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, 1999
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
of Incorporation or Organization Identification Number)
4800 South Pulaski Road, Chicago, Illinois 60632-4195
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (773) 376-3800
Securities Registered Pursuant to Section 12(b) of the Exchange Act:
None
Securities Registered Pursuant to Section 12(g) of the Exchange 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: $8.0 million
As of March 24, 2000, the Registrant had 1,669,290 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 24, 2000, was $20.0 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 - Portions of the Annual Report to Stockholders
for the fiscal year ended December 31, 1999.
Part III of Form 10-KSB - Portions of The Proxy Statement for Annual
Meeting of Stockholders to be held in 2000.
<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, 1999, the Company had total assets of $121.4 million,
deposits of $64.0 million and stockholders' equity of $18.9 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 and
commercial real estate 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, 1999, the Company's total
loans receivable, net totaled $72.2 million. See "- Originations and Purchases
of Loans".
1
<PAGE>
Loan Portfolio Composition. The following table sets forth the
composition of the Company's loan portfolio in dollar amounts and in percentages
as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ---------------- --------------- ---------------- ----------------
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 $56,408 77.55% $44,297 77.10% $29,129 77.07% $26,998 73.72% $25,858 73.44%
Multi-Family 9,446 12.99 8,006 13.93 5,636 14.91 6,088 16.62 6,094 17.31
Commercial 6,380 8.77 5,135 8.94 2,953 7.81 3,183 8.69 2,953 8.39
Construction 499 0.68 - -- 67 0.18 336 0.92 286 0.81
------- ------- ------- ------- ------- ------- ------- -------- ------- -------
Total real estate loans 72,733 99.99 57,438 99.97 37,785 99.97 36,605 99.95 35,191 99.95
Consumer Loans:
Deposit Account 6 0.01 15 0.03 11 0.03 17 0.05 18 0.05
------- ------- ------- ------- ------- ------- ------- -------- ------- -------
Total loans 72,739 100.00% 57,453 100.00% 37,796 100.00% 36,622 100.00% 35,209 100.00%
====== ====== ====== ====== ======
Less:
Deferred fees anddiscounts 294 373 443 493 548
Allowance for loan losses 266 258 186 186 136
------- ------- ------- ------- -------
Total loans receivable, net $72,179 $56,822 $37,167 $35,943 $34,525
======= ======= ======= ======= =======
</TABLE>
The following table shows the composition of the Company's loan
portfolio by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------- ---------------- --------------- ---------------- ----------------
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 $56,408 77.55% $44,297 77.10% $29,129 77.07% $26,998 73.72% $25,858 73.44%
Multi-family 9,446 12.99 8,006 13.93 5,636 14.91 6,088 16.62 6,094 17.31
Commercial 6,380 8.77 5,135 8.94 2,953 7.81 3,183 8.69 2,953 8.39
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total real estate loans 72,234 99.31 57,438 99.97 37,718 99.79 36,269 99.03 34,905 99.14
Consumer loans 6 0.01 15 0.03 11 0.03 17 0.05 16 0.05
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total fixed-rate loans 72,240 99.32 57,453 100.00 37,729 99.82 36,286 99.08 34,921 99.19
Adjustable-Rate Loans:
Real estate - construction 499 0.68 - -- 67 0.18 336 0.92 286 0.81
Consumer loans - -- - -- - -- - -- 2 --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total adjustable-rate loans 499 0.68 - -- 67 0.18 336 0.92 288 0.81
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total loans 72,739 100.00% 57,453 100.00% 37,796 100.00% 36,622 100.00% 35,209 100.00%
====== ====== ====== ====== ======
Less:
Deferred fees and discounts 294 373 443 493 548
Allowance for loan losses 266 258 186 186 136
------- ------- ------- ------- -------
Total loans receivable, net $72,179 $56,822 $37,167 $35,943 $34,525
======= ======= ======= ======= =======
</TABLE>
2
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at December 31, 1999. Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
---------------------------------------------------------------------------------
One- to Four-Family Multi-family Commercial Construction
---------------------- --------------------- ------------------ -----------------
Due During Weighted Weighted Weighted Weighted
Period Ending Average Average Average Average
December 31, Amount Rate Amount Rate Amount Rate Amount Rate
- ------------------------- -------- ------------- --------- ----------- -------- --------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2000 $ 173 8.11% $ -- --% $ 365 9.90% $ -- --%
2001 268 8.20 138 8.86 311 8.08 499 9.50
2002 and 2003 606 8.24 480 8.26 320 8.44 - --
2004 to 2008 23,157 7.74 5,697 8.44 3,112 8.78 - --
2009 to 2023 32,204 7.69 3,131 8.29 2,272 8.51 - --
------- ------ ------ ----
$56,408 7.72% $9,446 8.39% $6,380 8.70% $499 9.50%
======= ====== ====== ====
</TABLE>
Consumer Total
------------------------- ---------------------------
Due During Weighted Weighted
Period Ending Average Average
December 31, Amount Rate Amount Rate
- ------------------------- ------------ ------------ ------------- -------------
2000 $6 6.00% $ 544 9.28%
2001 - -- 1,216 8.78
2002 and 2003 - -- 1,406 8.29
2004 to 2008 - -- 31,966 7.96
2009 to 2023 - -- 37,607 7.79
-- -------
Total $6 6.00% $72,739 7.90%
== =======
The total amount of loans due after December 31, 2000 which have
predetermined interest rates is $71.7 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is
$499,000.
3
<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, 1999, based on the above, the Bank's regulatory loans-to-one
borrower limit was approximately $1.9 million. On the same date, the Bank had no
borrowers with outstanding balances in excess of this amount. As of December 31,
1999, 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
$1.4 million, secured by multi-family and one- to four-family real estate. The
second largest group of loans outstanding to one borrower was three loans
totaling $816,000 secured by commercial and one- to four-family real estate. At
December 31, 1999, these loans 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, 1999, $9.4 million or 12.9% of the Company's one- to
four-family residential loan portfolio were secured by properties with two or
more units. At that date, the average outstanding residential loan balance was
approximately $95,000.
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".
4
<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, 1999,
the Company had $6.0 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 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, 1999, the Company had $6.4 million in commercial real estate loans,
representing 8.8% of the total loan portfolio, and $9.4 million in multi-family
loans, or 13.0% 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.
5
<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, 1999. 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 40 $ 5,555 $ 158
Office Buildings 5 825 -
Multi-family 47 9,446 -
---- ------- -----
Total multi-family and
commercial real estate loans 92 $15,826 $ 158
==== ======= =====
At December 31, 1999, the Company's largest commercial real estate or
multi-family loan outstanding totaled $577,000 and was secured by a 12 unit
apartment complex located in Darien, Illinois.
Multi-family and commercial real estate loans may present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. At December 31, 1999, 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, 1999, the Company's construction lending
portfolio consisted of a participation interest in a construction loan of
$499,000, or 0.68% of the Company's real estate loan portfolio.
Consumer Lending. Federally chartered savings institutions may invest
up to 35% of assets in consumer loans (including any investment in investment
grade and commercial paper and corporate debt securities). The Company
originates consumer loans secured by deposit accounts. At December 31, 1999,
consumer loans totaled $6,000, or 0.01% 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.
6
<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 as the Company's existing loans. Through December 31, 1999,
the Company originated $16.8 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, 1999, the Company had $499,000 of participation
interests in construction loans. The Company intends to continue to purchase
such loans in the future, subject to market conditions.
From time to time, in order to supplement loan originations, the
Company has acquired mortgage-backed and other securities which are held,
depending on the investment intent, in the "held-to-maturity" or
"available-for-sale" portfolios. See "- Investment Activities - Mortgage- Backed
Securities" and Note 2 to the Notes to Consolidated Financial Statements in the
Annual Report included herein as exhibit 13.
The following table shows the loan origination, purchase, sale and
repayment activities of the Company for the periods indicated.
Year Ended
December 31,
------------------
1999 1998
------------------
(In Thousands)
Originations by type:
Real estate - one- to four-family $21,612 22,733
- multi-family 2,899 4,314
- commercial 2,754 2,696
Passbook - 12
------- ------
Total loans originated 27,265 29,755
------- ------
Purchases
Real estate - construction 435 0
Repayments
Principal repayment 12,233 10,098
(Increase) decrease in other items, net (1) 110 2
------- ------
$15,357 $19,655
======= ======
Footnotes
- ---------
(1) Other items consist primarily of deferred fees and the allowance for
loan losses.
7
<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 1999, four single family residences were acquired
through foreclosure, with two properties subsequently sold in the spring of
2000.
8
<PAGE>
The following table sets forth the Company's loan delinquencies by
type, by amount and by percentage of type at December 31, 1999.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
-------------------------------- ------------------------------- -----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
--------- ----------- ---------- --------- ---------- ---------- --------- -------- ----------
(Dollars in Thousands)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to Four-Family 10 $1,029 1.82% 3 $306 0.54% 11 $1,097 1.95%
Multi-family - - -- - - -- - - --
Commercial real estate - - -- - - -- 1 158 2.48
Construction or development - - -- - - -- - - --
Consumer - - -- - - -- - - --
Commercial Business - - -- - - -- - - --
Consumer - - -- - - -- - - --
---- ------ ---- ---- ---- ------
Total 10 $1,029 1.41% 3 $306 0.42% 12 $1,255 1.73%
==== ====== ==== ==== ==== ======
</TABLE>
Total Delinquent Loans
--------------------------------
Percent
of Loan
Number Amount Category
--------- ---------- ----------
Real Estate:
One- to Four-Family 24 $2,432 4.31%
Multi-family - - --
Commercial real estate 1 158 2.48
Construction or development - - --
Consumer - - --
Commercial Business - - --
Consumer - - --
---- ------
Total 25 $2,590 3.56
==== ======
9
<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,
1999, the Company had classified a total of $1.1 million of its loans and
$454,000 of foreclosed one- to four-family real estate.
December 31, 1999
-----------------
(In Thousands)
Substandard................................................... $1,537
Doubtful...................................................... ---
Loss.......................................................... ---
-----
Total.................................................... $1,537
======
10
<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,
------------------------
1999 1998
----------- ------------
(Dollars in Thousands)
Non-accruing loans over 90 days delinquent:
One- to four-family $ 876 $ 777
Multi-family - -
Commercial real estate 158 -
Commercial business - -
Total 1,034 777
------ ------
Accruing loans delinquent more than 90 days 221 372
Foreclosed assets 454 -
------ ------
Total non-performing assets $1,709 $1,149
====== ======
Total as a percentage of total assets 1.40% 1.11%
====== ======
For the year ended December 31, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $106,000. The amounts that were included in
interest income on such loans were $83,000.
At December 31, 1999, the Company's non-accruing loans greater than 90
days included nine loans secured by single-family real estate totaling $876,000
and one loan secured by commercial real estate totaling $158,000. Foreclosed
assets consisted of four single family residences, two of which were
subsequently sold in 2000.
Other Assets of Concern. In addition to the non-performing assets set
forth in the table above, as of December 31, 1999, 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.
11
<PAGE>
The following table sets forth an analysis of the Company's allowance
for loan losses.
Year Ended December 31,
------------------------
1999 1998
----------- ------------
(Dollars in Thousands)
Balance at beginning of year $258 $186
Charge-offs (7) (19)
Recoveries - 11
----- -----
Net charge-offs (7) (8)
Additions charged to operations 15 80
----- -----
Balance at end of year $266 $258
===== =====
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.01% 0.01%
===== =====
Ratio of net charge-offs during the year to
average non-performing assets 0.01% 0.01%
===== =====
Ratio of allowance for loan losses to total loans 0.37% 0.45%
===== =====
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized as follows:
December 31,
---------------------------------------------------------
1999 1998
---------------------------- ----------------------------
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)
One- to four-family $ 56 $56,408 77.55% $ 44 $44,297 77.10%
Multi-family 28 9,446 12.99 24 8,006 13.93
Commercial real estate 15 6,380 8.77 12 5,135 8.94
Construction 7 499 0.68 - - -
Consumer - 6 0.01 - 15 0.03
Unallocated 160 - - 178 - -
---- ------- ------ ---- ------- ------
Total $266 $72,739 100.00% $258 $57,453 100.00%
==== ======= ====== ==== ======= ======
12
<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, 1999, the Bank's liquidity ratio for regulatory
purposes was 24.8%.
Generally, the investment policy of the Bank 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. At December 31, 1999, 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, as
a separate component of stockholders' equity. At December 31, 1999, $35.5
million of securities and $5.6 million of mortgage-backed securities were
classified as available-for-sale.
13
<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, 1999 and December 31, 1998, the Company's
securities portfolio totaled $35.6 million and $27.6 million, respectively. At
December 31, 1999, the Company did not own any investment securities of a single
issuer which exceeded 10% of stockholders' equity, 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.
The following table sets forth the composition of the Company's
securities and other earning assets, other than mortgage-backed securities and
loans receivable, at the dates indicated.
December 31,
------------------------------------
1999 1998
----------------- ------------------
Carrying % of Carrying % of
Value Total Value Total
--------- ------- --------- --------
Securities available-for-sale
U.S. government securities $ - 0.00% $ - 0.00%
Federal agency obligations 25,630 72.10 14,951 54.18
Municipal securities 8,003 22.51 9,367 33.94
Equity securities 1,917 5.39 3,278 11.88
------- ------ ------- ------
Total securities $35,550 100.00% $27,596 100.00%
======= ====== ======= ======
Average remaining life of securities 11.30 yrs. 13.12 yrs.
Other earning assets:
Interest-bearing deposits
with other banks $ 2,596 57.40% $ 3,948 74.96%
Federal Home Loan Bank stock 1,927 42.60 1,319 25.04
------- ------ ------- ------
Total $ 4,523 100.00% $ 5,267 100.00%
======= ====== ======= ======
14
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
-----------------------------------------------------------------------------------------------------
Amortized Cost Amortized Cost Amortized Cost Amortized Cost Amortized Cost Fair Value
-----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities $- $ - $ - $ - $ - $ -
Federal agency securities - 2,498 22,267 2,065 26,830 25,630
Municipal securities - - 1,537 7,306 8,843 8,003
Equity securities - 598 - 1,537 2,135 1,917
--- ------ ------- ------- ------- -------
Total investment securities - $3,096 $23,804 $10,908 $37,808 $35,550
=== ====== ======= ======= ======= =======
Weighted average yield 6.40% 6.75% 7.12% 6.20%
</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, 1999, $5.6 million, or 100.0% 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, 1999, 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 stockholders' equity except for federal agency
obligations.
The following table sets forth the composition of the Company's
mortgage-backed securities at the dates indicated.
December 31,
----------------------------------------
1999 1998
------------------- --------------------
Carrying % of Carrying % of
Value Total Value Total
--------- --------- ---------- ---------
(Dollars in Thousands)
Mortgage-backed securities
available for sale:
GNMA $1,825 32.38% $ 3,053 26.89%
FNMA 2,656 47.13 4,757 41.90
FHLMC 1,155 20.49 3,544 31.21
------ ------ ------- ------
Total mortgage-backed securities $5,636 100.00% $11,354 100.00%
====== ====== ======= ======
15
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at December 31, 1999.
<TABLE>
<CAPTION>
Due In December 31,
----------------------------------- 1999
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 $- $- $- $1,155 $1,215
Federal National Mortgage Association - - - 2,656 2,707
Government National Mortgage Association - - - 1,825 1,852
-- -- -- ------ ------
Total - $0 $0 $5,636 $5,774
== == ====== ======
</TABLE>
At December 31, 1999, all mortgage-backed securities had floating or
adjustable rates.
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.
The following table sets forth the savings flows at the Company during
the periods indicated.
Year Ended December 31,
---------------------------------------------
1999 1998 1997
------- ------- -------
(Dollars in Thousands)
Opening balance $55,429 $41,275 $42,203
Deposits 56,272 45,699 33,220
Withdrawals (49,084) (33,662) (35,634)
Interest Credited 1,366 2,117 1,486
------- ------- -------
Ending balance $63,983 $55,429 $41,275
======= ======= =======
Net increase (decrease) $8,554 $14,154 $(928)
======= ======= =======
Percent increase (decrease) 15.43% 34.29% (2.20)%
======= ======= =======
16
<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.
December 31,
-------------------------------------
1999 1998
------------------ ------------------
Percent Percent
Amount of Total Amount of Total
------- ---------- --------- --------
(Dollars in Thousands)
Transactions and Savings Deposits
- ---------------------------------
Savings Accounts - 3.00% (1) $18,944 29.61% $19,577 35.33%
Transaction Accounts - 0.00% (1) 326 0.51 156 0.28
Money Market Accounts - 3.25% (1) 1,141 1.78 1,477 2.66
------- ------ ------- ------
Total Non-Certificates 20,411 31.90 21,210 38.27
------- ------ ------- ------
Certificates
4.00 - 5.99% 27,014 42.22 33,708 60.81
6.00 - 7.99% 16,558 25.88 511 0.92
------- ------ ------- ------
Total Certificates 43,572 68.10 34,219 61.73
------- ------ ------- ------
Total Deposits $63,983 100.00% $55,429 100.00%
======= ====== ======= ======
- --------------------------
(1) At December 31, 1999.
17
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of December 31, 1999.
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% $11,408 $1,012 $ 70 $ 12 $104 $12,606
5.00 - 5.99% 12,510 1,542 197 159 - 14,408
6.00 - 6.99% 12,411 3,503 302 255 - 16,471
7.00 - 7.99% 87 - - - - 87
------- ------ ---- ---- ---- -------
$36,416 $6,057 $569 $426 $104 $43,572
======= ====== ==== ==== ==== =======
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, 1999.
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 $7,493 $13,528 $12,676 $7,045 $40,742
Certificates of deposit
of $100,000 or more 825 470 1,424 111 2,830
------ ------- ------- ------ -------
Total certificates of deposit $8,318 $13,998 $14,100 $7,156 $43,572
====== ======= ======= ====== =======
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.
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. For additional information regarding the
Company's FHLB advances, see Note 7 of the Notes to Consolidated Financial
Statements in the Annual Report attached hereto as Exhibit 13.
The following table set forth the maximum month-end balance and average
balance of FHLB advances as of the dates indicated.
December 31,
--------------------------------
1999 1998
--------------------------------
(Dollars in Thousands)
Maximum Balance $37,405 $23,764
Average Balance $31,474 $20,154
Weighted average interest rate for the year 5.58% 5.82%
18
<PAGE>
Subsidiary Activities
On November 1, 1999, PS Financial sold its one wholly owned service
corporation, Preferred Service Corporation (the "Subsidiary"). The Subsidiary,
an Illinois corporation, was incorporated in 1969 and sold casualty, disability
and credit life insurance on an agency basis.
The Subsidiary had nominal net income for the ten month period ended
October 31, 1999. At October 31, 1999, PS Financial's investment in the
Subsidiary totaled $1,696.
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 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, 1999, the Company had a total of 17 full-time
employees. None of the Company's employees are represented by any collective
bargaining agreement. Management considers its employee relations to be good.
19
<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. 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.
20
<PAGE>
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, 1999, the Bank's lending limit under this restriction was $1.9
million. The Bank is in compliance with the loans-to-one-borrower limitation.
Insurance of Accounts and Regulation by the FDIC
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.
Regulatory Capital Requirements
Federally insured institutions are required to maintain minimum capital
capital standards, including a tangible capital, a leverage ratio (or core
capital) and a risk-based capital requirement.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets as defined by regulation. At December 31, 1999, the Bank
had tangible capital of $14.0 million, or 11.8% of adjusted total assets, which
is approximately $12.2 million above the minimum requirement of 1.5% of adjusted
total assets in effect on that date.
The capital standards also require core capital equal to at least 3%-4%
of adjusted total assets, depending on an institution's supervisory rating. Core
capital generally consists of tangible capital plus certain intangible assets,
including a limited amount of purchased credit card relationships. At December
31, 1999, the Bank had core capital equal to $14.0 million, or 11.8% of adjusted
total assets, which is $9.3 million above the minimum leverage ratio requirement
of 4% 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.
21
<PAGE>
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments.
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.
On December 31, 1999, the Bank had total capital of $14.2 million
(including $14.0 million in core capital and $266,000 in qualifying
supplementary capital) and risk-weighted assets of $57.4 million; or total
capital of 24.8% of risk-weighted assets. This amount was $9.6 million above the
8% requirement in effect on that date.
The OTS is also authorized to impose capital requirements in excess of
these standards on individual associations on a case-by-case basis. 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. These actions may include submission of a capital restoration plan
and various restrictions on an institution's growth and operations. In severe
cases the FDIC of the OTS may appoint a conservator or a receiver for the
institution.
The OTS is also generally authorized to reclassify an institution 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.
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.
Qualified Thrift Lender Test
All savings institutions, 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 institution 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. As an
alternative, the savings institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Such
assets primarily consist of residential housing related loans and investments.
At December 31, 1999, the Bank met the test with 85.9% 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
22
<PAGE>
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."
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 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. PS Financial was
examined for CRA compliance in November 1999 and received a rating of
satisfactory.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. The 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 Company and its non-savings
association subsidiaries which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the 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 Company and any of its
subsidiaries (other than PS financial or any other SAIF-insured savings
association) would generally become subject to additional restrictions.
If PS Financial fails the QTL test, within one year of such failure the
Company must register as, and will become subject to, the significant
restrictions applicable to bank holding companies.
Recent Legislation
On November 12,1999, the Gramm-Leach-Bliley Act, which modernizes the
financial services industry by, among other things, permitting banking,
insurance and securities companies to combine, was signed into law. It is
unclear what impact this legislation will have on our operations, although the
anticipated creation of larger and stronger financial services competitors could
materially affect our operations.
Federal Securities Law
The stock of the 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.
Company stock held by persons who are affiliates (generally executive
officers, directors and 10% stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
23
<PAGE>
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 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 be used for residential home financing.
As a member, PS Financial is required to purchase and maintain stock in
the FHLB of Chicago. At December 31, 1999, PS Financial had $1.9 million in FHLB
stock, which was in compliance with this requirement. Dividends on the FHLB
stock were 6.75% for 1999.
Federal and State Taxation
Savings associations such as the Bank are permitted to establish
reserves for bad debts using an experience method and to make annual additions
which may, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes.
In addition to the regular income tax, corporations, including savings
institutions, 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.
PS Financial and its subsidiary file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting.
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.
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 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 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 34. 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.
Certain Supplemental Financial Information
The Company's dividend payout ratio was 53.47% for the year ended 1999
and 548.78% for the year ended 1998. The Company's return on assets was 1.44%
for the year ended 1999, compared to 1.66% for the year ended 1998. Return on
equity was 8.10% for 1999, compared to 6.69% for 1998. Average equity to average
assets was 17.76% for the year ended 1999, compared to 24.84% for the year ended
1998.
24
<PAGE>
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 $277,000 at December 31,
1999. At December 31, 1999, 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 $477,000. 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, 1999
was approximately $71,000.
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, 1999.
25
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 45 of the Company's 1999 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 1999 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, 1999, 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 2-4
Management's Discussion and Analysis of Financial 5-18
Condition and Results of Operations
Report of Independent Auditors 19
Consolidated Statements of Financial Condition as of December 31, 20
1999 and 1998
Consolidated Statements of Income for the Years 21
Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' 22-23
Equity for the Years Ended December 31, 1999,
1998 and 1997
Consolidated Statements of Cash Flows for the 24-25
Years Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements 26-45
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended December 31, 1999, 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.
26
<PAGE>
PART III
Item 9. Directors, Promoters and Control Persons; Compliance with Section 16(a)
of the Exchange Act
Directors
Information concerning directors of the Company is incorporated herein
by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders for the fiscal year ended December 31, 1999, 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, 1999, 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, 1999, 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, 1999, a copy of which will be filed not later than 120 days after
the close of the fiscal year.
27
<PAGE>
PART IV
Item 13. 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(i) Articles of Incorporation *
3(ii) By-Laws *
4 Instruments defining the rights of security holders, *
including debentures
9 Voting Trust Agreement None
10 Material contracts None
10.1 Employment agreement with Kimberly P. Rooney *
10.2 Change-in-control severance agreements
with certain executive officers *
10.3 Stock Option and Incentive Plan *
10.4 Recognition and Retention Plan *
11 Statement regarding computation of per share None
earnings
13 Annual Report to Security Holders 13
16 Letter regarding change in certifying accountants None
18 Letter regarding change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote None
of security holders
23 Consents of Experts and Counsel None
24 Power of Attorney None
27 Financial Data Schedule 27
28 Information from reports furnished to state
insurance regulatory authorities None
99 Additional Exhibits None
Footnotes
- ---------
* Filed as exhibits to the Company's S-1 registration statement filed on
August 30, 1996 (file No. 333-11211) pursuant to Section 5 of the
Securities Act of 1933. All of such previously filed documents are
hereby incorporated herein by reference in accordance with item 601 of
regulation S-B,
<PAGE>
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 30, 2000 By: Kimberly P. Rooney
---------------------- -----------------------------------
Kimberly P. Rooney (Duly
Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
By: Kimberly P. Rooney By: S. J. Ptak
------------------------------- ---------------------------------
Kimberly P. Rooney, President, S. J. Ptak, Chairman of the Board
Chief Executive Officer and
Director (Principal Executive
and Operating Officer)
Date: March 30, 2000 Date: March 30, 2000
------------------------ ------------------------
By: Edward Wolak By: L. G. Ptak
------------------------------- ---------------------------------
Edward Wolak, Director L.G. Ptak, Director and Secretary
Date: March 30, 2000 Date: March 30, 2000
------------------------ ------------------------
By: Rocco Di Iorio By: By: Jeanine M. McInerney
------------------------------- ---------------------------------
Rocco Di Iorio Director Jeanine M. McInerney, Director
Date: March 30, 2000 Date: March 30, 2000
------------------------ ------------------------
By: Jeffrey Przybyl
-------------------------------
Jeffrey Przybyl, Treasurer
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 30, 2000
------------------------
29
- --------------------------------------------------------------------------------
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 19
Consolidated Financial Statements 20
Stockholder Information 46
I
<PAGE>
- --------------------------------------------------------------------------------
PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------
<PAGE>
March 31, 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, I am pleased
to present to our stockholders our fourth annual report as a public corporation.
PS Financial, Inc. enjoyed a successful 1999 with earnings of $1.6
million. Diluted earnings per share increased 23.2% over 1998 and an average of
50.7% annually since 1997. One of our goals for 1999 was to increase our return
on equity. We are pleased to report that our return on equity for 1999 was 8.1%,
compared to 6.7% for 1998, an increase of 20.9%. Since 1997, return on equity
has increased at an average annual rate of 73.2%. In addition, our return on
average assets for 1999 was 1.44%, while our efficiency ratio was 41.86%. Both
of these ratios are near the top of industry peer group standards.
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 1999, PS Financial, Inc. continued to pay
quarterly dividends. The first two dividends of $0.13 per share were paid in
February and May and dividends of $0.14 per share were paid in August and
November. The company completed two share repurchases in 1999. In all, 151,544
shares were repurchased during 1999. 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 $56.8 million in 1998 to $72.2
million in 1999, a 27.1% increase. During the same period, deposit growth
reflected an $8.6 million, or 15.5%, increase. Since 1997, our loan and deposit
portfolios have grown at an average annual rate of 39.9% and 24.8% respectively.
As a way to increase the scope and variety of the products and services
our Company can offer, PS Financial, Inc. converted to a new data processor in
February of l999. In 1999, we installed our first ATM machine. One of the
exciting new changes we will be instituting in the first half of 2000 is the
introduction of telephone banking.
Year 2000 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 our knowledge of our market area allow us to react quickly to
changing customer needs. The Company continues its significant growth due to the
dedication and competency of its directors, officers and staff, whom we wish to
thank.
Our plans for the future will emphasize 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 one.
Sincerely,
/s/ Kimberly P. Rooney
Kimberly P Rooney
President
<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.
December 31,
-------------------------------------------
1999 1998 1997 1996 1995
-------- -------- ------- ------- -------
(In Thousands)
Selected Financial Condition Data:
- ----------------------------------
Total assets $121,356 $102,784 $87,922 $75,133 $53,520
Cash and cash equivalents 3,305 4,237 6,290 8,758 3,754
Loans receivable, net (1): 72,179 56,822 37,167 35,943 34,525
Mortgage-backed securities -
available for sale 5,636 11,354 8,095 4,702 4,220
Securities - available for sale 35,550 27,596 33,459 24,080 9,739
Deposits 63,983 55,429 41,275 42,203 41,047
FHLB advances 37,405 23,764 13,750 -- --
Total stockholders' equity 18,872 21,026 23,109 32,147 11,724
Year ended December 31,
---------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(In Thousands)
Selected Operations Data:
- -------------------------
Total interest income $8,005 $6,757 $6,062 $4,664 $4,268
Total interest expense 4,181 3,101 2,084 1,781 1,632
------ ------ ------ ------ ------
Net interest income 3,824 3,656 3,978 2,883 2,636
Provision for loan losses(1) 15 80 -- 50 --
-- -- -- -- --
Net interest income after provision
for loan losses 3,809 3,576 3,978 2,833 2,636
Fees and service charges 89 94 77 69 58
Gain (loss) on sales of securities (86) 43 -- (38) --
------ ------ ------ ------ ------
Total non-interest income 3 137 77 31 58
Total non-interest expense 1,602 1,489 2,187 1,233 1,009
------ ------ ------ ------ ------
Income before taxes 2,210 2,224 1,868 1,631 1,685
Income tax provision 606 724 947 629 630
------ ------ ------ ------ ------
Net income $1,604 $1,500 $ 921 $1,002 $1,055
====== ====== ====== ====== ======
Basic earnings per share $1.01 $0.83 $0.47 $0.06(2) NA
Diluted earnings per share $1.01 $0.82 $0.46 $0.06(2) NA
2
(1) The allowance for loan losses at December 31, 1999, 1998, 1997, 1996
and 1995 was $266,000, $258,000, $186,000, $186,000 and $136,000,
respectively.
(2) From date of initial public offering, November 26, 1996.
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<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) 1.44% 1.66% 1.12% 1.71% 1.99%
Return on equity (ratio of net income to average total equity) 8.10 6.69 2.97 6.55 9.42
Interest rate spread information:
Average during year 2.68 2.95 3.23 3.89 4.26
End of year 2.51 2.74 2.92 3.30 3.71
Net interest margin (1) 3.52 4.14 5.01 5.03 5.13
Efficiency Ratio (2) 41.86 39.25 53.92 42.30 37.45
Ratio of operating expense to average total assets 1.44 1.65 2.67 2.10 1.91
Ratio of average interest-earning assets to average interest-bearing 121.80 135.19 167.82 136.86 127.21
liabilities
Quality Ratios:
Non-performing assets to total assets at end of year 1.40 1.11 0.97 0.37 1.45
Allowance for loan losses to non-performing loans 21.06 26.71 20.84 65.96 17.55
Allowance for loan losses to total loans 0.37 0.45 0.50 0.51 0.39
Capital Ratios:
Equity to total assets at end of year 15.55 20.45 26.28 42.79 21.91
Average equity to average assets 17.76 24.84 37.94 26.06 21.18
Regulatory Capital Ratios: (3)
Total capital -- -- -- -- 59.05
Tier 1 capital -- -- -- -- 58.37
Leverage ratio -- -- -- -- 22.19
Tangible capital 11.80 15.40 25.86 32.77 --
Core capital 11.80 15.40 25.86 32.77 --
Risk-based capital 24.80 31.40 65.39 92.91 --
<FN>
(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 year the
Bank was a state-chartered savings bank.
</FN>
</TABLE>
3
<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 and
investments and the average rate paid on deposits and FHLB advances, 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, 1999 and December 31, 1998
Total assets at December 31, 1999 were $121.4 million compared to
$102.8 million at December 31, 1998, an increase of $18.6 million, or 18.1%.
Increases in the loan portfolio of $15.4 million and securities
available-for-sale of $8.0 million were the largest components of the increase
in total assets. These increases were primarily funded by increases in advances
from the Federal Home Loan Bank of $13.6 million and deposits of $8.6 million.
In order to increase the size of the loan portfolio, the Company has
utilized the services of a local 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 as the Company's
existing loans. During 1999 and 1998, the Company originated $16.8 million and
$17.9 million of 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."
Total liabilities at December 31, 1999 were $102.5 million compared to
$81.8 million at December 31, 1998, an increase of $20.7 million, or 25.3%.
Total deposits increased by $8.6 million, or 15.4%, to $64.0 million at December
31, 1999 from $55.4 million at December 31, 1998. The increase in total deposits
was due to an increase in time deposits as a result of the Company continuing to
use marketing resources to attract new deposit customers. Total advances from
the Federal Home Loan Bank increased to $37.4 million at December 31, 1999 from
$23.8 million at December 31, 1998, to provide for additional liquidity to help
fund the increase in the loan portfolio.
4
<PAGE>
Total equity at December 31, 1999 was $18.9 million compared to $21.0
million at December 31, 1998, a decrease of $2.1 million, or 10%. The decrease
in total equity was a result of the repurchase of 151,544 shares of treasury
stock for $1.7 million, regular dividends of $883,000, or $0.54 per share, and a
change in unrealized loss on securities available-for-sale of $1.5 million,
offset by net income of $1.6 million for the year ending December 31, 1999.
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, 1999 and
December 31, 1998
General. Net income for the year ended December 31, 1999 was $1.6
million compared to $1.5 million for the year ended December 31, 1998, an
increase of $104,000, or 6.9%.
Interest Income. Interest income for the year ended December 31, 1999
was $8.0 million compared to $6.8 million for the year ended December 31, 1998,
an increase of $1.2 million, or 17.6%. The increase in interest income was the
result of an increase in the average balance of interest-earning assets to
$108.7 million for the year ended December 31, 1999 compared to $88.8 million
for the year ended December 31, 1998, primarily due to an increase in the
average balance of net loans receivable and securities available-for-sale. The
increase in interest-earning assets was partially offset by a decrease in the
yield on interest-earning assets. The yield on interest-earning assets decreased
25 basis points to 7.36% for the year ended December 31, 1999 compared to 7.61%
for the year ended December 31, 1998. The decrease was primarily due to a
decrease in the yield on net loans receivable of 48 basis points and a decrease
in the yield on securities available-for-sale of 39 basis points. The decrease
in the yield on loans and securities is reflective of the current rate
environment.
Interest Expense. Interest expense for the year ended December 31, 1999
was $4.2 million compared to $3.1 million for the year ended December 31, 1998,
an increase of $1.1 million, or 35.5%. The increase in interest expense was a
result of an increase in average interest-bearing liabilities to $89.3 million
for the year ended December 31, 1999 compared to $65.4 million for the year
ended December 31, 1998. The increase in interest-bearing liabilities was offset
partially by a decrease in the average cost of funds to 4.68% for the year ended
December 31, 1999 compared to 4.74% for the year ended December 31, 1998. The
decrease in the average cost of funds was primarily the result of the Company
replacing specific advances from the Federal Home Loan Bank with lower cost
advances in the current year, in addition to a decrease in certificate of
deposit rates offered to customers.
Net Interest Income. Net interest income for the year ended December
31, 1999 was $3.8 million compared to $3.7 million for the year ended December
31, 1998, an increase of $168,000, or 4.6%. Although the Company reduced the
average cost of funds by replacing specific advances from the Federal Home Loan
Bank with lower cost advances, the net interest spread decreased by 19 basis
points as the average yield on interest-earning assets decreased more than the
average cost of interest-bearing liabilities. The slight increase in net
interest income was a result of the increase in the volume of interest-earning
assets and interest-bearing liabilities.
5
<PAGE>
Provision for Loan Losses. The Company recorded a $15,000 provision for
loan losses for the year ended December 31, 1999 compared to an $80,000
provision for the year ended December 31, 1998. 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 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, 1999 is indicative of management's assessment of
the adequacy of the allowance for loan losses, given the trends in historical
loss experience of the portfolio and current economic conditions, as well as the
fact that the majority of loans are single-family residential loans and the
loan-to-values are generally less than 80%. Although management uses the best
information available and maintains the Company's allowance for loan losses at a
level it believes adequate to provide for losses, future adjustments to the
allowance may be necessary due to economic, operating, regulatory and other
conditions that may be beyond the Company's control.
Noninterest Income. Noninterest income for the year ended December 31,
1999 was $3,000 compared to $137,000 for the year ended December 31, 1998, a
decrease of $134,000. The decrease was primarily a result of net losses on sales
of securities of $86,000 for the year ended December 31, 1999 compared to net
gains of $43,000 for the year ended December 31, 1998.
Noninterest Expense. Noninterest expense was $1.6 million for the year
ended December 31, 1999 compared to $1.5 million for the year ended December 31,
1998, an increase of $113,000, or 7.5%. The increase was primarily due to the
increase in data processing expense of $62,000. The additional data processing
expense for the year ended December 31, 1999 was due to the Company converting
to a new data processor in February 1999. The system conversion was done as part
of the Company's preparation for year 2000 computer issues.
Income Tax Expense. The provision for income taxes totaled $606,000 for
the year ended December 31, 1999 compared to $724,000 for the year ended
December 31, 1998. The decrease was a result of an increase in interest income
from municipal securities, which are exempt for federal tax purposes.
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 the ratio of average interest
earning assets to average interest bearing liabilities 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 $695,000, 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
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.
6
<PAGE>
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 $322,000, 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 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.
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.
Service fees collected in 1998 also increased by $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 $698,000, 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. 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 in
noninterest expense 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 in non-interest expense was a result of an
increase in interest income from municipal securities, which are exempt for
federal tax purposes.
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.
7
<PAGE>
The following table presents for the years 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.
Year Ended December 31,
------------------------------------------------
1999 1998
------------------------ -----------------------
Average Average
Outst- Interest Outst- Interest
anding Earned/ Yield/ anding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
-------- -------- ------ -------- ------- ------
(Dollars in Thousands)
Interest-Earning Assets:
Loans Receivable (1) $ 63,264 $5,100 8.06% $47,509 $4,055 8.54%
Securities (2) 31,359 1,945 6.20 26,399 1,739 6.59
Equity securities 2,914 241 8.28 1,668 150 8.98
Mortgage-Backed Securities 7,865 468 5.96 8,726 603 6.90
Other 3,347 251 7.50 4,469 210 4.70
-------- ------ ----- ---
Total interest-earning
assets $108,749 8,005 7.36% $88,771 6,757 7.61%
======== ------ ======= -----
Interest-Earning Liabilities:
Savings accounts $ 21,143 555 2.62 $20,412 589 2.88
Certificate accounts 36,670 1,870 5.10 24,793 1,339 5.40
FHLB Advances 31,474 1,756 5.58 20,154 1,173 5.82
-------- ------ ------ -----
Total interest-bearing
liabilities $ 89,287 4,181 4.68 $65,359 3,101 4.74
======== ------ ---- ======= ----- ----
Net interest income $3,824 $3,656
====== ======
Net interest rate spread 2.68 2.87
==== ====
Net earning assets $ 19,462 $23,412
======== =======
Net yield on average interest-
earning assets 3.52% 4.12%
==== ====
Average interest-earning assets
to average interest-bearing
liabilities 121.80% 135.82%
====== ======
(1) Calculated net of deferred loan fees, loan discounts, loan in process
and loss reserves.
(2) Calculated based on amortized cost.
8
<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
dates indicated. Weighted average balances are based on monthly balances.
At December 31,
-------------
1999 1998
---- ------
Weighted average yield on:
Loans receivable (1) 8.06% 7.99%
Mortgage-backed securities 5.95 6.06
Securities 6.20 6.90
Other interest-earning assets 7.50 4.73
Combined weighted average yield on
interest-earning assets 7.36 7.33
Weighted average rate paid on:
Savings deposits 2.62 2.50
Certificate accounts 5.10 5.32
FHLB Advances 5.58 5.48
Combined weighted average rate
paid on interest-bearing liabilities 4.68 4.61
Spread 2.68 2.72
(1) Excluding amortization of deferred loan fees.
9
<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 those 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,
1999 vs. 1998 1998 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 $1,281 $(236) $1,045 $ 984 $(173) $ 811
Mortgage-backed securities (56) (78) (134) 55 (19) 36
Securities 312 (106) 206 (363) 56 (307)
Equity securities 104 (13) 91 150 0 150
Other (62) 103 41 47 (42) 5
------ ----- ------ ------ ----- ------
Total interest-earning assets $1,579 $(330) $1,249 $ 873 $(178) $ 695
====== ===== ====== ====== ===== ======
Interest-bearing liabilities:
Savings deposits $ 21 $ (55) ($34) $ (21) ($28) $ (49)
Certificate accounts 609 (78) 531 228 8 236
FHLB Advances 633 (50) 583 843 (13) 830
------ ----- ------ ------ ----- ------
Total interest-bearing liabilities $1,263 $(183) 1,080 $1,050 $ (33) 1,017
====== ===== ====== ====== ===== ======
Net interest income $ 169 $ (322)
====== ======
</TABLE>
10
<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, 1999 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, 1999, $53.4 million or 94.7% 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, 1999, adjustable
rate mortgage-backed securities totaled $5.6 million which represented 4.8% 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
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, 1999 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 (+/-300 basis points, measured
in 100 basis point increments).
11
<PAGE>
December 31, 1999
Estimated Increase
Change in Interest Estimated Ratio of NPV (Decrease) in NPV
Rates NPV To -------------------------------
(Basis Points) Amount Total Assets Amount Percent
- ---------------------- --------- ------------- --------------- --------------
(dollars in thousands)
+300 $5,194 4.8% ($11,027) (68)%
+200 8,779 7.9 (7,443) (46)
+100 12,498 10.8 (3,724) (23)
--- 16,222 13.5 --- ---
-100 19,757 15.9 3,536 22
-200 23,569 18.3 7,347 45
-300 27,830 20.7 11,608 72
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
- ---------------------- --------- ------------- --------------- --------------
(dollars in thousands)
+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
Certain assumptions utilized in assessing interest rate risk were
employed in preparing the preceding table. These assumptions relate to interest
rates, loan prepayment rates, deposit decay rates and the market values of
certain assets under the various interest rate scenarios. It was also assumed
that delinquency rates will not change as a result of changes in interest rates
although there can be no assurance that this will be the case. Even if interest
rates change in the designated amounts, there can be no assurance that the
Bank's assets and liabilities would perform as set forth above. In addition, a
change in U.S. Treasury rates in the designated amounts accompanied by a change
in the shape of the Treasury yield curve would cause significantly different
changes to the NPV than indicated above.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, proceeds from
principal and interest payments on loans and mortgage-backed securities and FHLB
advances. While borrowings and 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.
12
<PAGE>
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, 1999,
the Bank's liquidity ratio for regulatory purposes was 34.4%.
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 $411,000,
$1.8 million and $1.9 million for the years ended December 31, 1999, 1998 and
1997, respectively. Net cash from investing activities consisted primarily of
disbursements for loan originations and the purchase of investments and
mortgage-backed securities, offset by principal collections on loans, proceeds
from maturation and sales of securities and paydowns on mortgage-backed
securities. Net cash used in financing activities consisted primarily of the
purchase of treasury stock of $1.7 million and $2.9 million for the years ended
December 31, 1999 and 1998, respectively, net proceeds from FHLB advances
totaling $13.6 million and $10.0 million for the years ended December 31, 1999
and 1998, as well as payment of dividends of $883,000 for the year ended
December 31, 1999. The net increase (decrease) in deposits was $8.6 million,
$14.1 million and ($1.0) million for the years ended December 31, 1999, 1998,
and 1997, 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, 1999,
cash and short-term investments totaled $3.3 million. The Company has other
sources of liquidity if a need for additional funds arises, including securities
maturing within one year and the repayment of loans. The Company may also
utilize the sale of securities available-for-sale and Federal Home Loan Bank
advances as a source of funds.
At December 31, 1999, the Company had outstanding commitments to
originate loans of $377,800, 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, 1999 totaled $36.4 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, 1999, the Bank was in compliance with all applicable
capital requirements and was considered well capitalized. See Note 9 of the
Notes to the Consolidated Financial Statements.
13
<PAGE>
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on the operations of the Company is reflected in increased operating
costs. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant impact on a financial
institution's performance than does inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.
Impact of New Accounting Standards
In June 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.
Year 2000
The Company successfully completed its Year 2000 changeover without any
problems or disruptions to operations. While management believes that it is
unlikely, there can be no assurance that problems not yet apparent to the
Company or its vendors will not arise as the year progresses. Management will
continue to monitor all business processes and relationships with third parties
to ensure that all processes continue to function properly. Total expenditures
on the Year 2000 project through December 31, 1999 were $10,500, which is
consistent with the amount that management estimated for the project.
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.
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.
14
<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, 1999
and 1998 and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. 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, 1999 and 1998 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 28, 2000
15
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and 1998
(In thousands, except share and per share data)
- --------------------------------------------------------------------------------
1999 1998
-------- --------
ASSETS
Cash on hand and in banks $ 868 $ 448
Interest-bearing deposit accounts in other financial
institutions 2,437 3,789
-------- --------
Total cash and cash equivalents 3,305 4,237
Interest-bearing term deposits in other financial
institutions 159 159
Securities available-for-sale 35,550 27,596
Mortgage-backed securities available-for-sale 5,636 11,354
Loans receivable, net 72,179 56,822
Federal Home Loan Bank stock 1,927 1,319
Premises and equipment, net 477 426
Accrued interest receivable 1,051 803
Deferred income taxes 531 -
Other real estate owned 454 -
Other assets 87 68
-------- --------
Total assets $121,356 $102,784
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 63,983 $ 55,429
Advances from borrowers for taxes and insurance 733 578
Advances from the Federal Home Loan Bank 37,405 23,764
Deferred income taxes - 418
Accrued interest payable and other liabilities 363 1,569
-------- --------
Total liabilities 102,484 81,758
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 21,644 21,638
Unearned ESOP shares (981) (1,077)
Unearned stock awards (767) (941)
Retained earnings, substantially restricted 6,862 6,141
Treasury stock, at cost, 488,681 shares in 1999 and
337,137 shares in 1998 (6,425) (4,759)
Accumulated other comprehensive income (loss) (1,483) 2
-------- --------
Total stockholders' equity 18,872 21,026
-------- --------
Total liabilities and stockholders' equity $121,356 $102,784
======== ========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
15.
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998, and 1997
(In thousands, except share and per share data)
- --------------------------------------------------------------------------------
1999 1998 1997
------- -------- --------
Interest income
Loans $ 5,100 $ 4,055 $ 3,244
Securities
Taxable 1,531 1,599 2,046
Tax-exempt 414 140 -
Dividend income on equity investments 241 150 -
Mortgage-backed securities 468 603 568
Other interest-earning assets 251 210 204
------- -------- --------
Total interest income 8,005 6,757 6,062
Interest expense
Deposits 2,425 1,928 1,741
Federal Home Loan Bank advances 1,756 1,173 343
------- -------- --------
Total interest expense 4,181 3,101 2,084
------- -------- --------
Net interest income 3,824 3,656 3,978
Provision for loan losses 15 80 -
------- -------- --------
Net interest income after provision for
loan losses 3,809 3,576 3,978
Noninterest income
Gain (loss) on sales of securities (86) 43 -
Other operating income 89 94 77
------- -------- --------
Total noninterest income 3 137 77
Noninterest expense
Compensation and benefits 1,011 994 1,672
Occupancy and equipment expense 136 123 125
Data processing services 122 60 54
Federal deposit insurance premiums 34 26 27
Professional fees 68 88 97
Other operating expense 231 198 212
------- -------- --------
Total noninterest expense 1,602 1,489 2,187
------- -------- --------
Income before income tax expense 2,210 2,224 1,868
Income tax expense 606 724 947
------- -------- --------
Net income $ 1,604 $ 1,500 $ 921
======= ======== ========
Basic earnings per share $ 1.01 $ .83 $ .47
======= ======== ========
Diluted earnings per share $ 1.01 $ .82 $ .46
======= ======== ========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
15.
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998, and 1997
(In thousands, except share and per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Additional Unearned Unearned Comprehensive Total
Common Paid-in ESOP Stock Retained Treasury Income Stockholders' Comprehensive
Stock Capital Shares Awards Earnings Stock (Loss) Equity Income
----- ------- ------ ------ -------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $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
reclassifications 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
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
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
16.
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1999, 1998, and 1997
(In thousands, except share and per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other
Additional Unearned Unearned Comprehensive Total
Common Paid-in ESOP Stock Retained Treasury Income Stockholders' Comprehensive
Stock Capital Shares Awards Earnings Stock (Loss) Equity Income
----- ------- ------ ------ -------- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Comprehensive income
Net income $ - $ - $ - $ - $ 1,500 $ - $ - $ 1,500 $ 1,500
Change in fair value of
securities, net of reclassi-
fications and tax effects - - - - - - (151) (151) (151)
-------
Total comprehensive
income $ 1,349
=======
Purchases 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
Comprehensive income
Net income - - - - 1,604 - - 1,604 $ 1,604
Change in fair value of
securities, net of reclassi-
fications and tax effects - - - - - - (1,485) (1,485) (1,485)
-------
Total comprehensive
income $ 119
=======
Purchases of treasury stock - - - - - (1,666) - (1,666)
ESOP shares released - 6 96 - - - - 102
Stock awards earned - - - 174 - - - 174
Dividends declared
($.54 per share) - - - - (883) - - (883)
--- ------- ------- ------- ------- ------- ------- -------
Balance at December 31, 1999 $22 $21,644 $ (981) $ (767) $ 6,862 $(6,425) $(1,483) $18,872
=== ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
17.
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,604 $ 1,500 $ 921
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 58 47 46
Amortization of discounts and premiums on securities (39) 4 34
Provision for loan losses 15 80 -
Net (gain) loss on sale of securities available-for-sale 86 (43) -
ESOP compensation expense 102 132 1,005
Stock awards expense 174 176 105
Change in
Deferred loan origination fees (79) (70) (50)
Accrued interest receivable and other assets (267) 673 (294)
Other liabilities and deferred income taxes (1,243) (741) 176
---------- ---------- ----------
Net cash from operating activities 411 1,758 1,943
Cash flows from investing activities
Proceeds from sales of securities available-for-sale 2,390 4,716 14,990
Proceeds from sale of mortgage-backed securities available-for-sale 3,373 1,083 1,671
Purchase of Federal Home Loan Bank stock (608) (619) (338)
Proceeds from repayments of securities 3,120 2,787 1,186
Proceeds from maturities of securities 4,650 19,380 11,650
Purchase of securities available-for-sale (17,226) (17,293) (35,339)
Purchase of mortgage-backed securities available-for-sale (987) (7,215) (6,180)
Net decrease in interest-bearing term deposits in other financial
institutions - 50 39
Net increase in loans (15,747) (19,665) (1,173)
Capital expenditures, net (109) (15) (43)
---------- ---------- ----------
Net cash from investing activities (21,144) (16,791) (13,537)
Cash flows from financing activities
Net increase (decrease) in deposits 8,554 14,154 (928)
Net increase in advances from borrowers for taxes and insurance 155 80 21
Proceeds from Federal Home Loan Bank advances 29,930 21,814 13,750
Repayments of Federal Home Loan Bank advances (16,289) (11,800) -
Purchases of treasury stock (1,666) (2,863) (3,173)
Dividends paid (883) (8,405) (544)
---------- ---------- ----------
Net cash from financing activities 19,801 12,980 9,126
---------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
18.
<PAGE>
PS FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998, and 1997
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net change in cash and cash equivalents $ (932) $ (2,053) $ (2,468)
Cash and cash equivalents, beginning of year 4,237 6,290 8,758
---------- ---------- ----------
Cash and cash equivalents, end of year $ 3,305 $ 4,237 $ 6,290
========== ========== ==========
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 4,029 $ 2,966 $ 2,004
Income taxes 315 1,045 707
Supplemental schedule of noncash investing activities
Amount due to broker for purchase of securities - 1,558 499
Dividends declared - - 7,528
Transfers from loans to real estate owned 454 - -
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
19.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(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) and its wholly-owned
subsidiary, Preferred Savings Bank (the Bank). On November 1, 1999, the Bank
sold its wholly-owned subsidiary, Preferred Service Corporation, which had
engaged in limited insurance activities to an unrelated party. 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 other
comprehensive income (loss). 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.
- --------------------------------------------------------------------------------
(Continued)
20.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
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.
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.
- --------------------------------------------------------------------------------
(Continued)
21.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
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 (LOSS): Comprehensive income (loss) consists of net income
and other comprehensive income (loss). Other comprehensive income (loss)
includes unrealized gains and losses on securities available-for-sale which are
also recognized as separate components of equity.
- --------------------------------------------------------------------------------
(Continued)
22.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 AVAILABLE-FOR-SALE
Securities available-for-sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government agencies $ 26,830 $ - $ (1,200) $ 25,630
Municipal securities 8,843 - (840) 8,003
Equity securities 2,135 - (218) 1,917
---------- --------- --------- ---------
37,808 - (2,258) 35,550
Mortgage-backed securities available-for-sale
Federal Home Loan Mortgage Corporation 1,213 - (58) 1,155
Federal National Mortgage Association 2,707 - (51) 2,656
Government National Mortgage Association 1,852 - (27) 1,825
---------- --------- --------- ---------
5,772 - (136) 5,636
---------- --------- --------- ---------
$ 43,580 $ - $ (2,394) $ 41,186
========== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
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>
- --------------------------------------------------------------------------------
(Continued)
23.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The Bank held $1,000,000 and $500,000 of U.S. government agency bonds which are
structured notes issued by the Federal Home Loan Bank at December 31, 1999 and
1998.
Sales of securities are summarized as follows:
For the Years Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ------------
Proceeds from sales $5,763 $5,799 $16,661
Gross realized gains 22 43 14
Gross realized losses (108) - (14)
Contractual maturities of securities available-for-sale at December 31, 1999
were as follows. Securities not due at a single maturity date, primarily
mortgage-backed and equity securities, are shown separately.
December 31, 1999
--------------------------
Amortized Fair
Cost Value
----------- -----------
Securities available-for-sale
Due from one to five years $ 2,748 $ 2,656
Due after five years through ten years 23,554 22,419
Due after ten years 9,371 8,558
Equity securities 2,135 1,917
Mortgage-backed securities 5,772 5,636
----------- -----------
$ 43,580 $ 41,186
=========== ===========
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following at:
December 31, 1999
--------------------------
1999 1998
----------- -----------
First mortgage loans
Principal balances
Secured by one-to-four-family residences $ 56,408 $ 44,297
Secured by other properties 9,446 8,006
Secured by commercial real estate 6,380 5,135
Construction loans 499 -
----------- -----------
72,733 57,438
- --------------------------------------------------------------------------------
(Continued)
24.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE (Continued)
December 31, 1999
--------------------------
1999 1998
----------- -----------
Less net deferred loan origination fees $ (294) $ (373)
----------- -----------
First mortgage loans, net 72,439 57,065
Share loans 6 15
Less allowance for loan losses (266) (258)
----------- -----------
$ 72,179 $ 56,822
=========== ===========
The principal balance of loans greater than 90 days delinquent on nonaccrual
status at December 31, 1999 and 1998 was approximately $1,255,000 and $777,000.
The interest income that would have been recorded under the original terms of
such loans approximated $106,000 and $70,000 for the years ended December 31,
1999 and 1998.
The Bank did not have any impaired loans during 1999, 1998, or 1997.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Years Ended December 31,
----------- -----------------------------
1999 1998 1997
----------- ----------- -----------
Balance, beginning of year $ 258 $ 186 $ 186
Provision for loan losses 15 80 -
Charge-offs (7) (19) -
Recoveries - 11 -
----------- ----------- -----------
Balance, end of year $ 266 $ 258 $ 186
=========== =========== ===========
- --------------------------------------------------------------------------------
(Continued)
25.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT
Premises and equipment consist of the following at:
December 31,
--------------------------
1999 1998
----------- -----------
Land $ 95 $ 95
Building and improvements 541 530
Furniture and equipment 360 319
----------- -----------
Total cost 996 944
Accumulated depreciation 519 518
----------- -----------
$ 477 $ 426
=========== ===========
NOTE 6 - DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $2,830,000 at December 31, 1999 and
$3,261,000 at December 31, 1998.
At December 31, 1999, scheduled maturities of certificates of deposit are as
follows:
2000 $ 36,416
2001 6,057
2002 569
2003 426
2004 and thereafter 104
-----------
$ 43,572
===========
- --------------------------------------------------------------------------------
(Continued)
26.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 7 - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Chicago were as follows:
December 31,
--------------------
Description 1999 1998
- --------------------------------------------- ------- --------
Structured repayment; matures July 1999;
6.04% interest rate $ - $ 1,950
Amortizing; matures July 2005; 6.4% interest rate 2,167 2,261
Amortizing; matures July 2005; 5.76% interest rate 4,414 4,618
Amortizing; matures August 2005; 5.81% interest rate 894 935
Fixed terms; mature March 2000 through
October 2009; range of rates
5.00% to 5.75%;
average rate 5.19% 29,930 -
Fixed terms; mature November 1999 through
December 2003; range of rates
4.78% to 6.04%;
average rate 5.13% - 14,000
------- --------
$37,405 $ 23,764
======= ========
Scheduled repayments and maturities at December 31, 1999 are as follows:
2000 $ 2,900
2001 1,000
2002 1,030
2003 2,000
2004 and thereafter 30,475
-----------
$ 37,405
===========
The Company will incur a penalty if the advances are repaid prior to their
maturity dates.
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. The Company also pledges securities that it owns to secure these
advances.
- --------------------------------------------------------------------------------
(Continued)
27.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 8 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators for earnings per common
share computations for the years ended December 31, 1999, 1998, and 1997 is
presented below.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Basic earnings per share
Net income $ 1,604 $ 1,500 $ 921
============ ============ ============
Weighted average common shares outstanding 1,590,171 1,798,464 1,955,356
============ ============ ============
Basic earnings per share $ 1.01 $ .83 $ .47
======== ========= ========
Earnings per share assuming dilution
Net income $ 1,604 $ 1,500 $ 921
============ ============ ============
Weighted average common shares outstanding 1,590,171 1,798,464 1,955,356
Add dilutive effect of assumed exercises:
Incentive stock options 1,596 21,647 25,684
Stock awards - 1,125 1,994
------------ ------------ ------------
Weighted average common and dilutive
potential common shares outstanding 1,591,767 1,821,236 1,983,034
============ ============ ============
Diluted earnings per share $ 1.01 $ .82 $ .46
======== ========= ========
</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.
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.
- --------------------------------------------------------------------------------
(Continued)
28.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 9 - REGULATORY CAPITAL (Continued)
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
-------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- ----------- -------- ---------- --------
1999
- ----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $ 14,233 24.8% $ 4,592 8.0% $ 5,740 10.0%
Tier 1 (core) capital (to risk-weighted assets) 13,967 24.3 2,296 4.0 3,444 6.0
Tier 1 (core) capital (to adjusted total assets) 13,967 11.8 4,748 4.0 5,935 5.0
Tangible capital (to adjusted total assets) 13,967 11.8 1,781 1.5 N/A N/A
1998
- ----
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
</TABLE>
As of December 31, 1999, 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.
NOTE 10 - INCOME TAXES
The provision for income taxes consists of the following:
Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Current
Federal $ 598 $ 450 $ 940
State 45 (5) 43
-------- -------- --------
643 445 983
Deferred (37) 279 (164)
Change in valuation allowance - - (128)
-------- -------- --------
Income tax expense $ 606 $ 724 $ 947
======== ======== ========
- --------------------------------------------------------------------------------
(Continued)
29.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
The net deferred tax liability included in other liabilities in the accompanying
consolidated statements of financial condition consists of the following at:
December 31,
----------------
1999 1998
------ ------
Gross deferred tax liabilities
Deferred loan fees $ (163) $ (114)
Accrual to cash (102) (153)
Accumulated depreciation (49) (57)
FHLB stock dividend (14) (14)
ESOP expense (28) (42)
Other (33) (40)
Net unrealized gain on securities available-for-sale - (1)
------ ------
(389) (421)
Gross deferred tax assets
Loan loss reserve 99 94
Capital loss carryforward 100 99
Stock awards 39 39
Unrealized net loss on securities available-for-sale 911 -
------ ------
1,149 232
Valuation allowance (229) (229)
------ ------
Net deferred tax asset (liability) $ 531 $ (418)
====== ======
The valuation allowance relates to capital loss carryforwards, unrealized net
losses on equity securities, and other items that may not be recoverable.
- --------------------------------------------------------------------------------
(Continued)
30.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
The income tax provision differs from the amounts determined by applying the
statutory U.S. federal income tax rate as a result of the following items:
Years Ended Dec. 31,
---------------------------------
1999 1998
---------------- ---------------
Amount Percent Amount Percent
------- ------- ----- -------
Income tax computed at the statutory rate $ 751 34.0% $ 756 34.0%
Tax exempt income, net of disallowed
interest expense (116) (5.3) (30) (1.3)
Other (58) (2.6) (26) (1.2)
------- ------- ----- -----
Total federal income tax 577 26.1 700 31.5
State income tax, net of federal tax benefit 29 1.3 24 1.1
------- ------- ----- -----
$ 606 27.4% $ 724 32.6%
======= ======= ===== =====
Year Ended
December 31, 1997
------------------------
Amount Percent
----------- --------
Income tax computed at the
statutory rate $ 635 34.0%
Deferred tax valuation allowance 128 6.9
ESOP 111 5.9
Other 45 2.4
----------- -------
Total federal income tax 919 49.2
State income tax, net of federal
tax benefit 28 1.5
----------- -------
$ 947 50.7%
=========== =======
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, 1999 includes approximately
$1,514,000, consisting of bad debt deductions accumulated prior to 1988, on
which no provision for federal income taxes has been made. The related amount of
unrecognized deferred tax liability was approximately $587,000.
- --------------------------------------------------------------------------------
(Continued)
31.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION PLANS
The Company has 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.
During 1999 and 1998, 9,602 shares of stock in each year with an average fair
value of $10.68 and $13.75 per share were committed to be released resulting in
ESOP compensation expense of $102,587 and $132,070. During 1997, 51,799 shares
of stock, including 50,941 resulting from a special dividend, with an average
fair value of $19.39 per share were committed to be released, resulting in ESOP
compensation expense of $1,004,667. ESOP shares have been reduced by 1,756 as of
December 31, 1999 because of terminations.
Shares held by the ESOP at December 31 are as follows:
1999 1998
------------ ------------
Allocated shares 74,745 66,899
Unallocated shares 98,069 107,671
------------ ------------
Total ESOP shares 172,814 174,570
============ ============
Fair value of unallocated shares $ 1,165 $ 1,077
============ ============
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.
- --------------------------------------------------------------------------------
(Continued)
32.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION PLANS (Continued)
A summary of the status of the Company's stock option plan and changes during
the year are presented below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- ------------------------- --------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
----------- ----------- ----------- ----------- ----------- -----------
Outstanding at
<S> <C> <C> <C> <C> <C> <C>
beginning of year 167,350 $ 11.02 173,750 $ 11.02 - $ -
Granted - - 181,750 11.02
Exercised - - -
Forfeited - (6,400) (8,000)
----------- ----------- -----------
Outstanding at
end of year 167,350 167,350 173,750
=========== =========== ===========
Options exercisable
at end of year 68,220 34,750 -
</TABLE>
All of the outstanding options at December 31, 1999 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 7.5 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.
- --------------------------------------------------------------------------------
(Continued)
33.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 11 - STOCK-BASED COMPENSATION PLANS (Continued)
1999 1998 1997
----------- ----------- -----------
Net income as reported $ 1,604 $ 1,500 $ 921
Pro forma net income 1,506 1,394 851
Earnings per share as reported
Basic 1.01 .83 .47
Diluted 1.01 .82 .46
Pro forma earnings per share
Basic .95 .78 .44
Diluted .95 .77 .43
The $4.76 per share 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.
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. 1,600 shares were forfeited in 1998 and
an additional 725 were awarded in 1999. 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 $174,453,
$175,951, and $104,543 for the years ended December 31, 1999, 1998, and 1997.
A summary of the activity under the MRP is presented below:
1999 1998 1997
------------------- ------------------ ------------------
Unearned Unawarded Unearned Unawarded Unearned Unawarded
Shares Shares Shares Shares Shares Shares
--------- --------- -------- -------- -------- ---------
Number of shares at
beginning of year 49,605 24,879 64,006 23,279 - -
Acquired - - - - - 87,285
Awarded 725 (725) - - 64,006 (64,006)
Earned (12,401) - (12,801) - - -
Forfeited - - (1,600) 1,600 - -
--------- --------- -------- -------- -------- --------
Number of shares at
end of year 37,929 24,154 49,605 24,879 64,006 23,279
========= ========= ======== ======== ======== ========
Unearned shares and unawarded shares under the MRP are not considered
outstanding for earnings per share calculations.
- --------------------------------------------------------------------------------
(Continued)
34.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
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, 1999 and
1998, these financial instruments consist of commitments to extend credit
totaling $377,800 and $1,949,000. Fixed rate mortgage loan commitments at
December 31, 1999 have rates ranging from 7.75% to 8.63% and terms generally up
to 31 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, 1999, the
Bank had a deposit account at the Federal Home Loan Bank of Chicago with a
balance totaling approximately $1,474,000. At December 31, 1998, the balance was
approximately $3,272,000.
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.
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, 1999 December 31, 1998
-------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Financial assets
Cash on hand and in banks $ 868 $ 868 $ 448 $ 448
Interest-bearing deposits in other
financial institutions 2,437 2,437 3,789 3,789
Interest-bearing term deposits in other
financial institutions 159 159 159 159
Securities available-for-sale 41,186 41,186 38,950 38,950
Loans receivable, net 72,179 71,170 56,822 57,368
Federal Home Loan Bank stock 1,927 1,927 1,319 1,319
Accrued interest receivable 1,051 1,051 803 803
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
35.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 13 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------- -------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial liabilities
Non-interest-bearing deposits $ (326) $ (326) $ (147) $ (147)
Money market and passbook savings (20,085) (20,085) (21,063) (21,063)
Certificates of deposits (43,572) (43,778) (34,219) (34,434)
Advances from borrowers for taxes and
insurance (733) (733) (578) (578)
Advances from the Federal Home Loan Bank (37,405) (33,092) (23,764) (23,798)
Accrued interest payable (430) (430) (278) (278)
</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, 1999 and 1998, 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, 1999 and 1998, applied for the time period until maturity. Loan
commitments are not included in the table above as their estimated fair value is
immaterial.
Other assets and liabilities of the Bank that are not defined as financial
instruments, such as property and equipment, are not included in the above
disclosures.
While the above estimates are based on management's judgment of the most
appropriate factors, there is no assurance that were the Bank to have disposed
of these items on December 31, 1999 and 1998, the fair values would have been
achieved, because the market value may differ depending on the circumstances.
The estimated fair values at December 31, 1999 and 1998 should not necessarily
be considered to apply at subsequent dates.
- --------------------------------------------------------------------------------
(Continued)
36.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 14 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows.
1999 1998 1997
------- ----- ------
Unrealized holding gains (losses) on
securities available-for-sale $(2,483) $(201) $ 284
Less reclassification adjustments for gains
(losses) recorded in income (86) 43 -
------- ----- ------
Net unrealized gains and (losses) (2,397) (244) 284
Tax effect 912 93 (108)
------- ----- ------
Other comprehensive income (loss) $(1,485) $(151) $ 176
======= ===== ======
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, 1999 and 1998
1999 1998
----------- -----------
ASSETS
Cash and cash equivalents $ 3,250 $ 1,331
Securities available-for-sale 1,916 3,278
ESOP loan 903 973
Investment in bank subsidiary 12,620 15,260
Accrued interest receivable and other assets 183 184
----------- -----------
$ 18,872 $ 21,026
=========== ===========
Stockholders' equity $ 18,872 $ 21,026
=========== ===========
- --------------------------------------------------------------------------------
(Continued)
37.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 1999, 1998, and 1997
1999 1998 1997
------- ------- -------
Income
Interest on deposit with Bank $ 17 $ - $ -
Securities interest income 288 263 423
ESOP loan interest income 56 80 117
Dividend income from subsidiary 3,000 7,120 3,951
Gain (loss) on sales of securities (30) 33 -
------- ------- -------
Total income 3,331 7,496 4,491
Other expenses 203 199 155
------- ------- -------
Income before income taxes and equity (excess) in
undistributed earnings of bank subsidiary 3,128 7,297 4,336
Income taxes (benefit) (21) 16 96
------- ------- -------
Income before equity (excess) in undistributed
earnings of bank subsidiary 3,149 7,281 4,240
Excess undistributed earnings of bank subsidiary (1,545) (5,781) (3,319)
------- ------- -------
Net income $ 1,604 $ 1,500 $ 921
======= ======= =======
- --------------------------------------------------------------------------------
(Continued)
38.
<PAGE>
PS FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998, and 1997
(Table amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998, and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 1,604 $ 1,500 $ 921
Adjustments to reconcile net income to net cash
from operating activities
Amortization of discounts and premiums on securities - 2 (1)
Excess undistributed earnings of bank subsidiary 1,545 5,781 3,319
(Gain) loss on sale of securities 30 (33) -
Change in
Other assets 35 (9) 31
Other liabilities - (690) -
----------- ----------- -----------
Net cash from operating activities 3,214 6,551 4,270
Cash flows from investing activities
Purchase of securities available-for-sale - (4,299) (1,690)
Proceeds from sale of securities available-for-sale 92 5,172 1,000
Proceeds from repayment of securities - 14 95
Proceeds from maturities of securities 1,150 330 2,000
Capital contribution to subsidiary (58) (83) -
----------- ----------- -----------
Net cash from investing activities 1,184 1,134 1,405
Cash flows from financing activities
Purchases of treasury stock (1,666) (2,863) (3,172)
Payment received on loan to ESOP 70 720 9
Dividends paid (883) (8,405) (544)
----------- ----------- -----------
Net cash from financing activities (2,479) (10,548) (3,707)
----------- ----------- -----------
Net change in cash and cash equivalents 1,919 (2,863) 1,968
Cash and cash equivalents at beginning of year 1,331 4,194 2,226
----------- ----------- -----------
Cash and cash equivalents at end of year $ 3,250 $ 1,331 $ 4,194
=========== =========== ===========
</TABLE>
- --------------------------------------------------------------------------------
39.
<PAGE>
PS FINANCIAL, INC.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 11:00 a.m., Chicago, Illinois
time on May 3, 2000 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."
- --------------- -------------------------------- ---------------------------
1999 1998
- --------------- -------------------------------- ---------------------------
- --------------- -------- ----------- ----------- -------- -------- ---------
QUARTER ENDED HIGH LOW DIVIDEND HIGH LOW DIVIDEND
- --------------- -------- ----------- ----------- -------- -------- ---------
- --------------- -------- ----------- ----------- -------- -------- ---------
March 31 $10.38 $9.50 $0.13 $23.00 $13.50 $4.12*
June 30 11.38 9.75 0.13 14.88 12.75 0.12
September 30 11.50 10.50 0.14 13.50 10.75 0.12
December 31 13.13 10.19 0.14 12.00 8.50 0.13
- --------------- -------- ----------- ----------- -------- -------- ---------
* includes special dividend of $4.00 per share declared December 30, 1997 and
paid on January 30, 1998.
At March 24, 2000 there were 1,669,290 shares of PS Financial, Inc. common stock
issued and outstanding (including unallocated ESOP shares) and there were 141
holders of record. The closing sale price for the Company's stock on March 24,
2000 was $12.00 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, 1999, 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.
40
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage of Incorporation
Parent Subsidiary Ownership or Organization
- ------------------ ------------------------- -------------- ---------------
- ------------------ ------------------------- -------------- ---------------
PS Financial, Inc. Preferred Savings Bank 100% Federal
<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, 1999 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 868
<INT-BEARING-DEPOSITS> 2,437
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,186
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 72,179
<ALLOWANCE> 266
<TOTAL-ASSETS> 121,356
<DEPOSITS> 63,983
<SHORT-TERM> 20,930
<LIABILITIES-OTHER> 1,096
<LONG-TERM> 16,475
0
0
<COMMON> 22
<OTHER-SE> 18,850
<TOTAL-LIABILITIES-AND-EQUITY> 121,356
<INTEREST-LOAN> 5,100
<INTEREST-INVEST> 2,654
<INTEREST-OTHER> 251
<INTEREST-TOTAL> 8,005
<INTEREST-DEPOSIT> 2,425
<INTEREST-EXPENSE> 4,181
<INTEREST-INCOME-NET> 3,824
<LOAN-LOSSES> 15
<SECURITIES-GAINS> (86)
<EXPENSE-OTHER> 1,602
<INCOME-PRETAX> 2,210
<INCOME-PRE-EXTRAORDINARY> 2,210
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,604
<EPS-BASIC> 1.01
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 4.29
<LOANS-NON> 1,255
<LOANS-PAST> 3,000
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 258
<CHARGE-OFFS> 7
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 266
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
