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 Quarter Ended September 30, 1999
[ ] Transition Report Pursuant to 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 November 15, 1999
Common Stock, $.01 par value 1,669,290
Page
PART I - Financial Information
Item 1 - FINANCIAL STATEMENTS
Condensed Consolidated Statements of
Financial Condition at September 30,
1999 and December 31, 1998 3
Condensed Consolidated Statements of
Income for the three months and nine
months ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Changes
in Stockholders' Equity for the nine
months ended September 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash
Flows for the nine months ended September 30,
1999 and 1998 6
Notes to the Condensed Consolidated Financial
Statements as of September 30, 1999 8
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
Item 3 - Quantitative and Qualititave Disclosure About Market Risk 14
PART II - Other Information
Item 1 - Legal Proceedings 17
Item 2 - Changes in Securities 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
SIGNATURES 18
- 2 -
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1999 and December 31, 1998
(Dollars in thousands, expect per share data)
September 30, December 31,
1999 1998
-------- --------
ASSETS
Cash on hand and in banks $ 521 $ 448
Interest-bearing deposit accounts in
other financial institutions 257 3,789
-------- --------
Total cash and cash equivalents 778 4,237
Interest-bearing term deposits in
other financial institutions 159 159
Equity securities 2,556 3,278
Securities available-for-sale 33,785 24,318
Mortgage-backed securities available-for-sale 6,105 11,354
Loans receivable, net 68,104 56,822
Federal Home Loan Bank stock 1,927 1,319
Premises and equipment, net 483 426
Accrued interest receivable 985 803
Other assets 930 68
-------- --------
Total assets $115,812 $102,784
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 56,461 $ 55,429
Advances from borrowers for taxes and insurance 1,061 578
Advances from the Federal Home Loan Bank 37,943 23,764
Accrued interest payable and other liabilities 1,386 1,987
-------- --------
Total liabilities 96,851 81,758
Stockholders' Equity
Common stock $0.01 par value per share,
2,500,000 shares authorized;
2,182,125 issued 22 22
Additional paid-in capital 21,641 21,638
Retained earnings, substantially restricted 6,698 6,141
Unearned ESOP shares (1,005) (1,077)
Unearned stock awards (811) (941)
Treasury stock, at cost, 490,281 and
338,737 shares respectively (6,425) (4,759)
Accumulated other comprehensive (loss) income (1,159) 2
-------- --------
Total stockholders' equity 18,961 21,026
-------- --------
Total liabilities and stockholders' equity $115,812 $102,784
======== ========
- 3 -
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
- -------------------------------------------------------------------------------------------
Nine months Ended Three months ended
September 30, September 30,
----------------------- ---------------------
1999 1998 1999 1998
----------- ---------- ---------- ---------
Interest income
Loans $ 3,705 $ 2,907 $ 1,328 $ 1,056
Securities 1,390 1,361 553 398
Mortgage-backed securities 409 465 98 163
Dividend income on equity securities 196 87 63 87
Other 148 144 49 67
--------- --------- --------- ---------
Total interest income 5,848 4,964 2,091 1,771
Interest expense
Deposits 1,753 1,346 591 482
Other borrowings 1,245 849 517 370
--------- --------- --------- ---------
Total interest expense 2,998 2,195 1,108 852
--------- --------- --------- ---------
Net interest income 2,850 2,769 983 919
Provision for loan losses --- 40 --- 40
--------- --------- --------- ---------
Net interest income after provision
for loan losses 2,850 2,729 983 879
Noninterest income
Net gain (loss) on sale of securities (57) 22 (75) (1)
Other 60 71 18 25
--------- --------- --------- ---------
Total noninterest income 3 93 (57) 24
Noninterest expense
Compensation and benefits 691 709 230 263
Occupancy and equipment expense 98 90 33 30
Data processing 110 45 18 15
Federal insurance premiums 25 20 9 7
Professional Fees 58 69 9 19
Other 201 185 65 61
--------- --------- --------- ---------
Total noninterest expense 1,183 1,118 364 395
--------- --------- --------- ---------
Income before income tax expense 1,670 1,704 562 508
Income tax expense 455 572 149 148
--------- --------- --------- ---------
Net income $ 1,215 1,132 $ 413 $ 360
========= ========= ========= =========
Earnings per share
Basic $ 0.76 $ 0.61 $ 0.26 $ 0.20
========= ========= ========= =========
Diluted $ 0.76 $ 0.60 $ 0.26 $ 0.20
========= ========= ========= =========
Average shares outstanding 1,607,423 1,848,945 1,577,928 1,815,776
========= ========= ========= =========
- 4 -
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
Nine months Ended September 30 1999 1998
--------------- ----------------
Common Shares
Balance at beginning of year $ 22 $ 22
======= =======
Balance at September 30 $ 22 $ 22
======= =======
Additional Paid-In Capital
Balance at beginning of year $21,638 $21,602
ESOP shares released 3 35
------- -------
Balance at September 30 $21,641 $21,637
======= =======
Retained Earnings, Substantially Restricted
Balance at beginning of year $ 6,141 $ 5,518
Net income for the period 1,215 $1,215 1,132 $1,132
Dividends declared (658) (666)
------- -------
Balance at September 30 $ 6,698 $ 5,984
======= =======
Unearned ESOP Shares
Balance at beginning of year $(1,077) $(1,173)
ESOP shares released 72 72
------- -------
Balance at September 30 $(1,005) $(1,101)
======= =======
Unearned Stock Awards
Balance at beginning of year $ (941) $(1,117)
Stock awards earned 130 134
------- -------
Balance at September 30 $ (811) $ (983)
======= =======
Treasury Stock
Balance at beginning of year (4,759) (1,896)
Purchase of treasury stock (1,666) (1,414)
------- -------
Balance at September 30 $(6,425) $(3,310)
======= =======
Accumulated Other Comprehensive Income
Balance at beginning of year $ 2 $ 153
Change in unrealized loss on securities
available-for-sale net of tax (1,161)(1,161) (36) (36)
------- ------ ------- ------
Balance at September 30 $(1,159) $ 117
======= =======
Total Shareholders' Equity $18,961 $22,366
======= =======
Comprehensive Income $54 $1,096
====== ======
- 5 -
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
- --------------------------------------------------------------------------------
Nine months ended
September 30,
---------------------
1999 1998
-------- --------
Cash flows from operating activities
Net income $ 1,215 $ 1,132
Adjustments to reconcile net income to
net cash from operating activities
Depreciation 41 36
Provision for loan loss --- 40
Amortization of premiums and discounts
on investment and
mortgage-backed securities, net (19) 10
Net (gain) loss on sales of securities
available-for-sale 57 (22)
Stock award expense 130 134
ESOP expense 75 107
Change in
Deferred loan origination fees (61) (60)
Accrued interest receivable
and other assets (1,044) 611
Other liabilities and deferred
income taxes (877) (1,206)
-------- --------
Net cash (used in) provided by
operating activities (483) 782
Cash flows from investing activities
Proceeds from sale of securities
available-for-sale 2,298 3,500
Proceeds from sale of mortgage-backed
securities available-for-sale 3,373 1,102
Proceeds from sale of equity securities
available-for-sale 92 ---
Purchase of Federal Home Loan Bank Stock (608) (619)
Proceeds from repayment of securities
available-for-sale 2,656 1,864
Proceeds from maturities of securities
available-for-sale 3,500 15,000
Proceeds from maturities of equity
securities 588 205
Purchase of securities available-for-sale (16,926) (8,300)
Purchase of mortgage-backed securities
available-for-sale --- (3,014)
Purchase of equity securities
available-for-sale --- (4,272)
Net decrease in interest-bearing term
deposits in other financial institutions --- 52
Net change in loans (11,221) (15,907)
Capital expenditures, net (98) (14)
-------- --------
Net cash used in investing activities (16,346) (10,403)
Cash flows from financing activities
Net increase in deposits 1,032 9,936
Dividends Paid (658) (8,195)
Borrowings from FHLB 14,179 11,397
Purchase of treasury stock (1,666) (1,414)
Net change in advance payments
by borrowers for insurance and taxes
483 420
-------- --------
Net cash provided by financing activities 13,370 12,144
Change in cash and cash equivalents (3,459) 2,523
Cash and cash equivalents at beginning of period 4,237 6,290
-------- --------
Cash and cash equivalents at end of period $ 778 $ 8,813
======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest $ 3,005 $ 2,071
Income taxes --- 870
Supplemental disclosure of noncash
investing activity Amount due broker at
September 30 for purchase of securities
available-for-sale $ 987 $ ---
- 6 -
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 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
September 30, 1999 and December 31, 1998, and the results of its operations for
the three month and nine month periods ended September 30, 1999 and 1998.
NOTE 2 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators for earnings per common
share computations for the three months and nine months ended September 30, 1999
and 1998 is presented below.
Nine months Ended Three Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Basic Earnings Per Share
Net income $1,215,471 $1,132,288 $ 411,487 $ 360,723
========== ========== ========== ==========
Weighted average common shares outstanding 1,607,423 1,848,945 1,577,928 1,815,776
========== ========== ========== ==========
Basic Earnings Per Share $ 0.76 $ 0.61 $ 0.26 $ 0.20
========== ========== ========== ==========
Earnings Per Share Assuming Dilution
Net income $1,215,471 $1,132,288 $ 411,487 $ 360,723
========== ========== ========== ==========
Weighted average common shares outstanding 1,607,423 1,848,945 1,577,928 1,815,776
Add dilutive effect of assumed exercises
Incentive stock options --- 33,938 --- 12,436
Stock awards --- 206 --- ---
Weighted average common and dilutive
potential common shares outstanding 1,607,423 1,883,089 1,577,928 1,828,212
========== ========== ========== ==========
Diluted Earnings Per Share $ 0.76 $ 0.60 $ 0.26 $ 0.20
========== ========== ========== ==========
All of the outstanding options at June 30, 1999 and 1998 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.
- 7 -
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of Financial Condition at September 30, 1999 and December 31, 1998
Total assets increased $13.0 million from $102.8 million at December 31, 1998 to
$115.8 million at September 30, 1999 due mainly to increases in the loan
portfolio of $11.3 million and securities available for sale of $9.5 million,
funded by an increase in FHLB advances of $14.1 million and a decrease in
mortgage-backed securities available for sale of $5.3 million.
The Company's net loans receivable increased by $11.3 million from $56.8 million
at December 31, 1998 to $68.1 million at September 30, 1999, while securities
available-for-sale increased by $9.5 million, from $24.3 million at December 31,
1998 to $33.8 million at September 30, 1999. These increases were mainly offset
by decreases in cash and cash equivalents of $3.5 million, from $4.2 million at
December 31, 1998 to $778,000 at September 30, 1999, while mortgage-backed
securities available-for-sale decreased $5.3 million, from $11.4 million at
December 31, 1998 to $6.1 million at September 30, 1999, as lower yielding
assets were replaced by higher yielding assets. The Company is considering a
policy of selling loans, with servicing retained, in the future to fund loan
demand.
Total liabilities at September 30, 1999 were $96.9 million compared to $81.8
million at December 31, 1998, an increase of $15.1 million. The Company's
deposits increased by $1.1 million, from $55.4 million at December 31, 1998 to
$56.5 million at September 30, 1999. Advances from the Federal Home Loan Bank
also increased $14.1 million, from $23.8 million at December 31, 1998 to $37.9
million at September 30, 1999. These increases were the result of leveraging the
Company's high capital ratio and provide additional liquidity to fund increased
loan demand.
Total Stockholders' Equity at September 30, 1999 was $19.0 million compared to
$21.0 million at December 31, 1998, a decrease of $2 million, or 9.5%, due
primarily to net earnings of $1.2 million partially offset by a $1.2 million
decrease in the unrealized gain on securities available-for-sale, payment of
regular dividends totaling $658,000, and treasury stock purchased at a cost of
$1.6 million.
Comparison of Operating Results for the Three Months Ended September 30, 1999
and September 30, 1998.
General
Net income was $413,000 for the three months ended September 30, 1999 compared
to $360,000 for the three months ended September 30, 1998, an increase of
$53,000, or 14.7%. The increase in net income was primarily due to an increase
in net interest income as a result of an increase in the balance of average
interest earning assets and a decrease in noninterest expense, partially offset
by a decrease in noninterest income.
Interest Income
Interest income was $2.1 million for the three months ended September 30, 1999
compared to $1.8 million for the three months ended September 30, 1998, an
increase of $300,000, or 16.7%. The increase in interest income was the result
of a $20.7 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 September 30, 1999. The
decrease in loan yields was primarily the result of repayments on
higher-yielding mortgages being replaced by lower-yielding mortgages.
- 8 -
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Interest Expense
Interest expense was $1.1 million for the three months ended September 30, 1999
compared to $852,000 for the three months ended September 30, 1998, an increase
of $248,000, or 29.1%. The increase in interest expense was primarily due to an
increase of $12.3 million in average balance of FHLB advances, in an attempt to
better leverage the Company's high capital ratio and provide additional
liquidity to fund increased loan demand, and an increase in the average balance
of the Bank's deposits of $12.1 million. The increase in deposits and advances
was partially offset by a lower cost of funds, as the Bank's savings account
rate declined over the twelve month period.
Provision for Loan Losses
The Bank's provision for loan losses was zero for the three months ended
September 30, 1999 compared to $40,000 for the three months ended September 30,
1998. At September 30, 1999, the Bank's allowance for loan losses totaled
$253,000, 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 September 30, 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-value ratios 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 September 30, 1999 increased to $1.7
million compared to $758,000 at December 31, 1998. Non-accruing loans at
September 30, 1999 totaled $475,000 compared to $777,000 at December 31, 1998.
Noninterest Income
Noninterest income was a loss of $57,000 for the three months ended September
30, 1999 compared to income of $24,000 for the three months ended September 30,
1998. The decrease was primarily due to an increase in the loss on sale of
securities of $74,000, as lower yielding assets were liquidated and reinvested
in higher yielding assets.
Noninterest Expense
Noninterest expense was $364,000 for the three months ended September 30, 1999
compared to $395,000 for the three months ended September 30, 1998, a decrease
of $31,000, or 7.9%. The decrease was primarily a result of a $33,000 decrease
in compensation and benefits.
Income Taxes
Income taxes were $149,000 for the three months ended September 30, 1999
compared to $148,000 for the three months ended September 30, 1998, an increase
of $1,000, or 0.7%. The increase was primarily a result of a $54,000 increase in
pretax earnings, which was partially offset by an increase in income from
federally tax-exempt municipal bonds.
- 9 -
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of Operating Results for the Nine months Ended September 30, 1999 and
September 30, 1998.
General
Net income was $1.2 million for the nine months ended September 30, 1999
compared to $1.1 million for the nine months ended September 30, 1998, an
increase of $100,000, or 9.1. The increase in net income was primarily due to a
decrease in the income tax expense, due to an increase in earnings from
municipal securities which are tax free for federal tax purposes, partially
offset by an increase in noninterest expense and loss on sale of securities.
Interest Income
Interest income was $5.8 million for the nine months ended September 30, 1999
compared to $5.0 million for the nine months ended September 30, 1998, an
increase of $800,000, or 16.0%. The increase in interest income was the result
of a $20.9 million increase in the average balance of interest-earning assets
primarily due to an increase in the average balance of loans receivable and
securities available-for-sale in an attempt to better leverage the Company's
high capital ratio. The increase in the average balance was partially offset by
a decrease in yield on interest earning assets for the nine months ended
September 30, 1999. The decrease in asset 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 was $3.0 million for the nine months ended September 30, 1999
compared to $2.2 million for the nine months ended September 30, 1998, an
increase of $800,000, or 36.4%. The increase in interest expense was primarily
due to a $14.2 million increase in the average balance of deposits, as well as a
$10.6 million increase in average balance of FHLB advances, used in an attempt
to better leverage the Company's capital ratio and to fund increased loan
demand.. The $24.8 million increase in average interest bearing liabilities was
partially offset by a decrease in the average cost of funds. The decrease in the
cost of funds was primarily due to a decline in the Bank's savings account
interest rates since October, 1998.
Provision for Loan Losses
The Bank's provision for loan losses was zero for the nine months ended
September 30, 1999 compared to $40,000 for the nine months ended September 30,
1998. At September 30, 1999, the Bank's allowance for loan losses totaled
$251,000, 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 September 30, 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-value ratios 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 was $3,000 for the nine months ended September 30, 1999
compared to $93,000 for the nine months ended September 30, 1998. The decrease
was primarily a result of a net loss of $57,000 on sales of securities and a
decrease in other income of $11,000.
- 10 -
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Noninterest Expense
Noninterest expense was $1.2 million for the nine months ended September 30,
1999 compared to $1.1 million for the nine months ended September 30, 1998, an
increase of $100,000. The increase was primarily a result of a $65,000 increase
in data processing expense due to the Company's decision to change data
processing vendors, and an increase of $16,000 in other expenses, primarily used
to grow the loan portfolio, partially offset by an $18,000 decrease in
compensation and benefits.
Income Taxes
Income taxes were $455,000 for the nine months ended September 30, 1999 compared
to $572,000 for the nine months ended September 30, 1998, a decrease of
$117,000, or 20.5%. The decrease was primarily a result of an increase in
earnings from municipal securities which are tax free for federal income tax
purposes.
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.
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 June
30, 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
September 30, 1999, $51.1 million or 94.3% 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 September 30, 1999, adjustable rate mortgage-backed
securities totaled $6.1 million which represented 6.2% 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.
- 11 -
PS FINANCIAL, INC.
CHICAGO, ILLINOIS
Quantitative and Qualitative Disclosure About Market Risk
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. 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 the net
portfolio value ("NPV") analysis. In essence, this approach calculates the
difference between the present value of liabilities, expected cash flows from
assets and cash flows from off balance sheet contracts.
The following table sets forth, at June 30, 1999, the latest date for which
information is available, 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).
Estimated Increase
Change in Interest Estimated Ratio of NPV (Decrease) in NPV
Rates NPV to -------------------
(Basis Points) Amount Total Assets Amount Percent
- ------------------ -------------- ------------- -------------------
+300 796 7.92 (10,143) (56)
+200 11,245 10.81 (6,814) (38)
+100 14,679 13.56 (3,380) (19)
--- 18,059 16.06 --- ---
-100 21,370 18.33 3,311 18
-200 25,174 20.76 7,115 39
-300 29,421 23.27 11,361 63
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
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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.
Effective January 1, 1999, Statement of Financial Standards (SFAS) No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise", became
effective. SFAS No. 134 allows entities with mortgage banking operations which
convert pools of mortgages into securities to classify these securities as
available-for-sale, trading, or held-to-maturity, instead of the current
requirement to classify these pools as trading. This standard is not expected to
have a material effect on the Company.
American Institute of Certified Public Accountants Statement of Position 98-5,
effective in 1999, requires all start-up, pre-opening, and organization costs to
be expensed as incurred. Any such costs previously capitalized for financial
reporting purposes must be written off to income at the start of the year.
Statement of Position 98-5 is not expected to have a material impact on the
Company.
Year 2000
As the year 2000 approaches, a significant business issue has emerged regarding
how existing application software programs and operating systems can accommodate
the date value for the year 2000. Many existing software application products,
including software application products used by the Bank and its suppliers and
customers, were designed to accommodate only a two-digit date value, which
represents the year. For example, information relating to the year 1996 is
stored in the system as "96". As a result, the year 1999 (i.e. "99") could be
the maximum date value that these systems will be able to process accurately. In
response to concerns about this issue, regulatory agencies have begun to monitor
holding companies' and banks' readiness for the year 2000 as part of the regular
examination process. The Company presently believes that with modification to
existing software, conversion to new software, and conversion to a new third
party data processor, the year 2000 issue will not pose significant operational
problems for the Company's computer systems or business operations.
Implementation of the Company's plan to test in-house and out-sourced software
has been underway since the first quarter of 1998. Testing of applications
considered to be "mission critical" was completed in October, 1999. Total
compliance of all systems is expected by management to be completed by the
October, 1999; management currently estimates that such compliance will cost
$15,000. The team for the plan is responsible for the implementation of the plan
and reports to the Company's Board of Directors on a
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monthly basis until the plan is completed. However, if such modifications and
conversions are not made, or are not completed timely, the year 2000 issue could
have a material adverse impact on the operations of the Company. In addition,
there can be no assurance that unforeseen problems in the Company's computer
systems, or the systems of third parties on which the Company's computers rely,
will not have an adverse effect on the Company's systems or operations.
Additionally, failure of the Bank's customers' to prepare for year 2000
compatibility could have a significant adverse effect on such customer's
operations and profitability, thus inhibiting their ability to repay loans and
adversely affecting the Bank's operations. The Company does not have sufficient
information accumulated from customers of the Bank to enable the Company to
assess the degree to which customers' operations are susceptible to potential
problems relating to the year 2000 issue.
Safe Harbor Statement
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for 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.
- 14 -
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
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
a. None
b. None
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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: November 15, 1999 By: /s/Kimberly Rooney
------------------ ---------------------------------------------
Kimberly Rooney
Chief Executive Officer
(Principal Executive Officer)
Date: November 15, 1999 By: /s/Jeffrey Przybyl
------------------ ---------------------------------------------
Jeffrey Przybyl
Chief Financial Officer
(Principal Financial and Accounting Officer)
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