Permanent Bancorp, Inc.
1999 Annual Report
TABLE OF CONTENTS
Letter to Stockholders ............................................... 3
Selected Consolidated Financial Data ................................. 5
Quarterly Results of Operations ...................................... 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations ...................... 8
Independent Auditors' Report ......................................... 21
Consolidated Statements of Financial Condition ..................... 22
Consolidated Statements of Income .................................. 23
Consolidated Statements of Stockholders' Equity .................... 24
Consolidated Statements of Cash Flows .............................. 25
Notes to Consolidated Financial Statements ......................... 27
Officers and Directors ............................................... 47
Corporate Information ................................................ 48
[GRAPH OMITTED]depicting [GRAPH OMITTED]depicting
Net Income for the Year Total Assets at March 31,
Ended March 31,
1
[GRAPH OMITTED]depicting
Per Share Dividends (Quarter/Fiscal Year)
[GRAPH OMITTED]depicting
Deposit Structure at March 31,
[GRAPH OMITTED]depicting
Composition of Loan Portfolio at March 31,
2
[GRAPHIC OMITTED: Logo of
Permanent Bacnorp, Inc.
TO OUR STOCKHOLDERS
We are pleased to report that net income for the year ended March 31,
1999 was $2.86 million. This amount represents an 8.3% increase over the $2.64
million earned during the year ended March 31, 1998. Net income for the Company
has increased every year since Permanent Bancorp, Inc. became publicly traded in
1994.
Basic earnings per share were $0.72 for the year ended March 31, 1999
compared to $0.65 for the prior year. Diluted earnings per share were $0.70 for
the year ended March 31, 1999 compared to $0.62 for the prior year. Basic
earnings per share increased 10.8% and diluted earnings per share increased
12.9% during the year ended March 31, 1999 compared to the prior fiscal year. In
June 1998, the Board of Directors increased the dividend per share by 9.1% to an
annual rate of $0.24 per share. Based upon the initial public offering price of
$5 (as adjusted for the two-for-one stock split effected in the form of a 100%
stock dividend in April 1998) this represents a dividend yield of 4.8%.
The Company remains financially strong. Total assets at March 31, 1999
were $492.3 million, an increase of 12.1% from total assets at March 31, 1998.
Deposits increased $62.4 million, or 22.1%, and net loans increased $95.7
million, or 42.5%, from March 31, 1998. Substantially all of the deposit growth
and approximately 45% of the loan growth is attributable to the Company's
acquisition of the deposits and loans of four branch locations from NBD Bank,
N.A. in June 1998. The balance of the loan growth is attributable to internally
generated expansion of the Company's consumer and commercial loan portfolios.
This expansion into higher yielding loans was funded by a decrease in the
securities portfolios.
Interest rate spread for the year ended March 31, 1999 was 2.74%
compared to 2.41% for the year ended March 31, 1998. We are particularly
encouraged that at March 31, 1999 interest rate spread was 2.86% compared to
2.40% at March 31, 1998. Net interest margin (or net interest income dividend by
average earnings assets) for fiscal 1999 was 2.91% compared to 2.74% for fiscal
1998.
Asset quality remains very healthy. Non-performing assets as a
percentage of total assets was .24% at March 31, 1999 and .25% at March 31,
1998. The allowance for loan losses as a percentage of total loans was .84% at
March 31, 1999 and .87% at March 1998. Other measures of asset quality continue
to be very favorable.
The acquisition of the four branch locations from NBD Bank was a
milestone for the Company. Not only did this acquisition provide significant
growth, it drastically changed the nature of the Company. At the time of the
merger the Company had fifteen branches including the four acquired from NBD.
Because of the close proximity of some of the offices, the Company was able to
close two offices and take advantage of more modern and efficient locations.
Increasingly the Company is becoming a community bank rather than a
traditional thrift organization. Consider the following:
o Consumer and commercial loans represent 34.7% of the total loan portfolio at
March 31, 1999 but five years ago represented only 20.5% of total loans.
o Five years ago certificates of deposit represented 70% of all deposits. As of
March 31, 1999 they represent 62.5% of the Company's deposits. Non-interest
bearing deposits have grown from just under $1 million at March 31, 1994 to
$12.3 million at March 31, 1999.
o Five years ago the internet was only beginning to gain commercial viability.
Today the Company has its own website at www.permanentbank.com. We hope you
will visit this site. It's a convenient way to keep abreast of your accounts
as well as transfer funds and pay bills.
3
o The Company paid its first dividend to shareholders in the quarter ended June
30, 1995. Dividends have been paid in every quarter since then and the
dividend rate per share has increased 240% since the initial dividend.
In October 1998 the Board of Directors formally adopted a management
transition plan in anticipation of the retirement from management of the current
Chairman of the Board and Chief Executive Officer, Donald P. Weinzapfel.
In July 1998 John W. Forster retired from the Board of Directors. John
has served the Company and its operating subsidiary, Permanent Federal Savings
Bank, for more than twenty years. In recognition of this service John has been
elected a director emeritus of the Bank. We wish John well.
This spring the Company began construction on a new branch banking
facility on the growing east side of Evansville. We anticipate that this
facility will be fully operational by the end of 1999.
We, as always, appreciate the support of our shareholders. We are very
optimistic about fiscal 2000 and look forward to continued earnings growth.
/s/ Murray J. Brown
/s/ Donald P. Weinzapfel -------------------
- ------------------------ Murray J.Brown
Donald P. Weinzapfel President
Chairman of the Board
and Chief Executive Officer
4
SELECTED CONSOLIDATED FINANCIAL DATA
[GRAPHIC OMITTED: Logo of
Permanent Bacnorp, Inc.
(In Thousands)
At March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Selected Financial Condition Data:
Total assets $492,327 $439,115 $423,698 $395,903 $342,678
Loans, net 321,018 225,349 210,189 206,910 195,483
Cash and interest-bearing deposits 13,952 6,083 6,364 4,916 5,573
Securities available for sale 117,289 168,271 159,232 135,124 1,973
Securities held to maturity 6,920 18,861 27,206 32,179 124,338
Deposits 345,341 282,942 280,753 280,008 267,520
Total borrowings 99,504 99,353 100,278 70,985 28,114
Stockholders' equity 40,864 42,683 39,095 41,494 43,488
Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Selected Operating Data:
Interest income $32,886 $30,521 $29,689 $25,892 $22,705
Interest expense 19,909 19,342 18,724 16,354 13,352
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 12,977 11,179 10,965 9,538 9,353
Provision for loan losses 300 177 113 207 410
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 12,677 11,002 10,852 9,331 8,943
- ---------------------------------------------------------------------------------------------------------------------------
Other income:
Service charges 1,492 985 841 628 619
Gain (loss) on sale of loans 206 92 23 18 (16)
Gain (loss) on sale of investment and
mortgage-backed securities 230 43 (56) (6) 5
Other 1,103 972 816 797 1,085
- ---------------------------------------------------------------------------------------------------------------------------
Total other income 3,031 2,092 1,624 1,437 1,693
- ---------------------------------------------------------------------------------------------------------------------------
Other expense:
Salaries and employee benefits 5,696 4,519 4,295 4,427 4,397
Deposit insurance assessment 271 276 2,351 711 738
Occupancy 764 821 809 819 769
Other 4,172 3,015 2,714 2,900 2,614
- ---------------------------------------------------------------------------------------------------------------------------
Total other expense 10,903 8,631 10,169 8,857 8,518
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 4,805 4,463 2,307 1,911 2,118
Income tax provision 1,945 1,818 1,003 662 874
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 2,860 $ 2,645 $ 1,304 $ 1,249 $ 1,244
- ---------------------------------------------------------------------------------------------------------------------------
5
At or For the Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Performance Ratios:
Return on average assets (ratio of net
income to average total assets) 0.60% 0.62% 0.31% 0.34% 0.36%
Interest rate spread information:
Average during year 2.74 2.41 2.40 2.28 2.41
End of year 2.86 2.40 2.41 2.33 2.28
Net interest margin (1) 2.91 2.74 2.76 2.72 2.83
Ratio of operating expense to average
total assets 2.28 2.03 2.44 2.41 2.37
Return on average stockholders' equity
(ratio of net income to average
stockholders' equity) 6.86 6.45 3.25 2.95 2.92
Ratio of average interest-earning
assets to average interest-bearing
liabilities 103.94 106.97 107.63 109.42 110.51
Asset Quality Ratios:
Non-performing assets to total assets at
end of year (2) 0.24 0.25 1.11 1.75 2.43
Allowance for loan and real estate
owned losses to non-performing assets 220.11 180.51 44.73 32.22 25.33
Allowance for loan losses to total loans 0.84 0.87 1.00 1.07 1.06
Capital Ratios:
Stockholders' equity to total assets at
end of year 8.30 9.72 9.23 10.48 12.69
Average stockholders' equity to average
assets 11.43 9.63 9.63 11.54 12.29
Number of full-service offices 13 11 11 11 11
Number of deposit accounts 43,383 33,884 35,426 36,452 35,075
Book value per share (3) $10.27 $10.41 $9.52 $9.72 $9.36
Dividend payout ratio 33.7% 30.6% 46.7% 27.9% N/A
(1) Net interest income divided by average interest-earning assets.
(2) Non-performing assets consist of non-accruing loans, including in-substance
foreclosures, accruing loans past due 90 or more days, troubled debt
restructuring and real estate owned.
(3) Amounts reflect a stock split in the form of a 100% stock dividend on April
14, 1998.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain selected unaudited data relating
to results of operations for the three month periods ending on the dates
indicated.
Three Months Ended
- -----------------------------------------------------------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1998 1998 1998 1999
- -----------------------------------------------------------------------------------------------------------------------
Fiscal 1999
Total interest income $7,448,118 $8,599,719 $8,476,677 $8,361,322
Total interest expense 4,700,746 5,230,038 5,122,968 4,855,261
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 2,747,372 3,369,681 3,353,709 3,506,061
Provision for loan losses 75,000 75,000 75,000 75,000
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,672,372 3,294,681 3,278,709 3,431,061
Other income 621,434 774,873 583,318 1,051,315
Other expense 2,230,777 2,980,656 2,469,756 3,221,578
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,063,029 1,088,898 1,392,271 1,260,798
Income tax provision 435,681 403,039 529,822 576,569
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 627,348 $ 685,859 $ 862,449 $ 684,229
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended
- ------------------------------------------------------------------------------------------------------------------------
June 30, September 30, December 31, March 31,
1997 1997 1997 1998
- ------------------------------------------------------------------------------------------------------------------------
Fiscal 1998
Total interest income $7,653,837 $7,784,083 $7,587,707 $7,495,779
Total interest expense 4,850,898 5,001,278 4,817,298 4,673,037
- ------------------------------------------------------------------------------------------------------------------------
Net interest income 2,802,939 2,782,805 2,770,409 2,822,742
Provision for loan losses 77,386 75,164 (500) 25,000
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 2,725,553 2,707,641 2,770,909 2,797,742
Other income 497,035 529,984 591,674 473,300
Other expense 2,123,438 2,140,755 2,196,172 2,170,962
- ------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,099,150 1,096,870 1,166,411 1,100,080
Income tax provision 461,228 451,966 461,303 442,847
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 637,922 $ 644,904 $ 705,108 $ 657,233
- ------------------------------------------------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This section presents management's review of the operating results and
financial condition of Permanent Bancorp, Inc. (the "Company") and its
subsidiary, Permanent Federal Savings Bank (the "Bank"). This section provides
information which is not otherwise apparent from the Consolidated Statements of
Financial Condition, Income, Stockholders' Equity and Cash Flows and is intended
to assist readers in understanding the Company's performance and financial
condition.
The principal business of the Company consists of attracting deposits
from the general public and using these deposits, together with borrowings and
other funds, to originate one to four family residential mortgage loans as well
as multi-family and commercial real estate loans, automobile and other consumer
loans. The Company also originates construction and commercial business loans
and invests in mortgage-backed and other investment securities. The Company's
results of operations are primarily dependent on its interest rate spread, which
is the difference ("spread") between the average yield on interest-earning
assets, such as loans, mortgage-backed and investment securities and short-term
interest bearing deposits and the average rate paid on interest-bearing
liabilities, such as deposits and borrowings. The interest rate spread is
affected by regulatory, economic and competitive factors that influence interest
rates, loan demand and deposit flows. In addition to credit risk, the Company is
subject to interest rate risk to the degree that its interest-earning assets
mature or reprice at different times, or on a different basis, than its
interest-bearing liabilities.
The Company's results of operations also depend upon, among other
things, the level of fee income, gains or losses on the sale of loans and other
assets, provisions for possible loan losses, income derived from subsidiary
activities, operating expenses and income taxes. The Company's operating
expenses principally consist of employee compensation and benefits, occupancy
expenses, federal deposit insurance premiums and other general and
administrative expenses.
The Company is significantly affected by prevailing economic
conditions, including federal monetary and fiscal policies, as well as by
federal regulation of financial institutions. Deposit balances are influenced by
a number of factors, including interest rates paid on competing personal
investments and the level of personal income and savings within the
institution's market area. In addition, deposit balances are influenced by the
perceptions of customers regarding the stability of the financial markets and
financial services industry. Management expects to retain a significant portion
of existing deposit balances by offering competitive rates on such deposits. The
Bank has adopted a strategy of employing Federal Home Loan Bank of Indianapolis
(FHLB) advances to supplement deposits. FHLB advances are expected to augment
the liquidity necessary to fund lending operations and investment opportunities.
Lending activities are influenced by the demand for housing, consumer and
commercial loans as well as competition from other lending institutions. The
primary sources of funds for lending activities include deposits, loan payments,
borrowings, the sale of loans and other assets and funds provided from
operations.
Forward-looking Statements
The Company may from time to time make "forward-looking statements,"
including statements contained in the Company's filings with the Securities and
Exchange Commission (the "SEC"), in its reports to shareholders and in other
communications, which are made in good faith by the Company pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include statements with respect to the
Company's beliefs, expectations, estimates and intentions, that are subject to
significant risks and uncertainties, and are subject to change based on various
factors (some of which are beyond the Company's control). Those risks and
uncertainties could cause the Company's financial performance to differ
materially from expectations, estimates, and intentions expressed in such
forward-looking statements.
The Company does not undertake, and expressly disclaims any intent or
obligation, to update any forward-looking statement, whether written or oral,
that may be made from time to time by or on behalf of the Company.
8
Information Systems and the Year 2000
The Company began working on its Year 2000 (or "Y2K") plan, a term
which refers to uncertainties about the ability of data processing hardware and
software to properly interpret dates after the beginning of the Year 2000, in
calendar year 1997. A project leader who is a member of senior management has
been assigned to the project while senior management oversees it and regularly
reports to the Board of Directors. A comprehensive Year 2000 Plan (the "Plan")
that includes phases relating to awareness, assessment, renovation, validation
and implementation has been established and includes a timetable and summarizes
each major phase of the project and the estimated costs to renovate and test
systems in preparation for the Year 2000.
The awareness phase included a Company-wide campaign to communicate and
identify the problem and the potential ramifications to the organization.
Concurrent with this phase, the assessment phase began which included the
inventorying of systems that may be impacted. The business use of each system
was analyzed and prioritized based upon the perceived adverse effect on the
financial condition of the Company in the event of a loss or interruption in the
use of that system. The Company has completed the awareness and assessment
phases of the project.
The Company has outsourced the most critical data processing activities
to an industry-known service provider who is responsible for modifying its
programs to be compliant with Year 2000 processing; however, testing of those
systems is the responsibility of the Company. Focusing on these critical
systems, the Company has closely reviewed and monitored this vendor's progress.
Year 2000 compliant upgrades to these outsourced critical data processing
systems were installed throughout fiscal 1999 and the service provider has
represented that this process is substantially complete.
The Y2K upgrades have been tested according to a comprehensive plan.
All issues discovered during the testing were reported to the service provider
for remediation. Additional testing was conducted to assure that each identified
issue was correctly repaired. The Company has not discovered any material issues
during the testing.
Other critical systems have also been assessed as to their Year 2000
readiness. These systems have been purchased from other industry-known vendors
and are generally used in their purchased configuration. The Company is closely
reviewing and monitoring these systems in addition to reviewing less critical
systems as to each vendor's progress and testing. Systems are being tested in a
non-production environment. Assurance of Year 2000 compliance for these systems
has been received from substantially all of our vendors including all those
deemed critical. Integrated testing on all critical applications will continue
through the first half of calendar year 1999. The review of non-critical systems
has begun and is also expected to be completed by June 30, 1999. A system is
deemed validated upon completion of an appropriate test plan and system testing
of the Year 2000 compliant version without problems.
The Company's overall costs associated with year 2000 implementation
will be reduced due to its outsourcing arrangement previously discussed;
however, incremental direct expenses to date of approximately $55,000 have been
incurred and the Company anticipates incurring approximately $90,000 of
additional incremental expenses in fiscal 2000. Included in this amount are
capital improvements which will be accelerated in part due to Year 2000
concerns. The capital improvements include replacing older technology, personal
computers and software and telecommunication systems. Although implementation of
this equipment and software will resolve certain Year 2000 issues, they will
also provide increased or improved functionality and efficiencies. The cost of
this equipment and software is expected to be charged to expense over the
estimated useful lives. The aforementioned costs do not include the salary of
the project leader or the time of management and staff assisting on the project
which are estimated to total 2,000 hours from fourth quarter 1998 through
calendar 1999. The total cost could vary significantly from those currently
estimated because of unforeseen circumstances which could develop in
implementing the Plan.
9
The Company has begun communications with its customers informing them
of its efforts to become Y2K compliant and is periodically inserting a summary
of its progress in its periodic mailings to customers. The Company has posted
Y2K information on its Web Site and is training its employees to become
knowledgeable about the progress being made to be compliant. Posters are
displayed in the Bank's lobbies with Y2K information.
Concurrent with the development and execution of the Plan is the
evolution of the Company's Year 2000 contingency plan. The contingency plan is
intended to be a changing document developed and modified based on the results
of the project. The contingency plan currently includes the contingency
procedures for critical data processing and environmental systems and key
suppliers. The contingency plan also addresses a variety of additional issues
including credit risk, liquidity and loan and deposit customers.
The Company has completed an evaluation of Year 2000 risks relating to
its lines of business separate from its dependence on data processing that
includes a review of larger commercial customers to ascertain their overall
preparedness for Year 2000. The process required lending and other bank officers
to meet with their customers to review and assess their preparedness. The
failure of a commercial customer to prepare adequately for Year 2000 could have
a significant adverse effect on such customer's operations and profitability and
thereby inhibit its ability to repay loans or require the use of its deposited
funds. While the process of evaluating the potential adverse effects of Year
2000 risks on these customers is substantially complete, it is not possible to
quantify the overall potential effect on the Company.
The plan also includes provisions which address the Year 2000
compliance of environmental systems, which include items such as elevators,
security systems and heating and air conditioning systems. No significant
business risks have been revealed regarding these types of systems.
While the Company is making a substantial effort to become Year 2000
compliant, there is no assurance that the failure to adequately address all
issues relating to the Year 2000 problem would not have a material adverse
effect on its financial condition or results of operations.
FINANCIAL CONDITION
March 31, 1999 Compared to March 31, 1998
The Company's total assets at March 31, 1999 were $492.3 million, an
increase of $53.2 million, or 12.1% from $439.1 million at March 31, 1998.
Investment and mortgage-backed securities amounted to $123.2 million at March
31, 1999, a decrease of $63.9 million from $187.1 million at March 31, 1998. Net
loans increased by $95.7 million or 42.4% to $321 million at March 31, 1999
compared to $225.3 million at March 31, 1998. Total liabilities were $451.5
million at March 31, 1999, up $55.1 million, or 13.9% from $396.4 million at
March 31, 1998. Deposits of $345.3 million were up $62.4 million or 22.1% from
$282.9 million at March 31, 1998. Substantially all of the deposit growth and
approximately 45% of the loan growth is attributable to the Company's
acquisition of four branch locations from NBD Bank, N.A. on June 26, 1998. The
balance of the loan portfolio growth is attributable primarily to internally
generated growth primarily in the consumer loan portfolio.
Federal Home Loan Bank (FHLB) advances decreased by $2.9 million to
$96.5 million at March 31, 1999 from $99.4 million at March 31, 1998.
Total stockholders' equity decreased by $1.8 million to $40.9 million
at March 31, 1999. The Company earned $2.86 million and paid $1.21 million of
dividends to its shareholders. The Company purchased $4.16 million of treasury
shares and received $0.22 million from the issuance of its stock. The fair value
of securities decreased by approximately $0.22 million and $0.69 million of
stock was earned or became vested under the Company's ESOP and restricted stock
award programs.
10
One to four family first mortgage loans increased by $14 million and
consumer loans increased by $40.7 million. Commercial and multi-family real
estate loans increased by $36.5 million, land and construction loans increased
by $4.8 million and commercial paper decreased by $.014 million. The allowance
for loan losses increased by $.73 million due principally to the acquisition of
$.76 million of loss reserves associated with the loans acquired from NBD.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Years Ended March 31, 1999 and March 31,
1998.
General. The Company's net income of $2.86 million during the fiscal
year ended March 31, 1999 was $0.22 million greater or 8.3% more than the $2.64
million earned during the fiscal year ended March 31, 1998. Operating results
for the year ended March 31, 1999 include the income and expenses related to the
assets and liabilities of the four locations acquired from NBD Bank, N.A. since
June 26, 1998, the date of acquisition, since the transaction has been accounted
for as a purchase.
Net Interest Income. The Company's net interest income increased by
$1.8 million to $13 million for the year ended March 31, 1999 compared to $11.2
million for the year ended March 31, 1998. The increase was primarily
attributable to an increase in the interest rate spread of 0.33%.
Interest Income. Interest income for the year ended March 31, 1999
increased $2.4 million to $32.9 million compared to $30.5 million for the same
period in 1998.
Interest income increased because total interest earning assets
increased, primarily due to the previously described NBD acquisition, and funds
were shifted from lower earning investment securities into higher yielding
loans.
Average securities, which includes mortgage-backed securities, other
securities and FHLB stock, decreased by $31.2 million from fiscal 1998 to fiscal
1999. The rate earned on mortgage-backed securities decreased to 6.17% in fiscal
1999 from 6.52% in the prior fiscal year. The rate earned on all other
securities, including the FHLB stock, decreased to 6.16% in fiscal 1999 from
7.01% in the prior fiscal year.
The average of other interest bearing assets, which are primarily
deposits and other short-term investments, increased to $6.1 million in fiscal
1999 from $1.4 million in the prior fiscal year. The rate earned on these
investments decreased to 4.65% in fiscal 1999 from 7.49% in fiscal 1998.
Average loans outstanding increased $64.8 million from fiscal 1998 to
fiscal 1999. This represents a 30% increase in average outstanding loans. During
the same period, the yields on loans declined by one basis point (.01%).
The yield on all interest-earning assets decreased by 11 basis points
(.11%) in fiscal 1999. For the year ended March 31, 1999 the overall
interest-earning asset yield was 7.38% compared to 7.49% for the year ended
March 31, 1998.
Interest Expense. Interest expense increased by $0.57 million to $19.9
million during the fiscal year ended March 31, 1999 compared to $19.3 million
during fiscal 1998. Interest paid on deposits increased by $1.3 million due to
an increase of $54.1 million in average deposit balance which more than offset a
decrease in the rate paid from 4.83% to 4.44%. Interest on Federal Home Loan
Bank advances decreased by $.86 million as average balances outstanding
decreased by $7.2 million and the average rate paid on advances also decreased
from 5.77% during fiscal 1998 to 5.30% during fiscal year 1999. Interest expense
on Other long-term debt & other borrowings increased due primarily to the
Company borrowing $4.16 million of long-term debt from an unaffiliated bank in
August 1998. Proceeds from this borrowing was used by the Company to repurchase
302,100 shares of its own common stock. Fiscal 1998 borrowings consist primarily
of short-term borrowings to meet liquidity needs.
11
The cost of all interest-bearing liabilities decreased from 5.08% for
the year ended March 31, 1998 to 4.68% for the year ended March 31, 1999.
Provision for Loan Losses. The Bank establishes its provision for loan
losses and evaluates the adequacy of its allowance for loan losses based on
management's evaluation of the risk inherent in its loan portfolio and changes
in the nature and volume of its loan activity. Such evaluation, which includes a
review of all loans for which full collectibility may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience, the
composition of its loan portfolio and other factors that warrant recognition in
providing for an adequate loan loss allowance. This methodology is performed on
a periodic basis, generally monthly, and is designed to ensure that matters
affecting loan collectibility will be identified in a timely manner and
evaluated by management in determining the necessary reserves and the provision
for loan losses. The amounts actually reported in each period will vary with the
outcome of this detailed review.
During the year ended March 31, 1999, the Company recorded a provision
for loan losses of $300,000 compared to $177,050 for the year ended March 31,
1998. In addition the Company acquired $760,000 of loan loss reserves as part
its acquisitions of assets from NBD Bank, N.A. Net charge offs amounted to
$327,000 during fiscal 1999 compared to $330,000 during fiscal 1998. Asset
quality, as measured by non-performing loans to total loans, improved
significantly for the year ended March 31, 1999 compared to the prior year. The
ratios of non-performing loans to total loans was 0.25% at March 31, 1999 and
.40% at March 31, 1998 respectively. The allowance for losses, as a ratio to
total loans, was 0.84% at March 31, 1999 compared to .87% at March 31, 1998. At
March 31, 1999 and 1998, the allowance for loan losses as a percentage of
non-performing loans was 330.81% and 216.58%, respectively. It is management's
belief that the allowance for loan losses reflects an adequate reserve against
potential losses in the loan portfolio. Future additions to the Company's
allowance for loan losses and any change in the related ratio to non-performing
loans are dependent upon the performance of the Company's loan portfolio, the
economy, inflation, changes in real estate and other collateral values and
interest rates as well as the view of regulatory authorities toward adequate
reserve levels. See also "Asset Quality."
Other Income. Other income increased by $939,000 to $3,031,000 during
the fiscal year ended March 31, 1999. This represents an increase of 44.9% over
the prior year. Service charges increased by $507,000 and profit on sale of
loans, securities and real estate owned increased by $299,000. Commissions on
the sale of investment and insurance products decreased by $17,000. Earnings
from other sources were up by $150,000 during fiscal 1999.
Other Expense. The Company's other expense increased by $2.22 million
from fiscal 1998 to fiscal 1999. Salaries and employee benefits increased $1.2
million or 26%. Occupancy expenses increased $199,000, equipment expenses
increased $155,000, computer service expenses increased $168,000, advertising
expenses increased $58,000, postage and office supplies increased $158,000 and
other expenses increased $311,000 from fiscal 1998 to fiscal 1999, respectively,
due to an expansion of personnel to staff additional branch facilities to
service additional deposit and loan accounts acquired from NBD Bank, N.A.
Income Tax Provision. The Company's income tax provision increased by
$128,000 from fiscal 1998 to fiscal 1999 primarily as a result of increased
pretax earnings. The effective tax rate was 40.48% for fiscal 1999 compared to
40.72% for the prior year.
RESULTS OF OPERATIONS
Comparison of Operating Results for the Years Ended March 31, 1998 and March 31,
1997.
General. The Company's net income of $2.64 million during the fiscal
year ended March 31, 1998 was $1.34 million greater than the $1.30 million
earned during the fiscal year ended
12
March 31, 1997. The results of operations for the year ended March 31, 1997
include a $1.77 million (pretax) payment of a special assessment to recapitalize
the Savings Association Insurance Fund (SAIF) of the Federal Deposit Insurance
Corporation (FDIC). The after tax impact of this assessment on earnings was
$1.07 million. Net income for the year ended March 31, 1998 compared to prior
year earnings before the special assessment increased $275,000 or 11.4%.
Net Interest Income. The Company's net interest income increased by
$214,000 to $11.2 million for the year ended March 31, 1998 compared to $11.0
million for the year ended March 31, 1997. The increase was primarily
attributable to an increase in average interest earning assets and an
improvement in the interest rate spread of 0.01%.
Interest Income. Interest income for the year ended March 31, 1998
increased $833,000 to $30.5 million compared to $29.7 million for the same
period in 1997. With the exception of investment securities, interest income was
higher for all major earning asset categories including increased interest
income on loans of $713,000 (a 4.2% increase) and mortgage-backed securities of
$269,000 (a 4.4% increase). Due to decreased holdings of interest bearing
securities, investment security income decreased $199,000 or 3.2% from the prior
year. Due to increased holdings and an improved yield, dividends on Federal Home
Loan Bank stock were up by $49,000. Interest income on loans increased as a
result of growth in average loans outstanding of $ 5.6 million for the year
ended March 31, 1998. The weighted average yield on loans was 8.14% during the
fiscal year ended March 31, 1998 compared to 8.02% during the fiscal year ended
March 31, 1997. Interest income on mortgage-backed securities also increased
primarily as a result of higher outstanding balances. Mortgage-backed securities
balances averaged $97.7 million during fiscal 1998 compared to $91.4 million
during fiscal 1997. Interest bearing securities and FHLB stock averaged $93.2
million during fiscal 1998, compared to $95.2 million during fiscal 1997. The
weighted average yields on mortgage-backed securities and interest bearing
securities and FHLB stock were 6.52% and 7.01%, respectively during fiscal 1998,
compared to 6.67% and 7.02%, respectively, during fiscal 1997.
Interest Expense. Interest expense increased by $619,000 to $19.3
million during the fiscal year ended March 31, 1998 compared to $18.7 million
during fiscal 1997. Interest paid on deposits increased by $99,000 due to an
increase of $2.8 million in average deposit balance which more than offset a
decrease in the rate paid from 4.84% to 4.83%. Interest on Federal Home Loan
Bank advances increased by $545,000 as average balances outstanding increased by
$9.1 million and the average rate paid on advances also increased from 5.74%
during fiscal 1997 to 5.77% during fiscal 1998.
Provision for Loan Losses. During the year ended March 31, 1998, the
Company recorded a provision for loan losses of $177,050 compared to $113,256
for the year ended March 31, 1997. Net charge offs amounted to $330,000 during
fiscal 1998 compared to $225,000 during fiscal 1997. Asset quality, as measured
by non-performing loans to total loans, improved significantly for the year
ended March 31, 1998 compared to the prior year. The ratios of non-performing
loans to total loans was 0.40% at March 31, 1998 and 2.16% at March 31, 1997
respectively. The allowance for losses, as a ratio to total loans, was 0.87% at
March 31, 1998 compared to 1.00% at March 31, 1997. At March 31, 1998 and 1997,
the allowance for loan losses as a percentage of non-performing loans was
216.58% and 46.31%, respectively.
Other Income. Other income increased by $468,000 to $2,092,000 during
the fiscal year ended March 31, 1998. This represents an increase of 28.8% over
fiscal 1997. Service charges increased by $144,000 and profit on sale of loans,
securities and real estate owned increased by $193,000. Commissions on the sale
of investment and insurance products increased by $68,000. Earnings from other
sources were up by $63,000 during fiscal 1998.
Other Expense. The Company's other expense decreased by $1.54 million
from fiscal 1997 to fiscal 1998. The decrease is primarily attributable to the
aforementioned $1.77 million SAIF assessment. Salaries and employee benefits
increased $224,000 or 5.2%. The majority of this increase is attributable to
increased expense associated with the Company's ESOP and restricted stock awards
programs.
Income Tax Provision. The Company's income tax provision increased by
$814,000 from fiscal 1997 to fiscal 1998 primarily as a result of increased
pretax earnings.
13
Average Balance Sheet. The following table presents for the periods
indicated the average balance of interest-earning assets and interest-bearing
liabilities, the amount of interest income and the interest expense, and the
average yield on assets and the average cost of liabilities. Such yields and
costs are derived by dividing interest income or expense by the average balance
of assets or liabilities, respectively, for the periods shown. No tax equivalent
adjustments were made. Non-accruing loans have been included in the table as
loans carrying a zero yield.
(Dollars in Thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $279,790 $22,759 8.13% $214,982 $17,509 8.14% $209,420 $16,796 8.02%
Mortgage-backed securities 68,259 4,212 6.17 97,668 6,370 6.52 91,431 6,101 6.67
Securities and FHLB stock 91,456 5,631 6.16 93,210 6,536 7.01 95,212 6,686 7.02
Other 6,107 284 4.65 1,416 106 7.49 1,869 106 5.67
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets (1) $445,612 $32,886 7.38% $407,276 $30,521 7.49% $397,932 $29,689 7.46%
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities:
Deposits $332,301 $14,756 4.44% $278,181 $13,431 4.83% $275,407 $13,333 4.84%
FHLB advances 94,463 5,002 5.30 101,704 5,866 5.77 92,604 5,320 5.74
Other long-term debt &
other borrowings 2,060 151 7.33 845 46 5.44 1,693 71 4.19
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $428,824 $19,909 4.64% $380,730 $19,343 5.08% $369,704 $18,724 5.06%
Net interest income $12,977 $11,178 $10,965
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest rate spread 2.74% 2.41% 2.40%
- ---------------------------------------------------------------------------------------------------------------------------------
Net earning assets $ 16,788 $ 26,546 $ 28,228
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest margin(2) 2.91% 2.74% 2.76%
- ---------------------------------------------------------------------------------------------------------------------------------
Average interest-earning
assets to average interest-
bearing liabilities 103.91% 106.97% 107.64%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves. (2) Net interest margin represents net interest income divided by
average interest-earning assets.
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Company's interest income and
interest expense during the years indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided for changes attributable to (i) changes in volume (i.e., changes in
volume multiplied by prior rate) and (ii) changes in rate (i.e., changes in rate
multiplied by prior volume). Changes attributable to both rate and volume have
been allocated proportionately to the change due to volume and the change due to
rate.
14
Year Ended March 31,
1999 vs. 1998 1998 vs. 1997
- ---------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
- ---------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans receivable $ 5,275 $ (26) $5,249 $ 451 $263 $ 714
Mortgage-backed securities (1,867) (291) (2,158) 402 (133) 269
Securities and FHLB stock (117) (787) (904) (140) (10) (150)
Other 285 (107) 178
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 3,576 $(1,211) $2,365 $ 713 $120 $ 833
- ---------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits $ 2,515 $(1,190) $1,325 $ 134 $ (36) $ 98
FHLB advances (402) (462) (864) 525 21 546
Other borrowings 78 28 106 (62) 37 (25)
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 2,191 $(1,624) $ 567 $ 597 $ 22 $ 619
- ---------------------------------------------------------------------------------------------------------------------------
Change in net interest income $1,798 $ 214
- ---------------------------------------------------------------------------------------------------------------------------
The following table presents the weighted average yields on loans,
investments and other interest-earning assets, the weighted average rates on
savings deposits and borrowings and the resultant interest rate spreads at the
dates indicated:
At March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average yield on:
Loans, net 7.81% 7.91% 8.02%
Mortgage-backed securities 6.45 6.80 6.71
Securities & FHLB Stock 6.16 6.84 7.05
Other 4.76 6.06 6.69
Combined weighted average yield on
interest-earning assets 7.34 7.42 7.47
Weighted average rate paid on:
Savings deposits 3.13 3.77 3.87
Demand and NOW deposits 1.55 1.79 2.06
Time deposits 5.51 5.78 5.67
FHLB Advances 5.10 5.39 5.65
Other Borrowings 6.80 5.19
Combined weighted average rate paid
on interest-bearing liabilities 4.48 5.02 5.05
Spread 2.86 2.40 2.41
Asset Quality
In accordance with the Company's classification of assets policy,
management periodically evaluates the loan and investment portfolios to identify
substandard assets that may contain the potential for loss. In addition,
management evaluates the adequacy of its allowance for possible loan losses.
Non-Performing Assets. The following table sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. For the years
presented, the Bank had no accruing loans delinquent more than 90 days. Real
estate owned includes property acquired in settlement of foreclosed loans which
are carried at the lower of cost or estimated fair value less estimated cost to
sell. Other assets include other repossessed assets.
15
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Non-accruing loans:
One- to four-family $ 643 $ 822 $1,131 $ 695 $ 1,219
Multi-family 1,062 3,654 3,696
Commercial real estate 64
Construction or development 12 171 171
Consumer 111 77 99 185 78
- ---------------------------------------------------------------------------------------------------------------------------
Total 818 911 2,463 4,705 4,993
- ---------------------------------------------------------------------------------------------------------------------------
Troubled debt restructurings 2,128 2,165 3,293
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing loans $ 818 $ 911 $4,591 $6,870 $ 8,286
- ---------------------------------------------------------------------------------------------------------------------------
Real estate and other assets owned:
One- to four-family $ 112 $ 93 $ 41 $ 22 $7
Construction or development 26
Consumer 236 89 53 54 25
- ---------------------------------------------------------------------------------------------------------------------------
Total 348 182 94 76 58
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $1,166 $1,093 $4,685 $6,946 $ 8,344
- ---------------------------------------------------------------------------------------------------------------------------
Total as a percentage of total assets 0.24% 0.25% 1.11% 1.75% 2.43%
- ---------------------------------------------------------------------------------------------------------------------------
At March 31, 1999 the Bank had no non-performing assets with an
outstanding balance in excess of $100,000. This compares to one non-performing
asset at March 31, 1998 that had a balance in excess of $100,000.
Non-accruing Loans. As of March 31, 1999, the Bank had $818,000 in book
value of non-accruing loans compared to $911,000 as of March 31, 1998. For the
year ended March 31, 1999, gross interest income which would have been recorded
had the Bank's non-accruing loans been current in accordance with their original
terms amounted to $65,000. The amount that was included in interest income on
such loans was $21,000 for the year ended March 31, 1999.
Real Estate Owned. At March 31, 1999, the Bank's real estate acquired
through foreclosure totaled $112,000.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of March 31, 1999, there was an aggregate of $7.3
million of loans which management is closely monitoring for the borrowers'
ability to comply with current repayment terms compared to $3.2 million at March
31, 1998. Management believes it has taken a conservative approach in evaluating
under-performing credits.
Delinquent Loans. The following table sets forth the Bank's loan
delinquencies by type, by amount and by percentage of type at March 31, 1999.
Loan Delinquent For:
- ---------------------------------------------------------------------------------------------------------------------------
30-59 Days 60-89 Days 90 Days and Over
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Number Amount Percentage Number Amount Percentage Number Amount Percentage
- ---------------------------------------------------------------------------------------------------------------------------
Real Estate:
One- to four-family 70 $2,119 67.66% 47 $1,940 93.95% 24 $643 78.61%
Multi-family construction
or development 1 135 4.31% 0 0 0.00% 0 0 0.00%
Commercial real estate 1 64 7.82%
Consumer 116 878 28.03% 19 125 6.05% 18 111 13.57%
- ----------------------------------------------------------------------------------------------------------------------------
Total 187 $3,132 100.00% 66 $2,065 100.00% 43 $818 100.00%
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based upon management's evaluation of the
risk inherent in the loan portfolio and changes in the nature and volume of its
loan activity.
16
The following tables set forth an analysis of the Bank's allowance at
the years indicated.
(Dollars in Thousands) At March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year $1,973 $2,126 $2,238 $2,093 $2,110
Charge-offs:
One- to four-family 19 56 11 20
Multi-family 72 86
Consumer 488 276 354 93 63
Commercial business 17 414
- ---------------------------------------------------------------------------------------------------------------------------
507 404 371 104 583
- ---------------------------------------------------------------------------------------------------------------------------
Recoveries:
One-to-four-family 10 2 11 134
Multi-family & commercial 98 4
Consumer 170 74 46 27 22
- ---------------------------------------------------------------------------------------------------------------------------
180 74 146 42 156
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs 327 330 225 62 427
Provision for loan losses charged
to operations 300 177 113 207 410
Acquired in branch acquisition 760
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year $2,706 $1,973 $2,126 $2,238 $2,093
- ---------------------------------------------------------------------------------------------------------------------------
At March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the period to
average loans outstanding during the year 0.12% 0.15% 0.11% 0.03% 0.22%
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the period to
ending non-performing assets 28.04% 30.19% 4.80% 0.89% 5.12%
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of provision for loan losses
to total loans 0.09% 0.08% 0.05% 0.10% 0.21%
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan losses
to non-performing loans 330.81% 216.58% 46.31% 32.58% 25.26%
- ---------------------------------------------------------------------------------------------------------------------------
Ratio of allowance for loan losses
to total loans 0.84% 0.87% 1.00% 1.07% 1.06%
- ---------------------------------------------------------------------------------------------------------------------------
Asset/Liability Management
The measurement and analysis of the exposure of the Bank to changes in
the interest rate environment is referred to as asset/liability management. One
method used to analyze the Bank's sensitivity to changes in interest rates is to
measure the difference between the amount of interest-earning assets which are
anticipated to mature or reprice within a given period of time compared to the
amount of interest-bearing liabilities which are expected to mature or reprice
within the same period. This difference is known as the interest rate
sensitivity "gap." A gap is considered positive when the amount of interest rate
sensitive assets anticipated to reprice or mature exceeds the amount of interest
rate sensitive liabilities anticipated to reprice or mature in a given period. A
gap is considered negative when the amount of interest rate sensitive
liabilities anticipated to reprice or mature exceeds the amount of interest rate
sensitive assets anticipated to reprice or mature in a given period. At March
31, 1999, the Company's total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $18.4 million, representing a negative cumulative one-year
gap ratio of 3.74% of total assets. The Company relies on certain assumptions,
such as the amount and timing of loan prepayments, among others, in the
17
measurement of the interest rate sensitivity gap. In light of the Company's
negative cumulative one-year gap ratio, management believes that an increase in
interest rates will adversely effect its net interest income. The Company
focuses lending efforts toward the origination and purchase of competitively
priced adjustable-rate loan products and fixed-rate loan products with
relatively short terms to maturity, generally fifteen years or less. This allows
the Company to maintain a portfolio of loans which will be sensitive to changes
in the level of interest rates while providing a reasonable spread to the cost
of liabilities used to fund the loans. The effect of these assumptions is to
quantify the dollar amount of items that are interest-sensitive and which can be
repriced within each of the periods specified. Such repricing can occur in one
of three ways: (i) the rate of interest to be paid on an asset or liability may
adjust periodically on the basis of an interest rate index, (ii) an asset or
liability such as a mortgage loan may amortize, permitting reinvestment of cash
flows at the then-prevailing interest rate, or (iii) an asset or liability may
mature, at which time the proceeds can be reinvested at the current market
rates.
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities at March 31, 1999 on the basis of the
above-described assumptions, and sets forth the repricing dates of the Company's
interest-earning assets and interest-bearing liabilities at March 31, 1999 and
the Company's interest rate sensitivity "gap" percentages at the dates
indicated. Information presented is based on estimated prepayment rates ranging
from 9% to 50% for loans and mortgage-backed securities, depending on their
maturity and yield. Passbook savings and NOW account balances assume a 17% and
37% annual decay rate, respectively, and money market demand amounts assume a
79% annual decay rate.
Maturing or Repricing
- ---------------------------------------------------------------------------------------------------------------------------
Less than 6-12 Over 1-3 Over 3-5 Over
6 Months Months Years Years 5 Years
- ---------------------------------------------------------------------------------------------------------------------------
Fixed-rate one- to four-
family, multi-family (including
mortgage-backed securities),
commercial real estate and
construction loans $ 17,932 $ 10,572 $ 32,723 $ 24,151 $ 46,327
Adjustable rate one- to four-
family, multi-family (including
mortgage-backed securities),
commercial real estate and
construction loans 56,123 19,092 35,299 16,959 22,727
Consumer loans 20,600 9,128 32,570 15,695 6,811
Investment securities and other 15,248 2,003 9,000 57,831
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 109,903 40,795 100,592 65,805 133,696
- ---------------------------------------------------------------------------------------------------------------------------
Savings deposits 2,706 4,599 13,472 6,514 32,191
Demand and NOW deposits 20,017 11,485 13,985 4,298 7,860
Certificates 83,420 42,211 57,290 22,544 10,482
FHLB advances 4,536 157 15,137 7,448 72,763
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 110,679 58,452 99,884 40,804 123,296
- ---------------------------------------------------------------------------------------------------------------------------
Interest-earning assets less
interest-bearing liabilities $ (776) $ (17,657) $ 708 $ 25,001 $ 10,400
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative interest-rate
sensitivity gap $ (776) $ (18,433) $(17,725) $ 7,276 $ 17,676
- ---------------------------------------------------------------------------------------------------------------------------
Cumulative interest-rate
gap as a percentage of assets (0.16)% (3.74)% (3.60)% 1.48% 3.59%
- ---------------------------------------------------------------------------------------------------------------------------
18
In evaluating the Company's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing
tables must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate mortgages,
have features which restrict changes in interest rates on a short-term basis and
over the life of the asset. Further, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. For example, projected passbook, money
market and NOW account maturities may materially change if interest rates change
significantly or if alternative savings/investment products become attractive.
The ability of many borrowers to service their debt may decrease in the event of
an interest rate increase. The Company considers all of these factors in
monitoring its exposure to interest rate risk. In addition, the foregoing table
does not necessarily indicate the impact of general interest rate movements on
the Company's net interest income because the repricing of certain categories of
assets and liabilities is subject to competitive and other pressures beyond the
Company's control. As a result, certain assets and liabilities indicated as
maturing or otherwise repricing within a stated period may, in fact, mature or
reprice at different times and at different volumes. The Office of Thrift
Supervision ("OTS") requires the Bank to calculate the estimated change in its
net portfolio value ("NPV") assuming an instantaneous, parallel shift in the
Treasury yield curve either up or down. NPV represents the sum of future cash
flows discounted to present value. The OTS permits the Bank to utilize the OTS
model to determine the impact of parallel and instantaneous shifts in the
Treasury yields curve. While the OTS model uses data submitted by the Bank to
the OTS, many of the assumptions imbedded in the model, such as loan prepayment
rates and deposit decay rates, are determined by the OTS. The following table
sets forth the Bank's interest rate sensitivity of NPV as of March 31, 1999 as
calculated by the OTS (dollars in 000's):
Net portfolio value NPV as % of PV of Assets
- ---------------------------------------------------------------------------------------------------------------------------
Change in
rates $ Amount $ Change % Change NPV Ratio Change
- ---------------------------------------------------------------------------------------------------------------------------
+200 47,409 (5,390) -10% 9.81% - 68
+100 50,612 (2,186) - 4% 10.25% - 24
0 52,798 10.49%
- 100 54,660 1,862 4% 10.65% 16
- 200 55,998 3,200 6% 10.70% 21
Liquidity and Capital Resources
The OTS requires minimum levels of liquid assets. OTS regulations
presently require the Bank to maintain an average daily balance of liquid assets
(United States Treasury, federal agency and other investments) equal to at least
4.0% of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. Such requirements may be
changed from time to time by the OTS to reflect changing economic conditions.
Such investments are intended to provide a source of relatively liquid funds
upon which the Bank may rely, if necessary, to fund deposit withdrawals and
other short-term funding needs. The Bank has historically maintained its
liquidity ratio in excess of that required. At March 31, 1999, the amount of the
Bank's liquidity was $142.4 million, resulting in a liquidity ratio of 40.48%.
Liquidity management is both a daily and long-term responsibility of
management. The Bank adjusts its investments in liquid assets based upon
management's assessment of (i) expected loan demand, (ii) expected deposit
flows, (iii) yields available on interest-bearing deposits and (iv) the
objectives of its asset/liability management program. Excess liquidity generally
is invested in interest-bearing overnight deposits and other short-term
government and agency obligations. If the Bank requires additional funds, beyond
its internal ability to generate, it has additional borrowing capacity with the
FHLB and collateral eligible for repurchase agreements.
19
The Bank principally uses its liquidity resources to meet ongoing
commitments, to fund maturing certificates of deposit and deposit withdrawals,
to purchase securities, to fund existing and future loan commitments, to
maintain liquidity, and to meet operating expenses. At March 31, 1999, the Bank
had approximately $2.2 million of loan commitments and an additional $4.9
million of undisbursed loans in process. The Bank anticipates that it will have
sufficient funds available to meet current loan commitments.
Certificates of deposit scheduled to mature in one year or less at
March 31, 1999 totaled $117.9 million. Based on historical experience,
management believes that a significant portion of such deposits will remain with
the Bank, however, there can be no assurance that the Bank can retain all such
deposits.
Management believes that loan repayments and other sources of funds
will be adequate to meet and exceed the Bank's foreseeable short- and long-term
liquidity needs. The primary investing activities of the Bank include investing
in loans, mortgage-backed securities, U.S. Treasury and agency securities and
other investment securities. At March 31, 1999, these assets accounted for 90.8%
of the Company's total assets. The purchases are funded primarily from loan
repayments, maturities of securities, FHLB advances and increases in deposits
and net income.
At March 31, 1999, the Bank had outstanding borrowings of $96.5 million
from the FHLB and had the capacity to borrow up to a total of approximately $200
million.
Dividends are subject to determination and declaration by the Board of
Directors, which will take into account the Company's consolidated financial
condition and results of operations as well as other relevant factors. The
Company's ability to pay dividends is subject to federal regulations and its
continued compliance with regulatory capital requirements. The Company is also
subject to the requirements of Delaware law, which generally limits dividends to
an amount in excess of a company's net assets over paid-in-capital, or, if there
is no such excess, to its net profits for the current and immediately preceding
fiscal year. See the Notes to the Consolidated Financial Statements for a
further discussion.
Impact of Inflation and Changing Prices
The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and results of operations in
terms of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of Permanent Federal are monetary in nature. As a result, interest
rates have a more significant impact on the Company's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods and
services. In the present interest rate environment, the liquidity, maturity
structure and quality of Permanent Federal's assets and liabilities are
important factors in the maintenance of acceptable performance levels.
Recent Accounting Pronouncements
See the notes to the Consolidated Financial Statements for a
description of applicable pronouncements.
20
INDEPENDENT AUDITORS' REPORT
To the Stockholders and the Board of Directors of
Permanent Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Permanent Bancorp, Inc. and its subsidiary (the "Company") as of
March 31, 1999 and 1998 and the consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Permanent Bancorp, Inc. and
its subsidiary as of March 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 1999 in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
May 21, 1999
Indianapolis, Indiana
21
CONSOLIDATED STATEMENTS OF
FINANCIAL CONDITION
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS:
Cash $ 7,591,117 $ 4,274,700
Interest-bearing deposits 6,361,293 1,808,159
- ---------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 13,952,410 6,082,859
Securities available for sale - at fair value
(amortized cost - $117,279,217 and $167,898,534) 117,289,086 168,270,907
Securities held to maturity (fair value - $6,627,235
and $19,119,093) 6,919,793 18,861,416
Other investments 1,698,477 1,100,826
Loans (net of allowance for loan losses of $2,706,408
and $1,973,410) 321,017,805 225,349,258
Interest receivable 2,824,211 3,270,173
Office properties and equipment 8,687,387 7,533,251
Other assets 19,937,789 8,645,810
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $492,326,958 $439,114,500
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Deposits $345,341,089 $282,942,123
Federal Home Loan Bank advances 96,503,610 99,352,678
Advance payments by borrowers for taxes and insurance 974,636 979,859
Other long-term debt 3,000,000
Interest payable 2,204,007 2,193,548
Other liabilities 3,442,429 10,963,033
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 451,465,771 396,431,241
- ---------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Serial Preferred Stock ($.01 par value)
Authorized and unissued - 1,000,000 shares
Common Stock ($.01 par value)
Authorized - 9,000,000 shares Issued - 4,930,508 and
4,927,000 Outstanding - 3,978,322 and 4,232,934 49,241 49,241
Additional paid-in capital 24,844,508 24,525,662
Treasury Stock - 936,786 and 682,674 shares - at cost (9,920,624) (6,255,083)
Retained Earnings - substantially restricted 26,573,401 25,127,127
Accumulated other comprehensive income, net
of deferred tax of $3,909 and $147,127 5,960 225,247
ESOP borrowing (476,100) (714,150)
Unearned compensation - restricted stock awards (215,199) (274,785)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 40,861,187 42,683,259
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $492,326,958 $439,114,500
- ---------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
22
CONSOLIDATED STATEMENTS OF INCOME
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $22,758,455 $17,509,318 $16,796,387
Securities 9,405,583 12,472,811 12,403,059
Deposits 284,102 106,454 105,488
Dividends on Federal Home Loan Bank stock 437,696 432,823 383,691
- ---------------------------------------------------------------------------------------------------------------------------
32,885,836 30,521,406 29,688,625
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 14,755,940 13,431,142 13,332,587
Federal Home Loan Bank advances 5,001,771 5,865,542 5,320,326
Other long-term debt 150,792
Short-term borrowings 510 45,827 71,083
- ---------------------------------------------------------------------------------------------------------------------------
19,909,013 19,342,511 18,723,996
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 12,976,823 11,178,895 10,964,629
PROVISION FOR LOAN LOSSES 300,000 177,050 113,256
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER LOAN LOSS
PROVISION 12,676,823 11,001,845 10,851,373
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges 1,491,788 984,668 840,520
Gain on sale of loans 205,837 91,866 22,771
Commissions 591,192 607,806 539,487
Gain (loss) on sale of securities and mortgage-backed securities 229,708 42,643 (55,897)
Gain on sale of real estate owned 39,790 41,966 16,811
Other 472,625 323,044 260,221
- ---------------------------------------------------------------------------------------------------------------------------
3,030,940 2,091,993 1,623,913
- ---------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSE:
Salaries and employee benefits 5,695,772 4,519,290 4,294,824
Deposit insurance assessment 271,397 275,986 2,350,715
Occupancy 1,020,658 821,412 809,138
Equipment 763,669 608,472 566,098
Computer service 705,748 537,903 494,374
Advertising 412,183 354,370 326,211
Postage and office supplies 444,469 285,906 273,474
Other 1,588,871 1,227,988 1,053,922
- ---------------------------------------------------------------------------------------------------------------------------
10,902,767 8,631,327 10,168,756
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,804,996 4,462,511 2,306,530
INCOME TAX PROVISION 1,945,111 1,817,344 1,002,986
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,859,885 $ 2,645,167 $ 1,303,544
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE OF COMMON STOCK
Basic $ 0.72 $ 0.65 $ 0.31
Diluted 0.70 0.62 0.30
AVERAGE SHARES OUTSTANDING
Basic 3,956,590 4,048,150 4,226,304
Diluted 4,062,155 4,299,366 4,408,838
See notes to consolidated financial statements.
23
Additional
Common Stock Paid-in Treasury Retained
Shares Amount Capital Stock Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, APRIL 1, 1996 4,496,786 $49,204 $23,824,898 ($3,361,279) $22,727,602
Net income 1,303,544
Unrealized loss on
securities available for sale
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income
- ---------------------------------------------------------------------------------------------------------------------------------
ESOP shares earned 205,471
Vesting of restricted stock awards
Cancellation of restricted
stock awards (2,428) (24) (12,116)
Purchase of Treasury Stock (224,838) (2,286,925)
Issuance of restricted stock awards 1,000 2,570 7,930
Exercise of stock options 11,658 92,451 (28,806)
Payment of dividends (608,639)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1997 4,282,178 49,180 24,020,823 (5,547,823) 23,393,701
Net income 2,645,167
Unrealized gain on
securities available for sale
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income
- ---------------------------------------------------------------------------------------------------------------------------------
ESOP shares earned 383,336
Vesting of restricted stock awards
Cancellation of restricted
stock awards (2,856) (29) (14,251)
Purchase of Treasury Stock (92,000) (993,628)
Issuance of restricted stock awards 9,000 90 135,754
Exercise of stock options 36,112 286,368 (103,131)
Payment of dividends (808,610)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1998 4,232,434 49,241 24,525,662 (6,255,083) 25,127,127
Net income 2,859,885
Unrealized loss on
securities available for sale
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income
- ---------------------------------------------------------------------------------------------------------------------------------
ESOP shares earned 318,846
Vesting of restricted stock awards
Cancellation of restricted stock awards (2,866) (14,330)
Purchase of Treasury Stock (302,100) (4,163,316)
Issuance of retricted stock awards 6,400 19,751 64,974
Exercise of stock options 44,454 (19,751) 447,131 (205,109)
Payment of dividends (1,208,502)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1999 3,978,322 $49,241 $24,844,508 ($9,920,624) $26,573,401
- ---------------------------------------------------------------------------------------------------------------------------------
Restricted Total
Unrealized ESOP Stock Stockholders'
Gain (Loss) Borrowing Awards Equity
- ------------------------------------------------------------------------------------------------------------------------
BALANCES, APRIL 1, 1996 ($98,371) ($1,190,250) ($458,173) $41,493,631
Net income 1,303,544
Unrealized loss on
securities available for sale (1,492,220) (1,492,220)
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (188,676)
- ------------------------------------------------------------------------------------------------------------------------
ESOP shares earned 238,050 443,521
Vesting of restricted stock awards 178,070 178,070
Cancellation of restricted
stock awards 12,140
Purchase of Treasury Stock (2,286,925)
Issuance of restricted stock awards (10,500)
Exercise of stock options 63,645
Payment of dividends (608,639)
- ------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1997 (1,590,591) (952,200) (278,463) 39,094,627
Net income 2,645,167
Unrealized gain on
securities available for sale 1,815,838 1,815,838
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 4,461,005
- ------------------------------------------------------------------------------------------------------------------------
ESOP shares earned 238,050 621,386
Vesting of restricted stock awards 125,242 125,242
Cancellation of restricted
stock awards 14,280
Purchase of Treasury Stock (993,628)
Issuance of restricted stock awards (135,844)
Exercise of stock options 183,237
Payment of dividends (808,610)
- ------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1998 225,247 (714,150) (274,785) 42,683,259
Net income 2,859,885
Unrealized loss on
securities available for sale (219,287) (219,287)
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income 2,640,598
- ------------------------------------------------------------------------------------------------------------------------
ESOP shares earned 238,050 556,896
Vesting of restricted stock awards 129,981 129,981
Cancellation of restricted stock awards 14,330 0
Purchase of Treasury Stock (4,163,316)
Issuance of retricted stock awards (84,725) 0
Exercise of stock options 222,271
Payment of dividends (1,208,502)
- ------------------------------------------------------------------------------------------------------------------------
BALANCES, MARCH 31, 1999 $5,960 ($476,100) ($215,199) $40,861,187
- ------------------------------------------------------------------------------------------------------------------------
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,859,885 $ 2,645,167 $ 1,303,544
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 538,412 556,598 488,930
Amortization and accretion 706,429 258,006 (49,563)
Vesting of restricted stock awards 129,981 125,243 178,070
Provisions for loan losses 300,000 177,050 113,256
(Gain) loss on sale of securities (229,708) (42,643) 51,120
(Gain) on sale of loans (205,837) (91,866) (22,771)
(Gain) loss on sale of office properties and equipment (510) (13,886) 61,766
Gain on sale of real estate owned (15,121) (60,422) (13,289)
ESOP shares earned 318,846 383,336 205,471
Changes in assets and liabilities:
Proceeds from the sales of loans held for sale 12,926,125 5,169,926 984,756
Origination of loans for resale (12,720,288) (5,078,060) (961,985)
Other investments (597,651) (51,135) (422,734)
Interest receivable 162,142 268,912 (664,723)
Other assets (711,591) (173,604) (34,071)
Interest payable 10,459 143,821 127,092
Other liabilities (9,145,930) 1,456,933 36,942
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (5,674,357) 5,673,376 1,381,811
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired through branch purchase 26,933,017 4,578,736
Loans originated (168,807,683) (71,247,154) (61,933,496)
Loan principal repayments 125,616,701 73,116,431 76,390,492
Proceeds from:
Maturities and calls of:
Securities available for sale 143,007,087 60,991,550 18,000,000
Securities held to maturity 25,000
Sales of:
Securities available for sale 41,112,062 24,072,258 36,573,836
Office properties and equipment 54,122 187,596
Real estate owned 217,254 135,578 27,224
Purchases of:
Securities available for sale (143,786,943) (97,993,517) (91,445,439)
Securities held to maturity (6,923,110)
Loans (9,885,578) (17,257,140) (17,741,292)
FHLB stock (273,400) (1,689,000)
Office properties and equipment (834,601) (457,064) (305,595)
Payments on mortgage-backed securities 29,378,578 24,282,962 15,416,207
Increase in cash surrender value of life insurance (1,301,575) (72,378) (599,676)
Other 12,001 16,517 49,499
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 34,791,332 105,975 (27,257,240)
- ---------------------------------------------------------------------------------------------------------------------------
(Continued on next page)
25
Years Ended March 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (969,805) (808,610) (608,639)
Purchase of treasury stock (4,163,316) (993,628) (2,286,925)
Net change in deposits (16,720,332) (3,542,954) 745,291
Proceeds from FHLB advances 174,749,242 274,500,000 142,900,000
Proceeds from other long-term debt 4,153,875 (273,631,307) (112,719,231)
Repayment of other long-term debt (1,153,875)
Payments on FHLB advances (177,598,310)
Principal repayments of ESOP borrowing 238,050 238,050 238,050
Advance payments by borrowers for taxes and insurance (5,223) (34,739) (7,665)
Net change in other borrowed funds (1,793,967) (887,786)
Net proceeds from issuance of common stock 222,270 183,237 63,645
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (21,247,424) (5,883,918) 27,436,740
- ---------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 7,869,551 (281,617) 1,448,055
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,082,859 6,364,476 4,916,421
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,952,410 $ 6,082,859 $ 6,364,476
- ---------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $19,898,554 $19,198,690 $18,596,904
Income taxes 1,595,000 1,588,000 1,097,000
Noncash transactions:
Transfers from loans to real estate owned 356,332 151,339 39,307
Liability for purchase of available for sale securities 8,995,000
Transfer of held to maturity securities to
securities available for sale 16,324,314
See notes to consolidated financial statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and financial reporting policies of Permanent Bancorp,
Inc. (the "Company") and its subsidiary, Permanent Federal Savings Bank (the
"Bank"), conform to generally accepted accounting principles and reporting
practices followed by thrift holding companies. The more significant policies
are described below.
Basis of Presentation - The consolidated financial statements include
the accounts of the Company and the Bank which is wholly owned. All significant
intercompany balances and transactions have been eliminated. The Company
operates as a single business segment.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Estimates most susceptible to change in the near term include the allowance for
loan losses and the fair value of securities.
Cash and cash equivalents - All highly liquid investments with an
original maturity of three months or less are considered to be cash equivalents.
Securities Available for Sale and Securities Held to Maturity -
Securities are classified and accounted for as follows:
o Debt securities that the Company has the positive intent and
ability to hold to maturity are classified as "held to
maturity securities" and reported at amortized cost. Debt
securities classified as held to maturity and sold within
three months of their expected maturity or call dates are
considered maturities of the securities. Similarly, the sale
of held to maturity debt securities occurring after the
Company has collected at least 85% of the principal originally
acquired is considered a maturity of the security.
o Debt and equity securities that are acquired and held
principally for the purpose of selling them in the near term
are classified as "trading securities" and reported at fair
value with unrealized gains and losses included in earnings.
The Company has not held trading securities during the three
years ended March 31, 1999.
o Debt and equity securities not classified as either held to
maturity or trading securities are classified as "available
for sale securities" and reported at fair value with
unrealized gains and losses, after applicable taxes, excluded
from earnings and reported as a separate component of
stockholders' equity.
Premiums and discounts are amortized over the contractual lives of the
related securities using the level yield method. Gains or losses on sales of
securities are based on the specific identification method.
As discussed below, SFAS No. 133, "Accounting For Derivative
Investments," permitted a one time transfer of securities previously classified
as held to maturity into the available for sale category. On October 1, 1998 the
Company transferred mortgage-backed securities previously classified as held to
maturity to the available for sale category at fair value. At the time of the
transfer these securities had an amortized cost of $16,113,992 and a fair value
of $16,324,314.
Other Investments - The Bank, through a subsidiary, has an investment
in an insurance company partnership which underwrites various types of life and
disability insurance and annuity programs. The investment is recorded using the
equity method.
Loans - Loans are reported at their outstanding principal balance net
of the allowance for loan losses and any deferred fees or costs on originated
loans. Deferred loan fees and origination costs are amortized and recognized as
an adjustment of yield over the life of the loan.
27
The Bank originates loans for portfolio investment or for sale in the
secondary market. During the loan origination period, loans are designated as
held for sale or portfolio investment. Loans held for sale are carried at the
lower of cost or market, determined on an individual loan basis.
Allowance for Losses - The balance in the allowance for loan losses and
the amount of the provision for loan losses are judgmentally determined based
upon a number of factors. The allowance is maintained by management at a level
considered adequate to cover possible losses that are currently anticipated
based on past loss experience, general economic conditions, information about
specific borrower situations, collateral values and other factors. While
management endeavors to use the best information available in making the
evaluations, future allowance adjustments may be necessary. Management may
periodically allocate portions of the allowance for specific problem loan
situations although the entire allowance is available for any loan charge-offs
which occur. Increases to the allowance are recorded by a provision for possible
loan losses charged to expense. A loan is charged off by management as a loss
when deemed uncollectable, although collection efforts continue and future
recoveries may occur.
Loan Servicing - The Company services mortgage loans for permanent
investors under servicing contracts. Fees earned for servicing loans owned by
investors are based on the outstanding principal balances of the loans being
serviced and are recognized as income when the related mortgage payments are
received. Loan servicing costs are charged to expense as incurred.
Office Properties and Equipment are carried at cost less accumulated
depreciation. Depreciation is computed on the straight-line and accelerated
methods over estimated useful lives that range from three to thirty-five years.
Real Estate Owned - When property is acquired, it is recorded at the
lower of cost or estimated fair value at the date of acquisition less any
estimated selling costs and any write-down resulting therefrom is charged
against the allowance for loan losses. Any subsequent deterioration of the
property is charged directly to real estate owned expense. Loans secured by
property for which there is an indication that the borrower has little or no
equity in the collateral based upon the current fair value of the collateral, no
longer has the ability to repay the loan and it is doubtful that equity will be
rebuilt in the foreseeable future are classified as in-substance foreclosures.
Costs relating to the development and improvement of real estate owned are
capitalized, whereas costs relating to holding and maintaining the property are
charged to expense.
Goodwill represents the fair market value of liabilities assumed and
cash consideration paid over the fair market value of assets acquired. Goodwill
is amortized over the life of the underlying net assets or liabilities that give
rise to it but not more than fifteen years. Impairment of goodwill results in a
charge to expense. Amortization expense for the years ended March 31, 1999, 1998
and 1997 was $602,682, $167,036 and $218,603, respectively. Goodwill of
$9,357,000 and $453,000, net of accumulated amortization of $2,483,000 and
$1,909,000, is included in Other Assets in the Consolidated Statements of
Financial Condition at March 31, 1999 and March 31, 1998, respectively.
Uncollected Interest - The Bank provides an allowance for the loss of
uncollected interest on loans which are more than 90 days past due. The
allowance is established by a charge to interest income equal to all interest
previously accrued and income is subsequently recognized only to the extent that
cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments returns to normal, in
which case the loan is returned to accrual status.
Federal Income Taxes - Deferred income tax assets and liabilities
reflect the impact of temporary differences between amounts of assets and
liabilities for financial reporting purposes and basis of such assets and
liabilities as measured by tax laws and regulations. The Company and the Bank
file consolidated income tax returns.
28
New Accounting Pronouncements - In June 1998 the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments,"
which establishes accounting and reporting standards for derivative instruments
including derivative instruments embedded in financial instruments and for
hedging. The Company adopted this statement on October 1, 1998 and, except for
the reclassification of securities from the held-to-maturity to the
available-for-sale category noted above, the adoption of this statement had no
significant impact on the financial condition, results of operations or cash
flows of the Company.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" became effective during the current fiscal year. The Company has
determined that it operates as a single segment which is community banking. At
March 31, 1999 and 1998, the Bank had assets of approximately $493.7 million and
$437.7 million, or 100% and 99.7% of consolidated assets, respectively. Net
income of the Bank for the three years ended March 31, 1999 was $3,074,000,
$2,706,000 and $1,253,000 or 108%, 102% and 96% of consolidated net income for
fiscal years 1999, 1998 and 1997. Net interest income at the Bank for each of
the three years ended March 31, 1999 exceeded 98% of consolidated net interest
income.
Earnings per Share - In 1998 the Company adopted SFAS 128 "Earnings per
Share" and has retroactively restated 1997 per share amounts. The difference
between basic and diluted earnings per share represents the dilutive impact of
the Company's outstanding stock options. The following is a reconciliation of
the weighted average common shares for the basic and diluted earnings per share
computations:
Years Ended March 31,
- -----------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Basic average common shares 3,956,590 4,048,150 4,226,304
Dilutive effect of stock options 105,565 251,216 182,534
- -----------------------------------------------------------------------------------------------------
Diluted average common shares 4,062,155 4,299,366 4,408,838
- -----------------------------------------------------------------------------------------------------
Acquisitions - On June 26, 1998 the Company acquired deposits and
certain assets of four branch banking locations from NBD Bank, N.A. in a
purchase transaction. The operating results of the acquired branches have been
consolidated since the acquisition date. As a result of the purchase, the
Company acquired $79.1 million of deposits, $43.6 million of loans, $900,000 of
office properties and equipment and received cash of approximately $26.9
million. The purchase created approximately $9.5 million of goodwill.
On May 19, 1997 the Company acquired in a purchase transaction a branch
facility which included $5.7 million of deposit liabilities, $838,000 of office
properties and equipment and $30,000 of other assets. This transaction created
approximately $294,000 of goodwill.
Pro forma information is not presented since the transactions are not
considered significant.
Changes In Presentation - Certain items appearing in the 1998 and 1997
financial statements have been reclassified to conform to the 1999 presentation.
29
2. SECURITIES
The amortized cost and estimated fair values of securities available
for sale and securities held to maturity are summarized as follows:
March 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
U.S. Agency $ 62,947,099 $469,103 $ 62,477,996
FHLMC certificates 16,734,901 $247,720 29,472 16,953,149
FNMA certificates 17,419,111 206,609 29,121 17,596,599
GNMA certificates 20,178,106 151,872 68,636 20,261,342
- ---------------------------------------------------------------------------------------------------------------------------
$117,279,217 $606,201 $596,332 $117,289,086
- ---------------------------------------------------------------------------------------------------------------------------
March 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Municipal & Revenue Bonds $ 5,908,859 $290,346 $ 5,618,513
Other 1,010,934 2,212 1,008,722
- ---------------------------------------------------------------------------------------------------------------------------
$ 6,919,793 $292,558 $ 6,627,235
- ---------------------------------------------------------------------------------------------------------------------------
March 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
Securities available for sale:
U.S. Treasury $ 3,995,076 $ 38,049 $ 4,033,125
U.S. Agency 101,028,193 178,044 $ 234,772 100,971,465
FHLMC certificates 27,355,375 171,134 131,638 27,394,871
FNMA certificates 21,871,532 111,670 58,909 21,924,293
GNMA certificates 13,142,014 206,137 15,029 13,333,122
Other 506,344 107,687 614,031
- ---------------------------------------------------------------------------------------------------------------------------
$167,898,534 $ 812,721 $ 440,348 $168,270,907
- ---------------------------------------------------------------------------------------------------------------------------
March 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
FHLMC certificates $ 938,942 $ 3,378 $ 942,320
FNMA certificates 4,003,242 47,147 $ 26,415 4,023,974
GNMA certificates 13,919,232 271,158 37,591 14,152,799
- ---------------------------------------------------------------------------------------------------------------------------
$ 18,861,416 $321,683 $ 64,006 $19,119,093
- ---------------------------------------------------------------------------------------------------------------------------
30
The amortized cost and estimated fair value of securities at March 31,
1999 by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without prepayment penalties.
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------------
Due within 1 year
U.S. Agency $ 2,002,961 $ 1,965,000
FHLMC certificates 121,296 123,859
Other 1,010,934 1,008,722
- --------------------------------------------------------------------------------------
3,135,191 3,097,581
- --------------------------------------------------------------------------------------
Due after 1 year through 5 years
U.S. Agency 14,998,002 14,916,329
FHLMC certificates 1,692,783 1,705,069
FNMA certificates 1,128,942 1,153,463
- --------------------------------------------------------------------------------------
17,819,727 17,774,861
- --------------------------------------------------------------------------------------
Due after 5 years through 10 years
U.S. Agency 30,377,550 30,126,589
FHLMC certificates 1,487,047 1,493,942
FNMA certificates 3,913,787 3,902,361
GNMA certificates 471,806 477,118
- --------------------------------------------------------------------------------------
36,250,190 36,000,010
- --------------------------------------------------------------------------------------
Due after 10 years through 15 years
U.S. Agency 12,979,648 12,797,190
FHLMC certificates 1,452,100 1,462,494
FNMA certificates 179,951 182,875
Municipal Bonds 1,325,711 1,259,008
- --------------------------------------------------------------------------------------
15,937,410 15,701,567
- --------------------------------------------------------------------------------------
Due after 15 years
U.S. Agency 2,588,938 2,672,888
HLMC certificates 11,981,675 12,167,815
FNMA certificates 12,196,431 12,357,870
GNMA certificates 19,706,300 19,784,224
Municipal Bonds 4,583,148 4,359,505
- --------------------------------------------------------------------------------------
51,056,492 51,342,302
- --------------------------------------------------------------------------------------
Total $124,199,010 $123,916,321
- --------------------------------------------------------------------------------------
Activities related to the sales of securities are summarized as
follows:
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Proceeds from sales $41,101,856 $24,072,258 $36,573,836
Gross gains on sales 239,914 51,776 124,899
Gross loss on sales 10,206 9,135 176,019
31
3. LOANS
Approximately 89% of the Bank's loans are to customers in Indiana. The
portfolio of loans consists of residential, commercial real estate, commercial
construction, consumer and other loans.
March 31,
- ---------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
First mortgage:
Secured by one-to-four family residences $171,249,927 $157,225,530
Secured by other properties 31,897,812 8,886,895
Construction loans 8,193,828 3,409,383
Land 14,437 25,455
Automobile 56,779,077 31,436,243
Consumer 26,609,416 10,708,903
Commercial 17,327,986 3,799,904
Mobile home 724,200 935,365
Loans on savings accounts 868,346 891,516
Credit card 582,185 565,538
Second mortgage 24,661
Home improvement 569,597 838,893
Loan contracts 7,023 24,135
Commercial paper 9,275,099 9,116,180
- ---------------------------------------------------------------------------------------------------------------------
Subtotal 324,098,933 227,888,601
Allowance for loan losses (2,706,408) (1,973,410)
Deferred loan fees, net (310,064) (397,765)
Undisbursed loan proceeds (52,330) (148,567)
Unearned interest and unearned discounts (12,326) (19,601)
- ---------------------------------------------------------------------------------------------------------------------
Loans, net $321,017,805 $225,349,258
- ---------------------------------------------------------------------------------------------------------------------
The principal balance of loans on nonaccrual status totaled
approximately $818,000 and $911,000 at March 31, 1999 and 1998, respectively.
For the years ended March 31, 1999 and 1998, gross interest income which would
have been recorded had the Bank's non-accruing loans been current in accordance
with their original terms amounted to $65,013 and $73,277 respectively. The
amounts included in interest income on such loans were $20,681 and $39,388 for
the years ended March 31, 1999 and 1998, respectively.
The Bank originates commercial real estate loans. Such loans had a
carrying value of approximately $32 million and $9 million at March 31, 1999 and
1998, respectively. These loans are considered by management to be of somewhat
greater risk of uncollectibility than other loans due to the dependency on
income production. Of the commercial real estate loans, $3 million and $4
million are collateralized by multi-family residential property at March 31,
1999 and 1998, respectively; and $29 million and $5 million by hotel and other
property at March 31, 1999 and 1998, respectively.
The Bank had commitments to make loans approximating $23,421,000 and
$4,886,000 excluding undisbursed portions of loans in-process at March 31, 1999
and 1998, respectively.
32
The Bank originates both adjustable and fixed interest rate loans. The
composition of these loans was as follows:
Fixed Rate Adjustable Rate
- -------------------------------------------------------- ----------------------------------------------------------
Book Value Book Value
- -------------------------------------------------------- ----------------------------------------------------------
Term to March 31, March 31, Term to Rate March 31, March 31,
Maturity 1999 1998 Adjustment 1999 1998
- --------------------------------------------------------- ---------------------------------------------------------
1mo.-1yr $ 30,171,000 $ 17,079,000 1mo.-1yr. $27,279,000 $20,329,000
1yr.-3yr. 18,322,000 12,125,000 1yr.-3yr. 4,978,000 3,533,000
3yr.-5yr. 65,390,000 30,023,000 3yr.-5yr. 7,272,000 5,487,000
5yr.-10yr. 46,433,000 28,317,000 5yr.-10yr. 37,219,000 38,578,000
10yr.-20yr. 78,742,000 68,512,000 10yr.-20yr. 1,006,000 1,817,000
Over 20 years 7,164,000 1,884,000 over 20 yrs 123,000 205,000
- -------------------------------------------------------- ----------------------------------------------------------
$ 246,222,000 $ 157,940,000 $ 77,877,000 $69,949,000
- -------------------------------------------------------- ----------------------------------------------------------
The adjustable rate loans have interest rate adjustment limitations and
are generally indexed on a weekly average yield of U.S. Treasury securities
adjusted to a constant maturity of one year. Future market factors may affect
the correlation of the interest rate adjustment with the rates the Bank pays on
the short-term deposits that have been primarily utilized to fund these loans.
Aggregate loans to officers and directors totaled $609,277 and $630,613
at March 31, 1999 and 1998, respectively. For the years ended March 31, 1999 and
1998 loans of $152,383 and $202,444 respectively, were disbursed to officers and
directors and repayments of principal of $173,719 and $248,686 respectively,
were received from officers and directors.
The amount of loans serviced for others totaled approximately
$36,327,537 and $32,468,000 at March 31, 1999 and 1998, respectively. Servicing
loans for others generally consists of collecting mortgage payments, maintaining
escrow amounts, disbursing payments to investors and foreclosure processing. In
connection with loans serviced for others, the Bank held borrower's escrow
balances of approximately $228,391 and $233,216 at March 31, 1999 and 1998,
respectively. The Bank is obligated to repurchase certain loans sold to and
serviced for others which become delinquent as defined by the various
agreements. At March 31, 1999 and 1998, these obligations were limited to
approximately $316,000 and $443,000 respectively.
Loan servicing fee income for the years ended March 31, 1999, 1998 and
1997 was $81,575, $84,274, and $100,824, respectively.
There were no restructured loans in the Bank's loan portfolio as of
March 31, 1999 and 1998. For the year ended March 31, 1997, gross interest
income which would have been recorded had the Bank's modified loans been current
in accordance with their original terms amounted to $165,000. The amount
included in interest income during 1997 on such loans was $151,000.
An analysis of the allowance for loan losses is as follows:
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Beginning balance $1,973,410 $2,126,225 $2,237,804
Provision for losses charged to operations 300,000 177,050 113,256
Charge-offs (506,753) (403,896) (370,519)
Recoveries 179,751 74,031 145,684
Acquired in branch acquisition 760,000
- ---------------------------------------------------------------------------------------------------------------------------
Ending balance $2,706,408 $1,973,410 $2,126,225
- ---------------------------------------------------------------------------------------------------------------------------
33
The recorded investment in loans considered impaired at March 31, 1999
and 1998 was $362,920 and $116,778 for which no specific valuation reserve has
been established. For the year ended March 31, 1999 and 1998 the average
recorded investment in impaired loans was approximately $243,116 and $1,215,012,
respectively. Cash received for interest on impaired loans was $17,039 and
$108,989 for the years ended March 31, 1999 and 1998, respectively.
As a federally-chartered savings bank, aggregate commercial real estate
loans may not exceed 400% of capital as determined under the capital standards
provisions of FIRREA. This limitation was approximately $169 million and $154
million as of March 31, 1999, and 1998, respectively.
Also, under applicable regulations, the loans-to-one borrower
limitation is defined and is generally 15% of unimpaired capital which, for the
Bank, was approximately $4.9 million at March 31, 1999 and $5.7 million at March
31,1998. At March 31, 1999 and 1998 there were no loans exceeding this
limitation.
4. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Land $ 2,578,358 $ 1,841,659
Office buildings 8,212,588 7,379,489
Furniture and equipment 3,551,173 3,560,222
Leasehold improvements 289,824 375,184
Automobiles 55,642 52,728
- ---------------------------------------------------------------------------------------------------------------------------
Total 14,687,585 13,209,282
Less accumulated depreciation 6,000,198 5,676,031
- ---------------------------------------------------------------------------------------------------------------------------
Office properties and equipment, net $ 8,687,387 $ 7,533,251
- ---------------------------------------------------------------------------------------------------------------------------
Depreciation expense included in operations during the years ended
March 31, 1999, 1998 and 1997 totaled $538,412, $556,598 and $488,930,
respectively.
5. DEPOSITS
Deposit accounts are summarized as follows:
March 31,
- -----------------------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------------
Noninterest-bearing $ 12,267,705 $ 1,755,251
NOW and MMDA's 57,644,600 1.0% 34,010,142 2.0%
Passbook savings 59,482,126 3.1% 52,050,522 3.7%
- -----------------------------------------------------------------------------------------------------------------------
Total 129,394,431 87,815,915
- -----------------------------------------------------------------------------------------------------------------------
Certificates of deposit:
1.50 - 3.49% 40,396 2.4% 66,459 2.9%
3.50 - 5.49% 120,750,095 4.9% 61,522,709 5.0%
5.50 - 7.49% 92,403,547 6.1% 130,864,156 6.0%
7.50 - 9.49% 2,752,620 7.8% 2,672,884 7.8%
- -----------------------------------------------------------------------------------------------------------------------
Total certificates of deposit 215,946,658 195,126,208
- -----------------------------------------------------------------------------------------------------------------------
Total $345,341,089 $282,942,123
- -----------------------------------------------------------------------------------------------------------------------
34
Certificates of deposit in the amount of $100,000 or more total
approximately $30 million at March 31,1999 and $21 million at March 31, 1998.
A summary of certificate accounts by scheduled maturities at March 31,
1999 is as follows:
2000 2001 2002 2003 2004 Thereafter Total
- ---------------------------------------------------------------------------------------------------------------------------
Less than 3.49% $ 40,396 $ 40,396
3.50 - 5.49% 72,305,918 $32,306,250 $ 7,652,773 $ 4,018,315 $3,209,364 $ 1,257,474 120,750,094
5.50 - 7.49% 45,448,624 17,456,235 4,065,480 9,710,389 5,906,793 9,816,027 92,403,548
7.50 - 9.49% 65,355 1,315,885 1,371,380 2,752,620
- ---------------------------------------------------------------------------------------------------------------------------
$117,860,293 $51,078,370 $13,089,633 $13,728,704 $9,116,157 $11,073,501 $215,946,658
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense on deposits is as follows:
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
NOW and MMDA's $ 1,141,417 $ 716,098 $ 780,027
Passbook savings 1,974,533 1,951,908 2,056,077
Certificates of deposit 11,639,990 10,763,136 10,496,483
- ---------------------------------------------------------------------------------------------------------------------------
$14,755,940 $13,431,142 $13,332,587
- ---------------------------------------------------------------------------------------------------------------------------
6. FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank of Indianapolis (FHLB) are as
follows:
Average Rate March 31,
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Fixed Rate:
1999 5.55% $19,494,333
2000 4.89% 5.59% $ 805,873 2,026,678
2001 5.50% 5.50% 14,584,231 14,770,924
2002 5.46% 5.46% 5,000,000 5,000,000
After 2003 5.01% 5.09% 76,113,506 42,310,743
- ---------------------------------------------------------------------------------------------------------------------------
Total fixed rate $96,503,610 $83,602,678
- ---------------------------------------------------------------------------------------------------------------------------
Variable Rate:
1999 5.88% 15,750,000
- ---------------------------------------------------------------------------------------------------------------------------
Total variable rate $15,750,000
- ---------------------------------------------------------------------------------------------------------------------------
Total advances $96,503,610 $99,352,678
- ---------------------------------------------------------------------------------------------------------------------------
Fixed rate advances at March 31, 1999 include $38,500,000 of advances
that have reached the initial conversion date and $42,000,000 of advances that
reach the conversion date subsequent to March 31, 1999. The terms of these
advances generally allow the FHLB to convert the fixed rate advance to a LIBOR
based rate which will adjust quarterly. Once the initial conversion date is
reached, the FHLB may periodically exercise its option to convert the advance,
generally quarterly. If the FHLB elects to convert the advance, the Company has
the option to repay the advance without penalty. The FHLB did not convert any
advances in 1999.
35
The Bank has pledged mortgage loans and FHLB stock as collateral on
these advances. The Bank may receive advances from the FHLB up to 50% of the
Bank's adjusted assets which was approximately $200 million at March 31, 1999.
7. OTHER LONG-TERM DEBT
In August 1998 the Company borrowed $4,153,875 from an unaffiliated
bank and utilized the funds to repurchase 302,100 shares of its common stock.
This debt is secured by the stock of the Bank.
The rate on the note is determined quarterly and is, at the Company's
option, the prime rate or LIBOR plus 180 basis points (1.80%). At March 31, 1999
the rate was 6.80%
Interest on the debt is payable quarterly. Annual principal payments of
$500,000 commence February 29, 2000 with a final payment of any outstanding
balance due on August 15, 2003. Principal may be repaid at any time without
penalty and in November 1998 the Company repaid $1,153,875.
The loan agreement requires that the Company maintain defined capital
ratios which generally are those required by regulatory agencies. The Company is
also required to earn a minimum return on average assets of .50% and maintain
defined asset quality ratios. At March 31, 1999 the Company is in compliance
with the loan agreement.
8. OTHER BORROWED FUNDS
The Company had no other borrowed funds at March 31, 1999 or March 31,
1998.
An analysis of securities sold under agreements to repurchase is as
follows:
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Highest month-end balance $ 0 $444,636 $3,955,494
Average balance 10,417 103,260 1,484,957
Weighted average interest rate at end of period 5.70%
Weighted average interest rate during the period 5.33% 5.10% 4.80%
9. INCOME TAXES
An analysis of the income tax provision is as follows:
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Current:
Federal $1,232,983 $1,366,610 $ 862,572
State 448,893 447,482 254,275
Deferred 263,235 3,252 (113,861)
- ---------------------------------------------------------------------------------------------------------------------------
$1,945,111 $1,817,344 $1,002,986
- ---------------------------------------------------------------------------------------------------------------------------
36
The difference between the financial statement provision and amounts
computed by using the statutory rate of 34% is reconciled as follows:
Years Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Income tax provision at federal statutory rate $1,633,699 $1,517,254 $ 784,221
State tax, net of federal tax benefit 272,365 295,338 167,822
Nondeductible expenses 133,797 188,734 50,347
Other (94,750) (183,982) 596
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax provision $1,945,111 $1,817,344 $1,002,986
- ---------------------------------------------------------------------------------------------------------------------------
The Company's deferred income tax assets and liabilities are as
follows:
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Bad debt reserves $657,839 $628,648
Goodwill 117,670 23,225
Accrued employee benefits 146,564 113,198
Other 9,561
- ---------------------------------------------------------------------------------------------------------------------------
922,073 774,632
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation 124,717 107,547
Deferred loan fees 588,802 258,986
Unrealized gain of securities available for sale 3,909 147,127
Other 144,206 80,516
- ---------------------------------------------------------------------------------------------------------------------------
861,634 594,176
- ---------------------------------------------------------------------------------------------------------------------------
Deferred income tax, net $ 60,439 $180,456
- ---------------------------------------------------------------------------------------------------------------------------
Retained earnings at March 31, 1999 and 1998 includes approximately $6
million of income that has not been subject to tax because of deductions for bad
debts allowed for Federal income tax purposes. Deferred income taxes have not
been provided on such bad debt deductions since the Company does not intend to
use the accumulated bad debt deductions for purposes other than to absorb loan
losses. If, in the future, this portion of retained earnings is used for any
purpose other than to absorb bad debt losses, federal income taxes may be
imposed on such amounts at the then current corporate income tax rate.
In August 1996, the "Small Business Job Protection Act of 1996" was
passed into law. One provision of the act repeals the special bad debt reserve
method for thrift institutions currently provided for in Section 593 of the IRC.
The provision requires thrifts to recapture any reserve accumulated after 1987
but forgives taxes owed on reserves accumulated prior to 1988. Thrift
institutions will be given six years to account for the recaptured excess
reserves, beginning with the first taxable year after 1995, and will be
permitted to delay the timing of this recapture for one or two years, subject to
whether they meet certain residential loan test requirements.
37
10. REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and discretionary actions by
regulators that could have a direct material effect on the Company's financial
position and results of operations. The regulations require the Bank to meet
specific capital adequacy guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital classifications are
also subject to qualitative judgments by the regulators. The Bank's primary
regulator is the Office of Thrift Supervision ("OTS").
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios as set forth in
the following tables of core and total risk-based capital. Prompt Corrective
Action provisions contained in the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA) require specific supervisory actions as capital
levels decrease. To be considered well-capitalized under the regulatory
framework for Prompt Corrective Action Provisions under FDICIA, the Bank must
maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk-based capital
ratios as set forth in the following tables. As of March 31, 1999 and 1998, the
most recent notification from the OTS categorizes the Bank as "well capitalized"
under the regulatory framework for prompt corrective action. There are no events
or conditions since that notification that management believes have changed the
Bank's category.
The following presents the Bank's minimum and "well-capitalized"
regulatory capital levels.
As of March 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Actual Capital Required Capital
- ---------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
OTS Capital adequacy
Tangible Capital $32,803,000 6.76% $ 7,278,000 1.50%
Core Capital 32,803,000 6.76 19,410,000 4.00
Risk-based Capital 34,347,000 12.26 22,410,000 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 32,803,000 6.76 24,263,000 5.00
Tier 1 risk-based capital 32,803,000 11.71 16,808,000 6.00
Total risk-based capital 34,347,000 12.26 28,015,000 10.00
As of March 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Actual Capital Required Capital
- ---------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
OTS capital adequacy
Tangible Capital $38,178,000 8.76% $ 6,537,000 1.50%
Core capital 38,178,000 8.76 17,440,000 4.00
Risk-based capital 40,097,000 21.05 15,239,000 8.00
FDICIA regulations to be
classified well-capitalized
Tier 1 leverage capital 38,178,000 8.76 21,800,000 5.00
Tier 1 risk-based capital 38,178,000 20.04 11,429,000 6.00
Total risk-based capital 40,097,000 21.05 19,049,000 10.00
38
11. STOCKHOLDERS' EQUITY AND REGULATORY MATTERS
Dividend Restrictions - Under current regulations, the Bank is not
permitted to pay dividends on its stock if its regulatory capital would thereby
reduce below (i) the amount then required for the liquidation account
established at the time the Bank converted from a mutual to stock form of
ownership or (ii) the Bank's regulatory capital requirements. As a "Tier 1"
institution (an institution with capital in excess of its fully phased-in
capital requirements, both immediately before the proposed capital distribution
and on a pro forma basis after giving effect to such distribution), the Bank may
make capital distributions after prior notice to the OTS in any calendar year up
to 100% of its net earnings to date during such calendar year plus the amount
that would reduce by one-half its capital surplus ratio at the beginning of such
calendar year. Any additional amount of capital distributions would require
prior regulatory approval.
Preferred Stock - The Company is authorized to issue 1,000,000 shares
of preferred stock, $.01 par value which remains unissued at March 31, 1999. In
the event any preferred shares are issued, the Board of Directors is authorized
to fix and state the voting powers, designations, preferences and rights of the
shares of each such series and the qualifications, limitations and restrictions
thereof.
Recapitalization of SAIF - On September 30, 1996, the President signed
into law an omnibus appropriations act for fiscal year 1997 that included, among
other things, the recapitulation of the Savings Association Insurance Fund
(SAIF) in a section entitled "The Deposit Insurance Funds Act of 1996" (the
Act). The Act included a provision where all insured depository institutions
would be charged a one-time special assessment on their SAIF assessable deposits
as of March 31, 1995. The Company recorded a pre-tax charge of $1,766,185 during
the year ended March 31, 1997, which represented 65.7 basis points of the March
31, 1995, assessable deposits.'
12. EMPLOYEE BENEFIT PLANS
Multi-employer Pension Plan - The Bank participates in a
noncontributory multi-employer pension plan covering all qualified employees.
The plan is administered by the trustees of the Financial Institutions'
Retirement Fund. There is no separate valuation of the plan benefits nor
segregation of plan assets specifically for the Bank because the plan is a
multi-employer plan and separate actuarial valuations are not made with respect
to each employer.
Pension expense amounted to $40,000 for the year ended March 31, 1997.
There was no pension expense in 1999 and 1998.
Employee Stock Ownership Plan - The Company has an Employee Stock
Ownership Plan (ESOP) which owns 333,270 shares of the Company's common stock.
The ESOP purchase of the stock was funded by a loan from the Company (loan
balance of $476,100 and $714,150 at March 31, 1999 and 1998, respectively) which
will be repaid by contributions to the ESOP by the Company in the future.
Pursuant to the ESOP, the shares are to be allocated to participants annually
over an 8 year period. The ESOP covers substantially all employees and shares
are allocated based upon employee compensation levels during the year. ESOP
expense is based on the fair value of shares earned and totaled $594,925,
$639,317 and $479,046 during 1999, 1998, and 1997, respectively. During fiscal
years ended March 31, 1999, 1998 and 1997, 45,607 shares, 47,688 shares and
49,728 shares were earned by participants. At March 31, 1999, 84,736 shares with
a fair value of approximately $911,000 were held in suspense by the ESOP. These
shares are not considered to be outstanding for the purpose of computing
earnings per share.
39
Recognition and Retention Plan - The Company has a Recognition and
Retention Plan (RRP) which provides executive officers and employees with a
proprietary interest in the Company in a manner designed to encourage such
individuals to remain with the Bank. Restricted stock awards covering up to 4%
of the common stock issued may be awarded under the RRP. Awarded stock vests at
a rate of 20% per year. During the fiscal year ended March 31, 1999, and 1998 an
additional 9,000 and 1,000 shares were awarded. The cost of the RRP is being
reflected as compensation expense as vesting occurs. This amounted to $139,200,
$125,242 and $178,070 during the fiscal years ended March 31, 1999, 1998 and
1997. Termination of employees resulted in 2,866 shares, 2,856 shares 2,428
shares being canceled during the fiscal years ended March 31, 1999, 1998 and
1997 respectively.
Stock Option and Incentive Plan - The Company has granted stock options
to existing stockholders, officers, directors and other affiliated individuals
to purchase shares of the Company's stock. Awarded options vest at a rate of 25%
per year and are exercisable in the ten years immediately following the grant.
The following is an analysis of stock option activity for each of the
three years in the period ending March 31, 1999 and the stock options
outstanding at the end of the respective years:
Weighted
Average
Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding April 1, 1996 449,760 $ 5.26
Granted 9,522 8.13
Exercised (11,658) 5.46
Forfeited or expired (5,952) 5.00
- -------------------------------------------------------------------------------------------------------------------
Outstanding March 31, 1997 441,672 5.32
Exercised (36,112) 5.07
Forfeited or expired (3,572) 5.00
- -------------------------------------------------------------------------------------------------------------------
Outstanding March 31, 1998 401,988 5.34
Granted 7,000 11.25
Exercised (44,454) 5.00
- -------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1999 364,534 5.49
- -------------------------------------------------------------------------------------------------------------------
The number of vested shares exercisable at March 31, 1999, 1998, and
1997 were: 344,773, 376,465 and 296,272, respectively and had a weighted average
exercise price of $5.28, $5.16 and $5.09, respectively. The weighted average
remaining contractual life of the options outstanding at March 31, 1999 and 1998
was 5.3 years and 6.3 years, respectively. Exercise prices for options
outstanding at March 31, 1999 ranged from $5.00 to $11.25.
The Company applies APB opinion No. 25 ("Accounting for Stock Issued to
Employees") and related interpretations in accounting for the plan. No
compensation cost has been recognized for the plan because the stock option
price is equal to the fair value at the grant date. Had compensation cost for
the plan been determined based on the fair value at the grant dates for awards
under the plan consistent with the fair value method of SFAS No. 123
("Accounting for Stock-Based Compensation"), the Company's proforma net income
per share would be as follows:
40
Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Net income :
As reported $2,859,885 $2,645,167 $1,303,544
Proforma 2,843,474 2,631,973 1,293,311
Basic :
Net income per share:
As reported $ 0.72 $ 0.65 $ 0.31
Proforma 0.72 0.65 0.31
Diluted Net income per share:
As reported $ 0.70 $ 0.62 $ 0.30
Proforma 0.70 0.61 0.29
The fair value of option grants are estimated on the date of grant
using an option pricing model with the following assumptions: dividend yields of
0.96% to 2.64%, risk-free interest rates of 5.23% to 6.74%, expected volatility
of 18% to 30% and an expected life of five years. The proforma amounts are not
representative of the effects on reported net income for future years.
Deferred Compensation (401K) Plan - The Company has an Employee
Deferred Compensation (401K) Plan administered through the financial
institution's retirement fund. Each employee may contribute up to 6% of
compensation. Employee contributions of up to 4% of compensation are matched by
the Company at a rate of $.25 per dollar of employee contribution. The Company
matching expense was $22,271, $21,450 and $19,203 during the fiscal years ended
March 31, 1999, 1998 and 1997, respectively.
Directors Deferred Compensation Plan - The Bank has entered into
deferred compensation agreements with certain directors. Benefits under these
agreements are paid over a predetermined period upon retirement. The present
value of the benefit to be paid is accrued over the active period of employment
of individual participants and is funded by life insurance policies. Cash values
associated with these policies in the amount of $2,926,828 at March 31, 1999 and
$1,625,253 are included in Other Assets in the Consolidated Statements of
Financial Condition.
13. COMPREHENSIVE INCOME
The Company's other comprehensive income included the following
components:
Fiscal Year Ended March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains (losses)
on available for sale securities ($ 80,566) $1,841,590 ($1,525,976)
Less: Adjustment for net securities gains (losses)
realized in net income, net of tax 138,721 25,752 (33,756)
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) ($219,287) $1,815,838 ($1,492,220)
- ---------------------------------------------------------------------------------------------------------------------------
Substantially all of other comprehensive income is attributable to the
Bank as the amount of available for sale securities at the parent company is
immaterial.
41
14. COMMITMENTS
Lease commitments - The Company has future minimum rental commitments
for noncancelable operating leases as follows:
Fiscal year ended March 31:
---------------------------
2000 $306,904
2001 296,410
2002 259,382
2003 132,982
2004 112,976
Rental expense for the years ended March 31, 1999, 1998 and 1997 was
$261,022, $79,036 and $70,265, respectively.
Rental income from noncancelable subleases for the years ended March
31, 1999, 1998 and 1997 was $137,063, $119,306 and $103,306, respectively.
Financial Instruments with Off-Balance Sheet Risk - The Bank is a party
to financial instruments with off-balance-sheet risk of loss as part of its
normal business operations to meet the financing needs of its customers by
providing commitments to extend credit. These instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract amount of these instruments
reflects the extent of involvement the Company has in this class of financial
instruments.
Exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contract amount of those instruments. The Company uses the
same credit policies in making commitments as it does for on-balance-sheet
instruments. Unless noted otherwise, the Company does not require collateral or
other security to support financial instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Some commitments will expire without a loan
disbursement; thus, the total commitment does not necessarily represent future
cash requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Bank upon extension of credit, is based on management's credit evaluation of
the borrower. The collateral consists predominantly of residential family units,
commercial residential or non-residential real estate, and personal property.
Employment agreement - The Company has entered into employment
agreements with two executive officers. One agreement is in effect until March
31, 2000. Under the terms of the other agreement, the Company may be obligated
under terms specified in the agreement to continue the officer's salary for a
period of three years.
Standby letters of Credit - Standby letters of credit are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Standby letters of credit amounted to $136,000 at March 31, 1999.
42
15. PERMANENT BANCORP, INC. FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The following condensed statement of financial condition as of March
31, 1999 and 1998 and condensed statement of operations and cash flows for the
three years ended March 31, 1999 for Permanent Bancorp, Inc. should be read in
conjunction with the consolidated financial statements and notes thereto.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
March 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Cash $ 322,070 $ 1,519,171
Securities available for sale 838,766 2,614,031
Loans receivable from ESOP 476,100 714,150
Fixed assets 454,855 460,282
Interest receivable 11,353
Other assets 28,704 8,746
Investment in subsidiary 42,120,304 38,514,563
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $44,240,799 $43,842,296
- ---------------------------------------------------------------------------------------------------------------------------
Deferred income taxes $ 30,445 $ 111,341
Accrued expenses 110,470 1,047,696
Dividends payable 238,697
Other borrowed funds 3,000,000
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 3,379,612 1,159,037
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity - net 40,861,187 42,683,259
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $44,240,799 $43,842,296
- ---------------------------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME
Year Ended March 31,
INCOME: 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Interest income from securities held to maturity
and available for sale $ 86,342 $ 145,162 $ 293,929
Interest on loans 38,029 52,510 66,991
Other income 63,395 92,656 81,094
- ---------------------------------------------------------------------------------------------------------------------------
Total income 187,766 290,328 442,014
- ---------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Salaries and benefits 187,648 172,019 223,192
Interest expense 150,792
Legal and professional fees 93,878 130,957 67,433
Other expenses 110,561 86,646 79,418
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 542,879 389,622 370,043
- ---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED EARNINGS (355,113) (99,294) 71,971
INCOME TAX PROVISION (140,615) (38,426) 21,296
EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY 3,074,383 2,706,035 1,252,869
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $2,859,885 $2,645,167 $1,303,544
- ---------------------------------------------------------------------------------------------------------------------------
43
Year Ended March 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,859,885 $ 2,645,167 $ 1,303,544
Equity in undistributed earnings of subsidiary (3,074,383) (2,706,035) (1,252,869)
Adjustments to reconcile net income to net cash
provided by operating activities
Vesting of restricted stock awards 139,200 125,243 178,070
Depreciation, amortization and accretion 7,836 (246) 28,238
(Gain) Loss on sale of investments 10,206 (5,198) (5,790)
Changes in assets and liabilities:
Interest receivable 11,353 53,847 16,838
Deferred income tax (153,532) (7,422) (46,817)
Other assets (19,958) (4,059)
Other liabilities 62,774 (18,519) 20,848
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided (used in) by operating activities (156,619) 82,778 242,062
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Maturities of:
Securities available for sale 3,689,138 1,997,500 2,974,688
Commercial Paper 1,200,000 1,500,000 5,500,000
Principal repayments on loans 238,050 238,050 238,050
Sale of:
Securities available for sale 1,986,510 2,934,384
Purchase of:
Loans (497,415) (6,438,563)
Securities held to maturity (3,995,625)
Securities available for sale (2,759,969) (2,497,500)
Commercial paper (1,492,876)
Fixed assets (3,974)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 870,369 2,727,145 1,212,934
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from other borrowed funds 4,153,875
Dividends paid (969,805) (808,610) (608,737)
Purchase of treasury stock (4,163,316) (993,628) (2,286,926)
Sale of common stock 222,270 183,237 63,645
Principal repayment on other borrowed funds (1,153,875)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,910,851) (1,619,001) (2,832,018)
- ---------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH (1,197,101) 1,190,922 (1,377,022)
CASH AT BEGINNING OF PERIOD 1,519,171 328,249 1,705,271
- ---------------------------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 322,070 $ 1,519,171 $ 328,249
- ---------------------------------------------------------------------------------------------------------------------------
44
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107 (SFAS 107), "Disclosures about Fair Value
of Financial Instruments":
March 31, 1999 March 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------------------------------------------------------------------
Assets:
Cash $ 7,591,117 $ 7,591,117 $ 4,274,700 $ 4,274,700
Interest-bearing deposits 6,361,293 6,361,293 1,808,159 1,808,159
Securities available for sale 117,289,087 117,289,087 168,270,907 168,270,907
Securities held to maturity 6,919,793 6,627,235 18,861,416 19,119,093
Loans, net 321,017,805 324,264,853 225,349,258 226,008,379
Interest receivable 2,824,211 2,824,211 3,270,173 3,270,173
Federal Home Loan Bank stock 5,466,000 5,466,000 5,466,000 5,466,000
Cash surrender value of life insurance 2,926,828 2,926,828 1,625,253 1,625,253
Liabilities:
Deposits 345,341,089 350,438,836 282,942,123 287,384,759
Federal Home Loan Bank advances 96,503,610 97,541,079 99,352,678 98,824,254
Advance payments by borrowers
for taxes and insurance 974,636 974,636 979,859 979,859
Other borrowed funds 3,000,000 3,000,000
Interest payable 2,204,007 2,204,007 2,193,548 2,193,548
Off balance sheet: commitments
to extend credit 23,421,000 10,485,000
The estimated fair value amounts are determined by the Company, using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Cash, interest-bearing deposits, Federal Home Loan Bank stock, interest
receivable and payable, advance payments by borrowers for taxes and insurance
and other borrowed funds - The carrying amounts of these items are a reasonable
estimate of their fair value.
Securities - Fair values are based on prices obtained from independent
pricing services.
Loans - The fair value of mortgage loans is estimated using published
loan buy rates for similar loans and quoted market prices for mortgage-backed
securities backed by loans with similar characteristics. The fair value of
non-mortgage loans is estimated by discounting the future cash flows using the
current rates for loans of similar credit risk and maturities.
45
Deposits - The fair value of demand deposits, savings accounts and
money market deposit accounts is the amount payable on demand at the reporting
date. The fair value of fixed-maturity certificates of deposit is estimated by
discounting future cash flows using rates offered on the reporting date for
deposits of similar remaining maturities.
Federal Home Loan Bank advances - The fair value is estimated by
discounting future cash flows using rates currently available to the bank for
advances of similar maturities.
Commitments - The fair values of commitments to extend credit are based
on fees currently charged to enter into similar agreements with similar
maturities and interest rates.
The fair value estimates presented herein are based on information
available to management as of March 31, 1999 and 1998. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these consolidated financial statements since that date, and therefore,
current estimates of fair value may differ significantly from the amount
presented herein.
46
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
Donald P. Weinzapfel
PERMANENT BANCORP INC. Chairman of the Board and
Chief Executive Officer
BOARD OF DIRECTORS Murray J. Brown
President
Donald P. Weinzapfel Daniel L. Schenk Robert A. Cern
James W. Vogel James A. McCarty, Jr. Chief Financial Officer
Jack H. Kinkel Daniel F. Korb and Secretary
Robert L. Northerner John R. Stone
James D. Butterfield Murray J. Brown
PERMANENT FEDERAL SAVINGS BANK
BOARD OF DIRECTORS
Donald P. Weinzapfel Daniel L.Schenk EXECUTIVE OFFICERS
James W. Vogel James A. McCarty, Jr.
Jack H. Kinkel Daniel F. Korb Murray J. Brown George E. Orr
Robert L. Northerner John R. Stone Chairman of the Board, Senior Vice President
James D. Butterfield Murray J. Brown President & Richard A. Condi
Chief Executive Officer Vice President
Louis H. Boink, Jr(Director Emeritus) Robert A. Cern Glenna J. Kirsch
Carl F. Bernhardt (Director Emeritus) Senior Vice President, Vice President
Kenneth F. Allen (Director Emeritus) Chief Financial Officer Charles A. Becker, Sr.,
John W. Forster (Director Emeritus) & Secretary Vice President
Seth P. Allen
JASPER ADVISORY BOARD Senior Vice President
Stephen A. Habig Roger W. Brown For information about enrolling in
G. Earl Metzger the Company's Dividend Reinvestment
and Stock Purchase Plan, please
WHOLLY OWNED SUBSIDIARY write Registrar and Transfer
Company, Shareholders Investment
PERMA SERVICE CORP. Services, 10 Commerce Drive,
Cranford, NJ 07016 or use their
toll free number at 1-800-368-5948.
Perma Service Corp. provides
brokerage services, on an agency
basis, through INVEST(R), and a
full line of insurance products Visit us on the world-wide web at: www.permanentbank.com
through PERMANENT INSURANCE AGENCY,
INC.
47
CORPORATE INFORMATION
ANNUAL MEETING
The annual meeting of shareholders will be held Tuesday, July 27, 1999
at 1:00 p.m. Central Daylight Time at the Radisson Hotel, 606 Walnut
Street, Evansville, Indiana
CORPORATE OFFICE
Permanent Bancorp, Inc.
101 S.E. Third Street
Evansville, IN 47708
BRANCH OFFICES
University Heights St. Joe
4615 University Drive 530 N. St. Joseph Avenue
Evansville, Indiana Evansville, Indiana
Town Center Fort Branch
201 Diamond Avenue 810 East Locust Street
Evansville, Indiana Fort Branch, Indiana
Green River Road Jasper
123 South Green River Road 771 West Second Street
Evansville, Indiana Jasper, Indiana
Ross Center Newburgh
2521 Washington Avenue 8533 Bell Oaks Drive
Evansville, Indiana Newburgh, Indiana
4th Street Oakland City
19 N. W. 4th Street 410 West Morton Street
Evansville, Indiana Oakland City, Indiana
Bellemeade Vogel & Burkhardt Roads
4601 Bellemeade Avenue Evansville, Indiana
Evansville, Indiana (Opening late 1999)
Buena Vista
1010 W.Buena Vista
Evansville, Indiana
FORM 10-K
The Company's Annual Report on Form 10-K, as required to be filed with
the Securities and Exchange Commission, is available, without charge,
upon written request to:
Robert A. Cern
Chief Financial Officer and Secretary
Permanent Bancorp, Inc.
101 S.E. Third St., Evansville, IN 47708
STOCK INFORMATION
The stock of the Company is traded over-the-counter on the NASDAQ National
Market System under the symbol PERM. At March 31, 1999, the Company's stock was
held by approximately 1,115 holders of record. The stock transfer agent is:
REGISTRAR AND TRANSFER COMPANY
10 Commerce Drive
Cranford, New Jersey 07016
STOCK TRADING AND DIVIDEND DATA
Volume Dividend
Quarter Ended High Low (000's) Paid
- ------------------------------------------------------------
June 30, 1998 $18.50 $15.50 192.4 $ .055
September 30, 1998 16.25 11.63 1,090.9 .06
December 31, 1998 14.38 10.56 207.4 .06
March 31, 1999 13.75 10.75 169.9 .06
June 30, 1997 $13.00 $10.38 652.2 $ .0375
September 30, 1997 13.25 11.38 210.1 .05
December 31, 1997 15.56 12.03 312.6 .05
March 31, 1997 18.75 13.38 356.7 .055
REGISTERED MARKET MAKERS
The following firms make a market in Permanent Bancorp Inc.'s stock:
Capital Resources, Inc.
Herzog, Heine, Geduld, Inc.
J.J. B. Hilliard, W.L. Lyons
Knight Securities L.P.
NatCity Investments, Inc.
Friedman Billings Ramsey & Co.
GENERAL BANK COUNSEL
Bowers, Harrison, Kent and Miller, LLP
25 Northwest Riverside Drive
Evansville, IN 47708
SPECIAL COUNSEL
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
Washington, D.C. 20005
INDEPENDENT AUDITORS
Deloitte & Touche LLP
111 Monument Circle
Bank One Center/Tower
Indianapolis, IN 46204-5120