UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1999
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from
to
---------- ---------
Commission file number 0-23370
PERMANENT BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 35-1908797
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 Southeast Third Street, Evansville, Indiana 47708
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (812) 428-6800
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X . NO ___.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price of such stock on
the NASDAQ National Market System as of June 22, 1999, was $26,049,378. (The
exclusion from such amount of the market value of the shares owned by any person
shall not be deemed an admission by the registrant that such person is an
affiliate of the registrant.)
As of June 22, 1999, there were 3,994,222 issued and outstanding shares
of the Registrant's Common Stock
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV of Form 10-K - Portions of the Annual Report to
Stockholders for the fiscal year ended March 31, 1999.
Part III of Form 10-K - Portions of the Proxy Statement for 1999 Annual
Meeting of Stockholders.
PART I
Item 1. Business
General
Permanent Bancorp, Inc. (the "Company"), a Delaware corporation, was
organized in December 1993 as a savings and loan holding company for Permanent
Federal Savings Bank ("Permanent Federal" or the "Bank") in connection with the
Bank's conversion from mutual to stock form which was completed on March 31,
1994 (the "Conversion"). Permanent Federal, the predecessor of which was
originally organized in 1885, is a federally chartered savings bank
headquartered in Evansville, Indiana. The Bank's deposits are insured up to the
maximum allowable amount by the Federal Deposit Insurance Corporation (the
"FDIC"). Through its main office and network of twelve branch offices, the
Company serves Vanderburgh, Gibson, Warrick, Posey and Dubois Counties, Indiana.
At March 31, 1999, the Company had total assets of $492.3 million, deposits of
$345.3 million, and total stockholders' equity of $40.9 million (8.31% of total
assets).
Permanent Federal has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services to meet the needs of the communities it serves. The Bank attracts
deposits from the general public and uses these deposits, together with
borrowings and other funds, primarily to originate one- to four-family
residential mortgage loans as well as loans secured by multi-family and
commercial real estate, automobile and other consumer loans. To a lesser extent,
the Bank also originates a limited number of construction and commercial
business loans. The Bank also invests in mortgage-backed and other securities.
See "Lending Activities" and "Investment Activities."
Through its service corporation, Perma Service Corp., the Bank also
offers various types of insurance products and provides brokerage services. See
"Service Corporation Activities."
The executive office of the Company is located at 101 Southeast Third
Street, Evansville, Indiana 47708. Its telephone number at that address is (812)
428-6800.
Lending Activities
General. Historically, the Bank originated fixed-rate, one- to
four-family mortgage loans. In the early 1980s, however, the Bank began to also
originate, subject to market conditions, adjustable-rate mortgage ("ARM") loans
for retention in its portfolio. At March 31, 1999, 74.5% of the Bank's loan
portfolio was fixed-rate and 24.1% was adjustable-rate. The Bank's
adjustable-rate loan portfolio as a percentage of the total loan portfolio has
decreased from 42.9% at March 31, 1992 to 25.5% at March 31, 1999 as consumer
demand for fixed-rate loans increased. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management" in the Company's Annual Report to Stockholders for the fiscal year
ended March 31, 1999, attached hereto as Exhibit 13 (the "Annual Report").
2
The Bank focuses its lending activities on the origination of loans
secured by first mortgages on owner-occupied, one-to four-family residences as
well as multi-family and commercial real estate loans, automobile and other
consumer loans. To a lesser extent, the Bank also originates a limited number of
construction and commercial business loans. At March 31, 1999, the Bank's total
loan portfolio, including commercial paper, totaled $324.1 million, of which
$171.3 million, or 52.8%, were one- to four-family mortgage loans. At the same
date, consumer loans (including indirect and direct automobile loans) totaled
$86.1 million, or 26.6%, multi-family and commercial real estate loans totaled
$31.9 million, or 9.9%, construction loans totaled $8.2 million, or 2.5%, and
there was $9.3 million of commercial paper, representing 2.9% of the loan
portfolio. Other business loans totaled $17.3 million or 5.3% of the loan
portfolio.
The Bank also invests in mortgage-backed securities. At March 31, 1999,
mortgage-backed securities, net, totaled $54.8 million, or 11.1% of total
assets. See "Investment Activities -- Mortgage-Backed Securities."
Loan applications are initially underwritten and approved at various
levels of authority, depending on the type and amount of the loan, as
established by the Board of Directors. Residential loans in excess of $350,000,
commercial real estate loans in excess of $1,000,000 and commercial business
loans in excess of $1,000,000 require the approval of the Board of Directors or
the Senior Loan Committee consisting of three Bank officers and three
non-employee directors. All unsecured loans in excess of $250,000 are reviewed
by this committee.
Prior to the enactment of the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 ("FIRREA"), the aggregate amount of loans that the
Bank was permitted to make under applicable federal regulations to any one
borrower, including related entities, or the aggregate amount that the Bank
could have invested in any one real estate project, was, with certain
exceptions, limited to the lesser of 10% of the Bank's deposits or 100% of its
regulatory capital. Effective August 9, 1989, the Bank's loans-to-one-borrower
limit was reduced in accordance with FIRREA, generally to the greater of 15% of
unimpaired capital and surplus or $500,000. See "Regulation Federal Regulation
of Savings Associations." At March 31, 1999, the maximum amount which the Bank
could have lent to any one borrower and the borrower's related entities was
approximately $4.9 million. At March 31, 1999, the Bank had no loans with
aggregate outstanding balances in excess of this amount.
Management reserves the right to change its emphasis on the amount, or
type of lending in which it engages to adjust to market or other factors.
3
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.
1995 1996 1997
----- ----- -----
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Real Estate Loans:
One- to four-family........................... $133,864 67.62% $144,155 68.85% $152,655 71.82%
Multi-family.................................. 15,712 7.94 11,823 5.65 8,041 3.78
Commercial real estate........................ 5,052 2.55 4,787 2.29 4,034 1.90
Construction or development................... 2,406 1.22 2,700 1.29 1,888 .89
-------- ------ -------- ------ -------- -----
Total real estate loans................... $157,034 79.33 $163,465 78.08 $166,618 78.39
--------- ------ -------- ------ -------- ------
Other Loans:
Consumer Loans:
Deposit account.............................. 1,011 0.51 1,148 0.55 940 .44
Automobile................................... 28,005 14.14 31,056 14.83 31,394 14.77
Home improvement............................. 1,201 0.61 1,088 0.52 1,084 .51
Retail mobile home loans..................... 1,984 1.00 1,595 0.76 1,240 .58
Home equity and other........................ 8,137 4.11 8,666 4.14 10,269 4.83
-------- ------ -------- ------ -------- ------
Total consumer loans...................... 40,338 20.37 43,553 20.80 44,927 21.13
Commercial business loans..................... 96 0.05 57 0.03 52 .02
Bankers' acceptances.......................... 489 0.25 299 0.14 --- ---
Commercial paper.............................. --- --- 1,997 0.95 979 .46
-------- ------ -------- ------ -------- -----
Total other loans......................... 40,923 20.67 45,906 21.92 45,958 21.61
-------- ------ -------- ------- -------- ------
Total loans............................... $197,957 100.00% $209,371 100.00% $212,576 100.00%
======== ====== ======== ====== ======== ======
Less:
Loans in process.............................. 62 67 (24)
Deferred fees and discounts................... 319 156 284
Allowance for losses.......................... 2,093 2,238 2,126
-------- ------ --------
Total loans .................................. $195,483 $206,910 $210,190
======== ======== ========
Mortgage-Backed Securities:
FNMA.......................................... $16,684 21.61% $21,286 22.62% $31,793 31
GNMA.......................................... 35,692 46.24 31,949 33.96 27,160 26
FHLMC......................................... 24,812 32.14 40,852 43.42 41,832 41
-------- ------ ------ ----- -------- ---
Total mortgage-backed
securities............................... 77,188 100.00% 94,087 100.00% 100,785 100
====== ====== ===
Net premiums and discounts..................... 55 20 448
-------- ------- --------
Net mortgage-backed securities................. $77,243 $94,107 $101,233
======= ======= ========
1998 1999
------ -----
Amount Percent Amount Percent
------ ------- ------ -------
Real Estate Loans:
One- to four-family........................... $158,750 69.67% $171,250 52.84%
Multi-family.................................. 4,092 1.80 4,838 1.49
Commercial real estate........................ 4,795 2.10 27,060 8.35
Construction or development................... 3,435 1.51 8,208 2.53
-------- ------ -------- ------
Total real estate loans................... $171,072 75.08 $211,356 65.21
-------- ----- -------- -----
Other Loans:
Consumer Loans:
Deposit account.............................. 892 0.39 868 .27
Automobile................................... 31,436 13.80 56,766 17.52
Home improvement............................. 839 0.37 570 .18
Retail mobile home loans..................... 935 0.41 724 .22
Home equity and other........................ 9,718 4.26 27,199 8.39
------- ------- ---------- ------
Total consumer loans...................... 43,820 19.23 86,127 26.58
Commercial business loans..................... 3,861 1.69 17,328 5.35
Bankers' acceptances.......................... --- --- --- ---
Commercial paper.............................. 9,116 4.00 9,275 2.86
-------- ------ -------- ------
Total other loans......................... 56,797 24.92 112,730 34.79
------ ----- -------- -------
Total loans............................... $227,869 100.00% $324,086 100.00%
-------- ====== -------- ======
Less:
Loans in process.............................. 149 52
Deferred fees and discounts................... 398 310
Allowance for losses.......................... 1,973 2 ,706
------- -----------
Total loans .................................. $225,349 $321,018
======== ========
Mortgage-Backed Securities:
FNMA.......................................... .55% $25,730 31.76% $17,464 32.09%
GNMA.......................................... .95 27,116 33.47 20,105 36.94
FHLMC......................................... .50 28,163 34.77 16,858 30.97
--- ------ ------- --------- ---------
Total mortgage-backed 81,009 54,427 00%
==
securities............................... .00% 100.00% 100.
=== ====== ====
Net premiums and discounts..................... 505 422
--------- -------
Net mortgage-backed securities................. $81,514 $54,849
======= =======
4
The following table sets forth the composition of the Bank's loan
portfolio by fixed and adjustable rates at the dates indicated.
1995 1996 1997
------ ------ ------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
Fixed-Rate Loans:
- -----------------
Real estate:
One- to four-family....................... $ 96,379 48.67% $ 99,568 47.56% $ 94,842 44.45%
Multi-family.............................. 7,029 3.55 3,271 1.56 2,687 1.26
Commercial real estate.................... 3,803 1.92 3,634 1.74 3,357 1.58
Construction or development............... 2,392 1.21 2,686 1.28 1,855 .87
------- ------- ------- ------- ------- -------
Total real estate loans................ 109,603 55.35 109,159 52.14 102,741 48.16
Consumer.................................. 38,343 19.37 43,405 20.73 44,450 20.91
Commercial business....................... 74 0.04 57 0.03 52 .02
Term federal funds........................ --- --- --- --- --- ---
Bankers' acceptances...................... 489 0.25 299 0.14 --- ---
Commercial paper.......................... --- --- 1,997 0.95 979 .46
------- ------- ------- ------- ------- -------
Total fixed-rate loans................. 148,509 75.01 154,917 73.99 148,222 69.55
------- ------- ------- ------- ------- -------
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... 37,485 18.94 44,588 21.30 57,813 27.36
Multi-family.............................. 8,683 4.39 8,552 4.08 5,354 2.52
Commercial real estate.................... 1,249 0.63 1,153 0.55 677 .32
Construction or development............... 14 0.01 13 0.01 33 .02
------- ------- ------- ------- ------- -------
Total real estate loans................ 43,431 23.97 54,306 25.94 63,877 30.22
Consumer................................... 1,995 1.01 148 0.07 477 .23
Commercial business........................ 22 0.01 --- -- --- ---
------- ------- ------- ------- ------- -------
Total adjustable-rate
loans................................. 49,448 24.99 54,454 26.01 64,354 30.45
---------- ----- --------- ----- --------- -----
Total loans............................ 197,957 100.00% 209,371 100.00% 212,576 100.00%
====== ====== ======
Less:
Loans in process........................... 62 67 (24)
Deferred fees and discounts................ 319 156 284
Allowance for loan losses.................. 2,093 2,238 2,126
------- ------- -------
Total loans and loans held for sale, net $195,483 $206,910 $210,190
======== ======== ========
1998 1999
------ -----
Amount Percent Amount Percent
------ ------- ------ -------
Fixed-Rate Loans:
- -----------------
Real estate:
One- to four-family....................... $ 95,432 41.88% $110,140 33.98%
Multi-family.............................. 2,346 1.03 3,396 1.05
Commercial real estate.................... 3,386 1.49 17,054 5.26
Construction or development............... 3,423 1.50 8,196 2.53
------- ------- ------- -------
Total real estate loans................ 104,587 45.90 138,786 42.82%
Consumer.................................. 42,324 18.57 76,132 23.49
Commercial business....................... 581 0.25 17,203 5.31
Term federal funds........................ --- --- --- ---
Bankers' acceptances...................... --- --- --- ---
Commercial paper.......................... 9,116 4.00 9,275 2.87
------- ------- ------- -------
Total fixed-rate loans................. 156,608 68.72 241,396 74.49
------- ------- ------- -------
Adjustable-Rate Loans:
Real estate:
One- to four-family....................... 63,318 27.79 61,110 18.86
Multi-family.............................. 1,746 0.77 1,442 0.44
Commercial real estate.................... 1,409 0.62 10,006 3.09
Construction or development............... 12 --- 12 ---
------- ------- ------- -------
Total real estate loans................ 66,485 29.18 72,570 22.39
Consumer................................... 1,496 0.66 9,995 3.08
Commercial business........................ 3,280 1.44 125 0.04
------- ------- ------- -------
Total adjustable-rate
loans................................. 71,261 31.28 82,690 25.51
-------- ------ ---------- ---------
Total loans............................ 227,869 100.00% 324,086 100.00%
====== ======
Less:
Loans in process........................... 149 52
Deferred fees and discounts................ 398 310
Allowance for loan losses.................. 1,973 2,706
------- -------
Total loans and loans held for sale, net $225,349 $321,018
======== ========
5
The following table sets forth the maturities of the Bank's loan
portfolio (excluding commercial paper) at March 31, 1999. Loans that have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The table reflects scheduled principal
amortization, but does not reflect possible prepayments or enforcement of
due-on-sale clauses.
Real Estate
Multi-family
and
Commercial Construction
One- to four-family Real Estate or Development
---------------------- -------- ------ -------- ------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ------ -------- ------ -------- ------
(Dollars in Thousands)
Due During Years
Ending March 31,
2000(1) $ 13,284 8.05% $ 2,979 8.44% $ 6,761 8.04%
2001 to 2004 16,156 7.09 11,384 7.64 1,230 8.83
2005 to 2009 66,662 7.38 6,997 7.91 217 8.25
2010 to 2019 68,863 7.18 10,539 7.80 - - - - - -
2019 and following 6,285 6.56 - - - - - - - - - - - -
-------- ----------- -----------
Total $171,250 $ 31,898 $ 8,208
======== =========== ===========
Commercial
Consumer Business Total
-------------------- --------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ------ -------- ------ -------- -----
(Dollars in Thousands)
Due During Years
Ending March 31,
2000(1) $ 13,849 8.20% $ 5,248 8.18% $ 42,121 8.14%
2001 to 2004 59,968 8.72 7,603 6.69 96,341 8.16
2005 to 2009 9,374 9.71 2,747 6.86 85,997 7.67
2010 to 2019 2,865 10.56 798 5.94 83,065 7.36
2019 and following 71 9.56 931 7.75 7,287 6.74
---------- ---------- ----------
Total $ 86,127 $ 17,328 $ 314,811
========== ===
- ----------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
6
At March 31, 1999, the total amount of loans due after March 31, 1999
which had fixed interest rates was $241.4 million, while the total amount of
loans due after such date which had floating or adjustable interest rates was
$82.7 million.
One- to Four-Family Residential Mortgage Lending. The Bank's primary
lending activity consists of the origination of one- to four-family residential
mortgage loans secured primarily by property located in the Bank's primary
market area. At March 31, 1999, the Bank had $171.2 million, or 52.8% of its
loan portfolio invested in these loans.
The Bank presently offers fixed-rate conventional mortgage loans,
Federal Housing Administration ("FHA"), Veterans Administration ("VA") loans,
and ARM loans. During fiscal 1995, the Bank introduced a 10-year adjustable-rate
loan which features an initial 10-year fixed-rate that converts to a one-year
adjustable-rate loan upon expiration of the initial fixed-rate period. The
Bank's origination of fixed-rate mortgage loans as compared to ARM loans is
determined on an on-going basis and is based on changes in market interest rates
and consumer preference. Many borrowers have selected shorter-term 15-year
fixed-rate mortgages or ten-year adjustable rate loans recently. Interest rates
charged on fixed-rate loans are competitively priced according to local market
conditions. The Bank's current policy is to sell all newly originated fixed-rate
loans with terms of more than 20 years, as well as ARM loans converted to a
fixed rate with a remaining term to maturity in excess of 20 years, and all FHA
and VA loans. See "- Originations, Purchases, Sales and Servicing of Loans and
Mortgage-Backed Securities."
The Bank currently makes adjustable-rate, one- to four-family
residential mortgage loans in amounts of up to 100% of the appraised value or
selling price of the security property, whichever is less. For loans with
loan-to-value ratios of greater than 80%, the Bank typically requires private
mortgage insurance to reduce the Bank's exposure to 75% of the appraised value
or selling price of the security property. Adjustable-rate loans generally have
interest rate adjustment limitations consisting of 2% annual adjustments and 6%
lifetime adjustments, and are generally indexed to the weekly average yield of
U. S. Treasury securities adjusted to a constant maturity of one year.
The retention of ARM loans in the Bank's loan portfolio helps the Bank
to manage its exposure to changes in the interest rates. There are, however,
unquantifiable credit risks relating to such loans resulting from the potential
of increased costs due to changed rates to be paid by the customer. It is
possible that during periods of rising interest rates, the risk of default on
ARM loans may increase as a result of repricing and the increased costs to the
borrower. Furthermore, the ARM loans originated by the Bank generally provide,
as a marketing incentive, for initial rates of interest below the rates which
would apply were the adjustment index used for pricing initially
("discounting"). These loans are subject to increased risk of default or
delinquency due to this discounting. In addition, although ARM loans allow the
Bank to increase the sensitivity of its asset base to changes in interest rates,
the extent of this interest rate sensitivity is limited by the periodic and
lifetime interest rate adjustment limits, and by the ability of borrowers to
refinance their loans if they perceive that the interest rate they are paying is
too high. Accordingly, there can be no assurance that yields on ARM loans will
be sufficient to offset increases in the Bank's cost of funds.
In underwriting residential real estate loans, the Bank evaluates both
the borrower's ability to make monthly payments, employment history, credit
history and the value of the property securing
7
the loan. Potential borrowers are qualified for fixed-rate loans based upon the
initial or stated rate of the loan. Borrowers on one year adjustable-rate loans
are currently qualified at an 8% rate or the fully-indexed rate after one year,
whichever is higher. Borrowers on other adjustable-rate loans are qualified at
the note rate.
An appraisal of the security property from Board-approved independent
fee appraisers is obtained prior to mortgage loan approvals. In connection with
origination of residential real estate loans, the Bank currently requires that
the borrower obtain title insurance, and fire, flood (if applicable) and
casualty insurance to protect the Bank's interest.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid. The
Bank on occasion has enforced due-on-sale clauses in its mortgage contracts.
From 1991 to 1993, Permanent Federal increased its investment in
mortgage-backed securities, while in fiscal 1994 and 1995, the amount of such
securities remained relatively constant and again increased during fiscal 1996
and 1997. Mortgage-backed securities decreased $19.7 million in 1998, and $26.7
million in fiscal 1999. Although such securities are generally held for
investment, they can serve as collateral for borrowings. For information
regarding the carrying and market values of Permanent Federal's mortgage-backed
securities portfolio, see Note 3 of the Notes to Consolidated Financial
Statements in the Annual Report. See also "Investment Activities -
Mortgage-Backed Securities."
Consumer Lending. The Bank considers consumer lending an integral
component of its lending operations and has during the last fiscal year expanded
its consumer loan portfolio particularly in the automobile and home lending
areas. Consumer loans generally have shorter terms to maturity (thus reducing
Permanent Federal's exposure to changes in interest rates) and historically have
carried higher rates of interest than do one- to four-family residential
mortgage loans. In addition, management believes that the offering of consumer
loan products helps to expand and create stronger ties to its existing customer
base by increasing the number of customer relationships and providing
cross-marketing opportunities. At March 31, 1999, the Bank's consumer loan
portfolio totaled $86.1 million, or 26.6% of its loan portfolio. The chief
component of such loans consists of indirect and direct automobile paper,
accounting for $56.8 million, or 65.9%, of the consumer loan portfolio at March
31, 1999. Under applicable federal law, the Bank is authorized to invest up to
35% of its assets in consumer loans.
Permanent Federal offers a variety of secured consumer loans, including
automobile, boat, home equity, home improvement, mobile home loans, loans
secured by savings deposits and other consumer collateral. The Bank also offers
a limited amount of unsecured loans. The Bank generally originates consumer
loans in its market area. Although it has not done so in recent years, the Bank
may also purchase consumer loans, generally within its market area. Consumer
loan terms vary according to the type of collateral and length of contract. The
Bank's consumer loans generally have fixed rates of interest.
The Bank is actively engaged in indirect dealer financing of
automobiles. Such indirect dealer loans are originated through automobile
dealers located in, or in counties contiguous to, the
8
Bank's market area and underwritten by the Bank's lending staff in accordance
with the Bank's general standards for underwriting consumer loans. These loans
are originated at fixed interest rates and are typically for terms of up to five
years. At March 31, 1999, indirect dealer loans totaled $46.1 million, or 53.6%,
of the Bank's consumer loan portfolio.
5 At March 31, 1999, $23.4 million of the Bank's consumer loans
consisted of home equity loans, including home equity lines of credit. The home
equity loans are typically collateralized by second mortgages on owner-occupied,
single-family mortgage loans.
The Bank has also purchased loans secured by mobile homes. Such loans
were originated through a subsidiary of the Bank in association with two other
savings institutions. The subsidiary created pools of mobile home loans it
originated, and Permanent Federal and the other participating lenders each
purchased a one-third interest in the pools. The Bank's mobile home loan
portfolio as of March 31, 1999 was $724,000, or .22% of the Bank's loan
portfolio. Mobile home loans are typically made at higher yields and for a
shorter maturity than one- to four-family residential mortgage loans. The Bank's
mobile home loans were typically made for terms of up to 15 years and all were
one-year ARMs. At March 31, 1999, $54,000, or 7.5%, of the Bank's mobile home
loan portfolio was non-performing.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. In addition, the stability of the applicant's monthly income from
primary employment is considered during the underwriting process. Although
creditworthiness of the applicant is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured,
such as checking account overdraft privilege loans, or are secured by rapidly
depreciable assets, such as automobiles, mobile homes and recreational vehicles.
In such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans.
Multi-Family and Commercial Real Estate Lending. An increasing part of
the Bank's portfolio as a percentage of the total, the Bank has originated
multi-family and commercial real estate loans in its lending area, and has
purchased whole loan and participation interests in loans from other financial
institutions in Indiana, and to a lesser extent, in Kentucky and Tennessee. At
March 31, 1999, the Bank had multi-family and commercial real estate loans
totaling $31.9 million, representing 9.8% of its loan portfolio.
The majority of the Bank's multi-family and commercial real estate
loans are secured by apartment buildings, as well as other types of property,
including nursing homes, office buildings, hotels and shopping centers.
9
The table below sets forth by type of security property the Bank's
multi-family and commercial real estate (including land) loans at March 31,
1999.
Amount of
Outstanding Non-Performing
Number of Principal or Of Concern
Loans Balance Loans
----- ------- -----
(Dollars in Thousands)
Apartment buildings.................................... 3 $ 268 $ ---
Church................................................. 6 2,628 ---
Small business facilities and office
buildings............................................ 78 22,388 ---
Hotels 3 5,801 ---
Shopping centers....................................... 2 813 ---
---------- --------- ------------
Total commercial and multi-family
real estate loans................................... 92 $ 31,898 $ ---
========== ========= ============
At March 31, 1999, the Bank had a total of 13 multi-family and
commercial real estate loans with outstanding principal balances in excess of
$1.0 million. Each of these loans was performing in accordance with its terms at
March 31, 1999.
Multi-family and commercial real estate loans originated by the Bank
generally have terms ranging from 5 to 20 years and up to 30 year amortization
schedules. Rates on such loans generally either (i) adjust (subject, in some
cases, to specified interest rate caps) at one, three or five year intervals to
specified spreads over an index, (ii) float (subject, in some cases, to
specified interest rate caps) with changes in a specified prime rate or (iii)
carry fixed rates. Under the Bank's current loan policy, multi-family and
commercial real estate loans (other than loans to facilitate) are written in
amounts of up to 80% of the appraised value of the properties.
Appraisals on properties securing multi-family and commercial real
estate property loans originated by the Bank are performed by an independent
appraiser approved by the Bank prior to the time the loan is made. All
appraisals on multi-family and commercial real estate loans are reviewed by the
Bank's management. In addition, the Bank's underwriting procedures generally
require verification of the borrower's credit history, income and financial
statements, banking relationships and income projections for the property.
Historically, personal guarantees were not generally obtained for the Bank's
multi-family and commercial real estate loans. While the Bank continues to
monitor multi-family and commercial real estate loans on a regular basis after
origination, updated appraisals are not normally obtained after closing unless
the Bank believes that there are questions regarding the progress of the loan or
the value of the collateral.
Multi-family and commercial real estate loans generally present a
higher level of credit risk than loans secured by one- to four-family
residences. This greater risk is due to several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effect of general economic conditions on income-producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by multi-family and commercial real
estate is typically dependent upon the successful operation of the related real
estate project. If the cash flow from the project is reduced (for example, if
leases are not
10
obtained or renewed, or a bankruptcy court modifies a lease term, or a major
tenant is unable to fulfill its lease obligations), the borrower's ability to
repay the loan may be impaired.
Construction or Development Lending. The Bank makes a limited number of
construction loans to individuals for the construction of their residences. The
Bank generally requires that the customer have a general contractor. The Bank
also makes loans to builders for presold and speculative single-family
construction purposes and a limited number of multi-family and commercial
construction loans. At March 31, 1999, the Bank's construction loan portfolio
totaled $8.2 million (including a $155,000 loan on a low-income housing
project), or 2.5% of its total loan portfolio. As of that date, all of these
loans were secured by property located within the Bank's market area.
Construction loan terms to individuals are generally made under the ARM
program, although at a rate higher than that for a permanent ARM loan, with
provisions for converting to a fixed-rate loan upon completion of the
construction. Fixed-rate loans for construction purposes are limited to a
maximum term of 15 years. During the construction phase, the borrower pays
interest only. Residential construction loans are generally underwritten
pursuant to the same guidelines used for originating permanent residential loans
except that the record of the builder is also considered.
Construction loans to builders are written for a term of 18 months at a
fixed rate of interest. Construction loans are obtained primarily through
continued business from builders who have previously borrowed from the Bank, as
well as referrals from existing customers. The application process includes a
submission of accurate plans, specifications and costs of the project to be
constructed. These items are also used as a basis for determining the appraised
value of the subject property. Loans are based on the lesser of the current
appraised value or the cost of construction (land plus building). From time to
time, the Bank has lent funds for the development and subdivision of lots,
although the Bank had no such loans in its portfolio at March 31, 1999.
Commercial Business Lending. Federally chartered savings institutions,
such as Permanent Federal, are authorized to make secured or unsecured loans and
issue letters of credit for commercial, corporate, business and agricultural
purposes and to engage in commercial leasing activities, up to a maximum of 10%
of total assets.
A small but increasing part of the Bank's loan portfolio, at March 31,
1999, Permanent Federal had $17.3 million in commercial business loans
outstanding (representing 5.3% of the Bank's total loan portfolio). At March 31,
1999, Permanent Federal had $136,000 of standby letters of credit outstanding.
Originations, Purchases, Sales and Servicing of Loans and Mortgage-Backed
Securities
The Bank originates real estate loans through marketing efforts, the
Bank's customer base, walk-in customers and referrals from realtors and
builders. The Bank originates both adjustable-rate and fixed-rate loans. Its
ability to originate loans is dependent upon the relative demand for fixed-rate
or ARM loans in the origination market, which is affected by the term structure
(short-term compared to long-term) of interest rates, as well as the current and
expected future level of interest rates and competition.
11
During fiscal 1999, the Bank originated a total of $168.8 million in
loans. Of the loans originated during the year, $55.9 million were one- to
four-family real estate loans, $76.9 million were consumer loans, $27.7 million
were commercial loans, and $3.9 million were construction loans.
The Bank's current policy is to sell all fixed-rate conventional loans
that are originated or converted with terms of more than 15 years. Likewise, all
FHA and VA loans are sold, irrespective of term. In contrast, all ARM loans,
regardless of the term, are retained and other loans (generally non-conforming
loans) are also retained in the Bank's portfolio. Servicing is retained on all
loan sales, except for FHA and VA mortgage loans. During fiscal 1997, 1998 and
1999, the Bank sold $1.0 million, $5.1 million and $12.7 million of loans,
respectively.
With respect to the loans that the Bank sells, it is the policy of the
Bank to sell current production of such loans as quickly as the loans are
originated, unless it is determined to temporarily hold these loans until more
favorable rates are available. However, it is the Bank's policy that in no event
shall a loan continue to be held for sale if the price to be received on that
loan drops below net 98 (98 cents on the dollar). In addition, the Bank's policy
provides that any loan held for sale which bears a rate too high to sell in the
secondary market without having to accept a discounted premium will continue to
be held until such time as market conditions allow the loan to be sold without a
premium discount.
Government loans are committed for sale with a private investor the
same day an application is received. The requirements for delivery are on a
"best effort" basis, providing that if for any reason the loan does not close,
there is no financial exposure to the Bank.
The Board of Directors receives a monthly report identifying the number
and dollar amount of mortgage loans not sold which present any potential
interest rate risk exposure to the Bank. The report further details the current
secondary market buy rates and the estimated gain or loss at such rates. The
Bank attempts to limit any interest rate risk exposure created by commitments to
make or sell loans by limiting the number of days between the commitment and
closing, charging fees for commitments and managing the amount of its uncovered
commitments outstanding at any one time.
The Bank occasionally purchases loans and loan participations for one-
to four-family, multi-family and commercial real estate loans. Such loans had a
carrying value of approximately $7.1 million, $5.5 million, and $14.3 million at
March 31, 1997, 1998 and 1999, respectively.
During the past three fiscal years, the Bank has purchased
mortgage-backed securities in order to supplement loan demand. In fiscal 1996,
the Bank purchased $30.2 million of mortgage-backed securities and purchased
$34.5 million and $18.5 million of such securities in fiscal 1997 and 1998,
respectively. In fiscal 1999, the Bank purchased $20.9 million of mortgage
backed securities. The mortgage-backed securities purchased generally had fixed
rates and maturities of up to 15 years and adjustable rates up to 30 years. See
"Investment Activities."
The Bank had commitments to make loans, including participations, of
approximately $1.6 million, $4.9 million and $23.4 million (excluding
undisbursed portions of loans in process) at March 31, 1997, 1998 and 1999,
respectively. In addition, the Bank had approximately $104,000,
12
$100,000 and $106,000 in commitments to sell loans at March 31, 1997, 1998 and
1999, respectively.
The amount of loans serviced by the Bank for others totaled $34.3
million, $32.5 million and $36.3 million at March 31, 1997, 1998 and 1999,
respectively.
The Bank generally earns servicing fees of 25 basis points for
servicing loans for others. For the years ended March 31, 1997, 1998 and 1999
such fees amounted to approximately $101,000, $84,000 and $82,000, respectively.
13
The following table sets forth the loan origination, purchase and
repayment activities of the Bank for the periods indicated.
1997 1998 1999
------------ --------------------
cOriginations by type:
Real estate - one- to four-family....................... $32,020 $39,373 $55,948
- multi-family.............................. --- --- ---
- commercial real estate.................... --- 3,144 4,308
- construction.............................. 6,070 3,634 3,943
Non-real estate ........................................
-consumer............................... 24,647 24,829 76,933
-commercial business.................... 16 5,192 27,676
------ ------ ------
Total loans originated .......................... 62,753 76,172 168,808
------ ------ ------
Purchases:
Real estate - one- to four-family....................... $ --- $ --- $ ---
- multi-family.............................. --- --- ---
- commercial real estate.................... --- --- ---
- construction.............................. --- --- ---
Non-real estate - consumer.............................. --- --- ---
- commercial business....................... --- --- ---
- commercial paper.......................... 17,741 17,257 43,552
- bankers' acceptances...................... --- --- ---
------ ------ ------
Total loans purchased............................ 17,741 17,257 43,552
Mortgage-backed securities............................... 34,491 18,485 20,919
------ ------ ------
Total purchases.................................. 52,232 35,742 64,471
------ ------ ------
Sales and Principal Repayments:
Sales:
Real estate - adjustable-rate one- to four-family......... $ --- $ ---$ ---
- fixed-rate one- to four-family....................... 962 5,078 12,721
- multi-family.............................. --- --- ---
- commercial real estate.................... --- --- ---
- construction.............................. --- --- ---
Non-real estate - consumer.............................. --- --- ---
- commercial business............................. --- --- ---
------ ------ ------
Total loans sold................................. 962 5,078 12,721
Mortgage-backed securities.............................. 11,143 15,083 18,223
------ ------ ------
Total sales...................................... 12,105 20,161 30,944
Principal repayments...................................... 91,807 97,399 187,707
------ ------ ------
Total reductions................................. 103,912 117,560 218,651
Increase (decrease) in other items, net................... --- --- ---
------ ------ ------
Net increase (decrease).......................... $11,073 $ (5,646) $ 14,628
====== ====== ========
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 10 to 15 days after the scheduled payment date, depending on the
type of loan, and a second notice is sent after 16 days. In the case of consumer
loans, a late notice is sent five days after the scheduled payment date and a
second notice is sent after ten days. If the delinquency is not cured by this
time, contact with the borrower is made by phone. Additional written and verbal
contacts or meetings with the borrower are made to the extent necessary. With
respect to mortgage loans, if the delinquency is not cured by the 90th day, a
30-day default letter is sent and, once that period lapses, appropriate action
to foreclose on the property is initiated. Interest income on loans at this
point is reduced by the full amount of accrued and uncollected interest. If
foreclosed, the property is sold at a sheriff's sale and typically is purchased
by the Bank. Delinquent consumer loans are handled in a similar manner. If these
efforts fail to bring the loan current, appropriate action may be taken to
collect any loan payment that remains delinquent. The Bank's procedures for
repossession and sale of consumer collateral are subject to various requirements
under Indiana consumer protection laws.
Real estate acquired by Permanent Federal as a result of foreclosure or
by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired, it is recorded at the lower of cost or
estimated fair value at the date of acquisition, and any write-down resulting
therefrom is charged against the allowance for loan losses. Upon acquisition,
all costs incurred in maintaining the property are expensed. However, costs
relating to the development and improvement of the property are capitalized to
the extent of net realizable value.
Prior to the consummation of commercial real estate loans, financial
information on the project and its principals are reviewed, and appraisals are
obtained and reviewed. Subsequent balance sheets and operating statements are
obtained and reviewed on at least an annual basis. On loans that indicate
potential weaknesses, more frequent reviews are made.
A committee of senior officers and outside directors of the Bank
periodically reviews large loans (generally, those unsecured loans in excess of
$250,000, residential real estate loans in excess of $350,000 and commercial
credits in excess of $1,000,000). The committee examines the borrower's
financial statements and position, prior loan performance and any industry or
economic trends which would potentially affect the borrower's operations or
collateral values.
Appraisals are obtained on properties that are transferred to real
estate owned. The Bank performs periodic fair value computations using
methodology consistent with that of an appraiser. Appraisals are assigned only
to qualified appraisers located within or familiar with the location of the
subject property. Net realizable value calculations are performed on all
properties in either real estate owned or loans classified as impaired. The
result of these calculations may indicate a writedown of the asset or specific
reserve allowance.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the
15
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "special mention" by management.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances. Additionally, while the
Bank's asset quality is generally strong and its reserves adequate, changes in
the local or national exonomy could adversely affect asset quality or call for
the establishment of additional reserves.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews problem loans and real estate acquired through foreclosure in its
portfolio to determine whether such assets require classification in accordance
with applicable regulations. Classified assets of the Bank at March 31, 1999,
(without deduction for specific valuation allowances of $236,000) all of which
are included in the table of non-performing assets.
At March 31,
1997 1998 1999
(In Thousands)
Substandard (including real
estate owned)................................... $2,965 $1,372 $2,606
Doubtful......................................... 87 141 975
Loss............................................. --- --- ---
---------- ---------- ----------
Total classified assets
(including real estate
owned)..................................... $3,052 $1,513 $3,581
====== ====== ======
Special mention.................................. $4,587 $2,753 $4,633
------ ------ ======
Total classified assets $8,214
======
(including real estate
owned) and special
mention.................................... $7,639 $4,266
====== ======
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,
1995 1996 1997
----------------------------- --------------------------------- --------------------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount
------------- ----------- --------------------------- --------------- ---------------- ---------------
One- to four-
family...................... $ 1 68.2% $ 90 69.4% $ 90 71.7% $ ---
Multi-family................. 210 7.9 166 5.5 183 3.8 ---
Commercial real
estate...................... --- 2.9 --- 2.4 --- 1.9 ---
Construction or
development................. --- 1.2 --- 1.3 --- 1.0 ---
Consumer..................... 18 19.7 50 20.3 68 21.1 50
Commercial business.......... 107 0.1 --- --- --- -- ---
Bankers' acceptances......... --- -- --- 0.1 --- -- ---
Commercial paper............. --- -- --- 1.0 --- .5 ---
Unallocated
Consumer................... 382 N/A 456 N/A 454 N/A 520
One- to four-family........ 630 N/A 647 N/A 876 N/A 435
Multi-family and
commercial
real estate.............. 734 N/A 829 N/A 455 N/A 968
Construction or
development.............. 11 N/A --- N/A --- N/A ---
------ ----- -------- ----- ------ ----- ----------
Total................... $2,093 100.00% $2,238 100.00% $2,126 100.00% $1,973
====== ====== ====== ====== ====== ====== ======
1998 1999
--------------------------- ------------------
Percent Percent
of Loans of Loans
in Each in Each
Category Category
to Total to Total
Loans Amount Loans
------------- ---------------- -----------
One- to four-
family...................... 69.7% $ 3 52.8%
Multi-family................. 1.8 --- 1.5
Commercial real
estate...................... 2.1 --- 8.4
Construction or
development................. 1.5 --- 2.5
Consumer..................... 19.2 256 26.6
Commercial business.......... 1.7 --- 8.2
Bankers' acceptances......... -- ---
Commercial paper............. 4.0 ---
Unallocated
Consumer................... N/A 997 N/A
One- to four-family........ N/A 749 N/A
Multi-family and
commercial
real estate.............. N/A 643 N/A
Construction or
development.............. N/A 58 N/A
----- --------- -----
Total................... 100.00% $2,706 100.00%
====== ====== ======
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, 1999, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 40.5%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's liquidity
needs, asset/liability management policies, investment quality and marketability
and performance objectives.
Securities. At March 31, 1999, Permanent Federal's securities
(including mortgage-backed securities) totaled $124.2 million, or 14.1% of total
assets. As of such date, the Bank also had a $5.5 million investment in FHLB
stock, satisfying its requirement for membership in the FHLB of Indianapolis.
OTS and accounting guidelines regarding investment portfolio accounting
require institutions to categorize all securities and certain other assets as
"held to maturity", "available for sale" or "trading." The portion of the
investment portfolio which is held with the intent to hold to maturity is
accounted for on an amortized cost basis. Assets which are categorized as
available for sale are carried at estimated fair value. At March 31, 1999, the
Company had $117.3 million in securities "available for sale," $6.9 million of
securities which are held to maturity, and no securities identified as
"trading." The securities available for sale at March 31, 1999 had net
unrealized gains of $9,869. At March 31, 1998, the Bank had $168.3 million in
securities available for sale, $18.9 of securities classified as held to
maturity and no securities identified as "trading." The securities available for
sale at March 31, 1998 had net unrealized gains of $372,373.
18
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,
-----------------------------------------------------------------------------
1997 1998 1999
-----------------------------------------------------------------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
(Dollars in Thousands)
Available for sale securities at fair value:
U.S. government securities $ 7,009 3.66% $ 4,033 2.09% $ - - - - - - %
Federal agency securities ............ 78,171 40.79 100,972 52.43 62,478 48.18
Mortgage backed securities............ 74,052 38.64 62,652 32.53 54,811 42.27
Municipal bonds & other............... - - - - - - 614 0.32 - - - - - -
------------------------- ---------- -------------------------------------
Subtotal........................... 159,232 83.09% 168,271 87.37% 117,289 90.45%
Held to maturity securities at amortized cost:
Municipal bonds & other.............. 25 0.1 - - - - - - 6,920 5.34
Mortgage backed securities........... 27,181 14.18 18,861 9.79% - - - - - -
FHLB stock........................... 5,193 2.71 5,466 2.84 5,466 4.22
Subtotal.......................... 32,399 16.91 24,327 12.63 12,386 9.55
------ --------- ------ -------- ------
Total securities............... $191,631 100.00% $192,598 100.00% $129,674 100.00%
======== ========= ======== ======= ======== =======
Other interest earning deposits with banks $3,154 100.00% $1,808 100.00% $6,361 100.00%
====== ========== ====== ======= ====== =======
The following table sets forth as of March 31, 1999 the composition and
maturities of the securities portfolio, excluding FHLB stock.
At March 31, 1999
Less Than 1 to 5 Over 5 Total Investment
1 Year Years Years Securities
Fair Value Fair Value Fair Value Fair Value Amortized Cost
(Dollars in Thousands)
Federal agency obligations.......... $1,965,000 $14,916,329 $45,596,667 $62,477,996 $62,947,099
Mortgage backed securities.......... 123,859 2,858,532 51,828,699 54,811,090 54,332,118
State and local government
obligations and other............ 1,008,722 5,618,513 6,627,235 6,919,793
----------- ------------------------------- ----------- ------------
Total investment securities......... $3,097,581 $17,774,861 $103,043,879 $123,916,321 $124,199,010
========== =========== ============ ============ ============
At March 31, 1999 the Bank's securities portfolio did not contain
securities of any issuer with an aggregate book value in excess of 10% of the
Bank's retained earnings, excluding securities issued by the United States
Government or its agencies.
The Bank's securities portfolio is managed in accordance with a written
investment policy adopted by the Board of Directors. Investments may be made by
authorized Bank officers within specified limits. See also Note 2 of the Notes
to Consolidated Financial Statements in the Annual Report.
Mortgage-Backed Securities. The Bank has a portfolio of mortgage-backed
securities and has utilized such investments to complement its mortgage lending
activities. See "Lending Activities -One-to Four-Family Residential Mortgage
Lending." At March 31, 1999, the Bank's mortgage-backed securities totaled $54.8
million. At such date, the mortgage-backed securities portfolio consisted
entirely of securities backed by loans insured or guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA")
19
or the Federal Home Loan Mortgage Corporation ("FHLMC"). At March 31, 1999, the
Bank's portfolio consisted of $54.8 million available for sale. At such date,
the portfolio had a weighted average interest rate of 6.33%.
For information regarding the carrying and market values of Permanent
Federal's mortgage-backed securities portfolio, see Note 2 of the Notes to
Consolidated Financial Statements in the Annual Report.
Under the OTS risk-based capital requirements, GNMA mortgage-backed
securities have a zero percent risk weighting and FNMA, FHLMC and AA-rated
mortgage-backed securities have a 20% risk weighting, in contrast to the 50%
risk weighting carried by one- to four-family performing residential mortgage
loans.
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization
and repayment of loan principal and interest (including mortgage-backed
securities), maturities of securities, mortgage-backed securities and short-term
investments, FHLB advances and funds provided from operations.
Borrowings are used to compensate for seasonal reductions in deposits
or deposit inflows at less than projected levels, to purchase investments
(including mortgage-backed securities) and to support lending activities. At
March 31, 1999, the Bank's borrowings consisted of FHLB advances totaling $96.5
million. See Notes 6, 7 and 8 of the Notes to Consolidated Financial Statements
in the Annual Report.
Deposits. Permanent Federal offers a variety of deposit accounts having
a wide range of interest rates and terms. The Bank's deposits consist of
passbook accounts, NOW, money market and other checking accounts and certificate
accounts. The Bank relies primarily on advertising, competitive pricing policies
and customer service to attract and retain these deposits. Permanent Federal
solicits deposits from its market area only and does not solicit or accept
brokered deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. The ability of the Bank
to attract and maintain certificates of deposit, and the rates paid on these
deposits, has been and will continue to be significantly affected by market
conditions. The Bank believes that the recent trends in deposit migration
represents an industry phenomenon and are not unique to the Bank. The Bank will
continue to remain rate competitive on maturing deposits and to utilize FHLB
advances as a funding alternative when necessary. During fiscal years 1997, 1998
and 1999, the Bank experienced a net inflow as a result of branch acquisitions.
The FHLB has recently introduced several new advance programs that offer
variable rates or amortizing principal amounts specifically tied to funding one-
to four-family residential loans. These advances have proven to be a less costly
funding source after consideration of the cost of deposit insurance associated
with traditional deposits.
20
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,
---------------------------------------------------------------------------
1997 1998 1999
------ ------ -----
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(In Thousands)
Transactions and Savings Deposits:
Commercial Demand $ 902 0.32% $1,755 0.62% $12,268 3.53%
Passbook Accounts (2.75-5.59%) 54,245 19.20 52,051 18.27 59,482 17.13
NOW Accounts (2.00-2.60%) 24,046 8.51 22,468 7.89 30,889 8.89
Money Market Accounts (2.75-3.00%) 11,542 4.08 11,542 4.05 26,755 7.70
--------- --------- -------- -------- -------- --------
Total Non-Certificates 90,736 32.11 87,816 30.83 129,394 37.25
--------- --------- -------- -------- -------- --------
Certificates:
0.00 - 3.49% 158 0.06 66 0.02 40 .01
3.50 - 5.49% 81,947 29.00 61,523 21.59 120,750 34.77
5.50 - 7.49% 104,618 37.02 130,864 45.93 92,404 26.60
7.50 - 9.49% 3,295 1.17 2,673 0.94 2,753 .80
--------- --------- -------- -------- -------- --------
Total Certificates 190,018 67.24 195,126 68.48 215,947 62.18
--------- --------- -------- -------- -------- --------
Accrued Interest 1,809 0.65 1,971 0.69 1,985 .57
--------- --------- -------- -------- -------- --------
Total Deposits $282,563 100.00% $284,913 100.00% $347,326 100.00%
======== ========= ======== ======== ======== ========
The following table sets forth the savings flows at the Bank during the
periods indicated.
Year Ended March 31,
----------------------------------------
1997 1998 1999
-------- --------- ------------
(Dollars in Thousands)
Opening balance.... $280,008 $280,753 $ 282,942
Deposits........... 566,909 585,093 1,097,472(1)
Withdrawals........ 575,977 592,939 1,046,582
Interest credited.. 9,813 10,035 11,509
-------- --------- ------------
Ending balance..... $280,753 $282,942 $ 345,341
======== ======== =========
Net increase....... $ 745 $ 2,189 $ 62,399
======== ========= ==========
Percent increase.. 0.26% 0.78% 22.1 %
======== ========== ==========
(1) includes $78,749 of deposits acquired in branch acquisition
21
The following table sets forth the rate and maturity information for
the Bank's certificates of deposit as of March 31, 1999.
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, 1999.................... 40 21,764 17,370 39,174 18.14%
September 30, 1999............... 25,522 13,554 13 39,089 18.10
December 31, 1999................ 11,959 7,611 7 19,578 9.07
March 31, 2000................... 13,061 6,914 45 20,020 9.27
June 30, 2000.................... 10,882 4,969 15,851 7.34
September 30, 2000............... 11,962 8,286 20,248 9.38
December 31, 2000................ 4,043 2,948 204 7,195 3.33
March 31, 2001................... 5,419 1,253 1,112 7,784 3.60
June 30, 2001.................... 4,520 785 567 5,871 2.72
September 30, 2001............... 1,537 648 718 2,903 1.34
December 31, 2001................ 497 757 87 1,341 0.62
March 31, 2002................... 1,099 1,876 2,975 1.38
Thereafter....................... 8,485 25,433 33,918 15.71
--------- ------- -------- ---------- -------- -------
Total......................... $ 40 $120,750 $ 92,404 $ 2,753 $215,947 100.00%
======= ======== ======== ========= ======== ======
Percent of total.............. 0.02% 55.92 % 42.79% 1.27% 100.00 %
====== ========= ======= ======= =======
The following table indicates the amount of the Bank's certificates of
deposit and public funds by time remaining until maturity as of March 31, 1999.
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.............................. $34,499 $35,451 $31,167 $84,538 $185,655
Certificates of deposit of
$100,000 or more........................... 3,798 3,246 5,911 13,542 26,497
Public funds(1)............................. 877 392 2,520 6 3,795
---------- ------------ ---------- -------------- ------------
Total certificates of $39,174 $39,089 $39,598 $98,086 $215,947
======= ======== ======= ======== ========
deposit....................................
- ---------------
(1) Deposits from governmental and other public entities.
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings when they are a less costly
source of funds or can be invested at a positive rate of return.
Permanent Federal may obtain advances from the FHLB of Indianapolis
upon the security of its FHLB capital stock and certain of its mortgage loans
and mortgage-backed securities. Such advances may be made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. At March 31, 1999 the Bank's FHLB advances totaled $96.5 million.
See also Note 6 of the Notes to Consolidated Financial Statements in the Annual
Report.
22
The following table sets forth the Bank's maximum month-end balance and
average balance of FHLB advances and other borrowings for the periods indicated.
Year Ended March 31,
1997 1998 1999
----------- ----------- --------------
(In Thousands)
Maximum Balance:
FHLB advances.................................... $100,141 $107,778 $102,003
Securities sold under agreements to repurchase... 2,945 445 ---
FHLB overnight borrowings........................ 1,710 3,201 ---
----------- ----------- --------------
$104,796 $111,424 $102,003
======== ======== ========
Average Balance:
FHLB advances.................................... $ 92,604 $101,711 $94,462
Securities sold under agreements to repurchase... 1,485 103 10
FHLB overnight borrowings........................ 208 30 19
----------- ------------- ------------
$ 94,297 $101,844 $ 94,491
======== ======== ========
The following table sets forth certain information as to the Bank's
FHLB advances and FHLB overnight borrowings at the dates indicated.
Year Ended March 31,
1997 1998 1999
----------- ----------- --------------
(In Thousands)
FHLB advances........................................ $ 98,484 $ 99,353 $ 96,504
Securities sold under agreements to repurchase....... 607 --- ---
FHLB overnight borrowings............................ 1,187 --- ---
---------- ------------- ------------
Total borrowings................................ $100,278 $ 99,353 $ 96,504
======== ======== ========
Weighted average interest rate of FHLB advances...... 5.64% 5.39% 5.10%
Weighted average interest rate of securities sold
under agreements to repurchase...................... 5.19% ---% ---%
Weighted average interest rate
of FHLB overnight borrowings........................ ---% ---% ---%
23
Service Corporation Activities
Federal associations generally may invest up to 2% of their assets in
service corporations, plus an additional 1% of assets if for community purposes.
In addition, federal associations may invest up to 50% of their regulatory
capital in conforming loans to service corporations in which they own more than
10% of the capital stock. In addition to investments in service corporations,
federal associations are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities which a federal association may engage
in directly.
Permanent Federal has one first-tier service corporation, Perma Service
Corp. ("Perma Service"), located in Evansville, Indiana. Perma Service has
approximately a 12.5% interest, along with seven other financial institutions,
in Family Financial Life Insurance Company ("FFLIC"), which underwrites various
types of life and disability insurance and annuity programs. FFLIC reinsures a
majority of the risk it underwrites with other insurers. The Bank uses the
equity method to account for its investment and in fiscal 1990, recognized
$89,400 in income from FFLIC.
Perma Service also has one wholly owned subsidiary, Permanent Insurance
Agency Inc. ("PIAI"), which offers, on an agency basis, casualty, life,
accident, health, mortgage, disability, and consumer credit insurance. PIAI had
net income of $10,300 for the year ended March 31, 1999.
Through Perma Service, the Bank also provides brokerage services, on an
agency basis, through INVESTTM.
Competition
Permanent Federal faces strong competition, both in originating real
estate and other loans and in attracting deposits. Competition in originating
real estate loans comes primarily from commercial banks, other thrifts and
mortgage companies. The Bank competes for loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides to borrowers.
The Bank attracts most of its deposits from Vanderburgh, Gibson,
Warrick, Posey and Dubois Counties. Competition for those deposits is
principally from commercial banks, other thrifts, credit unions and other
financial intermediaries doing business in the same community. The ability of
the Bank to attract and retain deposits depends on its ability to provide an
investment opportunity that satisfies the requirements of investors as to rate
of return, liquidity, risk and other factors. The Bank competes for these
deposits by offering a variety of deposit accounts at competitive rates and
convenient business hours.
Regulation
General. Permanent Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Indianapolis and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). As the savings and loan holding company of the Bank, the Holding
Company also is subject to federal regulation and oversight. The purpose of the
regulation of the Holding Company and other
24
holding companies is to protect subsidiary savings associations. The Bank is a
member of the Savings Association Insurance Fund (the "SAIF") and the deposits
of the Bank are insured by the FDIC. As a result, the FDIC has certain
regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of Permanent Federal, for which reports have been issued,
were as of December 1997 and April 1991, respectively. When these examinations
are conducted by the OTS and the FDIC, the examiners may require the Bank to
provide for higher general or specific loan loss reserves. Financial
institutions in various regions of the United States have been called upon by
examiners to write down assets and to establish increased levels of reserves,
primarily as a result of perceived weaknesses in real estate values and a more
restrictive regulatory climate.
All savings associations are subject to a semi-annual assessment, based
upon the savings association's total assets, to fund the operations of the OTS.
Permanent Federal's OTS assessment for the fiscal year ended March 31, 1999 was
$100,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws and regulations, and it is prohibited from
engaging in any activities not permitted by such laws and regulations. For
instance, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. The Bank is in
compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to 15% of unimpaired capital and surplus (except for loans fully
secured by certain readily marketable collateral, in which case this limit is
increased to 25% of unimpaired capital and surplus). At March 31, 1999, the
Bank's lending limit under this restriction was $4.9 million. At March 31, 1999,
the Bank had no loans in excess of this limit. The Bank is in compliance with
the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on matters such as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and
25
compensation and other employee benefits. Any institution which fails to comply
with these standards must submit a compliance plan. A failure to submit a plan
or to comply with an approved plan will subject the institution to further
enforcement action. The Bank has not been required to submit a compliance plan.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member
of the SAIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the SAIF or the BIF. The FDIC also has the
authority to initiate enforcement actions against savings associations, after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., those with a core capital ratio of at least 5%, a ratio
of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital")
of at least 6% and a risk- based capital ratio of at least 10%) and considered
healthy pay the lowest premium while institutions that are less than adequately
capitalized (i.e., those with core and Tier 1 risk-based capital ratios of less
than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions is made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may impose special assessments on SAIF members to repay amounts
borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
Legislative Action
On September 30, 1996, President Clinton signed into law the Economic
Development and Regulatory Paperwork Reduction Act of 1996 (the "Act"). The
Act's principal provisions relate to recapitalization of SAIF, but it also
contains numerous regulatory relief measures, some of which are directly
applicable to the Bank.
Pursuant to the Act, as of January 1, 1997, commercial banks will be
required to share in the payment of interest due on Financial Corporation
("FICO") bonds used to rescue the savings and loan industry in the 1980's.
Annual FICO assessments to be added to deposit insurance premiums are expected
to equal approximately 6.4 basis points for SAIF members and 1.3 basis points
for BIF members from January 1, 1997 through December 31, 1999, and
approximately 2.4 basis points for both BIF and SAIF members thereafter.
26
Although this provision of the Act establishes a time frame for the
eventual elimination of the thrift charter, it contains no provisions concerning
the form the current thrift charter may be required to take. The Bank cannot
determine at this time what effect this provision will have on financial
position or operations.
Finally, the Act contains several other provisions designed to reduce
regulatory burdens associated with compliance with various consumer and other
laws applicable to the Company, including for example, provisions designed to
coordinate the disclosure and other requirements under the Truth-in-Lending and
Real Estate Settlement Procedures Act, modify certain insider lending
restrictions, permit OTS to allow exemptions to anti-tying prohibitions and
exempt certain transactions and simplify certain disclosures under the
Truth-in-Lending Act.
In addition, the United States Department of the Treasury recently
released a form of proposed legislation that would restructure the regulation of
the financial services industry, by among other things, eliminating the various
restrictions on the ability of banks to affiliate with companies engaged in
lines of business not generally currently permissible, such as securities and
insurance activities. Although the Company believes that the form of legislation
currently under consideration will not have a material adverse effect on the
Company, the Company cannot determine, whether or in what form, such legislation
will eventually be enacted or its effect on the Bank.
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At March 31, 1999, the Bank had no purchased mortgage servicing
rights.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. At March 31, 1999, the Bank's service corporation,
Perma Service, was an includable subsidiary; however, Perma Service's investment
in FFLIC was not considered an includable investment and, accordingly, the Bank
was required to deduct 100% of its investment in FFLIC from capital. At March
31, 1999, the non- includable portion of the Bank's investment in FFLIC totaled
$723,000. See also "Service Corporation Activities."
27
At March 31, 1999, the Bank had core capital of $32.8 million, or 6.76%
of adjusted total assets, which is approximately $13.4 million above the minimum
requirement of 4% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 4% of
adjusted total assets (as defined by regulation). Core capital generally
consists of tangible capital plus certain intangible assets, including a limited
amount of purchased credit card relationships. As a result of the prompt
corrective action provisions discussed below, however, a savings association
must maintain a core capital ratio of at least 4% to be considered adequately
capitalized unless its supervisory condition is such to allow it to maintain a
3% ratio. At March 31, 1999, the Bank had no intangibles which were subject to
these tests.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Other than goodwill, the
Bank's only exclusion from capital and assets at March 31, 1999 was its
investment in FFLIC.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
OTS Regulations also require that every savings association with more
than normal interest rate risk exposure to deduct from its total capital, for
purposes of determining compliance with such requirement, an amount equal to 50%
of its interest-rate risk exposure multiplied by the present value of its
assets. This exposure is a measure of the potential decline in the net portfolio
value of a savings association, greater than 2% of the present value of its
assets, based upon a hypothetical 200 basis point increase or decrease in
interest rates (whichever results in a greater decline). Net portfolio value is
the present value of expected cash flows from assets, liabilities and
off-balance sheet contracts. The rule will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this requirement unless the
OTS determines otherwise. Until the rule is finalized, no determination can be
made of what, if any, impact this rule may have on the Bank.
28
At March 31, 1999, the Bank had total capital of $34.3 million
(including $32.8 million in core capital) and risk-weighted assets of $280.1
million (including $9.7 million in converted off- balance sheet assets) or total
capital of 12.2% of risk-weighted assets. This amount was $11.9 million above
the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement actions by the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability and the value of the Common Stock purchased in the Conversion.
Holding Company shareholders do not have preemptive rights; and therefore, if
the Holding Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions or requirements on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings association from declaring or paying any dividends or from repurchasing
any of its stock if, as a result, the regulatory capital of the association
would be reduced below the amount required to be maintained for the liquidation
account established in connection with its mutual to stock conversion.
29
Generally, savings associations, such as the Subsidiary Bank that
before and after the proposed distribution meet their capital requirements, may
make capital distributions during any calendar year equal to the greater of 100%
of net income for the year-to-date plus 50% of the amount by which the lesser of
the association's tangible, core or risk-based capital exceeds its capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of their net income for the most recent four quarter
period. However, an association deemed to be in need of more than normal
supervision by the OTS may have its dividend authority restricted by the OTS.
Permanent Federal may pay dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report. This liquid asset ratio requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings associations. At the present time, the minimum liquid asset ratio
is 4%.
Penalties may be imposed upon associations for violations of the liquid
asset ratio requirement. At March 31, 1999, the Bank was in compliance with the
requirements, with an overall liquid asset ratio of 40.5%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and reemphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
30
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, require that transactions be reported in a manner that best reflects
their underlying economic substance and inherent risk and that financial reports
must incorporate any other accounting regulations or orders prescribed by the
OTS.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative, the savings association
may maintain 60% of its assets in those assets specified in Section 7701(a)(19)
of the Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At March 31, 1999, the
Bank met the test and has always met the test since it has been in effect.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
BIF. If such an association has not yet requalified or converted to a national
bank, its new investments and activities are limited to those permissible for
both a savings association and a national bank, and it is limited to national
bank branching rights in its home state. In addition, the association is
immediately ineligible to receive any new FHLB borrowings and is subject to
national bank limits for payment of dividends. If such association has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking practices to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of
Permanent Federal, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch, by
Permanent Federal. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to
30
devote additional funds for investment and lending in its local community. The
Bank was examined for CRA compliance in November 1997 and received a rating of
satisfactory.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates, however;
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case-by-case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as and will become subject to
the restrictions applicable to bank holding companies. The activities authorized
for a bank holding company are more limited than are the activities authorized
for a unitary or multiple savings and loan holding company. See "- Qualified
Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the
32
information, proxy solicitation, insider trading restrictions and other
requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Holding Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At March 31, 1999, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Indianapolis, which is one of 12 regional FHLBs ("FHLB System"), that
administers the home financing credit function of savings associations. Each
FHLB serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB which are subject to the regulation and oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At March 31, 1999, the Bank had $5.5 million in FHLB
stock, which was in compliance with this requirement. In past years, the Bank
has received substantial dividends on its FHLB stock. Over the past five fiscal
years, such dividends have averaged approximately 8% and were 8.03% for fiscal
year ended March 31, 1999. Under federal law the FHLBs are required to provide
funds for the resolution of troubled savings associations and to contribute to
low- and moderately priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low- and
moderate-income housing projects. These contributions have affected adversely
the level of FHLB dividends paid and could continue to do so in the future.
These contributions could also have an adverse effect on the value of FHLB stock
in the future. A reduction in value of Permanent Federal's FHLB stock may result
in a corresponding reduction in Permanent Federal's capital. For the fiscal year
ended March 31, 1999, dividends paid by the FHLB of Indianapolis to the Bank
totaled $437,696, which constitute a $4,873 increase over the amount of
dividends received in the fiscal year ended March 31, 1998.
33
Federal and State Taxation
Savings associations such as the Bank that meet certain definitional
tests relating to the composition of assets and other conditions prescribed by
the Internal Revenue Code of 1986, as amended (the "Code"), had been permitted
to establish reserves for bad debts and to make annual additions thereto which
could, within specified formula limits, be taken as a deduction in computing
taxable income for federal income tax purposes. The amount of the bad debt
reserve deduction for "non-qualifying loans" was computed under the experience
method. The amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) could be
computed under either the experience method or the percentage of taxable income
method (based on an annual election).
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
In August 1996, legislation was enacted that repealed the reserve
method of accounting (including the percentage of taxable income method) used by
many thrifts, including the Bank, to calculate their bad debt reserve for
federal income tax purposes. As a result, thrifts must recapture that portion of
the reserve that exceeds the amount that could have been under the specific
charge-off method for post-1987 tax years. The legislation also requires thrifts
to account for bad debts for federal income tax purposes on the same basis as
commercial banks for tax years beginning after December 31, 1995. The recapture
will occur over a six-year period, the commencement of which will be delayed
until the first taxable year beginning after December 31, 1997, provided the
institution meets certain residential lending requirements. The management of
the company does not believe that the legislation will have a material impact on
the Company or the Bank.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax, and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.
To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of March 31, 1999, the Bank's Excess for tax purposes totaled
approximately $6 million.
34
The Bank and its subsidiary file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. The
Company files consolidated federal income tax returns with the Bank and its
subsidiary.
The Bank and its consolidated subsidiary have not been audited by the
IRS with respect to consolidated federal income tax returns during the past
seven years. In the opinion of management, any examination of still open returns
(including returns of subsidiaries and predecessors of, or entities merged into,
the Bank) would not result in a deficiency which could have a material adverse
effect on the financial condition, results of operations or liquidity of the
Bank and its consolidated subsidiary.
Indiana Taxation. Indiana imposes a franchise tax on financial
institutions at the rate of 8.5% of modified federal taxable income. The
modifications to federal taxable income include an add- back of municipal
interest and state and local property taxes and bad debt deductions are limited
to actual net charge-offs. The franchise tax is imposed on a combined basis
including the Company, the Bank and its subsidiary.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Executive Officers of the Company and the Bank
The following table sets forth certain information regarding the
executive officers of the Company and the Bank who are not also directors.
Name Age Positions Held with the Company and the Bank
---- --- --------------------------------------------
George E. Orr 57 Senior Vice President of Bank
Seth P. Allen 40 Senior Vice President of Bank
Richard A. Condi 45 Vice President of Bank
Robert A. Cern 49 Chief Financial Officer and Secretary of the Company
and Senior Vice President, Secretary/Treasurer and
Chief Financial Officer of Bank
Glenna J. Kirsch 49 Vice President of Bank
Charles A. Becker, Sr. 52 Vice President of Bank
Officers are elected annually by the Board of Directors of the Bank.
The business experience of each executive officer who is not also a director is
set forth below.
35
George E. Orr. As Senior Vice President, Mr. Orr is primarily
responsible for the planning and development of the Bank's data processing
operations and manages the Bank's checking and proof of deposit departments. Mr.
Orr joined the Bank in 1963 and was promoted to his current position in 1990.
Seth P. Allen. Mr. Allen joined the Bank in January 1997 as Senior Vice
President and Commercial Lending Officer. Mr. Allen served as Senior Vice
President and Senior Lending Officer at Nashoba Bank in Memphis, Tennessee from
October 1994 to January 1997. Prior to that, Mr. Allen was Vice President and
Commercial Lending Officer at Deposit Guaranty National Bank in Jackson,
Mississippi from January 1991 to October 1994.
Richard A. Condi. Mr. Condi is Vice President in charge of residential
mortgage lending. Mr. Condi joined the Bank in 1979 and has served in various
capacities in the Bank's lending department before being promoted to his current
position in January 1991.
Robert A. Cern. Mr. Cern joined the Company in May 1999 as Chief
Financial Officer and Secretary. Mr. Cern is also Senior Vice President,
Secretary/Treasurer and Chief Financial Officer of the Bank. Prior to joining
the Company, Mr. Cern was an independent financial consultant. From December
1995 to December 1996, Mr. Cern was Vice President and Chief Financial Officer
of Associated Bank in Milwaukee, Wisconsin. Prior to this, Mr. Cern was Vice
President of Marshall & Ilsey Corporation in Milwaukee, Wisconsin.
Glenna J. Kirsch. Ms. Kirsch joined the Bank in 1980 and has held
several positions at the institution, including Training Officer from 1991 until
1992. In 1992, Ms. Kirsch was appointed Savings Officer and in 1995 was promoted
to Vice President. Currently, Ms. Kirsch is in charge of Deposit Operations and
is responsible for managing checking, savings and certificate of deposit
processing for the Bank.
Charles A. Becker, Sr. From 1973-1991 Mr. Becker was responsible for
Retail Banking at Peoples Savings Bank in Evansville, Indiana as Senior Vice
President. In 1991 Peoples Savings Bank was acquired by INB Banking Company,
Indianapolis, Indiana. As Vice President of Retail Banking for the Southwest
Region his responsibilities continued to be in the areas of consumer lending and
branch banking. In 1994 NBD Bank, N.A., Detroit, Michigan purchased INB and Mr.
Becker continued in the same capacity. Mr. Becker joined Permanent Federal
Savings Bank as Vice President, Branch Administration in June 1998 as Permanent
acquired the four Evansville branch locations from NBD Bank, N.A.
Employees
At March 31, 1999, the Bank had a total of 158 full-time and 26
part-time employees. The Bank's employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
36
Item 2. Properties
The following table sets forth information concerning the main office
and each branch office of the Bank at March 31, 1999. At March 31, 1999, the
Bank's premises, office properties and equipment had an aggregate book value of
approximately $8.7 million.
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
-------- -------- ------ ---- -----
Main (Downtown) Office
- ----------------------
101 Southeast Third Street 1963 Owned N/A $2,986
Evansville, Indiana
Branch Offices
- --------------
University Heights
4615 University Drive 1988 Owned N/A 413
Evansville, Indiana
Town Center
201 Diamond Avenue 1981 Owned N/A 345
Evansville, Indiana
Green River Road
123 South Green River Road 1978 Owned N/A 243
Evansville, Indiana
North Brook
3820 First Avenue 1978 Leased November 2002 74 (1)
Evansville, Indiana
West Franklin Street
2131 West Franklin Street 1960 Owned N/A 102
Evansville, Indiana
Ross Center
2521 Washington Avenue 1994 Owned N/A 721
Evansville, Indiana
Fort Branch
810 East Locust Street 1987 Owned N/A 357
Fort Branch, Indiana
Jasper
771 West Second Street 1991 Owned N/A 495
Jasper, Indiana
Newburgh
8533 Bell Oaks Drive 1997 Owned N/A 818
Newburgh, Indiana
36
Year Owned or Lease Expiration Net Book
Location Acquired Leased Date Value
-------- -------- ------ ---- -----
(In Thousands)
Oakland City
410 West Morton Street 1984 Owned N/A 230
Oakland City, Indiana
Fourth Street Office
19 N.W 4th Street 1998 Leased December 2001 27
Evansville, Indiana
Bellemeade Office
4601 Bellemeade 1998 Owned N/A 567
Evansville, Indiana
Buena Vista Office
1010 W. Buena Vista 1998 Leased September 2013 36
Evansville, Indiana
St. Joe Office
530 N. St. Joseph Avenue 1998 Owned N/A 406
Evansville, Indiana
(1) The Bank owns this branch's building and leases the land.
The Bank maintains depositor and borrower customer files on an on-line
basis with BISYS, Inc. The net book value of the data processing and computer
equipment utilized by the Bank at March 31, 1999 was $479,000.
Item 3. Legal Proceedings
Permanent Federal is involved as plaintiff or defendant in various
legal actions arising in the normal course of its business. While the ultimate
outcome of these proceedings cannot be predicted with certainty, it is the
opinion of management, after consultation with counsel representing Permanent
Federal in the proceedings, that the resolution of these proceedings should not
have a material effect on Permanent Federal's results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended March 31, 1999.
37
PART II
-------
Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters
Page 47 and 48 of the attached 1999 Annual Report to Stockholders is
herein incorporated by reference.
Item 6. Selected Financial Data
Pages 5 and 6 of the attached 1999 Annual Report to Stockholders is
herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Pages 8 through 20 of the attached 1999 Annual Report to Stockholders
are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Page 7 and 21 through 46 of the attached 1999 Annual Report to
Stockholders are herein incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
38
PART III
Item 10. Directors and Executive Officers of the Registrant; Compliance with
Section 16(a) of the Exchange Act
Information concerning Directors of the Registrant is incorporated
herein by reference from the Corporation's definitive Proxy Statement for the
Annual Meeting of Stockholders scheduled to be held on July 27, 1999, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation", a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Information concerning the business experience of the executive officers of the
Company and the Bank contained in Part I of this 10-K is incorporated by
reference herein.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Companys' directors and executive officers, and person who own moew than 10% of
a registered class of the Company's equity securities, to file with the SERC
initial reports of ownership and reports of changes in ownership of Common Sotkc
and other equity securities of the Company. Officvers, directors and greater
than 10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the company and written representations that no other
reports were required, during the fiscal year ended March 31, 1999, all Section
16(a) filing requirements applicable to its officers, directors amnd greater
than 10 percent beneficial owners were complied with except that Mr. Allen and
Ms. Kirsch inadvertently failed to timely file Form 4s to report one transaction
each. Mr. Allen reporeted his transaction on a Form 4 dated June 5, 1998, and
Ms. Kirsch reported her transaction on a Form 4 dated June 4, 1998. In addition,
Mr. Korb failed to timely file a Form 4 to report one transaction. Mr. Korb
reported the transaction on a Form 4 dated December 22, 1998.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on July 27, 1999, except for
information contained under the headings "Compensation Committee Report on
Executive Compensation" and "Stock Performance Presentation", a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Corporation's
definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to
be held on July 27, 1999, except for information contained under the headings
"Compensation Committee Report on Executive Compensation" and "Stock Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Corporation's definitive Proxy
Statement for the Annual Meeting of Stockholders scheduled to be held on July
27, 1999, except for information contained under the headings "Compensation
Committee Report on Executive Compensation" and "Stock Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
39
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements:
The following information appearing in the Registrant's Annual Report
to Shareholders for the year ended March 31, 1999, is incorporated by reference
in this Form 10-K Annual Report as Exhibit 13.
Pages in
Annual
Annual Report Section Report
Independent Auditors' Report.......................................................................... 21
Consolidated Statements of Financial Condition
at March 31, 1999 and 1998.......................................................................... 22
Consolidated Statements of Income for the Years Ended
March 31, 1999, 1998 and 1997....................................................................... 23
Consolidated Statements of Stockholders' Equity for the
Years Ended March 31, 1999, 1998 and 1997........................................................... 24
Consolidated Statements of Cash Flows for Years Ended
March 31, 1997, 1998 and 1999..................................................................... 25 - 26
Notes to Consolidated Financial Statements........................................................... 27 - 46
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.
41
(a) (3) Exhibits:
Reference to Prior
Regulation Filing or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
2 Plan of acquisition, reorganization, None
arrangement, liquidation or
succession
3 (i) Articles of Incorporation *
3 (ii) Bylaws *
4 Instruments defining the rights of *
security holders, including See also Exhibit 3
indentures
9 Voting trust agreement None
10 Material contracts:
(a) 1993 Stock Option and *
Incentive Plan
(b) Recognition and Retention Plan *
(c) Employment Agreement with 10(c)
Donald P. Weinzapfel dated
October 6, 1998
(d) Director Deferred Compensation **
Agreement
(e) Employment Agreement with ***
Murray T. Brown
11 Statement re computation of None
per share earnings
12 Statements re computation of Not required
ratios
13 Annual Report to security holders 13
16 Letter re change in certifying Not required
accountant
18 Letter re change in accounting None
principles
19 Previously unfiled documents None
21 Subsidiaries of the registrant 21
22 Published report regarding matters None
submitted to vote of security holders
42
23 Consents of experts and counsel 23
24 Power of Attorney Not required
27 Financial Data Schedule Not required
28 Information from reports Not required
furnished to state insurance
regulatory authorities
99 Additional Exhibits Not applicable
*Filed as exhibits to the Company's Registration Statement on Form S-1
under the Securities Act of 1933, filed with the Securities and Exchange
Commission on December 23, 1993 (Registration No. 33-73394). All of such
previously filed documents are hereby incorporated herein by reference in
accordance with Item 601 of Regulation S-K.
**Filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K
under the Securities Exchange Act
of 1934 on June 29, 1995 (File No. 0-23370).
***Filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K
under the Securities Exchange Act of 1934 on June 27, 1996 (File No. 0-23370)
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the three month period ended
March 31, 1999.
43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PERMANENT BANCORP, INC.
Date: June 29, 1999
By: /s/ Donald P. Weinzapfel
- ----------------------------
Donald P. Weinzapfel
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Donald P. Weinzapfel By: /s/ John R. Stone
---------------------------- ----------------------------
Donald P. Weinzapfel John R. Stone, Director
Chairman of the Board Date: June 29, 1999
and Chief Executive Officer
(Principal Executive Officer)
Date: June 29, 1999
By: /s/ Daniel F. Korb By: /s/ Daniel L. Schenk
---------------------------- ----------------------------
Daniel F. Korb, Director Daniel L. Schenk, Director
---------------------------- ----------------------------
Date: June 29, 1999 Date: June 29, 1999
---------------------------- -----------------
By: /s/ Murray J. Brown By: /s/ Jack H. Kinkel
---------------------------- ----------------------------
Murray J. Brown, Director Jack H. Kinkel, Director
Date: June 29, 1999 Date: June 29, 1999
---------------------------- -----------------
By: /s/ James D. Butterfield By: /s/ James W. Vogel
---------------------------- ----------------------------
James D. Butterfield, Director James W. Vogel, Director
Date: June 29, 1999 Date: June 29, 1999
---------------------------- -----------------
By: /s/ James A. McCarty, Jr. By: /s/ Robert L. Northerner
---------------------------- ----------------------------
James A. McCarty, Jr., Director Robert L. Northerner, Director
Date: June 29, 1999 Date: June 29, 1999
---------------------------- ----------------
By: /s/ Robert A. Cern
----------------------------
Robert A. Cern, Chief Financial
Officer (Principal Financial
and Accounting Officer)
Date: June 29, 1999
43