<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File No. 0-23368
PERPETUAL MIDWEST FINANCIAL, INC.
A Delaware Corporation I.R.S. Employer Identification
No. 42-1415490
Address Telephone Number
------- ----------------
700 1st Avenue NE (319) 366-1851
Cedar Rapids, Iowa 52401
Check whether the issuer (1) filed all reports required to be filed by Section
13 of 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
---- ----
There were 1,900,075 shares of Common Stock ($0.01 par value) outstanding as of
May 2, 1997.
Transitional Small Business Disclosure Format (check one): Yes ; No X.
--- ---
1 of 23
<PAGE> 2
PERPETUAL MIDWEST FINANCIAL, INC.
INDEX
<TABLE>
<S> <C>
PART I. Financial Information Page No.
--------------------- --------
Item 1.Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1997 and June 30, 1996 3
Condensed Consolidated Statements of Income -
Three and Nine Months Ended March 31, 1997
and March 31, 1996 4
Consolidated Statement of Changes in Stockholders'
Equity - March 31, 1997 5
Condensed Consolidated Statements of Cash Flows -
Three and Nine Months Ended March 31, 1997
and March 31, 1996 6-7
Notes to Condensed Consolidated Financial 8-10
Statements
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-22
PART II. Other Information
-----------------
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
----------
</TABLE>
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<PAGE> 3
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
March 31, 1997 June 30, 1996
-------------- ------------
<S> <C> <C>
Cash and due from financial institutions $ 5,343,167 $ 2,968,278
Interest-earning deposits in other financial institutions-short term 7,928,656 7,956,221
------------ ------------
Cash and cash equivalents 13,271,823 10,924,499
Trading securities 680,188 989,800
Securities available for sale 69,542,017 56,401,791
Other securities-Federal Home Loan Bank stock 4,640,900 4,640,900
Loans held for sale 631,208 1,870,570
Loans receivable, net of allowance for loan losses of $2,825,867
and $2,670,322 at March 31, 1997 and June 30, 1996 respectively 296,312,678 296,080,410
Accrued interest receivable 2,802,284 2,678,024
Premises and equipment, net 7,301,642 7,307,659
Other assets 2,597,170 2,379,202
------------ ------------
Total assets $397,779,910 $383,272,855
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Demand deposits $ 8,297,015 $ 7,192,677
Savings and NOW deposits 91,898,777 72,728,251
Certificates of deposit 191,413,476 181,576,182
------------ ------------
Total deposits 291,609,268 261,497,110
Borrowed funds 67,390,961 80,723,708
Advances from borrowers for taxes and insurance 284,350 818,524
Accrued interest payable 2,610,613 2,343,611
Other liabilities 2,098,407 2,301,985
------------ ------------
Total liabilities 363,993,599 347,684,938
Stockholders' equity
Common stock, $.01 par value, authorized: 6,000,000
shares; issued: 2,123,984 shares 21,240 21,240
Additional paid-in capital 20,712,301 20,546,070
Retained earnings (substantially restricted) 18,006,425 18,481,335
Net unrealized depreciation on securities available for sale
(net of tax of $134,024 and $289,492 for March 31, 1997 and
June 30, 1996 respectively) (225,288) (486,626)
Less: Treasury stock (216,706 and 135,902 shares at cost at
March 31, 1997 and June 30, 1996 respectively) (3,570,365) (2,152,190)
Unearned ESOP shares (651,272) (776,032)
Unearned compensation (506,730) (45,880)
------------ ------------
Total stockholders' equity 33,786,311 35,587,917
------------ ------------
Total liabilities and stockholders' equity $397,779,910 $383,272,855
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3 of 23
<PAGE> 4
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, 1997 March 31, 1996 March 31, 1997 March 31, 1996
------------------ ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Interest income
Loans receivable $6,271,523 $5,717,453 $18,799,164 $15,577,130
Trading securities 10,679 17,472 42,209 43,396
Securities available-for sale 944,351 996,341 2,525,272 2,752,040
Securities held-to-maturity -- -- -- 675,455
Other 121,664 258,188 587,206 896,687
---------- ---------- ----------- -----------
7,348,217 6,989,454 21,953,851 19,944,708
Interest expense
Deposits 3,720,106 3,232,210 10,919,355 9,456,103
Borrowed funds 923,400 1,385,042 3,190,357 3,993,028
---------- ---------- ----------- -----------
4,643,506 4,617,252 14,109,712 13,449,131
---------- ---------- ----------- -----------
Net interest income 2,704,711 2,372,202 7,844,139 6,495,577
Provision for loan losses 271,000 30,000 1,048,000 65,000
---------- ---------- ----------- -----------
Net interest income after provision
for loan losses 2,433,711 2,342,202 6,796,139 6,430,577
Noninterest income
Loan servicing fees 92,520 104,796 283,060 324,535
Net realized gains (losses) on sales
of available-for-sale securities (1,256) (139,543) 46,070 (150,706)
Net gains from sales of loans held for sale 69,522 125,385 257,994 295,391
Net trading securities gains 9,335 5,176 74,214 7,514
Other 295,760 186,208 714,803 412,799
---------- ---------- ----------- -----------
465,881 282,022 1,376,141 889,533
Noninterest expense
Compensation and benefits 878,961 828,647 2,643,828 2,359,375
Occupancy and equipment 398,616 358,893 1,181,928 1,032,358
SAIF deposit insurance premium 44,725 135,308 1,789,997 398,413
Net (gains) losses on foreclosed assets 11,192 5,175 21,507 (15,687)
Other 852,604 616,511 2,578,991 1,712,797
---------- ---------- ----------- -----------
2,186,098 1,944,534 8,216,251 5,487,256
---------- ---------- ----------- -----------
Income (Loss) before income taxes 713,494 679,690 (43,971) 1,832,854
Income tax expense (benefit) 279,035 252,350 (6,465) 713,746
---------- ---------- ----------- -----------
Net income (loss) $ 434,459 $ 427,340 $ (37,506) $ 1,119,108
========== ========== =========== ===========
Earnings per common and common
equivalent share $ 0.22 $ 0.21 $ (0.02) $ 0.55
Earnings per share-assuming full dilution $ 0.22 $ 0.21 $ (0.02) $ 0.55
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4 of 23
<PAGE> 5
PERPETUAL MIDWEST FINANCIAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Net Unrealized
Depreciation on
Additional Securities Unearned
Common Paid-in Retained Available Treasury ESOP
Stock Capital Earnings for-Sale Stock Shares
------- ----------- ----------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 $21,240 $20,546,070 $18,481,335 $ (486,626) $ (2,152,190) $(776,032)
Effect of contribution to fund ESOP -- -- -- -- -- 124,760
Effect of market adjustment of ESOP shares -- 158,628 -- -- -- --
Amortization of RRP contribution -- -- -- -- -- --
Tax effect of stock plans -- 40,906 -- -- -- --
Purchase of treasury stock -- -- -- -- (2,036,628) --
Issuance of 5,000 shares from treasury stock
in connection with exercise of stock options -- (47,500) -- -- 97,500 --
Issuance of 27,800 shares from treasury stock
in connection with RRP award -- 14,197 -- -- 520,953 --
Net changes in unrealized depreciation on
securities available-for-sale -- -- -- 261,338 -- --
Cash dividends paid -- -- (437,404) -- -- --
Net income -- -- (37,506) -- -- --
------- ----------- ----------- ---------- ------------ ----------
BALANCE AT MARCH 31, 1997 $21,240 $20,712,301 $18,006,425 $ (225,288) $ (3,570,365) $ (651,272)
======= =========== =========== ========== ============ ==========
<CAPTION>
Total
Unearned Stockholders'
Compensation Equity
------------ -------------
<S> <C> <C>
BALANCE AT JUNE 30, 1996 $ (45,880) $35,587,917
Effect of contribution to fund ESOP -- 124,760
Effect of market adjustment of ESOP shares -- 158,628
Amortization of RRP contribution 74,300 74,300
Tax effect of stock plans -- 40,906
Purchase of treasury stock -- (2,036,628)
Issuance of 5,000 shares from treasury stock
in connection with exercise of stock options -- 50,000
Issuance of 27,800 shares from treasury stock
in connection with RRP award (535,150) --
Net changes in unrealized depreciation on
securities available-for-sale -- 261,338
Cash dividends paid -- (437,404)
Net income -- (37,506)
------------ -------------
BALANCE AT MARCH 31, 1997 $ (506,730) $ 33,786,311
============ =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5 of 23
<PAGE> 6
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ---------------------------------
March 31, 1997 March 31, 1996 March 31, 1997 March 31, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 434,459 $ 427,340 $ (37,506) $ 1,119,108
Adjustments to reconcile net income
to net cash from operating activities
Depreciation 183,009 170,885 574,139 493,409
Amortization of:
Unearned compensation 50,000 12,150 74,300 54,220
Premiums and discounts on
securities, net 65,780 147,417 283,141 525,604
Provision for loan losses 271,000 30,000 1,048,000 65,000
(Gains) losses on sales of:
Securities available-for-sale 1,256 139,543 (46,070) 150,706
Loans held for sale (69,522) (125,385) (257,994) (295,391)
Foreclosed assets, net 11,192 5,175 21,507 18,952
Purchase of:
Trading securities (245,000) (30,375) (353,750) (235,363)
Net trading securities (gains) (9,335) (5,176) (74,214) (7,514)
Proceeds from sales of:
Trading securities 495,717 -- 737,576 --
Loans originated for sale 5,514,147 9,292,365 20,959,665 19,302,540
Origination of loans held for sale (4,751,575) (10,427,417) (19,462,309) (20,582,429)
Federal Home Loan Bank stock
dividend -- -- -- (90,900)
Market adjustment of ESOP shares -- -- 158,628 97,949
ESOP expense 40,726 42,027 124,760 119,072
Change in:
Accrued interest and dividends
receivable (262,531) (131,732) (124,260) (151,913)
Accrued expenses and other
liabilities 528,132 43,136 63,424 (694,033)
Other assets 272,140 157,324 (373,434) 655,486
------------ ------------ ------------ ------------
Total adjustments 2,095,136 (680,063) 3,353,109 (574,605)
------------ ------------ ------------ ------------
Net cash from operating activities 2,529,595 (252,723) 3,315,603 544,503
Cash flows from investing activities
Proceeds from:
Sales of securities available-for-sale 6,482,880 23,321,667 23,232,088 38,090,159
Maturities and principal payments of
securities available-for-sale 825,084 2,213,752 9,373,648 6,278,155
Maturities and principal payments of
securities held-to-maturity -- -- -- 4,914,146
Sales of foreclosed assets 97,160 20,242 554,321 38,904
Purchase of:
Securities available-for-sale (18,948,114) (16,218,638) (45,566,229) (21,650,027)
FHLB stock -- -- -- (50,000)
Loans receivable -- (21,284,952) -- (21,284,952)
Premises and equipment, net (99,870) (383,824) (568,122) (1,224,375)
Net change in loans 1,843,895 (10,678,552) (1,856,096) (34,676,704)
Net change in interest-earning deposits
in other financial institutions -- -- -- 3,000,000
------------ ------------ ------------ ------------
Net cash from investing activities (9,798,965) (23,010,305) (14,830,390) (26,564,694)
</TABLE>
(Continued)
6 of 23
<PAGE> 7
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
March 31, 1997 March 31, 1996 March 31, 1997 March 31, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Cash flows from financing activities
Purchase of shares of treasury stock $ -- $ (269,686) $ (2,036,628) $ (1,141,348)
Cash dividends paid (143,121) (153,952) (437,404) (309,403)
Tax effect of stock plans (37,237) -- 40,906 27,371
Effect of treasury stock issued
for stock plans -- -- 50,000 --
Net change in deposits 6,252,915 3,907,544 30,112,158 18,320,845
Proceeds from Federal Home Loan
Bank advances -- -- 5,000,000 22,000,000
Repayment of Federal Home Loan
Bank advances (10,000,000) (4,000,000) (31,500,000) (14,500,000)
Net increase (decrease) in Federal
Home Loan Bank line of credit 13,000,000 -- 13,000,000 --
Net change in other borrowed funds (256,505) 182,940 167,253 160,921
Net change in advance payments by
borrowers for taxes and insurance (486,333) (450,690) (534,174) (494,300)
------------ ------------ ------------ ------------
Net cash from financing activities 8,329,719 (783,844) 13,862,111 24,064,086
------------ ------------ ------------ ------------
Net change in cash and cash equivalents 1,060,349 (24,046,872) 2,347,324 (1,956,105)
Cash and cash equivalents at beginning
of period 12,211,474 31,213,144 10,924,499 9,122,377
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 13,271,823 $ 7,166,272 $ 13,271,823 $ 7,166,272
============ ============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest 3,703,757 4,635,349 13,844,672 13,964,462
Income taxes 472,764 428,600 472,764 921,353
Supplemental schedule of non-cash investing activities
Transfer from mortgage-backed and related
securities held-to-maturity to mortgage-
backed and related securities available-
for-sale -- -- -- 23,349,401
Transfer from securities held-to-maturity
to securities available-for-sale -- -- -- 14,450,886
Assets acquired in settlement of loans 108,352 83,054 1,025,828 117,093
Loans originated from sale of assets acquired
in settlement of loans -- -- 450,000 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7 of 23
<PAGE> 8
Item 1.
Financial Statements, Continued
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and, therefore, do not
include all disclosures required by generally accepted accounting
principals for complete presentation of financial statements. The
unaudited information for the three and nine months ended March 31, 1997
and March 31, 1996 includes the consolidated results of operations of
Perpetual Midwest Financial, Inc. (the "Company") and its wholly owned
subsidiary Perpetual Savings Bank, FSB (the "Bank"). In the opinion of
management, the information reflects all adjustments (consisting only of
normal recurring adjustments) which were necessary for a fair presentation
of the results of operations for such periods but should not be considered
as indicative of results for a full year.
2. BORROWINGS FROM THE FEDERAL HOME LOAN BANK
Borrowings at March 31, 1997 primarily consisted of advances from the
Federal Home Loan Bank of Des Moines (the "FHLB") bearing rates from 5.36%
to 6.59%. The advances are collateralized by the Company's single-family
and multi-family whole loans and mortgage-backed securities. Adjustable
rate advances included $14.0 million indexed to the 1 month LIBOR rate.
The Company also maintains a $20.0 million line of credit with the FHLB
which adjusts daily to the FHLB's posted rate for these borrowings. The
line of credit had a balance of $13.0 million at March 31, 1997. The
remaining balances of $40.0 million of advances are fixed rate, fixed
term, with maturities from 2 months to 6.25 years.
3. CAPITAL DISTRIBUTIONS REGULATIONS:
An OTS regulation imposes limitations upon all "capital distributions" by
savings associations, including cash dividends, payments by an institution
to repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger and other distributions charged
against capital. The regulation establishes a three-tiered system of
regulation, with the greatest flexibility being afforded to
well-capitalized institutions. A savings association which has total
capital (immediately prior to and after giving effect to capital
distribution) that is at least equal to its fully phased-in capital
requirements would be a Tier 1 institution ("Tier 1 Institution"). An
institution that has total capital at least equal to its minimum capital
requirements, but less than its fully phased-in capital requirements,
would be a Tier 2 institution ("Tier 2 Institution"). An institution
having total capital that is less than its minimum capital requirements
would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 institution may be
designated by the OTS as a Tier 2 or Tier 3 institution if the OTS
determines that the institution is "in need of more than normal
supervision." The Bank is currently a Tier 1 Institution.
8 of 23
<PAGE> 9
Item 1.
Financial Statements, Continued
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. CAPITAL DISTRIBUTIONS REGULATIONS (CONTINUED):
A Tier 1 Institution could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year up to 100% of
its net income to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess over its Fully
Phased-in Capital Requirements) at the beginning of the calendar year.
Any additional amount of capital distributions would require prior
regulatory approval.
4. EARNINGS PER COMMON SHARE:
Earnings per common and common equivalent share (primary and fully
diluted) for the three and nine months ended March 31, 1997 were computed
by dividing net income by the weighted average number of shares of common
and common stock equivalents outstanding. The weighted average number of
common and common equivalent shares outstanding exclude ESOP unallocated
shares and treasury stock.
5. ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is increased by charges to income and
decreased by charge-offs, net of recoveries. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated.
Management's periodic evaluation of the adequacy of the allowance is based
on the Company's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral, and the
current economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process periodically review the
Company's allowance for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the allowances
based on their judgments of information available to them at the time of
their examinations.
Loans are considered impaired if full principal or interest payments are
not anticipated in accordance with the contractual loan terms. Impaired
loans are carried at the present value of expected future cash flows
discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the
allowance for loan losses is allocated to impaired loans. If these
allocations cause the allowance for loan losses to require increase, such
increase is reported as a component of the provision for loan losses.
9 of 23
<PAGE> 10
Item 1.
Financial Statements, Continued
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. ALLOWANCE FOR LOAN LOSSES (CONTINUED):
Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include: residential first mortgage loans secured by one- to
four-family residences, residential construction loans, and automobile,
home equity and second mortgage loans. Commercial loans and mortgage
loans secured by other properties are evaluated individually for
impairment. When analysis of borrower operating results and financial
condition indicates that underlying cash flows of the borrower's business
are not adequate to meet its debt service requirements, the loan is
evaluated for impairment. Often this is associated with a delay or
shortfall in payments of 60 days or more. Loans are moved to nonaccrual
status when 90 days or more past due. These loans are often considered
impaired. Impaired loans, or portions thereof, are charged off when
deemed uncollectible by management review.
The following is a summary of the activity in the allowance for loan
losses account for the nine months ended March 31, 1997:
<TABLE>
<S> <C>
Balance at July 1, 1996 $ 2,670,322
Provision for loan losses 1,048,000
Losses charged to the allowance (1,047,989)
Recoveries credited to the allowance 155,534
-----------
Balance at March 31, 1997 $ 2,825,867
===========
</TABLE>
Information regarding impaired loans is as follows for the three and nine
months ending March 31, 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
March 31,
----------------------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average investment in impaired loans $3,621,261 $1,124,100 $3,312,467 $1,126,969
Interest income recognized on impaired
loans including interest income recognized
on a cash basis 71,747 5,883 183,230 35,376
Interest income recognized on impaired
loans on cash basis 75,101 5,883 183,678 35,376
</TABLE>
Information regarding impaired loans at March 31, 1997 is as follows:
<TABLE>
<S> <C>
Balance of impaired loans $3,623,813
Less portion for which no allowance for loan losses is allocated 324,024
----------
Portion of impaired loan balance for which an
allowance for loan losses is allocated $3,299,789
==========
Portion of allowance for loan losses allocated to impaired loan balance $1,034,442
==========
</TABLE>
10 of 23
<PAGE> 11
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
GENERAL:
The Company was incorporated under the laws of the State of Delaware to become
the holding company for the Bank. The Company was incorporated at the direction
of the Board of Directors of the Bank, and on March 30, 1994 acquired all of
the capital stock of the Bank upon its Conversion from mutual to stock form
(the "Conversion"). All references to the Company, unless otherwise indicated,
at or before March 28, 1994, refer to the Bank and its subsidiary on a
consolidated basis.
The Company is principally engaged in the business of attracting retail
checking and savings deposits from the general public and investing those
deposits, together with borrowings and other funds, primarily in one- to
four-family residential mortgage loans, in commercial and multi-family real
estate, in consumer and commercial business loans and, to a lesser extent, in
construction or development. The Company also invests in U.S. Government and
agency obligations and other permissible investments.
The Company is focusing on activities related to developing its retail banking
business within its market place by increasing consumer and mortgage loan
originations, while offering new deposit products. In addition, the Company's
strategy calls for a gradual growth that would leverage its high capital to
asset ratio. This strategy emphasizes an aggressive program of origination and
acquisition of retail consumer loans, including vehicle loans, home equity
(second mortgage) loans, credit card loans and recreational vehicle loans. In
addition, this strategy calls for a growth in the Company's commercial real
estate loans and business loans within the Company's market areas. This growth
of the company may be financed by either increases in deposits or from borrowed
funds. The source of funds for the Company's growth depends on several
factors, including cost, availability, interest rate risk, and reinvestment
alternatives.
The Company is selling substantially all of its originations of one to
four-family loans. With a "locked-in" rate at the time of commitment, the
Company sells one to four-family loans, servicing released, to a private
mortgage banker, generally for a 1.00% to 1.25% premium. This program has
allowed the Company to offer competitive one to four-family rates and products
in its market area. To a lesser extent, the Company sells one to four-family
loans to the Federal National Mortgage Association, servicing retained.
Although the loan rates in this program are generally less competitive, some
customers of the Company prefer that the servicing of their loan remain with
the Company.
The most significant outside factors influencing the operations of the Company
include general economic conditions, competition in the local market place, and
the related monetary and fiscal policies of agencies that regulate and/or
affect financial institutions. More specifically, the cost of funds primarily
consisting of deposits, is influenced by interest rates on competing
investments and general market rates of interest, while lending activities are
influenced by the demand for real estate financing and other types of loans,
which in turn is affected by the interest rates at which such loans may be
offered and other factors affecting loan demand and funds availability,
including posted rates by the Federal National Mortgage Association ("Fannie
Mae").
11 of 23
<PAGE> 12
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
FINANCIAL CONDITION:
Total assets increased $14.5 million to $397.8 million at March 31, 1997 from
$383.3 million at June 30, 1996. This increase was primarily attributable to a
$2.4 million increase in cash and cash equivalents, and a $13.1 million
increase in securities available-for-sale.
Loans receivable, net, increased $232,000 to $296.3 million at March 31, 1997
from $296.1 million at June 30, 1996. The increase in loans receivable, net,
was funded primarily by sales, repayments and maturities of securities and net
deposit increases.
There are no significant changes to the geographic concentrations of the
Company's out-of-area loans. The Company had no foreign loans outstanding at
March 31, 1997.
Total Deposits increased $30.1 million to $291.6 million at March 31, 1997.
Management attributes this increase to the Company's expanded marketing efforts
and competitive array of deposit products.
Borrowed funds at March 31, 1997 totaled $67.4 million as compared to $80.7
million at June 30, 1996. Borrowed funds consisted primarily of $27.5 million
of long term advances, $26.5 million of short term advances (due in 12 months
or less) and $13.0 million line of credit used, primarily from the Federal
Home Loan Bank of Des Moines.
At March 31, 1997 stockholders' equity totaled $33.8 million as compared to
$35.6 million at June 30, 1996 or a decrease of $1.8 million. Stockholders'
equity decreased primarily due to a net loss of $38,000 for the nine months
ended March 31, 1997, an increase of the contra-equity accounts for Employee
Stock Ownership Plan and Unearned Compensation in the amount of $336,000, cash
dividends paid in the amount of $437,000 and a reduction of equity in the
amount of $1.4 million for the increased holdings of Company Treasury Stock,
primarily offset by a net of tax reduction of $262,000 from June 30, 1996 for
net unrealized depreciation in securities available-for-sale. The increase in
the contra-equity accounts for Employee Stock Ownership Plan and Unearned
Compensation was predominately due to the award of 27,800 shares of the
Company's common stock to its directors, officers and employees in key
management positions at Perpetual Savings Bank, FSB, at a deferred cost of
$535,000. These shares were awarded from the shares approved and remaining
under the Company's Recognition and Retention Plan as ratified by the Company's
stockholders on October 20, 1994.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1996
The Company had net income after tax of $434,000 or $0.22 per share of common
stock for the three months ended March 31, 1997 compared to $427,000 or $0.21
per share for the same period in 1996. The increase in net income for the three
months ended March 31, 1997 compared to the same period last year was
predominately
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<PAGE> 13
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
RESULTS OF OPERATIONS: COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(CONTINUED)
due to an increase of $333,000 in net interest income before provision for
loan losses, a $184,000 increase in other income, offset by a $241,000 increase
in provision for loans losses, a $242,000 increase in noninterest expense and a
$27,000 increase in income tax provision.
Net interest income, before provision for loan losses, increased $333,000 to
$2.7 million for the three months ended March 31, 1997 compared to $2.4 million
for the same period in 1996. Interest income increased $359,000, primarily due
to an increase of 0.24% in the average rate earned on interest-earning assets,
and an increase of $7.4 million in the average balance. Interest expense
increased $27,000 and primarily reflected an $11.6 million increase in the
average balance on interest-bearing liabilities, offset by a decrease of 0.19%
in the average rate paid.
Noninterest income for the three months ended March 31, 1997, was $466,000
compared to $282,000 for the same period in 1996. Loan servicing fees decreased
$12,000 to $93,000 for the three months ended March 31, 1997 compared to
$105,000 for the same period in 1996, primarily due to a declining average
balance of loans serviced for others. The average balance of loans serviced for
others was $123.3 million during the three months ended March 31, 1997 compared
to $138.2 million during the same period last year. Gain or loss on the sales
of available-for-sale securities and loans held for sale reflected a net gain
of $68,000 for the three months ended March 31, 1997 compared to a net loss of
$14,000 for same period last year. Net trading securities gains were $9,000 for
the three months ended March 31, 1997, compared to a net trading gain of $5,000
for the same period last year.
Other noninterest income increased $110,000 for the three months ended March
31, 1997 to $296,000 as compared to $186,000 for the three months ended March
31, 1996, primarily due to a $15,000 increase in mortgage loan fees earned, a
$41,000 increase in savings fees, a $28,000 increase in non-mortgage fees
earned and a $20,000 reduction in the net loss generated by Perpetual Financial
Services, Inc. (the Bank's wholly owned service corporation). The operations of
Perpetual Financial Services, Inc. resulted in net income of $1,000 for the
quarter ended March 31, 1997 compared to net loss of $19,000 for the same
period last year. The increase in net income for the service corporation was
primarily due to an increase in commission income generated by Perpetual
Financial Services, Inc. which is generally attributed to a increase of
non-insured product sales by the service corporation. The Bank, through its
wholly owned subsidiary, Perpetual Financial Services, Inc., offers mutual
funds, annuities and brokerage services to its customers.
Noninterest expense increased $242,000 to $2.2 million for the three months
ended March 31, 1997 compared to $1.9 million for the same period in 1996.
Compensation and benefits increased $50,000 to $879,000, primarily due to
normal salary increases and a related increase in payroll taxes. Occupancy and
equipment expense increased $40,000 to $399,000 for the three months ended
March 31, 1997 compared to $359,000 for the same period last year, primarily
due to additional expense related to operations of the Company's new branch
office, which
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<PAGE> 14
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
RESULTS OF OPERATIONS: COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(CONTINUED)
opened on June 1, 1996. The regular SAIF deposit insurance premium expense
decreased $90,000 to $45,000 for the three months ended March 31, 1997 as
compared to $135,000 for the same period last year. The decrease in the SAIF
deposit insurance premium was primarily due to a decrease in the Company's
annual premium rate to 0.065% (SAIF FICO assessment) for the three months
ended March 31, 1997 from 0.23% for the three months ended March 31, 1996,
offset by a $40.0 million increase in the Company's assessable deposit base.
(See "--Insurance of Accounts and SAIF Deposit Premium"). Net gains or losses
on foreclosed assets reflected a net loss of $11,000 for the three months ended
March 31, 1997 compared to a net loss of $5,000 for the same period in 1996.
Other noninterest expense increased $236,000 to $853,000 for the three months
ended March 31, 1997 compared to $617,000 for the same period last year. Data
processing expense, marketing expense, loan expense and Visa/Master Card
service expense are the largest categorical increases in other noninterest
expense for the three months ended March 31, 1997 as compared to the same
period last year. Data processing expense increased $21,000 primarily due to an
increase in the number of accounts serviced and a scheduled price increase by
the Company's EDP servicer. Marketing expense increased $25,000 to $121,000 for
the three months ended March 31, 1997 as compared to the same period last year.
Visa/Master Card service expense increased $42,000, primarily due to an
increase in the number of accounts and transactions serviced, which is
partially offset by a related $27,000 increase in credit card fee income.
Service expense and charges for processing customer ATM and debit card
transactions increased $23,000 for the three months ended March 31, 1997 to
$47,000 as compared to the same period last year, primarily due to an increase
in the number of transaction accounts and the volume of electronic card
transactions.
Income tax provision increased $27,000 to $279,000 for the three months ended
March 31, 1997 compared to $252,000 for the same period in 1996. The increase
primarily reflected a tax provision on the higher amount of income before tax.
COMPARISON OF NINE MONTHS ENDED MARCH 31, 1997 AND 1996
The Company had a net loss of $38,000 or $0.02 per share of common stock for
the nine months ended March 31, 1997 compared to net income of $1.1 million or
$0.55 for the same period in 1996. The decrease in net income resulted from a
$2.7 million increase in noninterest expense ($1.5 million due to a special
SAIF assessment), and a $983,000 increase in provision for loan losses, offset
by a $1.3 million increase in net interest income before provision for loan
losses, a $486,000 increase in noninterest income and a $720,000 reduction in
income tax expense.
Net interest income before provision for loan losses increased $1.3 million to
$7.8 million for the nine months ended March 31, 1997 as compared to $6.5
million for the same period last year. Interest income increased $2.0 million
for the nine months ended March 31, 1997 compared to the same period last year,
primarily due
14 of 23
<PAGE> 15
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
RESULTS OF OPERATIONS: COMPARISON OF NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(CONTINUED)
to an 28 basis point increase in the yield on average interest-earning assets,
and an increase of $21.3 million in the average balance of interest-earning
assets. Interest expense increased $661,000 for the nine months ended March 31,
1997 compared to the nine months ended March 31, 1996, primarily due to a $25.1
million increase in the average balance of interest-bearing liabilities, offset
by a 19 basis point decrease in the cost of interest-bearing liabilities.
Provision for loan losses increased $983,000 for the nine months ended March
31, 1997 as compared to the same period in 1996, primarily due to the continued
growth in the Company's loan portfolio and an increase in the Company's actual
loan loss experience over the previous year (See - "Non-performing Assets and
Loan Loss Provision").
Noninterest income increased $486,000 for the nine months ended March 31, 1997
to $1.4 million compared to $890,000 for the same period 1996. Loan servicing
fees decreased $42,000 to $283,000 for the nine months ended March 31, 1997
compared to $325,000 for the same period in 1996, primarily due to a declining
average balance of loans serviced for others. The average balance of loans
serviced for others was $126.4 million during the nine months ended March 31,
1997 compared to $139.1 million during the same period last year. Net gains or
losses on the sale of interest-earning assets reflected a net gain of $304,000
for the nine months ended March 31, 1997, compared to a net gain of $145,000
for the same period last year. The increase in net gains on the sale of
interest-earning assets primarily reflects the increased volume of fixed-rate
loans sold under the Company's one-to four- family mortgage loan selling
program and a reduction in losses on sales of available-for-sale securities.
Loan sales during the nine months ended March 31, 1997 and 1996 were $21.0
million and $19.3 million respectively.
Net trading gains were $74,000 for the nine months ended March 31, 1997
compared to $8,000 for the same period in 1996. The increase in net trading
gains from the prior period was primarily due to a $59,000 gain realized from
the conversion to stock of a convertible corporate bond held by the Company and
subsequent sale of the stock in an acquisition offer.
Other noninterest income increased $302,000 for the nine months ended March 31,
1997 to $715,000 compared to $413,000 for the nine months ended March 31, 1996.
The increase was predominately due to a $99,000 increase in demand deposit
account fees, a $99,000 increase in non-mortgage loans fees, a $28,000 increase
in mortgage loan fees and a $51,000 decrease in net loss generated by Perpetual
Financial Services, Inc. (the Bank's wholly owned service corporation). The
decrease in the net loss from Perpetual Financial Services, Inc. was primarily
the result of a $9,000 increase in commission income and a $42,000 decrease in
the service corporation's operating expenses. The Bank, through its wholly
owned subsidiary, Perpetual Financial Services, Inc., offers mutual funds,
annuities and brokerage services to its customers.
15 of 23
<PAGE> 16
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
RESULTS OF OPERATIONS: COMPARISON OF NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(CONTINUED)
Noninterest expense increased $2.7 million to $8.2 million for the nine months
ended March 31, 1997 compared to $5.5 million for the nine months ended March
31, 1996. The most significant item causing the increase was a one-time $1.5
million assessment by the FDIC to recapitalize the Savings association
Insurance Fund ("SAIF") (See "--Insurance of Accounts and SAIF Deposit
Premium"). Compensation and benefits increased $285,000 to $2.6 million for the
nine months ended March 31, 1997 compared to $2.4 million for the same period
in 1996, primarily due to an increase of twelve employees to the Company's
staff and a related increase in payroll taxes. Occupancy and equipment expense
increased $150,000 to $1.2 million for the nine months ended March 31, 1997
compared to $1.0 million for the same period last year, primarily due to
additional expense related to operations of the Company's new branch office,
which opened on June 1, 1996. The regular portion of the SAIF deposit premium
expense decreased to $305,000 for the nine months ended March 31, 1997 compared
to $398,000 for the nine months ended March 31, 1996. The Company's annual
premium rate decreased from 0.230% to 0.180% for the three months ended
December 31, 1996 and 0.065% for the three months ended March 31, 1997 while
the average assessment base increased . Net gains or losses on foreclosed
assets reflected a net loss of $22,000 for the nine months ended March 31, 1997
compared to a net gain of $16,000 for the same period in 1996.
Other noninterest expense increased $866,000 to $2.6 million for the nine
months ended March 31, 1997 compared to $1.7 million for the nine months ended
March 31, 1996. The most significant item causing the increase in noninterest
expense was the recording by the Bank of $245,000 of other expense connected
with potential claims on disbursements related to a borrower's remodeling and
converting a commercial warehouse facility to a commercial office building
complex for rental purposes. Data processing expense increased $77,000 to
$471,000 for the nine months ended March 31, 1997 as compared to $394,000 for
the same period last year, primarily due to an increase in the number of
accounts serviced and a scheduled price increase by the Company's EDP servicer.
Marketing expense increased $54,000 to $338,000 over the previous period,
predominately due to an increased focus on direct mail and a related increase
in the volume of marketing pieces mailed. Visa/Master Card service expense
increased $123,000, primarily due to an increase in the number of accounts and
transactions serviced, which is partially offset by a related $94,000 increase
reflected in other noninterest income-credit card fee income. Service expense
and charges for processing customer ATM and debit card transactions increased
$36,000 for the nine months ended March 31, 1977 to $113,000 compared to
$77,000 for the same period last year, primarily due to an increase in the
number of transaction accounts and the volume of electronic card transactions.
Income tax provision decreased $720,000 to a minus $6,000 benefit for the nine
months ended March 31, 1997 compared to $714,000 for the same period in 1996.
The decrease primarily reflected a tax provision credit on the net loss for the
nine months ended March 31, 1997 compared to a tax provision expense on the net
income for the nine months ended March 31, 1996.
16 of 23
<PAGE> 17
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
RESULTS OF OPERATIONS: COMPARISON OF NINE MONTHS ENDED MARCH 31, 1997 AND 1996
(CONTINUED)
INSURANCE OF ACCOUNTS AND SAIF DEPOSIT PREMIUM:
On September 30, 1996, federal legislation was enacted that required the
Savings Association Insurance Fund ("SAIF") to be recapitalized with a one-time
assessment on virtually all SAIF-insured institutions, such as the Bank, equal
to 65.7 basis points on SAIF-insured deposits maintained by those institutions
as of March 31, 1995. The SAIF assessment, which was accrued as of September
30, 1996 and paid to the FDIC in November, 1996, was approximately $1.5 million
before tax or $900,000 after tax.
As a result of the SAIF recapitalization, the FDIC amended its regulation
concerning the insurance premiums payable by SAIF-insured institutions.
Effective October 1, 1996 through December 31, 1996, the FDIC reduced the SAIF
insurance premium for all SAIF-insured institutions that are required to pay
the Financing Corporation ("FICO") obligation, such as the Bank, to a range of
18 to 27 basis points from 23 to 31 basis points per $100 of domestic deposits.
The FDIC also reduced the SAIF insurance premium to a range of 0 to 27 basis
points per $100 of domestic deposits, effective January 1, 1997. The Bank
qualified for the minimum SAIF insurance premium. In addition, the FDIC has
imposed a FICO assessment on SAIF insured deposits equal to 6.48 basis points
per $100 of domestic deposits for the semi-annual period from January 1, 1997
through June 30, 1997.
RECOVERY OF BAD-DEBT DEDUCTION:
In August 1996, legislation was enacted that repeals the reserve method of
accounting used by many thrifts to calculate their bad debt reserve for federal
income tax purposes. As a result, small thrifts such as the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the experience method for post-1987 tax years. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning
after December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. The management of the Company does not believe that the
legislation will have a material impact on the Company or the Bank.
DISCONTINUED OPERATIONS:
Effective April 1, 1997 the Company discontinued its program for direct sales
of non-insured financial products through Perpetual Financial Services, Inc., a
wholly owned service corporation of Perpetual Savings Bank, FSB and has begun
the process to dissolve the service corporation. The Company has incorporated
Midwest Financial Services, Inc. ("MFSI"), a wholly owned corporation of
Perpetual Midwest Financial, Inc. Midwest Financial Services, Inc. entered into
an agreement, effective April 1, 1997, with Heartland Investment Associates, an
NASD licensed broker/dealer, to provide certain financial services to the
customers of Perpetual Savings Bank, FSB on the Bank's premises. Heartland
Investment Associates, located in Cedar Rapids, Iowa, engages in the business
of providing certain insurance products and a full spectrum of approved
(non-insured) investment products.
17 of 23
<PAGE> 18
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
NON-PERFORMING ASSETS AND LOAN LOSS PROVISIONS:
The allowance for loan losses is established through a provision for loan
losses based on management's quarterly asset classification review and
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation, which includes a review of
all loans of which full collectibility may not be reasonably assured, considers
among other matters, the estimated value of the underlying collateral, economic
conditions, cash flow analysis, historical loan loss experience,
discussions held with delinquent borrowers and other factors that warrant
recognition in providing for an adequate allowance for loan losses. Provisions
for loan losses in the amount of $1.0 million were recorded for the nine months
ended March 31, 1997 compared to $65,000 for the nine months ended March 31,
1996. The increase in provision for losses during the nine months ended March
31, 1997 compared to the nine months ended March 31, 1996 was due to continued
growth in net loans receivable and an increase in the Company's actual loan loss
experience. The Company's allowance for loan losses was $2.8 million or 0.94%
of loans receivable at March 31, 1997 as compared to $2.7 million or 0.89% at
June 30, 1996. While management believes that the current allowance for loan
losses is adequate to absorb loan losses in the existing loan portfolio, there
is no assurance that the subsequent evaluations of the loan portfolio may not
require additional provisions for loan loss.
The non-performing assets to total assets is one indicator of the Company's
exposure to credit risk. Non-performing assets of the Company consist of
non-accruing loans and real estate owned which has been acquired as a result
of foreclosure. Non-performing assets decreased from $1.4 million or .39% of
assets at June 30, 1996 to $1.3 million or .32% of assets at March 31, 1997,
exclusive of troubled debt restructured loans. The ratio of the allowance for
loan losses to non-performing assets increased from 1.8 times at June 30, 1996
to 2.2 times at March 31, 1997.
Troubled Debt Restructures. The Company does not consider troubled debt
restructurings to be "non-performing loans". At March 31, 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 March 31, 1997 the balance of the loan was $634,000. The borrower
has performed according to the terms of the modification agreement, and the
loan was current at March 31, 1997 (See -Impaired Loans).
Foreclosed Assets. As of March 31, 1997, the Company had $83,000 of foreclosed
and repossessed assets which represented nine automobiles totaling $71,000, and
a repossessed motor home and a travel trailer with book values of $4,000 and
$8,000 respectively. Management may initiate foreclosure on any specific
impaired loan described below if a further review of that specific loan
indicates an additional deterioration of the collateral or cash flow. Based on
a review of the Company's assets at March 31, 1997 and the current economic
environment, management does not expect to initiate any significant
foreclosures or repossessions of assets, other than impaired assets with the
conditions described previously, during the quarter following that review date
and they continue to monitor other loans of concern.
18 of 23
<PAGE> 19
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
NON-PERFORMING ASSETS AND LOAN LOSS PROVISIONS: (CONTINUED)
Impaired Loans. The Company had five loans classified as impaired at March 31,
1997 totaling $3.6 million, for which the Company allocated $1.0 million of the
allowance for loan losses.
The largest loan included in impaired loans at March 31, 1997 is a $1.6 million
business loan of which approximately 53% is secured by real estate and
improvements and the remainder of the loan is secured by business assets. The
loan was granted to an existing trucking and freight company in the Company's
market area for the purpose of expanding the trucking operation, including
relocation of trucking terminals. A significant portion of the trucking
company's revenue was dependent upon a single contract which expired and was not
renewed, resulting in a deterioration of cash flows from the trucking operation.
A collateral analysis was performed by the Company in March, 1997 which
estimated a loss exposure of $324,000 at March 31, 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 March 31, 1997 and management will continue
to monitor this loan closely.
The second largest loan included in impaired loans is a $634,000 loan secured
by an office/warehouse mortgage loan in Newport Beach, California. This loan is
discussed above under Troubled Debt Restructures and is classified as impaired
due to previous experience with the borrower and the necessity to restructure
the loan. An allowance for loan losses has been allocated for this loan in the
amount of $209,000.
The Company has classified as impaired a $584,000 loan secured by two buildings
with multi-tenant office suites located in Van Nuys, California. This loan was
originated in 1986 at a 67% loan to value ratio with a balloon date in
February, 1996, however, the borrower was not able to refinance the loan in the
local market of the security. The Company granted a five-year extension on the
loan to balloon in February, 2001. This loan was classified as impaired based
upon a high vacancy rate, property condition and the California real estate
market indicating that the borrower can not refinance in the local market. An
allowance for loan losses has been allocated for this loan in the amount of
$350,000. At March 31, 1997 the borrower had listed the property for sale in
the amount of $775,000. The loan was current at March 31, 1997, with no
delinquencies over the past twelve months.
A loan secured by a communications building located in Denver, Colorado in the
amount of $573,000 was classified as impaired at March 31, 1997. 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 March 31, 1997 with no
delinquencies over the past twelve months.
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 March
31, 1997. This loan was originated in 1991 at a 68% loan to value ratio and
has previously incurred negative cash flows from the security. At December 31,
1996, there was, subject to certain conditions, an offer to purchase this
property and acceptance of the offer by the owner. Management
19 of 23
<PAGE> 20
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
NON-PERFORMING ASSETS AND LOAN LOSS PROVISIONS: (CONTINUED)
believes the selling price is adequate to pay off the Company's loan and all
related selling costs. The offer to purchase this property expires June 1997 if
the conditions of the offer are not fulfilled and there are no assurances that a
final sale is eminent. The offering price is for an amount in excess of the
Company's outstanding loan amount and selling costs. The loan was five months
delinquent at March 31, 1997, and as such, is considered impaired.
A large loan included in impaired loans at June 30, 1996 and subsequently
removed from the impaired classification during the quarter ended December 31,
1996, was a $784,000 real estate participation loan secured by a 114 unit
multi-family complex located in Ft. Worth, Texas. The loan was originated at a
54% loan to value ratio for $1.3 million in 1987 with a twenty year
amortization and a ten year balloon date of July 1, 1997. The Company purchased
a 75% interest in the loan at the time of origination. An allowance for loan
losses had been allocated for this loan in the amount of $300,000. The Company
acquired this property through a foreclosure action and a trustee sale in
November, 1996. This property was sold in December, 1996, resulting in an
actual loss of approximately $178,000, and removed from the impaired loan
classification.
Other Loans of Concern. As of March 31, 1997 there were $2.5 million of other
loans of concern not discussed above where known information about the possible
credit problems of borrowers or the cash flows of the security properties have
caused management to have concerns as to the ability of the borrower to comply
with present loan repayment terms and which may result in the future inclusion
of such loans as non-performing or impaired. Other loans of concern have been
considered by management in conjunction with the analysis of the adequacy of
the allowance for loan losses.
The Company is monitoring four commercial real estate loans aggregating $1.5
million secured by properties located in Southern California. These loans were
originated prior to 1987 at loan to value ratios ranging from 40% - 80% (with
an average of 62%). The Company purchased these loans in 1988. At March 31,
1997, the three largest of these loans were $564,000, $375,000 and $340,000.
All of these loans are secured by office and/or industrial/warehouse
properties. Although all of these loans were performing in accordance with
their respective loan repayment terms at March 31, 1997, the Company is
monitoring these loans because of continuing concerns for the general economy
in California, and particularly the real estate market, which suffers from the
effects of a prolonged recession that began in 1990. Although there are reports
that the California real estate market may be experiencing a slow recovery, the
Company continues to monitor these loans closely.
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 March 31, 1997 was $470,000 and the Company's 75%
participation interest amounted to $352,000. Although the loan was current at
March 31, 1997, a recent analysis indicated a shortage of cash flows from the
security to cover the debt and the related note on this loan ballooned
December 1,
20 of 23
<PAGE> 21
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
NON-PERFORMING ASSETS AND LOAN LOSS PROVISIONS: (CONTINUED)
1996. The property is listed for sale and management granted the borrower's
request for an extension to June 1997 of the balloon date to allow more time
for selling the property.
Another large loan of concern is a small commercial real estate medical complex
in Colorado Springs, Colorado. The loan was originated in 1989 for $324,000 at
a loan to value ratio of 70%. The mortgagor is the tenant and conducts an
ophthalmology practice at the complex. The balance of the loan at March 31,
1997 was $293,000 and the loan was current at that date with no late payments
over the past twelve months. The Company estimates that the value of the
property has decreased due to declining market values in this area, resulting in
a loan to value ratio of approximately 95%.
There were no other loans of concern in excess of $500,000 being monitored by
the Company. The balance of other loans of concern consists of one- to
four-family loans totaling $7,000, commercial and multi-family real estate
loans totaling $82,000, consumer loans totaling $224,000 and commercial
business loans totaling $74,000. These loans have been considered by management
in conjunction with the analysis of the adequacy of the allowance for loan
losses.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's principal sources of funds are deposits, amortization and
prepayment of loan principal (including mortgage-backed securities), maturities
of securities and interest-earning deposits with other financial institutions,
sales of loans and securities available-for-sale, and operations. While
scheduled loan repayments, mortgage-backed securities amortization, and
maturing investments are relatively predictable, deposit flows and early loan
repayments are more influenced by interest rates, general economic conditions
and competition. The Company has been selective with regard to deposit rates
on certain savings products and, when necessary, has supplemented deposits with
longer term or less expensive alternative sources of funds.
Current OTS regulations require the Bank to maintain cash and eligible
investments in an amount equal to at least 5% of net withdrawable savings
deposits and borrowings payable on demand or in five years or less during the
preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency and other
securities and obligations generally having remaining maturities of less than
five years. The Bank has maintained its liquidity ratio at a level in excess
of those required. At March 31, 1997, the Bank's liquidity ratio was 17.65%
which was in excess of the minimum regulatory requirements.
The Company uses its capital resources principally to meet its ongoing
commitments to fund maturing certificates of deposit and loan commitments,
maintain its liquidity and meet operating expenses. At March 31, 1997, the
Company had outstanding commitments to extend credit which amounted to $60.1
million, of which $44.0 million is available lines of credit, $7.1 million for
one-to four-family residential, $860,000 for multifamily residential,
21 of 23
<PAGE> 22
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
LIQUIDITY AND CAPITAL RESOURCES: (CONTINUED)
$4.3 million for commercial real estate, and the remaining $3.8 million for
consumer/business loans. Management believes loan repayments and other sources
of funds will be adequate to meet the Company's foreseeable liquidity needs.
During the nine month period ended March 31, 1997, there was a net increase of
$2.3 million in cash and cash equivalents. This increase was temporary,
pending repayment of borrowed funds. The major source of cash during the
period was a $30.1 million increase in deposits and $32.6 million from sales
and repayments of securities available-for-sale. Major uses of funds included
purchases of securities available for sale of $45.6 million, net repayment of
Federal Home Loan Bank advances and line of credit of $13.5 million, and a net
increase in loans receivable, net, of $1.9 million.
At March 31, 1997, the Bank's tangible and core capital was $31.1 million or
7.84% of adjusted total assets, which was in excess of the 1.5% tangible
capital requirement by $25.1 million, and in excess of the 3.0% core capital
requirement by $19.2 million. The Bank also had risk-based capital of $32.9
million at March 31, 1997, or 12.51% of total risk-weighted assets, which
exceeded the 8.0% risk-based capital requirement by $11.8 million. The OTS has
adopted a regulation which requires that, for purposes of calculating
regulatory capital, unrealized gains or losses related to accounting for
certain investments in debt and equity securities classified as
"available-for-sale" under SFAS No. 115 are not included in the Bank's
regulatory capital.
PERPETUAL MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDING
There are no material legal proceedings to which the Company or the Bank
is a party or of which any of their property is subject. From
time-to-time, the Bank is a party to various legal proceedings incident to
its business.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
1. The Company filed a form 8-K dated April 17, 1997, attaching:
() its press release announcing earnings for the three and nine
months ended March 31, 1997, and (ii) its press release announcing
that the Company would pay a cash dividend of $0.075 (seven and
one-half cents) per share of outstanding common stock on May 15, 1997
to stockholders of record as of April 30, 1997.
22 of 23
<PAGE> 23
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PERPETUAL MIDWEST FINANCIAL, INC.
Registrant
Date: May 9, 1997 /s/ James L. Roberts
----------------------- ----------------------------------
James L. Roberts, President and
Chief Executive Officer
Date: May 9, 1997 /s/ Rick L. Brown
----------------------- ----------------------------------
Rick L. Brown, Senior Vice
President and Chief Financial
Officer
23 of 23
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- --------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY
REPORT ON FORM 10-QSB FOR THE NINE MONTHS ENDED MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 5,343,167
<INT-BEARING-DEPOSITS> 7,928,656
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 680,188
<INVESTMENTS-HELD-FOR-SALE> 69,542,017
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 296,943,886
<ALLOWANCE> (2,825,867)
<TOTAL-ASSETS> 397,779,910
<DEPOSITS> 291,609,268
<SHORT-TERM> 39,890,961
<LIABILITIES-OTHER> 4,993,370
<LONG-TERM> 27,500,000
0
0
<COMMON> 21,240
<OTHER-SE> 33,765,071
<TOTAL-LIABILITIES-AND-EQUITY> 397,779,910
<INTEREST-LOAN> 18,799,164
<INTEREST-INVEST> 2,567,481
<INTEREST-OTHER> 587,206
<INTEREST-TOTAL> 21,953,851
<INTEREST-DEPOSIT> 10,919,355
<INTEREST-EXPENSE> 14,109,712
<INTEREST-INCOME-NET> 7,844,139
<LOAN-LOSSES> 1,048,000
<SECURITIES-GAINS> 120,284
<EXPENSE-OTHER> 8,216,251
<INCOME-PRETAX> (43,971)
<INCOME-PRE-EXTRAORDINARY> (43,971)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,506)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
<YIELD-ACTUAL> 0
<LOANS-NON> 1,193,110
<LOANS-PAST> 0
<LOANS-TROUBLED> 634,137
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (2,670,322)
<CHARGE-OFFS> 1,047,989
<RECOVERIES> (155,534)
<ALLOWANCE-CLOSE> (2,825,867)
<ALLOWANCE-DOMESTIC> (2,825,867)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
