1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File No. 0-23368
PERPETUAL MIDWEST FINANCIAL, INC.
A Delaware Corporation I.R.S. Employer Identification
No. 42-1415490
Address Telephone Number
------------------------------------ ---------------------------
700 1st Avenue NE (319) 366-1851
Cedar Rapids, Iowa 52401
Check whether the issuer (1) filed all reports required to be filed by Section
13 of 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
--- ---
There were 1,901,078 shares of Common Stock ($0.01 par value) outstanding as of
October 31, 1996.
Transitional Small Business Disclosure Format (check one): Yes ; No X .
--- ---
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PERPETUAL MIDWEST FINANCIAL, INC.
INDEX
PART I. Financial Information Page No.
--------------------- --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1996 and June 30, 1996 3
Condensed Consolidated Statements of Income -
Three Months Ended September 30, 1996
and September 30, 1995 4
Consolidated Statement of Changes in Stockholders'
Equity - September 30, 1996 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended September 30, 1996
and September 30, 1995 6-7
Notes to Condensed Consolidated Financial
Statements 8-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
PART II. Other Information
-----------------
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
September 30, 1996 June 30, 1996
------------------ --------------------
Cash and due from financial institutions $ 4,092,014 $ 2,968,278
Interest-earning deposits in other financial institutions-short term 16,938,508 7,956,221
------------------ --------------------
Cash and cash equivalents 21,030,522 10,924,499
Trading securities 1,023,553 989,800
Securities available-for-sale 54,842,508 56,401,791
Other securities-Federal Home Loan Bank stock 4,640,900 4,640,900
Loans held for sale 1,612,953 1,870,570
Loans receivable, net of allowance for loan losses of $2,683,281
and $2,670,322 at September 30, 1996 and June 30, 1996 respectively 299,681,788 296,080,410
Accrued interest receivable 2,594,248 2,678,024
Premises and equipment, net 7,543,351 7,307,659
Other assets 2,736,950 2,379,202
------------------ --------------------
Total assets $ 395,706,773 $ 383,272,855
================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Demand deposits $ 7,823,845 $ 7,192,677
Savings and NOW deposits 78,346,036 72,728,251
Certificates of deposit 190,150,592 181,576,182
------------------ --------------------
Total deposits 276,320,473 261,497,110
Borrowed funds 78,339,250 80,723,708
Advances from borrowers for taxes and insurance 322,220 818,524
Accrued interest payable 3,045,002 2,343,611
Other liabilities 3,790,135 2,301,985
------------------ --------------------
Total liabilities 361,817,080 347,684,938
Stockholders' equity
Common stock, $.01 par value, authorized: 6,000,000
shares; issued: 2,123,984 shares 21,240 21,240
Additional paid-in capital 20,539,479 20,546,070
Retained earnings (substantially restricted) 17,777,061 18,481,335
Net unrealized depreciation on securities available-for-sale
(net of tax of $173,927 and $289,492 for September 30, 1996 and
June 30, 1996 respectively) (292,365) (486,626)
Less: Treasury stock (207,087 and 135,902 shares at cost at
September 30, 1996 and June 30, 1996 respectively) (3,387,979) (2,152,190)
Unearned ESOP shares (734,013) (776,032)
Unearned compensation (33,730) (45,880)
------------------ --------------------
Total stockholders' equity 33,889,693 35,587,917
------------------ --------------------
Total liabilities and stockholders' equity $ 395,706,773 $ 383,272,855
================== ====================
See accompanying notes to condensed consolidated financial statements
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PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
---------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
Interest income
Loans receivable $ 6,263,757 $ 4,777,915
Trading securities 18,507 12,256
Securities available-for-sale 778,309 857,548
Securities held-to-maturity -- 519,424
Other 282,268 159,026
-------------- --------------
7,342,841 6,326,169
Interest expense
Deposits 3,534,427 3,070,738
Borrowed funds 1,224,052 1,251,458
-------------- --------------
4,758,479 4,322,196
-------------- --------------
NET INTEREST INCOME 2,584,362 2,003,973
Provision for loan losses 225,000 --
-------------- --------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,359,362 2,003,973
Noninterest income
Loan servicing fees 97,600 111,050
Net realized losses on sales
of available-for-sale securities (14,354) (15,185)
Net gains from sale of loans held for sale 85,004 75,603
Net trading securities gains 45,655 2,338
Other 204,174 106,527
-------------- --------------
418,079 280,333
Noninterest expense
Compensation and benefits 899,539 786,022
Occupancy and equipment 387,332 326,924
SAIF deposit insurance premium 1,628,074 130,003
Net losses on foreclosed assets 4,075 1,475
Other 771,415 607,623
-------------- --------------
3,690,435 1,852,047
-------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES (912,994) 432,259
Income tax expense (benefit) (360,000) 176,496
-------------- --------------
NET INCOME $ (552,994) $ 255,763
============== ==============
Earnings per common and common equivalent
share subsequent to conversion $ (0.29) $ 0.13
Earnings per share - assuming full dilution -
subsequent to conversion $ (0.29) $ 0.12
See accompanying notes to condensed consolidated financial statements.
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PERPETUAL MIDWEST FINANCIAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Balance at June 30, 1996 35,587,917
Effect of contribution to fund ESOP 42,019
Amortization of RRP contribution 12,150
Purchase of treasury stock (1,333,289)
Issuance of 5,000 shares from treasury stock
in connection with exercise of stock options 50,000
Tax effect of stock plans 40,910
Net changes in unrealized depreciation on
securities available-for-sale 194,261
Cash dividends paid ($0.075 per common share) (151,281)
Net income (552,994)
-----------
Balance at September 30, 1996 $33,889,693
===========
See accompanying notes to condensed consolidated financial statements.
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PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
--------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
Cash flows from operating activities
Net income $ (552,994) $ 255,763
Adjustments to reconcile net income
to net cash from operating activities
Depreciation 194,549 160,503
Amortization of:
Unearned compensation 12,150 21,054
Premiums and discounts on securities, net 109,908 195,322
Provision for loan losses 225,000 --
Net (gains) losses on sales of:
Securities available-for-sale 14,354 15,185
Loans held for sale (85,004) (75,603)
Foreclosed assets, net 4,075 10,132
Purchase of:
Trading securities -- --
Net trading securities (gains) losses (45,655) (2,338)
Proceeds from sales of:
Trading securities 11,902 --
Loans originated for sale 7,771,485 4,421,601
Origination of loans held for sale (7,428,864) (3,846,741)
Market adjustment of ESOP shares 67,200 --
ESOP expense 42,019 26,792
Change in:
Accrued interest and dividends receivable 83,776 43,208
Accrued expenses and other liabilities 2,122,341 1,387,683
Other assets (473,313) 344,382
---------------- ------------
Total adjustments 2,625,923 2,701,180
---------------- ------------
Net cash from operating activities 2,072,929 2,956,943
Cash flows from investing activities
Proceeds from:
Sales of securities available-for-sale 5,496,577 8,846,792
Maturities and principal payments of
securities available-for-sale 2,374,353 2,381,200
Maturities and principal payments of
securities held-to-maturity -- 2,746,692
Sales of foreclosed assets 145,266 6,750
Purchase of:
Securities available-for-sale (6,126,083) (2,438,576)
FHLB stock -- --
Premises and equipment, net (430,241) (150,429)
Net change in loans (3,975,719) (10,714,532)
Net change in interest-earning deposits
in other financial institutions -- 3,000,000
---------------- ------------
Net cash from investing activities (2,515,847) 3,677,897
(Continued)
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PERPETUAL MIDWEST FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
----------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
Cash flows from financing activities
Purchase of shares of treasury stock $ (1,333,289) $ (403,659)
Issuance of treasury stock for stock plans 97,500 --
Cash dividends paid (151,281) --
Tax effect of stock plans 40,910 --
Effect of treasury stock issued for stock plans (47,500) --
Net change in deposits 14,823,363 2,894,403
Proceeds from Federal Home Loan
Bank advances -- 5,000,000
Repayment of Federal Home Loan
Bank advances (2,500,000) (5,000,000)
Net change in other borrowed funds 115,542 30,473
Net change in advance payments by
borrowers for taxes and insurance (496,304) (376,802)
---------------- -----------
Net cash from financing activities 10,548,941 2,144,415
---------------- -----------
Net change in cash and cash equivalents 10,106,023 8,779,255
Cash and cash equivalents at beginning of period 10,924,499 9,122,377
---------------- -----------
Cash and cash equivalents at end of period $ 21,030,522 $17,901,632
================ ===========
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest 4,057,088 3,443,828
Income taxes -- 180,193
Supplemental schedule of noncash investing activities
Assets acquired in settlement of loans 149,341 26,982
See accompanying notes to condensed consolidated financial statements.
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Item 1.
Financial Statements, Continued
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements were prepared
in accordance with instructions for Form 10-QSB and, therefore, do not
include all disclosures required by generally accepted accounting
principals for complete presentation of financial statements. The
unaudited information for the three months ended September 30, 1995 and
September 30, 1996 includes the consolidated results of operations of
Perpetual Midwest Financial, Inc. (the "Company") and its wholly-owned
subsidiary Perpetual Savings Bank, FSB (the "Bank"). In the opinion of
management, the information reflects all adjustments (consisting only of
normal recurring adjustments) which were necessary for a fair presentation
of the results of operations for such periods but should not be considered
as indicative of results for a full year.
2. BORROWINGS FROM THE FEDERAL HOME LOAN BANK
Borrowings at September 30, 1996 primarily consisted of advances from the
Federal Home Loan Bank of Des Moines (the "FHLB") bearing rates from 5.396%
to 6.88%. The advances are collateralized by the Company's single-family
and multi-family whole loans and mortgage-backed securities. Adjustable
rate advances included $14.0 million indexed to the 1 month LIBOR rate
which adjusts monthly. The Company also maintains a $20.0 million line of
credit with the FHLB which adjusts daily to the FHLB's posted rate for
these borrowings. The line of credit did not have a balance at September
30, 1996. The remaining balance of $64.0 million of advances are fixed
rate, fixed term, with maturities from .5 months to 7 years.
3. CAPITAL DISTRIBUTIONS REGULATIONS:
An OTS regulation imposes limitations upon all "capital distributions" by
savings associations, including cash dividends, payments by an institution
to repurchase or otherwise acquire its shares, payments to shareholders of
another institution in a cash-out merger and other distributions charged
against capital. The regulation establishes a three-tiered system of
regulation, with the greatest flexibility being afforded to
well-capitalized institutions. A savings association which has total
capital (immediately prior to and after giving effect to capital
distribution) that is at least equal to its fully phased-in capital
requirements would be a Tier 1 institution ("Tier 1 Institution"). An
institution that has total capital at least equal to its minimum capital
requirements, but less than its fully phased-in capital requirements,
would be a Tier 2 institution ("Tier 2 Institution"). An institution
having total capital that is less than its minimum capital requirements
would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 institution may be
designated by the OTS as a Tier 2 or Tier 3 institution if the OTS
determines that the institution is "in need of more than normal
supervision." The Bank is currently a Tier 1 Institution.
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Item 1.
Financial Statements, Continued
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. CAPITAL DISTRIBUTIONS REGULATIONS (CONTINUED):
A Tier 1 Institution could, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year up to 100% of
its net income to date during the calendar year plus the amount that would
reduce by one-half its "surplus capital ratio" (the excess over its Fully
Phased-in Capital Requirements) at the beginning of the calendar year.
Any additional amount of capital distributions would require prior
regulatory approval.
4. EARNINGS PER COMMON SHARE:
Earnings per common and common equivalent share (primary and fully
diluted) for the three months ended September 30, 1996 were computed by
dividing net income by the weighted average number of shares of common and
common stock equivalents outstanding. The weighted average number of
common and common equivalent shares outstanding exclude ESOP unallocated
shares and treasury stock.
5. ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is increased by charges to income and
decreased by charge-offs, net of recoveries. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level
considered adequate to cover losses that are currently anticipated.
Management's periodic evaluation of the adequacy of the allowance is based
on the Company's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral, and the
current economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process periodically review the
Company's allowance for losses on loans and foreclosed real estate. Such
agencies may require the Company to recognize additions to the allowances
based on their judgments of information available to them at the time of
their examinations.
Loans are considered impaired if full principal or interest payments are
not anticipated in accordance with the contractual loan terms. Impaired
loans are carried at the present value of expected future cash flows
discounted at the loan's effective interest rate or at the fair value of
the collateral if the loan is collateral dependent. A portion of the
allowance for loan losses is allocated to impaired loans. If these
allocations cause the allowance for loan losses to require increase, such
increase is reported as a component of the provision for loan losses.
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Item 1.
Financial Statements, Continued
PERPETUAL MIDWEST FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. ALLOWANCE FOR LOAN LOSSES (CONTINUED):
Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include: residential first mortgage loans secured by
one-to-four family residences, residential construction loans, and
automobile, home equity and second mortgage loans. Commercial loans and
mortgage loans secured by other properties are evaluated individually for
impairment. When analysis of borrower operating results and financial
condition indicates that underlying cash flows of the borrower's business
are not adequate to meet its debt service requirements, the loan is
evaluated for impairment. Often this is associated with a delay or
shortfall in payments of 60 days or more. Loans are moved to nonaccrual
status when 90 days or more past due. These loans are often considered
impaired. Impaired loans, or portions thereof, are charged off when
deemed uncollectible by management review.
Activity in the allowance for loan losses was as follows for the three
months ended September 30, 1996.
Balance at July 1, 1996 $2,670,322
Provision for loan losses 225,000
Losses charged to the allowance (220,280)
Recoveries credited to the allowance 8,239
----------
Balance at September 30, 1996 $2,683,281
==========
Information regarding impaired loans is as follows for the three months
ending September 30, 1996 and 1995:
Three Months Ended
---------------------------------------
September 30, 1996 September 30, 1995
------------------ ------------------
Average investment in impaired loans $ 2,923,354 $ --
Interest income recognized on impaired loans
including interest income recognized on a cash basis 46,421 --
Interest income recognized on impaired loans on cash basis 48,174 --
Information regarding impaired loans at September 30, 1996 is as follows:
Balance of impaired loans $ 2,919,948
Less portion for which no allowance for loan losses is allocated --
------------
Portion of impaired loan balance for which an
allowance for loan losses is allocated $ 2,919,948
============
Portion of allowance for loan losses allocated to impaired loan balance $ 1,112,856
============
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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 high capital to
asset ratio. This strategy emphasizes an aggressive program of origination and
acquisition of retail consumer loans, including vehicle loans, home equity
(second mortgage) loans, credit card loans and recreational vehicle loans. In
addition, this strategy calls for a growth in the Company's commercial real
estate loans and business loans within the Company's market areas. This growth
of the company may be financed by either increases in deposits or from borrowed
funds. The source of funds for the Company's growth depends on several
factors, including cost, availability, interest rate risk, and reinvestment
alternatives.
The Company is selling substantially all of its originations of one-to
four-family loans. With a "locked-in" rate at the time of commitment, the
Company sells one-to four-family loans, servicing released, to a private
mortgage banker, generally for a 1.00% to 1.25% premium. This program has
allowed the Company to offer competitive one-to four-family rates and products
in its market area. To a lesser extent, the Company sells one-to four-family
loans to the Federal National Mortgage Association, servicing retained.
Although the loan rates in this program are generally less competitive, some
customers of the Company prefer that the servicing of their loan remain with
the Company.
The most significant outside factors influencing the operations of the Company
include general economic conditions, competition in the local market place, and
the related monetary and fiscal policies of agencies that regulate and/or
affect financial institutions. More specifically, the cost of funds primarily
consisting of deposits, is influenced by interest rates on competing
investments and general market rates of interest, while lending activities are
influenced by the demand for real estate financing and other types of loans,
which in turn is affected by the interest rates at which such loans may be
offered and other factors affecting loan demand and funds availability,
including posted rates by the Federal National Mortgage Association ("Fannie
Mae").
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Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And Results of
Operations
Continued
FINANCIAL CONDITION:
Total assets increased $12.4 million to $395.7 million at September 30, 1996
from $383.3 million at June 30, 1996. This increase was primarily attributable
to a $3.6 million increase in loans receivable, net, and a $10.1 million
increase in cash and cash equivalents, partially offset by a $1.6 million
decrease in securities available-for-sale.
Loans receivable, net, increased $3.6 million to $299.7 million at September
30, 1996 from $296.1 million at June 30, 1996. The increase in loans
receivable, net, was funded primarily by sales, repayments and maturities of
securities and net deposit increases.
There are no significant changes to the geographic concentrations of the
Company's out-of-territory loans. The Company had no foreign loans outstanding
at September 30, 1996.
Total Deposits increased $14.8 million to $276.3 million at September 30, 1996.
Management attributes this increase to the Company's expanded marketing
efforts and competitive array of deposit products.
Borrowed funds at September 30, 1996 totaled $78.3 million as compared to $80.7
million at June 30, 1996. Borrowed funds consisted of $32.5 million of long
term advances and $45.8 million of short term advances (due in 12 months or
less) primarily from the Federal Home Loan Bank of Des Moines.
At September 30, 1996 stockholders' equity totaled $33.9 million as compared to
$35.6 million at June 30, 1996 or a decrease of $1.7 million. Stockholders'
equity decreased primarily due to a net loss of $553,000 for the three months
ended September 30, 1996 and a reduction of equity in the amount of $1.2
million for the increased holdings of Company Treasury Stock, primarily offset
by a net of tax reduction of $194,000 from June 30, 1996 for net unrealized
depreciation in securities available-for-sale, and a reduction of the
contra-equity accounts for Employee Stock Ownership Plan and Unearned
Compensation in the amount of $42,000.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
The Company had net income after tax of $347,000 or $0.18 per share of common
stock for the three months ended September 30, 1996 before the impact of a
one-time charge of $900,000 or $0.47 per share to recapitalize the Savings
Association Insurance Fund (SAIF). This compares to $256,000 or $0.12 per share
for the same period in 1995.
Net interest income, before provision for loan losses, increased $600,000 to
$2.6 million for the three months ended September 30, 1996 compared to $2.0
million for the same period in 1995. Interest income increased $1.0 million,
primarily due to an increase of 0.35% in the average rate earned on
interest-earning assets, and an increase of $36.2 million in the average
balance. Interest expense increased $400,000 and primarily reflected an
increase of 0.17% in the average rate paid on interest-bearing liabilities, and
a $39.6 million increase in the average balance.
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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 SEPTEMBER 30, 1996 AND
1995
(CONTINUED)
Noninterest income for the three months ended September 30, 1996, was $418,000
compared to $280,000 for the same period in 1995. Loan servicing fees decreased
$13,000 to $98,000 for the three months ended September 30, 1996 compared to
$111,000 for the same period in 1995, primarily due to a declining average
balance of loans serviced for others. The average balance of loans serviced for
others was $129.6 million during the three months ended September 30, 1996
compared to $137.9 million during the same period last year. Gain or loss on
the sales of available-for-sale securities and loans held for sale reflected a
net gain of $71,000 for the three months ended September 30, 1996 compared to a
net gain of $61,000 for same period last year. Net trading securities gains
was $46,000 for the three months ended September 30, 1996, compared to a $2,000
net trading gain for the same period last year.
Other noninterest income increased $97,000 for the three months ended September
30, 1996 to $204,000 as compared to $107,000 for the three months ended
September 30, 1995, primarily due to a $10,000 increase in mortgage loan fees,
a $24,000 increase in savings fees, a $36,000 increase in non-mortgage fees and
a $11,000 reduction in the net loss generated by Perpetual Financial Services,
Inc. (the Bank's wholly owned service corporation). The operations of Perpetual
Financial Services, Inc. resulted in a $18,000 loss for the quarter ended
September 30, 1996 compared to net loss of $29,000 for the same period last
year. The net loss continued for the quarter ended September 30, 1996
primarily due to the decrease in commission income generated by Perpetual
Financial Services, Inc. which is generally attributed to a decrease of
non-insured product sales by the service corporation. The Bank, through its
wholly owned subsidiary, Perpetual Financial Services, Inc., offers mutual
funds, annuities and brokerage services to its customers.
Noninterest expense increased $353,000 to $2.2 million for the three months
ended September 30, 1996, before the SAIF special assessment, compared to $1.9
million for the same period in 1995. Compensation and benefits increased
$114,000 to $900,000, primarily due to normal salary increases, to an increase
of nine employees to the Company's staff and a related increase in payroll
taxes. Occupancy and equipment expense increased $60,000 to $387,000 for the
three months ended September 30, 1996 compared to $327,000 for the same period
last year, primarily due to additional expense related to operations of the
Company's new branch office, which opened on June 1, 1996. The regular SAIF
deposit insurance premium expense increased $13,000 to $143,000 for the three
months ended September 30, 1996. The increase in SAIF deposit insurance premium
was primarily due to a $13.2 million increase in the Company's assessable
deposit base. The Company's regular SAIF Federal insurance premium rates for
the three months ended September 30, 1996 and 1995 was 0.23% (See "--Insurance
of Accounts and SAIF Deposit Premium"). The Company was assessed a one-time
charge of $1.5 million by the FDIC to recapitalize the Savings Association
Insurance Fund. Gain or loss on foreclosed real estate reflected a loss of
$4,000 for the three months ended September 30, 1996 compared to a loss of
$1,000 for the same period in 1995. Other noninterest expense increased
$163,000 to $771,000 for the three months ended September 30, 1996 compared to
$608,000 for the same period last year. Data processing expense, loan expense
and Visa/Master Card service expense are the largest categorical increases in
other noninterest expense for the three months ended
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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 SEPTEMBER 30, 1996 AND
1995
(CONTINUED)
September 30, 1996 as compared to the same period last year. Data processing
expense increased $25,000 primarily due to an increase in the number of
accounts serviced. Loan expense increased $53,000 primarily due to increased
activity in the production of indirect consumer loans and a related increase in
dealer fees paid. Visa/Master Card service expense increased $50,000, primarily
due to an increase in the number of accounts and transactions service, which is
partially offset by a related $34,000 increase in credit card fee income.
Income tax provision decreased $536,000 to ($360,000) for the three months
ended September 30, 1996 compared to $176,000 for the same period in 1995. The
decrease primarily reflected tax provision on the lower amount of income before
tax.
INSURANCE OF ACCOUNTS AND SAIF DEPOSIT PREMIUM:
On September 30, 1996, federal legislation was enacted that requires the
Savings Association Insurance Fund ("SAIF") to be recapitalized with a one-time
assessment on virtually all SAIF-insured institutions, such as the Bank, equal
to 65.7 basis points on SAIF-insured deposits maintained by those institutions
as of March 31, 1995. The SAIF assessment, which is to be paid to the FDIC by
November 27, 1996, is approximately $1.5 million before tax or $900,000 after
tax, and has been accrued by the Company at September 30, 1996.
As a result of the SAIF recpitalization, the FDIC has proposed to amend its
regulation concerning the insurance premiums payable by SAIF-insured
institutions. Effective October 1, 1996 through December 31, 1996, the FDIC
has proposed that the SAIF insurance premium for all SAIF-insured institutions
that are required to pay the Financing Corporation (FICO) obligation, such as
the Bank, be reduced to a range of 18 to 27 basis points from 23 to 31 basis
points per $100 of domestic deposits. The Bank currently qualifies for the
minimum SAIF insurance premium of 23 basis points. The FDIC has also proposed
to further reduce the SAIF insurance premium to a range of 0 to 27 basis points
per $100 of domestic deposits, effective January 1, 1997. Management cannot
predict whether or in what form the FDIC's final regulation may promulgate.
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.
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15
Item 2.
PERPETUAL MIDWEST FINANCIAL, INC.
Management's Discussion and Analysis of Financial Condition And Results of
Operations
Continued
NON-PERFORMING ASSETS AND LOAN LOSS PROVISIONS:
The allowance for loan losses is established through a provision for loan
losses based on management's quarterly asset classification review and
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation, which includes a review of
all loans of which full collectibility may not be reasonably assured, considers
among other matters, the estimated value of the underlying collateral, economic
conditions, cash flow analysis, historical loan loss experience, discussions
held with delinquent borrowers and other factors that warrant recognition in
providing for an adequate allowance for loan loss. Provisions for loan losses
in the amount of $225,000 were recorded for the three months ended September
30, 1996 compared to no provision for the three months ended September 30,
1995. The Company's allowance for loan loss was $2.7 million or 0.90% of net
loans receivable at September 30, 1996 as compared to $2.7 million or 0.90% at
June 30, 1996. While management believes that the current allowance for loan
loss is adequate to absorb loan losses in the existing loan portfolio, there is
no assurance that the subsequent evaluations of the loan portfolio may not
require additional provisions for loan loss.
The non-performing assets to total assets is one indicator of the Company's
exposure to credit risk. Non-performing assets of the Company consist of
non-accruing loans and real estate owned which has been acquired as a result
of foreclosure. Non-performing assets increased from $1.4 million or .38% of
assets at June 30, 1996 to $1.5 million or .37% of assets at September 30,
1996, exclusive of troubled debt restructured loans. The ratio of the loss
allowance to non-performing assets decreased slightly from 1.9 times at June
30, 1996 to 1.8 times at September 30, 1996.
Troubled Debt Restructures. The Company does not consider troubled debt
restructurings to be "non-performing loans". At September 30, 1996, the
Company held one restructured loan secured by a property located in Newport
Beach, California. This loan is secured by an office/warehouse building on
leased ground. At September 30, 1996 the balance of the loan was $638,000. The
borrower has performed according to the terms of the modification agreement,
and the loan was current at September 30, 1996 (See -Impaired Loans).
Foreclosed Assets. As of September 30, 1996, the Company had $86,000 of
foreclosed and repossessed assets which represented nine automobiles totaling
$84,000 and a repossessed all-terrain vehicle with a book value of $2,000.
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 September 30, 1996 and the current economic environment,
management does not expect to initiate any significant foreclosures or
repossessions of assets, other than impaired assets with the conditions
described previously, during the quarter following that review date and they
continue to monitor other loans of concern.
Impaired Loans. The Company had five loans classified as impaired at September
30, 1996 totaling $2.9 million, offset by an allocated allowance for loan
losses in the amount of $1.1 million.
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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 largest loan included in impaired loans is a $784,000 real estate
participation loan secured by a 114 unit multi-family complex located in Ft.
Worth, Texas. The loan was originated at a 54% loan to value ratio for $1.3
million in 1987 with a twenty year amortization and a ten year balloon date of
July 1, 1997. The Company purchased a 75% interest in the loan at the time of
origination. This loan has generally been 60 days or more delinquent over
the past four years and was nine months delinquent at September 30, 1996. An
allowance for loan loss has been allocated for this loan in the amount of
$300,000. This loan is included in the Company's non-performing loans at
September 30, 1996.
The second largest loan included in impaired loans is a $638,000 loan secured
by an office/warehouse mortgage loan in Newport Beach, California. This loan is
discussed above under Troubled Debt Restructures and is classified as impaired
due to previous experience with the borrower and the necessity to restructure
the loan. An allowance for loan loss has been allocated for this loan in the
amount of $213,000.
The Company has classified as impaired a $588,000 loan secured by two buildings
with multi-tenant office suites located in Van Nuys, California. This loan was
originated in 1986 at a 67% loan to value ratio with a balloon date in
February, 1996, however, the borrower was not able to refinance the loan in the
local market of the security. This loan was classified due to a high vacancy
rate and deteriorated condition of the security. An allowance for loan loss has
been allocated for this loan in the amount of $350,000. The loan was current at
September 30, 1996, with no delinquencies over the past twelve months.
A loan secured by a communications building located in Denver, Colorado in the
amount of $586,000 was classified as impaired at September 30, 1996. The
contractual rent on this property for the existing tenant is in excess of
current market rent for similar properties in the Denver area. This loan was
originated in 1987 at a 75% loan to value ratio. Based on a recent appraisal
analysis, an allowance for loan loss in the amount of $150,000 has been
allocated for this loan. This loan was current at September 30, 1996 with no
delinquencies over the past twelve months.
A $325,000 loan secured by a multi-tenant retail/office building located in the
central business district of Marion, Iowa was classified as impaired at
September 30, 1996. This loan was originated in 1991 at a 68% loan to value
ratio and has previously incurred negative cash flows from the security. During
1996 there was a change of property manager/leasing agent for this property and
management will continue to monitor the occupancy and cash flows. The loan was
current at September 30, 1996 and had an allowance for loan loss allocation in
the amount of $100,000.
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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)
Other Loans of Concern. As of September 30, 1996 there were $4.7 million of
other loans of concern not discussed above where known information about the
possible credit problems of borrowers or the cash flows of the security
properties have caused management to have concerns as to the ability of the
borrower to comply with present loan repayment terms and which may result in
the future inclusion of such loans as non-performing or impaired. Other loans
of concern have been considered by management in conjunction with the analysis
of the adequacy of the allowance for loan losses.
The Company is monitoring four commercial real estate loans aggregating $1.5
million secured by properties located in Southern California. These loans were
originated prior to 1987 at loan to value ratios ranging form 40% - 80% (with
an average of 62%). The Company purchased these loans in 1988. At September 30,
1996, the three largest of these loans were $569,000, $381,000 and $345,000.
All of these loans are secured by office and/or industrial/warehouse
properties. Although all of these loans were performing in accordance with
their respective loan repayment terms at September 30, 1996, the Company is
monitoring these loans because of continuing concerns for the general economy
in California, and particularly the real estate market, which suffers from the
effects of a prolonged recession that began in 1990. Although there are reports
that the California real estate market may be experiencing a slow recovery, the
Company continues to monitor these loans closely.
The Company is monitoring a second large commercial real estate loan of concern
in the amount of $2.5 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 September 30, 1996, 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 43 unit multi-family complex in Ft. Worth,
Texas. This loan was originated in 1986 for $600,000 at a loan to value ratio
of 55% and the Company purchased a 75% participation interest at origination.
The balance of the loan at September 30, 1996 was $480,000 and the Company's
75% participation interest amounted to $360,000. Although the loan was current
at September 30, 1996, a recent analysis indicated a shortage of cash flows
from the security to cover the debt. Additionally, this property is owned by
the same mortgagor as the property in Ft. Worth, Texas, classified as an
impaired loan and described above.
A fourth large loan of concern is a small commercial real estate medical
complex in Colorado Springs, Colorado. The loan was originated in 1989 for
$324,000 at a loan to value ratio of 70%. The mortgagor is the tenant and
conducts an ophthalmology practice at the complex. The balance of the loan at
September 30, 1996 was $296,000 and the loan was current at that date with no
late payments over the past twelve months. The Company estimates that the value
of the property has decreased due to declining market values in this market,
resulting in a loan to value ratio of approximately 95%.
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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)
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 $988,000, commercial and multi-family real estate
loans totaling $115,000, consumer loans totaling $408,000 and commercial
business loans totaling $34,000. 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 September 30, 1996, the Bank's liquidity ratio was
14.66% 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 September 30, 1996, the
Company had outstanding commitments to extend credit which amounted to $56.7
million, of which $38.6 million is available lines of credit, $7.6 million for
one-to four-family residential, $1.8 million for multifamily residential, $4.5
million for commercial real estate, and the remaining $4.2 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 three month period ended September 30, 1996, there was a net
increase of $10.1 million in cash and cash equivalents. This increase was
temporary, pending repayment of borrowed funds. The major source of cash
during the period was a $14.8 million increase in deposits, and $7.9 million
from sales and repayments of securities available-for-sale. Major uses of
funds included purchases of securities available for sale of $6.1 million, a
net increase in loans receivable of $4.1 million, and repayment of Federal Home
Loan Bank advances of $2.5 million.
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19
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 September 30, 1996, the Bank's tangible and core capital was $30.5 million
or 7.74% of adjusted total assets, which was in excess of the 1.5% tangible
capital requirement by $24.6 million, and in excess of the 3.0% core capital
requirement by $18.6 million. The Bank also had risk-based capital of $32.0
million at September 30, 1996, or 12.19% of total risk-weighted assets, which
exceeded the 8.0% risk-based capital requirement by $11.0 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.
PERPETUAL MIDWEST FINANCIAL, INC.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDING
There are no material legal proceedings to which the Holding Company or
the Bank is a party or of which any of their property is subject. From
time-to-time, the Bank is a party to various legal proceedings incident to
its business.
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
1. The Company filed a form 8-K dated October 10, 1996, concerning
the press release of earnings for the three months ended September
30, 1996.
2. The Company filed a form 8-K dated October 10, 1996, concerning
the press release announcing that the Company would pay a cash
dividend of $0.075 (seven and one-half cents) per share of
outstanding common stock on November 19, 1996 to stockholders of
record as of October 31, 1996.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PERPETUAL MIDWEST FINANCIAL, INC.
Registrant
Date: November 12, 1996 /s/ James L. Roberts
------------------ --------------------------------------
James L. Roberts, President and Chief
Executive Officer
Date: November 12, 1996 /s/ Rick L. Brown
------------------ --------------------------------------
Rick L. Brown, Senior Vice President
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit
No. Description Page
- ------- ----------- ----
EX 27 Financial Data Schedule