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, 1998
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. [ ]
<PAGE>
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 19, 1998, was $52,609,115. (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 19, 1998, there were issued and outstanding 4,118,948 shares
of the Registrant's Common Stock.
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, 1998.
Part III of Form 10-K - Portions of the Proxy Statement for 1998 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, 1998, the Company had total assets of $439.1 million, deposits of
$282.9 million, and total stockholders' equity of $42.7 million (9.72% 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, 1998, 68.7% of the Bank's loan
portfolio was fixed-rate and 31.3% 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 31.3% at March 31, 1998 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, 1998, attached hereto as Exhibit 13 (the "Annual Report").
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
2
<PAGE>
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, 1998, the Bank's total loan portfolio, including commercial paper,
totaled $227.9 million, of which $158.8 million, or 69.7%, were one- to
four-family mortgage loans. At the same date, consumer loans (including indirect
and direct automobile loans) totaled $43.8 million, or 19.2%, multi-family and
commercial real estate loans totaled $8.9 million, or 3.9%, construction loans
totaled $3.4 million, or 1.5%, and there was $9.1 million of commercial paper,
representing 4.0% of the loan portfolio. Other business loans totaled $3.9
million or 1.7% of the loan portfolio.
The Bank also invests in mortgage-backed securities. At March 31, 1998,
mortgage-backed securities, net, totaled $81.5 million, or 18.6% 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 $500,000 and commercial business loans
in excess of $500,000 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, 1998, the maximum amount which the Bank
could have lent to any one borrower and the borrower's related entities was
approximately $5.7 million. At March 31, 1998, 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.
3
<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,
-------------------------------------------------------------------------
1994 1995 1996
Amount Percent Amount Percent Amount Percent
------- ------ -------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family........................... $127,958 66.62% $133,864 67.62% $144,155 68.85%
Multi-family.................................. 17,775 9.25 15,712 7.94 11,823 5.65
Commercial real estate........................ 6,733 3.50 5,052 2.55 4,787 2.29
Construction or development................... 1,814 0.94 2,406 1.22 2,700 1.29
------- ------ -------- ------ -------- ------
Total real estate loans................... 154,280 80.31 157,034 79.33 $163,465 78.08
------- ------ -------- ------ -------- ------
Other Loans:
Consumer Loans:
Deposit account.............................. 850 0.45 1,011 0.51 1,148 0.55
Automobile................................... 26,086 13.58 28,005 14.14 31,056 14.83
Home improvement............................. 945 0.49 1,201 0.61 1,088 0.52
Retail mobile home loans..................... 2,410 1.25 1,984 1.00 1,595 0.76
Home equity and other........................ 7,361 3.83 8,137 4.11 8,666 4.14
-------- ------ -------- ------ -------- ------
Total consumer loans...................... 37,652 19.60 40,338 20.37 43,553 20.80
Commercial business loans..................... 174 0.09 96 0.05 57 0.03
Bankers' acceptances.......................... --- --- 489 0.25 299 0.14
Commercial paper.............................. --- --- --- --- 1,997 0.95
-------- ------ -------- ------ -------- -----
Total other loans......................... 37,826 19.69 40,923 20.67 45,906 21.92
-------- ------ -------- ------ -------- -----
Total loans............................... $192,106 100.00% $197,957 100.00% $209,371 100.00%
======== ====== ======== ====== ======== ======
Less:
Loans in process.............................. 107 62 67
Deferred fees and discounts................... 649 319 156
Allowance for losses.......................... 2,110 2,093 2,238
-------- -------- ------
Total loans and loans held for sale, net...... $189,240 $195,483 $206,910
======== ======== ========
Mortgage-Backed Securities:
FNMA.......................................... $ 13,500 17.83% $ 16,684 21.61% $ 21,286 22.62%
GNMA.......................................... 38,791 51.23 35,692 46.24 31,949 33.96
FHLMC......................................... 23,428 30.94 24,812 32.14 40,852 43.42
-------- ------ -------- ------ ------ -----
Total mortgage-backed
securities............................... 75,719 100.00% 77,188 100.00% 94,087 100.00%
====== ====== ======
Net premiums and discounts..................... 308 55 20
-------- -------- -------
Net mortgage-backed securities................. $ 76,027 $ 77,243 $94,107
======== ======== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At March 31
--------------------------------------------------
1997 1998
Amount Percent Amount Percent
-------- ------ -------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family........................... $152,655 71.82% $158,750 69.67%
Multi-family.................................. 8,041 3.78 4,092 1.80
Commercial real estate........................ 4,034 1.90 4,795 2.10
Construction or development................... 1,888 .89 3,435 1.51
-------- ------ -------- ------
Total real estate loans................... $166,618 78.39 $171,072 75.08
-------- ------ -------- ------
Other Loans:
Consumer Loans:
Deposit account.............................. 940 .44 892 0.39
Automobile................................... 31,394 14.77 31,436 13.80
Home improvement............................. 1,084 .51 839 0.37
Retail mobile home loans..................... 1,240 .58 935 0.41
Home equity and other........................ 10,269 4.83 9,718 4.26
-------- ------ -------- ------
Total consumer loans...................... 44,927 21.13 43,820 19.23
Commercial business loans..................... 52 .02 3,861 1.69
Bankers' acceptances.......................... --- --- --- ---
Commercial paper.............................. 979 .46 9,116 4.00
-------- ------ ------ -----
Total other loans......................... 45,958 21.61 56,797 24.92
-------- ------ ------ -----
Total loans............................... $212,576 100.00% $227,869 100.00%
======== ====== -------- ======
Less:
Loans in process.............................. (24) 149
Deferred fees and discounts................... 284 398
Allowance for losses.......................... 2,126 1,973
-------- -------
Total loans and loans held for sale, net...... $210,190 $225,349
======== ========
Mortgage-Backed Securities:
FNMA.......................................... $ 31,793 31.55% $25,730 31.76%
GNMA.......................................... 27,160 26.95 27,116 33.47
FHLMC......................................... 41,832 41.50 28,163 34.77
-------- ------ ------ -------
Total mortgage-backed
securities............................... 100,785 100.00% 81,009 100.00%
====== ======
Net premiums and discounts..................... 448 505
-------- ---------
Net mortgage-backed securities................. $101,233 $81,514
======== =======
</TABLE>
4
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio by fixed and adjustable rates at the dates indicated.
<TABLE>
<CAPTION>
1994 1995 1996
------------------ ------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family....................... $ 91,744 47.75% $ 96,379 48.67% $ 99,568 47.56%
Multi-family.............................. 8,792 4.58 7,029 3.55 3,271 1.56
Commercial real estate.................... 4,791 2.49 3,803 1.92 3,634 1.74
Construction or development............... 1,800 0.94 2,392 1.21 2,686 1.28
-------- ----- -------- ----- -------- -----
Total real estate loans................ 107,127 55.76 109,603 55.35 109,159 52.14
Consumer.................................. 35,246 18.35 38,343 19.37 43,405 20.73
Commercial business....................... 93 .05 74 0.04 57 0.03
Term federal funds........................ --- --- --- --- --- ---
Bankers' acceptances...................... --- --- 489 0.25 299 0.14
Commercial paper.......................... --- --- --- --- 1,997 0.95
-------- ----- -------- ----- -------- -----
Total fixed-rate loans................. 142,466 74.16 148,509 75.01 154,917 73.99
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... 36,214 18.85 37,485 18.94 44,588 21.30
Multi-family.............................. 8,983 4.68 8,683 4.39 8,552 4.08
Commercial real estate.................... 1,942 1.01 1,249 0.63 1,153 0.55
Construction or development............... 14 0.01 14 0.01 13 0.01
-------- ----- -------- ----- -------- -----
Total real estate loans................ 47,153 24.55 43,431 23.97 54,306 25.94
Consumer................................... 2,406 1.25 1,995 1.01 148 0.07
Commercial business........................ 81 .04 22 0.01 --- ---
-------- ----- -------- ----- -------- -----
Total adjustable-rate
loans................................. 49,640 25.84 49,448 24.99 54,454 26.01
-------- ----- -------- ----- -------- -----
Total loans............................ 192,106 100.00% 197,957 100.00% 209,371 100.00%
Less:
Loans in process........................... 107 62 67
Deferred fees and discounts................ 649 319 156
Allowance for loan losses.................. 2,110 2,093 2,238
-------- -------- --------
Total loans and loans held for sale, net $189,240 $195,483 $206,910
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 1998
------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family....................... $ 94,842 44.45% $ 95,432 41.88%
Multi-family.............................. 2,687 1.26 2,346 1.03
Commercial real estate.................... 3,357 1.58 3,386 1.49
Construction or development............... 1,855 .87 3,423 1.50
-------- ----- -------- -----
Total real estate loans................ 102,741 48.16 104,587 45.90
Consumer.................................. 44,450 20.91 42,324 18.57
Commercial business....................... 52 .02 581 0.25
Term federal funds........................ --- --- --- ---
Bankers' acceptances...................... --- --- --- ---
Commercial paper.......................... 979 .46 9,116 4.00
-------- ----- -------- -----
Total fixed-rate loans................. 148,222 69.55 156,608 68.72
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... 57,813 27.36 63,318 27.79
Multi-family.............................. 5,354 2.52 1,746 0.77
Commercial real estate.................... 677 .32 1,409 0.62
Construction or development............... 33 .02 12 0.00
-------- ----- -------- -----
Total real estate loans................ 63,877 30.22 66,485 29.18
Consumer................................... 477 .23 1,496 0.66
Commercial business........................ --- --- 3,280 1.44
-------- ----- -------- -----
Total adjustable-rate
loans................................. 64,354 30.45 71,261 31.28
-------- ----- -------- -----
Total loans............................ 212,576 100.00% 227,869 100.00%
Less:
Loans in process........................... (24) 149
Deferred fees and discounts................ 284 398
Allowance for loan losses.................. 2,126 1,973
-------- --------
Total loans and loans held for sale, net $210,190 $225,349
======== ========
</TABLE>
5
<PAGE>
The following table sets forth the maturities of the Bank's loan
portfolio (excluding commercial paper) at March 31, 1998. 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>
1999(1) $20,333 8.16% $ 252 10.49% $3,401 8.69% $ 4,094 9.47%
2000 to 2003 9,225 7.57 2,352 9.22 22 8.45 34,463 8.87
2004 to 2008 61,085 7.62 1,595 9.10 12 8.13 4,194 10.26
2009 to 2018 66,029 7.37 4,688 8.04 --- --- 1,058 11.23
2018 and following 2,078 7.62 --- --- --- --- 11 9.50
-------- ------ ------ -------
Total $158,750 $8,887 $3,435 $43,820
======== ====== ====== =======
<CAPTION>
Commercial
Business Total
------------------ ------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
Due During Years
Ending March 31,
<C> <C> <C> <C> <C>
1999(1) $ 405 9.62% $ 28,485 8.46%
2000 to 2003 3,412 8.62 49,474 8.62
2004 to 2008 44 11.25 66,930 7.82
2009 to 2018 --- --- 71,775 7.47
2018 and following --- --- 2,089 7.63
------ --------
Total $3,861 $218,753
====== ========
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
6
<PAGE>
At March 31, 1998, the total amount of loans due after March 31, 1998
which had fixed interest rates was $156.6 million, while the total amount of
loans due after such date which had floating or adjustable interest rates was
$71.3 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, 1998, the Bank had $158.8 million, or 69.7% 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 or ten-year adjustable rate loans recently. 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. 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 100% 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
7
<PAGE>
assurance that yields on ARM loans will be sufficient to offset increases in the
Bank's cost of funds.
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 one year adjustable-rate loans are currently qualified at an
8% rate or the fully-indexed rate after one year, whichever is higher. Borrowers
on other adjustable-rate loans are qualified at the note rate.
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. Mortgage-backed securities decreased $19.7 million in 1998. 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. 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, 1998, the Bank's
consumer loan portfolio totaled $43.8 million, or 19.2% of its loan portfolio.
The chief component of such loans consists of indirect and direct automobile
paper, accounting for $31.4 million, or 71.7%, of the consumer loan portfolio at
March 31, 1998. 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.
8
<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,
1998, indirect dealer loans totaled $22.4 million, or 51.1%, of the Bank's
consumer loan portfolio.
At March 31, 1998, $10.1 million of the Bank's consumer loans consisted
of home equity loans, including home equity lines of credit. 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, 1998 was $935,000, or 0.4% 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, 1998, $18,300, or 2.0%, 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, 1998, the Bank had multi-family and commercial real
estate loans totaling $8.9 million, representing 3.9% of its loan portfolio.
9
<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 and shopping centers. 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,
1998.
<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.............................. 12 $4,172 $ ---
Church........................................... 1 250 ---
Small business facilities and office
buildings...................................... 21 3,948 ---
Shopping centers................................. 1 517 ---
--- ------- -------
Total commercial and multi-family
real estate loans............................. 35 $ 8,887 $ ---
=== ======= =======
</TABLE>
At March 31, 1998, the Bank had a total of two multi-family and
commercial real estate loans with outstanding principal balances in excess of
$1.0 million. Each of these loans was performing in accordance with its terms at
March 31, 1998.
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.
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.
10
<PAGE>
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. At March 31, 1997, the Bank had 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 general partner of these partnerships was Cardinal Industries, Inc.
("Cardinal") of Columbus, Ohio, which filed for bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code in 1989. 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 were considered
"non-performing" assets, including one which was classified as a "troubled debt
restructuring" at March 31, 1997. The Bank was repaid in full on these loans
during 1998.
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, 1998, the Bank's construction loan portfolio
totaled $3.4 million (including a $262,000 loan on a low-income housing
project), or 1.5% 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 loan 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.
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, 1998.
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,
11
<PAGE>
corporate, business and agricultural purposes and to engage in commercial
leasing activities, up to a maximum of 10% of total assets.
At March 31, 1998, Permanent Federal had $3.9 million in commercial
business loans outstanding (representing 1.7% of the Bank's total loan
portfolio). At March 31, 1998, Permanent Federal had $53,000 of standby 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 1998, the Bank originated a total of $76.2 million in
loans, of which total $49.5 million were fixed-rate and $26.7 million were
adjustable-rate. Of the fixed-rate loans originated during the year, $22.7
million were one- to four-family real estate loans, $21.6 million were consumer
loans, $0.6 million were commercial loans, and $2.2 million were construction
loans. Of the adjustable-rate loans originated during the year, $16.7 million
were one- to four-family real estate loans, $0.8 million were commercial real
estate loans, $3.1 million were consumer loans, and $1.5 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 1996, 1997 and
1998, the Bank sold $3.3 million, $1.0 million and $5.1 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). In addition, 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.
12
<PAGE>
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 $8.5 million, $7.1 million, and $5.5 million at
March 31, 1996, 1997 and 1998, respectively.
During the past three fiscal years, the Bank has purchased
mortgage-backed securities in order to supplement loan demand. In fiscal 1996,
the Bank purchased $30.2 million of mortgage-backed securities and purchased
$34.5 million and $18.5 million of such securities in fiscal 1997 and 1998,
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 $4.0 million, $1.6 million and $4.9 million (excluding undisbursed
portions of loans in process) at March 31, 1996, 1997 and 1998, respectively. In
addition, the Bank had approximately $0, $104,000 and $100,000 in commitments to
sell loans at March 31, 1996, 1997 and 1998, respectively.
The amount of loans serviced by the Bank for others totaled $37.9
million, $34.3 million and $32.5 million at March 31, 1996, 1997 and 1998,
respectively.
The Bank generally earns servicing fees of 25 basis points for
servicing loans for others. For the years ended March 31, 1996, 1997 and 1998
such fees amounted to approximately $104,000, $101,000, and $84,000
respectively.
13
<PAGE>
The following table sets forth the loan origination, purchase and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -----
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family....................... $12,373 $20,717 $16,659
- multi-family.............................. --- --- ---
- commercial real estate.................... --- --- 798
- construction.............................. 2,147 3,865 1,466
Non-real estate - consumer.............................. --- 875 3,190
-commercial business.................... 419 --- 4,574
----- ------- -------
Total adjustable-rate............................ 14,939 25,457 26,687
Fixed rate:
Real estate - one- to four-family....................... $23,698 $11,303 $22,714
- multi-family.............................. 315 --- ---
- commercial real estate.................... --- --- 2,346
- construction.............................. 341 2,205 2,168
Non-real estate - consumer ............................. 25,312 23,772 21,639
-commercial business.................... 19 16 618
------- ------- -----------
Total fixed-rate................................. 49,685 37,296 49,485
Total loans originated........................... 64,624 62,753 76,172
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 17,257
- bankers' acceptances...................... 3,286 --- ---
------- --------------------
Total loans purchased............................ 5,260 17,741 17,257
Mortgage-backed securities-fixed rate.................... 22,278 6,914 4,960
- adjustable-rate........................... 7,898 27,577 13,525
------- ------- ---------
Total purchases.................................. 35,436 52,232 35,742
------- ------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Sales and Principal Repayments:
Sales:
Real estate - adjustable-rate one- to four-family......... $ --- $ --- $ ---
- fixed-rate one- to four-family....................... 3,250 962 5,078
- multi-family.............................. --- --- ---
- commercial real estate.................... --- --- ---
- construction.............................. --- --- ---
Non-real estate - consumer.............................. --- --- ---
- commercial business............................. --- --- ---
------- ------- ------
Total loans sold................................. 3,250 962 5,078
Mortgage-backed securities.............................. 743 11,143 15,083
------- ------- ---------
Total sales...................................... 3,993 12,105 20,161
Principal repayments...................................... 67,613 91,807 97,399
------- ------- ---------
Total reductions................................. 71,606 103,912 117,560
Increase (decrease) in other items, net................... --- --- ---
------- ------- -------
Net increase (decrease).......................... $28,454 $11,073 $ (5,646)
======= ======= =========
</TABLE>
14
<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 $250,000). 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. 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.
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.
15
<PAGE>
"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.
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, 1998,
(without deduction for specific valuation allowances of $50,000) all of which
are included in the table of non-performing assets.
At March 31,
-----------------------------
1996 1997 1998
(In Thousands)
Substandard (including real
estate owned)................................... $ 4,928 $2,965 $1,372
Doubtful 91 87 141
Loss -- -- --
------ ------ ------
Total classified assets
(including real estate
owned)..................................... $ 5,019 $3,052 $1,513
======= ====== ======
Special mention.................................. $ 6,088 $4,587 $2,753
------- ------ ------
Total classified assets
(including real estate
owned) and special
mention.................................... $11,107 $7,639 $4,266
======= ====== ======
The specific reserves established with respect to classified assets are
included in the allowance for loan losses.
16
<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,
----------------------------------------------------------------------------------------------------
1994 1995 1996 1997
------ ------ ------ ------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in Each in Each in Each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family...................... $ 1 67.0% $ 1 68.2% $ 90 69.4% $ 90 71.7%
Multi-family................. 493 9.4 210 7.9 166 5.5 183 3.8
Commercial real
estate...................... --- 3.4 --- 2.9 --- 2.4 --- 1.9
Construction or
development................. --- 0.9 --- 1.2 --- 1.3 --- 1.0
Consumer..................... 4 19.2 18 19.7 50 20.3 68 21.1
Commercial business.......... 162 0.1 107 0.1 --- --- --- ---
Bankers' acceptances......... --- --- --- --- --- 0.1 --- ---
Commercial paper............. --- --- --- --- --- 1.0 --- .5
Unallocated
Consumer................... 362 N/A 382 N/A 456 N/A 454 N/A
One- to four-family........ 929 N/A 630 N/A 647 N/A 876 N/A
Multi-family and
commercial
real estate.............. 146 N/A 734 N/A 829 N/A 455 N/A
Construction or
development.............. 13 N/A 11 N/A --- N/A --- N/A
------ ----- ------ ----- -------- ----- ------ -----
Total................... $2,110 100.0% $2,093 100.0% $2,238 100.0% $2,126 100.00%
====== ===== ====== ===== ====== ===== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At March 31,
-----------------------
1998
-----
Percent
of Loans
in Each
Category
to Total
Amount Loans
------ -----
<S> <C> <C>
One- to four-
family...................... $ --- 69.7%
Multi-family................. --- 1.8
Commercial real
estate...................... --- 2.1
Construction or
development................. --- 1.5
Consumer..................... 50 19.2
Commercial business.......... --- 1.7
Bankers' acceptances......... --- ----
Commercial paper............. --- 4.0
Unallocated
Consumer................... 520 N/A
One- to four-family........ 435 N/A
Multi-family and
commercial
real estate.............. 968 N/A
Construction or
development.............. --- N/A
------ -----
Total................... $1,973 100.00%
====== ======
</TABLE>
17
<PAGE>
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."
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
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. At March 31, 1998, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 65.6%. 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, 1998, Permanent Federal's securities totaled
$105.6 million, or 24.1% of total assets. As of such date, the Bank also had a
$5.5 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, 1998, the average
term to maturity or repricing of the securities portfolio was 6.9 years.
OTS and accounting 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 estimated fair value. At March 31, 1998, the Company had $105.6
million in securities "available for sale" and no securities identified as
"trading." The securities available for sale at March 31, 1998
18
<PAGE>
had net unrealized gains of $89,000. 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 unrealized
losses of $1,840,000.
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,
---------------------------------------------------------------------------------
1996 1997 1998
---------------------- ----------------------- ----------------------
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 $ 17,029 22.2% $ 7,009 7.8% $ 4,033 3.6%
Federal agency obligations 54,648 71.20 78,171 86.5 100,972 90.9
Municipal bonds and other 1,519 2.00 25 -- 614 0.6
-------- ------ -------- ------ -------- ------
Subtotal 73,196 95.40 85,205 94.3 105,619 95.1
FHLB stock 3,504 4.60 5,193 5.7 5,466 4.9
-------- ------ -------- ------ -------- ------
Total securities and FHLB
stock $ 76,700 100.00% $ 90,398 100.00% $111,085 100.00%
======== ====== ======== ======
Average remaining life of
securities, excluding FHLB stock 5.7 years 7.0 years 7.0 years
Other interest-earning assets:
Interest-bearing deposits
with banks $ 16 100.00% $ 3,154 100.00% $ 1,808 100.00%
======== ====== ======== ====== ======== ======
Average remaining life or
term to repricing of
securities and other interest-
earning assets, excluding FHLB
stock 5.7 years 6.7 years 6.9 years
</TABLE>
<PAGE>
The following table sets forth as of March 31, 1998 the composition and
maturities of the securities portfolio, excluding FHLB stock.
<TABLE>
<CAPTION>
At March 31, 1998
------------------------------------------------------------------------
Less Than 1 to 5 Over 5 Total Investment
1 Year Years Years Securities
----------- ---------- ---------- ---------------------------
Fair Value Fair Value Fair Value Fair Value Amortized Cost
---------- ---------- ---------- ---------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
U.S. government securities.......... $ --- $ 4,033 $ --- $ 4,033 $ 3,995
Federal agency obligations......... --- 23,863 77,109 100,972 101,029
State and local government
obligations and other............ 614 --- --- 614 506
---------- -------- -------- -------- --------
Total investment securities......... $ 614 $ 27,896 $ 77,109 $105,619 $105,530
========== ======== ======== ======== ========
Weighted average yield.............. 2.02 6.57 6.78 6.70 6.70
</TABLE>
At March 31, 1998 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
19
<PAGE>
specified limits. At March 31, 1998, all of the Bank's securities are classified
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, 1998, the Bank's mortgage-backed securities totaled $81.5
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, 1998, the Bank's portfolio consisted of $18.9 million in
mortgage-backed securities held to maturity and $62.6 million available for
sale. At such date, the portfolio had a weighted average interest rate of 6.52%.
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,
1998.
<TABLE>
<CAPTION>
At
March 31
1998
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 $2,107 $368 $3,035 $328 $22,496 $28,334
Federal National
Mortgage Association --- --- --- 1,501 24,427 25,928
Government National
Mortgage Association --- --- --- --- 27,252 27,252
------ ---- ------ ---- ------- -------
Total $2,107 $368 $3,035 $1,829 $74,175 $81,514
====== ==== ====== ====== ======= =======
</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.
20
<PAGE>
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
(including mortgage-backed securities) and to support lending activities. At
March 31, 1998, the Bank's borrowings consisted of FHLB advances totaling $99.4
million. See "- Borrowings" and Note 7 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.
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 years 1996, 1997
and 1998, the Bank experienced a net inflow. 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.
21
<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,
-------------------------------------------------------------------------------
1996 1997 1998
--------------------- --------------------- -----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Commercial Demand $ 994 .35% $ 902 0.32% $ 1,755 0.62%
Passbook Accounts (2.75-5.59%) 54,796 19.45 54,245 19.20 52,051 18.27
NOW Accounts (2.00-2.60%) 25,371 9.00 24,046 8.51 22,468 7.89
Money Market Accounts (2.75-3.00%) 11,199 3.97 11,542 4.08 11,542 4.05
------- --- ------- ---- ------- ----
Total Non-Certificates 92,360 32.77 90,736 32.11 87,816 30.83
------- --- ------- ---- ------- ----
Certificates:
0.00 - 3.49% 389 .14 158 0.06 66 0.02
3.50 - 5.49% 85,124 30.21 81,947 29.00 61,523 21.59
5.50 - 7.49% 98,266 34.87 104,618 37.02 130,864 45.93
7.50 - 9.49% 3,869 1.37 3,295 1.17 2,673 0.94
9.50 and above --- --- --- --- --- ---
------- --- ------- ---- ------- ----
Total Certificates 187,648 66.59 190,018 67.24 195,126 68.48
------- --- ------- ---- ------- ----
Accrued Interest 1,764 .64 1,809 0.65 1,971 0.69
------- --- ------- ---- ------- ----
Total Deposits $281,772 100.00% $282,563 100.00% $284,913 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------
1996 1997 1998
-------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
Opening balance.................. $267,520 $280,008 $280,753
Deposits......................... 405,665 566,909 585,093
Withdrawals...................... 402,754 575,977 592,939
Interest credited................ 9,577 9,813 10,035
-------- -------- ---------
Ending balance................... $280,008 $280,753 $282,942
======== ======== ========
Net (decrease) increase.......... $ 12,488 $ 745 $ 2,189
======== ======== =========
Percent (decrease) increase...... 4.67% 0.26% 0.78%
======== ======== =========
</TABLE>
22
<PAGE>
The following table sets forth the rate and maturity information for
the Bank's certificates of deposit as of March 31, 1998.
<TABLE>
<CAPTION>
0.00- 3.50- 5.50- 7.50- Percent
3.49% 5.49% 7.49% 9.49% Total of Total
----- ----- ----- ----- ----- --------
Certificate accounts maturing (Dollars in Thousands)
in quarter ending:
<S> <C> <C> <C> <C> <C> <C>
June 30, 1998.................... 55 15,996 22,361 --- 38,412 19.69%
September 30, 1998............... --- 18,107 26,727 --- 44,834 22.98
December 31, 1998................ 9 5,087 17,404 --- 22,500 11.53
March 31, 1999................... --- 6,628 11,555 30 18,213 9.33
June 30, 1999.................... --- 4,253 6,258 --- 10,511 5.39
September 30, 1999............... --- 2,836 4,275 --- 7,111 3.64
December 31, 1999................ --- 1,393 2,531 --- 3,924 2.01
March 31, 2000................... --- 1,760 5,004 45 6,809 3.49
June 30, 2000.................... --- 1,264 3,397 --- 4,661 2.39
September 30, 2000............... --- 873 2,361 --- 3,234 1.66
December 31, 2000................ --- 367 1,124 207 1,698 0.87
March 31, 2001................... --- 805 727 1,053 2,585 1.32
Thereafter....................... 2 2,154 27,140 1,338 30,634 15.70
------ ------- -------- ------ -------- ------
Total......................... $ 66 $61,523 $130,864 $2,673 $195,126 100.00%
======== ======= ======== ====== ======== ======
Percent of total.............. 0.03% 31.53% 67.07% 1.37% 100.00%
==== ===== ===== ==== ======
</TABLE>
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, 1998.
<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....................... $27,095 $40,609 $36,762 $70,082 $174,548
Certificates of deposit of
$100,000 or more.................... 2,811 3,890 3,832 835 12,368
Public funds(1)...................... 8,506 334 120 250 9,210
------- ------- ------- ------- --------
Total certificates of
deposit............................. $ 38,412 $44,833 $40,714 $71,167 $195,126
======== ======= ======= ======= ========
</TABLE>
- -------------
(1) Deposits from governmental and other public entities.
<PAGE>
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, 1998 the Bank's FHLB advances totaled $99.4 million.
See also Note 7 of the Notes to Consolidated Financial Statements in the Annual
Report.
23
<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,
--------------------------------------------------
1996 1997 1998
------- -------- -----------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances......................... $68,303 $100,141 $107,778
Securities sold under
agreements to repurchase............. 983 2,945 445
FHLB overnight borrowings............. 2,127 1,710 3,201
------- -------- -----------
$71,413 $104,796 $111,424
======= ======== ========
Average Balance:
FHLB advances......................... $46,308 $ 92,604 $101,711
Securities sold under
agreements to repurchase............. 530 1,485 103
FHLB overnight borrowings............. 1,135 208 30
------- -------- -----------
$47,973 $ 94,297 $101,844
======= ======== ========
</TABLE>
The following table sets forth certain information as to the Bank's
FHLB advances and FHLB overnight borrowings at the dates indicated.
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances........................................ $68,303 $ 98,484 $ 99,353
Securities sold under
agreements to repurchase............................ 555 607 0
FHLB overnight borrowings............................ 2,127 1,187 0
------- -------- --------
Total borrowings................................ $70,985 $100,278 $ 99,353
======= ======== ========
Weighted average interest
rate of FHLB advances............................... 5.77% 5.64% 5.39%
Weighted average interest
rate of securities sold
under agreements to repurchase...................... 4.80% 5.19% ---%
Weighted average interest rate
of FHLB overnight borrowings........................ ---% ---% ---%
</TABLE>
24
<PAGE>
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
received $43,700 of dividends for the year ended March 31, 1998 from FFLIC.
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 $16,930 for the year ended March 31, 1998.
Through Perma Service, the Bank also provides brokerage services, on an
agency basis, through INVEST(TM).
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, 1997, the latest date for which
information is available, the Bank's share of the savings market in its primary
market area was approximately 7.5%.
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
25
<PAGE>
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
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, 1998 was
$100,000.
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-one-borrower
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, 1998, the
Bank's lending limit under this restriction was $5.7 million. At March 31, 1998,
the
26
<PAGE>
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
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.
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
applicable to the Bank.
27
<PAGE>
Pursuant to the Act, as of January 1, 1997, commercial banks will be
required to share in the payment of interest 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 applicable 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 and
exempt certain transactions and simplify 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.
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, 1998, the Bank had no purchased mortgage servicing
rights.
28
<PAGE>
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, 1998, 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, 1998, the non-includable portion of the Bank's investment in FFLIC totaled
$633,000. See also "Service Corporation Activities."
At March 31, 1998, the Bank had core capital of $38.2 million, or 8.76%
of adjusted total assets, which is approximately $20.7 million above the minimum
requirement of 4% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 4% 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, 1998, the Bank had no intangibles which were subject to
these tests.
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.
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, 1998 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
29
<PAGE>
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, 1998, the Bank had total capital of $40.1 million
(including $38.2 million in core capital) and risk-weighted assets of $190.5
million (including $3.2 million in converted off-balance sheet assets) or total
capital of 21.05% of risk-weighted assets. This amount was $24.9 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.
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.
30
<PAGE>
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."
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.
31
<PAGE>
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 4%.
Penalties may be imposed upon associations for violations of the liquid
asset ratio requirement. At March 31, 1998, the Bank was in compliance with the
requirements, with an overall liquid asset ratio of 65.5%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and reemphasizes 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.
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, 1998, 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
32
<PAGE>
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 November 1997 and received a rating of satisfactory.
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
33
<PAGE>
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."
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, 1998, 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
34
<PAGE>
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, 1998, the Bank had $5.5 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 8.03% for fiscal year ended
March 31, 1998. 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
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, 1998, dividends paid by the FHLB of Indianapolis to the Bank
totaled $432,823, which constitute a $49,132 increase over the amount of
dividends received in the fiscal year ended March 31, 1997.
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" was 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) could 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.
35
<PAGE>
In August 1996, legislation was enacted that repealed 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, 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
36
<PAGE>
to absorb bad debt losses). As of March 31, 1998, 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.
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.
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 Postretirement 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.
37
<PAGE>
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 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>
George E. Orr 56 Senior Vice President of Bank
Seth P. Allen 39 Senior Vice President of Bank
Richard A. Condi 44 Vice President of Bank
Robert A. Cern 47 Chief Financial Officer and Secretary of the Company
and Senior Vice President, Secretary/Treasurer and
Chief Financial Officer of Bank
Glenna J. Kirsch 48 Vice President of Bank
Robert E. Whitfield, Jr. 36 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.
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 residential
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.
Robert A. Cern. Mr. Cern joined the Company in May 1998 as Chief
Financial Officer and Secretary. Mr. Cern is also Senior Vice President,
Secretary/Treasurer and Chief Financial Officer of the Bank. Prior to joining
the Company, Mr. Cern was an independent financial consultant. From December
1995 to December 1996, Mr. Cern was Vice President and Chief Financial Officer
of Associated Bank in Milwaukee, Wisconsin. Prior to this, Mr. Cern was Vice
President of Marshall & Ilsey Corporation in Milwaukee, Wisconsin.
38
<PAGE>
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.
Robert E. Whitfield, Jr. Mr. Whitfield joined the Bank in October 1997
as Vice President in charge of consumer lending. Mr. Whitfield served as Vice
President of retail and commercial lending at Peoples First, FSB in Central
City, Kentucky from October 1994 to October 1997. Prior to that, Mr. Whitfield
was Vice President at Citizens National Bank of Kentucky, N.A. in Madisonville,
Kentucky from July 1988 to October 1994.
Employees
At March 31, 1998, the Bank had a total of 118 full-time and 23
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, 1998. At March 31, 1998, the
Bank's premises, office properties and equipment had an aggregate book value of
approximately $7.0 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 $2,988
Evansville, Indiana
Branch Offices
University Heights
4615 University Drive 1988 Owned N/A 376
Evansville, Indiana
Town Center
201 Diamond Avenue 1981 Owned N/A 348
Evansville, Indiana
Green River Road
123 South Green River Road 1978 Owned N/A 257
Evansville, Indiana
North Brook
3820 First Avenue 1978 Leased November 2002 135(1)
Evansville, Indiana
West Franklin Street
2131 West Franklin Street 1960 Owned N/A 176
Evansville, Indiana
Ross Center
2521 Washington Avenue 1994 Owned N/A 759
Evansville, Indiana
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
-------- -------- ------ ---- -----
(In Thousands)
<S> <C> <C> <C> <C>
Fort Branch
810 East Locust Street 1987 Owned N/A 364
Fort Branch, Indiana
Jasper
771 West Second Street 1991 Owned N/A 512
Jasper, Indiana
Newburgh
8533 Bell Oaks Drive 1997 Owned N/A 847
Newburgh, Indiana
Oakland City
410 West Morton Street 1984 Owned N/A 243
Oakland City, Indiana
</TABLE>
(1) The Bank owns this branch's building and leases the land.
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, 1998 was $448,160.
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, 1998.
40
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
Page 47 and 48 of the attached 1998 Annual Report to Stockholders is
herein incorporated by reference.
Item 6. Selected Financial Data
Pages 3 and 4 of the attached 1998 Annual Report to Stockholders is
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Pages 6 through 18 of the attached 1998 Annual Report to Stockholders
are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Page 5 and 19 through 45 of the attached 1998 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.
41
<PAGE>
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 28, 1998, 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-K is incorporated by
reference herein.
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 28, 1998, 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 28, 1998, 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
28, 1998, 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.
42
<PAGE>
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, 1998, is incorporated by reference
in this Form 10-K Annual Report as Exhibit 13.
Pages in
Annual
Annual Report Section Report
--------------------- ------
Independent Auditors' Report...................................... 19
Consolidated Statements of Financial Condition
at March 31, 1998 and 1997...................................... 20
Consolidated Statements of Income for the Years Ended
March 31, 1998, 1997 and 1996................................... 21
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 1998, 1997 and 1996....................... 22
Consolidated Statements of Cash Flows for Years Ended
March 31, 1998, 1997 and 1998................................... 23-24
Notes to Consolidated Financial Statements........................ 25-45
(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.
43
<PAGE>
(a) (3) Exhibits:
Reference to Prior
Regulation Filing or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
------ -------- ------
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
22 Published report regarding matters None
submitted to vote of security holders
44
<PAGE>
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
- --------------
*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, 1998.
45
<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 29, 1998 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.
<TABLE>
<CAPTION>
<S> <C>
By: /s/ Donald P. Weinzapfel By: /s/ John R. Stone
------------------------ -----------------
Donald P. Weinzapfel John R. Stone, Director
Chairman of the Board Date: June 29, 1998
President and Chief Executive
Officer (Principal Executive Officer)
Date: June 29, 1998
By: /s/ Daniel F. Korb By: /s/ Daniel L. Schenk
------------------ --------------------
Daniel F. Korb, Director Daniel L. Schenk, Director
Date: June 29, 1998 Date: June 29, 1998
By: /s/ John W. Forster By: /s/ Jack H. Kinkel
------------------- ------------------
John W. Forster, Director Jack H. Kinkel, Director
Date: June 29, 1998 Date: June 29, 1998
By: /s/ Murray J. Brown By: /s/ James W. Vogel
------------------- ------------------
Murray J. Brown, Director James W. Vogel, Director
Date: June 29, 1998 Date: June 29, 1998
By: /s/ James D. Butterfield By: /s/ Robert L. Northerner
------------------------ ------------------------
James D. Butterfield, Director Robert L. Northerner, Director
Date: June 29, 1998 Date: June 29, 1998
By: /s/ James A. McCarty, Jr. By: /s/ Robert A. Cern
------------------------- ------------------
James A. McCarty, Jr., Director Robert A. Cern, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: June 29, 1998 Date: June 29, 1998
</TABLE>
46
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 ....................................... 19
Consolidated Statements of Financial Condition ................... 20
Consolidated Statements of Income ................................ 21
Consolidated Statements of Stockholders' Equity .................. 22
Consolidated Statements of Cash Flows ............................ 23
Notes to Consolidated Financial Statements ....................... 25
Officers and Directors ............................................. 46
Corporate Information .............................................. 47
1
<PAGE>
Permanent
Bancorp, Inc.
LETTER TO STOCKHOLDERS
To Our Stockholders:
Permanent Bancorp, Inc. completed its fourth year as a public company
on March 31, 1998 and earned $2.64 million for the year. This amount represents
a 103% increase from 1997 net income of $1.30 million. Included in 1997's
earnings is a $1.77 million (pretax) industry-wide assessment by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation. Earnings for the year ended March 31, 1998 compared to prior year
earnings before the SAIF assessment increased by 11.4%. Basic earnings per share
were $0.65 in fiscal 1998 compared to $0.31 in the prior year and diluted
earnings per share increased to $0.62 from $0.30 in the prior year.
The market price of the Company's stock reached record highs in March
1998 and the Board of Directors authorized a stock split, effected in the form
of a 100% stock dividend, which was completed in April.
The Company has recently adopted a dividend reinvestment and stock
purchase plan. This enables stockholders the convenience of purchasing
additional stock without incurring any brokerage commissions or administrative
fees.
The Board of Directors of the Company has elected a new director to its
board. In March 1998 Mr. Daniel L. Schenk, President of IVY Tech State College,
Evansville Region, joined the Board. Mr. Schenk was also elected a director of
the subsidiary Bank.
At the subsidiary level the Bank continues to increase its net interest
income and non-interest income while reducing classified assets. These trends,
coupled with a robust economy in the Evansville area, bodes well for the future.
In addition, in April 1998 the Company announced that it had reached an
agreement to acquire four branch locations from NBD Bank. This acquisition will
significantly increase the Company's presence in the Evansville area and afford
it marketing and other operating efficiencies. This acquisition will add
approximately $85 million to the Company's deposit base and we look forward to
having the NBD personnel join the Permanent family.
More recently Mr. Robert A. Cern has joined the management team as our
Chief Financial Officer and Corporate Secretary. Mr. Cern comes to us with many
years experience in financial and accounting management.
The banking environment is changing rapidly and the recent wave of
mega-mergers and technological advances will continue to reshape the financial
services industry. Permanent continues to explore growth opportunities and
profit improvement strategies. In the near future, the Company will offer a
telephone based bill paying service and personal computer based home banking
service.
We appreciate the continued support of our customers and shareholders
and look forward to another year of earnings improvement.
/s/Donald P. Weinzapfel
-----------------------
Donald P. Weinzapfel
Chairman of the Board
President and
Chief Executive Officer
2
<PAGE>
Permanent
Bancorp, Inc.
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(In Thousands)
At March 31,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets $439,115 $423,698 $395,903 $342,678 $365,184
Loans, net 225,349 210,189 206,910 195,483 189,240
Cash and interest-bearing deposits 6,083 6,364 4,916 5,573 36,235
Mortgage-backed securities available
for sale 62,652 74,052 61,953 981
Mortgage-backed securities held
to maturity 18,861 27,181 32,154 76,262 76,027
Securities available for sale 105,619 85,180 73,171 992
Securities held to maturity 25 25 48,076 48,247
Goodwill 453 326 545 769 1,015
Deposits 282,942 280,753 280,008 267,520 285,180
Total borrowings 99,353 100,278 70,985 28,114 34,823
Stockholders' equity 42,683 39,095 41,494 43,488 41,747
<CAPTION>
Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Selected Operations Data:
<S> <C> <C> <C> <C> <C>
Interest income $30,521 $29,689 $25,892 $22,705 $21,785
Interest expense 19,342 18,724 16,354 13,352 13,616
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 11,179 10,965 9,538 9,353 8,169
Provision for loan losses 177 113 207 410 350
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 11,002 10,852 9,331 8,943 7,819
- ---------------------------------------------------------------------------------------------------------------------
Other income:
Service charges 985 841 628 619 817
Gain (loss) on sale of loans 92 23 18 (16) 228
Gain (loss) on sale of investment and
mortgage-backed securities 43 (56) (6) 5 36
Other 972 816 797 1,085 544
- ---------------------------------------------------------------------------------------------------------------------
Total other income 2,092 1,624 1,437 1,693 1,625
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Other expense:
Salaries and employee benefits 4,519 4,295 4,427 4,397 3,768
Deposit insurance assessment 276 2,351 711 738 776
Occupancy 821 809 819 769 704
Other 3,015 2,714 2,900 2,614 2,449
- ---------------------------------------------------------------------------------------------------------------------
Total other expense 8,631 10,169 8,857 8,518 7,697
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,463 2,307 1,911 2,118 1,747
Income tax provision 1,818 1,003 662 874 721
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 2,645 $ 1,304 $ 1,249 $ 1,244 $ 1,026
=====================================================================================================================
</TABLE>
3
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (ratio of net
income to average total assets) 0.62% 0.31% 0.34% 0.36% 0.31%
Interest rate spread information:
Average during year 2.41 2.40 2.28 2.41 2.40
End of year 2.40 2.41 2.33 2.28 2.27
Net interest margin (1) 2.74 2.76 2.72 2.83 2.58
Ratio of operating expense to average
total assets 2.03 2.44 2.41 2.37 2.39
Return on average stockholders' equity
(ratio of net income to average
stockholders' equity) 6.45 3.25 2.95 2.92 4.90
Ratio of average interest-earning
assets to average interest-bearing
liabilities 106.97 107.63 109.42 110.51 04.19
Asset Quality Ratios:
Non-performing assets to total assets at
end of year (2) 0.25 1.11 1.75 2.43 2.83
Allowance for loan and real estate
owned losses to non-performing
assets 180.51 44.73 32.22 25.33 21.75
Allowance for loan losses to total loans 0.87 1.00 1.07 1.06 1.11
Capital Ratios:
Stockholders' equity to total assets at
end of year 9.72 9.23 10.48 12.69 11.43
Average stockholders' equity to average
assets 9.63 9.63 11.54 12.29 6.34
Number of full-service offices 11 11 11 11 11
Number of deposit accounts 33,884 35,426 36,452 35,075 38,644
Book value per share (3) $ 10.41 $ 9.52 $ 9.72 $ 9.36 $ 8.47
Dividend payout ratio 30.6% 46.7% 27.9% N/A N/A
</TABLE>
(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.
(3) Amounts reflect a stock split in the form of a 100% stock dividend on April
14, 1998.
4
<PAGE>
Permanent
Bancorp, Inc.
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,
1997 1997 1997 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1998
Total interest income $7,653,837 $7,784,083 $7,587,707 $7,495,779
Total interest expense 4,850,898 5,001,278 4,817,298 4,673,037
- --------------------------------------------------------------------------------------------------------------------
Net interest income 2,802,939 2,782,805 2,770,409 2,822,742
Provision for loan losses 77,386 75,164 (500) 25,000
- --------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,725,553 2,707,641 2,770,909 2,797,742
Other income 497,035 529,984 591,674 473,300
Other expense 2,123,438 2,140,755 2,196,172 2,170,962
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,099,150 1,096,870 1,166,411 1,100,080
Income tax provision 461,228 451,966 461,303 442,847
- --------------------------------------------------------------------------------------------------------------------
Net income $ 637,922 $ 644,904 $ 705,108 $ 657,233
====================================================================================================================
<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 353,983 442,397 513,793 313,740
Other expense 2,037,515 3,915,272 2,135,720 2,080,249
- --------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================
</TABLE>
5
<PAGE>
Permanent
Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
At March 31, 1998, Permanent Bancorp, Inc. (the "Company") successfully
completed its fourth 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
and 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 and investment securities and short-term
interest bearing deposits and the average rate paid on interest-bearing
liabilities, such as deposits and 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 or losses on the sale of loans and other
assets, 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 markets and
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,
consumer and commercial loans as well as competition from other lending
institutions. The primary sources of funds for lending activities include
deposits, loan payments, borrowings, the sale of loans and other assets and
funds provided from operations.
<PAGE>
Forward-looking Statements
Certain statements in this report that relate to Permanent Bancorp's
plans, objectives or future performance may be deemed to be forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Such statements are based on Management's current expectations. Actual
strategies and results in future periods may differ materially from those
currently expected because of various risks and uncertainties. Additional
discussion of factors affecting Permanent Bancorp's business and prospects is
contained in the Company's periodic filings with the Securities and Exchange
Commission.
Information Systems and the Year 2000
As is the case with most other companies using computers in their
operations, the Company is in the process of addressing the Year 2000 problem.
The Company is currently engaged in a comprehensive project to ascertain that
the
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
computer programs it utilizes, both internally generated and those provided by
outside sources, will consistently and properly recognize the Year 2000. Many of
the Company's significant systems used to generate both internal reports and
external documents (such as account statement and year-end tax reports) are
generated by an outside provider of data processing services which has
represented these systems will be Year 2000 compliant. The Company has initiated
contingency processing plans should this supplier not become Year 2000 compliant
in a timely manner. The Company is in the process of obtaining assurances from
vendors that timely updates will be made available to make all remaining
purchased software Year 2000 compliant.
The Company will utilize both internal and external resources to
reprogram or replace and test all of its software for Year 2000 compliance and
the Company expects to complete the project in early calendar year 1999. The
estimated cost for this project is being funded through operating cash flows. No
assurance can be given by the Company that either it or its vendors will be Year
2000 compliant and failure by the Company and/or significant vendors to complete
Year 2000 compliance work in a timely manner could have a material adverse
effect on certain of the Company's operations.
FINANCIAL CONDITION
March 31, 1998 Compared to March 31, 1997
The Company's total assets at March 31, 1998 were $439.1 million, an
increase of $15.4 million, or 3.6% from $423.7 million at March 31, 1997.
Investment and mortgage-backed securities amounted to $187.1 million at March
31, 1998, an increase of $694,000 from $186.4 million at March 31, 1997. Net
loans increased by $15.2 million or 7.2% to $225.3 million at March 31, 1998
compared to $210.2 million at March 31, 1997. Total liabilities were $396.4
million at March 31, 1998, up $11.8 million, or 3.1% from $384.6 million at
March 31, 1997. Deposits of $282.9 million were up $2.1 million or 0.8% from
$280.8 million at March 31, 1997. Federal Home Loan Bank (FHLB) advances
increased by $869,000 to $99.4 million at March 31, 1998 from $98.5 million at
March 31, 1997. Total stockholders' equity increased by $3.6 million to $42.7
million at March 31, 1998. The Company earned $2.64 million and paid $809,000 of
dividends to its shareholders. The Company purchased $994,000 of treasury shares
and received $183,000 from the issuance of its stock. The fair value of
securities increased by approximately $1.82 million and $509,000 of stock was
earned or became vested under the Company's ESOP and restricted stock award
programs.
One to four family first mortgage loans increased by $6.2 million and
consumer loans decreased by $1.3 million. Commercial and multi-family real
estate loans increased by $611,000, land and construction loans increased by
$1.6 million and commercial paper increased by $8.1 million. The allowance for
loan losses decreased by $153,000 as non-performing loans decreased by $3.7
million from March 31, 1997 to March 31, 1998.
<PAGE>
RESULTS OF OPERATIONS
Comparison of Operating Results for the Years Ended March 31, 1998 and March 31,
1997.
General. The Company's net income of $2.64 million during the fiscal
year ended March 31, 1998 was $1.34 million greater than the $1.30 million
earned during the fiscal year ended March 31, 1997. The results of operations
for the year ended March 31, 1997 include a $1.77 million (pretax) payment of a
special assessment to recapitalize the Savings Association Insurance Fund (SAIF)
of the Federal Deposit Insurance Corporation (FDIC). The after tax impact
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of this assessment on earnings was $1.07 million. Net income for the year ended
March 31, 1998 compared to prior year earnings before the special assessment
increased $275,000 or 11.4%.
Net Interest Income. The Company's net interest income increased by
$214,000 to $11.2 million for the year ended March 31, 1998 compared to $11.0
million for the year ended March 31, 1997. The increase was primarily
attributable to an increase in average interest earning assets and an
improvement in the interest rate spread of 0.01%.
Interest Income. Interest income for the year ended March 31, 1998
increased $833,000 to $30.5 million compared to $29.7 million for the same
period in 1997. With the exception of investment securities, interest income was
higher for all major earning asset categories including increased interest
income on loans of $713,000 (a 4.2% increase) and mortgage-backed securities of
$269,000 (a 4.4% increase). Due to decreased holdings of interest bearing
securities, investment security income decreased $199,000 or 3.2% from the prior
year. Due to increased holdings and an improved yield, dividends on Federal Home
Loan Bank stock were up by $49,000. Interest income on loans increased as a
result of growth in average loans outstanding of $ 5.6 million for the year
ended March 31, 1998. The weighted average yield on loans was 8.14% during the
fiscal year ended March 31, 1998 compared to 8.02% during the fiscal year ended
March 31, 1997. Interest income on mortgage-backed securities also increased
primarily as a result of higher outstanding balances. Mortgage-backed securities
balances averaged $97.7 million during fiscal 1998 compared to $91.4 million
during fiscal 1997. Interest bearing securities and FHLB stock averaged $93.2
million during fiscal 1998, compared to $95.2 million during fiscal 1997. The
weighted average yields on mortgage-backed securities and interest bearing
securities and FHLB stock were 6.52% and 7.01%, respectively during fiscal 1998,
compared to 6.67% and 7.02%, respectively, during fiscal 1997. During 1998, the
Company made investments of $500,000 in a limited partnership that invests in
the stock of other financial institutions. The fair value of this investment was
$614,000 at March 31, 1998.
Interest Expense. Interest expense increased by $619,000 to $19.3
million during the fiscal year ended March 31, 1998 compared to $18.7 million
during fiscal 1997. Interest paid on deposits increased by $99,000 due to an
increase of $2.8 million in average deposit balance which more than offset a
decrease in the rate paid from 4.84% to 4.83%. Interest on Federal Home Loan
Bank advances increased by $545,000 as average balances outstanding increased by
$9.1 million and the average rate paid on advances also increased from 5.74%
during fiscal 1997 to 5.77% during fiscal year 1998.
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 periodic basis, generally monthly, and is designed to ensure that matters
<PAGE>
affecting loan collectibility will be identified in a timely manner and
evaluated 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, 1998, the Company recorded a provision
for loan losses of $177,050 compared to $113,256 for the year ended March 31,
1997. Net charge offs amounted to $330,000 during fiscal 1998 compared to
$225,000 during fiscal 1997. Asset quality, as measured by non-performing loans
to total loans, improved significantly for the year ended March 31, 1998
compared to the prior year. The ratios of non-performing loans to total loans
was 0.40% at March 31, 1998 and 2.16% at March 31, 1997 respectively. The
allowance for losses, as a ratio to total loans, was 0.87% at March 31, 1998
compared to 1.00% at March 31, 1997. At March 31, 1998 and 1997, the
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
allowance for loan losses as a percentage of non-performing loans was 216.58%
and 46.31%, respectively. It is management's belief that the allowance for loan
losses reflects an adequate reserve against potential losses in the loan
portfolio. Future additions to the Company's allowance for loan losses and any
change in the related ratio to nonperforming loans are dependent upon the
performance of the Company's loan portfolio, the economy, inflation, changes in
real estate and other collateral 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 $468,000 to $2,092,000 during
the fiscal year ended March 31, 1998. This represents an increase of 28.8% over
the prior year. Service charges increased by $144,000 and profit on sale of
loans, securities and real estate owned increased by $193,000. Commissions on
the sale of investment and insurance products increased by $68,000. Earnings
from other sources were up by $63,000 during fiscal 1998.
Other Expense. The Company's other expense decreased by $1.54 million
from fiscal 1997 to fiscal 1998. The decrease is primarily attributable to the
aforementioned $1.77 million SAIF assessment. Salaries and employee benefits
increased $224,000 or 5.2%. The majority of this increase is attributable to
increased expense associated with the Company's ESOP and restricted stock awards
programs.
Income Tax Provision. The Company's income tax provision increased by
$814,000 from fiscal 1997 to fiscal 1998 primarily as a result of increased
pretax earnings.
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 for 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 occurred 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 improvement in the
interest rate spread.
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 earning asset
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
<PAGE>
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.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 an
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. 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 loans 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.
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 inclusion of the special
FDIC-SAIF special assessment in the amount of $1.77 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.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. Non-accruing loans have been included in the table as
loans carrying a zero yield.
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
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 $214,982 $17,509 8.14% $209,420 $16,796 8.02% $200,940 $16,338 8.13%
Mortgage-backed securities 97,668 6,370 6.52 91,431 6,101 6.67 87,551 5,761 6.58
Securities and FHLB stock 93,210 6,536 7.01 95,212 6,686 7.02 60,268 3,669 6.09
Other 1,416 106 7.49 1,869 106 5.67 1,854 124 6.69
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets (1) $407,276 $30,521 7.49% $397,932 $29,689 7.46 $350,613 $25,892 7.38
- --------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits $278,181 $13,431 4.83% $275,407 $13,333 4.84 $272,568 $13,442 4.93
FHLB advances 101,704 5,866 5.77 92,604 5,320 5.74 46,308 2,856 6.17
Other borrowings 845 46 5.44 1,693 71 4.19 1,541 56 3.63
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $380,730 $19,343 5.08% $369,704 $18,724 5.06 $320,417 $16,354 5.10
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income $11,178 $10,965 $ 9,538
- --------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread 2.41% 2.40% 2.28%
- --------------------------------------------------------------------------------------------------------------------------------
Net earning assets $ 26,546 $ 28,228 $ 30,196
- --------------------------------------------------------------------------------------------------------------------------------
Net interest margin(2) 2.74% 2.76% 2.72%
- --------------------------------------------------------------------------------------------------------------------------------
Average interest-earning
assets to average interest-
bearing liabilities 106.97% 107.64% 109.42%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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) 1998 vs. 1997 1997 vs. 1996
- ---------------------------------------------------------------------------------------------------------------------
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 $ 451 $ 263 $ 714 $ 676 $ (218) $ 458
Mortgage-backed securities 402 (133) 269 258 82 340
Securities and FHLB stock (140) (10) (150) 2,386 631 3,017
Other 1 (19) (18)
- ---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 713 $ 120 $ 833 $3,321 $ 476 $3,797
- ---------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits $ 134 $ (36) $ 98 $ 143 $ (252) $ (109)
FHLB advances 525 21 546 2,645 (181) 2,464
Other borrowings (62) 37 (25) 6 9 15
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 597 $ 22 $ 619 $2,794 $ (424) $2,370
=====================================================================================================================
Net change in interest income $ 214 $1,427
=====================================================================================================================
</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,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average yield on:
Loans, net 7.91% 8.02% 8.01%
Mortgage-backed securities 6.80 6.71 6.87
Securities 6.84 7.05 6.40
Other 6.06 6.69 5.35
Combined weighted average yield on
interest-earning assets 7.42 7.47 7.39
Weighted average rate paid on:
Savings deposits 3.77 3.87 3.90
Demand and NOW deposits 1.79 2.06 2.20
Time deposits 5.78 5.67 5.74
FHLB Advances 5.39 5.65 5.77
Other Borrowings 5.19 4.76
Combined weighted average rate paid
on interest-bearing liabilities 5.02 5.05 5.06
Spread 2.40 2.41 2.33
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asset Quality
In accordance with the Company's classification of assets policy,
management periodically evaluates the loan and investment portfolios 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. Other assets include
other repossessed assets.
<TABLE>
<CAPTION>
Year Ended March 31,
- --------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family $ 822 $1,131 $ 695 $1,219 $ 1,911
Multi-family 1,062 3,654 3,696 3,912
Commercial real estate 646
Construction or development 12 171 171 57
Consumer 77 99 185 78 93
- --------------------------------------------------------------------------------------------------------------------
Total 911 2,463 4,705 4,993 6,619
- --------------------------------------------------------------------------------------------------------------------
Troubled debt restructurings 2,128 2,165 3,293 3,341
- --------------------------------------------------------------------------------------------------------------------
Total non-performing loans $ 911 $4,591 $6,870 $8,286 $ 9,960
Real estate and other assets owned:
One- to four-family 93 41 22 7 46
Construction or development 26 342
Consumer 89 53 54 25
- --------------------------------------------------------------------------------------------------------------------
Total 182 94 76 58 388
- --------------------------------------------------------------------------------------------------------------------
Total non-performing assets $1,093 $4,685 $6,946 $8,344 $10,348
====================================================================================================================
Total as a percentage of total assets 0.25% 1.11% 1.75% 2.43% 2.83%
====================================================================================================================
</TABLE>
At March 31, 1998 the Bank had one non-performing asset with an
outstanding balance in excess of $100,000. This compares to four non-performing
assets at March 31, 1997 that had balances in excess of $100,000.
<PAGE>
Non-accruing Loans. As of March 31, 1998, the Bank had $911,000 in book
value of non-accruing loans compared to $2.5 million as of March 31, 1997. For
the year ended March 31, 1998, 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 $73,000. The amount that was included in interest
income on such loans was $39,000 for the year ended March 31, 1998.
Real Estate Owned. At March 31, 1998, the Bank's real estate acquired
through foreclosure totaled $93,000.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of March 31, 1998, there was an aggregate of $3.2
million in net book value of loans which management is closely monitoring for
the borrowers' ability to comply with current repayment terms. Management
believes it has taken a conservative approach in evaluating under-performing
credits.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Delinquent Loans. The following table sets forth the Bank's loan
delinquencies by type, amount and percentage at March 31, 1998.
<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 111 $3,161 81.65% 52 $1,598 96.32% 24 $ 822 90.23%
Construction or
development 1 1 0.03% 1 12 1.32%
Consumer 107 709 18.32% 14 61 3.68% 14 77 8.45%
- ----------------------------------------------------------------------------------------------------------------------
Total 219 $3,871 100.00% 66 $1,659 100.00% 39 $ 911 100.00%
======================================================================================================================
</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.
The following table sets forth an analysis of the Bank's allowance at
the years indicated.
<TABLE>
<CAPTION>
(Dollars in Thousands) At March 31,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $2,126 $2,238 $2,093 $2,110 $2,077
Charge-offs:
One- to four-family 56 11 20 5
Multi-family 72 86 97
Consumer 276 354 93 63 57
Commercial business 17 414 183
- --------------------------------------------------------------------------------------------------------------------
404 371 104 583 342
- --------------------------------------------------------------------------------------------------------------------
Recoveries:
One- to four-family 2 11 134
Multi-family & commercial 98 4
Consumer 74 46 27 22 25
- --------------------------------------------------------------------------------------------------------------------
74 146 42 156 25
- --------------------------------------------------------------------------------------------------------------------
Net charge-offs 330 225 62 427 317
Provision for loan losses charged
to operations 177 113 207 410 350
- --------------------------------------------------------------------------------------------------------------------
Balance at end of year $1,973 $2,126 $2,238 $2,093 $2,110
====================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Ratio of net charge-offs during the period to
average loans outstanding during the year 0.15% 0.11% 0.03% 0.22% 0.17%
====================================================================================================================
Ratio of net charge-offs during the period to
ending non-performing assets 30.19% 4.80% 0.89% 5.12% 3.06%
====================================================================================================================
Ratio of provision for loan losses
to total loans 0.08% 0.05% 0.10% 0.21% 0.19%
====================================================================================================================
Ratio of allowance for loan losses
to non-performing loans 216.58% 46.31% 32.58% 25.26% 21.18%
====================================================================================================================
Ratio of allowance for loan losses
to total loans 0.87% 1.00% 1.07% 1.06% 1.11%
====================================================================================================================
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 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, 1998, the Company's total interest-bearing liabilities
maturing or repricing within one year exceeded total interest-earning assets
maturing or repricing in the same period by $56.9 million, representing a
negative cumulative one-year gap ratio of 12.95% 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, 1998 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, 1998 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.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<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 $ 16,284 $ 10,009 $ 30,186 $ 21,630 $ 40,648
Adjustable rate one- to four-
family, multi-family (including
mortgage-backed securities)
commercial real estate and
construction loans 55,831 17,921 30,255 12,971 12,137
Consumer loans 10,256 7,183 21,444 9,244 4,008
Investment securities and other 10,942 7,001 21,849 77,186
--------- --------- --------- --------- ---------
Total interest-earning assets 93,313 35,113 88,886 65,694 133,979
--------- --------- --------- --------- ---------
Savings deposits 2,368 4,024 11,789 5,700 28,169
Demand and NOW deposits 9,830 6,277 9,600 2,761 5,540
Certificates 89,494 37,412 37,291 15,837 14,987
FHLB advances 18,340 17,553 17,107 5,365 40,993
--------- --------- --------- --------- ---------
Total interest-bearing liabilities 120,032 65,266 75,787 29,663 89,689
--------- --------- --------- --------- ---------
Interest-earning assets less
interest-bearing liabilities $ (26,719) $ (30,153) $ 13,099 $ 36,031 $ 44,290
========= ========= ========= ========= =========
Cumulative interest-rate
sensitivity gap $ (26,719) $ (56,872) $ (43,773) $ (7,742) $ 36,548
========= ========= ========= ========= =========
Cumulative interest-rate
gap as a percentage of assets (6.08)% (12.95)% (9.97)% (1.76)% 8.34%
========= ========= ========= ========= =========
</TABLE>
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
<PAGE>
those assumed in calculating the table. For example, projected passbook, money
market and NOW account maturities may materially change if interest rates change
significantly or if alternative savings/investment products become attractive.
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.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Office of Thrift Supervision ("OTS") requires the Bank to calculate
the estimated change in its net portfolio value ("NPV") assuming an
instantaneous, parallel shift in the Treasury yield curve of 100 to 400 basis
points ("bp") either up or down. NPV represents the sum of future cash flows
discounted to present value. The OTS permits the Bank to utilize the OTS model
to determine the impact of parallel and instantaneous shifts in the Treasury
yields curve. While the OTS model uses data submitted by the Bank to the OTS,
many of the assumptions imbedded in the model, such as loan prepayment rates and
deposit decay rates, are determined by the OTS. The following table sets forth
the Bank's interest rate sensitivity of NPV as of March 31, 1998 as calculated
by the OTS (dollars in 000's):
<TABLE>
<CAPTION>
Net portfolio value NPV as % of PV of Assets
- -----------------------------------------------------------------------------------------------------------------
Change in
rates $ Amount $ Change % Change NPV Ratio Change
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
+400 bp 26,039 (26,434) (50%) 6.55% (535 bp)
+300 bp 33,181 (19,292) (37%) 8.12% (378 bp)
+200 bp 40,138 (12,335) (24%) 9.57% (234 bp)
+100 bp 46,707 (5,766) (11%) 10.85% (105 bp)
0 bp 52,473 11.90%
(100 bp) 57,316 4,843 9% 12.72% + 82 bp
(200 bp) 60,845 8,373 16% 13.25% +134 bp
(300 bp) 64,458 11,985 23% 13.76% +186 bp
(400 bp) 69,635 17,162 33% 14.52% +262 bp
</TABLE>
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) equal to at least
4.0% 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, 1998, the amount of the
Bank's liquidity was $192.7 million, resulting in a liquidity ratio of 65.55%.
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.
<PAGE>
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, 1998, the Bank had approximately
$4.9 million of loan commitments and an additional $5.5 million of undisbursed
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, 1998 totalled $124 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.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 1998, these assets accounted for 94.2% 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, 1998, the Bank had outstanding borrowings of $99.4 million
from the FHLB and had the capacity to borrow up to a total of approximately $203
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 10 to the Consolidated Financial Statements for a further discussion of
regulatory capital requirements.
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 10 to the Consolidated Financial Statements for a further
discussion.
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 130 and
131 that the Company will be required to adopt in future periods. See Note 1 to
the Consolidated Financial Statements for a description of the statements
requirements.
18
<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, 1998 and 1997 and the consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1998. 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1998 in conformity with generally accepted accounting principles.
/s/DELOITTE & TOUCHE L L P
- --------------------------
DELOITTE & TOUCHE L L P
May 11, 1998
Indianapolis, Indiana
19
<PAGE>
Consolidated Statements of Permanent
Financial Condition Bancorp, Inc.
<TABLE>
<CAPTION>
March 31,
- ---------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
ASSETS:
<S> <C> <C>
Cash $ 4,274,700 $ 3,211,091
Interest-bearing deposits 1,808,159 3,153,385
Total cash and cash equivalents 6,082,859 6,364,476
Securities available for sale - at fair value
(amortized cost - $105,529,613 and $87,020,254) (Notes 2, 8) 105,618,621 85,180,313
Mortgage-backed securities available for sale - at fair value
(amortized cost - $62,368,921 and $74,846,178) (Note 3) 62,652,286 74,052,253
Securities held to maturity (Note 2) 25,000
Mortgage-backed securities held to maturity (fair value -
$19,119,093 and $27,197,070) (Note 3) 18,861,416 27,180,891
Other investments 1,100,826 1,056,036
Loans (net of allowance for loan losses of $1,973,410 and
$2,126,225) (Notes 4,13) 225,349,258 210,189,422
Interest receivable, net 3,270,173 3,539,085
Office properties and equipment, net (Note 5) 7,533,251 6,968,587
Real estate owned 93,182 40,653
Deferred income tax (Note 9) 180,456 1,374,109
Federal Home Loan Bank stock (Note 7) 5,466,000 5,192,600
Cash surrender value of life insurance (Note 12) 1,625,253 1,552,875
Goodwill (net of accumulated amortization of $1,909,003 and
$1,741,967) 452,912 326,198
Other 828,007 655,833
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $439,114,500 $423,698,331
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits (Notes 6) $282,942,123 $280,753,353
Federal Home Loan Bank advances (Note 7) 99,352,678 98,483,986
Advance payments by borrowers for taxes and insurance 979,859 1,014,598
Other borrowed funds (Note 8) 1,793,967
Interest payable 2,193,548 2,049,727
Other 10,963,033 508,073
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 396,431,241 384,603,704
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Commitments and contingencies (Notes 4,13)
STOCKHOLDERS' EQUITY (Notes 10,11,12):
Serial Preferred Stock ($.01 par value) Authorized and unissued
- 1,000,000 shares
Common Stock ($.01 par value) Authorized - 9,000,000 shares
Issued - 4,927,000 and 4,917,964 Outstanding - 4,102,094
and 4,104,150 49,241 49,180
Additional paid-in capital 24,525,662 24,020,823
Treasury Stock - 682,674 and 635,786 shares - at cost (6,255,083) (5,547,823)
Retained Earnings - substantially restricted 25,127,127 23,393,701
Unrealized gains (losses) on securities available for sale, net
of deferred tax of $147,127 and $(1,043,275) 225,247 (1,590,591)
ESOP borrowing (714,150) (952,200)
Unearned compensation - restricted stock awards (274,785) (278,463)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 42,683,259 39,094,627
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $439,114,500 $423,698,331
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
Consolidated Statements of Income Permanent
Bancorp, Inc.
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $17,509,318 $16,796,387 $16,338,109
Mortgage-backed securities and mortgage-backed securities
held for sale 6,370,350 6,101,478 5,760,962
Investment securities and securities held for sale 6,102,461 6,301,581 3,450,724
Deposits 106,454 105,488 124,465
Dividends on Federal Home Loan Bank stock 432,823 383,691 217,652
- ---------------------------------------------------------------------------------------------------------------------
30,521,406 29,688,625 25,891,912
- ---------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits (Note 6) 13,431,142 13,332,587 13,441,629
Federal Home Loan Bank advances (Note 7) 5,865,542 5,320,326 2,856,167
Short-term borrowings (Note 8) 45,827 71,083 56,444
- ---------------------------------------------------------------------------------------------------------------------
19,342,511 18,723,996 16,354,240
- ---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 11,178,895 10,964,629 9,537,672
PROVISION FOR LOAN LOSSES (Note 4) 177,050 113,256 206,923
- ---------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER LOAN LOSS PROVISION 11,001,845 10,851,373 9,330,749
- ---------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges 984,668 840,520 627,917
Gain on sale of loans 91,866 22,771 18,233
Commissions 607,806 539,487 559,593
Gain (loss) on sale of securities and mortgage-backed
securities 42,643 (55,897) (6,307)
Gain on sale of real estate owned 41,966 16,811 6,400
Other 323,044 260,221 231,133
- ---------------------------------------------------------------------------------------------------------------------
2,091,993 1,623,913 1,436,969
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
OTHER EXPENSE:
Salaries and employee benefits (Note 12) 4,519,290 4,294,824 4,427,347
Deposit insurance assessment 275,986 2,350,715 710,909
Occupancy (Note 13) 821,412 809,138 818,544
Equipment (Note 13) 608,472 566,098 592,033
Computer service 537,903 494,374 484,652
Advertising 354,370 326,211 304,593
Postage and office supplies 285,906 273,474 320,030
Other 1,227,988 1,053,922 1,198,859
- ---------------------------------------------------------------------------------------------------------------------
8,631,327 10,168,756 8,856,967
- ---------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,462,511 2,306,530 1,910,751
INCOME TAX PROVISION (Note 9) 1,817,344 1,002,986 661,446
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,645,167 $ 1,303,544 $ 1,249,305
=====================================================================================================================
EARNINGS PER SHARE OF COMMON STOCK
Basic $ 0.65 $ 0.31 $ 0.28
Diluted 0.62 0.30 0.27
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
Consolidated Statements of Permanent
Stockholders' Equity Bancorp, Inc.
For the Years Ended March 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Treasury Retained Unrealized
Shares Amount Capital Stock Earnings Gain (Loss)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, APRIL 1, 1995 4,926,104 $49,261 $23,586,140 $21,847,208 $6,571
Net income 1,249,305
Unrealized loss on
securities available for sale (104,942)
ESOP shares earned 265,528
Vesting of restricted stock awards
Cancellation of restricted
stock awards (5,712) (57) (28,503)
Purchase of Treasury Stock (436,744) (3,465,463)
Issuance of restricted stock awards 6,000 1,733 47,580
Exercise of stock options 7,138 56,604 (20,915)
Payment of dividends (347,996)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1996 4,496,786 49,204 23,824,898 (3,361,279) 22,727,602 (98,371)
Net income 1,303,544
Unrealized loss on
securities available for sale (1,492,220)
ESOP shares earned 205,471
Vesting of restricted stock awards
Cancellation of restricted
stock awards (2,428) (24) (12,116)
Purchase of Treasury Stock (224,838) (2,286,925)
Issuance of restricted stock awards 1,000 2,570 7,930
Exercise of stock options 11,658 92,451 (28,806)
Payment of dividends (608,639)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1997 4,282,178 49,180 24,020,823 (5,547,823) 23,393,701 (1,590,591)
Net income 2,645,167
Unrealized gain on
securities available for sale 1,815,838
ESOP shares earned 383,336
Vesting of restricted stock awards
Cancellation of restricted
stock awards (2,856) (29) (14,251)
Purchase of Treasury Stock (92,000) (993,628)
Issuance of restricted stock awards 9,000 90 135,754
Exercise of stock options 36,112 286,368 (103,131)
Payment of dividends (808,610)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1998 4,232,434 $49,241 $24,525,662 ($6,255,083) $25,127,127 $225,247
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Restricted Total
ESOP Stock Stockholders'
Borrowing Awards Equity
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCES, APRIL 1, 1995 ($1,428,300) ($573,160) $43,487,720
Net income 1,249,305
Unrealized 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
Unrealized 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
Net income 2,645,167
Unrealized gain on
securities available for sale 1,815,838
ESOP shares earned 238,050 621,386
Vesting of restricted stock awards 125,242 125,242
Cancellation of restricted
stock awards 14,280
Purchase of Treasury Stock (993,628)
Issuance of restricted stock awards (135,844)
Exercise of stock options 183,237
Payment of dividends (808,610)
- --------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1998 ($714,150) ($274,785) $42,683,259
============================================================================================
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
Consolidated Statements of Permanent
Cash Flows Bancorp, Inc.
<TABLE>
<CAPTION>
Years Ended March 31,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,645,167 $ 1,303,544 $ 1,249,305
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 556,598 488,930 478,535
Amortization and accretion 258,006 (49,563) (43,445)
Vesting of restricted stock awards 125,243 178,070 135,740
Provisions for loan and real estate owned losses (152,815) (142,153) 257,689
(Gain) Loss on sale of securities and mortgage-backed securities (42,643) 51,120 5,808
(Gain) on sale of loans (91,866) (22,771) (18,233)
(Gain) Loss on sale of building and improvements (13,886) 61,766
Gain on sale of real estate owned (60,422) (13,289) (34,014)
ESOP shares earned 383,336 205,471 265,528
Changes in assets and liabilities:
Proceeds from the sales of loans held for sale 5,169,926 984,756 3,268,671
Origination of loans for resale (5,078,060) (961,985) (2,984,456)
Other investments (51,135) (422,734)
Interest receivable 268,912 (664,723) (971,623)
Deferred income taxes (1,430) (113,861) 169,691
Other assets (172,174) 79,790 241,695
Interest payable 143,821 127,092 206,775
Other liabilities 1,456,933 36,942 (226,637)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,343,511 1,126,402 2,001,029
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired through branch purchase 4,578,736
Loans originated (71,094,339) (61,791,343) (61,639,620)
Loan principal repayments 73,116,431 76,390,492 55,018,039
Proceeds from:
Maturities of:
Securities available for sale 60,991,550 18,000,000 9,000,000
Securities held to maturity 25,000 15,626,930
Sales of:
Securities and mortgage-backed securities available for sale 24,072,258 36,573,836
Securities and mortgage-backed securities held to maturity 7,729,484
Fixed assets 187,596
Real estate owned 135,578 27,224 132,629
Purchases of:
Securities and mortgage-backed securities available for sale (97,993,517) (91,445,439) (43,952,634)
Securities and mortgage-backed securities held to maturity (42,104,045)
Loans (17,257,140) (17,741,292) (5,260,316)
FHLB stock (273,400) (1,689,000) (932,300)
Office properties and equipment (457,064) (305,595) (482,009)
Payments on mortgage-backed securities 24,282,962 15,416,207 12,594,721
Increase in cash surrender value of life insurance (72,378) (599,676) (121,812)
Other 16,517 49,499 33,534
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities 258,790 (27,115,087) (54,357,399)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued on next page)
23
<PAGE>
Consolidated Statements of Permanent
Cash Flows Bancorp, Inc.
<TABLE>
<CAPTION>
Years Ended March 31,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (808,610) (608,639) (347,996)
Purchase of treasury stock (993,628) (2,286,925) (3,465,463)
Net change in deposits (3,542,954) 745,291 12,488,154
Proceeds from FHLB advances 274,500,000 142,900,000 76,731,824
Payments on FHLB advances (273,631,307) (112,719,231) (34,117,384)
Principal repayments of ESOP borrowing 238,050 238,050 238,050
Advance payments by borrowers for taxes and insurance (34,739) (7,665) (120,411)
Net change in other borrowed funds (1,793,967) (887,786) 256,985
Net proceeds from issuance of common stock 183,237 63,645 35,689
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (5,883,918) 27,436,740 51,699,448
- ----------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (281,617) 1,448,055 (656,922)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,364,476 4,916,421 5,573,343
- ----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,082,859 $ 6,364,476 $ 4,916,421
- ----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 19,198,690 $ 18,596,904 $ 16,147,465
Income taxes 1,588,000 1,097,000 547,508
Noncash transactions:
Transfers from loans to real estate owned 151,339 39,307 123,151
Liability for purchase of available for sale securities 8,995,000
</TABLE>
24
<PAGE>
Permanent
Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Permanent Bancorp, Inc. (the "Company"), a Delaware
Corporation, commenced operations on March 31, 1994 upon acquisition of
Permanent Federal Savings Bank (the "Bank") in a transaction accounted for as a
pooling of interests. The Company was initially capitalized and the Bank
acquired by the issuance of 4,761,000 shares of common stock which resulted in
net proceeds to the Company of $22,809,881.
Business of the Company - Permanent Bancorp, Inc. is a savings and loan
holding company incorporated to hold all of the outstanding common stock of
Bank, with its 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 the Company and the Bank which is wholly owned. All significant
intercompany balances 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.
Cash and cash equivalents - All highly liquid investments with an
original maturity of three months or less are considered to be cash equivalents.
Securities Available for Sale and Securities Held to Maturity -
Securities are classified and accounted for as follows:
o Debt securities that the Company has the positive intent and ability
to hold to maturity are classified as "held to maturity securities" and reported
at amortized cost. Debt securities classified as held to maturity and sold
within three months of their expected maturity or call dates are considered
maturities of the securities. Similarly, the sale of held to maturity debt
securities occurring after the Company has collected at least 85% of the
principal originally acquired is considered a maturity of the security.
o Debt and equity securities that are acquired and held principally for
the purpose of selling them in the near term are classified as "trading
securities" and reported at fair value with unrealized gains and losses included
in earnings. The Company has not held trading securities during the three years
ended March 31, 1998.
o Debt and equity securities not classified as either held to maturity
or trading securities are classified as "available for sale securities" and
reported at fair value with unrealized gains and losses, after applicable taxes,
excluded from earnings and reported as a separate component of stockholders'
equity.
<PAGE>
Premiums and discounts are amortized over the contractual lives of the
related securities using the level yield method. Gains or losses on sales of
securities are based on the specific identification method.
Other Investments - The Bank, through a subsidiary, has an investment
in an insurance company partnership which underwrites various types of life and
disability insurance and annuity programs. The investment is recorded using the
equity method.
Loans - Loans are reported at their outstanding principal balance net
of the allowance for loan losses and any deferred fees or costs on originated
loans. Deferred loan fees and origination costs are amortized and recognized as
an adjustment of yield over the life of the loan.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 a loan. Additionally,
SFAS 122 requires that MSRs be reported on the consolidated statement of
financial condition at the lower of cost or fair value. These servicing costs
are initially capitalized and subsequently amortized in proportion to, and over
the period of estimated net loan servicing income.
The Bank originates loans for portfolio investment or for sale in the
secondary market. During the loan origination period, loans are designated as
held for sale or portfolio investment. Loans held for sale are carried at the
lower of cost or market, determined on an individual loan basis.
Allowance for Losses - The balance in the allowance for loan losses and
the amount in the provision for loan losses 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, collateral values and other factors. While
management endeavors to use the best information available in making the
evaluations, future allowance adjustments may be necessary. Management may
periodically allocate portions of the allowance for specific problem loan
situations although 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.
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.
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 - When property is acquired, it is recorded at the
lower of cost or estimated fair value at the date of acquisition less any
estimated selling costs 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. Loans secured by
property for which there is an indication that the borrower has little or no
equity in the collateral based upon the current fair value of the collateral, no
longer has the ability to repay the loan and it is doubtful that equity will be
rebuilt in the foreseeable future are classified as in-substance foreclosures.
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.
Goodwill represents the fair market value of liabilities assumed and
cash consideration paid over the fair market value of assets acquired. Goodwill
is amortized the life of the underlying net assets or liabilities that give rise
<PAGE>
to it but not more than fifteen years. Impairment of goodwill results in a
charge to expense and/or a change in the amortization period. Amortization
expense for the years ended March 31, 1998, 1997 and 1996 was $167,036, $
218,603 and $218,603 respectively.
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.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company and the Bank
file consolidated income tax returns.
New Accounting Pronouncements - In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for fiscal years beginning after December 15, 1997. This
statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events or circumstances from nonowner sources.
In June 1997, the FASB also issued No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which is effective for financial
statements for periods beginning after December 15, 1997. This statement
establishes the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The provisions of both of these statements are of a disclosure nature
only and will not have an effect on the Company's financial condition or net
income.
Earnings per Share - In 1998 the Company adopted SFAS 128 "Earnings per
Share" and has retroactively restated 1997 and 1996 per share amounts. The
difference between basic and diluted earnings per share represents the dilutive
impact of the Company's outstanding stock options. The following is a
reconciliation of the weighted average common shares for the basic and diluted
earnings per share computations:
Years Ended March 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Basic average common shares 4,048,150 4,226,304 4,413,420
Dilutive effect of stock options 251,216 182,534 156,560
- --------------------------------------------------------------------------------
Diluted average common shares 4,299,366 4,408,838 4,569,980
- --------------------------------------------------------------------------------
Acquisition - On May 19, 1997, the Company acquired in a purchase
transaction a branch location in Newburgh, Indiana. The Company acquired $4.6
million of cash, $838,000 of office properties and equipment and $30,000 of
other assets and assumed approximately $5.7 million of deposit liabilities. The
transaction created approximately $294,000 of goodwill.
Changes In Presentation - Certain items appearing in the 1997 and 1996
financial statements have been reclassified to conform to the 1998 presentation.
<PAGE>
Subsequent Events - In April, 1998 the Company announced a two-for-one
stock split effected in the form of a 100% stock dividend. All equity amounts
and per share data presented have been retroactively restated to reflect this
dividend.
Also in April, 1998, the Company announced that it had reached a
definitive agreement to acquire four branch offices from NBD Bank, N.A. The
acquisition, which is expected to be completed at the end of the first quarter
of fiscal 1999, will increase the Company's deposit base by approximately $85
million. The Company will acquire approximately $40 million of loans in this
transaction.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SECURITIES
The carrying values and estimated fair values of securities available
for sale and securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1998
- -----------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury $ 3,995,076 $ 38,049 $ 4,033,125
U.S. Agency 101,028,193 178,044 $ 234,772 100,971,465
Other 506,344 107,687 614,031
- -----------------------------------------------------------------------------------------------------
$105,529,613 $323,780 $ 234,772 $105,618,621
- -----------------------------------------------------------------------------------------------------
<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
- -----------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of available for sale
securities at March 31, 1998 by contractual maturity are as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due within 1 year $ 506,344 $ 614,031
Due after 1 year through 5 years 27,849,752 27,895,672
Due after 5 years through 10 years 73,344,492 73,345,673
Due after 10 years through 15 years 3,829,025 3,763,245
- --------------------------------------------------------------------------------
$105,529,613 $105,618,621
================================================================================
</TABLE>
<PAGE>
Activities related to the sales of securities are summarized as
follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $8,989,174 $25,430,978 $6,988,301
Gross gains on sales 22,530 77,581 1,971
Gross losses on sales 7,500 128,794 10,227
</TABLE>
28
<PAGE>
3. MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of mortgage-backed
securities held to maturity and mortgage-backed securities available for sale
are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities held to maturity:
FHLMC certificates $ 938,942 $ 3,378 $ 942,320
FNMA certificates 4,003,242 47,147 $ 26,415 4,023,974
GNMA certificates 13,919,232 271,158 37,591 14,152,799
- ---------------------------------------------------------------------------------------------------------------------
$18,861,416 $321,683 $ 64,006 $19,119,093
=====================================================================================================================
Mortgage-backed securities available for sale:
FHLMC certificates $27,355,375 $171,134 $ 131,638 $27,394,871
FNMA certificates 21,871,532 111,670 58,909 21,924,293
GNMA certificates 13,142,014 206,137 15,029 13,333,122
- ---------------------------------------------------------------------------------------------------------------------
$62,368,921 $488,941 $ 205,576 $62,652,286
=====================================================================================================================
<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>
The amortized cost and estimated fair values of mortgage-backed
securities at March 31, 1998 by contractural 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.
29
<PAGE>
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
- ------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in less than one year:
FHLMC certificates $ 2,168,371 $ 2,107,499
Due after one year through five years:
FHLMC certificates 3,356,915 3,402,638
Due five through ten years:
FHLMC certificates 325,162 328,450
FNMA certificates $ 1,500,540 $ 1,540,833
Due after ten years:
FHLMC certificates 21,504,927 21,556,283 938,943 942,320
FNMA certificates 21,871,532 21,924,294 2,502,704 2,483,141
GNMA certificates 13,142,014 13,333,122 13,919,229 14,152,799
- ------------------------------------------------------------------------------------------------------
$62,368,921 $62,652,286 $18,861,416 19,119,093
======================================================================================================
</TABLE>
Activities related to the sale of mortgage-backed securities are
summarized as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $15,083,084 $11,142,858 $ 744,220
Gross gains on sales 29,246 47,318 5,952
Gross losses on sales 1,635 47,225 3,504
</TABLE>
4. LOANS
Approximately 92% 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.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
March 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
First mortgage:
Secured by one-to-four family residences $ 158,721,706 $ 152,480,578
Secured by other properties 8,886,895 12,075,643
Construction loans 3,409,383 1,832,266
Land 25,455 56,064
Automobile 31,436,243 31,394,332
Consumer 9,212,727 9,692,035
Commercial 3,799,904
Mobile home 935,365 1,239,973
Loans on savings accounts 891,516 940,324
Credit card 565,538 623,196
Second mortgage 24,661 195,195
Home improvement 838,893 1,083,982
Loan contracts 24,135 28,211
FHA improvement 4,270
Commercial paper 9,116,180 978,922
------------- -------------
Subtotal 227,888,601 212,624,991
Allowance for loan losses (1,973,410) (2,126,225)
Deferred loan fees, net (397,765) (284,028)
Undisbursed loan proceeds (148,567) 24,213
Unearned interest and unearned discounts (19,601) (49,529)
------------- -------------
Loans, net $ 225,349,258 $ 210,189,422
============= =============
</TABLE>
The principal balance of loans on nonaccrual status totalled
approximately $911,000 and $2,463,000 at March 31, 1998 and 1997, respectively.
For the years ended March 31, 1998 and 1997, gross interest income which would
have been recorded had the Bank's non-accruing loans been current with their
original terms amounted to $73,277 and $240,756 respectively. The amounts
included in interest income on such loans were $39,338 and $105,038 for the
years ended March 31, 1998 and 1997, respectively.
The Bank originates commercial real estate loans. Such loans had a
carrying value of approximately $9 million and $12 million at March 31, 1998 and
1997, 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, $4 million and $8
million are collateralized by multi-family residential property at March 31,
1998 and 1997, respectively; and $5 million, and $4 million by hotel and other
property at March 31, 1998 and 1997, respectively.
The Bank had commitments to make loans, approximating $4,886,000 and
$1,550,000 excluding undisbursed portions of loans in-process at March 31, 1998
and 1997, respectively. The undisbursed portion of loans in process amounted to
$5,546,000 and $3,452,000 at March 31, 1998 and 1997, respectively.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1998 1997 Adjustment 1998 1997
- ---------------------------------------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1mo.-1yr $ 17,079,000 $ 6,095,000 1mo.-1yr. $20,329,000 $31,629,000
1yr.-3yr. 12,125,000 12,657,000 1yr.-3yr. 3,533,000 1,355,000
3yr.-5yr. 30,023,000 29,882,000 3yr.-5yr. 5,487,000 453,000
5yr.-10yr. 28,317,000 25,755,000 5yr.-10yr. 38,578,000 29,420,000
10yr.-20yr. 68,512,000 70,494,000 10yr.-20yr. 1,817,000 1,119,000
Over 20 years 1,884,000 3,339,000 over 20 yrs 205,000 427,000
- ---------------------------------------------------------- -----------------------------------------------------------
$157,940,000 $148,222,000 $69,949,000 $64,403,000
========================================================== ===========================================================
</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 $630,613 and $676,855
at March 31, 1998 and 1997, respectively. For the years ended March 31, 1998 and
1997 loans of $202,444 and $124,899 respectively, were disbursed to officers and
directors and repayments of principal of $248,686 and $181,150 respectively,
were received from officers and directors.
The amount of loans serviced for others totalled approximately
$32,468,000 and $34,298,000 at March 31, 1998 and 1997, 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 $233,216 and $249,000 at March 31, 1998 and 1997,
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, 1998 and 1997, these obligations were limited to
approximately $443,000 and $610,000 respectively.
Loan servicing fee income for the years ended March 31, 1998, 1997 and
1996 was $84,274, $100,824 and $104,184, respectively.
There were no restructured loans in the Bank's loan portfolio as of
March 31, 1998. The principal balance at March 31, 1997 of restructured loans
totalled approximately $2,127,700. Modifications included forgiveness of
interest, reduced interest rates and/or extensions of the loan term. For the
year ended March 31, 1997, 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. The amount that was included in interest income
during 1997 on such loans was $151,000.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- --------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $2,126,225 $2,237,804 $2,093,492
Provision for losses charged to operations 177,050 113,256 206,923
Charge-offs (403,896) (370,519) (104,335)
Recoveries 74,031 145,684 41,724
- --------------------------------------------------------------------------------------------
Ending balance $1,973,410 $2,126,225 $2,237,804
============================================================================================
</TABLE>
The recorded investment in loans considered impaired at March 31, 1998
was $116,778 for which no specific valuation reserve has been established. For
the year ended March 31, 1998, the average recorded investment in impaired loans
was approximately $1,215,012. Cash received for interest on impaired loans was
$108,989 and $294,091 for the years ended March 31, 1998 and 1997, respectively.
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 $154 million and $134
million as of March 31, 1998, and 1997, respectively.
Also, under applicable regulations, the loans-to-one borrower
limitation is defined and is generally 15% of unimpaired capital which, for the
Bank, was approximately $5.7 million at March 31, 1998 and $5.2 million at March
31,1997. At March 31, 1998 and 1997 there were no loans exceeding this
limitation.
5. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
March 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,841,659 $ 1,726,939
Office buildings 7,379,489 7,166,672
Furniture and equipment 3,560,222 3,102,854
Leasehold improvements 375,184 365,201
Automobiles 52,728 52,728
- --------------------------------------------------------------------------------
Total 13,209,282 12,414,394
Less accumulated depreciation 5,676,031 5,445,807
- --------------------------------------------------------------------------------
Office properties and equipment, net $ 7,533,251 $ 6,968,587
================================================================================
</TABLE>
Depreciation expense included in operations during the years ended
March 31, 1998, 1997 and 1996 totalled $556,598, $488,930 and $478,535,
respectively.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEPOSITS
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
March 31,
- --------------------------------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing $ 1,755,251 $ 902,835
NOW and MMDA's 34,010,142 2.0% 35,588,164 2.2%
Passbook savings 52,050,522 3.7% 54,244,569 3.8%
- --------------------------------------------------------------------------------------------------------
Total 87,815,915 90,735,568
- --------------------------------------------------------------------------------------------------------
Certificates of deposit:
1.50 - 3.49% 66,459 2.9% 157,572 2.9%
3.50 - 5.49% 61,522,709 5.0% 81,947,155 5.0%
5.50 - 7.49% 130,864,156 6.0% 104,618,045 6.1%
7.50 - 9.49% 2,672,884 7.8% 3,295,013 8.0%
- --------------------------------------------------------------------------------------------------------
Total certificates of deposit 195,126,208 190,017,785
- --------------------------------------------------------------------------------------------------------
Total $282,942,123 $280,753,353
========================================================================================================
</TABLE>
Certificates of deposit in the amount of $100,000 or more total
approximately $21 million at March 31, 1998 and 1997.
A summary of certificate accounts by scheduled maturities at March 31,
1998 is as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Less than 3.49% $ 64,051 $ 2,408 $ 66,459
3.50 - 5.49% 45,817,668 10,242,121 $ 3,308,413 $ 781,223 $ 1,047,369 325,914 61,522,708
5.50 - 7.49% 78,046,368 18,069,142 7,608,128 2,892,043 9,729,966 14,518,510 130,864,157
7.50 - 9.49% 30,474 45,000 1,259,632 1,337,778 2,672,884
------------ ------------ ------------ ------------ ------------ ------------ ------------
$123,958,561 $ 28,358,671 $ 12,176,173 $ 5,011,044 $ 10,777,335 $ 14,844,424 $195,126,208
============ ============ ============ ============ ============ ============ ============
</TABLE>
<PAGE>
Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- -------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW and MMDA's $ 716,098 $ 780,027 $ 968,605
Passbook savings 1,951,908 2,056,077 1,567,719
Certificates of deposit 10,763,136 10,496,483 10,905,305
- -------------------------------------------------------------------------------
$13,431,142 $13,332,587 $13,441,629
================================================================================
</TABLE>
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. 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 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Rate:
1998 5.67% $35,950,000
1999 5.55% 5.51 $19,494,333 17,500,000
2000 5.59 5.51 2,026,678 2,286,958
2001 5.61 5.68 3,770,924 1,478,037
After 2002 5.21 6.91 34,310,743 2,518,991
- ------------------------------------------------------------------------------------------------------------
Total FHLB fixed rate 59,602,678 59,733,986
- ------------------------------------------------------------------------------------------------------------
Variable Rate:
1998 5.61 38,750,000
1999 5.88 15,750,000
2001 5.47 11,000,000
After 2002 4.92 13,000,000
- ------------------------------------------------------------------------------------------------------------
Total variable rate 39,750,000 38,750,000
- ------------------------------------------------------------------------------------------------------------
Total advances $99,352,678 $98,483,986
============================================================================================================
</TABLE>
The Bank does not have any advances scheduled to mature in the year
ending March 31, 2002.
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 $203 million at March 31, 1998.
8. OTHER BORROWED FUNDS
The Company had no other borrowed funds at March 31, 1998. At March 31,
1997, other borrowed funds consisted of:
Federal Home Loan Bank, funds due April 1, 1997 $1,186,818
Securities sold under agreement to repurchase 607,149
- --------------------------------------------------------------------------------
Total $1,793,967
================================================================================
The FHLB funds represent checks written by the Bank on its demand
account at the FHLB of Indianapolis. U.S Agency Securities with an amortized
cost of $4,079,341 ($3,910,000 fair value) were pledged for the securities sold
under agreement to repurchase at March 31, 1997.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
An analysis of securities sold under agreements to repurchase is as
follows:
<TABLE>
<CAPTION>
March 31,
- --------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Highest month-end balance $444,636 $3,955,494 $982,868
Average balance $103,260 $1,484,957 $530,189
Weighted average interest rate at end of period 5.2% 4.8%
Weighted average interest rate during the period 5.1% 4.8% 4.8%
</TABLE>
9. INCOME TAXES
An analysis of the income tax provision is as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,366,610 $ 862,572 $437,317
State 447,482 254,275 123,341
Deferred 3,252 (113,861) 100,788
- --------------------------------------------------------------------------------
$1,817,344 $1,002,986 $661,446
================================================================================
</TABLE>
The difference between the financial statement provision and amounts
computed by using the statutory rate of 34% is reconciled as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision at federal statutory rate $1,517,254 $ 784,221 $649,655
State tax, net of federal tax benefit 295,338 167,822 127,056
Nondeductible expenses 188,734 50,347 135,248
Other (183,982) 596 (250,513)
- ----------------------------------------------------------------------------------------------
Total income tax provision $1,817,344 $1,002,986 $661,446
==============================================================================================
</TABLE>
<PAGE>
The Company's deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
March 31,
- -------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves $ 628,648 $ 635,090
Unrealized loss on securities available for sale 1,043,274
Accrued employee benefits 113,198 107,624
Other 32,786 64,317
- -------------------------------------------------------------------------------
774,632 1,850,305
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 107,547 119,405
Deferred loan fees 258,986 277,883
Restricted stock awards 39,598 78,908
Unrealized gain on securities available for sale 147,127
Other 40,918
- -------------------------------------------------------------------------------
594,176 476,196
- -------------------------------------------------------------------------------
Deferred income tax, net $ 180,456 $1,374,109
================================================================================
</TABLE>
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Retained earnings at March 31, 1998 and 1997 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.
10. 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 discretionary actions by
regulators that could have a direct material effect on the Company'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 classifications are
also subject to qualitative judgements by the regulators.
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 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. At March 31, 1998 and 1997 the Bank
exceeded the minimum requirements for the well-capitalized category.
<PAGE>
The following presents the Bank's minimum and "well-capitalized"
regulatory capital levels.
<TABLE>
<CAPTION>
As of March 31, 1998
- ------------------------------------------------------------------------------------------------
Actual Capital Required Capital
- ------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy
Core capital $38,178,423 8.76% $17,440,197 4.00%
Risk-based capital 40,097,017 21.05 15,239,127 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 38,178,423 8.76 21,800,246 5.00
Tier 1 risk-based capital 38,178,423 20.04 11,429,346 6.00
Total risk-based capital 40,097,017 21.05 19,048,909 10.00
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
As of March 31, 1997
- ----------------------------------------------------------------------------------------------------------------
Actual Capital Required Capital
- ----------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy
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>
11. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
Dividend Restrictions - Under current regulations, the Bank is not
permitted to pay dividends on its stock if its regulatory capital would thereby
reduce below (i) the amount then required for the liquidation account
established at the time the Bank converted from a mutual to stock form of
ownership 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. The Company has regulatory approval to pay $4,000,000
in dividends at March 31, 1998.
Preferred Stock - The Company is authorized to issue 1,000,000 shares
of preferred stock, $.01 par value which remains unissued at March 31, 1998. 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 recapitalization 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.
<PAGE>
12. 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 and $142,028 for the years ended
March 31, 1997 and 1996, respectively. There was no pension expense in 1998.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Ownership Plan - The Company has an Employee Stock
Ownership Plan (ESOP) which owns 333,270 shares of the Company's common stock.
The ESOP purchase of the stock was funded by a loan from the Company (loan
balance of $714,150 and $952,200 at March 31, 1998 and 1997, respectively) 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 $639,317,
$479,046 and $503,579 during 1998 and 1997, and 1996, respectively. During
fiscal years ended March 31, 1998, 1997 and 1996, 47,688 shares, 49,728 shares
and 51,780 shares were earned by participants. At March 31, 1998, 130,340 shares
with a fair value of approximately $2,273,000 were held in suspense by the ESOP.
These shares are not considered to be outstanding for the purpose of computing
earning per share.
Recognition and Retention Plan - The Company has a Recognition and
Retention Plan (RRP) which provides executive officers and employees with a
proprietary interest in the Company in a manner designed to encourage such
individuals to remain with the Bank. Restricted stock awards covering up to 4%
of the common stock issued may be awarded under the RRP. Awarded stock vests at
a rate of 20% per year. During the fiscal year ended March 31, 1998, and 1997 an
additional 9,000 and 1,000 shares were awarded. The cost of the RRP is being
reflected as compensation expense as vesting occurs. This amounted to $125,242,
$178,070 and $135,740 during the fiscal years ended March 31, 1998, 1997 and
1996. Termination of employees resulted in 2,856 shares, 2,428 shares 5,712
shares being cancelled during the fiscal years ended March 31, 1998, 1997 and
1996 respectively.
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. Awarded options vest at a rate of 25%
per year and are exercisable in the ten years immediately following the grant.
During the fiscal years ended March 31, 1997 and 1996, options to purchase an
additional 9,522 and 32,000 shares were awarded. No options were issued in 1998.
Employee terminations resulted in options to purchase of 3,572, 5,952 and 10,712
shares being cancelled during fiscal years ended March 31, 1998, 1997 and 1996
respectively.
<PAGE>
The following is an analysis of stock option activity for each of the
three years in the period ending March 31, 1998 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, 1995 435,610 5.03
Granted 32,000 8.22
Exercised (7,138) 5.00
Forfeited or expired (10,712) 5.00
- -------------------------------------------------------------------------------------------
Outstanding March 31, 1996 449,760 5.26
Granted 9,522 8.13
Exercised (11,658) 5.46
Fortified or expired (5,952) 5.00
- -------------------------------------------------------------------------------------------
Outstanding March 31, 1997 441,672 5.32
Exercised (36,112) 5.07
Fortified or expired (3,572) 5.00
- -------------------------------------------------------------------------------------------
Balance at March 31, 1998 401,988 5.34
===========================================================================================
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The number of vested shares exercisable at March 31, 1998, 1997, and
1996 were: 376,465, 296,272 and 196,384, respectively and had a weighted average
exercise price of $5.16, $5.09 and $5.01, respectively. The weighted average
remaining contractual life of the options outstanding at March 31, 1998 and 1997
was 6.3 years and 7.2 years, respectively. Exercise prices for options
outstanding at March 31, 1998 ranged from $5.00 to $8.22.
The Company applies APB opinion No. 25 ("Accounting for Stock Issued to
Employees") and related interpretations in accounting for the plan. No
compensation cost has been recognized for the plan because the stock option
price is equal to the fair value at the grant date. Had compensation cost for
the plan been determined based on the fair value at the grant dates for awards
under the plan consistent with the fair value method of SFAS No. 123
("Accounting for Stock-Based Compensation"), the Company's proforma net income
per share would be as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
- ------------------------------------------------------------------------------
1998 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income :
As reported $2,645,167 $1,303,544 $1,249,305
Proforma 2,631,973 1,293,311 1,246,344
Basic :
Net income per share:
As reported $ 0.65 $ 0.31 $ 0.28
Proforma 0.65 0.31 0.28
Diluted Net income per share:
As reported $ 0.62 $ 0.30 $ 0.27
Proforma 0.61 0.29 0.27
</TABLE>
The fair value of option grants are estimated on the date of grant
using an option pricing model with the following assumptions: dividend yields of
0.96% to 1.7%, risk-free interest rates of 5.75% to 6.74%, expected volatility
of 18% and an expected life of five years. The proforma amounts are not
representative of the effects on reported net income for future years.
Deferred Compensation (401K) Plan - The Company has 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 $21,450, $19,203 and $19,386 during the fiscal years ended
March 31, 1998, 1997 and 1996, 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.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMITMENTS
Lease commitments - The Company has future minimum rental commitments
for noncancelable operating leases as follows:
Fiscal year ended March 31:
---------------------------
1999 $81,156
2000 69,582
2001 65,724
2002 25,431
2003 7,000
Rental expense for the years ended March 31, 1998, 1997 and 1996 was
$79,036, $70,265 and $57,851, respectively.
Rental income from noncancelable subleases for the years ended March
31, 1998, 1997 and 1996 was $119,306, $103,306, and $93,883, 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.
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. See also Note 4.
The collateral consists predominantly of residential family units,
commercial residential or non-residential real estate, and personal property.
<PAGE>
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.
Standby letters of Credit - Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Standby letters of credit amounted to $53,000 at March 31, 1998.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PERMANENT BANCORP, INC. FINANCIAL INFORMATION
(PARENT COMPANY ONLY)
The following condensed statement of financial condition as of March
31, 1998 and 1997 and condensed statement of operations and cash flows for the
three years ended March 31, 1998 for Permanent Bancorp, Inc. should be read in
conjunction with the consolidated financial statements and notes thereto.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31,
- --------------------------------------------------------------------------------
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 1,519,171 $ 328,249
Securities available for sale 2,614,031 2,979,375
Loans 978,922
Loans receivable from ESOP 714,150 952,200
Fixed assets 460,282 467,441
Interest receivable 11,353 65,200
Other assets 8,746 4,687
Investment in subsidiary 38,514,563 33,448,734
----------- -----------
Total assets $43,842,296 $39,224,808
=========== ===========
Deferred income taxes $ 111,341 $ 63,867
Accrued expenses 1,047,696 66,314
----------- -----------
Total liabilities 1,159,037 130,181
----------- -----------
Total stockholder's equity - net 42,683,259 39,094,627
----------- -----------
Total liabilities and stockholder's equity $43,842,296 $39,224,808
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
- -------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME
INCOME:
Interest income from securities held to maturity and available for sale $ 145,162 $ 293,929 438,368
Interest on loans 52,510 66,991 81,681
Other income 92,656 81,094 77,771
- -------------------------------------------------------------------------------------------------------------------
Total income 290,328 442,014 597,820
- -------------------------------------------------------------------------------------------------------------------
EXPENSES:
Salaries and benefits 172,019 223,192 200,118
Legal and professional fees 130,957 67,433 94,590
Other expenses 86,646 79,418 80,436
- -------------------------------------------------------------------------------------------------------------------
Total expenses 389,622 370,043 375,144
- -------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED EARNINGS (99,294) 71,971 222,676
INCOME TAX PROVISION (38,426) 21,296 67,170
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 2,706,035 1,252,869 1,093,799
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $2,645,167 $1,303,544 $1,249,305
===================================================================================================================
</TABLE>
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARCH 31,
- ----------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,645,167 $ 1,303,544 $ 1,249,305
Equity in undistributed earnings of subsidiary (2,706,035) (1,252,869) (1,093,799)
Adjustments to reconcile net income to net cash
provided by operating activities
Vesting of restricted stock awards 125,243 178,070 135,740
Amortization and accretion (246) 28,238 (38,296)
(Gain) Loss on sale of investments (5,198) (5,790) (1,015)
Changes in assets and liabilities:
Interest receivable 53,847 16,838 34,054
Deferred income tax (7,422) (46,817) (59,786)
Other assets (4,059)
Other liabilities (18,519) 20,848 40,575
- ----------------------------------------------------------------------------------------------------
Net cash provided by operating activities 82,778 242,062 266,778
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Maturities of:
Securities held to maturity 600,000
Securities available for sale 1,997,500 2,974,688 2,000,000
Commercial Paper 1,500,000 5,500,000
Principal repayments on loans 238,050 238,050 238,050
Sale of:
Securities held to maturity 2,979,063
Securities available for sale 1,986,510 2,934,384
Purchase of:
Loans (497,415) (6,438,563)
Securities held to maturity (3,995,625) (1,000,000)
Securities available for sale (2,497,500)
- ----------------------------------------------------------------------------------------------------
Net cash provided by investing activities 2,727,145 1,212,934 4,817,113
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (808,610) (608,737) (347,996)
Purchase of treasury stock (993,628) (2,286,926) (3,465,463)
Sale of common stock 183,237 63,645 35,689
- ----------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,619,001) (2,832,018) (3,777,770)
- ----------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 1,190,922 (1,377,022) 1,306,121
CASH AT BEGINNING OF PERIOD 328,249 1,705,271 399,150
- ----------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 1,519,171 $ 328,249 $ 1,705,271
=========== =========== ===========
</TABLE>
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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, 1998 March 31, 1997
- --------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash $ 4,274,700 $ 4,274,700 $ 3,211,091 $ 3,211,091
Interest-bearing deposits 1,808,159 1,808,159 3,153,385 3,153,385
Securities available for sale 105,618,621 105,618,621 85,180,313 85,180,313
Mortgage-backed securities
available for sale 62,652,286 62,652,286 74,052,253 74,052,253
Securities held to maturity 25,000 25,000
Mortgage-backed securities held to maturity 18,861,416 19,119,093 27,180,891 27,197,070
Loans, net 225,349,258 226,008,379 210,189,422 206,062,560
Interest receivable 3,270,173 3,270,173 3,539,085 3,539,085
Federal Home Loan Bank stock 5,466,000 5,466,000 5,192,600 5,192,600
Cash surrender value of life insurance 1,625,253 1,625,253 1,552,875 1,552,875
Liabilities:
Deposits 282,942,123 287,384,759 280,753,353 275,017,173
Federal Home Loan Bank advances 99,352,678 98,824,254 98,483,986 98,084,186
Advance payments by borrowers
for taxes and insurance 979,859 979,859 1,014,598 1,014,598
Other borrowed funds 1,793,967 1,793,967
Interest payable 2,193,548 2,193,548 2,049,727 2,049,727
Off balance sheet: commitments
to extend credit 10,485,000 5,002,000
</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, Federal Home Loan Bank stock, interest
receivable and payable, 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.
<PAGE>
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.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 and 1997. 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 Permanent
EXECUTIVE OFFICERS Bancorp, Inc.
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
Daniel L. Schenk
EXECUTIVE OFFICERS
Donald P. Weinzapfel
Chairman of the Board, President and
Chief Executive Officer
Murray J. Brown
Executive Vice President and
Chief Operating Officer
Robert A. Cern
Chief Financial Officer and Secretary
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
Daniel L.Schenk
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
<PAGE>
WHOLLY OWNED SUBSIDIARY
PERMA SERVICE CORP.
Perma Service Corp. provides brokerage services, on an agency basis, through
INVEST(R), and a full line of insurance products through PERMANENT INSURANCE
AGENCY, INC.
EXECUTIVE OFFICERS
Donald P. Weinzapfel
Chairman of the Board, President &Chief Executive Officer
Murray J. Brown
Executive Vice President &
Chief Operating Officer
Robert A. Cern
Senior Vice President,
Chief Financial Officer
& Secretary
Seth P. Allen
Senior Vice President
George E. Orr
Senior Vice President
Richard A. Condi
Vice President
Glenna J. Kirsch
Vice President
Robert E. Whitfield Jr.
Vice President
For information about enrolling in the Company's Dividend Reinvestment and Stock
Purchase Plan, please write Registrar and Transfer Company, Shareholders
Investment Services, 10 Commerce Drive, Cranford, NJ 07016 or use their toll
free number at 1-800-368-5948.
46
<PAGE>
CORPORATE INFORMATION Permanent
Bancorp, Inc.
ANNUAL MEETING
The annual meeting of shareholders will be held Tuesday, July 28, 1998
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
8533 Bell Oaks Drive
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:
Robert A. Cern
Chief Financial Officer & Secretary
Permanent Bancorp, Inc.
101 S.E. Third St., Evansville, IN 47708
STOCK INFORMATION
The stock of the Company is traded over-the-counter on the NASDAQ National
Market System under the symbol PERM. At March 31, 1998, the Company's stock was
held by approximately 1,132 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 AND DIVIDEND DATA
Volume Dividend
Quarter Ended High Low (000's) Paid
- -------------------------------------------------------------------------
June 30, 1997 $13.00 $10.38 652.2 $.0375
September 30, 1997 13.25 11.38 210.1 .05
December 31, 1997 15.56 12.03 312.6 .05
March 31, 1998 18.75 13.38 356.7 .055
June 30, 1996 $8.25 $7.13 374.0 $.025
September 30, 1996 8.56 7.88 320.6 .0375
December 31, 1996 10.50 6.25 577.6 .0375
March 31, 1997 11.38 10.13 411.8 .0375
47
<PAGE>
CORPORATE INFORMATION Permanent
Bancorp, Inc.
REGISTERED MARKET MAKERS
The following firms make a market in Permanent Bancorp Inc.'s stock:
Capital Resources, Inc.
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,LLP
25 Northwest Riverside Drive
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, IN 46204-2985
48
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 4,274,700
<INT-BEARING-DEPOSITS> 1,808,159
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 168,270,907
<INVESTMENTS-CARRYING> 18,861,416
<INVESTMENTS-MARKET> 19,119,093
<LOANS> 227,322,668
<ALLOWANCE> 1,973,410
<TOTAL-ASSETS> 439,114,500
<DEPOSITS> 282,942,123
<SHORT-TERM> 35,244,333
<LIABILITIES-OTHER> 14,136,440
<LONG-TERM> 64,108,345
0
0
<COMMON> 49,241
<OTHER-SE> 42,634,018
<TOTAL-LIABILITIES-AND-EQUITY> 439,114,500
<INTEREST-LOAN> 17,509,318
<INTEREST-INVEST> 12,472,811
<INTEREST-OTHER> 539,277
<INTEREST-TOTAL> 30,521,406
<INTEREST-DEPOSIT> 13,431,142
<INTEREST-EXPENSE> 19,342,511
<INTEREST-INCOME-NET> 11,178,895
<LOAN-LOSSES> 177,050
<SECURITIES-GAINS> 42,643
<EXPENSE-OTHER> 8,631,327
<INCOME-PRETAX> 4,462,511
<INCOME-PRE-EXTRAORDINARY> 2,645,167
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,645,167
<EPS-PRIMARY> .65
<EPS-DILUTED> .62
<YIELD-ACTUAL> 7.49
<LOANS-NON> 911,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,200,000
<ALLOWANCE-OPEN> 2,126,225
<CHARGE-OFFS> 403,896
<RECOVERIES> 74,031
<ALLOWANCE-CLOSE> 1,973,410
<ALLOWANCE-DOMESTIC> 50,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,923,410
</TABLE>
