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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number:
PS FINANCIAL, INC.
------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-4101473
- -------------------------------- -------------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization
4800 South Pulaski Road, Chicago, Illinois 60632-4195
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (773) 376-3800
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days.
YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-K. [X]
State issuers' revenues for its most recent fiscal year: $6.9 million
As of March 22, 1999, the Registrant had 1,756,384 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 22, 1999, was $17.4 million. (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an admission by the Registrant that such person is an affiliate of the
Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Annual Report to Stockholders for the fiscal year
ended December 31, 1998.
Part III of Form 10-KSB - Portions of The Proxy Statement for Annual
Meeting of Stockholders to be held in 1999.
<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 of 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, 1998, the Company had total assets of $102.8 million,
deposits of $55.4 million and stockholders' equity of $21.0 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. In general, the Company solicits deposits only in its
primary market area and does not accept brokered deposits. In 1998, in an effort
to increase its deposit base, the Company began accepting larger term deposits
from outside its primary market area.
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, 1998, the Company's total
loans receivable, net totaled $56.8 million. See "- Originations and Purchases
of Loans".
2
<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,
------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ----------------- ---------------- ------------------ -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- -------- --------- ------- -------- ------- --------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family $44,297 77.10% $29,129 77.07% $26,998 73.72% $25,858 73.44% $24,711 73.62%
Multi-Family 8,006 13.93 5,636 14.91 6,088 16.62 6,094 17.31 5,929 17.66
Commercial 5,135 8.94 2,953 7.81 3,183 8.69 2,953 8.39 2,904 8.65
Construction --- --- 67 0.18 336 0.92 286 0.81 --- ---
------- ------ ------- ------ ------- ------ ------- ------ ------- -----
Total real estate
loans 57,438 99.97 37,785 99.97 36,605 99.95 35,191 99.95 33,544 99.93
Consumer Loans:
Deposit Account 15 0.03 11 0.03 17 0.05 18 0.05 24 0.07
------- ------ ------- ------ ------- ------ ------- ------ ------- -----
Total loans 57,453 100.00% 37,796 100.00% 36,622 100.00% 35,209 100.00% 33,568 100.00%
====== ====== ====== ====== ======
Less:
Deferred fees and
discounts 373 443 493 548 542
Allowance for loan
losses 258 186 186 136 136
------- ------- ------- ------- -------
Total loans $56,822 $37,167 $35,943 $34,525 $32,890
======= ======= ======= ======= =======
receivable, net
</TABLE>
3
<PAGE>
The following table s hows the composition of the Company's loan
portfolio by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ----------------- ---------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans:
Real Estate
One- to four-family $44,297 77.10% $29,129 77.07% $26,998 73.72% $25,858 73.44% $24,711 73.62%
Multi-family 8,006 13.93 5,636 14.91 6,088 16.62 6,094 17.31 5,929 17.66
Commercial 5,135 8.94 2,953 7.81 3,183 8.69 2,953 8.39 2,904 8.65
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total real estate loans 57,438 99.97 37,718 99.79 36,269 99.03 34,905 99.14 33,544 99.93
Consumer loans 15 0.03 11 0.03 17 0.05 16 0.05 15 0.04
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total fixed-rate loans 57,453 100.00 37,729 99.82 36,286 99.08 34,921 99.19 33,559 99.97
Adjustable-Rate Loans:
Real estate - construction --- --- 67 0.18 336 0.92 286 0.81 --- ---
Consumer loans --- --- --- --- --- --- 2 --- 9 0.03
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total adjustable-rate loans --- --- 67 0.18 336 0.92 288 0.81 9 0.03
------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total loans 57,453 100.00% 37,796 100.00% 36,622 100.00% 35,209 100.00% 33,568 100.00%
====== ====== ====== ====== ======
Less:
Deferred fees and discounts 373 443 493 548 542
Allowance for loan losses 258 186 186 136 136
--- --- --- --- ---
Total loans receivable, net $56,822 $37,167 $35,943 $34,525 $32,890
======= ======= ======= ======= =======
</TABLE>
4
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at December 31, 1998. 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.
Real Estate
-------------------------------------
One- to Four-Family Multi-family Commercial
------------------- ----------------- ------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------------------- ----------------- ------------------
Due During (Dollars in Thousands)
Period Ending
December 31,
- ---------------------
1999 $ 78 8.60% $ 43 9.78% $ 121 11.00%
2000 817 8.77 23 8.50 369 9.90
2001 and 2002 838 8.60 155 8.99 319 8.08
2003 to 2007 10,783 7.97 4,182 8.58 2,518 9.2
2008 to 2022 31,781 7.73 3,603 8.29 1,808 8.65
------- ------ ------
$44,297 7.83% $8,006 8.46% $5,135 9.03%
======= ====== ======
Consumer Total
----------------------- -----------------------
Due During Weighted Weighted
Period Ending Average Average
December 31, Amount Rate Amount Rate
- ---------------------------- ---------- ------------ ---------- -------------
1999 $15 6.58% $ 257 9.81%
2000 - -- 1,209 9.11
2001 and 2002 - -- 1,312 8.52
2003 to 2007 - -- 17,483 8.29
2008 to 2022 - -- 37,192 7.83
--- -------
Total $15 6.58% $57,453 8.02%
=== =======
The total amount of loans due after December 31, 1999 which have
predetermined interest rates is $57.2 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is $0.
5
<PAGE>
Under federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At
December 31, 1998, based on the above, the Bank's regulatory loans-to-one
borrower limit was approximately $2.3 million. On the same date, the Bank had no
borrowers with outstanding balances in excess of this amount. As of December 31,
1998, the largest dollar amount outstanding or committed to be lent to one
borrower, or group of related borrowers, was five loans to one borrower totaling
$761,000 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 three loans totaling $712,000 secured by multi-family and one- to
four-family real estate. At December 31, 1998, these loans, except for one
$369,000 loan on a commercial property consisting of nine stores and 11
apartments which was one month 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 and 25 year amortization
schedules. 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, 1998, $7.5 million or 17.0% of 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 $82,000.
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".
6
<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, 1998,
the Company had $3.7 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, 1998, the Company had $5.1 million in commercial real estate loans,
representing 8.9% of the total loan portfolio, and $8.0 million in multi-family
loans, or 13.9% 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.
7
<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, 1998. Substantially all of the loans referred to in the table below
are secured by properties located in the Company's market area.
Outstanding Amount
Number of Principal Non-Performing
Loans Balance or of Concern
--------- --------------- ----------------
(Dollars in Thousands)
Commercial Real Estate
Small business facilities 30 $4,118 $ -
Office Buildings 7 1,017 -
Multi-family 45 8,006 -
-- ----- ---
Total multi-family and commercial 82 $13,141 $ -
real estate loans == ======= ===
At December 31, 1998, the Company's largest commercial real estate or
multi-family loan outstanding totaled $369,000 and was secured by a 9 store and
11 unit apartment complex located in Berwyn, Illinois. At December 31, 1998,
this property was one month delinquent.
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, 1998, there were no
multi-family or commercial real estate loans 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, 1998, the Company had no construction loans
outstanding.
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, 1998, consumer loans
totaled $15,000, 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.
8
<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. In order to increase
the size of the loan portfolio, the Company has utilized the services of an area
mortgage broker who receives a fee for each mortgage originated for the Company.
The broker serves the same market area as the Company, and the loans share the
same characteristics of the Company's existing loans. Through December 31, 1998,
the Company originated $17.9 million loans through this broker.
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, 1998, the Company had no 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.
Year Ended December 31,
----------------------------------
1998 1997 1996 1995
----------------------------------
(In Thousands)
Originations by type:
Real estate - one- to four-family $22,733 8,207 $6,351 $5,162
- multi-family 4,314 460 2,678 821
- commercial 2,696 955 1,077 1,270
Passbook 12 - 15 9
-- - -- -
Total loans originated 29,755 9,622 10,121 7,262
------- ------ ------ ------
Purchases
Real estate - construction 0 8 574 551
Repayments
Principal repayment 10,098 8,456 9,282 6,172
(Increase) decrease in other items, net(1) 2 (50) (5) 6
------- ------ ------ ------
$19,655 $1,224 $1,418 $1,635
======= ====== ====== ======
Footnotes
(1) Other items consist primarily of deferred fees and the allowance for loan
losses.
9
<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. In 1998, one commercial business property was acquired
through foreclosure and subsequently sold.
10
<PAGE>
The following table sets forth the Company's loan delinquencies by type,
by amount and by percentage of type at December 31, 1998.
<TABLE>
<CAPTION>
Loans Delinquent For:
---------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
---------------------------------------------------------------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
---------------------------------------------------------------------------------
(Dollars in Thousands)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to Four-Family 9 $649 1.47% 3 $367 0.83% 7 $1,149 2.59%
Multi-family - - -- - - -- - - --
Commercial real estate 1 369 7.19 - - -- - - --
Construction or - - -- - - -- - - --
development
Consumer - - -- - - -- - - --
Commercial Business - - -- - - -- - - --
Consumer - - -- - - -- - - --
--- ------ --- ---- --- ------
Total 10 $1,018 1.77% 3 $367 0.64% 7 $1,149 2.00%
=== ====== === ==== === ======
</TABLE>
Total Delinquent Loans
----------------------------
Percent
of Loan
Number Amount Category
----------------------------
Real Estate:
One- to Four-Family 19 $2,165 4.89%
Multi-family - - --
Commercial real estate 1 369 7.19
Construction or development - - --
Consumer - - --
Commercial Business - - --
Consumer - - --
--- ------
Total 20 $2,534 4.41%
=== ======
11
<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, 1998,
the Company had classified a total of $823,000 of its loans consisting of one-
to four-family residential real estate as follows:
December 31, 1998
-----------------
(In Thousands)
Substandard..................... $823
Doubtful........................ ---
Loss............................ ---
-----
Total...................... $823
=====
At December 31, 1998, 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.
12
<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.
December 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans over
90 days delinquent:
One- to four-family $777 $264 $268 $775 $334
Multi-family - - - - -
Commercial real estate - - - - -
Commercial business - 207 - - -
---- ---- ---- ---- ----
Total 777 471 268 775 334
---- ---- ---- ---- ----
Accruing loans delinquent
more than 90 days
372 378 14 - -
Foreclosed assets - - - - -
- - - - -
Total non-performing
assets $1,149 $849 $282 $775 $334
====== ==== ==== ==== ====
Total as a percentage of
total assets 1.11% 0.97% 0.37% 1.45% 0.65%
==== ==== ==== ==== ====
For the year ended December 31, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $70,000. The amounts that were included in
interest income on such loans were $29,000.
At December 31, 1998, the Company's non-accruing loans greater than 90
days included three loans secured by single-family real estate totaling
$768,000. One loan, secured by a single-family home in Burr Ridge, IL, totaling
$616,000, was resolved in the first quarter of 1999, with no loss of principal.
Other Assets of Concern. In addition to the non-performing assets set
forth in the table above, as of December 31, 1998, 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.
13
<PAGE>
The following table sets forth an analysis of the Company's allowance
for loan losses.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------- ------------- ------------- ------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $186 $186 $136 $136 $94
Charge-offs (19) - - - -
Recoveries 11 - - - -
-- - - - -
Net charge-offs (8) - - - -
Additions charged to operations 80 - 50 - 42
---- ---- ---- ---- ----
Balance at end of period 258 $186 $186 $136 $136
==== ==== ==== ==== ====
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 0.45% 0.50% 0.51% 0.39% 0.41%
total loans ==== ==== ==== ==== ====
</TABLE>
14
<PAGE>
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -------------------------------
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 $ 44 $44,297 77.10% $ 30 $29,129 77.07% $ 27 $26,998 73.72%
Multi-family 24 8,006 13.93 15 5,636 14.91 15 6,088 16.62
Commercial real estate 12 5,135 8.94 7 2,953 7.81 8 3,183 8.69
Construction - - -- 1 67 0.18 1 336 0.92
Consumer - 15 0.03 - 11 0.03 1 17 0.05
Unallocated 178 - -- 133 - -- 134 - --
---- ------- ------ ---- ------- ------ ---- ------- -------
Total $258 $57,453 100.00% $186 $37,796 100.00% $186 $36,622 100.00%
==== ======= ====== ==== ======= ====== ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1995 1994
--------------------------- ------------------------------
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 $ 26 $25,858 73.44% $ 25 $24,711 73.62%
Multi-family 15 6,094 17.31 15 5,929 17.66
Commercial real estate 7 2,953 8.39 7 2,904 8.65
Construction 1 286 0.81 - - ---
Consumer - 18 0.05 - 24 0.07
Unallocated 87 - --- 89 - ---
---- ------- ------ ---- ------- -------
Total $136 $35,209 100.00% $136 $33,568 100.00%
==== ======= ====== ==== ======= =======
</TABLE>
15
<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, 1998, the Bank's liquidity ratio for regulatory
purposes was 36.2%.
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, 1998, 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, 1998, $27.6 million
of securities and $11.4 million of mortgage-backed securities were classified as
available-for-sale.
16
<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, 1998 and December 31, 1997, the Company's
securities portfolio totaled $27.6 million and $33.5 million, respectively. At
December 31, 1998, 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.
17
<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,
----------------------------------------------------------
1998 1997 1996
----------------- ------------------- --------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
--------- ------- ---------- -------- --------- ----------
Securities available-for-sale
<S> <C> <C> <C>
U.S. government securities $ - 0.00% $2,999 8.96% $13,993 58.11%
Federal agency obligations 14,951 54.18 30,460 91.04 10,087 41.89
Equity Securities 9,367 33.94 - 0 - 0
Municipal securities 3,278 11.88 - 0 - 0
------- ------ ------ ------ ------- ------
Total securities $27,596 100.00% 33,459 100.00% $24,080 100.00%
======= ====== ====== ====== ======= =======
Average remaining life of securities 13.12 yrs. 6.53 yrs. 3.19 yrs.
Other interest-earning assets:
Interest-bearing deposits with other $3,948 74.96% 6,059~ 89.64% $8,427 95.88%
banks
Federal Home Loan Bank Stock 1,319 25.04 700 10.36 0 4.12
------- ------ ------ ------ ------- ------
Total $5,267 100.00% $6,759 100.00% $8,789 100.00%
======= ====== ====== ====== ======= ======
</TABLE>
18
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
----------- -------------- -------------- ------------- ----------------------------
Carrying Carrying Carrying Carrying Carrying Fair Value
Value Value Value Value Value
----------- -------------- -------------- ------------- ------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government $ - $ - $ - $ - $ - $ -
securities
Federal agency - - 14,951 - 14,951 14,951
securities
Municipal securities - - 2,188 7,179 9,367 9,367
Equity securities - - - - 3,278 3,278
---- ---- ------- ------ ------- -------
Total investment
securities $ - $ - $17,139 $7,179 $27,596 $27,596
==== ==== ======= ====== ======= =======
Weighted average yield -% -% 6.82% 6.72% 6.90%
</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,
1998, $9.0 million, or 79.6% 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, 1998, 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, 1998, none of the Company's mortgage-backed securities
were classified as "high-risk."
19
<PAGE>
The following table sets forth the composition of the Company's
mortgage-backed securities at the dates indicated.
December 31,
--------------------------------------------------
1998 1997 1996
--------------- ---------------- ----------------
Mortgage-backed securities Carrying % of Carrying % of Carrying % of
available for sale: Value Total Value Total Value Total
- -------------------------- -------- ------ --------- ------ --------- ------
(Dollars in Thousands)
GNMA 3,053 26.89 566 6.99 662 14.08
FNMA 4,757 41.90 3,704 45.76 1,736 36.92
FHLMC 3,544 31.21 3,825 47.24 2,304 49.00
------- ------ ------ ------ ------ ------
Total mortgage-backed
securities $11,354 100.00% $8,095 100.00% $4,702 100.00%
======= ====== ====== ====== ====== ======
20
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at December 31, 1998.
<TABLE>
<CAPTION>
Due In December 31,
----------------------------------------- 1998
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 $ - $ - $767 $ 2,746 $ 3,513
Federal National Mortgage Association - 497 - 4,259 4,756
Government National Mortgage Association - - - 3,054 3,054
----- ---- ---- ------- -------
Total $ - $497 $767 $10,059 $11,323
===== ==== ==== ======= =======
</TABLE>
At December 31, 1998, the dollar amount of all mortgage-backed
securities due after December 31, 1998, which had fixed interest rates and
floating or adjustable rates totaled $2.3 million and $9.0 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.
Year Ended December 31,
-------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Purchases:
Adjustable-rate (1) $7,215 $2,982 $ -
Fixed-rate (1) - 3,198 2,458
- ----- -----
Total purchases 7,215 6,180 2,458
Sales:
Adjustable-rate (1) - 1,671 1,283
Fixed-rate (1) 1,083 - -
----- - -
Total sales 1,083 1,671 1,283
Repayments:
Principal repayments 2,787 1,186 673
Other increase (decrease) (86) 70 (20)
---- -- ----
Net increase (decrease) $3,259 $3,393 $482
====== ====== ====
Footnotes
(1) Consists of pass-through securities.
21
<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 solicits deposits in its market area and, in an effort to increase its
deposit base, the Company began accepting time deposits from outside its market
area in 1998.
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.
22
<PAGE>
The following table sets forth the savings flows at the Company during
the periods indicated.
Year Ended December 31,
----------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Opening balance $41,275 $42,203 $41,047
Deposits 45,699 33,220 51,120
Withdrawals (33,662) (35,634) (51,599)
Interest Credited 2,117 1,486 1,635
----- ----- -----
Ending balance $55,429 $41,275 $42,203
======= ======= =======
Net increase (decrease) $14,154 ($928) $1,156
======= ====== ======
Percent increase (decrease) 34.29 % (2.20) % 2.82 %
----- ------ ----
23
<PAGE>
The following table sets forth the dollar amount of savings deposits and
the various types of deposit programs offered by the Company as of the dates
indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1998 1997 1996
----------------- -------------------- ------------------
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) $19,577 35.33% $18,799 45.55% $20,492 48.56%
Transaction Accounts - 0.00% (1) 156 0.28 24 0.05 - -
Money Market Accounts - 3.25% (1) 1,477 2.66 1,575 3.82 1,495 3.54
----- ---- ----- ---- ----- ----
Total Non-Certificates 21,210 38.27 20,398 49.42 21,987 52.10
------ ----- ------ ----- ------ -----
Certificates
4.00 - 5.99% 33,708 60.81 19,856 48.11 19,231 45.57
6.00 - 7.99% 511 0.92 1,021 2.47 985 2.33
--- ---- ----- ---- --- ----
Total Certificates 34,219 61.73 20,877 50.58 20,216 47.90
------ ----- ------ ----- ------ -----
Total Deposits $55,429 100.00% $41,275 100.00% $42,203 100.00%
======= ======= ======= = ====== ======= ======
</TABLE>
Footnotes
(1) At December 31, 1998.
24
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of December 31, 1998.
Less Than 1 to 2 2 to 3 3 to 4 4 to 5
1 Year Years Years Years Years Total
---------------------------------------------------------------
(Dollars in Thousands)
4.00 - 4.99% $ 7,007 $ 264 $ 40 $ - $ 13 $ 7,324
5.00 - 5.99% 19,733 4,354 1,704 173 420 26,384
6.00 - 6.99% 68 165 156 28 - 417
7.00 - 7.99% - 94 - - - 94
- -- - - - --
$26,808 $4,877 $1,900 $201 $433 $34,219
======= ====== ====== ==== ==== =======
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, 1998.
Maturity
----------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
--------- -------- --------- --------- -------
Certificates of deposit of
less than $100,000 $8,503 $6,647 $9,208 $6,600 $30,958
Certificates of deposit of
$100,000 or more 704 640 1,106 811 3,261
--- --- ----- --- -----
Total certificates of deposit $9,207 $7,287 $10,314 $7,411 $34,219
====== ====== ======= ====== =======
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.
25
<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.
December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------
(Dollars in Thousands)
Maximum Balance
FHLB Advances $23,764 $13,750 - - -
Average Balance:
FHLB Advances $20,154 $5,673 - - -
Weighted average
interest rate of
FHLB Advances 5.48% 6.05% - % - % - %
26
<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, 1998, 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,
1998. At December 31, 1998, PS Financial's investment in the Subsidiary totaled
$5,129.
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, 1998, 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.
27
<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, November 1998, 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.
28
<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.
The Bank'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, 1998, the Bank's lending limit under this restriction was $2.3
million. The Bank 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 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
29
<PAGE>
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, 1997.
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 the Bank, 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, 1998, the Bank did not have any intangible
assets recorded as assets on its financial statements.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
At December 31, 1998, the Bank had tangible capital of $15.2 million, or
15.4% of adjusted total assets, which is approximately $13.7 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
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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, 1998, the
Bank had no intangibles which were subject to these tests.
At December 31, 1998, the Bank had core capital equal to $15.2 million,
or 15.4% of adjusted total assets, which is $11.2 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, 1998, the Bank had
$258,000 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, 1998.
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, 1998, PS
Financial would qualify for an exemption from the requirement.
On December 31, 1998, the Bank had total capital of $15.4 million
(including $15.2 million in core capital and $258,000 in qualifying
supplementary capital) and risk-weighted assets of $49.1 million; or total
capital of 31.4% of risk-weighted assets. This amount was $11.5 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 the
Bank may have a substantial adverse effect on the Bank's 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 the Bank, 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. The Bank 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 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
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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 the Bank, 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 the Bank
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, 1998, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 36.2% and a short-term
liquid assets ratio of 35.8%.
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, 1998, the Bank met the test with 89.2% of its portfolio assets in
qualified thrift investments and has always met the test since its
effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
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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, 1998, 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, 1998, PS Financial had $1.3 million 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 6.56% and were 6.64% for
calendar year 1998. As a result of their holdings, the Company could borrow up
to $26.4 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, 1998, dividends paid by the FHLB of
Chicago to Ps financial totaled $71,318, which constitute a $40,855 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 $1.5 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 33. Mr. Przybyl is currently serving as Chief
Financial Officer of the Company and the Bank, a position he has held since
1993. As Chief Financial Officer, Mr. Przybyl is responsible for overseeing the
accounting and financial reporting functions of the Company and the Bank.
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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 $288,000 at December 31,
1998. At December 31, 1998, 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 $425,000. 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, 1998 was
approximately $20,000.
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, 1998.
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PART II
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Item 5. Market for Common Equity and Related Stockholder Matters
Page 45 of the Company's 1998 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 1998 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, 1998, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.
Pages in
Annual Report Section Annual Report
Selected Consolidated Financial Information 2-3
Management's Discussion and Analysis of Financial 5-20
Condition and Results of Operations
Report of Independent Auditors 21
Consolidated Statements of Financial Condition as of December 31, 22
1998 and 1997
Consolidated Statements of Income for the Years 23
Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' 24-25
Equity for the Years Ended December 31, 1998,
1997 and 1996
Consolidated Statements of Cash Flows for the 26-27
Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 28-48
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended December 31, 1998, 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.
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PART III
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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, 1998, 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, 1998, 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, 1998, 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,
1998, a copy of which will be filed not later than 120 days after the close of
the fiscal year.
44
<PAGE>
PART IV
- -------
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits
Reference to
Regulation Prior Filing or
S-K Exhibit Exhibit Number
Number Document Attached Hereto
- --------------------------------------------------------------------------------
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3 (a) Articles of Incorporation *
3 (b) By-Laws *
4 Instruments defining the rights of security holders, *
including debentures
9 Voting Trust Agreement None
10 Material contracts None
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 None
authorities
99 Additional Exhibits None
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,
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PS FINANCIAL, INC.
Date: March 31, 1998 By: Kimberly P. Rooney
------------------ ----------------------------------
Kimberly P. Rooney (Duly
Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: /s/ Kimberly P. Rooney By: /s/ 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: /s/ Edward Wolak By: /s/ L. G. Ptak
--------------------------------- ---------------------------------
Edward Wolak, Director L.G. Ptak, Director and Secretary
Date: March 31, 1998 Date: March 31, 1998
-------------------- --------------------
By: /s/ Rocco Di Iorio By: /s/ Jeanine M. McInerney
--------------------------------- ---------------------------------
Rocco Di Iorio Director Jeanine M. McInerney, Director
Date: March 31, 1998 Date: March 31, 1998
-------------------- --------------------
By: /s/ Jeffrey Przybyl
---------------------------------
Jeffrey Przybyl, Treasurer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 31, 1998
--------------------
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
President's Message 1
Selected Consolidated Financial Information 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
Report of Independent Auditors 21
Consolidated Financial Statements 22
Stockholder Information 49
<PAGE>
- --------------------------------------------------------------------------------
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
March 16, 1999
To Our Fellow Stockholders:
On behalf of your Directors, Officers and Employees of PS Financial,
Inc., and its wholly owned subsidiary, Preferred Savings Bank FSB, it is with
pleasure that I present to our stockholders our third annual report as a public
corporation.
PS Financial, Inc. enjoyed a successful 1998 fiscal year with earnings
of $1.5 million. One of our goals for fiscal 1998 was to increase our return on
equity. We are pleased to report that our return on equity for 1998 was 6.69%,
as compared to 2.97% for the fiscal year ending December 31, 1997. In addition,
our return on average assets for 1998 was 1.66 %, near the top of industry peer
group standards, while our efficiency ratio was 39.25%.
Since the conversion, the Company has been focusing on ways to enhance
shareholder value, including the payment of cash dividends and the continuation
of a stock repurchase program. In 1998, PS Financial, Inc. continued to pay
quarterly dividends. The first three dividends of $0.12 per share were paid in
February, May and August and a dividend of $0.13 per share was paid in November.
The company completed two share repurchases in 1998, and was in the process of
an additional share repurchase as of December 31, 1998. In all, 230,320 share
were repurchased during 1998. In view of the price level of the Company's common
stock and the strong capital position of the bank, subject to regulatory
limitations, the Board of Directors believes the stock repurchase program to be
in the best interests of the Company as we continue to work on leveraging our
capital.
The Company is pleased to report the positive direction our institution
has taken over the past year in nearly every phase of our operation.
Specifically, our loan portfolio grew from $37.2 million in 1997 to $56.8
million in 1998. During the same time, deposit growth reflected a $14.2 million
increase.
As a way to increase the amount and variability of the products and
services our Company can offer, PS Financial Inc. has retained a new data
processor beginning in February of l999. One of the exciting new changes we will
be instituting in the first half of 1999 is the introduction of our first ATM
machine.
The next fiscal year continues to offer many challenges and
opportunities for PS Financial, Inc. Customer service remains our top priority.
We can still effectively compete against our larger regional competitors by
enhancing existing customer relationships and building new ones. Furthermore,
the size of the Bank and knowledge of the market area allow us to react quickly
to changing customer needs. The Company continues in a positive direction due to
the dedication and competency of the directors, officers and staff, whom we wish
to thank.
Our plans for the future include continued enhancement of stockholder
value. The Management and Directors of PS Financial, Inc. remain committed to
ensure that your investment in the Company will continue to be a sound
investment.
Sincerely,
Kimberly P Rooney
President
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
Set forth below are selected consolidated financial and other data of
the Company. The financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements and Notes of the Company
presented elsewhere in this Annual Report.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ------------- ------------- -------------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $102,784 $87,922 $75,133 $53,520 $51,619
Cash and cash equivalents 4,237 6,290 8,758 3,754 1,429
Loans receivable, net (1): 56,822 37,167 35,943 34,525 32,890
Mortgage-backed securities:
Held to maturity -- -- -- -- 1,792
Available for sale 11,354 8,095 4,702 4,220 1,694
Securities:
Held to maturity -- -- -- -- 201
Available for sale 27,596 33,459 24,080 9,739 7,326
Deposits 55,429 41,275 42,203 41,047 40,057
FHLB Advances 23,764 13,750 -- -- --
Total stockholders' equity 21,026 23,109 32,147 11,724 10,512
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ------------- ------------- -------------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income $6,757 $6,062 $4,664 $4,268 $3,854
Total interest expense 3,101 2,084 1,781 1,632 1,310
----- ----- ----- ----- -----
Net interest income 3,656 3,978 2,883 2,636 2,544
Provision for loan losses(1) 80 -- 50 -- 42
-- -- -- -- --
Net interest income after provision
for loan losses 3,576 3,978 2,833 2,636 2,502
Fees and service charges 94 77 69 58 76
Gain (loss) on sales of securities 43 -- (38) -- (365)
-- -- ---- -- -----
Total non-interest income 137 77 31 58 (289)
Total non-interest expense 1,489 2,186 1,233 1,009 838
----- ----- ----- ----- ---
Income before taxes 2,224 1,869 1,631 1,685 1,375
Income tax provision 724 947 629 630 617
--- --- --- --- ---
Net income $1,500 $922 $1,002 $1,055 $758
====== ==== ====== ====== ====
Diluted earnings per share $0.82 $0.46 $0.06(2) NA NA
===== ===== =====
<FN>
(1) The allowance for loan losses at December 31, 1998, 1997, 1996, 1995 and
1994 was $258,000, $186,000, $186,000, $136,000 and $136,000, respectively.
(2) From date of initial public offering, November 26, 1996.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to average total assets) 1.66% 1.12% 1.71% 1.99% 1.46%
Return on equity (ratio of net income to average total equity) 6.69 2.97 6.55 9.42 7.53
Interest rate spread information:
Average during period 2.95 3.23 3.89 4.26 4.38
End of period 2.74 2.92 3.3 3.71 4.26
Net interest margin (1) 4.14 5.01 5.03 5.13 5.03
Efficiency Ratio (2) 39.25 53.92 42.3 37.45 37.15
Ratio of operating expense to average total assets 1.65 2.67 2.1 1.91 1.61
Ratio of average interest-earning assets to average interest-bearing 135.19 167.82 136.86 127.21 125.08
liabilities
Quality Ratios:
Non-performing assets to total assets at end of period 0.94 1.71 0.37 1.45 0.65
Allowance for loan losses to non-performing loans 26.71 20.84 65.96 17.55 40.72
Allowance for loan losses to total loans 0.45 0.50 0.51 0.39 0.41
Capital Ratios:
Equity to total assets at end of period 20.45 26.28 42.79 21.91 20.36
Average equity to average assets 24.84 37.94 26.06 21.18 19.32
Regulatory Capital Ratios: (3)
Total capital -- -- -- 59.05 54.32
Tier 1 capital -- -- -- 58.37 52.79
Leverage ratio -- -- -- 22.19 20.29
Tangible capital 15.40 25.86 32.77 -- --
Core capital 15.40 25.86 32.77 -- --
Risk-based capital 31.40 65.39 92.91 -- --
</TABLE>
(1) Net interest income divided by average interest earning assets.
(2) The efficiency ratio represents noninterest expense as a percent of net
interest income and noninterest income before provision for loan losses.
(3) 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
PS Financial, Inc. (the "Company") is a Delaware corporation. The
Company is 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, the date of the Company's public offering and
the date the Company became the holding company of the Bank, relates to
consolidated information of the Company and the Bank. Financial and other
information prior to November 26, 1996, relates only to the Bank.
The Company is a financial intermediary engaged primarily in attracting
deposits from the general public and using such deposits to originate one- to
four- family residential mortgage and, to a significantly lesser extent,
multi-family, commercial real estate, construction and consumer loans primarily
in its market area. The 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 offered.
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, 1998 and December 31, 1997
Total assets at December 31, 1998 were $102.8 million compared to $87.9
million at December 31, 1997, an increase of $14.9 million, or 17.0%. The
increase was primarily the result of an increase in the loan portfolio of $19.6
million, funded by increases in FHLB advances of $10.0 million and deposits of
$14.1 million, partially offset by the payment of the special dividend of $7.5
million in January 1998. Securities available-for-sale decreased $5.9 million
from $33.5 million at December 31, 1997 to $27.6 million at December 31, 1998.
Interest-bearing deposits decreased $2.0 million from $5.8 million at December
31, 1997 to $3.8 million at December 31, 1998.
In order to increase the size of the loan portfolio, the Company has
utilized the services of an area mortgage broker who receives a fee for each
mortgage originated for the Company. The broker serves the same market area as
the Company, and the loans share the same characteristics of the Company's
existing loans. During 1998, the Company originated $17.9 million loans through
this broker. Because all of these loans carry fixed interest rates, the
Company's interest rate risk has increased as a result of the purchases. See
"Quantitative and Qualitative Disclosures About Market Risk".
5
<PAGE>
Total liabilities at December 31, 1998 were $81.8 million compared to
$64.8 million at December 31, 1997, an increase of $17.0 million, or 26.2%.
Total deposits increased by $14.1 million from $41.3 million at December 31,
1997 to $55.4 million at December 31, 1998 due to an increase in time deposits
as a result of an increase in marketing. The decrease of $7.3 million in other
liabilities was due mainly to the payment of the $4.00 per share special
dividend which totaled $7.5 million. In order to provide for additional
liquidity to fund the payment of the special dividend in January, 1998 and the
increase in the loan portfolio, the Company increased FHLB advances to $23.8
million at December 31, 1998 from $13.8 million at December 31, 1997.
Total equity at December 31, 1998 was $21.0 million compared to $23.1
million at December 31, 1997, a decrease of $2.1 million, or 9.1% as a result of
the repurchase of 230,320 shares of treasury stock at an aggregate price of $2.9
million and regular dividends of $877,000, or $0.49 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, 1998 and
December 31, 1997
General. Net income for the year ended December 31, 1998 was $1.5
million, an increase of $579,000, or 62.9%, from net income of $921,000 for the
year ended December 31, 1997. The increase was primarily a result of the absence
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 in 1997. Also contributing to the
increase in net income was an increase of $43,000 in gains on sale of
securities. This was partially offset by an increase in compensation and
benefits of $303,000 due to a full year of RRP expenses and a decrease in net
interest income of $322,000 due to a reduction in average interest earning
assets resulting from the payment of the special dividend.
Interest Income. Interest income for the year ended December 31, 1998
was $6.8 million compared to $6.1 million for the year ended December 31, 1997,
an increase of $700,000, or 11.5%. The increase in interest income was the
result of an increase in the average balance of interest-earning assets from
$79.5 million for the year ended December 31, 1997 to $88.8 million for the year
ended December 31, 1998. The increase in the average balance of interest-earning
6
<PAGE>
assets was largely a result of an $11.4 million increase in the average loans
receivable partially offset by a $5.5 million decrease in the average balance of
securities. The average yield on interest-earning assets decreased from 7.63%
for the year ended December 31, 1997 to 7.61% for the year ended December 31,
1998. This was largely a result of a decrease in the yield on mortgage loans
from 8.99% for the year ended December 31, 1997 to 8.54% for the year ended
December 31, 1998 due to a general decline in loan rates, as well as a decrease
in the yield on securities and mortgage-backed securities of 66 basis points.
Interest Expense. Interest expense for the year ended December 31, 1998
was $3.1 million compared to $2.1 million for the year ended December 31, 1997,
an increase of $1.0 million, or 47.6%. The increase in interest expense was a
result of an increase in average interest-bearing liabilities from $47.4 million
for the year ended December 31, 1997 to $65.4 million for the year ended
December 31, 1998 combined with an increase in the average cost of funds from
4.40% for the year ended December 31, 1997 to 4.74% for the year ended December
31, 1998. The increase in the average cost of funds was primarily the result of
the increased use of FHLB advances at higher rates than the bank deposit rates
and an increase in the ratio of time deposits to total deposits.
Net Interest Income. Net interest income for the year ended December
31, 1998 was $3.7 million compared to $4.0 million for the year ended December
31, 1997, a decrease of $300,000 million, or 7.5%. Although the Company's use of
borrowings to increase its financial leverage contributes to net interest
income, because its cost of borrowings was significantly higher than the cost of
the Company's other liabilities, the utilization of borrowings had the effect of
reducing the Company's net interest spread. The decrease in net interest income
was a result of a decrease in the ratio of average interest-earning assets to
average interest-bearing liabilities from 167.82% for the year ended December
31, 1997 to 135.19% for the year ended December 31, 1998.
Provision for Loan Losses. The Company recorded an $80,000 provision
for loan losses for the year ended December 31, 1998 compared to no provision
for the year ended December 31, 1997, due to the increase in the loan portfolio
in 1998. At December 31, 1998, the Company's allowance for losses totaled
$258,000, or .45% of total loans and 25.10% 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, 1998 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.
7
<PAGE>
Noninterest Income. Noninterest income for the year ended December 31,
1998 was $137,000 compared to $77,000 for the year ended December 31, 1997, an
increase of $60,000, or 77.9%. The increase was primarily a result of gains on
sales of securities of $43,000 for the year ended December 31, 1998 compared to
nominal losses for the year ended December 31, 1997. This was partially aided by
an increase in service fees collected of $17,000.
Noninterest Expense. Noninterest expense was $1.5 million for the year
ended December 31, 1998 compared to $2.2 million for the year ended December 31,
1997, a decrease of $700,000, or 31.8%. The decrease was primarily a result of
the absence of the additional ESOP expense incurred in 1997 due to the
declaration of the $4.00 per share special dividend in that year. 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. The decrease was partially offset by an increase in other
compensation and benefits, due to the full year of RRP expense, of $303,000.
Income Tax Expense. The provision for income taxes totaled $724,000 for
the year ended December 31, 1998 compared to $947,000 for the year ended
December 31, 1997. The decrease was a result of an increase in interest income
from municipal securities, which are tax exempt for federal tax purposes.
Comparison of Operating Results for the Years Ended December 31, 1997 and
December 31, 1996
General. Net income for the year ended December 31, 1997 was $921,000,
a decrease of $79,000, or 7.9%, from net income of $101 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, 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, 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
8
<PAGE>
interest-earning assets decreased from 8.31% for the year ended December 31,
1995 to 8.14% for the year ended December 31, 1996. This was largely a result of
a decrease in the yield on securities from 7.05% for the year ended December 31,
1995 to 6.54% for the year ended December 31, 1996 due to securities with higher
interest rates being called during 1996 combined with a decrease in the yield on
other earning assets of 99 basis points.
Interest Expense. Interest expense for the year ended December 31, 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.
9
<PAGE>
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 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.
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,
-----------------------------------------------------------------------------------------------
1998 1997 1996 1995
----------------------- ----------------------- ----------------------- -----------------------
Average Average Average Average
Out- Interest Out- Interest Out- Interest Out- Interest
standing Earned/ Yield/ standing Earned/ Yield/ standing Earned/ Yield/ standing Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans Receivable (1) $47,509 $4,055 8.54% $36,066 $3,244 8.99% $35,608 $3,331 9.35% $34,131 $3,156 9.25%
Securities (2) 26,399 1,739 6.59 31,926 2,046 6.41 11,947 781 6.54 9,250 652 7.05
Equity securities 1,668 150 8.98 --- --- --- --- --- --- --- --- ---
Mortgage-Backed Securities 8,726 603 6.90 7,930 567 7.15 4,460 275 6.17 3,549 186 5.24
Other 4,469 210 4.70 3,548 205 5.78 5,295 277 5.23 4,407 274 6.22
----- --- ----- --- ----- --- ----- ---
Total interest-earning
assets $88,771 6,757 7.61% $79,470 6,062 7.63% $57,310 4,664 8.14% $51,337 4,268 8.31%
======= ===== ======= ===== ======= ===== ======= =====
Interest-Earning
Liabilities:
Passbook savings $20,412 589 2.88 $21,117 638 3.02 $21,559 690 3.20 $21,512 649 3.02
Certificate accounts 24,793 1,339 5.40 20,565 1,103 5.36 20,317 1,091 5.36 18,843 983 5.22
FHLB Advances 20,154 1,173 5.82 5,673 343 6.05 --- --- --- --- --- ---
------ ----- ----- --- --- ---
Total interest-bearing
liabilities $65,359 3,101 4.74 $47,355 2,084 4.40 $41,876 1,781 4.25 $40,355 1,632 4.05
======= ===== ---- ======= ===== ---- ======= ===== ---- ======= ===== ----
Net interest income $3,656 $3,978 $2,883 $2,636
====== ====== ====== ======
Net interest rate spread 2.87 3.23 3.89 4.26
==== ==== ==== ====
Net earning assets $23,412 $32,115 $15,434 $10,982
======= ======= ======= =======
Net yield on average
interest- earning assets 4.12% 5.01% 5.03% 5.13%
==== ==== ==== ====
Average interest-earning
assets to average 135.82% 167.82% 136.86% 127.21%
interest-bearing liabilities ====== ====== ====== ======
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loan in process and
loss reserves.
(2) Calculated based on amortized cost.
</FN>
</TABLE>
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,
-------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on:
Loans receivable 7.99% 8.49% 8.57%
Mortgage-backed securities 6.06 6.87 6.84
Securities 6.90 7.01 6.05
Other interest-earning assets 4.73 5.55 6.53
Combined weighted average yield on interest-earning assets 7.33 7.24 7.41
Weighted average rate paid on:
Passbook savings deposits 2.50 3.01 3.01
Certificate accounts 5.32 5.50 5.31
FHLB Advances 5.48 6.05 ---
Combined weighted average rate paid on interest-bearing liabilities 4.61 4.71 4.11
Spread 2.72 2.53 3.30
<FN>
(1) Excluding amortization of deferred loan fees.
</FN>
</TABLE>
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,
1997 vs. 1998 1996 vs. 1997
---------------------------- ---------------------------
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 $ 984 ($173) $ 811 $42 ($129) ($87)
Securities 55 (19) 36 1,281 (16) 1,265
Mortgage-backed securities (363) 56 (307) 242 50 292
Equity securities 150 0 150 0 0 0
Other 47 (42) 5 (99) 27 (72)
------ ----- ------ ---- -- ----
Total interest-earning assets $873 ($178) $ 695 $1,466 ($68) $1,398
====== ===== ====== ====== ===== ======
Interest-bearing liabilities:
Passbook savings deposits ($21) ($28) ($49) ($14) ($38) ($52)
Certificate accounts 228 8 236 13 (1) 12
FHLB Advances 843 (13) 830 343 0 343
------ ----- ------ --- - ---
Total interest-bearing liabilities $1,050 ($33) 1,017 $342 ($39) 303
====== ===== ------ ==== ===== ---
Net interest income ($322) $1,095
===== ======
</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 reviews 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.
The Company's interest rate risk increased during the twelve months
ended December 31, 1998 due to the large increase in fixed rate loans, funded by
fixed rate time deposits and FHLB advances. However, 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, 1998, $39.6 million or 89.7% 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 has maintained a mortgage-backed
securities portfolio with adjustable-rates. At December 31, 1998, adjustable
rate mortgage-backed securities totaled $9.1 million which represented 9.0% of
interest-earning assets. Fourth, 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.
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. Investments generally include
interest-bearing deposits in other federally insured financial institutions,
FHLB stock, U.S. Government securities and municipal securities.
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
14
<PAGE>
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 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 tables set
forth, at December 31, 1997 and 1998, 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).
December 31, 1998
- ----------------------------------------------------------------------
Estimated Increase
Change in Interest Estimated Ratio of NPV (Decrease) in NPV
Rates NPV to ---------------------
(Basis Points) Amount Total Assets Amount Percent
- ------------------- ------------ -------------- ---------- ---------
+400 $9,915 11% ($9,837) (50)%
+300 12,327 13 (7,425) (38)
+200 14,828 15 (4,924) (25)
+100 17,313 17 (2,439) (12)
--- 19,752 19 --- ---
-100 22,419 21 2,667 14
-200 25,427 23 5,675 29
-300 28,833 25 9,082 32
-400 32,488 27 12,737 64
December 31, 1997
- ----------------------------------------------------------------------
Estimated Increase
Change in Interest Estimated Ratio of NPV (Decrease) in NPV
Rates NPV to ---------------------
(Basis Points) Amount Total Assets Amount Percent
- ------------------- ------------ -------------- ---------- ---------
+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
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
15
<PAGE>
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. The Company
generally manages the pricing of its deposits to be competitive and increase
core deposit relationships.
Federal regulations require the 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. The Bank has historically maintained its liquidity ratio for
regulatory purposes at levels in excess of those required. At December 31, 1998,
the Bank's liquidity ratio for regulatory purposes was 36.2%.
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 $1.8
million, $1.9 million and $869,000 for the years ended December 31, 1998, 1997,
and 1996, 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
16
<PAGE>
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 $2.9 million and $3.2 million for the years ended
December 31, 1998 and 1997, respectively, proceeds from FHLB advances totaling
$10.0 million and $13.8 million for the years ended December 31, 1998 and 1997,
as well as payment of the special dividend of $8.4 million for the year ended
December 31, 1998. The net increase (decrease) in deposits was $14.1 million,
($1.0) million and $1.2 million for the years ended December 31, 1998, 1997, and
1996, 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, 1998,
cash and short-term investments totaled $4.2 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, 1998, the Company had outstanding commitments to
originate loans of $1.9 million, 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, 1998 totaled $26.8 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. The Company adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-earning deposits and investment
securities, and (iv) the objectives of its asset/liability management program.
Excess liquidity is invested generally in interest-earning overnight deposits
and short-and intermediate-term U.S. Government and agency obligations and
mortgage-backed securities of short duration. If the Bank requires funds beyond
its ability to generate them internally, it has additional borrowing capacity
with the FHLB of Chicago.
The Bank is subject to various regulatory capital requirements imposed
by the OTS. At December 31, 1998, the Bank was in compliance with all applicable
capital requirements on a fully phased-in basis. See Note 9 of the Notes to the
Consolidated Financial Statements.
The Company'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. The Company 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.
17
<PAGE>
Impact of New Accounting Standards
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.
Comprehensive income is now reported for all periods. Comprehensive
income includes both net income and other comprehensive income. Other
comprehensive income includes the change in unrealized gains and losses on
securities available for sale.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about
Segments of an Enterprise and Related Information". The statement establishes
standards for the way that public business enterprises report information about
operating segments and certain other information in annual financial statements
and requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement is
effective for financial statements for periods beginning after December 15,
1997. The Company adopted SFAS No. 131 on January 1, 1998 and required
disclosures will be included beginning with the Company's 1998 Annual Report.
The Company operates as a single segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e. gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposure to change in fair value, cash flows, or foreign currencies. If
the hedged exposure is a fair value exposure, the gain or loss on the derivative
instrument is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item attributable to the risk being
hedged. If the hedged exposure is a cash flow exposure, the effective portion of
the gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amount excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to accounting for fair value
and cash flow hedges. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of change. This
Statement will have no effect on the Company.
18
<PAGE>
Year 2000
As the year 2000 approaches, a significant business issue has emerged
regarding how existing application software programs and operating systems can
accommodate the date value for the year 2000. Many existing software application
products, including software application products used by the Bank and its
suppliers and customers, were designed to accommodate only a two-digit date
value, which represents the year. For example, information relating to the year
1996 is stored in the system as "96". As a result, the year 1999 (i.e. "99")
could be the maximum date value that these systems will be able to process
accurately. In response to concerns about this issue, regulatory agencies have
begun to monitor holding companies' and banks' readiness for the year 2000 as
part of the regular examination process. The Company presently believes that
with modification to existing software, conversion to new software, and
conversion to a new third party data processor, the year 2000 issue will not
pose significant operational problems for the Company's computer systems or
business operations. Implementation of the Company's plan to test in-house and
out-sourced software has been underway since the first quarter of 1998. Testing
of applications considered to be "mission critical" are scheduled for completion
by second quarter of 1999. Total compliance of all systems is expected by
management to be completed by the third quarter of 1999; management currently
estimates that such compliance will cost $15,000. The team for the plan is
responsible for the implementation of the plan and reports to the Company's
Board of Directors on a quarterly basis until December 1998 and on a monthly
basis thereafter until the plan is completed. However, if such modifications and
conversions are not made, or are not completed timely, the year 2000 issue could
have a material adverse impact on the operations of the Company. In addition,
there can be no assurance that unforeseen problems in the Company's computer
systems, or the systems of third parties on which the Company's computers rely,
will not have an adverse effect on the Company's systems or operations.
Additionally, failure of the Bank's customers' to prepare for year 2000
compatibility could have a significant adverse effect on such customer's
operations and profitability, thus inhibiting their ability to repay loans and
adversely affecting the Bank's operations. The Company does not have sufficient
information accumulated from customers of the Bank to enable the Company to
assess the degree to which customers' operations are susceptible to potential
problems relating to the year 2000 issue.
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 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.
19
<PAGE>
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.
.
20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
PS Financial, Inc.
Chicago, Illinois
We have audited the accompanying consolidated statements of financial condition
of PS Financial, Inc. and its wholly-owned subsidiary as of December 31, 1998
and 1997 and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. 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, 1998 and 1997 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 29, 1999
21
<PAGE>
<TABLE>
<CAPTION>
PS FINANCIAL, INC.
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
(In thousands, except share and per share data)
- --------------------------------------------------------------------------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash on hand and in banks $ 448 $ 441
Interest-bearing deposit accounts in other financial
institutions 3,789 5,849
---------- ---------
Total cash and cash equivalents 4,237 6,290
Interest-bearing term deposits in other financial
institutions 159 209
Securities available-for-sale 27,596 33,459
Mortgage-backed securities available-for-sale 11,354 8,095
Loans receivable, net 56,822 37,167
Federal Home Loan Bank stock 1,319 700
Premises and equipment, net 426 458
Accrued interest receivable 803 801
Other assets 68 743
---------- ---------
Total assets $ 102,784 $ 87,922
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 55,429 $ 41,275
Advances from borrowers for taxes and insurance 578 498
Advances from the Federal Home Loan Bank 23,764 13,750
Deferred income taxes 418 182
Accrued interest payable and other liabilities 1,569 1,580
Accrued dividends payable - 7,528
---------- ---------
Total liabilities 81,758 64,813
Stockholders' equity
Common stock $ 0.01 par value per share, 2,500,000
shares authorized; 2,182,125 shares issued 22 22
Additional paid-in capital 21,638 21,602
Unearned ESOP shares (1,077) (1,173)
Unearned stock awards (941) (1,117)
Retained earnings, substantially restricted 6,141 5,518
Treasury stock, at cost, 338,737 shares in 1998 and
108,417 shares in 1997 (4,759) (1,896)
Accumulated other comprehensive income 2 153
---------- ---------
Total stockholders' equity 21,026 23,109
---------- ---------
Total liabilities and stockholders' equity $ 102,784 $ 87,922
========== =========
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997, and 1996
(In thousands, except share and per share data)
- --------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans $ 4,055 $ 3,244 $ 3,331
Securities 1,739 2,046 781
Dividend income on equity investments 150 - -
Mortgage-backed securities 603 568 275
Other interest-earning assets 210 204 277
-------- --------- --------
Total interest income 6,757 6,062 4,664
Interest expense
Deposits 1,928 1,741 1,781
Federal Home Loan Bank advances 1,173 343 -
-------- --------- --------
Total interest expense 3,101 2,084 1,781
-------- --------- --------
Net interest income 3,656 3,978 2,883
Provision for loan losses 80 - 50
-------- --------- --------
Net interest income after provision for
loan losses 3,576 3,978 2,833
Noninterest income
Gain (loss) on sale of securities 43 - (38)
Other operating income 94 77 69
-------- --------- --------
Total noninterest income 137 77 31
Noninterest expense
Compensation and benefits 994 1,672 550
Occupancy and equipment expense 123 125 113
Data processing services 60 54 47
Federal deposit insurance premiums 26 27 90
SAIF special assessment - - 245
Professional fees 88 97 29
Other operating expense 198 212 159
-------- --------- --------
Total noninterest expense 1,489 2,187 1,233
-------- --------- --------
Income before income tax expense 2,224 1,868 1,631
Income tax expense 724 947 629
-------- --------- --------
Net income $ 1,500 $ 921 $ 1,002
======== ========= ========
Basic earnings per share $ .83 $ .47 $ .06
========= ========= =========
Diluted earnings per share $ .82 $ .46 $ .06
========= ========= =========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
PS FINANCIAL, INC.
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997, and 1996
(In thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Unearned Unearned Other Total
Common Paid-in ESOP Stock Retained Treasury Comprehensive Stockholders' Comprehensive
Stock Capital Shares Awards Earnings Stock Income Equity Income
-------- ----------- -------- -------- ---------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ - $ - $ - $ - $ 11,667 $ - $ 57 $ 11,724
Comprehensive income
Net income - - - - 1,002 - - 1,002 $ 1,002
Change in fair value of
securities, net of
reclassification and
tax effects - - - - - - (80) (80) (80)
--------
Total comprehensive
income $ 922
========
Issuance of common stock, net
of conversion costs of $639 22 21,160 (1,746) - - - - 19,436
ESOP shares released - 10 55 - - - - 65
--- ------- ------ ---- ------ ----- ----- -------
Balance at December 31, 1996 22 21,170 (1,691) - 12,669 - (23) 32,147
Comprehensive income
Net income - - - - 921 - - 921 $ 921
Change in fair value
of securities, net of
reclassification and
tax effects - - - - - - 176 176 176
--------
Total comprehensive
income $ 1,097
========
Purchase of treasury stock - - - - - (3,173) - (3,173)
ESOP shares released - 487 518 - - - - 1,005
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31,1998, 1997, and 1996
(In thousands, except share and per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Unearned Unearned Other Total
Common Paid-in ESOP Stock Retained Treasury Comprehensive Stockholders' Comprehensive
Stock Capital Shares Awards Earnings Stock Income Equity Income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock awards issued $ - $ (55) $ - $ (1,222) $ - $ 1,277 $ - $ -
Stock awards earned - - - 105 - - - 105
Dividends declared
($4.28 per share) - - - - (8,072) - - (8,072)
---- -------- -------- -------- -------- -------- -------- ---------
Balance at
December 31, 1997 22 21,602 (1,173) (1,117) 5,518 (1,896) 153 23,109
Comprehensive income
Net income - - - - 1,500 - - 1,500 $ 1,500
Change in fair value
of securities, net of
reclassification and
tax effects - - - - - - (151) (151) (151)
--------
Total comprehensive
income $ 1,349
========
Purchase of treasury stock - - - - - (2,863) - (2,863)
ESOP shares released - 36 96 - - - - 132
Stock awards earned - - - 176 - - - 176
Dividends declared
($.49 per share) - - - - (877) - - (877)
---- -------- -------- -------- -------- -------- -------- ---------
Balance at
December 31, 1998 $ 22 $ 21,638 $ (1,077) $ (941) $ 6,141 $ (4,759) $ 2 $ 21,026
==== ======== ======== ======== ======== ======== ======== =========
</TABLE>
<PAGE>
25
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
(Continued)
- ---------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997, and 1996
(In thousands)
- ---------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,500 $ 921 $ 1,002
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 47 46 33
Amortization of discounts and premiums on securities 4 34 22
Provision for loan losses 80 - 50
Net (gain) loss on sale of securities
available-for-sale (43) - 38
ESOP compensation expense 132 1,005 65
Stock awards expense 176 105 -
Change in
Deferred loan origination fees (70) (50) (55)
Accrued interest receivable and other assets 673 (294) (352)
Other liabilities and deferred income taxes (741) 176 66
-------- --------- --------
Net cash from operating activities 1,758 1,943 869
Cash flows from investing activities
Proceeds from sales of securities available-for-sale 4,716 14,990 -
Proceeds from sale of mortgage-backed securities
available-for-sale 1,083 1,671 1,283
Purchase of Federal Home Loan Bank stock (619) (338) (21)
Proceeds from repayments of securities 2,787 1,186 673
Proceeds from maturities of securities 19,380 11,650 6,500
Purchase of securities available-for-sale (17,293) (35,339) (21,011)
Purchase of mortgage-backed securities available-for-sale (7,215) (6,180) (2,458)
Net decrease in interest-bearing term deposits in other
financial institutions 50 39 -
Net increase in loans (19,665) (1,173) (1,414)
Capital expenditures, net (15) (43) (27)
-------- --------- --------
Net cash from investing activities (16,791) (13,537) (16,475)
Cash flows from financing activities
Net increase (decrease) in deposits 14,154 (928) 1,156
Net increase in advances from borrowers for
taxes and insurance 80 21 18
Advances from the Federal Home Loan Bank 10,014 13,750 -
Purchase of treasury stock (2,863) (3,173) -
Dividends paid (8,405) (544)
Net proceeds from stock issuance - - 19,436
-------- --------- --------
Net cash from financing activities 12,980 9,126 20,610
-------- --------- --------
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997, and 1996
(In thousands)
- -----------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net change in cash and cash equivalents $ (2,053) $ (2,468) $ 5,004
Cash and cash equivalents, beginning of year 6,290 8,758 3,754
-------- --------- --------
Cash and cash equivalents, end of year $ 4,237 $ 6,290 $ 8,758
======== ========= ========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 2,966 $ 2,004 $ 1,789
Income taxes 1,045 707 631
Supplemental schedule of noncash investing activities
Amount due to broker for purchase of securities 1,558 499 -
Dividends declared - 7,528 -
</TABLE>
27
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
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.
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 than the recorded investment in the loan, although collection efforts
continue and future recoveries may occur.
28
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 whether 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.
29
<PAGE>
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: Amounts reported as basic earnings per share 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
was 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.
30
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Statement of Cash Flows: For the purpose of this statement, cash and cash
equivalents are defined to include the Company's cash on hand, demand balances,
and interest-bearing deposits with other financial institutions and investments
in certificates of deposit with maturities of less than three months.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available-for-sale which are also recognized as separate
components of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate footnote. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
NOTE 2 - SECURITIES
Securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------
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 $ 14,840 $ 120 $ (9) $ 14,951
Municipal securities 9,377 81 (91) 9,367
Equity securities 3,407 7 (136) 3,278
-------- -------- ------- --------
27,624 208 (236) 27,596
Mortgage-backed securities available-for-sale
Federal Home Loan Mortgage Corporation 3,513 31 - 3,544
Federal National Mortgage Association 4,756 12 (11) 4,757
Government National Mortgage Association 3,054 8 (9) 3,053
-------- -------- ------- --------
11,323 51 (20) 11,354
-------- -------- ------- --------
$ 38,947 $ 259 $ (256) $ 38,950
======== ======== ======= ========
</TABLE>
31
<PAGE>
NOTE 2 - SECURITIES (Continued)
<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 $ 143 $ (13) $ 33,459
-------- -------- ------- --------
Mortgage-backed securities available-for-sale
Federal Home Loan Mortgage Corporation 3,781 44 - 3,825
Federal National Mortgage Association 3,640 64 - 3,704
Government National Mortgage Association 557 9 - 566
-------- -------- ------- --------
7,978 117 - 8,095
-------- -------- ------- --------
$ 41,307 $ 260 $ (13) $ 41,554
======== ======== ======= ========
</TABLE>
The Bank holds $500,000 of U.S. government agency bonds which are structured
notes issued by the Federal Home Loan Bank at December 31, 1998 and 1997.
Sales of securities are summarized as follows:
For the Year Ended December 31,
---------------------------------------
1998 1997 1996
----------- ---------- --------------
Proceeds from sales $ 5,799 $ 16,661 $ 1,283
Gross realized gains 43 14 -
Gross realized losses - (14) (38)
Contractual maturities of securities available-for-sale at December 31, 1998
were as follows. Securities not due at a single maturity date, primarily
mortgage-backed and equity securities, are shown separately.
December 31, 1998
------------------------
Amortized Fair
Cost Value
------------ ----------
Securities available-for-sale
Due after five years through ten years $ 16,997 $ 16,689
Due after ten years 7,220 7,629
Equity securities 3,407 3,278
Mortgage-backed securities 11,323 11,354
--------- ---------
$ 38,947 $ 38,950
========= =========
32
<PAGE>
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following at:
December 31,
------------------------
1998 1997
---------- ------------
First mortgage loans
Principal balances
Secured by one-to-four-family residences $ 44,297 $ 29,129
Secured by other properties 8,006 5,636
Secured by commercial real estate 5,135 2,953
Construction loans - 67
--------- ---------
57,438 37,785
Less net deferred loan origination fees (373) (443)
--------- ---------
First mortgage loans, net 57,065 37,342
Share loans 15 11
Less allowance for loan losses (258) (186)
--------- ---------
$ 56,822 $ 37,167
========= =========
The principal balance of loans greater than 90 days delinquent on nonaccrual
status at December 31, 1998 and 1997 was approximately $777,000 and $905,000,
respectively. The interest income that would have been recorded under the
original terms of such loans approximated $70,000 and $40,000 for the years
ended December 31, 1998 and 1997, respectively.
The Bank did not have any impaired loans for the years ended December 31, 1998
and 1997.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
For the Year Ended
December 31,
-----------------------------------
1998 1997 1996
----------- ----------- ---------
Balance, beginning of year $ 186 $ 186 $ 136
Provision for loan losses 80 - 50
Charge-offs (19) - -
Recoveries 11 - -
--------- --------- ---------
Balance, end of year $ 258 $ 186 $ 186
========= ========= =========
33
<PAGE>
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following at:
December 31,
------------------------
1998 1997
---------- ------------
Land $ 95 $ 95
Building and improvements 530 520
Furniture and equipment 319 330
--------- ---------
Total cost 944 945
Accumulated depreciation 518 487
--------- ---------
$ 426 $ 458
========= =========
NOTE 6 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $3,261,000 at December 31, 1998 and
$1,327,000 at December 31, 1997.
At December 31, 1998, scheduled maturities of certificates of deposit are as
follows:
1999 $ 26,808
2000 4,877
2001 1,900
2002 201
2003 and thereafter 433
---------
$ 34,219
34
<PAGE>
NOTE 7 - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Chicago were as follows:
December 31,
------------------------
Description 1998 1997
------------------------------------------------- ----------- -----------
Structured repayment; matures May 1998;
6.19% interest rate $ - $ 3,000
Structured repayment; matures July 1999;
6.04% interest rate 1,950 2,750
Amortizing; matures July 2005;
6.40% interest rate 2,261 -
Amortizing; matures July 2005;
5.76% interest rate 4,618 -
Amortizing; matures August 2005;
5.81% interest rate 935 -
Fixed term; matures November 1999 through
December 2003; range of rates 4.78% to 6.04%;
average rate 5.13% 14,000 -
Fixed term; matures August 1998 through
December 1998; range of interest rates 5.98%
to 6.03%; average rate 6.06% - 8,000
--------- ---------
$ 23,764 $ 13,750
========= =========
The Company maintains a collateral pledge agreement covering secured advances
whereby the Company has agreed to at all times keep on hand, free of all other
pledges, liens, and encumbrances, whole first mortgage loans on improved
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.
35
<PAGE>
NOTE 8 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators for earnings per common
share computations for the years ended December 31, 1998, 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,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Basic Earnings Per Share
Net income ........................................ $ 1,500 $ 921 $ 1,002
Less net income of Bank prior to conversion ....... --- --- 881
---------- ---------- ----------
Net income available to common stockholders .... $ 1,500 $ 921 $ 121
========== ========== ==========
Weighted average common shares outstanding ........ 1,798,464 1,955,356 2,010,304
========== ========== ==========
Basic Earnings Per Share ....................... $ .83 $ .47 $ .06
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Earnings Per Share Assuming Dilution
Net income available to common stockholders $ 1,500 $ 921 $ 121
========== ========== ==========
Weighted average common shares outstanding 1,798,464 1,955,356 2,010,304
Add dilutive effect of assumed exercises:
Incentive stock options 21,647 25,684 ---
Stock awards 1,125 1,994 ---
---------- ---------- ----------
Weighted average common and dilutive
potential common shares outstanding 1,821,236 1,983,034 2,010,304
========== ========== ==========
Diluted Earnings Per Share $ .82 $ .46 $ .06
========== ========== ==========
</TABLE>
NOTE 9 - 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.
36
<PAGE>
NOTE 9 - REGULATORY CAPITAL (Continued)
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
---------------- ------------------- --------------------
1998 Amount Ratio Amount Ratio Amount Ratio
- ---- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $15,437 31.4% $3,930 8.0% $ 4,913 10.0%
Tier 1 (core) capital (to risk-weighted assets) 15,179 30.9 1,965 4.0 2,948 6.0
Tier 1 (core) capital (to adjusted total assets) 15,179 15.4 3,945 4.0 4,930 5.0
Tangible capital (to adjusted total assets) 15,179 15.4 1,479 1.5 N/A N/A
1997
- ----
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 3,180 4.0 3,975 5.0
Tangible capital (to adjusted total assets) 20,568 25.8 1,193 1.5 N/A N/A
</TABLE>
As of December 31, 1998, 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.
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.
37
<PAGE>
NOTE 9 - REGULATORY CAPITAL (Continued)
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 10 - INCOME TAXES
The provision for income taxes consists of the following:
For the Year Ended
December 31,
------------------------------------
1998 1997 1996
----------- ----------- ----------
Current
Federal $ 450 $ 940 $ 536
State (5) 43 61
--------- --------- ---------
445 983 597
Deferred 279 (164) 34
Change in valuation allowance - 128 (2)
--------- --------- ---------
Income tax expenses $ 724 $ 947 $ 629
========= ========= =========
The net deferred tax liability included in other liabilities in the accompanying
consolidated statements of financial condition consists of the following at:
December 31,
----------------------------
1998 1997
------------ --------------
Gross deferred tax liabilities
Deferred loan fees $ (114) $ (27)
Accrual to cash (153) (227)
Accumulated depreciation (57) (58)
FHLB stock dividend (14) (14)
ESOP expense (42) -
Other (40) -
Net unrealized gain on debt
securities available-for-sale (51) (94)
--------- ------
(471) (420)
38
<PAGE>
NOTE 10 - INCOME TAXES (Continued)
December 31,
------------------------
1998 1997
----------- -----------
Gross deferred tax assets
Loan loss reserve $ 94 $ 65
Capital loss carryforward 99 101
Prepayment on ESOP - 261
Stock awards 39 40
Unrealized net loss on equity
securities available-for-sale 50 -
--------- ---------
282 467
Valuation allowance (229) (229)
--------- ---------
Net deferred tax liability $ (418) $ (182)
========= =========
The valuation allowance relates to capital loss carryforwards, unrealized net
losses on equity securities, 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:
Year Ended
December 31, 1998
---------------------
Amount Percent
---------- ----------
Income tax computed at the statutory rate $ 756 34.0%
Tax exempt income, net of disallowed interest expense (30) (1.3)
Other (26) (1.2)
--------- -------
Total federal income tax 700 31.5
State income tax, net of federal tax benefit 24 1.1
--------- -------
$ 724 32.6%
========= =======
39
<PAGE>
NOTE 10 - INCOME TAXES (Continued)
Year Ended December 31,
---------------------------------------------
1997 1996
--------------------- --------------------
Amount Percent Amount Percent
---------- --------- ---------- --------
Income tax computed at the
statutory rate $ 635 34.0% $ 555 34.0%
Deferred tax valuation allowance 128 6.9 (2) (0.1)
ESOP 111 5.9 --- ---
Other 45 2.4 36 2.2
--------- ------- --------- -------
Total federal income tax 919 49.2 589 36.1
State income tax, net of federal
tax benefit 28 1.5 40 2.5
--------- ------- --------- -------
$ 947 50.7% $ 629 38.6%
========= ======= ========= =======
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, 1998 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 11 - 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.
40
<PAGE>
NOTE 11 - 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. During 1998,
9,602 shares of stock with a fair value of $13.75 per share were committed to be
released, resulting in ESOP compensation expense of $132,070. Shares held by the
ESOP at December 31, 1998 and 1997 are as follows:
1998 1997
---- ----
Allocated shares 66,899 57,297
Unallocated shares 107,671 117,273
---------- ---------
Total ESOP shares 174,570 174,570
========== =========
Fair value of unallocated shares $ 1,077 $ 2,258
========== =========
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:
<TABLE>
<CAPTION>
1998 1997
------------------------- --------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------------ ---------- ------------ ------------
<S> <C> <C> <C>
Outstanding at beginning of year 173,750 $ 11.02 - $ -
Granted - 181,750 11.02
Exercised - -
Forfeited (6,400) (8,000)
---------- ----------
Outstanding at end of year 167,350 173,750
========== ==========
Options exercisable at end of year 34,750 -
Weighted-average fair value of
options granted during year - $ 4.76
</TABLE>
41
<PAGE>
NOTE 11 - STOCK-BASED COMPENSATION PLANS (Continued)
All of the outstanding options at December 31, 1998 relate to options granted in
1997 at an exercise price of $14. In January 1998, the Company paid a special
dividend which resulted in a change in equity structure. This event allowed the
Company to modify the stock option agreements to adjust the exercise price to
$11 which was an adjustment in direct proportion to the decrease in exercise
price as compared to market value as a result of the change in equity structure.
The 1997 amounts have been restated to reflect this modification. The options
have a remaining life of 8.5 years before expiration and are not fully vested.
The exercise price equaled the market value on the date the options were
granted.
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 in 1997 for awards under the plan 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.
1998 1997
------------ -----------
Net income as reported $ 1,500 $ 921
Pro forma net income 1,394 851
Earnings per share as reported
Basic .83 .47
Diluted .82 .46
Pro forma earnings per share
Basic .78 .44
Diluted .77 .43
The fair value of options granted in 1997 was estimated at the date of grant
using the 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%, expected option term of 8
years, and a dividend yield of 0%.
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.
42
<PAGE>
NOTE 11 - STOCK-BASED COMPENSATION PLANS (Continued)
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 $175,951 and
$104,543 for the years ended December 31, 1998 and 1997, respectively.
NOTE 12 - 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, 1998 and
1997, these financial instruments consist of commitments to extend credit
totaling $1,949,000 and $564,000, respectively. Fixed rate mortgage loan
commitments at December 31, 1998 have rates ranging from 7.125% to 9.5% and
terms up to 30 days.
Since many commitments expire without being used, the amount above does not
necessarily represent a future cash commitment. Collateral may be obtained upon
exercise of a commitment. The amount of collateral is determined by management
and may include residential real estate.
Interest-bearing deposit accounts in other financial institutions potentially
subject the Bank to concentrations of credit risk. At December 31, 1998, the
Bank had a deposit account at the Federal Home Loan Bank of Chicago with a
balance totaling approximately $3,272,000. At December 31, 1997, the balance was
approximately $5,849,000.
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.
43
<PAGE>
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The approximate carrying amount and estimated fair value of financial
instruments is as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------- ----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Financial assets
Cash on hand and in banks $ 448 $ 448 $ 441 $ 441
Interest-bearing deposits in other
financial institutions 3,789 3,789 5,849 5,849
Interest-bearing term deposits in other
financial institutions 159 159 209 209
Securities available-for-sale 38,950 38,950 41,554 41,554
Loans receivable, net 56,822 57,368 37,167 37,756
Federal Home Loan Bank stock 1,319 1,319 700 700
Accrued interest receivable 803 803 801 801
Financial liabilities
Non-interest-bearing deposits (147) (147) (29) (29)
Money market and passbook savings (21,063) (21,063) (20,369) (20,369)
Certificates of deposits (34,219) (34,434) (20,877) (20,892)
Advances from the Federal Home Loan Bank (23,764) (23,798) (13,750) (13,741)
Accrued interest payable (278) (278) (143) (143)
</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, 1998 and 1997, applied for the time period until estimated payment.
The estimated fair values of certificates of deposit and FHLB advances are based
on estimates of the rates the Bank would pay on such financial instruments at
December 31, 1998 and 1997, 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.
44
<PAGE>
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that were the Bank to have disposed
of these items on December 31, 1998 and 1997, the fair values would have been
achieved, because the market value may differ depending on the circumstances.
The estimated fair values at December 31, 1998 and 1997 should not necessarily
be considered to apply at subsequent dates.
NOTE 14 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows.
1998 1997 1996
---- ---- ----
Unrealized holding gains (losses) on
securities available-for-sale $ (287) $ 284 $ (91)
Less reclassification adjustments for gains
(losses) recorded in income 43 - (38)
------ ------ ------
Net unrealized gains and (losses) (244) 284 (129)
Tax effect 93 (108) 49
------ ------ ------
Other comprehensive income (loss) $ (151) $ 176 $ (80)
====== ====== ======
45
<PAGE>
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed statements of financial condition, income, and
cash flows for PS Financial, Inc.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
1998 1997
------------ -----------
ASSETS
Cash and cash equivalents $ 1,331 $ 4,194
Securities available-for-sale 3,278 4,606
ESOP loan 973 1,693
Investment in bank subsidiary 15,260 20,713
Accrued interest receivable and other assets 184 121
--------- ---------
$ 21,026 $ 31,327
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ - $ 8,218
Stockholders' equity
Common stock 22 22
Additional paid-in capital 21,638 21,602
Unearned ESOP shares (1,077) (1,173)
Unearned stock awards (941) (1,117)
Treasury stock (4,759) (1,896)
Retained earnings 6,141 5,518
Accumulated other comprehensive income 2 153
--------- ---------
$ 21,026 $ 31,327
========= =========
46
<PAGE>
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1998 and 1997 and
for the period November 26, 1996 to December 31, 1996
1998 1997 1996
----------- ------------- ---------
<S> <C> <C> <C>
Income
Securities $ 263 $ 423 $ 28
ESOP loan 80 117 12
Interest-bearing deposits with other
financial institutions - - 16
Dividend income from subsidiary 7,120 3,951 -
Gain on sale of securities 33 - -
--------- --------- ---------
Total income 7,496 4,491 56
Other expenses 199 155 10
--------- --------- ---------
Income before income taxes and equity (excess) in
undistributed earnings of bank subsidiary 7,297 4,336 46
Income taxes 16 96 19
--------- --------- ---------
Income before equity (excess) in undistributed
earnings of bank subsidiary 7,281 4,240 27
Equity (excess) in undistributed earnings of
bank subsidiary (5,781) (3,319) 94
--------- --------- ---------
Net income $ 1,500 $ 921 $ 121
========= ========= =========
</TABLE>
47
<PAGE>
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998 and 1997 and
for the period November 26, 1996 to December 31, 1996
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,500 $ 921 $ 121
Adjustments to reconcile net income to net cash
from operating activities
Amortization of discounts and premiums on securities 2 (1) -
(Equity) excess in undistributed earnings of bank
subsidiary 5,781 3,319 (94)
Gain on sale of securities (33) - -
Change in
Other assets (9) 31 (148)
Other liabilities (690) - 7
--------- --------- ---------
Net cash from operating activities 6,551 4,270 (114)
Cash flows from investing activities
Purchase of bank subsidiary stock - - (11,144)
Purchase of securities available-for-sale (4,299) (1,690) (5,996)
Proceeds from sale of securities available-for-sale 5,172 1,000 -
Proceeds from repayment of securities 14 95 -
Proceeds from maturities of securities 330 2,000 -
Capital contribution to subsidiary (83) - -
--------- --------- ---------
Net cash from investing activities 1,134 1,405 (17,140)
Cash flows from financing activities
Net proceeds from sale of common stock - - 19,436
Purchase of treasury stock (2,863) (3,172) -
Payment received on loan to ESOP 720 9 44
Dividends paid (8,405) (544) -
--------- --------- ---------
Net cash from financing activities (10,548) (3,707) 19,480
--------- --------- ---------
Net change in cash and cash equivalents (2,863) 1,968 2,226
Cash and cash equivalents at beginning of period 4,194 2,226 -
--------- --------- ---------
Cash and cash equivalents at end of period $ 1,331 $ 4,194 $ 2,226
========= ========= =========
</TABLE>
48
<PAGE>
PS FINANCIAL, INC.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 4:00 p.m., Chicago, Illinois
time on April 28 1999 at the main office of PS Financial, Inc., 4800 South
Pulaski Road, Chicago, Illinois 60632.
MARKET PRICE AND DIVIDEND INFORMATION
The following information relates to the dividends paid and 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".
- --------------------- ---------------------------- -----------------------------
1998 1997
- --------------------- ---------------------------- -----------------------------
- --------------------- -------- -------- ---------- -------- -------- -----------
QUARTER ENDED HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- --------------------- -------- -------- ---------- -------- -------- -----------
- --------------------- -------- -------- ---------- -------- -------- -----------
March 31 $23.00 $13.50 $4.12* $14.25 $11.75 $ ---
June 30 $14.88 $12.75 $0.12 $14.88 $12.63 $0.08
September 30 $13.50 $10.75 $0.12 $18.00 $14.00 $0.08
December 31 $12.00 $8.50 $0.13 $23.00 $16.00 $0.12
- --------------------- -------- -------- ---------- -------- -------- -----------
* includes special dividend of $4.00 per share declared December 30, 1997 and
paid on January 30, 1998.
At March 22, 1999 there were 1,756,384 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 22,
1999 was $9.94 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, 1998, 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.
49
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage of Incorporation
Parent Subsidiary Ownership or Organization
- ------------------ ----------------------------- ------------- ---------------
- ------------------ ----------------------------- ------------- ---------------
PS Financial, Inc. Preferred Savings Bank 100% Federal
Preferred Preferred Service Corporation 100% Illinois
Savings Bank
<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, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 448
<INT-BEARING-DEPOSITS> 3,789
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,950
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 56,822
<ALLOWANCE> 258
<TOTAL-ASSETS> 102,784
<DEPOSITS> 55,429
<SHORT-TERM> 9,297
<LIABILITIES-OTHER> 2,565
<LONG-TERM> 14,467
0
0
<COMMON> 22
<OTHER-SE> 21,004
<TOTAL-LIABILITIES-AND-EQUITY> 102,784
<INTEREST-LOAN> 4,055
<INTEREST-INVEST> 2,342
<INTEREST-OTHER> 360
<INTEREST-TOTAL> 6,757
<INTEREST-DEPOSIT> 1,928
<INTEREST-EXPENSE> 3,101
<INTEREST-INCOME-NET> 3,656
<LOAN-LOSSES> 80
<SECURITIES-GAINS> 42
<EXPENSE-OTHER> 1,488
<INCOME-PRETAX> 2,224
<INCOME-PRE-EXTRAORDINARY> 2,224
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,500
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.82
<YIELD-ACTUAL> 4.29
<LOANS-NON> 967
<LOANS-PAST> 3,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 186
<CHARGE-OFFS> 19
<RECOVERIES> 12
<ALLOWANCE-CLOSE> 258
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
