<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File No. 0-23368
PERPETUAL MIDWEST FINANCIAL, INC.
A Delaware Corporation I.R.S. Employer Identification
No. 42-1415490
Address Telephone Number
------- ----------------
700 1st Avenue NE (319) 366-1851
Cedar Rapids, Iowa 52401
Check whether the issuer (1) filed all reports required to be filed by Section
13 of 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
--- --
There were 1,907,278 shares of Common Stock ($0.01 par value) outstanding as of
February 6, 1997.
Transitional Small Business Disclosure Format (check one): Yes ; No X .
--- ---
1 of 24
<PAGE> 2
PERPETUAL MIDWEST FINANCIAL, INC.
INDEX
<TABLE>
<CAPTION>
PART I. Financial Information Page No.
--------------------- --------
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1996 and June 30, 1996 3
Condensed Consolidated Statements of Income -
Three and Six Months Ended December 31, 1996
and December 31, 1995 4
Consolidated Statement of Changes in Stockholders'
Equity - December 31, 1996 5
Condensed Consolidated Statements of Cash Flows -
Three and Six Months Ended December 31, 1996
and December 31, 1995 6-7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-22
PART II. Other Information
-----------------
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22-23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
----------
</TABLE>
2 of 24
<PAGE> 3
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
December 31, 1996 June 30, 1996
----------------- --------------------
<S> <C> <C>
Cash and due from financial institutions $ 4,605,506 $ 2,968,278
Interest-earning deposits in other financial institutions-short term 7,605,968 7,956,221
------------- --------------
Cash and cash equivalents 12,211,474 10,924,499
Trading securities 921,570 989,800
Securities available-for-sale 58,180,261 56,401,791
Other securities-Federal Home Loan Bank stock 4,640,900 4,640,900
Loans held for sale 1,324,258 1,870,570
Loans receivable, net of allowance for loan losses of $2,780,720
and $2,670,322 at December 31, 1996 and June 30, 1996 respectively 298,535,925 296,080,410
Accrued interest receivable 2,539,753 2,678,024
Premises and equipment, net 7,384,781 7,307,659
Other assets 2,790,472 2,379,202
------------- --------------
Total assets $388,529,394 $ 383,272,855
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Demand deposits $ 8,226,884 $ 7,192,677
Savings and NOW deposits 85,406,209 72,728,251
Certificates of deposit 191,723,260 181,576,182
------------- --------------
Total deposits 285,356,353 261,497,110
Borrowed funds 64,647,466 80,723,708
Advances from borrowers for taxes and insurance 770,683 818,524
Accrued interest payable 1,668,902 2,343,611
Other liabilities 2,511,986 2,301,985
------------- --------------
Total liabilities 354,955,390 347,684,938
Stockholders' equity
Common stock, $.01 par value, authorized: 6,000,000
shares; issued: 2,123,984 shares 21,240 21,240
Additional paid-in capital 20,749,538 20,546,070
Retained earnings (substantially restricted) 17,715,087 18,481,335
Net unrealized depreciation on securities available-for-sale
(net of tax of $55,188 and $289,492 for December 31, 1996 and
June 30, 1996 respectively) (92,768) (486,626)
Less: Treasury stock (216,706 and 135,902 shares at cost at
December 31, 1996 and June 30, 1996 respectively) (3,570,365) (2,152,190)
Unearned ESOP shares (691,998) (776,032)
Unearned compensation (556,730) (45,880)
------------- --------------
Total stockholders' equity 33,574,004 35,587,917
------------- --------------
Total liabilities and stockholders' equity $388,529,394 $ 383,272,855
============= ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3 of 24
<PAGE> 4
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
Three Months Ended Six Months Ended
-------------------------------------- ---------------------------------------
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Interest income
Loans receivable $ 6,263,884 $ 5,081,762 $ 12,527,641 $ 9,859,677
Trading securities 13,023 13,668 31,530 25,924
Securities available-for sale 802,612 898,151 1,580,921 1,755,699
Securities held-to-maturity -- 156,031 -- 675,455
Other 183,274 479,473 465,542 638,499
--------- --------- ---------- ----------
7,262,793 6,629,085 14,605,634 12,955,254
Interest expense
Deposits 3,664,822 3,153,155 7,199,249 6,223,893
Borrowed funds 1,042,905 1,356,528 2,266,957 2,607,986
--------- --------- ---------- ----------
4,707,727 4,509,683 9,466,206 8,831,879
--------- --------- ---------- ----------
Net interest income 2,555,066 2,119,402 5,139,428 4,123,375
Provision for loan losses 552,000 35,000 777,000 35,000
--------- --------- ---------- ----------
Net interest income after provision
for loan losses 2,003,066 2,084,402 4,362,428 4,088,375
Noninterest income
Loan servicing fees 92,940 108,689 190,540 219,739
Net realized gains (losses) on sales
of available-for-sale securities 61,680 4,022 47,326 (11,163)
Net gains from sales of loans held
for sale 103,468 94,403 188,472 170,006
Net trading securities gains (losses) 19,224 -- 64,879 2,338
Other 214,869 120,064 419,043 226,591
--------- --------- --------- ---------
492,181 327,178 910,260 607,511
Noninterest expense
Compensation and benefits 865,328 744,706 1,764,867 1,530,728
Occupancy and equipment 395,980 346,541 783,312 673,465
SAIF deposit insurance premium 117,198 133,102 1,745,272 263,105
Net (gains) losses on foreclosed assets 6,240 (22,337) 10,315 (20,862)
Other 954,972 488,663 1,726,387 1,096,286
--------- --------- --------- ---------
2,339,718 1,690,675 6,030,153 3,542,722
--------- --------- --------- ---------
Income before income taxes 155,529 720,905 (757,465) 1,153,164
Income tax expense (benefit) 74,500 284,900 (285,500) 461,396
--------- --------- --------- ---------
Net income 81,029 $ 436,005 $(471,965) $ 691,768
========= ========= ========= =========
Earnings per common and common
equivalent share subsequent to
conversion $ 0.04 $ 0.22 $ (0.25) $ 0.35
Earnings per share-assuming full dilution-
subsequent to conversion $ 0.04 $ 0.22 $ (0.25) $ 0.34
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4 of 24
<PAGE> 5
PERPETUAL MIDWEST FINANCIAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Net Unrealized
Depreciation on
Additional Securities Unearned
Common Paid-in Retained Available Treasury ESOP
Stock Capital Earnings for-Sale Stock Shares
------- ----------- ----------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 $21,240 $20,546,070 $18,481,335 $ (486,626) $(2,152,190) $(776,032)
Effect of contribution to fund ESOP -- -- -- -- -- 84,034
Effect of market adjustment of ESOP shares -- 158,628 -- -- -- --
Amortization of RRP contribution -- -- -- -- -- --
Tax effect of stock plans -- 78,143 -- -- -- --
Purchase of treasury stock -- -- -- -- (2,036,628) --
Issuance of 5,000 shares from treasury stock
in connection with exercise of stock options -- (47,500) -- -- 97,500 --
Issuance of 27,800 shares from treasury stock
in connection with RRP award -- 14,197 -- -- 520,953 --
Net changes in unrealized depreciation on
securities available-for-sale -- -- -- 393,858 -- --
Cash dividends paid -- -- (294,283) -- -- --
Net income -- -- (471,965) -- -- --
------- ----------- ----------- --------------- ------------ ----------
BALANCE AT DECEMBER 31, 1996 $21,240 $20,749,538 $17,715,087 $(92,768) $(3,570,365) $(691,998)
======= =========== =========== =============== ============ ==========
<CAPTION>
Total
Unearned Stockholders'
Compensation Equity
------------ -------------
<S> <C> <C>
BALANCE AT JUNE 30, 1996 $ (45,880) $35,587,917
Effect of contribution to fund ESOP -- 84,034
Effect of market adjustment of ESOP shares -- 158,628
Amortization of RRP contribution 24,300 24,300
Tax effect of stock plans -- 78,143
Purchase of treasury stock -- (2,036,628)
Issuance of 5,000 shares from treasury stock
in connection with exercise of stock options -- 50,000
Issuance of 27,800 shares from treasury stock
in connection with RRP award (535,150) --
Net changes in unrealized depreciation on
securities available-for-sale -- 393,858
Cash dividends paid -- (294,283)
Net income -- (471,965)
------------ -------------
BALANCE AT DECEMBER 31, 1996 $ (556,730) $33,574,004
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5 of 24
<PAGE> 6
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------------- ------------------------------------
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 81,029 $ 436,005 $ (471,965) $691,768
Adjustments to reconcile net income
to net cash from operating activities
Depreciation 196,581 162,021 391,130 322,524
Amortization of:
Unearned compensation 12,150 21,016 24,300 42,070
Premiums and discounts on
securities, net 107,453 182,865 217,361 378,187
Provision for loan losses 552,000 35,000 777,000 35,000
(Gains) losses on sales of:
Securities available-for-sale (61,680) (4,022) (47,326) 11,163
Loans held for sale (103,468) (94,403) (188,472) (170,006)
Foreclosed assets, net 6,240 3,645 10,315 13,777
Purchase of:
Trading securities (108,750) (204,988) (108,750) (204,988)
Net trading securities (gains) losses (19,224) -- (64,879) (2,338)
Proceeds from sales of:
Trading securities 229,957 -- 241,859 --
Loans originated for sale 7,674,033 5,588,574 15,445,518 10,010,175
Origination of loans held for sale (7,281,870) (6,308,271) (14,710,734) (10,155,012)
Federal Home Loan Bank stock
dividend -- (90,900) -- (90,900)
Market adjustment of ESOP shares 158,628 97,949 158,628 97,949
ESOP expense 42,015 50,253 84,034 77,045
Change in:
Accrued interest and dividends
receivable 54,495 (63,389) 138,271 (20,181)
Accrued expenses and other
liabilities (2,654,249) (2,124,852) (464,708) (737,169)
Other assets (172,261) 153,780 (645,574) 498,162
----------- ------------- ----------- -----------
Total adjustments (1,367,950) (2,595,722) 1,257,973 105,458
----------- ------------- ----------- -----------
Net cash from operating activities (1,286,921) (2,159,717) 786,008 797,226
Cash flows from investing activities
Proceeds from:
Sales of securities available-for-sale 11,252,631 5,921,700 16,749,208 14,768,492
Maturities and principal payments of
securities available-for-sale 6,174,211 1,683,203 8,548,564 4,064,403
Maturities and principal payments of
securities held-to-maturity -- 2,167,454 -- 4,914,146
Sales of foreclosed assets 311,895 11,912 457,161 18,662
Purchase of:
Securities available-for-sale (20,492,032) (2,992,813) (26,618,115) (5,431,389)
FHLB stock -- (50,000) -- (50,000)
Premises and equipment, net (38,011) (690,122) (468,252) (840,551)
Net change in loans 275,728 (13,283,620) (3,699,991) (23,998,152)
Net change in interest-earning deposits
in other financial institutions -- -- -- 3,000,000
----------- ------------ ----------- -----------
Net cash from investing activities (2,515,578) (7,232,286) (5,031,425) (3,554,389)
</TABLE>
(Continued)
6 of 24
<PAGE> 7
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------------------- --------------------------------------
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from financing activities
Purchase of shares of treasury stock $ (703,339) $ (468,003) $(2,036,628) $(871,662)
Issuance of treasury stock for
stock plans 520,953 -- 618,453 --
Award of RRP shares of stock (535,150) -- (535,150) --
Cash dividends paid (143,002) (155,451) (294,283) (155,451)
Tax effect of stock plans 37,233 27,371 78,143 27,371
Effect of treasury stock issued
for stock plans 14,197 -- (33,303) --
Net change in deposits 9,035,880 11,518,898 23,859,243 14,413,301
Proceeds from Federal Home Loan
Bank advances 5,000,000 17,000,000 5,000,000 22,000,000
Repayment of Federal Home Loan
Bank advances (19,000,000) (5,500,000) (21,500,000) (10,500,000)
Net change in other borrowed funds 308,216 (52,492) 423,758 (22,019)
Net change in advance payments by
borrowers for taxes and insurance 448,463 333,192 (47,841) (43,610)
------------ ----------- ------------ ------------
Net cash from financing activities (5,016,549) 22,703,515 5,532,392 24,847,930
------------ ----------- ------------ ------------
Net change in cash and cash equivalents (8,819,048) 13,311,512 1,286,975 22,090,767
Cash and cash equivalents at beginning
of period 21,030,522 17,901,632 10,924,499 9,122,377
------------ ----------- ------------ ------------
Cash and cash equivalents at end of period $12,211,474 $31,213,144 $12,211,474 $31,213,144
============ =========== ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest 6,083,827 5,885,285 10,140,915 9,329,113
Income taxes -- 312,560 -- 492,753
Supplemental schedule of non-cash investing activities
Transfer from mortgage-backed and related
securities held-to-maturity to mortgage-
backed and related securities available-
for-sale -- 23,349,401 -- 23,349,401
Transfer from securities held-to-maturity
to securities available-for-sale -- 14,450,886 -- 14,450,886
Assets acquired in settlement of loans 768,135 26,982 917,476 34,039
Loans originated from sale of assets acquired
in settlement of loans 450,000 -- 450,000 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7 of 24
<PAGE> 8
Item 1.
Financial Statements, Continued
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and, therefore, do not
include all disclosures required by generally accepted accounting
principals for complete presentation of financial statements. The
unaudited information for the three and six months ended December 31, 1996
and December 31, 1995 includes the consolidated results of operations of
Perpetual Midwest Financial, Inc. (the "Company") and its wholly owned
subsidiary Perpetual Savings Bank, FSB (the "Bank"). In the opinion of
management, the information reflects all adjustments (consisting only of
normal recurring adjustments) which were necessary for a fair presentation
of the results of operations for such periods but should not be considered
as indicative of results for a full year.
2. BORROWINGS FROM THE FEDERAL HOME LOAN BANK
Borrowings at December 31, 1996 primarily consisted of advances from the
Federal Home Loan Bank of Des Moines (the "FHLB") bearing rates from
5.365% to 6.88%. The advances are collateralized by the Company's
single-family and multi-family whole loans and mortgage-backed securities.
Adjustable rate advances included $14.0 million indexed to the 1 month
LIBOR rate which adjusts monthly. The Company also maintains a $20.0
million line of credit with the FHLB which adjusts daily to the FHLB's
posted rate for these borrowings. The line of credit did not have a
balance at December 31, 1996. The remaining balance of $50.0 million of
advances are fixed rate, fixed term, with maturities from .20 months to
6.5 years.
3. CAPITAL DISTRIBUTIONS REGULATIONS:
An OTS regulation imposes limitations upon all "capital distributions" by
savings associations, including cash dividends, payments by an institution
to repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger and other distributions charged
against capital. The regulation establishes a three-tiered system of
regulation, with the greatest flexibility being afforded to
well-capitalized institutions. A savings association which has total
capital (immediately prior to and after giving effect to capital
distribution) that is at least equal to its fully phased-in capital
requirements would be a Tier 1 institution ("Tier 1 Institution"). An
institution that has total capital at least equal to its minimum capital
requirements, but less than its fully phased-in capital requirements,
would be a Tier 2 institution ("Tier 2 Institution"). An institution
having total capital that is less than its minimum capital requirements
would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 institution may be
designated by the OTS as a Tier 2 or Tier 3 institution if the OTS
determines that the institution is "in need of more than normal
supervision." The Bank is currently a Tier 1 Institution.
8 of 24
<PAGE> 9
Item 1.
Financial Statements, Continued
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. CAPITAL DISTRIBUTIONS REGULATIONS (CONTINUED):
A Tier 1 Institution could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year up to 100% of
its net income to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess over its Fully
Phased-in Capital Requirements) at the beginning of the calendar year.
Any additional amount of capital distributions would require prior
regulatory approval.
4. EARNINGS PER COMMON SHARE:
Earnings per common and common equivalent share (primary and fully
diluted) for the three and six months ended December 31, 1996 were
computed by dividing net income by the weighted average number of shares
of common and common stock equivalents outstanding. The weighted average
number of common and common equivalent shares outstanding exclude ESOP
unallocated shares and treasury stock.
5. ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is increased by charges to income and
decreased by charge-offs, net of recoveries. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated.
Management's periodic evaluation of the adequacy of the allowance is based
on the Company's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral, and the
current economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process periodically review the
Company's allowance for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the allowances
based on their judgments of information available to them at the time of
their examinations.
Loans are considered impaired if full principal or interest payments are
not anticipated in accordance with the contractual loan terms. Impaired
loans are carried at the present value of expected future cash flows
discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the
allowance for loan losses is allocated to impaired loans. If these
allocations cause the allowance for loan losses to require increase, such
increase is reported as a component of the provision for loan losses.
9 of 24
<PAGE> 10
Item 1.
Financial Statements, Continued
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. ALLOWANCE FOR LOAN LOSSES (CONTINUED):
Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include: residential first mortgage loans secured by
one-to-four family residences, residential construction loans, and
automobile, home equity and second mortgage loans. Commercial loans and
mortgage loans secured by other properties are evaluated individually for
impairment. When analysis of borrower operating results and financial
condition indicates that underlying cash flows of the borrower's business
are not adequate to meet its debt service requirements, the loan is
evaluated for impairment. Often this is associated with a delay or
shortfall in payments of 60 days or more. Loans are moved to nonaccrual
status when 90 days or more past due. These loans are often considered
impaired. Impaired loans, or portions thereof, are charged off when
deemed uncollectible by management review.
The following is a summary of the activity in the allowance for loan
losses account for the six months ended December 31, 1996:
<TABLE>
<S> <C>
Balance at July 1, 1996 $2,670,322
Provision for loan losses 777,000
Losses charged to the allowance (808,338)
Recoveries credited to the allowance 141,736
----------
Balance at December 31, 1996 $2,780,720
==========
</TABLE>
Information regarding impaired loans is as follows for the three and six
months ending December 31, 1996:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- --------------------
December 31,
-------------------------------------------------------
1996 1995 1996 1995
---------- --------- ---------- ------------
<S> <C> <C> <C> <C>
Average investment in impaired loans $3,392,787 $ -- $3,158,071 $ --
Interest income recognized on impaired
loans including interest income recognized
on a cash basis 63,309 -- 111,483 --
Interest income recognized on impaired
loans on cash basis 60,403 -- 108,577 --
</TABLE>
<TABLE>
<S> <C>
Information regarding impaired loans at December 31, 1996 is as follows:
Balance of impaired loans $ 3,632,328
Less portion for which no allowance for loan losses is allocated 324,416
-----------------
Portion of impaired loan balance for which an
allowance for loan losses is allocated $ 3,307,912
=================
Portion of allowance for loan losses allocated to impaired loan balance $ 911,165
=================
</TABLE>
10 of 24
<PAGE> 11
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial
Condition And Results of Operations
GENERAL:
The Company was incorporated under the laws of the State of Delaware to become
the holding company for the Bank. The Company was incorporated at the direction
of the Board of Directors of the Bank, and on March 30, 1994 acquired all of
the capital stock of the Bank upon its Conversion from mutual to stock form
(the "Conversion"). All references to the Company, unless otherwise indicated,
at or before March 28, 1994, refer to the Bank and its subsidiary on a
consolidated basis.
The Company is principally engaged in the business of attracting retail
checking and savings deposits from the general public and investing those
deposits, together with borrowings and other funds, primarily in one- to
four-family residential mortgage loans, in commercial and multi-family real
estate, in consumer and commercial business loans and, to a lesser extent, in
construction or development. The Company also invests in U.S. Government and
agency obligations and other permissible investments.
The Company is focusing on activities related to developing its retail banking
business within its market place by increasing consumer and mortgage loan
originations, while offering new deposit products. In addition, the Company's
strategy calls for a gradual growth that would leverage its high capital to
asset ratio. This strategy emphasizes an aggressive program of origination and
acquisition of retail consumer loans, including vehicle loans, home equity
(second mortgage) loans, credit card loans and recreational vehicle loans. In
addition, this strategy calls for a growth in the Company's commercial real
estate loans and business loans within the Company's market areas. This growth
of the company may be financed by either increases in deposits or from borrowed
funds. The source of funds for the Company's growth depends on several
factors, including cost, availability, interest rate risk, and reinvestment
alternatives.
The Company is selling substantially all of its originations of one to
four-family loans. With a "locked-in" rate at the time of commitment, the
Company sells one to four-family loans, servicing released, to a private
mortgage banker, generally for a 1.00% to 1.25% premium. This program has
allowed the Company to offer competitive one to four-family rates and products
in its market area. To a lesser extent, the Company sells one to four-family
loans to the Federal National Mortgage Association, servicing retained.
Although the loan rates in this program are generally less competitive, some
customers of the Company prefer that the servicing of their loan remain with
the Company.
The most significant outside factors influencing the operations of the Company
include general economic conditions, competition in the local market place, and
the related monetary and fiscal policies of agencies that regulate and/or
affect financial institutions. More specifically, the cost of funds primarily
consisting of deposits, is influenced by interest rates on competing
investments and general market rates of interest, while lending activities are
influenced by the demand for real estate financing and other types of loans,
which in turn is affected by the interest rates at which such loans may be
offered and other factors affecting loan demand and funds availability,
including posted rates by the Federal National Mortgage Association ("Fannie
Mae").
11 of 24
<PAGE> 12
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial
Condition And Results of Operations
Continued
FINANCIAL CONDITION:
Total assets increased $5.2 million to $388.5 million at December 31, 1996 from
$383.3 million at June 30, 1996. This increase was primarily attributable to a
$2.4 million increase in loans receivable, net, a $1.3 million increase in
cash and cash equivalents, and a $1.8 million increase in securities
available-for-sale.
Loans receivable, net, increased $2.4 million to $298.5 million at December
31, 1996 from $296.1 million at June 30, 1996. The increase in loans
receivable, net, was funded primarily by sales, repayments and maturities of
securities and net deposit increases.
There are no significant changes to the geographic concentrations of the
Company's out-of-area loans. The Company had no foreign loans outstanding at
December 31, 1996.
Total Deposits increased $23.9 million to $285.4 million at December 31, 1996.
Management attributes this increase to the Company's expanded marketing efforts
and competitive array of deposit products.
Borrowed funds at December 31, 1996 totaled $64.6 million as compared to $80.7
million at June 30, 1996. Borrowed funds consisted of $27.5 million of long
term advances and $37.1 million of short term advances (due in 12 months or
less) primarily from the Federal Home Loan Bank of Des Moines.
At December 31, 1996 stockholders' equity totaled $33.6 million as compared to
$35.6 million at June 30, 1996 or a decrease of $2.0 million. Stockholders'
equity decreased primarily due to a net loss of $472,000 for the six months
ended December 31, 1996, an increase of the contra-equity accounts for Employee
Stock Ownership Plan and Unearned Compensation in the amount of $427,000 and a
reduction of equity in the amount of $1.4 million for the increased holdings of
Company Treasury Stock, primarily offset by a net of tax reduction of $394,000
from June 30, 1996 for net unrealized depreciation in securities
available-for-sale. The increase in the contra-equity accounts for Employee
Stock Ownership Plan and Unearned Compensation was predominately due to the
award of 28,800 shares of the Company's common stock to its directors, officers
and employees in key management positions at Perpetual Savings Bank, FSB, at a
deferred cost of $522,000. These shares were awarded from the shares approved
and remaining under the Company's Recognition and Retention Plan as ratified by
the Company's stockholders on October 20, 1994.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
The Company had net income after tax of $81,000 or $0.04 per share of common
stock for the three months ended December 31, 1996 compared to $436,000 or
$0.22 per share for the same period in 1995. The decrease in net income for the
three months ended December 31, 1996 compared to the same period last year was
predominately
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<PAGE> 13
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
RESULTS OF OPERATIONS: COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1996
AND 1995
(CONTINUED)
due to a $517,000 increase in provision for loan losses, and a $649,000
increase in noninterest expense, offset by an increase of $436,000 in net
interest income before provision for loan losses, a $165,000 increase in other
income and a $210,000 decrease in income tax provision.
Net interest income, before provision for loan losses, increased $436,000 to
$2.6 million for the three months ended December 31, 1996 compared to $2.1
million for the same period in 1995. Interest income increased $634,000,
primarily due to an increase of 0.30% in the average rate earned on
interest-earning assets, and an increase of $21.6 million in the average
balance. Interest expense increased $198,000 and primarily reflected an
increase of 0.20% in the average rate paid on interest-bearing liabilities, and
a $24.0 million increase in the average balance.
Noninterest income for the three months ended December 31, 1996, was $492,000
compared to $327,000 for the same period in 1995. Loan servicing fees decreased
$16,000 to $93,000 for the three months ended December 31, 1996 compared to
$109,000 for the same period in 1995, primarily due to a declining average
balance of loans serviced for others. The average balance of loans serviced for
others was $126.1 million during the three months ended December 31, 1996
compared to $138.9 million during the same period last year. Gain or loss on
the sales of available-for-sale securities and loans held for sale reflected a
net gain of $165,000 for the three months ended December 31, 1996 compared to a
net gain of $98,000 for same period last year. Net trading securities gains
was $19,000 for the three months ended December 31, 1996, compared to a zero
net trading gain for the same period last year.
Other noninterest income increased $95,000 for the three months ended December
31, 1996 to $215,000 as compared to $120,000 for the three months ended
December 31, 1995, primarily due to a $34,000 increase in savings fees, a
$35,000 increase in non-mortgage fees and a $20,000 reduction in the net loss
generated by Perpetual Financial Services, Inc. (the Bank's wholly owned
service corporation). The operations of Perpetual Financial Services, Inc.
resulted in a $15,000 loss for the quarter ended December 31, 1996 compared to
net loss of $35,000 for the same period last year. The net loss continued for
the quarter ended December 31, 1996 primarily due to the decrease in commission
income generated by Perpetual Financial Services, Inc. which is generally
attributed to a decrease of non-insured product sales by the service
corporation. The Bank, through its wholly owned subsidiary, Perpetual
Financial Services, Inc., offers mutual funds, annuities and brokerage services
to its customers.
Noninterest expense increased $649,000 to $2.3 million for the three months
ended December 31, 1996 compared to $1.7 million for the same period in 1995.
Compensation and benefits increased $120,000 to $865,000, primarily due to
normal salary increases, to an increase of nine employees to the Company's
staff and a related increase in payroll taxes. Occupancy and equipment expense
increased $49,000 to $396,000 for the three months ended December 31, 1996
compared to $347,000 for the same period last year, primarily due to
additional expense
13 of 24
<PAGE> 14
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And Results of
Operations
Continued
RESULTS OF OPERATIONS: COMPARISON OF THREE MONTHS ENDED DECEMBER 31, 1996 AND
1995
(CONTINUED)
related to operations of the Company's new branch office, which opened on June
1, 1996. The regular SAIF deposit insurance premium expense decreased $16,000
to $117,000 for the three months ended December 31, 1996 as compared to
$133,000 for the same period last year. The decrease in the SAIF deposit
insurance premium was primarily due to a decrease in the Company's annual
premium rate to 0.18% for the three months ended December 31, 1996 from 0.23%
for the three months ended December 31, 1995, offset by a $30.0 million
increase in the Company's assessable deposit base. (See "--Insurance of
Accounts and SAIF Deposit Premium"). Net gains or losses on foreclosed assets
reflected a net loss of $6,000 for the three months ended December 31, 1996
compared to a net gain of $22,000 for the same period in 1995.
Other noninterest expense increased $466,000 to $955,000 for the three months
ended December 31, 1996 compared to $489,000 for the same period last year.
Data processing expense, marketing expense, loan expense and Visa/Master Card
service expense are the largest categorical increases in other noninterest
expense for the three months ended December 31, 1996 as compared to the same
period last year. Data processing expense increased $31,000 primarily due to an
increase in the number of accounts serviced and a scheduled price increase by
the Company's EDP servicer. Marketing expense increased $45,000 to $116,000 for
the three months ended December 31, 1996 as compared to the same period last
year. During the quarter ended December 31, 1996, the Bank recorded $245,000
of other expense connected with potential claims on disbursements related to a
borrower's remodeling and converting o commercial warehouse facility to a
commercial office building complex for rental purposes. Visa/Master Card
service expense increased $31,000, primarily due to an increase in the number
of accounts and transactions serviced, which is partially offset by a related
$34,000 increase in credit card fee income.
Income tax provision decreased $210,000 to $75,000 for the three months ended
December 31, 1996 compared to $285,000 for the same period in 1995. The
decrease primarily reflected tax provision on the lower amount of income before
tax.
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
The Company had a net loss of $472,000 or $0.25 per share of common stock for
the six months ended December 31, 1996 compared to net income of $692,000 or
$0.35 for the same period in 1995. The decrease in net income resulted from a
$2.5 million increase in noninterest expense and a $742,000 increase in
provision for loan losses, offset by a $1.0 million increase in net interest
income before provision for loan losses, a $302,000 increase in noninterest
income and a $747,000 reduction in income tax expense.
Net interest income before provision for loan losses increased $1.0 million to
$5.1 million for the six months ended December 31, 1996 as compared to $4.1
million for the same period last year. Interest income increased $1.6 million
for the six months ended December 31, 1996 compared to the same period last
year, primarily due
14 of 24
<PAGE> 15
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And Results of
Operations
Continued
RESULTS OF OPERATIONS: COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1996 AND
1995
(CONTINUED)
to an 85 basis point increase in the yield on average interest-earning assets,
and an increase of $28.1 million in the average balance of interest-earning
assets. Interest expense increased $634,000 for the six months ended December
31, 1996 compared to the six months ended December 31, 1995, primarily due to a
$31.8 million increase in the average balance of interest-bearing liabilities,
and a 20 basis point increase in the cost of interest-bearing liabilities.
Provision for loan losses increased $742,000 for the six months ended December
31, 1996 as compared to the same period in 1995, primarily due to the continued
growth in the Company's loan portfolio and an increase in the Company's actual
loan loss experience over the previous year (See - "Non-performing Assets and
Loan Loss Provision").
Noninterest income for the six months ended December 31, 1996 was $910,000
compared to $608,000 for the same period 1995. Net gains or losses on the sale
of interest-earning assets reflected a net gain of $236,000 for the six months
ended December 31, 1996, compared to a net gain of $159,000 for the same period
last year. The increase in net gains on the sale of interest-earning assets
primarily reflects the increased volume of fixed-rate loans sold under the
Company's one-to four- family mortgage loan selling program. Loan sales during
the six months ended December 31, 1996 and 1995 were $15.4 million and $10.0
million respectively. Loan servicing fees decreased $29,000 to $191,000 for the
six months ended December 31, 1996 compared to $220,000 for the same period in
1995, primarily due to a declining average balance of loans serviced for
others. The average balance of loans serviced for others was $127.8 million
during the six months ended December 31, 1996 compared to $139.7 million during
the same period last year.
Net trading gains were $65,000 for the six months ended December 31, 1996
compared to $2,000 for the same period in 1995. The increase in net trading
gains from the prior period was primarily due to a $59,000 gain realized from
the conversion to stock of a convertible corporate bond held by the Company and
subsequent sale of the stock in an acquisition offer.
Other noninterest income increased $192,000 for the six months ended December
31, 1996 to $419,000 compared to $227,000 for the six months ended December 31,
1995. The increase was predominately due to a $58,000 increase in demand
deposit account fees, a $71,000 increase in non-mortgage loans fees, a $13,000
increase in mortgage loan fees and a $31,000 decrease in net loss generated by
Perpetual Financial Services, Inc. (the Bank's wholly owned service
corporation). The decrease in the net loss from Perpetual Financial Services,
Inc. was primarily due to the result of a $12,000 increase in commission income
and a $19,000 decrease in the service corporation's operating expenses. The
Bank, through its wholly owned subsidiary, Perpetual Financial Services, Inc.,
offers mutual funds, annuities and brokerage services to its customers.
15 of 24
<PAGE> 16
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And Results of
Operations
Continued
RESULTS OF OPERATIONS: COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1996 AND
1995
(CONTINUED)
Noninterest expense increased $2.5 million to $6.0 million for the six months
ended December 31, 1996 compared to $3.5 million for the six months ended
December 31, 1995. The most significant item causing the increase was a
one-time $1.5 million assessment by the FDIC to recapitalize the Savings
Association Insurance Fund ("SAIF") (See "--Insurance of Accounts and SAIF
Deposit Premium"). Compensation and benefits increased $234,000 to $1.8 million
for the six months ended December 31, 1996 compared to $1.5 million for the
same period in 1995, primarily due to an increase of ten employees to the
Company's staff and a related increase in payroll taxes. Occupancy and
equipment expense increased $110,000 to $783,000 for the six months ended
December 31, 1996 compared to $673,000 for the same period last year, primarily
due to additional expense related to operations of the Company's new branch
office, which opened on June 1, 1996. The regular portion of the SAIF deposit
premium expense decreased slightly to $260,000 for the six months ended
December 31, 1996 compared to $263,000 for the six months ended December 31,
1995. The Company's annual premium rate decreased from 0.23% to 0.18% for the
last quarter of the six months ended December 31, 1996. Net gains or losses on
foreclosed assets reflected a net loss of $10,000 for the six months ended
December 31, 1996 compared to a net gain of $21,000 for the same period in
1995.
Other noninterest expense increased $630,000 to $1.7 million for the six months
ended December 31, 1996 compared to $1.1 million for the six months ended
December 31, 1995. The most significant item causing the increase in
noninterest expense was the recording by the Bank of $245,000 of other expense
connected with potential claims on disbursements related to a borrower's
remodeling and converting a commercial warehouse facility to a commercial
office building complex for rental purposes. Data processing expense increased
$56,000 to $308,000 for the six months ended December 31, 1996 as compared to
$252,000 primarily due to an increase in the number of accounts serviced and a
scheduled price increase by the Company's EDP servicer. Marketing expense
increased $29,000 to $217,000 over the previous period, predominately due to an
increased focus on direct mail and a related increase in the volume of
marketing pieces mailed. Visa/Master Card service expense increased $81,000,
primarily due to an increase in the number of accounts and transactions
serviced, which is partially offset by a related $68,000 increase reflected in
other noninterest income-credit card fee income. There are no other individual
expense categories in the summary category of other noninterest expense with
increases greater than $25,000 as compared to the previous period.
Income tax provision decreased $747,000 to a ($286,000) benefit for the six
months ended December 31, 1996 compared to $461,000 for the same period in
1995. The decrease primarily reflected a tax provision credit on the net loss
for the six months ended December 31, 1996 compared to a tax provision expense
for the net income for the six months ended December 31, 1995.
16 of 24
<PAGE> 17
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And Results of
Operations
Continued
RESULTS OF OPERATIONS: COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1996 AND
1995
(CONTINUED)
INSURANCE OF ACCOUNTS AND SAIF DEPOSIT PREMIUM:
On September 30, 1996, federal legislation was enacted that required the
Savings Association Insurance Fund ("SAIF") to be recapitalized with a one-time
assessment on virtually all SAIF-insured institutions, such as the Bank, equal
to 65.7 basis points on SAIF-insured deposits maintained by those institutions
as of March 31, 1995. The SAIF assessment, which was accrued as of September
30, 1996 and paid to the FDIC in November, 1996, was approximately $1.5 million
before tax or $900,000 after tax.
As a result of the SAIF recapitalization, the FDIC amended its regulation
concerning the insurance premiums payable by SAIF-insured institutions.
Effective October 1, 1996 through December 31, 1996, the FDIC reduced the SAIF
insurance premium for all SAIF-insured institutions that are required to pay
the Financing Corporation ("FICO") obligation, such as the Bank, to a range of
18 to 27 basis points from 23 to 31 basis points per $100 of domestic deposits.
The FDIC also reduced the SAIF insurance premium to a range of 0 to 27 basis
points per $100 of domestic deposits, effective January 1, 1997. The Bank
qualified for the minimum SAIF insurance premium. In addition, the FDIC has
imposed a FICO assessment on SAIF insured deposits equal to 6.48 basis points
per $100 of domestic deposits for the semi-annual period from January 1, 1997
through June 30, 1997.
RECOVERY OF BAD-DEBT DEDUCTION:
In August 1996, legislation was enacted that repeals the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for federal
income tax purposes. As a result, small thrifts such as the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the experience method for post-1987 tax years. The
legislation also requires 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. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. The management of the Company does not believe that the
legislation will have a material impact on the Company or the Bank.
NON-PERFORMING ASSETS AND LOAN LOSS PROVISIONS:
The allowance for loan losses is established through a provision for loan
losses based on management's quarterly asset classification review and
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation, which includes a review of
all loans of which full collectibility may not be reasonably assured, considers
among other matters, the estimated value of the underlying collateral, economic
conditions, cash flow analysis, historical loan loss experience,
discussions held with delinquent
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<PAGE> 18
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And Results of
Operations
Continued
NON-PERFORMING ASSETS AND LOAN LOSS PROVISIONS: (CONTINUED)
borrowers and other factors that warrant recognition in providing for an
adequate allowance for loan loss. Provisions for loan losses in the amount of
$552,000 were recorded for the six months ended December 31, 1996 compared to
$35,000 for the six months ended December 31, 1995. The increase in provision
for losses during the six months ended December 31, 1996 compared to the six
months ended December 31, 1995 was due to continued growth in net loans
receivable and an increase in the Company's actual loan loss experience. The
Company's allowance for loan loss was $2.8 million or 0.94% of net loans
receivable at December 31, 1996 as compared to $2.7 million or 0.90% at June 30,
1996. While management believes that the current allowance for loan loss is
adequate to absorb loan losses in the existing loan portfolio, there is no
assurance that the subsequent evaluations of the loan portfolio may not require
additional provisions for loan loss.
The non-performing assets to total assets is one indicator of the Company's
exposure to credit risk. Non-performing assets of the Company consist of
non-accruing loans and real estate owned which has been acquired as a result
of foreclosure. Non-performing assets decreased from $1.4 million or .38% of
assets at June 30, 1996 to $1.3 million or .33% of assets at December 31,
1996, exclusive of troubled debt restructured loans. The ratio of the loss
allowance to non-performing assets increased from 1.9 times at June 30, 1996
to 2.2 times at December 31, 1996.
Troubled Debt Restructures. The Company does not consider troubled debt
restructurings to be "non-performing loans". At December 31, 1996, the Company
held one restructured loan secured by a property located in Newport Beach,
California. This loan is secured by an office/warehouse building on leased
ground. At December 31, 1996 the balance of the loan was $636,000. The
borrower has performed according to the terms of the modification agreement,
and the loan was current at December 31, 1996 (See -Impaired Loans).
Foreclosed Assets. As of December 31, 1996, the Company had $68,000 of
foreclosed and repossessed assets which represented ten automobiles totaling
$62,000, and a repossessed jet-ski and motorcycle with book values of $5,000
and $1,000 respectively. Management may initiate foreclosure on any specific
impaired loan described below if a further review of that specific loan
indicates a further deterioration of the collateral or cash flow. Based on a
review of the Company's assets at December 31, 1996 and the current economic
environment, management does not expect to initiate any significant
foreclosures or repossessions of assets, other than impaired assets with the
conditions described previously, during the quarter following that review date
and they continue to monitor other loans of concern.
Impaired Loans. The Company had four loans classified as impaired at December
31, 1996 totaling $3.6 million, offset by an allocated allowance for loan
losses in the amount of $911,000.
The largest loan included in impaired loans at December 31, 1996 is a $1.5
million business loan of which approximately 53% is secured by real estate and
improvements and the remainder of the loan is secured by business assets. The
loan was granted to an existing trucking and freight company in the Company's
market area
18 of 24
<PAGE> 19
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And Results of
Operations
Continued
NON-PERFORMING ASSETS AND LOAN LOSS PROVISIONS: (CONTINUED)
for the purpose of expanding the trucking operation, including relocation of
trucking terminals. A significant portion of the trucking company's revenue was
dependent upon a single contract which expired and was not renewed, resulting
in a deterioration of cash flows from the trucking operation. A collateral
analysis was performed by the Company in December, 1996 which estimated a loss
exposure of $200,000 at December 31, 1996. Based on its review, the Company
allocated an allowance for loan loss in the amount of $200,000 for this loan.
The loan was current at December 31, 1996 and management will continue to
monitor this loan closely.
The second largest loan included in impaired loans is a $636,000 loan secured
by an office/warehouse mortgage loan in Newport Beach, California. This loan is
discussed above under Troubled Debt Restructures and is classified as impaired
due to previous experience with the borrower and the necessity to restructure
the loan. An allowance for loan loss has been allocated for this loan in the
amount of $211,000.
The Company has classified as impaired a $586,000 loan secured by two buildings
with multi-tenant office suites located in Van Nuys, California. This loan was
originated in 1986 at a 67% loan to value ratio with a balloon date in
February, 1996, however, the borrower was not able to refinance the loan in the
local market of the security. The Company granted a five year extension on the
loan to balloon in February, 2001. This loan was classified as impaired based
upon a high vacancy rate, property condition and the California real estate
market indicating that the borrower can not refinance in the local market. An
allowance for loan loss has been allocated for this loan in the amount of
$350,000. The loan was current at December 31, 1996, with no delinquencies over
the past twelve months.
A loan secured by a communications building located in Denver, Colorado in the
amount of $580,000 was classified as impaired at December 31, 1996. The
contractual rent on this property for the existing tenant is in excess of
current market rent for similar properties in the Denver area. This loan was
originated in 1987 at a 75% loan to value ratio. Based on a recent appraisal
analysis, an allowance for loan loss in the amount of $150,000 has been
allocated for this loan. This loan was current at December 31, 1996 with no
delinquencies over the past twelve months.
A $325,000 loan secured by a multi-tenant retail/office building located in the
central business district of Marion, Iowa was classified as impaired at
December 31, 1996. This loan was originated in 1991 at a 68% loan to value
ratio and has previously incurred negative cash flows from the security. At
December 31, 1996, there was, subject to reasonable conditions, an offer to
purchase this property and acceptance of the offer by the owner. Management
believes the selling price is adequate to pay off the Company's loan and all
related selling costs. While there are no assurances that a final sale is
imminent, management believes the property could be marketed/sold for an amount
in excess of the Company's outstanding loan amount and selling costs. The loan
was three months delinquent at December 31, 1996, and as such, is considered
impaired.
19 of 24
<PAGE> 20
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And Results of
Operations
Continued
NON-PERFORMING ASSETS AND LOAN LOSS PROVISIONS: (CONTINUED)
A large loan included in impaired loans at June 30, 1996 and subsequently
removed from the impaired classification during the quarter ended December 31,
1996, was a $784,000 real estate participation loan secured by a 114 unit
multi-family complex located in Ft. Worth, Texas. The loan was originated at a
54% loan to value ratio for $1.3 million in 1987 with a twenty year
amortization and a ten year balloon date of July 1, 1997. The Company purchased
a 75% interest in the loan at the time of origination. An allowance for loan
loss had been allocated for this loan in the amount of $300,000. The Company
acquired this property through a foreclosure action and a trustee sale in
November, 1996. This property was sold in December, 1996, resulting in an actual
loss of approximately $179,000, and removed from the impaired loan
classification.
Other Loans of Concern. As of December 31, 1996 there were $2.3 million of
other loans of concern not discussed above where known information about the
possible credit problems of borrowers or the cash flows of the security
properties have caused management to have concerns as to the ability of the
borrower to comply with present loan repayment terms and which may result in
the future inclusion of such loans as non-performing or impaired. Other loans
of concern have been considered by management in conjunction with the analysis
of the adequacy of the allowance for loan losses.
The Company is monitoring four commercial real estate loans aggregating $1.5
million secured by properties located in Southern California. These loans were
originated prior to 1987 at loan to value ratios ranging form 40% - 80% (with
an average of 62%). The Company purchased these loans in 1988. At December 31,
1996, the three largest of these loans were $565,000, $378,000 and $342,000.
All of these loans are secured by office and/or industrial/warehouse
properties. Although all of these loans were performing in accordance with
their respective loan repayment terms at December 31, 1996, the Company is
monitoring these loans because of continuing concerns for the general economy
in California, and particularly the real estate market, which suffers from the
effects of a prolonged recession that began in 1990. Although there are reports
that the California real estate market may be experiencing a slow recovery, the
Company continues to monitor these loans closely.
The second largest loan of concern is a 43 unit multi-family complex in Ft.
Worth, Texas. This loan was originated in 1986 for $600,000 at a loan to value
ratio of 55% and the Company purchased a 75% participation interest at
origination. The balance of the loan at December 31, 1996 was $476,000 and the
Company's 75% participation interest amounted to $357,000. Although the loan
was current at December 31, 1996, a recent analysis indicated a shortage of
cash flows from the security to cover the debt and the related note on this
loan ballooned December 1, 1996. The property is listed for sale and management
is reviewing the borrower's request for an extension of the balloon date to
allow more time for selling the property.
The third largest loan of concern is a small commercial real estate medical
complex in Colorado Springs, Colorado. The loan was originated in 1989 for
$324,000 at a loan to value ratio of 70%. The mortgagor is the tenant and
conducts an ophthalmology practice at the complex. The balance of the loan at
December 31, 1996 was $294,000 and the loan was current at that date with no
late payments over the past twelve months. The Company
20 of 24
<PAGE> 21
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And Results of
Operations
Continued
NON-PERFORMING ASSETS AND LOAN LOSS PROVISIONS: (CONTINUED)
estimates that the value of the property has decreased due to declining market
values in this market, resulting in a loan to value ratio of approximately 95%.
There were no other loans of concern in excess of $500,000 being monitored by
the Company. The balance of other loans of concern consists of one- to
four-family loans totaling $959,000, commercial and multi-family real estate
loans totaling $1.4 million, consumer loans totaling $450,000 and commercial
business loans totaling $239,000. These loans have been considered by management
in conjunction with the analysis of the adequacy of the allowance for loan
losses.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's principal sources of funds are deposits, amortization and
prepayment of loan principal (including mortgage-backed securities), maturities
of investment securities and interest-earning deposits with other financial
institutions, sales of loans and mortgage-backed and related securities
available for sale, and operations. While scheduled loan repayments,
mortgage-backed securities amortization, and maturing investments are
relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has been selective with regard to deposit rates on certain savings
products and, when necessary, has supplemented deposits with longer term or
less expensive alternative sources of funds.
Current OTS regulations require the Bank to maintain cash and eligible
investments in an amount equal to at least 5% of net withdrawable savings
deposits and borrowings payable on demand or in five years or less during the
preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency and other
securities and obligations generally having remaining maturities of less than
five years. The Bank has maintained its liquidity ratio at a level in excess
of those required. At December 31, 1996, the Bank's liquidity ratio was 13.75%
which was in excess of the minimum regulatory requirements.
The Company uses its capital resources principally to meet its ongoing
commitments to fund maturing certificates of deposit and loan commitments,
maintain its liquidity and meet operating expenses. At December 31, 1996, the
Company had outstanding commitments to extend credit which amounted to $63.6
million, of which $43.4 million is available lines of credit, $9.9 million for
one-to four-family residential, $600,000 for multifamily residential, $5.6
million for commercial real estate, and the remaining $4.1 million for
consumer/business loans. Management believes loan repayments and other sources
of funds will be adequate to meet the Company's foreseeable liquidity needs.
21 of 24
<PAGE> 22
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And Results of
Operations
Continued
LIQUIDITY AND CAPITAL RESOURCES: (CONTINUED)
During the six month period ended December 31, 1996, there was a net increase
of $1.3 million in cash and cash equivalents. This increase was temporary,
pending repayment of borrowed funds. The major source of cash during the
period was $25.3 million from sales and repayments of securities
available-for-sale and a $23.9 million increase in deposits. Major uses of
funds included purchases of securities available for sale of $26.6 million, net
repayment of Federal Home Loan Bank advances of $16.5 million, and a net
increase in loans receivable, net, of $3.7 million.
At December 31, 1996, the Bank's tangible and core capital was $30.6 million or
7.91% of adjusted total assets, which was in excess of the 1.5% tangible
capital requirement by $24.8 million, and in excess of the 3.0% core capital
requirement by $19.0 million. The Bank also had risk-based capital of $32.4
million at December 31, 1996, or 12.37% of total risk-weighted assets, which
exceeded the 8.0% risk-based capital requirement by $11.4 million. The OTS has
adopted a regulation which requires that, for purposes of calculating
regulatory capital, unrealized gains or losses related to accounting for
certain investments in debt and equity securities classified as
"available-for-sale" under SFAS No. 115 are not included in the Bank's
regulatory capital.
PERPETUAL MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDING
There are no material legal proceedings to which the Company or the Bank
is a party or of which any of their property is subject. From
time-to-time, the Bank is a party to various legal proceedings incident to
its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of stockholders was held on October 25, 1996.
c) The matters approved by stockholders at the annual meeting and number
of votes cast for, against or withheld as to each matter are set forth
below:
Election of the following Directors
for a three year term: For Withheld
--------- -----------
Robert C. Tilden 1,737,328 5,463
Douglas E. Anderson 1,736,996 5,795
22 of 24
<PAGE> 23
PERPETUAL MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
(CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: (CONTINUED)
Ratification of the appointment of Crowe Chizek and Company LLP, as the
Company's auditors for the fiscal year ending June 30, 1997:
For 1,734,124
Against 7,692
Abstain 975
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
1. The Company filed a form 8-K dated January 17, 1997, attaching:
(i) its press release announcing earnings for the three and six
months ended December 31, 1996, and (ii) its press release announcing
that the Company would pay a cash dividend of $0.075 (seven and
one-half cents) per share of outstanding common stock on February 19,
1997 to stockholders of record as of January 31, 1997.
23 of 24
<PAGE> 24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PERPETUAL MIDWEST FINANCIAL, INC.
Registrant
Date: February 12, 1997 /s/ James L. Roberts
----------------- ------------------------------------
James L. Roberts, President and
Chief Executive Officer
Date: February 12, 1997 /s/ Rick L. Brown
----------------- ------------------------------------
Rick L. Brown, Senior Vice President
and Chief Financial Officer
24 of 24
<PAGE> 25
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
EX-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-QSB FOR THE SIX MONTHS ENDED DECEMBER 31, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,605,506
<INT-BEARING-DEPOSITS> 7,605,968
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 921,570
<INVESTMENTS-HELD-FOR-SALE> 58,180,261
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 299,860,183
<ALLOWANCE> (2,780,720)
<TOTAL-ASSETS> 388,529,394
<DEPOSITS> 285,356,353
<SHORT-TERM> 37,147,466
<LIABILITIES-OTHER> 4,951,571
<LONG-TERM> 27,500,000
0
0
<COMMON> 21,240
<OTHER-SE> 33,552,764
<TOTAL-LIABILITIES-AND-EQUITY> 388,529,394
<INTEREST-LOAN> 12,527,641
<INTEREST-INVEST> 1,612,451
<INTEREST-OTHER> 465,542
<INTEREST-TOTAL> 14,605,634
<INTEREST-DEPOSIT> 7,199,249
<INTEREST-EXPENSE> 9,466,206
<INTEREST-INCOME-NET> 5,139,428
<LOAN-LOSSES> 777,000
<SECURITIES-GAINS> 47,326
<EXPENSE-OTHER> 6,030,153
<INCOME-PRETAX> (757,465)
<INCOME-PRE-EXTRAORDINARY> (757,465)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (471,965)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
<YIELD-ACTUAL> 0
<LOANS-NON> 1,231,786
<LOANS-PAST> 0
<LOANS-TROUBLED> 635,860
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (2,670,322)
<CHARGE-OFFS> 808,338
<RECOVERIES> (141,736)
<ALLOWANCE-CLOSE> (2,780,720)
<ALLOWANCE-DOMESTIC> (2,780,720)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
