<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 December 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
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 1,916,000 shares of Common Stock ($0.01 par value) outstanding as
of February 6, 1998.
1 of 26
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
INDEX
PART I. Financial Information Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1997 and June 30, 1997 3
Condensed Consolidated Statements of Income -
Three and Six Months Ended December 31, 1997
and December 31, 1996 4
Consolidated Statement of Changes in Stockholders'
Equity - December 31, 1997 5
Condensed Consolidated Statements of Cash Flows -
Three and Six Months Ended December 31, 1997
and December 31, 1996 6-7
Notes to Condensed Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-24
PART II. Other Information
Item 1. Legal Proceedings 24
Item 4. Submission of Matter to a Vote of
Security Holders 24-25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
2 of 26
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31, 1997 June 30, 1997
------------------- --------------------
(Unaudited)
<S> <C> <C>
Cash and due from financial institutions $ 6,929,498 $ 6,066,803
Interest-earning deposits in other financial institutions-short term 7,026,046 20,933,322
-------------------- ---------------------
Cash and cash equivalents 13,955,544 27,000,125
Trading securities 456,100 756,625
Securities available for sale 23,454,865 41,143,033
Loans receivable, net of allowance for loan losses of $2,927,264
and $2,973,457 at December 31, 1997 and June 30, 1997 337,908,514 310,522,161
Federal Home Loan Bank stock at cost 4,640,900 4,640,900
Loan held for sale 153,000 889,367
Accrued interest and dividends receivable 2,505,232 2,589,365
Premises and equipment, net 7,035,072 7,203,686
Other assets 1,983,413 2,484,211
-------------------- --------------------
Total assets $ 392,092,640 $ 397,229,473
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Demand deposits $ 9,751,843 $ 9,943,176
Savings and NOW deposits 106,717,069 98,882,369
Certificates of deposit 197,399,472 196,339,722
-------------------- --------------------
Total deposits 313,868,384 305,165,267
Borrowed funds 38,706,357 52,203,351
Advances from borrowers for taxes and insurance 860,435 828,198
Accrued interest payable 1,856,990 3,021,590
Other liabilities 1,826,850 2,121,405
-------------------- --------------------
Total liabilities 357,119,016 363,339,811
Stockholders' equity
Common stock, $.01 par value, authorized: 6,000,000
shares; issued: 2,123,984 shares; outstanding: 1,891,000
and 1,882,575 shares at December 31, 1997 and June 30, 1997 21,240 21,240
Additional paid-in capital 20,743,797 20,712,302
Retained earnings (substantially restricted) 19,078,430 18,367,609
Net unrealized depreciation on securities available for sale
(net of tax of $8,583 and $76,863 for December 31, 1997 and
June 30, 1997) (14,427) (129,204)
Less: Treasury stock (232,984 and 241,409 shares at cost at
December 31, 1997 and June 30, 1997) (3,925,414) (4,039,766)
Unearned ESOP shares (584,827) (610,542)
Unearned compensation (345,175) (431,977)
--------------------- ---------------------
Total stockholders' equity 34,973,624 33,889,662
-------------------- --------------------
Total liabilities and stockholders' equity $ 392,092,640 $ 397,229,473
==================== ====================
</TABLE>
See accompanying notes to condensed consolidated financial statements
3 of 26
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------ -----------------------------------
December 31, December 31, December 31, December 31,
1997 1996 1997 1996
------------------ ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Interest income
Loans receivable, including fees $ 7,106,101 $ 6,263,884 $ 14,068,418 $ 12,527,641
Trading securities 3,452 13,023 11,225 31,530
Securities available for sale 360,122 802,612 834,852 1,580,921
Securities held to maturity -- -- -- --
Other 218,861 183,274 474,384 465,542
------------ ------------ ------------ ------------
7,688,536 7,262,793 15,388,879 14,605,634
Interest expense
Deposits 4,118,931 3,664,822 8,188,430 7,199,249
Borrowed funds 713,359 1,042,905 1,454,852 2,266,957
------------ ------------ ------------ ------------
4,832,290 4,707,727 9,643,282 9,466,206
------------ ------------ ------------ ------------
Net interest income 2,856,246 2,555,066 5,745,597 5,139,428
Provision for loan losses 270,000 552,000 495,000 777,000
------------ ------------ ------------ ------------
Net interest income after provision
for loan losses 2,586,246 2,003,066 5,250,597 4,362,428
Noninterest income
Loan servicing fees, net 75,443 92,940 157,602 190,540
Net realized gains (losses) on sales
of securities available for sale (1,524) 61,680 (579) 47,326
Net gains from sales of loans held for sale 50,883 103,468 137,208 188,472
Net trading securities gains 13,867 19,224 33,911 64,879
Other 294,230 214,869 565,118 419,043
------------ ------------ ------------ ------------
432,899 492,181 893,260 910,260
Noninterest expense
Salaries and employee benefits 858,146 865,328 1,759,497 1,764,867
Occupancy and equipment 386,263 395,980 773,276 783,312
SAIF deposit insurance premium 48,171 117,198 93,965 1,745,272
Net (gains) losses on foreclosed assets (1,430) 6,240 590 10,315
Other 977,887 954,972 1,862,360 1,726,387
------------ ------------ ------------ ------------
2,269,037 2,339,718 4,489,688 6,030,153
------------ ------------ ------------ ------------
Income (loss) before income taxes 750,108 155,529 1,654,169 (757,465)
Income tax expense (benefit) 311,633 74,500 661,198 (285,500)
------------ ------------ ------------ ------------
Net income (loss) $ 438,475 $ 81,029 $ 992,971 $ (471,965)
============ ============ ============ ============
Basic earnings per share $ 0.24 $ 0.04 $ 0.55 $ (0.26)
Diluted earnings per share $ 0.24 $ 0.04 $ 0.52 $ (0.26)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4 of 26
<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
Stock Capital Earnings for Sale
----- ------- -------- --------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 $ 21,240 $ 20,712,302 $ 18,367,609 $ (129,204)
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 -- -- -- --
Issuance of 18,075 shares from treasury stock
in connection with exercise of stock options -- (164,845) -- --
Effect of exercise of 9,947 stock options -- (83,783) -- --
Net changes in unrealized depreciation on
securities available for sale -- -- -- 114,777
Cash dividends paid - $0.15 per share -- -- (282,150) --
Net income -- -- 992,971 --
----------- -------------- ------------- -------------
Balance at December 31, 1997 $ 21,240 $ 20,743,797 $ 19,078,430 $ (14,427)
=========== ============== ============= ==============
</TABLE>
[RESTUBBED FROM TABLE ABOVE]
<TABLE>
<CAPTION>
Unearned Total
Treasury ESOP Unearned Stockholders'
Stock Shares Compensation Equity
----- ------ ------------ ------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 $ (4,039,766) $ (610,542) $ (431,977) $ 33,889,662
Effect of contribution to fund ESOP -- 25,715 -- 25,715
Market adjustment of ESOP shares -- -- -- 224,108
Amortization of RRP contribution -- -- 86,802 86,802
Tax effect of stock plans -- -- -- 56,015
Purchase of 9,650 shares treasury stock (203,752) -- -- (203,752)
Issuance of 18,075 shares from treasury stock
in connection with exercise of stock options 345,595 -- -- 180,750
Effect of exercise of 9,947 stock options (27,491) -- -- (111,274)
Net changes in unrealized depreciation on
securities available for sale -- -- -- 114,777
Cash dividends paid - $0.15 per share -- -- -- (282,150)
Net income -- -- -- 992,971
-------------- ------------- ------------- -------------
Balance at December 31, 1997 $ (3,925,414) $ (584,827) $ (345,175) $ 34,973,624
=============== ============== ============== =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5 of 26
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------ ------------------------------------
December 31, 1997 December 31, 1996 December 31, 1997 December 31, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 438,475 $ 81,029 $ 992,971 $ (471,965)
Adjustments to reconcile net income
to net cash from operating activities
Depreciation 172,699 196,581 345,425 391,130
Amortization of:
Unearned compensation 39,572 12,150 86,802 24,300
Premiums and discounts on
securities, net 56,206 107,453 116,509 217,361
Provision for loan losses 270,000 552,000 495,000 777,000
Net (gains) losses on sales of:
Securities available for sale 1,524 (61,680) 579 (47,326)
Loans held for sale (50,883) (103,468) (137,208) (188,472)
Foreclosed assets, net (1,430) 6,240 590 10,315
Purchase of:
Trading securities -- (108,750) -- (108,750)
Net trading securities (gains) (13,867) (19,224) (33,911) (64,879)
Proceeds from sales of:
Trading securities 174,817 229,957 334,436 241,859
Loans originated for sale 3,585,960 7,674,033 9,859,876 15,445,518
Origination of loans held for sale (3,175,590) (7,281,870) (8,986,301) (14,710,734)
Market adjustment of ESOP shares 117,148 158,628 149,895 158,628
ESOP expense 12,857 42,015 25,715 84,034
Change in:
Accrued interest and dividends
receivable 139,694 54,495 84,133 138,271
Accrued expenses and other
liabilities (2,063,397) (2,654,249) (1,384,942) (464,708)
Other assets 128,569 (135,028) 239,711 (567,431)
---------- ---------- ----------- ----------
Total adjustments (606,121) (1,330,717) 1,196,309 1,336,116
---------- ---------- ----------- ----------
Net cash from operating activities (167,646) (1,249,688) 2,189,280 864,151
Cash flows from investing activities
Proceeds from:
Sales of securities available for sale 7,585,969 11,252,631 12,583,234 16,749,208
Maturities and principal payments of
securities available for sale 2,419,478 6,174,211 5,170,903 8,548,564
Sales of foreclosed assets 85,616 311,895 394,835 457,161
Purchase of:
Securities available for sale -- (20,492,032) -- (26,618,115)
Loans receivable -- -- (11,175,070) --
Premises and equipment, net (59,456) (38,011) (176,811) (468,252)
Net change in loans (7,742,612) 275,728 (16,852,886) (3,699,991)
---------- ---------- ----------- ----------
Net cash from investing activities 2,288,995 (2,515,578) (10,055,795) (5,031,425)
</TABLE>
(Continued)
6 of 26
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------ ------------------------------------
December 31, 1997 December 31, 1996 December 31, 1997 December 31, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from financing activities
Purchase of shares of treasury stock $ (2,888) $ (703,339) $ (203,752) $ (2,036,628)
Cash dividends paid (140,469) (143,002) (282,150) (294,283)
Effect of exercise of stock options (11,800) -- (111,274) --
Effect of treasury stock issued
for stock plans 180,750 -- 180,750 50,000
Proceeds from Federal Home Loan
Bank advances -- 5,000,000 -- 5,000,000
Repayment of Federal Home Loan
Bank advances (10,000,000) (19,000,000) (14,500,000) (21,500,000)
Net change in:
Deposits 3,728,495 9,035,880 8,703,117 23,859,243
Federal Home Loan Bank line of credit (2,500,000) -- 1,000,000 --
Other borrowed funds 4,206 308,216 3,006 423,758
Advance payments by borrowers
for taxes and insurance 553,935 448,463 32,237 (47,841)
------------ ------------ ------------ ------------
Net cash from financing activities (8,187,771) (5,053,782) (5,178,066) 5,454,249
------------ ------------ ------------ ------------
Net change in cash and cash equivalents (6,066,422) (8,819,048) (13,044,581) 1,286,975
Cash and cash equivalents at beginning
of period 20,021,966 21,030,522 27,000,125 10,924,499
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ 13,955,544 $ 12,211,474 $ 13,955,544 $ 12,211,474
============ ============ ============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest 6,486,646 6,083,827 10,807,833 10,140,915
Income taxes 375,000 -- 375,000 --
Supplemental schedule of non-cash investing activities
Assets acquired in settlement of loans 84,644 768,135 272,785 917,476
Loans originated from sale of assets acquired
in settlement of loans -- 450,000 -- 450,000
</TABLE>
See accompanying notes to condensed consolidated financial statements.
7 of 26
<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 six months
ended December 31, 1997 and December 31, 1996 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 December 31, 1997 primarily consisted of advances from
the Federal Home Loan Bank of Des Moines (the "FHLB") bearing rates
from 5.66% 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 $1.0 million at December 31, 1997. The
remaining balances of $31.5 million of advances are fixed rate, fixed
term, with maturities from 3.5 months to 5.5 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.
8 of 26
<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 Six Months Ended
------------------------------------- -------------------------------------
December 31, 1997 December 31, 1996 December 31, 1997 December 31, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Earnings Per Share
Net Income $ 438,475 $ 81,029 $ 992,971 $ (471,965)
=========== =========== =========== ===========
Weighted average common
shares outstanding 1,817,470 1,821,023 1,812,648 1,827,708
=========== =========== =========== ===========
Earnings Per Share $ 0.24 $ 0.04 $ 0.55 $ (0.26)
=========== =========== =========== ===========
Earnings Per Share Assuming
Dilution
Net Income $ 438,475 $ 81,029 $ 992,971 $ (471,965)
=========== =========== =========== ===========
Weighted average common
Shares outstanding 1,817,470 1,821,023 1,812,648 1,827,708
Add: dilutive effects of assumed
conversions and exercises of
stock options 47,414 45,806 91,735 --
----------- ----------- ----------- -----------
Weighted average common and
dilutive potential common
shares outstanding 1,864,884 1,866,829 1,904,383 1,827,708
=========== =========== =========== ===========
Earnings Per Share
Assuming Dilution $ 0.24 $ 0.04 $ 0.52 $ (0.26)
=========== =========== =========== ===========
</TABLE>
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.
9 of 26
<PAGE>
Item 1.
Financial Statements, Continued
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. ALLOWANCE FOR LOAN LOSSES (Continued):
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 six months ended December 31, 1997:
Balance at July 1, 1997 $ 2,973,457
Provision for loan losses 495,000
Losses charged to the allowance (595,671)
Recoveries credited to the allowance 54,478
-----------
Balance at December 31, 1997 $ 2,927,264
===========
Information regarding impaired loans is as follows for the three and
six months ending December 31, 1997:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------- --------------------------
December 31,
----------------------------------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average investment in impaired loans $2,308,879 $3,392,787 $2,515,293 $3,158,071
Interest income recognized on impaired
loans including interest income recognized
on a cash basis 39,959 63,309 129,018 111,483
Interest income recognized on impaired
loans on cash basis 47,320 60,403 145,313 108,577
</TABLE>
10 of 26
<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 at December 31, 1997 is as
follows:
<TABLE>
<S> <C>
Balance of impaired loans $ 2,305,077
Less portion for which no allowance for loan losses is allocated 877,035
---------------
Portion of impaired loan balance for which an
allowance for loan losses is allocated $ 1,428,042
===============
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.
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.
11 of 26
<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. 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"). 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
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
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.
12 of 26
<PAGE>
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
GENERAL (Continued):
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, 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").
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.
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 "FFEIC").
13 of 26
<PAGE>
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
GENERAL (Continued):
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. The committee's
program of issues and events was recently submitted to the OTS for an off-site
examination and review for the Company's awareness and preparedness for the
year 2000 impact. The OTS found that the Company is making adequate progress
addressing year 2000 issues.
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 does also does
not expest 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 decreased $5.1 million to $392.1 million at December 31, 1997
from $397.2 million at June 30, 1997. This decrease was primarily attributable
to a $27.4 million increase in loans receivable, net, offset by a $13.0
million decrease in cash and cash equivalents and a $17.7 million decrease in
securities available for sale.
Loans receivable, net, increased $27.4 million to $337.9 million at December
31, 1997 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 December 31, 1997.
Total deposits increased $8.7 million to $313.9 million at December 31, 1997.
Management attributes this increase to the Company's expanded marketing
efforts and competitive array of deposit products.
Borrowed funds at December 31, 1997 totaled $38.7 million as compared to $52.2
million at June 30, 1997. Borrowed funds consisted of $19.0 million of
long-term advances and $19.5 million of short term advances (due in 12 months
or less) primarily from the Federal Home Loan Bank of Des Moines.
At December 31, 1997 stockholders' equity totaled $35.0 million as compared to
$33.9 million at June 30, 1997 or an increase of $1.1 million. Stockholders'
equity increased primarily due to a net income of $993,000 for the six
14 of 26
<PAGE>
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
FINANCIAL CONDITION (Continued):
months ended December 31, 1997, a net of tax reduction of $115,000 from June
30, 1997 for net unrealized depreciation in securities available for sale, a
net decrease of $114,000 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 $113,000, primarily offset by a
reduction of equity in the amount of $282,000 paid out for cash dividends.
RESULTS OF OPERATIONS
Comparison of Three Months Ended December 31, 1997 and 1996
The Company had net income after tax of $438,000 or $0.24 per share of common
stock for the three months ended December 31, 1997 compared to $81,000 or
$0.04 per share of common stock for the same period in 1996. The increase in
net income for the three months ended December 31, 1997 compared to the same
period last year was predominately due to a $ 301,000 increase in net interest
income, a $282,000 decrease in provision for loan losses, and a $71,000
decrease in noninterest expense, partially offset by a $237,000 increase in
income tax provision and a $59,000 decrease in noninterest income.
Net interest income, before provision for loan losses, increased $301,000 to
$2.9 million for the three months ended December 31, 1997 compared to $2.6
million for the same period in 1996. Interest income increased $426,000,
offset by a $125,000 increase in interest expense for the three months ended
December 31, 1997 compared to the same period last year.
Provision for loan losses decreased $282,000 for the three months ended
December 31, 1997 as compared to the same period in 1996, 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 three months ended December 31, 1997, was $433,000
compared to $492,000 for the same period in 1996. Loan servicing fees
decreased $18,000 to $75,000 for the three months ended December 31, 1997
compared to $93,000 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 $108.8 million during the three months ended December
31, 1997 compared to $126.1 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 $49,000 for the three months ended December 31, 1997
compared to a net gain of $165,000 for same period last year. Net trading
securities gains were $14,000 for the three months ended December 31, 1997,
compared to a $19,000 net trading gain for the same period last year.
15 of 26
<PAGE>
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
RESULTS OF OPERATIONS: Comparison of Three Months Ended December 31, 1997
and 1996 (Continued)
Other noninterest income increased $79,000 for the three months ended December
31, 1997 to $294,000 as compared to $215,000 for the three months ended
December 31, 1996, primarily due to a $10,000 increase in mortgage loan fees,
a $40,000 increase in savings fees, and a $17,000 increase in non-mortgage
fees.
Noninterest expense was primarily flat at $2.3 million for the three months
ended December 31, 1997 compared to $2.3 million for the same period in 1996.
Compensation and benefits decreased $7,000 to $858,000 compared to $865,000
for the same period last year. Occupancy and equipment expense decreased
$10,000 to $386,000 for the three months ended December 31, 1997 compared
$396,000 for the same period last year. The regular SAIF deposit insurance
premium expense decreased $69,000 to $48,000 for the three months ended
December 31, 1997. The decrease in the regular SAIF deposit insurance premium
was primarily due to a reduction in the SAIF premium rates after the Company
was assessed a one-time charge of $1.5 million in the quarter ended September
30,1996 by the FDIC to recapitalize the Savings Association Insurance Fund in
1996. The Company's regular annualized SAIF Federal insurance premium rates
for the three months ended December 31, 1997 and 1996 were 0.063% and 0.18%,
respectively (See "--Insurance of Accounts and SAIF Deposit Premium"). Gain or
loss on foreclosed real estate reflected a gain of $1,000 for the three months
ended December 31, 1997 compared to a loss of $6,000 for the same period in
1996. Other noninterest expense increased $23,000 to $978,000 for the three
months ended December 31, 1997 compared to $955,000 for the same period last
year. Data processing expense and professional fee expense are the largest
categorical increases in other noninterest expense for the three months ended
December 31, 1997 as compared to the same period last year. Data processing
expense increased $23,000 primarily due to an increase in the number of
accounts serviced. Professional fee expense increased $79,0000 primarily due
to additional professional services requested by the Company during the three
months ending December 31, 1997 as compared to the prior year.
Income tax provision increased $237,000 to $312,000 for the three months ended
December 31, 1997 compared to $75,000 for the same period in 1996. The
increase primarily reflected tax provision on the greater amount of income
before tax.
Comparison of Six Months Ended December 31, 1997 and 1996
The Company had net income of $993,000 or $0.55 per share of common stock for
the six months ended December 31, 1997 compared to a net loss of $472,000 or
$0.26 per share for the same period in 1996. The increase in net income
resulted from a $1.5 million decrease in noninterest expense, a $606,000
increase in net interest income, and a $282,000 decrease in provision for loan
losses, partially offset by a $947,000 increase in income tax expense and a
$17,000 reduction in noninterest income.
16 of 26
<PAGE>
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
RESULTS OF OPERATIONS: Comparison of Six Months Ended December 31, 1997 and 1996
(Continued)
Net interest income before provision for loan losses increased $606,000 to
$5.7 million for the six months ended December 31, 1997 as compared to $5.1
million for the same period last year. Interest income increased $783,000 for
the six months ended December 31, 1997 compared to the same period last year,
primarily due to a 37 basis point increase in the yield on average
interest-earning assets, and an increase of $3.0 million in the average
balance of interest-earning assets. Interest expense increased $177,000 for
the six months ended December 31, 1997 compared to the six months ended
December 31, 1996, primarily due to an $8.0 million increase in the average
balance of interest-bearing liabilities, offset, by a 3 basis point decrease
in the cost of interest-bearing liabilities.
Provision for loan losses decreased $282,000 for the six months ended December
31, 1997 as compared to the same period in 1996, 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 six months ended December 31, 1997 was $893,000
compared to $910,000 for the same period in 1996. Net gains and losses on the
sale of securities available for sale and loans held for sale reflected a net
gain of $137,000 for the six months ended December 31, 1997, compared to a net
gain of $236,000 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 six months ended December 31, 1997 and
1996 were $9.9 million and $15.4 million respectively. Loan servicing fees
decreased $33,000 to $158,000 for the six months ended December 31, 1997
compared to $191,000 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 $102.1 million during the six months ended December
31, 1997 compared to $127.8 million during the same period last year.
Net trading gains were $34,000 for the six months ended December 31, 1997
compared to $65,000 for the same period in 1996.
Other noninterest income increased $146,000 for the six months ended December
31, 1997 to $565,000 compared to $419,000 for the six months ended December
31, 1996. The increase was predominately due to an increase of $88,000 in
mortgage loan fees and a $58,000 increase in demand deposit account and other
miscellaneous fees.
Noninterest expense decreased $1.5 million to $4.5 million for the six months
ended December 31, 1997 compared to $6.0 million for the six months ended
December 31, 1996. 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 1996 period. Compensation and benefits
remained flat at $1.8 million for both the six month period ended December 31,
1997 and 1996. Occupancy and equipment decreased $10,000 to $773,000 for the
six months ended December 31, 1997 compared
17 of 26
<PAGE>
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
RESULTS OF OPERATIONS: Comparison of Six Months Ended December 31, 1997 and 1996
(Continued)
to $783,000 for the same period last year. The regular portion of the SAIF
deposit premium expensed decreased $166,000 to $94,000 for the six months
ended December 31, 1997 compared to $260,000 for the six months ended December
31 1996. The Company's annual premium rate decreased to 0.063 from 0.18 for
the last quarter of the six months ended December 31, 1997 and 1996
respectively. Net losses on foreclosed assets decreased $10,000 for the six
months ended December 31, 1997 compared to the same period in 1996.
Other noninterest expense increased $136,000 to $1.9 million for the six
months ended December 31, 1997 compared to $1.7 million for the six months
ended December 31, 1996. Professional fee expense increased $204,000 to
$345,000 for the six months ended December 31, 1996 compared to $141,000 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"),
and an increase of $44,000 in data processing expense. There were no other
individual expense categories in the summary category of other noninterest
expense with increases greater than $25,000 as compared to the previous year.
The increased expenses were largely offset by a $245,000 decrease in other
expenses connected with a potential claim on disbursements related to a
borrower's account, which expenses were booked in the six months ended
December 31, 1996.
Income tax provision increased $947,000 to an expense of $661,000 for the six
months ended December 31, 1997 compared to a benefit of $286,000 for the same
period in 1996. The increase primarily reflected the increase in net income
for the six months ended December 31, 1997 compared to a net loss for the six
months ended December 31, 1996.
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
18 of 26
<PAGE>
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
RESULTS OF OPERATIONS: Comparison of Six Months Ended December 31, 1997 and 1996
(Continued)
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 or the Bank.
NON-PERFORMING ASSETS AND LOAN LOSS PROVISIONS:
The allowance for loan losses is established through a provision for loan
losses based on management's quarterly asset classification review and
evaluation of the risk inherent in its loan portfolio and changes in the
nature and volume of its loan activity. Such evaluation, which includes a
review of all loans of which full collectibility may not be reasonably
assured, considers among other matters, the estimated value of the underlying
collateral, economic conditions, cash flow analysis, historical loan loss
experience, discussions held with delinquent borrowers and other factors that
warrant recognition in providing for an adequate allowance for loan loss.
Provisions for loan losses in the amount of $270,000 were recorded for the
three months ended December 31, 1997 compared to $552,000 for the three months
ended December 31, 1996. The Company's allowance for loan loss was $2.9
million or 0.87% of net loans receivable at December 31, 1997 as compared to
$3.0 million or 0.96% at June 30, 1997. While management believes that the
current allowance for loan loss is adequate to absorb loan losses in the
existing loan portfolio, there is no assurance that the subsequent evaluations
of the loan portfolio may not require additional provisions for loan 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 was unchanged
from $1.2 million or .30% of assets at June 30, 1997 and $1.2 million or .31%
of assets at December 31, 1997, exclusive of troubled
19 of 26
<PAGE>
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)
debt restructured loans. The ratio of the loss allowance to non-performing
assets decreased slightly from 2.5 times at June 30, 1997 to 2.4 times at
December 31, 1997.
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 December 31, 1997. At December 31, 1997, 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 December 31, 1997, 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 December 31, 1997, the Company had $61,000 of
foreclosed and repossessed assets which represented six automobiles totaling
$33,000, three repossessed motorcycles with a combined book value of $13,000,
an all terrain vehicle (ATV) at a book value of $2,000 and a camper 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 December 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.
Impaired Loans. The Company had three loans classified as impaired at December
31, 1997 totaling $2.3 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 at December 31, 1997. 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 December 31, 1997 and management will continue
to monitor this loan closely.
The second largest loan included in impaired loans is a $590,000 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.
20 of 26
<PAGE>
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)
The loan was delinquent one month at December 31, 1997 and the borrower
incurred six delinquencies over the past twelve months.
The third loan included in impaired loans is a $287,000 business loan which
was originated in 1996 for $600,000 to floor plan a dealer in the Company's
local market area. The dealer is primarily a seller of new and used lawn and
garden equipment and small farm implements. This loan continues to be
monitored by management and management continues to work with the dealer to
further reduce the debt as sales occur. Although the loan has been reduced by
$313,000 over the past six months, $63,000 is owed and delinquent on principal
curtailments according to the loan agreement.
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 December 31, 1997 there were $4.8 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.
The Company is monitoring a combination of fourteen real estate loans to one
borrower aggregating $743,000 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 December
31, 1997, however, several delinquencies were incurred over the past twelve
months. Based on the recent analysis, an allowance for loan losses has been
allocated for these loans in the amount of $32,000.
The Company is monitoring a second large commercial real estate loan of
concern in the amount of $2.4 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. Although the loan was current at December 31,
21 of 26
<PAGE>
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)
1997, a recent analysis indicates a shortage of cash flows from the security
to cover the debt, primarily due to a current high vacancy rate. 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 December 31, 1997 was $443,000 and the Company's
75% participation interest amounted to $333,000. Although the loan was current
at December 31, 1997, a recent analysis indicated a shortage of cash flows
from the collateral to cover the debt, and the related note on this loan
ballooned December 1, 1996. The property is listed for sale, and management
granted the borrower's request for an extension of the 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
$580,000 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 December 31, 1997,
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 December 31, 1997, the balance of the loan was $396,000
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
obligor feels that the declining sales volume is due to lack of marketing and
working capital. 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.
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 $35,000, commercial and multi-family real estate
loans totaling $450,000, consumer loans totaling $201,000 and commercial
business loans totaling $392,000. These loans have been considered by
management in conjunction with the analysis of the adequacy of the allowance
for loan losses.
22 of 26
<PAGE>
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
LIQUIDITY AND CAPITAL RESOURCES:
The Company's principal sources of funds are deposits, amortization and
prepayment of loan principal (including mortgage-backed securities),
maturities of investment securities and interest-earning deposits with other
financial institutions, sales of loans and mortgage-backed and related
securities available for sale, and operations. While scheduled loan
repayments, mortgage-backed securities amortization, and maturing investments
are relatively predictable, deposit flows and early loan repayments are more
influenced by interest rates, general economic conditions and competition. The
Company has been selective with regard to deposit rates on certain savings
products and, when necessary, has supplemented deposits with longer term or
less expensive alternative sources of funds.
Current OTS regulations require the Bank to maintain cash and eligible
investments in an amount equal to at least 5% of net withdrawable savings
deposits and borrowings payable on demand or in five years or less during the
preceding calendar month. Liquid assets for purposes of this ratio include
cash, certain time deposits, U.S. Government, government agency and other
securities and obligations generally having remaining maturities of less than
five years. The Bank has maintained its liquidity ratio at a level in excess
of those required. At December 31, 1997, the Bank's liquidity ratio was 9.50%,
which was in excess of the minimum regulatory requirements.
The Company uses its capital resources principally to meet its ongoing
commitments to fund maturing certificates of deposit and loan commitments,
maintain its liquidity and meet operating expenses. At December 31, 1997, the
Company had outstanding commitments to extend credit which amounted to $52.6
million, of which $40.9 million is available lines of credit, $7.8 million for
one-to four-family residential, $1.3 million for multifamily residential, $1.4
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 six month period ended December 31, 1997, there was a net decrease
of $13.0 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 $17.8 million from sales and repayments of securities available for sale,
and an $8.7 million increase in deposits. Major uses of funds included a net
increase in loans receivable of $16.8 million, repayment of Federal Home Loan
Bank advances of $14.5 million, and purchase of loans receivable of $11.2
million.
At December 31, 1997, the Bank's tangible and core capital was $32.0 million
or 8.19% of adjusted total assets, which was in excess of the 1.5% tangible
capital requirement by $26.2 million, and in excess of the 3.0% core capital
requirement by $20.3 million. The Bank also had risk-based capital of $34.6
million at December 31, 1997, or 12.23% of total risk-weighted assets, which
exceeded the 8.0% risk-based capital requirement by $12.0 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.
23 of 26
<PAGE>
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition
And Results of Operations
Continued
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.
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of stockholders was held on October
24,1997.
b) The matter approved by stockholders at the annual meeting
and number of votes cast for, against or withheld as to each
matter are set forth below:
24 of 26
<PAGE>
PERPETUAL MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
(Continued)
Item 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Continued)
Election of the following Directors
For a three year term: For Against Withheld
--------- ------- --------
James L. Roberts 1,491,458 75,610 14,145
Robert H. O'Meara 1,489,878 75,610 15,725
Ratification of the appointment of Crowe Chizek and Company \
LLP, as the Company's auditors for the fiscal year ending
June 30, 1998:
For 1,403,125
Against 160,640
Abstain 17,448
Item 6. - EXHIBITS AND REPORTS ON FORM 8-K
1. The Company filed a form 8-K dated December 23, 1997,
concerning the Company's execution of a Reorganization and
Merger Agreement, dated December 15, 1997 .
2. The Company filed a form 8-K dated January 22, 1998,
concerning the press release of earnings for the three and
six months ended December 31, 1997 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
February 11, 1998 to stockholders of record as of January
31, 1998.
25 of 26
<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: February 10, 1998 /s/ James L. Roberts
------------------------ ------------------------------------------
James L. Roberts, President and Chief
Executive Officer
Date: February 10, 1998 /s/ Rick L. Brown
------------------------ ------------------------------------------
Rick L. Brown, Executive Vice President
and Chief Financial Officer
26 of 26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED DECEMBER 31, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,929,498
<INT-BEARING-DEPOSITS> 7,026,046
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 456,100
<INVESTMENTS-HELD-FOR-SALE> 23,454,865
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 338,061,514
<ALLOWANCE> (2,927,264)
<TOTAL-ASSETS> 392,092,640
<DEPOSITS> 313,868,384
<SHORT-TERM> 19,706,357
<LIABILITIES-OTHER> 4,544,275
<LONG-TERM> 19,000,000
0
0
<COMMON> 21,240
<OTHER-SE> 34,952,384
<TOTAL-LIABILITIES-AND-EQUITY> 392,092,640
<INTEREST-LOAN> 14,068,418
<INTEREST-INVEST> 846,077
<INTEREST-OTHER> 474,384
<INTEREST-TOTAL> 15,388,879
<INTEREST-DEPOSIT> 8,188,430
<INTEREST-EXPENSE> 9,643,282
<INTEREST-INCOME-NET> 5,745,597
<LOAN-LOSSES> 495,000
<SECURITIES-GAINS> 33,332
<EXPENSE-OTHER> 4,489,688
<INCOME-PRETAX> 1,654,169
<INCOME-PRE-EXTRAORDINARY> 1,654,169
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 992,971
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 2.72
<LOANS-NON> 1,137,859
<LOANS-PAST> 0
<LOANS-TROUBLED> 60,941
<LOANS-PROBLEM> 7,807,000
<ALLOWANCE-OPEN> (2,973,457)
<CHARGE-OFFS> 595,671
<RECOVERIES> (54,478)
<ALLOWANCE-CLOSE> (2,927,264)
<ALLOWANCE-DOMESTIC> (2,927,264)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
