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, 2000
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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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 (IRS. 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) 437-2265
--------------
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 12, 2000, was $66,417,312. (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 15, 2000, there were issued and outstanding 4,207,100 shares of
the Registrant's Common Stock.
1
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
Bank (the "Bank") in connection with the Bank's conversion from a mutual to a
stock form of ownership which was completed on March 31, 1994 (the
"Conversion"). Permanent Bank, 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 thirteen branch offices, the Company serves Vanderburgh, Gibson,
Warrick, Posey and Dubois Counties, Indiana. At March 31, 2000, the Company had
total assets of $492 million, deposits of $355.8 million, and total
stockholders' equity of $41.4 million (8.42% of total assets).
Permanent Bank has been 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 local governmental units
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
"Subsidiary Activities."
In December 1999 the Company announced its intention to merge with Old
National Bancorp which is also headquartered in Evansville, Indiana. The merger,
which is subject to shareholder and regulatory approval, is expected to be
completed during the quarter ending September 30, 2000. A description of the
terms of the proposed merger can be found in Note 1 to the Consolidated
Financial Statements contained in Part II, Item 8 of this report.
The executive office of the Company is located at 101 Southeast Third
Street, Evansville, Indiana 47708. Its telephone number at that address is (812)
437-2265.
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, many 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.
2
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, 2000, 69.8% of the Bank's total loan
portfolio was fixed-rate and 30.2% was adjustable-rate. The Bank's
adjustable-rate loan portfolio as a percentage of the total loan portfolio has
increased from 26% at March 31, 1996. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management" in Part II, Item 7 of this report.
The Bank focuses its lending activities on the origination of loans secured
by first mortgages on owner-occupied, one-to four-family residences as well as
multi-family and commercial real estate 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, 2000, the Bank's total
loan portfolio, including commercial paper, totaled $329.6 million, of which
$172 million, or 52.2%, were one- to four-family mortgage loans. At the same
date, consumer loans (including indirect and direct automobile loans) totaled
$86.1 million, or 26.1%, multi-family and commercial real estate loans totaled
$45.6 million, or 13.8%, construction loans totaled $6.0 million, or 1.8%, and
there was $4.0 million of commercial paper, representing 1.2% of the loan
portfolio. Other business loans totaled $15.9 million or 4.9% of the loan
portfolio.
The Bank also invests in mortgage-backed securities. At March 31, 2000, the
fair value of mortgage-backed securities totaled $49.2 million, or 10% 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.
The Bank's loans-to-one-borrower limit is generally the greater of 15% of
unimpaired capital and surplus or $500,000. See "Regulation - Federal Regulation
of Savings Associations." At March 31, 2000, the maximum the Bank could have
lent to any one borrower and the borrower's related entities was approximately
$5.4 million. At March 31, 2000, 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
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.
March 31,
--------------------------------------------------------------------------
1996 1997 1998
(Dollars in Thousands) ---- ---- ----
Real Estate Loans: Amount Percent Amount Percent Amount Percent
-------- --------- -------- --------- --------- ---------
One- to four-family............... $144,155 68.85% $152,655 71.82% $158,750 69.67%
Multi-family...................... 11,823 5.65 8,041 3.78 4,092 1.80
Commercial real estate............ 4,787 2.29 4,034 1.90 4,795 2.10
Construction or development....... 2,700 1.29 1,888 .89 3,435 1.51
-------- --------- -------- --------- --------- ---------
Total real estate loans....... $163,465 78.08 $166,618 78.39 $171,072 75.08
Other Loans:
Consumer Loans:
Deposit account.................. 1,148 0.55 940 .44 892 0.39
Automobile....................... 31,056 14.83 31,394 14.77 31,436 13.80
Home improvement................. 1,088 0.52 1,084 .51 839 0.37
Retail mobile home loans......... 1,595 0.76 1,240 .58 935 0.41
Home equity and other............ 8,666 4.14 10,269 4.83 9,718 4.26
-------- --------- -------- --------- --------- ---------
Total consumer loans.......... 43,553 20.80 44,927 21.13 43,820 19.23
Commercial business loans......... 57 0.03 52 .02 3,861 1.69
Bankers' acceptances.............. 299 0.14 -- -- -- --
Commercial paper.................. 1,997 0.95 979 .46 9,116 4.00
-------- --------- -------- --------- --------- ---------
Total other loans............. 45,906 21.92 45,958 21.61 56,797 24.92
-------- --------- -------- --------- --------- ---------
Total loans................... $209,371 100.00% $212,576 100.00% $227,869 100.00%
-------- ========= -------- ========= --------- =========
Less:
Loans in process.................. 67 (24) 149
Deferred fees and discounts....... 156 284 398
Allowance for losses.............. 2,238 2,126 1,973
-------- -------- ---------
Total loans ...................... $206,910 $210,190 $225,349
======== ======== =========
Mortgage-Backed Securities:
FNMA.............................. $21,286 22.62% $31,793 31.55% $25,730 31.76%
GNMA.............................. 31,949 33.96 27,160 26.95 27,116 33.47
FHLMC............................. 40,852 43.42 41,832 41.50 28,163 34.77
-------- --------- -------- --------- --------- ---------
Total mortgage-backed
securities................... 94,087 100.00% 100,785 100.00% 81,009 100.00%
========= ========= =========
Net premiums and discounts......... 20 448 505
-------- -------- ---------
Net mortgage-backed securities..... $94,107 $101,233 $81,514
======== ======== =========
March
-------------------------------------------------
1999 2000
---- ----
Real Estate Loans: Amount Percent Amount Percent
-------- ----------- -------- ----------
One- to four-family............... $171,250 52.84% $171,960 52.17%
Multi-family...................... 4,838 1.49 1,627 .49
Commercial real estate............ 27,060 8.35 43,958 13.34
Construction or development....... 8,208 2.53 6,030 1.83
-------- ----------- -------- ----------
Total real estate loans....... $211,356 65.21 $223,575 67.83
Other Loans
Consumer Loans:
Deposit account.................. 868 .27 392 .12
Automobile....................... 56,779 17.52 57,320 17.39
Home improvement................. 570 .18 434 .13
Retail mobile home loans......... 724 .22 501 .15
Home equity and other............ 27,198 8.39 27,463 8.33
-------- ----------- -------- ----------
Total consumer loans.......... 86,139 26.58 86,110 26.12
Commercial business loans......... 17,328 5.35 15,965 4.84
Bankers' acceptances.............. --- --- ---
Commercial paper.................. 9,275 2.86 3,967 1.21
-------- ----------- -------- ----------
Total other loans............. 112,742 34.79 106,042 32.17
-------- ----------- -------- ----------
Total loans................... $324,098 100.00% $329,617 100.00%
-------- =========== -------- ==========
Less:
Loans in process.................. 52 27
Deferred fees and discounts....... 310 207
Allowance for losses.............. 2 ,706 2,232
-------- --------
Total loans ...................... $321,030 $327,151
======== ========
Mortgage-Backed Securities:
FNMA.............................. $17,464 32.09% $18,016 36.80%
GNMA.............................. 20,105 36.94 15,289 31.22
FHLMC............................. 16,858 30.97 15,661 31.98
-------- ----------- -------- ----------
Total mortgage-backed
securities................... 54,427 100.00% 48,966 100.00%
=========== ==========
Net premiums and discounts......... 422 218
-------- --------
Net mortgage-backed securities..... $54,849 $49,184
======== ========
4
The following table sets forth the composition of the Bank's loan portfolio
by fixed and adjustable rates at the dates indicated.
March 31,
-------------------------------------------------------------------------
1996 1997 1998
(Dollars in Thousands) ---- ---- ----
Fixed-Rate Loans:
- -----------------
Real estate:
Amount Percent Amount Percent Amount Percent
----------- ---------- ---------- --------- ---------- ---------
One- to four-family................... $ 99,568 47.56% $ 94,476 44.44% $ 95,432 41.88%
Multi-family.......................... 3,271 1.56 2,687 1.26 2,346 1.03
Commercial real estate................. 3,634 1.74 3,357 1.58 3,386 1.49
Construction or development............ 2,686 1.28 1,855 .87 3,423 1.50
----------- ---------- ---------- --------- ---------- ---------
Total real estate loans............. 109,159 52.14 102,375 48.16 104,587 45.90
Consumer............................... 43,405 20.73 44,450 20.91 42,324 18.57
Commercial business.................... 57 0.03 52 .02 581 0.25
Bankers' acceptances................... 299 0.14 --- --- --- ---
Commercial paper....................... 1,997 0.95 979 .46 9,116 4.00
----------- ---------- ---------- --------- ---------- ---------
Total fixed-rate loans.............. 154,917 73.99 147,856 69.55 156,608 68.73
----------- ---------- ---------- --------- ---------- ---------
Adjustable-Rate Loans:
- ----------------------
Real estate:
One- to four-family.................... 44,588 21.30 58,179 27.37 63,318 27.79
Multi-family........................... 8,552 4.08 5,354 2.52 1,746 0.77
Commercial real estate................. 1,153 0.55 677 .32 1,409 0.62
Construction or development............ 13 0.01 33 .02 12 01
----------- ---------- ---------- --------- ---------- ---------
Total real estate loans............. 54,306 25.94 64,243 30.22 66,485 29.18
Consumer................................ 148 0.07 477 .22 1,496 0.66
Commercial business..................... --- --- --- --- 3,280 1.44
----------- ---------- ---------- --------- ---------- ---------
Total adjustable-rate
loans.............................. 54,454 26.01 64,720 30.45 71,261 31.27
----------- ---------- ---------- --------- ---------- ---------
Total loans......................... 209,371 100.00% 212,576 100.00% 227,869 100.00%
========== ========= =========
Less:
- -----
Loans in process........................ 67 (24) 149
Deferred fees and discounts............. 156 284 398
Allowance for loan losses............... 2,238 2,126 1,973
----------- ---------- ----------
Total loans and loans
held for sale, net ................ $206,910 $210,190 $225,349
=========== ========== ==========
March 31,
----------------------------------------------
Fixed-Rate Loans: 1999 2000
- ----------------- ---- ----
Real estate:
Amount Percent Amount Percent
---------- --------- ---------- -----------
One- to four-family................... $110,140 33.98% 102,585 31.12%
Multi-family.......................... 3,396 1.05 259 .08
Commercial real estate................. 17,054 5.26 33,589 10.19
Construction or development............ 8,196 2.53 6,019 1.83
---------- --------- ---------- -----------
Total real estate loans............. 138,786 42.82 142,452 43.22
Consumer............................... 76,132 23.49 73,873 22.41
Commercial business.................... 17,203 5.31 9,733 2.95
Bankers' acceptances................... --- --- --- ---
Commercial paper....................... 9,275 2.86 3,967 1.21
---------- --------- ---------- -----------
Total fixed-rate loans.............. 241,396 74.49 230,025 69.79
---------- --------- ---------- -----------
Adjustable-Rate Loans:
- ----------------------
Real estate:
One- to four-family.................... 61,110 18.86 69,375 21.05
Multi-family........................... 1,442 0.44 1,368 .42
Commercial real estate................. 10,006 3.09 10,369 3.15
Construction or development............ 12 --- 11 ---
---------- --------- ---------- -----------
Total real estate loans............. 72,570 22.39 81,123 24.61
Consumer................................ 9,995 3.08 12,237 3.71
Commercial business..................... 125 0.04 6,232 1.89
---------- --------- ---------- -----------
Total adjustable-rate
loans.............................. 82,690 25.51 99,592 30.21
---------- --------- ---------- -----------
Total loans......................... 324,086 100.00% 329,617 100.00%
========= ===========
Less:
- -----
Loans in process........................ 52 28
Deferred fees and discounts............. 310 212
Allowance for loan losses............... 2,706 2,232
---------- ----------
Total loans and loans
held for sale, net ................ $321,018 $327,145
========== ==========
5
The following table sets forth the maturities of the Bank's loan portfolio
(excluding commercial paper) at March 31, 2000. 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.
Real Estate
---------------------------------------------------------------------------
Multi-family
and
Commercial Construction
One- to four-family Real Estate or Development
---------------------- ----------- --------------
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Due During Years
Ending March 31,
- -----------------
2001(1) $ 10,725 7.73% $ 5,612 8.93% $ 3,819 8.25%
2002 to 2005 16,888 7.13 25,678 9.35 856 9.12
2006 to 2010 79,548 7.36 7,046 7.84 144 8.08
2011 to 2020 53,549 7.15 6,240 8.12 1,211 7.50
2020 and over 11,250 7.28 1,009 7.78 --- ---
-------- -------- -------
Total $171,960 $ 45,585 $ 6,030
======== ======== =======
Commercial
Consumer Business Total
-------- ---------- -----
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Due During Years
Ending March 31,
- -----------------
2001(1) $ 14,331 10.40% $ 3,390 9.61% $ 37,877 9.14%
2002 to 2005 61,525 8.51 8,764 8.89 113,711 8.53
2006 to 2010 7,487 9.79 3,039 7.27 97,264 7.58
2011 to 2020 2,647 10.55 772 5.94 64,419 7.37
2020 and over 120 9.10 --- --- 12,379 7.34
-------- -------- --------
Total $ 86,110 $ 15,965 $325,650
======== ======== ========
- ------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
6
The total amount of fixed interest rate loans due at March 31, 2000 was
$230 million while the total amount of variable rate loans due as of that date
was $99.6 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 by property located in the Bank's
immediate market area. At March 31, 2000, the Bank had $172 million, or 52.2% of
its loan portfolio invested in these loans.
The Bank presently offers fixed-rate conventional mortgage loans, Federal
Housing Administration ("FHA") Loans, 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. Recently many borrowers have opted for shorter-term
15-year fixed-rate mortgages or ten-year adjustable rate loans. Interest rates
charged on fixed-rate loans are competitively priced according to local market
conditions. The Bank's current policy is to sell all newly originated fixed-rate
loans with terms 15 years or more which conform to the secondary market
requirements as well as ARM loans converted to a fixed rate with a remaining
term to maturity in excess of 15 years, and all FHA and VA loans. See "-
Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed
Securities."
The Bank currently makes adjustable-rate, one- to four-family residential
mortgage loans in amounts of up to 100% of the appraised value or selling price
of the security property, whichever is less. For loans with loan-to-value ratios
of greater than 80%, the Bank typically requires private mortgage insurance to
reduce the Bank's exposure to 75% of the appraised value or selling price of the
security property. Adjustable-rate loans generally have interest rate adjustment
limitations consisting of 2% annual adjustments and 6% lifetime adjustments, and
are generally indexed to the weekly average yield of U. S. Treasury securities
adjusted to a constant maturity of one year.
The retention of ARM loans in the Bank's loan portfolio helps the Bank to
manage its exposure to changes in the interest rates. There are, however,
unquantifiable credit risks relating to such loans resulting from the potential
of increased monthly principal and interest payments due to increasing rates
which must 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 to meet
competitive conditions, for initial rates of interest below the rates which
would apply were the adjustment index fully utilized when establishing the
initial loan rates. 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 without penalty during periods of declining mortgage
rates. 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 the
borrower's ability to make monthly payments, employment history, credit history
and the value of the property securing the loan. Potential borrowers are
qualified for fixed-rate loans based upon the initial or stated rate of the
loan. Borrowers on one and three 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 initial
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
7
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.
Mortgage-backed securities decreased $19.7 million in fiscal 1998, $26.7
million in fiscal 1999 and another $5.6 million in fiscal 2000. At March 31,
2000 the mortgage-backed security portfolio was $49.2 million. The portfolio has
decreased during the last several years to fund growth in the consumer and
commercial loan portfolios. Although such securities are generally held for
investment, they can serve as collateral for FHLB borrowings. For information
regarding the carrying and market values of Permanent Bank's mortgage-backed
securities portfolio, see Note 2 of the Notes to Consolidated Financial
Statements contained in Part II, Item 8 of this 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 recent years expanded its consumer loan
portfolio particularly in the automobile and home lending areas. Consumer loans
generally have shorter terms to maturity (thus reducing Permanent Bank'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, 2000, the Bank's consumer loan portfolio totaled
$86.1 million, or 26.1% of its loan portfolio. The chief component of such loans
consists of indirect and direct automobile paper, accounting for $57.3 million,
or 66.6%, of the consumer loan portfolio at March 31, 2000. Under applicable
federal law, the Bank is authorized to invest up to 35% of its assets in
consumer loans.
Permanent Bank 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.
Other than home equity lines of credit, 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 Bank's primary 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 six years. At March 31, 2000, indirect
dealer loans totaled $48 million, or 55.7%, of the Bank's consumer loan
portfolio.
At March 31, 2000, $24.5 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 Bank 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, 2000 was $501,000, or .10% of the Bank's loan
portfolio.
8
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's credit history 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 loan may not provide
an adequate source of repayment on the outstanding loan balance. 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. Over the past five years,
------------------------------------------------
an increasing percentage of the Bank's loan portfolio has been multi-family and
commercial real estate loans made primarily in its lending area. The Bank has
also purchased whole loan and participation interests in loans in Indiana, and
to a lesser extent, in Kentucky, Tennessee and elsewhere. At March 31, 2000, the
Bank had multi-family and commercial real estate loans totaling $45.6 million,
representing 13.8% 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.
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,
2000.
Amount of
Outstanding Non-Performing
Number of Principal or Of Concern
Loans Balance Loans
--------- ----------- --------------
(Dollars in Thousands)
Apartment buildings.................................... 15 $ 5,899 $ ---
Churches .............................................. 6 4,464 ---
Small business facilities and office
buildings............................................ 97 23,858 ---
Hotel ................................................. 4 10,238 ---
Shopping centers....................................... 5 1,126 ---
--------- ----------- --------------
Total commercial and multi-family
real estate loans.................................... 127 $45,585 $ ---
========= =========== ==============
At March 31, 2000, the Bank had a total of 16 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 contractual terms.
Multi-family and commercial real estate loans originated by the Bank
generally have terms ranging from 5 to 20 years and up to 25 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
9
over an index, (ii) float (subject, in some cases, to specified interest rate
caps) with changes in a specified 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 Board of Directors 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 for appropriateness. 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 are 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
collectibility of the loan or the value of the collateral.
Multi-family and commercial real estate loans generally present a higher
level of credit risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effect of general economic
conditions on income-producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed, or a bankruptcy court modifies a lease term, or a major tenant is
unable to fulfill its lease obligations), the borrower's ability to repay the
loan may be impaired.
Construction or Development Lending. The Bank makes construction loans to
------------------------------------
individuals for the construction of their residences. The Bank generally
requires that the borrower 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,
2000, the Bank's construction loan portfolio totaled $6.0 or 1.8% 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 with provisions for converting to a fixed-rate loan upon completion of
the construction. Fixed-rate loans for construction purposes are limited to a
maximum term of 15 years. During the construction phase, the borrower pays
interest only. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential loans
except that the record of the builder is also considered.
Construction loans to builders are written for a term of 18 months at a
fixed rate of interest. Construction loans are obtained primarily through
continued business from builders who have previously borrowed from the Bank, as
well as referrals from existing customers. The application process includes a
submission of detailed 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 security 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, 2000.
Commercial Business Lending. Federally chartered savings institutions, such
----------------------------
as Permanent Bank, 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.
10
At March 31, 2000, Permanent Bank had $15.9 million in commercial business
loans outstanding (representing 4.9% of the Bank's total loan portfolio). At
March 31, 2000, Permanent Bank had $300,000 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
existing 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 market demand for
fixed-rate or ARM loans, which is affected by the term structure (short-term
compared to long-term) of interest rates, as well as the current and expected
future level of interest rates and competition.
During fiscal 2000, the Bank originated a total of $134.2 million in loans.
Of the loans originated during the year, $33.9 million were one- to four-family
real estate loans, $49 million were consumer loans, $38.6 million were
commercial loans, and $12.7 million were construction loans.
The Bank's current policy is to sell all conforming 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
1998, 1999 and 2000, the Bank sold $5.1 million, $12.7 million and $8.5 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 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 such a
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 $5.5 million, $14.3 million and $15.1 million at
March 31, 1998, 1999 and 2000, respectively.
The Bank has purchased mortgage-backed securities as a means of
supplementing loan demand. In recent years, however, the Bank has elected to
utilize the liquidation of its mortgage-backed portfolio to fund increasing
demand for commercial and consumer loans.
The Bank had commitments to make loans, including participations, of
approximately $4.9 million, $23.4 million and $26.1 million (excluding
undisbursed portions of loans in process) at March 31, 1998, 1999
11
and 2000, respectively. In addition, the Bank had approximately $100,000 and
$106,000 in commitments to sell loans at March 31, 1998 and 1999, respectively.
There were no loan sale commitments at March 31, 2000
The amount of loans serviced by the Bank for others totaled $32.5 million,
$36.3 million and $37.7 million at March 31, 1998, 1999 and 2000, respectively.
The Bank generally earns servicing fees of 25 basis points for servicing
loans for others. For the years ended March 31, 1998, 1999 and 2000 such fees
amounted to approximately $84,000, $82,000 and $84,000, respectively.
12
The following table sets forth the loan origination, purchase and repayment
activities of the Bank for the periods indicated.
1998 1999 2000
(Dollars in Thousands) ------- ------- -------
Originations by type:
- ---------------------
Real estate - one- to four-family...................... $39,373 $55,948 $33,905
- multi-family............................. --- --- ---
- commercial real estate................... 3,144 4,308 19,629
- construction............................. 3,634 3,943 12,733
Non-real estate .......................................
-consumer.............................. 24,829 76,933 48,962
-commercial business................... 5,192 27,676 18,961
------- ------- -------
Total loans originated ......................... 76,172 168,808 134,190
------- ------- -------
Purchases:
- ----------
Real estate - one- to four-family...................... $ --- $ --- $6,479
- multi-family............................. --- --- ---
- commercial real estate................... --- --- ---
- construction............................. --- --- ---
Non-real estate - consumer............................. --- --- ---
- commercial business...................... --- --- ---
- commercial paper......................... 17,257 43,552 26,266
- bankers' acceptances..................... --- --- ---
------- ------- -------
Total loans purchased........................... 17,257 43,552 32,745
Mortgage-backed securities.............................. 18,485 20,919 11,005
------- ------- -------
Total purchases................................. 35,742 64,471 43,750
------- ------- -------
Sales and Principal Repayments:
- -------------------------------
Sales:
Real estate - adjustable-rate one- to four-family........ $ --- $ --- $ ---
- fixed-rate one- to four-family...................... 5,078 12,721 8,549
- multi-family............................. --- --- ---
- commercial real estate................... --- --- ---
- construction............................. --- --- ---
Non-real estate - consumer............................. --- --- ---
- commercial business............................ --- --- ---
------- ------- -------
Total loans sold................................ 5,078 12,721 8,549
Mortgage-backed securities............................. 15,083 18,223 ---
------- ------- -------
Total sales..................................... 20,161 30,944 8,549
Principal repayments..................................... 97,399 187,707 172,473
------- ------- -------
Total reductions................................ 117,560 218,651 181,022
Increase (decrease) in other items, net.................. --- --- ---
------- ------- -------
Net increase (decrease)......................... $(5,646) $14,628 $(3,082)
======= ======= =======
13
Asset Quality
Loan Monitoring Procedures. When a borrower fails to make a required
---------------------------
payment on a loan, the Bank attempts to cure the delinquency 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 Bank 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 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 information including operating statements and statements of financial
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 write down of the asset or the establishment of a specific
reserve.
Classified Assets. Federal regulations provide for the classification of
------------------
loans and other assets, such as debt and equity securities considered by the OTS
to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the distinct possibility
that the insured institution will sustain some loss if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make collection or liquidation in full, on the basis of
currently existing facts, conditions and values, highly questionable and
improbable. Assets classified as "loss" are those considered to be 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
14
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
economy 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, 2000,
(without deduction for specific valuation allowances of $40,000) are as follows:
At March 31,
----------------------------------
1998 1999 2000
--------- -------- -------
(In Thousands)
Substandard (including real
estate owned)......................... $1,372 $2,606 $528
Doubtful............................... 141 975 268
Loss................................... --- --- ---
--------- -------- -------
Total classified assets
(including real estate
owned)........................... $1,513 $3,581 796
Special mention........................ $2,753 $4,633 5,489
--------- -------- -------
Total classified assets
(including real estate
owned) and special
mention.......................... $4,266 $8,214 $6,285
========= ======== =======
The specific reserves established with respect to classified assets are
included in the allowance for loan losses.
15
Allowance for Loan Losses. The distribution of the Bank's allowance for
--------------------------
losses on loans at the dates indicated is summarized as follows:
At March 31,
-----------------------------------------------------------------------------------------------
1996 1997 1998
-----------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loan
---------- ------------- --------- --------------- ---------- --------------
(Dollars in Thousands)
Allocated:
- ----------
One- to four-
family.................... $ 90 69.4% $ 90 71.7% $ --- 69.7%
Multi-family............... 166 5.5 183 3.8 --- 1.8
Commercial real
estate.................... --- 2.4 --- 1.9 --- 2.1
Construction or
development............... --- 1.3 --- 1.0 --- 1.5
Consumer................... 50 20.3 68 21.1 50 19.2
Commercial business........ --- --- --- -- --- 1.7
Bankers' acceptances....... --- 0.1 --- -- --- ---
Commercial paper........... --- 1.0 --- .5 --- 4.0
Unallocated:
- ------------
Consumer................. 456 N/A 454 N/A 520 N/A
One- to four-family...... 647 N/A 876 N/A 435 N/A
Commercial business...
Multi-family and
commercial
real estate............ 829 N/A 455 N/A 968 N/A
Construction or
development............ --- N/A --- N/A --- N/A
---------- ------------- --------- --------------- ---------- --------------
Total................. $2,238 100% $2,126 100% $1,973 100%
========== ============= ========= =============== ========== ==============
At March 31,
------------------------------------------------------------
1999 2000
------------------------------------------------------------
Percent of Percent of
Loans in Loans in
Each Each
Category Category
to Total to Total
Amount Loans Amount Loans
---------- ------------- --------- --------------
Allocated:
- ----------
One- to four-
family.................... $ 3 52.8% $ --- 52.2%
Multi-family............... --- 1.5 --- .5
Commercial real
estate.................... --- 8.4 --- 13.1
Construction or
development............... --- 2.5 --- 1.8
Consumer................... 256 26.6 98 26.1
Commercial business........ --- 8.2 40 5.1
Bankers' acceptances....... --- --- --- ---
Commercial paper........... --- --- --- 1.2
Unallocated:
- ------------
Consumer................. 997 N/A 861 N/A
One- to four-family...... 749 N/A 405 N/A
Commercial business... 737 N/A
Multi-family and
commercial
real estate............ 643 N/A 41 N/A
Construction or
development............ 58 N/A 50 N/A
---------- ------------- --------- --------------
Total................. $2,706 100% $2,232 100%
========== ============= ========= ==============
16
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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which is in Part II, Item 7 of this report.
Investment Activities
General. Permanent Bank 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 reviewed to assure that adequate liquidity
is maintained. At March 31, 2000, the Bank's liquidity ratio (liquid assets as a
percentage of net withdrawable savings deposits and current borrowings) was
39.14%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" in the Annual Report
and "Regulation - Liquidity" which is in Part II, Item 7 of this report.
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, 2000, Permanent Bank's securities (including
-----------
mortgage-backed securities) totaled $114.8 million, or 23.3% 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, 2000, the
Company had $108.1 million in securities "available for sale," $6.7 million of
securities which are held to maturity, and no securities identified as
"trading." The securities available for sale at March 31, 2000 had net
unrealized losses of $4,669,000. At March 31, 1999, the Bank had $117.3 million
in securities available for sale, $6.9 million of securities classified as 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.
17
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.
At March 31,
---------------------------------------------------------------------
1998 1999 2000
---- ---- ----
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Available for sale securities at fair value:
U.S. government securities ............................ $ 4,033 2.09% $ -- --% $ -- --%
Federal agency securities ............................. 100,972 52.43 62,478 48.18 58,886 48.95
Mortgage backed securities ............................ 62,652 32.53 54,811 42.27 49,184 40.88
Municipal bonds & other ............................... 614 0.32 -- -- -- --
-------- ------ -------- ------ -------- ------
Subtotal ........................................... 168,271 87.37 117,289 90.45 108,070 89.83
Held to maturity securities at amortized cost:
Municipal bonds & other .............................. -- -- 6,920 5.34 6,701 5.57
Mortgage backed securities ........................... 18,861 9.79 -- -- -- --
FHLB stock ........................................... 5,466 2.84 5,466 4.21 5,528 4.60
-------- ------ -------- ------ -------- ------
Subtotal .......................................... 24,327 12.63 12,386 9.55 12,229 10.17
-------- ------ -------- ------ -------- ------
Total securities ............................... $192,598 100.00% $129,675 100.00% $120,299 100.00%
======== ====== ======== ====== ======== ======
Other interest earning deposits with
banks ................................................... $ 1,808 100.00% $ 6,361 100.00% $ 6,304 100.00%
======== ====== ======== ====== ======== ======
The following table sets forth as of March 31, 2000 the composition and
maturities of the securities portfolio, excluding FHLB stock.
March 31, 2000
----------------------------------------------------------------------------
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)
Federal agency obligations .................... --- $ 13,384 $ 45,502 $ 58,886 $ 63,185
Mortgage backed securities .................... $ 281 3,039 45,864 49,184 49,554
Municipal bonds & other ....................... --- --- 5,926 5,926 6,701
--------- --------- --------- --------- ----------
Total investment securities ................... $ 281 $ 16,423 $ 97,292 $113,996 $119,440
========= ========= ========= ========= ==========
At March 31, 2000 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 Part II, Item 8 of this 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, 2000, the Bank's mortgage-backed securities totaled $49.2
million. At such date, the mortgage-backed securities portfolio consisted
entirely of securities backed by loans insured or guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). At
March 31, 2000, all of the Bank's portfolio of mortgage-backed securities was
classified as available for sale. At such date, the portfolio had a weighted
average interest rate of 6.44%.
18
For information regarding the carrying and market values of Permanent
Bank's mortgage-backed securities portfolio, see Note 2 of the Notes to
Consolidated Financial Statements in Part II, Item 8 of this 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, maturities of securities,
mortgage-backed securities and short-term investments, FHLB advances and funds
provided from operations.
Borrowings are used to compensate for seasonal reductions in deposits or
deposit inflows at less than projected levels, to purchase investments and to
support lending activities. At March 31, 2000, the Bank's borrowings consisted
of FHLB advances totaling $86.9 million. See Notes 6, 7 and 8 of the Notes to
Consolidated Financial Statements in Part II, Item 8 of this report.
Deposits. Permanent Bank 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 Bank
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 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
generally attempts to price 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 relative to pricing on maturing deposits and to utilize FHLB
advances as a funding alternative when necessary. During fiscal years 1998,
1999, the Bank experienced a net inflow as a result of branch acquisitions.
During fiscal 2000 the Bank experienced a net deposit inflow due to its
increased utilization of the "jumbo" certificate of deposit market. These
certificates, which are greater than $100,000 and are obtained through a
competitive bidding process, are obtained primarily from local government units.
The FHLB has several 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.
19
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.
At March 31,
------------------------------------------------------------------------------
1998 1999 2000
---- ---- ----
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- ---------- -------- ---------- -------- ----------
(In Thousands)
Transactions and Savings Deposits:
- ----------------------------------
Commercial Demand $1,755 0.62% $12,268 3.53% 13,112 3.66%
Passbook Accounts (2.75-5.59%) 52,051 18.27 59,482 17.13 47,438 13.25
NOW Accounts (2.00-2.60%) 22,468 7.89 30,889 8.89 32,213 9.00
Money Market Accounts (2.75-3.00%) 11,542 4.05 26,755 7.70 27,064 7.56
--------- ---------- --------- ---------- --------- ----------
Total Non-Certificates 87,816 30.83 129,394 37.25 119,827 33.47
--------- ---------- --------- ---------- --------- ----------
Certificates:
- -------------
0.00 - 3.49% 66 0.02 40 .01 33 .01
3.50 - 5.49% 61,523 21.59 120,750 34.77 108,672 30.35
5.50 - 7.49% 130,864 45.93 92,404 26.60 124,571 34.79
7.50 - 9.49% 2,673 0.94 2,753 .80 2,735 .76
--------- ---------- --------- ---------- --------- ----------
Total Certificates 195,126 62.42 215,947 62.18 236,011 65.91
--------- ---------- --------- ---------- --------- ----------
Accrued Interest 1,971 0.69 1,985 .57 2,208 .62
--------- ---------- --------- ---------- --------- ----------
Total Deposits $284,913 100.00% $347,326 100.00% $358,046 100.00%
========= ========== ========= ========== -======== ==========
The following table sets forth the savings flows at the Bank during the
periods indicated.
<
Year Ended March 31,
------------------------------------------
1998 1999 2000
---- ---- ----
(Dollars in Thousands)
Opening balance ................ $ 280,753 $ 282,942 $ 345,341
Deposits ....................... 585,093/(1)/ 1,097,472 1,377,078
Withdrawals .................... 592,939 1,046,582 1,378,221
Interest credited............... 10,035 11,509 11,640
--------- ---------- ----------
Ending balance ................. $ 282,942 $ 345,341 $ 355,838
========= ========== ==========
Net increase ................... $ 2,189 $ 62,399 $ 10,497
========= ========== ==========
Percent increase 0.78% 22.1% 3.04%
========= ========== ==========
/(1)/ includes $78,749 of deposits acquired in branch acquisition
20
The following table sets forth the rate and maturity information for the
Bank's certificates of deposit as of March 31, 2000.
0.00- 3.50- 5.50- 7.50- Percent
3.49% 5.49% 7.49% 9.49% Total of Total
------- ------- ------- ------- ------- --------
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
- ------------------
June 30, 2000............... 15 26,671 25,152 --- 51,838 21.96%
September 30, 2000.......... --- 19,893 40,416 --- 60,309 25.55
December 31, 2000........... --- 13,054 19,016 203 32,273 13.67
March 31, 2001.............. --- 13,500 3,182 1,136 17,818 7.55
June 30, 2001............... 18 10,411 1,839 590 12,858 5.45
September 30, 2001.......... --- 6,721 4,272 716 11,709 4.96
December 31, 2001........... --- 2,670 1,162 90 3,922 1.66
March 31, 2002.............. --- 4,059 2,930 --- 6,989 2.96
June 30, 2002............... --- 888 2,337 --- 3,225 1.37
September 30, 2002.......... --- 864 3,123 --- 3,987 1.69
December 31, 2002........... --- 987 3,219 --- 4,206 1.78
March 31, 2003.............. --- 2,114 2,573 --- 4,687 1.99
Thereafter.................. --- 6,840 15,350 --- 22,190 9.41
------- --------- -------- -------- -------- --------
Total.................... $ 33 $108,672 $124,571 $ 2,735 $236,011 100.00%
======= ========= ======== ======== ======== ========
Percent of total......... 0.01% 46.05% 52.78% 1.16% 100.00%
======= ========= ======== ======== =========
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, 2000.
Maturity
---------------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
---------------------------------------------------------------------
(In thousands)
Certificates of deposit less
than $100,000.............................. $29,521 $42,313 $42,820 $63,743 $178,397
Certificates of deposit of
$100,000 or more........................... 3,734 7,178 5,378 10,030 26,320
Public funds/(1)/........................... 18,583 10,818 1,893 --- 31,294
Total certificates of
deposit.................................... $51,838 $60,309 $50,091 $73,773 $236,011
/(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 Bank 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, 2000 the Bank's FHLB advances totaled $86.9 million.
See also Note 6 of the Notes to Consolidated Financial Statements in Part II,
Item 8 of this report.
21
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.
Year Ended March 31,
--------------------------------------------
1998 1999 2000
---- ---- ----
(In Thousands)
Maximum Balance:
- ----------------
FHLB advances................................... $107,778 $102,003 $104,300
Securities sold under agreements to repurchase.. 445 --- 7,985
FHLB overnight borrowings....................... 3,201 --- 1,000
-------- -------- --------
$111,424 $102,003 $113,285
======== ======== ========
Average Balance:
- ----------------
FHLB advances................................... $101,711 $94,462 $96,141
Securities sold under agreements to repurchase.. 103 10 958
FHLB overnight borrowings....................... 30 19 123
-------- -------- --------
$101,844 $ 94,491 $97,222
======== ======== ========
The following table sets forth certain information as to the Bank's FHLB
advances and FHLB overnight borrowings at the dates indicated.
Year Ended March 31,
--------------------------------------------
1998 1999 2000
---- ---- ----
(In Thousands)
FHLB advances....................................... $ 99,353 $ 96,504 $86,848
Securities sold under agreements to repurchase...... --- --- ---
FHLB overnight borrowings........................... --- --- ---
--------- -------- --------
Total borrowings............................... $ 99,353 $ 96,504 $86,848
========= ======== ========
Weighted average interest rate of FHLB advances..... 5.39% 5.10% 5.76%
Weighted average interest rate of securities sold
under agreements to repurchase..................... ---% ---% ---%
Weighted average interest rate
of FHLB overnight borrowings....................... ---% ---% ---%
Subsidiary 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 Bank has a first-tier service corporation, Perma Service Corp.
("Perma Service"), located in Evansville, Indiana and Permavest, Inc.
("Permavest") of Henderson, Nevada. Perma Service has approximately a 14.29%
interest, along with six 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 2000, recognized $56,500 in income from
FFLIC.
22
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 $16,000 for the year ended March 31, 2000.
Through Perma Service, the Bank also provides brokerage services, on an
agency basis, through INVESTTM.
Permavest, Inc, is a Delaware corporation, 100% owned by the Bank, which
was formed during fiscal 2000 to maintain custody and manage the Bank's
municipal and revenue bond portfolio. Permavest, Inc. has entered into a
partnership with the Company to maintain custody of and manage a portion of the
Bank's agency and mortgage-backed security portfolio. The Bank has a 99.5%
interest in the partnership and the Company has a .5% interest. As of March 31,
2000, Permavest, Inc. owned $6,701,000 of municipal and revenue bonds classified
as held to maturity securities and $1,113,000 of money market funds. The
partnership, which is known as Permavest Partners, owned $31,360,000 of agency
securities and $49,184,000 of mortgage-backed securities. Securities held by the
partnership are classified as available for sale. In addition, the partnership
had $3,528,000 of money market funds at March 31, 2000.
Competition
Permanent Bank 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. There are approximately eighty-eight mortgage lenders in the
Evansville market. 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 Bank 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 Company also is subject
to federal regulation and oversight. The purpose of the regulation of the Parent
Company and other holding companies is to protect subsidiary savings
associations. The Bank is a member of the Savings Association Insurance Fund
(the "SAIF") and the deposits of the Bank are insured by the FDIC. As a result,
the FDIC has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive authority
-------------------------------------------
over the operations of savings associations. As part of this authority, the Bank
is required to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. The last regular OTS and FDIC examinations
of Permanent Bank, for which reports have been issued, were as of May 1999 and
April 1991, respectively.
23
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 periodically
been required 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 Bank's OTS assessment for the fiscal year ended March 31, 2000 was
$100,170.
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, 2000, the Bank's lending
limit under this restriction was $5.4 million. At March 31, 2000, the Bank had
no loans in excess of this limit and the Bank is in compliance with the
loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on matters such as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action. The Bank has not been required to submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member of
-------------------------------------------------
the SAIF ("Savings Association Insurance Fund"), 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 the
institutions it insures. 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 ("Bank Insurance Fund"). 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
24
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 provide assistance to 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 2.12 basis points for both BIF and SAIF members thereafter.
Although this provision of the Act establishes a time frame for the
eventual elimination of the thrift charter, it contains no provisions concerning
the form the current thrift charter may be required to take. The Bank cannot
determine at this time what effect this provision will have on financial
position or operations.
Finally, the Act contains several other provisions designed to reduce
regulatory burdens associated with compliance with various consumer and other
laws applicable to the Company, including for example, provisions designed to
coordinate the disclosure and other requirements under the Truth-in-Lending and
Real Estate Settlement Procedures Act, modify certain insider lending
restrictions, permit OTS to allow exemptions to anti-tying prohibitions and
exempt certain transactions and simplify certain disclosures under the
Truth-in-Lending Act.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act modernized the financial services industry by
permitting affiliations between banks, securities firms and insurance companies.
The GLB Act also created two classes of unitary savings and loan holding
companies: grandfathered and non-grandfathered holding companies. A
grandfathered unitary savings and loan holding company is a company that (1) was
already a unitary savings and loan holding company before May 4, 1999 or (2)
applied for regulatory approval from the OTS to become a unitary savings and
loan holding company before May 4, 1999. Grandfathered unitary savings and loan
holding companies have no restrictions on their activities at the holding
company level. However, non-grandfathered unitary savings and loan holding
companies may engage in only banking, securities, insurance and merchant banking
activities permitted for financial holding companies under the GLB Act. The
Company is a grandfathered unitary savings and loan holding company.
25
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, 2000, 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, 2000, 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, 2000, the non-includable portion of the Bank's investment in FFLIC totaled
$724,000. See also "Service Corporation Activities." At March 31, 2000,
Permavest, Inc. is an includable subsidiary.
At March 31, 2000, the Bank had core capital of $35.5 million, or 7.27% of
adjusted total assets, which is approximately $16 million above the minimum
requirement of 4% of adjusted total assets.
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, 2000, 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, 2000 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.
26
OTS Regulations also require that every savings association with more than
normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise. Until the rule is finalized, no determination can be
made of what, if any, impact this rule may have on the Bank.
At March 31, 2000, the Bank had total capital of $36.8 million (including
$35.5 million in core capital) and risk-weighted assets of $266.9 million
(including $9.7 million in converted off-balance sheet assets) or total capital
of 13.8% of risk-weighted assets. This amount was $10.1 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 Company's Stock. Company shareholders do not have
preemptive rights and, therefore, if the Company is directed by the OTS or the
FDIC
27
to issue additional shares of Common Stock, such issuance may result in the
dilution in the percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions. OTS regulations
---------------------------------------------------------
impose various restrictions or requirements on savings associations with respect
to their ability to make distributions of capital, which include dividends,
stock redemptions or repurchases, cash-out mergers and other transactions
charged to the capital account. OTS regulations also prohibit a savings
association from declaring or paying any dividends or from repurchasing any of
its stock if, as a result, the regulatory capital of the association would be
reduced below the amount required to be maintained for the liquidation account
established in connection with its mutual to stock conversion.
Generally, savings associations, such as the 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.
The Bank has paid 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.
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 Part II, Item 7 of this report. This liquid asset ratio requirement may vary
from time to 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, 2000, the Bank was in compliance with the
requirements, with an overall liquid asset ratio of 39.1%.
28
Accounting. An OTS policy statement applicable to all savings associations
-----------
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Bank is in compliance with these
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, 2000, 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
its examination of Permanent Bank, 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 Bank. An unsatisfactory rating may be used as the basis for
the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for CRA compliance in
November 1997 and received a rating of satisfactory.
29
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 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 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.
30
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, 2000, 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, 2000, 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. For the five fiscal years
ended March 31, 2000, such dividends have averaged approximately 8%. 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 Bank's FHLB stock may result in a corresponding reduction in the
Bank's capital. For the fiscal year ended March 31, 2000, dividends paid by the
FHLB of Indianapolis to the Bank totaled $439,875, which constitute a $2,179
increase over the amount of dividends received in the fiscal year ended March
31, 1999.
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 deducted 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
31
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 has or will have a material
impact on the Company.
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, 2000, the Bank's excess for tax purposes totaled
approximately $6 million.
The Company files consolidated federal income tax returns with the Bank and
its subsidiaries.
The Bank and its consolidated subsidiaries 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 subsidiaries.
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 subsidiaries.
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.
32
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.
Name Age Positions Held with the Company and the Bank
---- --- --------------------------------------------
George E. Orr 58 Senior Vice President of Bank
Seth P. Allen 41 Senior Vice President of Bank
Richard A. Condi 46 Vice President of Bank
Robert A. Cern 50 Chief Financial Officer and Secretary of the
Company and Senior Vice President,
Secretary/Treasurer and Chief Financial
Officer of Bank
Glenna J. Kirsch 50 Vice President of Bank
Charles A. Becker, Sr. 53 Vice President of Bank
Officers are elected annually by the Board of Directors of the Bank. The
business experience of each executive officer who is not also a director is set
forth below.
George E. Orr. As Senior Vice President, Mr. Orr is primarily responsible
--------------
for the planning and development of the Bank's data processing operations and
manages the Bank's checking and proof of deposit departments. Mr. Orr joined the
Bank in 1963 and was promoted to his current position in 1990.
Seth P. Allen. Mr. Allen joined the Bank in January 1997 as Senior Vice
--------------
President and Commercial Lending Officer. Mr. Allen served as Senior Vice
President and Senior Lending Officer at Nashoba Bank in Memphis, Tennessee from
October 1994 to January 1997. Prior to that, Mr. Allen was Vice President and
Commercial Lending Officer at Deposit Guaranty National Bank in Jackson,
Mississippi from January 1991 to October 1994.
Richard A. Condi. Mr. Condi is Vice President in charge of residential
-----------------
mortgage lending. Mr. Condi joined the Bank in 1979 and has served in various
capacities in the Bank's lending department before being promoted to his current
position in January 1991.
Robert A. Cern. Mr. Cern joined the Company in May 1998 as Chief Financial
---------------
Officer and Secretary. Mr. Cern is also Senior Vice President,
Secretary/Treasurer and Chief Financial Officer of the Bank. Prior to joining
the Company, Mr. Cern was an independent financial consultant. From December
1995 to December 1996, Mr. Cern was Vice President and Chief Financial Officer
of Associated Bank in Milwaukee, Wisconsin. Prior to this, Mr. Cern was Vice
President of Marshall & Ilsey Corporation in Milwaukee, Wisconsin.
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
33
by INB Banking Company of 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 144 full-time and 23 part-time
employees. The Bank's employees are not represented by any collective bargaining
group. Management considers its employee relations to be good.
34
Item 2. Properties
The following table sets forth information concerning the main office
and each branch office of the Bank at March 31, 2000. As of this date the
Company's premises, office properties and equipment had an aggregate net book
value of approximately $9.5 million.
Net Book
Year Owned or Lease Expiration Value
Location Acquired Leased Date (In Thousands)
-------- -------- ------ --------------- --------------
Main (Downtown) Office
- ----------------------
101 Southeast Third Street 1963 Owned N/A $2,863
Evansville, Indiana
Branch Offices
University Heights
4615 University Drive 1988 Owned N/A 405
Evansville, Indiana
Town Center
201 Diamond Avenue 1981 Owned N/A 327
Evansville, Indiana
Green River Road
123 South Green River Road 1978 Owned N/A 228
Evansville, Indiana
Vogel & Burkhardt Roads 1999 Owned N/A 1,596
6245 Vogel Road
Evansville, Indiana
North Brook 1978 Leased November 2002 66 (1)
3820 First Avenue
Evansville, Indiana
Ross Center
2521 Washington Avenue 1994 Owned N/A 692
Evansville, Indiana
Fort Branch
810 East Locust Street 1987 Owned N/A 345
Fort Branch, Indiana
Jasper
771 West Second Street 1991 Owned N/A 460
Jasper, Indiana
Newburgh
8533 Bell Oaks Drive 1997 Owned N/A 800
Newburgh, Indiana
Oakland City
410 West Morton Street 1984 Owned N/A 214
Oakland City, Indiana
35
Fourth Street Office
19 N.W 4th Street 1998 Leased December 2001 0
Evansville, Indiana
Bellemeade Office
4601 Bellemeade 1998 Owned N/A 979
Evansville, Indiana
Buena Vista Office
1010 W. Buena Vista 1998 Leased September 2013 28
Evansville, Indiana
St. Joseph Office
530 N. St. Joseph Avenue 1998 Owned N/A 383
Evansville, Indiana
- ---------------------------------
(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 a third party service provider. The net book value of the data
processing and computer equipment utilized by the Bank at March 31, 2000 was
$319,000.
Item 3. Legal Proceedings
-----------------
The Bank 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 the Bank in these
proceedings, that the resolution of these proceedings should not have a material
effect on the Company'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, 2000.
36
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related
----------------------------------------------------
Security Holder Matters
-----------------------
STOCK TRADING AND DIVIDEND DATA
- --------------------------------
Volume Dividend
Quarter Ended High Low (000's) Paid
- ------------- ---- --- ------- ----
June 30,1999 $ 11.25 $ 8.81 195.3 $ .06
Sept 30,1999 15.00 8.88 411.1 .07
Dec. 31,1999 19.94 9.56 909.0 .07
Mar. 31,2000 19.38 14.88 452.6 .07
June 30,1998 $ 18.50 $ 15.50 192.4 $ .055
Sept.30,1998 16.25 11.63 1,090.9 .06
Dec. 31,1998 14.38 10.56 207.4 .06
Mar. 31,1999 13.75 10.75 169.9 .06
REGISTERED MARKET MAKERS
The following firms make a market in Permanent Bancorp Inc.'s stock:
Capital Resources, Inc.
Spear, Leeds & Kellogg
McDonald & Company Sec., Inc.
J.J. B. Hilliard, W.L. Lyons
NatCity Investments, Inc.
Instinet Corporation
Friedman Billings Ramsey & Co.
37
Item 6. Selected Financial Data
-----------------------
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands)
At March 31,
---------------------------------------------------------------------
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------- ------------
Selected Financial Condition Data:
Total assets $ 491,995 $ 492,327 $439,115 $423,698 $395,903
Loans, net 327,151 321,018 225,349 210,189 206,910
Cash and interest-bearing deposits 16,460 13,952 6,083 6,364 4,916
Securities available for sale 108,070 117,289 168,271 159,232 135,124
Securities held to maturity 6,701 6,920 18,861 27,206 32,179
Deposits 355,838 345,341 282,942 280,753 280,008
Total borrowings 89,348 99,504 99,353 100,278 70,985
Stockholders' equity 41,440 40,864 42,683 39,095 41,494
Year Ended March 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------------------
Selected Operating Data:
Interest income $33,757 $32,886 $30,521 $29,689 $25,892
Interest expense 20,630 19,909 19,342 18,724 16,354
------------------------------------------------------------------
Net interest income 13,127 12,977 11,179 10,965 9,538
Provision for loan losses 295 300 177 113 207
------------------------------------------------------------------
Net interest income after provision
for loan losses 12,832 12,677 11,002 10,852 9,331
------------------------------------------------------------------
Other income:
Service charges 1,752 1,492 985 841 628
Gain on sale of loans 108 206 92 23 18
Gain (loss) on sale of securities 230 43 (56) (6)
Other 1,135 1,103 972 816 797
------------------------------------------------------------------
Total other income 2,995 3,031 2,092 1,624 1,437
------------------------------------------------------------------
Other expense:
Salaries and employee benefits 6,123 5,696 4,519 4,295 4,427
Deposit insurance assessment 243 271 276 2,351 711
Occupancy 1,150 764 821 809 819
Other 5,201 4,172 3,015 2,714 2,900
------------------------------------------------------------------
Total other expense 12,717 10,903 8,631 10,169 8,857
------------------------------------------------------------------
Income before income taxes 3,110 4,805 4,463 2,307 1,911
Income tax provision 916 1,945 1,818 1,003 662
------------------------------------------------------------------
Net income $2,194 $2,860 $2,645 $1,304 $1,249
------------------------------------------------------------------
38
SELECTED CONSOLIDATED FINANCIAL DATA (CONT.)
At or For the Year Ended March 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------
Performance Ratios:
Return on average assets (ratio of net
income to average total assets) 0.45 % 0.60 % 0.62 % 0.31 % 0.34 %
Interest rate spread information:
Average during year 2.58 2.74 2.41 2.40 2.28
End of year 2.84 2.86 2.40 2.41 2.33
Net interest margin (1) 2.84 2.91 2.74 2.76 2.72
Ratio of operating expense to average
total assets 2.55 2.28 2.03 2.44 2.41
Return on average stockholders' equity
(ratio of net income to average
stockholders' equity) 5.32 6.86 6.45 3.25 2.95
Ratio of average interest-earning
assets to average interest-bearing
liabilities 105.97 103.91 106.97 107.63 109.42
Asset Quality Ratios:
Non-performing assets to total assets at
end of year (2) 0.17 0.24 0.25 1.11 1.75
Allowance for loan and real estate
owned losses to non-performing assets 271.53 220.11 180.51 44.73 32.22
Allowance for loan losses to total loans 0.68 0.84 0.87 1.00 1.07
Capital Ratios:
Stockholders' equity to total assets at
end of year 8.42 8.30 9.72 9.23 10.48
Average stockholders' equity to average
assets 8.28 11.43 9.63 9.63 11.54
Number of full-service offices 12 (4) 13 11 11 11
Number of deposit accounts 39,952 43,383 33,884 35,426 36,452
Book value per share (3) $9.85 $10.27 $10.41 $9.52 $9.72
Dividend payout ratio 51.1% 33.7% 30.6% 46.7% 27.9%
(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.
(4) In addition the Company operates one drive-up banking facility.
39
Stock Performance Presentation
Set forth below is a line graph comparing the cumulative total return
on the Company's Common Stock to the cumulative total return of the Nasdaq
Market Index and the Media General Savings and Loan Index for the past five
fiscal years, from March 31, 1995 through March 31, 2000. The presentation
assumes $100 was invested on March 31, 1995.
[GRAPHIC - PLOTTED POINTS LISTED BELOW]
3/31/95 3/31/96 3/31/97 3/31/98 3/31/99 3/31/00
------- ------- ------- ------- ------- -------
Permanent Bancorp.....................$100.00 $ 92.82 $137.30 $234.66 $147.39 $255.75
MG Industry Group......................100.00 135.85 174.81 270.59 261.46 236.99
NASDAQ Market Index....................100.00 134.51 150.48 227.41 297.18 547.25
40
Item 7. 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 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 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 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.
Information Systems and the Year 2000 ("Y2K")
To date the Company has not experienced any significant computer
operating problems associated with passing from 1999 into 2000 and the Company
is unaware of any Y2K related problems occurring at any of its major customers,
the presence of which might have a material financial impact on the Company.
While the Company believes that Y2K problems would have manifested
themselves, no assurance can be given that a Year 2000 related problem may
subsequently be discovered which could have a material adverse effect on the
Company's financial condition or results of operations.
41
Financial Condition
March 31, 2000 Compared to March 31, 1999
The Company's total assets at March 31, 2000 were $492 million, a
decrease of $344,000 from $492.3 million at March
31, 1999.
Securities amounted to $114.8 million at March 31, 2000, a decrease of
$9.4 million from $124.2 million at March 31, 1999. Approximately $4.7 million
of this decrease is attributable to a decrease in fair value of the securities
available for sale. Net loans increased by $6.1 million or 1.9% to $327.2
million at March 31, 2000 compared to $321 million at March 31, 1999. From an
earning asset perspective, during fiscal 2000 the Company utilized the proceeds
from security maturities and principal repayments to fund loan growth.
Total liabilities were $450.6 million at March 31, 2000, a decrease of
$923,000 from $451.5 million at March 31, 1999 and deposits of $355.8 million
were up $10.5 million, or 3%, from $345.3 million at March 31, 1999. Federal
Home Loan Bank (FHLB) advances decreased by $9.7 million to $86.8 million at
March 31, 2000 from $96.5 million at March 31, 1999. From a funding perspective,
during fiscal 2000 the Company increasingly relied on certificates of deposits
in amounts of $100,000 or more due to the attractiveness of the borrowing cost
compared to FHLB advances. Certificates of deposits greater than $100,000
totalled $58 million at March 31, 2000 compared to $30 million at March 31,
1999.
Total stockholders' equity increased by $579,000 to $41.4 million at
March 31, 2000. The Company earned $2.19 million and declared $1.12 million of
dividends to its shareholders. The vesting of ESOP shares resulted in a $540,000
increase in equity and the vesting and forfeitures of restricted stock awards
resulted in a $201,000 increase. The exercise of stock options increased equity
$2,551,000. The Company repurchased $684,000 of its stock and the after-tax
effect of the decline in the fair value of the Company's available for sale
securities was $3,103,000. The ratio of equity to assets was 8.42% at March 31,
2000 compared to 8.30% at March 31, 1999. Tangible equity to assets, which
excludes goodwill, was 6.66% at March 31, 2000 and 6.39% at March 31, 1999.
Non-performing assets were $822,000 at March 31, 2000 compared to $1.2
million at March 31, 1999.
At March 31, 2000 the Company maintained 3.35% of total assets as cash
and interest-bearing deposits compared to 2.83% at March 31, 1999.
Results of Operations
Comparison of Operating Results for the Years Ended March 31, 2000 and March 31,
1999.
General. The Company's net income of $2.19 million during the fiscal
year ended March 31, 2000 was $670,000 or 23.4% less than the $2.86 million
earned during the fiscal year ended March 31, 1999. Operating results for the
year ended March 31, 2000 include the income and expenses related to branches
acquired from NBD Bank, N.A. for the entire year whereas operating results for
the year ended March 31, 1999 include the income and expenses 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
$150,000 to $13.1 million for the year ended March 31, 2000 compared to $13
million for the year ended March 31, 1999. The increase was primarily
attributable to an increase in loan balances.
Interest Income. Interest income for the year ended March 31, 2000
increased $871,000 to $33.8 million compared to $32.9 million for the same
period in 1999.
42
Interest income increased because average interest earning assets
increased by $16 million in fiscal 2000 from fiscal 1999 and funds were shifted
from lower earning securities into higher yielding loans. Average loan balances
increased by $48.3 million from fiscal 1999 to fiscal 2000 and average
securities, which includes mortgage-backed securities, other securities and FHLB
stock, decreased by $33 million from fiscal 1999 to fiscal 2000. The loan
portfolio represented 71.1% of average earning assets for fiscal 2000 compared
to 62.8% for fiscal 1999. The rate earned on the loan portfolio decreased .35%
from fiscal 1999 to 2000 while the rate earned on mortgage-backed securities
decreased by .09% and the rate earned on other securities increased .16%.
The average balance of other interest bearing assets, which are
primarily deposits and other short-term investments, increased to $6.9 million
in fiscal 2000 from $6.1 million in the prior fiscal year. The rate earned on
these investments increased to 5.15% in fiscal 2000 from 4.65% in fiscal 1999
reflecting a general increase in short term money market rates during fiscal
2000.
The yield on all interest-earning assets decreased by .07% during
fiscal 2000. For the year ended March 31, 2000 the overall earning asset yield
was 7.31% compared to 7.38% for the year ended March 31, 1999. Increases in the
average balances of earning assets increased interest income by approximately
$1,772,000 and the decrease in the yield on earning assets decreased interest
income by approximately $901,000.
Interest Expense. Interest expense increased by $721,000 to $20.6
million for the fiscal year ended March 31, 2000 compared to $19.9 million for
fiscal 1999. Interest paid on deposits increased by $413,000 due to an increase
of $3.2 million in average interest-bearing deposit balances and an increase in
the rate paid from 4.44% to 4.52%. Interest on Federal Home Loan Bank advances
increased by $196,000 as average balances outstanding increased by $1.7 million
and the average rate paid on advances also increased from 5.30% during fiscal
1999 to 5.41% during fiscal year 2000. Interest expense on other long-term debt
& other borrowings increased by $111,000 due primarily to an increase in average
borrowings of $1.9 million which offset a decrease in rate from 7.33% in fiscal
1999 to 6.63% in fiscal 2000.
The average balance for all interest-bearing deposits increased from
$428.8 million in fiscal 1999 to $435.6 million in fiscal 2000 and the cost of
all interest-bearing liabilities increased from 4.64% for the fiscal year 1999
to 4.74% for the fiscal year 2000. The increase in average balances increased
interest expense by $361,000 and the increase in rates increased interest
expense by $360,000.
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 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, 2000, the Company recorded a provision
for loan losses of $296,000 compared to $300,000 for the year ended March 31,
1999. Net charge offs amounted to $770,000 during fiscal 2000 compared to
$327,000 during fiscal 1999. Asset quality, as measured by non-performing loans
to total loans, improved significantly for the year ended March 31, 2000
compared to the prior year. The ratios of non-performing loans to total loans
was 0.19% at March 31, 2000 and .25% at March 31, 1999, respectively. The
allowance for losses, as a ratio to total loans, was 0.68% at March 31, 2000
compared to .84% at March 31, 1999. At March 31, 2000 and 1999, the allowance
for loan losses as a percentage of non-performing loans was 364.7% and 330.8%,
43
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 decreased by $36,000 to $2,995,000 during
the fiscal year ended March 31, 2000. Offsetting a $260,000 increase in service
charges and a $60,000 increase in commission income were a $230,000 decrease in
gain related to security sales and a $97,000 decrease in gains related to loan
sales. Service charges increased primarily due to more accounts being service
charged and higher service charge fee levels.
Other Expense. The Company's other expense increased by $1.8 million
from fiscal 1999 to fiscal 2000. The increase is primarily attributable to
$584,000 of expenses related to the Company's planned merger with Old National
Bancorp, $299,000 related to the exercise of stock options and approximately
$624,000 of various other expenses arising from acquired branches being included
for all of fiscal 2000 but for only nine months in fiscal 1999.
Income Tax Provision. The Company's income tax provision decreased by
$1,029,000 from fiscal 1999 to fiscal 2000 primarily as a result of decreased
pretax earnings, increased utilization of tax credit opportunities and a
restructuring of the management of the securities portfolio. The effective tax
rate was 29.45% for fiscal 2000 compared to 40.48% for the prior year.
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 $220,000 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. Loans represented 62.8% of average earning assets in fiscal 1999 compared
to 52.8% in fiscal 1998.
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 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.
44
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.
Interest Expense. Interest expense increased by $570,000 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 balances 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 $860,000 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. Expense related to fiscal 1998 borrowings
consist primarily of short-term borrowings to meet liquidity needs.
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. 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 acquisition of assets and liabilities 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.
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.
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.
45
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.
March 31,
----------------------------------------------------------------------------------
(Dollars in Thousands) 2000 1999
----------------------------------------------------------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------------------------------------------------------------------------------
Interest-Earning Assets:
Loans $328,109 $25,523 7.78% $279,790 $22,759 8.13%
Mortgage-backed securities 51,686 3,144 6.08 68,259 4,212 6.17
Securities and FHLB stock 74,988 4,737 6.32 91,456 5,631 6.16
Other 6,859 353 5.15 6,107 284 4.65
----------------------------- ------------------------------
Total interest-earning assets (1) $461,642 $33,757 7.31% $445,612 $32,886 7.38%
==================================================================================
Interest-Bearing Liabilities:
Deposits $335,516 $15,169 4.52% $332,301 $14,756 4.44%
FHLB advances 96,141 5,198 5.41 94,463 5,002 5.30
Other long-term debt & other borrowings 3,965 263 6.63 2,060 151 7.33
----------------------------- ------------------------------
Total interest-bearing liabilities $435,622 $20,630 4.74% $428,824 $19,909 4.64%
==================================================================================
Net interest income $13,127 $12,977
==================================================================================
Net interest rate spread 2.57% 2.74%
==================================================================================
Net earning assets $26,020 $16,788
==================================================================================
Net interest margin (2) 2.84% 2.91%
==================================================================================
Average interest-earning assets to
average interest-bearing liabilities 105.97% 103.91%
==================================================================================
March 31,
--------------------------------------
(Dollars in Thousands) 1998
--------------------------------------
Average Interest Average
Outstanding Earned/ Yield/
Balance Paid Rate
--------------------------------------
Interest-Earning Assets:
Loans $214,982 $17,509 8.14%
Mortgage-backed securities 97,668 6,370 6.52
Securities and FHLB stock 93,210 6,536 7.01
Other 1,416 106 7.49
-------------------------
Total interest-earning assets (1) $407,276 $30,521 7.49%
======================================
Interest-Bearing Liabilities:
Deposits $278,181 $13,431 4.83%
FHLB advances 101,704 5,866 5.77
Other long-term debt & other borrowings 845 46 5.44
-------------------------
Total interest-bearing liabilities $380,730 $19,343 5.08%
======================================
Net interest income $11,178
======================================
Net interest rate spread 2.41%
======================================
Net earning assets $26,546
======================================
Net interest margin (2) 2.74%
======================================
Average interest-earning assets to
average interest-bearing liabilities 106.97%
======================================
March 31,
--------------------------------------
(Dollars in Thousands) 1998
--------------------------------------
Average Interest Average
Outstanding Earned/ Yield/
Balance Paid Rate
--------------------------------------
Interest-Earning Assets:
Loans $214,982 $17,509 8.14%
Mortgage-backed securities 97,668 6,370 6.52
Securities and FHLB stock 93,210 6,536 7.01
Other 1,416 106 7.49
-------------------------
Total interest-earning assets (1) $407,276 $30,521 7.49%
======================================
Interest-Bearing Liabilities:
Deposits $278,181 $13,431 4.83%
FHLB advances 101,704 5,866 5.77
Other long-term debt & other borrowings 845 46 5.44
-------------------------
Total interest-bearing liabilities $380,730 $19,343 5.08%
======================================
Net interest income $11,178
======================================
Net interest rate spread 2.41%
======================================
Net earning assets $26,546
======================================
Net interest margin (2) 2.74%
======================================
Average interest-earning assets to
average interest-bearing liabilities 106.97%
======================================
(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.
46
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.
Year Ended March 31,
-----------------------------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
-----------------------------------------------------------------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
------------------------------ ------------------------
Volume Rate (Decrease) Volume Rate (Decrease)
------------- ------------- ---------------------------- ---------- -----------
(In Thousands)
-----------------------------------------------------------------------------------------
Interest-earning assets:
Loans receivable $ 3,780 $ (1,016) $ 2,764 $ 5,275 $ (26) $ 5,249
Mortgage-backed securities (1,008) (60) (1,068) (1,867) (291) (2,158)
Securities and FHLB stock (1,037) 143 (894) (117) (787) (904)
Other 37 32 69 285 (107) 178
------------- ------------- -------------- ---------- ---------- -----------
Total interest-earning assets $ 1,772 $ (901) $ 871 $ 3,576 $(1,211) $ 2,365
============= ============= ============== ========== ========== ===========
Interest-bearing liabilities:
Deposits $ 144 $ 269 $ 413 $ 2,515 $(1,190) $ 1,325
FHLB advances 90 106 196 (402) (462) (864)
Other borrowings 127 (15) 112 78 28 106
------------- ------------- -------------- ---------- ---------- -----------
Total interest-bearing liabilities $ 361 $ 360 $ 721 $ 2,191 $(1,624) $ 567
============= ============= ============== ========== ========== ===========
Change in net interest income $ 150 $ 1,798
============== ===========
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:
At March 31,
-------------------------------------------------
2000 1999 1998
------------ ------------ ------------
Weighted average yield on:
Loans, net 7.83 % 7.81 % 7.91 %
Mortgage-backed securities 6.44 6.45 6.80
Securities & FHLB Stock 6.21 6.16 6.84
Other 6.28 4.76 6.06
Combined weighted average yield on
interest-earning assets 7.39 7.34 7.42
Weighted average rate paid on:
Savings deposits 3.05 3.13 3.77
Demand and NOW deposits 1.93 1.55 1.79
Time deposits 5.64 5.51 5.78
FHLB Advances 5.76 5.10 5.39
Other Borrowings 7.51 6.80
Combined weighted average rate paid
on interest-bearing liabilities 4.56 4.48 5.02
Spread 2.83 2.86 2.40
47
Asset Quality
In accordance with the Company's classification of assets policy,
management periodically evaluates the loan and investment portfolios to identify
substandard assets that may contain the potential for loss. In addition,
management evaluates the adequacy of its allowance for possible loan losses.
Non-Performing Assets. The following table sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. For the years
presented, the Bank had no accruing loans delinquent more than 90 days. Real
estate owned includes 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.
March 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ---------- -----------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family $ 492 $ 643 $ 822 $ 1,131 $ 695
Multi-family 1,062 3,654
Commercial real estate 64
Construction or development 12 171 171
Consumer 120 111 77 99 185
----------- ----------- ----------- ---------- -----------
Total 612 818 911 2,463 4,705
----------- ----------- ----------- ---------- -----------
Troubled debt restructurings 2,128 2,165
----------- ----------- ----------- ---------- -----------
Total non-performing loans $ 612 $ 818 $ 911 $ 4,591 $ 6,870
=========== =========== =========== ========== ===========
Real estate and other assets owned:
One- to four-family $ 27 $ 112 $ 93 $ 41 $ 22
Consumer 183 236 89 53 54
----------- ----------- ----------- ---------- -----------
Total 210 348 182 94 76
----------- ----------- ----------- ---------- -----------
Total non-performing assets $ 822 $ 1,166 $ 1,093 $ 4,685 $ 6,946
=========== =========== =========== ========== ===========
Total as a percentage of total
assets 0.17 % 0.24 % 0.25 % 1.11 % 1.75 %
=========== =========== =========== ========== ===========
At March 31, 2000 and 1999 the Bank had no non-performing assets with
an outstanding balance in excess of $100,000.
Non-accruing Loans. As of March 31, 2000 the Bank had $612,000 of
non-accruing loans compared to $818,000 as of March 31, 1999. For the year ended
March 31, 2000, 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 $40,000 and the amount that was included in interest income on such
loans was $18,000.
Real Estate Owned. At March 31, 2000, the Bank's real estate acquired
through foreclosure was $27,000.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of March 31, 2000, there was an aggregate of $5.4
million of loans which management is closely monitoring for the borrowers'
ability to comply with current repayment terms compared to $7.3 million at March
31, 1999. Management believes it has taken a conservative approach in evaluating
under-performing credits.
48
Delinquent Loans. The following table sets forth the Bank's loan
delinquencies by type, by amount and by percentage of type at March 31, 2000.
(Dollars in thousands) Loan Delinquent For:
-----------------------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
---------- ---------- ----------------
Number Amount Percentage Number Amount Percentage Number Amount Percentage
------ ------ ---------- ------ ------ ---------- ------ ------ ----------
One- to four-family 37 $ 1,285 45.89 % 6 $ 201 61.85 % 7 $ 379 75.95 %
Commercial 3 375 13.39
Consumer 113 1,140 40.72 17 124 38.15 16 120 24.05
------- ------------- --------- ---- -------- --------- ---- -------- ----------
Total 153 $ 2,800 100.00 % 23 $ 325 100.00 % 23 $ 499 100.00 %
======= ============= ========= ==== ======== ========= ==== ======== ==========
49
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.
The following table sets forth an analysis of the Bank's allowance at
the years indicated.
(Dollars in Thousands) At March 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------
Balance at beginning of year $2,706 $1,973 $2,126 $2,238 $2,093
Charge-offs:
One- to four-family 22 19 56 11
Multi-family 72
Consumer 872 488 276 354 93
Commercial business 17
----------------------------------------------------------------------
894 507 404 371 104
----------------------------------------------------------------------
Recoveries:
One-to-four-family 10 2 11
Multi-family & commercial 98 4
Consumer 124 170 74 46 27
----------------------------------------------------------------------
124 180 74 146 42
----------------------------------------------------------------------
Net charge-offs 770 327 330 225 62
Provision charged to operations 296 300 177 113 207
Acquired in branch acquisition 760
----------------------------------------------------------------------
Balance at end of year $ 2,232 $ 2,706 $1,973 $2,126 $2,238
======================================================================
Ratio of net charge-offs during the
period to average loans outstanding
during the year 0.24% 0.12% 0.15% 0.11% 0.03%
======================================================================
Ratio of net charge-offs during the
period to ending non-performing
assets 93.67% 28.04% 30.19% 4.80% 0.89%
======================================================================
Ratio of provision for loan losses
to total loans 0.09% 0.09% 0.08% 0.05% 0.10%
======================================================================
Ratio of allowance for loan losses
to non-performing loans 364.71% 330.81% 216.58% 46.31% 32.58%
======================================================================
Ratio of allowance for loan losses
to total loans 0.68% 0.84% 0.87% 1.00% 1.07%
======================================================================
50
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, 2000, 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 $99.3 million, representing a
negative cumulative one-year gap ratio of 20.2% of total assets. The Company
relies on certain assumptions, such as the amount and timing of loan
prepayments, among others, in the measurement of the interest rate sensitivity
gap. In light of the Company's negative cumulative one-year gap ratio,
management believes that an increase in interest rates will adversely effect its
net interest income.
The Company focuses lending efforts toward the origination and purchase
of competitively priced adjustable-rate loan products and fixed-rate loan
products with relatively short terms to maturity, generally fifteen years or
less. This allows the Company to maintain a portfolio of loans which will be
sensitive to changes in the level of interest rates while providing a reasonable
spread to the cost of liabilities used to fund the loans.
The effect of these assumptions is to quantify the dollar amount of
items that are interest-sensitive and which can be repriced within each of the
periods specified. Such repricing can occur in one of three ways: (i) the rate
of interest to be paid on an asset or liability may adjust periodically on the
basis of an interest rate index, (ii) an asset or liability such as a mortgage
loan may amortize, permitting reinvestment of cash flows at the then-prevailing
interest rate, or (iii) an asset or liability may mature, at which time the
proceeds can be reinvested at the current market rates.
51
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities at March 31, 2000 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, 2000 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.
Maturing or Repricing
--------------------------------------------------------------------------
Less than 6-12 Over 1-3 Over 3-5 Over
6 Months Months Years Years 5 Years
--------------- ---------------------------- ------------- ------------
(Dollars in Thousands)
Fixed-rate one- to four-
family, multi-family (including
mortgage-backed securities),
commercial real estate and
construction loans $ 20,368 $ 9,279 $ 29,879 $ 22,091 $ 41,917
Adjustable rate one- to four-
family, multi-family (including
mortgage-backed securities),
commercial real estate and
construction loans 47,478 14,187 45,797 23,677 26,401
Consumer loans 32,007 16,308 30,755 10,809 9,406
Investment securities and other 11,973 3,000 6,000 46,933
--------------------------------------------------------------------------
Total interest-earning assets 111,826 39,774 109,431 62,577 124,657
--------------------------------------------------------------------------
Savings deposits 4,129 3,852 12,275 8,002 19,180
Demand and NOW deposits 21,307 11,993 13,887 4,336 7,753
Certificates 112,147 50,091 51,583 16,788 5,402
FHLB advances and other 46,871 552 11,689 2,448 27,788
--------------------------------------------------------------------------
Total interest-bearing liabilities 184,454 66,488 89,434 31,574 60,123
--------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities $ (72,628) $ (26,714) $ 19,997 $ 31,003 $ 64,534
==========================================================================
Cumulative interest-rate
sensitivity gap $ (72,628) $ (99,342) $ (79,345) $ (48,342) $ 16,192
==========================================================================
Cumulative interest-rate
gap as a percentage of assets -14.76% -20.19% -16.13% -9.83% 3.29 %
==========================================================================
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
52
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 in
100 basis point ("bp") intervals. 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, 2000 as calculated by the OTS (dollars in 000's):
Net portfolio value NPV as % of PV of Assets
------------------- ------------------------
Change in
rates $ Amount $ Change % Change NPV Ratio Change
- -------------- ------------ ------------ ------------ ------------ ------------
+300 bp $22,568 -$25,499 -53% 4.90% -479 bp
+200 31,328 -16,739 -35 6.63 -306
+100 39,927 -8,140 -17 8.24 -145
0 48,067 9.69
-100 55,322 7,255 +15 10.91 +123
-200 61,019 12,952 +27 11.82 +213
-300 67,079 19,012 +40 12.75 +306
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, 2000, the amount of the
Bank's liquidity was $124.5 million, resulting in a liquidity ratio of 39.14%.
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.
53
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, 2000, the Bank
had approximately $26.1 million of loan commitments and an additional $4.7
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, 2000 totaled $162.2 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, 2000, these assets accounted for 89.8% 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, 2000, the Bank had outstanding borrowings of $86.9 million
from the FHLB and had the capacity to borrow up to a total of approximately $164
million.
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 Bank 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 Bank's assets and liabilities are important
factors in the maintenance of acceptable performance levels.
Item 7a. Quantitative and Qualitative Disclosure About Market Risks
----------------------------------------------------------
The Company is subject to various risks including credit quality,
interest risk and liquidity. See "Asset Quality" contained in Part I, Item 1 and
"Asset/Liability Management" and "Liquidity and Capital Resources" contained in
Part II, Item 7 of this report.
The Company is also exposed to general competitive pressures and, as a
regulated industry is subject to regulatory oversight. See "Competition" and
"Regulation" in Part I, Item 1 of this report.
54
Item 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS FOR
CONSOLIDATED FINANCIAL STATEMENT
Page(s)
Independent Auditors' Report........................................... 56
Consolidated Statements of Financial Condition at
March 31, 2000 and 1999........................................... 57
Consolidated Statements of Income for the Years Ended
March 31, 2000, 1999 and 1998..................................... 58
Consolidated Statements of Stockholders' Equity for the Years Ended
March 31, 2000, 1999 and 1998..................................... 59
Consolidated Statements of Cash Flows for the Years Ended
March 31, 2000, 1999 and 1998..................................... 60 - 61
Notes to Consolidated Financial Statements............................. 62 - 82
55
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, 2000 and 1999 and the consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
Deloitte & Touche LLP
May 25, 2000
Indianapolis, Indiana
56
PERMANENT BANCORP, INC.
Consolidated Statements of Financial Condition
March 31,
------------------------------------------
2000 1999
------------------- -------------------
ASSETS:
Cash $ 10,155,966 $ 7,591,117
Interest-bearing deposits 6,303,819 6,361,293
------------------- -------------------
Total cash and cash equivalents 16,459,785 13,952,410
Securities available for sale - at fair value
(amortized cost - $112,739,096 and $117,279,217) 108,069,628 117,289,086
Securities held to maturity (fair value - $5,926,222
and $6,627,235) 6,701,343 6,919,793
Other investments 1,710,635 1,698,477
Loans (net of allowance for loan losses of $2,231,826 and
$2,706,408) 327,150,866 321,030,131
Interest receivable, net 2,888,879 2,824,211
Office properties and equipment 9,498,672 8,687,387
Other assets 19,515,526 19,937,789
------------------- -------------------
TOTAL ASSETS $491,995,334 $492,339,284
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits $355,837,875 $345,341,089
Federal Home Loan Bank advances 86,848,182 96,503,610
Advance payments by borrowers for taxes and insurance 912,335 974,636
Other debt 2,500,000 3,000,000
Interest payable 2,420,227 2,204,007
Other liabilities 2,036,971 3,454,755
------------------- -------------------
TOTAL LIABILITIES 450,555,590 451,478,097
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Serial Preferred Stock ($.01 par value) Authorized and unissued
- 1,000,000 shares
Common Stock ($.01 par value) Authorized - 9,000,000 shares Issued - 4,930,508;
Outstanding - 4,207,100
and 3,978,322 49,241 49,241
Additional paid-in capital 25,860,821 24,844,508
Treasury Stock - 708,008 and 936,786 shares - at cost (7,688,842) (9,920,624)
Retained Earnings - substantially restricted 26,553,405 26,573,401
Accumulated other comprehensive income, net
of deferred tax of ($1,572,637) and $3,909 (3,096,831) 5,960
ESOP borrowing (238,050) (476,100)
Unearned compensation - restricted stock awards (215,199)
------------------- -------------------
TOTAL STOCKHOLDERS' EQUITY 41,439,744 40,861,187
------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $491,995,334 $492,339,284
=================== ===================
See notes to consolidated financial statements.
57
PERMANENT BANCORP, INC.
Consolidated Statements of Income
Year Ended March 31,
----------------------------------------------------------
2000 1999 1998
----------------- ---------------- ----------------
INTEREST INCOME:
Loans $ 25,522,808 $ 22,758,455 $ 17,509,318
Securities 7,440,079 9,405,583 12,472,811
Deposits 353,209 284,102 106,454
Dividends on Federal Home Loan Bank stock 440,745 437,696 432,823
----------------- ---------------- ----------------
33,756,841 32,885,836 30,521,406
----------------- ---------------- ----------------
INTEREST EXPENSE:
Deposits 15,169,317 14,755,940 13,431,142
Federal Home Loan Bank advances 5,197,654 5,001,771 5,865,542
Other long-term debt 212,416 150,792
Short-term borrowings 50,383 510 45,827
----------------- ---------------- ----------------
20,629,770 19,909,013 19,342,511
----------------- ---------------- ----------------
NET INTEREST INCOME 13,127,071 12,976,823 11,178,895
PROVISION FOR LOAN LOSSES 295,500 300,000 177,050
----------------- ---------------- ----------------
NET INTEREST INCOME AFTER LOAN LOSS
PROVISION 12,831,571 12,676,823 11,001,845
----------------- ---------------- ----------------
OTHER INCOME:
Service charges 1,752,033 1,491,788 984,668
Gain on sale of loans 108,345 205,837 91,866
Commissions 651,333 591,192 607,806
Gain on sale of securities 229,708 42,643
Gain on sale of real estate owned 21,358 39,790 41,966
Other 462,287 472,625 323,044
----------------- ---------------- ----------------
2,995,356 3,030,940 2,091,993
----------------- ---------------- ----------------
OTHER EXPENSE:
Salaries and employee benefits 6,122,814 5,695,772 4,519,290
Deposit insurance assessment 243,382 271,397 275,986
Occupancy 1,149,623 1,020,658 821,412
Equipment 830,851 763,669 608,472
Computer service 796,708 705,748 537,903
Advertising 374,724 412,183 354,370
Postage and office supplies 428,015 444,469 285,906
Merger related expenses 584,183
Other 2,186,962 1,588,871 1,227,988
----------------- ---------------- ----------------
12,717,262 10,902,767 8,631,327
----------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 3,109,665 4,804,996 4,462,511
INCOME TAX PROVISION 915,790 1,945,111 1,817,344
----------------- ---------------- ----------------
NET INCOME $ 2,193,875 $ 2,859,885 $ 2,645,167
================= ================ ================
EARNINGS PER SHARE OF COMMON STOCK:
Basic $ 0.55 $ 0.72 $ 0.65
Diluted 0.54 0.70 0.62
AVERAGE SHARES OUTSTANDING
Basic 3,969,419 3,956,590 4,048,150
Diluted 4,053,031 4,062,155 4,299,366
See notes to consolidated financial statements.
58
PERMANENT BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the Year Ended March 31, 2000, 1999 and 1998
- --------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional
--------------------------- Paid-in Treasury Retained
Shares Amount Capital Stock Earnings
-----------------------------------------------------------------------------------
BALANCES, APRIL 1, 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 retricted 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
Net income 2,193,875
Unrealized loss on AFS securities
securities available for sale
Total comprehensive income
ESOP shares earned 301,898
Vesting of restricted stock awards
Cancellation of restricted
stock awards (1,360) (14,398)
Purchase of Treasury Stock (44,497) (683,886)
-----------------------------------------------------------------------------------
Exercise of stock options 274,635 714,415 2,930,066 (1,093,261)
Payment of dividends (1,120,610)
-----------------------------------------------------------------------------------
BALANCES, MARCH 31, 2000 4,207,100 $49,241 $25,860,821 ($7,688,842) $26,553,405
===================================================================================
PERMANENT BANCORP, INC.
Consolidated Statements of Stockholders' Equity
For the Year Ended March 31, 2000, 1999 and 1998
- ---------------------------------------------------------------------------------------------------------
Accumulated Other Restricted Total
Comprehensive ESOP Stock Stockholders'
Income (Loss) Borrowing Awards Equity
--------------------------------------------------------------------
BALANCES, APRIL 1, 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 retricted 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
Net income 2,193,875
Unrealized loss on
securities available for sale (3,102,791) (3,102,791)
------------------
Total comprehensive income (908,916)
------------------
ESOP shares earned 238,050 539,948
Vesting of restricted stock awards 200,801 200,801
Cancellation of restricted
stock awards 14,398
Purchase of Treasury Stock (683,886)
--------------------------------------------------------------------
Exercise of stock options 2,551,220
Payment of dividends (1,120,610)
--------------------------------------------------------------------
BALANCES, MARCH 31, 2000 ($3,096,831) ($238,050) $0 $41,439,744
====================================================================
See note to consolidated financial statements
59
PERMANENT BANCORP, INC.
Consolidated Statements of Cash Flows
Year Ended March 31,
---------------------------------------------------
2000 1999 1998
---------------- ---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,193,875 $2,859,885 $2,645,167
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, amortization and accretion 1,274,639 1,244,841 814,664
Vesting of restricted stock awards 146,614 129,981 125,243
Provisions for loan losses 295,500 300,000 177,050
(Gain) on sale of securities (229,708) (42,641)
(Gain) on sale of loans (108,345) (205,837) (91,866)
(Gain) loss on sale of other assets (66,435) (15,631) (74,288)
ESOP shares earned 324,984 318,846 383,336
Proceeds from the sales of loans held for sale 8,657,663 12,926,125 5,169,926
Origination of loans for resale (8,549,318) (12,720,288) (5,078,060)
Changes in assets and liabilities:
Other investments 88,690 (597,651) (51,135)
Interest receivable (147,939) 162,142 268,912
Other assets 2,386,812 (711,591) (173,604)
Interest payable 216,220 10,459 143,821
Other liabilities 2,103,605 (9,145,930) 1,456,931
---------------- ---------------- ---------------
Net cash provided by (used in) operating activities 8,816,565 (5,674,357) 5,673,456
---------------- ---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired through branch purchase 26,933,017 4,578,736
Loans originated (134,189,861) (168,807,683) (71,424,204)
Loan principal repayments 156,879,414 125,616,701 73,116,431
Proceeds from maturities and calls of securities 3,000,000 143,007,087 61,016,550
Sales of:
Securities 41,112,062 24,072,258
Other assets 517,574 271,376 323,174
Purchases of:
Securities (14,104,277) (150,710,053) (97,993,517)
Loans (32,744,354) (9,885,578) (17,257,140)
Other assets (1,716,975) (834,601) (730,464)
Payments on mortgage-backed securities 15,593,922 29,378,578 24,282,962
Increase in cash surrender value of life insurance (182,115) (1,301,575) (71,155)
Other 55,356 12,001 16,437
---------------- ---------------- ---------------
Net cash provided by (used in) investing activities (6,891,316) 34,791,332 (71,075)
---------------- ---------------- ---------------
Continued on next page
60
PERMANENT BANCORP, INC.
Consolidated Statements of Cash Flows - Continuation
Year Ended March 31,
------------------------------------------------------
2000 1999 1998
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (1,087,899) (969,805) (808,610)
Purchase of treasury stock (93,125) (4,163,316) (993,628)
Net change in deposits 10,496,786 (16,720,332) (3,542,954)
Proceeds from FHLB advances 130,300,000 174,749,242 274,500,000
Proceeds from other debt 4,153,875 (273,631,307)
Repayment of other debt (500,000) (1,153,875)
Payments on FHLB advances (139,955,428) (177,598,310)
Principal repayments of ESOP borrowing 238,050 238,050 238,050
Advance payments by borrowers for taxes and insurance (62,301) (5,223) (34,739)
Net change in other borrowed funds (1,793,967)
Net proceeds from issuance of common stock 1,246,043 222,270 183,237
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities 582,126 (21,247,424) (5,883,918)
---------------- ---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,507,375 7,869,551 (281,617)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,952,410 6,082,859 6,364,476
---------------- ---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $16,459,785 $13,952,410 $6,082,859
================ ================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $20,413,550 $19,898,554 $19,198,690
Income taxes 920,000 1,595,000 1,588,000
Noncash transactions:
Transfers from loans to real estate owned 175,204 356,332 151,339
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
Purchase of treasury shares 590,761
See notes to consolidated financial statements.
61
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of Permanent Bancorp,
Inc. (the "Company") and its subsidiary, Permanent 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, 2000.
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.
As discussed below, SFAS No. 133, "Accounting For Derivative
Investments," permitted a one-time transfer of securities previously classified
as held to maturity to the available for sale category. On October 1, 1998 the
Company transferred mortgage-backed securities previously classified as
held-to-maturity into 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.
62
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.
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 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. 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. When loans
are sold servicing assets are recognized.
Office Properties and Equipment is 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 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 is
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, 2000, 1999
and 1998 was $695,816, $602,682 and $167,036, respectively. Goodwill of
$8,660,000 and $9,356,000 is included in Other Assets in the Consolidated
Statements of Financial Condition at March 31, 2000 and March 31, 1999,
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.
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.
63
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 fiscal year 1999. The Company has
determined that it operates as a single segment which is community banking. At
March 31, 2000 and 1999, the Bank had assets of approximately $492.7 million and
$493.7 million, or substantially all of consolidated assets as of these dates.
Net income of the Bank for the three years ended March 31, 2000 was $3,045,000,
$3,074,000 and $2,706,000 or 138%, 108% and 102% of consolidated net income for
fiscal years 2000, 1999 and 1998. Net interest income at the Bank for each of
the three years ended March 31, 2000 exceeded 98% of consolidated net interest
income.
Earnings per Share - 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:
Year Ended March 31,
-------------------------------------------
2000 1999 1998
------------ ------------ -------------
Basic average common shares 3,969,419 3,956,590 4,048,150
Dilutive effect of stock options 83,612 105,565 251,216
------------ ------------ -------------
Diluted average common shares 4,053,031 4,062,155 4,299,366
============ ============ =============
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.
Pending Merger - On December 20, 1999, the Company announced an
agreement to merge with Old National Bancorp, Inc. ("Old National") in a stock
transaction valued at approximately $92 million.
The agreement calls for a fixed price with the exchange ratio to be
based on the price of Old National stock at the time of the closing subject to
adjustment. The agreement provides for adjustments in the exchange ratio and the
renegotiation of the agreement under certain conditions. The following is a
description of the significant provisions of the agreement related to the
exchange ratio. Old National share prices have been adjusted from the original
agreement to reflect the 5% stock dividend payable to its shareholders of record
on January 6, 2000.
o The assumed number of Permanent shares and vested options to be
exchanged in the transaction is approximately 4,432,742. At a total
purchase price of $92 million, this equates to a projected price per
Permanent share/option of approximately $20.75.
64
o If the share price of Old National at the time of closing is between
$26.60 and $34.20, the number of shares of Old National stock
payable to Permanent shareholders would be derived by dividing $92
million by the Old National share price. Assuming the $20.75 value
above, the exchange ratio per Permanent share would range between a
low of .6069 shares of Old National at an Old National price of
$34.20 to a high of .7802 shares at an Old National price of $26.60.
o If the share price of Old National is less than $26.60, the exchange
ratio will be fixed at .7802 and the value of the transaction will
be less than $92 million. However, if the share price of Old
National is less than $24.70, Permanent may terminate the agreement
if Old National elects not to increase the transaction value to
$85.4 million.
o If the share price of Old National is greater than $34.20, the
exchange ratio will be fixed at .6069 and the value of the
transaction will be greater than $92 million. If the share price of
Old National is greater than $36.10, Old National may request to
renegotiate the exchange ratio and if the parties are unable to
agree to a new exchange ratio, Old National may terminate the
agreement.
This merger, which requires both regulatory and shareholder approval,
is expected to be completed in the quarter ending September 30, 2000.
The Company has in conjunction with this merger retained the services
of qualified professionals to advise it on merger related matters. Included in
operating results for the year ended March 31, 2000 are approximately $439,000
of expenses related to these services.
In addition, as of December 13, 1999, the Company accelerated the
vesting of all shares of stock held under the Recognition and Retention Plan
(RRP) which resulted in a pre-tax charge to earnings of approximately $145,000.
Because of this pending merger, the employment contract of the Chairman
of the Board and Chief Executive Officer of the Company, which was scheduled to
terminate on March 31, 2000, was extended to the earlier of the completion of
the merger or the end of the month following the termination of the merger
agreement. In conjunction with and upon completion of the merger the Chairman of
the Board and Chief Executive Officer of the Company will enter into an eighteen
month consulting agreement with Old National.
As part of the merger agreement the Company has agreed to repay all
borrowings of the parent company, which amounted to $2,500,000 at March 31,
2000, and refrain from borrowing under the $1,000,000 line of credit. See "Other
Debt" note.
Changes In Presentation - Certain items appearing in the 1999 and 1998
financial statements have been reclassified to conform to the 2000 presentation.
65
2. SECURITIES
The amortized cost and estimated fair values of securities available
for sale and securities held to maturity is summarized as follows:
March 31, 2000
Amortized Gross Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------
Securities available for sale:
U.S. Agency $ 63,184,591 $ 4,298,931 $ 58,885,660
FHLMC certificates 15,981,838 $ 23,626 290,898 15,714,566
FNMA certificates 18,257,776 66,465 259,276 18,064,965
GNMA certificates 15,314,891 130,623 41,077 15,404,437
----------------------------------------------------------------------
Total securities available for sale 112,739,096 220,714 4,890,182 108,069,628
----------------------------------------------------------------------
Securities held to maturity:
Municipal & Revenue Bonds 6,701,343 775,121 5,926,222
----------------------------------------------------------------------
Total securities $ 119,440,439 $ 220,714 $ 5,665,303 $ 113,995,850
======================================================================
March 31, 1999
----------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------
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
----------------------------------------------------------------------
Total securities available for sale 117,279,217 606,201 596,332 117,289,086
----------------------------------------------------------------------
Securities held to maturity:
Municipal & Revenue Bonds 5,908,859 290,346 5,618,513
Other 1,010,934 2,212 1,008,722
----------------------------------------------------------------------
Total securities held to maturity 6,919,793 292,558 6,627,235
----------------------------------------------------------------------
Total securities $ 124,199,010 $ 606,201 $ 888,890 $ 123,916,321
======================================================================
The estimated fair value of U.S. Agency securities pledged to the Federal Home
Loan Bank of Indianapolis as security for advances is approximately $20,151,000.
66
The amortized cost and estimated fair value of securities at March 31,
2000 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 penalties.
Amortized Fair
Cost Value
----------------------------------------
Due within 1 year
FHLMC certificates $281,721 $280,566
----------------- -----------------
281,721 280,566
----------------- -----------------
Due after 1 year through 5 years
U.S. Agency 14,000,000 13,383,705
FHLMC certificates 2,382,972 2,352,247
FNMA certificates 682,927 687,121
----------------- -----------------
17,065,899 16,423,073
----------------- -----------------
Due after 5 years through 10 years
U.S. Agency 33,675,317 31,652,531
FHLMC certificates 1,882,196 1,820,903
FNMA certificates 3,408,956 3,259,355
GNMA certificates 393,417 379,956
----------------- -----------------
39,359,886 37,112,745
----------------- -----------------
Due after 10 years through 15 years
U.S. Agency 12,980,961 11,751,163
FHLMC certificates 683,996 653,216
FNMA certificates 160,544 158,746
Municipal & Revenue Bonds 1,325,226 1,141,102
----------------- -----------------
15,150,727 13,704,227
----------------- -----------------
Due after 15 years
U.S. Agency 2,528,313 2,098,261
FHLMC certificates 10,750,953 10,607,634
FNMA certificates 14,005,349 13,959,743
GNMA certificates 14,921,474 15,024,481
Municipal & Revenue Bonds 5,376,117 4,785,120
----------------- -----------------
47,582,206 46,475,239
----------------- -----------------
Total $119,440,439 $113,995,850
================= =================
There were no sales of securities during the year ended March 31, 2000
and activities related to the security sales for the years ended March 31, 1999
and 1998 are:
Year Ended March 31,
----------------------------------
1999 1998
----------------------------------
Prodeeds from sales $41,101,856 $24,072,258
Gross gains on sales 239,914 51,776
Gross loss on sales 10,206 9,135
67
3. LOANS
Approximately 84% of the Bank's loans are to customers in Indiana and it
has no foreign loans. The portfolio of loans consists of residential, commercial
real estate, commercial construction, consumer and other loans.
March 31,
------------------------------------------
2000 1999
------------------- -----------------
First mortgage:
Secured by one-to-four family residences $ 171,957,118 $171,249,927
Secured by other properties 45,584,797 31,897,812
Construction loans 5,939,129 8,193,828
Automobile 57,320,284 56,779,077
Consumer 26,917,610 26,609,416
Commercial 15,965,302 17,327,986
Commercial paper 3,966,748 9,275,099
Credit card 544,997 582,185
Other loans 1,421,414 2,183,603
------------------- -----------------
Subtotal 329,617,399 324,098,933
Allowance for loan losses (2,231,826) (2,706,408)
Deferred loan fees and undisbursed proceeds (234,707) (362,394)
------------------- -----------------
Loans, net $ 327,150,866 $321,030,131
=================== =================
The principal balance of nonaccrual loans totaled approximately $612,000
and $818,000 at March 31, 2000 and 1999, respectively. For the years ended March
31, 2000 and 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 $39,768 and $65,013 respectively. The amounts included in interest
income on such loans were $18,289 and $20,681 for the years ended March 31, 2000
and 1999, respectively.
The Bank originates commercial real estate loans. Such loans had a
carrying value of approximately $46 million and $32 million at March 31, 2000
and 1999, 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, $6 million and $3
million are collateralized by multi-family residential property at March 31,
2000 and 1999, respectively, and $40 million and $29 million by hotel, office
and other property at March 31, 2000 and 1999, respectively.
The Bank had commitments to make loans approximating $23,563,000 and
$23,421,000 excluding undisbursed portions of loans in process at March 31, 2000
and 1999, respectively.
Fixed Rate Adjustable Rate
- ------------------------------------------------ ----------------------------------------------
Book Value Book Value
Term to March 31, Term to Rate March 31,
-------------------------------- ------------------------------
Maturity 2000 1999 Adjustment 2000 1999
- ------------------------------------------------ ----------------------------------------------
To.-1yr $11,114,000 $30,171,000 To.-1yr. $35,647,000 $27,279,000
1yr.-3yr. 24,232,000 18,322,000 1yr.-3yr. 6,484,000 4,978,000
3yr.-5yr. 71,462,000 65,390,000 3yr.-5yr. 8,192,000 7,272,000
5yr.-10yr. 48,778,000 46,433,000 5yr.-10yr. 47,990,000 37,219,000
10yr.-20yr. 62,303,000 78,742,000 10yr.-20yr. 1,159,000 1,006,000
Over 20 years 12,136,000 7,164,000 over 20 yrs 120,000 123,000
-------------- -------------- -------------- -------------
$230,025,000 $246,222,000 $99,592,000 $77,877,000
============== ============== ============== =============
68
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 $778,040 and $609,277
at March 31, 2000 and 1999, respectively. For the years ended March 31, 2000 and
1999 loans of $385,816 and $152,383 respectively, were disbursed to officers and
directors and repayments of principal of $217,053 and $173,719, respectively,
were received from officers and directors.
The amount of loans serviced for others totaled approximately
$37,650,000 and $36,328,000 at March 31, 2000 and 1999, 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 $231,392 and $228,391 at March 31, 2000 and 1999, 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, 2000
and 1999, these obligations were limited to approximately $72,000 and $316,000,
respectively.
Loan servicing fee income for each of the three years ended March 31,
2000 was $93,901, $81,575, and $84,274, respectively.
There were no restructured loans in the Bank's loan portfolio as of
March 31, 2000 and 1999.
An analysis of the allowance for loan losses is as follows:
Year Ended March 31,
-----------------------------------------------------
2000 1999 1998
----------------- ---------------- ----------------
Beginning balance $2,706,408 $1,973,410 $2,126,225
Provision for losses charged to operations 295,500 300,000 177,050
Charge-offs (894,278) (506,753) (403,896)
Recoveries 124,196 179,751 74,031
Acquired in branch acquisition 760,000
----------------- ---------------- ----------------
Ending balance $2,231,826 $2,706,408 $1,973,410
================= ================ ================
The recorded investment in loans considered impaired at March 31, 2000
and 1999 was $361,042 and $362,920 for which no specific valuation reserve has
been established. For the years ended March 31, 2000 and 1999 the average
recorded investment in impaired loans was approximately $347,000 and $243,000,
respectively. Cash received for interest on impaired loans was $29,346 and
$17,039 for the years ended March 31, 2000 and 1999, 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 $171 million and $169
million as of March 31, 2000, and 1999, respectively.
Also, under applicable regulations, the loans-to-one borrower limitation
is defined and is generally 15% of unimpaired capital which, for the Bank, was
approximately $5.4 million at March 31, 2000 and $4.9 million at March 31, 1999.
At March 31, 2000 and 1999 there were no loans exceeding this limitation.
69
4. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
March 31,
----------------------------------
2000 1999
---------------- ---------------
Land $2,506,477 $2,578,358
Office buildings 8,908,807 8,212,588
Furniture and equipment 4,006,831 3,551,173
Leasehold improvements 389,713 289,824
Automobiles 55,642 55,642
---------------- ---------------
Total 15,867,470 14,687,585
Less accumulated depreciation 6,368,798 6,000,198
---------------- ---------------
Office properties and equipment, net $9,498,672 $8,687,387
================ ===============
Depreciation expense included in operations during the years ended March
31, 2000, 1999 and 1998 totaled $598,950, $538,412 and $556,598, respectively.
5. DEPOSITS
Deposit accounts are summarized as follows:
March 31,
--------------------------------------------------------------------
2000 1999
---------------------------------- ------------------------------
Average Average
Amount Rate Amount Rate
--------------- ---------------- --------------- -------------
Noninterest-bearing $13,112,294 $12,267,705
NOW and MMDA's 59,276,434 2.4% 57,644,600 1.0%
Passbook savings 47,437,703 3.0 59,482,126 3.1
--------------- ---------------
Total 119,826,431 129,394,431
--------------- ---------------
Certificates of deposit:
1.50 - 3.49% 33,318 2.6 40,396 2.4
3.50 - 5.49% 108,672,484 5.0 120,750,095 4.9
5.50 - 7.49% 124,571,102 6.0 92,403,547 6.1
7.50 - 9.49% 2,734,540 7.8 2,752,620 7.8
--------------- ---------------
Total certificates of deposit 236,011,444 215,946,658
--------------- ---------------
Total $355,837,875 $345,341,089
=============== ===============
Certificates of deposit in the amount of $100,000 or more total
approximately $58 million at March 31, 2000 and $30 million at March 31, 1999.
70
A summary of certificate accounts by scheduled maturities at March 31,
2000 is as follows:
2001 2002 2003 2004 2005 Thereafter Total
----------------------------------------------------------------------------------------------------------------
Less than
3.49% $15,609 $17,709 $33,318
3.50 - 5.49% 73,118,450 23,861,311 $4,853,066 $3,976,817 $1,635,745 $1,227,095 108,672,484
5.50 - 7.49% 87,765,321 10,203,358 11,252,038 5,856,385 5,318,694 4,175,306 124,571,102
7.50 - 9.49% 1,338,473 1,396,067 2,734,540
----------------------------------------------------------------------------------------------------------------
$162,237,853 $35,478,445 $16,105,104 $9,833,202 $6,954,439 $5,402,401 $236,011,444
================================================================================================================
Interest expense on deposits is as follows:
Year Ended March 31,
--------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- --------------------
NOW and MMDA's $ 1,267,208 $ 1,141,417 $ 716,098
Passbook savings 1,640,274 1,974,533 1,951,908
Certificates of deposit 12,261,835 11,639,990 10,763,136
------------------- ------------------- --------------------
$ 15,169,317 $ 14,755,940 $ 13,431,142
=================== =================== ====================
6. FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank of Indianapolis (FHLB) are as
follows:
Average Rate, March 31, Borrowings, March 31,
----------------------- ----------------------
Fiscal Year 2000 1999 2000 1999
--------------------- ---------- --------- ----------------- ---------------
Fixed Rate:
2000 4.89% $805,873
2001 6.12% 5.50% $9,579,872 14,584,231
2002 6.11% 5.46% 149,611 5,000,000
2003 5.61% 4.80% 10,136,937 3,084,231
2004 & thereafter 5.32% 4.99% 40,481,762 73,029,275
--------------------- ---------- --------- ----------------- ---------------
Total fixed rate 60,348,182 96,503,610
--------------------- ---------- --------- ----------------- ---------------
Variable Rate:
2001 6.39% 26,500,000
--------------------- ---------- --------- ----------------- ---------------
Total advances $86,848,182 $96,503,610
--------------------- ---------- --------- ----------------- ---------------
Fixed rate advances at March 31, 2000 include $10,000,000 of putable
advances that have reached the initial conversion date and $39,000,000 of
putable advances that reach the conversion date subsequent to March 31, 2000.
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 Bank has pledged mortgage loans, securities and FHLB stock as
collateral on these advances. The Bank may receive additional advances up to an
amount approved by the FHLB, which was approximately $164 million at March 31,
2000.
71
7. OTHER 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. In
November 1998 the Company repaid $1,153,875 of this debt and in September 1999
the Company refinanced the remaining $3,000,000 of the debt to another
unaffiliated financial institution and obtained an additional $1,000,000 line of
credit.
Both the refinanced debt and the line of credit facilities are secured
by the stock of the Bank and bear interest at LIBOR (as defined in the loan
agreement) plus 160 basis points. The interest rate adjusts monthly and at March
31, 2000 the rate was 7.51%.
The Company repaid $500,000 of principal and the loan balance as of
March 31, 2000 is $2,500,000. The next scheduled quarterly principal payment of
$250,000 is in April 2000.
Under the terms of its merger agreement with Old National Bancorp, the
Company is precluded from borrowing under its line of credit facility and must
retire its remaining $2,500,000 of borrowings prior to the merger.
The loan agreement requires that the Company meet defined performance
standards including a return on average assets ratio of .50%. The Company did
not meet this requirement for the year ended March 31, 2000 but has obtained a
waiver of this requirement from the lender. All other loan covenants have been
met.
8. OTHER BORROWED FUNDS
The Company had no other borrowed funds at March 31, 2000 or March 31,
1999.
An analysis of securities sold under agreements to repurchase is as
follows:
Year Ended March 31,
-----------------------------------------------------
2000 1999 1998
----------------- ---------------- ----------------
Highest month-end balance $ 5,835,000 $ 0 $ 444,636
Average balance 957,853 10,417 103,260
Weighted average interest rate during the period 5.26% 5.33% 5.10%
9. INCOME TAXES
An analysis of the income tax provision is as follows:
Year Ended March 31,
------------------------------------------------------
2000 1999 1998
----------------- -------------- ---------------
Current:
Federal $ 206,505 $1,232,983 $ 1,366,610
State 51,616 448,893 447,482
Deferred 657,669 263,235 3,252
----------------- -------------- ---------------
$ 915,790 $1,945,111 $ 1,817,344
================= ============== ===============
72
The difference between the financial statement provision and amounts
computed by using the statutory rate of 34% is reconciled as follows:
Year Ended March 31,
-----------------------------------------------------------
2000 1999 1998
------------------ ---------------- -----------------
Income tax provision at federal
statutory rate $ 1,057,286 $ 1,633,699 $ 1,517,254
State tax, net of federal tax benefit (70,774) 272,365 295,338
Nondeductible expenses 383,232 133,797 188,734
Tax exempt interest (156,707)
Other (297,247) (94,750) (183,982)
------------------ ---------------- -----------------
Total income tax provision $ 915,790 $ 1,945,111 $ 1,817,344
================== ================ =================
The Company's deferred income tax assets and liabilities are as follows:
March 31,
--------------------------
2000 1999
------------- ----------
Deferred tax assets:
Bad debt reserves $ 410,179 $ 657,839
Goodwill 118,966 117,670
Accrued employee benefits 179,273 146,564
Net operating loss carryforwards 1,069,037
General business tax credits 107,301
Unrealized loss on securities available for sale 1,572,637
------------- ----------
3,457,393 922,073
------------- ----------
Deferred tax liabilities:
Depreciation 111,568 124,717
Deferred loan fees 703,410 588,802
Unrealized gain on securities available for sale 3,909
Mark to market transfer 1,358,520
Other 304,579 144,206
------------- ----------
2,478,077 861,634
------------- ----------
Deferred income tax, net $ 979,316 $ 60,439
============= ==========
As of March 31, 2000, the Company has net operating loss carryforwards
of approximately $1,069,000 for tax purposes which will be available to offset
future taxable income. If not used, these carryforwards will expire between
March 31, 2015 and March 31, 2020. To the extent that net operating loss
carryforwards, when realized, relate to stock option deductions, the resulting
benefits will be credited to stockholders' equity.
Retained earnings at March 31, 2000 and 1999 includes approximately $6
million of income that has not been subject to tax because of deductions for bad
debts allowed for federal income tax purposes. Deferred income taxes have not
been provided on such bad debt deductions since the Company does not intend to
use the accumulated bad debt deductions for purposes other than to absorb loan
losses. If, in the future, this portion of retained earnings is used for any
purpose other than to absorb bad debt losses, federal income taxes may be
imposed on such amounts at the then current corporate income tax rate.
In August 1996, the "Small Business Job Protection Act of 1996" was
passed into law. One provision of the act repeals the special bad debt reserve
method for thrift institutions currently provided for in Section 593 of the IRC.
The provision requires thrifts to recapture any reserve accumulated after 1987
but forgives taxes owed on reserves accumulated prior to 1988. Thrift
institutions will be given six years to account for the recaptured excess
73
reserves, beginning with the first taxable year after 1995, and will be
permitted to delay the timing of this recapture for one or two years, subject to
whether they meet certain residential loan test requirements.
10. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by
regulators that could have a direct material effect on the Company's financial
position and results of operations. The regulations require the Bank to meet
specific capital adequacy guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital classifications are
also subject to qualitative judgments by the regulators. The Bank's primary
regulator is the Office of Thrift Supervision ("OTS"). As of March 31, 2000 and
1999, 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.
As of March 31, 2000
------------------------------------------------------
Actual Capital Required Capital
------------------------------------------------------
Amount Ratio Amount Ratio
------------------------------------------------------
OTS Capital adequacy
Tangible Capital $35,538,000 7.27 % $7,329,000 1.50 %
Core Capital 35,538,000 7.27 19,543,000 4.00
Risk-based Capital 36,799,000 13.79 21,351,000 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 35,538,000 7.27 24,429,000 5.00
Tier 1 risk-based capital 35,538,000 13.32 16,013,000 6.00
Total risk-based capital 36,799,000 13.79 26,689,000 10.00
As of March 31, 1999
------------------------------------------------------
Actual Capital Required Capital
------------------------------------------------------
Amount Ratio Amount Ratio
------------------------------------------------------
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
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 that remains unissued at March 31, 2000. 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. Under the terms of its merger agreement with Old National Bancorp,
however, the Company may not make any changes to its capital stock accounts
except for the issuance of stock under its stock option plans.
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.
There was no pension expense during the three years ended March 31, 2000.
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 $238,050 and $476,100 at March 31, 2000 and 1999, 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 $552,010,
$594,925 and $639,317 during 2000, 1999, and 1998, respectively. During fiscal
years ended March 31, 2000, 1999 and 1998, 43,482 shares, 45,607 shares and
47,688 shares were earned by participants. At March 31, 2000, 41,255 shares with
a fair value of approximately $753,000 were held in suspense by the ESOP. These
shares are not considered to be outstanding for the purpose of computing earning
per share.
Under the terms of the merger agreement with Old National Bancorp, the
Company will terminate the ESOP as of the merger date and all previously
unvested shares will become fully vested and non-forfeitable.
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. No shares were awarded during the year ended March 31,
2000 and 9,000 and 1,000 shares were awarded during the fiscal years ended March
31, 1999 and 1998, respectively. The cost of the RRP is reflected as
compensation expense as vesting occurs. In anticipation of the Company's merger
with Old National Bancorp, the Board of Directors accelerated the vesting of
shares so that as of December 13, 1999 all previously unvested RRP shares became
100% vested. RRP expense amounted to $200,801, $139,200 and $125,242 during the
fiscal years ended March 31, 2000, 1999 and 1998. Termination of employees
resulted in 1,360 shares, 2,866 shares 2,856 shares being canceled during the
fiscal years ended March 31, 2000, 1999 and 1998, 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.
75
The following is an analysis of stock option activity for each of the
three years in the period ending March 31, 2000 and the stock options
outstanding at the end of the respective years:
Weighted
Average
Shares Price
- --------------------------------------------------------------------------------
Outstanding March 31, 1997 441,672 $ 5.32
Granted 9,522 15.75
Exercised (36,712) 5.07
Forfeited or expired (3,572) 5.00
- --------------------------------------------------------
Outstanding March 31, 1998 410,910 5.59
Granted 7,000 11.25
Exercised (44,454) 5.00
- --------------------------------------------------------
Outstanding March 31, 1999 373,456 5.76
Granted 134,000 12.50
Exercised (274,635) 5.10
Forfeited (7,140) 5.00
- --------------------------------------------------------
Balance at March 31, 2000 225,681 $ 10.59
================================================================================
The number of vested shares exercisable at March 31, 2000, 1999, and
1998 were: 129,290, 344,773 and 376,465, respectively and had a weighted average
exercise price of $5.79, $5.28 and $5.16, respectively. The weighted average
remaining contractual life of the options outstanding at March 31, 1999 and 1998
was 6.5 years and 5.3 years, respectively. Exercise prices for options
outstanding at March 31, 2000 ranged from $5.00 to $15.75. All unvested options
become fully vested upon a vote of the Company's shareholders to approve the
proposed merger with Old National Bancorp.
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:
Year Ended March 31,
-------------------------------------------------
2000 1999 1998
-------------- ------------- -------------
Net income :
As reported $2,193,875 $2,859,885 $2,645,167
Proforma 2,101,650 2,843,474 2,631,973
Basic : Net income per share:
As reported $ 0.55 $ 0.72 $ 0.65
Proforma 0.53 0.72 0.65
Diluted Net income per share:
As reported $ 0.54 $ 0.70 $ 0.62
Proforma 0.52 0.70 0.61
76
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 2.21%
to 2.64%, risk-free interest rates of 5.23% to 6.75%, expected volatility of 18%
to 35% 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's matching expense was
$19,083, $22,271 and $21,450 during the fiscal years ended March 31, 2000, 1999
and 1998, 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 attaining the year of
retirement. The present value of the benefit to be paid is accrued over the
active period of service of individual participants and is funded by life
insurance policies. Cash values associated with these policies in the amount of
$3,108,943 at March 31, 2000 and $2,926,828 at March 31, 1999 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:
Fiscal Year Ended March 31,
------------------------------------------------
2000 1999 1998
---- ---- ----
Net realized and unrealized gains (losses)
on available for sale securities ($3,102,791) ($80,566) $1,841,590
Less: Adjustment for net securities gains
realized in net income, net of tax 138,721 25,752
------------- -------------- ---------------
Other comprehensive income (loss) ($3,102,791) ($219,287) $1,815,838
============= ============== ===============
Substantially all of the other comprehensive income is attributable to
the Bank as the amount of available for sale securities at the parent company is
immaterial.
14. COMMITMENTS
Lease commitments - The Company has future minimum rental commitments
for noncancelable operating leases as follows:
Fiscal Year Ended March 31
---------------------------
2001 $240,922
2002 200,111
2003 132,982
2004 112,086
2005 113,207
Rental expense for the years ended March 31, 2000, 1999 and 1998 was
$311,642, $261,022, and $79,036, respectively.
77
Rental income from noncancelable subleases for the years ended March
31, 2000, 1999 and 1998 was $140,662, $137,063 and $119,306, 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. The Company does not generally require collateral or other security
to support financial instruments with off-balance-sheet 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 primarily of single and multi-family
residential property, other real estate, and personal property.
Employment agreement - The Company has entered into employment agreements
with two executive officers. One agreement, which was scheduled to end on March
31, 2000, was extended to the earlier of the completion of the Company's pending
merger with Old National Bancorp or the end of the month following the
termination of the merger agreement. 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 $300,000 at March 31, 2000.
78
15. PERMANENT BANCORP, INC. FINANCIAL INFORMATION
(PARENT COMPANY ONLY)
The following condensed statement of financial condition as of March 31,
2000 and 1999 and condensed statement of operations and cash flows for the three
years ended March 31, 2000 for Permanent Bancorp, Inc. should be read in
conjunction with the consolidated financial statements and the related notes
hereto.
March 31,
---------------------------------
CONDENSED STATEMENTS OF FINANCIAL CONDITION 2000 1999
---------------------------------
Cash $ 544,392 $ 322,070
Other investments 491,500 539,624
Loans receivable 238,050 775,242
Fixed assets 466,138 454,855
Accrued income tax benefit 985,104 22,732
Other assets 10,950 28,704
Investment in subsidiary 41,549,745 42,120,304
---------------------------------
Total assets $ 44,285,879 $ 44,263,531
=================================
Deferred income taxes $ 30,445 $ 30,445
Accrued expenses 21,196 133,302
Dividends payable 294,494 238,697
Other borrowed funds 2,500,000 3,000,000
---------------------------------
Total liabilities 2,846,135 3,402,344
---------------------------------
Total stockholders' equity 41,439,744 40,861,187
---------------------------------
Total liabilities and stockholders' equity $ 44,285,879 $ 44,263,531
=================================
CONDENSED STATEMENTS OF INCOME Year Ended March 31,
---------------------------------------------
INCOME: 2000 1999 1998
---------------------------------------------
Interest on securities $ 86,342 $ 145,162
Interest on loans $ 24,455 38,029 52,510
Other income 79,482 63,395 92,656
---------------------------------------------
Total income 103,937 187,766 290,328
---------------------------------------------
EXPENSES:
Salaries and benefits 555,801 187,648 172,019
Interest expense 212,416 150,792
Legal and professional fees 75,432 93,878 130,957
Merger related expenses 584,183
Other expenses 86,345 110,561 86,646
---------------------------------------------
Total expenses 1,514,177 542,879 389,622
---------------------------------------------
LOSS BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS (1,410,240) (355,113) (99,294)
INCOME TAX BENEFIT (558,596) (140,615) (38,426)
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 3,045,519 3,074,383 2,706,035
---------------------------------------------
NET INCOME $ 2,193,875 $ 2,859,885 $2,645,167
=============================================
79
Year Ended March 31,
---------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 2000 1999 1998
---------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,193,875 $ 2,859,885 $ 2,645,167
Equity in undistributed earnings of subsidiary (3,045,519) (3,074,383) (2,706,035)
Adjustments to reconcile net income to net cash
provided by operating activities
Vesting of restricted stock awards 146,614 139,200 125,243
Depreciation, amortization and accretion 7,514 7,836 (246)
(Gain) Loss on sale of investments 10,206 (5,198)
Non-cash compensation 298,516
Changes in assets and liabilities:
Interest receivable 11,353 53,847
Deferred income tax (153,532) (7,422)
Other assets 17,754 (19,958) (4,059)
Other liabilities (506,719) 62,774 (18,519)
---------------------------------------------
Net cash provided (used in) by operating activities (887,965) (156,619) 82,778
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Maturities of securities 3,689,138 1,997,500
Loan repayments 538,050 1,438,050 1,738,050
Sale of securities 1,986,510
Purchase of:
Loans (1,492,876) (497,415)
Securities (9,375) (2,759,969) (2,497,500)
Fixed assets (20,155) (3,974)
Investment in partnership (388,345)
Dividends and distributions from subsidiaries 1,425,093
---------------------------------------------
Net cash provided by investing activities 1,545,268 870,369 2,727,145
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from other debt 4,153,875
Dividends paid (1,087,899) (969,805) (808,610)
Purchase of treasury stock (683,886) (4,163,316) (993,628)
Sale of common stock 1,836,804 222,270 183,237
Principal repayment on other debt (500,000) (1,153,875)
---------------------------------------------
Net cash used in financing activities (434,981) (1,910,851) (1,619,001)
---------------------------------------------
NET INCREASE (DECREASE) IN CASH 222,322 (1,197,101) 1,190,922
CASH AT BEGINNING OF PERIOD 322,070 1,519,171 328,249
---------------------------------------------
CASH AT END OF PERIOD $ 544,392 $ 322,070 $ 1,519,171
=============================================
80
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":
March 31, 2000 March 31, 1999
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------------- ---------------- ---------------- ----------------
Assets:
Total cash and cash equivalents $16,459,785 $16,459,785 $13,952,410 $13,952,410
Securities available for sale 108,069,628 108,073,273 117,289,086 117,289,086
Securities held to maturity 6,701,343 5,926,222 6,919,793 6,627,235
Loans, net 327,150,866 324,447,261 321,030,131 324,264,853
Interest receivable 2,888,879 2,888,880 2,824,211 2,824,211
Federal Home Loan Bank stock 5,527,500 5,527,500 5,466,000 5,466,000
Cash surrender value of life insurance 3,108,943 3,108,943 2,926,828 2,926,828
Liabilities:
Deposits 355,837,875 361,326,292 345,341,089 350,438,836
Federal Home Loan Bank advances 86,848,182 86,281,229 96,503,610 97,541,079
Advance payments by borrowers
for taxes and insurance 912,335 912,335 974,636 974,636
Other borrowed funds 2,500,000 2,500,000 3,000,000 3,000,000
Interest payable 2,420,227 2,420,227 2,204,007 2,204,007
Off balance sheet: commitments to
extend credit 23,563,000 23,421,000
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.
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.
81
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, 2000 and 1999. 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.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant; Compliance with
Section 16(a) of the Exchange Act
-----------------------------------------------------------------------
The Company's Board of Directors currently consists of nine members.
The Board is divided into three classes containing three members. One of the
three stands for election annually. Directors of the Company are elected to
serve for a three-year term or until their respective successors are elected and
qualified.
82
The following table sets forth certain information, as of June 15,
2000, regarding the composition of the Company's Board of Directors. Except as
disclosed herein, there are no arrangements or understandings between any
director and any other person pursuant to which the director was selected.
Shares of
Common Stock Percent
Position(s) Held Director Term to Beneficially of
Name Age in the Company Since (1) Expire Owned (2) Class
---- --- -------------- --------- ------ ---------- -----
Donald P. Weinzapfel 64 Chairman of the Board, 1978 2002 244,345 5.74%
Chief Executive Officer
& Director
Daniel L. Schenk 46 Director 1998 2002 4,960 (3)
James D. Butterfield 43 Director 1995 2002 7,452 (3)
Daniel F. Korb 68 Director 1981 2000 18,563 (3)
Robert L. Northerner 71 Director 1978 2000 19,378 (3)
James W. Vogel 71 Director 1975 2000 37,378 (3)
Jack H. Kinkel 60 Director 1975 2001 46,808 1.11% (4)
James A. McCarty, Jr. 47 Director 1996 2001 11,142 (3)
Murray J. Brown 51 President & Director 1997 2001 70,704 1.68%
(1) Includes service as a director of the Bank.
(2) Amounts include shares held directly and jointly with family members, as
well as shares which are held in retirement accounts, held in a fiduciary
capacity, held by certain members of the director's family, or held by trusts of
which the director is a trustee or substantial beneficiary, with respect to
which shares the respective directors may be deemed to have sole or shared
voting and/or investment power. Amounts also include 50,000, 4,760 and 5,261
shares subject to options awarded under the stock option plans to Mr.
Weinzapfel, Mr. Schenk and Mr. Brown, which have vested and which are
exercisable within 60 days of the date hereof. Amounts exclude 2,382 and 2,380
shares subject to options granted under the stock option plans to Mr. Schenk and
Mr. McCarty, respectively, which have not vested and are not exercisable within
60 days of the date hereof.
(3) Less than one percent.
(4) Includes 26,808 shares held directly and 20,000 shares held as profit
sharing plan trustee.
83
The principal occupation of each director of the Company and each of
the nominees for director is set forth below. All directors and nominees have
held their present position for at least five years unless otherwise indicated.
Donald P. Weinzapfel. Mr. Weinzapfel joined the Bank in 1978 as Vice
President and Director upon the merger of Home Federal Savings and Loan
Association of Evansville into the Bank. He served as President and Chief
Executive Officer of the Bank from 1985 until 1998, and as Chairman of the Board
of the Bank from 1990 to January 1, 1999. Mr. Weinzapfel is currently serving as
Chairman of the Board and Chief Executive Officer of the Company.
Daniel L. Schenk. Mr. Schenk is the Chancellor of Ivy Tech State
College - Evansville Region, a position he has held since 1990. Mr. Schenk
joined the Board of Directors in March 1998.
James D. Butterfield. Since 1987, Mr. Butterfield has served as
President of Smith & Butterfield, Inc., a large office equipment and supply firm
in the Evansville area.
Daniel F. Korb. Prior to his retirement on December 31, 1993, Mr. Korb
served as Executive Vice President and Secretary of the Bank. Mr. Korb joined
the Bank in 1953, was promoted to Executive Vice President in 1985 and became
Secretary in 1990.
Robert L. Northerner. Until his retirement in April 2000, Mr.
Northerner has, since 1991, served as Vice President of Sales and General
Manager of The Floor Covering Emporium, a Evansville-based floor covering
company. Prior thereto, Mr. Northerner was co-owner (along with Director Vogel)
and served as President of Dale Sales Company, Inc, a service merchandising
company, prior to its merger into Roundy's, another service merchandising
company. After the merger, Mr. Northerner served as Vice President of Sales for
the Evansville branch of Roundy's from 1985 to 1989.
James W. Vogel. Mr. Vogel was founder and co-owner (along with Director
Northerner) of Dale Sales Company, Inc.. from 1952 to 1985, when this business
was sold to Roundy's. Mr. Vogel is now a private investor.
Jack H. Kinkel. Mr. Kinkel is President of Jack R. Kinkel & Son
Architects, P.C. and has been in private practice since 1964. Mr. Kinkel is a
licensed architect in Indiana, Kentucky and Illinois. He is certified by the
National Council of Architectural Registration Boards and is a member of the
American Institute of Architects.
James A. McCarty, Jr. Mr. McCarty joined the Board of Directors in
August of 1996. Since 1989, he has served as President of McCarty's Colonial
Home and Garden Supplies. As president, Mr. McCarty oversees all company
business including management of 100 full-time employees.
Murray J. Brown. Mr. Brown is currently serving as President of the
Company and Chairman of the Board, President and Chief Executive Officer of the
Bank. Mr. Brown joined the Board of Directors in March 1997. From November 1991
until November 1993, Mr. Brown served as the President and CEO of Trans
Financial Bank of Tennessee. From November 1993 until October 1995, Mr. Brown
was self-employed as a private investor/consultant and from February 1992 until
November 1993, he served as a Director of Trans Financial Corporation. Mr. Brown
joined the Company in October, 1995.
Information concerning executive officers of the Company and the Bank
who are not also directors is provided under Item 1 of Part I of this report.
84
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, 2000, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with except that Mr. Weinzapfel
inadvertently failed to timely file a Form 4 to report a transaction and Mr. Orr
inadvertently failed to timely file Form 4s to report two transactions. Section
16(a) of the Securities Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of a registered class of
the Company's equity securities, to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock of the Company.
Officers, directors and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section 16 forms they file.
Item 11. Executive Compensation
The Company has not paid compensation to its executive officers since
its formation. The Company does not presently anticipate paying compensation to
such persons.
The following table sets forth information regarding compensation paid
by the Bank to its Chief Executive Officer and President for services rendered
during fiscal years ended March 31, 2000, 1999, and 1998. No other executive
officer made in excess of $100,000 during the fiscal year ended March 31, 2000.
- ------------------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- ------------------------------------------------------------------------------------------------------------------------------
Long Term
Compensation
Annual Compensation Awards
- ------------------------------------------------------------------------------------------------------------------------------
Restricted
Stock Options/ All other
Name and Principal Position Year Salary Bonus Awards (s) SARs Compensation
($) (1) ($) ($) (#) ($)
- ------------------------------------------------------------------------------------------------------------------------------
Donald P. Weinzapfel 2000 $186,720 $ - - - $ - - - - - - $55,510 (2)
Chairman of the Board, 1999 181,500 - - - - - - - - - 39,582
Chief Executive Officer and 1998 165,213 33,043 - - - - - - 5,016
Director
Murray J. Brown 2000 $152,220 $18,750 $ 37,700 50,000 $56,712 (2)
President and Director 1999 137,603 16,784 14,700 - - - 37,933
1998 115,508 17,326 - - - - - - 4,499
- ------------------------------------------------------------------------------------------------------------------------------
(1) Includes directors fees of $7,500 and $7,500 to Messrs. Weinzapfel and
Brown, respectively.
(2) Includes matching 401(k) plan contributions of $1,600 and $1,500, ESOP
allocations of $43,313 and $43,313 and health insurance premiums of $3,989
and $3,989 on behalf of Messrs. Weinzpafel and Brown, respectively.
85
The following table sets forth certain information concerning the
number and value of stock options held by Mr. Weinzapfel and Mr. Brown at March
31, 2000.
- -------------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION IN LAST FISCAL YEAR AND FY-END
OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------------------
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($) (1)
------------------------------------------------------------------
Shares Acquired Value
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------------
Donald P. Weinzapfel 86,000 $679,426 50,000 - - - $662,500 $ - - -
Murray J. Brown 76,739 $506,458 5,261 - - - $30,251 $ - - -
- ---------------------------------------------- ------------------------------------------------ -----------------------------
(1) Represents the aggretage market value of incentive stock options to
purchase shares of Common Stock (market price less the exercise price of $5.00
per share with regard to Mr. Weinzapfel's options and $12.50 per share with
regard to Mr. Brown's options) awarded to Messrs. Weinzapfel and Brown based
upon the closing price of $18.25 per share for the Common Stock on March 31,
2000, as reported by the Nasdaq National Market.
Employment Agreements
The Company and the Bank entered into an employment agreement with
Donald P. Weinzapfel on October 6, 1998. The Bank also has an employment
agreement with Murray J. Brown dated November 21, 1995. Mr. Weinzapfel's
employment agreement was to expire on April 1, 2000 but was extended to the
earlier of the completion of the Company's pending merger with Old National
Bancorp or the end of the month following the termination of the merger
agreement. Mr. Brown's employment agreement provides for a three year term. Mr.
Weinzapfel's salary is a fixed amount, and Mr. Brown's employment agreement
provides for an annual base salary as determined by the Board of Directors,
which may not be less than his current salary. Salary increases for Mr. Brown
are reviewed not less often than annually thereafter, and are subject to the
sole discretion of the Board of Directors. Mr. Brown's employment agreement
provides for an extension for one additional year at the end of each contract
year, but only upon authorization by the Board of Directors. Both agreements
provide for termination upon the officer's death, for cause or upon certain
events specified by regulations of the Office of Thrift Supervision. The
agreement is terminable by the officer upon 90 days' notice to the Bank.
The employment agreements also provide for payment to the officers in
the event there is a change in control of the Company or the Bank (as defined in
the agreement) where employment terminates involuntarily in connection with such
change in control or within 12 months thereafter, of the remaining salary
payable under the contract, plus an additional amount, the sum of which will not
exceed 299% of the officer's highest salary in effect under the employment
agreements at any time during the 12 months prior to the date of termination,
provided that total payments under the agreements may not exceed three times the
officers' average annual compensation or an amount that would cause certain
adverse tax consequences to the Bank and the officers under Section 280G of the
Internal Revenue Code of 1986, as amended. The agreements contain a provision
which prohibits the officers, for a period of one year, from, directly or
86
indirectly, owning, managing, operating or controlling, or participating 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 20
miles of any office of the Bank at the date of his termination. The agreements
also provide, among other things, for participation in any equitable manner in
employee benefits applicable to executive personnel. The employment agreements
may have an "anti-takeover" effect that could affect a proposed future
acquisition of control of the Company.
Pension Plan
The Bank's employees are included in the Financial Institutions
Retirement Fund, a multiple employer comprehensive pension plan (the "Pension
Plan"). This noncontributory defined benefit retirement plan covers all
full-time employees who have reached the age of 21 and have completed one year
of service. The Pension Plan currently provides for an annual benefit at normal
retirement (age 65) equal to 2% of the employee's average annual salary over the
five consecutive years of highest salary multiplied by the employee's number of
years of service. Other than administrative expenses of the Pension Plan paid by
the Bank, the Bank did not contribute to the Pension Plan during fiscal 2000.
The following table indicates the annual retirement benefit that would
be payable under the Pension Plan upon retirement at age 65 to a participant
electing to receive his retirement in the standard form of benefit, assuming
various specified levels of compensation and years of service.
- ---------------------------------------------------------------------------------------------------------
PENSION PLAN TABLE
- ---------------------------------------------------------------------------------------------------------
Years of Service
---------------------------------------------------------------------------------------
Remuneration 15 20 25 30 35 40 45
- ---------------------------------------------------------------------------------------------------------
$50,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000
75,000 25,000 30,000 37,500 45,000 52,500 60,000 67,500
100,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000
125,000 37,500 50,000 62,500 75,000 87,500 100,000 112,500
150,000 45,000 60,000 75,000 90,000 105,000 120,000 122,727
175,000 52,500 70,000 87,500 105,000 122,500 122,727 122,727
200,000 60,000 80,000 100,000 120,000 118,182 122,727 122,727
225,000 67,500 90,000 112,500 122,727 122,727 122,727 122,727
- ---------------------------------------------------------------------------------------------------------
At March 31, 2000 the estimated years of credited service of Messrs.
Weinzapfel and Brown were 45 and 5 respectively.
Director Compensation
Fees. The Company's directors are not paid fees for their service in
such capacity. Non-employee directors of the Bank are paid a fee of $1,250 per
quarter plus $625 per regular Board meeting attended. Employee members of the
Bank's Board receive $625 for each Board meeting attended. No fee is paid for
membership on the Company's or Bank's committees.
Deferred Compensation Agreements. The Bank has entered into a Director
Deferred Compensation Agreement ("DDCA") with each non-employee director. The
DDCAs are unfunded, non-qualified agreements which provide for retirement,
financial hardship, death and disability benefits for the participants or their
designated beneficiaries. Under the DDCAs, each non-employee director may make
an annual election to defer receipt of all or a portion of his monthly director
fees. When the director reaches the age specified in his DDCA (generally between
age 70 and 73), he will be entitled to receive his accrued benefit payable over
a 10-year period. The DDCAs also provide for disability and death benefits,
including a $10,000 burial expense payment. Until disbursed, the amounts
87
directed to be deferred are subject to the claims of general creditors.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
As of June 15, 2000 the Company had 4,207,100 shares of Common Stock
issued and outstanding. The following table sets forth information regarding
share ownership of: (i) those persons or entities known by management to
beneficially own more than five percent of the Common Stock, (ii) each officer
of the Company and the Bank who made in excess of $100,000 (salary and bonus)
(the "Named Officers") during the 2000 fiscal year ("fiscal 2000"), and (iii)
all directors and executive officers as a group. Information regarding share
ownership of the directors of the Company is contained under Item 10 of this
report.
Shares Percent
Beneficially of
Beneficial Owner Owned Class
- --------------------------------------------------------------------------------
Five Percent Beneficial Owners
Permanent Bancorp, Inc. 333,270 (1) 7.9%
Employee Stock Ownership Plan
101 Southeast Third Street
Evansville, IN 47708
Rahmi Soyugenc 259,646 (2) 6.2
119 LaDonna Boulevard
Evansville, IN 47711
Named Officers
Donald P. Weinzapfel 244,345 (3) 5.7
Murray J. Brown 70,704 (4) 1.7
All directors and executive officers 530,157 (5) 12.5
of the Company and the Bank
As a group (16 persons)
(1) First Bankers Trust Co., N.A., Quincy Illinois, the Trustee of the
ESOP, has sole voting and investment power over the 41,255 shares held
by the Company's Employee Stock Ownership Plan (the "ESOP") which have
not been allocated to participants, and may be deemed under applicable
regulations to beneficially own such shares. Participants under the
ESOP have the right to direct the voting of the 292,015 shares
allocated to their ESOP accounts. Under the terms of the ESOP,
unallocated shares are voted by the trustee in the same proportion that
the participants vote the allocated shares with respect to each issue
being voted upon.
(2) As reported in a Schedule 13D, dated April 4, 1995, in which Mr.
Soyugenc reported sole voting and investment power over 259,646 shares
of Common Stock.
(3) As reported on Schedule 13D, dated May 26, 1998, in which Mr.
Weinzapfel reported sole voting power over 95,559 shares, sole
dispositive power over 90,897 shares, shared voting power over 22,319
shares and shared dispositive power over 22,319 shares on a pre-split
basis.
(4) Includes 60,143 shares held directly, 5,300 shares held jointly with
Mr. Brown's spouse, and 5,261 shares subject to options granted
pursuant to the Company's stock option plan, which options are
exercisable within 60 days of June 15, 2000. Mr. Brown may be deemed to
have sole or shared voting and/or investment power with respect to the
shares reported above as beneficially owned.
88
(5) This amount includes shares held directly, as well as shares held
jointly with family members, shares held in retirement accounts, shares
allocated to the accounts of such persons under the ESOP, shares held
in a fiduciary capacity, held by certain of the group members'
families, or held by trusts of which the group member is a trustee or
substantial beneficiary, with respect to which shares the group member
may be deemed to have sole or shared voting and/or investment power.
This amount also includes an aggregate of 265,107 shares subject to
options awarded under the Company's stock option plan which have vested
and are exercisable within 60 days of the date hereof. This amount
excludes an aggregate of 163,338 shares subject to options granted
under the stock option plan which have not vested and are not
exercisable within 60 days of the date hereof.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
The Bank has followed a policy of granting loans offered generally by
the Bank, subject to applicable regulations, to officers, directors and
employees. The loans to such persons are made in the ordinary course of business
and on the same terms and conditions as those of comparable transactions
prevailing at the time, in accordance with the Bank's underwriting guidelines,
and do not involve more than the normal risk of collectibility or present other
unfavorable features, which is consistent with current federal requirements.
Loans to executive officers and directors must be approved by a majority of the
disinterested directors and loans to other officers and other employees must be
approved by two officers of the Bank who are authorized to approve such loans.
Loans to all directors, executive officers, employees and their associates
totaled approximately $778,000 at March 31, 2000, which was approximately 1.9%
of the Company's stockholders' equity at such date.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
-------------------------------------------------------
Form 8-K
-------------------------------------------------------
(a) (1) Financial Statements:
- ------------------------------
Financial statements filed on this form 10-K under Item 8 are hereby
incorporated by reference.
(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.
89
(a) (3) Exhibits:
- -----------------
Reference to Prior
Regulation Filing or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
----------- ------------------------------- -------------------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or
succession
3 (i) Articles of Incorporation *
3 (ii) Bylaws *
4 Instruments defining the rights of *
security holders, including See also Exhibit 3
indentures
9 Voting trust agreement None
10 Material contracts:
(a) 1993 Stock Option and *
Incentive Plan
(b) Recognition and Retention Plan *
(c) Employment Agreement with ****
Donald P. Weinzapfel 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 Not required
16 Letter re change in certifying Not required
accountant
18 Letter re change in accounting None
principles
19 Previously unfiled documents None
90
21 Subsidiaries of the registrant 21
22 Published report regarding matters None
submitted to vote of security holders
23 Consents of experts and counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
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)
****Filed as Exhibit 10(c) to the Company's Annual Report on Form
10-K/A under the Securities Exchange Act of 1934 on July 13, 1999.
(b) Reports on Form 8-K:
- ------------------------
On February 2, 2000 the Company filed Form 8-K containing the Agreement
of Affiliation and Merger with Old National Bancorp dated December 20, 1999 and
press release dated February 1, 2000 describing the proposed merger.
91
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 15, 2000
---------------------------
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/ Daniel L. Schenk
-------------------------------- -----------------------------
Donald P. Weinzapfel Daniel L.Schenk, Director
Chairman of the Board
and Chief Executive Officer Date: June 15, 2000
(Principal Executive Officer) ------------------
Date: June 15, 2000
-------------------
By: /s/ Daniel F. Korb By: /s/ Jack H. Kinkel
-------------------------------- ---------------------------
Daniel F. Korb, Director Jack H. Kinkel, Director
Date: June 15, 2000 Date: June 15, 2000
------------------- ------------------
By: /s/ Murray J. Brown By: /s/ James W. Vogel
------------------------------------------- ---------------------------
Murray J. Brown, President and Director James W. Vogel, Director
Date: June 15, 2000 Date: June 15, 2000
---------------------------- -----------------
By: /s/ James D. Butterfield By: /s/ Robert L. Northerner
---------------------------------- -----------------------------
James D. Butterfield, Director Robert L. Northerner, Director
Date: June 15, 2000 Date: June 15, 2000
---------------------------- ----------------
By: /s/ James A. McCarty, Jr. By: /s/ Robert A. Cern
----------------------------------- ------------------------------------
James A. McCarty, Jr., Director Robert A. Cern, Chief Financial
Date: June 15, 2000 Officer (Principal Financial and
---------------------------- Accounting Officer)
Date: June 15, 2000
-----------------
92