<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
--- ---
There were 1,988,261 shares of Common Stock ($0.01 par value) outstanding as
of May 4, 1998.
1 of 25
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
INDEX
-----
PART I. Financial Information Page No.
--------------------- --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1998 and June 30, 1997 3
Condensed Consolidated Statements of Income -
Three and Nine Months Ended March 31, 1998
and March 31, 1997 4
Consolidated Statement of Changes in Stockholders'
Equity - March 31, 1998 5
Condensed Consolidated Statements of Cash Flows -
Three and Nine Months Ended March 31, 1998
and March 31, 1997 6-7
Notes to Condensed Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-23
PART II. Other Information
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
2 of 25
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, 1998 June 30, 1997
---------------------- --------------------
(Unaudited)
<S> <C> <C>
Cash and due from financial institutions $ 8,155,633 $ 6,066,803
Interest-earning deposits in other financial institutions-short term 5,650,389 20,933,322
-------------------- --------------------
Cash and cash equivalents 13,806,022 27,000,125
Trading securities 346,075 756,625
Securities available for sale 22,603,496 41,143,033
Loans receivable, net of allowance for loan losses of $3,031,296
and $2,973,457 at March 31, 1998 and June 30, 1997 348,857,197 310,522,161
Federal Home Loan Bank stock at cost 4,640,900 4,640,900
Loan held for sale 469,640 889,367
Accrued interest and dividends receivable 2,452,073 2,589,365
Premises and equipment, net 6,888,020 7,203,686
Other assets 1,887,779 2,484,211
-------------------- --------------------
Total assets $ 401,951,202 $ 397,229,473
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Demand deposits $ 10,538,244 $ 9,943,176
Savings and NOW deposits 116,520,046 98,882,369
Certificates of deposit 193,576,620 196,339,722
-------------------- --------------------
Total deposits 320,634,910 305,165,267
Borrowed funds 40,120,077 52,203,351
Advances from borrowers for taxes and insurance 377,816 828,198
Accrued interest payable 2,436,505 3,021,590
Other liabilities 2,233,343 2,121,405
-------------------- --------------------
Total liabilities 365,802,651 363,339,811
Stockholders' equity
Common stock, $.01 par value, authorized: 6,000,000
shares; issued: 2,123,984 shares; outstanding:1,949,873
and 1,882,575 shares at March 31, 1998 and June 30, 1997 21,240 21,240
Additional paid-in capital 20,337,820 20,712,302
Retained earnings (substantially restricted) 19,416,383 18,367,609
Net unrealized depreciation on securities available for sale
(net of tax of $90 and $76,863 for March 31, 1998
and June 30, 1997) (151) (129,204)
Less: Treasury stock (174,111 and 241,409 shares at cost at
March 31, 1998 and June 30, 1997) (2,930,707) (4,039,766)
Unearned ESOP shares (558,034) (610,542)
Unearned compensation (138,000) (431,977)
-------------------- --------------------
Total stockholders' equity 36,148,551 33,889,662
-------------------- --------------------
Total liabilities and stockholders' equity $ 401,951,202 $ 397,229,473
==================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Interest income
Loans receivable, including fees $ 7,229,485 $ 6,271,523 $ 21,297,903 $ 18,799,164
Trading securities 2,342 10,679 13,567 42,209
Securities available for sale 310,377 944,351 1,145,229 2,525,272
Other 176,758 121,664 651,142 587,206
----------- ---------- ----------- -----------
7,718,962 7,348,217 23,107,841 21,953,851
Interest expense
Deposits 4,142,190 3,720,106 12,330,620 10,919,355
Borrowed funds 597,028 923,400 2,051,880 3,190,357
----------- ---------- ----------- -----------
4,739,218 4,643,506 14,382,500 14,109,712
----------- ---------- ----------- -----------
Net interest income 2,979,744 2,704,711 8,725,341 7,844,139
Provision for loan losses 280,000 271,000 775,000 1,048,000
----------- ---------- ----------- -----------
Net interest income after provision
for loan losses 2,699,744 2,433,711 7,950,341 6,796,139
Noninterest income
Loan servicing fees, net 66,703 92,520 224,305 283,060
Net realized gains (losses) on sales
of securities available for sale 290 (1,256) (289) 46,070
Net gains from sales of loans held for sale 54,890 69,522 192,098 257,994
Net trading securities gains 28,303 9,335 62,214 74,214
Other 368,801 295,760 933,919 714,803
----------- ---------- ----------- -----------
518,987 465,881 1,412,247 1,376,141
Noninterest expense
Salaries and employee benefits 796,606 878,961 2,556,103 2,643,828
Occupancy and equipment 416,380 398,616 1,189,656 1,181,928
SAIF deposit insurance premium 48,643 44,725 142,608 1,789,997
Net (gains) losses on foreclosed assets (2,900) 11,192 (2,310) 21,507
Other 969,368 852,604 2,831,728 2,578,991
----------- ---------- ----------- -----------
2,228,097 2,186,098 6,717,785 8,216,251
----------- ---------- ----------- -----------
Income (loss) before income taxes 990,634 713,494 2,644,803 (43,971)
Income tax expense (benefit) 362,500 279,035 1,023,698 (6,465)
----------- ---------- ----------- -----------
Net income (loss) $ 628,134 $ 434,459 $ 1,621,105 $ (37,506)
=========== ========== =========== ===========
Basic earnings per share $ 0.34 $ 0.24 $ 0.90 $ (0.02)
Diluted earnings per share $ 0.33 $ 0.23 $ 0.87 $ (0.02)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4 of 25
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Net Unrealized
Depreciation on
Additional Securities
Common Paid-in Retained Available Treasury
Stock Capital Earnings for Sale Stock
----- ------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 $ 21,240 $ 20,712,302 $ 18,367,609 $ (129,204) $ (4,039,766)
Effect of contribution to fund ESOP -- -- -- -- --
Market adjustment of ESOP shares -- 224,108 -- -- --
Amortization of RRP contribution -- -- -- -- --
Tax effect of stock plans -- 56,015 -- -- --
Purchase of 9,650 shares treasury stock -- -- -- -- (203,752)
Issuance of 76,948 shares from treasury stock
in connection with exercise of stock options -- (570,822) -- -- 1,340,302
Effect of exercise of 9,947 stock options -- (83,783) -- -- (27,491)
Net changes in unrealized depreciation on
securities available for sale -- -- -- 129,053 --
Cash dividends paid - $0.30 per share -- -- (572,331) -- --
Net income -- -- 1,621,105 -- --
---------- ------------ ------------ --------- ------------
Balance at March 31, 1998 $ 21,240 $ 20,337,820 $ 19,416,383 $ (151) $ (2,930,707)
========== ============ ============ ========== ============
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Unearned Total
ESOP Unearned Stockholders'
Shares Compensation Equity
------ ------------ ------
<S> <C> <C> <C>
Balance at June 30, 1997 $ (610,542) $ (431,977) $ 33,889,662
Effect of contribution to fund ESOP 52,508 -- 52,508
Market adjustment of ESOP shares -- -- 224,108
Amortization of RRP contribution -- 293,977 293,977
Tax effect of stock plans -- -- 56,015
Purchase of 9,650 shares treasury stock -- -- (203,752)
Issuance of 76,948 shares from treasury stock
in connection with exercise of stock options -- -- 769,480
Effect of exercise of 9,947 stock options -- -- (111,274)
Net changes in unrealized depreciation on
securities available for sale -- -- 129,053
Cash dividends paid - $0.30 per share -- -- (572,331)
Net income -- -- 1,621,105
---------- ---------- ------------
Balance at March 31, 1998 $ (558,034) $ (138,000) $ 36,148,551
========== ========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5 of 25
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------ -----------------------------------------
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
--------------------- -------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 628,134 $ 434,459 $ 1,621,105 $ (37,506)
Adjustments to reconcile net income
to net cash from operating activities
Depreciation 170,276 183,009 515,701 574,139
Amortization of:
Unearned compensation 207,175 50,000 293,977 74,300
Premiums and discounts on
securities, net 45,486 65,780 161,995 283,141
Provision for loan losses 280,000 271,000 775,000 1,048,000
Net (gains) losses on sales of:
Securities available for sale (290) 1,256 289 (46,070)
Loans held for sale (54,890) (69,522) (192,098) (257,994)
Foreclosed assets, net (2,900) 11,192 (2,310) 21,507
Purchase of:
Trading securities -- (245,000) -- (353,750)
Net trading securities (gains) (28,303) (9,335) (62,214) (74,214)
Proceeds from sales of:
Trading securities 138,328 495,717 472,764 737,576
Loans originated for sale 4,965,099 5,514,147 14,824,975 20,959,665
Origination of loans held for sale (5,226,849) (4,751,575) (14,213,150) (19,462,309)
Market adjustment of ESOP shares -- -- 149,895 158,628
ESOP expense 26,793 40,726 52,508 124,760
Change in:
Accrued interest and dividends
receivable 53,159 (262,531) 137,292 (124,260)
Accrued expenses and other
liabilities 986,008 528,132 (398,934) 63,424
Other assets 35,012 234,903 274,723 (332,528)
----------- ----------- ----------- -----------
Total adjustments 1,594,104 2,057,899 2,790,413 3,394,015
----------- ----------- ----------- -----------
Net cash from operating activities 2,222,238 2,492,358 4,411,518 3,356,509
Cash flows from investing activities Proceeds from:
Sales of securities available for sale 514,181 6,482,880 13,097,415 23,232,088
Maturities and principal payments of
securities available for sale 314,761 825,084 5,485,664 9,373,648
Sales of foreclosed assets 57,927 97,160 452,762 554,321
Purchase of:
Securities available for sale -- (18,948,114) -- (45,566,229)
Loans receivable -- -- (11,175,070) --
Premises and equipment, net (23,224) (99,870) (200,035) (568,122)
Net change in loans (11,231,581) 1,843,895 (28,084,467) (1,856,096)
----------- ----------- ----------- -----------
Net cash from investing activities (10,367,936) (9,798,965) (20,423,731) (14,830,390)
</TABLE>
(Continued)
6 of 25
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------ -----------------------------------------
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
--------------------- -------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Cash flows from financing activities
Purchase of shares of treasury stock $ -- $ -- $ (203,752) $(2,036,628)
Cash dividends (290,181) (143,121) (572,331) (437,404)
Effect of exercise of stock options -- -- (111,274) --
Effect of treasury stock issued
for stock plans 588,730 -- 769,480 50,000
Proceeds from Federal Home Loan
Bank advances -- -- -- 5,000,000
Repayment of Federal Home Loan
Bank advances -- (10,000,000) (14,500,000) (31,500,000)
Net change in:
Deposits 6,766,526 6,252,915 15,469,643 30,112,158
Federal Home Loan Bank line of credit 1,500,000 13,000,000 2,500,000 13,000,000
Other borrowed funds (86,280) (256,505) (83,274) 167,253
Advance payments by borrower
for taxes and insurance (482,619) (486,333) (450,382) (534,174)
----------- ----------- ----------- -----------
Net cash from financing activities 7,996,176 8,366,956 2,818,110 13,821,205
----------- ----------- ----------- -----------
Net change in cash and cash equivalents (149,522) 1,060,349 (13,194,103) 2,347,324
Cash and cash equivalents at beginning
of period 13,955,544 12,211,474 27,000,125 10,924,499
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $13,806,022 $13,271,823 $13,806,022 $13,271,823
=========== =========== =========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest 4,143,846 3,703,757 14,951,679 13,844,672
Income taxes 358,100 472,764 733,100 472,764
Supplemental schedule of non-cash investing activities
Assets acquired in settlement of loans 7,258 108,352 280,043 1,025,828
Loans originated from sale of assets acquired
in settlement of loans -- -- -- 450,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7 of 25
<PAGE>
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-Q 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, 1998 and March 31, 1997 includes the consolidated
results of operations of Perpetual Midwest Financial, Inc. (the
"Company") and its wholly owned subsidiaries, Perpetual Savings Bank,
FSB (the "Bank"), and Greatland Financial Services, Inc. To prepare
consolidated financial statements in conformity with generally
accepted accounting principles, management makes estimates and
assumptions based on available information. The 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. 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, 1998 primarily consisted of advances from the
Federal Home Loan Bank of Des Moines (the "FHLB") bearing rates from
5.623% 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 $6.0 million indexed to
the 1 month LIBOR rate which adjusts monthly. The Company also
maintains a $20.0 million line of credit with the FHLB which adjusts
daily to the FHLB's posted rate for these borrowings. The line of
credit had a balance of $2.5 million at March 31, 1998. The remaining
balances of $31.5 million of advances are fixed rate, fixed term,
with maturities from .5 months to 5.2 years.
3. EARNINGS PER COMMON SHARE:
--------------------------
Basic and diluted earnings per share are computed under a new
accounting standard effective in the quarter ended December 31, 1997.
All prior amounts have been restated to be comparable. Basic earnings
per share is based on net income divided by the weighted average
number of shares outstanding during the period. Diluted earnings per
share shows the dilutive effect of additional common shares issuable
under stock options and RRP vesting.
8 of 25
<PAGE>
Item 1.
-------
Financial Statements, Continued
-------------------------------
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------
3. EARNINGS PER COMMON SHARE (Continued):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------ ----------------------------------------
March 31, 1998 March 31, 1997 March 31, 1998 March 31, 1997
-------------------- -------------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Basic Earnings Per Share
Net Income $ 628,134 $ 434,459 $ 1,621,105 $ (37,506)
=========== =========== =========== ===========
Weighted average common
shares outstanding before
adjustment 1,938,449 1,907,278 1,896,825 1,907,329
Less: unallocated ESOP shares (53,727) (65,356) (60,188) (74,883)
Less: non-vested RRP shares (22,794) (38,591) (29,910) (29,145)
----------- ----------- ----------- -----------
Weighted average common
shares outstanding 1,861,928 1,803,331 1,806,727 1,803,301
=========== =========== =========== ===========
Basic Earnings Per Share 0.34 0.24 0.90 (0.02)
=========== =========== =========== ===========
Diluted Earnings Per Share
Net Income 628,134 434,459 1,621,105 (37,506)
=========== =========== =========== ===========
Weighted average common
Shares outstanding 1,861,928 1,803,331 1,806,727 1,803,301
Add: dilutive effects of assumed
conversions and exercises of
stock options 45,516 79,762 56,498 ---
----------- ----------- ----------- -----------
Weighted average common and
dilutive potential common
shares outstanding 1,907,445 1,883,093 1,863,225 1,803,301
=========== =========== =========== ===========
Diluted
Earnings Per Share 0.33 0.23 0.87 (0.02)
=========== =========== =========== ===========
</TABLE>
9 of 25
<PAGE>
Item 1.
-------
Financial Statements, Continued
-------------------------------
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------
4. 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. 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.
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, 1998:
Balance at July 1, 1997 $ 2,973,457
Provision for loan losses 775,000
Losses charged to the allowance (821,942)
Recoveries credited to the allowance 104,781
-----------
Balance at March 31, 1998 $ 3,031,296
===========
10 of 25
<PAGE>
Item 1.
-------
Financial Statements, Continued
-------------------------------
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------
4. ALLOWANCE FOR LOAN LOSSES (Continued):
Information regarding impaired loans is as follows for the three and
nine months ending March 31, 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31,
-----------------------------------------------------------
1998 1997 1998 1997
------------- --------------- -------------- -----------
<S> <C> <C> <C> <C>
Average investment in impaired loans $ 2,308,879 $ 3,621,261 $ 2,515,293 $ 3,312,467
Interest income recognized on impaired
loans including interest income recognized
on a cash basis 61,798 71,747 210,207 183,230
Interest income recognized on impaired
loans on cash basis 64,895 75,101 190,816 183,678
</TABLE>
Information regarding impaired loans at March 31, 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance of impaired loans $ 2,199,953
Less portion for which no allowance for loan losses is allocated 778,075
------------
Portion of impaired loan balance for which an
allowance for loan losses is allocated $ 1,421,878
============
Portion of allowance for loan losses allocated to impaired loan balance $ 350,000
============
</TABLE>
5. IMPACT OF NEW ACCOUNTING STANDARDS:
-----------------------------------
Statement of Financial 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 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 is anticipated to be little effect on fully diluted
earnings per share.
11 of 25
<PAGE>
Item 1.
-------
Financial Statements, Continued
-------------------------------
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
-----------
5. IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS (Continued):
----------------------------------------------------
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.
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.
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").
The Company is principally engaged in the business of attracting retail
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 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
12 of 25
<PAGE>
Item 2.
-------
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And
Results of Operations
----------------------------------------------------------------
Continued
---------
GENERAL (Continued):
- --------------------
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 long-term,
fixed rate one-to four-family loans. With a "locked-in" rate at the time of
commitment, the Company sells these 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 ("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 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 Fannie Mae.
At the end of 1996 the Company's board of directors and management determined
that the change to year 2000 would be pervasive and complex for many areas of
the Company and should be addressed across the full spectrum of the Company.
In January 1997 the Company's board of directors determined to support and to
provide for the allocation of sufficient human and financial resources to
carry out an effective year 2000 issues and resolution program, and
established a committee to actively evaluate the Company's preparedness for
the year 2000. Members of the committee were selected, primarily for their
operational functions with the Bank.
The committee was requested to primarily perform the following functions:
1) Develop a program to identify operational areas (including a
survey and review of the Company's business customers) of possible
complications resulting from the changes to and uses of the year
2000.
2) Establish benchmarks for the implementation of testing on each of
the operational areas identified above.
3) Implement procedures to monitor the program and be prepared to
formalize and implement a contingency plan if the Company's
program 2000 corrective actions will not be completed as
scheduled.
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Management's Discussion and Analysis of Financial Condition And
Results of Operations
----------------------------------------------------------------
Continued
---------
GENERAL (Continued):
- --------------------
4) Coordinate and direct the Company's resources to ensure that the
Company's program 2000 continues on schedule.
5) Develop a procedure for awareness guidelines as they may become
available from the Company's industry/trade organizations and the
Company's regulators, the FDIC, the OTS and the Federal Financial
Institutions Examination Council (the "FFIEC").
To date the Company's 2000 program committee has identified the operational
areas of the Company that may have possible complications resulting from a
change to the year 2000, including forms, vendors, the Company's data
processing provider, and in-house data processing programs, and the committee
has developed a program for benchmark testing of these areas.
By using resources available to it, primarily the 2000 program committee, the
Bank has not incurred any significant direct expenses for activities related
to the year-2000 change. The 2000 program committee has confirmed that the
Bank's off-site data processor and servicer is on schedule with their program
to facilitate data processing changes required for the year-2000 change.
Management does not expect any significant change to its EDP user costs as a
result of the data processor's year-2000 changes. Management also does not
expect to incur any significant expense or use of additional resources for the
Bank's 2000 program pending a final close of the Company's and Bank's merger
with Commercial Federal at the merger effective date (See-"Reorganization and
Merger Agreement Dated December 15, 1997").
FINANCIAL CONDITION:
- --------------------
Total assets increased $4.8 million to $402.0 million at March 31, 1998 from
$397.2 million at June 30, 1997. This increase was primarily attributable to a
$38.4 million increase in loans receivable, net, offset by a $13.2 million
decrease in cash and cash equivalents and a $18.5 million decrease in
securities available for sale.
Loans receivable, net, increased $38.4 million to $348.9 million at March 31,
1998 from $310.5 million at June 30, 1997. 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-territory loans. The Company had no foreign loans outstanding
at March 31, 1998.
Total deposits increased $15.4 million to $320.6 million at March 31, 1998.
Management attributes this increase to the Company's expanded marketing
efforts and competitive array of deposit products.
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Management's Discussion and Analysis of Financial Condition And
Results of Operations
----------------------------------------------------------------
Continued
---------
FINANCIAL CONDITION (Continued):
- --------------------------------
Borrowed funds at March 31, 1998 totaled $40.1 million as compared to $52.2
million at June 30, 1997. Borrowed funds consisted of $19.0 million of
long-term advances and $21.1 million of short term advances (due in 12 months
or less) primarily from the Federal Home Loan Bank of Des Moines.
At March 31, 1998 stockholders' equity totaled $36.1 million as compared to
$33.9 million at June 30, 1997 or an increase of $2.2 million. Stockholders'
equity increased primarily due to a net income of $1.6 million for the nine
months ended March 31, 1998, a net of tax reduction of $129,000 from June 30,
1997 for net unrealized depreciation in securities available for sale, a net
decrease of $1.1 million in treasury stock due to stock option exercises, and
a reduction of the contra-equity accounts for Employee Stock Ownership Plan
and Unearned Compensation in the amount of $346,000, primarily offset by a
reduction of equity in the amount of $572,000 paid out for cash dividends.
RESULTS OF OPERATIONS
- ---------------------
Comparison of Three Months Ended March 31, 1998 and 1997
The Company had net income after tax of $628,000 or $0.34 per share of common
stock for the three months ended March 31, 1998 compared to $434,000 or $0.24
per share of common stock for the same period in 1997. The increase in net
income for the three months ended March 31, 1998 compared to the same period
last year was predominately due to a $275,000 increase in net interest income
and a $53,000 increase in noninterest income, partially offset by a $9,000
increase in provision for loan losses, a $42,000 increase in noninterest
expense, and a $83,000 increase in income tax provision.
Net interest income, before provision for loan losses, increased $275,000 to
$3.0 million for the three months ended March 31, 1998 compared to $2.7
million for the same period in 1997. Interest income increased $371,000,
offset by a $96,000 increase in interest expense for the three months ended
March 31, 1998 compared to the same period last year.
Provision for loan losses increased $9,000 for the three months ended March
31, 1998 as compared to the same period in 1997, (See - "Non-performing Assets
and Loan Loss Provision").
Noninterest income for the three months ended March 31, 1998, was $519,000
compared to $466,000 for the same period in 1997. Loan servicing fees
decreased $26,000 to $67,000 for the three months ended March 31, 1998
compared to $93,000 for the same period in 1997, primarily due to a declining
average balance of loans serviced for others. The average balance of loans
serviced for others was $98.1 million during the three months ended March 31,
1998 compared to $123.3 million during the same period last year. Gain or loss
15 of 25
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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, 1998 and 1997
- ----------------------
(Continued)
on the sales of available for sale securities and loans held for sale
reflected a net gain of $55,000 for the three months ended March 31, 1998
compared to a net gain of $68,000 for same period last year. Net trading
securities gains were $28,000 for the three months ended March 31, 1998,
compared to a $9,000 net trading gain for the same period last year.
Other noninterest income increased $73,000 for the three months ended March
31, 1998 to $369,000 as compared to $296,000 for the three months ended March
31, 1997, primarily due to increases in mortgage loan fees, in savings fees,
and in non-mortgage loan fees.
Noninterest expense was primarily flat at $2.2 million for the three months
ended March 31, 1998 compared to $2.2 million for the same period in 1997.
Compensation and benefits decreased $82,000 to $797,000 compared to $879,000
for the same period last year. Occupancy and equipment expense increased
$17,000 to $416,000 for the three months ended March 31, 1998 compared
$399,000 for the same period last year. The regular SAIF deposit insurance
premium expense increased $4,000 to $49,000 for the three months ended March
31, 1998 compared to the prior period. The Company's regular annualized SAIF
Federal insurance premium rates for the three months ended March 31, 1998 and
1997 were 0.063% and 0.18%, respectively (See "--Insurance of Accounts and
SAIF Deposit Premium"). Gain or loss on foreclosed real estate reflected a net
gain of $3,000 for the three months ended March 31, 1998 compared to a net
loss of $11,000 for the same period in 1997. Other noninterest expense
increased $116,000 to $969,000 for the three months ended March 31, 1998
compared to $853,000 for the same period last year. Other noninterest expense
for the three months ended March 31, 1998 included expenses related to the
company's merger acquisition, primarily professional services, in the
approximate amount of $143,000.
Income tax provision increased $84,000 to $363,000 for the three months ended
March 31, 1998 compared to $279,000 for the same period in 1997. The increase
primarily reflected tax provision on the greater amount of income before tax.
Comparison of Nine Months Ended March 31, 1998 and 1997
The Company had net income of $1.6 million or $0.90 per share of common stock
for the nine months ended March 31, 1998 compared to a net loss of $38,000 or
($0.02) per share for the same period in 1997. The increase in net income
resulted from a $1.5 million decrease in noninterest expense, an $881,000
increase in net interest income, a $273,000 decrease in provision for loan
losses and a $36,000 increase in noninterest income, partially offset by a
$1.0 million increase in income tax expense.
Net interest income before provision for loan losses increased $881,000 to
$8.7 million for the nine months ended March 31, 1998 as compared to $7.8
million for the same period last year. Interest income increased $1.2 million
for the nine months ended March 31, 1998 compared to the same period last
year, primarily due to a 28 basis point increase in the yield on average
interest-earning assets, and an increase of $7.3 million in the average
16 of 25
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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, 1998 and 1997
- ----------------------
(Continued)
balance of interest-earning assets. Interest expense increased $273,000 for
the nine months ended March 31, 1998 compared to the nine months ended March
31, 1997, primarily due to an $8.0 million increase in the average balance of
interest-bearing liabilities, offset by a 2 basis point decrease in the cost
of interest-bearing liabilities.
Provision for loan losses decreased $273,000 for the nine months ended March
31, 1998 as compared to the same period in 1997, primarily due to a decrease
in the Company's actual loan losses over the previous year (See -
"Non-performing Assets and Loan Loss Provision").
Noninterest income for the nine months ended March 31, 1998 was $1.4 million
compared to $1.4 million for the same period in 1997. Net gains and losses on
the sale of securities available for sale and loans held for sale reflected a
net gain of $192,000 for the nine months ended March 31, 1998, compared to a
net gain of $304,000 for the same period last year. The decrease in net gains
on the sales of these assets primarily reflects the decreased volume of
fixed-rate loans sold under the Company's one-to four- family mortgage loan
selling program. Loan sales during the nine months ended March 31, 1998 and
1997 were $14.8 million and $21.0 million respectively. Loan servicing fees
decreased $59,000 to $224,000 for the nine months ended March 31, 1998
compared to $283,000 for the same period in 1997, primarily due to a declining
average balance of loans serviced for others. The average balance of loans
serviced for others was $103.5 million during the nine months ended March 31,
1998 compared to $126.4 million during the same period last year.
Net trading gains were $62,000 for the nine months ended March 31, 1998
compared to $74,000 for the same period last year.
Other noninterest income increased $219,000 for the nine months ended March
31, 1998 to $934,000 compared to $715,000 for the nine months ended March 31,
1997. The increase was predominately due to an increase of $154,000 in
mortgage loan fees and a $97,000 increase in demand deposit account and other
miscellaneous fees.
Noninterest expense decreased $1.5 million to $6.7 million for the nine months
ended March 31, 1998 compared to $8.2 million for the nine months ended March
31, 1997. The most significant item causing the decrease 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") expensed during the 1997 period. Compensation and benefits remained
flat at $2.6 million for both the nine month periods ended March 31, 1998 and
1997. Occupancy and equipment increased $8,000 to $1.2 million for the nine
months ended March 31, 1998 compared to $1.2 million for the same period last
year. The regular portion of the SAIF deposit premium expensed decreased
$162,000 to $143,000 for the nine months ended March 31, 1998 compared to
$305,000 for the nine months ended March 31 1997. The Company's annual premium
rate decreased to 0.063 from 0.18 beginning October 1, 1997. Net losses on
foreclosed assets decreased $24,000 for the nine months ended March 31, 1998
compared to the same period last year.
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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, 1998 and 1997
- ----------------------
(Continued)
Other noninterest expense increased $253,000 to $2.8 million for the nine
months ended March 31, 1998 compared to $2.6 million for the nine months ended
March 31, 1997. Professional fee expense increased $276,000 to $479,000 for
the nine months ended March 31, 1998 compared to $203,000 for the same period
last year. This increase in expense was primarily due to additional
professional services requested by the Company connected to Company's pending
merger with Commercial Federal Corporation, of Omaha, Nebraska,
(See-"Reorganization And Merger Agreement Dated December 15, 1997").
Income tax provision increased $1.0 million to an expense of $1.0 million for
the nine months ended March 31, 1998 compared to a slight benefit of $6,000
for the same period in 1997. The increase primarily reflected the increase in
net income for the nine months ended March 31, 1998 compared to a net loss for
the nine months ended March 31, 1997.
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 in that period 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. 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 insurance premium. Additionally, the
FDIC had 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.
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.
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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 $280,000 were recorded for the
three months ended March 31, 1998 compared to $271,000 for the three months
ended March 31, 1997. The Company's allowance for loan losses was $3.0 million
or 0.87% of net loans receivable at March 31, 1998 as compared to $3.0 million
or 0.96% at June 30, 1997. 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 losses.
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 other assets which have been acquired as a result of
foreclosure or repossession. The volume of non-performing assets decreased
slightly from $1.2 million or .30% of assets at June 30, 1997 to $1.1 million
or .28% of assets at March 31, 1998, exclusive of troubled debt restructured
loans. The ratio of the loss allowance to non-performing assets increased
slightly from 2.5 times at June 30, 1997 to 2.7 times at March 31, 1998.
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 was secured by an office/warehouse building on leased
ground with an outstanding book balance of $424,000. This loan was paid off
during the three months ending September 30, 1997. At March 31, 1998, the
Company held one restructured loan secured by a property located in Liberty,
Iowa. This loan is secured by a first mortgage on a residential home and
certain titled vehicles. This loan was restructured to provide a longer
amortization period based on the borrower's current and limited repayment
capacity. At March 31, 1998, the balance of the loan was $61,000 and
management has allocated an allowance for loss on this loan equal to the full
amount of the loan or $61,000.
Foreclosed Assets. As of March 31, 1998, the Company had $13,000 of foreclosed
and repossessed assets which represented a travel trailer, carried at a book
value of $13,000. Management may initiate foreclosure on any specific impaired
loan described below if a further review of that specific loan indicates a
further deterioration of the collateral or cash flow. Based on a review of the
Company's assets at March 31, 1998 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.
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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 three loans classified as impaired at March
31, 1998 totaling $2.2 million, offset by an allocated allowance for loan
losses in the amount of $350,000.
The largest loan included in impaired loans is a $1.4 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 their
trucking terminal. A significant portion of the trucking company's revenue was
dependent upon a single contract which expired and was not renewed, resulting
in a deterioration of cash flows from the trucking operation. A collateral
analysis was performed by the Company in December 1997, which estimated a loss
exposure of $350,000. Based on its review, the Company allocated an allowance
for loan losses in the amount of $350,000 for this loan. The loan was current
at March 31, 1998 and management will continue to monitor this loan closely.
The second largest loan included in impaired loans is a $502,000 business loan
originated in 1995 for the development, production and marketing of a
software-based legal reference system. The loan is secured by a commercial
office building and business assets located in the Company's market area and
marketable securities. The loan was delinquent one month at March 31, 1998 and
the borrower has incurred six delinquencies over the past twelve months.
The third loan included in impaired loans is a $276,000 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. The loan has been reduced by $324,000
over the past six months and the loan was current at March 31, 1998.
At June 30, 1997 a large loan included in impaired loans was a $632,000 loan
secured by an office/warehouse mortgage loan in Newport Beach, California.
This loan is discussed above under Troubled Debt Restructures and was paid off
during the quarter ending September 30, 1997.
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 and paid off during the quarter ended September 30, 1997 without
loss.
Other Loans of Concern. As of March 31, 1998 there were $4.6 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 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 as 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.
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Management's Discussion and Analysis of Financial Condition And
Results of Operations
----------------------------------------------------------------
Continued
---------
NON-PERFORMING ASSETS AND LOAN LOSS PROVISIONS: (Continued)
- -----------------------------------------------
The Company is monitoring a combination of fourteen real estate loans to one
borrower aggregating $738,000 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 March 31,
1998, 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 $63,000.
The Company is monitoring a second large commercial real estate loan of
concern in the amount of $2.2 million and secured by a commercial/office
building complex in Cedar Rapids, Iowa. This loan was originated in January,
1995 at a loan to value ratio of 80% for the purpose of remodeling and
converting a commercial warehouse facility to a commercial/office building
complex for rental purposes. The loan was current at March 31, 1998, and a
recent analysis indicates break-even cash flows from the security to cover the
debt, however, management will continue to monitor this loan closely.
A third large loan of concern is a 42 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, 1998 was $437,000 and the Company's 75%
participation interest amounted to $328,000. The loan was current at March 31,
1998, and a recent analysis indicates break-even cash flows from the
collateral to cover the debt. The property is listed for sale, and management
granted the borrower's request for an extension of the December 1, 1996
balloon date to September 1, 1998, to allow more time for selling the
property.
The Company is monitoring a commercial real estate loan in the amount of
$578,000 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
security. 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 loss has been allocated for this
loan in the amount of $300,000. The loan was current at March 31, 1998, with
no delinquencies over the past twelve months.
At September 30, 1997, the Company discussed a large loan of concern secured
by a communications building located in Denver, Colorado in the amount of
$560,000. This loan was paid off during the quarter ended December 31, 1997.
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 March 31, 1998, the balance of the loan was $392,000
and although the loan was current at that date, the borrower had three
delinquencies over the past twelve months. A recent credit analysis indicated
a decreasing sales volume and net operating margin for the restaurant. The
restaurant and property was recently sold on contract and will operate under
new management. Management continues to monitor the credit status of this loan
and the operations under the new management.
21 of 25
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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)
- -----------------------------------------------
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 $40,000, consumer loans totaling $89,000 and
commercial business loans totaling $209,000. These loans have been considered
by management in conjunction with the analysis of the adequacy of the
allowance for loan losses.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
The Company's principal sources of funds are deposits, amortization and
prepayment of loan principal (including mortgage-backed securities),
maturities of investment securities and interest-earning deposits with other
financial institutions, sales of loans and mortgage-backed and related
securities available for sale, and operations. While scheduled loan
repayments, mortgage-backed securities amortization, and maturing investments
are relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has been selective with regard to deposit rates on certain savings
products and, when necessary, has supplemented deposits with longer term or
less expensive alternative sources of funds.
Current OTS regulations require the Bank to maintain cash and eligible
investments in an amount equal to at least 5% of net withdrawable savings
deposits and borrowings payable on demand or in five years or less during the
preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency and other
securities and obligations generally having remaining maturities of less than
five years. The Bank has maintained its liquidity ratio at a level in excess
of those required. At March 31, 1998, the Bank's liquidity ratio was 8.31%,
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, 1998, the
Company had outstanding commitments to extend credit which amounted to $61.4
million, of which $41.8 million is available lines of credit, $15.4 million
for one-to four-family residential, $689,000 for multifamily residential, $2.3
million for commercial real estate, and the remaining $1.2 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, 1998, there was a net decrease of
$13.2 million in cash and cash equivalents. This decrease was a result of
reinvestment of cash into other interest-earning assets with a higher yield,
and repayment of borrowed funds. The major source of cash during the period
was $18.6 million from sales and repayments of securities available for sale,
and a $15.5 million increase in deposits. Major uses of funds included a net
increase in loans receivable of $28.1 million, repayment of Federal Home Loan
Bank advances of $14.5 million, and purchase of loans receivable of $11.2
million.
22 of 25
<PAGE>
Item 2.
-------
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And
Results of Operations
----------------------------------------------------------------
Continued
---------
LIQUIDITY AND CAPITAL RESOURCES: (Continued)
- --------------------------------
At March 31, 1998, the Bank's core capital was $33.6 million or 8.38% of
adjusted total assets, which was in excess of the 4.0% core capital
requirement by $17.5 million. The Bank also had risk-based capital of $36.3
million at March 31, 1998, or 12.56% of total risk-weighted assets, which
exceeded the 8.0% risk-based capital requirement by $13.2 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.
REORGANIZATION AND MERGER AGREEMENT DATED DECEMBER 15, 1997:
- ------------------------------------------------------------
The Company entered into a Reorganization and Merger Agreement dated December
15, 1997, by and among Perpetual Midwest Financial, Inc. ("Perpetual Midwest")
and Commercial Federal Corporation ("Commercial"), and Perpetual Savings Bank,
FSB ("Perpetual Savings "), a wholly owned subsidiary of Perpetual Midwest,
and Commercial Federal Bank, A Federal Savings Bank ("Commercial Bank"), a
wholly owned subsidiary of Commercial, pursuant to which, among other things,
(i) Perpetual Midwest will be merged (the "Merger") with and into Commercial
with Commercial as the surviving corporation, (ii) Perpetual Savings will be
merged with and into Commercial Bank, with Commercial Bank as the surviving
financial institution and (iii) each share of the common stock, par value $.01
per share, of Perpetual Midwest issued and outstanding immediately prior to
the effective time of the Merger (except for certain shares held, other than
in a fiduciary capacity or as a result of debts previously contracted, by
Perpetual Midwest or Commercial or their respective subsidiaries) shall be
converted into .5757 of a share of common stock, par value $.01 per share (or
0.8636 shares taking into account Commercial's 3- for -2 split payable
December 15, 1997, of Commercial common stock, with attached Rights (as
defined in the Merger Agreement) subject to possible adjustment as described
in the Merger Agreement, with cash paid in lieu of issuing fractional shares.
PERPETUAL MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
---------------------------
Item 1. - LEGAL PROCEEDING
- --------------------------
The Bank is a defendant to a lawsuit in which the plaintiff alleges
that Perpetual Savings agreed to purchase certain mobile home loans
from the plaintiff's acquired subsidiary. The plaintiff is seeking to
compel the Bank to purchase the loans and is alleging damages of
approximately $400,000. Management of Perpetual Savings believes that
this claim is without merit and does not anticipate that there will
be any material adverse effect on the financial condition or results
of operation of the Bank as a result of this litigation. There are no
other 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.
23 of 25
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
---------------------------
(CONTINUED)
-----------
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
a) A Special Meeting of stockholders was held on April 14, 1998.
b) The matter approved by stockholders at the special meeting and
number of votes cast for, against or withheld are set forth below:
The following is a record of votes cast on the proposal to approve
and adopt the Reorganization and Merger Agreement, as amended,
dated December 15, 1997, by and among the Company, Commercial
Federal Corporation, Perpetual Savings Bank and Commercial Federal
Bank (the "Merger Agreement"):
For 1,264,782
Against 36,935
Abstain 12,839
Accordingly, the Merger Agreement was approved and adopted.
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
1. The Company filed a form 8-K dated April 14, 1998, concerning the
adoption at a special meeting of stockholders on April 14, 1998,
of the Reorganization and Merger Agreement, as amended, dated
December 15, 1997 .
2. The Company filed a form 8-K dated April 13, 1998, concerning the
press release of earnings for the three and nine months ended
March 31, 1998 and 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 12, 1998 to stockholders of record
as of April 30, 1998.
24 of 25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PERPETUAL MIDWEST FINANCIAL, INC.
Registrant
Date: May 11, 1998 /s/ James L. Roberts
---------------------------- -------------------------------------
James L. Roberts, President and Chief
Executive Officer
Date: May 11, 1998 /s/ Rick L. Brown
---------------------------- -------------------------------------
Rick L. Brown, Executive Vice President
and Chief Financial Officer
25 of 25
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED MARCH 31, 1998 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-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 8,155,633
<INT-BEARING-DEPOSITS> 5,650,389
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 346,075
<INVESTMENTS-HELD-FOR-SALE> 22,603,496
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 348,857,197
<ALLOWANCE> (3,031,296)
<TOTAL-ASSETS> 401,951,202
<DEPOSITS> 320,634,910
<SHORT-TERM> 21,120,077
<LIABILITIES-OTHER> 5,047,664
<LONG-TERM> 19,000,000
0
0
<COMMON> 21,240
<OTHER-SE> 36,127,311
<TOTAL-LIABILITIES-AND-EQUITY> 401,951,202
<INTEREST-LOAN> 21,297,903
<INTEREST-INVEST> 1,158,796
<INTEREST-OTHER> 651,142
<INTEREST-TOTAL> 23,107,841
<INTEREST-DEPOSIT> 12,330,620
<INTEREST-EXPENSE> 14,382,500
<INTEREST-INCOME-NET> 8,725,341
<LOAN-LOSSES> 775,000
<SECURITIES-GAINS> 61,925
<EXPENSE-OTHER> 6,717,785
<INCOME-PRETAX> 2,644,803
<INCOME-PRE-EXTRAORDINARY> 2,644,803
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,621,105
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.87
<YIELD-ACTUAL> 2.78
<LOANS-NON> 1,116,788
<LOANS-PAST> 0
<LOANS-TROUBLED> 60,542
<LOANS-PROBLEM> 6,752,000
<ALLOWANCE-OPEN> (2,973,457)
<CHARGE-OFFS> 821,942
<RECOVERIES> (104,781)
<ALLOWANCE-CLOSE> (3,031,296)
<ALLOWANCE-DOMESTIC> (3,031,296)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
