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, 1999
OR
[X] 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 Identification No.)
incorporation or organization)
101 Southeast Third Street, Evansville, Indiana 47708
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 428-6800
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X . NO ___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price of such stock on
the NASDAQ National Market System as of June 22, 1999, was $26,049,378. (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 22, 1999, there were 3,994,222 issued and outstanding 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, 1999.
Part III of Form 10-K - Portions of the Proxy Statement for 1999 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 twelve branch offices, the
Company serves Vanderburgh, Gibson, Warrick, Posey and Dubois Counties, Indiana.
At March 31, 1999, the Company had total assets of $492.3 million, deposits of
$345.3 million, and total stockholders' equity of $40.9 million (8.31% 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, 1999, 74.5% of the Bank's loan
portfolio was fixed-rate and 24.1% 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 25.5% at March 31, 1999 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, 1999, attached hereto as Exhibit 13 (the "Annual Report").
2
<PAGE>
The Bank focuses its lending activities on the origination of loans
secured by first mortgages on owner-occupied, one-to four-family residences as
well as multi-family and commercial real estate loans, automobile and other
consumer loans. To a lesser extent, the Bank also originates a limited number of
construction and commercial business loans. At March 31, 1999, the Bank's total
loan portfolio, including commercial paper, totaled $324.1 million, of which
$171.3 million, or 52.8%, were one- to four-family mortgage loans. At the same
date, consumer loans (including indirect and direct automobile loans) totaled
$86.1 million, or 26.6%, multi-family and commercial real estate loans totaled
$31.9 million, or 9.9%, construction loans totaled $8.2 million, or 2.5%, and
there was $9.3 million of commercial paper, representing 2.9% of the loan
portfolio. Other business loans totaled $17.3 million or 5.3% of the loan
portfolio.
The Bank also invests in mortgage-backed securities. At March 31, 1999,
mortgage-backed securities, net, totaled $54.8 million, or 11.1% 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 $350,000,
commercial real estate loans in excess of $1,000,000 and commercial business
loans in excess of $1,000,000 require the approval of the Board of Directors or
the Senior Loan Committee consisting of three Bank officers and three
non-employee directors. All unsecured loans in excess of $250,000 are reviewed
by this committee.
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, 1999, the maximum amount which the Bank
could have lent to any one borrower and the borrower's related entities was
approximately $4.9 million. At March 31, 1999, 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>
1995 1996 1997
----- ----- -----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family........................... $133,864 67.62% $144,155 68.85% $152,655 71.82%
Multi-family.................................. 15,712 7.94 11,823 5.65 8,041 3.78
Commercial real estate........................ 5,052 2.55 4,787 2.29 4,034 1.90
Construction or development................... 2,406 1.22 2,700 1.29 1,888 .89
-------- ------ -------- ------ -------- -----
Total real estate loans................... $157,034 79.33 $163,465 78.08 $166,618 78.39
--------- ------ -------- ------ -------- ------
Other Loans:
Consumer Loans:
Deposit account.............................. 1,011 0.51 1,148 0.55 940 .44
Automobile................................... 28,005 14.14 31,056 14.83 31,394 14.77
Home improvement............................. 1,201 0.61 1,088 0.52 1,084 .51
Retail mobile home loans..................... 1,984 1.00 1,595 0.76 1,240 .58
Home equity and other........................ 8,137 4.11 8,666 4.14 10,269 4.83
-------- ------ -------- ------ -------- ------
Total consumer loans...................... 40,338 20.37 43,553 20.80 44,927 21.13
Commercial business loans..................... 96 0.05 57 0.03 52 .02
Bankers' acceptances.......................... 489 0.25 299 0.14 --- ---
Commercial paper.............................. --- --- 1,997 0.95 979 .46
-------- ------ -------- ------ -------- -----
Total other loans......................... 40,923 20.67 45,906 21.92 45,958 21.61
-------- ------ -------- ------- -------- ------
Total loans............................... $197,957 100.00% $209,371 100.00% $212,576 100.00%
======== ====== ======== ====== ======== ======
Less:
Loans in process.............................. 62 67 (24)
Deferred fees and discounts................... 319 156 284
Allowance for losses.......................... 2,093 2,238 2,126
-------- ------ --------
Total loans .................................. $195,483 $206,910 $210,190
======== ======== ========
Mortgage-Backed Securities:
FNMA.......................................... $16,684 21.61% $21,286 22.62% $31,793 31
GNMA.......................................... 35,692 46.24 31,949 33.96 27,160 26
FHLMC......................................... 24,812 32.14 40,852 43.42 41,832 41
-------- ------ ------ ----- -------- ---
Total mortgage-backed
securities............................... 77,188 100.00% 94,087 100.00% 100,785 100
====== ====== ===
Net premiums and discounts..................... 55 20 448
-------- ------- --------
Net mortgage-backed securities................. $77,243 $94,107 $101,233
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
1998 1999
------ -----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family........................... $158,750 69.67% $171,250 52.84%
Multi-family.................................. 4,092 1.80 4,838 1.49
Commercial real estate........................ 4,795 2.10 27,060 8.35
Construction or development................... 3,435 1.51 8,208 2.53
-------- ------ -------- ------
Total real estate loans................... $171,072 75.08 $211,356 65.21
-------- ----- -------- -----
Other Loans:
Consumer Loans:
Deposit account.............................. 892 0.39 868 .27
Automobile................................... 31,436 13.80 56,766 17.52
Home improvement............................. 839 0.37 570 .18
Retail mobile home loans..................... 935 0.41 724 .22
Home equity and other........................ 9,718 4.26 27,199 8.39
------- ------- ---------- ------
Total consumer loans...................... 43,820 19.23 86,127 26.58
Commercial business loans..................... 3,861 1.69 17,328 5.35
Bankers' acceptances.......................... --- --- --- ---
Commercial paper.............................. 9,116 4.00 9,275 2.86
-------- ------ -------- ------
Total other loans......................... 56,797 24.92 112,730 34.79
------ ----- -------- -------
Total loans............................... $227,869 100.00% $324,086 100.00%
-------- ====== -------- ======
Less:
Loans in process.............................. 149 52
Deferred fees and discounts................... 398 310
Allowance for losses.......................... 1,973 2 ,706
------- -----------
Total loans .................................. $225,349 $321,018
======== ========
Mortgage-Backed Securities:
FNMA.......................................... .55% $25,730 31.76% $17,464 32.09%
GNMA.......................................... .95 27,116 33.47 20,105 36.94
FHLMC......................................... .50 28,163 34.77 16,858 30.97
--- ------ ------- --------- ---------
Total mortgage-backed 81,009 54,427 00%
==
securities............................... .00% 100.00% 100.
=== ====== ====
Net premiums and discounts..................... 505 422
--------- -------
Net mortgage-backed securities................. $81,514 $54,849
======= =======
</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>
1995 1996 1997
------ ------ ------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
- -----------------
Real estate:
One- to four-family....................... $ 96,379 48.67% $ 99,568 47.56% $ 94,842 44.45%
Multi-family.............................. 7,029 3.55 3,271 1.56 2,687 1.26
Commercial real estate.................... 3,803 1.92 3,634 1.74 3,357 1.58
Construction or development............... 2,392 1.21 2,686 1.28 1,855 .87
------- ------- ------- ------- ------- -------
Total real estate loans................ 109,603 55.35 109,159 52.14 102,741 48.16
Consumer.................................. 38,343 19.37 43,405 20.73 44,450 20.91
Commercial business....................... 74 0.04 57 0.03 52 .02
Term federal funds........................ --- --- --- --- --- ---
Bankers' acceptances...................... 489 0.25 299 0.14 --- ---
Commercial paper.......................... --- --- 1,997 0.95 979 .46
------- ------- ------- ------- ------- -------
Total fixed-rate loans................. 148,509 75.01 154,917 73.99 148,222 69.55
------- ------- ------- ------- ------- -------
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... 37,485 18.94 44,588 21.30 57,813 27.36
Multi-family.............................. 8,683 4.39 8,552 4.08 5,354 2.52
Commercial real estate.................... 1,249 0.63 1,153 0.55 677 .32
Construction or development............... 14 0.01 13 0.01 33 .02
------- ------- ------- ------- ------- -------
Total real estate loans................ 43,431 23.97 54,306 25.94 63,877 30.22
Consumer................................... 1,995 1.01 148 0.07 477 .23
Commercial business........................ 22 0.01 --- -- --- ---
------- ------- ------- ------- ------- -------
Total adjustable-rate
loans................................. 49,448 24.99 54,454 26.01 64,354 30.45
---------- ----- --------- ----- --------- -----
Total loans............................ 197,957 100.00% 209,371 100.00% 212,576 100.00%
====== ====== ======
Less:
Loans in process........................... 62 67 (24)
Deferred fees and discounts................ 319 156 284
Allowance for loan losses.................. 2,093 2,238 2,126
------- ------- -------
Total loans and loans held for sale, net $195,483 $206,910 $210,190
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998 1999
------ -----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
- -----------------
Real estate:
One- to four-family....................... $ 95,432 41.88% $110,140 33.98%
Multi-family.............................. 2,346 1.03 3,396 1.05
Commercial real estate.................... 3,386 1.49 17,054 5.26
Construction or development............... 3,423 1.50 8,196 2.53
------- ------- ------- -------
Total real estate loans................ 104,587 45.90 138,786 42.82%
Consumer.................................. 42,324 18.57 76,132 23.49
Commercial business....................... 581 0.25 17,203 5.31
Term federal funds........................ --- --- --- ---
Bankers' acceptances...................... --- --- --- ---
Commercial paper.......................... 9,116 4.00 9,275 2.87
------- ------- ------- -------
Total fixed-rate loans................. 156,608 68.72 241,396 74.49
------- ------- ------- -------
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... 63,318 27.79 61,110 18.86
Multi-family.............................. 1,746 0.77 1,442 0.44
Commercial real estate.................... 1,409 0.62 10,006 3.09
Construction or development............... 12 --- 12 ---
------- ------- ------- -------
Total real estate loans................ 66,485 29.18 72,570 22.39
Consumer................................... 1,496 0.66 9,995 3.08
Commercial business........................ 3,280 1.44 125 0.04
------- ------- ------- -------
Total adjustable-rate
loans................................. 71,261 31.28 82,690 25.51
-------- ------ ---------- ---------
Total loans............................ 227,869 100.00% 324,086 100.00%
====== ======
Less:
Loans in process........................... 149 52
Deferred fees and discounts................ 398 310
Allowance for loan losses.................. 1,973 2,706
------- -------
Total loans and loans held for sale, net $225,349 $321,018
======== ========
</TABLE>
5
<PAGE>
The following table sets forth the maturities of the Bank's loan
portfolio (excluding commercial paper) at March 31, 1999. 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
---------------------- -------- ------ -------- ------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Due During Years
Ending March 31,
2000(1) $ 13,284 8.05% $ 2,979 8.44% $ 6,761 8.04%
2001 to 2004 16,156 7.09 11,384 7.64 1,230 8.83
2005 to 2009 66,662 7.38 6,997 7.91 217 8.25
2010 to 2019 68,863 7.18 10,539 7.80 - - - - - -
2019 and following 6,285 6.56 - - - - - - - - - - - -
-------- ----------- -----------
Total $171,250 $ 31,898 $ 8,208
======== =========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Commercial
Consumer Business Total
-------------------- --------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ------ -------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Due During Years
Ending March 31,
2000(1) $ 13,849 8.20% $ 5,248 8.18% $ 42,121 8.14%
2001 to 2004 59,968 8.72 7,603 6.69 96,341 8.16
2005 to 2009 9,374 9.71 2,747 6.86 85,997 7.67
2010 to 2019 2,865 10.56 798 5.94 83,065 7.36
2019 and following 71 9.56 931 7.75 7,287 6.74
---------- ---------- ----------
Total $ 86,127 $ 17,328 $ 314,811
</TABLE>
========== ===
- ----------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
6
<PAGE>
At March 31, 1999, the total amount of loans due after March 31, 1999
which had fixed interest rates was $241.4 million, while the total amount of
loans due after such date which had floating or adjustable interest rates was
$82.7 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, 1999, the Bank had $171.2 million, or 52.8% of its
loan portfolio invested in these loans.
The Bank presently offers fixed-rate conventional mortgage loans,
Federal Housing Administration ("FHA"), Veterans Administration ("VA") loans,
and ARM loans. During fiscal 1995, the Bank introduced a 10-year adjustable-rate
loan which features an initial 10-year fixed-rate that converts to a one-year
adjustable-rate loan upon expiration of the initial fixed-rate period. The
Bank's origination of fixed-rate mortgage loans as compared to ARM loans is
determined on an on-going basis and is based on changes in market interest rates
and consumer preference. Many borrowers have selected shorter-term 15-year
fixed-rate mortgages 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.
<PAGE>
The retention of ARM loans in the Bank's loan portfolio helps the Bank
to manage its exposure to changes in the interest rates. There are, however,
unquantifiable credit risks relating to such loans resulting from the potential
of increased costs due to changed rates to be paid by the customer. It is
possible that during periods of rising interest rates, the risk of default on
ARM loans may increase as a result of repricing and the increased costs to the
borrower. Furthermore, the ARM loans originated by the Bank generally provide,
as a marketing incentive, for initial rates of interest below the rates which
would apply were the adjustment index used for pricing initially
("discounting"). These loans are subject to increased risk of default or
delinquency due to this discounting. In addition, although ARM loans allow the
Bank to increase the sensitivity of its asset base to changes in interest rates,
the extent of this interest rate sensitivity is limited by the periodic and
lifetime interest rate adjustment limits, and by the ability of borrowers to
refinance their loans if they perceive that the interest rate they are paying is
too high. Accordingly, there can be no assurance that yields on ARM loans will
be sufficient to offset increases in the Bank's cost of funds.
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
7
<PAGE>
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, and $26.7
million in fiscal 1999. 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 and has during the last fiscal year expanded
its consumer loan portfolio particularly in the automobile and home lending
areas. 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, 1999, the Bank's consumer loan
portfolio totaled $86.1 million, or 26.6% of its loan portfolio. The chief
component of such loans consists of indirect and direct automobile paper,
accounting for $56.8 million, or 65.9%, of the consumer loan portfolio at March
31, 1999. 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.
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
8
<PAGE>
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, 1999, indirect dealer loans totaled $46.1 million, or 53.6%,
of the Bank's consumer loan portfolio.
5 At March 31, 1999, $23.4 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.
The Bank has 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, 1999 was $724,000, or .22% 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, 1999, $54,000, or 7.5%, 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. An increasing part of
the Bank's portfolio as a percentage of the total, 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, 1999, the Bank had multi-family and commercial real estate loans
totaling $31.9 million, representing 9.8% of its loan portfolio.
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, hotels and shopping centers.
9
<PAGE>
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,
1999.
<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.................................... 3 $ 268 $ ---
Church................................................. 6 2,628 ---
Small business facilities and office
buildings............................................ 78 22,388 ---
Hotels 3 5,801 ---
Shopping centers....................................... 2 813 ---
---------- --------- ------------
Total commercial and multi-family
real estate loans................................... 92 $ 31,898 $ ---
========== ========= ============
</TABLE>
At March 31, 1999, the Bank had a total of 13 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, 1999.
Multi-family and commercial real estate loans originated by the Bank
generally have terms ranging from 5 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.
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
10
<PAGE>
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.
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, 1999, the Bank's construction loan portfolio
totaled $8.2 million (including a $155,000 loan on a low-income housing
project), or 2.5% 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.
<PAGE>
Construction loans to builders are written for a term of 18 months at a
fixed rate of interest. Construction loans are obtained primarily through
continued business from builders who have previously borrowed from the Bank, as
well as referrals from existing customers. The application process includes a
submission of accurate plans, specifications and costs of the project to be
constructed. These items are also used as a basis for determining the appraised
value of the subject property. Loans are based on the lesser of the current
appraised value or the cost of construction (land plus building). From time to
time, the Bank has lent funds for the development and subdivision of lots,
although the Bank had no such loans in its portfolio at March 31, 1999.
Commercial Business Lending. Federally chartered savings institutions,
such as Permanent Federal, are authorized to make secured or unsecured loans and
issue letters of credit for commercial, corporate, business and agricultural
purposes and to engage in commercial leasing activities, up to a maximum of 10%
of total assets.
A small but increasing part of the Bank's loan portfolio, at March 31,
1999, Permanent Federal had $17.3 million in commercial business loans
outstanding (representing 5.3% of the Bank's total loan portfolio). At March 31,
1999, Permanent Federal had $136,000 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.
11
<PAGE>
During fiscal 1999, the Bank originated a total of $168.8 million in
loans. Of the loans originated during the year, $55.9 million were one- to
four-family real estate loans, $76.9 million were consumer loans, $27.7 million
were commercial loans, and $3.9 million were construction loans.
The Bank's current policy is to sell all fixed-rate conventional loans
that are originated or converted with terms of more than 15 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 (generally non-conforming
loans) are also retained in the Bank's portfolio. Servicing is retained on all
loan sales, except for FHA and VA mortgage loans. During fiscal 1997, 1998 and
1999, the Bank sold $1.0 million, $5.1 million and $12.7 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.
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 $7.1 million, $5.5 million, and $14.3 million at
March 31, 1997, 1998 and 1999, 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. In fiscal 1999, the Bank purchased $20.9 million of mortgage
backed securities. 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 $1.6 million, $4.9 million and $23.4 million (excluding
undisbursed portions of loans in process) at March 31, 1997, 1998 and 1999,
respectively. In addition, the Bank had approximately $104,000,
12
<PAGE>
$100,000 and $106,000 in commitments to sell loans at March 31, 1997, 1998 and
1999, respectively.
The amount of loans serviced by the Bank for others totaled $34.3
million, $32.5 million and $36.3 million at March 31, 1997, 1998 and 1999,
respectively.
The Bank generally earns servicing fees of 25 basis points for
servicing loans for others. For the years ended March 31, 1997, 1998 and 1999
such fees amounted to approximately $101,000, $84,000 and $82,000, respectively.
13
<PAGE>
The following table sets forth the loan origination, purchase and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
1997 1998 1999
------------ --------------------
<S> <C> <C> <C>
cOriginations by type:
Real estate - one- to four-family....................... $32,020 $39,373 $55,948
- multi-family.............................. --- --- ---
- commercial real estate.................... --- 3,144 4,308
- construction.............................. 6,070 3,634 3,943
Non-real estate ........................................
-consumer............................... 24,647 24,829 76,933
-commercial business.................... 16 5,192 27,676
------ ------ ------
Total loans originated .......................... 62,753 76,172 168,808
------ ------ ------
Purchases:
Real estate - one- to four-family....................... $ --- $ --- $ ---
- multi-family.............................. --- --- ---
- commercial real estate.................... --- --- ---
- construction.............................. --- --- ---
Non-real estate - consumer.............................. --- --- ---
- commercial business....................... --- --- ---
- commercial paper.......................... 17,741 17,257 43,552
- bankers' acceptances...................... --- --- ---
------ ------ ------
Total loans purchased............................ 17,741 17,257 43,552
Mortgage-backed securities............................... 34,491 18,485 20,919
------ ------ ------
Total purchases.................................. 52,232 35,742 64,471
------ ------ ------
Sales and Principal Repayments:
Sales:
Real estate - adjustable-rate one- to four-family......... $ --- $ ---$ ---
- fixed-rate one- to four-family....................... 962 5,078 12,721
- multi-family.............................. --- --- ---
- commercial real estate.................... --- --- ---
- construction.............................. --- --- ---
Non-real estate - consumer.............................. --- --- ---
- commercial business............................. --- --- ---
------ ------ ------
Total loans sold................................. 962 5,078 12,721
Mortgage-backed securities.............................. 11,143 15,083 18,223
------ ------ ------
Total sales...................................... 12,105 20,161 30,944
Principal repayments...................................... 91,807 97,399 187,707
------ ------ ------
Total reductions................................. 103,912 117,560 218,651
Increase (decrease) in other items, net................... --- --- ---
------ ------ ------
Net increase (decrease).......................... $11,073 $ (5,646) $ 14,628
====== ====== ========
</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 10 to 15 days after the scheduled payment date, depending on the
type of loan, 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 and outside directors of the Bank
periodically reviews large loans (generally, those unsecured loans in excess of
$250,000, residential real estate loans in excess of $350,000 and commercial
credits in excess of $1,000,000). 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
15
<PAGE>
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances. Additionally, while the
Bank's asset quality is generally strong and its reserves adequate, changes in
the local or national exonomy could adversely affect asset quality or call for
the establishment of additional reserves.
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, 1999,
(without deduction for specific valuation allowances of $236,000) all of which
are included in the table of non-performing assets.
<TABLE>
<CAPTION>
At March 31,
1997 1998 1999
(In Thousands)
<S> <C> <C> <C>
Substandard (including real
estate owned)................................... $2,965 $1,372 $2,606
Doubtful......................................... 87 141 975
Loss............................................. --- --- ---
---------- ---------- ----------
Total classified assets
(including real estate
owned)..................................... $3,052 $1,513 $3,581
====== ====== ======
Special mention.................................. $4,587 $2,753 $4,633
------ ------ ======
Total classified assets $8,214
======
(including real estate
owned) and special
mention.................................... $7,639 $4,266
====== ======
</TABLE>
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,
1995 1996 1997
----------------------------- --------------------------------- --------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount
------------- ----------- --------------------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family...................... $ 1 68.2% $ 90 69.4% $ 90 71.7% $ ---
Multi-family................. 210 7.9 166 5.5 183 3.8 ---
Commercial real
estate...................... --- 2.9 --- 2.4 --- 1.9 ---
Construction or
development................. --- 1.2 --- 1.3 --- 1.0 ---
Consumer..................... 18 19.7 50 20.3 68 21.1 50
Commercial business.......... 107 0.1 --- --- --- -- ---
Bankers' acceptances......... --- -- --- 0.1 --- -- ---
Commercial paper............. --- -- --- 1.0 --- .5 ---
Unallocated
Consumer................... 382 N/A 456 N/A 454 N/A 520
One- to four-family........ 630 N/A 647 N/A 876 N/A 435
Multi-family and
commercial
real estate.............. 734 N/A 829 N/A 455 N/A 968
Construction or
development.............. 11 N/A --- N/A --- N/A ---
------ ----- -------- ----- ------ ----- ----------
Total................... $2,093 100.00% $2,238 100.00% $2,126 100.00% $1,973
====== ====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1998 1999
--------------------------- ------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Loans Amount Loans
------------- ---------------- -----------
<S> <C> <C> <C>
One- to four-
family...................... 69.7% $ 3 52.8%
Multi-family................. 1.8 --- 1.5
Commercial real
estate...................... 2.1 --- 8.4
Construction or
development................. 1.5 --- 2.5
Consumer..................... 19.2 256 26.6
Commercial business.......... 1.7 --- 8.2
Bankers' acceptances......... -- ---
Commercial paper............. 4.0 ---
Unallocated
Consumer................... N/A 997 N/A
One- to four-family........ N/A 749 N/A
Multi-family and
commercial
real estate.............. N/A 643 N/A
Construction or
development.............. N/A 58 N/A
----- --------- -----
Total................... 100.00% $2,706 100.00%
====== ====== ======
</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, 1999, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 40.5%. 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, 1999, Permanent Federal's securities
(including mortgage-backed securities) totaled $124.2 million, or 14.1% 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.
OTS and accounting guidelines regarding investment portfolio accounting
require institutions to categorize all 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, 1999, the
Company had $117.3 million in securities "available for sale," $6.9 million of
securities which are held to maturity, and no securities identified as
"trading." The securities available for sale at March 31, 1999 had net
unrealized gains of $9,869. At March 31, 1998, the Bank had $168.3 million in
securities available for sale, $18.9 of securities classified as held to
maturity and no securities identified as "trading." The securities available for
sale at March 31, 1998 had net unrealized gains of $372,373.
18
<PAGE>
The following table sets forth the composition of the Bank's securities
portfolio (including securities held to maturity and available for sale) at the
dates indicated.
<TABLE>
<CAPTION>
At March 31,
-----------------------------------------------------------------------------
1997 1998 1999
-----------------------------------------------------------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
(Dollars in Thousands)
Available for sale securities at fair value:
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities $ 7,009 3.66% $ 4,033 2.09% $ - - - - - - %
Federal agency securities ............ 78,171 40.79 100,972 52.43 62,478 48.18
Mortgage backed securities............ 74,052 38.64 62,652 32.53 54,811 42.27
Municipal bonds & other............... - - - - - - 614 0.32 - - - - - -
------------------------- ---------- -------------------------------------
Subtotal........................... 159,232 83.09% 168,271 87.37% 117,289 90.45%
Held to maturity securities at amortized cost:
Municipal bonds & other.............. 25 0.1 - - - - - - 6,920 5.34
Mortgage backed securities........... 27,181 14.18 18,861 9.79% - - - - - -
FHLB stock........................... 5,193 2.71 5,466 2.84 5,466 4.22
Subtotal.......................... 32,399 16.91 24,327 12.63 12,386 9.55
------ --------- ------ -------- ------
Total securities............... $191,631 100.00% $192,598 100.00% $129,674 100.00%
======== ========= ======== ======= ======== =======
Other interest earning deposits with banks $3,154 100.00% $1,808 100.00% $6,361 100.00%
====== ========== ====== ======= ====== =======
</TABLE>
The following table sets forth as of March 31, 1999 the composition and
maturities of the securities portfolio, excluding FHLB stock.
<TABLE>
<CAPTION>
At March 31, 1999
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>
Federal agency obligations.......... $1,965,000 $14,916,329 $45,596,667 $62,477,996 $62,947,099
Mortgage backed securities.......... 123,859 2,858,532 51,828,699 54,811,090 54,332,118
State and local government
obligations and other............ 1,008,722 5,618,513 6,627,235 6,919,793
----------- ------------------------------- ----------- ------------
Total investment securities......... $3,097,581 $17,774,861 $103,043,879 $123,916,321 $124,199,010
========== =========== ============ ============ ============
</TABLE>
<PAGE>
At March 31, 1999 the Bank's securities portfolio did not contain
securities of any issuer with an aggregate book value in excess of 10% of the
Bank's retained earnings, excluding securities issued by the United States
Government or its agencies.
The Bank's securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors. Investments may be made by
authorized Bank officers within specified limits. 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, 1999, the Bank's mortgage-backed securities totaled $54.8
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")
19
<PAGE>
or the Federal Home Loan Mortgage Corporation ("FHLMC"). At March 31, 1999, the
Bank's portfolio consisted of $54.8 million available for sale. At such date,
the portfolio had a weighted average interest rate of 6.33%.
For information regarding the carrying and market values of Permanent
Federal's mortgage-backed securities portfolio, see Note 2 of the Notes to
Consolidated Financial Statements in the Annual Report.
Under the OTS risk-based capital requirements, GNMA mortgage-backed
securities have a zero percent risk weighting and FNMA, FHLMC and AA-rated
mortgage-backed securities have a 20% risk weighting, in contrast to the 50%
risk weighting carried by one- to four-family performing residential mortgage
loans.
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization
and repayment of loan principal and interest (including mortgage-backed
securities), maturities of securities, mortgage-backed securities and short-term
investments, FHLB advances and funds provided from operations.
Borrowings are used to compensate for seasonal reductions in deposits
or deposit inflows at less than projected levels, to purchase investments
(including mortgage-backed securities) and to support lending activities. At
March 31, 1999, the Bank's borrowings consisted of FHLB advances totaling $96.5
million. See Notes 6, 7 and 8 of the Notes to Consolidated Financial Statements
in the Annual Report.
<PAGE>
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 1997, 1998
and 1999, the Bank experienced a net inflow as a result of branch acquisitions.
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.
20
<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,
---------------------------------------------------------------------------
1997 1998 1999
------ ------ -----
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 $ 902 0.32% $1,755 0.62% $12,268 3.53%
Passbook Accounts (2.75-5.59%) 54,245 19.20 52,051 18.27 59,482 17.13
NOW Accounts (2.00-2.60%) 24,046 8.51 22,468 7.89 30,889 8.89
Money Market Accounts (2.75-3.00%) 11,542 4.08 11,542 4.05 26,755 7.70
--------- --------- -------- -------- -------- --------
Total Non-Certificates 90,736 32.11 87,816 30.83 129,394 37.25
--------- --------- -------- -------- -------- --------
Certificates:
0.00 - 3.49% 158 0.06 66 0.02 40 .01
3.50 - 5.49% 81,947 29.00 61,523 21.59 120,750 34.77
5.50 - 7.49% 104,618 37.02 130,864 45.93 92,404 26.60
7.50 - 9.49% 3,295 1.17 2,673 0.94 2,753 .80
--------- --------- -------- -------- -------- --------
Total Certificates 190,018 67.24 195,126 68.48 215,947 62.18
--------- --------- -------- -------- -------- --------
Accrued Interest 1,809 0.65 1,971 0.69 1,985 .57
--------- --------- -------- -------- -------- --------
Total Deposits $282,563 100.00% $284,913 100.00% $347,326 100.00%
======== ========= ======== ======== ======== ========
</TABLE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------
1997 1998 1999
-------- --------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance.... $280,008 $280,753 $ 282,942
Deposits........... 566,909 585,093 1,097,472(1)
Withdrawals........ 575,977 592,939 1,046,582
Interest credited.. 9,813 10,035 11,509
-------- --------- ------------
Ending balance..... $280,753 $282,942 $ 345,341
======== ======== =========
Net increase....... $ 745 $ 2,189 $ 62,399
======== ========= ==========
Percent increase.. 0.26% 0.78% 22.1 %
======== ========== ==========
</TABLE>
(1) includes $78,749 of deposits acquired in branch acquisition
21
<PAGE>
The following table sets forth the rate and maturity information for
the Bank's certificates of deposit as of March 31, 1999.
<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, 1999.................... 40 21,764 17,370 39,174 18.14%
September 30, 1999............... 25,522 13,554 13 39,089 18.10
December 31, 1999................ 11,959 7,611 7 19,578 9.07
March 31, 2000................... 13,061 6,914 45 20,020 9.27
June 30, 2000.................... 10,882 4,969 15,851 7.34
September 30, 2000............... 11,962 8,286 20,248 9.38
December 31, 2000................ 4,043 2,948 204 7,195 3.33
March 31, 2001................... 5,419 1,253 1,112 7,784 3.60
June 30, 2001.................... 4,520 785 567 5,871 2.72
September 30, 2001............... 1,537 648 718 2,903 1.34
December 31, 2001................ 497 757 87 1,341 0.62
March 31, 2002................... 1,099 1,876 2,975 1.38
Thereafter....................... 8,485 25,433 33,918 15.71
--------- ------- -------- ---------- -------- -------
Total......................... $ 40 $120,750 $ 92,404 $ 2,753 $215,947 100.00%
======= ======== ======== ========= ======== ======
Percent of total.............. 0.02% 55.92 % 42.79% 1.27% 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, 1999.
<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> <C>
Certificates of deposit less
than $100,000.............................. $34,499 $35,451 $31,167 $84,538 $185,655
Certificates of deposit of
$100,000 or more........................... 3,798 3,246 5,911 13,542 26,497
Public funds(1)............................. 877 392 2,520 6 3,795
---------- ------------ ---------- -------------- ------------
Total certificates of $39,174 $39,089 $39,598 $98,086 $215,947
======= ======== ======= ======== ========
deposit....................................
</TABLE>
- ---------------
(1) Deposits from governmental and other public entities.
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, 1999 the Bank's FHLB advances totaled $96.5 million.
See also Note 6 of the Notes to Consolidated Financial Statements in the Annual
Report.
22
<PAGE>
The following table sets forth the Bank's maximum month-end balance and
average balance of FHLB advances and other borrowings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended March 31,
1997 1998 1999
----------- ----------- --------------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances.................................... $100,141 $107,778 $102,003
Securities sold under agreements to repurchase... 2,945 445 ---
FHLB overnight borrowings........................ 1,710 3,201 ---
----------- ----------- --------------
$104,796 $111,424 $102,003
======== ======== ========
Average Balance:
FHLB advances.................................... $ 92,604 $101,711 $94,462
Securities sold under agreements to repurchase... 1,485 103 10
FHLB overnight borrowings........................ 208 30 19
----------- ------------- ------------
$ 94,297 $101,844 $ 94,491
======== ======== ========
</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>
Year Ended March 31,
1997 1998 1999
----------- ----------- --------------
(In Thousands)
<S> <C> <C> <C>
FHLB advances........................................ $ 98,484 $ 99,353 $ 96,504
Securities sold under agreements to repurchase....... 607 --- ---
FHLB overnight borrowings............................ 1,187 --- ---
---------- ------------- ------------
Total borrowings................................ $100,278 $ 99,353 $ 96,504
======== ======== ========
Weighted average interest rate of FHLB advances...... 5.64% 5.39% 5.10%
Weighted average interest rate of securities sold
under agreements to repurchase...................... 5.19% ---% ---%
Weighted average interest rate
of FHLB overnight borrowings........................ ---% ---% ---%
</TABLE>
23
<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 12.5% interest, along with seven 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. The Bank uses the
equity method to account for its investment and in fiscal 1990, recognized
$89,400 in income 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
net income of $10,300 for the year ended March 31, 1999.
Through Perma Service, the Bank also provides brokerage services, on an
agency basis, through INVESTTM.
Competition
Permanent Federal faces strong competition, both in originating real
estate and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from commercial banks, other thrifts and
mortgage companies. The Bank competes for loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers.
The Bank attracts most of its deposits from Vanderburgh, Gibson,
Warrick, Posey and Dubois Counties. Competition for those deposits is
principally from commercial banks, other thrifts, credit unions and other
financial intermediaries doing business in the same community. The ability of
the Bank to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk and other factors. The Bank competes for these
deposits by offering a variety of deposit accounts at competitive rates and
convenient business hours.
Regulation
General. Permanent Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Indianapolis and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). As the savings and loan holding company of the Bank, the Holding
Company also is subject to federal regulation and oversight. The purpose of the
regulation of the Holding Company and other
24
<PAGE>
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 1997 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, 1999 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, 1999, the
Bank's lending limit under this restriction was $4.9 million. At March 31, 1999,
the Bank had no loans in excess of this limit. The Bank is in compliance with
the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on matters such as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and
25
<PAGE>
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.
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.
26
<PAGE>
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, 1999, the Bank had no purchased mortgage servicing
rights.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. At March 31, 1999, 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, 1999, the non- includable portion of the Bank's investment in FFLIC totaled
$723,000. See also "Service Corporation Activities."
27
<PAGE>
At March 31, 1999, the Bank had core capital of $32.8 million, or 6.76%
of adjusted total assets, which is approximately $13.4 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, 1999, 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. Other than goodwill, the
Bank's only exclusion from capital and assets at March 31, 1999 was its
investment in FFLIC.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS Regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise. Until the rule is finalized, no determination can be
made of what, if any, impact this rule may have on the Bank.
28
<PAGE>
At March 31, 1999, the Bank had total capital of $34.3 million
(including $32.8 million in core capital) and risk-weighted assets of $280.1
million (including $9.7 million in converted off- balance sheet assets) or total
capital of 12.2% of risk-weighted assets. This amount was $11.9 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.
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.
29
<PAGE>
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.
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, 1999, the Bank was in compliance with the
requirements, with an overall liquid asset ratio of 40.5%.
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
30
<PAGE>
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, 1999, the
Bank met the test and has always met the test since it has been in effect.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
BIF. If such an association has not yet requalified or converted to a national
bank, its new investments and activities are limited to those permissible for
both a savings association and a national bank, and it is limited to national
bank branching rights in its home state. In addition, the association is
immediately ineligible to receive any new FHLB borrowings and is subject to
national bank limits for payment of dividends. If such association has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of
Permanent Federal, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch, by
Permanent Federal. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to
30
<PAGE>
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 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
32
<PAGE>
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, 1999, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Indianapolis, which is one of 12 regional FHLBs ("FHLB System"), that
administers the home financing credit function of savings associations. Each
FHLB serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB which are subject to the regulation and oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At March 31, 1999, 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 approximately 8% and were 8.03% for fiscal
year ended March 31, 1999. 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, 1999, dividends paid by the FHLB of Indianapolis to the Bank
totaled $437,696, which constitute a $4,873 increase over the amount of
dividends received in the fiscal year ended March 31, 1998.
33
<PAGE>
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
could, 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.
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 must recapture that portion of
the reserve that exceeds the amount that could have been under the specific
charge-off method for post-1987 tax years. The legislation also requires thrifts
to account for bad debts for federal income tax purposes on the same basis as
commercial banks for tax years beginning after December 31, 1995. The recapture
will occur over a six-year period, the commencement of which will be delayed
until the first taxable year beginning after December 31, 1997, provided the
institution meets certain residential lending requirements. The management of
the company does not believe that the legislation will have a material impact on
the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax, and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1999, the Bank's Excess for tax purposes totaled
approximately $6 million.
34
<PAGE>
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.
Indiana Taxation. Indiana imposes a franchise tax on financial
institutions at the rate of 8.5% of modified federal taxable income. The
modifications to federal taxable income include an add- back of municipal
interest and state and local property taxes and bad debt deductions are limited
to actual net charge-offs. The franchise tax is imposed on a combined basis
including the Company, the Bank and its subsidiary.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Executive Officers of the Company and the Bank
The following table sets forth certain information 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 57 Senior Vice President of Bank
Seth P. Allen 40 Senior Vice President of Bank
Richard A. Condi 45 Vice President of Bank
Robert A. Cern 49 Chief Financial Officer and Secretary of the Company
and Senior Vice President, Secretary/Treasurer and
Chief Financial Officer of Bank
Glenna J. Kirsch 49 Vice President of Bank
Charles A. Becker, Sr. 52 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.
35
<PAGE>
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 1999 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.
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.
Charles A. Becker, Sr. From 1973-1991 Mr. Becker was responsible for
Retail Banking at Peoples Savings Bank in Evansville, Indiana as Senior Vice
President. In 1991 Peoples Savings Bank was acquired by INB Banking Company,
Indianapolis, Indiana. As Vice President of Retail Banking for the Southwest
Region his responsibilities continued to be in the areas of consumer lending and
branch banking. In 1994 NBD Bank, N.A., Detroit, Michigan purchased INB and Mr.
Becker continued in the same capacity. Mr. Becker joined Permanent Federal
Savings Bank as Vice President, Branch Administration in June 1998 as Permanent
acquired the four Evansville branch locations from NBD Bank, N.A.
Employees
At March 31, 1999, the Bank had a total of 158 full-time and 26
part-time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
36
<PAGE>
Item 2. Properties
The following table sets forth information concerning the main office
and each branch office of the Bank at March 31, 1999. At March 31, 1999, the
Bank's premises, office properties and equipment had an aggregate book value of
approximately $8.7 million.
<TABLE>
<CAPTION>
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
-------- -------- ------ ---- -----
<S> <C> <C> <C> <C>
Main (Downtown) Office
- ----------------------
101 Southeast Third Street 1963 Owned N/A $2,986
Evansville, Indiana
Branch Offices
- --------------
University Heights
4615 University Drive 1988 Owned N/A 413
Evansville, Indiana
Town Center
201 Diamond Avenue 1981 Owned N/A 345
Evansville, Indiana
Green River Road
123 South Green River Road 1978 Owned N/A 243
Evansville, Indiana
North Brook
3820 First Avenue 1978 Leased November 2002 74 (1)
Evansville, Indiana
West Franklin Street
2131 West Franklin Street 1960 Owned N/A 102
Evansville, Indiana
Ross Center
2521 Washington Avenue 1994 Owned N/A 721
Evansville, Indiana
Fort Branch
810 East Locust Street 1987 Owned N/A 357
Fort Branch, Indiana
Jasper
771 West Second Street 1991 Owned N/A 495
Jasper, Indiana
Newburgh
8533 Bell Oaks Drive 1997 Owned N/A 818
Newburgh, Indiana
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
-------- -------- ------ ---- -----
(In Thousands)
<S> <C> <C> <C> <C>
Oakland City
410 West Morton Street 1984 Owned N/A 230
Oakland City, Indiana
Fourth Street Office
19 N.W 4th Street 1998 Leased December 2001 27
Evansville, Indiana
Bellemeade Office
4601 Bellemeade 1998 Owned N/A 567
Evansville, Indiana
Buena Vista Office
1010 W. Buena Vista 1998 Leased September 2013 36
Evansville, Indiana
St. Joe Office
530 N. St. Joseph Avenue 1998 Owned N/A 406
Evansville, 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, 1999 was $479,000.
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, 1999.
37
<PAGE>
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
Page 47 and 48 of the attached 1999 Annual Report to Stockholders is
herein incorporated by reference.
Item 6. Selected Financial Data
Pages 5 and 6 of the attached 1999 Annual Report to Stockholders is
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Pages 8 through 20 of the attached 1999 Annual Report to Stockholders
are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Page 7 and 21 through 46 of the attached 1999 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.
38
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant; Compliance with
Section 16(a) of the Exchange Act
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 27, 1999, 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.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Companys' directors and executive officers, and person who own moew than 10% of
a registered class of the Company's equity securities, to file with the SERC
initial reports of ownership and reports of changes in ownership of Common Sotkc
and other equity securities of the Company. Officvers, directors and greater
than 10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the company and written representations that no other
reports were required, during the fiscal year ended March 31, 1999, all Section
16(a) filing requirements applicable to its officers, directors amnd greater
than 10 percent beneficial owners were complied with except that Mr. Allen and
Ms. Kirsch inadvertently failed to timely file Form 4s to report one transaction
each. Mr. Allen reporeted his transaction on a Form 4 dated June 5, 1998, and
Ms. Kirsch reported her transaction on a Form 4 dated June 4, 1998. In addition,
Mr. Korb failed to timely file a Form 4 to report one transaction. Mr. Korb
reported the transaction on a Form 4 dated December 22, 1998.
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 27, 1999, 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 27, 1999, 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
27, 1999, 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.
39
<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, 1999, is incorporated by reference
in this Form 10-K Annual Report as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
<S> <C>
Independent Auditors' Report.......................................................................... 21
Consolidated Statements of Financial Condition
at March 31, 1999 and 1998.......................................................................... 22
Consolidated Statements of Income for the Years Ended
March 31, 1999, 1998 and 1997....................................................................... 23
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 1999, 1998 and 1997........................................................... 24
Consolidated Statements of Cash Flows for Years Ended
March 31, 1997, 1998 and 1999..................................................................... 25 - 26
Notes to Consolidated Financial Statements........................................................... 27 - 46
(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.
</TABLE>
41
<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 10(c)
Donald P. Weinzapfel dated
October 6, 1998
(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
42
<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, 1999.
43
<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, 1999
By: /s/ Donald P. Weinzapfel
- ----------------------------
Donald P. Weinzapfel
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Donald P. Weinzapfel By: /s/ John R. Stone
---------------------------- ----------------------------
Donald P. Weinzapfel John R. Stone, Director
Chairman of the Board Date: June 29, 1999
and Chief Executive Officer
(Principal Executive Officer)
Date: June 29, 1999
By: /s/ Daniel F. Korb By: /s/ Daniel L. Schenk
---------------------------- ----------------------------
Daniel F. Korb, Director Daniel L. Schenk, Director
---------------------------- ----------------------------
Date: June 29, 1999 Date: June 29, 1999
---------------------------- -----------------
By: /s/ Murray J. Brown By: /s/ Jack H. Kinkel
---------------------------- ----------------------------
Murray J. Brown, Director Jack H. Kinkel, Director
Date: June 29, 1999 Date: June 29, 1999
---------------------------- -----------------
By: /s/ James D. Butterfield By: /s/ James W. Vogel
---------------------------- ----------------------------
James D. Butterfield, Director James W. Vogel, Director
Date: June 29, 1999 Date: June 29, 1999
---------------------------- -----------------
By: /s/ James A. McCarty, Jr. By: /s/ Robert L. Northerner
---------------------------- ----------------------------
James A. McCarty, Jr., Director Robert L. Northerner, Director
Date: June 29, 1999 Date: June 29, 1999
---------------------------- ----------------
By: /s/ Robert A. Cern
----------------------------
Robert A. Cern, Chief Financial
Officer (Principal Financial
and Accounting Officer)
Date: June 29, 1999
43
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 6th day of October, 1998, by and between PERMANENT BANCORP, INC., a
Delaware corporation which is registered savings and loan holding company (the
"Holding Company"), PERMANENT FEDERAL SAVINGS BANK, a federally-chartered
savings bank (hereinafter referred to as the "Bank"), whose address is 101
Southeast Third Street, Evansville, Indiana 47708 and Donald P. Weinzapfel (the
"Employee") whose address is 7826 Briarwood, Evansville, Indiana 47715.
WHEREAS, the Employee is currently serving as Chairman of the Board,
and Chief Executive Officer of the Bank, and Chairman of the Board, President
and Chief Executive Officer of the Holding Company; and
WHEREAS, the Boards of Directors of the Bank and the Holding Company
recognize that, as is the case with publicly held corporations generally, the
possibility of a change in control of the Holding Company may exist and that
such possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of key management
personnel to the detriment of the Bank, the Holding Company and its
stockholders; and
WHEREAS, the Boards of Directors of the Bank and the Holding Company
believe it is in the best interests of the Bank and the Holding Company to enter
into this Agreement with the Employee in order to assure continuity of
management of the Bank and the Holding Company and to reinforce and encourage
the continued attention and dedication of the Employee to his assigned duties
without distraction in the face of potentially disruptive circumstances arising
from the possibility of a change in control of the Holding Company, although no
such change is now contemplated; and
WHEREAS, the Boards of Directors of the Bank and the Holding Company
have approved and authorized the execution of this Agreement with the Employee
to take effect as stated in Section 4 hereof and this Agreement shall supersede
the prior agreement between the parties related to the Employee's employment
with the Bank such that the Employee shall now have an agreement with both the
Bank and the Holding Company;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. Employment. The Employee will be employed solely as
Chairman of the Board of the Bank, such position to last until
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<PAGE>
January 1, 1999, and shall additionally be employed as Chairman of the Board and
Chief Executive Officer of the Holding Company until April 1, 2000. In
performing such duties, Employee shall render administrative and management
services as are customarily performed by persons situated in similar executive
capacities, and shall have other powers and duties as may from time to time be
prescribed by the Board, provided that such duties are consistent with the
Employee's positions as described above. The Employee shall continue to devote
his best efforts and substantially all his business time and attention to the
business and affairs of the Bank, or the Holding Company, as appropriate.
2. Compensation.
(a) Salary. The Bank, until January 1, 1999, and then
thereafter the Holding Company, agree to pay the Employee during the term of
this Agreement a salary established by the Board of Directors. The salary
hereunder as of the Commencement Date (as defined in Section 4 hereof) shall be
$174,000 per year. The salary provided for herein shall be payable not less
frequently than monthly in accordance with the practices of the Bank, provided,
however, that no such salary is required to be paid by the terms of this
Agreement in respect of any month or portion thereof subsequent to the
termination of this Agreement.
(b) Expenses. During the term of his employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him (in accordance with policies and procedures at least as
favorable to the Employee as those presently applicable to the senior executive
officers of the Bank) in performing services hereunder, provided that the
Employee properly accounts therefor in accordance with Bank policy.
3. Benefits.
(a) Participation in Retirement and Employee Benefit Plans.
The Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to stock options, stock purchases,
pension (including defined benefit plan and employee stock ownership plan),
thrift, profit-sharing (including 401(k) plan), group life insurance, medical
coverage, education, cash or stock bonuses, and other retirement or employee
benefits or combinations thereof, that are now or hereafter maintained for the
benefit of the Bank's executive employees or for its employees generally.
(b) Fringe Benefits. The Employee shall be eligible while
employed hereunder to participate in, and receive benefits under, any other
fringe benefits which are or may become applicable to the Bank's executive
employees or to its employees generally.
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4. Term. The term of employment under this Agreement shall be from
October 6, 1998 to April 1, 2000, subject to earlier termination as provided
herein.
5. Vacations. The Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) The Employee shall be entitled to an annual vacation
of not less than five (5) weeks per year;
(b) The timing of vacations shall be scheduled in a
reasonable manner by the Employee; and
(c) Management shall, solely at the Employee's request, be
entitled to grant to the Employee a leave or leaves of absence with or without
pay at such time or times and upon such terms and conditions as management, in
its discretion, may determine.
6. Termination of Employment; Death.
(a) The Board of Directors of either the Bank or the Holding
Company, as appropriate, may terminate the Employee's employment (but not board
membership) at any time, but any such termination, other than termination for
cause, shall not prejudice the Employee's right to compensation and other
benefits under the Agreement. If the employment of the Employee is involuntarily
terminated, other than for "cause" as provided in this Section 6(a) or pursuant
to any of Sections 6(d) through 6(g), or by reason of death or disability as
provided in Sections 6(c) or 7, the Employee shall be entitled to receive, (i)
his then applicable salary for the then-remaining term of the Agreement as
calculated in accordance with Section 4 hereof, payable in such manner and at
such times as such salary would have been payable to the Employee under Section
2 had he remained in the employ of the Bank, and (ii) all benefits currently
received, including a car assignment, club dues, disability benefits, and life
insurance, as well as those benefits stated in Section 3(a) and 3(b) over the
then-remaining term of the Agreement as calculated in accordance with Section 4
hereof.
The terms "termination" or "involuntarily terminated" in this
Agreement shall refer to the termination of the employment of Employee without
his express written consent. The Employee shall be considered to be
involuntarily terminated (1) if the employment of the Employee is involuntarily
terminated for any reason other than for "cause" as provided in this Section
6(a), pursuant to any of Sections 6(d) through 6(g) or by reason of death or
disability as provided in Sections 6(c) and 7; or (2) there occurs a material
diminution of or interference with the Employee's duties, responsibilities and
benefits in the Employee's positions as described in Section 1. By way of
example and not by way of limitation, any of the following actions, if
unreasonable or
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materially adverse to the Employee, shall constitute such diminution or
interference unless consented to in writing by the Employee: (i) a change in the
principal workplace of the Employee to a location more than 30 miles from
Evansville, Indiana; (ii) a material demotion of the Employee, a significant
reduction in the number or seniority of other personnel reporting to the
Employee, or a reduction in the frequency with which, or in the nature of the
matters with respect to which, such personnel are to report to the Employee,
other than as part of a Bank or Holding Company-wide reduction in staff; or
(iii) a reduction or adverse change in the salary, perquisites, benefits,
contingent benefits or vacation time which had theretofore been provided to the
Employee, other than as part of an overall program applied uniformly and with
equitable effect to all members of the senior management of the Bank and the
Holding Company.
In case of termination of the Employee's employment for cause,
the Bank or the Holding Company, as appropriate, shall pay the Employee his
salary through the date of termination, and neither the Bank nor the Holding
Company shall have any further obligation to the Employee under this Agreement.
The Employee shall have no right to receive compensation or other benefits for
any period after termination for cause. For purposes of this Agreement,
termination for "cause" shall include termination because of the Employee's
personal dishonesty, incompetence, willful misconduct, breach of a fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, or regulation (other than traffic violations
or similar offenses) or final cease-and-desist order, or material breach of any
provision of this Agreement. Notwithstanding the foregoing, the Employee shall
not be deemed to have been terminated for cause unless and until there shall
have been delivered to the Employee a copy of a resolution, duly adopted by the
affirmative vote of not less than a majority of the disinterested members of the
Board of Directors of the Bank or the Holding Company, as appropriate, at a
meeting of the Board called and held for such purpose (after reasonable notice
to the Employee and an opportunity for the Employee, together with the
Employee's counsel, to be heard before the Board), stating that in the good
faith opinion of the Board the Employee was guilty of conduct constituting
"cause" as set forth above and specifying the particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by
the Employee at any time upon ninety (90) days written notice to the Bank or the
Holding Company, as appropriate, or upon such shorter period as may be agreed
upon between the Employee and the Board of Directors of the Bank or the Holding
Company, as appropriate. In the event of such voluntary termination, the Bank or
the Holding Company, as appropriate, shall be obligated to continue to pay the
Employee his salary only through the date of termination, at the time such
payments are due, and neither the Bank nor the Holding Company shall have any
further obligation to the Employee under this Agreement.
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<PAGE>
(c) In the event of the death of the Employee during the term
of employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Bank or the Holding Company,
as appropriate, the salary of the Employee through the last day of the calendar
month in which his death shall have occurred, and the term of employment under
this Agreement shall end on such last day of the month.
(d) If the Employee is suspended from office and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit
Insurance Act ("FDIA"), 12 U.S.C. ss.ss. 1818(e)(3) and (g)(1), the obligations
of the Bank and the Holding Company, as appropriate, under this Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank or the Holding
Company, as appropriate, may in its discretion (i) pay the Employee all or part
of the compensation withheld while its contract obligations were suspended and
(ii) reinstate in whole or in part any of its obligations which were suspended.
(e) If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. ss.ss. 1818(e)(4)
or (g)(1)), all obligations of the Bank and the Holding Company under this
Agreement shall terminate, as of the effective date of the order, but vested
rights of the parties shall not be affected.
(f) If the Bank is in default (as defined in Section 3(x)(1)
of the FDIA), all its obligations under this Agreement shall terminate as of the
date of default, but this provision shall not affect any vested rights of the
parties.
(g) All the Bank's obligations under this Agreement shall be
terminated, except to the extent determined that continuation of this Agreement
is necessary for the continued operation of the Bank: (i) by the Director of the
Office of Thrift Supervision ("OTS") or his or her designee at the time the
Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters
into an agreement to provide assistance to or on behalf of the Bank under the
authority contained in Section 13(c) of the FDIA, 12 U.S.C. ss. 1823(c); or (ii)
by the Director of the OTS or his or her designee at the time the Director of
the OTS or his or her designee approves a supervisory merger to resolve problems
related to operation of the Bank or when the Bank is determined by the Director
of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however,
shall not be affected by any such action.
(h) In the event the Bank or the Holding Company purport to
terminate the Employee for cause, but it is determined by a
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<PAGE>
court of competent jurisdiction or by an arbitrator pursuant to Section 18 that
cause did not exist for such termination, or if in any event it is determined by
any such court or arbitrator that the Bank or the Holding Company, as
appropriate, has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
7. Disability. If during the term of employment hereunder the Employee
shall become disabled or incapacitated to the extent that he is unable to
perform the duties of the positions set forth in Section 1, above, he shall be
entitled to receive disability benefits of the type provided for other executive
employees of the Bank.
8. Change in Control.
(a) Involuntary Termination. If the Employee's employment is
involuntarily terminated (other than for cause or pursuant to any of Sections
6(c) through 6(g) or Section 7 of this Agreement) in connection with or within
twelve (12) months after a change in control which occurs at any time during the
term of employment under this Agreement, the Bank or the Holding Company, as
appropriate, shall pay to the Employee in a lump sum in cash within twenty-five
(25) business days after the Date of Termination (as hereinafter defined) of
employment an amount equal to 299 percent of the Employee's "base amount" of
compensation received from the Bank and any affiliated entity thereof, as
defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended
("Code").
(b) Definitions. For purposes of Sections 8, 9 and 12 of this
Agreement, "Date of Termination" means the earlier of (i) the date upon which
the Bank or the Holding Company, as appropriate, gives notice to the Employee of
the termination of his employment with the Bank or the Holding Company, as
appropriate (ii) the date upon which the Employee ceases to serve as an Employee
of the Bank or the Holding Company, as appropriate, and "change in control" is
defined solely as any acquisition of control (other than pursuant to the
Conversion or by a trustee or other fiduciary holding securities under an
employee benefit plan of the Holding Company or a subsidiary of the Holding
Company), as defined in 12 C.F.R. ss. 574.4, or any successor regulation, of the
Bank or Holding Company which would require the filing of an application for
acquisition of control or notice of change in control in a manner as set forth
in 12 C.F.R. ss. 574.3, or any successor regulation.
(c) Compliance with Capital Requirements. Notwithstanding
anything in this Agreement to the contrary, no payments may be made by the Bank
pursuant to Section 8 hereof without the prior approval of the Regional Deputy
Director of the
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<PAGE>
OTS if following such payment the Bank would not be in compliance with its fully
phased-in capital requirements as defined in OTS regulations.
9. Certain Reduction of Payments by the Bank. (a) Anything in this
Agreement to the contrary notwithstanding, in the event it shall be determined
that any payment or distribution by the Bank or the Holding Company, as
appropriate, to or for the benefit of the Employee (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise) (a "Payment") would be nondeductible (in whole or part) by the
employer for Federal income tax purposes because of Section 280G of the Code,
then the aggregate present value of amounts payable or distributable to or for
the benefit of the Employee pursuant to this Agreement (such amounts payable or
distributable pursuant to this Agreement are hereinafter referred to as
"Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced
Amount" shall be an amount, not less than zero (0), expressed in present value
which maximizes the aggregate present value of Agreement Payments without
causing any Payment to be nondeductible by the employer because of Section 280G
of the Code. For purposes of this Section 9, present value shall be determined
in accordance with Section 280G(d)(4) of the Code.
(b) All determinations required to be made under this Section
9 shall be made by the Bank's independent auditors, or at the election of such
auditors by such other firm or individuals of recognized expertise as such
auditors may select (such auditors or, if applicable, such other firm or
individual, are hereinafter referred to as the "Advisory Firm"). The Advisory
Firm shall within ten business days of the Date of Termination, or at such
earlier time as is requested by the Bank or the Holding Company, as appropriate,
provide to both the Bank and the Holding Company and the Employee an opinion
(and detailed supporting calculations) that the Bank and the Holding Company
have substantial authority to deduct for federal income tax purposes the full
amount of the Agreement Payments and that the Employee has substantial authority
not to report on his federal income tax return any excise tax imposed by Section
4999 of the Code with respect to the Agreement Payments. Any such determination
and opinion by the Advisory Firm shall be binding upon the Bank, the Holding
Company and the Employee. The Employee shall determine which and how much, if
any, of the Agreement Payments shall be eliminated or reduced consistent with
the requirements of this Section 9, provided that, if the Employee does not make
such determination within ten (10) business days of the receipt of the
calculations made by the Advisory Firm, the Bank or the Holding Company, as
appropriate, shall elect which and how much, if any, of the Agreement Payments
shall be eliminated or reduced consistent with the requirements of this Section
9 and shall notify the Employee promptly of such election. Within five (5)
business days of the earlier of (i) the Bank or the Holding Company's receipt of
the Employee's determination pursuant to the immediately preceding sentence of
this Agreement or (ii) the Bank or the Holding Company's election in lieu of
such determination,
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<PAGE>
the Bank or the Holding Company, as appropriate shall pay to or distribute to or
for the benefit of the Employee such amounts as are then due the Employee under
this Agreement. The Bank and the Holding Company and the Employee shall
cooperate fully with the Advisory Firm, including without limitation providing
to the Advisory Firm all information and materials reasonably requested by it,
in connection with the making of the determinations required under this Section
9.
(c) As a result of uncertainty in application of Section 280G
of the Code at the time of the initial determination by the Advisory Firm
hereunder, it is possible that Agreement Payments will have been made which
should not have been made ("Overpayment") or that additional Agreement Payments
will not have been made which should have been made ("Underpayment"), in each
case, consistent with the calculations required to be made hereunder. In the
event that the Advisory Firm, based upon the assertion by the Internal Revenue
Service against the Employee of a deficiency which the Advisory Firm believes
has a high probability of success determines that an Overpayment has been made,
any such Overpayment paid or distributed by the Bank or the Holding Company to
or for the benefit of Employee shall be treated for all purposes as a loan ab
initio which the Employee shall repay to the Bank or the Holding Company
together with interest at the applicable federal rate provided for in Section
7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to
have been made and no amount shall be payable by the Employee to the Bank or the
Holding Company if and to the extent such deemed loan and payment would not
either reduce the amount on which the Employee is subject to tax under Section 1
and Section 4999 of the Code or generate a refund of such taxes. In the event
that the Advisory Firm, based upon controlling precedent or other substantial
authority, determines that an Underpayment has occurred, any such Underpayment
shall be promptly paid by the Bank or the Holding Company, as appropriate, to or
for the benefit of the Employee together with interest at the applicable federal
rate provided for in Section 7872(f)(2) of the Code.
(d) Notwithstanding anything in this Agreement to the
contrary, in no event shall the sum of a payment to the Employee under Section 8
of this Agreement and payments of salary under Section 6 of this Agreement
exceed an amount that is three (3) times the Employee's average annual
compensation from the Bank and the Holding Company, based on the most recent
five taxable years at the time of termination of employment.
(e) Any payments made to the Employee pursuant to this
Agreement, or otherwise, are subject to and conditioned upon their compliance
with 12 U.S.C. ss. 1828(k) and any regulations promulgated thereunder.
8
<PAGE>
10. Confidential Information; Loyalty; Non-Competition.
(a) During the term of the Employee's employment hereunder and
thereafter, the Employee shall not, except as may be required to perform his
duties hereunder or as required by law, disclose to others or use, whether
directly or indirectly, any Confidential Information. "Confidential Information"
means information about the Bank or the Holding Company and the Bank's or the
Holding Company's clients and customers which is not available to the general
public and was or shall be learned by the Employee in the course of his
employment by the Bank or the Holding Company, including without limitation any
data, formulae, information, proprietary knowledge, trade secrets, and credit
reports and analyses owned, developed and used in the course of the business of
the Bank or the Holding Company, including client and customer lists and
information related thereto; and all papers, resumes, records and other
documents (and all copies thereof) containing such Confidential Information. The
Employee acknowledges that such Confidential Information is specialized, unique
in nature and of great value to the Bank and the Holding Company. The Employee
agrees that upon the expiration of the Employee's term of employment hereunder
or in the event the Employee's employment hereunder is terminated prior thereto
for any reason whatsoever, the Employee will promptly deliver to the Bank or the
Holding Company, as appropriate, all documents (and all copies thereof)
containing any Confidential Information.
(b) The Employee shall devote his full time to the performance
of his employment under this Agreement; provided, however, that the Employee may
serve, without compensation, with charitable, community and industry
organizations and continue to serve, with compensation, as a director of any
business corporation of which he is currently a director to the extent such
directorships do not inhibit the performance of his duties thereunder or
conflict with the business of the Bank or the Holding Company. During the term
of the Employee's employment hereunder, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or the Holding Company.
(c) Upon the expiration of the term of the Employee's
employment hereunder or in the event the Employee's employment hereunder
terminates prior thereto for any reason whatsoever, the Employee shall not, for
a period of three (3) years after the occurrence of such event, for himself, or
as the agent of, on behalf of, or in conjunction with, any person or entity,
solicit or attempt to solicit, whether directly or indirectly: (i) any employee
of the Bank to terminate such employee's employment relationship with the Bank;
or (ii) any savings and loan, banking or similar business from any person or
entity that is or was a client, employee, or customer of the Bank or the Holding
Company and had dealt with the Employee or any other employee of the Bank or the
Holding Company under the supervision of the Employee.
9
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(d) In the event Employee voluntarily resigns pursuant to
Section 6(b) of this Agreement, or in the event the Employee's employment
hereunder is terminated for cause, the Employee shall not, for a period of one
year from the date of termination, directly or indirectly, own, manage, operate
or control, or participate in the ownership, management, operation or control
of, or be employed by or connected in any manner with, any financial institution
having an office located within twenty (20) miles of any office of the Bank as
of the date of termination.
(e) The provisions of subsections (b) and (d) hereof shall not
prevent the Employee from purchasing, solely for investment, not more than five
(5%) percent of any other financial institution's stock or other securities
which are traded on any national or regional securities exchange or are actively
traded in the over-the-counter market and registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended.
(f) The provisions of this Section shall survive the
termination of the Employee's employment hereunder whether by expiration of the
term thereof or otherwise.
11. No Mitigation. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
12. No Assignments.
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that the Bank and the Holding Company will require any
successor or assign (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of the Bank or the Holding Company, by an assumption agreement in form
and substance satisfactory to the Employee, to expressly assume and agree to
perform this Agreement in the same manner and to the same extent that the Bank
or the Holding Company would be required to perform it if no such succession or
assignment had taken place. Failure of the Bank and the Holding Company to
obtain such an assumption agreement prior to the effectiveness of any such
succession or assignment shall be a breach of this Agreement and shall entitle
the Employee to compensation from the Bank and the Holding Company in the same
amount and on the same terms as the compensation pursuant to Section 8(a)
hereof. For purposes of implementing the provisions of this Section 12(a), the
date on which any such succession becomes effective shall be deemed the Date of
Termination.
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(b) This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Employee should die while any
amounts would still be payable to the Employee hereunder if the Employee had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to the Employee's devisee,
legatee or other designee or if there is no such designee, to the Employee's
estate.
13. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement (provided that all
notices to the Bank or the Holding Company shall be directed to the attention of
the Board of Directors of the Bank or the Holding Company, as appropriate, with
a copy to the Secretary of the Bank or the Holding Company, as appropriate), or
to such other address as either party may have furnished to the other in writing
in accordance herewith.
14. Prior Agreements/Amendments. Upon the Commencement Date of this
Agreement, all prior agreements, still in effect, among the parties related to
the employment of the Employee shall be deemed null and void and have no effect.
No amendments or additions to this Agreement shall be binding unless in writing
and signed by both parties, except as herein otherwise provided.
15. Paragraph Headings. The paragraph headings used in this Agreement
are included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Governing Law. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Indiana.
18. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
PERMANENT FEDERAL SAVINGS BANK
By: /s/ James W. Vogel
------------------------------------
(Duly Authorized Representative)
PERMANENT BANCORP, INC.
By: /s/ James W. Vogel
------------------------------------
James W. Vogel
(Duly Authorized Representative)
EMPLOYEE
Donald P. Weinzapfel
12
Permanent Bancorp, Inc.
1999 Annual Report
<PAGE>
TABLE OF CONTENTS
Letter to Stockholders ............................................... 3
Selected Consolidated Financial Data ................................. 5
Quarterly Results of Operations ...................................... 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations ...................... 8
Independent Auditors' Report ......................................... 21
Consolidated Statements of Financial Condition ..................... 22
Consolidated Statements of Income .................................. 23
Consolidated Statements of Stockholders' Equity .................... 24
Consolidated Statements of Cash Flows .............................. 25
Notes to Consolidated Financial Statements ......................... 27
Officers and Directors ............................................... 47
Corporate Information ................................................ 48
[GRAPH OMITTED]depicting [GRAPH OMITTED]depicting
Net Income for the Year Total Assets at March 31,
Ended March 31,
1
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[GRAPH OMITTED]depicting
Per Share Dividends (Quarter/Fiscal Year)
[GRAPH OMITTED]depicting
Deposit Structure at March 31,
[GRAPH OMITTED]depicting
Composition of Loan Portfolio at March 31,
2
<PAGE>
[GRAPHIC OMITTED: Logo of
Permanent Bacnorp, Inc.
TO OUR STOCKHOLDERS
We are pleased to report that net income for the year ended March 31,
1999 was $2.86 million. This amount represents an 8.3% increase over the $2.64
million earned during the year ended March 31, 1998. Net income for the Company
has increased every year since Permanent Bancorp, Inc. became publicly traded in
1994.
Basic earnings per share were $0.72 for the year ended March 31, 1999
compared to $0.65 for the prior year. Diluted earnings per share were $0.70 for
the year ended March 31, 1999 compared to $0.62 for the prior year. Basic
earnings per share increased 10.8% and diluted earnings per share increased
12.9% during the year ended March 31, 1999 compared to the prior fiscal year. In
June 1998, the Board of Directors increased the dividend per share by 9.1% to an
annual rate of $0.24 per share. Based upon the initial public offering price of
$5 (as adjusted for the two-for-one stock split effected in the form of a 100%
stock dividend in April 1998) this represents a dividend yield of 4.8%.
The Company remains financially strong. Total assets at March 31, 1999
were $492.3 million, an increase of 12.1% from total assets at March 31, 1998.
Deposits increased $62.4 million, or 22.1%, and net loans increased $95.7
million, or 42.5%, from March 31, 1998. Substantially all of the deposit growth
and approximately 45% of the loan growth is attributable to the Company's
acquisition of the deposits and loans of four branch locations from NBDBank,
N.A. inJune 1998. The balance of the loan growth is attributable to internally
generated expansion of the Company's consumer and commercial loan portfolios.
This expansion into higher yielding loans was funded by a decrease in the
securities portfolios.
Interest rate spread for the year ended March 31, 1999 was 2.74%
compared to 2.41% for the year ended March 31, 1998. We are particularly
encouraged that at March 31, 1999 interest rate spread was 2.86% compared to
2.40% at March 31, 1998. Net interest margin (or net interest income dividend by
average earnings assets) for fiscal 1999 was 2.91% compared to 2.74% for fiscal
1998.
Asset quality remains very healthy. Non-performing assets as a
percentage of total assets was .24% at March 31, 1999 and .25% at March 31,
1998. The allowance for loan losses as a percentage of total loans was .84% at
March 31, 1999 and .87% at March 1998. Other measures of asset quality continue
to be very favorable.
The acquisition of the four branch locations fromNBDBank was a
milestone for the Company. Not only did this acquisition provide significant
growth, it drastically changed the nature of theCompany. At the time of the
merger the Company had fifteen branches including the four acquired from NBD.
Because of the close proximity of some of the offices, the Company was able to
close two offices and take advantage of more modern and efficient locations.
Increasingly the Company is becoming a community bank rather than a
traditional thrift organization. Consider the following:
o Consumer and commercial loans represent 34.7%of the total loan portfolio at
March 31, 1999 but five years ago represented only 20.5% of total loans.
<PAGE>
o Five years ago certificates of deposit represented 70% of all deposits. As of
March 31, 1999 they represent 62.5% of the Company's deposits. Non-interest
bearing deposits have grown from just under $1 million at March 31, 1994 to
$12.3 million at March 31, 1999.
o Five years ago the internet was only beginning to gain commercial viability.
Today the Company has its own website at www.permanentbank.com. We hope you
will visit this site. It's a convenient way to keep abreast of your accounts
as well as transfer funds and pay bills.
3
<PAGE>
o The Company paid its first dividend to shareholders in the quarter ended June
30, 1995. Dividends have been paid in every quarter since then and the
dividend rate per share has increased 240% since the initial dividend.
In October 1998 the Board of Directors formally adopted a management
transition plan in anticipation of the retirement from management of the current
Chairman of the Board and Chief Executive Officer, Donald P. Weinzapfel.
In July 1998 John W. Forster retired from the Board of Directors. John
has served the Company and its operating subsidiary, Permanent Federal Savings
Bank, for more than twenty years. In recognition of this service John has been
elected a director emeritus of the Bank. We wish John well.
This spring the Company began construction on a new branch banking
facility on the growing east side of Evansville. We anticipate that this
facility will be fully operational by the end of 1999.
We, as always, appreciate the support of our shareholders. We are very
optimistic about fiscal 2000 and look forward to continued earnings growth.
/s/ Murray J. Brown
-------------------
Donald P. Weinzapfel Murray J.Brown
Chairman of the Board President
and Chief Executive Officer
4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
[GRAPHIC OMITTED: Logo of
Permanent Bacnorp, Inc.
<TABLE>
<CAPTION>
(In Thousands)
At March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets $492,327 $439,115 $423,698 $395,903 $342,678
Loans, net 321,018 225,349 210,189 206,910 195,483
Cash and interest-bearing deposits 13,952 6,083 6,364 4,916 5,573
Securities available for sale 117,289 168,271 159,232 135,124 1,973
Securities held to maturity 6,920 18,861 27,206 32,179 124,338
Deposits 345,341 282,942 280,753 280,008 267,520
Total borrowings 99,504 99,353 100,278 70,985 28,114
Stockholders' equity 40,864 42,683 39,095 41,494 43,488
Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Interest income $32,886 $30,521 $29,689 $25,892 $22,705
Interest expense 19,909 19,342 18,724 16,354 13,352
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 12,977 11,179 10,965 9,538 9,353
Provision for loan losses 300 177 113 207 410
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 12,677 11,002 10,852 9,331 8,943
- ---------------------------------------------------------------------------------------------------------------------------
Other income:
Service charges 1,492 985 841 628 619
Gain (loss) on sale of loans 206 92 23 18 (16)
Gain (loss) on sale of investment and
mortgage-backed securities 230 43 (56) (6) 5
Other 1,103 972 816 797 1,085
- ---------------------------------------------------------------------------------------------------------------------------
Total other income 3,031 2,092 1,624 1,437 1,693
- ---------------------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits 5,696 4,519 4,295 4,427 4,397
Deposit insurance assessment 271 276 2,351 711 738
Occupancy 764 821 809 819 769
Other 4,172 3,015 2,714 2,900 2,614
- ---------------------------------------------------------------------------------------------------------------------------
Total other expense 10,903 8,631 10,169 8,857 8,518
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,805 4,463 2,307 1,911 2,118
Income tax provision 1,945 1,818 1,003 662 874
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 2,860 $ 2,645 $ 1,304 $ 1,249 $ 1,244
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Ratios:
Return on average assets (ratio of net
income to average total assets) 0.60% 0.62% 0.31% 0.34% 0.36%
Interest rate spread information:
Average during year 2.74 2.41 2.40 2.28 2.41
End of year 2.86 2.40 2.41 2.33 2.28
Net interest margin (1) 2.91 2.74 2.76 2.72 2.83
Ratio of operating expense to average
total assets 2.28 2.03 2.44 2.41 2.37
Return on average stockholders' equity
(ratio of net income to average
stockholders' equity) 6.86 6.45 3.25 2.95 2.92
Ratio of average interest-earning
assets to average interest-bearing
liabilities 103.94 106.97 107.63 109.42 110.51
Asset Quality Ratios:
Non-performing assets to total assets at
end of year (2) 0.24 0.25 1.11 1.75 2.43
Allowance for loan and real estate
owned losses to non-performing assets 220.11 180.51 44.73 32.22 25.33
Allowance for loan losses to total loans 0.84 0.87 1.00 1.07 1.06
Capital Ratios:
Stockholders' equity to total assets at
end of year 8.30 9.72 9.23 10.48 12.69
Average stockholders' equity to average
assets 11.43 9.63 9.63 11.54 12.29
Number of full-service offices 13 11 11 11 11
Number of deposit accounts 43,383 33,884 35,426 36,452 35,075
Book value per share (3) $10.27 $10.41 $9.52 $9.72 $9.36
Dividend payout ratio 33.7% 30.6% 46.7% 27.9% 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
restructuring and real estate owned. (3) Amounts reflect a stock split in the
form of a 100% stock dividend on April 14, 1998.
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain selected unaudited data relating
to results of operations for the three month periods ending on the dates
indicated.
<TABLE>
<CAPTION>
Three Months Ended
- -----------------------------------------------------------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1998 1998 1998 1999
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1999
Total interest income $7,448,118 $8,599,719 $8,476,677 $8,361,322
Total interest expense 4,700,746 5,230,038 5,122,968 4,855,261
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 2,747,372 3,369,681 3,353,709 3,506,061
Provision for loan losses 75,000 75,000 75,000 75,000
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,672,372 3,294,681 3,278,709 3,431,061
Other income 621,434 774,873 583,318 1,051,315
Other expense 2,230,777 2,980,656 2,469,756 3,221,578
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,063,029 1,088,898 1,392,271 1,260,798
Income tax provision 435,681 403,039 529,822 576,569
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 627,348 $ 685,859 862,449 $ 684,229
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<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
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This section presents management's review of the operating results and
financial condition of Permanent Bancorp, Inc. (the "Company") and its
subsidiary, Permanent Federal Savings Bank (the "Bank"). This section provides
information which is not otherwise apparent from the Consolidated Statements of
Financial Condition, Income, Stockholders' Equity and Cash Flows and is intended
to assist readers in understanding the Company's performance and financial
condition.
The principal business of the Company consists of attracting deposits
from the general public and using these deposits, together with borrowings and
other funds, to originate one to four family residential mortgage loans as well
as multi-family and commercial real estate loans, 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.
The Company 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. The
Bank 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
The Company may from time to time make "forward-looking statements,"
including statements contained in the Company's filings with the Securities and
Exchange Commission (the "SEC"), in its reports to shareholders and in other
communications, which are made in good faith by the Company pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include statements with respect to the
Company's beliefs, expectations, estimates and intentions, that are subject to
significant risks and uncertainties, and are subject to change based on various
factors (some of which are beyond the Company's control). Those risks and
uncertainties could cause the Company's financial performance to differ
materially from expectations, estimates, and intentions expressed in such
forward-looking statements.
The Company does not undertake, and expressly disclaims any intent or
obligation, to update any forward-looking statement, whether written or oral,
that may be made from time to time by or on behalf of the Company.
8
<PAGE>
Information Systems and the Year 2000
The Company began working on its Year 2000 (or "Y2K") plan, a term
which refers to uncertainties about the ability of data processing hardware and
software to properly interpret dates after the beginning of the Year 2000, in
calendar year 1997. A project leader who is a member of senior management has
been assigned to the project while senior management oversees it and regularly
reports to the Board of Directors. A comprehensive Year 2000 Plan (the "Plan")
that includes phases relating to awareness, assessment, renovation, validation
and implementation has been established and includes a timetable and summarizes
each major phase of the project and the estimated costs to renovate and test
systems in preparation for the Year 2000.
The awareness phase included a Company-wide campaign to communicate and
identify the problem and the potential ramifications to the organization.
Concurrent with this phase, the assessment phase began which included the
inventorying of systems that may be impacted. The business use of each system
was analyzed and prioritized based upon the perceived adverse effect on the
financial condition of the Company in the event of a loss or interruption in the
use of that system. The Company has completed the awareness and assessment
phases of the project.
The Company has outsourced the most critical data processing activities
to an industry-known service provider who is responsible for modifying its
programs to be compliant with Year 2000 processing; however, testing of those
systems is the responsibility of the Company. Focusing on these critical
systems, the Company has closely reviewed and monitored this vendor's progress.
Year 2000 compliant upgrades to these outsourced critical data processing
systems were installed throughout fiscal 1999 and the service provider has
represented that this process is substantially complete.
The Y2K upgrades have been tested according to a comprehensive plan.
All issues discovered during the testing were reported to the service provider
for remediation. Additional testing was conducted to assure that each identified
issue was correctly repaired. The Company has not discovered any material issues
during the testing.
Other critical systems have also been assessed as to their Year 2000
readiness. These systems have been purchased from other industry-known vendors
and are generally used in their purchased configuration. The Company is closely
reviewing and monitoring these systems in addition to reviewing less critical
systems as to each vendor's progress and testing. Systems are being tested in a
non-production environment. Assurance of Year 2000 compliance for these systems
has been received from substantially all of our vendors including all those
deemed critical. Integrated testing on all critical applications will continue
through the first half of calendar year 1999. The review of non-critical systems
has begun and is also expected to be completed by June 30, 1999. A system is
deemed validated upon completion of an appropriate test plan and system testing
of the Year 2000 compliant version without problems.
<PAGE>
The Company's overall costs associated with year 2000 implementation
will be reduced due to its outsourcing arrangement previously discussed;
however, incremental direct expenses to date of approximately $55,000 have been
incurred and the Company anticipates incurring approximately $90,000 of
additional incremental expenses in fiscal 2000. Included in this amount are
capital improvements which will be accelerated in part due to Year 2000
concerns. The capital improvements include replacing older technology, personal
computers and software and telecommunication systems. Although implementation of
this equipment and software will resolve certain Year 2000 issues, they will
also provide increased or improved functionality and efficiencies. The cost of
this equipment and software is expected to be charged to expense over the
estimated useful lives. The aforementioned costs do not include the salary of
the project leader or the time of management and staff assisting on the project
which are estimated to total 2,000 hours from fourth quarter 1998 through
calendar 1999. The total cost could vary significantly from those currently
estimated because of unforeseen circumstances which could develop in
implementing the Plan.
9
<PAGE>
The Company has begun communications with its customers informing them
of its efforts to become Y2K compliant and is periodically inserting a summary
of its progress in its periodic mailings to customers. The Company has posted
Y2K information on its Web Site and is training its employees to become
knowledgeable about the progress being made to be compliant. Posters are
displayed in the Bank's lobbies with Y2K information.
Concurrent with the development and execution of the Plan is the
evolution of the Company's Year 2000 contingency plan. The contingency plan is
intended to be a changing document developed and modified based on the results
of the project. The contingency plan currently includes the contingency
procedures for critical data processing and environmental systems and key
suppliers. The contingency plan also addresses a variety of additional issues
including credit risk, liquidity and loan and deposit customers.
The Company has completed an evaluation of Year 2000 risks relating to
its lines of business separate from its dependence on data processing that
includes a review of larger commercial customers to ascertain their overall
preparedness for Year 2000. The process required lending and other bank officers
to meet with their customers to review and assess their preparedness. The
failure of a commercial customer to prepare adequately for Year 2000 could have
a significant adverse effect on such customer's operations and profitability and
thereby inhibit its ability to repay loans or require the use of its deposited
funds. While the process of evaluating the potential adverse effects of Year
2000 risks on these customers is substantially complete, it is not possible to
quantify the overall potential effect on the Company.
The plan also includes provisions which address the Year 2000
compliance of environmental systems, which include items such as elevators,
security systems and heating and air conditioning systems. No significant
business risks have been revealed regarding these types of systems.
While the Company is making a substantial effort to become Year 2000
compliant, there is no assurance that the failure to adequately address all
issues relating to the Year 2000 problem would not have a material adverse
effect on its financial condition or results of operations.
FINANCIAL CONDITION
March 31, 1999 Compared to March 31, 1998
The Company's total assets at March 31, 1999 were $492.3 million, an
increase of $53.2 million, or 12.1% from $439.1 million at March 31, 1998.
Investment and mortgage-backed securities amounted to $123.2 million at March
31, 1999, a decrease of $63.9 million from $187.1 million at March 31, 1998. Net
loans increased by $95.7 million or 42.4% to $321 million at March 31, 1999
compared to $225.3 million at March 31, 1998. Total liabilities were $451.5
million at March 31, 1999, up $55.1 million, or 13.9% from $396.4 million at
March 31, 1998. Deposits of $345.3 million were up $62.4 million or 22.1% from
$282.9 million at March 31, 1998. Substantially all of the deposit growth and
approximately 45% of the loan growth is attributable to the Company's
acquisition of four branch locations from NBD Bank, N.A. on June 26, 1998. The
balance of the loan portfolio growth is attributable primarily to internally
generated growth primarily in the consumer loan portfolio.
Federal Home Loan Bank (FHLB) advances decreased by $2.9 million to
$96.5 million at March 31, 1999 from $99.4 million at March 31, 1998.
<PAGE>
Total stockholders' equity decreased by $1.8 million to $40.9 million
at March 31, 1999. The Company earned $2.86 million and paid $1.21 million of
dividends to its shareholders. The Company purchased $4.16 million of treasury
shares and received $0.22 million from the issuance of its stock. The fair value
of securities decreased by approximately $0.22 million and $0.69 million of
stock was earned or became vested under the Company's ESOP and restricted stock
award programs.
10
<PAGE>
One to four family first mortgage loans increased by $14 million and
consumer loans increased by $40.7 million. Commercial and multi-family real
estate loans increased by $36.5 million, land and construction loans increased
by $4.8 million and commercial paper decreased by $.014 million. The allowance
for loan losses increased by $.73 million due principally to the acquisition of
$.76 million of loss reserves associated with the loans acquired from NBD.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Years Ended March 31, 1999 and March 31,
1998.
General. The Company's net income of $2.86 million during the fiscal
year ended March 31, 1999 was $0.22 million greater or 8.3% more than the $2.64
million earned during the fiscal year ended March 31, 1998. Operating results
for the year ended March 31, 1999 include the income and expenses related to the
assets and liabilities of the four locations acquired from NBD Bank, N.A. since
June 26, 1998, the date of acquisition, since the transaction has been accounted
for as a purchase.
Net Interest Income. The Company's net interest income increased by
$1.8 million to $13 million for the year ended March 31, 1999 compared to $11.2
million for the year ended March 31, 1998. The increase was primarily
attributable to an increase in the interest rate spread of 0.33%.
Interest Income. Interest income for the year ended March 31, 1999
increased $2.4 million to $32.9 million compared to $30.5 million for the same
period in 1998.
Interest income increased because total interest earning assets
increased, primarily due to the previously described NBD acquisition, and funds
were shifted from lower earning investment securities into higher yielding
loans.
Average securities, which includes mortgage-backed securities, other
securities and FHLB stock, decreased by $31.2 million from fiscal 1998 to fiscal
1999. The rate earned on mortgage-backed securities decreased to 6.17% in fiscal
1999 from 6.52% in the prior fiscal year. The rate earned on all other
securities, including the FHLB stock, decreased to 6.16% in fiscal 1999 from
7.01% in the prior fiscal year.
The average of other interest bearing assets, which are primarily
deposits and other short-term investments, increased to $6.1 million in fiscal
1999 from $1.4 million in the prior fiscal year. The rate earned on these
investments decreased to 4.65% in fiscal 1999 from 7.49% in fiscal 1998.
Average loans outstanding increased $64.8 million from fiscal 1998 to
fiscal 1999. This represents a 30% increase in average outstanding loans. During
the same period, the yields on loans declined by one basis point (.01%).
The yield on all interest-earning assets decreased by 11 basis points
(.11%) in fiscal 1999. For the year ended March 31, 1999 the overall
interest-earning asset yield was 7.38% compared to 7.49% for the year ended
March 31, 1998.
<PAGE>
Interest Expense. Interest expense increased by $0.57 million to $19.9
million during the fiscal year ended March 31, 1999 compared to $19.3 million
during fiscal 1998. Interest paid on deposits increased by $1.3 million due to
an increase of $54.1 million in average deposit balance which more than offset a
decrease in the rate paid from 4.83% to 4.44%. Interest on Federal Home Loan
Bank advances decreased by $.86 million as average balances outstanding
decreased by $7.2 million and the average rate paid on advances also decreased
from 5.77% during fiscal 1998 to 5.30% during fiscal year 1999. Interest expense
on Other long-term debt & other borrowings increased due primarily to the
Company borrowing $4.16 million of long-term debt from an unaffiliated bank in
August 1998. Proceeds from this borrowing was used by the Company to repurchase
302,100 shares of its own common stock. Fiscal 1998 borrowings consist primarily
of short-term borrowings to meet liquidity needs.
11
<PAGE>
The cost of all interest-bearing liabilities decreased from 5.08% for
the year ended March 31, 1998 to 4.68% for the year ended March 31, 1999.
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
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, 1999, the Company recorded a provision
for loan losses of $300,000 compared to $177,050 for the year ended March 31,
1998. In addition the Company acquired $760,000 of loan loss reserves as part
its acquisitions of assets from NBD Bank, N.A. Net charge offs amounted to
$327,000 during fiscal 1999 compared to $330,000 during fiscal 1998. Asset
quality, as measured by non-performing loans to total loans, improved
significantly for the year ended March 31, 1999 compared to the prior year. The
ratios of non-performing loans to total loans was 0.25% at March 31, 1999 and
.40% at March 31, 1998 respectively. The allowance for losses, as a ratio to
total loans, was 0.84% at March 31, 1999 compared to .87% at March 31, 1998. At
March 31, 1999 and 1998, the allowance for loan losses as a percentage of
non-performing loans was 330.81% and 216.58%, 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 non-performing
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 $939,000 to $3,031,000 during
the fiscal year ended March 31, 1999. This represents an increase of 44.9% over
the prior year. Service charges increased by $507,000 and profit on sale of
loans, securities and real estate owned increased by $299,000. Commissions on
the sale of investment and insurance products decreased by $17,000. Earnings
from other sources were up by $150,000 during fiscal 1999.
Other Expense. The Company's other expense increased by $2.22 million
from fiscal 1998 to fiscal 1999. Salaries and employee benefits increased $1.2
million or 26%. Occupancy expenses increased $199,000, equipment expenses
increased $155,000, computer service expenses increased $168,000, advertising
expenses increased $58,000, postage and office supplies increased $158,000 and
other expenses increased $311,000 from fiscal 1998 to fiscal 1999, respectively,
due to an expansion of personnel to staff additional branch facilities to
service additional deposit and loan accounts acquired from NBD Bank, N.A.
<PAGE>
Income Tax Provision. The Company's income tax provision increased by
$128,000 from fiscal 1998 to fiscal 1999 primarily as a result of increased
pretax earnings. The effective tax rate was 40.48% for fiscal 1999 compared to
40.72% for the prior year. 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
12
<PAGE>
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 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.
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 1998.
Provision for Loan Losses. 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 allowance for loan losses as a percentage of non-performing loans was
216.58% and 46.31%, respectively.
<PAGE>
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
fiscal 1997. 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.
13
<PAGE>
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) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
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 $279,790 $22,759 8.13% $214,982 $17,509 8.14% $209,420 $16,796 8.02%
Mortgage-backed securities 68,259 4,212 6.17 97,668 6,370 6.52 91,431 6,101 6.67
Securities and FHLB stock 91,456 5,631 6.16 93,210 6,536 7.01 95,212 6,686 7.02
Other 6,107 284 4.65 1,416 106 7.49 1,869 106 5.67
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets (1) $445,612 $32,886 7.38% $407,276 $30,521 7.49% $397,932 $29,689 7.46%
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits $332,301 $14,756 4.44% $278,181 $13,431 4.83% $275,407 $13,333 4.84%
FHLB advances 94,463 5,002 5.30 101,704 5,866 5.77 92,604 5,320 5.74
Other long-term debt &
other borrowings 2,060 151 7.33 845 46 5.44 1,693 71 4.19
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $428,824 $19,909 4.64% $380,730 $19,343 5.08% $369,704 $18,724 5.06%
Net interest income $12,977 $11,178 $10,965
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread 2.74% 2.41% 2.40%
- ---------------------------------------------------------------------------------------------------------------------------------
Net earning assets $ 16,788 $ 26,546 $ 28,228
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin(2) 2.91% 2.74% 2.76%
- ---------------------------------------------------------------------------------------------------------------------------------
Average interest-earning
assets to average interest-
bearing liabilities 103.91% 106.97% 107.64%
- ---------------------------------------------------------------------------------------------------------------------------------
</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.
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.
14
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
1999 vs. 1998 1998 vs. 1997
- ---------------------------------------------------------------------------------------------------------------------------
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 $ 5,275 $ (26) $5,249 $ 451 $263 $ 714
Mortgage-backed securities (1,867) (291) (2,158) 402 (133) 269
Securities and FHLB stock (117) (787) (904) (140) (10) (150)
Other 285 (107) 178
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 3,576 $(1,211) $2,365 $ 713 $120 $ 833
- ---------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits $ 2,515 $(1,190) $1,325 $ 134 $ (36) $ 98
FHLB advances (402) (462) (864) 525 21 546
Other borrowings 78 28 106 (62) 37 (25)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 2,191 $(1,624) $ 567 $ 597 $ 22 $ 619
- ---------------------------------------------------------------------------------------------------------------------------
Change in net interest income $1,798 $ 214
- ---------------------------------------------------------------------------------------------------------------------------
</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,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average yield on:
Loans, net 7.81% 7.91% 8.02%
Mortgage-backed securities 6.45 6.80 6.71
Securities & FHLB Stock 6.16 6.84 7.05
Other 4.76 6.06 6.69
Combined weighted average yield on
interest-earning assets 7.34 7.42 7.47
Weighted average rate paid on:
Savings deposits 3.13 3.77 3.87
Demand and NOW deposits 1.55 1.79 2.06
Time deposits 5.51 5.78 5.67
FHLB Advances 5.10 5.39 5.65
Other Borrowings 6.80 5.19
Combined weighted average rate paid
on interest-bearing liabilities 4.48 5.02 5.05
Spread 2.86 2.40 2.41
Asset Quality
</TABLE>
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 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.
15
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family $ 643 $ 822 $1,131 $ 695 $ 1,219
Multi-family 1,062 3,654 3,696
Commercial real estate 64
Construction or development 12 171 171
Consumer 111 77 99 185 78
- ---------------------------------------------------------------------------------------------------------------------------
Total 818 911 2,463 4,705 4,993
- ---------------------------------------------------------------------------------------------------------------------------
Troubled debt restructurings 2,128 2,165 3,293
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing loans $ 818 $ 911 $4,591 $6,870 $ 8,286
- ---------------------------------------------------------------------------------------------------------------------------
Real estate and other assets owned:
One- to four-family $ 112 $ 93 $ 41 $ 22 $7
Construction or development 26
Consumer 236 89 53 54 25
- ---------------------------------------------------------------------------------------------------------------------------
Total 348 182 94 76 58
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $1,166 $1,093 $4,685 $6,946 $ 8,344
- ---------------------------------------------------------------------------------------------------------------------------
Total as a percentage of total assets 0.24% 0.25% 1.11% 1.75% 2.43%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
At March 31, 1999 the Bank had no non-performing assets with an
outstanding balance in excess of $100,000. This compares to one non-performing
asset at March 31, 1998 that had a balance in excess of $100,000.
Non-accruing Loans. As of March 31, 1999, the Bank had $818,000 in book
value of non-accruing loans compared to $911,000 as of March 31, 1998. For the
year ended March 31, 1999, 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 $65,000. The amount that was included in interest income on
such loans was $21,000 for the year ended March 31, 1999.
Real Estate Owned. At March 31, 1999, the Bank's real estate acquired
through foreclosure totaled $112,000.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of March 31, 1999, there was an aggregate of $7.3
million of loans which management is closely monitoring for the borrowers'
ability to comply with current repayment terms compared to $3.2 million at March
31, 1998. Management believes it has taken a conservative approach in evaluating
under-performing credits.
Delinquent Loans. The following table sets forth the Bank's loan
delinquencies by type, by amount and by percentage of type at March 31, 1999.
<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>
Real Estate:
One- to four-family 70 $2,119 67.66% 47 $1,94093.95% 24 $64378.61%
Multi-family construction
or development 1 135 4.31% 0 0 0.00% 0 0 0.00%
Commercial real estate 1 64 7.82%
Consumer 116 878 28.03% 19 125 6.05% 18 11113.57%
- ---------------------------------------------------------------------------------------------------------------------------
Total 187 $3,132100.00% 66 $2,065100.00% 43 $818100.00%
- ---------------------------------------------------------------------------------------------------------------------------
</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 the loan portfolio and changes in the nature and volume of its
loan activity.
16
<PAGE>
The following tables set forth an analysis of the Bank's allowance at
the years indicated.
<TABLE>
<CAPTION>
(Dollars in Thousands) At March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $1,973 $2,126 $2,238 $2,093 $2,110
Charge-offs:
One- to four-family 19 56 11 20
Multi-family 72 86
Consumer 488 276 354 93 63
Commercial business 17 414
- ---------------------------------------------------------------------------------------------------------------------------
507 404 371 104 583
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries:
One-to-four-family 10 2 11 134
Multi-family & commercial 98 4
Consumer 170 74 46 27 22
- ---------------------------------------------------------------------------------------------------------------------------
180 74 156
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs 327 330 225 62 427
Provision for loan losses charged
to operations 300 177 113 207 410
Acquired in branch acquisition 760
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year $2,706 $1,973 $2,126 $2,238 $2,093
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ratio of net charge-offs during the period to
average loans outstanding during the year 0.12% 0.15% 0.11% 0.03% 0.22%
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the period to
ending non-performing assets 28.04% 30.19% 4.80% 0.89% 5.12%
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of provision for loan losses
to total loans 0.09% 0.08% 0.05% 0.10% 0.21%
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan losses
to non-performing loans 330.81% 216.58% 46.31% 32.58% 25.26%
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan losses
to total loans 0.84% 0.87% 1.00% 1.07% 1.06%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1999, 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 $18.4 million, representing a negative cumulative one-year
gap ratio of 3.74% of total assets. The Company relies on certain assumptions,
such as the amount and timing of loan prepayments, among others, in the
17
<PAGE>
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, 1999 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, 1999 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.
<PAGE>
<TABLE>
<CAPTION>
Maturing or Repricing
- ---------------------------------------------------------------------------------------------------------------------------
Less than 6-12 Over 1-3 Over 3-5 Over
6 Months Months Years Years 5 Years
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed-rate one- to four-
family, multi-family (including
mortgage-backed securities),
commercial real estate and
construction loans $ 17,932 $ 10,572 $ 32,723 $ 24,151 $ 46,327
Adjustable rate one- to four-
family, multi-family (including
mortgage-backed securities),
commercial real estate and
construction loans 56,123 19,092 35,299 16,959 22,727
Consumer loans 20,600 9,128 32,570 15,695 6,811
Investment securities and other 15,248 2,003 9,000 57,831
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 109,903 40,795 100,592 65,805 133,696
- ---------------------------------------------------------------------------------------------------------------------------
Savings deposits 2,706 4,599 13,472 6,514 32,191
Demand and NOW deposits 20,017 11,485 13,985 4,298 7,860
Certificates 83,420 42,211 57,290 22,544 10,482
FHLB advances 4,536 157 15,137 7,448 72,763
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 110,679 58,452 99,884 40,804 123,296
- ---------------------------------------------------------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities $ (776) $ (17,657) $ 708 $ 25,001 $ 10,400
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative interest-rate
sensitivity gap $ (776) $ (18,433) $(17,725) $ 7,276 $ 17,676
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative interest-rate
gap as a percentage of assets (0.16)% (3.74)% (3.60)% 1.48% 3.59%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgages,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. For example, projected passbook, money
market and NOW account maturities may 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. 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 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, 1999 as
calculated by the OTS (dollars in 000's):
<PAGE>
<TABLE>
<CAPTION>
Net portfolio value NPVas % of PVof Assets
- ---------------------------------------------------------------------------------------------------------------------------
Change in
rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
+200 47,409 (5,390) -10% 9.81% - 68
+100 50,612 (2,186) - 4% 10.25% - 24
0 52,798 10.49%
- 100 54,660 1,862 4% 10.65% 16
- 200 55,998 3,200 6% 10.70% 21
</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 the Bank 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, 1999, the amount of the
Bank's liquidity was $142.4 million, resulting in a liquidity ratio of 40.48%.
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.
19
<PAGE>
The Bank principally uses its liquidity resources to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals,
to purchase securities, to fund existing and future loan commitments, to
maintain liquidity, and to meet operating expenses. At March 31, 1999, the Bank
had approximately $2.2 million of loan commitments and an additional $4.9
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 one year or less at
March 31, 1999 totaled $117.9 million. Based on historical experience,
management believes that a significant portion of such deposits will remain with
the Bank, however, there can be no assurance that the Bank can retain all such
deposits.
Management believes that loan repayments and other sources of funds
will be adequate to meet and exceed the Bank's foreseeable short- and long-term
liquidity needs. The primary investing activities of the Bank include investing
in loans, mortgage-backed securities, U.S. Treasury and agency securities and
other investment securities. At March 31, 1999, these assets accounted for 90.8%
of the Company's total assets. The purchases are funded primarily from loan
repayments, maturities of securities, FHLB advances and increases in deposits
and net income.
At March 31, 1999, the Bank had outstanding borrowings of $96.5 million
from the FHLB and had the capacity to borrow up to a total of approximately $200
million.
<PAGE>
Dividends are subject to determination and declaration by the Board of
Directors, which will take into account the Company's consolidated financial
condition and results of operations as well as other relevant factors. The
Company's ability to pay dividends is subject to federal regulations and its
continued compliance with regulatory capital requirements. The Company is also
subject to the requirements of Delaware law, which generally limits dividends to
an amount in excess of a company's net assets over paid-in-capital, or, if there
is no such excess, to its net profits for the current and immediately preceding
fiscal year. See the Notes 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
See the notes to the Consolidated Financial Statements for a
description of applicable pronouncements.
20
<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, 1999 and 1998 and the consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1999. 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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1999 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
May 21, 1999
Indianapolis, Indiana
21
<PAGE>
CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash $ 7,591,117 $ 4,274,700
Interest-bearing deposits 6,361,293 1,808,159
- ---------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 13,952,410 6,082,859
Securities available for sale - at fair value
(amortized cost - $117,279,217 and $167,898,534) 117,289,086 168,270,907
Securities held to maturity (fair value - $6,627,235
and $19,119,093) 6,919,793 18,861,416
Other investments 1,698,477 1,100,826
Loans (net of allowance for loan losses of $2,706,408
and $1,973,410) 321,017,805 225,349,258
Interest receivable 2,824,211 3,270,173
Office properties and equipment 8,687,387 7,533,251
Other assets 19,937,789 8,645,810
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $492,326,958 $439,114,500
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits $345,341,089 $282,942,123
Federal Home Loan Bank advances 96,503,610 99,352,678
Advance payments by borrowers for taxes and insurance 974,636 979,859
Other long-term debt 3,000,000
Interest payable 2,204,007 2,193,548
Other liabilities 3,442,429 10,963,033
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 451,465,771 396,431,241
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies STOCKHOLDERS' EQUITY:
Serial Preferred Stock ($.01 par value)
Authorized and unissued - 1,000,000 shares
Common Stock ($.01 par value)
Authorized - 9,000,000 shares Issued - 4,930,508 and
4,927,000 Outstanding - 3,978,322 and 4,232,934 49,241 49,241
Additional paid-in capital 24,844,508 24,525,662
Treasury Stock - 936,786 and 682,674 shares - at cost (9,920,624) (6,255,083)
Retained Earnings - substantially restricted 26,573,401 25,127,127
Accumulated other comprehensive income, net
of deferred tax of $3,909 and $147,127 5,960 225,247
ESOP borrowing (476,100) (714,150)
Unearned compensation - restricted stock awards (215,199) (274,785)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 40,861,187 42,683,259
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $492,326,958 $439,114,500
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
<S> <C> <C> <C>
Loans $22,758,455 $17,509,318 $16,796,387
Securities 9,405,583 12,472,811 12,403,059
Deposits 284,102 106,454 105,488
Dividends on Federal Home Loan Bank stock 437,696 432,823 383,691
- ---------------------------------------------------------------------------------------------------------------------------
32,885,836 30,521,406 29,688,625
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 14,755,940 13,431,142 13,332,587
Federal Home Loan Bank advances 5,001,771 5,865,542 5,320,326
Other long-term debt 150,792
Short-term borrowings 510 45,827 71,083
- ---------------------------------------------------------------------------------------------------------------------------
19,909,013 19,342,511 18,723,996
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 12,976,823 11,178,895 10,964,629
PROVISION FOR LOAN LOSSES 300,000 177,050 113,256
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER LOAN LOSS
PROVISION 12,676,823 11,001,845 10,851,373
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges 1,491,788 984,668 840,520
Gain on sale of loans 205,837 91,866 22,771
Commissions 591,192 607,806 539,487
Gain (loss) on sale of securities and mortgage-backed securities 229,708 42,643 (55,897)
Gain on sale of real estate owned 39,790 41,966 16,811
Other 472,625 323,044 260,221
- ---------------------------------------------------------------------------------------------------------------------------
3,030,940 2,091,993 1,623,913
- ---------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Salaries and employee benefits 5,695,772 4,519,290 4,294,824
Deposit insurance assessment 271,397 275,986 2,350,715
Occupancy 1,020,658 821,412 809,138
Equipment 763,669 608,472 566,098
Computer service 705,748 537,903 494,374
Advertising 412,183 354,370 326,211
Postage and office supplies 444,469 285,906 273,474
Other 1,588,871 1,227,988 1,053,922
- ---------------------------------------------------------------------------------------------------------------------------
10,902,767 8,631,327 10,168,756
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,804,996 4,462,511 2,306,530
INCOME TAX PROVISION 1,945,111 1,817,344 1,002,986
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,859,885 $ 2,645,167 $ 1,303,544
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE OF COMMON STOCK
Basic $ 0.72 $ 0.65 $ 0.31
Diluted 0.70 0.62 0.30
AVERAGE SHARES OUTSTANDING
Basic 3,956,590 4,048,150 4,226,304
Diluted 4,062,155 4,299,366 4,408,838
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in Treasury Retained
Shares Amount Capital Stock Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, APRIL 1, 1996 4,496,786 $49,204 $23,824,898 ($3,361,279) $22,727,602
Net income 1,303,544
Unrealized loss on
securities available for sale
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income
- ---------------------------------------------------------------------------------------------------------------------------------
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
Net income 2,645,167
Unrealized gain on
securities available for sale
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income
- ---------------------------------------------------------------------------------------------------------------------------------
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
Net income 2,859,885
Unrealized loss on
securities available for sale
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income
- ---------------------------------------------------------------------------------------------------------------------------------
ESOP shares earned 318,846
Vesting of restricted stock awards
Cancellation of restricted stock awards (2,866) (14,330)
Purchase of Treasury Stock (302,100) (4,163,316)
Issuance of retricted stock awards 6,400 19,751 64,974
Exercise of stock options 44,454 (19,751) 447,131 (205,109)
Payment of dividends (1,208,502)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1999 3,978,322 $49,241 $24,844,508 ($9,920,624) $26,573,401
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Restricted Total
Unrealized ESOP Stock Stockholders'
Gain (Loss) Borrowing Awards Equity
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES, APRIL 1, 1996 ($98,371) ($1,190,250) ($458,173) $41,493,631
Net income 1,303,544
Unrealized loss on
securities available for sale (1,492,220) (1,492,220)
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (188,676)
- ------------------------------------------------------------------------------------------------------------------------
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 (1,590,591) (952,200) (278,463) 39,094,627
Net income 2,645,167
Unrealized gain on
securities available for sale 1,815,838 1,815,838
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 4,461,005
- ------------------------------------------------------------------------------------------------------------------------
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 225,247 (714,150) (274,785) 42,683,259
Net income 2,859,885
Unrealized loss on
securities available for sale (219,287) (219,287)
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 2,640,598
- ------------------------------------------------------------------------------------------------------------------------
ESOP shares earned 238,050 556,896
Vesting of restricted stock awards 129,981 129,981
Cancellation of restricted stock awards 14,330 0
Purchase of Treasury Stock (4,163,316)
Issuance of retricted stock awards (84,725) 0
Exercise of stock options 222,271
Payment of dividends (1,208,502)
- ------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1999 $5,960 ($476,100) ($215,199) $40,861,187
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,859,885 $ 2,645,167 $ 1,303,544
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 538,412 556,598 488,930
Amortization and accretion 706,429 258,006 (49,563)
Vesting of restricted stock awards 129,981 125,243 178,070
Provisions for loan losses 300,000 177,050 113,256
(Gain) loss on sale of securities (229,708) (42,643) 51,120
(Gain) on sale of loans (205,837) (91,866) (22,771)
(Gain) loss on sale of office properties and equipment (510) (13,886) 61,766
Gain on sale of real estate owned (15,121) (60,422) (13,289)
ESOP shares earned 318,846 383,336 205,471
Changes in assets and liabilities:
Proceeds from the sales of loans held for sale 12,926,125 5,169,926 984,756
Origination of loans for resale (12,720,288) (5,078,060) (961,985)
Other investments (597,651) (51,135) (422,734)
Interest receivable 162,142 268,912 (664,723)
Other assets (711,591) (173,604) (34,071)
Interest payable 10,459 143,821 127,092
Other liabilities (9,145,930) 1,456,933 36,942
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (5,674,357) 5,673,376 1,381,811
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired through branch purchase 26,933,017 4,578,736
Loans originated (168,807,683) (71,247,154) (61,933,496)
Loan principal repayments 125,616,701 73,116,431 76,390,492
Proceeds from:
Maturities and calls of:
Securities available for sale 143,007,087 60,991,550 18,000,000
Securities held to maturity 25,000
Sales of:
Securities available for sale 41,112,062 24,072,258 36,573,836
Office properties and equipment 54,122 187,596
Real estate owned 217,254 135,578 27,224
Purchases of:
Securities available for sale (143,786,943) (97,993,517) (91,445,439)
Securities held to maturity (6,923,110)
Loans (9,885,578) (17,257,140) (17,741,292)
FHLB stock (273,400) (1,689,000)
Office properties and equipment (834,601) (457,064) (305,595)
Payments on mortgage-backed securities 29,378,578 24,282,962 15,416,207
Increase in cash surrender value of life insurance (1,301,575) (72,378) (599,676)
Other 12,001 16,517 49,499
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 34,791,332 105,975 (27,257,240)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued on next page)
25
<PAGE>
<TABLE>
<CAPTION>
Years Ended March 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C> <C>
Dividends paid (969,805) (808,610) (608,639)
Purchase of treasury stock (4,163,316) (993,628) (2,286,925)
Net change in deposits (16,720,332) (3,542,954) 745,291
Proceeds from FHLB advances 174,749,242 274,500,000 142,900,000
Proceeds from other long-term debt 4,153,875 (273,631,307) (112,719,231)
Repayment of other long-term debt (1,153,875)
Payments on FHLB advances (177,598,310)
Principal repayments of ESOP borrowing 238,050 238,050 238,050
Advance payments by borrowers for taxes and insurance (5,223) (34,739) (7,665)
Net change in other borrowed funds (1,793,967) (887,786)
Net proceeds from issuance of common stock 222,270 183,237 63,645
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (21,247,424) (5,883,918) 27,436,740
- ---------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 7,869,551 (281,617) 1,448,055
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,082,859 6,364,476 4,916,421
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,952,410 $ 6,082,859 $ 6,364,476
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $19,898,554 $19,198,690 $18,596,904
Income taxes 1,595,000 1,588,000 1,097,000
Noncash transactions:
Transfers from loans to real estate owned 356,332 151,339 39,307
Liability for purchase of available for sale securities 8,995,000
Transfer of held to maturity securities to
securities available for sale 16,324,314
</TABLE>
See notes to consolidated financial statements.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of Permanent Bancorp,
Inc. (the "Company") and its subsidiary, Permanent Federal Savings Bank (the
"Bank"), conform to generally accepted accounting principles and reporting
practices followed by thrift holding companies. The more significant policies
are described below.
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. The Company
operates as a single business segment.
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, 1999.
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.
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.
<PAGE>
As discussed below, SFAS No. 133, "Accounting For Derivative
Investments," permitted a one time transfer of securities previously classified
as held to maturity into the available for sale category. On October 1, 1998 the
Company transferred mortgage-backed securities previously classified as held to
maturity to the available for sale category at fair value. At the time of the
transfer these securities had an amortized cost of $16,113,992 and a fair value
of $16,324,314.
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.
27
<PAGE>
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 of 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 uncollectable, 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 over the life of the underlying net assets or liabilities that give
rise to it but not more than fifteen years. Impairment of goodwill results in a
charge to expense. Amortization expense for the years ended March 31, 1999, 1998
and 1997 was $602,682, $167,036 and $218,603, respectively. Goodwill of
$9,357,000 and $453,000, net of accumulated amortization of $2,483,000 and
$1,909,000, is included in Other Assets in the Consolidated Statements of
Financial Condition at March 31, 1999 and March 31, 1998, 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.
<PAGE>
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.
28
<PAGE>
New Accounting Pronouncements - In June 1998 the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments,"
which establishes accounting and reporting standards for derivative instruments
including derivative instruments embedded in financial instruments and for
hedging. The Company adopted this statement on October 1, 1998 and, except for
the reclassification of securities from the held-to-maturity to the
available-for-sale category noted above, the adoption of this statement had no
significant impact on the financial condition, results of operations or cash
flows of the Company.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" became effective during the current fiscal year. The Company has
determined that it operates as a single segment which is community banking.At
March 31, 1999 and 1998, the Bank had assets of approximately $493.7 million and
$437.7 million, or 100% and 99.7% of consolidated assets, respectively. Net
income of the Bank for the three years ended March 31, 1999 was $3,074,000,
$2,706,000 and $1,253,000 or 108%, 102% and 96% of consolidated net income for
fiscal years 1999, 1998 and 1997. Net interest income at the Bank for each of
the three years ended March 31, 1999 exceeded 98% of consolidated net interest
income.
Earnings per Share - In 1998 the Company adopted SFAS 128 "Earnings per
Share" and has retroactively restated 1997 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:
<TABLE>
<CAPTION>
Years Ended March 31,
- -----------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic average common shares 3,956,590 4,048,150 4,226,304
Dilutive effect of stock options 105,565 251,216 182,534
- -----------------------------------------------------------------------------------------------------
Diluted average common shares 4,062,155 4,299,366 4,408,838
- -----------------------------------------------------------------------------------------------------
</TABLE>
Acquisitions - On June 26, 1998 the Company acquired deposits and
certain assets of four branch banking locations from NBD Bank, N.A. in a
purchase transaction. The operating results of the acquired branches have been
consolidated since the acquisition date. As a result of the purchase, the
Company acquired $79.1 million of deposits, $43.6 million of loans, $900,000 of
office properties and equipment and received cash of approximately $26.9
million. The purchase created approximately $9.5 million of goodwill.
On May 19, 1997 the Company acquired in a purchase transaction a branch
facility which included $5.7 million of deposit liabilities, $838,000 of office
properties and equipment and $30,000 of other assets. This transaction created
approximately $294,000 of goodwill.
Pro forma information is not presented since the transactions are not
considered significant.
Changes In Presentation - Certain items appearing in the 1998 and 1997
financial statements have been reclassified to conform to the 1999 presentation.
29
<PAGE>
2. SECURITIES
The amortized cost and estimated fair values of securities available
for sale and securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Agency $ 62,947,099 $469,103 $ 62,477,996
FHLMC certificates 16,734,901 $247,720 29,472 16,953,149
FNMA certificates 17,419,111 206,609 29,121 17,596,599
GNMA certificates 20,178,106 151,872 68,636 20,261,342
- ---------------------------------------------------------------------------------------------------------------------------
$117,279,217 $606,201 $596,332 $117,289,086
- ---------------------------------------------------------------------------------------------------------------------------
March 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Municipal & Revenue Bonds $ 5,908,859 $290,346 $ 5,618,513
Other 1,010,934 2,212 1,008,722
- ---------------------------------------------------------------------------------------------------------------------------
$ 6,919,793 $292,558 $ 6,627,235
- ---------------------------------------------------------------------------------------------------------------------------
March 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
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
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
Other 506,344 107,687 614,031
- ---------------------------------------------------------------------------------------------------------------------------
$167,898,534 $ 812,721 $ 440,348 $168,270,907
- ---------------------------------------------------------------------------------------------------------------------------
March 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
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
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
The amortized cost and estimated fair value of securities at March 31,
1999 by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------------
<S> <C> <C>
Due within 1 year
U.S. Agency $ 2,002,961 $ 1,965,000
FHLMC certificates 121,296 123,859
Other 1,010,934 1,008,722
- --------------------------------------------------------------------------------------
3,135,191 3,097,581
- --------------------------------------------------------------------------------------
Due after 1 year through 5 years
U.S. Agency 14,998,002 14,916,329
FHLMC certificates 1,692,783 1,705,069
FNMA certificates 1,128,942 1,153,463
- --------------------------------------------------------------------------------------
17,819,727 17,774,861
- --------------------------------------------------------------------------------------
Due after 5 years through 10 years
U.S. Agency 30,377,550 30,126,589
FHLMC certificates 1,487,047 1,493,942
FNMA certificates 3,913,787 3,902,361
GNMA certificates 471,806 477,118
- --------------------------------------------------------------------------------------
36,250,190 36,000,010
- --------------------------------------------------------------------------------------
Due after 10 years through 15 years
U.S. Agency 12,979,648 12,797,190
FHLMC certificates 1,452,100 1,462,494
FNMA certificates 179,951 182,875
Municipal Bonds 1,325,711 1,259,008
- --------------------------------------------------------------------------------------
15,937,410 15,701,567
- --------------------------------------------------------------------------------------
Due after 15 years
U.S. Agency 2,588,938 2,672,888
HLMC certificates 11,981,675 12,167,815
FNMA certificates 12,196,431 12,357,870
GNMA certificates 19,706,300 19,784,224
Municipal Bonds 4,583,148 4,359,505
- --------------------------------------------------------------------------------------
51,056,492 51,342,302
- --------------------------------------------------------------------------------------
Total $124,199,010 $123,916,321
- --------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Activities related to the sales of securities are summarized as
follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $41,101,856 $24,072,258 $36,573,836
Gross gains on sales 239,914 51,776 124,899
Gross loss on sales 10,206 9,135 176,019
</TABLE>
31
<PAGE>
3. LOANS
Approximately 89% of the Bank's loans are to customers in Indiana. The
portfolio of loans consists of residential, commercial real estate, commercial
construction, consumer and other loans.
<TABLE>
<CAPTION>
March 31,
- ---------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
First mortgage:
<S> <C> <C>
Secured by one-to-four family residences $171,249,927 $157,225,530
Secured by other properties 31,897,812 8,886,895
Construction loans 8,193,828 3,409,383
Land 14,437 25,455
Automobile 56,779,077 31,436,243
Consumer 26,609,416 10,708,903
Commercial 17,327,986 3,799,904
Mobile home 724,200 935,365
Loans on savings accounts 868,346 891,516
Credit card 582,185 565,538
Second mortgage 24,661
Home improvement 569,597 838,893
Loan contracts 7,023 24,135
Commercial paper 9,275,099 9,116,180
- ---------------------------------------------------------------------------------------------------------------------
Subtotal 324,098,933 227,888,601
Allowance for loan losses (2,706,408) (1,973,410)
Deferred loan fees, net (310,064) (397,765)
Undisbursed loan proceeds (52,330) (148,567)
Unearned interest and unearned discounts (12,326) (19,601)
- ---------------------------------------------------------------------------------------------------------------------
Loans, net $321,017,805 $225,349,258
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The principal balance of loans on nonaccrual status totaled
approximately $818,000 and $911,000 at March 31, 1999 and 1998, respectively.
For the years ended March 31, 1999 and 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 $65,013 and $73,277 respectively. The
amounts included in interest income on such loans were $20,681 and $39,388 for
the years ended March 31, 1999 and 1998, respectively.
The Bank originates commercial real estate loans. Such loans had a
carrying value of approximately $32 million and $9 million at March 31, 1999 and
1998, 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, $3 million and $4
million are collateralized by multi-family residential property at March 31,
1999 and 1998, respectively; and $29 million and $5 million by hotel and other
property at March 31, 1999 and 1998, respectively.
The Bank had commitments to make loans approximating $23,421,000 and
$4,886,000 excluding undisbursed portions of loans in-process at March 31, 1999
and 1998, respectively.
32
<PAGE>
The Bank originates both adjustable and fixed interest rate loans. The
composition of these loans was as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
- -------------------------------------------------------- ----------------------------------------------------------
Book Value Book Value
- -------------------------------------------------------- ----------------------------------------------------------
Term to March 31, March 31, Term to Rate March 31, March 31,
Maturity 1999 1998 Adjustment 1999 1998
- --------------------------------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1mo.-1yr $ 30,171,000 $ 17,079,000 1mo.-1yr. $27,279,000 $20,329,000
1yr.-3yr. 18,322,000 12,125,000 1yr.-3yr. 4,978,000 3,533,000
3yr.-5yr. 65,390,000 30,023,000 3yr.-5yr. 7,272,000 5,487,000
5yr.-10yr. 46,433,000 28,317,000 5yr.-10yr. 37,219,000 38,578,000
10yr.-20yr. 78,742,000 68,512,000 10yr.-20yr. 1,006,000 1,817,000
Over 20 years 7,164,000 1,884,000 over 20 yrs 123,000 205,000
- -------------------------------------------------------- ----------------------------------------------------------
$246,222,000 $157,940,000 $77,877,000 $69,949,000
- -------------------------------------------------------- ----------------------------------------------------------
</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 $609,277 and $630,613
at March 31, 1999 and 1998, respectively. For the years ended March 31, 1999 and
1998 loans of $152,383 and $202,444 respectively, were disbursed to officers and
directors and repayments of principal of $173,719 and $248,686 respectively,
were received from officers and directors.
The amount of loans serviced for others totaled approximately
$36,327,537 and $32,468,000 at March 31, 1999 and 1998, 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 $228,391 and $233,216 at March 31, 1999 and 1998,
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, 1999 and 1998, these obligations were limited to
approximately $316,000 and $443,000 respectively.
Loan servicing fee income for the years ended March 31, 1999, 1998 and
1997 was $81,575, $84,274, and $100,824, respectively.
There were no restructured loans in the Bank's loan portfolio as of
March 31, 1999 and 1998. 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
included in interest income during 1997 on such loans was $151,000.
<PAGE>
<TABLE>
<CAPTION>
An analysis of the allowance for loan losses is as follows:
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $1,973,410 $2,126,225 $2,237,804
Provision for losses charged to operations 300,000 177,050 113,256
Charge-offs (506,753) (403,896) (370,519)
Recoveries 179,751 74,031 145,684
Acquired in branch acquisition 760,000
- ---------------------------------------------------------------------------------------------------------------------------
Ending balance $2,706,408 $1,973,410 $2,126,225
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
The recorded investment in loans considered impaired at March 31, 1999
and 1998 was $362,920 and $116,778 for which no specific valuation reserve has
been established. For the year ended March 31, 1999 and 1998 the average
recorded investment in impaired loans was approximately $243,116 and $1,215,012,
respectively. Cash received for interest on impaired loans was $17,039 and
$108,989 for the years ended March 31, 1999 and 1998, 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 $169 million and $154
million as of March 31, 1999, and 1998, 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 $4.9 million at March 31, 1999 and $5.7 million at March
31,1998. At March 31, 1999 and 1998 there were no loans exceeding this
limitation.
4. OFFICE PROPERTIES AND EQUIPMENT
<TABLE>
<CAPTION>
Office properties and equipment are summarized as follows:
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 2,578,358 $ 1,841,659
Office buildings 8,212,588 7,379,489
Furniture and equipment 3,551,173 3,560,222
Leasehold improvements 289,824 375,184
Automobiles 55,642 52,728
- ---------------------------------------------------------------------------------------------------------------------------
Total 14,687,585 13,209,282
Less accumulated depreciation 6,000,198 5,676,031
- ---------------------------------------------------------------------------------------------------------------------------
Office properties and equipment, net $ 8,687,387 $ 7,533,251
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Depreciation expense included in operations during the years ended
March 31, 1999, 1998 and 1997 totaled $538,412, $556,598 and $488,930,
respectively.
5. DEPOSITS
<TABLE>
<CAPTION>
Deposit accounts are summarized as follows:
March 31,
- -----------------------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing $ 12,267,705 $ 1,755,251
NOW and MMDA's 57,644,600 1.0% 34,010,142 2.0%
Passbook savings 59,482,126 3.1% 52,050,522 3.7%
- -----------------------------------------------------------------------------------------------------------------------
Total 129,394,431 87,815,915
- -----------------------------------------------------------------------------------------------------------------------
Certificates of deposit:
1.50 - 3.49% 40,396 2.4% 66,459 2.9%
3.50 - 5.49% 120,750,095 4.9% 61,522,709 5.0%
5.50 - 7.49% 92,403,547 6.1% 130,864,156 6.0%
7.50 - 9.49% 2,752,620 7.8% 2,672,884 7.8%
- -----------------------------------------------------------------------------------------------------------------------
Total certificates of deposit 215,946,658 195,126,208
- -----------------------------------------------------------------------------------------------------------------------
Total $345,341,089 $282,942,123
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
Certificates of deposit in the amount of $100,000 or more total
approximately $30 million at March 31,1999 and $21 million at March 31, 1998.
A summary of certificate accounts by scheduled maturities at March 31,
1999 is as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Less than 3.49% $ 40,396 $ 40,396
3.50 - 5.49% 72,305,918 $32,306,250 $ 7,652,773 $ 4,018,315 $3,209,364 $ 1,257,474 120,750,094
5.50 - 7.49% 45,448,624 17,456,235 4,065,480 9,710,389 5,906,793 9,816,027 92,403,548
7.50 - 9.49% 65,355 1,315,885 1,371,380 2,752,620
- ---------------------------------------------------------------------------------------------------------------------------
$117,860,293 $51,078,370 $13,089,633 $13,728,704 $9,116,157 $11,073,501 $215,946,658
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Interest expense on deposits is as follows:
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW and MMDA's $ 1,141,417 $ 716,098 $ 780,027
Passbook savings 1,974,533 1,951,908 2,056,077
Certificates of deposit 11,639,990 10,763,136 10,496,483
- ---------------------------------------------------------------------------------------------------------------------------
$14,755,940 $13,431,142 $13,332,587
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
6. FEDERAL HOME LOAN BANK ADVANCES
<TABLE>
<CAPTION>
Advances from the Federal Home Loan Bank of Indianapolis (FHLB) are as
follows:
Average Rate March 31,
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fixed Rate:
1999 5.55% $19,494,333
2000 4.89% 5.59% $ 805,873 2,026,678
2001 5.50% 5.50% 14,584,231 14,770,924
2002 5.46% 5.46% 5,000,000 5,000,000
After 2003 5.01% 5.09% 76,113,506 42,310,743
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed rate $96,503,610 $83,602,678
- ---------------------------------------------------------------------------------------------------------------------------
Variable Rate:
1999 5.88% 15,750,000
- ---------------------------------------------------------------------------------------------------------------------------
Total variable rate $15,750,000
- ---------------------------------------------------------------------------------------------------------------------------
Total advances $96,503,610 $99,352,678
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Fixed rate advances at March 31, 1999 include $38,500,000 of advances
that have reached the initial conversion date and $42,000,000 of advances that
reach the conversion date subsequent to March 31, 1999. The terms of these
advances generally allow the FHLB to convert the fixed rate advance to a LIBOR
based rate which will adjust quarterly. Once the initial conversion date is
reached, the FHLB may periodically exercise its option to convert the advance,
generally quarterly. If the FHLB elects to convert the advance, the Company has
the option to repay the advance without penalty.
The FHLB did not convert any advances in 1999.
35
<PAGE>
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 $200 million at March 31, 1999.
7. OTHER LONG-TERM DEBT
In August 1998 the Company borrowed $4,153,875 from an unaffiliated
bank and utilized the funds to repurchase 302,100 shares of its common stock.
This debt is secured by the stock of the Bank.
The rate on the note is determined quarterly and is, at the Company's
option, the prime rate or LIBOR plus 180 basis points (1.80%). At March 31, 1999
the rate was 6.80%
Interest on the debt is payable quarterly. Annual principal payments of
$500,000 commence February 29, 2000 with a final payment of any outstanding
balance due on August 15, 2003. Principal may be repaid at any time without
penalty and in November 1998 the Company repaid $1,153,875.
The loan agreement requires that the Company maintain defined capital
ratios which generally are those required by regulatory agencies. The Company is
also required to earn a minimum return on average assets of .50% and maintain
defined asset quality ratios. At March 31, 1999 the Company is in compliance
with the loan agreement.
8. OTHER BORROWED FUNDS
The Company had no other borrowed funds at March 31, 1999 or March 31,
1998.
<TABLE>
<CAPTION>
An analysis of securities sold under agreements to repurchase is as
follows:
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Highest month-end balance $ 0 $444,636 $3,955,494
Average balance 10,417 103,260 1,484,957
Weighted average interest rate at end of period 5.20%
Weighted average interest rate during the period 5.33% 5.10% 4.80%
</TABLE>
9. INCOME TAXES
<TABLE>
<CAPTION>
An analysis of the income tax provision is as follows:
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $1,232,983 $1,366,610 $ 862,572
State 448,893 447,482 254,275
Deferred 263,235 3,252 (113,861)
- ---------------------------------------------------------------------------------------------------------------------------
$1,945,111 $1,817,344 $1,002,986
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
The difference between the financial statement provision and amounts
computed by using the statutory rate of 34% is reconciled as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax provision at federal statutory rate $1,633,699 $1,517,254 $ 784,221
State tax, net of federal tax benefit 272,365 295,338 167,822
Nondeductible expenses 133,797 188,734 50,347
Other (94,750) (183,982) 596
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax provision $1,945,111 $1,817,344 $1,002,986
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
The Company's deferred income tax assets and liabilities are as
follows:
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves $657,839 $628,648
Goodwill 117,670 23,225
Accrued employee benefits 146,564 113,198
Other 9,561
- ---------------------------------------------------------------------------------------------------------------------------
922,073 774,632
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 124,717 107,547
Deferred loan fees 588,802 258,986
Unrealized gain of securities available for sale 3,909 147,127
Other 144,206 80,516
- ---------------------------------------------------------------------------------------------------------------------------
861,634 594,176
- ---------------------------------------------------------------------------------------------------------------------------
Deferred income tax, net $ 60,439 $180,456
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Retained earnings at March 31, 1999 and 1998 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.
<PAGE>
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.
37
<PAGE>
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 judgments by the regulators. The Bank's primary
regulator is the Office of Thrift Supervision ("OTS").
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. As of March 31, 1999 and 1998, the
most recent notification from the OTS categorizes the Bank as "well capitalized"
under the regulatory framework for prompt corrective action. There are no events
or conditions since that notification that management believes have changed the
Bank's category.
The following presents the Bank's minimum and "well-capitalized"
regulatory capital levels.
<TABLE>
<CAPTION>
As of March 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Actual Capital Required Capital
- ---------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS Capital adequacy
Tangible Capital $32,803,000 6.76% $ 7,278,000 1.50%
Core Capital 32,803,000 6.76 19,410,000 4.00
Risk-based Capital 34,347,000 12.26 22,410,000 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 32,803,000 6.76 24,263,000 5.00
Tier 1 risk-based capital 32,803,000 11.71 16,808,000 6.00
Total risk-based capital 34,347,000 12.26 28,015,000 10.00
As of March 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Actual Capital Required Capital
- ---------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
OTS capital adequacy
Tangible Capital $38,178,000 8.76% $ 6,537,000 1.50%
Core capital 38,178,000 8.76 17,440,000 4.00
Risk-based capital 40,097,000 21.05 15,239,000 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 38,178,000 8.76 21,800,000 5.00
Tier 1 risk-based capital 38,178,000 20.04 11,429,000 6.00
Total risk-based capital 40,097,000 21.05 19,049,000 10.00
</TABLE>
38
<PAGE>
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.
Preferred Stock - The Company is authorized to issue 1,000,000 shares
of preferred stock, $.01 par value which remains unissued at March 31, 1999. 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 restrictions
thereof.
Recapitalization of SAIF - On September 30, 1996, the President signed
into law an omnibus appropriations act for fiscal year 1997 that included, among
other things, the recapitulation of the Savings Association Insurance Fund
(SAIF) in a section entitled "The Deposit Insurance Funds Act of 1996" (the
Act). The Act included a provision where all insured depository institutions
would be charged a one-time special assessment on their SAIF assessable deposits
as of March 31, 1995. The Company recorded a pre-tax charge of $1,766,185 during
the year ended March 31, 1997, which represented 65.7 basis points of the March
31, 1995, assessable deposits. 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 for the year ended March 31, 1997.
There was no pension expense in 1999 and 1998.
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 $476,100 and $714,150 at March 31, 1999 and 1998, 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 $594,925,
$639,317 and $479,046 during 1999, 1998, and 1997, respectively. During fiscal
years ended March 31, 1999, 1998 and 1997, 45,607 shares, 47,688 shares and
49,728 shares were earned by participants. At March 31, 1999, 84,736 shares with
a fair value of approximately $911,000 were held in suspense by the ESOP. These
shares are not considered to be outstanding for the purpose of computing earning
per share.
39
<PAGE>
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, 1999, and 1998 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 $139,200,
$125,242 and $178,070 during the fiscal years ended March 31, 1999, 1998 and
1997. Termination of employees resulted in 2,866 shares, 2,856 shares 2,428
shares being canceled during the fiscal years ended March 31, 1999, 1998 and
1997 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.
The following is an analysis of stock option activity for each of the
three years in the period ending March 31, 1999 and the stock options
outstanding at the end of the respective years:
<TABLE>
<CAPTION>
Weighted
Average
Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding April 1, 1996 449,760 $ 5.26
Granted 9,522 8.13
Exercised (11,658) 5.46
Forfeited or expired (5,952) 5.00
- -------------------------------------------------------------------------------------------------------------------
Outstanding March 31, 1997 441,672 5.32
Exercised (36,112) 5.07
Forfeited or expired (3,572) 5.00
- -------------------------------------------------------------------------------------------------------------------
Outstanding March 31, 1998 401,988 5.34
Granted 7,000 11.25
Exercised (44,454) 5.00
- -------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 364,534 5.49
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The number of vested shares exercisable at March 31, 1999, 1998, and
1997 were: 344,773, 376,465 and 296,272, respectively and had a weighted average
exercise price of $5.28, $5.16 and $5.09, respectively. The weighted average
remaining contractual life of the options outstanding at March 31, 1999 and 1998
was 5.3 years and 6.3 years, respectively. Exercise prices for options
outstanding at March 31, 1999 ranged from $5.00 to $11.25.
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:
40
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income :
As reported $2,859,885 $2,645,167 $1,303,544
Proforma 2,843,474 2,631,973 1,293,311
Basic :
Net income per share:
As reported $ 0.72 $ 0.65 $ 0.31
Proforma 0.72 0.65 0.31
Diluted Net income per share:
As reported $ 0.70 $ 0.62 $ 0.30
Proforma 0.70 0.61 0.29
</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 2.64%, risk-free interest rates of 5.23% to 6.74%, expected volatility
of 18% to 30% 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 $22,271, $21,450 and $19,203 during the fiscal years ended
March 31, 1999, 1998 and 1997, respectively.
Directors Deferred Compensation Plan - The Bank has entered into
deferred compensation agreements with certain directors. Benefits under these
agreements are paid over a predetermined 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. Cash values
associated with these policies in the amount of $2,926,828 at March 31, 1999 and
$1,625,253 are included in Other Assets in the Consolidated Statements of
Financial Condition. 13. COMPREHENSIVE INCOME
The Company's other comprehensive income included the following
components:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
<S> <C> <C> <C>
on available for sale securities ($ 80,566) $1,841,590 ($1,525,976)
Less: Adjustment for net securities gains (losses)
realized in net income, net of tax 138,721 25,752 (33,756)
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) ($219,287) $1,815,838 ($1,492,220)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Substantially all of other comprehensive income is attributable to the
Bank as the amount of available for sale securities at the parent company is
immaterial.
41
<PAGE>
14. COMMITMENTS
Lease commitments - The Company has future minimum rental commitments
for noncancelable operating leases as follows:
<TABLE>
<CAPTION>
Fiscal year ended March 31:
---------------------------
<S> <C>
2000 $306,904
2001 296,410
2002 259,382
2003 132,982
2004 112,976
</TABLE>
Rental expense for the years ended March 31, 1999, 1998 and 1997 was
$261,022, $79,036 and $70,265, respectively.
Rental income from noncancelable subleases for the years ended March
31, 1999, 1998 and 1997 was $137,063, $119,306 and $103,306, 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. The collateral consists predominantly of residential family units,
commercial residential or non-residential real estate, and personal property.
Employment agreement - The Company has entered into employment
agreements with two executive officers. One agreement is in effect until March
31, 2000. Under the terms of the other agreement, the Company may be obligated
under terms specified in the agreement 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 $136,000 at March 31, 1999.
42
<PAGE>
15. PERMANENT BANCORP, INC. FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The following condensed statement of financial condition as of March
31, 1999 and 1998 and condensed statement of operations and cash flows for the
three years ended March 31, 1999 for Permanent Bancorp, Inc. should be read in
conjunction with the consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 322,070 $ 1,519,171
Securities available for sale 838,766 2,614,031
Loans Loans receivable from ESOP 476,100 714,150
Fixed assets 454,855 460,282
Interest receivable 11,353
Other assets 28,704 8,746
Investment in subsidiary 42,120,304 38,514,563
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $44,240,799 $43,842,296
- ---------------------------------------------------------------------------------------------------------------------------
Deferred income taxes $ 30,445 $ 111,341
Accrued expenses 110,470 1,047,696
Dividends payable 238,697
Other borrowed funds 3,000,000
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,379,612 1,159,037
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity - net 40,861,187 42,683,259
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $44,240,799 $43,842,296
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
Year Ended March 31,
INCOME: 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Interest income from securities held to maturity
<S> <C> <C> <C>
and available for sale $ 86,342 $ 145,162 $ 293,929
Interest on loans 38,029 52,510 66,991
Other income 63,395 92,656 81,094
- ---------------------------------------------------------------------------------------------------------------------------
Total income 187,766 290,328 442,014
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Salaries and benefits 187,648 172,019 223,192
Interest expense 150,792
Legal and professional fees 93,878 130,957 67,433
Other expenses 110,561 86,646 79,418
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 542,879 389,622 370,043
- ---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED EARNINGS (355,113) (99,294) 71,971
INCOME TAX PROVISION (140,615) (38,426) 21,296
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 3,074,383 2,706,035 1,252,869
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $2,859,885 $2,645,167 $1,303,544
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 2,859,885 $ 2,645,167 $ 1,303,544
Equity in undistributed earnings of subsidiary (3,074,383) (2,706,035) (1,252,869)
Adjustments to reconcile net income to net cash
provided by operating activities
Vesting of restricted stock awards 139,200 125,243 178,070
Depreciation, amortization and accretion 7,836 (246) 28,238
(Gain) Loss on sale of investments 10,206 (5,198) (5,790)
Changes in assets and liabilities:
Interest receivable 11,353 53,847 16,838
Deferred income tax (153,532) (7,422) (46,817)
Other assets (19,958) (4,059)
Other liabilities 62,774 (18,519) 20,848
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used in) by operating activities (156,619) 82,778 242,062
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Maturities of:
Securities available for sale 3,689,138 1,997,500 2,974,688
Commercial Paper 1,200,000 1,500,000 5,500,000
Principal repayments on loans 238,050 238,050 238,050
Sale of:
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)
Securities available for sale (2,759,969) (2,497,500)
Commercial paper (1,492,876)
Fixed assets (3,974)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 870,369 2,727,145 1,212,934
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from other borrowed funds 4,153,875
Dividends paid (969,805) (808,610) (608,737)
Purchase of treasury stock (4,163,316) (993,628) (2,286,926)
Sale of common stock 222,270 183,237 63,645
Principal repayment on other borrowed funds (1,153,875)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,910,851) (1,619,001) (2,832,018)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (1,197,101) 1,190,922 (1,377,022)
CASH AT BEGINNING OF PERIOD 1,519,171 328,249 1,705,271
- ---------------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 322,070 $ 1,519,171 $ 328,249
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
44
<PAGE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value
of Financial Instruments":
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash $ 7,591,117 $ 7,591,117 $ 4,274,700 $ 4,274,700
Interest-bearing deposits 6,361,293 6,361,293 1,808,159 1,808,159
Securities available for sale 117,289,087 117,289,087 168,270,907 168,270,907
Securities held to maturity 6,919,793 6,627,235 18,861,416 19,119,093
Loans, net 321,017,805 324,264,853 225,349,258 226,008,379
Interest receivable 2,824,211 2,824,211 3,270,173 3,270,173
Federal Home Loan Bank stock 5,466,000 5,466,000 5,466,000 5,466,000
Cash surrender value of life insurance 2,926,828 2,926,828 1,625,253 1,625,253
Liabilities:
Deposits 345,341,089 350,438,836 282,942,123 287,384,759
Federal Home Loan Bank advances 96,503,610 97,541,079 99,352,678 98,824,254
Advance payments by borrowers
for taxes and insurance 974,636 974,636 979,859 979,859
Other borrowed funds 3,000,000 3,000,000
Interest payable 2,204,007 2,204,007 2,193,548 2,193,548
Off balance sheet: commitments
to extend credit 23,421,000 10,485,000
</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.
Securities - Fair values are based on prices obtained from independent
pricing services.
Loans - The fair value of mortgage loans is estimated using published
loan buy rates for similar loans and quoted market prices for mortgage-backed
securities backed by loans with similar characteristics. The fair value of
non-mortgage loans is estimated by discounting the future cash flows using the
current rates for loans of similar credit risk and maturities.
45
<PAGE>
Deposits - The fair value of demand deposits, savings accounts and
money market deposit accounts is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated by
discounting future cash flows using rates offered on the reporting date for
deposits of similar remaining maturities.
Federal Home Loan Bank advances - The fair value is estimated by
discounting future cash flows using rates currently available to the bank for
advances of similar maturities.
Commitments - The fair values of commitments to extend credit are based
on fees currently charged to enter into similar agreements with similar
maturities and interest rates.
The fair value estimates presented herein are based on information
available to management as of March 31, 1999 and 1998. 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.
46
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BOARD OF DIRECTORS AND Daniel L. Schenk EXECUTIVE OFFICERS
EXECUTIVE OFFICERS James A. McCarty, Jr.
Daniel F. Korb Donald P. Weinzapfel
PERMANENT BANCORP INC. John R. Stone Chairman of the Board and
Murray J. Brown Chief Executive Officer
BOARD OF DIRECTORS Murray J. Brown
President
Donald P. Weinzapfel Robert A. Cern
James W. Vogel Chief Financial Officer
Jack H. Kinkel and Secretary
Robert L. Northerner
James D. Butterfield
PERMANENT FEDERAL SAVINGS BANK
BOARD OF DIRECTORS
Donald P. Weinzapfel Daniel L.Schenk EXECUTIVE OFFICERS
James W. Vogel James A. McCarty, Jr.
Jack H. Kinkel Daniel F. Korb Murray J. Brown George E. Orr
Robert L. Northerner John R. Stone Chairman of the Board, Senior Vice President
James D. Butterfield Murray J. Brown President & Richard A. Condi
Chief Executive Officer Vice President
Louis H. Boink, Jr(Director Emeritus) Robert A. Cern Glenna J. Kirsch
Carl F. Bernhardt (Director Emeritus) Senior Vice President, Vice President
Kenneth F. Allen (Director Emeritus) Chief Financial Officer Charles A. Becker, Sr.,
John W. Forster (Director Emeritus) & Secretary Vice President
Seth P. Allen
JASPER ADVISORY BOARD Senior Vice President
Stephen A. Habig Roger W. Brown For information about enrolling in
G. Earl Metzger the Company's Dividend Reinvestment
and Stock Purchase Plan, please
WHOLLY OWNED SUBSIDIARY write Registrar and Transfer
Company, Shareholders Investment
PERMA SERVICE CORP. Services, 10 Commerce Drive,
Cranford, NJ 07016 or use their
toll free number at 1-800-368-5948.
Perma Service Corp. provides
brokerage services, on an agency
basis, through INVEST(R), and a
full line of insurance products Visit us on the world-wide web at: www.permanentbank.com
through PERMANENT INSURANCE AGENCY,
INC.
</TABLE>
47
<PAGE>
CORPORATE INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held Tuesday, July 27, 1999
at 1:00 p.m. Central Daylight Time at the Radisson Hotel, 606 Walnut
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
Ross Center
2521 Washington Avenue
Evansville, Indiana
4th Street
19 N. W. 4th Street
Evansville, Indiana
Bellemeade
4601 Bellemeade Avenue
Evansville, Indiana
Buena Vista
1010 W.Buena Vista
Evansville, Indiana
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 and Secretary
Permanent Bancorp, Inc.
101 S.E. Third St., Evansville, IN 47708
<PAGE>
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, 1999, the Company's stock was
held by approximately 1,115 holders of record. The stock transfer agent is:
REGISTRAR AND TRANSFER COMPANY
10 Commerce Drive
Cranford, New Jersey 07016
STOCK TRADING AND DIVIDEND DATA
<TABLE>
<CAPTION>
Volume Dividend
Quarter Ended High Low (000's) Paid
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
June 30, 1998 $18.50 $15.50 192.4 $.055
September 30, 1998 16.25 11.63 1,090.9 .06
December 31, 1998 14.38 10.56 207.4 .06
March 31, 1999 13.75 10.75 169.9 .06
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, 1997 18.75 13.38 356.7 .055
</TABLE>
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
Knight Securities L.P.
NatCity Investments, Inc.
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
111 Monument Circle
Bank One Center/Tower
Indianapolis, IN 46204-5120
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,591,117
<INT-BEARING-DEPOSITS> 6,361,293
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 117,289,086
<INVESTMENTS-CARRYING> 6,627,793
<INVESTMENTS-MARKET> 6,627,235
<LOANS> 323,724,213
<ALLOWANCE> 2,706,408
<TOTAL-ASSETS> 492,326,958
<DEPOSITS> 345,341,089
<SHORT-TERM> 1,305,873
<LIABILITIES-OTHER> 6,621,072
<LONG-TERM> 98,197,737
0
0
<COMMON> 49,241
<OTHER-SE> 40,811,946
<TOTAL-LIABILITIES-AND-EQUITY> 492,326,958
<INTEREST-LOAN> 22,758,455
<INTEREST-INVEST> 9,405,583
<INTEREST-OTHER> 721,798
<INTEREST-TOTAL> 32,885,836
<INTEREST-DEPOSIT> 14,755,940
<INTEREST-EXPENSE> 19,909,013
<INTEREST-INCOME-NET> 12,976,823
<LOAN-LOSSES> 205,837
<SECURITIES-GAINS> 229,708
<EXPENSE-OTHER> 10,902,767
<INCOME-PRETAX> 4,804,996
<INCOME-PRE-EXTRAORDINARY> 2,859,885
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,859,885
<EPS-BASIC> 0.72
<EPS-DILUTED> 0.70
<YIELD-ACTUAL> 7.38
<LOANS-NON> 818,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,166,000
<ALLOWANCE-OPEN> 1,973,410
<CHARGE-OFFS> 506,753
<RECOVERIES> 179,751
<ALLOWANCE-CLOSE> 2,706,408
<ALLOWANCE-DOMESTIC> 259,274
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,447,134
</TABLE>
