UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-23370
PERMANENT BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 35-1908797
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 Southeast Third Street, Evansville, Indiana 47708
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 428-6800
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price of such stock on
the NASDAQ National Market System as of June 19, 1998, was $52,609,115. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
As of June 19, 1998, there were issued and outstanding 4,118,948 shares
of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV of Form 10-K - Portions of the Annual Report to
Stockholders for the fiscal year ended March 31, 1998.
Part III of Form 10-K - Portions of the Proxy Statement for 1998 Annual
Meeting of Stockholders.
PART I
Item 1. Business
General
Permanent Bancorp, Inc. (the "Company"), a Delaware corporation, was
organized in December 1993 as a savings and loan holding company for Permanent
Federal Savings Bank ("Permanent Federal" or the "Bank") in connection with the
Bank's conversion from mutual to stock form which was completed on March 31,
1994 (the "Conversion"). Permanent Federal, the predecessor of which was
originally organized in 1885, is a federally chartered savings bank
headquartered in Evansville, Indiana. The Bank's deposits are insured up to the
maximum allowable amount by the Federal Deposit Insurance Corporation (the
"FDIC"). Through its main office and network of ten branch offices, the Company
serves Vanderburgh, Gibson, Warrick, Posey and Dubois Counties, Indiana. At
March 31, 1998, the Company had total assets of $439.1 million, deposits of
$282.9 million, and total stockholders' equity of $42.7 million (9.72% of total
assets).
Permanent Federal has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services to meet the needs of the communities it serves. The Bank attracts
deposits from the general public and uses these deposits, together with
borrowings and other funds, primarily to originate one- to four-family
residential mortgage loans as well as loans secured by multi-family and
commercial real estate, automobile and other consumer loans. To a lesser extent,
the Bank also originates a limited number of construction and commercial
business loans. The Bank also invests in mortgage-backed and other securities.
See "Lending Activities" and "Investment Activities."
Through its service corporation, Perma Service Corp., the Bank also
offers various types of insurance products and provides brokerage services. See
"Service Corporation Activities."
The executive office of the Company is located at 101 Southeast Third
Street, Evansville, Indiana 47708. Its telephone number at that address is (812)
428-6800.
Lending Activities
General. Historically, the Bank originated fixed-rate, one- to
four-family mortgage loans. In the early 1980s, however, the Bank began to also
originate, subject to market conditions, adjustable-rate mortgage ("ARM") loans
for retention in its portfolio. At March 31, 1998, 68.7% of the Bank's loan
portfolio was fixed-rate and 31.3% was adjustable-rate. The Bank's
adjustable-rate loan portfolio as a percentage of the total loan portfolio has
decreased from 42.9% at March 31, 1992 to 31.3% at March 31, 1998 as consumer
demand for fixed-rate loans increased. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Asset/Liability
Management" in the Company's Annual Report to Stockholders for the fiscal year
ended March 31, 1998, attached hereto as Exhibit 13 (the "Annual Report").
The Bank focuses its lending activities on the origination of loans
secured by first mortgages on owner-occupied, one-to four-family residences as
well as multi-family and commercial real estate
2
loans, automobile and other consumer loans. To a lesser extent, the Bank also
originates a limited number of construction and commercial business loans. At
March 31, 1998, the Bank's total loan portfolio, including commercial paper,
totaled $227.9 million, of which $158.8 million, or 69.7%, were one- to
four-family mortgage loans. At the same date, consumer loans (including indirect
and direct automobile loans) totaled $43.8 million, or 19.2%, multi-family and
commercial real estate loans totaled $8.9 million, or 3.9%, construction loans
totaled $3.4 million, or 1.5%, and there was $9.1 million of commercial paper,
representing 4.0% of the loan portfolio. Other business loans totaled $3.9
million or 1.7% of the loan portfolio.
The Bank also invests in mortgage-backed securities. At March 31, 1998,
mortgage-backed securities, net, totaled $81.5 million, or 18.6% of total
assets. See "Investment Activities -- Mortgage-Backed Securities."
Loan applications are initially underwritten and approved at various
levels of authority, depending on the type and amount of the loan, as
established by the Board of Directors. Residential loans in excess of $250,000,
commercial real estate loans in excess of $500,000 and commercial business loans
in excess of $500,000 require the approval of the Board of Directors or the
Senior Loan Committee consisting of three Bank officers and three non-employee
directors.
Prior to the enactment of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 ("FIRREA"), the aggregate amount of loans that the
Bank was permitted to make under applicable federal regulations to any one
borrower, including related entities, or the aggregate amount that the Bank
could have invested in any one real estate project, was, with certain
exceptions, limited to the lesser of 10% of the Bank's deposits or 100% of its
regulatory capital. Effective August 9, 1989, the Bank's loans-to-one-borrower
limit was reduced in accordance with FIRREA, generally to the greater of 15% of
unimpaired capital and surplus or $500,000. See "Regulation Federal Regulation
of Savings Associations." At March 31, 1998, the maximum amount which the Bank
could have lent to any one borrower and the borrower's related entities was
approximately $5.7 million. At March 31, 1998, the Bank had no loans with
aggregate outstanding balances in excess of this amount.
Management reserves the right to change its emphasis on the amount, or
type of lending in which it engages to adjust to market or other factors.
3
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.
At March 31,
-------------------------------------------------------------------------
1994 1995 1996
Amount Percent Amount Percent Amount Percent
------- ------ -------- ------ -------- ------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family........................... $127,958 66.62% $133,864 67.62% $144,155 68.85%
Multi-family.................................. 17,775 9.25 15,712 7.94 11,823 5.65
Commercial real estate........................ 6,733 3.50 5,052 2.55 4,787 2.29
Construction or development................... 1,814 0.94 2,406 1.22 2,700 1.29
------- ------ -------- ------ -------- ------
Total real estate loans................... 154,280 80.31 157,034 79.33 $163,465 78.08
------- ------ -------- ------ -------- ------
Other Loans:
Consumer Loans:
Deposit account.............................. 850 0.45 1,011 0.51 1,148 0.55
Automobile................................... 26,086 13.58 28,005 14.14 31,056 14.83
Home improvement............................. 945 0.49 1,201 0.61 1,088 0.52
Retail mobile home loans..................... 2,410 1.25 1,984 1.00 1,595 0.76
Home equity and other........................ 7,361 3.83 8,137 4.11 8,666 4.14
-------- ------ -------- ------ -------- ------
Total consumer loans...................... 37,652 19.60 40,338 20.37 43,553 20.80
Commercial business loans..................... 174 0.09 96 0.05 57 0.03
Bankers' acceptances.......................... --- --- 489 0.25 299 0.14
Commercial paper.............................. --- --- --- --- 1,997 0.95
-------- ------ -------- ------ -------- -----
Total other loans......................... 37,826 19.69 40,923 20.67 45,906 21.92
-------- ------ -------- ------ -------- -----
Total loans............................... $192,106 100.00% $197,957 100.00% $209,371 100.00%
======== ====== ======== ====== ======== ======
Less:
Loans in process.............................. 107 62 67
Deferred fees and discounts................... 649 319 156
Allowance for losses.......................... 2,110 2,093 2,238
-------- -------- ------
Total loans and loans held for sale, net...... $189,240 $195,483 $206,910
======== ======== ========
Mortgage-Backed Securities:
FNMA.......................................... $ 13,500 17.83% $ 16,684 21.61% $ 21,286 22.62%
GNMA.......................................... 38,791 51.23 35,692 46.24 31,949 33.96
FHLMC......................................... 23,428 30.94 24,812 32.14 40,852 43.42
-------- ------ -------- ------ ------ -----
Total mortgage-backed
securities............................... 75,719 100.00% 77,188 100.00% 94,087 100.00%
====== ====== ======
Net premiums and discounts..................... 308 55 20
-------- -------- -------
Net mortgage-backed securities................. $ 76,027 $ 77,243 $94,107
======== ======== =======
At March 31
--------------------------------------------------
1997 1998
Amount Percent Amount Percent
-------- ------ -------- ------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family........................... $152,655 71.82% $158,750 69.67%
Multi-family.................................. 8,041 3.78 4,092 1.80
Commercial real estate........................ 4,034 1.90 4,795 2.10
Construction or development................... 1,888 .89 3,435 1.51
-------- ------ -------- ------
Total real estate loans................... $166,618 78.39 $171,072 75.08
-------- ------ -------- ------
Other Loans:
Consumer Loans:
Deposit account.............................. 940 .44 892 0.39
Automobile................................... 31,394 14.77 31,436 13.80
Home improvement............................. 1,084 .51 839 0.37
Retail mobile home loans..................... 1,240 .58 935 0.41
Home equity and other........................ 10,269 4.83 9,718 4.26
-------- ------ -------- ------
Total consumer loans...................... 44,927 21.13 43,820 19.23
Commercial business loans..................... 52 .02 3,861 1.69
Bankers' acceptances.......................... --- --- --- ---
Commercial paper.............................. 979 .46 9,116 4.00
-------- ------ ------ -----
Total other loans......................... 45,958 21.61 56,797 24.92
-------- ------ ------ -----
Total loans............................... $212,576 100.00% $227,869 100.00%
======== ====== -------- ======
Less:
Loans in process.............................. (24) 149
Deferred fees and discounts................... 284 398
Allowance for losses.......................... 2,126 1,973
-------- -------
Total loans and loans held for sale, net...... $210,190 $225,349
======== ========
Mortgage-Backed Securities:
FNMA.......................................... $ 31,793 31.55% $25,730 31.76%
GNMA.......................................... 27,160 26.95 27,116 33.47
FHLMC......................................... 41,832 41.50 28,163 34.77
-------- ------ ------ -------
Total mortgage-backed
securities............................... 100,785 100.00% 81,009 100.00%
====== ======
Net premiums and discounts..................... 448 505
-------- ---------
Net mortgage-backed securities................. $101,233 $81,514
======== =======
4
The following table sets forth the composition of the Bank's loan
portfolio by fixed and adjustable rates at the dates indicated.
1994 1995 1996
------------------ ------------------- --------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family....................... $ 91,744 47.75% $ 96,379 48.67% $ 99,568 47.56%
Multi-family.............................. 8,792 4.58 7,029 3.55 3,271 1.56
Commercial real estate.................... 4,791 2.49 3,803 1.92 3,634 1.74
Construction or development............... 1,800 0.94 2,392 1.21 2,686 1.28
-------- ----- -------- ----- -------- -----
Total real estate loans................ 107,127 55.76 109,603 55.35 109,159 52.14
Consumer.................................. 35,246 18.35 38,343 19.37 43,405 20.73
Commercial business....................... 93 .05 74 0.04 57 0.03
Term federal funds........................ --- --- --- --- --- ---
Bankers' acceptances...................... --- --- 489 0.25 299 0.14
Commercial paper.......................... --- --- --- --- 1,997 0.95
-------- ----- -------- ----- -------- -----
Total fixed-rate loans................. 142,466 74.16 148,509 75.01 154,917 73.99
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... 36,214 18.85 37,485 18.94 44,588 21.30
Multi-family.............................. 8,983 4.68 8,683 4.39 8,552 4.08
Commercial real estate.................... 1,942 1.01 1,249 0.63 1,153 0.55
Construction or development............... 14 0.01 14 0.01 13 0.01
-------- ----- -------- ----- -------- -----
Total real estate loans................ 47,153 24.55 43,431 23.97 54,306 25.94
Consumer................................... 2,406 1.25 1,995 1.01 148 0.07
Commercial business........................ 81 .04 22 0.01 --- ---
-------- ----- -------- ----- -------- -----
Total adjustable-rate
loans................................. 49,640 25.84 49,448 24.99 54,454 26.01
-------- ----- -------- ----- -------- -----
Total loans............................ 192,106 100.00% 197,957 100.00% 209,371 100.00%
Less:
Loans in process........................... 107 62 67
Deferred fees and discounts................ 649 319 156
Allowance for loan losses.................. 2,110 2,093 2,238
-------- -------- --------
Total loans and loans held for sale, net $189,240 $195,483 $206,910
======== ======== ========
1997 1998
------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ -------
Fixed-Rate Loans:
Real estate:
One- to four-family....................... $ 94,842 44.45% $ 95,432 41.88%
Multi-family.............................. 2,687 1.26 2,346 1.03
Commercial real estate.................... 3,357 1.58 3,386 1.49
Construction or development............... 1,855 .87 3,423 1.50
-------- ----- -------- -----
Total real estate loans................ 102,741 48.16 104,587 45.90
Consumer.................................. 44,450 20.91 42,324 18.57
Commercial business....................... 52 .02 581 0.25
Term federal funds........................ --- --- --- ---
Bankers' acceptances...................... --- --- --- ---
Commercial paper.......................... 979 .46 9,116 4.00
-------- ----- -------- -----
Total fixed-rate loans................. 148,222 69.55 156,608 68.72
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... 57,813 27.36 63,318 27.79
Multi-family.............................. 5,354 2.52 1,746 0.77
Commercial real estate.................... 677 .32 1,409 0.62
Construction or development............... 33 .02 12 0.00
-------- ----- -------- -----
Total real estate loans................ 63,877 30.22 66,485 29.18
Consumer................................... 477 .23 1,496 0.66
Commercial business........................ --- --- 3,280 1.44
-------- ----- -------- -----
Total adjustable-rate
loans................................. 64,354 30.45 71,261 31.28
-------- ----- -------- -----
Total loans............................ 212,576 100.00% 227,869 100.00%
Less:
Loans in process........................... (24) 149
Deferred fees and discounts................ 284 398
Allowance for loan losses.................. 2,126 1,973
-------- --------
Total loans and loans held for sale, net $210,190 $225,349
======== ========
5
The following table sets forth the maturities of the Bank's loan
portfolio (excluding commercial paper) at March 31, 1998. Loans that have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The table reflects scheduled principal
amortization, but does not reflect possible prepayments or enforcement of
due-on-sale clauses.
Real Estate
----------------------------------------------------------------
Multi-family
and
Commercial Construction
One- to four-family Real Estate or Development Consumer
-------------------- -------------------- ----------------- -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During Years
Ending March 31,
1999(1) $20,333 8.16% $ 252 10.49% $3,401 8.69% $ 4,094 9.47%
2000 to 2003 9,225 7.57 2,352 9.22 22 8.45 34,463 8.87
2004 to 2008 61,085 7.62 1,595 9.10 12 8.13 4,194 10.26
2009 to 2018 66,029 7.37 4,688 8.04 --- --- 1,058 11.23
2018 and following 2,078 7.62 --- --- --- --- 11 9.50
-------- ------ ------ -------
Total $158,750 $8,887 $3,435 $43,820
======== ====== ====== =======
Commercial
Business Total
------------------ ------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
Due During Years
Ending March 31,
1999(1) $ 405 9.62% $ 28,485 8.46%
2000 to 2003 3,412 8.62 49,474 8.62
2004 to 2008 44 11.25 66,930 7.82
2009 to 2018 --- --- 71,775 7.47
2018 and following --- --- 2,089 7.63
------ --------
Total $3,861 $218,753
====== ========
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
6
At March 31, 1998, the total amount of loans due after March 31, 1998
which had fixed interest rates was $156.6 million, while the total amount of
loans due after such date which had floating or adjustable interest rates was
$71.3 million.
One- to Four-Family Residential Mortgage Lending. The Bank's primary
lending activity consists of the origination of one- to four-family residential
mortgage loans secured primarily by property located in the Bank's primary
market area. At March 31, 1998, the Bank had $158.8 million, or 69.7% of its
loan portfolio invested in these loans.
The Bank presently offers fixed-rate conventional mortgage loans,
Federal Housing Administration ("FHA"), Veterans Administration ("VA") loans,
and ARM loans. During fiscal 1995, the Bank introduced a 10-year adjustable-rate
loan which features an initial 10-year fixed-rate that converts to a one-year
adjustable-rate loan upon expiration of the initial fixed-rate period. The
Bank's origination of fixed-rate mortgage loans as compared to ARM loans is
determined on an on-going basis and is based on changes in market interest rates
and consumer preference. Many borrowers have selected shorter-term 15-year
fixed-rate mortgages or ten-year adjustable rate loans recently. Interest rates
charged on fixed-rate loans are competitively priced according to local market
conditions. The Bank's current policy is to sell all newly originated fixed-rate
loans with terms of more than 20 years, as well as ARM loans converted to a
fixed rate with a remaining term to maturity in excess of 20 years, and all FHA
and VA loans. See "- Originations, Purchases, Sales and Servicing of Loans and
Mortgage-Backed Securities."
The Bank currently makes adjustable-rate, one- to four-family
residential mortgage loans in amounts of up to 100% of the appraised value or
selling price of the security property, whichever is less. For loans with
loan-to-value ratios of greater than 80%, the Bank typically requires private
mortgage insurance to reduce the Bank's exposure to 75% of the appraised value
or selling price of the security property. Adjustable-rate loans generally have
interest rate adjustment limitations consisting of 2% annual adjustments and 6%
lifetime adjustments, and are generally indexed to the weekly average yield of
U. S. Treasury securities adjusted to a constant maturity of one year.
The retention of ARM loans in the Bank's loan portfolio helps the Bank
to manage its exposure to changes in the interest rates. There are, however,
unquantifiable credit risks relating to such loans resulting from the potential
of increased costs due to changed rates to be paid by the customer. It is
possible that during periods of rising interest rates, the risk of default on
ARM loans may increase as a result of repricing and the increased costs to the
borrower. Furthermore, the ARM loans originated by the Bank generally provide,
as a marketing incentive, for initial rates of interest below the rates which
would apply were the adjustment index used for pricing initially
("discounting"). These loans are subject to increased risk of default or
delinquency due to this discounting. In addition, although ARM loans allow the
Bank to increase the sensitivity of its asset base to changes in interest rates,
the extent of this interest rate sensitivity is limited by the periodic and
lifetime interest rate adjustment limits, and by the ability of borrowers to
refinance their loans if they perceive that the interest rate they are paying is
too high. Accordingly, there can be no
7
assurance that yields on ARM loans will be sufficient to offset increases in the
Bank's cost of funds.
In underwriting residential real estate loans, the Bank evaluates both
the borrower's ability to make monthly payments, employment history, credit
history and the value of the property securing the loan. Potential borrowers are
qualified for fixed-rate loans based upon the initial or stated rate of the
loan. Borrowers on one year adjustable-rate loans are currently qualified at an
8% rate or the fully-indexed rate after one year, whichever is higher. Borrowers
on other adjustable-rate loans are qualified at the note rate.
An appraisal of the security property from Board-approved independent
fee appraisers is obtained prior to mortgage loan approvals. In connection with
origination of residential real estate loans, the Bank currently requires that
the borrower obtain title insurance, and fire, flood (if applicable) and
casualty insurance to protect the Bank's interest.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid. The
Bank on occasion has enforced due-on-sale clauses in its mortgage contracts.
From 1991 to 1993, Permanent Federal increased its investment in
mortgage-backed securities, while in fiscal 1994 and 1995, the amount of such
securities remained relatively constant and again increased during fiscal 1996
and 1997. Mortgage-backed securities decreased $19.7 million in 1998. Although
such securities are generally held for investment, they can serve as collateral
for borrowings. For information regarding the carrying and market values of
Permanent Federal's mortgage-backed securities portfolio, see Note 3 of the
Notes to Consolidated Financial Statements in the Annual Report. See also
"Investment Activities -Mortgage-Backed Securities."
Consumer Lending. The Bank considers consumer lending an integral
component of its lending operations. Consumer loans generally have shorter terms
to maturity (thus reducing Permanent Federal's exposure to changes in interest
rates) and historically have carried higher rates of interest than do one- to
four-family residential mortgage loans. In addition, management believes that
the offering of consumer loan products helps to expand and create stronger ties
to its existing customer base by increasing the number of customer relationships
and providing cross-marketing opportunities. At March 31, 1998, the Bank's
consumer loan portfolio totaled $43.8 million, or 19.2% of its loan portfolio.
The chief component of such loans consists of indirect and direct automobile
paper, accounting for $31.4 million, or 71.7%, of the consumer loan portfolio at
March 31, 1998. Under applicable federal law, the Bank is authorized to invest
up to 35% of its assets in consumer loans.
Permanent Federal offers a variety of secured consumer loans, including
automobile, boat, home equity, home improvement, mobile home loans, loans
secured by savings deposits and other consumer collateral. The Bank also offers
a limited amount of unsecured loans. The Bank generally originates consumer
loans in its market area. Although it has not done so in recent years, the Bank
may also purchase consumer loans, generally within its market area. Consumer
loan terms vary according to the type of collateral and length of contract. The
Bank's consumer loans generally have fixed rates of interest.
8
The Bank is actively engaged in indirect dealer financing of
automobiles. Such indirect dealer loans are originated through automobile
dealers located in, or in counties contiguous to, the Bank's market area and
underwritten by the Bank's lending staff in accordance with the Bank's general
standards for underwriting consumer loans. These loans are originated at fixed
interest rates and are typically for terms of up to five years. At March 31,
1998, indirect dealer loans totaled $22.4 million, or 51.1%, of the Bank's
consumer loan portfolio.
At March 31, 1998, $10.1 million of the Bank's consumer loans consisted
of home equity loans, including home equity lines of credit. The home equity
loans are typically collateralized by second mortgages on owner-occupied,
single-family mortgage loans.
From 1987 to 1990, the Bank also purchased loans secured by mobile
homes. Such loans were originated through a subsidiary of the Bank in
association with two other savings institutions. The subsidiary created pools of
mobile home loans it originated, and Permanent Federal and the other
participating lenders each purchased a one-third interest in the pools. The
Bank's mobile home loan portfolio as of March 31, 1998 was $935,000, or 0.4% of
the Bank's loan portfolio. Mobile home loans are typically made at higher yields
and for a shorter maturity than one- to four-family residential mortgage loans.
The Bank's mobile home loans were typically made for terms of up to 15 years and
all were one-year ARMs. At March 31, 1998, $18,300, or 2.0%, of the Bank's
mobile home loan portfolio was non-performing.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. In addition, the stability of the applicant's monthly income from
primary employment is considered during the underwriting process. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured,
such as checking account overdraft privilege loans, or are secured by rapidly
depreciable assets, such as automobiles, mobile homes and recreational vehicles.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans.
Multi-Family and Commercial Real Estate Lending. The Bank has
originated multi-family and commercial real estate loans in its lending area,
and has purchased whole loan and participation interests in loans from other
financial institutions in Indiana, and to a lesser extent, in Kentucky and
Tennessee. At March 31, 1998, the Bank had multi-family and commercial real
estate loans totaling $8.9 million, representing 3.9% of its loan portfolio.
9
The majority of the Bank's multi-family and commercial real estate
loans are secured by apartment buildings, as well as other types of property,
including nursing homes, office buildings and shopping centers. See "-- Cardinal
Industries, Inc." and "Asset Quality."
The table below sets forth by type of security property the Bank's
multi-family and commercial real estate (including land) loans at March 31,
1998.
Amount of
Outstanding Non-Performing
Number of Principal or Of Concern
Loans Balance Loans
----- ------- -----
(Dollars in Thousands)
Apartment buildings.............................. 12 $4,172 $ ---
Church........................................... 1 250 ---
Small business facilities and office
buildings...................................... 21 3,948 ---
Shopping centers................................. 1 517 ---
--- ------- -------
Total commercial and multi-family
real estate loans............................. 35 $ 8,887 $ ---
=== ======= =======
At March 31, 1998, the Bank had a total of two multi-family and
commercial real estate loans with outstanding principal balances in excess of
$1.0 million. Each of these loans was performing in accordance with its terms at
March 31, 1998.
Multi-family and commercial real estate loans originated by the Bank
generally have terms ranging from ten to 20 years and up to 30 year amortization
schedules. Rates on such loans generally either (i) adjust (subject, in some
cases, to specified interest rate caps) at one, three or five year intervals to
specified spreads over an index, (ii) float (subject, in some cases, to
specified interest rate caps) with changes in a specified prime rate or (iii)
carry fixed rates. Under the Bank's current loan policy, multi-family and
commercial real estate loans (other than loans to facilitate) are written in
amounts of up to 80% of the appraised value of the properties.
Appraisals on properties securing multi-family and commercial real
estate property loans originated by the Bank are performed by an independent
appraiser approved by the Bank prior to the time the loan is made. All
appraisals on multi-family and commercial real estate loans are reviewed by the
Bank's management. In addition, the Bank's underwriting procedures generally
require verification of the borrower's credit history, income and financial
statements, banking relationships and income projections for the property.
Historically, personal guarantees were not generally obtained for the Bank's
multi-family and commercial real estate loans. While the Bank continues to
monitor multi-family and commercial real estate loans on a regular basis after
origination, updated appraisals are not normally obtained after closing unless
the Bank believes that there are questions regarding the progress of the loan or
the value of the collateral.
10
Multi-family and commercial real estate loans generally present a
higher level of credit risk than loans secured by one- to four-family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effect of general economic conditions on income-producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family and commercial real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced (for example, if
leases are not obtained or renewed, or a bankruptcy court modifies a lease term,
or a major tenant is unable to fulfill its lease obligations), the borrower's
ability to repay the loan may be impaired.
Cardinal Industries, Inc. At March 31, 1997, the Bank had a group of
three loans totaling approximately $3.6 million in net book value to separate
syndicated limited partnerships on three apartment complexes located in Indiana.
The general partner of these partnerships was Cardinal Industries, Inc.
("Cardinal") of Columbus, Ohio, which filed for bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code in 1989. As a result of Cardinal's financial
difficulties, the terms of two of the three loans were restructured as of July
1, 1991. For accounting purposes, the two modified loans were considered
"non-performing" assets, including one which was classified as a "troubled debt
restructuring" at March 31, 1997. The Bank was repaid in full on these loans
during 1998.
Construction or Development Lending. The Bank makes a limited number of
construction loans to individuals for the construction of their residences. The
Bank generally requires that the customer have a general contractor. The Bank
also makes loans to builders for presold and speculative single-family
construction purposes and a limited number of multi-family and commercial
construction loans. At March 31, 1998, the Bank's construction loan portfolio
totaled $3.4 million (including a $262,000 loan on a low-income housing
project), or 1.5% of its total loan portfolio. As of that date, all of these
loans were secured by property located within the Bank's market area.
Construction loan terms to individuals are generally made under the ARM
program, although at a rate higher than that for a permanent ARM loan, with
provisions for converting to a fixed-rate loan upon completion of the
construction. Fixed-rate loans for construction purposes are limited to a
maximum term of 15 years. During the construction phase, the borrower pays
interest only. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential loans
except that the record of the builder is also considered.
Construction loans to builders are written for a term of 18 months at a
fixed rate of interest. Construction loans are obtained primarily through
continued business from builders who have previously borrowed from the Bank, as
well as referrals from existing customers. The application process includes a
submission of accurate plans, specifications and costs of the project to be
constructed. These items are also used as a basis for determining the appraised
value of the subject property. Loans are based on the lesser of the current
appraised value or the cost of construction (land plus building). From time to
time, the Bank has lent funds for the development and subdivision of lots,
although the Bank had no such loans in its portfolio at March 31, 1998.
Commercial Business Lending. Federally chartered savings institutions,
such as Permanent Federal, are authorized to make secured or unsecured loans and
issue letters of credit for commercial,
11
corporate, business and agricultural purposes and to engage in commercial
leasing activities, up to a maximum of 10% of total assets.
At March 31, 1998, Permanent Federal had $3.9 million in commercial
business loans outstanding (representing 1.7% of the Bank's total loan
portfolio). At March 31, 1998, Permanent Federal had $53,000 of standby letters
of credit outstanding.
Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed
Securities
The Bank originates real estate loans through marketing efforts, the
Bank's customer base, walk-in customers and referrals from realtors and
builders. The Bank originates both adjustable-rate and fixed-rate loans. Its
ability to originate loans is dependent upon the relative demand for fixed-rate
or ARM loans in the origination market, which is affected by the term structure
(short-term compared to long-term) of interest rates, as well as the current and
expected future level of interest rates and competition.
During fiscal 1998, the Bank originated a total of $76.2 million in
loans, of which total $49.5 million were fixed-rate and $26.7 million were
adjustable-rate. Of the fixed-rate loans originated during the year, $22.7
million were one- to four-family real estate loans, $21.6 million were consumer
loans, $0.6 million were commercial loans, and $2.2 million were construction
loans. Of the adjustable-rate loans originated during the year, $16.7 million
were one- to four-family real estate loans, $0.8 million were commercial real
estate loans, $3.1 million were consumer loans, and $1.5 million were
construction loans.
The Bank's current policy is to sell all fixed-rate conventional loans
that are originated or converted with terms of more than 20 years. Likewise, all
FHA and VA loans are sold, irrespective of term. In contrast, all ARM loans,
regardless of the term, are retained and other loans with terms of 20 years or
less are also retained in the Bank's portfolio. Servicing is retained on all
loan sales, except for FHA and VA mortgage loans. During fiscal 1996, 1997 and
1998, the Bank sold $3.3 million, $1.0 million and $5.1 million of loans,
respectively.
With respect to the loans that the Bank sells, it is the policy of the
Bank to sell current production of such loans as quickly as the loans are
originated, unless it is determined to temporarily hold these loans until more
favorable rates are available. However, it is the Bank's policy that in no event
shall a loan continue to be held for sale if the price to be received on that
loan drops below net 98 (98 cents on the dollar). In addition, the Bank's policy
provides that any loan held for sale which bears a rate too high to sell in the
secondary market without having to accept a discounted premium will continue to
be held until such time as market conditions allow the loan to be sold without a
premium discount.
Government loans are committed for sale with a private investor the
same day an application is received. The requirements for delivery are on a
"best effort" basis, providing that if for any reason the loan does not close,
there is no financial exposure to the Bank.
12
The Board of Directors receives a monthly report identifying the number
and dollar amount of mortgage loans not sold which present any potential
interest rate risk exposure to the Bank. The report further details the current
secondary market buy rates and the estimated gain or loss at such rates. The
Bank attempts to limit any interest rate risk exposure created by commitments to
make or sell loans by limiting the number of days between the commitment and
closing, charging fees for commitments and managing the amount of its uncovered
commitments outstanding at any one time.
The Bank occasionally purchases loans and loan participations for one-
to four-family, multi-family and commercial real estate loans. Such loans had a
carrying value of approximately $8.5 million, $7.1 million, and $5.5 million at
March 31, 1996, 1997 and 1998, respectively.
During the past three fiscal years, the Bank has purchased
mortgage-backed securities in order to supplement loan demand. In fiscal 1996,
the Bank purchased $30.2 million of mortgage-backed securities and purchased
$34.5 million and $18.5 million of such securities in fiscal 1997 and 1998,
respectively. The mortgage-backed securities purchased generally had fixed rates
and maturities of up to 15 years and adjustable rates up to 30 years. See
"Investment Activities."
The Bank had commitments to make loans, including participations, of
approximately $4.0 million, $1.6 million and $4.9 million (excluding undisbursed
portions of loans in process) at March 31, 1996, 1997 and 1998, respectively. In
addition, the Bank had approximately $0, $104,000 and $100,000 in commitments to
sell loans at March 31, 1996, 1997 and 1998, respectively.
The amount of loans serviced by the Bank for others totaled $37.9
million, $34.3 million and $32.5 million at March 31, 1996, 1997 and 1998,
respectively.
The Bank generally earns servicing fees of 25 basis points for
servicing loans for others. For the years ended March 31, 1996, 1997 and 1998
such fees amounted to approximately $104,000, $101,000, and $84,000
respectively.
13
The following table sets forth the loan origination, purchase and
repayment activities of the Bank for the periods indicated.
1996 1997 1998
------ ------ -----
Originations by type:
Adjustable rate:
Real estate - one- to four-family....................... $12,373 $20,717 $16,659
- multi-family.............................. --- --- ---
- commercial real estate.................... --- --- 798
- construction.............................. 2,147 3,865 1,466
Non-real estate - consumer.............................. --- 875 3,190
-commercial business.................... 419 --- 4,574
----- ------- -------
Total adjustable-rate............................ 14,939 25,457 26,687
Fixed rate:
Real estate - one- to four-family....................... $23,698 $11,303 $22,714
- multi-family.............................. 315 --- ---
- commercial real estate.................... --- --- 2,346
- construction.............................. 341 2,205 2,168
Non-real estate - consumer ............................. 25,312 23,772 21,639
-commercial business.................... 19 16 618
------- ------- -----------
Total fixed-rate................................. 49,685 37,296 49,485
Total loans originated........................... 64,624 62,753 76,172
Purchases:
Real estate - one- to four-family....................... $ --- $ --- $ ---
- multi-family.............................. --- --- ---
- commercial real estate.................... --- --- ---
- construction.............................. --- --- ---
Non-real estate - consumer.............................. --- --- ---
- commercial business....................... --- --- ---
- commercial paper.......................... 1,974 17,741 17,257
- bankers' acceptances...................... 3,286 --- ---
------- --------------------
Total loans purchased............................ 5,260 17,741 17,257
Mortgage-backed securities-fixed rate.................... 22,278 6,914 4,960
- adjustable-rate........................... 7,898 27,577 13,525
------- ------- ---------
Total purchases.................................. 35,436 52,232 35,742
------- ------- ---------
Sales and Principal Repayments:
Sales:
Real estate - adjustable-rate one- to four-family......... $ --- $ --- $ ---
- fixed-rate one- to four-family....................... 3,250 962 5,078
- multi-family.............................. --- --- ---
- commercial real estate.................... --- --- ---
- construction.............................. --- --- ---
Non-real estate - consumer.............................. --- --- ---
- commercial business............................. --- --- ---
------- ------- ------
Total loans sold................................. 3,250 962 5,078
Mortgage-backed securities.............................. 743 11,143 15,083
------- ------- ---------
Total sales...................................... 3,993 12,105 20,161
Principal repayments...................................... 67,613 91,807 97,399
------- ------- ---------
Total reductions................................. 71,606 103,912 117,560
Increase (decrease) in other items, net................... --- --- ---
------- ------- -------
Net increase (decrease).......................... $28,454 $11,073 $ (5,646)
======= ======= =========
14
Asset Quality
Loan Monitoring Procedures. When a borrower fails to make a required
payment on a loan, the Bank attempts to cause the delinquency to be cured by
contacting the borrower. In the case of loans secured by real estate, a late
notice is sent nine days after the scheduled payment date and a second notice is
sent after 16 days. In the case of consumer loans, a late notice is sent five
days after the scheduled payment date and a second notice is sent after ten
days. If the delinquency is not cured by this time, contact with the borrower is
made by phone. Additional written and verbal contacts or meetings with the
borrower are made to the extent necessary. With respect to mortgage loans, if
the delinquency is not cured by the 90th day, a 30-day default letter is sent
and, once that period lapses, appropriate action to foreclose on the property is
initiated. Interest income on loans at this point is reduced by the full amount
of accrued and uncollected interest. If foreclosed, the property is sold at a
sheriff's sale and typically is purchased by the Bank. Delinquent consumer loans
are handled in a similar manner. If these efforts fail to bring the loan
current, appropriate action may be taken to collect any loan payment that
remains delinquent. The Bank's procedures for repossession and sale of consumer
collateral are subject to various requirements under Indiana consumer protection
laws.
Real estate acquired by Permanent Federal as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired, it is recorded at the lower of cost or
estimated fair value at the date of acquisition, and any write-down resulting
therefrom is charged against the allowance for loan losses. Upon acquisition,
all costs incurred in maintaining the property are expensed. However, costs
relating to the development and improvement of the property are capitalized to
the extent of net realizable value.
Prior to the consummation of commercial real estate loans, financial
information on the project and its principals are reviewed, and appraisals are
obtained and reviewed. Subsequent balance sheets and operating statements are
obtained and reviewed on at least an annual basis. On loans that indicate
potential weaknesses, more frequent reviews are made.
A committee of senior officers of the Bank periodically reviews large
loans (generally, those with balances in excess of $250,000). The committee
examines the borrower's financial statements and position, prior loan
performance and any industry or economic trends which would potentially affect
the borrower's operations or collateral values.
Appraisals are obtained on properties that are transferred to real
estate owned. The Bank performs periodic fair value computations using
methodology consistent with that of an appraiser. Appraisals are assigned only
to qualified appraisers located within or familiar with the location of the
subject property. Net realizable value calculations are performed on all
properties in either real estate owned or loans classified as impaired. The
result of these calculations may indicate a writedown of the asset or specific
reserve allowance.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
15
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets which do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are required to be designated "special mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews problem loans and real estate acquired through foreclosure in its
portfolio to determine whether such assets require classification in accordance
with applicable regulations. Classified assets of the Bank at March 31, 1998,
(without deduction for specific valuation allowances of $50,000) all of which
are included in the table of non-performing assets.
At March 31,
-----------------------------
1996 1997 1998
(In Thousands)
Substandard (including real
estate owned)................................... $ 4,928 $2,965 $1,372
Doubtful 91 87 141
Loss -- -- --
------ ------ ------
Total classified assets
(including real estate
owned)..................................... $ 5,019 $3,052 $1,513
======= ====== ======
Special mention.................................. $ 6,088 $4,587 $2,753
------- ------ ------
Total classified assets
(including real estate
owned) and special
mention.................................... $11,107 $7,639 $4,266
======= ====== ======
The specific reserves established with respect to classified assets are
included in the allowance for loan losses.
16
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,
----------------------------------------------------------------------------------------------------
1994 1995 1996 1997
------ ------ ------ ------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in Each in Each in Each in Each
Category Category Category Category
to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
One- to four-
family...................... $ 1 67.0% $ 1 68.2% $ 90 69.4% $ 90 71.7%
Multi-family................. 493 9.4 210 7.9 166 5.5 183 3.8
Commercial real
estate...................... --- 3.4 --- 2.9 --- 2.4 --- 1.9
Construction or
development................. --- 0.9 --- 1.2 --- 1.3 --- 1.0
Consumer..................... 4 19.2 18 19.7 50 20.3 68 21.1
Commercial business.......... 162 0.1 107 0.1 --- --- --- ---
Bankers' acceptances......... --- --- --- --- --- 0.1 --- ---
Commercial paper............. --- --- --- --- --- 1.0 --- .5
Unallocated
Consumer................... 362 N/A 382 N/A 456 N/A 454 N/A
One- to four-family........ 929 N/A 630 N/A 647 N/A 876 N/A
Multi-family and
commercial
real estate.............. 146 N/A 734 N/A 829 N/A 455 N/A
Construction or
development.............. 13 N/A 11 N/A --- N/A --- N/A
------ ----- ------ ----- -------- ----- ------ -----
Total................... $2,110 100.0% $2,093 100.0% $2,238 100.0% $2,126 100.00%
====== ===== ====== ===== ====== ===== ====== ======
At March 31,
-----------------------
1998
-----
Percent
of Loans
in Each
Category
to Total
Amount Loans
------ -----
One- to four-
family...................... $ --- 69.7%
Multi-family................. --- 1.8
Commercial real
estate...................... --- 2.1
Construction or
development................. --- 1.5
Consumer..................... 50 19.2
Commercial business.......... --- 1.7
Bankers' acceptances......... --- ----
Commercial paper............. --- 4.0
Unallocated
Consumer................... 520 N/A
One- to four-family........ 435 N/A
Multi-family and
commercial
real estate.............. 968 N/A
Construction or
development.............. --- N/A
------ -----
Total................... $1,973 100.00%
====== ======
17
The distribution of the allowance for loan losses is consistent with
the Bank's accounting policy. See also "Lending Activities - Multi-Family and
Commercial Real Estate Lending."
Additional information concerning the quality of the Company's assets
and allowance for loan losses is incorporated herein by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the Annual Report.
Investment Activities
General. Permanent Federal must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. At March 31, 1998, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 65.6%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's liquidity
needs, asset/liability management policies, investment quality and marketability
and performance objectives.
Securities. At March 31, 1998, Permanent Federal's securities totaled
$105.6 million, or 24.1% of total assets. As of such date, the Bank also had a
$5.5 million investment in FHLB stock, satisfying its requirement for membership
in the FHLB of Indianapolis. It is the Bank's general policy to purchase
securities which are U.S. Government securities or federal agency obligations or
other issues that are rated investment grade. At March 31, 1998, the average
term to maturity or repricing of the securities portfolio was 6.9 years.
OTS and accounting guidelines regarding investment portfolio accounting
require institutions to categorize securities and certain other assets as "held
to maturity", "available for sale" or "trading." The portion of the investment
portfolio which is held with the intent to hold to maturity is accounted for on
an amortized cost basis. Assets which are categorized as available for sale are
carried at estimated fair value. At March 31, 1998, the Company had $105.6
million in securities "available for sale" and no securities identified as
"trading." The securities available for sale at March 31, 1998
18
had net unrealized gains of $89,000. At March 31, 1997, the Bank had $85.2
million in securities available for sale and no securities identified as
"trading." The securities available for sale at March 31, 1997 had unrealized
losses of $1,840,000.
The following table sets forth the composition of the Bank's securities
portfolio (including securities held to maturity and available for sale) at the
dates indicated.
At March 31,
---------------------------------------------------------------------------------
1996 1997 1998
---------------------- ----------------------- ----------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
(Dollars in Thousands)
Securities:
U.S. government securities $ 17,029 22.2% $ 7,009 7.8% $ 4,033 3.6%
Federal agency obligations 54,648 71.20 78,171 86.5 100,972 90.9
Municipal bonds and other 1,519 2.00 25 -- 614 0.6
-------- ------ -------- ------ -------- ------
Subtotal 73,196 95.40 85,205 94.3 105,619 95.1
FHLB stock 3,504 4.60 5,193 5.7 5,466 4.9
-------- ------ -------- ------ -------- ------
Total securities and FHLB
stock $ 76,700 100.00% $ 90,398 100.00% $111,085 100.00%
======== ====== ======== ======
Average remaining life of
securities, excluding FHLB stock 5.7 years 7.0 years 7.0 years
Other interest-earning assets:
Interest-bearing deposits
with banks $ 16 100.00% $ 3,154 100.00% $ 1,808 100.00%
======== ====== ======== ====== ======== ======
Average remaining life or
term to repricing of
securities and other interest-
earning assets, excluding FHLB
stock 5.7 years 6.7 years 6.9 years
The following table sets forth as of March 31, 1998 the composition and
maturities of the securities portfolio, excluding FHLB stock.
At March 31, 1998
------------------------------------------------------------------------
Less Than 1 to 5 Over 5 Total Investment
1 Year Years Years Securities
----------- ---------- ---------- ---------------------------
Fair Value Fair Value Fair Value Fair Value Amortized Cost
---------- ---------- ---------- ---------- --------------
(Dollars in Thousands)
U.S. government securities.......... $ --- $ 4,033 $ --- $ 4,033 $ 3,995
Federal agency obligations......... --- 23,863 77,109 100,972 101,029
State and local government
obligations and other............ 614 --- --- 614 506
---------- -------- -------- -------- --------
Total investment securities......... $ 614 $ 27,896 $ 77,109 $105,619 $105,530
========== ======== ======== ======== ========
Weighted average yield.............. 2.02 6.57 6.78 6.70 6.70
At March 31, 1998 the Bank's securities portfolio did not contain
securities of any issuer with an aggregate book value in excess of 10% of the
Bank's retained earnings, excluding securities issued by the United States
Government or its agencies.
The Bank's securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors. Investments may be made by
authorized Bank officers within
19
specified limits. At March 31, 1998, all of the Bank's securities are classified
as available for sale. See also Note 2 of the Notes to Consolidated Financial
Statements in the Annual Report.
Mortgage-Backed Securities. The Bank has a portfolio of mortgage-backed
securities and has utilized such investments to complement its mortgage lending
activities. See "Lending Activities - One- to Four-Family Residential Mortgage
Lending." At March 31, 1998, the Bank's mortgage-backed securities totaled $81.5
million. At such date, the mortgage-backed securities portfolio consisted
entirely of securities backed by loans insured or guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"). At
March 31, 1998, the Bank's portfolio consisted of $18.9 million in
mortgage-backed securities held to maturity and $62.6 million available for
sale. At such date, the portfolio had a weighted average interest rate of 6.52%.
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities held to maturity and available for sale at March 31,
1998.
At
March 31
1998
Less than -----------
6 Months 1 to 3 to 5 5 to 10 Over 10 Balance
to 1 Year 3 Years Years Years Years Outstanding
--------- ------- ----- ----- ----- -----------
(Dollars in Thousands)
Federal Home Loan
Mortgage Corporation $2,107 $368 $3,035 $328 $22,496 $28,334
Federal National
Mortgage Association --- --- --- 1,501 24,427 25,928
Government National
Mortgage Association --- --- --- --- 27,252 27,252
------ ---- ------ ---- ------- -------
Total $2,107 $368 $3,035 $1,829 $74,175 $81,514
====== ==== ====== ====== ======= =======
For information regarding the carrying and market values of Permanent
Federal's mortgage-backed securities portfolio, see Note 3 of the Notes to
Consolidated Financial Statements in the Annual Report.
Under the OTS risk-based capital requirements, GNMA mortgage-backed
securities have a zero percent risk weighting and FNMA, FHLMC and AA-rated
mortgage-backed securities have a 20% risk weighting, in contrast to the 50%
risk weighting carried by one- to four-family performing residential mortgage
loans.
20
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization
and repayment of loan principal and interest (including mortgage-backed
securities), maturities of securities, mortgage-backed securities and short-term
investments, FHLB advances and funds provided from operations.
Borrowings are used to compensate for seasonal reductions in deposits
or deposit inflows at less than projected levels, to purchase investments
(including mortgage-backed securities) and to support lending activities. At
March 31, 1998, the Bank's borrowings consisted of FHLB advances totaling $99.4
million. See "- Borrowings" and Note 7 of the Notes to Consolidated Financial
Statements in the Annual Report.
Deposits. Permanent Federal offers a variety of deposit accounts having
a wide range of interest rates and terms. The Bank's deposits consist of
passbook accounts, NOW, money market and other checking accounts and certificate
accounts. The Bank relies primarily on advertising, competitive pricing policies
and customer service to attract and retain these deposits. Permanent Federal
solicits deposits from its market area only and does not solicit or accept
brokered deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. The ability of the Bank
to attract and maintain certificates of deposit, and the rates paid on these
deposits, has been and will continue to be significantly affected by market
conditions. The Bank believes that the recent trends in deposit migration
represents an industry phenomenon and are not unique to the Bank. The Bank will
continue to remain rate competitive on maturing deposits and to utilize FHLB
advances as a funding alternative when necessary. During fiscal years 1996, 1997
and 1998, the Bank experienced a net inflow. The FHLB has recently introduced
several new advance programs that offer variable rates or amortizing principal
amounts specifically tied to funding one- to four-family residential loans.
These advances have proven to be a less costly funding source after
consideration of the cost of deposit insurance associated with traditional
deposits.
21
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,
-------------------------------------------------------------------------------
1996 1997 1998
--------------------- --------------------- -----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(In Thousands)
Transactions and Savings Deposits:
Commercial Demand $ 994 .35% $ 902 0.32% $ 1,755 0.62%
Passbook Accounts (2.75-5.59%) 54,796 19.45 54,245 19.20 52,051 18.27
NOW Accounts (2.00-2.60%) 25,371 9.00 24,046 8.51 22,468 7.89
Money Market Accounts (2.75-3.00%) 11,199 3.97 11,542 4.08 11,542 4.05
------- --- ------- ---- ------- ----
Total Non-Certificates 92,360 32.77 90,736 32.11 87,816 30.83
------- --- ------- ---- ------- ----
Certificates:
0.00 - 3.49% 389 .14 158 0.06 66 0.02
3.50 - 5.49% 85,124 30.21 81,947 29.00 61,523 21.59
5.50 - 7.49% 98,266 34.87 104,618 37.02 130,864 45.93
7.50 - 9.49% 3,869 1.37 3,295 1.17 2,673 0.94
9.50 and above --- --- --- --- --- ---
------- --- ------- ---- ------- ----
Total Certificates 187,648 66.59 190,018 67.24 195,126 68.48
------- --- ------- ---- ------- ----
Accrued Interest 1,764 .64 1,809 0.65 1,971 0.69
------- --- ------- ---- ------- ----
Total Deposits $281,772 100.00% $282,563 100.00% $284,913 100.00%
======== ====== ======== ====== ======== ======
The following table sets forth the savings flows at the Bank during the
periods indicated.
Year Ended March 31,
-----------------------------------------
1996 1997 1998
-------- -------- ---------
(In Thousands)
Opening balance.................. $267,520 $280,008 $280,753
Deposits......................... 405,665 566,909 585,093
Withdrawals...................... 402,754 575,977 592,939
Interest credited................ 9,577 9,813 10,035
-------- -------- ---------
Ending balance................... $280,008 $280,753 $282,942
======== ======== ========
Net (decrease) increase.......... $ 12,488 $ 745 $ 2,189
======== ======== =========
Percent (decrease) increase...... 4.67% 0.26% 0.78%
======== ======== =========
22
The following table sets forth the rate and maturity information for
the Bank's certificates of deposit as of March 31, 1998.
0.00- 3.50- 5.50- 7.50- Percent
3.49% 5.49% 7.49% 9.49% Total of Total
----- ----- ----- ----- ----- --------
Certificate accounts maturing (Dollars in Thousands)
in quarter ending:
June 30, 1998.................... 55 15,996 22,361 --- 38,412 19.69%
September 30, 1998............... --- 18,107 26,727 --- 44,834 22.98
December 31, 1998................ 9 5,087 17,404 --- 22,500 11.53
March 31, 1999................... --- 6,628 11,555 30 18,213 9.33
June 30, 1999.................... --- 4,253 6,258 --- 10,511 5.39
September 30, 1999............... --- 2,836 4,275 --- 7,111 3.64
December 31, 1999................ --- 1,393 2,531 --- 3,924 2.01
March 31, 2000................... --- 1,760 5,004 45 6,809 3.49
June 30, 2000.................... --- 1,264 3,397 --- 4,661 2.39
September 30, 2000............... --- 873 2,361 --- 3,234 1.66
December 31, 2000................ --- 367 1,124 207 1,698 0.87
March 31, 2001................... --- 805 727 1,053 2,585 1.32
Thereafter....................... 2 2,154 27,140 1,338 30,634 15.70
------ ------- -------- ------ -------- ------
Total......................... $ 66 $61,523 $130,864 $2,673 $195,126 100.00%
======== ======= ======== ====== ======== ======
Percent of total.............. 0.03% 31.53% 67.07% 1.37% 100.00%
==== ===== ===== ==== ======
The following table indicates the amount of the Bank's certificates of
deposit and public funds by time remaining until maturity as of March 31, 1998.
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....................... $27,095 $40,609 $36,762 $70,082 $174,548
Certificates of deposit of
$100,000 or more.................... 2,811 3,890 3,832 835 12,368
Public funds(1)...................... 8,506 334 120 250 9,210
------- ------- ------- ------- --------
Total certificates of
deposit............................. $ 38,412 $44,833 $40,714 $71,167 $195,126
======== ======= ======= ======= ========
- -------------
(1) Deposits from governmental and other public entities.
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings when they are a less costly
source of funds or can be invested at a positive rate of return.
Permanent Federal may obtain advances from the FHLB of Indianapolis
upon the security of its FHLB capital stock and certain of its mortgage loans
and mortgage-backed securities. Such advances may be made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. At March 31, 1998 the Bank's FHLB advances totaled $99.4 million.
See also Note 7 of the Notes to Consolidated Financial Statements in the Annual
Report.
23
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and other borrowings for the periods indicated.
Year Ended March 31,
--------------------------------------------------
1996 1997 1998
------- -------- -----------
(In Thousands)
Maximum Balance:
FHLB advances......................... $68,303 $100,141 $107,778
Securities sold under
agreements to repurchase............. 983 2,945 445
FHLB overnight borrowings............. 2,127 1,710 3,201
------- -------- -----------
$71,413 $104,796 $111,424
======= ======== ========
Average Balance:
FHLB advances......................... $46,308 $ 92,604 $101,711
Securities sold under
agreements to repurchase............. 530 1,485 103
FHLB overnight borrowings............. 1,135 208 30
------- -------- -----------
$47,973 $ 94,297 $101,844
======= ======== ========
The following table sets forth certain information as to the Bank's
FHLB advances and FHLB overnight borrowings at the dates indicated.
1996 1997 1998
------- -------- --------
(Dollars in Thousands)
FHLB advances........................................ $68,303 $ 98,484 $ 99,353
Securities sold under
agreements to repurchase............................ 555 607 0
FHLB overnight borrowings............................ 2,127 1,187 0
------- -------- --------
Total borrowings................................ $70,985 $100,278 $ 99,353
======= ======== ========
Weighted average interest
rate of FHLB advances............................... 5.77% 5.64% 5.39%
Weighted average interest
rate of securities sold
under agreements to repurchase...................... 4.80% 5.19% ---%
Weighted average interest rate
of FHLB overnight borrowings........................ ---% ---% ---%
24
Service Corporation Activities
Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets if for community purposes.
In addition, federal associations may invest up to 50% of their regulatory
capital in conforming loans to service corporations in which they own more than
10% of the capital stock. In addition to investments in service corporations,
federal associations are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities which a federal association may engage
in directly.
Permanent Federal has one first-tier service corporation, Perma Service
Corp. ("Perma Service"), located in Evansville, Indiana. Perma Service has
approximately a 20% interest, along with four other financial institutions, in
Family Financial Life Insurance Company ("FFLIC"), which underwrites various
types of life and disability insurance and annuity programs. FFLIC reinsures a
majority of the risk it underwrites with other insurers. Permanent Federal
received $43,700 of dividends for the year ended March 31, 1998 from FFLIC.
Perma Service also has one wholly owned subsidiary, Permanent Insurance
Agency Inc. ("PIAI"), which offers, on an agency basis, casualty, life,
accident, health, mortgage, disability, and consumer credit insurance. PIAI had
a net loss of $16,930 for the year ended March 31, 1998.
Through Perma Service, the Bank also provides brokerage services, on an
agency basis, through INVEST(TM).
Competition
Permanent Federal faces strong competition, both in originating real
estate and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from commercial banks, other thrifts and
mortgage companies. The Bank competes for loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers.
The Bank attracts most of its deposits from Vanderburgh, Gibson,
Warrick, Posey and Dubois Counties. Competition for those deposits is
principally from commercial banks, other thrifts, credit unions and other
financial intermediaries doing business in the same community. The ability of
the Bank to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk and other factors. The Bank competes for these
deposits by offering a variety of deposit accounts at competitive rates and
convenient business hours. At June 30, 1997, the latest date for which
information is available, the Bank's share of the savings market in its primary
market area was approximately 7.5%.
Regulation
General. Permanent Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Indianapolis and is subject to certain limited
25
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"). As the savings and loan holding company of the Bank, the
Holding Company also is subject to federal regulation and oversight. The purpose
of the regulation of the Holding Company and other holding companies is to
protect subsidiary savings associations. The Bank is a member of the Savings
Association Insurance Fund (the "SAIF") and the deposits of the Bank are insured
by the FDIC. As a result, the FDIC has certain regulatory and examination
authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of Permanent Federal, for which reports have been issued,
were as of December 1996 and April 1991, respectively. When these examinations
are conducted by the OTS and the FDIC, the examiners may require the Bank to
provide for higher general or specific loan loss reserves. Financial
institutions in various regions of the United States have been called upon by
examiners to write down assets and to establish increased levels of reserves,
primarily as a result of perceived weaknesses in real estate values and a more
restrictive regulatory climate.
All savings associations are subject to a semi-annual assessment, based
upon the savings association's total assets, to fund the operations of the OTS.
Permanent Federal's OTS assessment for the fiscal year ended March 31, 1998 was
$100,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws and regulations, and it is prohibited from
engaging in any activities not permitted by such laws and regulations. For
instance, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. The Bank is in
compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to 15% of unimpaired capital and surplus (except for loans fully
secured by certain readily marketable collateral, in which case this limit is
increased to 25% of unimpaired capital and surplus). At March 31, 1998, the
Bank's lending limit under this restriction was $5.7 million. At March 31, 1998,
the
26
Bank had no loans in excess of this limit. The Bank is in compliance with the
loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on matters such as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action. The Bank has not been required to submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., those with a core capital ratio of at least 5%, a ratio
of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital")
of at least 6% and a risk-based capital ratio of at least 10%) and considered
healthy pay the lowest premium while institutions that are less than adequately
capitalized (i.e., those with core and Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may impose special assessments on SAIF members to repay amounts
borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
Legislative Action
On September 30, 1996, President Clinton signed into law the Economic
Development and Regulatory Paperwork Reduction Act of 1996 (the "Act"). The
Act's principal provisions relate to recapitalization of SAIF, but it also
contains numerous regulatory relief measures, some of which are directly
applicable to the Bank.
27
Pursuant to the Act, as of January 1, 1997, commercial banks will be
required to share in the payment of interest due on Financial Corporation
("FICO") bonds used to rescue the savings and loan industry in the 1980's.
Annual FICO assessments to be added to deposit insurance premiums are expected
to equal approximately 6.4 basis points for SAIF members and 1.3 basis points
for BIF members from January 1, 1997 through December 31, 1999, and
approximately 2.4 basis points for both BIF and SAIF members thereafter.
Although this provision of the Act establishes a time frame for the
eventual elimination of the thrift charter, it contains no provisions concerning
the form the current thrift charter may be required to take. The Bank cannot
determine at this time what effect this provision will have on financial
position or operations.
Finally, the Act contains several other provisions designed to reduce
regulatory burdens associated with compliance with various consumer and other
laws applicable to the Company, including for example, provisions designed to
coordinate the disclosure and other requirements under the Truth-in-Lending and
Real Estate Settlement Procedures Act, modify certain insider lending
restrictions, permit OTS to allow exemptions to anti-tying prohibitions and
exempt certain transactions and simplify certain disclosures under the
Truth-in-Lending Act.
In addition, the United States Department of the Treasury recently
released a form of proposed legislation that would restructure the regulation of
the financial services industry, by among other things, eliminating the various
restrictions on the ability of banks to affiliate with companies engaged in
lines of business not generally currently permissible, such as securities and
insurance activities. Although the Company believes that the form of legislation
currently under consideration will not have a material adverse effect on the
Company, the Company cannot determine, whether or in what form, such legislation
will eventually be enacted or its effect on the Bank.
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At March 31, 1998, the Bank had no purchased mortgage servicing
rights.
28
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. At March 31, 1998, the Bank's service corporation,
Perma Service, was an includable subsidiary; however, Perma Service's investment
in FFLIC was not considered an includable investment and, accordingly, the Bank
was required to deduct 100% of its investment in FFLIC from capital. At March
31, 1998, the non-includable portion of the Bank's investment in FFLIC totaled
$633,000. See also "Service Corporation Activities."
At March 31, 1998, the Bank had core capital of $38.2 million, or 8.76%
of adjusted total assets, which is approximately $20.7 million above the minimum
requirement of 4% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 4% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including a limited
amount of purchased credit card relationships. As a result of the prompt
corrective action provisions discussed below, however, a savings association
must maintain a core capital ratio of at least 4% to be considered adequately
capitalized unless its supervisory condition is such to allow it to maintain a
3% ratio. At March 31, 1998, the Bank had no intangibles which were subject to
these tests.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. The Bank's only exclusion
from capital and assets at March 31, 1998 was its investment in FFLIC.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS Regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present
29
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule will not become effective
until the OTS evaluates the process by which savings associations may appeal an
interest rate risk deduction determination. It is uncertain as to when this
evaluation may be completed. Any savings association with less than $300 million
in assets and a total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determines otherwise. Until the rule is finalized, no
determination can be made of what, if any, impact this rule may have on the
Bank.
At March 31, 1998, the Bank had total capital of $40.1 million
(including $38.2 million in core capital) and risk-weighted assets of $190.5
million (including $3.2 million in converted off-balance sheet assets) or total
capital of 21.05% of risk-weighted assets. This amount was $24.9 million above
the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement actions by the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
30
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability and the value of the Common Stock purchased in the Conversion.
Holding Company shareholders do not have preemptive rights; and therefore, if
the Holding Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions or requirements on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
Generally, savings associations, such as the Subsidiary Bank that
before and after the proposed distribution meet their capital requirements, may
make capital distributions during any calendar year equal to the greater of 100%
of net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
Permanent Federal may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
31
Liquidity. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report. This liquid asset ratio requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings associations. At the present time, the minimum liquid asset ratio
is 4%.
Penalties may be imposed upon associations for violations of the liquid
asset ratio requirement. At March 31, 1998, the Bank was in compliance with the
requirements, with an overall liquid asset ratio of 65.5%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and reemphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At March 31, 1998, the
Bank met the test and has always met the test since it has been in effect.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
BIF. If such an association has not yet requalified or converted to a national
bank, its new investments and activities are limited to those permissible for
both a savings association and a national bank, and it is limited to national
bank branching rights in its home state. In addition, the association is
immediately ineligible to receive any new FHLB borrowings and is subject to
national bank limits for payment of dividends. If such association has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the
32
holding company must register as a bank holding company and become subject to
all restrictions on bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of
Permanent Federal, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch, by
Permanent Federal. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in November 1997 and received a rating of satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates, however;
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate
33
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Company and any of its subsidiaries (other than the Bank or
any other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and were
acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as and will become subject to
the restrictions applicable to bank holding companies. The activities authorized
for a bank holding company are more limited than are the activities authorized
for a unitary or multiple savings and loan holding company. See "- Qualified
Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Holding Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At March 31, 1998, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Indianapolis, which is one of 12 regional FHLBs ("FHLB System"), that
administers the home financing credit function of savings associations. Each
FHLB serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated
34
obligations of the FHLB System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the board of directors of
the FHLB which are subject to the regulation and oversight of the Federal
Housing Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In addition, all
long-term advances are required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At March 31, 1998, the Bank had $5.5 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five fiscal
years, such dividends have averaged 8.01% and were 8.03% for fiscal year ended
March 31, 1998. Under federal law the FHLBs are required to provide funds for
the resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of Permanent Federal's FHLB stock may result in a
corresponding reduction in Permanent Federal's capital. For the fiscal year
ended March 31, 1998, dividends paid by the FHLB of Indianapolis to the Bank
totaled $432,823, which constitute a $49,132 increase over the amount of
dividends received in the fiscal year ended March 31, 1997.
Federal and State Taxation
Savings associations such as the Bank that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code of 1986, as amended (the "Code"), had been permitted
to establish reserves for bad debts and to make annual additions thereto which
may, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction for "non-qualifying loans" was computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) could be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
35
In August 1996, legislation was enacted that repealed the reserve
method of accounting (including the percentage of taxable income method) used by
many thrifts, including the Bank, to calculate their bad debt reserve for
federal income tax purposes. As a result, thrifts such as the Bank must
recapture that portion of the reserve that exceeds the amount that could have
been taken under the specific charge-off method for post-1987 tax years. The
legislation also requires thrifts to account for bad debts for federal income
tax purposes on the same basis as commercial banks for tax years beginning after
December 31, 1995. The recapture will occur over a six-year period, the
commencement of which will be delayed until the first taxable year beginning
after December 31, 1997, provided the institution meets certain residential
lending requirements. The management of the company does not believe that the
legislation will have a material impact on the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax, and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except
36
to absorb bad debt losses). As of March 31, 1998, the Bank's Excess for tax
purposes totaled approximately $6.0 million.
The Bank and its subsidiary file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. The
Company files consolidated federal income tax returns with the Bank and its
subsidiary.
The Bank and its consolidated subsidiary have not been audited by the
IRS with respect to consolidated federal income tax returns during the past
seven years. In the opinion of management, any examination of still open returns
(including returns of subsidiaries and predecessors of, or entities merged into,
the Bank) would not result in a deficiency which could have a material adverse
effect on the financial condition, results of operations or liquidity of the
Bank and its consolidated subsidiary.
Change in Accounting for Income Taxes. Statement of Financial
Accounting Standards No. 109, was issued by the Financial Accounting Standards
Board ("FASB") in early 1992 and is required for fiscal years beginning after
December 15, 1992. FASB No. 109 requires a change from the deferred method to
the asset and liability method of accounting for income taxes. Under the asset
and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Under
SFAS No. 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date. Under the
deferred method, deferred taxes were recognized using the tax rate applicable to
the year of the calculation and were not adjusted for subsequent changes in tax
rates.
In December 1990, the FASB issued SFAS No. 106, "Employers" Accounting
for Postretirement Benefits Other Than Pensions." This statement will change the
current practice of accounting for postretirement benefits on a cash basis by
requiring accrual, during the years that the employee renders the necessary
service, of the expected cost of providing those benefits to an employee. The
Holding Company and the Bank were required to adopt this new method of
accounting in fiscal 1993. The statement allows for two transition methods. The
Holding Company and the Bank adopted this standard when required and the
adoption of SFAS No. 106 had no material effect on the financial position and
results of operations of either entity.
Indiana Taxation. Indiana imposes a franchise tax on financial
institutions at the rate of 8.5% of modified federal taxable income. The
modifications to federal taxable income include an add-back of municipal
interest and state and local property taxes and bad debt deductions are limited
to actual net charge-offs. The franchise tax is imposed on a combined basis
including the Company, the Bank and its subsidiary.
37
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Executive Officers of the Company and the Bank
The following table sets forth certain information regarding the
executive officers of the Company and the Bank who are not also directors.
Name Age Positions Held with the Company and the Bank
---- --- --------------------------------------------
George E. Orr 56 Senior Vice President of Bank
Seth P. Allen 39 Senior Vice President of Bank
Richard A. Condi 44 Vice President of Bank
Robert A. Cern 47 Chief Financial Officer and Secretary of the Company
and Senior Vice President, Secretary/Treasurer and
Chief Financial Officer of Bank
Glenna J. Kirsch 48 Vice President of Bank
Robert E. Whitfield, Jr. 36 Vice President of Bank
Officers are elected annually by the Board of Directors of the Bank.
The business experience of each executive officer who is not also a director is
set forth below.
George E. Orr. As Senior Vice President, Mr. Orr is primarily
responsible for the planning and development of the Bank's data processing
operations and manages the Bank's checking and proof of deposit departments. Mr.
Orr joined the Bank in 1963 and was promoted to his current position in 1990.
Seth P. Allen. Mr. Allen joined the Bank in January 1997 as Senior Vice
President and Commercial Lending Officer. Mr. Allen served as Senior Vice
President and Senior Lending Officer at Nashoba Bank in Memphis, Tennessee from
October 1994 to January 1997. Prior to that, Mr. Allen was Vice President and
Commercial Lending Officer at Deposit Guaranty National Bank in Jackson,
Mississippi from January 1991 to October 1994.
Richard A. Condi. Mr. Condi is Vice President in charge of residential
mortgage lending. Mr. Condi joined the Bank in 1979 and has served in various
capacities in the Bank's lending department before being promoted to his current
position in January 1991.
Robert A. Cern. Mr. Cern joined the Company in May 1998 as Chief
Financial Officer and Secretary. Mr. Cern is also Senior Vice President,
Secretary/Treasurer and Chief Financial Officer of the Bank. Prior to joining
the Company, Mr. Cern was an independent financial consultant. From December
1995 to December 1996, Mr. Cern was Vice President and Chief Financial Officer
of Associated Bank in Milwaukee, Wisconsin. Prior to this, Mr. Cern was Vice
President of Marshall & Ilsey Corporation in Milwaukee, Wisconsin.
38
Glenna J. Kirsch. Ms. Kirsch joined the Bank in 1980 and has held
several positions at the institution, including Training Officer from 1991 until
1992. In 1992, Ms. Kirsch was appointed Savings Officer and in 1995 was promoted
to Vice President. Currently, Ms. Kirsch is in charge of Deposit Operations and
is responsible for managing checking, savings and certificate of deposit
processing for the Bank.
Robert E. Whitfield, Jr. Mr. Whitfield joined the Bank in October 1997
as Vice President in charge of consumer lending. Mr. Whitfield served as Vice
President of retail and commercial lending at Peoples First, FSB in Central
City, Kentucky from October 1994 to October 1997. Prior to that, Mr. Whitfield
was Vice President at Citizens National Bank of Kentucky, N.A. in Madisonville,
Kentucky from July 1988 to October 1994.
Employees
At March 31, 1998, the Bank had a total of 118 full-time and 23
part-time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
Item 2. Properties
The following table sets forth information concerning the main office
and each branch office of the Bank at March 31, 1998. At March 31, 1998, the
Bank's premises, office properties and equipment had an aggregate book value of
approximately $7.0 million.
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
-------- -------- ------ ---- ----- (In Thousands)
Main (Downtown) Office
101 Southeast Third Street 1963 Owned N/A $2,988
Evansville, Indiana
Branch Offices
University Heights
4615 University Drive 1988 Owned N/A 376
Evansville, Indiana
Town Center
201 Diamond Avenue 1981 Owned N/A 348
Evansville, Indiana
Green River Road
123 South Green River Road 1978 Owned N/A 257
Evansville, Indiana
North Brook
3820 First Avenue 1978 Leased November 2002 135(1)
Evansville, Indiana
West Franklin Street
2131 West Franklin Street 1960 Owned N/A 176
Evansville, Indiana
Ross Center
2521 Washington Avenue 1994 Owned N/A 759
Evansville, Indiana
39
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
-------- -------- ------ ---- -----
(In Thousands)
Fort Branch
810 East Locust Street 1987 Owned N/A 364
Fort Branch, Indiana
Jasper
771 West Second Street 1991 Owned N/A 512
Jasper, Indiana
Newburgh
8533 Bell Oaks Drive 1997 Owned N/A 847
Newburgh, Indiana
Oakland City
410 West Morton Street 1984 Owned N/A 243
Oakland City, Indiana
(1) The Bank owns this branch's building and leases the land.
The Bank maintains depositor and borrower customer files on an on-line
basis with BISYS, Inc. The net book value of the data processing and computer
equipment utilized by the Bank at March 31, 1998 was $448,160.
Item 3. Legal Proceedings
Permanent Federal is involved as plaintiff or defendant in various
legal actions arising in the normal course of its business. While the ultimate
outcome of these proceedings cannot be predicted with certainty, it is the
opinion of management, after consultation with counsel representing Permanent
Federal in the proceedings, that the resolution of these proceedings should not
have a material effect on Permanent Federal's results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 1998.
40
PART II
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
Page 47 and 48 of the attached 1998 Annual Report to Stockholders is
herein incorporated by reference.
Item 6. Selected Financial Data
Pages 3 and 4 of the attached 1998 Annual Report to Stockholders is
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Pages 6 through 18 of the attached 1998 Annual Report to Stockholders
are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Page 5 and 19 through 45 of the attached 1998 Annual Report to
Stockholders are herein incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
41
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Directors of the Registrant is incorporated
herein by reference from the Corporation's definitive Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on July 28, 1998, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation", a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Information concerning the business experience of the executive officers of the
Company and the Bank contained in Part I of this 10-K is incorporated by
reference herein.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on July 28, 1998, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation", a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Corporation's
definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to
be held on July 28, 1998, except for information contained under the headings
"Compensation Committee Report on Executive Compensation" and "Stock Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Corporation's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on July
28, 1998, except for information contained under the headings "Compensation
Committee Report on Executive Compensation" and "Stock Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
42
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements:
The following information appearing in the Registrant's Annual Report
to Shareholders for the year ended March 31, 1998, is incorporated by reference
in this Form 10-K Annual Report as Exhibit 13.
Pages in
Annual
Annual Report Section Report
--------------------- ------
Independent Auditors' Report...................................... 19
Consolidated Statements of Financial Condition
at March 31, 1998 and 1997...................................... 20
Consolidated Statements of Income for the Years Ended
March 31, 1998, 1997 and 1996................................... 21
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 1998, 1997 and 1996....................... 22
Consolidated Statements of Cash Flows for Years Ended
March 31, 1998, 1997 and 1998................................... 23-24
Notes to Consolidated Financial Statements........................ 25-45
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.
43
(a) (3) Exhibits:
Reference to Prior
Regulation Filing or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
------ -------- ------
2 Plan of acquisition, reorganization, None
arrangement, liquidation or
succession
3 (i) Articles of Incorporation *
3 (ii) Bylaws *
4 Instruments defining the rights of *
security holders, including See also Exhibit 3
indentures
9 Voting trust agreement None
10 Material contracts:
(a) 1993 Stock Option and *
Incentive Plan
(b) Recognition and Retention Plan *
(c) Employment Agreement with *
Donald P. Weinzapfel
(d) Director Deferred Compensation **
Agreement
(e) Employment Agreement with ***
Murray T. Brown
11 Statement re computation of None
per share earnings
12 Statements re computation of Not required
ratios
13 Annual Report to security holders 13
16 Letter re change in certifying Not required
accountant
18 Letter re change in accounting None
principles
19 Previously unfiled documents None
21 Subsidiaries of the registrant 21
22 Published report regarding matters None
submitted to vote of security holders
44
23 Consents of experts and counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule Not required
28 Information from reports Not required
furnished to state insurance
regulatory authorities
99 Additional Exhibits Not applicable
- --------------
*Filed as exhibits to the Company's Registration Statement on Form S-1
under the Securities Act of 1933, filed with the Securities and Exchange
Commission on December 23, 1993 (Registration No. 33-73394). All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
**Filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K
under the Securities Exchange Act of 1934 on June 29, 1995 (File No. 0-23370).
***Filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K
under the Securities Exchange Act of 1934 on June 27, 1996 (File No. 0-23370)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three month period ended
March 31, 1998.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PERMANENT BANCORP, INC.
Date: June 29, 1998 By: /s/ Donald P. Weinzapfel
------------------------
Donald P. Weinzapfel
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Donald P. Weinzapfel By: /s/ John R. Stone
------------------------ -----------------
Donald P. Weinzapfel John R. Stone, Director
Chairman of the Board Date: June 29, 1998
President and Chief Executive
Officer (Principal Executive Officer)
Date: June 29, 1998
By: /s/ Daniel F. Korb By: /s/ Daniel L. Schenk
------------------ --------------------
Daniel F. Korb, Director Daniel L. Schenk, Director
Date: June 29, 1998 Date: June 29, 1998
By: /s/ John W. Forster By: /s/ Jack H. Kinkel
------------------- ------------------
John W. Forster, Director Jack H. Kinkel, Director
Date: June 29, 1998 Date: June 29, 1998
By: /s/ Murray J. Brown By: /s/ James W. Vogel
------------------- ------------------
Murray J. Brown, Director James W. Vogel, Director
Date: June 29, 1998 Date: June 29, 1998
By: /s/ James D. Butterfield By: /s/ Robert L. Northerner
------------------------ ------------------------
James D. Butterfield, Director Robert L. Northerner, Director
Date: June 29, 1998 Date: June 29, 1998
By: /s/ James A. McCarty, Jr. By: /s/ Robert A. Cern
------------------------- ------------------
James A. McCarty, Jr., Director Robert A. Cern, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date: June 29, 1998 Date: June 29, 1998
46