (including land, building and leasehold improvements, and
furniture, fixtures and equipment) was approximately $458,000. The Company
believes that its current facilities are adequate to meet the present and
foreseeable future needs of the Bank and the Company.
The Company'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 Company at December 31, 1997
was approximately $28,000.
Item 3. Legal Proceedings
From time to time, PS Financial 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, 1997.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 45 of the Company's 1997 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 19 of the Company's 1997 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, 1997, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual Report Section Annual Report
- --------------------- -------------
<S> <C>
Selected Consolidated Financial Information 2-3
Management's Discussion and Analysis of Financial 5-19
Condition and Results of Operations
Report of Independent Auditors 20
Consolidated Statements of Financial Condition as of December 31, 21
1997 and 1996
Consolidated Statements of Income for the Years 22
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' 23
Equity for the Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Cash Flows for the 24-25
Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements 26-44
</TABLE>
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended December 31, 1997, 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.
42
<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, 1997, 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, 1997, 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, 1997, 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, 1997, a copy of which will be filed not later than 120 days after
the close of the fiscal year.
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.
<TABLE>
<CAPTION>
<S> <C> <C>
PS FINANCIAL, INC.
Date: March 31, 1998
---------------------- By: Kimberly P. Rooney
------------------------------------------
Kimberly P. Rooney (Duly
Authorized Representative)
</TABLE>
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.
<TABLE>
<CAPTION>
<S> <C> <C>
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 31, 1998 Date: March 31, 1998
------------------------ ------------------------
By: Edward Wolak By: L. G. Ptak
-------------------------------------------------------- ---------------------------------------------
Edward Wolak, Director L.G. Ptak, Director and Secretary
Date: March 31, 1998 Date: March 31, 1998
------------------------ ------------------------
By: Rocco Di Iorio By: By: Jeanine M. McInerney
-------------------------------------------------------- ---------------------------------------------
Rocco Di Iorio Director Jeanine M. McInerney, Director
Date: March 31, 1998 Date: March 31, 1998
------------------------ ------------------------
By: Jeffrey Przybyl
--------------------------------------------------------
Jeffrey Przybyl, Treasurer and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Date: March 31, 1998
------------------------
</TABLE>
44
<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 Company
presented elsewhere in this Annual Report.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
- ----------------------------------
Total assets $87,922 $75,133 $53,520 $51,619 $53,854
Cash and cash equivalents 6,290 8,758 3,754 1,429 5,874
Loans receivable, net (1): 37,167 35,943 34,525 32,890 30,821
Mortgage-backed securities:
Held to maturity -- -- -- 1,792 2,026
Available for sale 8,095 4,702 4,220 1,694 --
Securities:
Held to maturity -- -- -- 201 403
Available for sale 33,459 24,080 9,739 7,326 9,044
Deposits 41,275 42,203 41,047 40,057 41,139
FHLB Advances 13,750 -- -- -- --
Total stockholders' equity 23,109 32,147 11,724 10,512 9,645
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
10 Months
December 31, Ended
---------------------------------------------------------- December 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
- -------------------------
Total interest income $ 6,062 $ 4,664 $ 4,268 $ 3,854 $ 3,401
Total interest expense 2,084 1,781 1,632 1,310 1,169
------- ------- ------- ------- -------
Net interest income 3,978 2,883 2,636 2,544 2,232
Provision for loan losses(l) -- 50 -- 42 27
Net interest income after provision for loan 3,978 2,833 2,636 2,502 2,205
losses
Fees and service charges 77 69 58 76 40
Gain (loss) on sales of securities -- (38) -- (365) (28)
------- ------- -------
Total non-interest income 77 31 58 (289) 12
Total non-interest expense 2,186 1,233 1,009 838 647
------- ------- ------- ------- -------
Income before taxes 1,869 1,631 1,685 1,375 1,570
Income tax provision 947 629 630 617 628
------- ------- ------- ------- -------
Net income $ 922 $ 1,002 $ 1,055 $ 758 $ 942
======= ======= ======= ======= =======
</TABLE>
- ----------
(1) The allowance for loan losses at December 31, 1997, 1996, 1995, 1994
and 1993 was $186,000, $186,000, $136,000, $136,000 and $94,000,
respectively.
3
<PAGE>
<TABLE>
<CAPTION>
10 Months
December 31, Ended
---------------------------------------------------------- December 31,
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Date:
- -----------------------------------------
Petformance Ratios:
Return on assets (ratio of net income
to average total assets)(1) 1.12% 1.71% 1.99% 1.46% 1.83%
Return on equity (ratio of net income
to average total equity)(1) 2.97 6.55 9.42 7.53 10.21
Interest rate spread information:
Average during period (1) 3.23 3.89 4.26 4.38 4.78
End of period 2.92 3.30 3.71 4.26 3.92
Net interest margin (2)(1) 5.01 5.03 5.13 5.03 5.39
Efficiency Ratio (3) 53.92 42.30 37.45 37.15 28.83
Ratio of operating expense to average
total assets (1) 2.67 2.10 1.91 1.61 1.26
Ratio of average interest-earning assets
to average interest-bearing liabilities 167.82 136.86 127.21 125.08 121.7
Quality Ratios:
Non-performing assets to total assets
at end of period 1.71 0.37 1.45 0.65 0.33
Allowance for loan losses to non-performing
loans 20.84 65.96 17.55 40.72 53.41
Allowance for loan losses to total loans 0.50 0.51 0.39 0.41 0.3
Capital Ratios:
Equity to total assets at end of period 26.28 42.79 21.91 20.36 17.91
Average equity to average assets 37.94 26.06 21.18 19.32 17.93
Regulatory Capital Ratios: (4)
Total capital -- -- 59.05 54.32 38.9
Tier I capital -- -- 58.37 52.79 37.74
Leverage ratio -- -- 22.19 20.29 18.08
Tangible capital 25.86 32.77 -- -- --
Core capital 25.86 32.77 -- -- --
Risk-based capital 65.39 92.91 -- -- --
</TABLE>
- ----------
(1) Ratios for the ten month period have been annualized.
(2) Net interest income divided by average interest earning assets.
(3) The efficiency ratio represents noninterest expense as a percent of net
interest income and noninterest income before provision for loan
losses.
(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.
4
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
PS Financial, Inc. (the "Company") is a Delaware corporation. The
Company a savings and loan holding company which has as its wholly owned
subsidiary, Preferred Savings Bank. Financial and other information presented
herein after November 26, 1996, relates to consolidated information of the
Company and Preferred Savings Bank. Financial and other infomation prior to
November 26, 1996. relates only to Preferred Savings Bank. The Company is a
financial intermediary engaged primarily in attracting deposits ftom 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
Company's revenues are derived principally from interest on loans and, to a
lesser extent, from interest earned on investments and mortgage-backed and
related securities. The operations of the Company are influenced significantly
by general economic conditions and by policies of financial institution
regulatory agencies, including the OTS and the FDIC. The Company'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 offerd.
The Company'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, 1997 and December 31, 1996
Total assets at December 31, 1997 were $87.9 million compared to $75.1
million at December 31, 1996, an increase of $12.8 million, or 17.0%. The
increase was primarily the result of the utilization of FHLB advances, as the
Company used the borrowings to leverage its very large capital base. The
proceeds from the advances were invested primarily in securities
available-for-sale with anticipated call dates matched to the maturity of the
advances. Securities available-for-sale increased $9.4 million from $24.1
million at December 31, 1996 to $33.5 million at December 31, 1997.
Interest-bearing deposits decreased $2.4 million from $8.2 million at December
31, 1996 to $5.8 million at December 31, 1997.
Total liabilities at December 31, 1997 were $64.8 million compared to
$43.0 million at December 31, 1996, an increase of $21.8 million or 50.7%. Total
deposits decreased slightly by $900,000 from $42.2 million at December 31, 1996
to $41.3 million at December 31, 1997 due to a decrease in savings accounts as a
result of local economic and comparative factors and runoff after the Initial
Public Offering purchase date. FHLB advances increased to $13.8 million at
December 31, 1997 from $0 at December 31, 1996, while dividends payable
increased to $7.5 million at December 31, 1997 from $0 at December 31, 1996 due
to a special dividend of $4.00
5
<PAGE>
per share declared on December 30, 1997 to record holders as of January 15,
1998. This special dividend was actually paid on January 30, 1998.
Total equity at December 31, 1997 was $23.1 million compared to $32.1
million at December 31, 1996, a decrease of $9.0 million, or 28.0% as a result
of the repurchase of 131,696 shares of treasury stock, the ratification of the
Recognition and Retention Plan ("RRP") at the May annual meeting, regular
dividends of $592,000, or $0.28 per share, and the declaration of a special
dividend of $7.5 million, or $4.00 per share.
Results of Operations
The Company'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 Company's interest-bearing liabilities, primarily deposits and borrowings.
Results of operations are also dependent upon the level of the Company'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, 1997 and
December 31, 1996
General. Net income for the year ended December 3 1, 1997 was $921,000,
a decrease of $79,000, or 7.9%, from net income of $1.0 million for the year
ended December 31, 1996. The decrease was primarily a result of additional ESOP
expense of $981,000 due to the declaration of the $4.00 per share special
dividend which resulted in a paydown of the ESOP debt and the release of
additional shares to participants. Also contributing to the decline in net
income was an increase in other compensation and benefits of $105,000, due to
the ratification of the RRP at the annual meeting, and an increase in
professional fees and other operating expenses of $120,000 which can be
associated with being a public company. This was partially offset by an increase
in net interest income of $1.1 million and a decrease in federal deposit
insurance premiums of $63,000.
Interest Income. Interest income for the year ended December 31, 1997
was $6.1 million compared to $4.7 million for the year ended December 31, 1996,
an increase of $1.4 million, or 29.8%. The increase in interest income was the
result of an increase in the average balance of interest-earning assets from
$57.3 million for the year ended December 31, 1996 to $79.5 million for the year
ended December 31, 1997. The increase in the average balance of interest-earning
assets was largely a result of a $500,000 increase in loans receivable and a
$20.0 million increase in the average balance of securities from the investment
of the public offering proceeds. The average yield on interest-earning assets
decreased from 8.14% for the year ended December 31, 1996 to 7.63% for the year
ended December 31, 1997. This was largely a result of a decrease in the yield on
mortgage loans from 9.35% for the year ended December 31, 1996 to 8.99% for the
6
<PAGE>
year ended December 31, 1997 due to a general decline in loan rates, offset in
part by an increase in the yield on securities and mortgage-backed securities of
98 basis points.
Interest Expense. Interest expense for the year ended December 31, 1997
was $2.1 million compared to $1.8 million for the year ended December 31, 1996,
an increase of $304,000, or 16.9%. The increase in interest expense was a result
of an increase in average interest-bearing liabilities from $41.9 million for
the year ended December 31, 1996 to $47.4 million for the year ended December
31, 1997 combined with an increase in the average cost of funds from 4.25% for
the year ended December 31, 1996 to 4.40% for the year ended December 31, 1997.
The increase in the cost of funds was a result of the use of FHLB advances at
higher rates than the bank deposit rates.
Net Interest Income. Net interest income for the year ended December
31, 1997 was $4.0 million compared to $2.9 million for the year ended December
31, 1996, an increase of $ 1.1 million, or 37.9%. Although the Company's use
of borrowings to increase its financial leverage contributed to the increase in
net interest income, because the spread between the Company's borrowings was
significantly lower than the spread between the Company's other liabilities, the
utilization of borrowings had the effect of reducing the Company's net interest
spread. 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 136.86% for the year ended December 31, 1996 to 167.82% for the year ended
December 31, 1997.
Provision for Loan Losses. The Company recorded no provision for loan
losses for the year ended December 31, 1997 compared to a $50,000 provision for
the year ended December 31, 1996. At December 31, 1997, the Company's allowance
for losses totaled $186,000, or .50% of total loans and 20.84% 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 Company's market
area. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for estimated
losses on loans. Such agencies may require the Company 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, 1997 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 Company'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 Company's control.
Noninterest Income. Noninterest income for the year ended December 31,
1997 was $77,000 compared to $32,000 for the year ended December 31, 1996, an
increase of $45,000, or 140.6%. The increase was primarily a result of losses on
sales of securities of $38,000 for the
7
<PAGE>
year ended December 31, 1996 compared to nominal losses for the year ended
December 31, 1997. This was partially aided by an increase in service fees
collected of $8,000.
Noninterest Expense. Noninterest expense was $2.2 million for the year
ended December 31, 1997 compared to $1.2 million for the year ended December 31,
1996, an increase of $953,000, or 79.4%. The increase was primarily a result of
an increase in the ESOP expense due to the declaration of the $4.00 per share
special dividend. Under Federal Employee Retirement Income Safety Act, the ESOP
was required to use the dividend received for the benefit of participants
therein. Accordingly, the ESOP trustee elected to use the dividend proceeds to
pay down the ESOP debt which caused the mandatory release of additional shares
to participants with a value at December 31, 1997 of $981,000. Also
contributing to the decline in net income was an increase in other compensation
and benefits, due to the ratification of the RRP at the annual meeting, of
$105,000, and an increase in professional fees and other operating expenses
associated with being a public company of $120,000. This increase was partially
offset by a decrease in federal deposit insurance premiums of $63,000 and the
absence of the special Savings Association Insurance Fund ("SAIF") assessment of
$245,000 paid in 1996. However, the Company expects that noninterest expense
will decrease in the future due to the limited ability to declare additional
large dividends.
Income Tax Expense. The provision for income taxes totaled $947,000 for
the year ended December 31, 1997 compared to $629,000 for the year ended
December 31, 1996. The increase was a result of an increase in income before
income taxes of $237,000 combined with an increase in the valuation allowance of
$128,000.
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
8
<PAGE>
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.
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 Company 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 Company'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 Company's market area. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for estimated losses on loans. Such agencies may require the Company
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 Company'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
Company's control. In view of the Company's focus on one-to-four family lending,
management does not expect the Company'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
9
<PAGE>
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 Company's pension plan during 1996.
However, the Company 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 totaled $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.
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.
10
<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,
------------------------------------------------------------------------
1997 1996
---------------------------------- ----------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans Receivable (1) $36,066 $ 3,244 8.99% $35,608 $ 3,331 9.35%
Securities (2) 31,926 2,046 6.41 11,947 781 6.54
Mortgage-Backed Securities 7,930 567 7.15 4,460 275 6.17
Other 3,458 205 5.78 5,295 277 5.23
------- ------- ------ ------
Total interest-earning
assets $79,470 6,062 7.63% $57,310 4,664 8.14%
======= ======= ======= ======
Interest-Earning Liabilities:
Passbook savings $21,117 638 3.02 $21,559 690 3.20
Certificate accounts 20,565 1,103 5.36 20,317 1,091 5.36
FHLB Advances 5,673 343 6.05 -- -- --
------- -------
Total interest-bearing
liabilities $47,351 2,048 4.40 $41,876 1,781 4.25
======= ======= ---- ======= ====== ----
Net interest income $ 3,978 $2,883
======= ======
Net interest rate spread 3.23 3.89
==== ====
Net earning assets $32,115 $15,434
======= =======
Net yield on average interest-
earning assets 5.01% 5.03%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 167.82% 136.86%
======== =======
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1995 1994
------------------------------ -------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Rate Rate
------- ---- ---- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans Receivable (1) $34,131 $ 3,156 9.25% $31,685 $ 3,014 9.56%
Securities (2) 9,250 652 7.05 7,357 327 4.46
Mortgage-Backed Securities 3,549 186 5.24 3,600 172 4.78
Other 4,407 274 6.22 7,962 341 4.28
----- ------- ------ -------
Total interest-earning
assets $51,337 4,268 8.31% $50,604 3,854 7.62%
======= ===== ======= =====
Interest-Earning Liabilities:
Passbook savings $21,512 649 3.02 $23,882 680 2.85
Certificate accounts 18,843 983 5.22 16,576 630 3.80
FHLB Advances -- -- -- -- -- --
----- ------- ------ -------
Total interest-bearing
liabilities $40,355 1,632 4.05 $40,458 1,310 3.24
======= ===== ---- ======= ====== ----
Net interest income $2,636 $2,544
====== ======
Net interest rate spread 4.26 4.38
==== ====
Net earning assets $10,982 $ 10,146
======= ========
Net yield on average interest-
earning assets 5.13% 5.03%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 127.21% 125.08%
======= =======
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loan in process
and loss reserves.
(2) Calculated based on amortized cost.
11
<PAGE>
The following table presents the weighted average yields earned on
loans, securities and other interest-earning assets, and the weighted average
rates paid on savings deposits and the resultant interest rate spreads at the
date indicated. Weighted average balances are based on monthly balances.
<TABLE>
<CAPTION>
At December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable 8.49% 8.57% 8.75%
Mortgage-backed securities 6.87 6.84 6.08
Securities 7.01 6.05 6.98
Other interest-earning assets 5.55 6.53 5.22
Combined weighted average yield on interest-earning
assets 7.24 7.41 7.98
Weighted average rate paid on:
Passbook savings deposits 3.01 3.01 3.00
Certificate accounts 5.50 5.31 5.58
FHLB Advances 6.05 -- --
Combined weighted average rate paid on interest-bearing
liabilities 4.71 4.11 4.27
Spread 2.53 3.30 3.71
</TABLE>
- ----------
(1) Excluding amortization of deferred loan fees.
12
<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,
1996 vs. 1997 1995 vs. 1996
------------------------------------ --------------------------------
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 $ 42 ($ 129) ($ 87) $ 138 $ 37 $ 175
Securities 1,281 (16) 1,265 179 (50) 129
Mortgage-backed securities 242 50 292 53 36 89
Other (99) 27 (72) 50 (47) 3
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 1,466 ($ 68) $ 1,398 $ 420 $($24) $ 396
======= ======= ======= ======= ===== =======
Interest-bearing liabilities:
Passbook savings deposits ($ 14) ($ 38) ($ 52) $ 1 $ 40 $ 41
Certificate accounts 13 (1) 12 79 29 108
FBLB Advances 343 0 343 0 0 0
------- ------- --- ------- ------- --------
Total interest-bearing liabilities $ 342 ($ 39) 303 $ 80 $ 69 149
------- ------- --- ------- ------- --------
Net interest income $1,095 $ 247
====== =======
</TABLE>
13
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. The Board of Directors
meets at least quarterly to review the Company's interest rate risk position and
profitability. The Board of Directors also reviews the Company's portfolio,
formulates investment strategies and oversees the timing and implementation of
transactions to assure attainment of the Company's objectives in the most
effective manner. In addition, the Board anticipates reviewing on a quarterly
basis the Company's asset/liability position, including simulations of the
effect on the Company's capital of various interest rate scenarios.
In managing its asset/liability mix, PS Financial, 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 Company focuses its fixed rate loan originations
on loans with maturities of 15 years or less. At December 31, 1997, $28.1
million or 96.2% of the Company'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 Company offers balloon loans of 10 years or less in an attempt
to decrease its asset/liability mismatch. Third, the Company maintains a
portfolio of securities and liquid assets with weighted average lives of three
years or less. At December 31, 1997, the Company had $33.5 million of securities
with a remaining average life of 6.53 years. Fourth, the Company has maintained
a mortgage-backed securities portfolio with adjustable-rates. At December 31,
1997, adjustable rate mortgage-backed securities totaled $3.7 million which
represented 4.7% of interest-earning assets. Fifth, the Company has attempted to
reinvest the proceeds of most of its borrowings into assets with maturities
which are anticipated to be similar to those of its borrowings. Finally, a
substantial proportion of the Company'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 PS Financial's 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 Company is to invest funds
among various categories of investments and maturities based upon the Company'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 Company's asset/liability management policies.
14
<PAGE>
PS Financial's 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. PS Financial offers a range of 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.
The following table sets forth, at December 31, 1997, an analysis of
the Bank's interest rate risk as measured by the estimated changes in NPV
resulting from instantaneous and sustained parallel shifts in the yield curve
(+/-400 basis points, measured in 100 basis point increments).
<TABLE>
<CAPTION>
Change in Interest Estimated Ratio of NPV Estimated Increase
Rates NPV to (Decrease) in NPV
(Basis Points) Amount Total Assets Amount Percent
-------------- --------- ------------ ------ -------
<S> <C> <C> <C> <C>
+400 $14,271 18% ($8,611) (38)%
+300 16,443 21 (6,439) (28)
+200 18,792 24 (4,090) (18)
+100 21,087 27 (1,795) (8)
-- 22,882 29 -- --
-100 24,658 31 1,776 8
-200 26,318 34 3,436 15
-300 28,216 36 5,334 23
-400 30,508 39 7,626 33
</TABLE>
Certain assumptions utilized in assessing interest rate risk were
employed in preparing the preceding table. These assumptions relate to interest
rates, loan prepayment rates, deposit decay rates, and the market values of
certain assets under the various interest rate scenarios. It was also assumed
that delinquency rates will not change as a result of changes in interest rates
although there can be no assurance that this will be the case. Even if interest
rates change in the designated amounts, there can be no assurance that the
Bank's assets and liabilities would perform as set forth above. In addition, a
change in U.S. Treasury rates in the designated amounts accompanied by a change
in the shape of the Treasury yield curve would cause significantly different
changes to the NPV than indicated above.
Liquidity and Capital Resources
The Company'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. PS Financial
generally manages the pricing of its deposits to be competitive and increase
core deposit relationships.
15
<PAGE>
Federal regulations require Preferred Savings Bank 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 4% 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, 1997, Preferred Savings Bank's liquidity ratio
for regulatory purposes was 31.0%.
The Company'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 $ 1.9
million, $868,000 and $1.2 million for the years ended December 31, 1997, 1996,
and 1995, 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 used in financing activities consisted primarily of the
purchase of treasury stock of $3.2 million, $0, and $0 for the years ended
December 31, 1997, 1996, and 1995, respectively, as well as the proceeds from
FHLB advances totaling $13.8 million, $0, and $0 for the years ended December
31, 1997, 1996, and 1995. The net increase (decrease) in deposits was ($1.0)
million, $1.2 million, and $990,000 for the years ended December 31, 1997, 1996,
and 1995, respectively.
The Company's most liquid assets are cash and short-term investments.
The levels of these assets are dependent on the Company's operating, financing,
lending and investing activities during any given period. At December 31, 1997,
cash and short-term investments totaled $6.3 million. The Company has other
sources of liquidity if a need for additional funds arises, including securities
maturing within one year and the repayment of loans. The Company may also
utilize the sale of securities available-for-sale and Federal Home Loan Bank
advances as a source of funds.
At December 31, 1997, the Company had outstanding commitments to
originate loans of $564,000, all of which had fixed interest rates. These loans
are to be secured by properties located in its market area. The Company
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, 1997 totaled $18.1 million. Management believes
that a significant portion of such deposits will remain with the Company.
Liquidity management is both a daily and long-term responsibility of
management. PS Financial 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
16
<PAGE>
securities of short duration. If PS Financial requires funds beyond its ability
to generate them internally, it has additional borrowing capacity with the FBLB
of Chicago.
Preferred Savings is subject to various regulatory capital requirements
imposed by the OTS. At December 31, 1997, Preferred Savings was in compliance
with all applicable capital requirements on a fully phased-in basis. See Note 10
of the Notes to the Consolidated Financial Statements.
PS Financial's 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. PS Financial 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.
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 Company is reflected in increased operating
costs. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates, generally, have a more significant impact on a financial
institution's performance than does inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
Impact of New Accounting Standards
In June 1996, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 125 ("SFAS No. 125"),
"Accounting for Transfers and Extinguishments of Liabilities." SFAS No. 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. SFAS No. 125 requires a
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, and derecognizes liabilities when extinguished. SFAS No. 125 also
supersedes SFAS No. 122 and requires that servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the period of
estimated net servicing income or loss and requires assessment for asset
impairment or increases obligation based on their fair values. SFAS No. 125
applies to transfers and extinguishments occurring after December 31, 1996 and
early or retroactive application is not permitted. Management anticipates that
the adoption of SFAS No. 125 will not have a material impact on the financial
condition or operations of the Company. Because the volume and variety of
certain transactions will make it difficult for some entities to comply, some
provisions have been delayed
17
<PAGE>
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
Company.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", was issued by the Financial Accounting Standards Board in
1997. This Statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. It does not address issues of recognition or measurement
for comprehensive income and is components. Statement 130 is effective for
fiscal years beginning after December 15, 1997. Since the provisions of this
Statement are disclosure oriented, it will have no impact on the operations of
the Company.
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information", was issued in 1997 by
the Financial Accounting Standards Board. This Statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Statement 131 is effective for periods beginning after
December 15, 1997. Management does not believe that the provisions of this
Statement are applicable to the Company, since substantially all of the
Company's operations are banking services.
Year 2000
The Company has conducted a review of its computer systems to review
the systems that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. For example, programs that have time sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
believes that, with modifications to existing software and by converting to new
software, the Year 2000 problem will not pose significant operational problems
for the Company's computer systems as so modified and converted. However, if
such modifications and conversions are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company.
Safe Harbor Statement
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies, and expectations of the Company, are
generally identifiable by use of the words "believe", "expect", "intend",
"anticipate", "estimate", "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently
18
<PAGE>
uncertain. Factors which could have a material adverse effect on the operations
and future prospects of the Company and the subsidiaries include, but are not
limited to, changes in: interest rates, general economic conditions, the
legislative/regulatory situation, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filings with the Securities and Exchange Commission.
19
<PAGE>
GRAPHIC
CROWE CHIZEK
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 subsidiary as of December 31, 1997
and 1996 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, 1997. 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 subsidiary at December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Crowe, Chizek and Company LLP
---------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 30, 1998
20
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 440,543 $ 579,271
Interest-bearing deposit accounts in other financial
institutions 5,849,610 8,178,521
------------ ------------
Total cash and cash equivalents 6,290,153 8,757,792
Interest-bearing term deposits in other financial
institutions 209,000 248,000
Securities available-for-sale 33,459,003 24,080,360
Mortgage-backed securities available-for-sale 8,095,228 4,702,065
Loans receivable, net 37,166,605 35,943,469
Federal Home Loan Bank stock 700,000 362,100
Premises and equipment, net 457,797 460,840
Accrued interest receivable 801,086 476,526
Other assets 743,486 101,722
------------ ------------
Total assets $ 87,922,358 $ 75,132,874
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 41,274,722 $ 42,203,144
Advances from borrowers for taxes and insurance 497,831 476,623
Advances from the Federal Home Loan Bank 13,750,000 --
Deferred income taxes 182,052 109,456
Accrued interest payable and other liabilities 1,579,669 196,456
Accrued dividends payable 7,528,860 --
------------ ------------
Total liabilities 64,813,134 42,985,679
Stockholders' equity
Common stock $ 0.01 par value per share, 2,500,000
shares authorized; 2,182,125 shares issued 21,821 21,821
Additional paid-in capital 21,601,814 21,169,750
Unearned ESOP shares (1,172,726) (1,690,716)
Unearned stock awards (1,117,447) --
Retained earnings, substantially restricted 5,518,308 12,669,386
Treasury stock, at cost, 108,417 shares (1,895,711) --
Unrealized gain (loss) on securities available-
for-sale, net of taxes 153,165 (23,046)
------------ ------------
Total stockholders' equity 23,109,224 32,147,195
------------ ------------
Total liabilities and stockholders' equity $ 87,922,358 $ 75,132,874
============ ============
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Interest income
<S> <C> <C> <C>
Loans $ 3,244,083 $ 3,331,305 $ 3,156,211
Securities 2,045,647 780,821 651,687
Mortgage-backed securities 567,539 274,649 186,495
Other interest-earning assets 204,534 276,935 274,084
----------- ----------- -----------
Total interest income 6,061,803 4,663,710 4,268,477
Interest expense
Deposits 1,741,066 1,780,483 1,632,593
Federal Home Loan Bank advances 343,021 -- --
----------- ----------- -----------
2,084,087 1,780,483 1,632,593
----------- ----------- -----------
Net interest income 3,977,716 2,883,227 2,635,884
Provision for loan losses -- 50,000 --
----------- ----------- -----------
Net interest income after provision for
loan losses 3,977,716 2,833,227 2,635,884
Noninterest income
Net loss on sale of securities (179) (37,903) (218)
Other 77,506 69,438 58,343
----------- ----------- -----------
Total noninterest income 77,327 31,535 58,125
Noninterest expense
Compensation and benefits 1,672,023 550,323 627,651
Occupancy and equipment expense 124,897 112,891 106,927
Data processing 54,153 47,078 42,800
Federal deposit insurance premiums 27,258 89,668 92,921
SAIF special assessment -- 245,241 --
Professional fees 96,933 28,987 28,010
Other operating expenses 211,141 158,822 111,059
----------- ----------- -----------
Total noninterest expense 2,186,405 1,233,010 1,009,368
----------- ----------- -----------
Income before income tax provision 1,868,638 1,631,752 1,684,641
Provision for income taxes 947,355 629,342 630,110
----------- ----------- -----------
Net income $ 921,283 $ 1,002,410 $ 1,054,531
=========== =========== ===========
Earnings per share
Basic $ .47 $ .06
=========== ===========
Diluted $ .47 $ .06
=========== ===========
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Unrealized
Gain
Retained (Loss) on
Additional Unearned Unearned Earnings, Securities Total
Common Paid-in ESOP Stock Substantially Treasury Available- Stockholders'
Stock Capital Shares Awards Restricted Stock for-Sale Equity
----- ------- ------ ------ ---------- ----- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1, 1995 $ -- $ -- $ -- $ -- $ 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 -- -- -- -- -- -- (19,966) (19,966)
Change in unrealized
gain (loss) on securities
available- for-sale,
net of tax of $113,725 -- -- -- -- -- 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) on securities
available- for-sale,
net of tax of $49,321 -- -- -- -- -- -- (80,470) (80,470)
Net income -- -- -- -- 1,002,410 -- -- 1,002,410
------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1996 21,821 21,169,750 (1,690,716) -- 12,669,386 -- (23,046) 32,147,195
ESOP shares released -- 486,617 517,990 -- -- -- -- 1,004,607
Treasury stock purchased -- -- -- -- -- (3,172,254) -- (3,172,254)
Stock awards issued -- (54,553) -- (1,221,990) -- 1,276,543 -- --
Stock awards earned -- -- -- 104,543 -- -- -- 104,543
Change in unrealized
gain (loss) on securities
available- for-sale,
net of tax of $108,001 -- -- -- -- -- -- 176,211 176,211
Net income -- -- -- -- 921,283 -- -- 921,283
Dividends declared
($4.28 per share) -- -- -- -- (8,072,361) -- -- (8,072,361)
------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at
December 31, 1997 $21,821 $ 21,601,814 $ (1,172,726) $ (1,117,447) $ 5,518,308 $ (1,895,711) $ 153,165 $ 23,109,224
======= ============ ============ ============ ============ ============ ============ ============
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 921,283 $ 1,002,410 $ 1,054,531
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 45,584 32,784 34,570
Amortization of discounts and premiums on
securities 33,741 22,239 89,163
Provision for loan losses -- 50,000 --
Net loss on sale of securities available-for-sale 179 37,903 218
Stock dividends received on Federal Home
Loan Bank stock -- -- (4,700)
ESOP compensation expense 1,004,607 64,606 --
Stock awards expense 104,543 -- --
Change in
Deferred loan origination fees (49,758) (54,915) 6,292
Accrued interest receivable and other assets (293,468) (351,832) 44,653
Other liabilities and deferred income taxes 175,733 65,126 (6,251)
------------ ------------ ------------
Net cash provided by operating activities 1,942,444 868,321 1,218,476
Cash flows from investing activities
Proceeds from sales of securities available-for-sale 14,989,786 -- 1,018,903
Proceeds from sale of mortgage-backed securities
available-for-sale 1,671,253 1,282,899 814,194
Purchase of Federal Home Loan Bank stock (337,900) (20,700) (28,100)
Proceeds from repayments of securities 1,185,676 672,792 476,327
Proceeds from maturities of securities 11,650,000 6,500,000 4,900,000
Purchase of securities available-for-sale (35,339,376) (21,011,040) (8,046,167)
Purchase of mortgage-backed securities available-
for-sale (6,179,634) (2,457,985) (1,939,739)
Net decrease in interest-bearing term
deposits in other financial institutions 39,000 -- 5,002,818
Net increase in loans (1,173,378) (1,413,516) (1,641,313)
Capital expenditures, net (42,541) (26,977) (44,088)
------------ ------------ ------------
Net cash (used in) provided by investing
activities (13,537,114) (16,474,527) 512,835
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued)
24
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities
Net increase (decrease) in deposits $ (928,422) $ 1,156,439 $ 989,496
Net increase (decrease) in advances from
borrowers for taxes and insurance 21,208 17,518 (395,696)
Advances from the Federal Home Loan Bank 13,750,000 -- --
Purchase of treasury stock (3,172,254) -- --
Dividends paid (543,501)
Net proceeds from stock issuance -- 19,436,249 --
------------ ------------ ------------
Net cash provided by financing activities 9,127,031 20,610,206 593,800
------------ ------------ ------------
Net change in cash and cash equivalents (2,467,639) 5,004,000 2,325,111
Cash and cash equivalents, beginning of year 8,757,792 3,753,792 1,428,681
------------ ------------ ------------
Cash and cash equivalents, end of year $ 6,290,153 $ 8,757,792 $ 3,753,792
============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 2,003,809 $ 1,788,739 $ 1,605,763
Income taxes 707,009 631,233 640,734
Supplemental schedule of noncash investing activities
Transfer of securities from held-to-maturity
to available-for-sale on December 1, 1995 -- -- 1,571,423
Amount due to broker for purchase of securities 499,219 -- --
Dividends declared 7,528,860 -- --
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
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, certificate of deposit and checking accounts.
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.
Securities: Securities are classified as held-to-maturity when the Company 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 Company may decide to sell those securities in
response to changes in market interest rates, liquidity needs, changes in yields
or alternative investments, and for other reasons. These securities are carried
at market value with unrealized gains and losses charged or credited, net of
income taxes, to a valuation allowance included as a separate component of
equity. Realized gains and losses on disposition are based on the net proceeds
and the adjusted carrying amounts of the securities sold, using the specific
identification method.
Loans Receivable: Loans receivable are stated at unpaid principal balances, less
the allowance for loan losses, and net of deferred loan origination fees and
discounts.
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
- --------------------------------------------------------------------------------
(Continued)
26
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
than the recorded investment in the loan, although collection efforts continue
and future recoveries may occur.
Impaired loans are measured 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. 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.
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.
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. 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 and Related Costs: 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.
- --------------------------------------------------------------------------------
(Continued)
27
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using principally an
accelerated 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 which 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 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.
Earnings Per Common Share: Earnings per share is computed under the provisions
of Statement of Financial Accounting Standards No. 128 "Earnings Per Share",
which was adopted retroactively by the Company at the beginning of the fourth
quarter of 1997. Amounts reported as basic earnings per share for the two years
ended December 31, 1997 and 1996 reflect the earnings available to common
stockholders for the year divided by the weighted average number of common
shares outstanding during the year. Diluted earnings per share shows the
dilutive effect of additional common shares issuable under stock option and
stock award plans. In 1996, earnings per share is computed using net earnings
from November 26, 1996, the date that the Bank converted to stock ownership.
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.
- --------------------------------------------------------------------------------
(Continued)
28
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Future Accounting Changes: New accounting standards have been issued which will
require future reporting of comprehensive income (net income plus changes in
holding gains and losses on securities available-for-sale) and may require
redetermination of industry segment financial information. Management does not
anticipate these statements will impact the financial condition or operations of
the Company.
NOTE 2 - SECURITIES
Securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------------
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 $ 33,329,031 $ 143,074 $ (13,102) $ 33,459,003
------------ ------------ ------------ ------------
Mortgage-backed securities available-for-sale
Federal Home Loan Mortgage Corporation 3,780,702 43,604 -- 3,824,306
Federal National Mortgage Association 3,640,087 63,789 -- 3,703,876
Government National Mortgage Association 557,370 9,676 -- 567,046
------------ ------------ ------------ ------------
7,978,159 117,069 -- 8,095,228
------------ ------------ ------------ ------------
$ 41,307,190 $ 260,143 $ (13,102) $ 41,554,231
============ ============ ============ ============
December 31, 1996
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities available-for-sale
U.S. Treasury securities and
obligations of U.S. government agencies $ 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>
The Bank holds $500,000 and $1,500,000 of U.S. government agency bonds which are
structured notes issued by the Federal Home Loan Bank at December 31, 1997 and
1996, respectively.
- --------------------------------------------------------------------------------
(Continued)
29
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Sales of securities are summarized as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales $ 16,660,861 $ 1,282,899 $ 1,833,097
Gross realized gains 13,740 -- 11,799
Gross realized losses (13,919) (37,903) (12,017)
</TABLE>
The amortized cost and estimated fair value of debt securities, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------
Amortized Fair
Cost Value
------------- ------------
<S> <C> <C>
Securities available-for-sale
Due in less than one year $ 2,997,146 $ 2,999,196
Due after one year through five years 5,995,793 5,995,465
Due after five years 24,336,092 24,464,342
------------ -----------
33,329,031 33,459,003
Mortgage-backed securities 7,978,159 8,095,228
------------ -----------
$ 41,307,190 $41,554,231
============ ===========
</TABLE>
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following at:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
First mortgage loans
Principal balances
Secured by one-to-four-family residences $ 29,129,094 $ 26,998,328
Secured by other properties 5,636,226 6,088,322
Secured by commercial real estate 2,952,563 3,182,716
Construction loans 66,874 335,830
--------------- ---------------
37,784,757 36,605,196
Less net deferred loan origination fees (443,364) (493,122)
--------------- ---------------
First mortgage loans, net 37,341,393 36,112,074
Share loans 11,212 17,395
Less allowance for loan losses (186,000) (186,000)
--------------- ---------------
$ 37,166,605 $ 35,943,469
=============== ===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
30
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
The principal balance of loans greater than 90 days delinquent on nonaccrual
status at December 31, 1997 and 1996 was approximately $905,000 and $289,000,
respectively. The interest income that would have been recorded under the
original terms of such loans approximated $40,000 and $9,000 for the years ended
December 31, 1997 and 1996, respectively.
The Bank did not have any impaired loans for the years ended December 31, 1997
and 1996.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 186,000 $ 136,000 $ 136,000
Provision for loan losses - 50,000 -
------------ ------------ ------------
Balance, end of year $ 186,000 $ 186,000 $ 136,000
============ ============ ============
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following at:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Land $ 95,052 $ 95,052
Building and improvements 519,854 508,557
Furniture and equipment 329,608 307,618
------------ ------------
Total cost 944,514 911,227
Accumulated depreciation 486,717 450,387
------------ ------------
$ 457,797 $ 460,840
============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
31
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $1,327,000 at December 31, 1997 and
$1,011,000 at December 31, 1996. Deposits greater than $100,000 are not insured.
At December 31, 1997, scheduled maturities of certificates of deposit are as
follows:
1998 $ 18,131,483
1999 1,460,321
2000 904,246
2001 284,190
Thereafter 97,012
------------
$ 20,877,252
============
NOTE 7 - ADVANCES FROM THE FEDERAL HOME LOAN BANK
At December 31, 1997, secured advances from the Federal Home Loan Bank were as
follows:
<TABLE>
<CAPTION>
Type Maturity Date Rate 1997
---- ------------- ---- ----
<S> <C> <C> <C>
Structure advance May 14, 1998 6.19% $ 3,000,000
Fixed rate August 28, 1998 6.03% 1,000,000
Fixed rate October 1, 1998 5.99% 2,000,000
Fixed rate October 2, 1998 5.98% 1,000,000
Fixed rate December 24, 1998 6.01% 2,000,000
Structure advance July 30, 1999 6.04% 2,750,000
Fixed rate October 30, 2000 6.02% 2,000,000
----------------
$ 13,750,000
================
</TABLE>
The Company maintains a collateral pledge agreement with the FHLB covering
secured advances whereby the Company has agreed to at all times keep on hand,
free of all other pledges, liens, and encumbrances, first mortgage loans on
residential property (not more than 90 days delinquent), aggregating no less
than 167% of the outstanding secured advances from the Federal Home Loan Bank of
Chicago. At December 31, 1997, the minimum collateral requirement was
$22,963,000.
- --------------------------------------------------------------------------------
(Continued)
32
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 8 - 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.
NOTE 9 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators for earnings per common
share computations for the years ended December 31, 1997 and 1996 is presented
below. Earnings per share for the year ended December 31, 1996 is based on net
income since the date of conversion (November 26, 1996).
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996
---------- ----------
<S> <C> <C>
Basic Earnings Per Share
Net income $ 921,283 $1,002,410
Less: net income of Bank prior to conversion -- 880,966
---------- ----------
Net income available to common stockholders $ 921,283 $ 121,444
========== ==========
Weighted average common shares outstanding 1,955,356 2,010,304
========== ==========
Basic Earnings Per Share $ .47 $ .06
========== ==========
Earnings Per Share Assuming Dilution
Net income available to common stockholders $ 921,283 $ 121,444
========== ==========
Weighted average common shares outstanding 1,955,356 2,010,304
Add dilutive effect of assumed exercises:
Incentive stock options 6,464 --
Stock awards 1,994 --
---------- ----------
Weighted average common and dilutive
potential common shares outstanding 1,963,814 2,010,304
========== ==========
Diluted Earnings Per Share $ .47 $ .06
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
33
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 10 - REGULATORY CAPITAL
The Bank is subject to regulatory capital requirements administered by federal
regulatory agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
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 is asset growth and
expansion, and plans for capital restoration are required.
At year-end, actual capital levels of the Bank and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required
to Be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
----------------- ------------------ ------------------
1997 Amount Ratio Amount Ratio Amount Ratio
- ---- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $ 20,754 65.4% $ 2,538 8.0% $ 3,172 10.0%
Tier 1 (core) capital (to risk-weighted assets) 20,568 64.8 1,269 4.0 1,903 6.0
Tier 1 (core) capital (to adjusted total assets) 20,568 25.8 2,385 3.0 N/A N/A
Tangible capital (to adjusted total assets) 20,568 25.8 1,193 1.5 N/A N/A
Tier 1 (core) capital (to average assets) 20,568 28.2 2,187 3.0 3,646 5.0
1996
Total capital (to risk-weighted assets) $ 22,288 92.9% $ 1,919 8.0% $ 2,399 10.0%
Tier 1 (core) capital (to risk-weighted assets) 22,105 92.1 960 4.0 1,439 6.0
Tier 1 (core) capital (to adjusted total assets) 22,105 32.8 2,023 3.0 N/A N/A
Tangible capital (to adjusted total assets) 22,105 32.8 1,012 1.5 N/A N/A
Tier 1 (core) capital (to average assets) 22,105 36.7 1,806 3.0 3,612 5.0
</TABLE>
As of December 31, 1997, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. There are no conditions or events since
that notification that management believes have changed the Bank's category.
- --------------------------------------------------------------------------------
(Continued)
34
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 10 - REGULATORY CAPITAL (Continued)
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.
NOTE 11 - INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Current
Federal $ 939,929 $ 536,629 $ 582,286
State 42,557 60,910 90,155
------------ ------------ ------------
982,486 597,539 672,441
Deferred (163,515) 33,957 (42,331)
Change in valuation allowance 128,384 (2,154) -
------------ ------------ ------------
$ 947,355 $ 629,342 $ 630,110
============ ============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
35
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
The net deferred tax liability included in other liabilities in the accompanying
consolidated statements of financial condition consists of the following at:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
<S> <C> <C>
Gross deferred tax liabilities
Deferred loan fees $ (27,428) $ (11,789)
Accrual to cash (226,813) (106,887)
Accumulated depreciation (58,437) (60,601)
FHLB stock dividend (13,790) (13,790)
Net unrealized gain on securities available-for-sale (93,876) -
------------ ------------
(420,344) (193,067)
Gross deferred tax assets
Loan loss reserve 65,091 65,091
Capital loss carryforward 101,071 101,071
Prepayment on ESOP 260,845 -
Stock awards 40,465 -
Net unrealized loss on securities available-for-sale - 14,126
Other - 4,394
------------ ------------
467,472 184,682
Valuation allowance (229,455) (101,071)
------------ ------------
Net deferred tax liability $ (182,327) $ (109,456)
============ ============
</TABLE>
The valuation allowance relates to capital loss carryforwards and other items
that may not be recoverable.
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:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
----------------------------
Amount Percent
------------ -----------
<S> <C> <C>
Income tax computed at the statutory rate $ 635,337 34.0%
Deferred tax valuation allowance 128,384 6.9
ESOP 111,081 5.9
Other 44,465 2.4
------------ -----------
Total federal income tax 919,267 49.2
State income tax, net of federal tax benefit 28,088 1.5
------------ -----------
$ 947,355 50.7%
============ ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------------------------------------
1 9 9 6 1 9 9 5
------------------------- --------------------------
Amount Percent Amount Percent
------------ --------- ------------- -------
<S> <C> <C> <C> <C>
Income tax computed at the
statutory rate $ 554,795 34.0% $ 572,778 34.0%
Deferred tax valuation allowance (2,154) (0.1) - -
Other 36,501 2.2 1,522 0.1
------------ ------- ------------ -------
Total federal income tax 589,142 36.1 574,300 34.1
State income tax, net of federal
tax benefit 40,200 2.5 55,810 3.3
------------ ------- ------------ -------
$ 629,342 38.6% $ 630,110 37.4%
============ ======= ============ =======
</TABLE>
Under the Internal Revenue Code, the Bank may, for tax purposes, deduct a
provision for bad debts in excess of such provisions recorded in the financial
statements. Retained earnings at December 31, 1997 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.
NOTE 12 - 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
forty-year period. However, in the event the Company's contributions exceed the
minimum debt service requirements, additional principal payments will be made.
- --------------------------------------------------------------------------------
(Continued)
37
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)
During 1997, 51,799 shares of stock, including 50,941 shares resulting from a
special dividend, with a fair value of $19.39 per share were committed to be
released, resulting in ESOP compensation expense of $1,004,607. Shares held by
the ESOP at December 31, 1997 and 1996 are as follows:
1997 1996
---------- ----------
Allocated shares 57,297 5,498
Unallocated shares 117,273 169,072
---------- ----------
Total ESOP shares 174,570 174,570
========== ==========
Fair value of unallocated shares $2,257,505 $1,986,596
========== ==========
The Company has a stock option plan under the terms of which 470,000 shares of
the Company's common stock were reserved for issuance. The options become
exercisable on a cumulative basis in equal installments over a five-year period
from the date of grant. The options expire ten years from the date of grant.
A summary of the status of the Company's stock option plan and changes during
the year are presented below:
Weighted-
Average
Exercise
Shares Price
------ -----
Outstanding at beginning of year --
Granted 181,750 $ 14.00
Exercised --
Forfeited --
-------
Outstanding at end of year 181,750
=======
Options exercisable at end of year --
Weighted-average fair value of
options granted during year $ 6.05
All of the outstanding options at December 31, 1997 relate to options granted in
1997 at an exercise price of $14.00 and have a remaining life of 9.5 years
before expiration. These options are not fully vested. The exercise price
equaled the market value on the date the options were granted.
- --------------------------------------------------------------------------------
(Continued)
38
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 12 - STOCK-BASED COMPENSATION PLANS (Continued)
The Company applies APB Opinion 25 and related Interpretations in accounting for
its stock option plan. Accordingly, no compensation cost has been recognized at
the date of grant. Had compensation cost been determined based on the fair value
at the grant dates for awards under the plan in 1997 consistent with the method
of SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net
income and earnings per share would have been reduced to the pro forma amounts
in the table below. For purposes of pro forma disclosure, the estimated fair
value of the options is amortized to expense over the options' vesting period.
1997
------------
Pro forma net income $ 825,795
Pro forma earnings per share
Basic .42
Diluted .42
The fair value of options granted in 1997 was estimated at the date of grant
using a Black-Scholes option pricing model using the following assumptions:
expected volatility factor of the expected market price of the Company's common
stock of 15.75%, risk-free interest rate of 6.74%, and expected option term of 8
years.
The Black-Scholes option pricing valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its stock
options.
In connection with the conversion to stock ownership, the Company adopted a
Management Recognition and Retention Plan (MRP). In 1997, the Company
contributed $1.3 million allowing the MRP to acquire 87,285 shares of common
stock of the Company, at an average cost of $14.00 per share, with 64,006 shares
awarded to directors and key employees. These shares vest over a five-year
period. The unamortized cost of shares not yet earned (vested) is reported as a
reduction of stockholders' equity. MRP compensation expense totaled $104,543 for
the year ended December 31, 1997.
- --------------------------------------------------------------------------------
(Continued)
39
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 13 - FINANCIAL INSTRUMENTS AND COMMITMENTS
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the 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, 1997 and
1996, these financial instruments consist of commitments to extend credit
totaling $564,000 and $401,250, respectively. Fixed rate mortgage loan
commitments at December 31, 1997 have rates ranging from 7.125% to 9.00% 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.
Interest-bearing deposit accounts in other financial institutions potentially
subject the Bank to concentrations of credit risk. At December 31, 1997, the
Bank had a deposit account at the Federal Home Loan Bank of Chicago with a
balance totaling approximately $5,850,000. At December 31, 1996, the balance was
approximately $8,179,000.
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.
- --------------------------------------------------------------------------------
(Continued)
40
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 14 - 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, 1997 December 31, 1996
--------------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash on hand and in banks $ 441 $ 441 $ 579 $ 579
Interest-bearing deposits in other
financial institutions 5,850 5,850 8,179 8,179
Interest-bearing term deposits in other
financial institutions 209 209 248 248
Securities available-for-sale 41,554 41,554 28,782 28,782
Loans receivable, net 37,167 37,756 35,943 36,228
Federal Home Loan Bank stock 700 700 362 362
Accrued interest receivable 801 801 477 477
Financial liabilities
Non-interest-bearing deposits (29) (29) - -
Money market and passbook savings (20,369) (20,369) (21,987) (21,987)
Certificates of deposits (20,877) (20,892) (20,216) (20,230)
Advances from the Federal Home Loan Bank (13,750) (13,741) - -
Accrued interest payable (143) (143) (63) (63)
</TABLE>
For purposes of the above, the following assumptions were used. The estimated
fair value for cash, interest-bearing deposits with financial institutions,
Federal Home Loan Bank stock, accrued interest receivable, money market and
savings deposits, and accrued interest payable are considered to approximate
their carrying values. The estimated fair value for securities
available-for-sale is based on quoted market values for the individual
securities or for equivalent securities. The estimated fair value for loans is
based on estimates of the rate the Bank would charge for similar loans at
December 31, 1997 and 1996, 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, 1997 and 1996, 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, 1997 and 1996, the fair values would have been
achieved, because the market value may differ depending on the circumstances.
The estimated fair values at December 31, 1997 and 1996 should not necessarily
be considered to apply at subsequent dates.
- --------------------------------------------------------------------------------
(Continued)
41
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 15 - 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, 1997.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,193,821 $ 2,226,099
Securities available-for-sale 4,605,511 5,989,000
ESOP loan 1,692,664 1,702,058
Investment in bank subsidiary 20,713,420 22,086,459
Accrued interest receivable and other assets 121,347 151,182
------------ ------------
$ 31,326,763 $ 32,154,798
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 8,217,539 $ 7,603
Stockholders' equity
Common stock 21,821 21,821
Additional paid-in capital 21,601,814 21,169,750
Retained earnings 5,518,308 12,669,386
Unearned ESOP shares (1,172,726) (1,690,716)
Unearned stock awards (1,117,447) --
Treasury stock (1,895,711) --
Unrealized gain (loss) on securities available-
for-sale, net 153,165 (23,046)
------------ ------------
$ 31,326,763 $ 32,154,798
============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
42
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
For the year ending December 31, 1997 and
for the period November 26, 1996 to December 31, 1996
<TABLE>
<CAPTION>
1997 1996
----------- --------
<S> <C> <C>
Income
Securities $ 423,424 $ 27,604
ESOP loan 117,442 11,711
Interest-bearing deposits with other financial institutions -- 15,935
Dividend income from subsidiary 3,950,896 --
----------- -----------
Total income 4,491,762 55,250
Other expenses 155,272 9,611
----------- -----------
Income before income taxes and equity (excess) in
undistributed earnings of bank subsidiary 4,336,490 45,639
Income taxes 96,535 18,269
----------- -----------
Income before equity (excess) in undistributed
earnings of bank subsidiary 4,239,955 27,370
Equity (excess) in undistributed earnings of bank subsidiary (3,318,672) 94,074
----------- -----------
Net income $ 921,283 $ 121,444
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
43
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the year ending December 31, 1997 and
for the period November 26, 1996 to December 31, 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Operating activities
Net income $ 921,283 $ 121,444
Adjustments to reconcile net income to net cash
from operating activities
Amortization of discounts and premiums on
securities (1,497) 139
Gain on sale of securities (156) --
(Equity) excess in undistributed earnings of
bank subsidiary 3,318,672 (94,074)
Change in
Other assets 29,835 (148,480)
Other liabilities 507 7,603
------------ ------------
Net cash from operating activities 4,268,644 (113,368)
Investing activities
Purchase of bank subsidiary stock -- (11,144,174)
Purchase of securities available-for-sale (1,689,631) (5,996,250)
Proceeds from sale of securities available-for-sale 1,000,156 --
Proceeds from repayment of securities 94,914 --
Proceeds from maturities of securities 2,000,000 --
------------ ------------
Net cash from investing activities 1,405,439 (17,140,424)
Financing activities
Net proceeds from sale of common stock -- 19,436,249
Purchase of treasury stock (3,172,254) --
Payment received on loan to ESOP 9,394 43,642
Dividends paid (543,501) --
------------ ------------
Net cash from financing activities (3,706,361) 19,479,891
------------ ------------
Net change in cash and cash equivalents 1,967,722 2,226,099
Cash and cash equivalents at beginning of period 2,226,099 --
------------ ------------
Cash and cash equivalents at end of period $ 4,193,821 $ 2,226,099
============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
44
<PAGE>
PS FINANCIAL, INC.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 2:30 p.m., Chicago, Illinois
time on April 22, 1998 at the main office of PS Financial, Inc., 4800 South
Pulaski Road, Chicago, Illinois 60632.
MARKET PRICE INFORMATION
The following information relates to the closing price of the Company's $.01 par
value common stock, which is traded on the over-the-counter market and is quoted
on the NASDAQ National Market under the symbol "PSFI".
<TABLE>
<CAPTION>
1997 1996
------------------------------- ------------------------------
QUARTER ENDED HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- ------------- ---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
March 31 $14.25 $11.75 $ -- $ -- $ -- $ --
June 30 $14.88 $12.63 $0.08 $ -- $ -- $ --
September 30 $18.00 $14.00 $0.08 $ -- $ -- $ --
December 31 $23.00 $16.00 $0.12 $12.50 $11.25 $ --
</TABLE>
* Common stock began trading on November 26, 1996.
At March 10, 1998, there were 2,050,429 shares of PS Financial, Inc. common
stock issued and outstanding (including unallocated ESOP shares) and there were
159 holders of record. The closing sale price for the Company's stock on March
10, 1998 was $14.125 per share.
STOCKHOLDER AND GENERAL INQUIRIES TRANSFER AGENT
Kimberly P. Rooney, President First Bankers Trust Co.
PS Financial, Inc. 1201 Broadway
4800 South Pulaski Road Quincy, Illinois 62301
Chicago, Illinois 60632
(773) 376-3800
ANNUAL AND OTHER REPORTS
A copy of PS Financial, Inc.'s Annual Report on Form 10-KSB for the year ended
December 31, 1997, as filed with the Securities and Exchange Commission, may be
obtained without charge by contacting Jeffrey Przybyl, Chief Financial Officer,
PS Financial, Inc., 4800 South Pulaski Road, Chicago, Illinois 60632-4195.
45
<PAGE>
PART IV
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
10.1 Employment agreement with Kimberly P. Rooney *
10.2 Change-in-control severance agreements with certain executive officers *
10.3 Stock Option and Incentive Plan *
10.4 Recognition and Retention Plan *
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 regulatory authorities None
99 Additional Exhibits None
</TABLE>
Footnotes
* 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,
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of
Percentage of Incorporation
Parent Subsidiary Ownership or Organization
- --------------------- ---------------------------------------------- --------------------- ------------------------
<S> <C> <C> <C>
PS Financial, Inc. Preferred Savings Bank 100% Federal
Preferred Savings Preferred Service Corporation 100% Illinois
Bank
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY
REPORT ON FORM 10-K FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 440,543
<INT-BEARING-DEPOSITS> 5,849,610
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,554,231
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 37,166,605
<ALLOWANCE> 186,000
<TOTAL-ASSETS> 87,922,358
<DEPOSITS> 41,274,722
<SHORT-TERM> 13,750,000
<LIABILITIES-OTHER> 9,788,412
<LONG-TERM> 0
0
0
<COMMON> 21,821
<OTHER-SE> 23,087,403
<TOTAL-LIABILITIES-AND-EQUITY> 87,922,358
<INTEREST-LOAN> 3,244,083
<INTEREST-INVEST> 2,613,186
<INTEREST-OTHER> 204,534
<INTEREST-TOTAL> 6,061,803
<INTEREST-DEPOSIT> 1,741,066
<INTEREST-EXPENSE> 2,084,087
<INTEREST-INCOME-NET> 3,977,716
<LOAN-LOSSES> 0
<SECURITIES-GAINS> (179)
<EXPENSE-OTHER> 2,186,405
<INCOME-PRETAX> 1,868,638
<INCOME-PRE-EXTRAORDINARY> 1,868,638
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 921,283
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
<YIELD-ACTUAL> 5.01
<LOANS-NON> 470,987
<LOANS-PAST> 2,887,847
<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>
