United States
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, 2000
[ ] Transition Reports under Section 13 or 15(d)
Of The Securities Exchange Act of 1934
Commission File Number 0-28864
PS Financial, Inc.
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(Exact name of the registrant as specified in its charter)
Delaware 36-4101473
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(State of incorporation) (I.R.S. Employer Identification Number)
4800 South Pulaski Road, Chicago, Illinois 60632
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(Address of principal executive offices)
(773) 376-3800
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(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 14, 2000
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Common Stock, $.01 par value 1,302,057
PS Financial, Inc.
Form 10-QSB
Six Months Ended June 30, 2000
Part I - Financial Information
ITEM 1 - FINANCIAL STATEMENTS Page
Condensed Consolidated Statements of Financial Condition
at June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income for the
three months and six months ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2000 and 1999 5
Condensed Consolidated Statements of Comprehensive
Income (Loss) for the three months and six months
ended June 30, 2000 and 1999 6
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999 7
Notes to the Condensed Consolidated Financial Statements
as of June 30, 2000 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
Part II - Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
2
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000 and December 31, 1999
(Dollars in thousands, expect per share data)
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June 30, December 31,
2000 1999
--------- --------
ASSETS
Cash on hand and in banks $ 520 $ 868
Interest-bearing deposit accounts
in other financial institutions 1,397 2,437
--------- --------
Total cash and cash equivalents 1,917 3,305
Interest-bearing term deposits in other
financial institutions 153 159
Equity securities 967 1,917
Securities available-for-sale 33,188 33,633
Mortgage-backed securities
available-for-sale 5,020 5,636
Loans receivable, net 69,683 72,179
Federal Home Loan Bank stock 1,961 1,927
Premises and equipment, net 513 477
Accrued interest receivable 1,033 1,051
Other assets 1,187 1,072
--------- --------
Total assets $ 115,622 $121,356
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 62,644 $ 63,983
Advances from borrowers for taxes and insurance 724 733
Advances from the Federal Home Loan Bank
and other borrowings 37,246 37,405
Accrued interest payable and other liabilities 726 363
--------- --------
Total liabilities 101,340 102,484
Stockholders' 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 21,652 21,644
Retained earnings, substantially restricted 7,099 6,862
Unearned ESOP shares (932) (981)
Unearned stock awards (679) (767)
Treasury stock, at cost, 855,914 and
488,681 shares respectively (10,948) (6,425)
Accumulated other comprehensive loss (1,932) (1,483)
--------- --------
Total stockholders' equity 14,282 18,872
--------- --------
Total liabilities and stockholders' equity $ 115,622 $121,356
========= ========
See accompanying notes to condensed consolidated financial statements.
3
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
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Six Months Ended Three Months ended
June 30, June 30,
--------------- ----------------
2000 1999 2000 1999
------ ------ ------ ------
Interest income
Loans $2,886 $2,377 $1,417 $1,228
Securities 1,115 837 558 491
Mortgage-backed securities 177 311 86 149
Dividend income on equity securities 55 133 26 66
Other interest earning assets 179 99 69 45
------ ------ ------ ------
Total interest income 4,412 3,757 2,156 1,979
Interest expense
Deposits 1,505 1,162 747 588
Federal Home Loan Bank advances 1,042 728 543 402
------ ------ ------ ------
Total interest expense 2,547 1,890 1,290 990
------ ------ ------ ------
Net interest income 1,865 1,867 866 989
Provision for loan losses 15 0 8 0
------ ------ ------ ------
Net interest income after provision
for loan losses 1,850 1,867 858 989
Noninterest income
Net gain (loss) on sale of securities (103) 18 (45) 18
Other operating income 71 42 34 22
------ ------ ------ ------
Total noninterest income (32) 60 (11) 40
Noninterest expense
Compensation and benefits 498 461 249 240
Occupancy and equipment expense 74 65 36 34
Data processing services 45 92 23 14
Federal deposit insurance premiums 7 16 4 8
Professional fees 155 49 95 36
Other operating expenses 145 136 81 75
------ ------ ------ ------
Total noninterest expense 924 819 488 407
------ ------ ------ ------
Income before income tax expense 894 1,108 359 622
Income tax expense 256 306 107 179
------ ------ ------ ------
Net income $ 638 $ 802 $ 252 $ 443
====== ====== ====== ======
Basic earnings per share $ 0.47 $ 0.48 $ 0.21 $ 0.27
====== ====== ====== ======
Diluted earnings per share $ 0.47 $ 0.48 $ 0.21 $ 0.27
====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements.
4
8PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
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Six Months Ended June 30 2000 1999
-------- -------
Common Stock
Balance at beginning of year $ 22 $ 22
-------- -------
Balance at June 30 $ 22 $ 22
======== =======
Additional Paid-In Capital
Balance at beginning of year $ 21,644 $21,638
ESOP shares released 8 0
-------- -------
Balance at June 30 $ 21,652 $21,638
======== =======
Retained Earnings, Substantially Restricted
Balance at beginning of year $ 6,862 $ 6,141
Net income for the period 638 802
Dividends declared, $0.29 $0.26 per share, respectively (401) (432)
-------- -------
Balance at June 30 $ 7,099 $ 6,511
======== =======
Unearned ESOP Shares
Balance at beginning of year $ (981) $(1,077)
ESOP shares released 49 48
-------- -------
Balance at June 30 $ (932) $(1,029)
======== =======
Unearned Stock Awards
Balance at beginning of year $ (767) $ (941)
Stock awards earned 88 86
-------- -------
Balance at June 30 $ (679) $ (855)
======== =======
Treasury Stock
Balance at beginning of year (6,425) (4,759)
Purchases of treasury stock (4,523) (653)
-------- -------
Balance at June 30 $(10,948) $(5,412)
======== =======
Accumulated Other Comprehensive Income
Balance at beginning of year $ (1,483) $ 2
Change in unrealized loss on securities
available-for-sale net of tax (449) (874)
-------- -------
Balance at June 30 $ (1,932) $ (872)
======== =======
Total Stockholders' Equity $ 14,282 $20,003
======== =======
See accompanying notes to condensed consolidated financial statements.
5
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE SIX MONTHS AND THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(Dollars in thousands)
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Six Months Ended Three Months ended
June 30, June 30,
--------------- ----------------
2000 1999 2000 1999
----- ------- ----- -------
Net income $ 638 $ 802 $ 252 $ 443
Other Comprehensive oncome:
Unrealized losses on available
-for-sale securities (593) (1,393) (237) (1,081)
Less reclassification adjustments
for losses (gains)
recorded in income 103 (18) 45 (18)
Tax effect 41 537 64 419
----- ------- ----- -------
Other comprehensive loss (449) (874) (128) (680)
----- ------- ----- -------
Total comprehensive income (loss) $ 189 $ (72) $ 124 $ (237)
===== ======= ===== =======
See accompanying notes to condensed consolidated financial statements.
6
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
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Six months ended
June 30,
------------------
2000 1999
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Cash flows from operating activities
Net income $ 638 $ 802
Adjustments to reconcile net income to
net cash from operating activities
Provision for loan losses 15 -
Depreciation 40 28
Amortization of premiums and discounts
on investment and mortgage-backed
securities, net (40) (7)
Net (gain) loss on sales of securities
available-for-sale 103 (18)
RRP expense 88 86
ESOP expense 56 48
Change in
Deferred loan origination fees (25) (47)
Accrued interest receivable and other assets (97) (852)
Other liabilities and deferred income taxes 405 (640)
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Net cash provided by (used in) operating
activities 1,183 (600)
Cash flows from investing activities
Proceeds from repayment of securities
available-for-sale 548 2,097
Calls on equity securities available-for-sale 910 -
Proceeds from sale of equity securities
available-for-sale - 92
Purchase of securities available-for-sale - (13,961)
Proceeds from sale of mortgage-backed securities
available-for-sale
- 2,028
Purchase of Federal Home Loan Bank Stock (34) (267)
Proceeds from maturities of securities
available-for-sale - 3,500
Net decrease in interest-bearing term deposits
in other financial institutions 6 -
Net change in loans 2,506 (5,241)
Capital expenditures, net (76) (76)
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Net cash provide by (used in) investing
activities 3,860 (11,828)
Cash flows from financing activities
Net increase (decrease) in deposits (1,339) 2,097
Dividends paid (401) (432)
Proceeds from FHLB and other borrowings 18,374 9,630
Repayment of FHLB and other borrowings (18,533) (1,767)
Purchase of treasury stock (4,523) (653)
Net increase (decrease) in advance payments
by borrowers for insurance and taxes (9) 117
------- -------
Net cash provided by (used in)
financing activities (6,431) 8,992
------- -------
Decrease in cash and cash equivalents (1,388) (3,436)
Cash and cash equivalents at beginning of period 3,305 4,237
------- -------
Cash and cash equivalents at end of period $ 1,917 $ 801
======= =======
7
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 2,605 $ 1,848
Income taxes 285 -
Supplemental disclosure of noncash investing activity
Amount due broker at June 30 for purchase of
securities available-for-sale $ - $ 1,200
See accompanying notes to condensed consolidated financial statements.
8
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
Notes to Condensed Consolidated Financial Statements
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed 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 condensed 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, 2000 and the results of its operations for the
three month and six month periods then ended June 30, 2000 and 1999. The results
for the interim periods are not necessarily indicative of the results to be
expected for the entire fiscal year.
The condensed financial statements should be read in conjunction with the
audited financial statements and accompanying notes (or "notes thereto") of the
Company for the years ended December 31, 1999, 1998 and 1997.
NOTE 2 - 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, 2000 and
1999 is presented below.
Six Months Ended Three Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Basic Earnings Per Share
Net income $ 638,143 $ 801,984 $ 251,725 $ 443,007
========= ========= ========= =========
Weighted average common shares outstanding 1,358,579 1,661,724 1,182,753 1,652,596
========= ========= ========= =========
Basic Earnings Per Share $ 0.47 $ 0.48 $ 0.21 $ 0.27
========= ========= ========= =========
Earnings Per Share Assuming Dilution
Net income $ 638,143 $ 801,984 $ 251,725 $ 443,007
========= ========= ========= =========
Weighted average common shares outstanding 1,358,579 1,661,724 1,182,753 1,652,596
Add dilutive effect of assumed exercises
Incentive stock options 7,132 - 5,095 -
Stock awards - - - -
--------- --------- --------- ---------
Weighted average common and dilutive potential
common shares outstanding 1,365,711 1,661,724 1,187,848 1,652,596
========= ========= ========= =========
Diluted Earnings Per Share $ 0.47 $ 0.48 $ 0.21 $ 0.27
========= ========= ========= =========
All of the outstanding options at June 30, 2000 and 1999 relate to options
granted in 1997 at an exercise price of $14.00. 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 $11.02, 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.
9
NOTE 3 - MODIFIED DUTCH TENDER OFFER
On March 1, 2000, the Company offered to purchase up to 333,858 shares of its
common stock through a modified dutch auction tender offer. Upon expiration of
the offer on March 29, 2000, the Company agreed to purchase 367,233 shares of
its common stock at a price of $12.00 per share. Final payment for these shares
took place on April 7, 2000. Funding for the purchase consisted of $3.5 million
of cash, $577,000 on a variable rate loan with a current rate of 7.25%, and
$300,000 on a variable rate line of credit with a current rate of 8.27%.
NOTE 4 - OTHER MATTERS
At the 2000 annual meeting held on May 3, 2000, shareholders approved a
stockholder proposal relating to the engagement of an investment banker to
explore the Company's strategic options, including a sale of the Company,
details of which are disclosed in the proxy statement to the 2000 annual
meeting.
10
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Comparison of Financial Condition at June 30, 2000 and December 31, 1999
Total assets decreased $5.8 million to $115.6 million at June 30, 2000 from
$121.4 million at December 31, 1999, due mainly to decreases in cash and cash
equivalents of $1.4 million, net loans receivable of $2.5 million and securities
available-for-sale of $2.0 million.
The Company's net loans receivable decreased by $2.5 million to $69.7 million at
June 30, 2000 from $72.2 million at December 31, 1999 as a result of lower
demand due to rising mortgage rates. Securities available-for-sale decreased by
$2.0 million to $39.2 million at June 30, 2000 from $41.2 million at December
31, 1999, as maturities of equity securities and principal repayments from
mortgage backed securities were used to pay for treasury shares tendered in the
dutch auction tender offer. Cash and cash equivalents decreased by $1.4 million
to $1.9 million at June 30, 2000 from $3.3 million at December 31, 1999.
Total liabilities at June 30, 2000 were $101.3 million compared to $102.5
million at December 31, 1999, a decrease of $1.2 million. During the period,
deposits decreased $1.4 million to $62.6 million at June 30, 2000 from $64.0
million at December 31, 1999 as a result of interest sensitive deposits seeking
higher yields.
Stockholders' equity at June 30, 2000 was $14.3 million compared to $18.9
million at December 31, 1999, a decrease of $4.6 million, or 24.3%, due
primarily to the purchase of $4.4 million of treasury stock in the dutch auction
tender offer, a $449,000 increase in the unrealized loss on securities
available-for-sale, and payment of regular dividends totaling $401,000,
partially offset by net income of $638,000.
Comparison of Operating Results for the Three Months Ended June 30, 2000 and
June 30, 1999.
General
Net earnings for the three months ended June 30, 2000 were $252,000, a decrease
of $191,000, or 43.1%, from net earnings of $443,000 for the three months ended
June 30, 1999. The decrease in net earnings is primarily due to a decrease in
the ratio of average interest earning assets to average interest bearing
liabilities as a result of the completion of the Company's modified dutch
auction tender offer in which interest earning assets and additional debt were
used to fund the purchase. Also contributing to the decrease in earnings was the
loss on sale of securities, as issuers exercised call options before maturity
and an increase in professional fees due to the proxy contest at the annual
meeting.
Interest Income
Interest income for the three months ended June 30, 2000 was $2.2 million
compared to $2.0 million for the three months ended June 30, 1999, an increase
of $177,000, or 8.9%. The increase in interest income was the result of an
increase in the average balance of interest-earning assets primarily due to an
increase in the average balance of loans receivable.
Interest Expense
Interest expense for the three months ended June 30, 2000 was $1.3 million
compared to $990,000 for the three months ended June 30, 1999, an increase of
$300,000, or 30.3%. The increase in interest expense was primarily due to the
increased average balance of interest-bearing liabilities during the three
months ended June 30, 2000 compared to the three months ended June 30, 1999, as
well as an increase in the Company's cost of funds due to an increase in short
term deposit rates.
11
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Provision for Loan Losses
The Bank's provision for loan losses was $8,000 for the three months ended June
30, 2000 compared to zero for the three months ended June 30, 1999. At June 30,
2000, the Bank's allowance for loan losses totaled $281,000, or 0.4% of total
loans. The amount of the provision and allowance for 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, 1999 was 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, delinquent greater than 30 days, at June 30, 2000
remained the same at $4.1 million compared to $4.1 million at June 30, 1999.
Included in the past due loan balances are non-accruing loans at June 30, 2000
which totaled $532,000 compared to $258,000 at June 30, 1999.
Noninterest Income
Noninterest income for the three months ended June 30, 2000 was a loss of
$11,000 compared to income of $40,000 for the three months ended June 30, 1999.
The decrease was primarily due to a net $45,000 loss on the sale of securities
in 2000, partially offset by a $12,000 increase in other noninterest income,
including $9,000 from the gain on sale of foreclosed assets.
Noninterest Expense
Noninterest expense was $488,000 for the three months ended June 30, 2000
compared to $407,000 for the three months ended June 30, 1999, an increase of
$81,000. The increase was primarily a result of a $59,000 increase in
professional fees related to the proxy contest at the annual meeting.
Income Taxes
Income taxes were $107,000 for the three months ended June 30, 2000 compared to
$179,000 for the three months ended June 30, 1999, a decrease of $72,000, or
40.2%. The decrease was primarily the result of a $263,000 decrease in pretax
earnings.
Comparison of Operating Results for the Six Months Ended June 30, 2000 and June
30, 1999.
General
Net earnings for the six months ended June 30, 2000 were $638,000, a decrease of
$164,000, or 20.4%, from net earnings of $802,000 for the six months ended June
30, 1999. The decrease in net earnings is primarily due to a $106,000 increase
in professional fees and a $103,000 net loss on the sale of securities,
partially offset by a $47,000 decrease in data processing fees.
Interest Income
Interest income for the six months ended June 30, 2000 was $4.4 million compared
to $3.8 million for the six months ended June 30, 1999, an increase of $655,000,
or 17.4%. The increase in interest income was the result of an increase in the
average balance of interest-earning assets primarily due to an increase in the
average balance of loans receivable.
12
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Interest Expense
Interest expense for the six months ended June 30, 2000 was $2.5 million
compared to $1.9 million for the six months ended June 30, 1999, an increase of
$657,000, or 34.8%. The increase in interest expense was primarily due to the
increased average balance of interest-bearing liabilities during the six months
ended June 30, 2000 compared to the six months ended June 30, 1999, as well as
an increase in the Company's cost of funds due to an increase in short term
deposit rates.
Provision for Loan Losses
The Bank's provision for loan losses was $15,000 for the six months ended June
30, 2000 compared to zero for the six months ended June 30, 1999. At June 30,
2000, the Bank's allowance for loan losses totaled $281,000, or 0.4% of total
loans. The amount of the provision and allowance for 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, 1999 was 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.
Noninterest Income
Noninterest income for the six months ended June 30, 2000 was a loss of $32,000
compared to income of $60,000 for the six months ended June 30, 1999. The
decrease was primarily due to a $103,000 loss on the sale of securities in 2000,
partially offset by a $29,000 increase in other income, including $18,000 from
the gain on sale of foreclosed assets.
Noninterest Expense
Noninterest expense was $924,000 for the six months ended June 30, 2000 compared
to $819,000 for the six months ended June 30, 1999, an increase of $105,000. The
increase was primarily a result of a $37,000 increase in compensation expense
and a $106,000 increase in professional fees, partially offset by a $47,000
decrease in data processing expenses. Data processing expense was higher in 1999
due to a system conversion that was completed in the first quarter of 1999.
Income Taxes
Income taxes were $256,000 for the six months ended June 30, 2000 compared to
$306,000 for the six months ended June 30, 1999, a decrease of $50,000, or
16.3%. The decrease was primarily a result of a decrease in pretax earnings.
Asset/Liability Management
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.
13
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 March
31, 2000 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
June 30, 2000, $52.4 million, or 94.9% 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 June 30, 2000, adjustable rate mortgage-backed securities
totaled $5.0 million which represented 4.3% 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.
14
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 table sets forth, at
March 31, 2000, 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).
Estimated Increase
Change in Interest Estimated Ratio of NPV (Decrease) in NPV
Rates NPV to -------------------
(Basis Points) Amount Total Assets Amount Percent
------------------ --------- ------------- --------- --------
+300 6,361 5.9 (11,041) (63)
+200 9,866 8.9 (7,537) (43)
+100 13,569 11.7 (3,833) (22)
--- 17,405 14.4 --- ---
-100 21,149 16.9 3,746 22
-200 24,669 19.1 7,267 42
-300 28,903 21.5 11,501 66
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
In June 1999, 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.
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
15
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
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 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.
16
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 and use of Proceeds
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 May
3, 2000. At the meeting, Jeannine McInerney and Paul J Duggan
were elected for terms to expire in 2003. The votes cast for
and withheld from each such director were as follows:
Director For Withheld/Abstain
Jeannine McInerney 1,428,115 2,140
Paul J Duggan 831,188 0
Rocco DiIorio 596,677 2,390
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, 2000 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
For Against Abstentions Broker Non-Votes
1,370,271 26,912 39,640 0
Also at the meeting, a stockholder proposal to proceed to
effect a sale or a merger by (i) retaining a leading
qualified investment banking firm and (ii) establishing a
committee to consider and recommend to the full Board of
Directors the best available offer to acquire the Company by
sale or merger.
For Against Abstentions Broker Non-Votes
905,716 485,671 7,450 0
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
a. None
b. None
17
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, 2000 By: /s/Kimberly Rooney
----------------------------------------------
Kimberly Rooney
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2000 By: /s/Jeffrey Przybyl
----------------------------------------------
Jeffrey Przybyl
Chief Financial Officer
(Principal Financial and Accounting Officer)
18