SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934 For the Fiscal Year Ended December 31, 1996

                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13  OR  15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934


     For  the  transition  period  from   ________________  to  ________________
     Commission File Number



                               PS FINANCIAL, INC.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in its Charter)


                Delaware                                   36-4101473
---------------------------------------------     ------------------------------
(State or Other Jurisdiction of Incorporation    (I.R.S. Employer Identification
            or Organization                                    Number)



4800 South Pulaski Road, Chicago, Illinois                        60632-4195
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)                          (Zip Code)

       Registrant's telephone number, including area code: (773) 376-3800


           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None
           Securities Registered Pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                                (Title of Class)


         Indicate  by check mark  whether the  Registrant  (1) filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the  preceding  twelve  months (or for such shorter  period that the
Registrant was required to file such reports),  and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of  Regulation  S-K (ss.  229.405  of this  chapter)  is not  contained
herein,  and will not be contained,  to the best of Registrant's  knowledge,  in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-K. [X]

         State issuers' revenues for its most recent fiscal year: $4.7 million

         As of March 25, 1997,  the  Registrant  had 2,182,125  shares of Common
Stock issued and outstanding.

         The aggregate  market value of the voting stock held by  non-affiliates
of the  Registrant,  computed by  reference  to the average of the bid and asked
price of such stock as of February 1, 1997,  was $24.4  million.  (The exclusion
from such amount of the market value of the shares owned by any person shall not
be deemed an admission by the Registrant that such person is an affiliate of the
Registrant.)


                       DOCUMENTS INCORPORATED BY REFERENCE

         Part II of Form 10-KSB - Annual Report to  Stockholders  for the fiscal
year ended December 31, 1996.

         Part III of Form  10-KSB - Portions of The Proxy  Statement  for Annual
Meeting of Stockholders to be held in 1996.



<PAGE>
                                     PART I

Item 1. Description of Business

Forward Looking Statements
         When used in this Form 10-KSB or future filings by the Company with the
Securities  and Exchange  Commission,  in the Company's  press releases or other
public  or  shareholder  communications,  or in oral  statements  made  with the
approval of an authorized  executive  officer,  the words or phrases "would be",
"will  allow",  "intends to",  "will likely  result",  "are expected to",  "will
continue", "is anticipated",  "estimate",  "project", or similar expressions are
intended  to  identify  "forward-looking  statements"  within the meaning of the
Private Securities Litigation Reform Act of 1995.

         The Company  wishes to caution  readers not to place undue  reliance on
any such forward-looking  statements,  which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions,  substantial  changes in levels of market interest rates, credit and
other risks of lending and investment  activities and competitive and regulatory
factors,  could affect the Company's  financial  performance and could cause the
Company's  actual  results for future  periods to differ  materially  from those
anticipated or projected.

         The  Company  does  not  undertake,   and  specifically  disclaims  any
obligation,  to update any  forward-looking  statements to reflect occurences or
unanticipated events or circumstances after the date of such statements.

 General
         PS  Financial,  Inc.  (the  "Company"),  a  Delaware  corporation,  was
organized to act as the holding company for Preferred  Savings Bank  ("Preferred
Savings" or the "Bank") upon completion of the Bank's conversion from the mutual
to the stock form or  organization  (the  "Conversion").  The  Company  received
approval from the Office of Thrift Supervision (the "OTS") to acquire all of the
Common Stock of the Bank to be outstanding  upon  completion of the  Conversion.
The  Conversion  was  completed  on November  26, 1996.  All  references  to the
Company, unless otherwise indicated, at or before November 26, 1996 refer to the
Bank and its subsidiary on a consolidated  basis.  The Company's Common Stock is
quoted on the National  Association of Securities  Dealers  Automated  Quotation
("Nasdaq") National Market System under the symbol "PSFI."

         At December  31, 1996,  the Company had total assets of $75.1  million,
deposits  of $42.2  million  and  stockholders'  equity  of $32.1  million.  the
executive  offices  of the  Company  are  located at 4800  South  Pulaski  Road,
Chicago,  Illinois  60632,  and its  telephone  number at that  address is (773)
376-3800.

         As a community-oriented financial institution,  Preferred Savings seeks
to serve the  financial  needs of  communities  in its  market  area.  Preferred
Savings' business involves attracting deposits from the general public and using
such  deposits,  together  with other  funds,  to  originate  primarily  one- to
four-family  residential  mortgage loans and, to a lesser extent,  multi-family,
commercial  real estate and  consumer  loans in its market  area.  The Bank also
invests  in   mortgage-backed   and  other  securities  and  other   permissible
investments.

         The Bank offers a variety of accounts  having a range of interest rates
and terms. The Bank's deposits include passbook accounts,  money market accounts
and  certificate  accounts  with  terms of six  months to five  years.  The Bank
solicits  deposits only in its primary market area and does not accept  brokered
deposits.

Market Area
         Preferred  Savings  serves  primarily the southwest side of Chicago and
Cook County,  Illinois  through its office located at 4800 South Pulaski Road in
Chicago,  Illinois.  Preferred Savings' market area for loans includes primarily
Cook  County,  Illinois  and,  to a lesser  extent,  portions of DuPage and Will
Counties,  Illinois.  The  market  area  for  deposits  includes  primarily  the
southwest  side of the City of Chicago  including  the  Garfield  Ridge,  Archer
Heights  and  Brighton  Park areas of  Chicago.  The  southwest  side of Chicago
includes a diverse  population of low- and  moderate-income  neighborhoods.  The
housing in these neighborhoods consists primarily of two- to six-unit apartments
and single family residences.

         The Bank's  market area also  includes  small strip  shopping  centers,
small  retail  and  medical  offices,  and small- to  medium-size  manufacturing
facilities as well as the Chicago  Metropolitan  area's second largest  airport,
Midway Airport. Management believes the economic and demographic characteristics
of its market area to be generally stable.

Lending Activities
         General.  The principal lending activity of the Bank is originating for
its  portfolio  fixed  rate  mortgage  loans  secured  by  one-  to  four-family
residences located primarily in the Bank's market area. To a much lesser extent,
Preferred  Savings also  originates  commercial  real estate,  multi-family  and
consumer  loans in its market area. At December 31, 1996, the Bank's total loans
receivable,  net totaled $35.9  million.  See "-  Originations  and Purchases of
Loans" and "Use of Proceeds."
                                        1
<PAGE>

         Loan  Portfolio  Composition.   The  following  table  sets  forth  the
composition of the Bank's loan portfolio in dollar amounts and in percentages as
of the dates indicated.

<TABLE>
<CAPTION>

                                                                         December 31,
                                 -----------------------------------------------------------------------------     February 28,
                                         1996              1995               1994                1993                 1993
                                 -----------------------------------------------------------------------------  --------------------
                                    Amount  Percent   Amount  Percent    Amount   Percent    Amount    Percent   Amount    Percent
                                                                                 (Dollars in Thousands)

Real Estate Loans:
<S>                                <C>       <C>     <C>        <C>     <C>         <C>     <C>         <C>     <C>         <C>
  One- to four-family............  $26,998   73.72%  $25,858    73.44%  $24,711     73.62%  $23,403     74.45%  $25,411     76.32%
  Multi-family...................    6,088   16.62     6,094    17.31     5,929     17.66     5,452     17.34     6,157     18.49
  Commercial.....................    3,183    8.69     2,953     8.39     2,904      8.65     2,546      8.10     1,681      5.05
  Construction...................      336    0.92       286     0.81       ---       ---       ---       ---       ---       ---
                                  --------  ------  --------  ------- ---------   -------   -------   -------   -------    ------
     Total real estate loans.....   36,605   99.95    35,191    99.95    33,544     99.93    31,401     99.89    33,249     99.86
                                   -------           -------  -------   -------   -------   -------   -------   -------    ------

Consumer Loans:
 Deposit account.................       17    0.05        18     0.05        24      0.07        35      0.11        45      0.14
                                  -------- ------- ---------  ------- ---------   -------  --------   ------- ---------    ------
     Total loans.................   36,622  100.00%   35,209   100.00%   33,568    100.00%   31,436    100.00%   33,294    100.00%
                                            ======             ======              ======              ======              ======

Less:
 Deferred fees and discounts.....      493               548                542                 521                 511
 Allowance for loan losses.......      186               136                136                  94                  67
                                   -------          --------           --------            --------           ---------
    Total loans receivable, net..  $35,943           $34,525            $32,890             $30,821             $32,716
                                   =======           =======            =======            ========             =======

</TABLE>

                                        2

<PAGE>



         The following  table shows the composition of the Bank's loan portfolio
by fixed- and adjustable-rate at the dates indicated.

<TABLE>
<CAPTION>

                                                                         December 31,
                                 ------------------------------------------------------------------------------    February 28,
                                         1996               1995               1994                1993                1993
                                 -------------------------------------------------------------------------------------------------
                                  Amount     Percent   Amount   Percent   Amount    Percent  Amount    Percent   Amount    Percent
                                                                                 (Dollars in Thousands)
Fixed-Rate Loans:
Real estate
<S>                              <C>          <C>     <C>        <C>     <C>         <C>    <C>         <C>     <C>         <C>
  One- to four-family........... $26,998      73.72%  $25,858    73.44%  $24,711     73.62% $23,403     74.45%  $25,411     76.32%
  Multi-family..................   6,088      16.62     6,094    17.31     5,929     17.66    5,452     17.34     6,157     18.49
  Commercial....................   3,183       8.69     2,953     8.39     2,904      8.65    2,546      8.10     1,681      5.05
  Construction..................     ---        ---       ---      ---       ---       ---      ---       ---       ---       ---
                                 -------    -------    ------   ------   -------   -------  -------   -------   -------    ------
   Total real estate loans......  36,269      99.03    34,905    99.14    33,544     99.93   31,401     99.89    33,249     99.86
Consumer loans..................      17       0.05        16     0.04        15      0.05       19      0.06        23      0.07
                                 -------    -------    ------  -------   -------   -------  -------   -------   -------   -------
   Total fixed-rate loans.......  36,286      99.08    34,921    99.18    33,559     99.98   31,420     99.95    33,272     99.93
                                 -------               ------             ------            -------             -------

Adjustable-Rate Loans:
 Real estate - construction.....     336       0.92       286     0.81       ---       ---      ---       ---       ---       ---
 Consumer loans.................     ---        ---         2     0.01         9      0.02       16      0.05        22      0.07
                                 -------   --------    ------  ------- ---------   -------  -------   -------  --------   -------
   Total adjustable-rate loans..     336       0.92       288     0.82         9      0.02       16      0.05        22      0.07
                                 -------   --------    ------  ------- ---------   -------  -------   -------  --------   -------
   Total loans..................  36,622     100.00%   35,209   100.00%   33,568    100.00%  31,436    100.00%   33,294    100.00%
                                           ========            =======             =======             ======             =======

Less
 Deferred fees and discounts....     493                  548                542                521                 511
 Allowance for loan losses......     186                  136                136                 94                  67
                                 -------              -------            -------            -------             -------
   Total loans receivable, net.. $35,943              $34,525            $32,890            $30,821             $32,716
                                 =======              =======            =======            =======             =======

</TABLE>

                                        3

<PAGE>



         The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1996.  Mortgages  which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract  is due.  The  schedule  does  not  reflect  the  effects  of  possible
prepayments or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>

                                                                       Real Estate
                        ------------------------------------------------------------------------------------------------------
                              One- to Four-Family           Multi-family              Commercial              Construction
                                            Weighted                  Weighted              Weighted                 Weighted
                                             Average                   Average               Average                  Average
                              Amount          Rate      Amount          Rate     Amount       Rate       Amount        Rate
                        ------------------------------------------------------------------------------------------------------
                                                                                        (Dollars in Thousands)
      Due During
    Period Ending
     December 31,
-----------------------
<C>                            <C>             <C>      <C>             <C>     <C>            <C>        <C>          <C>
1997...................        $  87           8.30%    $   5           9.50%   $  ---          ---%      $ 336        9.25%
1998...................          358           7.60       ---            ---       ---          ---         ---         ---
1999 and 2000..........          398           9.00       688           9.25       156        10.81         ---         ---
2001 to 2005...........        3,355           8.79     2,630           8.86     1,791         9.47         ---         ---
2006 to 2020...........       22,800           8.34     2,765           8.90     1,236         9.62         ---         ---
2021 and following.....          ---            ---       ---            ---       ---          ---         ---         ---
                             -------         ------    ------         ------    ------       ------      ------       -----
  Total:                     $26,998           8.39%   $6,088           8.92%   $3,183         9.59%      $ 336        9.25%
                             =======                   ======                   ======                   ======



                                Consumer                   Total
                        --------------------------------------------------
                                      Weighted                    Weighted
                                       Average                     Average
                           Amount       Rate        Amount           Rate
                        --------------------------------------------------
     Due During
    Period Ending
     December 31,
-----------------------
1997...................   $    7         7.00%     $  435           9.00%
1998...................       10         6.98         368           7.58
1999 and 2000..........      ---          ---       1,242           9.36
2001 to 2005...........      ---          ---       7,776           8.97
2006 to 2020...........      ---          ---      26,801           8.45
2021 and following.....      ---          ---         ---            ---
                          ------       ------     -------         ------
  Total:                  $   17         6.99%    $36,622           8.59%
                          ======                  =======

</TABLE>


         The total  amount  of loans due after  December  31,  1997  which  have
predetermined  interest rates is $36.2 million,  while the total amount of loans
due after such dates which have floating or adjustable interest rates is $0.

                                        4

<PAGE>



         Under  federal  law,  the  aggregate  amount of loans  that the Bank is
permitted to make to any one borrower is generally  limited to 15% of unimpaired
capital  and  surplus  (25%  if  the  security  for  such  loan  has a  "readily
ascertainable"  value or 30% for  certain  residential  development  loans).  At
December  31,  1996,  based on the  above,  the Bank's  regulatory  loans-to-one
borrower limit was approximately $4.8 million. On the same date, the Bank had no
borrowers with outstanding balances in excess of this amount. As of December 31,
1996,  the largest  dollar  amount  outstanding  or  committed to be lent to one
borrower or, group of related borrowers,  was 11 loans totaling $847,000 secured
by  multi-family,  commercial  and one- to four-family  real estate.  The second
largest group of loans  outstanding to a group of related  borrowers was 3 loans
totaling  $748,000  secured by multi-family  real estate.  At December 31, 1996,
these loans were performing in accordance with their terms.

         All of the  Bank's  lending  is  subject  to its  written  underwriting
standards and to loan origination procedures. Decisions on loan applications are
made on the basis of detailed  applications and property valuations  (consistent
with the Bank's appraisal policy).  The loan applications are designed primarily
to determine the borrower's  ability to repay and the more significant  items on
the  application  are  verified   through  use  of  credit  reports,   financial
statements,  tax returns or  confirmations.  All loans  originated  by Preferred
Savings are approved by the full board.

         The Bank  requires  title  insurance or other  evidence of title on its
mortgage  loans,  as well as fire and extended  coverage  casualty  insurance in
amounts  at least  equal to the  principal  amount  of the loan or the  value of
improvements  on the  property,  depending  on the type of loan.  The Bank  also
requires flood insurance to protect the property  securing its interest when the
property is located in a flood plain.

         One- to Four-Family Residential Real Estate Lending. The cornerstone of
the Bank's lending  program is the  origination of loans secured by mortgages on
owner-occupied one- to four-family residences. Historically, the Bank focused on
fixed  rate  loans  with 15 year  terms  with 25 year  amortization  maturities.
Substantially  all  of the  Bank's  one-  to  four-family  residential  mortgage
originations are secured by properties  located in its market area. All mortgage
loans originated by the Bank are retained and serviced by it.

         As of  December  31,  1996,  $7.6  million or 28.1% the Bank's  one- to
four-family  residential  loan  portfolio was secured by properties  with two or
more units. At that date, the average  outstanding  residential loan balance was
approximately $64,000.

         The Bank currently  offers  fixed-rate  mortgage loans with  maturities
from 15 to 25 years and balloon  loans with terms of up to 15 years with 25 year
amortization  schedules.  Interest  rates and fees  charged on these  fixed-rate
loans are established on a regular basis according to market conditions.  See "-
Originations and Purchases of Loans."


                                        5

<PAGE>



         The  Bank  also  originates  a  limited  number  of  loans  secured  by
condominiums  located  in  its  market  area.  Condominium  loans  are  made  on
substantially the same terms as one- to four-family loans. At December 31, 1996,
the Bank had $1.1 million of condominium loans.

         Preferred  Savings  will  generally  lend  up to 80% (or up to 85% on a
case-by-case  basis) of the lesser of the sales price or appraised  value of the
security property on owner occupied one- to four-family loans. The loan-to-value
ratio on non-owner  occupied,  one- to four-family loans is generally 80% of the
lesser of the sales price or appraised value of the security property. Non-owner
occupied  one- to  four-family  loans may pose a  greater  risk to the Bank than
traditional  owner occupied one- to four-family  loans. In underwriting  one- to
four-family residential real estate loans, the Bank currently evaluates both the
borrower's ability to make principal, interest and escrow payments, the value of
the property that will secure the loan and debt to income ratios.

         Residential loans do not currently include  prepayment  penalties,  are
non-assumable and do not produce negative amortization. Properties securing one-
to  four-family  residential  real estate  loans made by  Preferred  Savings are
appraised by independent appraisers.

         Since under its current policy,  the Bank originates all mortgage loans
for its portfolio, the Bank's loans are not underwritten to permit their sale in
the secondary market.

         The Bank's residential  mortgage loans customarily  include due-on-sale
clauses  giving  the Bank the  right to  declare  the loan  immediately  due and
payable in the event that,  among other things,  the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.

         Multi-family and Commercial Real Estate Lending.  In recognition of the
many small  apartment  buildings and businesses in the Bank's market area and in
order to increase the interest rate  sensitivity and yield of its loan portfolio
and to complement  residential  lending  opportunities,  the Bank has originated
permanent  multi-family  and commercial real estate loans. At December 31, 1996,
the Bank had $3.2 million in commercial real estate loans,  representing 8.7% of
the total loan portfolio,  and $6.1 million in  multi-family  loans, or 16.7% of
the Bank's total loan portfolio.

         The Bank's  multi-family  and  commercial  real estate  loan  portfolio
includes loans secured by small apartment buildings,  office buildings and other
income producing properties located in its market area.

         The Bank's  permanent  multi-family  and  commercial  real estate loans
generally carry a maximum term of 15 years and have fixed rates. These loans are
generally  made in amounts of up to 80% of the lesser of the appraised  value or
the  purchase  price  of  the  property.   Appraisals  on  properties   securing
multi-family  and  commercial  real estate loans are performed by an independent
appraiser designated by the Bank at the time the loan is made. All appraisals on
multi-family  or commercial  real estate loans are reviewed by the Bank's board.
In addition,

                                        6

<PAGE>



the Bank's underwriting procedures require verification of the borrower's credit
history, income and financial statements, banking relationships,  references and
income  projections for the property.  The Bank obtains  personal  guarantees on
these loans.

         The table below sets forth,  by type of security  property,  the number
and amount of Preferred  Savings'  multi-family and commercial real estate loans
at December 31, 1996.  Substantially  all of the loans  referred to in the table
below are secured by properties located in the Bank's market area.

<TABLE>
<CAPTION>

                                                                                     Outstanding        Amount
                                                                        Number of     Principal     Non-Performing
                                                                          Loans        Balance       or of Concern
                                                                        ------------------------------------------
                                                                                   (Dollars in Thousands)
Commercial real estate:
<S>                                                                       <C>          <C>                <C>
    Small business facilities.......................................         19       $2,230              $    --
    Office buildings................................................          5          631                   --
    Three flats.....................................................          4          322                   --
Multi-family........................................................         41        6,088                   --
                                                                          ------      --------            --------
    Total multi-family and commercial real estate loans.............         69       $9,271              $    --
                                                                          ======      ========            ========
</TABLE>


         At December  31, 1996,  the Bank's  largest  commercial  real estate or
multi-family  loan  outstanding  totaled  $334,000  and was secured by a 16 unit
apartment complex located in Cicero, Illinois.

         Multi-family  and  commercial  real  estate  loans may present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several  factors,  including the  concentration of principal in a
limited  number  of  loans  and  borrowers,  the  effects  of  general  economic
conditions  on income  producing  properties  and the  increased  difficulty  of
evaluating and monitoring these types of loans. At December 31, 1996, there were
no  multi-family  loans or  commercial  real estate loans  delinquent 90 days or
more.

         Construction  Lending.  The Bank occasionally  purchases  participation
interests in construction  loans to builders or developers for the  construction
of small  residential or commercial  properties.  Such  properties are generally
located in  Illinois.  At December  31, 1996,  the Bank's  construction  lending
portfolio  consisted  of a  participation  interest  in a  construction  loan of
$336,000 or 0.9% of the Bank's real estate loan portfolio.

         Consumer Lending.  Federally chartered savings  institutions may invest
up to 35% of assets in consumer  loans  (including  any investment in investment
grade and commercial paper and corporate debt  securities).  The Bank originates
consumer loans secured by deposit accounts. At December 31, 1996, consumer loans
totaled  $17,000,  or 0.05% of the  Bank's  total  loan  portfolio.  In order to
increase  the  yield  and  interest  rate  sensitivity  of its  loan  portfolio,
management is also considering offering various types of home equity loans.

                                        7

<PAGE>



Originations and Purchases of Loans

         Real estate loans are  originated by Preferred  Savings'  staff through
referrals from existing customers or real estate agents.

         The Bank's ability to originate loans is dependent upon customer demand
for loans in its  market and to a limited  extent,  various  marketing  efforts.
Demand is affected by both the local economy and the interest rate  environment.
See "- Market Area." Under  current  policy,  all loans  originated by Preferred
Savings are retained in the Bank's portfolio.

         In  the  past,  the  Bank  has  purchased  participation  interests  in
construction loans originated by a local financial  institution.  All such loans
are  secured.  At December  31,  1996,  the Bank had  $336,000 of  participation
interests in construction  loans.  The Bank intends to continue to purchase such
loans in the future, subject to market conditions.

         From time to time, in order to supplement loan  originations,  the Bank
has acquired  mortgage-backed and other securities which are held,  depending on
the  investment  intent,  in  the  "held-to-maturity"  or   "available-for-sale"
portfolios. See "- Investment Activities - Mortgage- Backed Securities" and Note
2 to the Notes to Consolidated Financial Statements.

         The  following  table shows the loan  origination,  purchase,  sale and
repayment activities of the Bank for the periods indicated.

<TABLE>
<CAPTION>



                                                                 Year Ended                   10 Months
                                                                 December 31,                    Ended
                                                      -----------------------------------     December 31,
                                                        1996         1995         1994           1993
                                                      -------------------------------------------------
                                                                       (In Thousands)

Originations by type:
<S>                                                    <C>         <C>          <C>            <C>
    Real estate - one- to four-family...........       $6,351      $ 5,162      $ 6,951        $ 6,050
                - multi-family..................        2,678          821        1,180            ---
                - commercial....................        1,077        1,270        1,315          1,080
    Passbook....................................           15            9           12             40
                                                      -------     --------     --------       --------
         Total loans originated.................       10,121        7,262        9,458          7,170
                                                       ------      -------      -------        -------

Purchases:
    Real estate - construction..................          574          551          ---            ---

Sales and Repayments:
    Principal repayments........................        9,282        6,172        7,326          9,028
    Increase (decrease) in other items, net(1)..            5           (6)         (63)           (37)
                                                      -------     --------     --------       --------
         Net increase (decrease)................       $1,418      $ 1,635      $ 2,069        $(1,895)
                                                       ======      =======      =======        =======

<FN>

(1) Other items  consist  primarily of deferred  fees and the allowance for loan
losses.
</FN>
</TABLE>

                                        8

<PAGE>



Delinquencies and Non-Performing Assets

         Delinquency  Procedures.  When a  borrower  fails  to  make a  required
payment on a loan,  the Bank attempts to cure the  delinquency by contacting the
borrower.  Generally, Bank personnel work with the delinquent borrower on a case
by case basis to solve the delinquency.  Generally, a late notice is sent on all
delinquent loans over 20 days delinquent. Additional written and verbal contacts
may be made with the borrower  between 30 and 60 days after the due date. If the
loan is contractually delinquent for 90 days, the Bank may institute appropriate
action to foreclose on the property.  If a borrower  agrees to a payment plan to
bring a delinquent loan current,  a designated lending officer monitors the loan
for compliance with the payment agreement.  If foreclosed,  the property is sold
at public sale and may be purchased by the Bank.

         Real estate acquired by Preferred Savings as a result of foreclosure or
by deed in lieu of  foreclosure  is  classified as real estate owned until it is
sold.  When property is acquired by foreclosure or deed in lieu of  foreclosure,
it is  recorded  at the lower of cost or  estimated  fair value  less  estimated
selling costs. After acquisition, all costs incurred in maintaining the property
are expensed. Costs relating to the development and improvement of the property,
however,  are  capitalized.  The Bank had no real estate acquired as a result of
foreclosure during the last five years.

                                        9

<PAGE>



         The following table sets forth the Bank's loan  delinquencies  by type,
by amount and by percentage of type at December 31, 1996.

<TABLE>
<CAPTION>

                                                                       Loans Delinquent For:
                                ----------------------------------------------------------------------------------------------------
                                              30-59 Days                       60-89 Days                    90 Days and Over
                                ----------------------------------------------------------------------------------------------------
                                                           Percent                         Percent                          Percent
                                                           of Loan                         of Loan                          of Loan
                                      Number    Amount     Category    Number    Amount    Category   Number     Amount     Category
                                ----------------------------------------------------------------------------------------------------
                                                                                      (Dollars in Thousands)
Real Estate:
<S>                                     <C>      <C>         <C>          <C>     <C>        <C>          <C>     <C>         <C>
  One- to four-family...........        10       $793        2.94%        4       $404       1.50%        5       $282        1.04%
  Multi-family..................       ---        ---         ---       ---        ---        ---       ---        ---        ---
  Commercial real estate........         2        288        9.05       ---        ---        ---       ---        ---        ---
  Construction or development...       ---        ---         ---       ---        ---        ---       ---        ---        ---
  Consumer......................       ---        ---         ---       ---        ---        ---       ---        ---        ---
  Commercial business...........       ---        ---         ---       ---        ---        ---       ---        ---        ---

Consumer........................       ---        ---         ---       ---        ---        ---       ---        ---        ---
                                      ----    -------      ------      ----      -----      -----      ----      -----      -----
     Total......................        12     $1,081        2.95%        4       $404       1.10%        5       $282       0.78%
                                       ===     ======                  ====       ====                 ====       ====




                                      Total Delinquent Loans
                                --------------------------------
                                                        Percent
                                                        of Loan
                                   Number   Amount      Category
                                --------------------------------

Real Estate:
  One- to four-family...........     19     $1,479        5.48%
  Multi-family..................    ---        ---         ---
  Commercial real estate........      2        288        9.05
  Construction or development...    ---        ---         ---
  Consumer......................    ---        ---         ---
  Commercial business...........    ---        ---         ---

Consumer........................    ---        ---         ---
                                  -----    -------      ------
     Total......................     21     $1,767        4.82%
                                   ====     ======

</TABLE>

                                       10
<PAGE>



         Classification of Assets. Federal regulations require that each savings
institution  classify  its own  assets  on a  regular  basis.  In  addition,  in
connection  with  examinations of savings  institutions,  OTS and FDIC examiners
have authority to identify  problem assets and, if appropriate,  require them to
be classified.  There are three classifications for problem assets: Substandard,
Doubtful and Loss.  Substandard  assets have one or more defined  weaknesses and
are  characterized  by the distinct  possibility that the Bank will sustain some
loss if the deficiencies are not corrected.  Doubtful assets have the weaknesses
of Substandard assets, with the additional  characteristics  that the weaknesses
make collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable,  and there is a high possibility of loss. An
asset classified Loss is considered  uncollectible and of such little value that
continuance  as an  asset  on  the  balance  sheet  of  the  institution  is not
warranted.  Assets classified as Substandard or Doubtful require the institution
to establish prudent general  allowances for loan losses. If an asset or portion
thereof is classified as a loss, the institution charges off such amount against
the loan loss  allowance.  If an  institution  does not agree with an examiner's
classification  of an asset,  it may appeal this  determination  to the District
Director of the OTS.

         On the basis of  management's  review of its assets,  at  December  31,
1996,  the Bank had  classified a total of $268,000 of its loans  consisting  of
one- to four-family residential real estate as follows:


                                                         December 31, 1996
                                                         -----------------
                                                           (In Thousands)

Substandard...................................................  $282
Doubtful......................................................   ---
Loss..........................................................   ---
                                                               -----
     Total....................................................  $282
                                                                ====


         At December 31, 1996,  Preferred Savings'  classified assets consist of
the non-performing loans. As of the date hereof, these asset classifications are
materially  consistent with those of the OTS and FDIC. When loans are classified
as a "loss," they are charged off against the loan loss allowance.


                                       11

<PAGE>



         Non-Performing  Assets.  The table  below  sets forth the  amounts  and
categories of non-performing assets in the Bank's loan portfolio.  For all years
presented,  the Bank has had no  troubled  debt  restructurings  (which  involve
forgiving a portion of interest or  principal  on any loans or making loans at a
rate  materially  less than that of market  rates).  Foreclosed  assets  include
assets acquired in settlement of loans.

<TABLE>
<CAPTION>

                                                                 December 31,
                                                 ----------------------------------------      February 28,
                                                    1996       1995       1994       1993         1993
                                                    ----       ----       ----       ----         ----
                                                               (Dollars in Thousands)

Non-accruing loans over 90 days delinquent:
<S>                                                <C>       <C>        <C>        <C>           <C>
  One- to four-family.......................       $ 268     $  775     $  334     $  170        $  106
  Multi-family..............................         ---        ---        ---        ---           ---
  Commercial real estate....................         ---        ---        ---        ---           ---
  Commercial business.......................         ---        ---        ---        ---           ---
                                                 -------   --------    -------   --------      --------
     Total..................................         268        775        334        170           106
                                                  ------     ------     ------     ------        ------

Accruing loans delinquent more than 90 days.          14        ---        ---          6           ---

Foreclosed assets...........................         ---        ---        ---        ---           ---
                                                 -------   --------  ---------   --------      --------

Total non-performing assets.................       $ 282     $  775    $   334     $  176        $  106
                                                   =====     ======    =======     ======        ======
Total as a percentage of total assets.......        0.37%      1.45%      0.65%      0.33%         0.21%
                                                  ======     ======   ========    =======       =======

</TABLE>

         For the year ended December 31, 1996, gross interest income which would
have been recorded had the  non-accruing  loans been current in accordance  with
their  original  terms  amounted to $23,000.  The amounts that were  included in
interest income on such loans were $18,000.

         At December 31, 1996,  the Bank's  non-accruing  loans  greater than 90
days included four loans secured by single-family real estate totaling $268,000.

         Other Assets of Concern.  In addition to the non-performing  assets set
forth in the table above, as of December 31, 1996,  there were no loans or other
assets  with  respect  to which  known  information  about the  possible  credit
problems of the  borrowers  or the cash flows of the  security  properties  have
caused  management to have concerns as to the ability of the borrowers to comply
with present loan repayment  terms and which may result in the future  inclusion
of such items in the non-performing asset categories.



                                       12

<PAGE>



         The following table sets forth an analysis of the Bank's  allowance for
loan losses.


<TABLE>
<CAPTION>


                                                                                                          10 Months     Year Ended
                                                                 Year Ended December 31,                     Ended      -----------
                                                           ---------------------------------------        December 31,  February 28,
                                                                1996           1995           1994           1993           1993
                                                                                 (Dollars in Thousands)

<S>                                                             <C>            <C>            <C>            <C>            <C>
Balance at beginning of period.......................           $136           $136           $ 94           $ 67           $ 43

Charge-offs..........................................            ---            ---            ---            ---            ---
Recoveries...........................................            ---            ---            ---            ---            ---
                                                              ------          -----         ------         ------         ------
Net charge-offs......................................            ---            ---            ---            ---            ---
Additions charged to operations......................             50            ---             42             27             24
                                                               -----         ------          -----          -----          -----
Balance at end of period.............................           $186           $136           $136           $ 94           $ 67
                                                                ====           ====           ====           ====           ====

Ratio of net charge-offs during the period to
 average loans outstanding during the period.........            ---%           ---%           ---%           ---%           ---%
                                                               =====         ======         ======          =====          =====

Ratio of net charge-offs during the period to
 average non-performing assets.......................            ---%           ---%           ---%           ---%           ---%
                                                               =====         ======         ======          =====          =====

Ratio of allowance for loan losses to total loans....           0.51%          0.39%          0.41%          0.30%          0.20%
                                                                ====           ====           ====           ====           ====

</TABLE>

                                       13

<PAGE>



                  The  distribution of the Bank's  allowance for losses on loans
at the dates indicated is summarized as follows:

<TABLE>
<CAPTION>


                                                                        December 31,
                         ------------------------------------------------------------------------------------------------
                                      1996                             1995                             1994
                         ------------------------------------------------------------------------------------------------
                                                Percent                          Percent                        Percent
                                                of Loans                         of Loans                       of Loans
                                      Loan      in Each                Loan      in Each                Loan    in Each
                         Amount of   Amounts    Category  Amount of   Amounts    Category  Amount of  Amounts   Category
                         Loan Loss     by       to Total  Loan Loss     by       to Total  Loan Loss     by         to
                         Allowance  Category      Loans   Allowance  Category      Loans   Allowance  Category    Loans
                                                                       (In Thousands)

<S>                        <C>       <C>          <C>       <C>       <C>          <C>        <C>      <C>        <C>
One- to four-family...     $  27     $26,998      73.72%    $ 26      $25,858      73.44%     $ 25     $24,711    73.62%
Multi-family..........        15       6,088      16.62       15        6,094      17.31        15       5,929    17.66
Commercial real estate         8       3,183       8.69        7        2,953       8.39         7       2,904     8.65
Construction..........         1         336       0.92        1          286        .81       ---         ---      ---
Consumer..............       ---          17       0.05      ---           18        .05       ---          24      .07
Unallocated...........       135         ---        ---       87          ---        ---        89         ---      ---
                            ----   ---------       ----    -----     --------       ----    ------   ---------     ----
     Total............      $186     $36,622     100.00%    $136      $35,209     100.00%     $136     $33,568   100.00%
                            ====     =======     ======     ====      =======     ======      ====     =======   ======



                              December 31,
                      -------------------------------
                                  1993                       February 28, 1993
                      ------------------------------- ---------------------------------
                                             Percent                           Percent
                                             of Loans                          of Loans
                                   Loan      in Each                Loan       in Each
                       Amount of Amounts     Category   Amount of  Amounts     Category
                       Loan Loss    by       to Total   Loan Loss    by        to Total
                       Allowance Category     Loans     Allowance Category      Loans


<S>                       <C>    <C>          <C>          <C>    <C>          <C>
One- to four-family...    $23    $23,403      74.45%       $25    $25,411      76.32%
Multi-family..........     14      5,452      17.34         15      6,157      18.49
Commercial real estate      6      2,546       8.10          4      1,681       5.05
Construction..........    ---        ---        ---        ---        ---        ---
Consumer..............    ---         35        .11        ---         45        .14
Unallocated...........     51        ---        ---         23        ---        ---
                         ----   --------       ----       ----   --------       ----
     Total............    $94    $31,436     100.00%       $67    $33,294     100.00%
                          ===    =======     ======        ===    =======     ======


</TABLE>

                                       14


<PAGE>



         The  allowance for loan losses is  established  through a provision for
loan losses  charged to earnings  based on  management's  evaluation of the risk
inherent in its entire loan portfolio. Such evaluation,  which includes a review
of all  loans  of  which  full  collectibility  may not be  reasonably  assured,
considers the market value of the underlying collateral,  growth and composition
of the loan portfolio,  delinquency  trends,  adverse situations that may affect
the borrower's ability to repay,  prevailing and projected  economic  conditions
and  other  factors  that  warrant  recognition  in  providing  for an  adequate
allowance  for loan losses.  In  determining  the general  reserves  under these
policies,  historical charge-offs and recoveries,  changes in the mix and levels
of  the  various  types  of  loans,  net  realizable  values,  the  current  and
prospective loan portfolio and current economic conditions are considered.

         While management  believes that it uses the best information  available
to  determine  the  allowance  for loan losses,  unforeseen  economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly  affected, if circumstances differ substantially
from the assumptions used in making the final determination.

Investment Activities

         General.  Preferred Savings must maintain minimum levels of investments
and other assets that qualify as liquid assets under OTS regulations.  Liquidity
may  increase  or  decrease   depending  upon  the  availability  of  funds  and
comparative   yields  on  investments  in  relation  to  the  return  on  loans.
Historically,   Preferred   Savings  has  maintained  liquid  assets  at  levels
significantly above the minimum  requirements imposed by the OTS regulations and
above levels believed  adequate to meet the  requirements of normal  operations,
including  potential  deposit  outflows.  At December  31, 1996,  the  Company's
liquidity ratio for regulatory purposes was 30.5%.

         Generally,  the  investment  policy of the  Company is to invest  funds
among  categories  of  investments  and  maturities  based  upon  the  Company's
asset/liability  management  policies,  investment  quality,  loan  and  deposit
volume, liquidity needs and performance objectives.  Prior to December 31, 1993,
the Bank recorded its investments in its investment  securities portfolio at the
lower of cost or current  market value if held for sale or at amortized  cost if
held for investment.  Unrealized declines in the market value of securities held
to maturity were not reflected in the financial statements;  however, unrealized
losses in the market value of securities held for sale were recorded as a charge
to current earnings. Effective December 31, 1993, Preferred Savings adopted SFAS
115. As required by SFAS 115,  securities are classified into three  categories:
trading, held-to-maturity and available-for-sale. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading  securities and are reported at fair value with unrealized  gains and
losses  included in trading  account  activities in the statement of operations.
Securities that Preferred Savings has the positive intent and ability to hold to
maturity are classified as held-to-maturity  and reported at amortized cost. All
other securities not classified as trading or held-to-maturity are classified as
available-for-sale.  At  December  31,  1996,  the  Company  had  no  securities
which   were   classified   as  trading   and  no   securities   classified   as
held-to-maturity. Available-for-sale securities

                                       15

<PAGE>



are  reported at fair value with  unrealized  gains and losses  included,  on an
after-tax basis, in a separate component of retained  earnings.  At December 31,
1996, $24.1 million of securities and $4.7 million of mortgage-backed securities
were classified as available-for-sale.

         Securities. In order to supplement loan volume, invest excess liquidity
and increase  holdings of short and medium term assets,  the Company  invests in
liquidity investments and in high-quality investments, such as U.S. Treasury and
agency  obligations.  At December 31, 1996 and December 31, 1995,  the Company's
securities  portfolio totaled $24.1 million and $9.7 million,  respectively.  At
December 31, 1996, the Company did not own any investment securities of a single
issuer which exceeded 10% of the Company's  retained  earnings,  other than U.S.
government securities and federal agency obligations. See Note 2 of the Notes to
the Consolidated  Financial Statements for additional  information regarding the
Company's securities portfolio.

                                       16

<PAGE>



         The  following  table  sets  forth  the  composition  of the  Company's
securities and other interest-earning assets at the dates indicated.

<TABLE>
<CAPTION>

                                                                                 December 31,
                                               ---------------------------------------------------------------------------------
                                                        1996                1995               1994                  1993
                                               ---------------------------------------------------------------------------------
                                                 Carrying   % of    Carrying   % of     Carrying   % of     Carrying      % of
                                                   Value    Total     Value    Total      Value    Total      Value       Total
                                                                                             (Dollars in Thousands)

Securities held-to-maturity:
<S>                                                <C>     <C>     <C>         <C>     <C>          <C>    <C>            <C>
  U.S. government securities...................    $  ---     ---% $    ---      ---%  $    201     2.67%  $    403       4.27%

Securities available-for-sale:
  U.S. government securities...................    13,993   58.11     3,527    36.22      4,880     64.84     2,999      31.74
  Federal agency obligations...................    10,087   41.89     6,212    63.78      2,445     32.49       ---        ---
  Marketable equity securities.................       ---     ---       ---      ---        ---       ---     6,045      63.99
                                               ---------- -------- --------  -------    -------   -------   -------     ------
     Total securities..........................   $24,080  100.00% $  9,739   100.00%  $  7,526    100.00% $  9,447     100.00%
                                                  =======  ======    ======   ======     ======    ======    ======     ======
Average remaining life of securities...........                     3.97 yrs.           2.00 yrs.          1.41 yrs.(1)

Other interest-earning assets:
  Interest-bearing deposits with other banks...   $ 8,427   95.88% $  3,086    90.05%  $  6,060     95.15% $  7,151      72.13%
  Repurchase agreements........................       ---     ---       ---      ---        ---       ---       750       7.57
  Money market mutual finds....................       ---     ---       ---      ---        ---       ---       165       1.66
  Federal funds sold...........................       ---     ---       ---      ---        ---       ---     1,500      15.13
  Federal Home Loan Bank Stock.................       362    4.12       341     9.95        309      4.85       348       3.51
                                                 -------- -------  --------  -------   --------   -------   -------    -------
     Total.....................................   $ 8,789  100.00%  $ 3,427   100.00%   $ 6,369    100.00%  $ 9,914     100.00%
                                                  =======  ======   =======   ======    =======    ======   =======     ======

<FN>

(1)  Excludes marketable equity securities.

</FN>
</TABLE>

                                       17

<PAGE>



         The composition and maturities of the securities  portfolio,  excluding
FHLB stock, are indicated in the following table.

<TABLE>
<CAPTION>

                                                                  December 31, 1996
                                  --------------------------------------------------------------------------------------
                                     Less Than       1 to 5         5 to 10       Over
                                      1 Year          Years          Years       10 Years         Total Securities
                                  --------------------------------------------------------------------------------------
                                  Carrying Value Carrying Value Carrying Value Carrying Value Carrying Value  Fair Value
                                  --------------------------------------------------------------------------------------
                                                     (Dollars in Thousands)

<S>                                    <C>          <C>             <C>          <C>             <C>            <C>
U.S. government securities....         $6,013       $ 7,980         $  ---       $    ---        $13,993        $13,993
Federal agency obligations....          2,755         3,948          3,384            ---         10,087         10,087
                                      -------       -------        -------      ---------       --------       --------
Total investment securities...         $8,768       $11,928         $3,384       $    ---        $24,080        $24,080
                                       ======       =======         ======       ========        =======        =======
Weighted average yield........           5.88%         5.85%          7.17%           ---%          6.05%

</TABLE>


         See Note 2 of the Notes to the Consolidated  Financial Statements for a
discussion of the Bank's securities portfolio.

         Mortgage-Backed  Securities. In order to supplement loan and investment
activities, the Company invests in mortgage-backed securities.

         Consistent with its asset/liability  management  strategy,  at December
31, 1996,  $1.5 million,  or 31.9% of the Company's  mortgage-backed  securities
have  adjustable  interest  rates.  For  information   regarding  the  Company's
mortgage-backed   securities  portfolio,   see  Note  2  of  the  Notes  to  the
Consolidated Financial Statements.

         As of December 31, 1996, all of the mortgage-backed securities owned by
the Company were issued,  insured or guaranteed either directly or indirectly by
a federal  agency.  As a result,  the Company  did not have any  mortgage-backed
securities  in excess of 10% of  retained  earnings  except for  federal  agency
obligations.

         To  assess  price  volatility,   the  Federal  Financial   Institutions
Examination  Council ("FFIEC") adopted a policy in 1992 which requires an annual
"stress" test of mortgage  derivative  securities.  This policy,  which has been
adopted  by the OTS,  requires  the  Bank to  annually  test its CMOs and  other
mortgage-related   securities  to  determine   whether  they  are  high-risk  or
nonhigh-risk  securities.  Mortgage  derivative products with an average life or
price volatility in excess of a benchmark 30-year, mortgage-backed, pass-through
security are considered high-risk mortgage securities. Under the policy, savings
institutions may generally only invest in high-risk mortgage securities in order
to reduce  interest rate risk. In addition,  all high-risk  mortgage  securities
acquired after February 9, 1992 which are classified as high risk at the time of
purchase must be carried in the institution's  trading account or as assets held
for sale. At December 31, 1996, none of the Company's mortgage-backed securities
were classified as "high-risk."


                                       18

<PAGE>



         The  following  table  sets  forth  the  composition  of the  Company's
mortgage-backed securities at the dates indicated.

<TABLE>
<CAPTION>

                                                                                                     December 31,
                                                  ----------------------------------------------------------------------------------
                                                         1996                    1995                 1994                1993
                                                  ---------------------------------------------------------------------------------
                                                  Carrying    % of       Carrying     % of   Carrying     % of    Carrying    % of
                                                    Value     Total        Value      Total    Value      Total     Value     Total
                                                    -----     -----        -----      -----    -----      -----     -----     -----
                                                                                    (Dollars in Thousands)
Mortgage-backed securities held to maturity:
<S>                                                <C>         <C>       <C>        <C>       <C>        <C>       <C>      <C>
  FNMA...........................................  $  ---       ---%     $  ---        ---%   $1,792     51.41%    $2,026   100.00%
Mortgage-backed securities available for sale:
  GNMA...........................................     662     14.08         766      18.15       773     22.17        ---      ---
  FNMA...........................................   1,736     36.92       2,426      57.49       ---       ---        ---      ---
  FHLMC..........................................   2,304     49.00       1,028      24.36       921     26.42        ---      ---
                                                   ------      -----    -------     ------    ------    ------     ------   ------
     Total mortgage-backed securities............  $4,702    100.00%     $4,220     100.00%   $3,486    100.00%    $2,026   100.00%
                                                   ======    ======      ======     ======    ======    ======     ======   ======


</TABLE>



                                       19

<PAGE>



         The  following  table  sets  forth the  contractual  maturities  of the
Company's mortgage-backed securities at December 31, 1996.


<TABLE>
<CAPTION>


                                                                       Due In                           December 31,
                                                      -----------------------------------------------       1996
                                                     Less than      1 to       5 to 10       Over         Balance
                                                      1 Year       5 Years      Years      10 Years     Outstanding
                                                      -------------------------------------------------------------
                                                                          (In Thousands)

<S>                                                   <C>           <C>         <C>          <C>            <C>
Federal Home Loan Mortgage Corporation...........     $   ---       $  ---      $  ---       $2,304         $2,304
Federal National Mortgage Association............         ---          761         975          ---          1,736
Government National Mortgage Association.........         ---          ---         ---          662            662
                                                      -------      -------      ------       ------         ------
     Total.......................................     $   ---        $ 761       $ 975       $2,966         $4,702
                                                      =======        =====       =====       ======         ======

</TABLE>

         At  December  31,  1996,  the  dollar  amount  of  all  mortgage-backed
securities  due after  December 31,  1997,  which had fixed  interest  rates and
floating  or   adjustable   rates   totaled  $3.2  million  and  $1.5   million,
respectively.

         The  market  values  of a  portion  of  the  Company's  mortgage-backed
securities  held-to-maturity  have  been  from  time to time  lower  than  their
carrying values.  However,  for financial reporting  purposes,  such declines in
value are  considered  to be  temporary  in nature  since  they have been due to
changes in interest rates rather than credit  concerns.  See Note 2 of the Notes
to the Consolidated Financial Statements.

         The following table shows mortgage-backed securities purchase, sale and
repayment activities of the Company for the periods indicated.

<TABLE>
<CAPTION>



                                                                                          10 Months
                                                  Year Ended December 31,                   Ended
                                              -----------------------------------        December 31,
                                                  1996          1995         1994            1993
                                                  ----          ----         ----            ----
                                                                 (In Thousands)
Purchases:
<S>                                           <C>            <C>          <C>             <C>
  Adjustable-rate(1).....................     $    ---       $ 1,023      $ 2,047         $    ---
  Fixed-rate(1)..........................        2,458           917          ---            2,026
                                               -------     ---------    ---------          -------
         Total purchases.................        2,458         1,940        2,047            2,026

Sales:
  Adjustable-rate(1).....................        1,283           814          ---              ---

Repayments:
  Principal repayments...................          673           476          437              ---
  Other increase (decrease)..............          (20)           84         (150)             ---
                                                ------      --------     --------         --------
         Net increase (decrease).........        $ 482      $    734      $ 1,460          $ 2,026
                                                 =====      ========      =======          =======
<FN>

(1)  Consists of pass-through securities.
</FN>
</TABLE>

                                       20

<PAGE>



Sources of Funds

         General.  The Bank's  primary  sources of funds are deposits,  payments
(including  prepayments)  of  loan  principal,  interest  earned  on  loans  and
securities,  repayments  of  securities,  borrowings  and  funds  provided  from
operations.

         Deposits. Preferred Savings offers deposit accounts having a wide range
of interest  rates and terms.  The Bank's  deposits  consist of passbook,  money
market and  various  certificate  accounts.  The Bank does not  currently  offer
transaction  accounts  but may  consider  offering  such  accounts in the future
depending on the level of consumer  demand for such accounts in its market area.
The Bank only  solicits  deposits in its market area and does not  currently use
brokers to obtain deposits.

         The variety of deposit  accounts  offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with  flexibility to changes in
consumer  demand.  As a result,  as  customers  have become more  interest  rate
conscious,  the Bank has become more  susceptible to short-term  fluctuations in
deposit flows. In the future,  the Bank may offer  transaction  accounts to meet
the needs of changing  customers as well as increase its deposit  promotion  and
advertising.

         Management  believes  that the "core"  portion  of the  Bank's  regular
savings and money market accounts can have a lower cost and be more resistant to
interest rate changes than certificate  accounts.  The Bank continues to utilize
customer service and marketing initiatives in an effort to maintain and increase
the volume of such  deposits.  However,  the  ability of the Bank to attract and
maintain these  accounts (as well as certificate  accounts) has been and will be
affected by market conditions.




                                       21

<PAGE>



         The following table sets forth the savings flows at the Bank during the
periods indicated.



<TABLE>
<CAPTION>


                                                                                            10 Months
                                                      Year Ended December 31,                 Ended
                                                  ------------------------------------     December 31,
                                                     1996         1995          1994           1993
                                                     ----         ----          ----           ----
                                                             (Dollars in Thousands)

<S>                                               <C>          <C>           <C>            <C>
Opening balance.............................      $ 41,047     $ 40,057      $ 41,139       $ 40,363
Deposits....................................        51,120       24,295        24,604         15,841
Withdrawals.................................       (51,599)     (24,759)      (26,856)       (16,193)
Interest credited...........................         1,635        1,454         1,170          1,128
                                                   -------     --------      --------       --------

Ending balance..............................       $42,203     $ 41,047      $ 40,057       $ 41,139
                                                   =======     ========      ========       ========

Net increase (decrease).....................       $ 1,156    $     990     $ (1,082)      $     776
                                                   =======    =========     ========       =========

Percent increase (decrease).................          2.82%        2.47%       (2.63)%          1.92%
                                                      ----       ------       ------          ------
</TABLE>


                                       22

<PAGE>



         The following table sets forth the dollar amount of savings deposits in
the  various  types of  deposit  programs  offered  by the Bank as of the  dates
indicated.

<TABLE>
<CAPTION>

                                                                         December 31,
                                    ------------------------------------------------------------------------------------
                                            1996                 1995                  1994                  1993
                                    ------------------------------------------------------------------------------------
                                                Percent              Percent               Percent               Percent
                                      Amount   of Total    Amount   of Total     Amount   of Total     Amount   of Total
                                      ------   --------    ------   --------     ------   --------     ------   --------
                                                                   (Dollars in Thousands)
Transactions and Savings Deposits:
-----------------------------------
<S>                                  <C>         <C>      <C>         <C>       <C>         <C>       <C>         <C>
Passbook Accounts - 3.00%(1).......  $20,492     48.56%   $19,409     47.29%    $20,750     51.80%    $22,989     55.88%
Money Market Accounts - 3.25%(1)...    1,495      3.54      1,601      3.90       1,924      4.80       2,029      4.93
                                    --------    ------     ------    ------    --------    ------    --------    ------

Total Non-Certificates.............   21,987     52.10     21,010     51.19      22,674     56.60      25,018     60.81
                                    --------     -----     ------    ------    --------    ------    --------    ------

Certificates:

 0.00 -  3.99%.....................      ---       ---         49      0.12       5,130     12.81      12,935     31.44
 4.00 -  5.99%.....................   19,231     45.57     16,222     39.52      11,669     29.13       2,343      5.70
 6.00 -  7.99%.....................      985      2.33      3,766      9.17         494      1.23         668      1.62
 8.00 and over.....................      ---       ---        ---       ---          90       .23         175       .43
                                   ---------  --------   --------  --------     -------   -------   ---------   -------

Total Certificates.................   20,216     47.90     20,037     48.81      17,383     43.40      16,121     39.19
                                      ------    ------    -------    ------    --------    ------    --------    ------
Total Deposits.....................  $42,203    100.00%   $41,047    100.00%    $40,057    100.00%    $41,139    100.00%
                                     =======    ======    =======    ======     =======    ======     =======    ======

<FN>

(1)  At December 31, 1996.
</FN>
</TABLE>

                                       23

<PAGE>



         The following table shows rate and maturity  information for the Bank's
certificates of deposit as of December 31, 1996.

<TABLE>
<CAPTION>


                             Less Than        1 to 2         2 to 3         3 to 4         4 to 5
                               1 Year          Years          Years          Years          Years           Total
                       ------------------------------------------------------------------------------------------
                                                         (Dollars in Thousands)

<S>                           <C>            <C>             <C>            <C>            <C>           <C>
5.00 - 5.99%..........         $16,619        $ 1,994         $  478         $   32         $  107        $19,230
6.00 - 6.99%..........             505            ---             88            119            171            883
7.00 - 7.99%..........             ---            ---            ---            103            ---            103
                            ----------      ---------       --------         ------       --------       --------
                               $17,124        $ 1,994         $  566         $  254         $  278        $20,216
                               =======        =======         ======         ======         ======        =======

</TABLE>


         The following table indicates the amount of the Bank's  certificates of
deposit and other deposits by time  remaining  until maturity as of December 31,
1996.

<TABLE>
<CAPTION>

                                                                         Maturity
                                                      --------------------------------------------------
                                                                       Over        Over
                                                      3 Months        3 to 6      6 to 12        Over
                                                       or Less        Months       Months      12 months      Total
                                                       -------        ------       ------      ---------      -----
                                                                           (In Thousands)

<S>                                                     <C>           <C>          <C>           <C>         <C>
Certificates of deposit of less than $100,000....       $6,796        $5,462       $4,060        $2,887      $19,205

Certificates of deposit of $100,000 or more......          300           206          300           205        1,011
                                                        ------       -------      -------        ------       ------

Total certificates of deposit....................       $7,096        $5,668       $4,360        $3,092      $20,216
                                                        ======        ======       ======        ======      =======

</TABLE>

         For  additional  information  regarding the  composition  of the Bank's
deposits, see Note 6 of the Notes to the Consolidated Financial Statements.

         Borrowings.  In the past, the Bank has not utilized  borrowings to fund
its operations.  Preferred  Savings' available sources of funds include advances
from  the FHLB of  Chicago  and  other  borrowings.  As a member  of the FHLB of
Chicago, the Bank is required to own capital stock in the FHLB of Chicago and is
authorized  to apply for  advances  from the FHLB of  Chicago.  Each FHLB credit
program has its own interest rate, which may be fixed or variable,  and range of
maturities.  The FHLB of Chicago may  prescribe  the  acceptable  uses for these
advances,  as well as  limitations  on the size of the  advances  and  repayment
provisions.

Subsidiary Activities

         As a federally  chartered savings bank,  Preferred Savings is permitted
by OTS  regulations  to invest up to 2% of its  assets in the stock of, or loans
to,  service  corporation  subsidiaries,  and may invest an additional 1% of its
assets  in  service  corporations  where  such  additional  funds  are  used for
inner-city or community  development  purposes.  In addition to  investments  in
service

                                       24

<PAGE>



corporations,  federal  institutions are permitted to invest an unlimited amount
in operating  subsidiaries  engaged solely in activities which a federal savings
association may engage in directly.

         At December 31, 1996,  Preferred  Savings had one wholly owned  service
corporation,  Preferred Service Corporation (the "Subsidiary").  The Subsidiary,
an Illinois corporation, was incorporated in 1969 and sells casualty, disability
and credit life insurance on an agency basis.

         The  Subsidiary  had nominal net income for the year ended December 31,
1996. At December 31, 1996,  Preferred  Savings'  investment  in the  Subsidiary
totaled $4,601.

Competition

         Preferred  Savings faces strong  competition  both in originating  real
estate loans and in attracting deposits.  Competition in originating loans comes
primarily  from  commercial  banks,  credit  unions  mortgage  bankers and other
savings  institutions,  which also make loans secured by real estate  located in
Cook  County,   Illinois.   At  December  31,  1996,   there  were  344  savings
institutions,  551  commercial  bank  offices,  40 savings  bank offices and 265
credit unions located in Cook County,  Illinois.  Preferred Savings competes for
loans  principally  on the basis of the interest rates and loan fees it charges,
the types of loans it  originates  and the  quality of  services  it provides to
borrowers.

         Competition for those deposits is principally  from  commercial  banks,
credit unions,  mutual funds,  securities  firms and other savings  institutions
located in the same  communities.  The ability of the Bank to attract and retain
deposits  depends  on its  ability to provide  an  investment  opportunity  that
satisfies the requirements of investors as to rate of return,  liquidity,  risk,
convenient  locations and other factors. The Bank competes for these deposits by
offering  competitive rates,  convenient  business hours and a customer oriented
staff. At December 31, 1996,  Preferred Savings' share of deposits in its market
area was approximately .04%.

Employees

         At December 31, 1996,  the Bank had a total of 15 full-time  employees.
None of the  Bank's  employees  are  represented  by any  collective  bargaining
agreement. Management considers its employee relations to be good.




                                       25

<PAGE>



                                   REGULATION

General

         Preferred  Savings is a federally  chartered savings bank, the deposits
of which are  federally  insured  and backed by the full faith and credit of the
United States  Government.  Accordingly,  Preferred  Savings is subject to broad
federal  regulation  and oversight  extending to all its  operations.  Preferred
Savings  is a member of the FHLB of Chicago  and is  subject to certain  limited
regulation  by the Board of Governors of the Federal  Reserve  System  ("Federal
Reserve Board").  Prior to August,  1996, the Bank was a state chartered savings
bank and was subject to the regulation of the State of Illinois  Office of Banks
and Real  Estate  (the  "Illinois  Office of  Banks").  As the  savings and loan
holding  company of Preferred  Savings,  the Holding  Company also is subject to
federal  regulation and oversight.  The purpose of the regulation of the Holding
Company  and  other  holding   companies  is  to  protect   subsidiary   savings
associations. Preferred Savings is a member of the Savings Association Insurance
Fund ("SAIF") and the deposits of Preferred  Savings are insured by the FDIC. As
a  result,  the FDIC has  certain  regulatory  and  examination  authority  over
Preferred Savings.

         Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.

Federal Regulation of Savings Associations

         The  OTS  has  extensive  authority  over  the  operations  of  savings
associations.  As part of this authority,  Preferred Savings is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC.  Prior to its conversion to a federal  charter in August 1996, the
Bank was examined and filed periodic  reports with the Illinois Office of Banks.
The  last  regular  Illinois  Office  of  Banks,  OTS and FDIC  examinations  of
Preferred Savings were as of May 1994, March 1992 and August 1995, respectively.
Under agency scheduling  guidelines,  it is likely that another examination will
be initiated in the near future.  When these  examinations  are conducted by the
OTS and the FDIC,  the  examiners may require  Preferred  Savings to provide for
higher  general or specific loan loss  reserves.  All savings  associations  are
subject to a semi-annual assessment,  based upon the savings association's total
assets, to fund the operations of the OTS.

                  The OTS  also has  extensive  enforcement  authority  over all
savings  institutions and their holding companies,  including  Preferred Savings
and the  Holding  Company.  This  enforcement  authority  includes,  among other
things, the ability to assess civil money penalties,  to issue  cease-and-desist
or  removal  orders  and to  initiate  injunctive  actions.  In  general,  these
enforcement  actions may be initiated for violations of laws and regulations and
unsafe or unsound  practices.  Other  actions or inactions may provide the basis
for enforcement action,  including misleading or untimely reports filed with the
OTS. Except under certain circumstances,  public disclosure of final enforcement
actions by the OTS is required.


                                       26

<PAGE>



         In  addition,  the  investment,  lending  and  branching  authority  of
Preferred  Savings is  prescribed  by  federal  laws and it is  prohibited  from
engaging in any activities not permitted by such laws. For instance,  no savings
institution may invest in  non-investment  grade corporate debt  securities.  In
addition,  the permissible level of investment by federal  associations in loans
secured by  non-residential  real property may not exceed 400% of total capital,
except with approval of the OTS. Federal savings associations are also generally
authorized to branch  nationwide.  Preferred  Savings is in compliance  with the
noted restrictions.

         Preferred    Savings'   general    permissible    lending   limit   for
loans-to-one-borrower  is equal to the greater of $500,000 or 15% of  unimpaired
capital  and  surplus  (except  for  loans  fully  secured  by  certain  readily
marketable  collateral,  in  which  case  this  limit  is  increased  to  25% of
unimpaired  capital and  surplus).  At December  31,  1996,  Preferred  Savings'
lending limit under this restriction was $4.8 million.  Preferred  Savings is in
compliance with the loans-to-one-borrower limitation.

         The OTS, as well as the other  federal  banking  agencies,  has adopted
guidelines  establishing  safety and soundness standards on such matters as loan
underwriting and  documentation,  internal controls and audit systems,  interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these  standards  must submit a  compliance  plan.  A
failure to submit a plan or to comply  with an  approved  plan will  subject the
institution to further enforcement action. The OTS and the other federal banking
agencies have also proposed additional  guidelines on asset quality and earnings
standards.  No assurance can be given as to whether or in what form the proposed
regulations will be adopted.

Insurance of Accounts and Regulation by the FDIC

         Preferred Savings is a member of the SAIF, which is administered by the
FDIC.  Deposits  are  insured  up to  applicable  limits  by the  FDIC  and such
insurance  is  backed  by  the  full  faith  and  credit  of the  United  States
Government.  As insurer,  the FDIC  imposes  deposit  insurance  premiums and is
authorized to conduct  examinations of and to require  reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC  determines  by regulation or order to pose a serious risk
to the FDIC.  The FDIC also has the  authority to initiate  enforcement  actions
against savings  associations,  after giving the OTS an opportunity to take such
action,  and may  terminate  the deposit  insurance  if it  determines  that the
institution  has  engaged in unsafe or unsound  practices  or is in an unsafe or
unsound condition.

         The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well  capitalized  (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to  risk-weighted  assets  ("Tier 1  risk-based  capital") of at
least 6% and a risk-based  capital ratio of at least 10%) and considered healthy
pay the  lowest  premium  while  institutions  that  are  less  than  adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios

                                       27

<PAGE>



of less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial  supervisory concern pay the highest premium. Risk classification of
all  insured  institutions  will  be  made  by the  FDIC  for  each  semi-annual
assessment period. For the first six months of 1995, the assessment schedule for
Bank Insurance Fund ("BIF") members and SAIF members ranged from .23% to .31% of
deposits.

         The FDIC is authorized to increase  assessment  rates,  on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated  reserve ratio of 1.25% of  SAIF-insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC.  The FDIC may also impose  special  assessments  on SAIF  members to repay
amounts  borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

         For the  first six  months of 1995,  the  assessment  schedule  for BIF
members and SAIF members  ranged from .23% to .31% of  deposits.  As is the case
with the SAIF, the FDIC is authorized to adjust the insurance  premium rates for
banks that are insured by the BIF of the FDIC in order to  maintain  the reserve
ratio of the BIF at  1.25%  of  BIF-insured  deposits.  As a  result  of the BIF
reaching its statutory  reserve ratio the FDIC revised the premium  schedule for
BIF-insured  institutions  to provide a range of .04% to .31% of  deposits.  The
revisions  became  effective in the third quarter of 1995. In addition,  the BIF
rates were further revised,  effective January 1996, to provide a range of 0% to
 .27%.  The  SAIF  rates,  however,  were  not  adjusted.  As a  result  of these
revisions, BIF members will generally pay lower premiums.

         The SAIF is not expected to attain the  designated  reserve ratio until
the year 2002 due to the  shrinking  deposit base for SAIF  assessments  and the
requirement  that SAIF  premiums be used to make the interest  payments on bonds
issued by the  Financing  Corporation  ("FICO") in order to finance the costs of
resolving thrift failures in the 1980s. As a result, SAIF members will generally
be subject to higher  deposit  insurance  premiums than BIF members  until,  all
things being equal, the SAIF attains the required reserve ratio.

         In  order  to  help  eliminate  this  disparity  and  any   competitive
disadvantage due to disparate deposit insurance premium  schedules,  legislation
to recapitalize the SAIF was enacted in September 1996. The legislation provides
for a one-time  assessment  to be imposed on all  deposits  assessed at the SAIF
rates, as of March 31, 1995, in order to recapitalize the SAIF. It also provides
for the merger of the BIF and the SAIF on January  1, 1999  provided  no savings
associations then exist.

Regulatory Capital Requirements

         Federally insured savings associations,  such as Preferred Savings, are
required  to  maintain  a  minimum  level  of  regulatory  capital.  The OTS has
established  capital  standards,  including a tangible  capital  requirement,  a
leverage  ratio  (or  core  capital)   requirement  and  a  risk-based   capital
requirement applicable to such savings associations.  These capital requirements
must be  generally  as  stringent as the  comparable  capital  requirements  for
national banks. The

                                       28

<PAGE>



OTS is also  authorized  to  impose  capital  requirements  in  excess  of these
standards on individual associations on a case-by-case basis.

         The capital  regulations  require  tangible capital of at least 1.5% of
adjusted total assets (as defined by  regulation).  Tangible  capital  generally
includes  common   stockholders'   equity  and  retained  income,   and  certain
noncumulative perpetual Preferred Savings stock and related income. In addition,
all  intangible  assets,  other  than a  limited  amount of  purchased  mortgage
servicing  rights,  must be  deducted  from  tangible  capital  for  calculating
compliance with the requirement. At December 31, 1996, Preferred Savings did not
have any intangible assets recorded as assets on its financial statements.

         The OTS regulations establish special  capitalization  requirements for
savings associations that own subsidiaries.  In determining  compliance with the
capital requirements,  all subsidiaries engaged solely in activities permissible
for national  banks or engaged in certain other  activities  solely as agent for
its customers are  "includable"  subsidiaries  that are consolidated for capital
purposes in proportion to the association's  level of ownership.  For excludable
subsidiaries the debt and equity  investments in such  subsidiaries are deducted
from assets and capital.

         At December 31, 1996,  Preferred  Savings had tangible capital of $22.1
million, or 32.8% of adjusted total assets, which is approximately $21.1 million
above the minimum requirement of 1.5% of adjusted total assets in effect on that
date.

         The capital standards also require core capital equal to at least 3% of
adjusted total assets.  Core capital generally consists of tangible capital plus
certain intangible  assets,  including a limited amount of purchased credit card
relationships.  As a result of the prompt corrective action provisions discussed
below,  however, a savings  association must maintain a core capital ratio of at
least  4%  to  be  considered  adequately  capitalized  unless  its  supervisory
condition  is such to allow it to  maintain a 3% ratio.  At December  31,  1996,
Preferred Savings had no intangibles which were subject to these tests.

         At December 31, 1996, Preferred Savings had core capital equal to $22.1
million,  or 32.8% of adjusted  total  assets,  which is $20.1 million above the
minimum leverage ratio requirement of 3% as in effect on that date.

          The OTS risk-based  requirement  requires savings associations to have
total capital of at least 8% of risk-weighted  assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based  requirement  only to the extent of core capital.  The
OTS is  also  authorized  to  require  a  savings  association  to  maintain  an
additional  amount of total capital to account for  concentration of credit risk
and the risk of  non-traditional  activities.  At December 31,  1996,  Preferred
Savings had $186,000 of general  loss  reserves  that  qualify as  supplementary
capital, which was less than 1.25% of risk-weighted assets.

                                       29

<PAGE>



         Certain  exclusions from capital and assets are required to be made for
the purpose of calculating  total  capital.  Such  exclusions  consist of equity
investments  (as  defined  by  regulation)  and that  portion  of land loans and
nonresidential  construction  loans in excess of an 80% loan-to-value  ratio and
reciprocal holdings of qualifying capital instruments.  Preferred Savings had no
such exclusions from capital and assets at December 31, 1996.

         In  determining  the  amount  of  risk-weighted   assets,  all  assets,
including certain  off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%,  based on the risk  inherent in the type of asset.  For
example,  the OTS has assigned a risk weight of 50% for  prudently  underwritten
permanent  one- to  four-family  first lien mortgage loans not more than 90 days
delinquent  and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.

         The  OTS  has  adopted  a  final  rule  that  requires   every  savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement,  an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets.  This exposure is a measure of the potential decline in the
net  portfolio  value of a savings  association,  greater than 2% of the present
value of its  assets,  based upon a  hypothetical  200 basis  point  increase or
decrease  in  interest  rates  (whichever  results  in a greater  decline).  Net
portfolio  value is the  present  value of  expected  cash  flows  from  assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between  calculating  interest rate risk and  recognizing any deduction from
capital.  The rule will not become effective until the OTS evaluates the process
by which  savings  associations  may  appeal an  interest  rate  risk  deduction
determination.  It is uncertain as to when this evaluation may be completed. Any
savings  association  with less than $300 million in assets and a total  capital
ratio in excess of 12% is exempt from this requirement unless the OTS determines
otherwise.  Based upon its capital  level and assets size at December  31, 1996,
Preferred Savings would qualify for an exemption from the requirement.

         On December  31,  1996,  Preferred  Savings had total  capital of $22.3
million  (including  $22.1  million in core capital and  $186,000 in  qualifying
supplementary  capital)  and  risk-weighted  assets of $24.0  million;  or total
capital of 92.9% of  risk-weighted  assets.  This amount was $20.4 million above
the 8% requirement in effect on that date.

         The OTS and the FDIC are authorized  and,  under certain  circumstances
required, to take certain actions against savings associations that fail to meet
their  capital  requirements.  The OTS is  generally  required to take action to
restrict the activities of an "undercapitalized  association" (generally defined
to be  one  with  less  than  either  a 4%  core  capital  ratio,  a 4%  Tier  1
risked-based  capital  ratio  or an  8%  risk-based  capital  ratio).  Any  such
association  must  submit a  capital  restoration  plan and  until  such plan is
approved by the OTS may not increase its assets,  acquire  another  institution,
establish a branch or engage in any new  activities,  and generally may not make
capital   distributions.   The  OTS  is  authorized  to  impose  the  additional
restrictions that are applicable to significantly undercapitalized associations.


                                       30

<PAGE>



          As a condition to the approval of the capital  restoration  plan,  any
company  controlling  an  undercapitalized  association  must agree that it will
enter  into  a  limited  capital  maintenance  guarantee  with  respect  to  the
institution's achievement of its capital requirements.

         Any savings  association  that fails to comply with its capital plan or
is  "significantly  undercapitalized"  (i.e.,  Tier 1 risk-based or core capital
ratios of less than 3% or a  risk-based  capital  ratio of less than 6%) must be
made  subject  to one or more of  additional  specified  actions  and  operating
restrictions  which may cover all aspects of its operations and include a forced
merger  or  acquisition  of  the   association.   An  association  that  becomes
"critically  undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly  undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator  with the concurrence of the FDIC) for a
savings  association,  with certain limited exceptions,  within 90 days after it
becomes critically  undercapitalized.  Any undercapitalized  association is also
subject to the general enforcement  authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.

         The OTS is also generally  authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound  practices or is in an unsafe
or unsound condition.

         The  imposition  by the OTS or the  FDIC of any of  these  measures  on
Preferred  Savings may have a substantial  adverse effect on Preferred  Savings'
operations and  profitability and the value of the Common Stock purchased in the
Conversion.  Holding Company  stockholders do not have  preemptive  rights,  and
therefore,  if the  Holding  Company is directed by the OTS or the FDIC to issue
additional  shares of Common Stock,  such issuance may result in the dilution in
the percentage of ownership of the Holding  Company of those persons  purchasing
shares in the Conversion.

Limitations on Dividends and Other Capital Distributions

         OTS regulations  impose various  restrictions  on savings  associations
with respect to their ability to make  distributions  of capital,  which include
dividends,  stock  redemptions  or  repurchases,   cash-out  mergers  and  other
transactions  charged to the capital  account.  OTS regulations  also prohibit a
savings  association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result,  the  regulatory  capital  of the  association
would be reduced below the amount  required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.  See "The
Conversion--Effects  of Conversion to Stock Form on Depositors  and Borrowers of
the Bank" and "-Restrictions on Repurchase of Stock."

         Generally, savings associations, such as Preferred Savings, that before
and after the proposed  distribution meet their capital  requirements,  may make
capital  distributions  during any calendar year equal to the greater of 100% of
net income for the year-to-date plus 50% of the

                                       31

<PAGE>



amount by which the lesser of the  association's  tangible,  core or  risk-based
capital exceeds its capital requirement for such capital component,  as measured
at the  beginning  of the calendar  year,  or 75% of its net income for the most
recent four quarter period. However, an association deemed to be in need of more
than normal supervision by the OTS may have its dividend authority restricted by
the OTS.  Preferred  Savings may pay dividends in  accordance  with this general
authority.

         Savings  associations  proposing to make any capital  distribution need
only  submit  written  notice  to the OTS 30 days  prior  to such  distribution.
Savings  associations  that do not,  or would  not meet  their  current  minimum
capital requirements  following a proposed capital  distribution,  however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution  during that 30-day  period  notice  based on safety and  soundness
concerns. See "- Regulatory Capital Requirements."

         The OTS has proposed  regulations that would revise the current capital
distribution  restrictions.  Under the proposal a savings  association that is a
subsidiary of a holding company may make a capital  distribution  with notice to
the  OTS  provided  that it has a CAMEL  1 or 2  rating,  is not of  supervisory
concern,  and would remain adequately  capitalized (as defined in the OTS prompt
corrective  action  regulations)  following the proposed  distribution.  Savings
associations  that would remain  adequately  capitalized  following the proposed
distribution but do not meet the other noted requirements must notify the OTS 30
days prior to declaring a capital distribution. The OTS stated it will generally
regard as permissible  that amount of capital  distributions  that do not exceed
50% of the  institution's  excess  regulatory  capital  plus net  income to date
during  the  calendar  year.  A  savings  association  may  not  make a  capital
distribution  without  prior  approval  of  the  OTS  and  the  FDIC  if  it  is
undercapitalized  before,  or as a result of, such a distribution.  As under the
current  rule,  the  OTS  may  object  to a  capital  distribution  if it  would
constitute  an unsafe  or  unsound  practice.  No  assurance  may be given as to
whether or in what form the regulations may be adopted.

Liquidity

         All savings associations,  including Preferred Savings, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings  payable  in one year or less.  For a  discussion  of what  Preferred
Savings includes in liquid assets, see "Management's  Discussion and Analysis of
Financial   Condition   and  Results  of  Operations  -  Liquidity  and  Capital
Resources."  This  liquid  asset  ratio  requirement  may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.

         In  addition,  short-term  liquid  assets  (e.g.,  cash,  certain  time
deposits,  certain  bankers  acceptances  and short-term  United States Treasury
obligations)  currently must constitute at least 1% of the association's average
daily  balance of net  withdrawable  deposit  accounts  and current  borrowings.
Penalties may be imposed upon associations for violations of either liquid asset

                                       32

<PAGE>



ratio  requirement.  At December 31, 1996,  Preferred  Savings was in compliance
with  both  requirements,  with an  overall  liquid  asset  ratio of 49.2% and a
short-term liquid assets ratio of 48.6%.

Accounting

         An  OTS  policy  statement   applicable  to  all  savings  associations
clarifies  and  re-emphasizes  that  the  investment  activities  of  a  savings
association  must be in  compliance  with  approved  and  documented  investment
policies and  strategies,  and must be accounted  for in  accordance  with GAAP.
Under the policy  statement,  management must support its  classification of and
accounting   for  loans  and   securities   (i.e.,   whether   held-to-maturity,
available-for-sale or trading) with appropriate documentation. Preferred Savings
is in compliance with these amended rules.

         The OTS has adopted an amendment to its accounting  regulations,  which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying  economic substance and
inherent risk and that financial  reports must  incorporate any other accounting
regulations or orders prescribed by the OTS.

Qualified Thrift Lender Test

         All savings associations,  including Preferred Savings, are required to
meet a qualified  thrift lender  ("QTL") test to avoid certain  restrictions  on
their operations.  This test requires a savings association to have at least 65%
of  its  portfolio  assets  (as  defined  by  regulation)  in  qualified  thrift
investments  on a monthly  average  for nine out of every 12 months on a rolling
basis.  Such assets primarily  consist of residential  housing related loans and
investments.  At December 31, 1996, Preferred Savings met the test with 79.3% of
its portfolio assets in qualified thrift investments and has always met the test
since its effectiveness.

         Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the BIF.  If such an  association  has not yet  requalified  or  converted  to a
national  bank,  its  new  investments  and  activities  are  limited  to  those
permissible  for both a  savings  association  and a  national  bank,  and it is
limited to national bank branching  rights in its home state.  In addition,  the
association is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
has not requalified or converted to a national bank within three years after the
failure,  it must  divest  of all  investments  and  cease  all  activities  not
permissible  for a  national  bank.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. See "- Holding Company Regulation."


                                       33

<PAGE>



Community Reinvestment Act

         Under the  Community  Reinvestment  Act  ("CRA"),  every  FDIC  insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking  practices to help meet the credit needs of its entire  community,
including  low and moderate  income  neighborhoods.  The CRA does not  establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's  discretion to develop the types of products and services
that it believes are best suited to its particular  community,  consistent  with
the CRA.  The CRA  requires  the OTS,  in  connection  with the  examination  of
Preferred  Savings,  to assess the  institution's  record of meeting  the credit
needs of its community and to take such record into account in its evaluation of
certain  applications,  such as a merger or the  establishment  of a branch,  by
Preferred  Savings.  An  unsatisfactory  rating may be used as the basis for the
denial of an application by the OTS.

         The federal banking agencies,  including the OTS, have recently revised
the CRA  regulations  and  the  methodology  for  determining  an  institution's
compliance with the CRA. Due to the heightened  attention being given to the CRA
in the past few years,  Preferred  Savings may be required to devote  additional
funds for investment and lending in its local community.  Preferred  Savings was
examined for CRA compliance in March 1995 and received a rating of satisfactory.

Transactions with Affiliates

         Generally,   transactions   between  a  savings   association   or  its
subsidiaries  and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates.  In addition,  certain of these
transactions,  such as loans to an affiliate,  are restricted to a percentage of
the association's  capital.  Affiliates of Preferred Savings include the Holding
Company and any company which is under common control with Preferred Savings. In
addition,  a  savings  association  may not  lend to any  affiliate  engaged  in
activities not  permissible for a bank holding company or acquire the securities
of most affiliates.  Preferred  Savings'  subsidiary is not deemed an affiliate,
however;   the  OTS  has  the  discretion  to  treat  a  subsidiary  of  savings
associations as an affiliate on a case-by-case basis.

         Certain  transactions with directors,  officers or controlling  persons
are also subject to conflict of interest  regulations enforced by the OTS. These
conflict of interest  regulations and other statutes also impose restrictions on
loans to such persons and their  related  interests.  Among other  things,  such
loans must be made on terms  substantially the same as for loans to unaffiliated
individuals.

Holding Company Regulation

         The  Holding  Company is a unitary  savings  and loan  holding  company
subject to  regulatory  oversight  by the OTS. As such,  the Holding  Company is
required to register and file reports with the OTS and is subject to  regulation
and examination by the OTS. In addition, the

                                       34

<PAGE>



OTS has  enforcement  authority  over the Holding  Company  and its  non-savings
association  subsidiaries  which also  permits  the OTS to  restrict or prohibit
activities  that are determined to be a serious risk to the  subsidiary  savings
association.

         As a unitary  savings and loan  holding  company,  the Holding  Company
generally  is not  subject to  activity  restrictions.  If the  Holding  Company
acquires  control of another savings  association as a separate  subsidiary,  it
would become a multiple savings and loan holding company,  and the activities of
the Holding Company and any of its subsidiaries (other than Preferred Savings or
any  other  SAIF-insured  savings  association)  would  become  subject  to such
restrictions  unless  such  other  associations  each  qualify as a QTL and were
acquired in a supervisory acquisition.

         If  Preferred  Savings  fails the QTL test,  the Holding  Company  must
obtain the approval of the OTS prior to continuing after such failure,  directly
or  through  its other  subsidiaries,  any  business  activity  other than those
approved for multiple savings and loan holding companies or their  subsidiaries.
In addition,  within one year of such failure the Holding  Company must register
as, and will become  subject to, the  restrictions  applicable  to bank  holding
companies. The activities authorized for a bank holding company are more limited
than are the activities  authorized  for a unitary or multiple  savings and loan
holding company. See "- Qualified Thrift Lender Test."

         The Holding Company must obtain approval from the OTS before  acquiring
control of any other SAIF-insured  association.  Such acquisitions are generally
prohibited  if they  result  in a  multiple  savings  and loan  holding  company
controlling  savings  associations  in  more  than  one  state.   However,  such
interstate  acquisitions are permitted based on specific state  authorization or
in a supervisory acquisition of a failing savings association.

Federal Securities Law

         The stock of the Holding  Company is registered  with the SEC under the
Securities  Exchange Act of 1934, as amended (the "Exchange  Act").  The Holding
Company is subject  to the  information,  proxy  solicitation,  insider  trading
restrictions and other requirements of the SEC under the Exchange Act.

         Holding  Company  stock held by persons who are  affiliates  (generally
officers,  directors and principal  stockholders) of the Holding Company may not
be resold without  registration or unless sold in accordance with certain resale
restrictions.  If the Holding Company meets specified current public information
requirements,  each  affiliate  of the  Holding  Company  is able to sell in the
public  market,  without  registration,  a  limited  number  of  shares  in  any
three-month period.


                                       35

<PAGE>



Federal Reserve System

         The Federal  Reserve  Board  requires all  depository  institutions  to
maintain  non-interest  bearing  reserves  at  specified  levels  against  their
transaction accounts (primarily checking,  NOW and Super NOW checking accounts).
At December 31, 1996,  Preferred  Savings was in  compliance  with these reserve
requirements.  The balances maintained to meet the reserve  requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity  requirements that
may be imposed by the OTS. See "-Liquidity."

         Savings  associations are authorized to borrow from the Federal Reserve
Bank  "discount   window,"  but  Federal  Reserve  Board   regulations   require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.

Federal Home Loan Bank System

         Preferred  Savings is a member of the FHLB of Chicago,  which is one of
12 regional  FHLBs,  that  administers  the home  financing  credit  function of
savings  associations.  Each FHLB  serves as a reserve or  central  bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated  obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal  Housing  Finance  Board.  All advances from the FHLB are required to be
fully secured by  sufficient  collateral as determined by the FHLB. In addition,
all  long-term  advances  are  required to provide  funds for  residential  home
financing. The aggregate amount of advances cannot exceed 20 times the amount of
FHLB stock held by the institutions.

         As a member,  Preferred  Savings is required to purchase  and  maintain
stock in the FHLB of  Chicago.  At  December  31,  1996,  Preferred  Savings had
$362,100 in FHLB stock,  which was in compliance with this requirement.  In past
years,  Preferred Savings has received substantial  dividends on its FHLB stock.
Over the past five calendar  years such  dividends  have averaged 6.11% and were
6.75% for  calendar  year 1996.  As a result of their  holdings,  the Bank could
borrow up to $7.24 million from the FHLB.

         Under  federal  law the FHLBs are  required  to  provide  funds for the
resolution  of  troubled  savings  associations  and to  contribute  to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income  housing
projects.  These  contributions  have  affected  adversely  the  level  of  FHLB
dividends  paid and could continue to do so in the future.  These  contributions
could also have an adverse  effect on the value of FHLB stock in the  future.  A
reduction  in  value  of  Preferred   Savings'   FHLB  stock  may  result  in  a
corresponding reduction in Preferred Savings' capital.


                                       36

<PAGE>



         For the year ended  December  31, 1996,  dividends  paid by the FHLB of
Chicago to Preferred Savings totaled $24,199, which constitute a $2,215 increase
from the amount of dividends received in calendar year 1995.

Federal and State Taxation

         Savings  associations  such as  Preferred  Savings  that  meet  certain
definitional  tests relating to the  composition of assets and other  conditions
prescribed by the Internal  Revenue Code of 1986,  as amended (the "Code"),  are
permitted  to  establish  reserves  for bad debts and to make  annual  additions
thereto which may, within specified  formula limits,  be taken as a deduction in
computing taxable income for federal income tax purposes.  The amount of the bad
debt  reserve  deduction  is computed  under the  experience  method.  Under the
experience  method, the bad debt reserve deduction is an amount determined under
a formula based  generally upon the bad debts actually  sustained by the savings
association over a period of years.

         In August 1996, federal legislation was enacted that changed the manner
in which the bad debt deduction is calculated by thrift institutions,  including
the Bank.  Formerly the Bank had been allowed to calculate its  deduction  under
the  experience of percentage  of taxable  income  methods and deduct the higher
amount.  The percentage of taxable income method was repealed  effective for the
1996 tax year. The legislation  effectively  required thrifts to account for bad
debts for federal income tax purposes on the same basis as commercial  banks for
tax years beginning after December 31, 1995.

         In addition to the regular income tax, corporations,  including savings
associations  such as the Bank,  generally  are  subject  to a minimum  tax.  An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of alternative  minimum  taxable  income.  For taxable years  beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental  tax equal to 0.12% of the excess
of alternative  minimum taxable income for the taxable year (determined  without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.


                                       37

<PAGE>



         To the extent earnings appropriated to a savings association's bad debt
reserves for  "qualifying  real property  loans" and deducted for federal income
tax purposes  exceed the allowable  amount of such reserves  computed  under the
experience method and to the extent of the association's  supplemental  reserves
for  losses on loans  ("Excess"),  such  Excess  may not,  without  adverse  tax
consequences,   be  utilized  for  the  payment  of  cash   dividends  or  other
distributions   to  a  shareholder   (including   distributions  on  redemption,
dissolution or  liquidation) or for any other purpose (except to absorb bad debt
losses).  As of December 31, 1995,  Preferred  Savings'  Excess for tax purposes
totaled approximately $1.6 million.

         Preferred Savings and its subsidiary file  consolidated  federal income
tax  returns on a fiscal year basis  using the cash  method of  accounting.  The
Holding  Company  intends to file  consolidated  federal income tax returns with
Preferred Savings and its subsidiary.  Savings  associations,  such as Preferred
Savings,  that file federal income tax returns as part of a  consolidated  group
are required by applicable  Treasury  regulations to reduce their taxable income
for  purposes  of  computing  the  percentage  bad  debt  deduction  for  losses
attributable  to  activities  of  the  non-savings  association  members  of the
consolidated  group  that are  functionally  related  to the  activities  of the
savings association member.


                                       38

<PAGE>


         Preferred Savings and its consolidated subsidiary have not been audited
by the IRS with respect to  consolidated  federal income tax returns in the past
five years.  With respect to years examined by the IRS, either all  deficiencies
have been  satisfied or  sufficient  reserves have been  established  to satisfy
asserted  deficiencies.  In the opinion of management,  any examination of still
open returns  (including  returns of subsidiary and predecessors of, or entities
merged into,  Preferred  Savings)  would not result in a deficiency  which could
have a material adverse effect on the financial  condition of Preferred  Savings
and its consolidated subsidiary.

         Illinois Taxation.  For Illinois income tax purposes, the Bank is taxed
at an  effective  rate  equal to 7.18% of  Illinois  taxable  income.  For these
purposes,  "Illinois  Taxable  Income"  generally  means federal taxable income,
subject to certain  adjustments  (including  the addition of interest  income on
state and municipal  obligations  and the exclusion of interest income on United
States Treasury obligations).

         Delaware Taxation.  As a Delaware holding company,  the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware.  The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.

Executive Officers of the Holding Company and the Bank Who Are Not Directors

         Jeffrey  Przybyl,  age 30. Mr.  Przybyl is  currently  serving as Chief
Financial  Officer of the Bank,  a position  he has held  since  1993.  As Chief
Financial Officer,  Mr. Przybyl is responsible for overseeing the accounting and
financial reporting functions of the Bank.

         Marianne I. Maciejewski,  age 58. Ms.  Maciejewski is currently serving
as Vice  President  of the Bank,  a position  she has held since  1995.  As Vice
President  of the Bank,  Ms.  Maciejewski  is  responsible  for  overseeing  the
compliance  function  of the  Bank.  Prior to  serving  as Vice  President,  Ms.
Maciejewski served in various  capacities with the Bank since 1985.  Marianne I.
Maciejewski is the mother of Linda Peterson.  Ms. Maciejewski was married to the
late brother of Lorraine Ptak.

         Linda M. Peterson,  age 38. Ms.  Peterson is currently  serving as Vice
President  of the Bank.  In that  capacity,  Ms.  Peterson  is  responsible  for
overseeing the mortgage  lending  functions of the Bank. Ms. Peterson joined the
Bank in 1987 as a loan  officer.  Linda  Peterson is the  daughter of  executive
officer Maciejewski.


                                       39

<PAGE>



Item 2. Properties

         Preferred  Savings  conducts  its  business at its  stand-alone  office
located at 4800 South Pulaski Road, Chicago,  Illinois.  The Bank's 5,000 square
foot  office  was  acquired  in 1980 and had a net book  value  of  $307,000  at
December 31, 1996.  At December 31, 1996,  the total net book value of Preferred
Savings'  premises  and  equipment   (including  land,  building  and  leasehold
improvements, and furniture, fixtures and equipment) was approximately $457,000.
The Bank believes that its current  facilities  are adequate to meet the present
and foreseeable future needs of the Bank and the Company.

         The Bank's  depositor and borrower  customer files are maintained by an
independent data processing  company.  The net book value of the data processing
and  computer   equipment  utilized  by  the  Bank  at  December  31,  1996  was
approximately $9,000.

Item 3. Legal Proceedings


         From time to time,  Preferred  Savings  is  involved  as  plaintiff  or
defendant  in various  legal  proceedings  arising  in the normal  course of its
business.  While the ultimate outcome of these various legal proceedings  cannot
be predicted with certainty, it is the opinion of management that the resolution
of  these  legal  actions  should  not have a  material  effect  on the  Holding
Company's and Preferred Savings' financial position or results of operations.


Item 4. Submissions of Matters to a Vote of Securities Holders

         No matter was  submitted  to a vote of  Security  holders,  through the
solicitation of proxies or otherwise during the quarter ended December 31, 1996.

                                       40

<PAGE>



                                     PART II

Item 5. Market for Common Equity and Related Stockholder Matters

         Page 43 of the Company's  1996 Annual Report to  stockholders  attached
hereto as Exhibit 13 is herein incorporated by reference.

Item 6. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

         Pages 5 through 18 of the Company's 1996 Annual Report to  stockholders
attached hereto as Exhibit 13 is herein incorporated by reference.

Item 7. Financial Statements

         The following  information  appearing in the Company's Annual Report to
Stockholders  for the year ended December 31, 1996, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.

                                                                    Pages in
Annual Report Section                                              Annual Report
---------------------                                              -------------
Selected Consolidated Financial Information.....................        2-3

Management's Discussion and Analysis of Financial
  Condition and Results of Operation............................       5-18

Independent Auditors' Report....................................         19

Consolidated Statements of Financial Condition as of December 31,
  1996 and 1995.................................................         20

Consolidated Statements of Income for the Years
  Ended December 31, 1996, 1995 and 1994........................         21

Consolidated Statements of Changes in Stockholders'
  Equity for the Years Ended December 31, 1996,
  1995 and 1994.................................................         22

Consolidated Statements of Cash Flows for the
  Years Ended December 31, 1996, 1995 and 1994..................      23-24

Notes to Consolidated Financial Statements......................      25-42

         With the  exception of the  aforementioned  information,  the Company's
Annual  Report to  Stockholders  for the year ended  December 31,  1996,  is not
deemed filed as part of this Annual Report on Form 10-KSB.

Item  8.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure

         There has been no  current  report  on Form 8-K filed  within 24 months
prior to the date of the most recent financial  statements reporting a change in
accountants and/or reporting disagreements on any matter of accounting principle
or financial  statement  disclosure  nor has there been a change of  accountants
within the past 24 months.

                                       41

<PAGE>



                                    PART III

Item  9. Directors, Promoters and Control Persons; Compliance with Section 16(a)
         of the Exchange Act

Directors

         Information  concerning directors of the Company is incorporated herein
by  reference  from the  Company's  definitive  Proxy  Statement  for the Annual
Meeting of  Stockholders  for the fiscal year ended December 31, 1996, a copy of
which will be filed not later than 120 days after the close of the fiscal year.

Executive Officers

         Information regarding the business experience of the executive officers
of the Company and the Bank  contained in Part I of this 10-KSB is  incorporated
herein by reference.

Item 10. Executive Compensation

         Information concerning executive compensation is incorporated herein by
reference  from the  Company's  definitive  Proxy  Statement for the fiscal year
ended  December  31, 1996, a copy of which will be filed not later than 120 days
after the close of the fiscal year.

Item 11. Security Ownership of Certain Beneficial Owners and Management

         Information  concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy  Statement  for the fiscal year ended  December  31, 1996, a copy of which
will be filed not later than 120 days after the close of the fiscal year.

Item 12. Certain Relationships and Related Transactions

         Information  concerning certain  relationships and related transactions
is  incorporated  herein  by  reference  from  the  Company's  definitive  Proxy
Statement  for the Annual  Meeting  of  Stockholders  for the fiscal  year ended
December  31,  1996, a copy of which will be filed not later than 120 days after
the close of the fiscal year.


                                       42

<PAGE>



                                     PART IV

Item 14. Exhibits and Reports on Form 8-K

(a)      Exhibits

<TABLE>
<CAPTION>


     <S>           <C>                                                      <C>
                                                                              Reference to
    Regulation                                                              Prior Filing or
   S-K Exhibit                                                               Exhibit Number
      Number                              Document                           Attached Hereto
   -----------------------------------------------------------------------------------------
        2         Plan of acquisition, reorganization, arrangement,               None
                  liquidation or succession
       3(a)       Articles of Incorporation                                        *
       3(b)       By-Laws                                                          *
        4         Instruments defining the rights of security holders,             *
                  including debentures
        9         Voting Trust Agreement                                          None
        10        Material contracts                                              None
        11        Statement regarding computation of per share                    None
                  earnings
        13        Annual Report to Security Holders                                13
        16        Letter regarding change in certifying accountants               None
        18        Letter regarding change in accounting principles                None
        21        Subsidiaries of Registrant                                       21
        22        Published report regarding matters submitted to vote            None
                  of security holders
        23        Consents of Experts and Counsel                                 None
        24        Power of Attorney                                               None
        27        Financial Data Schedule                                          27
        28        Information from reports furnished to state insurance           None
                  regulatory authorities
        99        Additional Exhibits                                             None
<FN>
------------

*    Filed as exhibits to the  Company's  S-1  registration  statement  filed on
     August  30,  1996  (file  No.  333-11211)  pursuant  to  Section  5 of  the
     Securities Act of 1933. All of such  previously  filed documents are hereby
     incorporated  herein by reference in accordance with item 601 of regulation
     S-B,
</FN>
</TABLE>


                                       43

<PAGE>



                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                              PS FINANCIAL, INC.

Date: March 28, 1997                             By: Kimberly P. Rooney
      --------------                                 ---------------------------
                                                     Kimberly P. Rooney (Duly
                                                     Authorized Representative)

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  Report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.

By: Kimberly P. Rooney                     By: S. J. Ptak
    -------------------------------            ---------------------------------
    Kimberly P. Rooney, President,             S. J. Ptak, Chairman of the Board
     Chief Executive Officer and
     Director (Principal Executive
     and Operating Officer)

Date: March 28, 1997                       Date: March 28, 1997
      --------------                             --------------

By: Edward Wolak                           By: L. G. Ptak
    -------------------------------            ---------------------------------
    Edward Wolak, Director                     L.G. Ptak, Director and Secretary


Date: March 28, 1997                       Date: March 28, 1997
      --------------                             --------------

By: Rocco Di Iorio                         By: Jeanine M. McInerney
    -------------------------------            ---------------------------------
    Rocco Di Iorio Director                    Jeanine M. McInerney, Director


Date: March 28, 1997                       Date: March 28, 1997
      --------------                             --------------

By: Jeffrey Przybyl
    -----------------------------------
    Jeffrey Przybyl, Treasurer and
     Chief Financial Officer (Principal
     Financial and Accounting Officer)

Date: March 28, 1997
      --------------