UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-23370
PERMANENT BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 35-1908797
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Southeast Third Street, Evansville, Indiana 47708
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 428-6800
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) 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
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price of such stock on
the NASDAQ National Market System as of June 24, 1997, was $24.25. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
As of June 24, 1997, there were issued and outstanding 2,097,140 shares
of the Registrant's Common Stock.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV of Form 10-K - Portions of the Annual Report to
Stockholders for the fiscal year ended March 31, 1997.
Part III of Form 10-K - Portions of the Proxy Statement for 1997 Annual
Meeting of Stockholders.
<PAGE>
PART I
Item 1. Business
General
Permanent Bancorp, Inc. (the "Company"), a Delaware corporation, was
organized in December 1993 as a savings and loan holding company for Permanent
Federal Savings Bank ("Permanent Federal" or the "Bank") in connection with the
Bank's conversion from mutual to stock form which was completed on March 31,
1994 (the "Conversion"). Permanent Federal, the predecessor of which was
originally organized in 1885, is a federally chartered savings bank
headquartered in Evansville, Indiana. The Bank's deposits are insured up to the
maximum allowable amount by the Federal Deposit Insurance Corporation (the
"FDIC"). Through its main office and network of ten branch offices, the Company
serves Vanderburgh, Gibson, Warrick, Posey and Dubois Counties, Indiana. At
March 31, 1997, the Company had total assets of $423.7 million, deposits of
$280.8 million, and total stockholders' equity of $39.1 million (9.2% of total
assets).
Permanent Federal has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services to meet the needs of the communities it serves. The Bank attracts
deposits from the general public and uses these deposits, together with
borrowings and other funds, primarily to originate one- to four-family
residential mortgage loans as well as loans secured by multi-family and
commercial real estate, automobile and other consumer loans. To a lesser extent,
the Bank also originates a limited number of construction and commercial
business loans. The Bank also invests in mortgage-backed and other securities.
See "Lending Activities" and "Investment Activities."
Through its service corporation, Perma Service Corp., the Bank also
offers various types of insurance products and provides brokerage services. See
"Service Corporation Activities."
The executive office of the Company is located at 101 Southeast Third
Street, Evansville, Indiana 47708. Its telephone number at that address is (812)
428-6800.
Lending Activities
General. Historically, the Bank originated fixed-rate, one-to
four-family mortgage loans. In the early 1980s, however, the Bank began to also
originate, subject to market conditions, adjustable-rate mortgage ("ARM") loans
for retention in its portfolio. At March 31, 1997, 69.6% of the Bank's loan
portfolio was fixed-rate and 30.4% was adjustable-rate. The Bank's
adjustable-rate loan portfolio as a percentage of the total loan portfolio has
decreased from 42.9% at March 31, 1992 to 30.4% at March 31, 1997 as consumer
demand for fixed-rate loans increased. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management" in the Company's Annual Report to Stockholders for the fiscal year
ended March 31, 1997, attached hereto as Exhibit 13 (the "Annual Report").
<PAGE>
The Bank focuses its lending activities on the origination of loans
secured by first mortgages on owner-occupied, one-to four-family residences as
well as multi-family and commercial real estate loans, automobile and other
consumer loans. To a lesser extent, the Bank also originates a limited number of
construction and commercial business loans. At March 31, 1997, the Bank's total
loan portfolio, including commercial paper, totaled $212.6 million, of which
$152.7 million, or 71.8%, were one- to four-family mortgage loans. At the same
date, consumer loans (including indirect and direct automobile loans) totaled
$44.9 million, or 21.1%, multi-family and commercial real estate loans totaled
$12.1 million, or 5.7%, construction loans totaled $1.9 million, or 1.0%, and
there was $1.0 million of commercial paper, representing 0.5% of the loan
portfolio. Total loans and loans held for sale, net, as a percentage of total
assets equaled 49.6% at March 31, 1997.
The Bank also invests in mortgage-backed securities. At March 31, 1997,
mortgage-backed securities, net, totaled $101.2 million, or 23.9% of total
assets. See "Investment Activities -- Mortgage-Backed Securities."
Loan applications are initially underwritten and approved at various
levels of authority, depending on the type and amount of the loan, as
established by the Board of Directors. Residential loans in excess of $250,000,
commercial real estate loans in excess of $200,000 and commercial business loans
in excess of $100,000 require the approval of the Board of Directors or the
Senior Loan Committee consisting of three Bank officers and three non-employee
directors.
Prior to the enactment of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 ("FIRREA"), the aggregate amount of loans that the
Bank was permitted to make under applicable federal regulations to any one
borrower, including related entities, or the aggregate amount that the Bank
could have invested in any one real estate project, was, with certain
exceptions, limited to the lesser of 10% of the Bank's deposits or 100% of its
regulatory capital. Effective August 9, 1989, the Bank's loans-to-one-borrower
limit was reduced in accordance with FIRREA, generally to the greater of 15% of
unimpaired capital and surplus or $500,000. See "Regulation - Federal Regulation
of Savings Associations." At March 31, 1997, the maximum amount which the Bank
could have lent to any one borrower and the borrower's related entities was
approximately $5.5 million. At March 31, 1997, the Bank had no loans with
aggregate outstanding balances in excess of this amount.
Management reserves the right to change its emphasis on the amount, or
type of lending in which it engages to adjust to market or other factors.
<PAGE>
Portfolio Composition. The following table sets forth the composition
of the Bank's loan and mortgage-backed securities portfolios (including loans
held for sale) in dollar amounts and in percentages at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
1993 1994 1995
---------------------- --------------------- -----------------------
Amount Percent Amount Percent Amount Percent
-------- ------ ------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family........................... $126,275 70.58% $127,958 66.62% $133,864 67.62%
Multi-family.................................. 13,753 7.69 17,775 9.25 15,712 7.94
Commercial real estate........................ 7,339 4.10 6,733 3.50 5,052 2.55
Construction or development................... 1,961 1.10 1,814 0.94 2,406 1.22
-------- ------ ------- ------ -------- ------
Total real estate loans................... 149,328 83.47 154,280 80.31 157,034 79.33
-------- ------ ------- ------ -------- ------
Other Loans:
Consumer Loans:
Deposit account.............................. 1,136 0.63 850 0.45 1,011 0.51
Student...................................... --- --- --- --- --- ---
Automobile................................... 17,126 9.57 26,086 13.58 28,005 14.14
Home improvement............................. 746 0.42 945 0.49 1,201 0.61
Retail mobile home loans..................... 2,938 1.64 2,410 1.25 1,984 1.00
Home equity and other........................ 7,181 4.01 7,361 3.83 8,137 4.11
-------- ------ -------- ------ -------- ------
Total consumer loans...................... 29,127 16.27 37,652 19.60 40,338 20.37
Commercial business loans..................... 468 0.26 174 0.09 96 0.05
Term federal funds(1)......................... --- --- --- --- --- ---
Bankers' acceptances.......................... --- --- --- --- 489 0.25
Commercial paper.............................. --- --- --- --- --- ---
Total other loans......................... 29,595 16.53 37,826 19.69 40,923 20.67
-------- ------ -------- ------ -------- ------
Total loans............................... $178,923 100.00% $192,106 100.00% $197,957 100.00%
======== ====== ======== ====== ======== ======
Less:
Loans in process.............................. 133 107 62
Deferred fees and discounts................... 847 649 319
Allowance for losses.......................... 2,077 2,110 2,093
-------- -------- --------
Total loans and loans held for sales, net..... $175,866 $189,240 $195,483
======== ======== ========
Mortgage-Backed Securities:
FNMA.......................................... $ 10,045 12.87% $ 13,500 17.83% $ 16,684 21.61%
GNMA.......................................... 36,721 47.04 38,791 51.23 35,692 46.24
FHLMC......................................... 31,297 40.09 23,428 30.94 24,812 32.14
-------- ------ -------- ------ -------- ------
Total mortgage-backed
securities............................... 78,063 100.00% 75,719 100.00% 77,188 100.00%
====== ====== ======
Net premiums and discounts..................... 632 308 55
-------- -------- --------
Net mortgage-backed securities................. $ 78,695 $ 76,027 $ 77,243
======== ======== ========
- -------------------
(1) Represents short-term loans to other financial institutions.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------
1996 1997
--------------------- ----------------------
Amount Percent Amount Percent
-------- ------ -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family........................... $144,155 68.85% $152,655 71.82%
Multi-family.................................. 11,823 5.65 8,041 3.78
Commercial real estate........................ 4,787 2.29 4,034 1.90
Construction or development................... 2,700 1.29 1,888 .89
-------- ------ -------- -----
Total real estate loans................... $163,465 78.08 $166,618 78.39
-------- ------ -------- ------
Other Loans:
Consumer Loans:
Deposit account.............................. 1,148 0.55 940 .44
Student...................................... --- --- --- ---
Automobile................................... 31,056 14.83 31,394 14.77
Home improvement............................. 1,088 0.52 1,084 .51
Retail mobile home loans..................... 1,595 0.76 1,240 .58
Home equity and other........................ 8,666 4.14 10,269 4.83
-------- ------ -------- ------
Total consumer loans...................... 43,553 20.80 44,927 21.13
Commercial business loans..................... 57 0.03 52 .02
Term federal funds(1)......................... --- --- --- ---
Bankers' acceptances.......................... 299 0.14 --- ---
Commercial paper.............................. 1,997 0.95 979 .46
Total other loans......................... 45,906 21.92 45,958 21.61
-------- ------ -------- ------
Total loans............................... $209,371 100.00% $212,576 100.00%
======== ====== ======== ======
Less:
Loans in process.............................. 67 (24)
Deferred fees and discounts................... 156 284
Allowance for losses.......................... 2,238 2,126
------ --------
Total loans and loans held for sale, net...... $206,910 $210,190
======== ========
Mortgage-Backed Securities:
FNMA.......................................... $ 21,286 22.62% $ 31,793 31.55%
GNMA.......................................... 31,949 33.96 27,160 26.95
FHLMC......................................... 40,852 43.42 41,832 41.50
------ ------ -------- ------
Total mortgage-backed
securities............................... 94,087 100.00% 100,785 100.00%
====== ======
Net premiums and discounts..................... 20 448
------- --------
Net mortgage-backed securities................. $94,107 $101,233
======= ========
- -------------------
(1) Represents short-term loans to other financial institutions.
</TABLE>
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio (including loans held for sale) by fixed and adjustable rates at the
dates indicated.
<TABLE>
<CAPTION>
1993 1994 1995
---------------------- -------------------- --------------------
Amount Percent Amount Percent Amount Percent
Fixed-Rate Loans: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family....................... $79,776 44.58% $ 91,744 47.75% $ 96,379 48.67%
Multi-family.............................. 7,638 4.27 8,792 4.58 7,029 3.55
Commercial real estate.................... 2,679 1.50 4,791 2.49 3,803 1.92
Construction or development............... 1,930 1.08 1,800 0.94 2,392 1.21
-------- ------ -------- ------ -------- ------
Total real estate loans................. 92,023 51.43 107,127 55.76 109,603 55.35
Consumer.................................. 26,229 14.66 35,246 18.35 38,343 19.37
Commercial business....................... 286 0.16 93 .05 74 0.04
Term federal funds........................ --- --- --- --- --- ---
Bankers' acceptances...................... --- --- --- --- 489 0.25
Commercial paper.......................... --- --- --- --- --- ---
------- ----- ------- ----- ------- -----
Total fixed-rate loans.................. 118,538 66.25 142,466 74.16 148,509 75.01
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... 46,499 25.99 36,214 18.85 37,485 18.94
Multi-family.............................. 6,115 3.42 8,983 4.68 8,683 4.39
Commercial real estate.................... 4,660 2.60 1,942 1.01 1,249 0.63
Construction or development............... 31 0.02 14 0.01 14 0.01
-------- ------ -------- ------ -------- ------
Total real estate loans................. 57,305 32.03 47,153 24.55 43,431 23.97
Consumer................................... 2,898 1.62 2,406 1.25 1,995 1.01
Commercial business........................ 182 0.10 81 .04 22 0.01
-------- ------ -------- ------ -------- ------
Total adjustable-rate
loans................................. 60,385 33.75 49,640 25.84 49,448 24.99
-------- ------ -------- ------ -------- ------
Total loans............................. 178,923 100.00% 192,106 100.00% 197,957 100.00%
====== ====== ======
Less:
Loans in process........................... 133 107 62
Deferred fees and discounts................ 847 649 319
Allowance for loan losses.................. 2,077 2,110 2,093
-------- -------- --------
Total loans and loans held for sale, net $175,866 $189,240 $195,483
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996 1997
----------------------- ---------------------
Amount Percent Amount Percent
------- ----- -------- -----
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family....................... $ 99,568 47.56% $ 94,842 44.45%
Multi-family.............................. 3,271 1.56 2,687 1.26
Commercial real estate.................... 3,634 1.74 3,357 1.58
Construction or development............... 2,686 1.28 1,855 .87
------- ----- -------- -----
Total real estate loans................ 109,159 52.14 102,741 48.16
Consumer.................................. 43,405 20.73 44,450 20.91
Commercial business....................... 57 0.03 52 .02
Term federal funds........................ --- --- --- ---
Bankers' acceptances...................... 299 0.14 --- ---
Commercial paper.......................... 1,997 0.95 979 .46
------- ----- -------- -----
Total fixed-rate loans................. 154,917 73.99 148,222 69.55
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... 44,588 21.30 57,813 27.36
Multi-family.............................. 8,552 4.08 5,354 2.52
Commercial real estate.................... 1,153 0.55 677 .32
Construction or development............... 13 0.01 33 .02
------ ----- ------- -----
Total real estate loans................ 54,306 25.94 63,877 30.22
Consumer................................... 148 0.07 477 .23
Commercial business........................ --- --- --- ---
------ ----- ------- -----
Total adjustable-rate
loans................................. 54,454 26.01 64,354 30.45
------ ----- ------- -----
Total loans............................ 209,371 100.00% 212,576 100.00%
====== ======
Less:
Loans in process........................... 67 (24)
Deferred fees and discounts................ 156 284
Allowance for loan losses.................. 2,238 2,126
-------- --------
Total loans and loans held for sale, net $206,910 $210,190
======== ========
</TABLE>
<PAGE>
The following table sets forth the maturities of the Bank's loan
portfolio (excluding commercial paper) at March 31, 1997. Loans that have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The table reflects scheduled principal
amortization, but does not reflect possible prepayments or enforcement of
due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
----------------------------------------------------------------------------
Multi-family
and
Commercial Construction
One- to four-family Real Estate or Development Consumer
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
----------------------- ------ -------------- ------------------- ----------------------
(Dollars in Thousands)
Due During
Years Ending
March 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998(1)......... 28,400 8.18% 4,553 8.67% 1,832 8.56% 1,957 10.60%
1999 to 2002... 4,773 8.18 1,909 9.78 36 8.34 36,491 8.75
2003 to 2007... 49,948 7.62 590 9.69 7 8.50 5,670 9.62
2008 to 2017... 67,606 7.46 3,185 7.86 13 8.38 809 11.46
2017 and
following..... 1,928 8.39 1,838 8.59 --- --- --- ---
<CAPTION>
Commercial
Business Total
Weighted Weighted
Average Average
Amount Rate Amount Rate
---------------------- ---------------------
Due During
Years Ending
March 31,
<S> <C> <C> <C> <C>
1998(1)......... 3 9.75% 36,745 8.40%
1999 to 2002... 49 10.44 43,258 8.73
2003 to 2007... --- --- 56,215 7.84
2008 to 2017... --- --- 71,613 7.52
2017 and
following..... --- --- 3,766 8.49
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
</TABLE>
<PAGE>
At March 31, 1997, the total amount of loans due after March 31, 1998
which had fixed interest rates was $155.0 million, while the total amount of
loans due after such date which had floating or adjustable interest rates was
$64.4 million.
One- to Four-Family Residential Mortgage Lending. The Bank's primary
lending activity consists of the origination of one- to four-family residential
mortgage loans secured primarily by property located in the Bank's primary
market area. At March 31, 1997, the Bank had $152.7 million, or 71.8% of its
loan portfolio invested in these loans.
The Bank presently offers fixed-rate conventional mortgage loans,
Federal Housing Administration ("FHA"), Veterans Administration ("VA") loans,
and ARM loans. During fiscal 1995, the Bank introduced a 10-year adjustable-rate
loan which features an initial 10-year fixed-rate that converts to a one-year
adjustable-rate loan upon expiration of the initial fixed-rate period. The
Bank's origination of fixed-rate mortgage loans as compared to ARM loans is
determined on an on-going basis and is based on changes in market interest rates
and consumer preference. Many borrowers have selected shorter-term 15-year
fixed-rate mortgages recently, as a higher interest rate environment during
fiscal 1995, 1996 and 1997 resulted in a decrease in traditional 30-year
fixed-rate loans. The higher market rates resulted in increased activity for
adjustable-rate, and decreased activity for fixed-rate, one- to four-family
residential loans. Interest rates charged on fixed-rate loans are competitively
priced according to local market conditions. The Bank's current policy is to
sell all newly originated fixed-rate loans with terms of more than 20 years, as
well as ARM loans converted to a fixed rate with a remaining term to maturity in
excess of 20 years, and all FHA and VA loans. The Bank's prior policy was to
sell the noted fixed-rate loans with terms in excess of 15 years. See "-
Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed
Securities."
The Bank currently makes adjustable-rate, one- to four-family
residential mortgage loans in amounts of up to 97% of the appraised value or
selling price of the security property, whichever is less. For loans with
loan-to-value ratios of greater than 80%, the Bank typically requires private
mortgage insurance to reduce the Bank's exposure to 75% of the appraised value
or selling price of the security property. Adjustable-rate loans generally have
interest rate adjustment limitations consisting of 2% annual adjustments and 6%
lifetime adjustments, and are generally indexed to the weekly average yield of
U. S. Treasury securities adjusted to a constant maturity of one year.
The retention of ARM loans in the Bank's loan portfolio helps the Bank
to manage its exposure to changes in the interest rates. There are, however,
unquantifiable credit risks relating to such loans resulting from the potential
of increased costs due to changed rates to be paid by the customer. It is
possible that during periods of rising interest rates, the risk of default on
ARM loans may increase as a result of repricing and the increased costs to the
borrower. Furthermore, the ARM loans originated by the Bank generally provide,
as a marketing incentive, for initial rates of interest below the rates which
would apply were the adjustment index used for pricing initially
("discounting"). These loans are subject to increased risk of default or
delinquency due to this discounting. In addition, although ARM loans allow the
Bank to increase the sensitivity of its asset base to changes in interest rates,
the extent of this interest rate sensitivity is limited by the periodic and
lifetime interest rate adjustment limits, and by the ability of borrowers to
refinance their loans if they perceive that the interest rate they are paying is
too high. Accordingly, there can be no assurance that yields on ARM loans will
be sufficient to offset increases in the Bank's cost of funds.
<PAGE>
In underwriting residential real estate loans, the Bank evaluates both
the borrower's ability to make monthly payments, employment history, credit
history and the value of the property securing the loan. Potential borrowers are
qualified for fixed-rate loans based upon the initial or stated rate of the
loan. Borrowers on adjustable-rate loans are currently qualified at an 8% rate
or the fully-indexed rate after one year, whichever is higher.
An appraisal of the security property from Board-approved independent
fee appraisers is obtained prior to mortgage loan approvals. In connection with
origination of residential real estate loans, the Bank currently requires that
the borrower obtain title insurance, and fire, flood (if applicable) and
casualty insurance to protect the Bank's interest.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid. The
Bank on occasion has enforced due-on-sale clauses in its mortgage contracts.
From 1991 to 1993, Permanent Federal increased its investment in
mortgage-backed securities, while in fiscal 1994 and 1995, the amount of such
securities remained relatively constant and again increased during fiscal 1996
and 1997. Although such securities are generally held for investment, they can
serve as collateral for borrowings. For information regarding the carrying and
market values of Permanent Federal's mortgage-backed securities portfolio, see
Note 3 of the Notes to Consolidated Financial Statements in the Annual Report.
See also "Investment Activities - Mortgage-Backed Securities."
Consumer Lending. The Bank considers consumer lending an integral
component of its lending operations. Consumer loans generally have shorter terms
to maturity (thus reducing Permanent Federal's exposure to changes in interest
rates) and historically have carried higher rates of interest than do one- to
four-family residential mortgage loans, although that is not currently the case.
In addition, management believes that the offering of consumer loan products
helps to expand and create stronger ties to its existing customer base by
increasing the number of customer relationships and providing cross-marketing
opportunities. At March 31, 1997, the Bank's consumer loan portfolio totaled
$44.9 million, or 21.1% of its loan portfolio. The chief component of such loans
consists of indirect and direct automobile paper, accounting for $31.4 million,
or 69.9%, of the consumer loan portfolio at March 31, 1997. Under applicable
federal law, the Bank is authorized to invest up to 35% of its assets in
consumer loans.
Permanent Federal offers a variety of secured consumer loans, including
automobile, boat, home equity, home improvement, mobile home loans, loans
secured by savings deposits and other consumer collateral. The Bank also offers
a limited amount of unsecured loans. The Bank generally originates consumer
loans in its market area. Although it has not done so in recent years, the Bank
may also purchase consumer loans, generally within its market area. Consumer
loan terms vary according to the type of collateral and length of contract. The
Bank's consumer loans generally have fixed rates of interest.
<PAGE>
The Bank is actively engaged in indirect dealer financing of
automobiles. Such indirect dealer loans are originated through automobile
dealers located in, or in counties contiguous to, the Bank's market area and
underwritten by the Bank's lending staff in accordance with the Bank's general
standards for underwriting consumer loans. These loans are originated at fixed
interest rates and are typically for terms of up to five years. At March 31,
1997, indirect dealer loans totaled $22.4 million, or 50.0%, of the Bank's
consumer loan portfolio.
At March 31, 1997, $9.2 million of the Bank's consumer loans consisted
of home equity loans. The home equity loans are typically collateralized by
second mortgages on owner-occupied, single-family mortgage loans.
From 1987 to 1990, the Bank also purchased loans secured by mobile
homes. Such loans were originated through a subsidiary of the Bank in
association with two other savings institutions. The subsidiary created pools of
mobile home loans it originated, and Permanent Federal and the other
participating lenders each purchased a one-third interest in the pools. The
Bank's mobile home loan portfolio as of March 31, 1997 was $1.2 million, or .6%
of the Bank's loan portfolio. Mobile home loans are typically made at higher
yields and for a shorter maturity than one- to four-family residential mortgage
loans. The Bank's mobile home loans were typically made for terms of up to 15
years and all were one-year ARMs. At March 31, 1997, $50,116, or 4.0%, of the
Bank's mobile home loan portfolio was non-performing.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. In addition, the stability of the applicant's monthly income from
primary employment is considered during the underwriting process. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured,
such as checking account overdraft privilege loans, or are secured by rapidly
depreciable assets, such as automobiles, mobile homes and recreational vehicles.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans.
Multi-Family and Commercial Real Estate Lending. The Bank has
originated multi-family and commercial real estate loans in its lending area,
and has purchased whole loan and participation interests in loans from other
financial institutions in Indiana, and to a lesser extent, in Kentucky and
Tennessee. At March 31, 1997, the Bank had multi-family and commercial real
estate loans totaling $12.1 million, representing 5.7% of its loan portfolio.
<PAGE>
The majority of the Bank's multi-family and commercial real estate
loans are secured by apartment buildings, as well as other types of property,
including nursing homes, office buildings, motels and shopping centers. Some of
the areas in which the security properties are located have experienced adverse
economic conditions, including a general softening in the real estate markets
and local economies, which resulted in increased delinquencies and loan losses
during prior years, as described below. See "-- Cardinal Industries, Inc." and
"Asset Quality."
The table below sets forth by type of security property the Bank's
multi-family and commercial real estate (including land) loans at March 31,
1997.
<TABLE>
<CAPTION>
Amount of
Outstanding Non-Performing
Number of Principal or Of Concern
Loans Balance Loans
----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C>
Apartment buildings....................... 16 $ 8,041 $3,023
Motels.................................... 1 1,000 ---
Small business facilities and office
buildings............................... 14 2,552 ---
Shopping centers.......................... 1 482 ---
--- ------ ------
Total commercial and multi-family
real estate loans...................... 32 $12,075 $3,023
=== ======= ======
</TABLE>
At March 31, 1997, the Bank had a total of four multi-family and
commercial real estate loans with an outstanding principal balances in excess of
$1.0 million. With the exception of certain loans discussed under "-- Cardinal
Industries, Inc." below, each of these loans was performing in accordance with
its terms at March 31, 1997.
Multi-family and commercial real estate loans originated by the Bank
generally have terms ranging from ten to 20 years and up to 30 year amortization
schedules. Rates on such loans generally either (i) adjust (subject, in some
cases, to specified interest rate caps) at one, three or five year intervals to
specified spreads over an index, (ii) float (subject, in some cases, to
specified interest rate caps) with changes in a specified prime rate or (iii)
carry fixed rates. Under the Bank's current loan policy, multi-family and
commercial real estate loans (other than loans to facilitate) are written in
amounts of up to 80% of the appraised value of the properties.
Appraisals on properties securing multi-family and commercial real
estate property loans originated by the Bank are performed by an independent
appraiser approved by the Bank prior to the time the loan is made. All
appraisals on multi-family and commercial real estate loans are reviewed by the
Bank's management. In addition, the Bank's underwriting procedures generally
require verification of the borrower's credit history, income and financial
statements, banking relationships and income projections for the property.
<PAGE>
Historically, personal guarantees were not generally obtained for the Bank's
multi-family and commercial real estate loans. While the Bank continues to
monitor multi-family and commercial real estate loans on a regular basis after
origination, updated appraisals are not normally obtained after closing unless
the Bank believes that there are questions regarding the progress of the loan or
the value of the collateral.
Multi-family and commercial real estate loans generally present a
higher level of credit risk than loans secured by one- to four-family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effect of general economic conditions on income-producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family and commercial real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed, or a bankruptcy court modifies a lease term,
or a major tenant is unable to fulfill its lease obligations), the borrower's
ability to repay the loan may be impaired.
Cardinal Industries, Inc. The Bank has a group of three loans totaling
approximately $3.6 million in net book value to separate syndicated limited
partnerships on three apartment complexes located in Indiana. The loans were
originated from 1983 through 1988. Two of the loans are wholly-owned and one is
a 50% participation with another Indiana savings institution. The general
partner of these partnerships is Cardinal Industries, Inc. ("Cardinal") of
Columbus, Ohio. On May 15, 1989, Cardinal, which is a general partner in these
properties and not the borrower, filed for bankruptcy under Chapter 11 of the
U.S. Bankruptcy Code. As a result of Cardinal's financial difficulties, the
terms of two of the three loans were restructured as of July 1, 1991. For
accounting purposes, the two modified loans are considered "non-performing"
assets, including one which is classified as a "troubled debt restructuring."
Cardinal has since emerged from bankruptcy protection as a publicly held company
and engages primarily in managing its apartment projects.
Construction or Development Lending. The Bank makes a limited number of
construction loans to individuals for the construction of their residences. The
Bank generally requires that the customer have a general contractor. The Bank
also makes loans to builders for presold and speculative single-family
construction purposes and a limited number of multi-family and commercial
construction loans. At March 31, 1997, the Bank's construction loan portfolio
totaled $1.9 million (including a $264,000 loan on a low-income housing
project), or 1.0% of its total loan portfolio. As of that date, all of these
loans were secured by property located within the Bank's market area.
Construction terms to individuals are generally made under the ARM
program, although at a rate higher than that for a permanent ARM loan, with
provisions for converting to a fixed-rate loan upon completion of the
construction. Fixed-rate loans for construction purposes are limited to a
maximum term of 15 years. During the construction phase, the borrower pays
interest only. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential loans
except that the record of the builder is also considered.
<PAGE>
Construction loans to builders are written for a term of 18 months at a
fixed rate of interest. Construction loans are obtained primarily through
continued business from builders who have previously borrowed from the Bank, as
well as referrals from existing customers. The application process includes a
submission of accurate plans, specifications and costs of the project to be
constructed. These items are also used as a basis for determining the appraised
value of the subject property. Loans are based on the lesser of the current
appraised value or the cost of construction (land plus building). From time to
time, the Bank has lent funds for the development and subdivision of lots,
although the Bank had no such loans in its portfolio at March 31, 1997.
Commercial Business Lending. Federally chartered savings institutions,
such as Permanent Federal, are authorized to make secured or unsecured loans and
issue letters of credit for commercial, corporate, business and agricultural
purposes and to engage in commercial leasing activities, up to a maximum of 10%
of total assets.
At March 31, 1997, Permanent Federal had $52,000 in commercial business
loans outstanding (representing .02% of the Bank's total loan portfolio). At
March 31, 1997, Permanent Federal had no letters of credit outstanding.
Originations, Purchases, Sales and Servicing of Loans and
Mortgage-Backed Securities
The Bank originates real estate loans through marketing efforts, the
Bank's customer base, walk-in customers and referrals from realtors and
builders. The Bank originates both adjustable-rate and fixed-rate loans. Its
ability to originate loans is dependent upon the relative demand for fixed-rate
or ARM loans in the origination market, which is affected by the term structure
(short-term compared to long-term) of interest rates, as well as the current and
expected future level of interest rates and competition.
During fiscal 1997, the Bank originated a total of $62.8 million in
loans, of which total $37.3 million were fixed-rate and $25.5 million were
adjustable-rate. Of the fixed-rate loans originated during the year, $11.3
million were one- to four-family real estate loans, $23.8 million were consumer
loans and $2.2 million were construction loans. Of the adjustable-rate loans
originated during the year, $20.7 million were one- to four-family real estate
loans and $3.9 million were construction loans.
The Bank's current policy is to sell all fixed-rate conventional loans
that are originated or converted with terms of more than 20 years. Likewise, all
FHA and VA loans are sold, irrespective of term. In contrast, all ARM loans,
regardless of the term, are retained and other loans with terms of 20 years or
less are also retained in the Bank's portfolio. Servicing is retained on all
loan sales, except for FHA and VA mortgage loans.
During fiscal 1995, 1996 and 1997, the Bank sold $1.5 million, $3.3 million and
$1.0 million of loans, respectively.
With respect to the loans that the Bank sells, it is the policy of the
Bank to sell current production of such loans as quickly as the loans are
originated, unless it is determined to temporarily hold these loans until more
favorable rates are available. However, it is the Bank's policy that in no event
shall a loan continue to be held for sale if the price to be received on that
loan drops below net 98 (98 cents on the dollar) or the maximum dollar loss on
the sale of that loan would exceed $4,063, whichever comes first. In addition,
<PAGE>
the Bank's policy provides that any loan held for sale which bears a rate too
high to sell in the secondary market without having to accept a discounted
premium will continue to be held until such time as market conditions allow the
loan to be sold without a premium discount.
Government loans are committed for sale with a private investor the
same day an application is received. The requirements for delivery are on a
"best effort" basis, providing that if for any reason the loan does not close,
there is no financial exposure to the Bank.
The Board of Directors receives a monthly report identifying the number
and dollar amount of mortgage loans not sold which present any potential
interest rate risk exposure to the Bank. The report further details the current
secondary market buy rates and the estimated gain or loss at such rates. The
Bank attempts to limit any interest rate risk exposure created by commitments to
make or sell loans by limiting the number of days between the commitment and
closing, charging fees for commitments and managing the amount of its uncovered
commitments outstanding at any one time.
The Bank occasionally purchases loans and loan participations for one-
to four-family, multi-family and commercial real estate loans. Such loans had a
carrying value of approximately $9.1 million, $8.5 million and $7.1 million at
March 31, 1995, 1996 and 1997, respectively.
During the past three fiscal years, the Bank has purchased
mortgage-backed securities in order to supplement loan demand. In fiscal 1995,
the Bank purchased $11.1 million of mortgage-backed securities and purchased
$30.2 million and $34.5 million of such securities in fiscal 1996 and 1997,
respectively. The mortgage-backed securities purchased generally had fixed rates
and maturities of up to 15 years and adjustable rates up to 30 years.
See "Investment Activities."
The Bank had commitments to make loans, including participations, of
approximately $800,000, $4.0 million and $1.6 million (excluding undisbursed
portions of loans in process), at March 31, 1995, 1996 and 1997, respectively.
In addition, the Bank had approximately $266,500, $0 and $104,000 in commitments
to sell loans at March 31, 1995, 1996 and 1997, respectively.
The amount of loans serviced by the Bank for others totaled $41.3
million, $37.9 million, and $34.3 million at March 31, 1995, 1996 and 1997,
respectively.
The Bank generally earns servicing fees of 25 basis points for
servicing loans for others. For the years ended March 31, 1995, 1996 and 1997
such fees amounted to approximately $123,000, $104,000 and $101,000,
respectively.
<PAGE>
The following table sets forth the loan origination, purchase and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ -----
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family.......................$ 9,754 $12,373 $20,717
- multi-family.............................. --- --- ---
- commercial real estate.................... 75 --- ---
- construction.............................. 1,736 2,147 3,865
Non-real estate - consumer.............................. --- --- 875
-commercial business.................... 25 419 ---
------- ------- -------
Total adjustable-rate............................ 11,590 14,939 25,457
Fixed rate:
Real estate - one- to four-family.......................$15,806 $23,698 $11,303
- multi-family.............................. --- 315 ---
- commercial real estate.................... --- --- ---
- construction.............................. 2,903 341 2,205
Non-real estate - consumer ............................. 21,097 25,312 23,772
-commercial business.................... 30 19 16
------- ------- -------
Total fixed-rate................................. 39,836 49,685 37,296
Total loans originated........................... 51,426 64,624 62,753
Purchases:
Real estate - one- to four-family.......................$ --- $ --- $ ---
- multi-family.............................. --- --- ---
- commercial real estate.................... --- --- ---
- construction.............................. --- --- ---
Non-real estate - consumer.............................. --- --- ---
- commercial business....................... --- --- ---
- commercial paper.......................... --- 1,974 17,741
- bankers' acceptances...................... 3,049 3,286 ---
------- ------- -------
Total loans purchased............................ 3,049 5,260 17,741
Mortgage-backed securities-fixed rate.................... 11,055 22,278 6,914
- adjustable-rate........................... --- 7,898 27,577
------- ------- -------
Total purchases.................................. 14,104 35,436 52,232
------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ -----
<S> <C> <C> <C>
Sales and Principal Repayments:
Sales:
Real estate - adjustable-rate one- to four-family......... $ --- $ --- $ ---
- fixed-rate one- to four-family....................... 1,486 3,250 962
- multi-family.............................. --- --- ---
- commercial real estate.................... --- --- ---
- construction.............................. --- --- ---
Non-real estate - consumer.............................. --- --- ---
- commercial business............................. --- --- ---
------ ------- -------
Total loans sold................................. 1,486 3,250 962
Mortgage-backed securities.............................. --- 743 11,143
------ ------- -------
Total sales...................................... 1,486 3,993 12,105
Principal repayments...................................... 55,041 67,613 91,807
------ ------- -------
Total reductions................................. 56,527 71,606 103,912
Increase (decrease) in other items, net................... --- --- ---
------- ------- -------
Net increase (decrease)..........................$ 9,003 $28,454 $11,073
======= ======= =======
</TABLE>
<PAGE>
Asset Quality
Loan Monitoring Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cause the delinquency to be cured by
contacting the borrower. In the case of loans secured by real estate, a late
notice is sent nine days after the scheduled payment date and a second notice is
sent after 16 days. In the case of consumer loans, a late notice is sent five
days after the scheduled payment date and a second notice is sent after ten
days. If the delinquency is not cured by this time, contact with the borrower is
made by phone. Additional written and verbal contacts or meetings with the
borrower are made to the extent necessary. With respect to mortgage loans, if
the delinquency is not cured by the 90th day, a 30-day default letter is sent
and, once that period lapses, appropriate action to foreclose on the property is
initiated. Interest income on loans at this point is reduced by the full amount
of accrued and uncollected interest. If foreclosed, the property is sold at a
sheriff's sale and typically is purchased by the Bank. Delinquent consumer loans
are handled in a similar manner. If these efforts fail to bring the loan
current, appropriate action may be taken to collect any loan payment that
remains delinquent. The Bank's procedures for repossession and sale of consumer
collateral are subject to various requirements under Indiana consumer protection
laws.
Real estate acquired by Permanent Federal as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired, it is recorded at the lower of cost or
estimated fair value at the date of acquisition, and any write-down resulting
therefrom is charged against the allowance for loan losses. Upon acquisition,
all costs incurred in maintaining the property are expensed. However, costs
relating to the development and improvement of the property are capitalized to
the extent of net realizable value.
Prior to the consummation of commercial real estate loans, financial
information on the project and its principals are reviewed, and appraisals are
obtained and reviewed. Subsequent balance sheets and operating statements are
obtained and reviewed on at least an annual basis. On loans that indicate
potential weaknesses, more frequent reviews are made.
A committee of senior officers of the Bank periodically reviews large
loans (generally, those with balances in excess of $100,000). The committee
examines the borrower's financial statements and position, prior loan
performance and any industry or economic trends which would potentially affect
the borrower's operations or collateral values.
Appraisals are obtained on properties that are transferred to real
estate owned. The Bank performs periodic fair value computations using
methodology consistent with that of an appraiser. For a description of the
Bank's fair value computations for certain Cardinal loans, see "Lending
Activities - Multi-Family and Commercial Real Estate Lending -- Cardinal
Industries, Inc." Appraisals are assigned only to qualified appraisers located
within or familiar with the location of the subject property. Net realizable
value calculations are performed on all properties in either real estate owned
or loans classified as impaired. The result of these calculations may indicate a
writedown of the asset or specific reserve allowance.
<PAGE>
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "special mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
<PAGE>
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews problem loans and real estate acquired through foreclosure in its
portfolio to determine whether such assets require classification in accordance
with applicable regulations. Classified assets of the Bank at March 31, 1997,
(without deduction for specific valuation allowances of $342,000) all of which
are included in the table of non-performing assets.
<TABLE>
<CAPTION>
At March 31,
------------------------------------
1995 1996 1997
------- ------- ------
(In Thousands)
<S> <C> <C> <C>
Substandard (including real
estate owned)...................................$ 5,146 $ 4,928 $2,965
Doubtful......................................... 13 91 87
Loss............................................. --- --- ---
------- ------- ------
Total classified assets
(including real estate
owned).....................................$ 5,159 $ 5,019 $3,052
======= ======= ======
Special mention..................................$ 8,635 $ 6,088 $4,587
------- ------- ------
Total classified assets
(including real estate
owned) and special
mention....................................$13,794 $11,107 $7,639
======= ======= ======
</TABLE>
The specific reserves established with respect to classified assets are
included in the allowance for loan losses.
<PAGE>
Allowance for Loan Losses. The distribution of the Bank's allowance for
losses on loans at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------ ------------------ ------------------ ------------------- -----------------
Percent Percent Percent Percent Percent
f Loans of Loans of Loans of Loans of Loans
in Each in Each in Each in Each in Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family..................$ 3 69.3% $ 1 67.0% $ 1 68.2% $ 90 69.4% $ 90 71.7%
Multi-family............. 378 9.4 493 9.4 210 7.9 166 5.5 183 3.8
Commercial real
estate.................. 90 4.2 --- 3.4 --- 2.9 --- 2.4 --- 1.9
Construction or
development............. --- 1.1 --- 0.9 --- 1.2 --- 1.3 --- 1.0
Consumer................. 10 15.7 4 19.2 18 19.7 50 20.3 68 21.1
Commercial business...... 155 0.3 162 0.1 107 0.1 --- --- --- ---
Bankers' acceptances..... --- --- --- --- --- --- --- 0.1 --- ---
Commercial paper......... --- --- --- --- --- --- --- 1.0 --- .5
Unallocated
Consumer............... 278 N/A 362 N/A 382 N/A 456 N/A 454 N/A
One- to four-family.... 956 N/A 929 N/A 630 N/A 647 N/A 876 N/A
Multi-family and
commercial
real estate.......... 192 N/A 146 N/A 734 N/A 829 N/A 455 N/A
Construction or
development.......... 15 N/A 13 N/A 11 N/A --- N/A --- N/A
------ ----- ------ ----- ------ ----- ------- ----- ------ -----
Total...............$2,077 100.0% $2,110 100.0% $2,093 100.0% $2,238 100.0% $2,126 100.00%
====== ===== ====== ===== ====== ===== ====== ===== ====== ======
</TABLE>
The distribution of the allowance for loan losses is consistent with
the Bank's accounting policy. See also "Lending Activities - Multi-Family and
Commercial Real Estate Lending -- Cardinal Industries, Inc."
Additional information concerning the quality of the Company's assets
and allowance for loan losses is incorporated herein by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the Annual Report.
Investment Activities
General. Permanent Federal must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including repayments of maturing debt and potential deposit
<PAGE>
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. At March 31, 1997, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 8.7%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources"
in the Annual Report and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's liquidity
needs, asset/liability management policies, investment quality and marketability
and performance objectives.
Securities. At March 31, 1997, Permanent Federal's securities totaled
$85.2 million, or 20.1% of total assets. As of such date, the Bank also had a
$5.2 million investment in FHLB stock, satisfying its requirement for membership
in the FHLB of Indianapolis. It is the Bank's general policy to purchase
securities which are U.S. Government securities or federal agency obligations or
other issues that are rated investment grade. At March 31, 1997, the average
term to maturity or repricing of the securities portfolio was 7.0 years.
OTS guidelines regarding investment portfolio accounting require
institutions to categorize securities and certain other assets as "held to
maturity", "available for sale" or "trading." The portion of the investment
portfolio which is held with the intent to hold to maturity is accounted for on
an amortized cost basis. Assets which are categorized as available for sale are
carried at the lower of historical cost or market. At March 31, 1995 the Bank
had $992,000 in securities "Available for Sale" and no securities identified as
"Trading". The securities available for sale at March 31, 1995 had unrealized
gains of $3,000. At March 31, 1996, the Bank had $73.2 million in securities
available for sale and no securities identified as "trading." The securities
available for sale at March 31, 1996 had net unrealized losses of $238,000. At
March 31, 1997, the Bank had $85.2 million in securities available for sale and
no securities identified as trading. The securities available for sale at March
31, 1997 had net unrealized losses of $1,840,000.
<PAGE>
The following table sets forth the composition of the Bank's securities
portfolio (including securities held to maturity and available for sale) at the
dates indicated.
<TABLE>
<CAPTION>
At March 31,
1995 1996 1997
------------------- ------------------- -------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
------- ----- ------- ----- ------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities:
U.S. government securities .... $28,034 54.3% $17,029 22.2% $ 7,009 7.8%
Federal agency obligations .... 20,984 40.6 54,648 71.2 78,171 86.5
Municipal bonds and other ..... 50 0.1 1,519 2.0 25 --
------- ----- ------- ----- ------- -----
Subtotal ................... $49,068 95.0% 73,196 95.4 85,205 94.3
FHLB stock ...................... 2,571 5.0 3,504 4.6 5,193 5.7
------- ----- ------- ----- ------- -----
Total securities and FHLB
stock ..................... $51,639 100.0% $76,700 100.0% $90,398 100.0%
======= ===== ======= ===== ======= =====
Average remaining life of
securities, excluding FHLB stock 1.6 years 5.7 years 7.0 years
Other interest-earning assets:
Interest-bearing deposits
with banks ................... $ 1,159 100.0% $ 16 100.0% $ 3,154 100.0%
======= ===== ======= ===== ======= =====
Average remaining life or
term to repricing of
securities and other interest-
earning assets, excluding FHLB
stock .......................... 1.6 years 5.7 years 6.7 years
</TABLE>
<PAGE>
The following table sets forth as of March 31, 1997 the composition and
maturities of the securities portfolio, excluding FHLB stock.
<TABLE>
<CAPTION>
At March 31, 1997
------------------------------------------------------------------------------
Less Than 1 to 5 Over 5 Total Investment
1 Year Years Years Securities
Fair Value eir Value Fair Value Fair Value Amortized Cost
---------- --------- ---------- ---------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. government
securities........................ $4,005 $ 3,004 $ $ 7,009 $ 7,029
Federal agency
obligations....................... 1,950 12,901 63,320 78,171 79,991
State and local
government
obligations and other............. 25 25 25
------ ------- ------ ------- -------
Total investment
securities........................ $5,980 $15,905 $63,320 $85,205 $87,045
====== ======= ======= ======= =======
Weighted average
yield............................. 5.94% 6.67% 7.38% 7.15% 6.99%
</TABLE>
At March 31, 1997 the Bank's securities portfolio did not contain
securities of any issuer with an aggregate book value in excess of 10% of the
Bank's retained earnings, excluding securities issued by the United States
Government or its agencies.
The Bank's securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors. Investments may be made by
authorized Bank officers within specified limits. At March 31, 1997, the Bank
held $25,000 of such securities as held to maturity and $85.2 million as
available for sale. See also Note [2] of the Notes to Consolidated Financial
Statements in the Annual Report.
Mortgage-Backed Securities. The Bank has a portfolio of mortgage-backed
securities and has utilized such investments to complement its mortgage lending
activities. See "Lending Activities - One- to Four-Family Residential Mortgage
Lending." At March 31, 1997, the Bank's mortgage-backed securities totaled
$101.2 million. At such date, the mortgage-backed securities portfolio consisted
entirely of securities backed by loans insured or guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). At
March 31, 1997, the Bank's portfolio consisted of $27.2 million in
mortgage-backed securities held to maturity and $74.0 million available for
sale. At such date, the portfolio had a weighted average interest rate of 6.71%.
<PAGE>
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities held to maturity and available for sale at March 31,
1997.
<TABLE>
<CAPTION>
At
March 31,
1997
Less than --------------
6 Months 1 to 3 to 5 5 to 10 Over 10 Balance
to 1 Year 3 Years Years Years Years Outstanding
------------ ------------ ----------- ----------- ----------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation $585 $5,188 $5,773 $3,156 $27,261 $ 41,963
Federal National
Mortgage Association --- 122 --- 2,961 28,940 32,023
Government National
Mortgage Association --- --- --- --- 27,247 27,247
----- ------ ------ ------ ------- --------
Total $585 $5,310 $5,773 $6,117 $83,448 $101,233
==== ====== ====== ====== ======= ========
</TABLE>
For information regarding the carrying and market values of Permanent
Federal's mortgage-backed securities portfolio, see Note 3 of the Notes to
Consolidated Financial Statements in the Annual Report.
Under the OTS risk-based capital requirements, GNMA mortgage-backed
securities have a zero percent risk weighting and FNMA, FHLMC and AA-rated
mortgage-backed securities have a 20% risk weighting, in contrast to the 50%
risk weighting carried by one- to four-family performing residential mortgage
loans.
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization
and repayment of loan principal and interest (including mortgage-backed
securities), maturities of securities, mortgage-backed securities and short-term
investments, FHLB advances and funds provided from operations.
Borrowings are used to compensate for seasonal reductions in deposits
or deposit inflows at less than projected levels, to purchase investments and to
support lending activities. At March 31, 1997, the Bank's borrowings included
FHLB advances totaling $98.5 million, FHLB funds due April 1, 1997 of $1.2
million and securities sold under agreements to repurchase of $607,000. See
"Borrowings" and Notes 8 and 9 of the Notes to Consolidated Financial Statements
in the Annual Report.
Deposits. Permanent Federal offers a variety of deposit accounts having
a wide range of interest rates and terms. The Bank's deposits consist of
passbook accounts, NOW, money market and other checking accounts and certificate
accounts. The Bank relies primarily on advertising, competitive pricing policies
and customer service to attract and retain these deposits. Permanent Federal
solicits deposits from its market area only and does not solicit or accept
brokered deposits.
<PAGE>
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. The ability of the Bank
to attract and maintain certificates of deposit, and the rates paid on these
deposits, has been and will continue to be significantly affected by market
conditions. The Bank believes that the recent trends in deposit migration
represents an industry phenomenon and are not unique to the Bank. The Bank will
continue to remain rate competitive on maturing deposits and to utilize FHLB
advances as a funding alternative when necessary. During fiscal year 1995, the
Bank experienced a net outflow of deposits, but had a net inflow during fiscal
1996 and fiscal 1997. The FHLB has recently introduced several new advance
programs that offer variable rates or amortizing principal amounts specifically
tied to funding one-to four-family residential loans. These advances have proven
to be a less costly funding source after consideration of the cost of deposit
insurance associated with traditional deposits.
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank for the periods
indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------------------------
1995 1996 1997
------------------- -------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Commercial Demand $ 649 0.24% $ 994 .35% $ 902 0.32%
Passbook Accounts (2.90-5.50%) 33,178 12.33 54,796 19.45 54,245 19.20
NOW Accounts (2.50-5.25%) 25,379 9.43 25,371 9.00 24,046 8.51
Money Market Accounts (2.90-5.50%) 15,916 5.91 11,199 3.97 11,542 4.08
------- ----- ------- ------- ------ -----
Total Non-Certificates 75,122 27.91 92,360 32.77 90,736 32.11
------- ----- ------- ------- ------ -----
Certificates:
0.00 - 3.49% 590 0.22 389 .14 158 0.06
3.50 - 5.49% 101,813 37.83 85,124 30.21 81,947 29.00
5.50 - 7.49% 76,093 28.27 98,266 34.87 104,618 37.02
7.50 - 9.49% 13,011 4.83 3,869 1.37 3,295 1.17
9.50 and above 891 0.33 --- --- --- ---
-------- ------ ------- ------- ------- ------
Total Certificates 192,398 71.48 187,648 66.59 190,018 67.24
-------- ------ ------- ------- ------- ------
Accrued Interest 1,636 0.61 1,764 .64 1,809 0.65
-------- ------ ------- ------ ------- ------
Total Deposits $269,156 100.00% $281,772 100.00% $282,563 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------
1995 1996 1997
<S> <C> <C> <C>
Opening balance.... 285,180 $267,520 $280,008
Deposits........... 420,227 405,665 566,909
Withdrawals........ 446,325 402,754 575,977
Interest credited.. 8,438 9,577 9,813
-------- -------- --------
Ending balance..... $267,520 $280,008 $280,753
======== ======== ========
Net (decrease)
increase.......... $(17,660) $ 12,488 $ 745
======== ======== ========
Percent (decrease)
increase.......... (6.19)% 4.67% 0.26%
======== ======== ========
</TABLE>
The following table sets forth the rate and maturity information for
the Bank's certificates of deposit as of March 31, 1997.
<TABLE>
<CAPTION>
0.00- 3.50- 5.50- 7.50- Percent
3.49% 5.49% 7.49% 9.49% Total of Total
----- ----- ----- ----- ----- --------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
<S> <C> <C> <C> <C> <C> <C>
June 30, 1997.................... $ 158 $14,913 $ 9,253 $ 146 $ 24,469 12.88%
September 30, 1997............... --- 30,250 19,665 431 50,346 26.50
December 31, 1997................ --- 5,891 9,560 161 15,612 8.22
March 31, 1998................... --- 6,622 3,546 2 10,170 5.35
June 30, 1998.................... --- 7,006 3,154 --- 10,160 5.35
September 30, 1998............... --- 6,548 4,287 --- 10,835 5.70
December 31, 1998................ --- 2,868 8,309 --- 11,177 5.88
March 31, 1999................... --- 3,777 9,497 28 13,302 7.00
June 30, 1999.................... --- 1,431 5,416 --- 6,847 3.60
September 30, 1999............... --- 470 1,584 --- 2,054 1.08
December 31, 1999................ --- 149 1,411 --- 1,560 0.82
March 31, 2000................... --- 416 922 --- 1,338 0.70
Thereafter....................... --- 1,607 28,014 2,527 32,148 16.92
----- ------ -------- ----- -------- -----
Total......................... $ 158 $81,947 $104,618 $3,295 $190,018 100.00%
===== ======= ======== ====== ======== ======
Percent of total.............. 0.08% 43.13% 55.06% 1.73% 100.00%
==== ===== ===== ==== ======
</TABLE>
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit and public funds by time remaining until maturity as of March 31, 1997.
<TABLE>
<CAPTION>
Maturity
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less
than $100,000.............................. $ 21,822 $ 44,798 $ 22,540 $ 79,572 $168,732
Certificates of deposit of
$100,000 or more........................... 2,270 3,967 1,945 9,781 17,963
Public funds(1)............................. 377 1,581 1,297 68 3,323
-------- -------- -------- -------- --------
Total certificates of
deposit.................................... $ 24,469 $ 50,346 $ 25,782 $ 89,421 $190,018
======== ======== ======== ======== ========
- ---------------
(1) Deposits from governmental and other public entities.
</TABLE>
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings when they are a less costly
source of funds or can be invested at a positive rate of return.
Permanent Federal may obtain advances from the FHLB of Indianapolis
upon the security of its FHLB capital stock and certain of its mortgage loans
and mortgage-backed securities. Such advances may be made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. At March 31, 1997 the Bank's FHLB advances totaled $98.5 million and
its FHLB overnight borrowings totaled $1.2 million. See also Notes 8 and 9 of
the Notes to Consolidated Financial Statements in the Annual Report.
<PAGE>
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and other borrowings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
------------------------------------
1995 1996 1997
-------- ------- --------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances........................................ $ 25,689 $68,303 $100,141
Securities sold under
agreements to repurchase............................ 899 983 2,945
FHLB overnight borrowings............................ 1,526 2,127 1,710
-------- ------- --------
$ 28,114 $71,413 $104,796
======== ======= ========
Average Balance:
FHLB advances........................................ $ 20,101 $46,308 $ 92,604
Securities sold under
agreements to repurchase............................ 1,474 530 1,485
FHLB overnight borrowings............................ 267 1,135 208
-------- ------- --------
$ 21,842 $47,973 $ 94,297
======== ======= ========
</TABLE>
<PAGE>
The following table sets forth certain information as to the Bank's
FHLB advances and FHLB overnight borrowings at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------
1995 1996 1997
-------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances........................................ $ 25,689 $68,303 $ 98,484
Securities sold under
agreements to repurchase............................ 899 555 607
FHLB overnight borrowings............................ 1,526 2,127 1,187
-------- ------- --------
Total borrowings................................ $ 28,114 $70,985 $100,278
======== ======= ========
Weighted average interest
rate of FHLB advances............................... 6.53% 5.77% 5.64%
Weighted average interest
rate of securities sold
under agreements to
repurchase.......................................... 4.60% 4.80% 5.19%
Weighted average interest rate
of FHLB overnight borrowings........................ ---% ---% ---%
- ------------------
(1) The FHLB funds represent checks written by the Bank on its demand
account at the FHLB of Indianapolis and $107,000 of borrowings under a
$1 million overdraft line of credit agreement with the FHLB. Checks
written by the bank include $12.4 million of stock subscriptions
refundable in conjunction with the Conversion.
</TABLE>
Service Corporation Activities
Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets if for community purposes.
In addition, federal associations may invest up to 50% of their regulatory
capital in conforming loans to service corporations in which they own more than
10% of the capital stock. In addition to investments in service corporations,
federal associations are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities which a federal association may engage
in directly.
Permanent Federal has one first-tier service corporation, Perma Service
Corp. ("Perma Service"), located in Evansville, Indiana. Perma Service has
approximately a 20% interest, along with four other financial institutions, in
Family Financial Life Insurance Company ("FFLIC"), which underwrites various
types of life and disability insurance and annuity programs. FFLIC reinsures a
majority of the risk it underwrites with other insurers. Permanent Federal's
share of FFLIC's net income for the year ended March 31, 1997 was $43,000.
<PAGE>
Perma Service also has one wholly owned subsidiary, Permanent Insurance
Agency Inc. ("PIAI"), which offers, on an agency basis, casualty, life,
accident, health, mortgage, disability, and consumer credit insurance. PIAI had
a net loss of $25,000 for the year ended March 31, 1997.
Through Perma Service, the Bank also provides brokerage services, on an
agency basis, through INVESTTM.
Competition
Permanent Federal faces strong competition, both in originating real
estate and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from commercial banks, other thrifts and
mortgage companies. The Bank competes for loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers.
The Bank attracts most of its deposits from Vanderburgh, Gibson,
Warrick, Posey and Dubois Counties. Competition for those deposits is
principally from commercial banks, other thrifts, credit unions and other
financial intermediaries doing business in the same community. The ability of
the Bank to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk and other factors. The Bank competes for these
deposits by offering a variety of deposit accounts at competitive rates and
convenient business hours. At June 30, 1996, the latest date for which
information is available, the Bank's share of the savings market in its primary
market area was 6.6%.
Regulation
General. Permanent Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Indianapolis and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). As the savings and loan holding company of the Bank, the Holding
Company also is subject to federal regulation and oversight. The purpose of the
regulation of the Holding Company and other holding companies is to protect
subsidiary savings associations. The Bank is a member of the Savings Association
Insurance Fund (the "SAIF") and the deposits of the Bank are insured by the
FDIC. As a result, the FDIC has certain regulatory and examination authority
over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of Permanent Federal, for which reports have been issued,
were as of December 1996 and April 1991, respectively. When these examinations
are conducted by the OTS and the FDIC, the examiners may require the Bank to
provide for higher general or specific loan loss reserves. Financial
<PAGE>
institutions in various regions of the United States have been called upon by
examiners to write down assets and to establish increased levels of reserves,
primarily as a result of perceived weaknesses in real estate values and a more
restrictive regulatory climate.
All savings associations are subject to a semi-annual assessment, based
upon the savings association's total assets, to fund the operations of the OTS.
Permanent Federal's OTS assessment for the fiscal year ended March 31, 1997, was
$97,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws and regulations, and it is prohibited from
engaging in any activities not permitted by such laws and regulations. For
instance, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. The Bank is in
compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-oneborrower
is equal to 15% of unimpaired capital and surplus (except for loans fully
secured by certain readily marketable collateral, in which case this limit is
increased to 25% of unimpaired capital and surplus). At March 31, 1997, the
Bank's lending limit under this restriction was $5.3 million. At March 31, 1997,
the Bank had no loans in excess of this limit. The Bank is in compliance with
the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on matters such as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action. The Bank has not been required to submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
<PAGE>
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., those with a core capital ratio of at least 5%, a ratio
of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital")
of at least 6% and a risk-based capital ratio of at least 10%) and considered
healthy pay the lowest premium while institutions that are less than adequately
capitalized (i.e., those with core and Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may impose special assessments on SAIF members to repay amounts
borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio the FDIC revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as discussed
below), the SAIF would not attain its designated reserve ratio until the year
2002. As a result, SAIF insured members would continue to be generally subject
to higher deposit insurance premiums than BIF insured institutions until, all
things being equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September, 1996.
The legislation provides for a one-time assessment, to be imposed on all
deposits assessed at the SAIF rates as of March 31, 1995. It also provides for
the merger of the BIF and the SAIF on January 1, 1999 if no savings associations
then exist. The special assessment rate has been established at .657% of
deposits by the FDIC and the resulting assessment of $1,766,185 was paid in
November 1996. This special assessment significantly increased noninterest
expense and adversely affected the Bank's results of operations for the year
ended March 31, 1997. As a result of the special assessment, the Bank's deposit
insurance premiums was reduced to .065% based upon its current risk
classification and the new assessment schedule for SAIF insured institutions.
These premiums are subject to change in future periods.
<PAGE>
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment was limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC-insured institutions is uncertain at this time,
but are anticipated to be about a 6.5 basis points assessment on SAIF deposits
and 1.5 basis points on BIF deposits until BIF insured institutions participate
fully in the assessment.
Legislative Action
On September 30, 1996, President Clinton signed into law the Economic
Development and Regulatory paperwork Reduction Act of 1996 (the "Act"). The
Act's principal provisions relate to recapitalization of SAIF, but it also
contains numerous regulatory relief measures, some of which are directly
appliable to the Bank.
Pursuant to the Act, as of January 1, 1997, commercial banks will be
required to share in the payment of interst due on Financial Corporation
("FICO") bonds used to rescue the savings and loan industry in the 1980's.
Annual FICO assessments to be added to deposit insurance premiums are expected
to equal approximately 6.4 basis points for SAIF members and 1.3 basis points
for BIF members from January 1, 1997 through December 31, 1999, and
approximately 2.4 basis points for both BIF and SAIF members thereafter.
Although this provision of the Act establishes a time frame for the
eventual elimination of the thrift charter, it contains no provisions concerning
the form the current thrift charter may be required to take. The Bank cannot
determine at this time what effect this provision will have on financial
position or operations.
Finally, the Act contains several other provisions designed to reduce
regulatory burdens associated with compliance with various consumer and other
laws applicabale to the Company, including for example, provisions designed to
coordinate the disclosure and other requirements under the Truth-in-Lending and
Real Estate Settlement Procedures Act, modify certain insider lending
restrictions, permit OTS to allow exemptions to anti-tying prohibitions an
exempt certain transactions and simplilfy certain disclosures under the
Truth-in-Lending Act.
In addition, the United States Department of the Treasury recently
released a form of proposed legislation that would restructure the regulation of
the financial services industry, by among other things, eliminating the various
restrictions on the ability of banks to affiliate with companies engaged in
lines of business not generally currently permissible, such as securities and
insurance activities. Although the Company believes that the form of legislation
currently under consideration will not have a material adverse effect on the
Company, the Company cannot determine, whether or in what form, such legislation
will eventually be enacted or its effect on the Bank.
<PAGE>
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At March 31, 1997, the Bank had no purchased mortgage servicing
rights.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. At March 31, 1997, the Bank's service corporation,
Perma Service, was an includable subsidiary; however, Perma Service's investment
in FFLIC was not considered an includable investment and, accordingly, the Bank
was required to deduct 100% of its investment in FFLIC from capital. At March
31, 1997, the nonincludable portion of the Bank's investment in FFLIC totaled
$633,302. See also "Service Corporation Activities."
At March 31, 1997, the Bank had tangible capital of $34.7 million, or
8.27% of adjusted total assets, which is approximately $28.4 million above the
minimum requirement of 1.50% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including a limited
amount of purchased credit card relationships. As a result of the prompt
corrective action provisions discussed below, however, a savings association
must maintain a core capital ratio of at least 4% to be considered adequately
capitalized unless its supervisory condition is such to allow it to maintain a
3% ratio. At March 31, 1997, the Bank had no intangibles which were subject to
these tests.
At March 31, 1997, the Bank had core capital equal to $34.7 million, or
8.27% of adjusted total assets, which is $22.1 million above the minimum
leverage ratio requirement of 3% in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets.
<PAGE>
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank's only exclusion
from capital and assets at March 31, 1997 was its investment in FFLIC.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS Regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise. Until the rule is finalized, no determination can be
made of what, if any, impact this rule may have on the Bank.
At March 31, 1997, the Bank had total capital of $36.5 million
(including $34.7 million in core capital) and risk-weighted assets of $175.4
million (including $2.3 million in converted off-balance sheet assets) or total
capital of 20.80% of risk-weighted assets. This amount was $22.5 million above
the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
<PAGE>
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement actions by the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability and the value of the Common Stock purchased in the Conversion.
Holding Company shareholders do not have preemptive rights; and therefore, if
the Holding Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions or requirements on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations, such as the Subsidiary Bank that
before and after the proposed distribution meet their capital requirements, may
make capital distributions during any calendar year equal to the greater of 100%
of net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
Permanent Federal may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
<PAGE>
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report. This liquid asset ratio requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings associations. At the present time, the minimum liquid asset ratio
is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At March 31, 1997, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 8.71% and a short-term
liquid assets ratio of 3.69%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
<PAGE>
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At March 31, 1997, the
Bank met the test and has always met the test since it has been in effect.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
BIF. If such an association has not yet requalified or converted to a national
bank, its new investments and activities are limited to those permissible for
both a savings association and a national bank, and it is limited to national
bank branching rights in its home state. In addition, the association is
immediately ineligible to receive any new FHLB borrowings and is subject to
national bank limits for payment of dividends. If such association has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of
Permanent Federal, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch, by
Permanent Federal. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in September 1995 and received a rating of satisfactory.
<PAGE>
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates, however;
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as and will become subject to
the restrictions applicable to bank holding companies. The activities authorized
for a bank holding company are more limited than are the activities authorized
for a unitary or multiple savings and loan holding company. See "- Qualified
Thrift Lender Test."
<PAGE>
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Holding Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At March 31, 1997, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Indianapolis, which is one of 12 regional FHLBs ("FHLB System"), that
administers the home financing credit function of savings associations. Each
FHLB serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB which are subject to the regulation and oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At March 31, 1997, the Bank had $5.2 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five fiscal
years, such dividends have averaged 8.01% and were 7.77% for fiscal year ended
March 31, 1997. Under federal law the FHLBs are required to provide funds for
the resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
<PAGE>
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Permanent Federal's FHLB stock may result in a
corresponding reduction in Permanent Federal's capital. For the fiscal year
ended March 31, 1997, dividends paid by the FHLB of Indianapolis to the Bank
totaled $383,691, which constitute a $166,039 increase over the amount of
dividends received in the fiscal year ended March 31, 1996.
Federal and State Taxation
Savings associations such as the Bank that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code of 1986, as amended (the "Code"), had been permitted
to establish reserves for bad debts and to make annual additions thereto which
may, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction for "non-qualifying loans" is computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
The percentage of specially computed taxable income that is used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. The
availability of the percentage of taxable income method permits qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constitute less than 60% of its total assets, the
association may not deduct any addition to a bad debt reserve and generally must
include existing reserves in income over a four-year period. No representation
can be made as to whether the Bank will meet the 60% test for subsequent taxable
years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. At
March 31, 1997, the 6% and 12% limitations did not restrict the percentage bad
debt deduction available to the Bank. It is not expected that these limitations
would be a limiting factor in the foreseeable future.
<PAGE>
In August 1996, legislation was enacted that repeals the reserve method
of accounting (including the percentage of taxable income method) used by many
thrifts, including the Bank, to calculate their bad debt reserve for federal
income tax purposes. As a result, large thrifts such as the Bank must recapture
that portion of the reserve that exceeds the amount that could have been taken
under the specific charge-off 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.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax, and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1997, the Bank's Excess for tax purposes totaled
approximately $6.0 million.
The Bank and its subsidiary file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. The
Company files consolidated federal income tax returns with the Bank and its
subsidiary. Savings associations, such as the Bank, that file federal income tax
returns as part of a consolidated group are required by applicable Treasury
regulations to reduce their taxable income for purposes of computing the
percentage bad debt deduction for losses attributable to activities of the
non-savings association members of the consolidated group that are functionally
related to the activities of the savings association member.
The Bank and its consolidated subsidiary have not been audited by the
IRS with respect to consolidated federal income tax returns during the past
seven years. In the opinion of management, any examination of still open returns
(including returns of subsidiaries and predecessors of, or entities merged into,
the Bank) would not result in a deficiency which could have a material adverse
effect on the financial condition, results of operations or liquidity of the
Bank and its consolidated subsidiary.
<PAGE>
Change in Accounting for Income Taxes. Statement of Financial
Accounting Standards No. 109, was issued by the Financial Accounting Standards
Board ("FASB") in early 1992 and is required for fiscal years beginning after
December 15, 1992. FASB No. 109 requires a change from the deferred method to
the asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under
SFAS No. 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. Under the
deferred method, deferred taxes were recognized using the tax rate applicable to
the year of the calculation and were not adjusted for subsequent changes in tax
rates.
In December 1990, the FASB issued SFAS No. 106, "Employers" Accounting
for Post-retirement Benefits Other Than Pensions." This statement will change
the current practice of accounting for postretirement benefits on a cash basis
by requiring accrual, during the years that the employee renders the necessary
service, of the expected cost of providing those benefits to an employee. The
Holding Company and the Bank were required to adopt this new method of
accounting in fiscal 1993. The statement allows for two transition methods. The
Holding Company and the Bank adopted this standard when required and the
adoption of SFAS No. 106 had no material effect on the financial position and
results of operations of either entity.
Indiana Taxation. Indiana imposes a franchise tax on financial
institutions at the rate of 8.5% of modified federal taxable income. The
modifications to federal taxable income include an add-back of municipal
interest and state and local property taxes and bad debt deductions are limited
to actual net charge-offs. The franchise tax is imposed on a combined basis
including the Company, the Bank and its subsidiary.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Executive Officers of the Company and the Bank
The following table sets forth certain information as of March 31, 1997
regarding the executive officers of the Company and the Bank who are not also
directors.
<TABLE>
<CAPTION>
Name Age Positions Held with the Company and the Bank
---- --- --------------------------------------------
<S> <C> <C>
Carl E. Root 50 Vice President and Secretary of the
Company and Senior Vice President and
Secretary of the Bank
George E. Orr 55 Senior Vice President of Bank
Seth P. Allen 38 Senior Vice President of the Bank
<PAGE>
<CAPTION>
Name Age Positions Held with the Company and the Bank
---- --- --------------------------------------------
<S> <C> <C>
Richard A. Condi 43 Vice President of Bank
Joseph M. Schnapf 46 Chief Financial Officer of the Company
and Vice President and Treasurer of
the Bank
Glenna J. Kirsch 47 Vice President of Bank
</TABLE>
Officers are elected annually by the Board of Directors of the Bank.
The business experience of each executive officer who is not also a director is
set forth below.
Carl E. Root. Effective March 31, 1995, Mr. Root became Vice President
and Secretary of the Company and Senior Vice President and Secretary of the
Bank. As Vice President and Secretary of the Company, Mr. Root is also
responsible for investor relations. Mr. Root joined the Bank in 1989 and served
as Senior Vice President, Treasurer and Chief Financial Officer from 1990 until
April 1, 1995, when he assumed his current positions.
George E. Orr. As Senior Vice President, Mr. Orr is primarily
responsible for the planning and development of the Bank's data processing
operations and manages the Bank's checking and proof of deposit departments. Mr.
Orr joined the Bank in 1963 and was promoted to his current position in 1990.
Seth P. Allen. Mr. Allen joined the Bank in January 1997 as Senior Vice
President and Commercial Lending Officer. Mr. Allen served as Senior Vice
President and Senior Lending Officer at Nashoba Bank in Memphis, Tennessee from
October 1994 to January 1997. Prior to that, Mr. Allen was Vice President and
Commercial Lending Officer at Deposit Guaranty National Bank in Jackson,
Mississippi from January 1991 to October 1994.
Richard A. Condi. Mr. Condi is Vice President in charge of one- to
four-family mortgage lending. Mr. Condi joined the Bank in 1979 and has served
in various capacities in the Bank's lending department before being promoted to
his current position in January 1991.
Joseph M. Schnapf. Mr. Schnapf joined the Bank in October 1991 as Vice
President and Controller. Effective March 31, 1995, Mr. Schnapf was promoted to
Chief Financial Officer of the Company as well as Vice President and Treasurer
of the Bank. In this capacity, he manages the overall financial function of the
Company and the Bank in collaboration with the Chief Executive Officer and is
responsible for the Bank's financial accounting and reporting function. Mr.
Schnapf is also responsible for establishing interest rates on all wholesale and
retail funds and manages the Bank's liquidity and investment portfolio.
Glenna J. Kirsch. Ms. Kirsch joined the Bank in 1980 and has held
several positions at the institution, including Training Officer from 1991 until
1992. In 1992, Ms. Kirsch was appointed Savings Officer and in 1995 was promoted
to Vice President. Currently, Ms. Kirsch is in charge of Deposit Operations and
is responsible for managing checking, savings and certificate of deposit
processing for the Bank.
<PAGE>
Employees
At March 31, 1997, the Bank had a total of 115 full-time and 19
part-time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Item 2. Properties
The following table sets forth information concerning the main office
and each branch office of the Bank at March 31, 1997. At March 31, 1997, the
Bank's premises, office properties and equipment had an aggregate book value of
approximately $6.4 million.
<TABLE>
<CAPTION>
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
-------- -------- ------ ---- -----
(In Thousands)
<S> <C> <C> <C> <C>
Main (Downtown) Office
101 Southeast Third Street 1963 Owned N/A $2,889
Evansville, Indiana
Branch Offices
University Heights
4615 University Drive 1988 Owned N/A 401
Evansville, Indiana
Town Center
201 Diamond Avenue 1981 Owned N/A 366
Evansville, Indiana
Green River Road
123 South Green River Road 1978 Owned N/A 270
Evansville, Indiana
North Brook
3820 First Avenue 1978 Leased November 1997 145(1)
Evansville, Indiana
West Franklin Street
2131 West Franklin Street 1960 Owned N/A 190
Evansville, Indiana
Ross Center
2521 Washington Avenue 1950 Owned N/A 798
Evansville, Indiana
Fort Branch
810 East Locust Street 1987 Owned N/A 378
Fort Branch, Indiana
<PAGE>
<CAPTION>
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
-------- -------- ------ ---- -----
(In Thousands)
<S> <C> <C> <C> <C>
Jasper
771 West Second Street 1991 Owned N/A 541
Jasper, Indiana
Newburgh
4855 Highway 261 North 1976 Owned N/A 142
Newburgh, Indiana
Oakland City
410 West Morton Street 1984 Owned N/A 256
Oakland City, Indiana
(1) The Bank owns this branch's building and leases the land.
</TABLE>
The Bank maintains depositor and borrower customer files on an on-line
basis with BISYS, Inc. The net book value of the data processing and computer
equipment utilized by the Bank at March 31, 1997 was $343,355.
Item 3. Legal Proceedings
Permanent Federal is involved as plaintiff or defendant in various
legal actions arising in the normal course of its business. While the ultimate
outcome of these proceedings cannot be predicted with certainty, it is the
opinion of management, after consultation with counsel representing Permanent
Federal in the proceedings, that the resolution of these proceedings should not
have a material effect on Permanent Federal's results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 1997.
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
Page 47 & 48 of the attached 1997 Annual Report to Stockholders is
herein incorporated by reference.
Item 6. Selected Financial Data
Pages 3 and 4 of the attached 1997 Annual Report to Stockholders is
herein incorporated by reference.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Pages 6 through 17 of the attached 1997 Annual Report to Stockholders
are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Page 5 and 18 through 45 of the attached 1997 Annual Report to
Stockholders are herein incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Directors of the Registrant is incorporated
herein by reference from the Corporation's definitive Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on July 22, 1997, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation", a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Information concerning the business experience of the executive officers of the
Company and the Bank contained in Part I of this 10-KSB is incorporated by
reference herein.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC reports of ownership and
reports of changes in ownership of common stock and other equity securities of
the Company. Officers, directors and greater than 10% stockholders are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended March 31, 1997, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with the exception of three executive
officers covering one transaction each.
<PAGE>
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on July 22, 1997, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation", a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Corporation's
definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to
be held on July 22, 1997, except for information contained under the headings
"Compensation Committee Report on Executive Compensation" and "Stock Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Corporation's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on July
22, 1997, except for information contained under the headings "Compensation
Committee Report on Executive Compensation" and "Stock Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements:
The following information appearing in the Registrant's Annual Report
to Shareholders for the year ended March 31, 1997, is incorporated by reference
in this Form 10-K Annual Report as Exhibit 13.
Pages in
Annual
Annual Report Section Report
--------------------- ------
Independent Auditors' Report............................................. 18
Consolidated Statements of Financial Condition
at March 31, 1997 and 1996............................................ 19
Consolidated Statements of Income for the Years Ended
March 31, 1997, 1996 and 1995......................................... 20
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 1997, 1996 and 1995............................. 21
Consolidated Statements of Cash Flows for Years Ended
March 31, 1997, 1996 and 1995......................................... 22-23
Notes to Consolidated Financial Statements.............................. 24-45
<PAGE>
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.
(a) (3) Exhibits:
<TABLE>
<CAPTION>
Reference to Prior
Regulation Filing or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
------ -------- ------
<S> <C> <C>
2 Plan of acquisition, reorganization, None
arrangement, liquidation or
succession
3 (i) Articles of Incorporation *
3 (ii) Bylaws *
4 Instruments defining the rights of *
security holders, including See also Exhibit 3
indentures
9 Voting trust agreement None
10 Material contracts:
(a) 1993 Stock Option and *
Incentive Plan
(b) Recognition and Retention Plan *
(c) Employment Agreement with *
Donald P. Weinzapfel
(d) Director Deferred Compensation **
Agreement
(e) Employment Agreement with ***
Murray T. Brown
11 Statement re computation of None
per share earnings
12 Statements re computation of Not required
ratios
13 Annual Report to security holders 13
16 Letter re change in certifying Not required
accountant
18 Letter re change in accounting None
principles
19 Previously unfiled documents None
21 Subsidiaries of the registrant 21
<PAGE>
<CAPTION>
Reference to Prior
Regulation Filing or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
------ -------- ------
<S> <C> <C>
22 Published report regarding matters None
submitted to vote of security holders
23 Consents of experts and counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule Not required
28 Information from reports Not required
furnished to state insurance
regulatory authorities
99 Additional Exhibits Not applicable
</TABLE>
*Filed as exhibits to the Company's Registration Statement on Form S-1
under the Securities Act of 1933, filed with the Securities and Exchange
Commission on December 23, 1993 (Registration No. 33-73394). All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
**Filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K
under the Securities Exchange Act of 1934 on June 29, 1995 (File No. 0-23370).
***Filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K
under the Securities Exchange Act of 1934 on June 27, 1996 (File No. 0-23370)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three month
period ended March 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PERMANENT BANCORP, INC.
Date: June 30, 1997 By: /s/ Donald P. Weinzapfel
------------------------
Donald P. Weinzapfel
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Donald P. Weinzapfel By: /s/ John R. Stone
------------------------ -----------------
Donald P. Weinzapfel, John R. Stone, Director
Chairman of the Board,
President and Chief
Executive Officer (Principal
Executive Officer)
Date: June 30, 1997 Date: June 30, 1997
By: /s/ Daniel F. Korb By: /s/ Jack H. Kinkel
------------------ ------------------
Daniel F. Korb, Director Jack H. Kinkel, Director
Date: June 30, 1997 Date: June 30, 1997
By: /s/ John W. Forster By: /s/James W. Vogel
------------------- -----------------
John W. Forster, Director James W. Vogel, Director
Date: June 30, 1997 Date: June 30, 1997
By: /s/ Murray J. Brown By: /s/ Robert L. Northerner
------------------- ------------------------
Murray J. Brown, Director Robert L. Northerner, Director
Date: June 30, 1997 Date: June 30, 1997
<PAGE>
By: /s/ James D. Butterfield By: /s/ Joseph M. Schnapf
------------------------ ---------------------
James D. Butterfield Joseph M. Schnapf, Chief
Director Financial Officer (Principal
Financial and Accounting
Officer)
Date: June 30, 1997 Date: June 30, 1997
By: /s/ James A. McCarty, Jr.
-------------------------
James A. McCarty, Jr.
Director
Date: June 30, 1997
TABLE OF CONTENTS
President's Letter......................................... 2
Selected Consolidated Financial Data....................... 3
Quarterly Results of Operations............................ 5
Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 6
Independent Auditors' Report............................... 18
Consolidated Statements of Financial Condition........... 19
Consolidated Statements of Income........................ 20
Consolidated Statements of Stockholders' Equity.......... 21
Consolidated Statements of Cash Flows.................... 22
Notes to Consolidated Financial Statements............... 24
Officers and Directors..................................... 46
Corporate Information...................................... 47
<PAGE>
LETTER TO STOCKHOLDERS
To Our Stockholders:
It is a pleasure to present the results of the financial performance of
Permanent Bancorp, Inc. for the year ended March 31, 1997. This completes our
third full year as a public company and was our best year as measured by
earnings.
The Company recorded a 90% increase in earnings during the fiscal year
before a one-time industry wide assessment by the Savings Association Insurance
Fund of the Federal Deposit Insurance Corporation. Even with this assessment
earnings were improved from the previous year.
To further enhance shareholder value the Company completed a 5% stock
buyback program in January and announced another 5% buyback program to begin
April 1, 1997. In fiscal 1997, a cash dividend was paid that represented a 50%
increase over the previous year.
During the year, our subsidiary bank announced plans to acquire the
Newburgh branch of NBD Bank to expand its franchise and better serve the
residents of Newburgh.
The Bank has developed a plan to provide a customer interactive voice
response system and a check imaging system. These technological changes are
expected to be implemented early in our next fiscal year and are expected to
enhance service to customers and reduce operational costs.
The Bank announced the formation of a commercial lending department in
January 1997, when it added Seth P. Allen as Senior Vice President and
Commercial Lending Officer. Mr. Allen's immediate duties will include the
development of a commercial loan portfolio as well as overseeing the consumer
lending activities. Mr. Allen comes to us with many years of successful
experience in the commercial banking industry.
This past year, the Board of Directors elected two new directors to its
Board. Mr. James A. McCarty, Jr., President of Colonial Garden Center, Inc.,
joined the Board in August 1996 and Mr. Murray J. Brown, Executive Vice
President and Chief Operating Officer of Permanent Bancorp, Inc. and of our
subsidiary bank, was elected in March 1997. Mr. McCarty and Mr. Brown were also
elected directors of the subsidiary bank.
We wish to acknowledge the retirement of two officers from their long
time employment with our subsidiary bank. Mrs. Gail Hendrix completed her career
as Vice President and Manager of our West Franklin Street Office. Mr. Joseph
Stofleth completed his career as Asst. Vice President and Manager of our Ft.
Branch Office.
<PAGE>
Southwestern Indiana continues its industrial expansion with the new
Toyota Motor Manufacturing plant under construction and the ground breaking for
AK Steel Corporation's steel finishing plant. These two industries along with
their support suppliers will help assure economic expansion in our core market.
We appreciate and depend on the continued support of our customers and
shareholders. We look forward to another year of earnings improvement and in the
growth in shareholder value that will come along with these results.
/s/Donald P. Weinzapfel
-----------------------
Donald P. Weinzapfel
Chairman of the Board
President and
Chief Executive Officer
- 2-
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(In Thousands)
At March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $423,698 $395,903 $342,678 $365,184 $327,334
Loans, net 210,220 206,910 195,217 188,513 174,733
Loans held for sale -- -- 266 727 1,133
Cash and interest-bearing deposits 6,364 4,916 5,573 36,235 3,803
Mortgage-backed securities available
for sale 74,052 61,953 981 -- 2,000
Mortgage-backed securities held
to maturity 27,181 32,154 76,262 76,027 76,695
Securities available for sale 85,180 73,171 992 -- 9,048
Securities held to maturity 25 25 48,076 48,247 39,634
Goodwill - net 326 545 769 1,015 1,290
Deposits 280,753 280,008 267,520 285,180 289,538
Total borrowings 100,278 70,985 28,114 34,823 14,673
Stockholders' equity - net 39,095 41,494 43,488 41,747 19,578
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
(In Thousands)
Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Interest income $29,689 $25,892 $22,705 $21,785 $24,767
Interest expense 18,724 16,354 13,352 13,616 15,323
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 10,965 9,538 9,353 8,169 9,444
Provision for loan losses 113 207 410 350 1,041
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 10,852 9,331 8,943 7,819 8,403
- ---------------------------------------------------------------------------------------------------------------------------
Other income:
Service charges 841 628 619 817 915
Gain (loss) on sales of loans 23 18 (16) 228 476
Gain (loss) on sale of investment and
mortgage-backed securities (56) (6) 5 36 12
Other 816 797 1,085 544 555
- ---------------------------------------------------------------------------------------------------------------------------
Total other income 1,624 1,437 1,693 1,625 1,958
- ---------------------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits 4,295 4,427 4,397 3,768 3,512
Deposit insurance assessment 2,351 711 738 776 745
Occupancy 809 819 769 704 641
Other 2,714 2,900 2,614 2,449 3,034
- ---------------------------------------------------------------------------------------------------------------------------
Total other expense 10,169 8,857 8,518 7,697 7,932
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of change for deferred
income taxes 2,307 1,911 2,118 1,747 2,429
Income tax provision 1,003 662 874 721 1,070
Cumulative effect of change in
accounting for deferred income taxes -- -- -- -- 547
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 1,304 $ 1,249 $ 1,244 $ 1,026 $ 1,906
===========================================================================================================================
</TABLE>
- 3 -
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
At or For the Year Ended March 31,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets (ratio of net
income to average total assets) 0.31% 0.34% 0.36% 0.31% 0.57%
Interest rate spread information:
Average during year 2.40 2.28 2.41 2.40 2.95
End of year 2.62 2.50 2.29 2.27 2.85
Net interest margin (1) 2.76 2.72 2.83 2.58 3.03
Ratio of operating expense to average
total assets 2.44 2.41 2.37 2.39 2.39
Return on average stockholders' equity
(ratio of net income to average
stockholders' equity) 3.25 2.95 2.92 4.90 10.23
Ratio of average interest-earning
assets to average interest-bearing
liabilities 107.63 109.42 110.51 104.19 101.16
Asset Quality Ratios:
Non-performing assets to total assets at
end of year (2) 1.11 1.75 2.43 2.83 3.46
Allowance for loan and real estate
owned losses to non-performing
assets 44.73 32.22 25.33 21.75 20.19
Allowance for loan losses to total loans 1.00 1.07 1.06 1.11 1.17
Capital Ratios:
Stockholders' equity to total assets at
end of year 9.23 10.48 12.69 11.43 5.98
Average stockholders' equity to average
assets 9.63 11.54 12.29 6.34 5.61
Number of full-service offices 11 11 11 11 11
Number of deposit accounts 35,426 36,452 35,075 38,644 39,633
Book value per share - primary $19.05 $19.44 $18.72 $16.95 N/A
(1) Net interest income divided by average interest-earning assets.
(2) Non-performing assets consist of non-accruing loans, including in-substance
foreclosures, accruing loans past due 90 or more days, troubled debt
restructurings and real estate owned.
</TABLE>
- 4 -
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain selected unaudited data relating
to results of operations for the three month periods ending on the dates
indicated.
<TABLE>
<CAPTION>
Three Months Ended
- ---------------------------------------------------------------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1996 1996 1996 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1997
Total interest income $7,226,117 $7,436,240 $7,532,390 $7,493,878
Total interest expense 4,571,382 4,711,195 4,752,329 4,689,090
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 2,654,735 2,725,045 2,780,061 2,804,788
Provision for loan losses 60,000 88,486 (132,040) 96,810
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,594,735 2,636,559 2,912,101 2,707,978
Other income 353,983 442,397 513,793 296,929
Other expense 2,037,515 3,915,272 2,135,720 2,063,438
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 911,203 (836,316) 1,290,174 941,469
Income tax provision (benefit) 406,800 (275,822) 573,492 298,516
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $504,403 $(560,494) $716,682 $642,953
===========================================================================================================================
<CAPTION>
Three Months Ended
- ---------------------------------------------------------------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1995 1995 1995 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1996
Total interest income $5,982,494 $6,316,474 $6,690,583 $6,902,361
Total interest expense 3,705,531 4,081,309 4,283,422 4,283,978
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 2,276,963 2,235,165 2,407,161 2,618,383
Provision for loan losses 26,354 76,070 48,902 55,597
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,250,609 2,159,095 2,358,259 2,562,786
Other income 360,359 322,709 366,628 380,873
Other expense 2,158,711 2,110,650 2,258,731 2,322,475
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 452,257 371,154 466,156 621,184
Income tax provision 147,833 56,907 138,657 318,049
- ---------------------------------------------------------------------------------------------------------------------------
Net income $304,424 $314,247 $327,499 $303,135
===========================================================================================================================
</TABLE>
During the second quarter of fiscal 1997 the Company paid a one-time
assessment of approximately $1.8 million for the capitalization of the Savings
Association Insurance Fund. See Note 12 of the Consolidated Financial
Statements.
- 5 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
At March 31, 1997, Permanent Bancorp, Inc. (the "Company") successfully
completed its third year as a publicly owned entity. All references to the
Company before March 31, 1994, refer to the operations of the Company's
subsidiary, Permanent Federal Savings Bank ("Permanent Federal" or the "Bank").
The principal business of the Company consists of attracting deposits from the
general public and using these deposits, together with borrowings and other
funds, primarily to originate one- to four-family residential mortgage loans as
well as multi-family and commercial real estate, automobile and other consumer
loans. The Company also originates construction and commercial business loans.
The Company also invests in mortgage-backed and other investment securities. The
Company's results of operations are primarily dependent on its interest rate
spread, which is the difference ("spread") between the average yield on
interest-earning assets, such as loans, mortgage-backed securities and
investment securities and the average rate paid on interest-bearing liabilities,
such as deposits and other borrowings. The interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. In addition to credit risk, the Company is subject to
interest rate risk to the degree that its interest-earning assets mature or
reprice at different times, or on a different basis, than its interest-bearing
liabilities.
The Company's results of operations also depend upon, among other
things, the level of fee income, gains on the sale of loans, provisions for
possible loan losses, income derived from subsidiary activities, operating
expenses and income taxes. The Company's operating expenses principally consist
of employee compensation and benefits, occupancy expenses, federal deposit
insurance premiums and other general and administrative expenses.
Permanent Federal is significantly affected by prevailing economic
conditions, including federal monetary and fiscal policies, as well as by
federal regulation of financial institutions. Deposit balances are influenced by
a number of factors, including interest rates paid on competing personal
investments and the level of personal income and savings within the
institution's market area. In addition, deposit balances are influenced by the
perceptions of customers regarding the stability of the financial services
industry. Management expects to retain a significant portion of existing deposit
balances by offering competitive rates on such deposits. Permanent Federal has
adopted a strategy of employing Federal Home Loan Bank of Indianapolis (FHLB)
advances to supplement deposits. FHLB advances are expected to augment the
liquidity necessary to fund lending operations and investment opportunities.
Lending activities are influenced by the demand for housing as well as
competition from other lending institutions. The primary sources of funds for
lending activities include deposits, loan payments, borrowings, gains on the
sale of loans and funds provided from operations.
<PAGE>
FINANCIAL CONDITION
March 31, 1997 Compared to March 31, 1996
The Company's total assets at March 31, 1997 were $423.7 million, an
increase of $27.8 million, or 7.0% from $395.9 million at March 31, 1996. Total
investment and mortgage-backed securities amounted to $186.4 million at March
31, 1997, an increase of $19.1 million, or 11.4% from $167.3 million at March
31, 1996. Net loans increased by $3.3 million or 1.6% to $210.2 million at March
31, 1997 compared to $206.9 million at March 31, 1996. Total liabilities were
$384.6 million at March 31, 1997, up $30.2 million, or 8.5% from $354.4 million
at March 31, 1996. Deposits at $280.8 million were up $0.8 million or 0.3% from
$280.0 million at March 31, 1996. FHLB advances increased by $30.2 million to
$98.5 million at March 31, 1997 from $68.3 million at March 31, 1996. Tota1
stockholders' equity decreased by $2.4 million to $39.1 million at March 31,
1997. Treasury stock in the amount of $2.2 million acquired through the
Company's stock repurchases exceeded increases in retained earnings and benefit
program awards. Stockholder's equity was also decreased by $1.5 million in
unrealized changes in securities available for sale and by $609,000 paid in
dividends.
- 6 -
<PAGE>
The availability of reasonably priced FHLB advances provided the
opportunity for the Company to borrow funds and invest the proceeds in U.S.
Government Agency and mortgage- backed securities earning higher rates than paid
on the advances. The growth in both loans and deposits was indicative of the
strength of the local economy. One to four family first mortgage loans increased
by $8.5 million, consumer and auto loans increased by $1.4 million. Commercial
and multi-family real estate loans decreased by $4.5 million, land and
construction loans decreased by $811,000 and commercial paper and bankers
acceptances decreased by $1.3 million. The allowance for loan losses decreased
by $142,000.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Years Ended March 31, 1997 and March 31,
1996.
General. The Company's net income of $1.30 million during the fiscal
year ended March 31, 1997 was slightly improved from the $1.25 million earned
during the fiscal year ended March 31, 1996. The earnings improvement occured
despite the payment of a special assessment in the amount of $1.77 million to
recapitalize the Savings Association Insurance Fund (SAIF) of the Federal
Deposit Insurance Corporation (FDIC). The after tax impact of this assessment on
earnings was $1.07 million.
Net Interest Income. The Company's net interest income increased by
$1.5 million to $11.0 million for the year ended March 31, 1997 compared to $9.5
million for the year ended March 31, 1996. The increase was primarily
attributable to an increase in interest earning assets and an inprovement in the
interest rate spread (the difference between the rate earned on interest earning
assets and the rate paid on interest bearing liabilities).
Interest Income. Interest income for the year ended March 31, 1997
increased $3.8 million to $29.7 million compared to $25.9 million for the same
period in 1996. Interest income was higher for all major categories including
increased interest income on loans of $458,000, mortgage-backed securities of
$341,000, and investment securities of $2,851,000. Due to increased holdings,
dividends on Federal Home Loan Bank stock were also up by $166,000. Income on
interest bearing deposits was down by a modest $19,000. Interest income on loans
increased as a result of growth in average loans outstanding of $ 3.9 million
for the year ended March 31, 1997. The weighted average yield on loans was 8.02%
during the fiscal year ended March 31, 1997, compared to 8.13% during the fiscal
year ended March 31, 1996. Interest income on mortgage-backed and investment
securities also increased primarily as a result of higher outstanding balances.
Mortgage-backed securities averaged $91.4 million during fiscal 1997, compared
to $87.6 million during fiscal 1996. Securities and FHLB stock averaged $95.2
million during fiscal 1997, compared to $60.3 million during fiscal 1996. The
weighted average yields on mortgage-backed and investment securities were 6.67%
and 7.02% respectively during fiscal 1997, compared to 6.58% and 6.09% during
fiscal 1996.
<PAGE>
Interest Expense. Interest expense increased by $2.3 million to $18.7
million during the fiscal year ended March 31, 1997, compared to $16.4 million
during fiscal 1996. Interest paid on deposits decreased by $109,000, due to a
decrease in the average rate paid to 4.84% from 4.93%, which more than offset
the decrease of $2.8 million in average deposit balances. Interest on Federal
Home Loan Bank advances increased by $2.5 million as average balances
outstanding increased by $46.3 million. The average rate paid on advances was
5.74% during fiscal 1997, compared to 6.17% during fiscal year 1996.
Provision for Loan Losses. The Bank establishes its provision for loan
losses and evaluates the adequacy of its allowance for loan losses based on
management's 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 for which full collectibility may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience, the
composition of its loan portfolio and other factors that warrant
- 7 -
<PAGE>
recognition in providing for an adequate loan loss allowance. This methodology
is performed on a monthly basis and is designed to ensure that all relevant
matters affecting loan collectibility will consistently be identified in a
detailed loan review and that the outcome of the review will be considered in a
disciplined manner by management in determining the necessary reserves and the
provision for loan losses. The amounts actually reported in each period will
vary with the outcome of this detailed review.
During the year ended March 31, 1997, the Company recorded a provision
for loan losses of $113,000 compared to $207,000 for the year ended March 31,
1996. During the period ended March 31, 1997 the bank reduced the loan loss
provision by $232,000 relating to the reversal of specific reserves on a
previously impaired loan. This decrease in the provision is partially offset by
increases of $119,000 reflecting increased charge offs on consumer loans. Net
recoveries amounted to $225,000 during fiscal 1997 compared to $62,000 during
fiscal 1996. Asset quality, as measured by non-performing loans to total loans,
improved for the year ended March 31, 1997 compared to the same period a year
ago. The ratios of non-performing assets to total assets were 1.11% at March 31,
1997 and 1.75% at March 31, 1996 respectively. The allowance for losses, as a
ratio to total loans, was 1.00 % at March 31, 1997 compared to 1.07% at March
31, 1996. It is management's belief that the allowance for loan losses reflects
an adequate reserve against potential loss on the loan portfolio. Future
additions to the Company's allowance for loan losses and any change in the
related ratio to non-performing loans are dependent upon the performance of the
Company's loan portfolio, the economy, inflation, changes in real estate values
and interest rates as well as the view of regulatory authorities toward adequate
reserve levels. See also "Asset Quality."
Other Income. Other income increased by $187,000 to $1,624,000 during
the fiscal year ended March 31, 1997. Service charges increased by $213,000,
profit on sale of loans by $5,000, and gains on real estate owned by $10,000.
Commissions on investment and insurance products decreased by $20,000. A loss of
$56,000 was realized on the sale of investment and mortgage-backed securities
compared to a loss of $6,000 during fiscal 1996. Earnings from other sources
were up by $29,000 during fiscal 1997.
Other Expense. The Company's other expenses increased $1.3 million to
$10.2 million for the year ended March 31, 1997, compared to $8.9 million for
the year ended March 31, 1996, primarily because of the special FDIC-SAIF
special assessment in the amount of $1.8 million mentioned under the "general"
heading above. Salaries and employee benefits were $133,000 or 3.0% lower during
fiscal 1997 than during fiscal 1996, while most other expenses remained
relatively stable.
Income Tax Provision. The Company's income tax provision increased from
$661,000 for the year ended March 31, 1996 to $1,003,000 for the year ended
March 31, 1997. The increase was primarily because the Company was able to
recognize a greater loan loss deduction for tax purposes due to growth in loan
balances during fiscal 1996.
<PAGE>
Comparison of Operating Results for the Years Ended March 31, 1996 and March 31,
1995.
General. The Company's net income of $1.25 million during the fiscal
year ended March 31, 1996 was slightly improved from the $1.24 million earned
during the fiscal year ended March 31, 1995.
During the later part of the fiscal year ended March 31, 1996, the
Company retained a consulting firm to assist management in performing a detailed
study of profit improvement opportunities. The study successfully identified
areas where savings may be realized through technological and work flow
improvements, permitting a reduction in staff, and where non-interest income can
be improved while remaining competitive in pricing the Company's services. Many
of the study's recommendations were implemented in fiscal 1997. Staffing
reductions were achieved through normal attrition.
- 8 -
<PAGE>
Net Interest Income. The Company's net interest income increased by
$185,000 to $9.5 million for the year ended March 31, 1996 compared to $9.4
million for the year ended March 31, 1995. The increase was partially
attributable to an increase in interest earning assets funded by lower cost FHLB
advances. The increase somewhat offset the effects of the Company's repurchase
of common stock which used otherwise investable assets to reduce stockholder's
equity.
Interest Income. Interest income for the year ended March 31, 1996
increased $3.2 million to $25.9 million compared to $22.7 million for the same
period in 1995. Interest income was higher for all major categories including
increased interest income on loans of $992,000, mortgage-backed securities of
$1,307,000, investment securities of $810,000, and interest bearing deposits of
$25,000. Due to increased holdings, dividends on Federal Home Loan Bank stock
were also up by $52,000. Interest income on loans increased as a result of a
growth in average loan outstanding of $6.3 million for the year ended March 31,
1996. The weighted average yield on loans was 8.13% during the fiscal year ended
March 31, 1996, compared to 7.88% during the fiscal year ended March 31, 1995.
Interest income on mortgage-backed and investment securities also increased
primarily as a result of higher outstanding balances. Mortgage-backed securities
averaged $87.6 million during fiscal 1996, compared to $78.1 million during
fiscal 1995. Securities and FHLB stock averaged $60.2 million during fiscal
1996, compared to $55.3 million during fiscal 1995. The weighted average yields
on mortgage-backed and investment securities were 6.58% and 6.09% respectively
during fiscal 1996, compared to 5.71% and 5.07% during fiscal 1995.
Interest Expense. Interest expense increased by $3.0 million to $16.4
million during the fiscal year ended March 31, 1996, compared to $13.4 million
during fiscal 1995. Interest paid on deposits increased by $1.4 million, due to
an increase in the average rate paid to 4.93% from 4.34%, which more than offset
the decrease of $4.6 million in average deposit balances. Interest on Federal
Home Loan Bank advances increased by $1.6 million as average balances
outstanding increased by $26.0 million. The average rate paid on advances was
6.17% during fiscal 1996, compared to 6.31% during fiscal year,1995.
Provision for Loan Losses. The Bank establishes its provision for loan
losses and evaluates the adequacy of its allowance for loan losses based on
management's 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 for which full collectibility may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience, the
composition of its loan portfolio and other factors that warrant recognition in
providing for an adequate loan loss allowance. This methodology is performed on
a monthly basis and is designed to ensure that all relevant matters affecting
loan collectibility will consistently be identified in a detailed loan review
and that the outcome of the review will be considered in a disciplined manner by
management in determining the necessary reserves and the provision for loan
losses. The amounts actually reported in each period will vary with the outcome
of this detailed review.
During the year ended March 31, 1996, the Company recorded a provision
for loan losses of $207,000 compared to $410,000 for the year ended March 31,
1995. The decreased loss provision reflects the improved charge off experience
during fiscal 1996. Net charge offs amounted to $62,000 during fiscal 1996
compared to $427,000 during fiscal 1995. Asset quality, as measured by
non-performing loans to total loans, improved for the year ended March 31, 1996
<PAGE>
compared to the same period a year ago. The ratios of non-performing assets to
total assets were 1.75% at March 31, 1996 and 2.43% at March 31, 1995
respectively. The allowance for losses, as a ratio to total loans, was 1.07% at
March 31, 1996 compared to 1.06% at March 31, 1995. It is management's belief
that the allowance for loan losses reflects an adequate reserve against
potential loss on the loan portfolio. Future additions to the Company's
allowance for loan losses and any change in the related ratio to non-performing
loans are dependent upon the performance of the Company's loan portfolio, the
economy, inflation, changes in real estate values and interest rates as well as
the view of regulatory authorities toward adequate reserve levels. See also
"Asset Quality."
- 9 -
<PAGE>
Other Income. Other income decreased by $256,000 to $1,437,000 during
the fiscal year ended March 31, 1996. Service charges increased by $8,000,
profit on sale of loans by $34,000 and commissions on investment and insurance
products by $77,000. Real estate owned gains and recoveries net of expenses
produced a net benefit of $6,000 during fiscal 1996, compared to a benefit of
$315,000 during fiscal 1995 when greater non-recurring gains on sales of real
estate owned were achieved. A loss of $6,000 was realized on the sale of
investment and mortgage-backed securities compared to a gain of $5,000 during
fiscal 1995. Earnings from other sources were down by $55,000 during fiscal
1996.
Other Expense. The Company's other expenses increased $340,000 to $8.9
million for the year ended March 31, 1996, compared to $8.5 million for the year
ended March 31, 1995. Consultant and management fees were $168,000 higher during
fiscal year 1996, primarily because of the profit improvement study described in
this section under the "General" heading. Salaries and employee benefits were
$30,000 or 0.7% higher during fiscal 1996 than during fiscal 1995.
Income Tax Provision. The Company's income tax provision decreased from
$875,000 for the year ended March 31, 1995 to $661,000 for the year ended March
31, 1996. The decrease was primarily because the Company was able to recognize a
greater loan loss deduction for tax purposes due to growth in loan balances.
Average Balance Sheet. The following table presents for the periods
indicated the average balance of interest-earning assets and interest-bearing
liabilities, the amount of interest income and the interest expense, and the
average yield on assets and the average cost of liabilities. Such yields and
costs are derived by dividing interest income or expense by the average balance
of assets or liabilities, respectively, for the periods shown. No tax equivalent
adjustments were made. All average balances are monthly average balances.
Non-accruing loans have been included in the table as loans carrying a zero
yield.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $209,420 $16,796 8.02% $200,940 $16,338 8.13% $194,675 $15,346 7.88%
Mortgage-backed securities 91,431 6,101 6.67 87,551 5,761 6.58 78,070 4,454 5.71
Securities and FHLB stock 95,212 6,686 7.02 60,268 3,669 6.09 55,303 2,806 5.07
Other 1,869 106 5.67 1,854 124 6.69 2,274 99 4.35
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets (1) $397,932 $29,689 7.46 $350,613 $25,892 7.38 $330,322 $22,705 6.87
===========================================================================================================================
Interest-bearing liabilities:
Deposits $275,407 $13,333 4.84 $272,568 $13,442 4.93 $277,130 $12,015 4.34
FHLB advances 92,604 5,320 5.74 46,308 2,856 6.17 20,284 1,280 6.31
Other borrowings 1,693 71 4.19 1,541 56 3.63 1,476 57 3.86
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $369,704 $18,724 5.06 $320,417 $16,354 5.10 $298,890 $13,352 4.47
===========================================================================================================================
Net interest income $10,965 $ 9,538 $ 9,353
===========================================================================================================================
Net interest rate spread 2.40% 2.28% 2.40%
===========================================================================================================================
Net earning assets $ 28,228 $ 30,196 $ 31,432
===========================================================================================================================
Net interest margin(2) 2.76% 2.72% 2.83%
===========================================================================================================================
Average interest-earning
assets to average interest-
bearing liabilities 107.64% 109.42% 110.52%
===========================================================================================================================
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves. (2) Net interest margin represents net interest income divided by
average interest-earning assets.
</TABLE>
- 10 -
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest income and
interest expense during the years indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided for changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by prior rate) and (ii) changes in rate (i.e., changes in rate
multiplied by prior volume). Changes attributable to both rate and volume have
been allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands) 1997 vs. 1996 1996 vs. 1995
- ---------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 676 $ (218) $ 458 $ 502 $ 490 $ 992
Mortgage-backed securities 258 82 340 578 729 1,307
Securities and FHLB stock 2,386 631 3,017 268 595 863
Other 1 (19) (18) (13) 38 25
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $3,321 $ 476 $3,797 $1,335 $1,852 $3,187
===========================================================================================================================
Interest-bearing liabilities:
Deposits $ 143 $ (252) $ (109) $ (194) $1,621 $1,427
FHLB advances 2,645 (181) 2,464 1,604 (28) 1,576
Other borrowings 6 9 15 3 (4) (1)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $2,794 $ (424) $2,370 $1,413 $1,589 $3,002
===========================================================================================================================
Net change in interest income $1,427 $ 185
===========================================================================================================================
</TABLE>
<PAGE>
The following table presents the weighted average yields on loans,
investments and other interest-earning assets, the weighted average rates on
savings deposits and borrowings and the resultant interest rate spreads at the
dates indicated:
<TABLE>
<CAPTION>
At March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average yield on:
Loans, net 8.02% 8.01% 7.84%
Mortgage-backed securities 6.71 6.87 6.20
Securities 7.05 6.40 5.47
Other 6.69 5.35 5.14
Combined weighted average yield on
interest-earning assets 7.47 7.39 7.07
Weighted average rate paid on:
Savings deposits 3.87 3.90 2.79
Demand and NOW deposits 2.06 2.20 2.58
Time deposits 5.67 5.74 5.60
Borrowings 5.19 4.76 4.82
Combined weighted average rate paid
on interest-bearing liabilities 4.85 4.89 4.78
Spread 2.62 2.50 2.29
</TABLE>
- 11 -
<PAGE>
Asset Quality
In accordance with the Company's classification of assets policy,
management evaluates the loan and investment portfolios each month to identify
substandard assets that may contain the potential for loss. In addition,
management evaluates the adequacy of its allowance for possible loan losses.
Non-Performing Assets. The following table sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. For the years
presented, the Bank had no accruing loans delinquent more than 90 days. Real
estate owned includes loans classified as in-substance foreclosures and property
acquired in settlement of foreclosed loans which are carried at the lower of
cost or estimated fair value less estimated cost to sell.
<TABLE>
<CAPTION>
Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family $1,131 $ 695 $1,219 $ 1,911 $ 908
Multi-family 1,062 3,654 3,696 3,912 4,302
Commercial real estate -- -- -- 646 764
Construction or development 171 171 -- 57 36
Consumer 99 185 78 93 206
- ---------------------------------------------------------------------------------------------------------------------------
Total 2,463 4,705 4,993 6,619 6,216
- ---------------------------------------------------------------------------------------------------------------------------
Troubled debt restructurings 2,128 2,165 3,293 3,341 3,374
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing loans $4,591 $6,870 $8,286 $ 9,960 $ 9,590
===========================================================================================================================
Real estate owned:
One- to four-family $ 41 $ 22 $ 7 $ 46 $ 351
Commercial real estate -- -- -- -- 327
Construction or development -- -- 26 342 1,056
Consumer 53 54 25 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total 94 76 58 388 1,734
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $4,685 $6,946 $8,344 $10,348 $11,324
===========================================================================================================================
Total as a percentage of total assets 1.11% 1.75% 2.43% 2.83% 3.46%
===========================================================================================================================
</TABLE>
At March 31, 1997 the Bank had four non-performing assets with
outstanding balances in excess of $100,000.
Non-accruing Loans. As of March 31, 1997, the Bank had $2.5 million in
book value of non-accruing loans compared to $4.7 million as of March 31, 1996.
For the year ended March 31, 1997, gross interest income which would have been
recorded had the Bank's non-accruing loans been current in accordance with their
original terms amounted to $241,000. The amount that was included in interest
income on such loans was actually $105,000 for the year ended March 31, 1997.
<PAGE>
Real Estate Owned. At March 31, 1997, the Bank's real estate acquired
through foreclosure totaled $41,000.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of March 31, 1997, there was also an aggregate of
$2.6 million in net book value of loans ($2.4 million secured by single family
residences, $82,000 secured by non-redsidential property, and $160,000 of
secured and unsecured consumer loans) compared to $4.2 million for the prior
year, with respect to which known information about the possible credit problems
of the borrowers have caused management to have doubts as to the ability of the
borrowers to comply with present loan repayment terms and which may result in
the future inclusion of such items in the non-performing asset category.
- 12 -
<PAGE>
Delinquent Loans. The following table sets forth the Bank's loan
delinquencies by type, by amount and by percentage of type at March 31, 1997.
<TABLE>
<CAPTION>
Loan Delinquent For:
- ---------------------------------------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Number Amount Percentage Number Amount Percentage Number Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family 128 $2,972 73.75% 77 $2,397 90.62% 38 $1,131 45.92%
Multi-family -- -- -- -- -- -- 1 1,062 43.12
Construction or
development 2 27 0.67 -- -- -- 1 171 6.94
Consumer 155 1,031 25.58 40 248 9.38 26 99 4.02
- ---------------------------------------------------------------------------------------------------------------------------
Total 285 $4,030 100.00% 117 $2,645 100.00% 66 $2,463 100.00%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based upon management's evaluation of the
risk inherent in its loan portfolio and changes in the nature and volume of it's
loan activity.
<PAGE>
The following table sets forth an anaysis of the Bank's allowance at
the years indicated.
<TABLE>
<CAPTION>
(Dollars in Thousands) At March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $2,238 $2,093 $2,110 $2,077 $2,190
Charge-offs:
One- to four-family -- 11 20 5 18
Multi-family -- -- 86 97 698
Construction or development -- -- -- -- 594
Consumer 354 93 63 57 84
Commercial business 17 -- 414 183 20
- ---------------------------------------------------------------------------------------------------------------------------
371 104 583 342 1,414
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries:
One- to four-family 2 11 134 -- --
Multi-family 98 4 -- -- --
Consumer 46 27 22 25 21
- ---------------------------------------------------------------------------------------------------------------------------
146 42 156 25 21
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs 225 62 427 317 1,393
Provision for loan losses charged
to operations 113 207 410 350 1,280
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year $2,126 $2,238 $2,093 $2,110 $2,077
===========================================================================================================================
Ratio of net charge-offs during the period to
average loans outstanding during the year 0.11% 0.03% 0.22% 0.17% 0.73%
===========================================================================================================================
Ratio of net charge-offs during the period to
ending non-performing assets 4.80% 0.89% 5.12% 3.06% 12.30%
===========================================================================================================================
Ratio of provision for loan losses
to total loans 0.05% 0.10% 0.21% 0.19% 0.73%
===========================================================================================================================
Ratio of allowance for loan losses
to non-performing loans 46.31% 32.58% 25.26% 21.18% 21.66%
===========================================================================================================================
Ratio of allowance for loan losses
to total loans 1.00% 1.07% 1.06% 1.11% 1.17%
===========================================================================================================================
</TABLE>
- 13 -
<PAGE>
Asset/Liability Management
The measurement and analysis of the exposure of the Bank to changes in
the interest rate environment is referred to as asset/liability management. One
method used to analyze the Bank's sensitivity to changes in interest rates is to
measure the difference between the amount of interest-earning assets which are
anticipated to mature or reprice within a given period of time as compared to
the amount of interest-bearing liabilities which are expected to mature or
reprice within the same period. This difference is known as the interest rate
sensitivity "gap." A gap is considered positive when the amount of interest rate
sensitive assets anticipated to reprice or mature exceeds the amount of interest
rate sensitive liabilities anticipated to reprice or mature in a given period. A
gap is considered negative when the amount of interest rate sensitive
liabilities anticipated to reprice or mature exceeds the amount of interest rate
sensitive assets anticipated to reprice or mature in a given period.
At March 31, 1997, the Company's total interest-earning liabilities
maturing or repricing within one year exceeded total interest-bearing assets
maturing or repricing in the same period by $66.4 million, representing a
negative cumulative one-year gap ratio of 15.8% of total assets. The Company
relies on certain assumptions, such as the amount and timing of loan
prepayments, among others, in the measurement of the interest rate sensitivity
gap. In light of the Company's negative cumulative one-year gap ratio,
management believes that an increase in interest rates will adversely effect its
net interest income.
The Company focuses lending efforts toward the origination and purchase
of competitively priced adjustable-rate loan products and fixed-rate loan
products with relatively short terms to maturity, generally fifteen years or
less. This allows the Company to maintain a portfolio of loans which will be
sensitive to changes in the level of interest rates while providing a reasonable
spread to the cost of liabilities used to fund the loans.
The effect of these assumptions is to quantify the dollar amount of
items that are interest-sensitive and which can be repriced within each of the
periods specified. Such repricing can occur in one of three ways: (i) the rate
of interest to be paid on an asset or liability may adjust periodically on the
basis of an interest rate index, (ii) an asset or liability such as a mortgage
loan may amortize, permitting reinvestment of cash flows at the then-prevailing
interest rate, or (iii) an asset or liability may mature, at which time the
proceeds can be reinvested at the current market rates.
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities at March 31, 1997 on the basis of the
above-described assumptions, and sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at March 31, 1997 and
the Company's interest rate sensitivity "gap" percentages at the dates
indicated. Information presented is based on estimated prepayment rates ranging
from 9% to 50% for loans and mortgage-backed securities, depending on their
maturity and yield. Passbook savings and NOW account balances assume a 17% and
37% annual decay rate, respectively, and money market demand amounts assume a
79% annual decay rate.
- 14 -
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
- ---------------------------------------------------------------------------------------------------------------------------
Less than 6-12 Over 1-3 Over 3-5 Over
6 Months Months Years Years 5 Years
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed-rate one- to four-
family, multi-family (including
mortgage-backed securities),
commercial real estate and
construction loans $ 19,142 $ 13,583 $ 37,100 $ 24,425 $46,069
Adjustable rate one- to four-
family, multi-family (including
mortgage-backed securities)
commercial real estate and
construction loans 65,783 16,120 26,369 8,143 9,330
Consumer loans 7,382 6,097 19,580 8,458 3,540
Investment securities and other 7,174 2,000 4,023 10,015 62,988
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 99,481 37,800 87,072 51,041 121,927
- ---------------------------------------------------------------------------------------------------------------------------
Savings deposits 2,468 4,194 12,286 5,940 29,356
Demand and NOW deposits 10,470 6,612 9,905 2,865 5,706
Certificates 81,639 22,082 54,149 10,334 21,814
FHLB advances 38,374 37,053 20,630 1,310 1,124
Other borrowings 711 104 417 327 0
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 133,662 70,045 97,387 20,776 58,000
- ---------------------------------------------------------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities $(34,181) $(32,245) $(10,315) $ 30,265 $63,927
===========================================================================================================================
Cumulative interest-rate
sensitivity gap $(34,181) $(66,426) $(76,741) $(46,476) $17,451
===========================================================================================================================
Cumulative interest-rate
gap as a percentage of assets (8.14)% (15.82)% (18.27)% (11.07)% 4.16%
===========================================================================================================================
</TABLE>
<PAGE>
In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgages,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. For example, projected passbook, money
market and NOW account maturities may also materially change if interest rates
change. Finally, the ability of many borrowers to service their debt may
decrease in the event of an interest rate increase. The Company considers all of
these factors in monitoring its exposure to interest rate risk.
In addition, the foregoing table does not necessarily indicate the
impact of general interest rate movements on the Company's net interest income
because the repricing of certain categories of assets and liabilities is subject
to competitive and other pressures beyond the Company's control. As a result,
certain assets and liabilities indicated as maturing or otherwise repricing
within a stated period may, in fact, mature or reprice at different times and at
different volumes.
- 15 -
<PAGE>
Liquidity and Capital Resources
The OTS requires minimum levels of liquid assets. OTS regulations
presently require the Bank to maintain an average daily balance of liquid assets
(United States Treasury, federal agency and other investments having maturities
of five years or less) equal to at least 5.0% of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. Such requirements may be changed from time to time by the OTS to
reflect changing economic conditions. Such investments are intended to provide a
source of relatively liquid funds upon which Permanent Federal may rely, if
necessary, to fund deposit withdrawals and other short-term funding needs. The
Bank has historically maintained its liquidity ratio in excess of that required.
At March 31, 1997, the amount of the Bank's liquidity was $33.0 million,
resulting in a liquidity ratio of 8.71%.
Liquidity management is both a daily and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits and (iv) the
objectives of its asset/liability management program. Excess liquidity generally
is invested in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Bank requires additional funds, beyond
its internal ability to generate, it has additional borrowing capacity with the
FHLB and collateral eligible for repurchase agreements.
The Bank principally uses its liquidity resources to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals,
to invest, to fund existing and future loan commitments, to maintain liquidity,
and to meet operating expenses. At March 31, 1997, the Bank had $5.2 million of
loans in process. The Bank anticipates that it will have sufficient funds
available to meet current loan commitments.
Certificates of deposit scheduled to mature in a year or less at March
31, 1997 totalled $103.7 million. Based on historical experience, management
believes that a significant portion of such deposits will remain with the Bank,
however, there can be no assurance that the Bank can retain all such deposits.
Management believes that loan repayments and other sources of funds
will be adequate to meet and exceed the Bank's foreseeable short- and long-term
liquidity needs.
The primary investing activities of the Bank include investing in
loans, mortgage-backed securities, U.S. Treasury and agency securities and other
investment securities. At March 31, 1997, these assets accounted for 94.8% of
the Company's total assets. The purchases are funded primarily from loan
repayments, maturities of securities, FHLB advances and increases in deposits
and net income.
At March 31, 1997, the Bank had outstanding borrowings of $98.5 million
from the FHLB and had the capacity to borrow up to a total of approximately $163
million.
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), the capital requirements applicable to all savings
institutions, including the Bank, have been substantially increased. However,
the Bank is in compliance with the fully phased-in capital requirements. See
Note 11 to the Consolidated Financial Statements for a further discussion of
regulatory capital requirements.
<PAGE>
Dividends are subject to determination and declaration by the Board of
Directors, which will take into account the Company's consolidated financial
condition and results of operations as well as other relevant factors. The
Company's ability to pay dividends is subject to federal regulations and its
continued compliance with regulatory capital requirements. The Company is also
subject to the requirements of Delaware law, which generally limits dividends to
an amount in excess of a company's net assets over paid-in-capital, or, if there
is no such excess, to its net profits for the current and immediately preceding
fiscal year. See Note 12 to the Consolidated Financial Statements for a further
discussion.
- 16 -
<PAGE>
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and results of operations in
terms of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of Permanent Federal are monetary in nature. As a result, interest
rates have a more significant impact on the Company's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services. In the present interest rate environment, the liquidity, maturity
structure and quality of Permanent Federal's assets and liabilities are
important factors in the maintenance of acceptable performance levels.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statements 123, 125
and 128 that the Company either has adopted or will be required to adopt in
future periods. See Note 1 to the Consolidated Financial Statements for a
further discussion.
- 17 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and the Board of Directors of
Permanent Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Permanent Bancorp, Inc. and its subsidiary (the "Company") as of
March 31, 1997 and 1996 and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended March 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Permanent Bancorp, Inc. and
its subsidiary as of March 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1997 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche L L P
- --------------------------
DELOITTE & TOUCHE L L P
May 14, 1997
Indianapolis, Indiana
- 18 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION
March 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C> <C>
Cash $ 3,211,091 $ 4,900,671
Interest-bearing deposits 3,153,385 15,750
- ---------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 6,364,476 4,916,421
- ---------------------------------------------------------------------------------------------------------------------------
Securities available for sale - at fair value
(amortized cost - $87,020,254 and $73,408,696) (Note 2, 9) 85,180,313 73,170,635
Mortgage-backed securities available for sale - at fair value
(amortized cost - $74,846,178 and $61,888,585) (Note 3) 74,052,253 61,953,242
Securities held to maturity (fair value - $25,000 and $25,000) (Notes 2, 9) 25,000 25,000
Mortgage-backed securities held to maturity
(fair value - $27,197,070 and $32,319,409) (Note 3) 27,180,891 32,153,595
Other investments 1,056,036 633,302
Loans (net of allowance for loan losses of $2,126,225
and $2,237,804 (Notes 4, 14) 210,189,422 206,909,621
Interest receivable, net (Note 5) 3,539,085 2,874,362
Office properties and equipment, net (Note 6) 6,968,587 7,256,587
Real estate owned, net 40,653 21,881
Deferred income taxes (Note 10) 1,374,109 281,495
Federal Home Loan Bank stock (Note 8) 5,192,600 3,503,600
Cash surrender value of life insurance (Note 13) 1,552,875 953,199
Goodwill (net of accumulated amortization of $1,741,967 and $1,523,364) 326,198 544,801
Other 655,833 705,051
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $423,698,331 $395,902,792
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION (continued)
March 31,
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
<S> <C> <C>
LIABILITIES:
Deposits (Note 7) $280,753,353 $280,008,062
Federal Home Loan Bank advances (Note 8) 98,483,986 68,303,217
Advance payments by borrowers for taxes and insurance 1,014,598 1,022,263
Other borrowed funds (Note 9) 1,793,967 2,681,753
Interest payable 2,049,727 1,922,635
Other 508,073 471,231
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 384,603,704 354,409,161
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 4, 14)
STOCKHOLDERS' EQUITY (Notes 11, 12, 13):
Serial Preferred Stock ($.01 par value) Authorized and unissued - 1,000,000
shares
Common Stock ($.01 par value) Authorized - 9,000,000
Issued - 2,458,982 and 2,460,196 Outstanding - 2,052,075 and 2,134,515 24,590 24,602
Additional paid-in capital 24,045,413 23,849,500
Treasury Stock - 317,893 and 211,803 shares - at cost (5,547,823) (3,361,279)
Retained Earnings - substantially restricted 23,393,701 22,727,602
Unrealized losses on securities available for sale,
net of deferred tax of $1,043,275 and $64,521 (1,590,591) (98,371)
ESOP borrowing (952,200) (1,190,250)
Unearned compensation - restricted stock awards (278,463) (458,173)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY - NET 39,094,627 41,493,631
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $423,698,331 $395,902,792
===========================================================================================================================
See notes to consolidated financial statements.
</TABLE>
- 19 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $16,796,387 $16,338,109 $15,345,850
Mortgage-backed securities and mortgage-backed securities
available for sale 6,101,478 5,760,962 4,453,802
Securities and securities available for sale 6,301,581 3,450,724 2,640,466
Deposits 105,488 124,465 99,551
Dividends on Federal Home Loan Bank stock 383,691 217,652 165,426
- ---------------------------------------------------------------------------------------------------------------------------
29,688,625 25,891,912 22,705,095
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits (Note 7) 13,332,587 13,441,629 12,014,313
Federal Home Loan Bank advances (Note 8) 5,320,326 2,856,167 1,280,111
Short-term borrowings (Note 9) 71,083 56,444 57,196
- ---------------------------------------------------------------------------------------------------------------------------
18,723,996 16,354,240 13,351,620
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 10,964,629 9,537,672 9,353,475
PROVISION FOR LOAN LOSSES (Note 4) 113,256 206,923 410,479
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 10,851,373 9,330,749 8,942,996
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges 840,520 627,917 619,487
Gain (loss) on sale of loans 22,771 18,233 (16,080)
Commissions 539,487 559,593 483,030
Gain (loss) on sale of securities and mortgage-backed securities (55,897) (6,307) 5,273
Gain on Real Estate owned 16,811 6,400 314,786
Other 260,221 231,133 286,191
- ---------------------------------------------------------------------------------------------------------------------------
1,623,913 1,436,969 1,692,687
- ---------------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME (continued)
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OTHER EXPENSE:
Salaries and employee benefits (Note 13) 4,294,824 4,427,347 4,396,995
Deposit insurance assessment (Note 12) 2,350,715 710,909 738,155
Occupancy (Note 14) 809,138 818,544 769,187
Equipment (Note 14) 566,098 592,033 583,269
Computer service 494,374 484,652 477,755
Advertising 326,211 304,593 294,689
Postage and office supplies 273,474 320,030 293,851
Other 1,053,922 1,198,859 963,474
- ---------------------------------------------------------------------------------------------------------------------------
10,168,756 8,856,967 8,517,375
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,306,530 1,910,751 2,118,308
INCOME TAX PROVISION (Note 10) 1,002,986 661,446 874,541
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,303,544 $ 1,249,305 $ 1,243,767
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE OF COMMON STOCK
Primary $ 0.59 $ 0.57 $ 0.53
Fully diluted 0.59 0.55 0.52
WEIGHTED AVERAGE SHARES OUTSTANDING
Primary 2,202,466 2,206,710 2,346,140
Fully diluted 2,225,188 2,283,016 2,383,532
See notes to consolidated financial statements.
</TABLE>
- 20 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
For the Years Ended March 31, 1995, 1996 and 1997
Additional
Common Stock Paid-in Treasury Retained Unrealized
Shares Amount Capital Stock Earnings Gain (Loss)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, APRIL 1, 1994 2,463,452 $24,635 $23,614,766 $20,603,441
Net income 1,243,767
Net change in unrealized
gain (loss) on securities
available for sale $ 6,571
ESOP shares earned
Vesting of restricted stock
awards (Note 13)
Cancellation of Restricted
Stock 400 (4) (3,996)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1995 2,463,052 24,631 23,610,770 21,847,208 6,571
Net income 1,249,305
Net change in unrealized
gain (loss) on securities
available for sale (104,942)
ESOP shares earned 265,528
Vesting of restricted
stock awards
Cancellation of restricted
stock awards (2,856) (29) (28,531)
Purchase of Treasury Stock (218,372) $(3,465,463)
Issuance of restricted
stock awards 3,000 1,733 47,580
Exercise of stock options 3,569 56,604 (20,915)
Payment of dividends (347,996)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1996 2,248,393 24,602 23,849,500 (3,361,279) 22,727,602 (98,371)
Net income 1,303,544
Net change in unrealized
gain (loss) on securities
available for sale (1,492,220)
ESOP shares earned 205,471
Vesting of restricted
stock awards
Cancellation of restricted
stock awards (1,214) (12) (12,128)
Purchase of treasury stock (112,419) (2,286,925)
Issuance of restricted
stock awards 500 2,570 7,930
Exercise of stock options 5,829 92,451 (28,806)
Payment of dividends (608,639)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1997 2,141,089 $24,590 $24,045,413 ($5,547,823) $23,393,701 $(1,590,591)
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (continued)
For the Years Ended March 31, 1995, 1996 and 1997
Restricted Total
ESOP Stock Stockholders'
Borrowing Awards Equity
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCES, APRIL 1, 1994 $(1,666,350) $(829,520) $41,746,972
Net income 1,243,767
Net change in unrealized
gain (loss) on securities
available for sale 6,571
ESOP shares earned 238,050 238,050
Vesting of restricted stock
awards (Note 13) 252,360 252,360
Cancellation of Restricted
Stock 4,000
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1995 (1,428,300) (573,160) 43,487,720
Net income 1,249,305
Net change in unrealized
gain (loss) on securities
available for sale (104,942)
ESOP shares earned 238,050 503,578
Vesting of restricted
stock awards 135,740 135,740
Cancellation of restricted
stock awards 28,560
Purchase of Treasury Stock (3,465,463)
Issuance of restricted
stock awards (49,313)
Exercise of stock options 35,689
Payment of dividends (347,996)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1996 (1,190,250) (458,173) 41,493,631
Net income 1,303,544
Net change in unrealized
gain (loss) on securities
available for sale (1,492,220)
ESOP shares earned 238,050 443,521
Vesting of restricted
stock awards 178,070 178,070
Cancellation of restricted
stock awards 12,140
Purchase of treasury stock (2,286,925)
Issuance of restricted
stock awards (10,500)
Exercise of stock options 63,645
Payment of dividends (608,639)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1997 $(952,200) $(278,463) $39,094,627
===========================================================================================================================
See notes to consolidated financial statements.
</TABLE>
- 21 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,303,544 $ 1,249,305 $ 1,243,767
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 488,930 478,535 451,027
Amortization and accretion (49,563) (43,445) (70,612)
Vesting of restricted stock awards 178,070 135,740 252,360
Provisions for loan and real estate owned losses (142,153) 257,689 410,478
(Gain) Loss on sale of securities and mortgage-backed securities 51,120 5,808 (5,273)
(Gain) Loss on sale of loans (22,771) (18,233) 16,080
Loss on sale of building and improvements 61,766
Gain on sale of real estate owned (13,289) (34,014) (378,566)
ESOP shares earned 205,471 265,528
Changes in assets and liabilities:
Proceeds from the sales of loans held for sale 984,756 3,268,671 1,470,088
Origination of loans for resale (961,985) (2,984,456) (1,027,236)
Other investments (422,734) (103,302)
Interest receivable (664,723) (971,623) (75,310)
Deferred income taxes (113,861) 169,691 438,678
Other assets 79,790 241,695 (205,793)
Interest payable 127,092 206,775 123,462
Other liabilities 36,942 (226,637) (49,412)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,126,402 2,001,029 2,490,436
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated (61,791,343) (61,639,620) (50,398,543)
Loan principal repayments 76,390,492 55,018,039 45,229,546
Proceeds from :
Maturities of:
Securities available for sale 18,000,000 9,000,000
Securities held to maturity 15,626,930 16,033,333
Sales of:
Securities available for sale 25,430,978 1,000,000
Securities held to maturity 6,988,301 3,483,124
Mortgage-backed securities available for sale 11,142,858
Mortgage-backed securities held to maturity 741,183
Real estate owned 27,224 132,629 2,077,863
Purchases of:
Securities available for sale (56,954,923) (31,486,644) (1,970,344)
Securities held to maturity (24,394,086) (19,378,373)
Mortgage-backed securities available for sale (34,490,516) (12,465,990) (973,875)
Mortgage-backed securities held to maturity (17,709,959) (10,081,040)
Loans (17,741,292) (5,260,316) (3,049,481)
FHLB stock (1,689,000) (932,300)
Office properties and equipment (305,595) (482,009) (735,629)
Payments on mortgage-backed securities 15,416,207 12,594,721 9,811,755
Increase in cash surrender value of life insurance (599,676) (121,812) (130,387)
Other 49,499 33,534 12,884
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (27,115,087) (54,357,399) (9,069,167)
- ---------------------------------------------------------------------------------------------------------------------------
- 22 -
<PAGE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (608,639) (347,996)
Purchase of treasury stock (2,286,925) (3,465,463)
Net change in deposits 745,291 12,488,154 (17,659,743)
Proceeds from FHLB advances 142,900,000 76,731,824 16,066,627
Payments on FHLB advances (112,719,231) (34,117,384) (8,377,850)
Principal repayments of ESOP borrowing 238,050 238,050 238,050
Advance payments by borrowers for taxes and insurance (7,665) (120,411) 48,808
Net change in other borrowed funds (887,786) 256,985 (14,398,473)
Net proceeds from issuance of common stock 63,645 35,689
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 27,436,740 51,699,448 (24,082,581)
- ---------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS 1,448,055 (656,922) (30,661,312)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,916,421 5,573,343 36,234,655
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,364,476 $ 4,916,421 $ 5,573,343
===========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 13,272,862 $13,386,480 $13,228,158
Income taxes 1,097,000 547,508 602,500
Noncash transactions:
Transfers from loans to real estate owned 39,307 123,151 455,179
See notes to consolidated financial statements.
</TABLE>
- 23 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - On September 21, 1993, the Board of Directors of Permanent
Federal Savings Bank (the "Bank") adopted a Plan of Conversion to convert from a
mutual savings bank to a stock savings bank with the concurrent formation of
Permanent Bancorp, Inc. (the "Company"), a holding company, to be incorporated
in the State of Delaware for the purpose of acquiring all of the stock of the
Bank.
Basis of the Company - Permanent Bancorp, Inc. is a savings and loan
holding company incorporated to hold all of the outstanding common stock of
Permanent Federal Savings Bank, a federally chartered savings bank with
principal offices in Evansville, Indiana and branch locations in Fort Branch,
Jasper, Newburgh and Oakland City, Indiana.
Basis of Presentation - The consolidated financial statements include
the accounts of Permanent Bancorp, Inc. its wholly owned subsidiary, Permanent
Federal Savings Bank (the "Bank"), its wholly owned subsidiary, Perma-Service
Corp and its wholly owned subsidiary, Permanent Family Insurance, Inc. All
significant intercompany accounts and transactions have been eliminated.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Estimates most susceptible to change in the near term include the allowance for
loan losses and the fair value of securities.
Securities - Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity Securities" requires
securities to be classified as held to maturity, available for sale or trading.
Only those securities classified as held to maturity, which management has the
intent and ability to hold to maturity, are reported at amortized cost.
Available for sale securities are reported at fair value with unrealized after
tax gains and losses included in shareholders' equity. The Company does not
maintain any securities classified as trading. Realized securities gains or
losses are reported in the Consolidated Statements of Income. The cost of
securities sold is based on the specific identification method.
In November 1995, the Financial Accounting Standards Board allowed a
one time reclassification of securities. In December 1995, the Corporation
reclassified approximately $101 million of securities from held to maturity to
available for sale, and recognized an unrealized loss in stockholder's equity of
approximately $77,000.
Premium and discounts are amortized over the contractual lives of the
related securities using the level yield method. Gains or losses on sales of
these securities are based on the specific identification method.
Other Investments - The Bank has an investment in an insurance company
partnership through its subsidiary, Perma-Service Corp, which underwrites
various types of life and disability insurance and annuity programs. The Bank's
investment is recorded using the equity method.
<PAGE>
Loans and Loans Held for Sale - The Bank originates loans for portfolio
investment or for sale in the secondary market. During the period of
origination, loans are designated as held for sale or for investment purposes.
Loans held for sale are carried at the lower of cost or market value, determined
on an individual loan basis.
- 24 -
<PAGE>
The Company adopted SFAS 114 and 118, "Accounting by Creditors for
Impairment of a Loan and Income Recognition and Disclosures", as amended,
effective April 1, 1995. These statements require that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or the fair value of the underlying
collateral, and specifies alternative methods for recognizing interest income on
loans that are impaired or for which there are credit concerns. For purposes of
applying this standard, impaired loans have been defined as all nonaccrual
loans.
In accordance with SFAS 114, the Bank reclassified to the loan
portfolio $4,008,158 of loans which were classified as in-substance foreclosure
at April 1, 1995 but for which the Bank had not taken possession of the
collateral. The Company's policy for income recognition was not affected by
adoption of the standard. The adoption of SFAS 114 and 118 did not have any
effect on the total reserve, credit losses, or related provision.
The Company adopted SFAS 122, "Accounting for Mortgage Servicing
Rights" (MSRs), on April 1, 1996. SFAS 122 requires that the Company recognize
as separate assets, rights to service mortgage loans for others that have been
acquired through either the purchase or origination of loans. An entity that
sells or securitizes those loans with servicing rights retained should allocate
the total cost of the mortgage loans to the MSRs and the loans based on their
relative fair values. These costs are initially capitalized and subsequently
amortized in proportion to, and over the period of estimated net loan servicing
income.
Additionally, SFAS 122 requires that MSRs be reported on the
Consolidated Balance Sheet at the lower of cost or fair value. The Company is
required to assess its capitalized MSRs for impairment based upon the fair value
of the rights. MSRs are stratified based upon one or more of the predominant
risk characteristics of underlying loans. Impairment is recognized through a
valuation allowance for each impaired stratum. The provisions of SFAS 122 were
applied prospectively beginning in the fiscal year ended March 31, 1997. The
ongoing impact of SFAS 122 is dependent upon, among other things, the volume of
loan originations, the general levels of market interest rates and the rate of
estimated loan prepayments. Accordingly, management is unable to predict with
any reasonable certainty what effect SFAS 122 will have on the Company's future
results of operations or its financial conditions. However, based on the
Company's limited mortgage banking activities, the adoption of SFAS 122 did not
have a material impact on the Company's financial position, results of
operations or cash flows.
Loan Servicing - The Company services mortgage loans for permanent
investors under servicing contracts. Fees earned for servicing loans owned by
investors are based on the outstanding principal balances of the loans being
serviced, and are recognized as income when the related mortgage payments are
received. Loan servicing costs are charged to expense as incurred.
Cash and cash equivalents - All highly liquid investments with an
original maturity of three months or less are considered to be cash equivalents.
<PAGE>
Office Properties and Equipment are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line and accelerated
methods over estimated useful lives that range from three to thirty-five years.
Real Estate Owned includes property acquired in settlement of
foreclosed loans which are carried at the lower of cost or estimated fair value
less estimated cost to sell. When property is acquired, it is recorded at the
lower of cost or estimated fair value at the date of acquisition, and any
write-down resulting therefrom is charged against the allowance for loan losses.
Any subsequent deterioration of the property is charged directly to real estate
owned expense. Costs relating to the development and improvement of real estate
owned are capitalized, whereas costs relating to holding and maintaining the
property are charged to expense.
- 25 -
<PAGE>
Goodwill represents the fair market value of liabilities assumed and
cash consideration paid over the fair market value of intangible assets acquired
in the purchase of another savings institution and the purchase of four
different insurance agencies. The intangibles are principally being amortized to
expense at a constant rate applied to the anticipated remaining principal
balance of the long-term interest-earning assets acquired over a period no
longer than the estimated remaining life of those assets ranging from seven to
ten years. Amortization expense for the years ended March 31, 1997, 1996 and
1995 was $218,603, $ 223,972 and $248,829 respectively.
Allowance for Losses - The balance in the allowance and the amount in
the annual provision charged to expenses are judgmentally determined based upon
a number of factors. The allowance is maintained by management at a level
considered adequate to cover possible losses that are currently anticipated
based on past loss experience, general economic conditions, information about
specific borrower situations, including their financial position and collateral
values, and other factors that are particularly susceptible to changes that
could result in material adjustment in the near term. While management endeavors
to use the best information available in making the evaluations, future
allowance adjustments may be necessary if economic conditions change
substantially from the assumptions used in making the evaluations. While
management may periodically allocate portions of the allowance for specific
problem loan situations, the entire allowance is available for any loan
charge-offs which occur. Increases to the allowance are recorded by a provision
for possible loan losses charged to expense. A loan is charged off by management
as a loss when deemed uncollectible, although collection efforts continue and
future recoveries may occur.
Uncollected Interest - The Bank provides an allowance for the loss of
uncollected interest on loans which are more than 90 days past due. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments returns to normal, in
which case the loan is returned to accrual status.
Loan Origination Fees - Nonrefundable origination fees net of certain
direct origination costs are deferred and recognized, as a yield adjustment,
over the life of the underlying loan. Any unamortized fees on loans sold are
credited to income in the year such loans are sold.
Federal Income Taxes - Deferred income tax assets and liabilities
reflect the impact of temporary differences between amounts of assets and
liabilities for financial reporting purposes and basis of such assets and
liabilities as measured by tax laws and regulations. (See Note 10)
<PAGE>
Changes In Presentation - Certain amounts and items appearing in the
1995 and 1996 financial statements have been reclassified to conform with the
fiscal 1997 presentation.
Stock-Based Compensation - Effective April 1, 1996, the Company adopted
the provisions of Financial Accounting Standards Board, Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation."The accounting requirements of this pronouncement are applicable
to all new employee awards granted after the adoption of SFAS 123. The new
standard provides for the adoption, at the option of the Company, of a fair
value method of accounting for stock options and similar equity instruments. The
Company has elected to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The adoption of SFAS 123 has no effect on the net income, earnings
per share or the cash flows of the Company.
- 26 -
<PAGE>
New Accounting Pronouncements -SFAS 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", is effective
for transactions after December 15, 1996. SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The adoption of SFAS 125 had no impact on the
financial position, results of operations or cash flows of the Company.
SFAS 128, "Earnings per Share," applies to financial statements for
public companies for fiscal years beginning after December 15, 1997. This
statement establishes new accounting standards for the calculation of basic
earnings per share as well as diluted earnings per share. Management does not
believe the adoption of this statement will have a material effect on the
Company's calculation of earnings per share.
Earnings per Share - Primary and fully diluted earnings per share are
based on the weighted average number of shares outstanding during the period,
adjusted for the effect of common stock equivalents, if dilutive. The stock
options outstanding are considered common stock equivalents. Unallocated shares
held by ESOP are not considered to be outstanding while shares awarded pursuant
to the Recognition and Retention Plan (RRP) are considered to be outstanding.
2. SECURITIES
The amortized cost and estimated fair values of securities are
summarized as follows:
<TABLE>
<CAPTION>
March 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
Other $ 25,000 $ 25,000
===========================================================================================================================
Securities available for sale:
U.S. Treasury $ 7,029,449 $ 9,691 $ 30,390 $ 7,008,750
U.S. Agency 79,990,805 4,723 1,823,965 78,171,563
- ---------------------------------------------------------------------------------------------------------------------------
$87,020,254 $14,414 $1,854,355 $85,180,313
===========================================================================================================================
<CAPTION>
March 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities held to maturity:
Other $ 25,000 $ 25,000
===========================================================================================================================
Securities available for sale:
U.S. Treasury $16,925,301 $114,179 $ 10,925 $17,028,555
U.S. Agency 54,979,241 71,881 402,684 54,648,438
ARM Mutual Fund 1,504,144 10,502 1,493,642
- ---------------------------------------------------------------------------------------------------------------------------
$73,408,686 $186,060 $424,111 $73,170,635
===========================================================================================================================
</TABLE>
- 27 -
<PAGE>
The amortized cost and estimated fair value of securities at March 31,
1997 by contractual maturity are as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in 1 year or less $ 5,995,309 $ 5,955,000 $25,000 $25,000
Due after 1 year through 5 years 16,037,348 15,905,000
Due after 5 years through 10 years 60,988,076 59,448,750
Due after 10 years through 15 years 3,999,521 3,871,563
- ---------------------------------------------------------------------------------------------------------------------------
$87,020,254 $85,180,313 $25,000 $25,000
===========================================================================================================================
</TABLE>
Activities related to the sales of securities are summarized as
follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 (1) 1996 (1) 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $25,430,978 $6,988,301 $4,483,124
Gross gains on sales 77,581 1,971 16,184
Gross losses on sales 128,794 10,227 10,911
(1) Includes sales of temporary ARM Mutual Funds (included in Other
Securities) of $1 million, and $6 million for the years ended March 31, 1997 and
March 31, 1996, respectively.
</TABLE>
<PAGE>
3. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair values of mortgage-backed
securities are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities held to maturity:
FHLMC certificates $ 5,390,009 $ 83,862 $ 5,306,147
FNMA certificates 4,787,009 $ 14,782 63,052 4,738,739
GNMA certificates 17,003,873 228,213 79,902 17,152,184
- ---------------------------------------------------------------------------------------------------------------------------
$27,180,891 $242,995 $ 226,816 $27,197,070
===========================================================================================================================
Mortgage-backed securities available for sale:
FHLMC certificates $37,269,433 $43,186 $ 739,907 $36,572,712
FNMA certificates 27,483,089 3,919 251,080 27,235,928
GNMA certificates 10,093,656 164,711 14,754 10,243,613
- ---------------------------------------------------------------------------------------------------------------------------
$74,846,178 $211,816 $1,005,741 $74,052,253
===========================================================================================================================
</TABLE>
- 28 -
<PAGE>
<TABLE>
<CAPTION>
March 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities held to maturity:
FHLMC certificates $ 6,066,825 $ 12,046 $ 2,146 $ 6,076,725
FNMA certificates 5,898,647 79,134 18,141 5,959,640
GNMA certificates 20,188,123 216,060 121,139 20,283,044
- ---------------------------------------------------------------------------------------------------------------------------
$32,153,595 $307,240 $141,426 $32,319,409
===========================================================================================================================
Mortgage-backed securities available for sale:
FHLMC certificates 34,893,133 $141,831 238,552 $ 34,796,412
FNMA certificates 15,241,419 76,513 32,733 15,285,199
GNMA certificates 11,754,033 146,927 29,329 11,871,631
- ---------------------------------------------------------------------------------------------------------------------------
$61,888,585 $365,271 $300,614 $61,953,242
===========================================================================================================================
</TABLE>
<PAGE>
The amortized cost and estimated fair values of mortgage-backed
securities at March 31, 1997 by contractual maturity are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less:
FHLMC certificates $ 605,410 $ 585,021
Due after one year through five years:
FNMA and FHLMC certificates 11,319,523 11,082,766
Due after five years through ten years:
FNMA and FHLMC certificates 4,368,533 4,268,980 $ 1,848,761 $ 1,859,636
Due after ten years:
FHLMC certificates 22,226,180 21,870,208 5,390,009 5,306,147
FNMA certificates 26,232,876 26,001,665 2,938,248 2,879,103
GNMA certificates 10,093,656 10,243,613 17,003,873 17,152,184
- ---------------------------------------------------------------------------------------------------------------------------
$74,846,178 $74,052,253 $27,180,891 $27,197,070
===========================================================================================================================
</TABLE>
Activities related to the sale of mortgage-backed securities are
summarized as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $11,142,858 $744,220 None
Gross gains on sales 47,318 5,952
Gross losses on sales 47,225 3,504
</TABLE>
- 29 -
<PAGE>
4. LOANS
Approximately 93% of the Bank's loans are to customers in Indiana,
although certain mortgage-banking and commercial lending activities extend
outside Indiana. The portfolio of loans consists of residential, commercial real
estate, commercial construction, consumer and other loans.
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage:
Secured by one-to-four family residences $152,480,578 $143,969,801
Secured by other properties 12,075,643 16,609,560
Construction loans 1,832,266 2,570,200
Land 56,064 129,320
Automobile 31,394,332 31,055,752
Consumer 9,692,035 8,016,636
Mobile home 1,239,973 1,595,083
Loans on savings accounts 940,324 1,148,065
Credit card 623,196 707,051
Second mortgage 195,195 215,972
Home improvement 1,083,982 1,080,592
Loan contracts 28,211 31,525
FHA improvement 4,270 6,893
Bankers acceptances 299,287
Commercial paper 978,922 1,996,630
- ---------------------------------------------------------------------------------------------------------------------------
Subtotal 212,624,991 209,432,367
Allowance for loan losses (2,126,225) (2,237,804)
Deferred loan fees, net (284,028) (155,527)
Undisbursed loan proceeds 24,213 (66,593)
Unearned interest and unearned discounts (49,529) (62,822)
- ---------------------------------------------------------------------------------------------------------------------------
Loans, net $210,189,422 $206,909,621
===========================================================================================================================
</TABLE>
The principal balance of loans on nonaccrual status totalled
approximately $2,463,000 and $4,705,000 at March 31, 1997 and 1996,
respectively. For the years ended March 31, 1997 and 1996, gross interest income
which would have been recorded had the Bank's non-accruing loans been current
with their original terms amounted to $240,756 and $447,430, respectively. The
amounts included in interest income on such loans were $105,038 and $381,314 for
the years ended March 31, 1997 and 1996, respectively.
The Bank originates commercial real estate loans. Such loans had a
carrying value of approximately $12 million and $17 million at March 31, 1997
and 1996, respectively. These loans are considered by management to be of
somewhat greater risk of uncollectibility than other loans due to the dependency
on income production. Of the commercial real estate loans, $8 million and $12
million are collateralized by multi-family residential property at March 31,
1997 and 1996, respectively; and $4 million, and $5 million by hotel and other
property at March 31, 1997 and 1996, respectively.
<PAGE>
The Bank had commitments to make loans, approximating $1,550,000 and
$4,037,000 excluding undisbursed portions of loans in-process at March 31, 1997
and 1996, respectively. Additionally, the Bank had commitments to sell
fixed-rate loans of approximately $104,000 at March 31, 1997, and no commitments
to sell loans, at March 31, 1996.
- 30 -
<PAGE>
The Bank originates both adjustable and fixed interest rate loans. The
composition of these loans was as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
- ---------------------------------------------------------------------------------------------------------------------------
Book Value Book Value
- ---------------------------------------------------------------------------------------------------------------------------
Term to March 31, March 31, Term to Rate March 31, March 31,
Maturity 1997 1996 Adjustment 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1mo.-1yr. $ 6,095,000 $ 6,934,000 1mo.-1yr. $ 31,629,000 $38,708,000
1yr.-3yr. 12,657,000 13,816,000 1yr.-3yr. 1,355,000 4,426,000
3yr.-5yr. 29,882,000 26,455,000 3yr.-5yr. 453,000 0
5yr.-10yr. 25,755,000 25,319,000 5yr.-10yr. 29,420,000 9,130,000
10yr.-20yr. 70,494,000 78,086,000 10yr.-20yr. 1,119,000 2,214,000
Over 20 years 3,339,000 4,344,000 427,000 0
- ---------------------------------------------------------------------------------------------------------------------------
$148,222,000 $154,954,000 $ 64,403,000 $54,478,000
===========================================================================================================================
</TABLE>
The adjustable rate loans have interest rate adjustment limitations and
are generally indexed on a weekly average yield of U.S. Treasury securities
adjusted to a constant maturity of one year. Future market factors may affect
the correlation of the interest rate adjustment with the rates the Bank pays on
the short-term deposits that have been primarily utilized to fund these loans.
Aggregate loans to officers and directors totaled $676,855 and $733,107
at March 31, 1997 and March 31, 1996, respectively. For the years ended March
31, 1997 and 1996 loans of $124,899 and $157,350, respectively, were disbursed
to officers and directors and repayments of principal of $181,150 and $194,514
respectively, were received from officers and directors.
The amount of loans serviced for others totalled approximately
$34,298,000 and $37,872,000 at March 31, 1997 and 1996, respectively. Servicing
loans for others generally consists of collecting mortgage payments, maintaining
escrow amounts, disbursing payments to investors and foreclosure processing. In
connection with loans serviced for others, the Bank held borrower's escrow
balances of approximately $249,000 and $278,000 at March 31, 1997 and 1996,
respectively. The Bank is obligated to repurchase certain loans sold to and
serviced for others which become delinquent as defined by the various
agreements. At March 31, 1997 and 1996, these obligations were limited to
approximately $610,000 and $821,000, respectively.
Loan servicing fee income for the years ended March 31, 1997, 1996 and
1995 was $100,824, $104,184 and $123,128 respectively.
At March 31, 1997 and 1996, the Bank's loan portfolio included certain
loans to customers who were experiencing financial difficulties for which the
Bank agreed to modify the original loan terms in a prior year. Modifications
included forgiveness of interest, reduced interest rates and/or extensions of
the loan term. The principal balance at March 31, 1997 and 1996 on these
restructured loans totalled approximately $2,127,700 and $2,165,400,
respectively. For the years ended March 31, 1997 and 1996, gross interest income
which would have been recorded had the Bank's modified loans been current in
accordance with their original terms amounted to $165,000 each year. The amounts
that were included in interest income on such loans were $151,000 during each of
the years ended March 31, 1997 and 1996.
- 31 -
<PAGE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $2,237,804 $2,093,492 $2,110,273
Provision for losses charged to operations 113,256 206,923 410,479
Charge-offs (370,519) (104,335) (583,382)
Recoveries 145,684 41,724 156,121
- ---------------------------------------------------------------------------------------------------------------------------
Ending balance $2,126,225 $2,237,804 $2,093,491
===========================================================================================================================
</TABLE>
The recorded investment in loans considered impaired at March 31, 1997,
under SFAS 114 and 118, was $1,578,914 of which $1,061,876 related to loans with
a specific valuation reserve of $27,632 and $517,038 related to loans with no
valuation reserve. For the year ended March 31, 1997, the average recorded
investment in impaired loans was approximately $3,002,257. Cash received for
interest on impaired loans was $294,091 and $313,024 for the years ended March
31, 1997 and March 31, 1996.
As a federally-chartered savings bank, aggregate commercial real estate
loans may not exceed 400% of capital as determined under the capital standards
provisions of FIRREA. This limitation was approximately $134 million and $133
million as of March 31, 1997, and 1996, respectively.
Also, under FIRREA, the loans-to-one borrower limitation is generally
15% of unimpaired capital and surplus which, for the Bank, was approximately
$5.0 million at both March 31, 1997 and 1996. This is a substantial reduction
from the previous loans-to-one borrower limitation. At March 31, 1997 there were
no loans exceeding this limitation, however, aggregate loans of approximately
$7.6 million made prior to FIRREA to six related borrowers (all limited
partnerships with the same general partner) were in excess of the FIRREA
limitation at March 31, 1996. Additional loans to these borrowers have been
curtailed and the existing loans are being reduced through principal repayment.
5. INTEREST RECEIVABLE
Interest receivable is summarized as follows:
<TABLE>
<CAPTION>
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans (less allowance for uncollectibles - $42,528 and $37,245) $1,123,458 $1,092,937
Interest-bearing deposits and securities 1,729,034 1,190,395
Mortgage-backed securities 686,593 591,030
- ---------------------------------------------------------------------------------------------------------------------------
Interest receivable, net $3,539,085 $2,874,362
===========================================================================================================================
</TABLE>
- 32 -
<PAGE>
6. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,726,939 $ 1,758,408
Office buildings 7,166,672 7,304,979
Furniture and equipment 3,102,854 3,149,905
Leasehold improvements 365,201 365,201
Automobiles 52,728 45,404
- ---------------------------------------------------------------------------------------------------------------------------
Total 12,414,394 12,623,897
Less accumulated depreciation 5,445,807 5,367,310
- ---------------------------------------------------------------------------------------------------------------------------
Office properties and equipment, net $ 6,968,587 $ 7,256,587
===========================================================================================================================
</TABLE>
Depreciation expense included in operations during the years ended
March 31, 1997, 1996 and 1995 totalled $489,002, $478,535 and $451,027,
respectively.
7. DEPOSITS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing $ 902,835 $ 993,584
NOW and MMDA's 35,588,164 2.2% 36,570,790 2.4%
Passbook savings 54,244,569 3.8 54,796,081 3.8
- ---------------------------------------------------------------------------------------------------------------------------
Total 90,735,568 92,360,455
- ---------------------------------------------------------------------------------------------------------------------------
Certificates of deposit:
1.50 - 3.49% 157,572 2.9 389,485 2.9
3.50 - 5.49% 81,947,155 5.0 85,123,998 5.0
5.50 - 7.49% 104,618,045 6.1 98,265,612 6.2
7.50 - 9.49% 3,295,013 8.0 3,868,512 8.0
- ---------------------------------------------------------------------------------------------------------------------------
Total certificates of deposit 190,017,785 187,647,607
- ---------------------------------------------------------------------------------------------------------------------------
Total $280,753,353 $280,008,062
===========================================================================================================================
</TABLE>
Certificates of deposit in the amount of $100,000 or more total
approximately $21 million at March 31, 1997, and $18 million at March 31, 1996.
- 33 -
<PAGE>
A summary of certificate accounts by scheduled maturities at March 31,
1997, is as follows:
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less than 3.49% $ 157,572 $ 157,572
3.50 - 5.49% 57,675,516 $20,198,379 $ 2,466,177 $1,009,788 $ 416,437 $ 180,857 81,947,154
5.50 - 7.49% 42,024,394 25,246,507 9,333,401 3,552,181 2,828,076 21,633,486 104,618,045
7.50 - 9.49% 739,461 28,257 1,216,369 1,310,927 3,295,014
- ---------------------------------------------------------------------------------------------------------------------------
$100,596,943 $45,473,143 $11,799,578 $5,778,338 $4,555,440 $21,814,343 $190,017,785
===========================================================================================================================
</TABLE>
Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW and MMDA's $ 780,027 $ 968,605 $ 1,179,360
Passbook savings 2,056,077 1,567,719 973,292
Certificates of deposit 10,496,483 10,905,305 9,861,661
- ---------------------------------------------------------------------------------------------------------------------------
$13,332,587 $13,441,629 $12,014,313
===========================================================================================================================
</TABLE>
<PAGE>
8. FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank of Indianapolis (FHLB) are as
follows:
<TABLE>
<CAPTION>
Average Rate March 31,
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Rate: 1997 6.10% $27,000,000
1998 5.67 5.56 $35,950,000 13,500,000
1999 5.51 5.43 17,500,000 15,500,000
2000 5.51 4.89 2,286,958 1,597,688
2001 5.68 1,478,037
Thereafter 6.91 6.39 2,518,991 4,473,705
- ---------------------------------------------------------------------------------------------------------------------------
Total Fixed Rate $59,733,986 $62,071,393
- ---------------------------------------------------------------------------------------------------------------------------
Variable Rate:
1997 5.42 $ 6,231,824
1998 5.61 $38,750,000
- ---------------------------------------------------------------------------------------------------------------------------
Total Variable Rate $38,750,000 $ 6,231,824
- ---------------------------------------------------------------------------------------------------------------------------
Total advances $98,483,986 $68,303,217
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank has pledged mortgage loans and FHLB stock as collateral on
these advances. The Bank may receive advances from the FHLB up to 50% of the
Bank's adjusted assets which was approximately $163 million at March 31, 1997.
The variable rate advances at March 31, 1996 include $231,824 advanced against
the Bank's overdraft line of credit.
- 34 -
<PAGE>
9. OTHER BORROWED FUNDS
Other borrowed funds are as follows:
<TABLE>
<CAPTION>
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank, funds due
April 1, 1997 and April 1, 1996 $1,186,818 $2,126,981
Securities sold under agreement to purchase 607,149 554,772
- ---------------------------------------------------------------------------------------------------------------------------
Total $1,793,967 $2,681,753
===========================================================================================================================
</TABLE>
The FHLB funds represent checks written by the Bank on its demand
account at the FHLB of Indianapolis.
An analysis of securities sold under agreements to repurchase is as
follows:
<TABLE>
<CAPTION>
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Highest month-end balance $3,955,494 $982,868 $1,434,814
Average balance $1,484,957 $530,189 $1,203,640
Weighted average interest rate at end of period 5.2% 4.8% 4.6%
Weighted average interest rate during the period 4.8% 4.8% 3.7%
</TABLE>
At March 31, 1997, securities sold under agreement to repurchase had
maturities ranging from April 1, 1997 to June 30, 1997.
Assets pledged to secure securities sold under agreements to repurchase
are as follows:
<TABLE>
<CAPTION>
Amortized Cost Fair Value
- ---------------------------------------------------------------------------------------------------------------------------
March 31, March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Agency Securities $4,079,341 $4,011,405 $3,910,000 $3,851,250
</TABLE>
<PAGE>
10. INCOME TAXES
An analysis of the income tax provision is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 862,572 $437,317 $284,159
State 254,275 123,341 147,322
Deferred (113,861) 100,788 443,060
- ---------------------------------------------------------------------------------------------------------------------------
$1,002,986 $661,446 $874,541
===========================================================================================================================
</TABLE>
- 35 -
<PAGE>
The difference between the financial statement provision and amounts
computed by using the statutory rate of 34% is reconciled as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision at federal statutory rate $ 784,221 $649,655 $720,225
State tax, net of federal tax benefit 167,822 127,056 97,233
Nondeductible expenses 50,347 135,248 69,976
Bad debt deduction 126,723 (211,689)
Other (126,127) (38,824) (12,893)
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax provision $1,002,986 $661,446 $874,541
===========================================================================================================================
</TABLE>
The Company's deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves $ 635,090 $603,987
Unrealized loss on securities available for sale 1,043,274 64,521
Accrued employee benefits 107,624 61,646
Other 64,317 19,542
- ---------------------------------------------------------------------------------------------------------------------------
$1,850,305 $749,696
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation $ 119,405 $ 95,307
Deferred loan fees 277,883 163,387
Restricted stock awards 78,908 110,314
Other 99,193
- ---------------------------------------------------------------------------------------------------------------------------
$ 476,196 $468,201
- ---------------------------------------------------------------------------------------------------------------------------
Deferred income taxes, net $1,374,109 $281,495
===========================================================================================================================
</TABLE>
<PAGE>
Retained earnings at March 31, 1997 and 1996 includes approximately $6
million of income that has not been subject to tax because of deductions for bad
debts allowed for Federal income tax purposes. Deferred income taxes have not
been provided on such bad debt deductions since the Company does not intend to
use the accumulated bad debt deductions for purposes other than to absorb loan
losses. If, in the future, this portion of retained earnings is used for any
purpose other than to absorb bad debt losses, federal income taxes may be
imposed on such amounts at the then current corporate income tax rate.
In August 1996, the "Small Business Job Protection Act of 1996" was
passed into law. One provision of the act repeals the special bad debt reserve
method for thrift institutions currently provided for in Section 593 of the IRC.
The provision requires thrifts to recapture any reserve accumulated after 1987
but forgives taxes owed on reserves accumulated prior to 1988. Thrift
institutions will be given six years to account for the recaptured excess
reserves, beginning with the first taxable year after 1995, and will be
permitted to delay the timing of this recapture for one or two years, subject to
whether they meet certain residential loan test requirements. The adoption of
the act will have no impact on the Company's results of operations.
- 36 -
<PAGE>
11. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial position and results of
operations. The regulations require the Bank to meet specific capital adequacy
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital classification is also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios as set forth in
the following tables of tangible, core and total risk-based capital. Prompt
Corrective Action provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) require specific supervisory
actions as capital levels decrease. To be considered well-capitalized under the
regulatory framework for Prompt Corrective Action provisions under FDICIA, the
Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total
risk-based capital ratios as set forth in the following tables. March 31, 1997
and 1996, the Bank exceeded the minimum requirements for the well-capitalized
category.
The following presents the Bank's regulatory capital levels and ratios
relative to its minimum capital levels and ratios relative to its minimum
capital requirements.
<TABLE>
<CAPTION>
As of March 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Actual Capital Required Capital
- ---------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy
Tangible capital $34,701,101 8.27% $ 6,291,923 1.50%
Core capital 34,701,101 8.27 12,583,846 3.00
Risk-based capital 36,480,827 20.80 14,034,819 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 34,701,101 8.27 20,980,109 5.00
Tier 1 risk-based capital 34,701,101 19.78 10,526,117 6.00
Total risk-based capital 36,480,827 20.80 17,538,859 10.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Actual Capital Required Capital
- ---------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy
Tangible capital $32,786,108 8.40% $ 5,857,874 1.50%
Core capital 32,786,108 8.40 11,715,748 3.00
Risk-based capital 34,579,204 22.50 12,292,374 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 32,786,108 8.40 19,515,540 5.00
Tier 1 risk-based capital 32,786,108 21.34 9,218,212 6.00
Total risk-based capital 34,034,403 22.15 15,365,419 10.00
</TABLE>
- 37 -
<PAGE>
12. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
Dividend Restrictions - Under current regulations, the Bank is not
permitted to pay dividends on its stock after the Conversion if its regulatory
capital would thereby reduce below (i) the amount then required for the
aforementioned liquidation account or (ii) the Bank's regulatory capital
requirements. As a "Tier 1" institution (an institution with capital in excess
of its fully phased-in capital requirements, both immediately before the
proposed capital distribution and on a pro forma basis after giving effect to
such distribution), the Bank may make capital distributions after prior notice
to the OTS in any calendar year up to 100% of its net earnings to date during
such calendar year plus the amount that would reduce by one-half its capital
surplus ratio at the beginning of such calendar year. Any additional amount of
capital distributions would require prior regulatory approval.
Preferred Stock - The Company is authorized to issue 1,000,000 shares
of preferred stock, $.01 par value which remains unissued at March 31, 1997. In
the event any preferred shares are issued, the Board of Directors is authorized
to fix and state the voting powers, designations, preferences and rights of the
shares of each such series and the qualifications, limitations and restriction
thereof.
Recapitalization of SAIF - On September 30, 1996, the President signed
into law an omnibus appropriations act for fiscal year 1997 that included, among
other things, the recapitulation of the Savings Association Insurance Fund
(SAIF) in a section entitled "The Deposit Insurance Funds Act of 1996" (the
Act). The Act included a provision where all insured depository institutions
would be charged a one-time special assessment on their SAIF assessable deposits
as of March 31, 1995. The Company recorded a pre-tax charge of $1,766,185 during
the year ended March 31, 1997, which represented 65.7 basis points of the March
31, 1995, assessable deposits.
13. EMPLOYEE BENEFIT PLANS
Multi-employer Pension Plan - The Bank participates in a
noncontributory multi-employer pension plan covering all qualified employees.
The plan is administered by the trustees of the Financial Institutions'
Retirement Fund. There is no separate valuation of the plan benefits nor
segregation of plan assets specifically for the Bank because the plan is a
multi-employer plan and separate actuarial valuations are not made with respect
to each employer.
Pension expense amounted to $40,000, $142,028, and $208,483 for the
years ended March 31, 1997, 1996 and 1995, respectively.
Employee Stock Ownership Plan - The Company established an Employee
Stock Ownership Plan (ESOP) which purchased 7% or 166,635 shares of the stock
offered in the conversion. The funds used by the ESOP to purchase the stock
offered by a $1,666,350 loan from the Company which will be repaid by
contributions to the ESOP by the Company in the future. Pursuant to the ESOP,
the shares are to be allocated to participants annually, over an 8 year period.
The ESOP covers substantially all employees and shares are allocated based upon
employee compensation levels during the year. ESOP expense is based on the fair
value of shares earned, and totaled $479,046 and $503,579 during 1997 and 1996,
respectively. During fiscal years ended March 31, 1997, 1996 and 1995 24,864
shares, 25,890 shares and 26,867 shares were earned by participants. At March
31, 1997, 89,014 shares with a fair value of $1,847,000 were held in suspense by
the ESOP. These shares are not considered to be outstanding for the purpose of
computing earning per share.
- 38 -
<PAGE>
Recognition and Retention Plan - The Company also established a
Recognition and Retention Plan (RRP) as a method of providing executive officers
and employees with a proprietary interest in the Company in a manner designed to
encourage such individuals to remain with the Bank. At March 31, 1994, 3.48% or
82,952 shares were awarded to certain employees with such shares vesting at a
rate of 20% per year, with the first installment vesting March 31, 1995. The
cost of the RRP is being reflected as compensation expense as vesting occurs.
This amounted to $149,873 and $147,217 and $252,360 during the fiscal years
ended March 31, 1997, 1996 and 1995.
Stock Option and Incentive Plan - The Company has granted stock options
to existing stockholders, officers, directors and other affiliated individuals
to purchase shares of the Company's stock. At March 31, 1997, outstanding stock
options of 220,836 vest at a rate of 25% per year and are exercisible in the ten
years immediately following vesting. During the fiscal years ended March 31,
1997 and 1996, options to purchase an additional 4,761 and 16,000 shares were
awarded with the first vesting to occur September 1, 1997 and November 21, 1996,
respectively. Employee terminations resulted in options to purchase 2,976, 5,356
and 1,190 shares being cancelled during fiscal years ended March 31, 1997, 1996
and 1995 respectively.
The following is an analysis of stock option activity for each of the
three years in the period ending March 31, 1997 and the stock options
outstanding at the end of the respective years:
<TABLE>
<CAPTION>
Weighted
Average
Options Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding April 1, 1994 214,234 10.00
Granted 4,761 12.25
Forfeited or expired (1,190) 10.00
- -------------------------------------------------------------------------------------------------------------------
Outstanding March 31, 1995 217,805 10.05
Granted 16,000 16.44
Exercised (3,569) 10.00
Forfeited or expired (5,356) 10.00
- -------------------------------------------------------------------------------------------------------------------
Outstanding March 31, 1996 224,880 10.51
Granted 4,761 16.25
Exercised (5,829) 10.92
Forfeited or expired (2,976) 10.00
- -------------------------------------------------------------------------------------------------------------------
Outstanding March 31, 1997 220,836 10.63
</TABLE>
The number of shares exercisable at March 31, 1997, 1996, and 1995
were: 220,836, 224,880 and 217,805, respectively and had a weighted average
exercised price of $10.63, $10.51 and $10.05, respectively. The weighted average
remaining contractual life of the options outstanding at March 31, 1997 and 1996
was 8.1 years and 7.2 years, respectively.
APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations in accounting for the stock-based plans have been
applied by the Company. No compensation cost has been recognized for the stock
option and incentive plan because the stock option price is equal to the fair
value of the underlying common stock at the date of grant.
- 39 -
<PAGE>
The Company estimated the SFAS 123 fair value by utilizing the binomial
options pricing model based upon estimated values for the risk-free rate,
volatility rate and life ranges. The pro forma compensation effects of this
calculation were insignificant.
Deferred Compensation (401K) Plan - Effective January 1, 1995 the
Company adopted an Employee Deferred Compensation (401K) Plan administered
through the financial institution's retirement fund. Each employee may
contribute up to 6% of compensation. Employee contributions of up to 4% of
compensation are matched by the Company at a rate of $.25 per dollar of employee
contribution. The Company matching expense was $19,203, $19,386 and $6,249
during the fiscal year ended March 31, 1997, 1996 and 1995 respectively.
Directors Deferred Compensation Plan - The Bank has entered into
deferred compensation agreements with certain directors. Benefits under these
agreements are paid over a ten year period upon retirement. The present value of
the benefit to be paid is accrued over the active period of employment of
individual participants and is funded by life insurance policies.
14. COMMITMENTS
Lease commitments - The Company has future minimum rental commitments
for noncancelable operating leases as follows:
<TABLE>
<CAPTION>
Fiscal year ended March 31:
- --------------------------------------------------------------------------------
<S> <C>
1998 $73,516
1999 66,516
2000 66,516
2001 53,724
2002 3,724
</TABLE>
Rental expense for long-term leases for the years ended March 31, 1997,
1996 and 1995 was $70,265 $57,851 and $101,452, respectively.
Rental income from noncancelable subleases for the years ended March
31, 1997, 1996 and 1995 was $103,306, $93,883, and $66,807, respectively.
Financial Instruments with Off-Balance Sheet Risk - The Bank is a party
to financial instruments with off-balance-sheet risk of loss as part of its
normal business operations to meet the financing needs of its customers by
providing commitments to extend credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract amount of these instruments
reflects the extent of involvement the Company has in this class of financial
instruments.
Exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contract amount of those instruments. The Company uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments. Unless noted otherwise, the Company does not require collateral or
other security to support financial instruments with credit risk.
<PAGE>
Real estate loan commitments whose contract amounts represent credit
risk were approximately $1,930,000, $3,963,100 and $743,000 at March 31, 1997,
1996 and 1995, respectively.
- 40 -
<PAGE>
Commitments to extend credit are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Some commitments will expire without a loan
disbursement; thus, the total commitment does not necessarily represent future
cash requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the borrower.
<PAGE>
The collateral consists predominantly of residential family units,
commercial residential or non-residential real estate, and personal property.
Employment agreement - The Company has entered into employment
agreements with two executive officers. Under certain circumstances provided in
the agreement, the Company may be obligated to continue the officer's salary for
a period of three years.
15. PERMANENT BANCORP, INC. FINANCIAL INFORMATION
(PARENT COMPANY ONLY)
The following condensed statement of financial condition as of March
31, 1997 and 1996 and condensed statement of operations and cash flows for the
three years ended March 31, 1997 for Permanent Bancorp, Inc. should be read in
conjunction with the consolidated financial statements and notes thereto.
- 41 -
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 328,249 $ 1,705,271
Securities available for sale 2,979,375 4,995,635
Securities held to maturity
Loans 978,922
Loans receivable from ESOP 952,200 1,190,250
Fixed assets 467,441 474,600
Interest receivable 65,200 82,038
Other assets 4,687 4,687
Investment in subsidiary 35,027,299 33,330,909
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $40,803,373 $41,783,390
- ---------------------------------------------------------------------------------------------------------------------------
Deferred income taxes $ 63,867 $ 129,367
Accrued expenses 66,314 45,466
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 130,181 174,833
- ---------------------------------------------------------------------------------------------------------------------------
Common stock 24,590 24,602
Additional paid-in capital 24,042,843 23,849,500
Treasury stock (5,555,753) (3,361,279)
Retained earnings 23,393,601 22,727,602
Unrealized gain on securities available for sale (11,926) 16,555
ESOP borrowing (952,200) (1,190,250)
Unearned compensation - restricted stock awards (267,963) (458,173)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity - net $40,673,192 $41,608,557
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $40,803,373 $41,783,390
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
March 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME
INCOME:
Interest income from securities held to maturity and available for sale $ 293,929 $ 438,368 $ 490,392
Interest on loans 66,991 81,681 114,232
Other income 81,094 77,771 --
- ---------------------------------------------------------------------------------------------------------------------------
Total income $ 442,014 $ 597,820 $ 604,624
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Salaries and benefits $ 223,192 $ 200,118 $ 277,295
Legal and professional fees 67,433 94,590 69,069
Other expenses 79,418 80,436 107,440
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 370,043 375,144 453,804
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE EQUITY IN UNDISTRIBUTED EARNINGS $71,971 $ 222,676 $ 150,820
- ---------------------------------------------------------------------------------------------------------------------------
INCOME TAX PROVISION 21,296 67,170 59,740
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 1,252,869 1,093,799 1,152,686
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $1,303,544 $1,249,305 $1,243,766
===========================================================================================================================
</TABLE>
- 42 -
<PAGE>
<TABLE>
<CAPTION>
MARCH 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,303,544 $ 1,249,305 $ 1,243,766
Equity in undistributed earnings of subsidiary (1,252,869) (1,093,799) (1,152,686)
Adjustments to reconcile net income to net cash provided
by operating activities
Vesting of restricted stock awards 178,070 135,740 252,360
Amortization and accretion 28,238 (38,296) (110,266)
(Gain) Loss on sale of investments (5,790) (1,015) 2,709
Changes in assets and liabilities:
Interest receivable 16,838 34,054 (116,092)
Deferred income tax (46,817) (59,786) 178,293
Other assets (4,688)
Other liabilities 20,848 40,575 (96,257)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 242,062 266,778 197,139
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Maturities of:
Securities held to maturity 600,000
Securities available for sale 2,974,688 2,000,000
Commercial paper 5,500,000
Principal repayments on loans 238,050 238,050 1,338,050
Sale of:
Securities held to maturity 2,979,063 1,492,968
Securities AFS 2,934,384
Purchase of:
Loans (6,438,563) (1,081,721)
Securities held to maturity (3,995,625) (1,000,000) (10,908,082)
Purchase land and improvements (478,180)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investment activities 1,212,934 4,817,113 (9,636,965)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (608,737) (347,996)
Purchase of stock treasury (2,286,926) (3,465,463)
Sale of common stock 63,645 35,689
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (2,832,018) (3,777,770)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,377,022 1,306,121 (9,439,826)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,705,271 399,150 9,838,976
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 328,249 $1,705,271 $ 399,150
===========================================================================================================================
</TABLE>
- 43 -
<PAGE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value
of Financial Instruments":
<TABLE>
<CAPTION>
March 31, 1997 March 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash $ 3,211,091 $ 3,211,091 $ 4,900,671 $ 4,900,671
Interest-bearing deposits 3,153,385 3,153,385 15,750 15,750
Securities available for sale 85,180,313 85,180,313 73,170,635 73,170,635
Mortgage-backed securities available for sale 74,052,253 74,052,253 61,953,242 61,953,242
Securities held to maturity 25,000 25,000 25,000 25,000
Mortgage-backed securities held to maturity 27,180,891 27,197,070 32,153,595 32,319,409
Loans, net 210,219,994 206,062,560 206,909,621 206,016,286
Interest receivable 3,539,085 3,539,085 2,874,362 2,874,362
Federal Home Loan Bank stock 5,192,600 5,192,600 3,503,600 3,503,600
Cash surrender value of life insurance 1,552,875 1,552,875 953,199 953,199
Liabilities:
Deposits 280,753,353 275,017,173 280,008,062 284,071,916
Federal Home Loan Bank advances 98,483,986 98,084,186 68,303,217 68,074,701
Advance payments by borrowers
for taxes and insurance 1,014,598 1,014,598 1,022,263 1,022,263
Other borrowed funds 1,793,967 1,793,967 2,681,753 2,681,753
Interest Payable 2,049,727 2,049,727 1,922,635 1,922,625
</TABLE>
The estimated fair value amounts are determined by the Company, using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Cash, interest-bearing deposits, interest receivable and payable, cash
surrender value of life insurance advance payments by borrowers for taxes and
insurance and other borrowed funds - The carrying amounts of these items are a
reasonable estimate of their fair value.
Investment securities and mortgage-backed securities - Fair values are
based on prices obtained from independent pricing services.
Loans - The fair value of mortgage loans is estimated using published
loan buy rates for similar loans and quoted market prices for mortgage-backed
securities backed by loans with similar characteristics. The fair value of
non-mortgage loans is estimated by discounting the future cash flows using the
current rates for loans of similar credit risk and maturities.
Federal Home Loan Bank stock - The fair value is estimated to be the
carrying value which is par. All transactions in the capital stock of the
Federal Home Loan Bank of Indianapolis are executed at par.
- 44 -
<PAGE>
Deposits - The fair value of demand deposits, savings accounts and
money market deposit accounts is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated by
discounting future cash flows using rates offered on the reporting date for
deposits of similar remaining maturities.
Federal Home Loan Bank advances - The fair value is estimated by
discounting future cash flows using rates currently available to the bank for
advances of similar maturities.
Commitments - The commitments to originate and purchase loans have
terms that are consistent with current market conditions. Accordingly, the Bank
estimated that the face amounts of these commitments approximates carrying
value.
The fair value estimates presented herein are based on information
available to management as of March 31, 1997 and 1996. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these consolidated financial statements since that date, and therefore,
current estimates of fair value may differ significantly from the amount
presented herein.
- 45 -
<PAGE>
BOARD OF DIRECTORS AND
EXECUTIVE OFFICERS
PERMANENT BANCORP INC.
BOARD OF DIRECTORS
Donald P. Weinzapfel John W. Forster
James W. Vogel James A. McCarty, Jr.
Jack H. Kinkel Daniel F. Korb
Robert L. Northerner John R. Stone
James D. Butterfield Murray J. Brown
EXECUTIVE OFFICERS
Donald P. Weinzapfel
Chairman of the Board, President and
Chief Executive Officer
Murray J. Brown
Executive Vice President and
Chief Operating Officer
Carl E. Root
Vice President and Secretary
Joseph M. Schnapf
Chief Financial Officer
PERMANENT FEDERAL SAVINGS BANK
BOARD OF DIRECTORS
Donald P. Weinzapfel John W. Forster
James W. Vogel James A. McCarty, Jr.
Jack H. Kinkel Daniel F. Korb
Robert L. Northerner John R. Stone
James D. Butterfield Murray J. Brown
Louis H. Boink, Jr. (Director Emeritus)
Carl F. Bernhardt (Director Emeritus)
Kenneth F. Allen (Director Emeritus)
JASPER ADVISORY BOARD
Stephen A. Habig Roger W. Brown
G. Earl Metzger
WHOLLY OWNED SUBSIDIARY
PERMA SERVICE CORP.
PERMANENT INSURANCE AGENCY, INC.
Perma Service Corp. provides brokerage services, on an agency basis, through
INVEST(R), Donald R. Woehler, Manager
<PAGE>
CORPORATE STAFF
Donald P. Weinzapfel
Chairman of the Board, President
& Managing Officer
Murray J. Brown
Executive Vice President &
Chief Operating Officer
Carl E. Root
Sr. Vice President & Secretary
George E. Orr
Senior Vice President
Seth P. Allen
Senior Vice President
Kevin M. Moore
Vice President
Dean E. Smith
Vice President
Richard A. Condi
Vice President
Joseph M. Schnapf
Vice President & Treasurer
Barbara O. Bolin
Vice President & Auditor
Linda K. Hoover
Vice President
Glenna J. Kirsch
Vice President
ASSISTANT VICE PRESIDENTS
Karen S. Miller
Michael B. Stuckey
Gregory E. Matheis
Daniel T. Denton
ASSISTANT SECRETARIES
Phillip D. Effinger
Robert D. Stone
Timothy F. Robinson
Robert A. Baumgart
- 46 -
<PAGE>
CORPORATE INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held Tuesday, July 22, 1997 at 4:00
p.m. Central Daylight Time at the Company's Main office, 101 S.E. Third Street,
Evansville, Indiana
CORPORATE OFFICE
Permanent Bancorp, Inc.
101 S.E. Third Street
Evansville, IN 47708
BRANCH OFFICES
University Heights
4615 University Drive
Evansville, Indiana
Town Center
201 Diamond Avenue
Evansville, Indiana
Green River Road
123 South Green River Road
Evansville, Indiana
North Brook
3820 First Avenue
Evansville, Indiana
West Franklin Street
2131 West Franklin Street
Evansville, Indiana
Ross Center
2521 Washington Avenue
Evansville, Indiana
Fort Branch
810 East Locust Street
Fort Branch, Indiana
Jasper
771 West Second Street
Jasper, Indiana
Newburgh
4855 Highway 261 North
Newburgh, Indiana
Oakland City
410 West Morton Street
Oakland City, Indiana
<PAGE>
FORM 10-K
The Company's Annual Report on Form 10-K, as required to be filed with the
Securities and Exchange Commission, is available, without charge, upon written
request to:
Carl E. Root
Secretary
Permanent Bancorp, Inc.
101 S.E. Third Street
Evansville, IN 47708
STOCK INFORMATION
The Company's stock is traded over-the-counter on the NASDAQ National Market
System under the symbol PERM. At March 31, 1997, the Company's stock was held by
approximately 1,246 holders of record. The stock transfer agent is:
REGISTRAR AND TRANSFER COMPANY
10 Commerce Drive
Cranford, New Jersey 07016
The Company's stock began trading on April 4, 1994.
STOCK TRADING DATA
Volume
High Low (000's)
- --------------------------------------------------------------------------------
June 30, 1996 $16 1/4 $14 1/4 187.0
September 30, 1996 17 1/8 15 3/4 160.3
December 31, 1996 21 16 1/2 288.8
March 31, 1997 22 3/4 20 1/4 205.9
June 30, 1995 $16 1/2 $14 3/4 554.9
September 30, 1995 19 14 1/2 494.9
December 31, 1995 17 1/4 16 255.8
March 31, 1996 16 3/4 14 399.4
- 47 -
<PAGE>
REGISTERED MARKET MAKERS
The following firms make a market in Permanent Bancorp Inc.'s stock:
Capital Resources, Inc.
The Chicago Corporation
Herzog, Heine, Geduld, Inc.
J.J.B. Hilliard, W.L. Lyons
NatCity Investments, Inc.
Sandler, O'Neill & Partners
Friedman Billings Ramsey &Co.
GENERAL BANK COUNSEL
Bowers, Harrison, Kent and Miller
25 Northwest Riverside Dr.
Evansville, IN 47708
SPECIAL COUNSEL
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Suite 3000
Market Tower
10 West Market Street
Indianapolis, IN46204-2985
- 48 -
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
Percentage State of
of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <C> <C>
Permanent Bancorp, Inc. Permanent Federal 100% United States
Savings Bank
Permanent Federal Perma Service Corp. 100% Indiana
Savings Bank
Perma Service Corp. Permanent Family 100% Indiana
Insurance, Inc.
</TABLE>
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration No. 33-86438) of Permanent Bancorp, Inc.
(the "Company") of our report dated May 14, 1997 appearing in this Annual Report
on Form 10-K of the Company for the year ended March 31, 1997.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
June 30, 1997
Indianapolis, Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,211,091
<INT-BEARING-DEPOSITS> 3,153,385
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 159,232,566
<INVESTMENTS-CARRYING> 27,205,891
<INVESTMENTS-MARKET> 27,222,070
<LOANS> 212,315,647
<ALLOWANCE> 2,126,225
<TOTAL-ASSETS> 423,698,331
<DEPOSITS> 280,753,353
<SHORT-TERM> 76,493,967
<LIABILITIES-OTHER> 3,572,398
<LONG-TERM> 23,792,546
0
0
<COMMON> 24,590
<OTHER-SE> 39,070,037
<TOTAL-LIABILITIES-AND-EQUITY> 423,698,331
<INTEREST-LOAN> 16,796,387
<INTEREST-INVEST> 12,403,059
<INTEREST-OTHER> 489,179
<INTEREST-TOTAL> 29,688,625
<INTEREST-DEPOSIT> 13,332,587
<INTEREST-EXPENSE> 18,723,996
<INTEREST-INCOME-NET> 10,964,629
<LOAN-LOSSES> 113,256
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