<PAGE>
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 [FEE REQUIRED]
For the Fiscal Year Ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to ________________
Commission File Number 0-23368
PERPETUAL MIDWEST FINANCIAL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 42-1415490
- -------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
700 First Avenue, N.E., Cedar Rapids, Iowa 52401
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (319) 366-1851
_______________________________
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 (Section 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]
As of September 11, 1997, the Registrant had 1,873,075 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 September 11, 1997 was $33.9 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
Parts II and IV of Form 10-KSB - Annual Report to Stockholders for the
fiscal year ended June 30, 1997.
Part III of Form 10-KSB - Proxy Statement for Annual Meeting of
Stockholders to be held in 1997.
<PAGE>
PART I
Item 1. Business
General. Perpetual Midwest Financial, Inc ("Perpetual Midwest" and,
with its subsidiary, the "Company") was formed at the direction of Perpetual
Savings Bank, FSB (the "Bank" or "Perpetual Savings") in December, 1993 for the
purpose of owning all of the outstanding stock of the Bank issued upon the
conversion of the Bank from the mutual to the stock form (the "Conversion"). On
March 30, 1994 Perpetual Midwest acquired all of the shares of the Bank in
connection with the completion of the Conversion. All references to the Company,
unless otherwise indicated, at or before March 30, 1994 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 Quotations ("Nasdaq")
National Market under the symbol "PMFI".
The Company is incorporated under the laws of the State of Delaware,
and authorized to do business in the State of Iowa, and generally is authorized
to engage in any activity that is permitted by the Delaware General Corporation
Law. The business of the Company currently consists primarily of the business of
Perpetual Savings. The holding company structure, however, provides the Company
with greater flexibility than the Bank has to diversify its business activities,
through existing or newly formed subsidiaries, or through acquisitions or
mergers of both mutual and stock financial institutions as well as other
companies. Although there are no current arrangements, understandings or
agreements regarding any such activity or acquisition, the Company is in a
position, subject to regulatory restrictions and/or approval, to take advantage
of any favorable acquisition opportunities that may develop.
The assets of the Company consist of the stock of the Bank and a
diversified investment portfolio. Activities of Perpetual Midwest are funded by
proceeds and income on the investment portfolio at the holding company level and
dividends from the Bank, if any. Activities of the Company may also be funded
through sales of additional securities, through borrowings and through income
generated by other activities of the Company. At June 30, 1997, the Company had
total consolidated assets of $397.2 million and stockholders' equity of $33.9
million.
Perpetual Savings is a federally chartered stock savings bank
headquartered in Cedar Rapids, Iowa. Originally organized in 1875, the Bank
converted to a federal mutual savings bank in 1991. Its deposits are insured up
to applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
Perpetual Savings' primary market area covers all or a portion of Linn and
Johnson Counties, Iowa, which are serviced through its four full service branch
offices located in Cedar Rapids and one additional full service branch office
located in Iowa City, Iowa. At June 30, 1997, Perpetual Savings had total assets
of $395.7 million, deposits of $305.3 million and stockholders' equity of $31.5
million.
2
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The Company has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services to meet the needs of the communities it serves. The Company focuses 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 also invests in
U.S. Government and agency obligations, agency issued mortgage-backed securities
and other investments permitted by regulation.
The board and management continue to emphasize the expansion of the
Bank's retail banking operations. In this regard, management has decreased its
mortgage-backed and related securities portfolio to fund loans originated or
purchased for retention in the Bank's loan portfolio. Beginning in 1994, the
Company undertook to restructure its investments in earning assets by decreasing
its holdings of mortgage-backed and related securities and increasing its
portfolio of loans. From June 30, 1996 to June 30, 1997, the Company's portfolio
of loans receivable, net increased from $296.1 million or 77% of total assets to
$310.5 million or 78% of total assets. Conversely, the Company's mortgage-backed
and related securities and other securities portfolio decreased during the same
period from $57.4 million or 15% of total assets at June 30, 1996 to $41.9
million or 11% of total assets at June 30, 1997. Small Business Administration
("SBA") participation certificates accounted for $5.3 million or 11.0% of the
mortgage-backed and related securities and other investment securities portfolio
at June 30, 1997.
The Company's revenues are derived primarily from interest on loans,
mortgage-backed and related securities, other securities, income from service
charges and loan originations and loan servicing fee income.
The Company offers a variety of deposit accounts having a wide range of
interest rates and terms, which generally include passbook accounts, checking,
business and personal money market checking and regular checking accounts, and
certificate accounts with varied terms. The Company only solicits deposits in
its primary market area and does not accept brokered deposits.
The executive offices of the Bank are located at 700 First Avenue,
N.E., Cedar Rapids, Iowa 52401, and the telephone number at that address is
(319) 366-1851.
3
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Market Area
The main office of the Company is in Cedar Rapids, located in Linn
County, Iowa. The Company's market enjoys a well diversified environment of
employers, including such major employers as Rockwell International, Amana
Refrigeration, Quaker Oats, IES Industries, Inc., Aegon USA, St. Luke's
Hospital, Mercy Medical Center, The University of Iowa and the Cedar Rapids and
Iowa City Community Schools.
Lending Activities
General. The Company primarily originates fixed- and adjustable-rate,
one- to four-family, commercial and multi-family mortgage loans. In addition,
the Company originates or purchases retail consumer loans, including vehicle
loans, home equity (second mortgage) loans, credit card loans and recreational
vehicle loans. The Company's general policy is to originate mortgages with terms
between 15 and 30 years. The Company focuses on the origination of
adjustable-rate mortgage ("ARM") loans, short-term balloon loans, short-term
consumer and other loans for retention in its portfolio. ARM, balloon and
consumer loans are originated in order to increase the percentage of loans with
more frequent repricing or shorter maturities, and in some cases higher yields,
than fixed-rate, long-term, mortgage loans. While the Company's loan portfolio
consists mainly of adjustable-rate and balloon one- to four-family loans and
short-term consumer loans, it also originates fixed-rate mortgage loans in
response to customer demand and for sale, subject to market conditions, in the
secondary market. The Company underwrites these mortgage loans under secondary
market guidelines allowing them to be saleable, without recourse, in order to
generate fee income and reduce the Company's exposure to changes in interest
rates.
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 the most 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 ("Fannie Mae"),
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 Company also originates consumer, construction and commercial
business loans in its primary market area. At June 30, 1997, the Company's net
loan portfolio totaled $310.5 million.
Consumer, commercial business and real estate loan applications are
initially considered and approved at various levels of authority, depending on
the type, amount and loan to value ratio of the loan. The review and
ratification by the Bank's Board of Directors is required for such loans above
$500,000, following a review and approval by the Bank's executive loan
committee.
4
<PAGE>
The aggregate amount of loans that the Bank is permitted to make under
applicable federal regulations to any one borrower, including related entities,
or the aggregate amount that the Bank could have invested in any one real estate
project is generally the greater of 15% of unimpaired capital and surplus or
$500,000. At June 30, 1997, the maximum amount which the Bank could have lent to
any one borrower and the borrower's related entities was approximately $5.1
million.
At June 30, 1997, the Bank did not have any loans or series of loans
with outstanding balances in excess of the loans to one borrower limit and the
following discussion summarizes the Bank's ten largest lending relationships
with one borrower or group of related borrowers.
At June 30, 1997, the Bank's largest lending relationship with one
borrower or group of related borrowers totaled $4.3 million and consisted of
three loans which were primarily secured by a bank stock loan and a single
family residence. The Bank's second largest lending relationship consisted of
one loan in the amount of $4.0 million secured by three commercial real estate
buildings utilized for office space, manufacturing and warehousing. The third
largest lending relationship totaled $3.7 million and consisted of seventeen
loans, primarily secured by four speculative and two pre-sold single-family
construction, four land parcels, two medical office complexes and two commercial
buildings.
The fourth largest lending relationship consisted of three loans
totaling $3.5 million and primarily secured by two commercial office buildings.
The fifth largest lending relationship totaled $3.5 million consisting of
sixteen loans primarily secured by a commercial office building and fourteen
retail sales facilities. The Bank's sixth largest lending relationship consisted
of twelve loans totaling $3.5 million and primarily secured by the general
business assets of six restaurants, two single-family condominium units and one
single-family residence. The seventh largest lending relationship consisted of
seven loans in the total amount of $3.4 million primarily secured by four office
buildings, one land development loan, two single-family speculative construction
and a single-family residence.
The eighth largest lending relationship consisted of thirteen loans
totaling $3.4 million and primarily secured by two commercial office buildings,
three commercial retail sales buildings, one multi-family mortgage, one car wash
facility, two speculative single-family construction loans and a single-family
residence. The ninth largest lending relationship consisted of four loans which
totaled $3.1 million and were primarily secured by a commercial office building,
a commercial warehouse and a communications tower. The tenth largest lending
relationship was one loan in the amount of $3.1 million secured by a 144 unit
multi-family complex.
In addition to the regulatory limit of loans to one-borrower,
management monitors the Company's concentration of loans. Management considers
loan concentrations to exist when there are amounts loaned to a multiple number
of borrowers engaged in similar activities, including geographic concentration,
which would cause them to be similarly impacted by economic or other conditions.
At June 30, 1997 the Company did not have any such concentration of loans
exceeding 10% of total loans receivable, net or $31.1 million.
5
<PAGE>
Loan Portfolio Composition. The following information concerning the
composition of the Company's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and allowances for
losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------
1997 1996 1995 1994
------------------ --------------- --------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- ------------------
One- to four-family................ $127,492 39.56% $129,876 42.60% $137,832 57.84% $ 69,819 52.07%
Commercial......................... 61,373 19.04 48,384 15.87 33,822 14.19 18,853 14.06
Multi-family....................... 33,865 10.51 31,989 10.49 25,029 10.50 15,245 11.37
Construction or development........ 22,053 6.84 21,020 6.90 14,979 6.29 7,469 5.56
-------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans........ $244,783 75.95 $231,269 75.86 $211,662 88.82 $111,386 83.06
-------- ----- -------- ----- -------- ----- -------- -----
Other Loans:
- ------------
Consumer Loans:
Classic car loans................. $ --- --- $ --- -- $ --- -- $ --- --
Automobile........................ 27,886 8.66 28,831 9.46 2,590 1.08 930 .70
Home equity line of credit........ 14,503 4.50 12,472 4.09 10,005 4.20 6,238 4.65
Second mortgage................... 12,547 3.89 9,516 3.12 5,986 2.51 5,362 4.00
Home improvement.................. 2,092 .65 1,686 .55 1,493 .63 1,369 1.02
Student........................... --- --- --- -- --- -- 4,003 2.99
Credit cards...................... 4,381 1.36 3,618 1.19 2,389 1.00 1,511 1.13
Other consumer.................... 2,985 .92 1,906 .63 846 .36 744 .55
--------- ----- -------- ----- -------- ---- -------- -----
Total consumer loans........... $ 64,394 19.98 $ 58,029 19.04 $ 23,309 9.78 $ 20,157 15.04
Commercial business loans.......... 13,127 4.07 15,562 5.10 3,331 1.40 2,552 1.90
--------- ----- --------- ----- -------- ----- -------- -----
Total other loans.............. $ 77,521 24.05 $ 73,591 24.14 $ 26,640 11.18 $ 22,709 16.94
--------- ----- --------- ----- -------- ----- -------- -----
Total loans before net items... $322,304 100.00% $ 304,860 100.00% $238,302 100.00% $134,095 100.00%
--------- ====== --------- ====== -------- ====== -------- ======
Less:
- -----
Loans in process................... (8,460) (5,992) (8,018) (5,495)
Net deferred (fees) costs and
discounts........................ (349) (118) (217) (208)
Allowance for losses............... (2,973) (2,670) (2,686) (2,482)
------- --------- -------- --------
Total loans receivable, net..... $310,522 $ 296,080 $227,381 $125,910
======== ========= ======== ========
<PAGE>
At December 31,
---------------------
1993
----------------
Amount Percent
Real Estate Loans: ------ -------
- ------------------
One- to four-family................ $ 58,692 49.80%
Commercial......................... 17,529 14.87
Multi-family....................... 11,404 9.68
Construction or development........ 4,530 3.84
-------- -----
Total real estate loans.... $ 92,155 78.19
-------- -----
Other Loans:
- ------------
Consumer Loans:
Classic car loans................. $ 6,294 5.34
Automobile........................ 778 .66
Home equity line of credit........ 3,637 3.09
Second mortgage................... 4,868 4.13
Home improvement.................. 1,217 1.03
Student........................... 4,035 3.42
Credit cards...................... 1,647 1.40
Other consumer.................... 737 .63
-------- -----
Total consumer loans........... $ 23,213 19.70
Commercial business loans.......... 2,483 2.11
-------- -----
Total other loans.............. $ 25,696 21.81
-------- -----
Total loans before net items... $117,851 100.00%
-------- =======
Less:
- -----
Loans in process................... (2,454)
Net deferred (fees) costs and
discounts........................ 194
Allowance for losses............... (2,437)
---------
Total loans receivable, net..... $113,154
========
</TABLE>
The following table shows the composition of the Company's loan
portfolio by fixed and adjustable rate at the dates indicated.
6
<PAGE>
<TABLE>
<CAPTION>
At June 30,
-------------------------------------------------------------------------------------
1997 1996 1995 1994
----------------- ----------------- ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Real Estate Loans
One- to four-family........................ $ 12,146 3.77% $13,253 4.35% $15,815 6.64% $ 14,980 11.17%
Commercial................................. 5,520 1.71 2,904 .95 2,926 1.22 4,280 3.19
Multi-family............................... 1,967 .61 2,030 .66 4,535 1.90 4,453 3.32
Construction or development................ 22,053 6.84 21,020 6.90 14,979 6.29 7,469 5.56
-------- ------ -------- ------- -------- ------- -------- -------
Total fixed-rate real estate loans..... 41,686 12.93 39,207 12.86 38,255 16.05 31,182 23.24
-------- ------ -------- ------- -------- ------- -------- -------
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... $115,346 35.79 $116,623 38.25 $122,017 51.20 $ 54,839 40.90
Commercial................................ 55,853 17.33 45,480 14.92 30,896 12.97 14,573 10.87
Multi-family.............................. 31,898 9.90 29,959 9.83 20,494 8.60 10,792 8.05
-------- ------ -------- ------- -------- ------ -------- -------
Total adjustable-rate real estate loans $203,097 63.02 $192,062 63.00 $173,407 72.77 $ 80,204 59.82
-------- ------ -------- ------- -------- ------ -------- -------
Consumer(1)................................. $ 64,394 19.98 $ 58,029 19.04 $423,309 9.78 $20,157(1) 15.04
Commercial business(2)...................... 13,127 4.07 15,562 5.10 3,331 1.40 2,552(2) 1.90
-------- ------ -------- ------- -------- ------ -------- -------
Total loans............................ $322,304 100.00 $304,860 100.00 $238,302 100.00% $134,095 100.0
Less: -------- ====== -------- ======= -------- ====== -------- =======
Loans in process........................... (8,460) (5,992) (8,018) (5,495)
Deferred fees and discounts................ (349) (118) (217) (208)
Allowance for loan losses.................. (2,973) (2,670) (2,686) (2,482)
-------- -------- --------- ---------
Total loans receivable, net............ $310,522 $296,080 $227,381 $125,910
======== ======== ========= =========
At December 31,
-------------------
1993
-----------------
Amount Percent
------ -------
Fixed-Rate Real Estate Loans
One- to four-family........................ $16,612 14.10%
Commercial................................. 3,925 3.33
Multi-family............................... 2,912 2.46
Construction or development................ 4,530 3.84
------- ------
Total fixed-rate real estate loans..... 27,979 23.73
------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... $ 42,080 35.71
Commercial................................ 13,604 11.54
Multi-family.............................. 8,492 7.21
-------- ------
Total adjustable-rate real estate loans $ 64,176 54.46
-------- ------
Consumer(1)................................. $23,213(1) 19.70
Commercial business(2)...................... 2,483(2) 2.11
-------- ------
Total loans............................ $117,851 100.00%
Less: ======== ======
Loans in process........................... (2,454)
Deferred fees and discounts................ 194
Allowance for loan losses.................. (2,437)
Total loans receivable, net............ $113,154
</TABLE>
_____________________
(1) Consumer includes $23.8 million, $21.8 million, $16.5 million, $11.6
million and $10.8 million of adjustable-rate loans at June 30, 1997,
1996, 1995 and 1994 and December 31, 1993, respectively.
(2) Commercial business includes $11.2 million, $10.3 million, $.7 million,
$1.7 million and $1.8 million of adjustable-rate loans at June 30,
1997, 1996, 1995 and 1994and December 31, 1993, respectively.
7
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The following schedule illustrates the interest rate sensitivity of the
Company's loan portfolio at June 30, 1997. Loans which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract adjusts, not when the contract matures. The schedule does not reflect
the effects of possible prepayments or enforcement of due on sale clauses.
<TABLE>
<CAPTION>
Commercial
Mortgage Loans Construction Loans(2) Consumer Loans Business Loans(2)
---------------------- --------------------- ---------------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- --------- --------- ------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Periods
Ending June 30,
1998(1)..................... $ 5,926 9.17% $21,933 8.55% $ 6,529 10.58% $10,056 8.83%
1999 - 2002................. 6,106 8.53 120 8.75 22,074 8.89 2,984 9.10
2003 and following.......... 210,698 8.02 --- --- 35,791 9.25 87 10.36
--------- ----- ------- ----- ------- ------ ------- ------
Total..................... $222,730 8.06% $22,053 8.55% $64,394 9.26% $13,127 8.90%
========= ===== ======= ===== ======= ====== ======= ======
Total Loans
------------------
Weighted
Average
Amount Rate
------- --------
Due During Periods
Ending June 30,
1998(1)..................... $ 44,444 8.99%
1999 - 2002................. 31,284 8.84
2003 and following.......... 246,576 8.20
---------- ---------
Total..................... $322,304 8.37%
========== =========
</TABLE>
____________________
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
(2) Of construction loans due after one year, $120,000 are fixed rate and
none are adjustable rate. Of commercial business loans due after one
year, $981,000 are fixed rate and $2.1 million are adjustable rate.
8
<PAGE>
One- to Four-Family Residential Mortgage Lending
Residential loan originations are generated by the Company's marketing
efforts, its present customers, walk-in customers and referrals from real estate
agents, mortgage brokers and builders. The Company focuses its lending efforts
primarily on the origination of loans secured by first mortgages on
owner-occupied, one- to four-family residences. At June 30, 1997, the Company's
one- to four-family residential mortgage loans totaled $127.5 million, or
approximately 40% of the Company's gross loan portfolio. Approximately 20% of
the Company's one- to four-family mortgage loans have been purchased with a
dispersion over approximately twelve states, and are generally from and serviced
by other financial institutions.
During the twelve months ended June 30, 1997, the Company originated
$54.4 million of loans secured by one- to four-family residential real estate
and sold $27.2 million into the secondary market. Substantially all the
Company's one- to four-family residential mortgage originations are in its
market area.
The Company currently originates one- to four family residential
mortgage loans, fixedand adjustable-rate, with terms of up to 30-years in
amounts up to 95% of the appraised value of the security property. The Company
generally requires that the borrower obtain private mortgage insurance in an
amount sufficient to reduce the Company's exposure to 80% or less of the
loan-to-value level.
The Company has offered ARM loans at rates, terms and points determined
in accordance with market and competitive factors. The programs currently
offered generally meet the standards and requirements of the secondary market
for residential loans. The Company's current one- to four-family residential
ARMs are fully amortizing loans with contractual maturities of up to 30 years.
The interest rates on the ARMs originated by the Company are subject to
adjustment at stated intervals and are subject to periodic and lifetime
adjustment limits. Most of the Company's ARMs have interest rates which adjust
annually or at three year intervals based on a margin over one of several
indices. To a lesser extent, the Company's ARMs have been originated with fixed
rates for the first five years ("five year step") or seven years ("seven year
step") and adjustable rates at one year intervals thereafter. As a consequence
of using an initial fixed-rate and caps, the interest rates on these loans may
not be as sensitive as is the Company's cost of funds. The Company's ARMs do not
permit negative amortization of principal and are not convertible into a fixed
rate loan, however, they are assumable by qualified borrowers at the Company's
option. The ARM loans offered by the Company, as well as by many other financial
institutions, sometimes provide for initial rates of interest below the rates
which would prevail were the fully indexed rates used for pricing applied
initially. These loans are subject to increased risk of delinquency or default
as the higher, fully-indexed rate of interest subsequently comes into effect.
The Company generally qualifies borrowers, however, at the fully indexed rate.
The Company also offers fixed-rate 30-year mortgage loans for sale in
the secondary market, without recourse and fixed-rate mortgage loans up to
15-years in term for retention in its portfolio. The fixed rate 30-year mortgage
loans offered by the Company generally conform to secondary market standards
(i.e., FNMA and Federal Home Loan Mortgage Corporation
9
<PAGE>
("FHLMC") standards). Interest rates charged on fixed-rate loans are
competitively priced according to market conditions. Residential loans generally
do not include prepayment penalties.
In underwriting one- to four-family residential real estate loans, the
Company evaluates both the borrower's ability to make monthly payments and the
value of the property securing the loan. Properties securing real estate loans
made by the Company are appraised to the extent required by federal regulation
by independent fee appraisers approved by the Board of Directors. The Company
generally requires borrowers to obtain an attorney's title opinion or title
insurance, and fire and property insurance (including flood insurance, if
necessary) in an amount not less than the amount of the loan. Real estate loans
originated by the Company generally contain a "due on sale" clause allowing the
Company to declare the unpaid principal balance due and payable upon the sale of
the security property. The Company has waived the due on sale clause on loans
held in its portfolio from time to time to permit assumptions of the loans by
qualified borrowers.
Commercial and Multi-Family Real Estate Lending
The Company has also engaged in commercial and multi-family real estate
lending in its market area and has purchased a significant number of whole loans
and participation interests in loans, primarily from other financial
institutions, of which 24 loans remained on the Bank's books, aggregating $8.4
million at June 30, 1997. At June 30, 1997, the Company had $61.4 million and
$33.9 million of commercial and multi-family real estate loans, respectively,
which represented approximately 19% and 11%, respectively, of the Company's
gross loan portfolio.
The Company's commercial and multi-family real estate loan portfolio is
secured primarily by apartment buildings, small and medium size office
buildings, warehouses, nursing homes, churches, and strip shopping centers.
Commercial and multi-family real estate loans generally have terms to maturity
that do not exceed 30 years and a variety of rate adjustment features and other
terms. Generally, the loans are made in amounts up to 75% of the appraised value
of the security property. Adjustable rate commercial and multi-family real
estate loans provide for a margin over a designated index, with periodic
adjustments of up to five years, subject to limitations on the maximum periodic
and total interest rate increase or decrease over the life of the loan. In
underwriting these loans, the Company currently analyzes the financial condition
of the borrower, the borrower's credit history, and the reliability and
predictability of the cash flow generated by the property securing the loan. The
Company generally requires personal guaranties of the borrowers. Appraisals on
properties securing commercial real estate loans originated by the Company are,
to the extent required by federal regulations, performed by independent
appraisers.
Commercial and multi-family real estate loans generally 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 effect of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial and multi-family real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases
10
<PAGE>
are not obtained or renewed, or a bankruptcy court modifies a lease term, or a
major tenant is unable to fulfill its lease obligations), the borrower's ability
to repay the loan may be impaired.
Construction and Development Lending
At June 30, 1997, the Company had $22.1 million of construction and
development loans. The Company offers loans to builders principally for the
construction of one- to four-family residences, and to a lesser extent,
commercial real estate and multi-family properties. Currently, such loans are
offered with fixed or adjustable rates of interest, however, all loans
outstanding at June 30, 1997, were at fixed rates. Following the construction
period, these loans may become permanent loans with terms for up to 30 years.
The Company offers loans to builders for the construction of up to four
residences without requiring contracts of sale. At June 30, 1997, the Company's
largest construction line of credit to one builder totaled $1.0 million for the
purpose of constructing residential properties in Cedar Rapids, Iowa, and at
that date $288,000 of this amount was advanced.
Construction lending generally affords the Company an opportunity to
receive interest at rates higher than those obtainable from residential lending.
In addition, construction loans may be made with adjustable rates of interest
and have relatively short terms. Nevertheless, construction lending is generally
considered to involve a higher level of credit risk than one- to four-family
residential lending since the risk of loss on construction loans is dependent
largely upon the accuracy of the initial estimate of the individual property's
value upon completion of the project and the estimated cost (including interest)
of the project. If the cost estimate proves to be inaccurate, the Company may be
required to advance funds beyond the amount originally committed to permit
completion of the project.
Consumer Lending
The Company offers a variety of secured consumer loans, including
automobile, home equity lines of credit, second mortgage, home improvement and
loans secured by savings deposits. In addition, the Company offers other secured
and unsecured consumer loans, including offering a Visa/Mastercard credit card.
The Company currently originates substantially all of its consumer loans in its
primary market area. The Company originates consumer loans on a direct basis,
where the Company extends credit directly to the borrower. To a lesser extent,
the Company accepts indirect consumer loans from selected dealers of consumer
products, where the Company retains the right-of-rejection for any individual
loan.
The Company also originates second mortgage, home improvement and home
equity line of credit loans. Home equity, second mortgage and home improvement
loans secured by second mortgages, together with loans secured by prior liens,
are generally limited to 90% or less of the appraised value (or in the case of
loans less than $100,000, an estimated value) of the property securing the loan.
Generally, such loans have a maximum term of up to 15 years. As of June 30,
1997, second mortgage, home equity and home improvement loans, most of which are
secured by second mortgages, amounted to $29.1 million or 9.0% of the Company's
gross loan portfolio.
11
<PAGE>
The Company offers VISA/Mastercard credit card accounts. At June 30,
1997, approximately 8,000 credit card accounts were open, with an aggregate
outstanding balance of $4.4 million and unused credit available of $22.5
million. At that date, $309,000 or 7.1% of the credit card portfolio balance
outstanding was 30 days or more delinquent. The Company typically offers a 14.9%
fixed-rate account with no annual membership fee or a prime plus 5.9%
adjustable-rate account with no annual membership fee. Both account types are
currently offered with a six month introductory rate of 5.9%.
At June 30, 1997, the Bank's consumer loan portfolio totaled $64.4
million, or 20% of its gross loan portfolio. At June 30, 1997, approximately 63%
of the Bank's consumer loans were short- and intermediate-term, fixed-rate loans
and 37% were adjustable rate loans.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Company for consumer loans include an application, a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured
or are secured by rapidly depreciable collateral, such as automobiles. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance as a result of
the greater likelihood of damage, loss or depreciation. In addition, consumer
loan collections are dependent on the borrower's continuing financial stability,
and thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At June 30, 1997, $148,000 of the Company's consumer loans were
non-performing.
Commercial Business Lending
The Company also originates commercial business loans. At June 30,
1997, approximately $13.1 million, or 4.1% of the Bank's gross loan portfolio
was comprised of commercial business loans of which $8,000 was non-performing at
that date. The largest commercial business loan is a loan in the net amount of
$4.0 million to an Iowa based investment group. The loan was originated in 1996
for $4.5 million to purchase a bank, approximately $90.0 million asset size,
located in Iowa, and secured by that bank's stock. The Company sold a $500,000
or approximately 11% participation interest in this loan.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow
12
<PAGE>
of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself (which, in turn, is likely to depend upon the
general economic environment). The Company's commercial business loans are
usually, but not always, secured by business assets. However, the collateral
securing the loans may depreciate over time, may be difficult to appraise and
may fluctuate in value based on the success of the business.
The Company's commercial business lending policy includes credit file
documentation and analysis of the borrower's character, capacity to repay the
loan, adequacy of the borrower's capital and collateral as well as an evaluation
of conditions affecting the borrower. Analysis of the borrower's past, present
and future cash flows is also an important aspect of the Company's current
credit analysis. Nonetheless, such loans, are believed to carry higher credit
risk than more traditional thrift investments.
Originations, Purchases, Sales, and Servicing of Loans
For the year ended June 30, 1997, the Company originated $118.8 million
of loans, compared to $139.3 million and $114.6 million during the years ended
June 30, 1996 and June 30, 1995, respectively. In the year ended June 30, 1997,
$83.5 million of loans were repaid, compared to $65.0 million and $35.1 million
during the years ended June 30, 1996 and June 30, 1995, respectively. Mortgage
loan originations are handled by the regular employees of the Company as
separate origination facilities are not maintained.
The Company sells whole real estate loans, primarily fixed-rate loans,
without recourse, to FNMA and from time to time other secondary market
purchasers. The Company sold whole loans in aggregate amounts of $27.2 million
for the year ended June 30, 1997, $29.1 million during the year ended June 30,
1996 and $8.3 million for the year ended June 30, 1995, respectively. Sales of
whole loans generally are beneficial to the Company since these sales may
generate income from gains at the time of sale, produce future servicing income
if servicing rights are retained, provide funds for additional lending and other
investments and increase liquidity. The Company does not sell loans pursuant to
forward sales commitments and, therefore, an increase in interest rates after
loan origination and prior to sale may adversely affect the Company's income at
the time of sale.
Depending on the available gain from the sale of specific loans, the
Company sells single-family whole loans with servicing released or retained. The
Company serviced mortgage loans for others totaling $118.0 million at June 30,
1997, and $132.9 million and $141.3 million at June 30, 1996 and June 30, 1995,
respectively.
During the years ended June 30, 1997, June 30, 1996 and June 30, 1995,
the Company purchased $7.2 million, $24.4 million and $29.7 million,
respectively, of whole loans or loan participations originated by other lenders.
From prior purchasing activities, the Company had acquired whole loans and loan
participations which totaled approximately $35.4 million at June 30, 1997. At
that date, approximately $2.2 million of these loans were secured by properties
located
13
<PAGE>
in Iowa with the remainder secured by properties located throughout the United
States. At June 30, 1997, none of these loans were included in the Company's
non-performing assets.
In periods of economic uncertainty, the Company's ability to originate
large dollar volumes of real estate loans may be substantially reduced or
restricted, with a resultant decrease in related loan fee income and operating
earnings. In addition, the Company's ability to sell fixed- rate loans may
substantially decrease as potential borrowers shift their preference from
fixed-rate to adjustable-rate mortgage loans.
Non-Performing Assets and Classified Assets
Delinquencies and Collection Procedures. Generally, when a borrower
fails to make a required payment on real estate secured loans and other loans
the Company institutes collection procedures by mailing a delinquency notice.
The customer is contacted again, by telephone, when the delinquency is not
promptly cured. In most cases, delinquencies are cured promptly; however, if a
loan secured by real estate or other collateral has been delinquent for more
than 60 days, a final letter is sent demanding payment and the customer is
requested to make arrangements to bring the loan current. At 90 days past due, a
thirty day right-to-cure/foreclosure notice is sent, and if the loan becomes 120
days overdue, unless satisfactory arrangements have been made, immediate
repossession or foreclosure procedures are initiated by the Company.
The following table sets forth the Company's loan delinquencies by
type, by amount and by percentage of type at June 30, 1997.
<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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family..... 17 $ 728 .57% 3 $ 97 .08% 9 $ 580 .45%
Commercial.............. 1 83 .14 1 381 .62 1 324 .52
Multi-family............ --- --- --- 2 133 .39 --- --- ---
Consumer.................. 183 678 1.05 68 246 .38 49 148 .23
Commercial business....... 2 253 1.93 2 243 1.85 1 8 .06
--- ------ -- ------ --- ------
Total................. 203 $1,742 .54% 76 $1,100 .34% 60 $1,060 .33%
=== ====== == ====== === ======
Total Delinquent
--------------------------
Loans
--------------------------
Percent
of Loan
Number Amount Category
------ -------- ---------
Real Estate:
One- to four-family..... 29 $1,405 1.10%
Commercial.............. 3 788 1.28
Multi-family............ 2 133 .39
Consumer.................. 300 1,072 1.66
Commercial business....... 5 504 3.84
--- -----
Total................. 339 $3,902 1.21%
=== ======
</TABLE>
Non-Performing Assets. Loans are placed on non-accrual status when the
loan becomes 90 days delinquent. Generally, payments received on non-accruing
loans are applied first to the principal balance, or recorded as interest
income, depending on an assessment of the probability of collection of the
principal of the loan. Loans remain on non-accrual status until full collection
of the principal and interest arrearage is received and the loan is current.
Foreclosed assets include assets acquired in settlement of loans.
14
<PAGE>
The table below sets forth the amounts and categories of non-performing
assets, excluding restructured loan balances, in the Company's loan portfolio.
<TABLE>
<CAPTION>
At
At June 30, December 31,
----------------------------------- ------------
1997 1996 1995 1994 1993
------- ------ ------ ------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family................. $ 580 $ 449 $ 60 $ 70 $ 348
Commercial real estate.............. 324 --- --- 70 631
Multi-family........................ --- 784 75 247 860
Consumer............................ 148 105 20 26 490
Commercial business................. 8 --- --- 37 38
------ ------ ----- ----- ------
Total............................ 1,060 1,338 155 450 2,367
====== ====== ===== ===== ======
Foreclosed assets:
One- to four-family................. 97 --- --- 6 145
Commercial real estate.............. --- --- --- 384 463
Multi-family........................ --- --- --- --- ---
Construction or development......... --- --- --- --- ---
Consumer............................ 87 103 3 --- ---
------ ------ ----- ----- ------
Total............................ 184 103 3 390 608
------ ------ ----- ----- ------
Total non-performing assets........... $1,244 $1,441 $158 $ 840 $2,975
------ ------ ----- ----- ------
Total as a percentage of total assets. .31% .38% .05% .31% 1.19%
====== ====== ===== ===== ======
</TABLE>
Troubled Debt Restructures. The Company does not consider troubled debt
restructurings to be "non-performing loans". At June 30, 1997, 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 June 30, 1997 the balance of the loan was $632,000. A specific
reserve for $208,000 has been set up for the loan. The borrower has performed
according to the terms of the modification agreement, and the loan was current
at June 30, 1997.
Foreclosed Assets. As of June 30, 1997, the Company had $184,000 of
foreclosed assets which represented a newly constructed single-family dwelling
for $97,000 and nine vehicles totaling $87,000. Based on a review of the
Company's assets at June 30, 1997 and the current economic environment,
management does not expect to initiate any significant foreclosure of assets
during the quarter following that review date, however, they continue to watch
other loans of concern.
Impaired Loans. The Company had three loans classified as impaired at
June 30, 1997 totaling $2.5 million, offset by an allocated allowance for loan
losses in the amount of $532,000.
The largest loan included in impaired loans at June 30, 1997 is a $1.5
million business loans 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 for the purpose of expanding the trucking operation, including
relocation of their trucking terminal. A significant portion of the trucking
company's
15
<PAGE>
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 March 1997, which estimated
a loss exposure of $324,000 at June 30, 1997. Based on its review, the Company
allocated an allowance for loan losses in the amount of $324,000 for this loan.
The loan was current at June 30, 1997 and management will continue to monitor
this loan closely.
The second largest loan included in impaired loans is a $632,000 loan
secured by an office/warehouse 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 $208,000.
A $324,000 loan secured by a multi-tenant retail/office building
located in the central business district of Marion, Iowa was classified as
impaired at June 30, 1997. This loan was originated in 1991 at a 68% loan to
value ratio and has previously incurred negative cash flows from the collateral.
At December 31, 1996, there was, subject to certain 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. On July 8, 1997, Management was informed by the selling
agent that all of the contingencies had been released and a mid-August 1997,
closing date has been established, however, the Company does not control nor can
it assure that a final sale and closing is imminent. The offering price is for
an amount in excess of the Company's outstanding loan amount and selling costs.
The loan was eight months delinquent at June 30, 1997, and as such, is
considered impaired.
Other Loans of Concern. As of June 30, 1997, there was $4.2 million of
other loans not included on the table or discussed above where known information
about the possible credit problems of borrowers or the cash flows of the
collateral 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 in the non-performing or impaired asset
categories. Other loans of concern have been considered by management in
conjunction with the analysis of the adequacy of the allowance for loan losses.
Set forth below is a description of the larger components of other loans of
concern.
The Company is monitoring a combination of fourteen real estate loans
to one borrower aggregating $755,000 and secured by a laundromat, a
commercial/retail building, six separate apartment complexes and five
single-family rental properties, all of which are located in the Company's
market area. These loans were originated during 1995 and 1996, however, recent
analysis indicates that the aggregate loan to value has increased. The loans
were current at June 30, 1997, however, several delinquencies were incurred over
the past twelve months. Based on the recent analysis, an allowance for loan
losses has been allocated for these loans in the amount of $40,000.
Another large loan of concern is a $595,000 business loan originated in
1995 for the development, production and marketing of a software-based legal
reference system. The loan is
16
<PAGE>
secured by a commercial office building and business assets located in the
Company's market area and marketable securities. Although the loan was current
at June 30, 1997, the borrower incurred eight delinquencies over the past twelve
months. Based on a recent credit analysis of the loan, an allowance for loan
losses has been allocated for this loan in the amount of $23,000.
The Company is monitoring a commercial real estate loan in the amount
of $583,000 secured by a two-story building 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 collateral. The
Company granted a five-year extension on the loan to balloon in February 2001.
The Company continues to monitor this loan based upon the California real estate
market indicating that the borrower could not refinance in the local market. An
allowance for loan losses has been allocated for this loan in the amount of
$300,000. At June 30, 1997, the borrower had the property listed for sale in the
amount of $775,000. The loan was current at June 30, 1997, with no delinquencies
over the past twelve months.
Another large loan of concern is secured by a communications building
located in Denver, Colorado in the amount of $573,000. 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
losses in the amount of $150,000 has been allocated for this loan. This loan was
current at June 30, 1997, with no delinquencies over the past twelve months.
A large 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 June 30, 1997, was $464,000 and the Company's 75%
participation interest amounted to $348,000. Although the loan was current at
June 30, 1997, a recent analysis indicated a shortage of cash flows from the
collateral to cover the debt and the related note on this loan ballooned
December 1, 1996. The property is listed for sale, and management granted the
borrower's request for an extension to September 1997 of the balloon date to
allow more time for selling the property.
Another large loan of concern is a $437,000 business loan which was
originated in 1996 for $600,000 to floor plan a dealer in the Company's local
market area. The dealer is primarily a seller of new and used lawn and garden
equipment and small farm implements. This loan continues to be monitored by
management and management continues to work with the dealer to further reduce
the debt as sales occur. Although the loan has been reduced by $163,000 over the
past two months, $42,000 is owed and delinquent on principal curtailments
according to the loan agreement. Based on a recent credit analysis, an allowance
for loan losses has been allocated for this loan in the amount of $50,000.
A large loan of concern is secured by a restaurant in the Company's
market area. This loan was originated in 1994 at a 64% loan to value ratio in
the amount of $450,000. At June 30, 1997, the balance of the loan was $404,000
and although the loan was current at that date, the borrower had four
delinquencies over the past twelve months. A recent credit analysis revealed
17
<PAGE>
a decreasing sales volume. The obligor feels that the declining sales volume is
due to lack of marketing and working capital and has listed the property for
sale. Management continues to monitor the credit status of this loan and the
interest, if any, for purchasing the restaurant.
There were no other loans of concern in excess of $100,000 being
monitored by the Company. The balance of other loans of concern consists of one-
to four-family loans totaling $151,000, consumer loans totaling $62,000 and
commercial business loans totaling $203,000. These loans have been considered by
management in conjunction with the analysis of the adequacy of the allowance for
loan losses.
Classified Assets. Federal regulations provide for the classification
of loans and other assets such as debt and equity securities considered by the
OTS to be of lesser quality as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the Company to sufficient risk to warrant classification in one
of the aforementioned categories, but possess weaknesses, are also designated
"Special Mention" by management.
When a financial institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a financial institution classifies
problem assets as "loss," it is required to establish specific allowance for
losses equal to 100% of that portion of the asset so classified or to charge-off
such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
institution's District Director at the regional OTS office, who may order the
establishment of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Company regularly
reviews the loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations. On the basis of
management's review of its assets, at June 30, 1997, the Company had classified
a total of $7.0 million of its assets as substandard, $585,000 as doubtful and
none as loss. At June 30, 1997 any loans classified for regulatory purposes as
loss, doubtful or substandard that have not been disclosed above do not
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources, or represent material credits about which management is aware of any
information
18
<PAGE>
which causes management to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
At June 30, 1997, total classified assets comprised $8.2 million or 24%
of the Company's equity, or 2.1% of the Company's assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience for both the
Company and its peer group, and other factors that warrant recognition in
providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at
fair value. If fair value at the date of foreclosure is lower than the balance
of the related loan, the difference will be charged-off to the allowance for
loan losses at the time of transfer. Valuations are periodically updated by
management and valuation allowances are adjusted through a charge to income for
changes in fair value or estimated selling loss.
Although management believes that it uses the best information
available to determine the allowances, unforeseen market conditions and events
could result in adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowances will be the result
of periodic loan, property and collateral, and general economic conditions
reviews and thus cannot be predicted in advance. In addition, federal regulatory
agencies, as an integral part of the examination process periodically review the
Company's allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance level based upon their judgment of the
information available to them at the time of their examination. At June 30,
1997, the Company had a total allowance for loan losses of $3.0 million,
representing 2.8 times total non-performing loans.
19
<PAGE>
The following table sets forth an analysis of the Company's allowance
for loan losses.
<TABLE>
<CAPTION>
Six
Months Year
Ended Ended
Year Ended June 30, June 30, December 31,
------------------------------- -------- ------------
1997 1996 1995 1994 1993
------- ------ ------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.................. $ 2,670 $2,686 $2,482 $2,437 $1,088
Charge-offs:
One- to four-family........................... --- (5) (13) (13) (73)
Commercial real estate........................ --- --- --- --- (700)
Multi-family.................................. (300) --- --- --- ---
Consumer...................................... (993) (289) (84) (29) (65)
Commercial business........................... --- --- (15) --- ---
------- ------ ------ ------ ------
(1,293) (294) (112) (42) (838)
Recoveries: ------- ------ ------ ------ ------
Commercial real estate........................ --- --- 275 --- 3
Multi-family................................. 122 --- --- --- ---
Consumer...................................... 59 68 29 10 27
Commercial business........................... --- --- 8 --- ---
------- ------ ------ ------ ------
181 68 312 10 30
------- ------ ------ ------ ------
Net recoveries (charge-offs)................... (1,112) (226) 200 (32) (808)
Additions charged to operations................. 1,415 210 4 77 2,157
------- ------ ------ ------ ------
Balance at end of period........................ $2,973 $2,670 $2,686 $2,482 $2,437
======= ====== ====== ====== ======
Ratio of net charge-offs (recoveries) during the
period to average loans outstanding during the
period......................................... .37% .09% (.10)% .03% .72%
======= ====== ====== ====== ======
Ratio of net charge-offs (recoveries) during the
period to average non-performing assets........ 75.65% 24.51% (64.72)% 3.88% 77.47%
======= ====== ======= ====== ======
</TABLE>
20
<PAGE>
The distribution of the Company's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At June 30, At December 31,
------------------------------------------------------------------------------ ----------------
1997 1996 1995 1994 1993
------------------ ----------------- ----------------- ------------------- ----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ------- ------- ------ ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family............. $ 184 39.56% $ 66 42.60% $ 254 57.84% $ 214 52.07% $ 25 49.80%
Commercial..................... 906 19.04 1,275 15.87 1,591 14.19 942 14.06 686 14.87
Multi-family................... 452 10.51 399 10.49 271 10.50 425 11.37 403 9.68
Construction or development.... 61 6.84 54 6.90 320 6.29 33 5.56 29 3.84
Consumer....................... 920 19.98 806 19.04 132 9.78 444 15.04 483 19.70
Commercial business............ 431 4.07 70 5.10 64 1.40 275 1.90 528 2.11
Unallocated.................... 19 --- --- --- 54 --- 149 -- 283 --
------ ------ ------ ------- ------ ------- ------ ------- ------ -------
Total..................... $2,973 100.00% $2,670 100.00% $2,686 100.00% $2,482 100.00% $2,437 100.00%
====== ====== ====== ======= ====== ======= ====== ======= ====== =======
</TABLE>
21
<PAGE>
Investment Activities
Perpetual Savings must maintain minimum levels of investments 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, the Bank has
generally maintained its liquid assets above the minimum requirements imposed by
the OTS regulations and at a level believed adequate to meet requirements of
normal daily activities, repayment of maturing debt and potential deposit
outflows. As of June 30, 1997, the Bank's liquidity ratio (liquid assets as a
percentage of net withdrawable savings deposits and current borrowings) was
15.93%.
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Company is to invest funds
among various categories of investments and maturities based upon the Company's
need for liquidity, to achieve the proper balance between its desire to minimize
risk and maximize yield, to provide collateral for borrowings, and to fulfill
the Company's asset/liability management policies.
At June 30, 1997, the Bank had two investment portfolios, one
consisting of agency issued mortgage-backed and related securities and the other
consisting principally of U.S. Government and agency obligations. These
investments were made in order to generate income and because these securities
carry a low risk weighting for OTS risk-based capital requirements and satisfy
OTS' liquid-asset requirements. In addition the Company had a portfolio of
equities which were acquired in order to generate income through dividends,
growth and reduction of income tax as a result of the preferred stock dividend
exclusion.
Mortgage-backed Securities. The Company first began making significant
purchases of mortgage-backed and related securities in 1987 as an alternative to
home mortgage originations for portfolio when management determined that such
investments would produce higher riskadjusted yields for the Company in light of
the competition for home mortgages in the Company's market area. The Company's
current investment strategy emphasizes a reduction in the mortgage-backed and
related securities portfolio as the opportunity for loan production and
retention in portfolio of low interest-rate risk loans increases.
The Company's mortgage-backed and related securities portfolio
consists entirely of federal agency securities, principally those issued or
guaranteed by FNMA, FHLMC, SBA and Government National Mortgage Association
("GNMA"). The FNMA, FHLMC and GNMA certificates are modified pass-through
mortgage-backed securities that represent undivided interests in underlying
pools of fixed-rate, or certain types of adjustable rate, single-family
residential
22
<PAGE>
mortgages issued by these government sponsored entities. FNMA and FHLMC provide
the certificate holder a guarantee of timely payments of interest and scheduled
principal payments, whether or not they have been collected. GNMA's guarantee to
the holder of timely payments of principal and interest is backed by the full
faith and credit of the U.S. government. SBA securities are modified
pass-through securities that represent undivided interests in underlying pools
of the insured portion of the loan. SBA's guarantee to the holder of timely
payments of principal and interest is backed by the full faith and credit of the
U.S. government.
A CMO is a special type of pass-through debt in which the stream of
principal and interest payments on the underlying mortgages or mortgage-backed
securities is used to create classes with different maturities and, in some
cases, amortization schedules, as well as a residual interest, with each such
class possessing different risk characteristics. Management believes these
securities may represent attractive alternatives relative to other investments
due to the wide variety of maturity and repayment options available through such
investments. The Company held one floating rate (monthly) CMO with an
outstanding balance of $1.9 million at June 30, 1997.
Mortgage-backed securities generally yield less than the loans that
underlie such securities, because of service fees and the cost of payment
guarantees or credit enhancements that result in nominal credit risk. In
addition, mortgage-backed securities are more liquid than individual mortgage
loans and may be used to collateralize obligations of the Company. In general,
mortgage-backed securities issued by or guaranteed by FNMA and FHLMC and certain
AA-rated mortgage-backed pass-through securities are weighted at no more than
20% for risk-based capital purposes, and mortgage-backed securities issued or
guaranteed by GNMA and SBA are weighted at 0% for risk-based capital purposes,
compared to an assigned risk weighting of 50% to 100% for whole residential
mortgage loans. These types of securities thus allow the Bank to optimize
regulatory capital to a greater extent than non-securitized whole loans.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities. The adjustable rate and/or short maturity of the
Company's portfolio is designed to minimize that risk. In contrast to
mortgage-backed securities in which cash flow is received (and, hence,
prepayment risk is shared) pro rata by all securities holders, the cash flows
from the mortgages or mortgage-backed securities underlying CMOs are segmented
and paid in accordance with a predetermined priority to investors holding
various tranches of such securities or obligations. A particular tranche of CMOs
may therefore carry prepayment risk that differs from that of both the
underlying collateral and other tranches.
The Company has continued to sell loans and mortgage-backed related
securities to generate income and fund loans for the loan portfolio when
consistent with its asset/liability objectives. For the years ended June 30,
1997, 1996 and 1995, net gains (losses) on sales of loans and non-equity
securities totaled $363,000, $249,000 and $(108,000), respectively.
23
<PAGE>
The following tables set forth the composition of the Company's
mortgage-backed and related securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------------------------
1997 1996 1995
------------------- ----------------- ----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ----- ----- ----- ------ -----
(Dollars in Thousands)
Mortgage-backed and
related securities
available-for-sale:
<S> <C> <C> <C> <C> <C> <C>
FHLMC......................... $ 2,657 5.71% $ 4,600 7.42% $ 5,970 6.11%
FNMA.......................... 1,452 3.12 7,190 11.59 12,048 12.34
SBA........................... 5,325 11.44 18,670 30.10 28,578 29.26
CMOs.......................... 1,911 4.11 1,891 3.04 1,861 1.91
-------- ------ ------- ----- ------- ------
Total mortgage-backed
and related securities
available-for-sale........ $11,345 24.38% $32,351 52.15% $48,457 49.62%
------- ====== ------- ===== ------- ======
At June 30,
------------------------------------------------------------------
1997 1996 1995
------------------- ----------------- ----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ----- ----- ----- ------ -----
Mortgage-backed and
related securities held
to-maturity:
FHLMC......................... $ --- ---% $ --- ---% $17,048 17.46%
FNMA.......................... --- --- --- --- 7,768 7.95
------- ------ -------- ------ ------- ------
Total mortgage-
backed and related
securities held-to-
maturity................. $ --- ---% $ --- ---% $24,816 25.41%
------- ------ -------- ------ ------- ------
Total mortgage-backed
related securities............ $11,345 24.38% $32,351 52.15% $73,273 75.03%
======= ====== ======== ====== ======= ======
</TABLE>
24
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed and related securities at June 30, 1997. Not
considered in the preparation of the table below is the effect of prepayments,
periodic principal repayments and the adjustable-rate nature of these
instruments.
<TABLE>
<CAPTION>
Total Mortgage-Backed
1 to 5 Over 10 and
Years Years Related Securities
---------- ---------- --------------------------
Book Value Book Value Book Value Market Value
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation............................... $2,657 $ --- $ 2,657 $ 2,657
Federal National Mortgage Association........ --- 1,452 1,452 1,452
Government National Mortgage
Association............................... --- --- --- ---
Small Business Administration................ --- 5,325 5,325 5,325
CMOs......................................... --- 1,911 1,911 1,911
REMICs....................................... --- --- --- ---
------ ------ ------- -------
Total................................... $2,657 $8,688 $11,345 $11,345
====== ====== ======= =======
Weighted average yield................ 5.99% 7.33% 7.02%
</TABLE>
Investment Securities. At June 30, 1997, the Company's interest-earning
deposits in the Federal Home Loan Bank ("FHLB") of Des Moines totaled $20.9
million, or 5.3% of its total assets, and securities (including a $4.6 million
investment in the common stock of the FHLB of Des Moines) totaled $46.5 million,
or 11.7% of its total assets. It is the Company's general policy to purchase
U.S. Government securities and federal agency obligations and investment
securities for short- and intermediate-term investments. At June 30, 1997, the
Company did not hold any securities classified as held to maturity.
The Company holds one $500,000 investment in a structured note that was
purchased for its regulatory liquidity portfolio, which is classified
available-for-sale and summarized as follows:
* $500,000 Federal Home Loan Mortgage Corporation ("FHLMC"),
step-up bond, due 9-8-98 and callable on coupon payment dates.
The Company's net unrealized depreciation on securities
available-for-sale decreased, net of tax, from $487,000 at June 30, 1996 to
$129,000 at June 30, 1997 . The Company's unrealized depreciation on securities
available-for-sale is primarily due to changes in market rates of interest and
accordingly, the amount is subject to fluctuation as market rates of interest
change. As the duration of these instruments shorten and the adjusting and
floating rate instruments' yields attain their fully indexed rate, the fair
value will increase. Therefore, management considers this unrealized
depreciation to be temporary in nature at June 30, 1997.
25
<PAGE>
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, which totaled $5.1 million as of June 30, 1997, plus an additional
10% if the investments are fully secured by readily marketable collateral. At
June 30, 1997, the Bank was in compliance with this regulation.
The following table sets forth the composition of the Company's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Investment securities held-to-maturity:
Debt Securities:
U.S. Government and federal agencies............. $ --- ---% $ --- ---% $13,450 13.77%
Mortgage backed.................................. --- --- --- --- 24,816 25.41
Structured notes................................. --- --- --- --- 4,490 4.60
------ ----- ----- ----- ------- ------
Subtotal....................................... $ --- ---% $ --- ---% $42,756 43.78%
======= ===== ======= ===== ======= ====
Securities available-for-sale:
Debt securities:
U.S. Government and federal agencies............. $28,879 62.05% $21,081 33.99% $ 1,000 1.02%
Domestic corporate notes......................... --- --- 100 .16 100 .10
Structured notes................................. 498 1.07 2,463 3.97 --- ---
Mortgage-backed.................................. 11,345 24.38 32,351 52.15 48,457 49.62
Equity securities................................ 421 .90 406 .66 76 .08
------- ----- ------- ----- -------- -----
Subtotal ..................................... $41,143 88.40% $56,401 90.93 $ 49,633 50.82%
======= ===== ======= ===== ======== =====
Other securities:
FHLB stock....................................... $ 4,641 9.97% $ 4,641 7.48 $ 4,500 4.61%
------- ----- ------- ----- -------- -----
Total securities.............................. $45,784 98.37% $61,042 98.41% $ 96,889 99.21%
------- ----- ------- ----- -------- -----
Weighted average remaining life of investment
securities, excluding mortgage-backed equity
securities and FHLB stock......................... 1.46 yrs 2.03 yrs 3.03 yrs
==== ==== ====
Weighted average remaining life of term to
repricing of investment securities, excluding
mortgage-backed equity securities and FHLB stock.. 1.10 yrs .10 yrs .33 yrs
==== ==== ====
Trading securities:
Debt securities:
Municipal bonds.................................. $ --- --- $ 29 .04% $ --- ---%
Domestic corporate notes......................... 13 .03 21 .03 25 .03
Equity securities:
Preferred stock.................................. 366 .79% $ 575 .93% $ 543 .56%
Other............................................ 378 .81 365 .59 199 .20
------- ---- ------ ---- --- ---
Total trading securities....................... $ 757 1.63% $ 990 1.59% 767 .79%
------- ---- ------ ---- --- ---
Weighted average remaining life of trading
securities, excluding equity securities........... 7.92 yrs 12.73 yrs N/A yrs
==== ===== ===
Weighted average remaining life of term to
repricing of trading securities, excluding
equity securities................................. .08 yrs 12.73 yrs N/A yrs
=== ===== ===
Total securities............................. $46,541 100.00% $62,032 100.00% $97,656 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
26
<PAGE>
The composition and maturities of the securities available-for-sale
portfolio, excluding mortgage-backed and equity securities are indicated in the
following table.
<TABLE>
<CAPTION>
At June 30, 1997
-------------------------------------------------------
Less Than 1 to 5 Total Securities
1 Year Years Available for Sale
---------- ---------- --------------------------
Book Value Book Value Book Value Market Value
---------- ---------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Securities available-for-sale...... $4,994 $24,383 $29,377 $29,377
====== ======= ======= =======
Weighted average yield............. 5.36% 5.77% 5.70%
The composition and maturities of trading securities other than equity
securities are indicated in the following table.
At June 30, 1997
----------------------------------------
5 to 10
Years Total Trading Securities
---------- --------------------------
Book Value Book Value Market Value
---------- ---------- ------------
(Dollars in Thousands)
Trading securities.................. $ 13 $ 13 $ 13
==== ==== ====
Weighted average yield.............. 10.00% 10.00%
</TABLE>
The Company's investment securities portfolio at June 30, 1997,
contained neither tax-exempt securities nor securities of any issuer with an
aggregate book value in excess of 10% of the Company's stockholders' equity,
excluding those issued by the United States Government, or its agencies.
Sources of Funds
General. The Company's sources of funds are deposits, borrowings,
payment of principal and interest on loans and mortgage-backed and related
securities, interest earned on or maturation of other investment securities and
short-term investments, and funds provided from operations.
Borrowings, including FHLB advances, have been used at times to
compensate for seasonal reductions in deposits or deposit inflows at less than
projected levels and may be used on a longer-term basis to support expanded
lending activities, and may also be used to match a corresponding asset.
Deposits. The Company offers a variety of deposit accounts having a
wide range of interest rates and terms. The Company's deposits consist of
passbook savings accounts, money market savings accounts, regular checking
accounts, and certificate accounts currently ranging in terms from 91 days to 60
months. The Company only solicits deposits from its market area and
27
<PAGE>
does not use brokers to obtain deposits. The Company relies primarily on
competitive pricing policies, advertising and customer service to attract and
retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition.
The variety of deposit accounts offered by the Company has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Company has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The typical certificate of deposit customer continues to be reluctant
to deposit for the long term and generally opens or renews a certificate account
for a term not exceeding 30 months. The Company endeavors to manage the pricing
of its deposits in keeping with its asset/liability management, liquidity and
profitability objectives.
Based on its experience, the Company believes that its passbook
savings, money market savings accounts and regular checking accounts are
relatively stable sources of deposits. However, the ability of the Company to
attract and maintain certificates of deposit and the rates paid on these
deposits has been and will continue to be significantly affected by market
conditions. During the year ended June 30, 1997 the Company's deposits
increased, primarily due to increased direct mail advertising which focuses on
the Company's extra efforts to serve the customer and specific features of its
deposit accounts.
The following table sets forth the deposit flows at the Company during
the periods indicated.
Year Ended June 30,
-----------------------------------
1997 1996 1995
-------- --------- --------
(Dollars in Thousands)
Opening balance.......... $261,497 $ 230,840 $208,030
Deposits................. 651,024 460,866 333,683
Withdrawals.............. (622,203) (442,950) (321,068)
Interest credited........ 14,847 12,741 10,195
-------- --------- --------
Ending balance........... $305,165 $ 261,497 $230,840
======== ========= ========
Net increase............. $ 43,668 $ 30,657 $ 22,810
======== ========= ========
Percent increase......... 16.70% 13.28% 10.96%
====== ====== ======
28
<PAGE>
The following table sets forth the distribution of the Company's
deposit accounts in the various types of deposit programs offered by the Company
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ---------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- ------ -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Non-Interest Bearing Demand
Deposits(1)................................. $ 9,943 3.26% $ 7,193 2.75% $4,204 1.82%
Interest Bearing Demand Deposits
4.31%(1).................................... 87,642 28.72 58,494 22.37 26,985 11.69
Savings Deposits 2.00%(1).................... 9,447 3.10 11,623 4.44 14,851 6.43
Money Market Accounts 2.20%(1)............... 1,793 .59 2,611 1.00 4,276 1.86
-------- ------ -------- ------ -------- ------
Total Non-Certificates.................... $108,825 35.67% $ 79,921 30.56% $ 50,316 21.80%
-------- ------ -------- ------ -------- ------
Certificates:
0.00 - 3.99%............................... $ 251 .08% $ 2,154 .82% $ 12,865 5.57%
4.00 - 5.99%............................... 93,132 30.52 107,087 40.95 57,408 24.87
6.00 - 7.99%............................... 101,415 33.23 70,752 27.06 108,409 46.96
8.00 - 9.99%............................... 1,542 .50 1,583 .61 1,842 .80
-------- ------ -------- ------ -------- ------
Total Certificates........................ $196,340 64.33% $181,576 69.44% $180,524 78.20
-------- ------ -------- ------ -------- ------
Total Deposits............................ $305,165 100.00% $261,497 100.00% $230,840 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
_________________________
(1) At June 30, 1997.
29
<PAGE>
The following table shows rate and maturity information for the
Company's certificates of deposit as of June 30, 1997.
<TABLE>
<CAPTION>
0.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 9.99% Total of Total
------ ------ ------ ------ ----- --------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1997............................ $ 81 $16,303 $ 3,450 $ 16 $ 19,850 10.11%
December 31, 1997............................. 20 21,721 11,524 27 33,292 16.96
March 31, 1998................................ 70 14,800 23,728 109 38,707 19.72
June 30, 1998................................. 60 12,901 5,843 24 18,828 9.59
September 30, 1998............................ 3 12,081 1,990 21 14,095 7.18
December 31, 1998............................. 4 3,749 15,741 9 19,503 9.93
March 31, 1999................................ 6 1,825 3,353 --- 5,184 2.64
June 30, 1999................................. --- 3,483 5,314 --- 8,797 4.48
September 30, 1999............................ 4 1,210 5,146 9 6,369 3.24
December 31, 1999............................. 1 709 5,254 --- 5,964 3.04
March 31, 2000................................ 1 709 3,953 --- 4,663 2.37
June 30, 2001................................. --- 1,413 2,598 --- 4,011 2.04
Thereafter.................................... 1 2,228 13,521 1,327 17,077 8.70
Total...................................... $ 251 $93,132 $101,415 $1,542 $196,340 100.00%
====== ======= ======== ====== ======== =======
Percent of total........................... .13% 47.43% 51.65% .79%
==== ===== ===== ===
</TABLE>
The following table indicates the amount of the Company's certificates
of deposit by time remaining until maturity as of June 30, 1997.
<TABLE>
<CAPTION>
Maturity
----------------------------------------------------
Over Over
0 to 3 3 to 6 6 to 12 Over
Months Months Months 12 months Total
------- ------ ------- --------- ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000............ $19,171 $31,857 $53,228 $81,090 $185,346
Certificates of deposit of $100,000 or more........... 679 1,435 4,307 4,573 10,994
------- ------- ------- ------- --------
Total certificates of deposit........................ $19,850 $33,292 $57,535 $85,663 $196,340
======= ======= ======= ======= ========
</TABLE>
Borrowings. Although deposits are the Company's primary source of
funds, the Company's policy has been to utilize borrowings when they are a less
costly source of funds, can be invested at a positive interest rate spread or
when the Company desires additional capacity to fund loan demand.
30
<PAGE>
The Company's borrowings historically have consisted primarily of
advances from the FHLB of Des Moines. Such advances can be made pursuant to
several different credit programs, each of which has its own interest rate,
fixed or variable rate, and range of maturities. At June 30, 1997, the Company
had $52.0 million of advances.
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and other borrowings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1997 1996 1995
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Highest Balance:
FHLB advances......................................$80,500 $90,500 $90,000
Average Balance:
FHLB advances......................................$67,785 $83,236 $68,878
</TABLE>
The following table sets forth certain information as to the Bank's
FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------
1997 1996 1995
------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances.........................................$52,000 $80,500 $77,000
Other borrowings...................................... 203 224 101
------- ------- -------
Total borrowings.................................$52,203 $80,724 $77,101
======= ======= =======
Weighted average interest rate of FHLB advances....... 5.95% 6.01% 6.51%
Weighted average interest rate of other borrowings.... 5.63% 5.36% 1.51%
</TABLE>
Subsidiary Activities
Effective April 1, 1997, the Company discontinued its program for
direct sales of noninsured financial products through Perpetual Financial
Services, Inc., a wholly-owned service corporation of Perpetual Savings Bank,
FSB. The Company has initiated the process to dissolve Perpetual Financial
Services, Inc. ("PFS") through formal filings with the State of Iowa. At April
1, 1997, the Company entered into an agreement with Heartland Investment
Associates, an NASD licensed broker/dealer, to provide certain non-insured
financial services and products to the customers of Perpetual Savings Bank, FSB
on the Bank's premises. Heartland Investment Associates, located in Cedar Rapids
and Iowa City, Iowa engages in the business of providing certain insurance
products and annuities and a full spectrum of approved (non-insured) investment
products.
31
<PAGE>
Prior to its discontinued operations and for the year ended June 30,
1997, PFS recognized a net loss of $34,000.
Competition
Perpetual Savings faces strong competition, both in originating real
estate and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from other commercial banks, savings
associations, mortgage bankers and credit unions making loans secured by real
estate located in the Company's market area. Commercial banks, credit unions and
finance companies provide vigorous competition in consumer lending. The Company
competes for real estate and other loans principally on the basis of the quality
and speed of services it provides to borrowers, interest rates and loan fees it
charges, and the types of loans it originates.
The Company attracts all of its deposits through its branches,
primarily from the communities in which those offices are located; therefore,
competition for those deposits is principally from other commercial banks,
savings associations, credit unions and brokerage houses located in the same
communities. In addition, however, the Company competes for deposits with
various popular mutual funds that, through mail and regional customer service
offices, conduct a successful marketing campaign to customers in the Company's
market area by selling higher yielding investments than available from the
typical insured deposit account.
The Company competes for deposits by offering a variety of deposit
accounts at competitive rates, convenient business hours and branch locations
with interbranch deposit and withdrawal privileges. Automated teller machine
("ATM") facilities are available at each branch location and the Bank is a
member of "SHAZAM", an Iowa based ATM network that facilitates the interchange
of ATM activities, including deposit and withdrawal privileges, at any ATM owned
and operated by a SHAZAM member. Additionally, SHAZAM provides an ATM
interchange with other regional networks, whereby the customer of a bank member
of SHAZAM virtually has nationwide banking privileges.
The Company primarily serves Linn and Johnson Counties, Iowa. There are
26 commercial banks, three savings institutions other than Perpetual Savings and
18 credit unions which compete for deposits and loans in the Company's primary
market area.
Regulation
General. Perpetual 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, Perpetual Savings is subject to
broad federal regulation and oversight extending to all its operations.
Perpetual Savings is a member of the FHLB of Des Moines and is subject to
certain limited regulation by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). Perpetual Savings is a member of the Savings
Association Insurance Fund ("SAIF") and the deposits of Perpetual Savings are
insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over Perpetual Savings.
32
<PAGE>
As the savings and loan holding company of Perpetual Savings, Perpetual
Midwest also is subject to OTS regulation and oversight. The purpose of the
regulation of Perpetual Midwest and other holding companies is to protect
subsidiary savings associations. As a company the stock of which is registered
under the Securities Exchange Act of 1934, as amended, Perpetual Midwest is also
subject to the jurisdiction of the Securities and Exchange Commission. See "-
Federal Securities Laws."
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS, as the Bank's
primary federal regulator and chartering authority, and the FDIC, as the insurer
of its deposits, have extensive authority over the operations of savings
associations. As part of this authority, Perpetual Savings is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS examination of Perpetual Savings was as of
March 24, 1997. When these examinations are conducted by the OTS or the FDIC,
the examiners may require Perpetual 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. Perpetual Savings' OTS assessment
for the fiscal year ended June 30, 1997, was $93,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Perpetual Savings and
Perpetual Midwest. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue ceaseand-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 and the FDIC is required.
In addition, the investment, lending and branching authority of
Perpetual Savings is prescribed by federal laws and regulations, and it is
prohibited from engaging in any activities not permitted by such laws and
regulations. For instance, no savings institution may invest in non-investment
grade corporate debt securities not rated in one of the four highest rating
categories by a nationally recognized rating organization. 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 establish branch offices nationwide. Perpetual Savings is in compliance with
the noted restrictions.
Perpetual 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
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capital and surplus). At June 30, 1997, Perpetual Savings' lending limit under
this restriction was $5.1 million.
The OTS, as well as other federal banking agencies, have adopted
guidelines establishing safety and soundness standards on matters such 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. The guidelines are not expected to materially
affect the Bank.
Insurance of Accounts and Regulation by the FDIC. Perpetual 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 or is engaging 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 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 classifications of all insured
institutions are made by the FDIC for each semi-annual assessment period.
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 SAIFinsured 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.
On September 30, 1996, federal legislation was enacted that required
the 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,
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1995. The SAIF special assessment applicable to the Bank, which was paid to the
FDIC in November 1996, was approximately $1.5 million. This amount was accrued
by the Company at September 30, 1996 by a charge to earnings.
As a result of the SAIF recapitalization, the FDIC has amended its
regulation concerning the insurance premiums payable by SAIF-insured
institutions. For the period October 1, 1996 through December 31, 1996, the SAIF
insurance premium for all SAIF-insured institutions that are required to pay the
Financing Corporation ("FICO") obligation, such as the Bank, was reduced to a
range of 18 to 27 basis points from 23 to 31 basis points per $100 of domestic
deposits. The FDIC further 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 qualifies for the minimum SAIF assessment.
Additionally, the FDIC has imposed a FICO assessment on SAIF-
assessable deposits for the first semi-annual period of 1997 equal to 6.48 basis
points per $100 of domestic deposits, as compared to a FICO assessment on
BIF-assessable deposits for that same period equal to 1.30 basis points per $100
of domestic deposits.
Regulatory Capital Requirements. Federally insured savings
associations, such as Perpetual 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 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 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. Further, the valuation allowance
applicable to the write-down of investments and mortgage-backed securities in
accordance with the Statement of Financial Accounting Standards No. 115 is
excluded from the regulatory capital calculation. At June 30, 1997, the Bank did
not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. Under these regulations certain
subsidiaries are consolidated for capital purposes and others are excluded from
assets and capital. 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 June 30, 1997, the Bank did not have any includable
subsidiaries.
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At June 30, 1997, Perpetual Savings had tangible capital of $31.7
million, or 8.00% of adjusted total assets, which is approximately $25.8 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 (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including
supervisory goodwill (which is phased-out over a five-year period) and a limited
amount of purchased credit card relationships. As a result of the prompt
corrective action provisions of FDICIA 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 June 30, 1997, Perpetual Savings had no intangibles
which were subject to these tests.
At June 30, 1997, Perpetual Savings had core capital equal to $31.7
million, or 8.00% of adjusted total assets, which is $19.8 million above the
minimum leverage ratio requirement of 3.0% in effect on that date.
The OTS risk-based capital 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. At June 30, 1997, Perpetual Savings had $2.4 million
of supplementary capital.
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 (these
items are excluded on a sliding scale through June 30, 1997, after which they
must be excluded in their entirety) and reciprocal holdings of qualifying
capital instruments. Perpetual Savings had no such exclusions from capital and
assets at June 30, 1997.
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 FNMA or FHLMC.
On June 30, 1997, Perpetual Savings had total risk-based capital of
$34.1 million (including $31.7 million in core capital and $2.4 million in
qualifying supplementary capital) and risk-weighted assets of $270.8 million
(including no converted off-balance sheet assets); or total capital of 12.6% of
risk-weighted assets. This amount was $12.4 million above the 8.0% requirement
in effect on that date.
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The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk 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
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. 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. The Bank does not anticipate that this rule will affect its ability
to meet its regulatory capital requirements.
Pursuant to FDICIA, the federal banking agencies, including the OTS,
have also proposed regulations authorizing the agencies to require a depository
institution to maintain additional total capital to account for concentration of
credit risk and the risk of non-traditional activities. No assurance can be
given as to the final form of any such regulation.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against associations that fail to meet their
capital requirements. Effective December 19, 1992, the federal banking agencies,
including the OTS, were given additional enforcement authority over
undercapitalized depository institutions. 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, discussed below, that are applicable to significantly
undercapitalized associations.
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 mandated by FDICIA. These actions and restrictions include
requiring the issuance of additional voting securities; limitations on asset
growth; mandated asset reduction; changes in senior management; divestiture,
merger or acquisition of the association; restrictions on executive
compensation; and any other action the OTS deems appropriate. 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
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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 other possible
enforcement actions by the OTS and the FDIC, including the appointment of a
receiver or conservator.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose 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
Perpetual Savings may have a substantial adverse effect on Perpetual Savings'
operations and profitability. Company shareholders do not have preemptive
rights, and therefore, if the 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 Company of existing stockholders.
As of June 30, 1997, Perpetual Savings believes it qualifies as a well
capitalized institution under the prompt corrective action rules.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions or requirements on associations with
respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an 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.
The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. See "--Regulatory Capital
Requirements."
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in 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 amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. Perpetual Savings meets the
requirements for a Tier 1 association and has not been notified of a need for
more than normal supervision. Tier 2 associations, which are associations that
before and after the proposed distribution meet their current minimum capital
requirements, may make capital distributions of up to 75% of net income over the
most recent four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose
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to make a capital distribution in excess of the noted safe harbor level must
obtain OTS approval prior to making such distribution. Tier 2 associations
proposing to make a capital distribution within the safe harbor provisions and
Tier 1 associations proposing to make any capital distribution need only submit
written notice to the OTS 30 days prior to such distribution. As a subsidiary of
the Company, Perpetual Savings will also be required to give the OTS 30 days'
notice prior to declaring any dividend on its stock. The OTS may object to the
distribution during that 15-30 day period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings
association may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not in troubled condition and would remain adequately capitalized (as
defined by regulation) 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. A savings association will be considered in
troubled condition if it has a CAMEL rating of 4 or 5, is subject to an
enforcement action relating to its safety and soundness or financial viability
or has been informed in writing by the OTS that it is in troubled condition. 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 Perpetual 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. 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
ratio requirement. At June 30, 1997, Perpetual Savings was in compliance with
both requirements, with an overall liquid asset ratio of 15.9% and a short-term
liquid assets ratio of 5.8%.
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
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of and accounting for loans and securities (i.e., whether held for investment,
sale or trading) with appropriate documentation. Perpetual 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, 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. Perpetual Savings is in compliance
with these amended rules.
Qualified Thrift Lender Test. All savings associations, including
Perpetual 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 June 30, 1997, Perpetual Savings met
the test and has always met the test since its effectiveness. At June 30, 1997,
Perpetual Savings' QTL percentage was 76%.
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 Bank Insurance Fund. If an association has not yet requalified and has not
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."
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 the Bank, 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 the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
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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, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in April 1996, and received a compliance 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 are restricted to a percentage of the
association's capital. Affiliates of Perpetual Savings include Perpetual Midwest
and any company which is under common control with Perpetual 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. Affiliates do not generally include subsidiaries.
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. Perpetual Midwest is a unitary savings and
loan holding company subject to regulatory oversight by the OTS. As such,
Perpetual Midwest is required to register and file reports with the OTS and is
subject to regulation and examination by the OTS. In addition, the OTS has
enforcement authority over Perpetual Midwest 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, Perpetual Midwest
generally is not subject to activity restrictions. If Perpetual Midwest acquires
control of another savings association as a separate subsidiary, it would become
a multiple savings and loan holding company, and the activities of Perpetual
Midwest and any of its subsidiaries (other than the Bank or any other
SAIFinsured savings association) would become subject to such restrictions,
which generally limit activities to those related to controlling a savings
association, unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If Perpetual Savings fails the QTL test, Perpetual Midwest 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 Perpetual Midwest 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."
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Perpetual Midwest 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 Perpetual Midwest is registered
with the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Perpetual Midwest is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of Perpetual Midwest may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If Perpetual Midwest meets specified current public information
requirements, each affiliate of Perpetual Midwest is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
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 June 30, 1997, Perpetual 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. Perpetual Savings is a member of the
FHLB of Des Moines, 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. These
policies and procedures are subject to the regulation and 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.
As a member, Perpetual Savings is required to purchase and maintain
stock in the FHLB of Des Moines. At June 30, 1997, Perpetual Savings had $4.6
million in FHLB stock, which was in compliance with this requirement.
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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 Perpetual Savings' FHLB stock may result in a
corresponding reduction in Perpetual Savings' capital.
For the year ended June 30, 1997, dividends paid by the FHLB of Des
Moines to Perpetual Savings totaled $327,000 which amounts to an approximate
rate of 7.05%.
Federal and State Taxation. Savings associations such as the Bank 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 for "non-qualifying loans" is computed
under the experience method. The amount of the bad debt reserve deduction for
"qualifying real property loans" (generally loans secured by improved real
estate) may be computed under either the experience method or the percentage of
taxable income method (based on an annual election).
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.
Since 1987, the percentage of specially-computed taxable income that
was used to compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") was
8%. The percentage bad debt deduction thus computed was reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction). Under changes in federal tax law enacted
in August 1996, the percentage bad debt deduction has been eliminated for tax
years beginning after December 31, 1995. Accordingly, this method will not be
available to the Bank for its tax years ending June 30, 1997 and thereafter.
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for qualifying real property loans to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for non-qualifying loans equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. Through
June 30, 1996, the 6% and 12% limitations did not restrict the percentage bad
debt deduction available to the Bank.
43
<PAGE>
The federal tax legislation enacted in August 1996 also imposes a
requirement to recapture into taxable income the portion of the qualifying and
non-qualifying loan reserves in excess of the "base-year" balances of such
reserves. For the Bank, the base-year reserves are the balances as of June 30,
1988. Recapture of the excess reserves will occur over a six-year period which
could begin for the Association as early as the tax year ending June 30, 1997.
Commencement of the recapture period may be delayed, however, for up to two
years provided the Bank meets certain residential lending requirements). The
Bank previously established, and will continue to maintain, a deferred tax
liability with respect to its federal tax bad debt reserves in excess of the
base-year balances; accordingly, the legislative changes will have no effect on
total income tax expense for financial reporting purposes.
Also, under the August 1996 legislation, the Bank's base-year federal
tax bad debt reserves are "frozen" and subject to current recapture only in very
limited circumstances. Generally, recapture of all or a portion of the base-year
reserves will be required if the Association pays a dividend in excess of the
greater of its current or accumulated earnings and profits, redeems any of its
stock, or is liquidated. The Bank has not established a deferred federal tax
liability under SFAS No. 109 for its base-year federal tax bad debt reserves, as
it does not anticipate engaging in any of the transactions that would cause such
reserves to be recaptured.
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.
The Company was audited in 1995 by the Internal Revenue Service for the
federal income tax returns for the years 1992 through 1995. 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 would not
result in a deficiency which could have a material adverse effect on the
financial condition of the Company.
For additional information regarding federal taxation, see Notes to
Consolidated Financial Statements included in the 1997 Annual Report to
Stockholders attached hereto as Exhibit 13.
Iowa Taxation. Iowa-based thrift institutions, such as the Bank, are
subject to a special financial institutions tax, based on net income without
regard to net operating loss carryforwards, at the rate of 5% of net income.
This tax is in lieu of all other state taxes on thrift institutions, on their
property, capital or income, except taxes on tangible personal property owned by
the Bank and held for lease or rental to others and on real estate,
contributions paid pursuant to the
44
<PAGE>
Unemployment Compensation Law of Iowa, social security taxes, sales taxes and
use taxes. In addition, Perpetual Savings is entitled to credit against this tax
all taxes paid to the State of Iowa or any political subdivision except taxes on
tangible personal property owned by the Bank and held for lease or rental to
others and on real estate, contributions paid pursuant to the Unemployment
Compensation Law of Iowa, social security taxes, sales and use taxes, and taxes
imposed by the Iowa Financial Institutions Tax Law. Iowa thrift institutions are
not subject to the regular state corporate income tax.
Iowa-based corporations such as Perpetual Midwest, are subject to Iowa
corporation income tax based on federal taxable income. The corporate tax is
assessed at a graduated rate ranging from a rate of 6% to 12% of taxable income.
Delaware Taxation. As a Delaware holding company, Perpetual Midwest 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. Perpetual Midwest is
also subject to an annual franchise tax imposed by the State of Delaware.
Employees
At June 30, 1997, the Company had a total of 111 employees, including 7
part-time employees. The Company's employees are not represented by any
collective bargaining group.
Management considers its employee relations to be good.
Executive Officers of Perpetual Midwest and the Bank Who Are Not Directors
The following table sets forth certain information regarding the
executive officers of Perpetual Midwest or the Bank who are not also directors.
Name Age(1) Positions Held with Bank and Company
---- ------ ------------------------------------
Rick L. Brown 50 Executive Vice President, Treasurer and Chief
Financial Officer of the Bank and the Company
David W. Lodge 51 Senior Executive Vice President and Chief
Lending Officer of the Bank
Hal D. Gilchrist 50 Executive Vice President and Chief Retail
Banking Officer of the Bank
Herbert E. Musser 38 Sr. Vice President and Controller of the Bank
and the Company
- --------------------
(1) At June 30, 1997.
45
<PAGE>
The business experience of the executive officers who are not also
directors is set forth below.
Rick L. Brown - Mr. Brown joined the Bank in 1983 as its Vice
President/Controller. He has been in the banking industry since 1969 and
currently serves as the Bank's and the Company's Executive Vice President, Chief
Financial Officer and Treasurer. Mr. Brown received his B.A. degree in
Accounting from Parsons College in 1971.
David W. Lodge - Mr. Lodge joined the Bank in 1969 and has served the
Bank in various capacities. He currently serves as its Senior Executive Vice
President and Chief Lending Officer. Mr. Lodge received his B.A. degree in
History and Economics from Westmar College and is a Certified General Real
Property Appraiser.
Hal D. Gilchrist - Mr. Gilchrist joined the Bank in 1992 as its Senior
Vice President for Lending. He currently serves as the Bank's Executive Vice
President and Chief Retail Banking Officer. Mr. Gilchrist joined the Bank with
over 20 years of banking experience. He holds a B.A. degree in finance and an
M.B.A. degree both from the University of Iowa.
Herbert E. Musser - Mr. Musser joined the Bank in 1986 and has served
the Bank in various capacities, including Internal Auditor. He has been in the
banking industry for 14 years, and currently serves as the Bank's and the
Company's Sr. Vice President and Controller. Mr. Musser received a B.B.A. degree
in Economics from the University of Iowa in 1983, and a B.A. degree in
Accounting from Coe College in 1997.
Item 2. Properties
The Company conducts its business at its main office and branch office
located in Cedar Rapids, Iowa, and four other locations in its primary market
area. The following table sets forth information relating to each of the
Company's offices as of June 30, 1997.
The Company owns its main office and three of its branch offices. The
remaining office is built on leased land. The total net book value of the
Company's premises and equipment (including land, building and leasehold
improvements and furniture, fixtures and equipment) at June 30, 1997 was $7.2
million. See Notes to Consolidated Financial Statements.
Total
Owned Lease Approximate
Date or Expiration Square
Location Acquired Leased Date Footage
- ---------------------- -------- ------ ---------- -----------
Main Office:
700 First Avenue, N.E. 1991 Owned --- 25,000
Cedar Rapids, Iowa
Branch Offices:
46
<PAGE>
<TABLE>
<CAPTION>
Total
Owned Lease Approximate
Date or Expiration Square
Location Acquired Leased Date Footage
- -------------------------------- -------- ------ ---------- -----------
<S> <C> <C> <C> <C>
3730 Williams Boulevard, S.W.(1) 1982 Owned --- 11,000
Cedar Rapids, Iowa
4444 First Avenue, N.E. 1972 Owned(1) --- 8,000
Cedar Rapids, Iowa
301 South Clinton Street 1980 Owned --- 12,000
Iowa City, Iowa
5000 Edgewood Road, N.E.
Cedar Rapids, Iowa 1996 Owned --- 10,000
</TABLE>
______________________
(1) Facility was built by the Bank on leased land. This lease expires
in 1997 with renewal options.
The Company believes that its current facilities are adequate to meet
the present and foreseeable needs of the Bank and the Holding Company.
Management continues to search for opportunities to acquire other financial
institutions to expand the Company's market area and enhance the value of the
Company's franchise value.
The Company maintains an on-line data base with a service bureau
servicing financial institutions. The Company recently renewed its contract with
this service bureau for a term ending June 30, 1999. The net book value of the
data processing and computer equipment utilized by the Company at June 30, 1997
was approximately $196,000. Management anticipates an expenditure of
approximately $160,000, to upgrade the Company's computer equipment and software
in fiscal 1998.
Item 3. Legal Proceedings
The Company is involved from time to time as plaintiff or defendant in
various legal actions arising in the normal course of its business. While the
ultimate outcome of these proceedings cannot be predicted with certainty, it is
the opinion of management, after consultation with counsel representing the
Company in the proceedings, that the resolution of these proceedings should not
have a material effect on the Company's consolidated financial position or
results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1997.
45
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
Page 54 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operations
Pages 5 through 17 of the attached 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 7. Financial Statements
Pages 19 through 53 of the attached 1997 Annual Report to Stockholders
are herein incorporated by reference.
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 of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors, Executive Officers, 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 definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, 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 Form 10-KSB is
incorporated herein by reference.
48
<PAGE>
Compliance with Section 16(a)
Information concerning compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated herein by reference from the definitive
Proxy Statement for the Annual Meeting of Stockholders to be held in 1997, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, 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 definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, 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 definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
49
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) (1) Financial Statements
The following information appearing in the Company's Annual Report to
Stockholders for the year ended June 30, 1997, is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.
Annual Report Section Pages in Annual Report
- ----------------------------------------------- ----------------------
Common Stock and Related Information Page 54
Selected Consolidated Financial Information and
Other Data Pages 2 thru 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations Pages 5 thru 17
Report of Independent Auditors Page 18
Consolidated Balance Sheets as of June 30, 1997
and June 30, 1996 Page 19
Consolidated Statements of Income for the Years
Ended June 30, 1997, 1996 and 1995 Page 20
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended
June 30, 1997, 1996 and 1995 Page 21
Consolidated Statements of Cash Flows for the Years
Ended June 30, 1997, 1996 and 1995 Pages 22 thru 24
Notes to Consolidated Financial Statements Pages 25 thru 53
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 1997 is not deemed
filed as part of this Annual Report on Form 10-KSB.
50
<PAGE>
(a) (2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Consolidated Financial
Statements.
(a) (3) Exhibits
<TABLE>
<CAPTION>
Reference to
Prior Filing
Regulation S-B or Exhibit
Exhibit Number Attached
Number Document Hereto
-------------- -------- ---------------
<S> <C> <C>
3(a) Certificate of Incorporation *
3(b) By-Laws **
4 Instruments defining the rights of security holders, *
including debentures
9 Voting Trust Agreement None
10 Material Contracts
Employment Contracts *
Recognition and Retention Plan and Stock
Option and Incentive Plan *
11 Statement re: computation of per share earnings ***
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountants None
18 Letter re: change in accounting principles None
19 Previously unfiled documents None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote None
of security holders
23 Consents of Experts and Counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
28 Information from reports furnished to state insurance None
regulatory authorities
99 Additional Exhibits None
</TABLE>
- ----------------
* Filed as exhibits to the Company's Form S-1 registration statement
filed on December 21, 1993 (File No. 33-73242) pursuant to Section 5 of the
Securities Act of 1933, as amended. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
** Filed as exhibits to the Company's Pre-effective Amendment No. 1 to
its Form S-1 registration statement filed on February 2, 1995. (File No.
33-73242) pursuant to Section 5 of the Securities Act of 1933, as amended
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-B.
*** Included in Note I of Notes to Consolidated Financial Statements
included in the attached 1997 Annual Report to Stockholders.
(b) Reports on Form 8-K
No current reports on Form 8-K were filed by the Company during the
quarter ended June 30, 1997
51
<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.
PERPETUAL MIDWEST FINANCIAL, INC.
Date: September 26, 1997 By: /s/ James L. Roberts
------------------------ --------------------------------
James L. Roberts
(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:/s/ James L. Roberts By: /s/ William C. Fletcher
---------------------------- -------------------------------
James L. Roberts, President and William C. Fletcher, Chairman
Chief Executive Officer and of the Board
Director
Date: September 26, 1997 Date: September 26, 1997
------------------------ -------------------------------
By:/s/ Robert H. O'Meara By: /s/ Robert C. Tilden
---------------------------- -------------------------------
Robert H. O'Meara, Director and Robert C. Tilden, Director
and Secretary
Date: September 26, 1997 Date: September 26, 1997
------------------------ -------------------------------
By:/s/ Eugene J. Dowie By: /s/ Douglas E. Anderson
---------------------------- -------------------------------
Eugene J. Dowie, Director Douglas E. Anderson, Director
Date: September 26, 1997 Date: September 26, 1997
------------------------ -------------------------------
By:/s/ Rick L. Brown
-----------------------------------
Rick L. Brown, Senior Vice
President, Chief Financial Officer
and Treasurer
Date: September 26, 1997
-------------------------------
52
<PAGE>
- --------------------------------------------------------------------------------
1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
PERPETUAL MIDWEST FINANCIAL, INC.
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
President's Message................................................ 1
Selected Consolidated Financial Information........................ 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 5
Consolidated Financial Statements.................................. 19
Stockholder Information............................................ 54
Corporate Information.............................................. 55
i
<PAGE>
[PERPETUAL MIDWEST FINANCIAL, INC. LETTERHEAD]
September 24, 1997
Dear Stockholder:
Since Perpetual Midwest Financial, Inc. was formed in 1994, we have
worked toward providing the services and products needed by the customers in our
market areas. We have stayed focused on our target markets, and followed a
strategic plan on the way to fulfilling our vision of being known for our
advanced service quality and held in the highest esteem by our customers,
employees, shareholders, industry and communities. Our commitment is to provide
our customers with the service and products that fit their needs and we are
convinced that our company can be one of the most successful financial
institutions in our market areas.
Perpetual Midwest Financial, Inc. completed its fiscal 1997 year with
earnings of $0.24 per share and a book value of $18.00 per share. Although our
net interest income, before loss provision, increased $1.7 million over fiscal
1996, operating results for fiscal year 1997 were hit hard with a one-time
special assessment to recapitalize the Savings Association Insurance Fund
("SAIF") and with an increase in actual loan losses. Our SAIF assessment was
$1.5 million, however, with the SAIF fund fully capitalized our ongoing premiums
to SAIF will be significantly reduced. Over the 1997 fiscal year total deposits
grew $44 million which funded a $15 million growth in our loan portfolio and a
reduction of $29 million in borrowed funds.
We continue to face a future that promises continuing change and
challenge for the financial services industry. Competition continues to
increase, particularly from nonbanks, and technology alters the nature of both
our competition and our customer's expectations. Change also brings opportunity,
particularly for institutions that have the flexibility to adapt. We believe
that the franchise we are developing provides a solid base from which to
continue building an organization that can succeed in a changing environment. We
also believe that we have the franchise, the customer base, the capital strength
and the talent to succeed in this challenging environment. We will continue to
invest in technology to expand alternative delivery systems that customers are
demanding and to foster new product development.
As we look forward to fiscal 1998 and beyond, our goals are to continue
an aggressive program for refining our business mix, for reallocating resources
to areas with the most attractive opportunities and for maintaining the high
quality customer service that is essential for our success.
Perpetual's board of directors, its management team and its employees
own 16% of the company's common stock. The point of all the work we do for our
customers and employees, of course, is to produce returns for our shareholders.
We are committed to managing this company for the benefit of all of our
shareholders and we appreciate your investment in Perpetual Midwest Financial,
Inc.
Sincerely,
/s/ James L. Roberts
James L. Roberts
President and Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated financial information of the
Company and its subsidiary is qualified in its entirety by, and should be read
in conjunction with, the consolidated financial statements, including notes
thereto, included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At June 30, At December 31,
---------------------------------------- ---------------
1997 1996 1995 1994(1) 1993
---- ---- ---- ------- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets................................................... $397,229 $383,273 $349,281 $272,172 $249,368
Loans receivable, net.......................................... 310,522 296,080 227,381 125,910 113,154
Loans held for sale............................................ 889 1,871 1,058 1,216 1,788
Mortgage-backed and related securities held for sale........... --- --- --- --- 104,538
Mortgage-backed and related securities available for sale...... 11,345 32,351 48,457 72,371 ---
Mortgage-backed and related securities held to maturity........ --- --- 24,816 27,816 ---
Trading securities............................................. 757 990 768 2,718 ---
Investment securities held-to-maturity......................... --- --- 17,940 21,383 413
Securities available-for-sale.................................. 29,798 24,050 1,176 99 ---
Securities held for sale....................................... --- --- --- --- 11,431
Other securities............................................... 4,641 4,641 4,500 2,602 2,602
Deposits....................................................... 305,165 261,497 230,840 208,030 211,794
Borrowed funds................................................. 52,203 80,724 77,101 26,051 18,588
Stockholders' equity - substantially restricted(2)............. 33,890 35,588 36,043 34,556 15,124
</TABLE>
- ----------
(1) During 1994, the Company changed its fiscal year from December 31 to June
30.
(2) The Bank converted from a mutual to a stock savings bank on March 30, 1994.
2
<PAGE>
<TABLE>
<CAPTION>
Six Months
Year Ended Ended Year Ended
June 30, June 30,(1) December 31,
------------------------------------- ----------- ------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest and dividend income.................... $29,629 $27,074 $22,224 $ 8,111 $ 16,564
Total interest expense................................ 18,979 18,066 14,448 4,839 10,723
------- ------- ------- ------- --------
Net interest income................................ 10,650 9,008 7,776 3,272 5,841
Provisions for loan losses............................ 1,416 210 4 77 2,157
------- ------- ------- ------- --------
Net interest income after provision for loan losses... 9,234 8,798 7,772 3,195 3,684
Loan servicing fees................................... 371 429 483 227 456
Gain (loss) on sales of interest-earning assets, net.. 363 248 (108) (93) 1,415
Gain (loss) on securities held for sale............... --- --- --- --- (424)
Other noninterest income.............................. 1,124 675 827 1,121 657
------- ------- ------- ------- --------
Total noninterest income.............................. 1,858 1,352 1,202 1,255 2,104
Total noninterest expense............................. 10,306 7,747 6,758 3,151 4,892
------- ------- ------- ------- --------
Income before income taxes.......................... 786 2,403 2,216 1,299 896
Income tax expense.................................... 319 909 875 315 378
------- ------- ------- ------- --------
Net Income......................................... $ 467 $ 1,494 $ 1,341 $ 984 $ 518
======= ======= ======= ======= ========
</TABLE>
- ----------
(1) During 1994, the Company changed its fiscal year from December 31 to June
30.
3
<PAGE>
<TABLE>
<CAPTION>
Six
Months
Year Ended Ended Year Ended
June 30, June 30, December 31,
------------------------------ -------- ------------
1997 1996 1995 1994(2) 1993
--------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on assets (ratio of net income to average total assets)......... .12% .40% .40% .75% .20%
Interest rate spread information:
Average during period................................................ 2.51 2.20 2.02 2.26 2.11
End of period........................................................ 2.97 2.48 1.84 2.27 1.85
Net interest margin(1)................................................. 2.84 2.58 2.48 2.60 2.36
Ratio of operating expense to average total assets..................... 2.61 2.12 2.20 2.41 1.89
Return on stockholders' equity (ratio of net income to average equity). 1.38 4.17 3.80 7.93 3.48
Earnings per share(3).................................................. $ .24 $ .74 $ .65 $ .30 ---
Earnings per share - assuming full dilution............................ $ .24 $ .74 $ .65 $ .29 ---
Dividend payout (ratio of dividends paid to net income)................ 124.37 .31 --- --- ---
Quality Ratios:
Non-performing assets to total assets at end of period................. .31 .38 .05 .31 1.19
Allowance for loan losses to non-performing loans...................... 280.47 199.55 1,732.90 551.56 102.96
Capital Ratios:
Stockholders' equity to total assets at end of period.................. 8.53 9.29 10.32 12.69 6.06
Average stockholders' equity to average assets......................... 8.56 9.78 10.57 9.45 5.73
Ratio of average interest-earning assets
to average interest-bearing liabilities............................... 106.48% 107.02% 109.32% 108.91% 105.73%
Number of full service offices........................................... 5 5 4 4 4
</TABLE>
- ----------
(1) Net interest income divided by average interest earning assets.
(2) June 30, 1994 ratios are annualized for comparative purposes.
(3) Earnings per common share subsequent to the conversion.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Perpetual Midwest Financial, Inc. ("Perpetual Midwest" or the
"Company") was formed in December of 1993 by Perpetual Savings Bank, FSB (the
"Bank") to become the thrift institution holding company of the Bank. The
acquisition of the Bank by the Company was consummated on March 30, 1994 in
connection with the Bank's conversion from the mutual to the stock form (the
"Conversion"). All references to the Company prior to March 30, 1994, except
where otherwise indicated, are to the Bank and its subsidiaries on a
consolidated basis.
The Company focuses 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 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 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 costs, availability, interest rate risk and reinvestment alternatives.
The Company also invests in U.S. Government and agency obligations, agency
issued mortgage-backed securities and other investments permitted by regulation.
Perpetual Midwest's net income is primarily dependent upon the
difference (or "spread") between the average yield earned on loans and
securities and the average rate paid on deposits and borrowings, as well as the
relative amounts of such assets and liabilities. Interest income is a function
of the balances of loans, securities and other interest-earning assets
outstanding during the period and the yield earned on such assets. Interest
expense is a function of the balances of deposits and borrowings outstanding
during the same period and the rates paid on such deposits and borrowings.
The operating results of Perpetual Midwest are also affected by general
economic conditions, the monetary and fiscal policies of federal agencies and
the regulatory policies of agencies that regulate financial institutions. The
Company's cost of funds is influenced by interest rates on competing investments
and general market rates of interest. Lending activities are influenced by the
demand for real estate loans and other types of loans, which is in turn affected
by the interest rates at which such loans are made, general economic conditions
and the availability of funds for lending activities.
Perpetual Midwest's earnings are also affected by, among other things,
provisions for loan losses, net income from subsidiary activities, gains and
losses on sales of loans and securities, service charges and income taxes.
Noninterest expense consists primarily of employee compensation and benefits,
occupancy and equipment expense, federal deposit insurance premiums and other
general and administrative expenses. Operating results are affected to a lesser
extent
5
<PAGE>
by the type of lending, fixed-rate versus adjustable or short-term, each of
which has a different rate and fee structure.
Financial Condition
The Company's total assets were $397.2 million at June 30, 1997 and
$383.3 million at June 30, 1996. The increase in assets was primarily funded by
growth in deposits.
Total securities were $46.5 million at June 30, 1997 and $62.0 million
at June 30, 1996. The decrease primarily resulted from sales, maturities and
repayments of mortgage-backed and other securities.
Net loans receivable, including loans held for sale, were $311.4
million at June 30, 1997 and $298.0 million at June 30, 1996. Management's
strategy is to continue to shift investments from mortgage-backed and other
securities to investments in loans to maximize the yield of interest-earning
assets. As a result, mortgage loans increased $11.1 million and consumer and
other loans increased $3.6 million, before allowance for loan losses,
respectively.
Foreclosed assets totaled $184,000 at June 30, 1997 and $103,000 at
June 30, 1996. Management will continue to provide valuation allowances as
necessary in future periods to ensure that foreclosed real estate and other
repossessed assets are carried at their fair value.
Total deposits were $305.2 million at June 30, 1997 and $261.5 million
at June 30, 1996. The increase was as a result of management continuing to
monitor its deposit product design, pricing and direct mail marketing programs.
Borrowed funds were $52.2 million at June 30, 1997 and $80.7 million at
June 30, 1996. With the net increase in deposits, the decrease in securities and
cash flow from operations being sufficient to fund the increase in net loans
receivable, borrowed funds were reduced.
Stockholders' equity decreased to $33.9 million at June 30, 1997 from
$35.6 million at June 30, 1996 primarily due to the Company's repurchase of
138,307 shares of its stock at a cost of $2.5 million and $580,000 distributed
to stockholders as cash dividends. Stockholder's equity was enhanced primarily
due to a $514,000 increase related to the Company's benefit plans, a $357,000
decrease in the net unrealized depreciation on securities available for sale,
net of tax and an increase from net income in the amount of $467,000.
Results of Operations
General. The Company had net income of $467,000 for the twelve months
ended June 30, 1997, $1.5 million for the twelve months ended June 30, 1996 and
$1.3 million for the twelve months ended June 30, 1995. The decrease in net
income for the twelve months ended June 30, 1997 was primarily due to a special
assessment in the amount of $1.5 million by the FDIC to recapitalize the Savings
Association Insurance Fund (the "SAIF"), a $245,000 non-interest expense item
for potential claims on disbursements related to a borrower's remodeling of a
commercial office building complex and a $1.2 million increase over the previous
year provision for loan losses, of which $303,000 was used to increase the
allowance for loan losses. The Company had
6
<PAGE>
net income after tax of $1.4 million for the twelve months ended June 30, 1997
before the impact of the one-time charge by the FDIC.
Interest Income. Interest income was $29.6 million for the twelve
months ended June 30, 1997, $27.1 million for the twelve months ended June 30,
1996 and $22.2 million for the twelve months ended June 30, 1995.
Interest Expense. Interest expense was $19.0 million for the twelve
months ended June 30, 1997, $18.1 million for the twelve months ended June 30,
1996 and $14.4 million for the twelve months ended June 30, 1995.
Net Interest Income. Net interest income before provision for loan
losses was $10.6 million for the twelve months ended June 30, 1997, $9.0 million
for the twelve months ended June 30, 1996 and $7.8 million for the twelve months
ended June 30, 1995.
Provision for Loan Losses. The Company's provision for loan losses was
$1.4 million for the twelve months ended June 30, 1997, $210,000 for the twelve
months ended June 30, 1996 and $4,000 for the twelve months ended June 30, 1995.
The increase in provision for loan losses was primarily due to replenishing the
allowance for loan losses for higher than normal net charge-offs experienced
during the fiscal year ended June 30, 1997 and to provide a net increase of
$303,000 in the allowance for loan losses. Charge-offs, net of recoveries,
increased $886,000 for the year ended June 30, 1997 over the previous year. Net
charge-offs by portfolio for the Company were $178,000, $223,000, $181,000,
$390,000 and $140,000 for mortgage loan, credit card, consumer loan, purchased
car loan portfolios and all other loans, respectively, for the year ended June
30, 1997. Charge-offs for the Company's credit card and purchased car loan
portfolios increased over the twelve months ended June 30, 1997, primarily due
to a significant increase in customer bankruptcy filings.
Non-performing assets (which include non-accrual loans, accruing loans
delinquent 90 days or more and foreclosed assets, but exclude restructured
loans) were $1.2 million or .31% of total assets at June 30, 1997, $1.4 million
or .38% of total assets at June 30, 1996 and $158,000 or .05% of total assets at
June 30, 1995.
At June 30, 1997, the Company's allowance for loan losses totaled $3.0
million or .96% of total loans receivable, net. The calculation of the adequacy
of the allowance for loan losses is based on a variety of factors, and not
directly to the level of non-performing loans. The Company believes it has taken
an appropriate approach toward allowance levels, consistent with the Company's
experience and considering, among other factors, the composition of the
Company's loan portfolio, the level of the Company's classified and
non-performing assets and their estimated value, the uncertain national economic
outlook which may tend to inhibit economic activity and depress real estate and
other values both nationally and in the Company's primary market area and the
regulators' uncertain view of adequate reserve levels for the thrift industry.
Although the Company maintains its allowance for loan losses at a level
which it considers to be adequate to provide for potential losses, there can be
no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, the Company's determination as to the amount of its allowance for
7
<PAGE>
loan losses is subject to review by the OTS and the FDIC, as part of their
examination process, which may require the establishment of additional general
or specific allowances based upon their judgement of the information available
to them at the time of their examination.
Noninterest Income. Noninterest income was $1.9 million for the twelve
months ended June 30, 1997, $1.4 million for the twelve months ended June 30,
1996 and $1.2 million for the twelve months ended June 30, 1995. The increase in
1997 was primarily due to increased service charges and fees on deposit
accounts.
Noninterest Expense. Noninterest expense was $10.3 million for the
twelve months ended June 30, 1997, $7.7 million for the twelve months ended June
30, 1996 and $6.8 million for the twelve months ended June 30, 1995. The
increase was primarily due to the $1.5 million special assessment to
recapitalize the SAIF, a $245,000 expense for claims on disbursements related to
a borrower's remodeling of a commercial office building complex, an increase in
data processing, printing, postage, stationery, supplies and other miscellaneous
noninterest expenses.
Income Tax Expense. Income tax expense was $319,000 for the twelve
months ended June 30, 1997, $909,000 for the twelve months ended June 30, 1996
and $875,000 for the twelve months ended June 30, 1995. The decrease in income
tax expense for 1997 was the result of a lower level of income before income
tax.
Interest Rate Risk
Interest Rate Risk Exposure. In evaluating the Company's exposure to
interest rate risk ("IRR"), certain shortcomings inherent in the method of
analysis must be considered. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Additionally, certain assets, such as adjustable
rate mortgages, have features which restrict changes in interest rates in the
short-term and over the life of the asset. Further, in the event of a change in
interest rates, prepayment and early withdrawal levels may deviate significantly
from those assumed in evaluating the Company's exposure to interest rate risk.
Finally, the ability of many borrowers to service their debt may decrease in the
event of an interest rate increase. The Company considers all of these factors
in monitoring its exposure to interest rate risk.
Net Portfolio Value. The OTS provides a Net Portfolio Value ("NPV")
approach to the measurement of interest rate risk. This approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off-balance sheet contracts. Management of the Company's assets and
liabilities is done within the context of the marketplace, and also within
limits established by the Board of Directors on the amount of change in NPV
which is acceptable given certain interest rate changes.
Presented below, as of June 30, 1997 and June 30, 1996, is an analysis
of the Company's interest rate risk measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 400 basis points as measured by the
8
<PAGE>
OTS and compared to Board policy limits. Such limits have been established with
consideration of the dollar impact of various rate changes and the Company's
strong capital position. As illustrated in the table, NPV is more sensitive to
rising rates than declining rates. This occurs principally because, as rates
rise, the market value of fixed-rate loans declines due to both the rate
increase and slowing prepayments. When rates decline, the Company does not
experience a significant rise in market value for these loans because borrowers
prepay at relatively high rates. Additionally, as rates rise, the market value
of adjustable-rate loans may be slow to increase due to period and lifetime
limits which restrict changes in interest rates. As rates decline, prepayments
on adjustable-rate loans accelerate as borrowers refinance from their
adjustable-rate loans to lock in lower fixed-rate loans. The value of the
Company's deposits and borrowings change in relatively the same manner in both
rising or falling rate scenarios.
<TABLE>
<CAPTION>
Change in At June 30, 1997 At June 30, 1996
Interest Rate Board Limit ---------------- ----------------
(Basis Points) % Change $ Change % Change $ Change % Change
-------------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 (65.00)% $(4,337) (11.00)% $(7,416) (20.00)%
+300 (55.00) (2,640) (7.00) (4,859) (13.00)
+200 (30.00) (1,720) (3.00) (2,494) (7.00)
+100 (20.00) (298) (1.00) (799) (2.00)
0
-100 (20.00) (143) --- 144 ---
-200 (30.00) 588 2.00 359 1.00
-300 (55.00) 1,415 4.00 1,111 3.00
-400 (65.00) 2,565 7.00 2,264 6.00
</TABLE>
Management reviews the quarterly OTS measurements and related peer
reports on a quarterly basis. In addition to monitoring selected measures on
NPV, management also monitors on a quarterly basis effects on net interest
income resulting from assumed changes, up and down 400 basis points, in interest
rates. This measure is used in conjunction with NPV measures to identify
excessive IRR.
Asset/Liability Strategy. The primary elements of the Company's
asset/liability strategy include the following:
1. The Company has focused on building its portfolio of adjustable-rate
("ARM") loans and short-term consumer and real estate mortgage loans.
2. The Company has followed a program of selling substantially all of its
newly originated 30 year, fixed-rate one- to four-family real estate
loans.
3. The Company continues to aggressively compete in its market for
consumer loans having maturity terms that are significantly shorter
than residential real estate loans.
4. The Company has continued to build its portfolio of adjustable-rate
and short-term, fixed-rate commercial and multi-family real estate
loans.
9
<PAGE>
5. The Company has actively emphasized the lengthening of maturities for
its certificates of deposits and Federal Home Loan Bank borrowings,
subject to market conditions.
6. Excess liquid funds are invested in fixed-rate or short-term U.S.
government and agency securities which are classified available for
sale. This provides the Company the opportunity to reinvest in various
higher yielding loan products for retention in the Company's portfolio
as market conditions permit.
General. Generally, the investment policy of the Company is to invest
funds among various categories of investments and maturities based upon the
Company's projected need for liquidity, to achieve the proper balance between
its desire to minimize risk and maximize yield, to provide collateral for
borrowings, and to fulfill the Company's asset/liability management policies.
Investments generally include interest-earning deposits in other financial
institutions, U.S. government and agency securities and mortgage-backed and
related securities.
The Company's cost of funds responds to changes in interest rates due
to the relatively short-term nature of its deposit portfolio. Consequently, the
results of operations are influenced by the levels of short-term interest rates.
The Company offers a range of maturities on its deposit products at competitive
rates and monitors the maturities on an ongoing basis.
The Company emphasizes and promotes its statement savings and demand
deposit accounts and, subject to market conditions, certificates of deposit with
maturities of 91 days through five years, principally from its primary market
area. The statement savings and demand deposit accounts tend to be less
susceptible to rapid changes in interest rates.
In managing its asset/liability mix, the Company, depending on the
relationship between long- and short-term interest rates, market conditions and
consumer preference, may place somewhat greater emphasis on maximizing its net
interest margin than on strictly matching the interest rate sensitivity of its
assets and liabilities. Management believes that the increased net income which
may result from an acceptable mismatch in the actual maturity or repricing of
its asset and liability portfolios can, during periods of declining or stable
interest rates, provide sufficient returns to justify the increased exposure to
sudden and unexpected increases in interest rates which may result from such a
mismatch. The Company has established guidelines, which may change from time to
time, on the level of acceptable interest rate risk. There can be no assurances,
however, that in the event of an adverse change in interest rates, the Company's
efforts to limit interest rate risk will be successful.
10
<PAGE>
Average Balances, Interest Rates and Yields
The following table sets forth certain information relating to the
Company's average consolidated balance sheets and consolidated statements of
income for the years ended June 30, 1997, 1996 and 1995 and reflects the average
yield on assets and average costs of liabilities for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown. All
average balances are daily average balances. The average balance of loans
receivable includes loans on which the Company has discontinued accruing
interest. The yields and costs include fees which are considered adjustment to
yields.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------
1997 1996
--------------------------------- -------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------------ ------- ------- ----------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)................................. $300,487 $25,316 8.43% $262,228 $21,744 8.29%
Mortgage-backed and related securities(4)........... 24,900 1,559 6.21 45,484 3,193 6.95
Other securities(4)................................. 34,279 1,966 5.30 22,703 1,105 4.54
FHLB stock.......................................... 4,641 327 7.05 4,573 329 7.19
Other............................................... 11,323 461 4.07 14,154 703 4.97
-------- ------ -------- ------
Total interest-earning assets(1)(4)............. $375,630 $29,629 7.89 $349,142 $27,074 7.75
======== ------- ======== -------
Other assets........................................ 19,181 22,061
-------- --------
Total assets.................................... $394,811 $371,203
======== ========
Interest-Bearing Liabilities:
Demand and NOW deposits............................. $ 83,279 $ 3,318 3.98 $ 51,163 $ 1,774 3.47
Savings deposits.................................... 10,094 199 1.97 12,351 382 3.09
Certificate accounts................................ 191,293 11,329 5.92 179,313 10,585 5.90
FHLB advances....................................... 67,785 4,119 6.08 83,236 5,302 6.37
Other borrowings.................................... 306 14 4.58 185 23 12.43
-------- ------ -------- ------
Total interest-bearing liabilities............... $352,757 18,979 5.38 $326,248 18,066 5.54
======== ------ ======== ------
Other liabilities................................... 8,269 9,367
-------- --------
Total liabilities............................... 361,026 335,615
Shareholder's equity................................ 33,385 35,588
-------- --------
Total liabilities and stockholder's equity..... $394,311 $371,203
======== ========
Net interest income.................................. $10,650 $ 9,008
======= =======
Net interest rate spread(1)(2)....................... 2.51% 2.20%
==== ====
Net interest earning assets(1)....................... $ 22,873 $ 22,894
======== ========
Net yield on average interest-earning assets(1)(3)(4) 2.84% 2.58%
==== ====
Average interest-earning assets to average
interest-bearing liabilities......................... 106.48x 107.02x
====== ======
</TABLE>
<PAGE>
RESTUBBED TABLE
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1995
---------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
----------- ------ ------
<S> <C> <C> <C>
Interest-Earning Assets:
Loans receivable(1)................................. $192,736 $15,412 8.00%
Mortgage-backed and related securities(4)........... 88,373 5,058 5.63
Other securities(4)................................. 24,966 1,314 5.63
FHLB stock.......................................... 3,600 275 7.64
Other............................................... 3,835 165 4.30
-------- ------ ----
Total interest-earning assets(1)(4)............. $313,510 $22,224 7.09
======== -------
Other assets........................................ 20,209
--------
Total assets.................................... $333,719
========
Interest-Bearing Liabilities:
Demand and NOW deposits............................. $ 34,206 $ 801 2.34
Savings deposits.................................... 15,158 303 2.00
Certificate accounts................................ 168,460 9,091 5.40
FHLB advances....................................... 68,878 4,252 6.17
Other borrowings.................................... 80 1 1.25
-------- ------ ----
Total interest-bearing liabilities............... $286,782 14,448 5.04
======== ------ ====
Other liabilities................................... 11,677
--------
Total liabilities............................... 298,459
Shareholder's equity................................ 35,260
--------
Total liabilities and stockholder's equity..... $333,719
========
Net interest income.................................. $ 7,776
=======
Net interest rate spread(1)(2)....................... 2.02%
====
Net interest earning assets(1)....................... $ 26,728
========
Net yield on average interest-earning assets(1)(3)(4) 2.48%
====
Average interest-earning assets to average
interest-bearing liabilities......................... 109.32x
======
</TABLE>
- ----------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
(2) Net interest rate spread represents the difference between the average rate
on interest-earning assets and the average cost of interest bearing
liabilities.
(3) Net yield on average interest-earning assets represents net interest income
divided by average interest-earning assets.
(4) The average outstanding balance is based on carrying value, while the yield
is based on cost, not on the disclosed fair market value of the average
outstanding balance of the assets.
11
<PAGE>
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. Information is provided in each
category with respect to (i) changes attributable to changes in volume (i.e.,
changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (i.e., changes in rate multiplied by prior volume) and (iii) the
net change. The changes attributable to the combined impact of volume and rate
have been allocated proportionately to the changes due to volume and the changes
due to rate.
<TABLE>
<CAPTION>
Year Ended June 30, 1997 vs. Year Ended June 30, 1996 vs.
Year Ended June 30, 1996 Year Ended June 30, 1995
------------------------------ ---------------------------
Increase Increase
(Decrease) (Decrease)
Due to Due to
----------------- ---------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable............................. $ 3,218 $ 354 $ 3,572 $ 5,557 $ 775 $ 6,332
Mortgage-backed and related securities....... (1,307) (327) (1,634) (2,473) 608 (1,865)
Other securities............................. 634 227 861 (113) (96) (209)
FHLB stock................................... 5 (7) (2) 74 (20) 54
Other........................................ (127) (115) (242) 444 94 538
------- ----- ------- ------- ------- -------
Total interest-earning assets.............. $ 2,423 $ 132 $ 2,555 $ 3,489 $ 1,361 $ 4,850
------- ----- ------- ------- ------- -------
Interest-bearing liabilities:
Demand and NOW deposits...................... 1,248 296 1,544 397 576 973
Savings deposits............................. (474) (291) (183) (56) 135 79
Certificate accounts......................... 709 35 744 586 908 1,494
FHLB advances................................ (891) (292) (1,183) 886 164 1,050
Other borrowings............................. 10 (19) (9) 1 21 22
------- ----- ------- ------- ------- -------
Total interest-bearing liabilities......... $ 602 $ 311 $ 913 $ 1,814 $ 1,804 $ 3,618
------- ----- ------- ------- ------- -------
Net interest income........................... $ 1,813 $ (171) $ 1,642 $ 1,675 $ (443) $ 1,232
======= ====== ======= ======= ======= =======
</TABLE>
12
<PAGE>
Net Interest Rate Spread
The Company's results of operations are determined primarily by net
interest income and, to a lesser extent by noninterest income as reduced by
noninterest expense. Net interest income is determined by the interest rate
spread between the yields earned on its interest-earning assets and the rates
paid on interest-bearing liabilities and by the relative amounts of
interest-earning assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest
rate earned by the Company on its loan, mortgage-backed and related securities
and other securities portfolios, the average cost of the Company's deposits and
borrowings, the interest rate spread of the Company and the net yield on the
average interest-earning assets as of the dates shown.
<TABLE>
<CAPTION>
At June 30,
----------------------------
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
Average yield on:
Loans receivable............................................ 8.37% 8.56% 8.17%
Mortgage-backed and related securities...................... 7.02 4.49 6.03
Other debt securities....................................... 5.70 6.05 6.12
Combined average yield on interest-earning assets......... 7.89 7.98 7.45
Average rate paid on:
Demand and NOW deposits..................................... 4.02 4.31 2.92
Savings deposits............................................ 2.00 2.00 2.10
Certificate accounts........................................ 6.01 5.95 6.03
Borrowings.................................................. 5.95 6.01 6.51
Combined average rate paid on interest-bearing
liabilities.............................................. 5.34 5.50 5.61
Net interest rate spread..................................... 2.55% 2.53% 1.84%
</TABLE>
Liquidity and Capital Resources
Liquidity. The Company's principal sources of funds are deposits,
amortization and prepayment of loan principal (including mortgage-backed and
related securities), sales or maturities of securities, sales of loans held for
sale and operations. While scheduled loan repayments and maturing securities 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.
Federal regulations have required the Company to maintain levels of
liquid assets. The required percentage has varied from time to time based upon
economic conditions and savings flows and is currently 5% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less during
the preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. government and agencies and other securities
13
<PAGE>
and obligations generally having maturities of less than five years. The Company
has maintained its liquidity ratio at levels in excess of those required. At
June 30, 1997, the Company's liquidity ratio was 15.93%. Management expects to
use excess liquidity to pay off maturing FHLB advances to the extent that the
excess liquidity funds exceed funding requirements for loan commitments.
Alternative sources of funds available to the Company include
borrowings from the Federal Home Loan Bank ("FHLB") of Des Moines. At June 30,
1997, the Company had $52.0 million of FHLB advances outstanding. The Company
uses its liquid resources principally to meet ongoing commitments, to fund
maturing certificates of deposit and deposit withdrawals, to invest, to fund
existing and future loan commitments, to maintain liquidity and to meet
operating expenses. The Company anticipates that it will have sufficient funds
available to meet current loan commitments. At June 30, 1997, the Company had
outstanding commitments to extend credit which amounted to $57.8 million
(including $41.0 million in available lines of credit). At June 30, 1997, the
Company also had commitments to purchase $5.4 million of adjustable rate
single-family mortgage loans. Management believes that loan repayments and other
sources of funds will be adequate to meet the Company's foreseeable liquidity
needs.
The primary investing activity of the Company is the origination of
loans and the purchase of mortgage-backed and related securities and other
securities. During the twelve months ended June 30, 1997, the twelve months
ended June 30, 1996 and the twelve months ended June 30, 1995, there were net
increases in loans receivable, including loans purchased, of $16.6 million,
$69.2 million and $105.4 million, respectively. Purchases of loans for the same
periods were $7.2 million during fiscal 1997, $24.4 million during fiscal 1996
and $29.7 million during fiscal 1995. Purchases of securities, including
collateralized mortgage obligations, mortgage-backed and related securities and
other securities totaled $46.7 million during fiscal 1997, $27.9 million during
fiscal 1996 and $12.2 million during fiscal 1995.
The primary financing activity of the Company is deposits. For the
twelve months ended June 30, 1997, there was a net increase in deposit accounts
of $43.7 million, $30.7 million for the twelve months ended June 30, 1996 and
$22.8 million for the twelve months ended June 30, 1995. The net increases in
deposits were primarily a result of changes in market rates of interest,
competition for such funds from others, and the Company's aggressiveness in
pricing for such funds.
The following is a brief description of the sources and uses of funds
for the indicated periods:
Fiscal Year Ended June 30, 1997. During the fiscal year ended June 30,
1997, there was a net increase of $16.1 million in cash and cash equivalents.
The major uses of cash during this period included the funding of a $9.3 million
net increase in loans receivable and purchases of $7.2 million of loans and
$46.7 million of mortgage-backed and other securities and repayment of $43.5
million of Federal Home Loan Bank advances. Major sources of funds, which
partially offset these uses of funds, were a net increase in deposits of $43.7
million, principal payments of mortgage-backed securities and maturities of
other securities amounting to $17.1 million, sale of
14
<PAGE>
$45.0 million of mortgage-backed and other securities available for sale, $15
million in proceeds from Federal Home Loan Bank advances and a net increase in
cash from operating activities of $5.1 million.
Fiscal Year Ended June 30, 1996. During the fiscal year ended June 30,
1996, there was a net increase of $1.8 million in cash and cash equivalents. The
major uses of cash during this period included the funding of a $44.8 million
net increase in loans receivable and purchases of $24.4 million of loans and
$27.9 million of mortgage-backed and other securities and repayment of $27.5
million of Federal Home Loan Bank advances. Major sources of funds, which
partially offset these uses of funds, were a net increase in deposits of $30.7
million, principal payments of mortgage-backed securities and maturities of
other securities amounting to $15.2 million, sale of $47.5 million of
mortgage-backed and other securities available for sale, $31 million in proceeds
from Federal Home Loan Bank advances and a net increase in cash from operating
activities of $2.5 million.
Fiscal Year Ended June 30, 1995. During the fiscal year ended June 30,
1995, there was a net increase of $3.0 million in cash and cash equivalents. The
major uses of cash during this period included the funding of a $75.7 million
net increase in loans receivable, purchases of $29.7 million of loans and $14.1
million of mortgage-backed and other securities and repayment of $10 million of
Federal Home Loan Bank advances. Major sources of funds, which partially offset
these uses of funds, were a net increase in deposits of $22.8 million, principal
payments of mortgage-backed securities and maturities of other securities
amounting to $18.9 million, sale of $24.3 million of mortgage-backed and other
securities available for sale, $61.0 million in proceeds from Federal Home Loan
Bank advances and a net increase in cash from operating activities of $9.4
million.
Regulatory Capital. Federally insured savings associations 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 OTS is
also authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
At June 30, 1997, the Bank had tangible and core capital of $31.7
million and $31.7 million, or 8.00% and 8.00% of total tangible assets,
respectively, which was approximately $25.8 million and $19.8 million above the
minimum requirements of 1.5% and 3.0%, respectively, of tangible assets. On June
30, 1997, the Bank had $34.1 million available for risk-based capital, or 12.6%
of risk-weighted assets of $270.8 million, which was approximately $12.4 million
above the 8% minimum requirement in effect on that date. The Bank is presently
in compliance with the fully phased-in capital requirements and meets the OTS
definition of a well capitalized thrift institution.
15
<PAGE>
Impact of Inflation and Changing Prices
The Company's consolidated financial statements and related notes have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power over time due to inflation except for mortgage-backed and other securities
available for sale which are recorded at fair values and loans held for sale
which are recorded at the lower of historical cost or fair value in the
aggregate. The impact of inflation is reflected in the increased cost of the
Company's operations. Unlike most industrial companies, nearly all the assets
and liabilities of the Company are monetary in nature. As a result, interest
rates have a greater impact on the Company's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Impact of New Accounting Standards
SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities," was issued in 1996. It revises the
accounting for transfers of financial assets, such as loans and securities, and
for distinguishing between sales and secured borrowings. It became effective for
some transactions occurring after December 31, 1996 and will be effective for
others in 1998. The impact of partial adoption in 1997 was not material to the
June 30, 1997 consolidated financial statements and the impact of the complete
adoption in 1998 is also not expected to be material to the consolidated
financial statements.
In March 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share," which revised the accounting requirements
for calculating earnings per share. Basic earnings per share for the quarter
ended December 31, 1997 and later will be calculated solely on average common
shares outstanding. Diluted earnings per share will reflect the potential
dilution of stock options and other common stock equivalents. All prior
calculations will be restated to be comparable to the new methods. As the
Company has dilution from stock options, the new calculation methods will
increase basic earnings per share over what otherwise would have been reported
as primary earnings per share, while there will be little effect on fully
diluted earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. This Statement requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Income tax
effects must also be shown. This Statement is effective for fiscal years
beginning after December 15, 1997. The adoption of SFAS No. 130 is not expected
to have a material impact on the results of operations or financial condition of
the Company.
16
<PAGE>
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This statement is effective for financial statements for periods beginning after
December 15, 1997. The adoption of SFAS No. 131 is not expected to have a
material impact on the results of operations or financial condition of the
Company.
17
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC. AND SUBSIDIARY
Cedar Rapids, Iowa
CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
CONTENTS
REPORT OF INDEPENDENT AUDITORS............................................ 18
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS.......................................... 19
CONSOLIDATED STATEMENTS OF INCOME.................................... 20
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY............................................... 21
CONSOLIDATED STATEMENTS OF CASH FLOWS................................ 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................... 25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Perpetual Midwest Financial, Inc.
Cedar Rapids, Iowa
We have audited the accompanying consolidated balance sheets of Perpetual
Midwest Financial, Inc. and Subsidiary as of June 30, 1997 and 1996 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended June 30, 1997, 1996 and 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Perpetual Midwest
Financial, Inc. and Subsidiary as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for the years ended June 30, 1997, 1996
and 1995 in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
August 1, 1997
- --------------------------------------------------------------------------------
18
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
ASSETS ---- ----
<S> <C> <C>
Cash and due from financial institutions $ 6,066,803 $ 2,968,278
Interest-bearing deposits in other financial institutions -
short-term 20,933,322 7,956,221
-------------- --------------
Cash and cash equivalents 27,000,125 10,924,499
Trading securities 756,625 989,800
Securities available for sale 41,143,033 56,401,791
Loans receivable, net of allowance for loan
losses of $2,973,457 in 1997 and $2,670,322 in 1996 310,522,161 296,080,410
Federal Home Loan Bank stock at cost 4,640,900 4,640,900
Loans held for sale 889,367 1,870,570
Accrued interest and dividends receivable 2,589,365 2,678,024
Premises and equipment, net 7,203,686 7,307,659
Other assets 2,484,211 2,379,202
-------------- --------------
$ 397,229,473 $ 383,272,855
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand deposits $ 9,943,176 $ 7,192,677
Savings and NOW deposits 98,882,369 72,728,251
Time deposits 196,339,722 181,576,182
-------------- --------------
Total deposits 305,165,267 261,497,110
Borrowed funds 52,203,351 80,723,708
Advances from borrowers for taxes and insurance 828,198 818,524
Accrued interest payable 3,021,590 2,343,611
Other liabilities 2,121,405 2,301,985
-------------- --------------
363,339,811 347,684,938
Stockholders' equity
Common stock, par value: $.01 per share; shares
authorized: 6,000,000; shares issued: 2,123,984;
shares outstanding: 1997 - 1,882,575 and 1996
- 1,988,082 21,240 21,240
Additional paid-in capital 20,712,302 20,546,070
Retained earnings - substantially restricted 18,367,609 18,481,335
Net unrealized depreciation on securities available for
sale, net of tax of $76,863 in 1997 and $289,492 in 1996 (129,204) (486,626)
Less: Treasury stock, 241,409 and 135,902 shares
at cost at June 30, 1997 and 1996 (4,039,766) (2,152,190)
Unearned ESOP shares (610,542) (776,032)
Unearned compensation (431,977) (45,880)
------------- --------------
33,889,662 35,587,917
------------- --------------
$ 397,229,473 $ 383,272,855
============= ==============
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
19
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $ 25,315,842 $ 21,744,188 $ 15,411,917
Trading securities 52,323 58,842 43,602
Securities available for sale 3,472,804 3,564,100 3,894,383
Securities held to maturity - 675,455 2,432,906
Other 788,199 1,031,795 441,327
---------------- ---------------- ----------------
29,629,168 27,074,380 22,224,135
Interest expense
Deposits 14,846,677 12,741,281 10,194,817
Borrowed funds 4,132,749 5,325,170 4,253,353
---------------- ---------------- ----------------
18,979,426 18,066,451 14,448,170
---------------- ---------------- ----------------
Net interest income 10,649,742 9,007,929 7,775,965
Provision for loan losses 1,415,500 210,000 4,065
---------------- ---------------- ----------------
Net interest income after provision for loan
losses 9,234,242 8,797,929 7,771,900
Noninterest income
Loan servicing fees, net 370,771 428,757 483,024
Net realized gains (losses) on sales
of securities available for sale 19,552 (161,358) (190,529)
Net gains on sales of loans held for sale 343,773 409,956 82,680
Net trading securities gains (losses) 101,787 (658) 35,495
Other 1,021,862 675,174 791,974
---------------- ---------------- ----------------
1,857,745 1,351,871 1,202,644
Noninterest expense
Salaries and employee benefits 3,480,230 3,264,164 3,246,031
Occupancy and equipment 1,551,240 1,399,938 1,185,613
SAIF deposit insurance premium 1,836,222 539,012 489,315
Net (gains) losses on foreclosed assets 21,557 (15,687) (39,620)
Other 3,417,104 2,559,656 1,877,218
---------------- ---------------- ----------------
10,306,353 7,747,083 6,758,557
---------------- ---------------- ----------------
Income before income taxes 785,634 2,402,717 2,215,987
Income tax expense 319,000 908,996 875,239
---------------- ---------------- -----------------
Net income $ 466,634 $ 1,493,721 $ 1,340,748
================ ================ =================
Earnings per common and common
equivalent share - primary $ .24 $ .74 $ .65
Earnings per share - fully diluted $ .24 $ .74 $ .65
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these
consolidated financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized
Depreciation on
Securities
Additional Available for
Common Paid-in Retained Sale, Net Treasury
Stock Capital Earnings of Tax Stock
----- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994 $ 21,240 $ 20,408,600 $ 16,107,550 $ (586,255) $ -
Effect of contribution to fund ESOP - - - - -
Market adjustment of ESOP shares - 12,150 - - -
Amortization of RRP contribution - - - - -
Purchase of 36,900 shares of treasury stock - - - - (511,717)
Net change in unrealized depreciation
on securities available for sale, net of
tax of $178,599 - - - 300,219 -
Net income - - 1,340,748 - -
------------- ------------- ------------- ------------- -------------
Balance at June 30, 1995 21,240 20,420,750 17,448,298 (286,036) (511,717)
Effect of contribution to fund ESOP - - - - -
Market adjustment of ESOP shares - 97,949 - - -
Amortization of RRP contribution - - - - -
Tax effect of stock plans - 27,371 - - -
Purchase of 99,002 shares of treasury stock - - - - (1,640,473)
Net change in unrealized depreciation
on securities available for sale,
net of tax of $(119,330) - - - (200,590) -
Cash dividends paid - $.225 per share - - (460,684) - -
Net income - - 1,493,721 - -
------------- ------------- ------------- ------------- -------------
Balance at June 30, 1996 21,240 20,546,070 18,481,335 (486,626) (2,152,190)
Effect of contribution to fund ESOP - - - - -
Market adjustment of ESOP shares - 158,629 - - -
Amortization of RRP contribution - - - - -
Tax effect of stock plans - 40,906 - - -
Purchase of 138,307 shares of treasury stock - - - - (2,506,029)
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 change in unrealized depreciation
on securities available for sale, net of tax
of $212,629 - - - 357,422 -
Cash dividends paid - $.30 per share - - (580,360) - -
Net income - - 466,634 - -
------------- ------------- ------------- ------------- -------------
Balance at June 30, 1997 $ 21,240 $ 20,712,302 $ 18,367,609 $ (129,204) $ (4,039,766)
============= ============= ============= ============= =============
<PAGE>
Unearned Unearned Total
ESOP Compen- Stockholders'
Shares sation Equity
------ ------ ------
Balance at June 30, 1994 $ (1,044,917) $ (350,642) $ 34,555,576
Effect of contribution to fund ESOP 107,793 - 107,793
Market adjustment of ESOP shares - - 12,150
Amortization of RRP contribution - 238,392 238,392
Purchase of 36,900 shares of treasury stock - - (511,717)
Net change in unrealized depreciation
on securities available for sale, net of
tax of $178,599 - 300,219
Net income - - 1,340,748
------------- ------------ -------------
Balance at June 30, 1995 (937,124) (112,250) 36,043,161
Effect of contribution to fund ESOP 161,092 - 161,092
Market adjustment of ESOP shares - - 97,949
Amortization of RRP contribution - 66,370 66,370
Tax effect of stock plans - - 27,371
Purchase of 99,002 shares of treasury stock - - (1,640,473)
Net change in unrealized depreciation
on securities available for sale,
net of tax of $(119,330) - - (200,590)
Cash dividends paid - $.225 per share - - (460,684)
Net income - - 1,493,721
------------- ------------ -------------
Balance at June 30, 1996 (776,032) (45,880) 35,587,917
Effect of contribution to fund ESOP 165,490 - 165,490
Market adjustment of ESOP shares - - 158,629
Amortization of RRP contribution - 149,053 149,053
Tax effect of stock plans - - 40,906
Purchase of 138,307 shares of treasury stock - - (2,506,029)
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 change in unrealized depreciation
on securities available for sale, net of tax
of $212,629 - - 357,422
Cash dividends paid - $.30 per share - - (580,360)
Net income - - 466,634
------------ ------------ -------------
Balance at June 30, 1997 $ (610,542) $ (431,977) $ 33,889,662
============= ============= =============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 466,634 $ 1,493,721 $ 1,340,748
Adjustments to reconcile net income
to net cash from operating activities
Depreciation 743,397 667,612 610,661
Amortization of:
Unearned compensation 149,053 66,370 238,392
Premiums and discounts on securities, net 405,977 692,964 828,197
Excess servicing fees receivable 18,649 (65,468) 21,791
Provision for loan losses 1,415,500 210,000 4,065
(Gains) losses on sales of:
Securities available for sale (19,552) 161,358 190,529
Loans held for sale (343,773) (409,956) (82,680)
Foreclosed assets, net 21,557 (15,687) (39,620)
Purchase of:
Trading securities (453,750) (222,909) (371,821)
Net trading securities (gains) losses (101,787) 658 (35,495)
Proceeds from sales and maturities of:
Trading securities 788,712 - 104,750
Loans originated for sale 27,233,080 29,087,202 8,338,481
Origination of loans held for sale (25,908,104) (29,489,359) (3,762,101)
Federal Home Loan Bank stock dividend - (90,900) -
Market adjustment of ESOP shares 158,629 97,949 12,150
ESOP expense 165,490 161,092 107,793
Change in:
Accrued interest and dividends receivable 88,659 (232,751) (448,184)
Accrued expenses and other liabilities 497,399 99,997 1,524,261
Other assets (215,187) 330,882 831,425
------------- ------------- ------------
Total adjustments 4,643,949 1,049,054 8,072,594
------------- ------------- ------------
Net cash from operating activities 5,110,583 2,542,775 9,413,342
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
22
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing activities
Proceeds from:
Sales of securities available for sale $ 44,982,204 $ 47,505,854 $ 24,327,841
Maturities and principal payments of
securities available for sale 17,115,508 10,295,986 6,665,003
Maturities and principal payments of
securities held to maturity - 4,914,146 12,196,649
Sales of foreclosed assets 629,405 198,915 20,259
Purchase of:
Securities available for sale (46,655,328) (27,902,971) (8,598,038)
Securities held to maturity - - (3,598,874)
FHLB stock - (50,000) (1,898,400)
Loans receivable (7,239,182) (24,399,734) (29,686,657)
Premises and equipment, net (639,424) (1,752,565) (691,495)
Net change in loans (9,349,225) (44,795,743) (75,715,810)
Net change in long-term interest-bearing
deposits in other financial institutions - 3,000,000 (3,000,000)
---------------- --------------- -----------------
Net cash from investing activities (1,156,042) (32,986,112) (79,979,522)
Cash flows from financing activities
Purchase of shares of treasury stock (2,506,029) (1,640,473) (511,717)
Cash dividends paid (580,360) (460,684) -
Effect of treasury stock issued
for stock plans 50,000 - -
Proceeds from Federal Home Loan Bank
advances 15,000,000 31,000,000 61,049,629
Repayment of Federal Home Loan Bank
advances (43,500,000) (27,500,000) (10,000,000)
Net change in:
Deposits 43,668,157 30,657,000 22,810,538
Other borrowed funds (20,357) 123,194 -
Advances from borrowers for taxes
and insurance 9,674 66,422 237,132
----------------- -------------- ----------------
Net cash from financing activities 12,121,085 32,245,459 73,585,582
----------------- --------------- ----------------
Net change in cash and cash equivalents 16,075,626 1,802,122 3,019,402
Cash and cash equivalents at beginning of period 10,924,499 9,122,377 6,102,975
----------------- --------------- ---------------
Cash and cash equivalents at end of period $ 27,000,125 $ 10,924,499 $ 9,122,377
================= =============== ===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
23
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flow information
Cash paid (refunded) during the period for
Interest $ 18,301,447 $ 18,047,050 $ 13,121,164
Income taxes 493,000 906,200 (531,000)
Supplemental schedule of noncash investing activities
Transfer from:
Trading securities to securities
held to maturity - - 2,253,019
Securities held to maturity to
securities available for sale - 37,800,287 -
Loans receivable to loans held for sale - - 4,336,255
Assets acquired in settlement of loans 1,181,156 286,443 60,503
Loans originated from sale of assets
acquired in settlement of loans 450,000 - 469,320
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral
part of these consolidated financial statements.
24
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: Perpetual Midwest Financial, Inc. is a bank holding
company located in Cedar Rapids, Iowa and owns all the outstanding stock of
Perpetual Savings Bank, a Federal Savings Bank ("the Bank"). The accompanying
consolidated financial statements include the accounts of Perpetual Midwest
Financial, Inc. and its wholly-owned subsidiary (together referred to as "the
Company"). All significant inter-company balances and transactions have been
eliminated in consolidation.
Nature of Operations and Industry Segment Information: The Bank operates in the
single industry of banking, including granting loans (primarily real estate
loans), taking in deposits, and other banking activities. This accounts for more
than 90% of the Bank's revenues, operating income and assets.
Use of Estimates: To prepare consolidated financial statements in conformity
with generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the reported amounts of assets, liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Certain Significant Estimates: Areas involving the use of management's estimates
and assumptions include the allowance for loan losses, the realization of
deferred tax assets, fair values of securities and other financial instruments,
the determination and carrying value of impaired loans, the carrying value of
loans held for sale, the carrying value of other real estate, the determination
of other-than-temporary reductions in the fair value of securities, recognition
and measurement of loss contingencies, depreciation of premises and equipment
and the carrying value and amortization of loan servicing rights. Estimates that
are more susceptible to change in the near term include the allowance for loan
losses, securities valuations, the carrying value of loans held for sale, and
the realization of deferred tax assets.
Vulnerability Due to Certain Concentrations: Management is of the opinion that
no concentrations exist that make the Corporation vulnerable to the risk of
near-term severe impact.
Statement of Cash Flows: For purposes of reporting cash flows, cash and cash
equivalents is defined to include the Company's cash on hand, amounts due from
financial institutions and short-term interestbearing deposits in other
financial institutions. The Company reports net cash flows for customer loan
transactions, deposit transactions, short-term borrowed funds, advances from
borrowers for taxes and insurance, and long-term interest-bearing time deposits
in other financial institutions.
- --------------------------------------------------------------------------------
(Continued)
25
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: The Company classifies securities into held to maturity, available
for sale and trading categories. Held to maturity securities are those which the
Company has the positive intent and ability to hold to maturity, and are
reported at amortized cost. Available for sale securities are those the Company
may decide to sell if needed for liquidity, asset-liability management or other
reasons. Available for sale securities are reported at fair value, with
unrealized gains and losses included as a separate component of equity, net of
tax. Trading securities are bought principally for sale in the near term, and
are reported at fair value with unrealized gains and losses included in
earnings. Declines in the fair value of individual held to maturity and
available for sale securities below their cost that are other than temporary
result in write-downs of the individual securities to their fair value. The
related write-downs are included in earnings as realized losses.
In November 1995, the Financial Accounting Standards Board ("FASB") issued its
Special Report, "A Guide to Implementation of SFAS No. 115 on Accounting for
Certain Investments in Debt and Equity Securities ("Guide")." As permitted by
the Guide, on December 31, 1995, the Corporation made a one-time reassessment
and transferred securities from the held to maturity portfolio to the available
for sale portfolio. At the date of transfer, these securities had an amortized
cost of $37.8 million and the transfer increased the unrealized loss on
securities available for sale by $828,000 and shareholders' equity by $519,000,
net of tax of $309,000.
Realized gains and losses resulting from the sale of securities are computed by
the specific identification method. Interest and dividend income, adjusted by
amortization of purchase premium or discount, is included in earnings. Premiums
and discounts are recognized in interest income using the interest method over
the period of maturity.
Loans Held for Sale: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of cost or estimated market value in
the aggregate. Net unrealized losses are recognized in a valuation allowance by
charges to income.
Loans Receivable: Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal balances adjusted for any charge-offs, the allowance
for loan losses, and any deferred fees or costs on originated loans and
unamortized premiums or discounts on purchased loans.
- --------------------------------------------------------------------------------
(Continued)
26
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Discounts on mortgage loans are amortized to income using the level yield method
over the remaining period to contractual maturity, adjusted for anticipated
prepayments. Loan fees and certain direct loan origination costs are deferred,
and the net fee or cost is recognized as an adjustment to interest income using
the level yield method over the contractual life of the loans, adjusted for
estimated prepayments based on the Company's historical prepayment experience.
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 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 examination.
Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended by SFAS No. 118 were adopted
effective July 1, 1995 and require recognition of loan impairment. 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. The effect of adopting these standards was not material to the
consolidated financial statements.
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 a
borrower's 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 30 days or more. Commercial and
mortgage loans placed on nonaccrual are often considered for impairment.
Impaired loans, or portions thereof, are charged off when deemed uncollectible.
The nature of disclosures for impaired loans is considered generally comparable
to prior nonaccrual and renegotiated loans and non-performing and past-due asset
disclosures.
- --------------------------------------------------------------------------------
(Continued)
27
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
Interest income on loans is accrued over the term of the loans based upon the
principal outstanding. The accrual of interest on impaired loans is discontinued
when, in management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent that cash payments are received until, in management's judgment, the
borrower has the ability to make contractual interest and principal payments, in
which case the loan is returned to accrual status. Under SFAS No. 114 as amended
by SFAS No. 118, the carrying value of impaired loans is periodically adjusted
to reflect cash payments, revised estimates of future cash flows, and increases
in the present value of expected cash flows due to the passage of time.
Increases or decreases in carrying value due to changes in estimates of future
payments or the passage of time are reported as a component of the provision for
loan losses.
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of
acquisition, establishing a new cost basis. Any reduction to fair value from the
carrying value of the related loan at the time of acquisition is accounted for
as a loan loss and charged against the allowance for loan losses. Valuations are
periodically performed by management and valuation allowances are adjusted
through a charge to income for changes in fair value or estimated selling costs.
Foreclosed real estate amounted to approximately $97,000 and $0 at June 30, 1997
and 1996, and is included in other assets in the consolidated balance sheets.
Income Taxes: Income tax expense is the sum of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax consequences of temporary
differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Stock Compensation: Expense for employee compensation under stock option plans
is based on Accounting Principles Board Opinion 25, with expense reported only
if options are granted below market price at grant date. If applicable,
disclosures of net income and earnings per share are provided as if the fair
value method of SFAS No. 123 was used for stock-based compensation.
- --------------------------------------------------------------------------------
(Continued)
28
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment: Land and land improvements are carried at cost.
Buildings, leasehold improvements, furniture and equipment, and automobiles are
carried at cost, less accumulated depreciation and amortization. Buildings,
furniture and equipment, and automobiles are depreciated using the straight-line
method over the estimated useful lives of the assets. The cost of leasehold
improvements is being amortized using the straight-line method over the terms of
the related leases. These assets are reviewed for impairment under SFAS No. 121
when events indicate the carrying amount may not be recoverable.
Recognition of Gains and Losses on the Sale of Loans: Loans sold on a net yield
basis, with servicing rights and obligations retained by the Company, result in
the recognition of gains or losses at the time of sale. The Company uses the
purchaser's normal servicing fee in computing these gains and losses. The
resulting premiums or discounts, if any, are amortized or accreted into income
over the estimated lives of the loans sold using the level yield method.
Loan Servicing Rights: The Company adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights," as of July 1, 1995. The cost of loan servicing
rights acquired is amortized in proportion to, and over the period of, estimated
net servicing revenues. Impairment of mortgage servicing rights is assessed
based on the fair value of those rights. The amount of impairment recognized is
the amount by which the capitalized mortgage servicing rights exceed their fair
value.
When participating interests in loans sold have an average contractual interest
rate, adjusted for normal servicing fees, that differs from the agreed yield to
the purchaser, gains or losses are recognized equal to the present value of such
differential over the estimated life using the level yield method. The remaining
excess servicing receivable is amortized over the estimated life using a method
approximating the interest method.
Quoted market prices are not available for the excess servicing receivables.
Thus, the cost of loan servicing rights purchased, the excess servicing fees
receivable, and the amortization thereon is periodically evaluated in relation
to estimated future net servicing revenues, taking into consideration changes in
interest rates, current prepayment rates, and expected future cash flows. The
Company evaluates the carrying value of the servicing portfolio by estimating
the future net servicing income of the portfolio based on management's best
estimate of remaining loan lives discounted at the original discount rate. The
impact of the adoption was not material to the Company's consolidated financial
statements.
- --------------------------------------------------------------------------------
(Continued)
29
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Employee Stock Ownership Plan: The Company accounts for its employee stock
ownership plan ("ESOP") in accordance with AICPA Statement of Position 93-6. The
cost of shares issued to the ESOP, but not yet allocated to participants, are
presented in the consolidated balance sheets as a reduction of shareholders'
equity. Compensation expense is recorded based on the market price of the shares
as they are committed to be released for allocation to participant accounts. The
difference between the market price and the cost of shares committed to be
released is recorded as an adjustment to additional paid-in capital. Dividends
on allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unearned ESOP shares are reflected as a reduction of debt and
accrued interest.
Shares are considered outstanding for earnings per share calculations as they
are committed to be released; unearned ESOP shares are not considered
outstanding.
Federal Home Loan Bank System: The Bank is a member of the Federal Home Loan
Bank System and is required to invest in capital stock of the Federal Home Loan
Bank ("FHLB"). The amount of the required investment is based upon the balance
of the Bank's outstanding home mortgage loans or advances from the FHLB and is
carried at cost plus the value assigned to stock dividends.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed separately. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments, and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates.
Financial Instruments with Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to extend credit which are not reflected
in the consolidated financial statements. A summary of these commitments is
disclosed separately.
Earnings Per Share: Earnings per common share is computed by dividing net income
by the weighted average number of shares of common shares outstanding and common
shares which would arise from considering dilutive stock options, less ESOP
shares not committed to be released. The weighted-average number of shares
outstanding for the calculation of earnings per common share ("EPS") is as
follows:
- --------------------------------------------------------------------------------
(Continued)
29
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
1997 1996 1995
---- ---- ----
Primary 1,915,528 2,019,663 2,059,541
Fully diluted 1,916,504 2,022,093 2,074,476
Reclassifications: Some items in the prior consolidated financial statements
have been reclassified to conform with the current presentation.
NOTE 2 - SECURITIES
Trading securities are presented on the consolidated balance sheets at fair
value. The fair value of trading securities at June 30 is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Debt securities
Municipal bonds $ - $ 28,928
Corporate note 12,500 21,250
------------- -------------
Total debt securities 12,500 50,178
Equity securities
Preferred stock 365,750 574,469
Common stock 378,375 365,153
------------- -------------
Total equity securities 744,125 939,622
------------- -------------
Total trading securities $ 756,625 $ 989,800
============= =============
</TABLE>
Year end securities were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale - 1997
U.S. Government and agency $ 28,970,082 $ 7,044 $ (98,556) $ 28,878,570
Corporate bond - - - -
Structured notes 500,000 - (2,010) 497,990
Mortgage-backed 11,467,718 579 (123,499) 11,344,798
Equity 411,300 10,375 - 421,675
---------------- --------------- --------------- ---------------
$ 41,349,100 $ 17,998 $ (224,065) $ 41,143,033
================ =============== =============== ===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
31
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997, 1996 and 1995
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available for sale - 1996
U.S. Government and agency $ 21,424,748 $ 16,505 $ (360,698) $ 21,080,555
Corporate bond 100,000 - - 100,000
Structured notes 2,493,320 - (30,125) 2,463,195
Mortgage-backed 32,748,541 55,361 (451,786) 32,352,116
Equity 411,300 - (5,375) 405,925
--------------- ---------- ----------- -------------
$ 57,177,909 $ 71,866 $ (847,984) $ 56,401,791
=============== ========== =========== ============
</TABLE>
The amortized cost and fair value of debt securities by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
----------June 30, 1997----------
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 4,998,870 $ 4,993,820
Due after one year through five years 24,471,212 24,382,740
Mortgage-backed securities 11,467,718 11,344,798
--------------- ----------------
$ 40,937,800 $ 40,721,358
=============== ================
Detail activity from sales of securities available for sale:
Proceeds Gross Gains Gross Losses
-------- ----------- ------------
Year ended June 30, 1997 $ 44,982,204 $ 87,650 $ 68,098
Year ended June 30, 1996 47,505,854 31,958 193,316
Year ended June 30, 1995 24,327,841 75,843 266,372
The Company did not sell any securities held to maturity during the years ended
June 30, 1997, 1996 and 1995.
Securities available for sale with carrying value of approximately $5,318,000
and $6,939,000 as of June 30, 1997 and 1996, were pledged as collateral for FHLB
advances and for purposes required or permitted by law.
- --------------------------------------------------------------------------------
(Continued)
32
<PAGE>
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE, NET
Year end loans were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Residential real estate $ 127,492,187 $ 129,875,553
Commercial and other real estate 95,238,234 80,372,944
Construction 22,052,921 21,020,127
------------------ ------------------
244,783,342 231,268,624
Loans in process (8,459,796) (5,991,718)
Unearned discounts (37,318) (67,903)
Net deferred loan origination fees (447,118) (466,209)
------------------ ------------------
235,839,110 224,742,794
Home equity and second mortgage 27,049,704 21,988,462
Home improvement 2,092,083 1,686,328
Automobile 27,885,975 28,831,242
Credit cards 4,380,648 3,617,654
Commercial 13,126,590 15,561,895
Other 2,985,687 1,905,682
------------------ ------------------
77,520,687 73,591,263
Unamortized premiums 113,112 239,044
Net deferred loan origination costs 22,709 177,631
------------------ ------------------
77,656,508 74,007,938
Allowance for loan losses (2,973,457) (2,670,322)
------------------ ------------------
$ 310,522,161 $ 296,080,410
================== ==================
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 2,670,322 $ 2,686,360 $ 2,482,150
Provision charged to income 1,415,500 210,000 4,065
Charge-offs (1,293,497) (293,926) (111,546)
Recoveries 181,132 67,888 311,691
--------------- --------------- ---------------
Balance at end of year $ 2,973,457 $ 2,670,322 $ 2,686,360
=============== =============== ===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
33
<PAGE>
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE, NET (Continued)
Impaired loans were as follows.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Year end loans with no allowance for loan losses allocated $ 324,024 $ 388,044
Year end loans with allowance for loan losses allocated 2,135,457 2,932,147
Amount of the allowance allocated 531,686 1,114,516
Average of impaired loans during the year 3,099,389 3,350,932
Interest income recognized during impairment 229,304 293,242
Cash-basis interest income recognized 227,352 267,099
</TABLE>
NOTE 4 - SECONDARY MORTGAGE MARKET OPERATIONS
The Company's secondary mortgage market activities for the years ended June 30
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Loan servicing fees, net $ 370,771 $ 428,757 $ 483,024
Net gains on sales of mortgage loans 343,773 409,956 82,680
-------------- -------------- --------------
714,544 838,713 565,704
Operating expenses 111,437 110,243 103,000
-------------- -------------- --------------
Operating profit from secondary
mortgage market activities $ 603,107 $ 728,470 $ 462,704
============== ============== ==============
Origination of loans held for sale $ 25,908,104 $ 29,489,359 $ 3,762,101
Proceeds from sales of loans
originated for sale $ 27,233,080 $ 29,087,202 $ 8,338,481
Loans held for sale at year end $ 889,367 $ 1,870,570 $ 1,058,457
</TABLE>
At June 30, 1997, mortgage loans sold with recourse had remaining principal
balances of approximately $9.6 million. Of that amount, $3.3 million represented
whole loan sales completed in 1984 and 1990, and $6.3 million represented the
Bank's obligation to repurchase loans sold on an ongoing basis to a mortgage
loan broker, should they become 90 days delinquent within six months of
origination and sale.
- --------------------------------------------------------------------------------
(Continued)
34
<PAGE>
- --------------------------------------------------------------------------------
NOTE 4 - SECONDARY MORTGAGE MARKET OPERATIONS (Continued)
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans at
June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Mortgage loans underlying pass-through securities
FNMA $ 11,835,717 $ 14,516,005
FHLMC 5,546,906 6,800,636
Mortgage loan portfolios serviced for
FNMA 84,903,772 93,147,308
Other investors 15,707,499 18,387,716
----------------- ----------------
$ 117,993,894 $ 132,851,665
================= ================
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were approximately $983,000 and $1,088,000 at June 30, 1997 and 1996.
The Company does not securitize loans into mortgage-backed and related
securities.
NOTE 5 - PREMISES AND EQUIPMENT, NET
Premises and equipment are stated at cost, less accumulated depreciation, and
consist of the following at June 30:
1997 1996
---- ----
Land and land improvements $ 2,013,460 $ 1,919,278
Buildings 4,999,054 4,866,999
Furniture and equipment 4,153,584 3,791,848
Leasehold improvements 294,303 294,303
Automobiles 85,129 104,749
------------------ -----------------
11,545,530 10,977,177
Accumulated depreciation (4,341,844) (3,669,518)
------------------ -----------------
$ 7,203,686 $ 7,307,659
================== =================
- --------------------------------------------------------------------------------
(Continued)
35
<PAGE>
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
The aggregate amount of time deposits in denominations of $100,000 or more was
approximately $10,994,000 and $9,062,000 at June 30, 1997 and 1996.
At June 30, 1997 scheduled maturities of time deposits are as follows:
1998 $ 110,677,567
1999 47,579,131
2000 21,007,548
2001 6,372,704
2002 and thereafter 10,702,772
----------------
$ 196,339,722
================
NOTE 7 - BORROWED FUNDS
Borrowed funds at June 30 are summarized as follows:
1997 1996
---- ----
FHLB $ 52,000,000 $ 80,500,000
U.S. Treasury demand notes 203,351 223,708
---------------- ----------------
$ 52,203,351 $ 80,723,708
================ ================
The Bank has a $20.0 million open line-of-credit with the Federal Home Loan Bank
of Des Moines, Iowa for which no amounts were outstanding at June 30, 1997 or
1996. The interest rate on the line-of-credit was 6.90% at June 30, 1997.
Advances from the Federal Home Loan Bank of Des Moines consist of the following:
Weighted Average
Maturity Interest Rate Amount
-------- ------------- ------
1998 5.79% $ 29,500,000
1999 5.78% 9,500,000
2000 6.14% 2,000,000
2001 6.32% 3,000,000
2002 6.44% 4,000,000
Thereafter 6.57% 4,000,000
----------------
$ 52,000,000
================
- --------------------------------------------------------------------------------
(Continued)
36
<PAGE>
- --------------------------------------------------------------------------------
NOTE 7 - BORROWED FUNDS (Continued)
Interest expense on borrowed funds for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Advances from the FHLB $ 4,119,176 $ 5,301,540 $ 4,252,150
Other 13,573 23,630 1,203
-------------- --------------- --------------
$ 4,132,749 $ 5,325,170 $ 4,253,353
============== =============== ==============
</TABLE>
The funds borrowed under the open line-of-credit and advances from Federal Home
Loan Bank are collateralized by the stock in the Federal Home Loan Bank,
mortgage-backed and related securities and sufficient real estate loans to at
least equal 150% of the total advances outstanding and line of credit available
under the agreement.
NOTE 8 - EMPLOYEE BENEFIT PLANS
Deferred Compensation Agreements: The Bank has entered into deferred
compensation agreements with certain current and former directors and former
executives which provide benefits payable at age sixty-five or upon their
retirement from the Bank, whichever is later, or if they become totally
disabled. Under certain circumstances, benefits are payable to a surviving
beneficiary. The present value of the estimated liability under the agreements
is included in other liabilities. The deferred compensation charged to expense
totaled approximately $(50,000), $5,000 and $9,000 for the years ended June 30,
1997, 1996 and 1995. The reduction in expense for 1997 was the result of
redemption of three of the agreements, which reduced the accrued liability. At
June 30, 1997 and 1996, the accrued liability for the deferred compensation
agreements was approximately $728,000 and $1,140,000. To fund the benefits that
will be payable under these plans, life insurance on the participants was
purchased. The cash surrender value of such insurance at June 30, 1997 and 1996
was $563,000 and $500,000 and is included in other assets.
Employee Stock Ownership and 401(k) Profit Sharing Plan: In conjunction with the
Bank's conversion, the Company established an Employee Stock Ownership Plan
(ESOP) for eligible employees. All employees of the Bank as of January 1, 1994,
were eligible to participate immediately in the ESOP. All employees of the Bank
hired after January 1, 1994 were eligible to participate in the ESOP after they
attained age 21 and completed one year of service during which they worked at
least 1,000 hours. The ESOP borrowed funds in the amount of $1,071,710 from the
Company to purchase 107,171 shares of common stock issued in the conversion.
Collateral for the loan was the common stock purchased by the ESOP. The loan
will be repaid principally from the Bank's discretionary contributions to the
ESOP over a period of ten years at a fixed interest rate of 7%. The borrowing is
payable in quarterly principal payments of $26,793 plus interest.
- --------------------------------------------------------------------------------
(Continued)
37
<PAGE>
- --------------------------------------------------------------------------------
NOTE 8 - EMPLOYEE BENEFIT PLANS (Continued)
On August 29, 1994, and effective retroactively to January 1, 1994, the Bank
merged the Perpetual Midwest Financial, Inc. Employee Stock Ownership Plan and
the Perpetual Savings Bank, FSB 401(k) Profit Sharing Plan. The merged Plan is
known as the Perpetual Midwest Financial, Inc. Employee Stock Ownership and
401(k) Profit Sharing Plan (the "Plan"). The merged plan is intended to be a
qualified retirement plan under Internal Revenue Code Sections 401(a), 401(k),
409 and 4975. It is the intent of the Company's management to operate the Plan
in essentially the same manner as the Perpetual Midwest Financial, Inc. Employee
Stock Ownership Plan and the Perpetual Savings Bank, FSB 401(k) Profit Sharing
Plan were operated prior to the merger.
Contributions to the Plan and shares released from the suspense account in an
amount proportional to the repayment of the former ESOP loan are allocated among
Plan participants on the basis of compensation in the year of allocation.
Benefits generally become 100% vested after three years of credited service.
Benefits may be payable in the form of stock or cash upon termination of
employment. The Bank's contributions to the Plan are not fixed, so benefits
payable under the Plan cannot be estimated.
On January 1, 1994, the Company adopted the AICPA's Statement of Position 93-6
("SOP 93-6"), "Employers' Accounting for Employee Stock Ownership Plans." SOP
93-6 requires that the employer record compensation expense in an amount equal
to the fair value of shares committed to be released to employees from the Plan.
The fair value of unearned plan shares at June 30, 1997 and 1996 was
approximately $1,250,000 and $1,403,000.
The Plan shares as of June 30 were as follows:
1997 1996 1995
---- ---- ----
Allocated shares 39,019 24,666 8,100
Unearned shares 65,356 82,505 99,071
------- ------- -------
Total plan shares 104,375 107,171 107,171
======= ======= =======
At June 30, 1997, the Company had no committed-to-be-released or suspense
shares. During the year ended June 30, 1997, 2796 shares were distributed to
participants. The amount of compensation expense recognized for the years ended
June 30, 1997, 1996 and 1995 for the Plan was approximately $368,000 (comprised
of $44,000 for the 401(k) profit sharing portion and $324,000 for the ESOP),
$277,000 (comprised of $18,000 for the 401(k) profit sharing portion and
$259,000 for the ESOP) and $138,000 (comprised of $18,000 for the 401(k) profit
sharing portion and $120,000 for the ESOP).
- --------------------------------------------------------------------------------
(Continued)
38
<PAGE>
- --------------------------------------------------------------------------------
NOTE 8 - EMPLOYEE BENEFIT PLANS (Continued)
Recognition and Retention Plans (RRP): In conjunction with the Bank's
conversion, the Company established the Recognition and Retention Plans as a
method of providing directors, officers and other key employees of the Bank with
a proprietary interest in the Company in a manner designed to encourage such
persons to remain with the Company. The terms of each RRP will be identical;
only the participants and the number of shares awarded to each participant vary.
Eligible directors, officers and other key employees of the Company earn (i.e.,
become vested in) shares of common stock covered by the award at a rate of 20%
per year, with the first installment vesting September 28, 1994 and annually on
a calendar year basis thereafter.
Pursuant to the RRP, restricted stock awards for shares representing an
aggregate of 4.0% of the shares of common stock or 82,800 shares were authorized
during the conversion. The Company awarded 53,984 shares as of the conversion
date. During the year ended June 30, 1997 the Company awarded 27,800 treasury
shares at a fair value of $19.25 per share. Compensation expense for the RRP is
recognized on a pro rata basis over the vesting period of the awards. During the
year ended June 30, 1997, 1996 and 1995, $149,053, $66,370 and $238,392 were
charged to compensation expense for the RRP. The consolidated stockholders'
equity is reduced by unearned compensation in the amount of $431,977 and $45,880
at June 30, 1997 and 1996 which represents the unamortized unearned portion of
the RRP awards.
Stock Option Plan: The Board of Directors of the Company has adopted the
Perpetual Midwest Financial, Inc. 1993 Stock Option and Incentive Plan (the
"Option Plan"). The number of options authorized under the plan is 10% or
207,000 shares of common stock issued in the conversion. Directors, officers and
employees of the Company and its subsidiary are eligible to participate in the
Option Plan. The option exercise price must be at least 100% of the fair market
value of the common stock on the date of the grant, and the option term cannot
exceed 10 years. Upon conversion, 198,547 options were granted at an exercise
price of $10 per share.
Activity in the Option Plan for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
Option
Exercise
Price 1997 1996 1995
----- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of year $ 10.00 196,547 198,547 198,547
Options exercised 10.00 (5,000) - -
Options forfeited 10.00 (10,448) (2,000) -
--------- --------- -------
Balance at end of year 181,099 196,547 198,547
========= ========= =======
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
39
<PAGE>
- --------------------------------------------------------------------------------
NOTE 8 - EMPLOYEE BENEFIT PLAN (Continued)
SFAS No. 123, which became effective for 1996, requires disclosures for
companies that do not adopt its fair value accounting method for stock-based
employee compensation. This standard had no impact on the Company in 1997 or
1996 as no new options were granted during the year.
NOTE 9 - INCOME TAXES
The Company and the Bank file consolidated federal income tax returns. Prior to
fiscal year 1997, if certain conditions were met in determining taxable income
as reported on the consolidated federal income tax return, the Bank was allowed
a special bad debt deduction based on a percentage of taxable income (8% for
1996) or on specified experience formulas. The Bank used the
percentage-of-taxable-income method for tax returns as of June 30, 1996 and
1995. Tax legislation passed in August 1996 now requires the Bank to deduct a
provision for bad debts for tax purposes based on actual loss experience and
recapture the excess bad debt reserve accumulated in tax years after 1987. The
related amount of deferred tax liability which must be recaptured is
approximately $136,000 and is payable over a six year period beginning not later
than the tax year ending June 30, 1999.
Income tax expense at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal
Current $ 485,488 $ 829,684 $ 614,436
Deferred (207,988) (39,684) 140,264
State
Current 76,455 141,411 51,325
Deferred (34,955) (22,415) 69,214
---------------- ------------- ------------
$ 319,000 $ 908,996 $ 875,239
================ ============= ============
The provision for income taxes differs from amounts computed by using the
statutory federal income tax rate of 34% at June 30 is as follows:
1997 1996 1995
---- ---- ----
Income tax provision computed at statutory rate $ 267,116 $ 816,924 $ 753,436
Tax effect of
State tax, net of federal income tax effect 27,390 78,537 79,566
Other 24,494 13,535 42,237
--------------- ------------ ------------
$ 319,000 $ 908,996 $ 875,239
=============== ============ ============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
40
<PAGE>
- --------------------------------------------------------------------------------
NOTE 9- INCOME TAXES (Continued)
The tax effects of each type of income and expense item that gave rise to net
deferred taxes at June 30 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets
Bad debt deduction $ 961,000 $ 853,816 $ 840,644
Deferred compensation 271,581 425,271 444,857
Net deferred loan fees 37,933 - -
Net unrealized depreciation on securities
available for sale 76,863 289,492 170,162
Other 182,919 167,822 118,258
--------------- --------------- ----------------
1,530,296 1,736,401 1,573,921
Deferred tax liabilities
Depreciation (125,170) (134,309) (254,810)
FHLB stock dividend (244,757) (244,757) (210,851)
Fair value adjustment for securities
and loans held for sale (78,262) (342,110) (272,599)
Other (51,304) (14,736) (16,601)
--------------- --------------- ----------------
(499,493) (735,912) (754,861)
Valuation allowance - - -
--------------- --------------- ----------------
Net deferred tax asset $ 1,030,803 $ 1,000,489 $ 819,060
=============== =============== ================
</TABLE>
Federal income tax laws provide savings banks with additional bad debt
deductions through 1987, totaling $3,383,000 for the Bank. Accounting standards
do not require a deferred tax liability to be recorded on this amount, which
liability otherwise would total $1,150,000 at June 30, 1997 and 1996. If the
Bank were liquidated or otherwise ceases to be a bank or if tax laws were to
change, the $1,150,000 would be recorded as expense.
NOTE 10 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED
EARNINGS
Regulations of the Office of Thrift Supervision limit the amount of dividends
and other capital distributions that may be paid by a savings institution
without prior approval of the Office of Thrift Supervision. The regulatory
restriction is based on a three-tiered system with the greatest flexibility
being afforded to well-capitalized (Tier 1) institutions. The Bank is currently
a Tier 1 institution. Accordingly, the Bank can make, without prior regulatory
approval, distributions during a calendar year up to 100% of its net income to
date during the calendar year plus an amount that would reduce by one-half its
"surplus capital ratio" (the excess over its capital requirements) at the
beginning of the calendar year. Accordingly, at June 30, 1997 approximately $6.7
million of the Bank's retained earnings is potentially available for
distribution to the Company under this calculation. See also Note 17.
- --------------------------------------------------------------------------------
(Continued)
41
<PAGE>
NOTE 11 - OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Other noninterest income
Service charges and fees $ 765,151 $ 484,490 $ 388,055
Loan late charges 55,757 44,685 38,804
Commission income 65,136 84,680 157,283
Other 135,818 61,319 207,832
-------------- -------------- ------------
$ 1,021,862 $ 675,174 $ 791,974
Other noninterest expense ============== ============== ============
Advertising and promotion $ 445,571 $ 409,449 $ 400,087
Data processing 655,122 573,177 377,431
Professional fees 324,490 251,246 272,212
Printing, postage, stationery
and supplies 293,813 239,251 175,525
Other 1,698,108 1,086,533 654,963
-------------- -------------- ------------
$ 3,417,104 $ 2,559,656 $ 1,877,218
============== ============== ============
</TABLE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company leases the land on which the branch office in Cedar Rapids was
constructed. The lease expires on December 31, 1997, but contains five year
tenant renewal options through 2007. Remaining payments for 1997 will total
approximately $13,000. Future annual rental payments will be adjusted each year
according to the increase in the Wholesale Price Index.
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans. The Company's exposure
to credit loss in the event of nonperformance by the other party to the
financial instrument for commitment to make loans is represented by the
contractual amount of those instruments. The Company follows the same credit
policy to make such commitments as it uses for on-balance-sheet items.
Under employment agreements with five of its officers, certain events leading to
separation from the Company could result in cash payments totaling $940,000.
- --------------------------------------------------------------------------------
(Continued)
42
<PAGE>
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
The Company had the following commitments outstanding at June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Fixed rate loans $ 5,226,000 $ 5,487,000
Variable rate loans 3,069,000 6,382,000
Loans in process 8,460,000 5,992,000
Variable rate unused lines of credit 18,526,000 21,216,000
Variable rate unused credit card lines of credit 22,511,000 20,423,000
---------------- ---------------
$ 57,792,000 $ 59,500,000
================ ===============
</TABLE>
Fixed rate loan commitments at June 30, 1997 are at rates primarily ranging from
6.75% to 8.5%. These fixed rate loan commitments are primarily for 30 year
terms. Rates on variable rate loans range from 7.375% to 8.375% and are tied
primarily to the one year Treasury note. Rates on loans in process, unused lines
of credit, and unused credit card lines of credit range from 7.125% to 18.9%.
Since many commitments to make loans expire without being used, the amount does
not necessarily represent future cash commitments. Collateral obtained upon
exercise of the commitment is determined using management's credit evaluation of
the borrower and may include real estate, vehicles, business assets, deposits
and other items.
At June 30, 1997, the company had outstanding, a commitment to purchase
approximately $5.4 million in adjustable rate single family mortgage loans.
These loans were primarily three year adjustable rate loans tied to the three
year Treasury note, with rates ranging from 6.75% to 9.75%, a net weighted
average coupon rate of 7.90%, and a weighted average maturity of 325 months.
The Company is involved in various legal actions arising in the ordinary course
of business. In the opinion of management, the outcome of these matters will not
have a material effect on the Company.
NOTE 13 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
The Company grants real estate loans, primarily single-family residential loans,
and consumer loans, including education, home improvement, mobile home and other
consumer loans, primarily in the Cedar Rapids area. Substantially all loans are
secured by consumer assets and real estate. Loans secured by real estate
mortgages make up approximately 76% of the loan portfolio as of June 30, 1997
and 1996, and are primarily secured by residential mortgages.
- --------------------------------------------------------------------------------
(Continued)
43
<PAGE>
NOTE 13 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK (Continued)
The Company's underwriting policies allow mortgage loans to be made for up to
95% of the collateral value, based upon appraised values. All loans with a
loan-to-value of greater than 80% are required to carry private mortgage
insurance. These loans are collateralized by the underlying properties.
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors and officers of the Company are loan customers. A summary of
related party loan activity, for loans aggregating $60,000 or more to any one
related party, is as follows:
Balance -June 30, 1995 $ 999,233
New loans 40,692
Repayments (129,917)
Other changes 46,743
---------------
Balance - June 30, 1996 956,751
New loans -
Repayments (25,526)
Other changes (58,469)
---------------
Balance - June 30, 1997 $ 872,756
===============
Other changes are the result of changes in directors and officers for loans
applicable to one reporting period that are excludable from the other reporting
period.
- --------------------------------------------------------------------------------
(Continued)
44
<PAGE>
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent company,
Perpetual Midwest Financial, Inc.
Condensed Balance Sheets
June 30, 1997 and 1996
1997 1996
---- ----
ASSETS
Cash and cash equivalents $ 739,041 $ 192,978
Trading securities 756,625 989,800
Securities available for sale - 100,000
Investment in the Bank 31,534,700 30,642,631
Loan to the Bank 250,000 1,605,000
Loan to the ESOP 610,542 776,032
Loans receivable-real estate - 1,343,189
Other assets 97,968 22,087
---------------- ---------------
$ 33,988,876 $ 35,671,717
================ ===============
LIABILITIES $ 99,214 $ 83,800
STOCKHOLDERS' EQUITY 33,889,662 35,587,917
---------------- ---------------
$ 33,988,876 $ 35,671,717
================ ===============
- --------------------------------------------------------------------------------
(Continued)
45
<PAGE>
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Income
June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income
Interest income $ 155,184 $ 282,198 $ 298,907
Dividend income 47,554 52,593 43,213
Net trading securities gains (losses) 101,787 (658) 35,495
Dividends from the Bank 155,822 997,494 -
Net realized gains on sales
of securities available for sale 59,375 - -
Other income - 8,500 -
-------------- -------------- --------------
519,722 1,340,127 377,615
Other expenses 458,246 325,458 448,112
-------------- -------------- --------------
Income (loss) before income tax expense 61,476 1,014,669 (70,497)
Income tax expense (benefit) (36,000) 9,496 (26,300)
-------------- -------------- --------------
Income (loss) before equity in undistributed
net income of the Bank 97,476 1,005,173 (44,197)
Equity in undistributed net income of the Bank 369,158 488,548 1,384,945
-------------- -------------- --------------
Net income $ 466,634 $ 1,493,721 $ 1,340,748
============== ============== ==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
46
<PAGE>
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Cash Flows
June 30, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 466,634 $ 1,493,721 $ 1,340,748
Adjustments to reconcile net income to net
cash from operating activities
Amortization of:
Unearned compensation 149,053 66,370 238,392
Premiums and discounts on securities, net - (290) (13,154)
Net trading securities (gains) losses (101,787) 658 (35,495)
Net realized (gains) losses on sales
of securities available for sale (59,375) - -
Purchase of trading securities (453,750) (222,909) (371,821)
Proceeds from sales of trading securities 788,712 - 104,750
Equity in undistributed net income of the Bank (369,158) (488,548) (1,384,945)
Market adjustment of ESOP shares 158,629 97,949 12,150
Change in:
Other assets (34,974) 54,941 4,888
Accrued expenses and other liabilities 15,414 29,357 54,443
--------------- --------------- ----------------
Net cash from operating activities 559,398 1,031,249 (50,044)
Cash flows from investing activities
Proceeds from maturity of securities held to maturity - 500,000 5,250,000
Purchase of:
Securities available for sale (100,000) - (100,000)
Securities held to maturity - - (3,483,537)
Proceeds from sales of securities available for sale 259,375 - -
Repayment on loan to the ESOP 165,490 161,092 107,793
Net change in other loans receivable 2,698,189 26,811 (2,975,000)
--------------- --------------- ----------------
Net cash from investing activities 3,023,054 687,903 (1,200,744)
Cash flows from financing activities
Purchase of shares of treasury stock (2,506,029) (1,640,473) (511,717)
Cash dividends paid (580,360) (460,684) -
Effect of treasury stock issued for stock plans 50,000 - -
--------------- --------------- ----------------
Net cash from financing activities (3,036,389) (2,101,157) (511,717)
--------------- --------------- ----------------
Net change in cash and cash equivalents 546,063 (382,005) (1,762,505)
Cash and cash equivalents at beginning of period 192,978 574,983 2,337,488
--------------- --------------- -----------------
Cash and cash equivalents at end of period $ 739,041 $ 192,978 $ 574,983
=============== =============== =================
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
47
<PAGE>
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows the estimated fair values and the related carrying
values of the Company's financial instruments at June 30, 1997 and 1996. Items
which are not financial instruments are not included.
<TABLE>
<CAPTION>
1997 1996
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 27,000,125 $ 27,000,000 $ 10,924,499 $ 10,924,000
Trading securities 756,625 757,000 989,800 990,000
Securities available for sale 41,143,033 41,143,000 56,401,791 56,402,000
FHLB stock 4,640,900 4,641,000 4,640,900 4,641,000
Loans receivable (including loans
held for sale), net of allowance
for loan losses 311,411,528 310,077,593 297,950,980 293,309,000
Financial liabilities
Noninterest-bearing demand deposits (9,943,176) (9,943,000) (7,192,677) (7,193,000)
Savings and NOW deposits (98,882,369) (98,882,000) (72,728,251) (72,728,000)
Time deposits (196,339,722) (196,931,000) (181,576,182) (181,885,000)
Borrowed funds (52,203,351) (52,467,000) (80,723,708) (80,158,000)
Advances from borrowers for taxes
and insurance (828,198) (828,000) (818,524) (819,000)
</TABLE>
For purposes of the above disclosures of estimated fair value, the following
assumptions were used as of June 30, 1997 and 1996. The estimated fair value for
cash and cash equivalents and FHLB stock is considered to approximate cost. The
estimated fair value for securities is based on quoted market values for the
individual securities or for equivalent securities. The estimated fair value for
loans receivable is based on estimates of the rate the Company would charge for
similar loans at June 30, 1997 and 1996, applied for the time period until
estimated repayment.
The estimated fair value for noninterest-bearing demand, savings and NOW
deposits and advances from borrowers for taxes and insurance is based on their
carrying value. The estimated fair value for time deposits and borrowed funds is
based on estimates of the rate the Company would pay on such deposits and
borrowed funds at June 30, 1997 and 1996, applied for the time period until
maturity. The estimated fair value of other financial instruments (including
accrued interest and dividends receivable, accrued interest payable and cash
surrender value of life insurance) and off-balance-sheet loan commitments
approximates cost at June 30, 1997 and 1996 and is not considered significant to
this presentation.
- --------------------------------------------------------------------------------
(Continued)
48
<PAGE>
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that, were the Company to have
disposed of such items at June 30, 1997 and 1996, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at June 30,
1997 and 1996, should not necessarily be considered to apply at subsequent
dates.
In addition, other assets and liabilities of the Company that are not defined as
financial instruments are not included in the above disclosures, such as
property and equipment. Also, non-financial instruments typically not recognized
in the financial statements nevertheless may have value but are not included in
the above disclosures. These include, among other items, the estimated earnings
power of core deposit accounts, the trained work force, customer goodwill and
similar items.
NOTE 17 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and prompt corrective action
regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
The prompt corrective action regulations provide five classifications, including
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
- --------------------------------------------------------------------------------
(Continued)
49
<PAGE>
NOTE 17 - REGULATORY MATTERS (Continued)
At year end, the Bank's actual and required capital amounts (in millions) and
ratios were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C
1997
Total capital (to risk weighted assets) $ 34.1 12.6% $ 21.7 8.0% $ 27.1 10.0%
Tier 1 (core) capital (to risk weighted
assets) $ 31.7 11.7% $ 8.1 3.0% $ 16.2 6.0%
Tier 1 (core) capital (to adjusted total
assets) $ 31.7 8.0% $ 11.9 3.0% N/A N/A
Tangible capital (to adjusted total assets) $ 31.7 8.0% $ 5.9 1.5% N/A N/A
Tier 1 (core) capital (to average assets) $ 31.7 8.0% $ 15.8 4.0% $ 19.7 5.0%
1996
Total capital (to risk weighted assets) $ 32.7 12.6% $ 20.7 8.0% $ 25.9 10.0%
Tier 1 (core) capital (to risk weighted
assets) $ 31.1 12.0% $ 7.8 3.0% $ 15.5 6.0%
Tier 1 (core) capital (to adjusted total
assets) $ 31.1 8.2% $ 11.4 3.0% N/A N/A
Tangible capital (to adjusted total assets) $ 31.1 8.2% $ 5.7 1.5% N/A N/A
Tier 1 (core) capital (to average assets) $ 31.1 8.4% $ 14.9 4.0% $ 18.6 5.0%
</TABLE>
The Bank was categorized as well capitalized at year end 1997 and 1996.
- --------------------------------------------------------------------------------
(Continued)
50
<PAGE>
NOTE 18 - IMPACT OF NEW ACCOUNTING STANDARDS
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," was issued in 1996. It revises the accounting
for transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It became effective for
some transactions occurring after December 31, 1996 and will be effective for
others in 1998. The impact of partial adoption in 1997 was not material to the
June 30, 1997 consolidated financial statements and the impact of the complete
adoption in 1998 is also not expected to be material to the consolidated
financial statements.
In March 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
128, "Earnings Per Share," which revised the accounting requirements for
calculating earnings per share. Basic earnings per share for the quarter ended
December 31, 1997 and later will be calculated solely on average common shares
outstanding. Diluted earnings per share will reflect the potential dilution of
stock options and other common stock equivalents. All prior calculations will be
restated to be comparable to the new methods. As the Company has dilution from
stock options, the new calculation methods will increase basic earnings per
share over what otherwise would have been reported as primary earnings per
share, while there will be little effect on fully diluted earnings per share.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This Statement establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. Income tax effects must also
be shown. This Statement is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 is not expected to have a material impact
on the results of operations or financial condition of the Company.
In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement is effective for financial statements for periods beginning after
December 15, 1997. The adoption of SFAS No. 131 is not expected to have a
material impact on the results of operations or financial condition of the
Company.
- --------------------------------------------------------------------------------
(Continued)
51
<PAGE>
NOTE 19 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
---------------Year Ended June 30, 1997---------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $ 7,342 $ 7,263 $ 7,348 $ 7,676
Interest expense 4,758 4,708 4,643 4,870
---------- --------- ---------- --------
Net interest income 2,584 2,555 2,705 2,806
Provision for loan losses 225 552 271 368
---------- --------- ---------- --------
Net interest income after provision for loan losses 2,359 2,003 2,434 2,438
Noninterest income 418 492 465 483
Noninterest expense 3,690 2,340 2,186 2,090
---------- --------- ---------- --------
Income before income taxes (913) 155 713 831
Income taxes (360) 74 279 326
---------- --------- ---------- --------
Net income $ (553) $ 81 $ 434 $ 505
========== ========= ========== ========
Earnings per share $ (0.29) $ 0.04 $ 0.22 $ 0.27
(Continued)
NOTE 19 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
---------------Year Ended June 30, 1996--------------
1st 2nd 3rd 4th
(In thousands, except per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Interest income $ 6,326 $ 6,629 $ 6,989 $ 7,130
Interest expense 4,322 4,510 4,617 4,617
---------- ---------- ---------- ----------
Net interest income 2,004 2,119 2,372 2,513
Provision for loan losses - 35 30 145
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 2,004 2,084 2,342 2,368
Noninterest income 280 327 282 463
Noninterest expense 1,852 1,690 1,945 2,260
---------- ---------- ---------- ----------
Income before income taxes 432 721 679 571
Income taxes 176 285 252 196
---------- ---------- ---------- ----------
Net income $ 256 $ 436 $ 427 $ 375
========== ========== ========== ==========
Earnings per share $ 0.13 $ 0.22 $ 0.21 $ 0.18
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
52
<PAGE>
NOTE 20 - SAIF DEPOSIT INSURANCE PREMIUM
The deposits of savings associations such as the Bank are insured by the Savings
Association Insurance Fund ("SAIF"). A recapitalization plan signed into law on
September 30, 1996 provided for a one-time assessment of 65.7 basis points
applied to all SAIF deposits as of March 31, 1995. Based on the Bank's deposits
as of this date, a one-time assessment of approximately $1.5 million was paid
and recorded as SAIF deposit insurance premium expense for the year ended June
30, 1997.
- --------------------------------------------------------------------------------
(Continued)
53
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The annual meeting of stockholders will be held at 11:00 a.m., October 24, 1997,
at the Crowne Plaza Hotel located at 350 First Avenue, N.E., Cedar Rapids, Iowa.
STOCK LISTING
The Company's stock is traded over the counter, on the NASDAQ National Market
under the symbol "PMFI".
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The table below shows the range of high and low bid prices and dividends paid in
fiscal 1996 and 1997. These prices do not represent actual transactions and do
not include retail markups, markdowns or commissions.
QUARTER ENDED HIGH LOW DIVIDENDS
------------- ---- --- ---------
September 30, 1995............. $17 3/4 $14 1/4 $ ---
December 31, 1995.............. 17 1/2 16 1/4 .075
March 31, 1996................. 17 1/2 16 .075
June 30, 1996.................. 17 3/4 16 3/4 .075
September 30, 1996............. 20 17 .075
December 31, 1996.............. 22 1/4 18 1/4 .075
March 31, 1997................. 20 1/2 18 3/4 .075
June 30, 1997.................. 20 1/2 19 .075
The Board of Directors intends to continue the payment of cash dividends,
dependent on the results of operations and financial condition of the Company,
tax considerations, industry standards, economic conditions, general business
practices and other factors. Dividend payment decisions are made with
consideration of a variety of factors including earnings, financial condition,
market considerations and regulatory restrictions. Restrictions on dividend
payments are described in Note 10 of the Notes to Consolidated Financial
Statements included in this report.
As of June 30, 1997, the Company had approximately 1,430 stockholders of record
and 1,882,575 outstanding shares of common stock.
SHAREHOLDERS AND GENERAL INQUIRIES TRANSFER AGENT
James L. Roberts Carmen Walch, Trust Officer
Perpetual Midwest Financial, Inc. First Bankers Trust Company, N.A.
700 First Avenue, N.E. 2321 Koch's Lane
Cedar Rapids, Iowa 52401 Quincy, Illinois 62301
(319) 366-1851 (217) 228-8063
ANNUAL AND OTHER REPORTS
The Company is required to file an annual report on Form 10-KSB for its fiscal
year ended June 30, 1997, with the Securities and Exchange Commission. Copies of
the Form 10-KSB annual report and the Company's quarterly reports may be
obtained without charge by contacting:
Rick L. Brown, Chief Financial Officer
Perpetual Midwest Financial, Inc.
700 First Avenue, N.E.
Cedar Rapids, Iowa 52401
(319) 366-1851
54
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
COMPANY AND CORPORATE INFORMATION
<TABLE>
<CAPTION>
<S> <C>
COMPANY AND BANK ADDRESS
700 First Avenue, N.E. Telephone (319) 366-1851
Cedar Rapids, Iowa 52401 Fax (319) 369-5653
DIRECTORS OF THE BOARD
William C. Fletcher Douglas E. Anderson
Chairman of the Board, Retired President President of Fidler, Inc., Goshen, Indiana
and Owner of Rapids Chevrolet, Cedar
Rapids, Iowa
James L. Roberts Robert H. O'Meara
President and Chief Executive Officer, Director and Secretary of Perpetual Midwest
Cedar Rapids, Iowa Financial, Inc., Cedar Rapids, Iowa
Robert C. Tilden
Retired partner of Simmons, Perrine, Eugene J. Dowie
Albright and Ellwood, Cedar Rapids, Former owner and President of Dowie Outdoor
Iowa Advertising, Cedar Rapids, Iowa and owner
and member of the Board of Directors of
Radio Stations KTOF-FM and KMRY-AM, Cedar
Rapids, Iowa
PERPETUAL MIDWEST FINANCIAL, INC.
OFFICERS
James L. Roberts Robert H. O'Meara
President and Chief Executive Officer Secretary
Rick L. Brown Janice M. Klein
Executive Vice President, Chief Financial Assistant Secretary
Officer and Treasurer
Herbert E. Musser
Sr. Vice President and Controller
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
INDEPENDENT AUDITORS CORPORATE COUNSEL SPECIAL COUNSEL
Crowe, Chizek and Company LLP Simmons, Perrine, Albright Silver, Freedman & Taff, L.L.P.
330 East Jefferson Boulevard and Ellwood 1100 New York Avenue, N.W.
South Bend, Indiana 46624 115 3rd Street, S.E. Seventh Floor, East Tower
Suite 1200 Washington, D.C. 20005
Cedar Rapids, Iowa 52401
</TABLE>
55
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
------------------------------
Subsidiary or Percent of State of
Parent Organization Ownership Incorporation
- ------ ------------ --------- -------------
Perpetual Midwest Perpetual Savings 100% Federal
Financial, Inc. Bank, FSB
Perpetual Savings Perpetual Financial 100% Iowa
Bank, FSB Service, Inc.
<PAGE>
CROWE CHIZEK
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We hereby consent to the incorporation by reference of our report, dated August
1, 1997 on the consolidated financial statements of Perpetual Midwest Financial,
Inc. and Subsidiary, which report is incorporated by reference in Form 10K-SB
from Perpetual Midwest Financial Inc.'s Annual Report to Shareholders for the
year ended June 30, 1997 in Perpetual Midwest Financial, Inc.'s previously filed
Registration Statements on Form S-8 (Registration No. 33-92318 and No.
33-92320).
Crowe, Chizek and Company LLP
South Bend, Indiana
September 22, 1997
CROWE, CHIZEK AND COMPANY LLP
330 EAST JEFFERSON BOULEVARD POST OFFICE BOX 7
SOUTH BEND, INDIANA 46624 219.232.3992 FAX 219.236.8692
HORWATH
A member of Horwath International
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE TWELVE MONTHS ENDED JUNE 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 6,066,803
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0
0
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