Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[x] Quarterly Report pursuant to
Section 13 or 15 (d) Of The
Securities Exchange Act of 1934
[ ] For the Six Months Ended June 30, 1998
Commission File Number 0-28864
PS Financial, Inc.
(Exact name of the registrant as specified in its charter)
Delaware 36-4101473
(State of incorporation) (I.R.S. Employer Identification Number)
4800 South Pulaski Road, Chicago,
Illinois 60632 (Address of
principal executive offices)
(773) 376-3800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No (First Filing Pursuant to Rule 15d-13(a))___
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Class: SHARES OUTSTANDING at August 13, 1997
Common Stock, $.01 par value 1,947,904
PS Financial, Inc.
Form 10-QSB
Six Months Ended June 30, 1998
Part I - Financial Information
ITEM 1 - FINANCIAL STATEMENTS (Unaudited) Page
Condensed Consolidated Statements of Financial Condition at June 30, 3
1998 and December 31, 1997
Condensed Consolidated Statements of Income for the three months 4
and six months ended June 30, 1998 and 1997
Condensed Consolidated Statements of Changes in Stockholders' Equity 5
for the six months ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows for the six months 6
ended June 30, 1998 and 1997
Notes to the Condensed Consolidated Financial Statements as of June 30, 8
1998
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 9
AND RESULTS OF OPERATIONS
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
2
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1998 and December 31, 1997
(Dollars in thousands, expect per share data)
(Unaudited)
June 30, December 31,
1998 1997
-------- --------
ASSETS
Cash on hand and in banks $ 485 $ 440
Interest-bearing deposit accounts in other financial institutions 681 5,850
-------- --------
Total cash and cash equivalents 1,166 6,290
Interest-bearing term deposits in other financial institutions 207 209
Equity securities 253 --
Securities available-for-sale 24,956 33,459
Mortgage-backed securities available-for-sale 8,592 8,095
Loans receivable, net 47,619 37,167
Federal Home Loan Bank stock 938 700
Premises and equipment, net 447 458
Accrued interest receivable 717 801
Other assets 105 743
-------- --------
Total assets $ 85,000 $ 87,922
======== ========
LIABILITIES AND EQUITY
Liabilities
Deposits $ 41,245 $ 41,275
FHLB Advances 18,550 13,750
Advances from borrowers for taxes and insurance 619 498
Accrued interest payable and other liabilities 1,823 1,761
Dividends payable -- 7,529
-------- --------
Total liabilities 62,237 64,813
Equity
Common stock $0.01 par value per share, 2,500,000 shares
authorized; 2,182,125 issued and outstanding
22 22
Additional paid-in capital 21,628 21,602
Retained earnings, substantially restricted 5,837 5,518
Unearned ESOP shares (1,123) (1,173)
Unearned stock awards (1,028) (1,117)
Treasury stock, at cost, 163,417 & 108,417 shares respectively (2,690) (1,896)
Net unrealized gain on securities available-for-sale, net of tax 117 153
-------- --------
Total equity 22,763 23,109
-------- --------
Total liabilities and equity $ 85,000 $ 87,922
======== ========
3
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Six Months Ended Three months ended
June 30, June 30,
1998 1997 1998 1997
-------------- -------------- --------------- -------------
Interest income
Loans $ 1,851 $ 1,618 $ 978 $ 814
Securities 963 873 424 502
Mortgage-backed securities 302 267 143 138
Other 77 110 44 35
-------------- -------------- --------------- -------------
Total interest income 3,193 2,868 1,589 1,489
Interest expense
Deposits 864 859 433 435
Other borrowings 479 40 255 40
-------------- -------------- --------------- -------------
Total interest expense 1,343 899 688 475
-------------- -------------- --------------- -------------
Net interest income 1,850 1,969 901 1,014
Provision for loan losses 0 0 0 0
-------------- -------------- --------------- -------------
Net interest income after provision for loan 1,850 1,969 901 1,014
Noninterest income
Net gain (loss) on sale of securities 23 (3) 0 (9)
Other 46 35 34 17
-------------- -------------- --------------- -------------
Total noninterest income 69 32 34 8
Noninterest expense
Compensation and benefits 446 362 218 196
Occupancy and equipment expense 60 65 32 33
Data processing 30 25 15 11
Federal insurance premiums 13 14 6 7
Professional Fees 50 66 33 47
Other 124 93 74 51
-------------- -------------- --------------- -------------
Total noninterest expense 723 625 378 345
-------------- -------------- --------------- -------------
Income before income tax expense 1,196 1,376 557 677
Income tax expense 424 528 199 259
-------------- -------------- --------------- -------------
Net income $ 772 $ 848 $ 358 $ 418
============== ============== =============== =============
Earnings per share $ 0.41 $ 0.42 $ 0.19 $ 0.21
============== ============== =============== =============
Average shares outstanding 1,867,852 2,016,469 1,875,819 2,017,769
============== ============== =============== =============
4
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
- --------------------------------------------------------------------------------------------------------------
Six Months Ended June 30 1998 1997
- --------------------------------------------------------------------------------------------------------------
Common Shares
Balance at beginning of year $ 22 $ 22
- --------------------------------------------------------------------------------------------------------------
Balance at June 30 $ 22 $ 22
- --------------------------------------------------------------------------------------------------------------
Additional Paid-In Capital
Balance at beginning of year $ 21,602 $ 21,170
Change in additional paid in capital 26 0
- --------------------------------------------------------------------------------------------------------------
Balance at June 30 $ 21,628 $ 21,170
- --------------------------------------------------------------------------------------------------------------
Retained Earnings, Substantially Restricted
Balance at beginning of year $ 5,518 $ 12,669
Net income for the period 772 $772 $ 848 $848
Dividends declared (453) (174)
- --------------------------------------------------------------------------------------------------------------
Balance at June 30 $ 5,837 $ 13,343
- --------------------------------------------------------------------------------------------------------------
Unearned ESOP Shares
Balance at beginning of year $ (1,173) $ (1,691)
Change in unearned ESOP shares 50 0
- --------------------------------------------------------------------------------------------------------------
Balance at June 30 $ (1,123) $ (1,691)
- --------------------------------------------------------------------------------------------------------------
Unearned RRP Shares
Balance at beginning of year $ (1,117) $ 0
Change in RRP shares 89 (881)
- --------------------------------------------------------------------------------------------------------------
Balance at June 30 $ (1,028) $ (881)
- --------------------------------------------------------------------------------------------------------------
Treasury Stock
Balance at beginning of year (1,896) 0
Change in Treasury Stock (794) 0
- --------------------------------------------------------------------------------------------------------------
Balance at June 30 $ (2,690) $ 0
- --------------------------------------------------------------------------------------------------------------
Unrealized gain (loss) on securities available-for-sale
Balance at beginning of year $ 153 $ (23)
Change in unrealized gain (loss) on securities (36) (36) 40 40
available-for-sale net of tax
- --------------------------------------------------------------------------------------------------------------
Balance at June 30 $ 117 $ 17
- --------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity $ 22,763 $ 31,980
- --------------------------------------------------------------------------------------------------------------
Comprehensive Income $736 $888
- --------------------------------------------------------------------------------------------------------------
5
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Six months ended
June 30,
1998 1997
-------- --------
Cash flows from operating activities
Net income $ 772 $ 848
Adjustments to reconcile net income to net cash from operating
activities
Depreciation 25 24
Amortization of premiums and discounts on investment and
mortgage-backed securities, net
13 (37)
Net gain on sales of securities available-for-sale (23) 3
RRP expense 89 15
ESOP expense 71 0
Change in
Deferred loan origination fees (41) (18)
Accrued interest receivable and other assets 722 (115)
Other liabilities and deferred income taxes 129 372
-------- --------
Net cash provided by operating activities 1,757 1,092
Cash flows from investing activities
Proceeds from sale of securities available-for-sale 3,500 7,989
Proceeds from sale of mortgage-backed securities available-for-sale
1,102 1,014
Purchase of Federal Home Loan Bank Stock (238) 0
Proceeds from repayment of securities available-for-sale 1,381 466
Proceeds from maturities of securities available-for-sale 12,000 2,250
Purchase of securities available-for-sale (6,996) (16,505)
Purchase of mortgage-backed securities available-for-sale (3,014) (4,176)
Purchase of equity securities available-for-sale (268) 0
Net decrease in interest-bearing term deposits in other financial
institutions 2 89
Net change in loans (10,411) (454)
Capital expenditures, net (14) (13)
-------- --------
Net cash used in investing activities (2,956) (9,340)
Cash flows from financing activities
Net increase (decrease) in deposits (30) (178)
Dividends Paid (8,022) (174)
Borrowings from FHLB 4,800 4,500
Purchase of Treasury Stock (794) 0
Net increase in advance payments by borrowers for insurance and taxes 121 45
-------- --------
Net cash provided by (used in) financing activities (3,925) 4,193
Decrease in cash and cash equivalents (5,124) (4,055)
Cash and cash equivalents at beginning of period 6,290 8,758
-------- --------
Cash and cash equivalents at end of period $ 1,166 $ 4,703
======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 1,310 $ 860
Income taxes 645 486
6
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
Notes to Condensed Consolidated Financial Statements
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements.
In the opinion of management, the unaudited consolidated financial statements
contain all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the financial condition of PS Financial, Inc. as of
June 30, 1998 and December 31, 1997, and the results of its operations for the
three month and six month periods then ended June 30, 1998 and 1997.
NOTE 2 - CONVERSION
On November 26, 1996, Preferred Savings Bank ("Bank") converted from a state
chartered mutual savings bank to a federally chartered stock savings bank. The
Bank issued all of its common stock to PS Financial, Inc. ("Company") and at the
same time the Company issued 2,182,125 shares of common stock at $10.00 per
share to the ESOP, certain depositors of the Bank, and certain members of the
general public, all pursuant to a plan of conversion ("Conversion").
The ESOP purchased 174,570 shares of common stock representing 8% of the total
issued shares. The ESOP borrowed $1,745,700 from the Company to purchase the
stock using the stock as collateral for the loan. The loan is to be repaid
principally from the Bank's contributions to the ESOP over a period of up to 40
years.
NOTE 3 - CAPITAL REQUIREMENTS
Pursuant to federal regulations, savings institutions must meet two separate
capital requirements. The following is a summary of the Bank's regulatory
capital at June 30, 1998.
Core Risk based
Capital Capital
------- -------
(In thousands)
Regulatory capital $15,282 $15,461
Minimum capital requirement 3,414 3,189
------- -------
Excess regulatory capital over minimum requirement $11,868 $12,272
======= =======
8
NOTE 4 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators for earnings per common
share computations for the three months and six months ended June 30, 1998 and
1997 is presented below.
Six Months Ended June 30, Three Months Ended June 30,
1998 1997 1998 1997
---- ---- ---- ----
Basic Earnings Per Share
Net income $ 771,565 $ 847,843 $ 357,647 $ 418,046
================ ================ ================ ==========
Weighted average common shares outstanding 1,867,852 2,016,469 1,875,819 2,017,769
================ ================ ================ ==========
Basic Earnings Per Share $ 0.41 $ 0.42 $ 0.19 $ 0.21
================ ================ ================ ==========
Earnings Per Share Assuming Dilution
Net income $ 771,565 $ 847,843 $ 357,647 $ 418,046
================ ================ ================ ==========
Weighted average common shares outstanding 1,867,852 2,016,469 1,875,819 2,017,769
Add dilutive effect of assumed exercises
Incentive stock options 37,169 -- 37,169 --
Stock awards -- 82 -- --
Weighted average common and dilutive potential common 1,905,021 2,016,551 1,912,988 2,017,769
shares outstanding
================ ================ ================ ==========
Diluted Earnings Per Share $ 0.41 $ 0.42 $ 0.19 $ 0.21
================ ================ ================ ==========
9
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Comparison of Financial Condition at June 30, 1998 and December 31, 1997
Total assets decreased $2.9 million from $87.9 million at December 31, 1997 to
$85.0 million at June 30, 1998 due mainly to the payment of the special dividend
of $7.5 million in January 1998. In order to provide for additional liquidity in
light of the payment of the special dividend, the Company increased FHLB
advances by $4.8 million.
The Company's net loans receivable increased by $10.4 million from $37.2 million
at December 31, 1997 to $47.6 million at June 30, 1998. In addition, mortgage
backed securities increased by $497,000 from $8.1 million at December 31, 1997
to $8.6 million at June 30, 1998. These increases were mainly offset by a
decrease in cash and cash equivalents of $5.1 million, from $6.3 million at
December 31, 1997 to $1.2 million at June 30, 1998, as well as a decrease in
securities available-for-sale by $8.5 million, from $33.5 million at December
31, 1997 to $25.0 million at June 30, 1998. The decreases were due to the
payment of the special dividend of $7.5 million in January 1998.
Total liabilities at June 30, 1998 were $62.2 million compared to $64.8 million
at December 31, 1997, a decrease of $2.6 million. The decrease of $7.5 million
in other liabilities was due mainly to the payment of the $4.00 per share
special dividend which totaled $7.5 million. In order to provide for additional
liquidity in light of the payment of the special dividend, the Company increased
FHLB advances by $4.8 million.
Equity at June 30, 1998 was $22.8 million compared to $23.1 million at December
31, 1997, a decrease of $346,000, or 1.5%, due primarily to net earnings of
$772,000 partially offset by a $36,000 decrease in the unrealized gain on
securities available-for-sale, payment of regular dividends totaling $453,000,
and treasury stock purchased at a cost of $794,000.
Comparison of Operating Results for the Three Months Ended June 30, 1998 and
June 30, 1997.
General
Net earnings for the three months ended June 30, 1998 were $358,000, a decrease
of $60,000, or 14.4%, from net earnings of $418,000 for the three months ended
June 30, 1997. The decrease in net earnings is primarily due to the decrease in
the net interest margin resulting from the payment of a special $4.00 per share
dividend in January and the increased use of FHLB advances in an attempt to
better leverage the Company's high capital ratio and provide additional
liquidity to fund increased loan demand.
Interest Income
Interest income for the three months ended June 30, 1998 was $1.6 million
compared to $1.5 million for the three months ended June 30, 1997, an increase
of $100,000, or 6.8%. The increase in interest income was the result of a $4.2
million increase in the average balance of interest-earning assets primarily due
to an increase in the average balance of loans receivable. The increase in the
average balance was partially offset by a decrease in yield on new loan
originations for the three months ended June 30, 1998. The decrease in loan
yields was primarily the result of repayments on higher-yielding mortgages being
replaced by lower-yielding mortgages as long term rates declined in general.
Interest Expense
Interest expense for the three months ended June 30, 1998 was $688,000 compared
to $475,000 for the three months ended June 30, 1997, an increase of $213,000,
or 44.8%. The increase in interest expense was primarily due to the addition of
$14.1 million in FHLB advances, as well as an increase in the Bank's cost of
deposits. The increase in the cost of deposits was primarily due to a decrease
in lower-yielding passbook balances..
Provision for Loan Losses
10
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The Bank's provision for loan losses was zero for the three months ended June
30, 1998 and 1997. At June 30, 1998, the Bank's allowance for loan losses
totaled $179,000, or 0.4% of total loans. The amount of the provision and
allowance for estimated losses on loans is influenced by current economic
conditions, actual loss experience, industry trends and other factors, such as
adverse economic conditions, including declining real estate values, in the
Bank's market area. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to provide additions to the
allowance based upon judgments which differ from those of management. The
absence of a loan loss provision for the three months ended June 30, 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, future adjustments
to the allowance may be necessary due to economic, operating, regulatory and
other conditions that may be beyond the Bank's control.
Past due loan balances over sixty days at June 30, 1998 decreased to $1.9
million compared to $2.0 million at December 31, 1997. Non-accruing loans at
June 30, 1998 totaled $352,000 compared to $471,000 at December 31, 1997.
Noninterest Income
Noninterest income for the three months ended June 30, 1998 was $34,000 compared
to $8,000 for the three months ended June 30, 1997. The increase was primarily
due to a net gain of $16,000 on the sale of a company vehicle as well as a net
loss of $9,000 on sales of securities in 1997.
Noninterest Expense
Noninterest expense was $378,000 for the three months ended June 30, 1998
compared to $345,000 for the three months ended June 30, 1997, an increase of
$33,000. The increase was primarily a result of a $22,000 increase in
compensation and benefits, including the implementation of the Company's
Recognition and Retention Plan, and an increase of $19,000 in other expenses
used to grow the loan portfolio, partially offset by a decrease in professional
fees of $10,000.
Income Taxes
Income taxes were $199,000 for the three months ended June 30, 1998 compared to
$259,000 for the three months ended June 30, 1997, a decrease of $60,000, or
23.2%. The decrease was primarily a result of a $120,000 decrease in pretax
earnings.
Comparison of Operating Results for the Six Months Ended June 30, 1998 and June
30, 1997.
General
Net earnings for the six months ended June 30, 1998 were $772,000, a decrease of
$76,000, or 9.0%, from net earnings of $848,000 for the six months ended June
30, 1997. The decrease in net earnings is primarily due to the decrease in the
ratio of interest earning assets to interest bearing liabilities resulting from
the payment of a special $4.00 per share dividend in January and the increased
use of FHLB advances in an attempt to better leverage the Company's high capital
ratio.
Interest Income
Interest income for the six months ended June 30, 1998 was $3.2 million compared
to $2.9 million for the six months ended June 30, 1997, an increase of $325,000,
or 11.3%. The increase in interest income was the result of a $4.8 million
increase in the average balance of interest-earning assets primarily due to an
increase in the average balance of loans receivable. The increase in the average
balance was partially offset by a decrease in yield on new loan originations
11
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
for the three months ended June 30, 1998. The decrease in loan yields was
primarily the result of repayments on higher-yielding mortgages being replaced
by lower-yielding mortgages as long term rates declined in general.
Interest Expense
Interest expense for the six months ended June 30, 1998 was $1.3 million
compared to $899,000 for the six months ended June 30, 1997, an increase of
$444,000, or 49.4%. The increase in interest expense was primarily due to a
$14.1 million increase in FHLB advances. A $700,000 decrease in the average
balance of interest-bearing deposit for the six months ended June 30, 1998
compared to the six months ended June 30, 1997 was partially offset by an
increase in the average cost of funds for deposits. The increase in the cost of
funds was primarily due to a decrease in lower-yielding passbook balances.
Provision for Loan Losses
The Bank's provision for loan losses was zero for the six months ended June 30,
1998 and 1997. At June 30, 1998, the Bank's allowance for loan losses totaled
$179,000, or 0.4% of total loans. The amount of the provision and allowance for
estimated losses on loans is influenced by current economic conditions, actual
loss experience, industry trends and other factors, such as adverse economic
conditions, including declining real estate values, in the Bank's market area.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to provide additions to the allowance based
upon judgments which differ from those of management. The absence of a loan loss
provision for the six months ended June 30, 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, future adjustments to the allowance may be necessary
due to economic, operating, regulatory and other conditions that may be beyond
the Bank's control.
Past due loan balances over sixty days at June 30, 1998 decreased to $1.9
million compared to $2.0 million at December 31, 1997. Non-accruing loans at
June 30, 1998 totaled $352,000 compared to $471,000 at December 31, 1997.
Noninterest Income
Noninterest income for the six months ended June 30, 1998 was $69,000 compared
to $32,000 for the six months ended June 30, 1998. The increase was primarily a
result of a net gain of $23,000 on sales of securities and a net gain of $16,000
on the sale of a company vehicle in 1998.
Noninterest Expense
Noninterest expense was $723,000 for the six months ended June 30, 1998 compared
to $625,000 for the six months ended June 30, 1997, an increase of $98,000. The
increase was primarily a result of an $84,000 increase in compensation and
benefits, including the implementation of the Company's Recognition and
Retention Plan, and an increase of $30,000 in other expenses used to grow the
loan portfolio, offset in part by a $16,000 decrease in professional fees.
Income Taxes
Income taxes were $424,000 for the six months ended June 30, 1998 compared to
$528,000 for the six months ended June 30, 1997, a decrease of $104,000, or
19.7%. The decrease was primarily a result of a $180,000 decrease in pretax
earnings.
Asset/Liability Management
12
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. The Board of Directors meets at least
quarterly to review the Company's interest rate risk position and profitability.
The Board of Directors also reviews the Company's portfolio, formulates
investment strategies and oversees the timing and implementation of transactions
to assure attainment of the Company's objectives in the most effective manner.
In addition, the Board anticipates reviewing on a quarterly basis the Company's
asset/liability position, including simulations of the effect on the Company's
capital of various interest rate scenarios. Interest rate risk information as of
June 30, 1998 was not yet available at the time of this filing; however,
management estimates that there has not been a material change from the December
31, 1997 presentation, which is discussed below.
In managing its asset/liability mix, PS Financial, depending on the relationship
between long- and short-term interest rates, market conditions and consumer
preference, often places more emphasis on managing net interest margin than on
better matching the interest rate sensitivity of its assets and liabilities in
an effort to enhance net interest income. Management believes that the increased
net interest income resulting from a mismatch in the maturity of its asset and
liability portfolios can, during periods of declining or stable interest rates,
provide high enough returns to justify the increased exposure to sudden and
unexpected increases in interest rates.
Management has taken a number of steps to limit to some extent its interest rate
risk. First, the Company focuses its fixed rate loan originations on loans with
maturities of 15 years or less. At June 30, 1998, $34.2 million or 92.6% of the
Company's one- to four family residential loan portfolio consisted of fixed rate
loans having original terms to maturity of 15 years or less. Second, the Company
offers balloon loans of 10 years or less in an attempt to decrease its
asset/liability mismatch. Third, the Company maintains a portfolio of securities
and liquid assets with weighted average lives of three years or less. At June
30, 1998, the Company had $25.0 million of securities with a remaining average
life of 9.29 years. Fourth, the Company has maintained a mortgage-backed
securities portfolio with adjustable-rates. At June 30, 1998, adjustable rate
mortgage-backed securities totaled $5.8 million which represented 7.10% of
interest-earning assets. Fifth, the Company has attempted to reinvest the
proceeds of most of its borrowings into assets with maturities which are
anticipated to be similar to those of its borrowings. Finally, a substantial
proportion of the Company's liabilities consists of passbook savings accounts
which are believed by management to be somewhat less sensitive to interest rate
changes than certificate accounts.
The primary objective of PS Financial's investment strategy is to provide
liquidity necessary to meet funding needs as well as to address daily, cyclical
and long-term changes in the asset/liability mix, while contributing to
profitability by providing a stable flow of dependable earnings. Investments
generally include interest-bearing deposits in other federally insured financial
institutions, FHLB stock and U.S. Government securities.
Generally, the investment policy of the Company is to invest funds among various
categories of investments and maturities based upon the Company's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, to provide collateral for borrowings, and to fulfill the
Company's asset/liability management policies.
PS Financial's cost of funds responds to changes in interest rates due to the
relatively short-term nature of its deposit portfolio. Consequently, the results
of operations are heavily influenced by the levels of short-term interest rates.
PS Financial offers a range of maturities on its deposit products at competitive
rates and monitors the maturities on an ongoing basis.
An approach used by management to quantify interest rate risk is the net
portfolio value ("NPV") analysis. In essence, this approach calculates the
difference between the present value of liabilities, expected cash flows from
assets and cash flows from off balance sheet contracts.
13
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following table sets forth, at December 31, 1997, an analysis of the Bank's
interest rate risk as measured by the estimated changes in NPV resulting from
instantaneous and sustained parallel shifts in the yield curve (+/-400 basis
points, measured in 100 basis point increments).
Change in Interest
Rates Estimated Ratio of NPV Estimated Increase
(Basis Points) NPV to (Decrease) in NPV
------------- Amount Total Assets Amount Percent
------ ------------ ------ -------
+400 $14,271 18% ($8,611) (38)%
+300 16,443 21 (6,439) (28)
+200 18,792 24 (4,090) (18)
+100 21,087 27 (1,795) (8)
-- 22,882 29 -- --
-100 24,658 31 1,776 8
-200 26,318 34 3,436 15
-300 28,216 36 5,334 23
-400 30,508 39 7,626 33
Certain assumptions utilized in assessing interest rate risk were employed in
preparing the preceding table. These assumptions relate to interest rates, loan
prepayment rates, deposit decay rates, and the market values of certain assets
under the various interest rate scenarios. It was also assumed 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
Impact of New Accounting Standards
On March 3, 1997, the Financial Accounting Standards Board (FASB) issued
Statement 128, "Earning Per Share", which is effective for financial statements
beginning with year end 1997. Statement 128 simplifies the calculation of
earnings per share (EPS) by replacing primary EPS with basic EPS. It also
requires dual presentation of basic EPS and diluted EPS for entities with
complex capital structures. Basic EPS include no dilution and is computed by
dividing income available to common shareholders by the weighted-average common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in earnings, such as stock options, warrants or
other common stock equivalents. The Company expects Statement 128 to have little
impact on its earnings per share calculations in future years, other than
changing terminology from primary EPS to basic EPS. All prior period EPS data
will be restated to conform with the new presentation.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income", was issued by the Financial Accounting Standards Board in 1997. This
Statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
It does not address issues of recognition or measurement for comprehensive
income and is components. Statement 130 is effective for fiscal years beginning
after December 15, 1997. Since the provisions of this Statement are disclosure
oriented, it will have no impact on the operations of the Company.
Comprehensive income is now reported for all periods. Comprehensive income
includes both net income and other comprehensive income. Other comprehensive
income includes the change in unrealized gains and losses on securities
available for sale.
14
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Year 2000
The Company has conducted a review of its computer systems to review the systems
that could be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The Year 2000 problem is the result of
computer programs being written using two digits rather than four to define the
applicable year. For example, programs that have time sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations. The Company presently
believes that, with modifications to existing software and by converting to new
software, the Year 2000 problem will not pose significant operational problems
for the Company's computer systems as so modified and converted. However, if
such modifications and conversions are not completed timely, the Year 2000
problem may have a material impact on the operations of the Company.
Safe Harbor Statement
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for the purpose of these safe harbor
provisions. Forward-looking statements, which are based on certain assumption
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 affect 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,
legislative / regulatory changes, 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.
15
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of stockholders was held on April 22,
1998. At the meeting, Lorraine G Ptak and Edward Wolak were elected
for terms to expire in 2001. The votes cast for and withheld from each
such director were as follows:
Director For Withheld/Abstain Broker Non-Votes
-------- --- ---------------- ----------------
Lorraine G Ptak 1,706,756 42,302 0
Edward Wolak 1,706,756 42,302 0
Also at the annual meeting, a proposal to ratify the appointment of
Crowe, Chizek and Company, LLP as independent auditors for the fiscal
year ending December 31, 1998 was approved. The votes cast for and
against this proposal, and the number of abstentions and broker
non-votes with respect to the proposal, was as follows
Approval of Crowe, Chizek and Company, LLP as independent auditors for
the fiscal year ending December 31, 1998
For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
1,718,932 20,676 9,450 0
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
a. None
b. None
16
SIGNATURES
Pursuant to the requirements 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.
(Registrant)
-----------------------------------
Date: August 14, 1998 By: /s/Kimberly Rooney
-----------------------------------
Kimberly Rooney
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 1998 By: /s/Jeffrey Przybyl
--------------------------------------------
Jeffrey Przybyl
Chief Financial Officer
(Principal Financial and Accounting Officer)
17