<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission File No.: 0-20907
Kenwood Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Ohio 31-1457996
----------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
7711 Montgomery Road
Cincinnati, Ohio 45236
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (513) 791-2834
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
Securities registered pursuant to Section 12(g) of the Act
Common Stock (par value $.01 per share)
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Based upon the $10.50 closing price of the Registrant's common stock as of
December 24, 1996, the aggregate market value of the 234,793 shares of the
Registrant's common stock deemed to be held by non-affiliates of the Registrant
was approximately $2.47 million. Although directors and executive officers of
the Registrant and certain of its employee benefit plans were assumed to be
"affiliates" of the Registrant for purposes of this calculation, the
classification is not to be interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of December 24, 1996: 295,133
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended September
30, 1996 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 1997 Annual Meeting of
Stockholders are incorporated into Part III, Items 9 through 13 of this Form
10-K.
<PAGE> 2
PART I.
ITEM 1. BUSINESS.
GENERAL
On June 28, 1996, Kenwood Savings Bank, an Ohio-chartered stock
savings institution ("Kenwood" or the "Savings Bank") completed its
reorganization from the mutual holding company form of organization to the
stock holding company form of organization. Pursuant to the terms of a Plan of
Conversion and Agreement and Plan of Reorganization adopted by Kenwood and
Kenwood Federal Mutual Holding Company, a federally chartered mutual holding
company (the "Mutual Holding Company"), (i) Kenwood incorporated Kenwood
Bancorp, Inc. (the "Company") as a wholly owned subsidiary of Kenwood, (ii) the
Mutual Holding Company converted to an interim federal stock savings
institution and simultaneously merged with and into Kenwood, pursuant to which
the Mutual Holding Company ceased to exist and the shares of common stock of
Kenwood held by the Mutual Holding Company were cancelled, and (iii) an interim
institution ("Interim") formed as a wholly owned subsidiary of the Company,
merged with and into Kenwood. As a result of the merger of Interim with and
into Kenwood, Kenwood became a wholly owned subsidiary of the Company and the
outstanding shares of common stock of Kenwood (other than those held by the
Mutual Holding Company) were converted pursuant to a specified exchange ratio
into shares of common stock of the Company (collectively, the "Conversion and
Reorganization"). In connection with the foregoing, Kenwood amended its
articles of incorporation to change its corporate title from "Kenwood Savings
and Loan Association" to "Kenwood Savings Bank" and the Company also offered
and sold additional shares of its common stock to certain depositors and
employee benefit plans of Kenwood (the "Offering").
As a result of the Conversion and Reorganization, the Company became
the unitary holding company of the Savings Bank. The only significant assets
of the Company are the capital stock of the Savings Bank, the Company's loan to
the Company's Employee Stock Ownership Plan (the "ESOP"), and the portion of
the net proceeds retained by the Company in connection with the Conversion and
Reorganization. The business and management of the Company consists of the
business and management of the Savings Bank. At September 30, 1996, the
Company had $50.2 million of total assets, $46.0 million of total liabilities,
including $41.6 million of deposits, and $4.2 million of total stockholders'
equity.
Kenwood is an Ohio-chartered stock savings institution which conducts
business from one full-service office and one loan origination office, both of
which are located in the Cincinnati, Ohio metropolitan area. The Savings Bank
was originally established in 1892 as an Ohio-chartered, mutual deposit and
loan company known as "The Kenwood Savings and Loan Association" (the "Mutual
Association"). In November 1992, the Mutual Association reorganized into the
mutual holding company form of organization (the "MHC Reorganization") whereby
the Mutual Association (i) organized a newly formed stock savings and loan
association; (ii)
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transferred substantially all of its assets and liabilities to the newly formed
stock savings and loan association in exchange for all of the common stock of
such institution; and (iii) reorganized from an Ohio-chartered mutual savings
and loan association to a federally chartered, mutual holding company known as
"Kenwood Federal Mutual Holding Company." As part of the MHC Reorganization,
the newly formed stock savings and loan association issued 69,000 shares of
common stock to certain members of the general public and 81,000 shares of
common stock to the Mutual Holding Company.
The Savings Bank is primarily engaged in attracting deposits from the
general public through its office and using those and other available sources
of funds to originate loans secured by single-family residences located
primarily in southwestern Ohio. Such loans amounted to $37.7 million, or
94.6%, of the Savings Bank's total loan portfolio at September 30, 1996. To a
much lesser extent, the Savings Bank originates consumer and other loans, which
amounted to $860,000, or 2.2%, of the total loan portfolio at September 30,
1996, as well as loans secured by existing multi-family residential and
nonresidential real estate, which amounted to $126,000, or 0.3%, and $142,000,
or 0.4%, respectively, of the total loan portfolio at such date. The Savings
Bank also invests in interest-bearing deposits in other financial institutions
(including certificates of deposit), U.S. Government and federal agency
obligations and mortgage-backed securities which are insured or guaranteed by
federal agencies.
The Company, as a registered savings and loan holding company, is
subject to examination and regulation by the Ohio Department of Commerce,
Division of Financial Institutions ("Division") and by the Office of Thrift
Supervision ("OTS") and is subject to various reporting and other requirements
of the Securities and Exchange Commission ("SEC"). Kenwood is subject to
examination and comprehensive regulation by the Division, which is Kenwood's
chartering authority and primary regulator, by the OTS, Kenwood's primary
federal regulator, and by the Federal Deposit Insurance Corporation ("FDIC"),
which as administrator of the Savings Association Insurance Fund ("SAIF")
insures Kenwood's deposits up to applicable limits. Kenwood also is subject to
certain reserve requirements established by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") and is a member of the Federal
Home Loan Bank ("FHLB") of Cincinnati, which is one of the 12 regional banks
comprising of FHLB System.
LENDING ACTIVITIES
GENERAL. At September 30, 1996, the Savings Bank's net loan portfolio
(including loans held for sale) totalled $39.3 million, representing
approximately 78.3% of the Savings Bank's $50.2 million of total assets at that
date. The principal lending activity of the Savings Bank is the origination of
one-to-four family residential loans and, to a much lesser extent, consumer and
other loans, as well as multi-family residential and nonresidential real estate
loans and construction loans.
As an Ohio-chartered savings institution, the Savings Bank has general
authority to originate and purchase loans secured by real estate located
throughout the United States. Notwithstanding this nationwide lending
authority, substantially all of the mortgage loans in the Savings Bank's
portfolio are secured by properties located in the Savings Bank's market area
in southwestern Ohio.
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Although the Savings Bank historically originated loans with lesser
dollar balances than was permitted by federal regulations, loans-to-one
borrower limitations may restrict its ability to do business with certain
customers. See "Regulation - The Savings Bank - Federal Regulation." A
savings association generally may not make loans to one borrower and related
entities in an amount which exceeds the greater of $500,000, or 15%, of its
unimpaired capital and surplus, although loans in an amount equal to an
additional 10% of unimpaired capital and surplus may be made to a borrower if
the loans are fully secured by readily marketable securities. At September 30,
1996, the Savings Bank's limit on loans-to-one borrower was $500,000 and its
five largest loans or groups of loans-to-one borrower, including related
entities, aggregated $364,000, $310,000, $297,000, $297,000 and $279,000. All
of these loans are secured by single-family residential real estate located in
Hamilton County, Ohio and all of these loans were performing in accordance with
their terms at September 30, 1996.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Savings Bank's loan portfolio by type of loan at the dates
indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Amount % Amount % Amount %
-------- ------ -------- ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family residential(1) $37,699 94.6% $31,464 95.7% $26,187 93.9%
Multi-family residential 126 0.3 239 0.7 655 2.3
Nonresidential real estate 142 0.4 232 0.7 345 1.2
Construction 1,016 2.5 226 0.7 519 1.9
------ ---- ------ ----- ------ ----
Total real estate loans 38,983 97.8 32,161 97.8 27,706 99.3
Consumer and other loans:
Home equity lines of credit 817 2.1 366 1.2 -- --
Deposit secured 41 0.1 306 0.9 121 0.4
Other(2) 2 -- 35 0.1 69 0.3
------ ----- ------ ----- ------ -----
Total consumer and other 860 2.2 707 2.2 190 0.7
loans ------ ----- ------ ----- ------ -----
Total loans 39,843 100.0% 32,868 100.0% 27,896 100.0%
------ ===== ------ ===== ------ =====
Less (add):
Undisbursed portion of
loans-in-process 502 61 265
Deferred loan origination costs (85) (46) (32)
Allowance for loan losses 95 81 69
------ ------ ------
512 96 302
------ ------ ------
Net loans $39,331 $32,772 $27,594
====== ====== ======
- -----------------------
</TABLE>
(1) Included $9.3 million, $213,000 and $0 of loans designated as held for
sale at September 30, 1996, 1995 and 1994, respectively.
(2) Consists of secured commercial business loans.
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<PAGE> 5
CONTRACTUAL PRINCIPAL REPAYMENTS AND INTEREST RATES. The following
table sets forth certain information at September 30, 1996 regarding the dollar
amount of loans maturing in the Savings Bank's portfolio, based on the
contractual terms to maturity, before giving effect to net items. Demand loans
and loans having no stated schedule of repayments and no stated maturity are
reported as due in one year or less.
<TABLE>
<CAPTION>
Due 3-5 Due 5-10
years after years after
1997 1998 1999 09/30/96 09/30/96
----------- ----------- ------------ ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
One-to-four family residential $ 75 $24 $197 $3,469 $7,927
Multi-family residential and
nonresidential real estate -- -- -- -- 203
Construction -- -- -- -- --
Consumer and other 43 -- -- 817 --
--- --- --- ----- -----
Total $118 $ 24 $197 $4,286 $8,130
=== === === ===== =====
</TABLE>
<TABLE>
<CAPTION>
Due 10-20 Due 20
years after years after
09/30/96 09/30/96 Total
----------- ----------- ------------
(In Thousands)
<S> <C> <C> <C>
One-to-four family residential $4,195 $21,812 $37,699
Multi-family residential and
nonresidential real estate 65 -- 268
Construction -- 1,016 1,016
Consumer and other -- -- 860
----- ------ ------
Total $4,260 $22,828 $39,843
===== ====== ======
</TABLE>
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The following table sets forth the dollar amount of all loans, before
net items, due after one year from September 30, 1996 which have fixed interest
rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating
Fixed or
Rates Adjustable Rates Total
------------- --------------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Single-family residential $17,791 $19,833 $37,624
Multi-family residential and
nonresidential real estate 80 188 268
Construction -- 1,016 1,016
Consumer and other -- 817 817
------ ------ ------
Total $17,871 $21,854 $39,725
====== ====== ======
</TABLE>
Scheduled contractual amortization of loans does not reflect the
actual term of the Savings Bank's loan portfolio. The average life of loans is
substantially less than their contractual terms because of prepayments and
due-on-sale clauses, which give the Savings Bank the right to declare a
conventional loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the loan
is not repaid. The average life of mortgage loans tends to increase when
current mortgage loan rates are substantially higher than rates on existing
mortgage loans and, conversely, decrease when rates on existing mortgages are
substantially lower than current mortgage loan rates (due to refinancings of
adjustable-rate and fixed-rate loans at lower rates). Under the latter
circumstances, the weighted average yield on loans decreases as higher yielding
loans are repaid or refinanced at lower rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of
the Savings Bank are subject to the written, non-discriminatory, underwriting
standards and loan origination procedures established by the Savings Bank's
Board of Directors and management. Loan originations are obtained by a variety
of sources, including referrals from real estate brokers, developers, builders,
existing customers, newspaper, radio, periodical advertising and walk-in
customers. Loan applications are taken by lending personnel, and the loan
department supervises the obtainment of credit reports, appraisals and other
documentation involved with a loan. Property valuations are generally
performed by independent outside appraisers approved by the Savings Bank's
Board of Directors. Title and hazard insurance are required on all security
property.
The Savings Bank's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan and the
adequacy of the value of the property that will secure the loan. A loan
application is first reviewed by the Savings Bank's loan officer and then is
submitted for approval to the Board of Directors. All loans must be approved
by the Loan Committee appointed by the Board of Directors. In addition, Thomas
W.
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Burns, Executive Vice President and Chief Executive Officer, has been granted
loan approval authority by the Board of Directors for single-family residential
first mortgage loans of $75,000 and less and with loan-to-value ratios of 90%
and less.
In March 1995, the Savings Bank opened a loan origination office in
Cincinnati, Ohio and the Savings Bank currently performs its loan origination,
processing and underwriting out of such office. The Savings Bank currently has
four loan originators working out of such office who are compensated in part on
a commission basis and provide convenient origination services during banking
and non-banking hours.
Historically, the Savings Bank has originated substantially all of the
loans in its portfolio and has held them until maturity. However, since fiscal
1991, the Savings Bank has sold fixed-rate single-family residential loans to
the Federal Home Loan Mortgage Corporation ("FHLMC") and other investors in the
secondary market as a means of minimizing interest rate risk as well as
generating additional funds for lending and other purposes. Beginning in
fiscal 1992, the Savings Bank has designated substantially all fixed-rate
single-family residential loans with terms to maturity of greater than ten
years as held for sale and has retained in its portfolio all fixed-rate
single-family residential loans with terms to maturity of ten years or less and
all adjustable-rate single-family residential loans originated. At September
30, 1996, there were $9.3 million of loans designated as held for sale. The
Savings Bank's loan policy currently limits the total amount of loans
designated as held for sale to a maximum of $1.5 million, excluding the special
loan sale of adjustable rate mortgages in December 1996. Sales of loans to
date generally have been under terms which do not provide any recourse to the
Savings Bank by the purchaser in the event of default on the loan by the
borrower.
With respect to the Savings Bank's loan sales to investors other than
the FHLMC, the Savings Bank generally sells such loans servicing released and
recognizes current income from receipt of servicing release fees. With respect
to the Savings Bank's loan sales to the FHLMC, the Savings Bank generally
continues to collect payments on such loans as they become due, to inspect the
security property, to make certain insurance and tax advances on behalf of
borrowers and to otherwise service such loans. The Savings Bank records a
premium or discount, as adjusted for a normal servicing fee, when it realizes a
gain or loss from the sale of loans, respectively. The Savings Bank amortizes
such premiums and discounts over the estimated lives of the loans using the
level yield method, and recognizes the servicing fee when the related loan
payments are received. At September 30, 1996, the Savings Bank was servicing
$18.2 million of loans for others.
Historically, the Savings Bank has not been an active purchaser of
loans. At September 30, 1996, loans purchased and serviced by others totalled
$225,000.
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<PAGE> 8
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1996 1995 1994
----------- ---------------- ----------
(In Thousands)
<S> <C> <C> <C>
Loan originations:
One-to-four family residential
and construction(1) $24,801 $13,298 $18,676
Multi-family residential -- -- --
Nonresidential real estate -- -- --
Consumer and other 773 683 133
----- ------ ------
Total loans originated 25,574 13,981 18,809
Purchases -- -- --
----- ------- ------
Total loans originated and
purchased 25,574 13,981 18,809
Sales and loan principal reductions:
Loans sold 12,595 3,175 7,014
Loan principal reductions 6,445 5,630 7,878
------ ----- ------
Total loans sold and
principal reductions 19,040 8,805 14,892
Increase due to other net items 25 2 3
----- ----- ------
Net increase in loan portfolio $ 6,559 $5,178 $ 3,920
====== ===== ======
</TABLE>
- ----------------------------
(1) Includes loans designated as held for sale during the periods.
SINGLE-FAMILY RESIDENTIAL LOANS. The primary lending activity of the
Savings Bank is the origination of loans secured by first mortgage liens on
single-family residences (one-to-four units). At September 30, 1996, $37.7
million, or 94.6%, of the Savings Bank's total loan portfolio (including loans
held for sale), before net items, consisted of single-family residential loans.
The Savings Bank's single-family residential loans include
non-conventional loans (loans which are either insured by the Federal Housing
Administration or partially guaranteed by the Department of Veterans Affairs)
and conventional loans. Although a majority of the Savings Bank's loans
consist of conventional loans, the Savings Bank has recently increased its
origination of non-conventional mortgage loans. The Savings Bank
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<PAGE> 9
has also recently increased its origination of non-owner occupied single-family
residential loans.
The loan-to-value ratio, maturity and other provisions of the loans
made by the Savings Bank generally have reflected the policy of making less
than the maximum loan permissible under applicable regulations, in accordance
with sound lending practices, market conditions and underwriting standards
established by the Savings Bank. The Savings Bank's lending policies on
single-family residential mortgage loans generally limits the maximum
loan-to-value ratio to 95% of the lesser of the appraised value or purchase
price of the property and generally all single-family residential loans in
excess of an 80% loan-to-value ratio require private mortgage insurance.
The Savings Bank offers fixed-rate single-family residential loans
with terms of five to 30 years. Such loans are amortized on a monthly basis
with principal and interest due each month and customarily include
"due-on-sale" clauses, which are provisions giving the Savings Bank the right
to declare a loan immediately due and payable in the event the borrower sells
or otherwise disposes of the real property subject to the mortgage and the loan
is not repaid. The Savings Bank enforces due-on-sale clauses to the extent
permitted under applicable laws. Currently, substantially all fixed-rate
single-family residential loans with terms to maturity of greater than ten
years originated by the Savings Bank are designated as held for sale and sold
to the FHLMC and other investors in the secondary market as market conditions
permit.
Since 1983, the Savings Bank has been offering adjustable-rate loans
in order to decrease the vulnerability of its operations to changes in interest
rates. At September 30, 1996, $20.9 million, or 54.0%, of the single-family
residential loans in the Savings Bank's loan portfolio consisted of
adjustable-rate loans.
The Savings Bank's single-family residential adjustable-rate loans are
fully amortizing loans with contractual maturities of up to 30 years. The
loans currently being originated by the Savings Bank have interest rates which
are scheduled to adjust every one or three years in accordance with a
designated index (the weekly average yield on U.S. Treasury securities adjusted
to a constant comparable maturity, as made available by the Federal Reserve
Board). There is a 2% cap on the rate adjustment per period and a 6% cap rate
adjustment over the life of the loan. The Savings Bank's adjustable-rate loans
currently being originated are not convertible into fixed-rate loans, are not
assumable, do not contain prepayment penalties and do not produce negative
amortization. The Savings Bank generally offers discounts with respect to the
interest rate on its adjustable-rate loans during the first year of the
mortgage loan for competitive reasons.
The demand for adjustable-rate loans in the Savings Bank's primary
market area has been a function of several factors, including the level of
interest rates, the expectations of changes in the level of interest rates and
the difference between the interest rates and loan fees offered for fixed-rate
loans and adjustable-rate loans. The relative amount of fixed-rate
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<PAGE> 10
and adjustable-rate residential loans that can be originated at any time is
largely determined by the demand for each in a competitive environment. Due to
the generally lower rates of interest prevailing in recent periods, the Savings
Bank's originations of adjustable-rate loans have decreased as consumer
preference for fixed-rate loans has increased.
Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. The Savings Bank believes that these risks, which have not had
a material adverse effect on the Savings Bank to date, generally are less than
the risks associated with holding fixed-rate loans in an increasing interest
rate environment.
CONSUMER AND OTHER LOANS. At September 30, 1996, consumer and other
loans totalled $860,000, or 2.2%, of the total loan portfolio (including loans
held for sale), before net items, and consisted primarily of home equity lines
of credit, which amounted to $817,000, or 2.1%, of the Savings Bank's consumer
and other loan portfolio (before net items). Home equity lines of credit are
originated by the Savings Bank for up to 80% of the appraised value (90% if the
Savings Bank holds the first mortgage), less the amount of any existing prior
liens on the property. Home equity lines of credit have a maximum term of five
years and interest rates which adjust in accordance with a designated prime
rate. The Savings Bank will secure the loan with a mortgage on the property
(generally a second mortgage) and will originate the loan even if another
institution holds the first mortgage.
Consumer and other loans also included at September 30, 1996, $41,000
of loans secured by customer deposits and $2,000 of commercial business loans.
Except for home equity lines of credit, the Savings Bank does not emphasize the
origination of consumer or commercial business loans and does not expect to do
so in the future.
MULTI-FAMILY RESIDENTIAL, NONRESIDENTIAL REAL ESTATE AND CONSTRUCTION
LOANS. At September 30, 1996, $126,000, or 0.3%, and $142,000, or 0.4%, of the
Savings Bank's total loan portfolio (including loans held for sale), before net
items, consisted of loans secured by existing multi-family residential and
nonresidential real estate, respectively. The Savings Bank's multi-family
residential (five units or more) and nonresidential real estate, loan portfolio
includes, for the most part, nine loans secured primarily by apartment
buildings and small office buildings located within the Savings Bank's primary
lending area.
Multi-family residential and nonresidential real estate loans have
terms which range up to 25 years. Although some of the multi-family
residential and nonresidential real estate loans which were originated in prior
periods have fixed rates, interest rates on originations in recent years
generally adjust at a one-year interval in accordance with a designated index.
The maximum adjustment in any one period is 2% with a 6% cap over the life of
the loan. At September 30, 1996, $188,000, or 70.1%, of the multi-family
residential and nonresidential real estate loan portfolio consisted of
adjustable-rate loans.
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Multi-family residential and nonresidential real estate loans are
generally made in amounts up to 75% of the appraised value of the security
property. All appraisals are generally performed by an independent appraiser
designated by the Savings Bank and are reviewed by management. In originating
multi-family residential and nonresidential real estate loans, the Savings Bank
considers the quality of the property, the credit of the borrower, cash flow of
the project, location of the real estate and the quality of management involved
with the property.
The Savings Bank makes construction loans to individuals for the
construction of their residences and to borrowers for the construction of
multi-family residential and nonresidential real estate. At September 30,
1996, construction loans amounted to $1.0 million or 2.5% of the Savings Bank's
total loan portfolio (including loans held for sale), before net items. Of
this amount, $1.0 million consisted of loans for the construction of
single-family residences. The Savings Bank had no loans for the construction
of multi-family residential and nonresidential real estate at September 30,
1996.
Construction lending is generally limited to the Savings Bank's
primary lending area. Construction loans are structured to be converted to
permanent loans at the end of the construction phase, which typically is 12
months. Construction loans have rates and terms which generally match the
non-construction loans then offered by the Savings Bank, except that during the
construction phase the borrower only pays interest on the loan. Construction
loans are underwritten pursuant to the same general guidelines used for
originating permanent loans.
Multi-family residential and nonresidential real estate lending is
generally considered to involve a higher degree of risk than single-family
residential lending. Such lending typically involves large loan balances
concentrated in a single borrower or groups of related borrowers. In addition,
the payment experience on loans secured by income-producing properties is
typically dependent on the successful operation of the related real estate
project and thus may be subject to a greater extent to adverse conditions in
the real estate market or in the economy generally. The Savings Bank generally
attempts to mitigate the risks associated with multi-family residential and
nonresidential real estate lending by, among other things, lending primarily in
its market area and using low loan-to-value ratios in the underwriting process.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on
loans, the Savings Bank often receives loan origination fees or "points" for
originating loans. Loan points are a percentage of the principal amount of the
mortgage loan and are charged to the borrower in connection with the
origination of the loan.
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 91 issued by the Financial Accounting Standards Board ("FASB"),
which deals with the accounting for non-refundable fees and costs associated
with originating or acquiring loans, the Savings Bank's loan origination fees
and certain related direct loan origination costs are
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<PAGE> 12
offset, and the resulting net amount is deferred and amortized as interest
income over the contractual life of the related loans as an adjustment to the
yield of such loans. At September 30, 1996, the Savings Bank had $85,000 of
loan costs which had been deferred and are being recognized into income over
the contractual maturities of the related loans.
ASSET QUALITY
DELINQUENT LOANS. The following table sets forth information
concerning delinquent loans at September 30, 1996, in dollar amount and as a
percentage of the Savings Bank's total loan portfolio (including loans held for
sale). The amounts presented represent the total outstanding principal
balances of the related loans, rather than the actual payment amounts which are
past due.
<TABLE>
<CAPTION>
Total
---------------------------------
Amount Percentage
------------- ---------------
(Dollars in Thousands)
<S> <C> <C>
Loans delinquent for:
30 - 59 days $ 916 2.3%
60 - 89 days 140 0.4
90 days and over -- --
----- ---
Total delinquent loans(1) $1,056 2.7%
===== ===
</TABLE>
- -----------------------------
(1) Consisted entirely of single-family residential loans.
NON-PERFORMING ASSETS. When a borrower fails to make a required
payment on a loan, the Savings Bank attempts to cure the deficiency by
contacting the borrower and seeking payment. Contacts are generally made
following the fifteenth day after a payment is due. In most cases,
deficiencies are cured promptly. If a delinquency extends beyond 15 days, the
loan and payment history is reviewed and efforts are made to collect the loan.
While the Savings Bank generally prefers to work with borrowers to resolve such
problems, when the account becomes 90 days delinquent, the Savings Bank does
institute foreclosure or other proceedings, as necessary, to minimize any
potential loss.
All loans are reviewed on a regular basis and are placed on a
non-accrual status when, in the opinion of management, the collection of
additional interest is deemed insufficient to warrant further accrual. As a
matter of policy, the Savings Bank does not accrue interest on loans past due
90 days or more except when the estimated value of the collateral and
collection efforts are deemed sufficient to ensure full recovery. Interest
-11-
<PAGE> 13
accrued and unpaid at the time a loan is placed on non-accrual status is
charged against interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan.
Real estate acquired by the Savings Bank by foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until such time
as it is sold. Real estate owned is carried at the lower of fair value minus
estimated costs to sell the property, or cost (generally the balance of the
loan on the property at the date of acquisition). After the date of
acquisition, all costs incurred in maintaining the property are expensed and
costs incurred for the improvement or development of such property are
capitalized up to the extent of fair value.
The following table sets forth the amounts and categories of the
Savings Bank's non-performing assets at the dates indicated. The Savings Bank
did not have any troubled debt restructurings at any of the dates presented.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------
1996 1995 1994
-------------- --------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accruing loans(1) $ -- $ -- $ 33
Accruing loans greater than
90 days delinquent(1) -- -- --
Real estate owned -- -- --
---- ---- ----
Total non-performing assets $ -- $ -- $ 33
==== === ===
Total non-performing loans as
a percentage of total loans --% --% .12%
==== === ===
Total non-performing assets as
a percentage of total assets --% --% .08%
==== === ===
</TABLE>
- -------------------------
(1) Consisted solely of single-family residential loans.
The interest income that would have been recorded during the years
ended September 30, 1996, 1995 and 1994 if the Savings Bank's non-performing
loans at the end of such periods had been current in accordance with their
terms during such periods was $0, $0 and $1,800, respectively.
CLASSIFIED ASSETS. Federal regulations require that each insured
savings association classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate,
-12-
<PAGE> 14
classify them. There are three classifications for problem assets:
"substandard," "doubtful" and "loss." Substandard assets have one or more
defined weaknesses and are characterized by the distinct possibility that the
insured institution will sustain some loss if the deficiencies are not
corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
loss is considered uncollectible and of such little value that continuance as
an asset of the institution is not warranted. Another category designated
"special mention" also must be established and maintained for assets which do
not currently expose an insured institution to a sufficient degree of risk to
warrant classification as substandard, doubtful or loss. Assets classified as
substandard or doubtful require the institution to establish general allowances
for loan losses. If an asset or portion thereof is classified loss, the
insured institution must either establish specific allowances for loan losses
in the amount of 100% of the portion of the asset classified loss, or
charge-off such amount. General loss allowances established to cover possible
losses related to assets classified substandard or doubtful may be included in
determining an institution's regulatory capital, while specific valuation
allowances for loan losses do not qualify as regulatory capital. Federal
examiners may disagree with an insured institution's classifications and
amounts reserved. For information concerning a recent OTS proposal which would
revise the amount of general loss allowances required with respect to
classified and other assets, see "- Allowance for Loan Losses." At September
30, 1996, the Savings Bank had no classified assets.
ALLOWANCE FOR LOAN LOSSES. The Savings Bank maintains an allowance
for estimated losses on loans based upon an assessment of prior loss
experience, the volume and type of lending conducted by the Savings Bank,
industry standards, past due loans, general economic conditions and other
factors related to the collectibility of the loan portfolio. Although
management believes that it uses the best information available to make such
determinations, future adjustments to the allowance may be necessary, and net
income could be significantly affected, if circumstances differ substantially
from the assumptions used in making the initial determinations.
At September 30, 1996, the Savings Bank's allowance for loan losses
amounted to $95,000, all of which was classified as general pursuant to OTS
regulations and, as a result, was includable as a component of regulatory
risk-based capital.
-13-
<PAGE> 15
The following table sets forth an analysis of the Savings Bank's
allowance for loan losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------------
1996 1995 1994
--------------- ---------------------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Total net loans outstanding(1) $39,331 $32,772 $27,594
====== ====== ======
Average loans outstanding, net $35,234 $30,792 $23,844
====== ====== ======
Balance at beginning of period $ 81 $ 69 $ 60
Charge-offs -- -- (2)
Recoveries -- -- --
------ ------- -------
Net charge-offs -- -- (2)
Provision for losses on loans 14 12 11
------- ------ -------
Balance at end of period $ 95 $ 81 $ 69
======= ====== ======
Allowance for loan losses as a
percent of total loans
outstanding .24% .25% .25%
==== === ===
Ratio of net charge-offs to average
loans outstanding --% --% --%(2)
==== === ===
</TABLE>
- ----------------------------
(1) Includes loans held for sale.
(2) Less than .1%.
Effective December 21, 1993, the OTS, in conjunction with the Office
of the Comptroller of the Currency, the FDIC and the Federal Reserve Board,
issued an Interagency Policy Statement on the Allowance for Loan and Lease
Losses ("Policy Statement"). The Policy Statement, which effectively
supersedes the proposed guidance issued on September 1, 1992, includes guidance
(i) on the responsibilities of management for the assessment and establishment
of an adequate allowance and (ii) for the agencies' examiners to use in
evaluating the adequacy of such allowance and the policies utilized to
determine such allowance. The Policy Statement also sets forth quantitative
measures for the allowance with respect to assets classified substandard and
doubtful and with respect to the remaining portion of an institution's loan
portfolio. Specifically, the Policy Statement sets forth the following
quantitative measures which examiners may use to determine the reasonableness
of an allowance: (i) 50% of the portfolio that is classified doubtful; (ii) 15%
of the portfolio that is classified substandard; and (iii) for the portions of
the portfolio that have not been classified (including loans designated special
mention), estimated credit losses over the upcoming twelve months based on
facts and circumstances available on the evaluation date. While the Policy
Statement sets forth this quantitative measure, such guidance is not intended
as a "floor" or "ceiling."
-14-
<PAGE> 16
The following table sets forth information concerning the allocation
of the Savings Bank's allowance for loan losses by loan categories at the dates
indicated.
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------------------
1996 1995 1994
--------------------------- ---------------------------- -------------------------
Percent of Percent of Percent of
Total Total Total
Loans by Loans by Loans by
Amount Category Amount Category Amount Category
------------- ------------ ------------ -------------- ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family
residential $91 95.8% $78 96.9% $65 93.9%
Multi-family residential -- 0.3 1 .7 2 2.3
Nonresidential real estate -- 0.4 1 .7 1 1.2
Construction 2 1.3 1 .7 1 1.9
Consumer and other loans 2 2.2 -- 1.0 -- .7
-- ------ -- ------ -- ------
Total $95 100.00% $81 100.00% $69 100.00%
== ====== == ====== == ======
</TABLE>
Management of the Savings Bank believes that the reserves it has
established are adequate to cover any potential losses in the Savings Bank's
loan portfolio. However, future adjustments to these reserves may be
necessary, and the Savings Bank's results of operations could be adversely
affected if circumstances differ substantially from the assumptions used by
management in making its determinations in this regard.
INVESTMENT ACTIVITIES
GENERAL. The Savings Bank's mortgage-backed and investment securities
portfolio is managed in accordance with a written investment policy adopted by
the Board of Directors. All transactions must be approved by and reported to
the Board of Directors.
Prior to October 1, 1994, portfolio investment securities and
mortgage-backed securities were carried at cost, adjusted for amortization of
premiums and accretion of discounts. The investments and mortgage-backed
securities were carried at cost, as it was management's intent, and the Savings
Bank had the ability to hold the securities until maturity. Investment
securities and mortgage-backed securities held for indefinite periods of time,
or which management utilized as part of its asset/liability management
strategy, or that would be sold in response to changes in interest rates,
prepayment risk or the perceived need to increase regulatory capital were
classified as held for sale at the point of purchase and carried at the lower
of cost or market, with any resulting decline in market value below cost
charged to operations. Gains or losses on securities held for sale, including
lower of cost or market adjustments, were recognized using the specific
identification method.
In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (the "Statement"). The Statement
requires that investments be categorized as held-to-maturity, trading or
available for sale. Securities classified as held to maturity are carried at
cost only if the Savings Bank has the positive intent and ability
-15-
<PAGE> 17
to hold these securities to maturity. Trading securities and securities
available for sale are carried at fair value with resulting unrealized gains or
losses charged to operations or stockholders' equity, respectively. The
Savings Bank adopted the Statement as of October 1, 1994. In accordance with
the terms of a recent FASB implementation guide, on December 31, 1995, the
Savings Bank transferred mortgage-backed securities with an amortized cost of
$7.2 million from held to maturity to available for sale. At September 30,
1996, the Company had $486,000 of investment securities and $4.5 million of
mortgage-backed securities classified as available for sale and the Company's
stockholders' equity reflected a net unrealized gain of $12,000.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities represent a
participation interest in a pool of single-family or multi-family mortgage
loans, the principle and interest payments on which, in general, are passed
from the mortgage originators, through intermediaries that pool and repackage
the participation interests in the form of securities, to investors such as the
Savings Bank. Such intermediaries may be private issuers, or agencies
including the FHLMC, the Federal National Mortgage Association ("FNMA") and the
Government National Mortgage Association ("GNMA") that insure or guarantee the
payment of principal and interest to investors.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed- or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through
certificates. As a result, the interest rate risk characteristics of the
underlying pool of mortgages (e.g., fixed-rate or adjustable-rate) as well as
prepayment, default and other risks associated with the underlying mortgages
are passed on to the certificate holder. The life of a mortgage-backed
pass-through security is equal to the life of the underlying mortgages.
The Savings Bank has invested in a portfolio of mortgage-backed
securities which are insured or guaranteed by federal agencies.
Mortgage-backed securities increase the quality of the Savings Bank's assets by
virtue of the guarantees that back them, are more liquid than individual
mortgage loans and may be used to collateralize borrowings or other obligations
of the Savings Bank.
-16-
<PAGE> 18
The following table sets forth information relating to the amortized
cost and market value of the Savings Bank's mortgage-backed securities at
September 30, 1996, 1995 and 1994 (including those designated as available for
sale).
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------
1996 1995 1994
------------------------- -------------------- ------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------- ---------- --------- --------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLMC participation
certificates $ 348 $ 339 $ 397 $ 396 $ 616 $ 597
GNMA participation
certificates 3,835 3,867 6,033 6,080 6,484 6,226
FNMA participation
certificates 560 573 881 888 1,050 1,021
----- ----- ----- ----- ----- -----
Total mortgage-backed
securities $4,743 $4,779 $7,311 $7,364 $8,150 $7,844
===== ===== ===== ===== ===== =====
</TABLE>
The following table sets forth the activity in the Savings Bank's
mortgage-backed securities portfolio during the periods indicated (including
those designated as available for sale).
<TABLE>
<CAPTION>
At or For the Year
Ended September 30,
-----------------------------------------------------
1996 1995 1994
------------ -------------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities
at beginning of period $7,311 $8,150 $5,773
Purchases 513 -- 3,090
Repayments (1,332) (839) (689)
Sales (1,745)
Change in unrealized gain on available
for sale securities 30 -- --
Premium amortization (3) -- (24)
----- ------ -----
Mortgage-backed securities at end
of period(1) $4,774 $7,311 $8,150
===== ===== =====
Weighted average yield at end of
period 6.63% 6.23% 5.06%
===== ==== ====
</TABLE>
- --------------------------
(1) At September 30, 1996, $4.5 million of such securities were classified
as available for sale.
-17-
<PAGE> 19
At September 30, 1996, of the $4.8 million portfolio, $348,000 was
scheduled to mature in between one and five years and $4.4 million was
scheduled to mature after ten years. Due to repayments of the underlying
loans, the actual maturities of mortgage-backed securities generally are
substantially less than the scheduled maturities.
Of the $4.8 million of mortgage-backed securities, $245,000 consisted
of fixed-rate and $4.5 million consisted of adjustable-rate securities.
INVESTMENT SECURITIES. The following table sets forth information
relating to the amortized cost and market value of the Savings Bank's
investment securities at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-----------------------------------------------------------------------------
1996 1995 1994
------------------------- ---------------------- ------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
----------- ------------ ---------- ---------- ----------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government agency
obligations(1) $2,493 $2,445 $2,990 $2,995 $1,989 $1,989
===== ===== ===== ===== ===== =====
Weighted average yield
at end of period 6.0% 6.16% 5.02%
==== ==== ====
</TABLE>
- -------------------
(1) At September 30, 1996, $486,000 of investment securities were
classified as available for sale.
The following table sets forth the amortized cost and market value of
investment securities by contractual terms to maturity at September 30, 1996.
<TABLE>
<CAPTION>
Amortized Market
Cost Value
------------- -------------
(In Thousands)
<S> <C> <C>
One year $ -- $ --
One to five years 2,493 2,445
Five to ten years -- --
More than ten years -- --
----- -----
Total $2,493 $2,445
===== =====
</TABLE>
-18-
<PAGE> 20
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Savings Bank's funds
for lending and other investment purposes. In addition to deposits, the
Savings Bank derives funds from loan principal repayments. Loan repayments are
a relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in
the availability of funds from other sources. They may also be used on a
longer term basis for general business purposes.
DEPOSITS. The Savings Bank's deposits are attracted principally from
within the Savings Bank's primary market area through the offering of a broad
selection of deposit instruments, including NOW accounts, money market
accounts, regular savings accounts, and term certificate accounts. Included
among these deposit products are individual retirement account certificates of
approximately $5.7 million at September 30, 1996. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
period the funds must remain on deposit and the interest rate.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Savings Bank on a periodic basis.
Determination of rates and terms are predicated on funds acquisition and
liquidity requirements, rates paid by competitors, growth goals and applicable
laws and regulations.
The Savings Bank utilizes traditional marketing methods to attract new
customers and savings deposits, including print media advertising. The Savings
Bank maintains a drive-up facility at its office. The Savings Bank does not
advertise for deposits outside its local market area or utilize the services of
deposit brokers.
-19-
<PAGE> 21
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Savings Bank for the periods
indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ------------------------ -------------------------
Amount Percentage Amount Percentage Amount Percentage
------------ ------------ --------- ------------ ---------- ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
2.00 - 4.00% $ -- --% $ -- --% $ 2,626 6.8%
4.01 - 6.00% 18,807 45.2 18,061 40.6 24,788 63.8
6.01 - 8.00% 14,997 36.0 19,530 44.0 2,513 6.5
8.01 - 10.00% -- -- 53 .1 309 .8
10.01 - 12.00% -- -- 22 .1 20 .1
------ ----- ------- ----- ------ -----
Total certificate
accounts 33,804 81.2 37,666 84.8 30,256 78.0
------ ----- ------ ----- ------ -----
Transactions
accounts:
Passbook accounts 1,396 3.3 1,939 4.4 1,999 5.1
Statement savings 2,535 6.1
Money market 2,616 6.3 4,082 9.2 5,980 15.4
accounts
NOW accounts 1,285 3.1 741 1.6 602 1.5
------ ----- ----- ----- ------ -----
Total transaction
accounts 7,832 18.8 6,762 15.2 8,581 22.0
------ ----- ------ ----- ------ -----
Total deposits $41,636 100.0% $44,428 100.0% $38,837 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
The following table sets forth the savings activities of the Savings
Bank during the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------
1996 1995 1994
------------- -------------------- --------------
(In Thousands)
<S> <C> <C> <C>
Deposits $30,928 $ 37,426 $ 28,193
Withdrawals (35,751) (33,750) (25,811)
------- ------- -------
Net increase (decrease)
before interest credited (4,823) 3,676 2,382
Interest credited 2,031 1,915 1,284
------ ------- ------
Net increase (decrease)
in deposits $(2,792) $ 5,591 $ 3,666
====== ======= =======
</TABLE>
-20-
<PAGE> 22
The following table shows the interest rate and maturity information
for the Savings Bank's certificates of deposit at September 30, 1996.
<TABLE>
<CAPTION>
Maturity Date
----------------------------------------------------------------------------
One Year Over Over Over
Interest Rate or Less 1-2 Years 2-3 Years 3 Years Total
------------- ------------ ------------- ------------- ------------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
4.01 - 6.00% $13,019 $4,484 $1,246 $ 58 $18,807
6.01 - 8.00% 8,636 2,523 3,212 626 14,997
------ ----- ----- --- ------
Total $21,655 $7,007 $4,458 $684 $33,804
====== ===== ===== === ======
</TABLE>
The following table sets forth the maturities of the Savings Bank's
certificates of deposit having principal amounts of $100,000 or more at
September 30, 1996.
<TABLE>
<CAPTION>
Certificates of deposit
maturing in quarter ending:
-----------------------------------
(In Thousands)
<S> <C>
December 31, 1996 $ --
March 31, 1997 1,014
June 30, 1997 100
September 30, 1997 310
After September 30, 1997 2,112
-----
Total certificates of deposit
with balances of $100,000
or more $3,536
=====
</TABLE>
-21-
<PAGE> 23
BORROWINGS. The Savings Bank's other sources of funds include
advances from the FHLB of Cincinnati. As a member of the FHLB of Cincinnati,
the Savings Bank is required to own capital stock in the FHLB of Cincinnati and
is authorized to apply for advances from the FHLB of Cincinnati. Each FHLB
credit program has its own interest rate, which may be fixed or variable, and a
range of maturities. The FHLB of Cincinnati may prescribe the acceptable uses
for these advances, as well as limitations on the size of the advances and
repayment provisions. At September 30, 1996, the Savings Bank had a $6.0
million line of credit with the FHLB of Cincinnati. As of such date the
Savings Bank had $3.7 million of advances from the FHLB of Cincinnati.
The following table sets forth the maximum month-end balance and
average balance of the Savings Bank's FHLB advances during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------
1996 1995 1994
------------- ------------------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Maximum balance $3,658 $1,708 $1,715
Average balance 1,313 720 521
Weighted average interest
rate of FHLB advances 5.48% 5.97% 4.61%
</TABLE>
The following table sets forth certain information as to the Savings
Bank's FHLB advances at the dates indicated.
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1996 1995 1994
-------------- -------------- ----------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances $3,653 $194 $212
Weighted average interest
rate of FHLB advances 5.46% 5.65% 5.65%
</TABLE>
EMPLOYEES
The Savings Bank had 11 full-time employees and three part-time
employees at September 30, 1996. None of these employees is represented by a
collective bargaining agreement, and the Savings Bank believes that it enjoys
good relations with its personnel.
-22-
<PAGE> 24
COMPETITION
The Savings Bank faces strong competition both in attracting deposits
and making real estate loans. Its most direct competition for deposits has
historically come from other savings associations, credit unions and commercial
banks located in the greater Cincinnati area, including many large financial
institutions which have greater financial and marketing resources available to
them. In addition, during times of high interest rates, the Savings Bank has
faced additional significant competition for investors' funds from short-term
money market securities and other corporate and government securities. The
ability of the Savings Bank to attract and retain savings deposits depends on
its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities. As of
September 30, 1996, it was estimated that the Savings Bank held approximately
1.6% of total thrift deposits within Hamilton County, Ohio and 0.2% of total
thrift and bank deposits within such county.
The Savings Bank experiences strong competition for real estate loans
principally from other savings associations, commercial banks, and mortgage
banking companies. The Savings Bank competes for loans principally through the
interest rates and loan fees it charges and the efficiency and quality of
services it provides borrowers. Competition may increase as a result of the
continuing reduction of restrictions on the interstate operations of financial
institutions.
REGULATION
THE COMPANY
GENERAL. The Company, as a registered savings and loan holding
company within the meaning of the Home Owners' Loan Act ("HOLA"), is subject to
OTS and Division regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the
Savings Bank will be subject to certain restrictions in its dealings with the
Company and affiliates thereof.
ACTIVITIES RESTRICTIONS. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one
subsidiary savings institution. However, if the Director of the OTS determines
that there is reasonable cause to believe that the continuation by a savings
and loan holding company of an activity constitutes a serious risk to the
financial safety, soundness or stability of its subsidiary savings institution,
the Director may impose such restrictions as deemed necessary to address such
risk, including limiting (i) payment of dividends by the savings institution;
(ii) transactions between the savings institution and its affiliates; and (iii)
any activities of the savings institution that might create a serious risk that
the liabilities of the holding company and its affiliates may be imposed on the
savings institution. Notwithstanding the above rules as to permissible
business activities of unitary savings and loan holding companies, if the
savings
-23-
<PAGE> 25
institution subsidiary of such a holding company fails to meet a qualified
thrift lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings institution requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "- The Savings Bank -
Federal Regulation - Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Savings Bank,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Savings Bank or other subsidiary savings
institutions) would thereafter be subject to further restrictions. Among other
things, no multiple savings and loan holding company or subsidiary thereof
which is not a savings institution shall commence or continue for a limited
period of time after becoming a multiple savings and loan holding company or
subsidiary thereof any business activity, upon prior notice to, and no
objection by the OTS, other than: (i) furnishing or performing management
services for a subsidiary savings institution; (ii) conducting an insurance
agency or escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the Federal Reserve Board as permissible for bank holding
companies. Those activities described in (vii) above also must be approved by
the Director of the OTS prior to being engaged in by a multiple savings and
loan holding company.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings institution is any company
or entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company
of a savings institution (such as the Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar other types of
transactions. In addition to the restrictions imposed by Sections 23A and 23B,
no savings institution may (i) loan or otherwise extend credit to
-24-
<PAGE> 26
an affiliate, except for any affiliate which engages only in activities which
are permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate,
except for affiliates which are subsidiaries of the savings institution.
In addition, Sections 22(h) and (g) of the Federal Reserve Act places
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the institution's
loans to one borrower limit (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also requires that loans to
directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
and also requires prior board approval for certain loans. In addition, the
aggregate amount of extensions of credit by a savings institution to all
insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers. At September 30, 1996, the Savings Bank was in compliance with the
above restrictions.
RESTRICTIONS ON ACQUISITIONS. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings institution or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
institution, other than a subsidiary savings institution, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home
or branch office located in the state of the institution to be acquired as of
March 5, 1987; (ii) the acquiror is authorized to acquire control of the
savings institution pursuant to the emergency acquisition provisions of the
Federal Deposit Insurance Act ("FDIA"); or (iii) the statutes of the state in
which the institution to be acquired is located specifically permit
institutions to be acquired by the state-chartered institutions or savings and
loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions).
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") amended provisions of the Bank Holding Company Act of 1956 to
specifically authorize the Federal Reserve Board to approve an application by a
bank holding company
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to acquire control of a savings institution. FIRREA also authorized a bank
holding company that controls a savings institution to merge or consolidate the
assets and liabilities of the savings institution with, or transfer assets and
liabilities to, any subsidiary bank which is a member of the Bank Insurance
Fund ("BIF"), the federal deposit insurance fund that covers commercial bank
deposits, with the approval of the appropriate federal banking agency and the
Federal Reserve Board. As a result of these provisions, there have been a
number of acquisitions of savings institutions by bank holding companies in
recent years.
THE SAVINGS BANK - FEDERAL REGULATION
GENERAL. The OTS has extensive authority over the operations of
savings institutions. As part of this authority, savings institutions are
required to file periodic reports with the OTS and are subject to periodic
examinations by the OTS and the FDIC. Such regulation and supervision is
primarily intended for the protection of depositors.
Although the investment and lending authority of the Savings Bank is
prescribed by Ohio laws and regulations, many federal laws and regulations also
apply to state-chartered savings associations. Certain of the investment and
lending authorities for federally-chartered savings associations were amended
significantly and made applicable to state-chartered savings associations by
FIRREA.
The OTS' enforcement authority over all savings institutions was
substantially enhanced by FIRREA. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis
for enforcement action, including misleading or untimely reports filed with the
OTS. FIRREA significantly increased the amount of and grounds for civil money
penalties.
On December 19, 1991, the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") was enacted into law. The FDICIA provided
for, among other things, the recapitalization of the BIF; the authorization of
the FDIC to make emergency special assessments under certain circumstances
against BIF members and members of the SAIF; the establishment of risk-based
deposit insurance premiums; and improved examinations and reporting
requirements. The FDICIA also provided for enhanced federal supervision of
depository institutions based on, among other things, an institution's capital
level.
INSURANCE OF ACCOUNTS. The deposits of the Savings Bank are insured
to the maximum extent permitted by the SAIF, which is administered by the FDIC,
and are backed by the full faith and credit of the U.S. Government. As
insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC. The FDIC also has the
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authority to initiate enforcement actions against savings institutions, after
giving the OTS an opportunity to take such action.
Under current FDIC regulations, institutions are assigned to one of
three capital groups which are based solely on the level of an institution's
capital--"well capitalized," "adequately capitalized," and
"undercapitalized"--which are defined in the same manner as the regulations
establishing the prompt corrective action system under Section 38 of the FDIA,
as discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates previously ranging from .23% for well capitalized,
healthy institutions to .31% for undercapitalized institutions with substantial
supervisory concerns. As of September 30, 1996, the insurance premiums for the
Savings Bank amounted to .23% of insured deposits.
On November 14, 1995, the FDIC adopted a new assessment rate schedule
of zero to 27 basis points (subject to a $2,000 minimum) for BIF members
beginning on or about January 1, 1996 while retaining the existing assessment
rate schedule for SAIF member institutions. In announcing this new schedule,
the FDIC noted that the premium differential may have adverse consequences for
SAIF members, including reduced earnings and an impaired ability to raise funds
in the capital markets. In addition, SAIF members, such as the Savings Bank,
could be placed at a competitive disadvantage to BIF members with respect to
pricing of loans and deposits and the ability to achieve lower operating costs.
The U.S. Congress has enacted, and on September 30, 1996, the
President signed into law legislation which eliminates the premium differential
between SAIF-insured institutions and BIF-insured institutions by
recapitalizing the SAIF's reserves to the required ratio. The legislation
provides that all SAIF member institutions pay a special one-time assessment to
recapitalize the SAIF, which in the aggregate will be sufficient to bring the
reserve ratio in the SAIF to 1.25% of insured deposits. The amount of the
special assessment required to recapitalize the SAIF will be 65.7 basis points
of the SAIF-assessable deposits as of March 31, 1995. The special assessment
was due on October 1, 1996, and payable on November 27, 1996. Based on
deposits of the Saving Bank as of March 31, 1995, the Savings Bank incurred an
adverse earnings impact of approximately $289,000, gross of related tax
benefits, for the fourth quarter of fiscal 1996.
After the recapitalization of the SAIF, premiums paid by SAIF-insured
institutions are to be reduced to 0 to 27 basis points, effective January 1,
1997, plus an additional 6.4 basis points to cover applicable FICO assessments.
The legislation also provides for the merger of the BIF and the SAIF, with such
merger being conditioned upon the prior elimination of the thrift charter.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Savings Bank, if it determines after a hearing that
the institution has engaged
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or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. There are no pending proceedings to terminate the deposit
insurance of the Savings Bank.
REGULATORY CAPITAL REQUIREMENTS. Federally insured savings
institutions are required to maintain minimum levels of regulatory capital.
Pursuant to FIRREA, the OTS has established capital standards applicable to all
savings institutions. These standards generally must be as stringent as the
comparable capital requirements imposed on national banks. The OTS also is
authorized to impose capital requirements in excess of these standards on
individual institutions on a case-by-case basis.
Current OTS capital standards require savings institutions to satisfy
three different capital requirements. Under these standards, savings
institutions must maintain "tangible" capital equal to at least 1.5% of
adjusted total assets, "core" capital equal to at least 3.0% of adjusted total
assets and "total" capital (a combination of core and "supplementary" capital)
equal to at least 8.0% of "risk-weighted" assets. For purposes of the
regulation, core capital generally consists of common stockholders' equity
(including retained earnings), noncumulative perpetual preferred stock and
related surplus, minority interests in the equity accounts of fully
consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits and "qualifying supervisory goodwill." Tangible capital is given the
same definition as core capital but does not include qualifying supervisory
goodwill and is reduced by the amount of all the savings institution's
intangible assets, with only a limited exception for purchased mortgage
servicing rights. The Savings Bank had no goodwill or other intangible assets
at September 30, 1996. Both core and tangible capital are further reduced by
an amount equal to a savings institution's debt and equity investments in
subsidiaries engaged in activities not permissible to national banks (other
than subsidiaries engaged in activities undertaken as agent for customers or in
mortgage banking activities and subsidiary depository institutions or their
holding companies). These adjustments do not affect the Savings Bank's
regulatory capital. Supplementary capital generally consists of hybrid capital
instruments; perpetual preferred stock which is not eligible to be included as
core capital; subordinated debt and intermediate-term preferred stock; and
general allowances for loan losses up to a maximum of 1.25% of risk-weighted
assets.
In determining compliance with the risk-based capital requirement, a
savings institution is allowed to include both core capital and supplementary
capital in its total capital, provided that the amount of supplementary capital
included does not exceed the savings institution's core capital. In
determining the required amount of risk-based capital, total assets, including
certain off-balance sheet items, are multiplied by a risk weight based on the
risks inherent in the type of assets. The risk weights assigned by the OTS for
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principal categories of assets are (i) 0% for cash and securities issued by the
U.S. Government or unconditionally backed by the full faith and credit of the
U.S. Government; (ii) 20% for securities (other than equity securities) issued
by U.S. Government-sponsored agencies and mortgage-backed securities issued
by, or fully guaranteed as to principal and interest by, the FNMA or the FHLMC,
except for those classes with residual characteristics or stripped
mortgage-related securities; (iii) 50% for prudently underwritten permanent
one- to four-family first lien mortgage loans not more than 90 days delinquent
and having a loan-to-value ratio of not more than 80% at origination unless
insured to such ratio by an insurer approved by the FNMA or the FHLMC,
qualifying residential bridge loans made directly for the construction of
one-to-four family residences and qualifying multi-family residential loans;
and (iv) 100% for all other loans and investments, including consumer loans,
commercial loans, and single-family residential real estate loans more than 90
days delinquent, and for repossessed assets.
At September 30, 1996, the Savings Bank exceeded all of its regulatory
capital requirements, with tangible, core and risk-based capital ratios of
7.9%, 7.9% and 18.5%, respectively.
A savings institution which is not in capital compliance or which is
otherwise deemed to require more than normal supervision is subject to
restrictions on its ability to grow pursuant to Regulatory Bulletin 3a-1. In
addition, a provision of HOLA generally provides that the Director of OTS must
restrict the asset growth of savings institutions not in regulatory capital
compliance, subject to a limited exception for growth not exceeding interest
credited.
A savings institution which is not in capital compliance is also
automatically subject to the following: (i) new directors and senior executive
officers and employment contracts for senior executive officers must be
approved by the OTS in advance; (ii) the savings institution may not accept or
renew any brokered deposits; (iii) the savings institution is subject to higher
OTS assessments as a capital-deficient institution; and (iv) the savings
institution may not make any capital distributions without prior written
approval.
Any savings institution that fails any of the capital requirements is
subject to possible enforcement actions by the OTS or the FDIC. Such actions
could include a capital directive, a cease and desist order, civil money
penalties, the establishment of restrictions on the institution's operations,
termination of federal deposit insurance and the appointment of a conservator
or receiver. The OTS' capital regulation provides that such actions, through
enforcement proceedings or otherwise, could require one or more of a variety of
corrective actions.
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In August 1993, the OTS adopted a final rule incorporating an
interest-rate risk component into the risk-based capital regulation. Under the
rule, an institution with a greater than "normal" level of interest rate risk
is subject to a deduction of its interest rate risk component from total
capital for purposes of calculating its risk-based capital. As a result, such
an institution is required to maintain additional capital in order to comply
with the risk-based capital requirement. An institution with a greater than
"normal" interest rate risk is defined as an institution that would suffer a
loss of net portfolio value exceeding 2.0% of the estimated economic value of
its assets in the event of a 200 basis point increase or decrease (with certain
minor exceptions) in interest rates. The interest rate risk component is
calculated, on a quarterly basis, as one-half of the difference between an
institution's measured interest rate risk and 2.0%, multiplied by the economic
value of its assets. The rule also authorizes the Director of the OTS, or his
designee, to waive or defer an institution's interest rate risk component on a
case-by-case basis. The final rule was originally to be effective as of
January 1, 1994, subject however to a three quarter "lag" time between the
reporting date of the data used to calculate an institution's interest rate
risk and the effective date of each quarter's interest rate risk component.
However, in October 1994, the Director of the OTS indicated that it would waive
the capital deduction for institutions with greater than "normal" interest rate
risk until the OTS publishes an appeals process. The OTS has recently
indicated that no savings institution will be required to deduct capital for
interest rate risk until further notice. In any event, management of the
Savings Bank does not believe that the OTS' adoption of an interest rate risk
component to the risk-based capital requirement will adversely affect the
Savings Bank's regulatory capital position.
PROMPT CORRECTIVE ACTION. Under Section 38 of the FDIA, as added by
the FDICIA, each federal banking agency was required to implement a system of
prompt corrective action for institutions which it regulates. The federal
banking agencies, including the OTS, adopted substantially similar regulations
to implement Section 38 of the FDIA, effective as of December 19, 1992. Under
the regulations, an institution is deemed to be (i) "well capitalized" if it
has total risk-based capital of 10.0% or more, has a Tier 1 risk-based capital
ratio of 6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and
is not subject to any order or final capital directive to meet and maintain a
specific capital level for any capital measure, (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized," (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is
less than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based
capital ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is
less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Section 38
of the FDIA and the regulations promulgated thereunder also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
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capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized).
An institution generally must file a written capital restoration plan
which meets specified requirements with an appropriate federal banking agency
within 45 days of the date that the institution receives notice or is deemed to
have notice that it is undercapitalized, significantly undercapitalized or
critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after
receiving a capital restoration plan, subject to extensions by the agency.
An institution which is required to submit a capital restoration plan
must concurrently submit a performance guaranty by each company that controls
the institution. Such guaranty shall be limited to the lesser of (i) an amount
equal to 5.0% of the institution's total assets at the time the institution was
notified or deemed to have notice that it was undercapitalized or (ii) the
amount necessary to restore the relevant capital measures of the institution to
the levels required for the institution to be classified as adequately
capitalized. Such a guarantee shall expire after the federal banking agency
notifies the institution that it has remained adequately capitalized for each
of four consecutive calendar quarters. An institution which fails to submit a
written capital restoration plan within the requisite period, including any
required performance guarantee(s), or fails in any material respect to
implement a capital restoration plan, shall be subject to the restrictions in
Section 38 of the FDIA which are applicable to significantly undercapitalized
institutions.
Immediately upon becoming undercapitalized, an institution shall
become subject to the provisions of Section 38 of the FDIA (i) restricting
payment of capital distributions and management fees, (ii) requiring that the
appropriate federal banking agency monitor the condition of the institution and
its efforts to restore its capital, (iii) requiring submission of a capital
restoration plan, (iv) restricting the growth of the institution's assets and
(v) requiring prior approval of certain expansion proposals. The appropriate
federal banking agency for an undercapitalized institution also may take any
number of discretionary supervisory actions if the agency determines that any
of these actions is necessary to resolve the problems of the institution at the
least possible long-term cost to the deposit insurance fund, subject in certain
cases to specified procedures. These discretionary supervisory actions include
requiring the institution to raise additional capital; restricting transactions
with affiliates; restricting interest rates paid by the institution on
deposits; requiring replacement of senior executive officers and directors;
restricting the activities of the institution and its affiliates; requiring
divestiture of the institution or the sale of the institution to a willing
purchaser; and any other supervisory action that the agency deems appropriate.
These and additional mandatory and permissive supervisory actions may be taken
with respect to significantly undercapitalized and critically undercapitalized
institutions.
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At September 30, 1996, the Savings Bank was deemed a "well
capitalized" institution for purposes of the above regulations and as such was
not subject to the above mentioned restrictions.
SAFETY AND SOUNDNESS. FDICIA requires each federal banking regulatory
agency to prescribe, by regulation or guideline, standards for all insured
depository institutions and depository institution holding companies relating
to (i) internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; (vi) compensation, fees and benefits; and (vii) such other
operational and managerial standards as the agency determines to be
appropriate. The compensation standards would prohibit employment contracts or
other compensatory arrangements that provide excess compensation, fees or
benefits or could lead to material financial loss. In addition, each federal
banking regulatory agency must prescribe, by regulation or guideline, standards
relating to asset quality, earnings and stock valuation as the agency
determines to be appropriate. On July 10, 1995, the federal banking agencies,
including the OTS, adopted final rules and proposed guidelines concerning
standards for safety and soundness required to be prescribed by regulation
pursuant to Section 39 of the FDIA. In general, the standards relate to (1)
operational and managerial matters; (2) asset quality and earnings; and (3)
compensation. The operational and managerial standards cover (a) internal
controls and information systems, (b) internal audit systems, (c) loan
documentation, (d) credit underwriting, (e) interest rate exposure, (f) asset
growth, and (g) compensation, fees and benefits. Under the proposed asset
quality and earnings standards, the Savings Bank would be required to establish
and maintain systems to (i) identify problem assets and prevent deterioration
in those assets, and (ii) evaluate and monitor earnings and ensure that
earnings are sufficient to maintain adequate capital reserves. Finally, the
proposed compensation standard states that compensation will be considered
excessive if it is unreasonable or disproportionate to the services actually
performed by the individual being compensated. If a savings institution fails
to meet any of the standards promulgated by regulation, then such institution
will be required to submit a plan within 30 days to the OTS specifying the
steps it will take to correct the deficiency. In the event that a savings
institution fails to submit or fails in any material respect to implement a
compliance plan within the time allowed by the federal banking agency, Section
39 of the FDIA provides that the OTS must order the institution to correct the
deficiency and may (1) restrict asset growth; (2) require the savings
institution to increase its ratio of tangible equity to assets; (3) restrict
the rates of interest that the savings institution may pay; or (4) take any
other action that would better carry out the purpose of prompt corrective
action. The Savings Bank believes that it has been and will continue to be in
compliance with each of the standards as they have been adopted by the OTS.
LIQUIDITY REQUIREMENTS. All savings institutions are required to
maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. The liquidity requirement
may vary from time to time (between 4% and 10%) depending upon economic
conditions and savings flows of all savings institutions. At the present
time,
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the required minimum liquid asset ratio is 5%. At September 30, 1996, the
Savings Bank's liquidity ratio was 8.9%.
CAPITAL DISTRIBUTIONS. OTS regulations govern capital distributions
by savings institutions, which include cash dividends, stock redemptions or
repurchases, cash-out mergers, interest payments on certain convertible debt
and other transactions charged to the capital account of a savings institution
to make capital distributions. Generally, the regulation creates a safe harbor
for specified levels of capital distributions from institutions meeting at
least their minimum capital requirements, so long as such institutions notify
the OTS and receive no objection to the distribution from the OTS. Savings
institutions and distributions that do not qualify for the safe harbor are
required to obtain prior OTS approval before making any capital distributions.
Generally, a savings institution that before and after the proposed
distribution meets or exceeds its fully phased-in capital requirements (Tier 1
institutions) may make capital distributions during any calendar year equal to
the higher of (i) 100% of net income for the calendar year-to-date plus 50% of
its "surplus capital ratio" at the beginning of the calendar year or (ii) 75%
of net income over the most recent four-quarter period. The "surplus capital
ratio" is defined to mean the percentage by which the institution's ratio of
total capital to assets exceeds the ratio of its fully phased-in capital
requirement to assets. "Fully phased-in capital requirement" is defined to
mean an institution's capital requirement under the statutory and regulatory
standards applicable on December 31, 1994, as modified to reflect any
applicable individual minimum capital requirement imposed upon the institution.
Failure to meet fully phased-in or minimum capital requirements will result in
further restrictions on capital distributions, including possible prohibition
without explicit OTS approval. See "- Regulatory Capital Requirements."
Tier 2 institutions, which are institutions that before and after the
proposed distribution meet or exceed their minimum capital requirements, may
make capital distributions up to 75% of their net income over the most recent
four quarter period.
In order to make distributions under these safe harbors, Tier 1 and
Tier 2 institutions must submit 30 days written notice to the OTS prior to
making the distribution. The OTS may object to the distribution during that
30-day period based on safety and soundness concerns. In addition, a Tier 1
institution deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 institution as a result of such a
determination.
Tier 3 institutions, which are institutions that do not meet current
minimum capital requirements, or that have capital in excess of either their
fully phased-in capital requirement or minimum capital requirement but which
have been notified by the OTS that it will be treated as a Tier 3 institution
because they are in need of more than normal supervision, cannot make any
capital distribution without obtaining OTS approval prior to making such
distributions.
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At September 30, 1996, the Savings Bank was a Tier 1 institution for
purposes of this regulation.
On December 5, 1994, the OTS published a notice of proposed rulemaking
to amend its capital distribution regulation. Under the proposal, savings
institutions would be permitted to only make capital distributions that would
not result in their capital being reduced below the level required to remain
"adequately capitalized." A savings institution is adequately capitalized if
it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more and a Tier 1 leverage capital ratio of 4.0% or
more. Because the Savings Bank is a subsidiary of the Company, the proposal
would require the Savings Bank to provide notice to the OTS of its intent to
make a capital distribution. The Savings Bank does not believe that the
proposal will adversely affect its ability to make capital distributions if it
is adopted substantially as proposed.
LOANS TO ONE BORROWER. FIRREA imposed limitations on the aggregate
amount of loans that a savings institution could make to any one borrower,
including related entities. The permissible amount of loans-to-one borrower
now follows the national bank standard for all loans made by savings
institutions. Loans-to-one borrower may not exceed the greater of $500,000 or
15% of unimpaired capital and surplus. Loans in an amount equal to an
additional 10% of unimpaired capital and surplus also may be made to a borrower
if the loans are fully secured by readily marketable securities.
QUALIFIED THRIFT LENDER TEST. All savings institutions are required
to meet a QTL test set forth in Section 10(m) of the HOLA and regulations of
the OTS thereunder to avoid certain restrictions on their operations. A
savings institution that does not meet the QTL test set forth in the HOLA and
implementing regulations must either convert to a bank charter or comply with
the following restrictions on its operations: (i) the institution may not
engage in any new activity or make any new investment, directly or indirectly,
unless such activity or investment is permissible for a national bank; (ii) the
branching powers of the institution shall be restricted to those of a national
bank; (iii) the institution shall not be eligible to obtain any advances from
its FHLB; and (iv) payment of dividends by the institution shall be subject to
the rules regarding payment of dividends by a national bank. Upon the
expiration of three years from the date the savings institution ceases to be a
QTL, it must cease any activity and not retain any investment not permissible
for a national bank and immediately repay any outstanding FHLB advances
(subject to safety and soundness considerations).
Currently, the QTL test requires that 65% of an institution's
"portfolio assets" (as defined) consist of certain housing and consumer-related
assets on a monthly average basis in nine out of every 12 months. Assets that
qualify without limit for inclusion as part of the 65% requirement are loans
made to purchase, refinance, construct, improve or repair domestic residential
housing and manufactured housing; home equity loans; mortgage-backed securities
(where the mortgages are secured by domestic residential housing or
manufactured housing); stock issued by the FHLB of Cincinnati; and direct or
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indirect obligations of the FDIC. In addition, the following assets, among
others, may be included in meeting the test subject to an overall limit of 20%
of the savings institution's portfolio assets: 50% of residential mortgage
loans originated and sold within 90 days of origination; 100% of consumer and
educational loans (limited to 10% of total portfolio assets); and stock issued
by the FHLMC or the FNMA. Portfolio assets consist of total assets minus the
sum of (i) goodwill and other intangible assets, (ii) property used by the
savings institution to conduct its business, and (iii) liquid assets up to 20%
of the institution's total assets. At September 30, 1996, the qualified thrift
investments of the Savings Bank were approximately 99.0% of its portfolio
assets.
FEDERAL HOME LOAN BANK SYSTEM. The Savings Bank is a member of the
FHLB of Cincinnati, which is one of 12 regional FHLBs that administers the home
financing credit function of savings institutions. Each FHLB serves as a
reserve or central bank for its members within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors
of the FHLB.
As a member, the Savings Bank is required to purchase and maintain
stock in the FHLB of Cincinnati in an amount equal to at least 1% of its
aggregate unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year. At September 30, 1996, the Savings
Bank had $430,000 in FHLB stock, which was in compliance with this requirement.
As a result of FIRREA, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances
targeted for community investment and low- and moderate-income housing
projects. These contributions have adversely affected the level of FHLB
dividends paid and could continue to do so in the future. These contributions
also could have an adverse effect on the value of FHLB stock in the future.
For the year ended September 30, 1996, dividends paid by the FHLB of Cincinnati
to the Savings Bank amounted to $29,000, compared to $24,000 during the same
period in the prior year.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board requires all
depository institutions to maintain reserves against their transaction accounts
(primarily NOW and Super NOW checking accounts). As of September 30, 1996, no
reserves were required to be maintained on the first $4.3 million of
transaction accounts, reserves of 3% were required to be maintained against the
next $52.0 million of net transaction accounts (with such dollar amounts
subject to adjustment by the Federal Reserve Board), and a reserve of 10%
(which is subject to adjustment by the Federal Reserve Board to a level between
8% and 14%) against all remaining net transaction accounts. Because required
reserves must be maintained in the form of vault cash or a noninterest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce an institution's earning assets.
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<PAGE> 37
THE SAVINGS BANK - OHIO REGULATION
As an Ohio-chartered savings institution, the Savings Bank also is
subject to regulation and supervision by the Division. The Savings Bank is
required to file periodic reports with and is subject to periodic examinations
at least once within every 18-month period by the Division. The lending and
investment authority of the Savings Bank is prescribed by Ohio laws and
regulations, as well as applicable federal laws and regulations, and the
Savings Bank is prohibited from engaging in any activities not permitted by
such laws and regulations.
The Savings Bank is required by Ohio law and regulations to comply
with certain reserve and net worth requirements. Currently, Ohio-chartered
savings institutions are required to establish and maintain a reserve for the
absorption of bad debts and other losses in an amount at least equal to 3% of
the institutions's deposit account balance. For purposes of complying with
this reserve requirement, such savings institutions are able to include the
amount of any permanent stock issued and outstanding, contributed surplus,
undivided profits, specific loss or valuation reserves and any other
nonwithdrawable accounts. In addition, Ohio-chartered savings institutions
which are rated a composite one under the Uniform Financial Institutions Rating
System are required to establish and maintain a ratio of net worth to total
assets of not less than 3%. All other Ohio-chartered savings institutions are
required to have a ratio of net worth to total assets of not less than 4%. Net
worth shall consist of common stockholders' equity, noncumulative perpetual
preferred stock (including any related surplus), minority interests in the
equity capital accounts of consolidated subsidiaries and subordinated
debentures (in varying amounts and percentages). At September 30, 1996, the
Savings Bank was in compliance with applicable reserve and net worth
requirements.
Ohio law and regulations also restrict the lending and investment
authority of Ohio-chartered savings institutions. Such laws and regulations
restrict the amount an Ohio-chartered savings institution can lend to any one
borrower to an amount which, in the aggregate, does not exceed the lesser of
(i) 10% of the association's withdrawable accounts or (ii) the sum of the
association's capital and surplus. Notwithstanding the foregoing, Ohio law
permits any such institution to lend to any one borrower an aggregate amount
not exceeding $500,000.
In addition, Ohio law restricts the ability of Ohio-chartered savings
institutions to invest in, among other things, (i) commercial real estate loans
(including commercial construction real estate loans) up to 20% of total
assets; (ii) land acquisition and development loans up to 2% of total assets;
(iii) consumer loans, commercial paper and corporate debt securities up to 20%
of total assets; (iv) commercial business loans up to 10% of total assets; (v)
stock or other equity securities up to 10% of total assets; and (vi) capital
stock, obligations and other securities of service corporations up to 15% of
total assets. Ohio law also sets forth the maximum loan-to-value ratios with
respect to various types of loans.
-36-
<PAGE> 38
The investment authority of Ohio-chartered savings institutions is
broader in many respects than that of federally chartered savings institutions.
However, since the enactment of FIRREA, state-chartered savings institutions,
such as the Savings Bank, are generally prohibited from acquiring or retaining
any equity investment, other than certain investments in service corporations,
of a type or in an amount that is not permitted for a federally chartered
savings and loan association. This prohibition applies to equity investments
in real estate, investments in equity securities and any other investment or
transaction that is in substance an equity investment, even if the transaction
is nominally a loan or other permissible transaction. At September 30, 1996,
the Savings Bank had no investments subject to the foregoing prohibition.
Furthermore, a state-chartered savings institution may not engage as
principal in any activity not permitted for federal institutions unless the
FDIC has determined that such activity would pose no significant risk to the
affected deposit insurance fund and the institution is in compliance with the
capital standards prescribed under FIRREA. When certain activities are
permissible for a federal institution, the state institution may engage in the
activity in a higher amount if the FDIC has not determined that such activity
would pose a significant risk of loss to the affected deposit insurance fund
and the association meets its capital requirements. This increased investment
authority does not apply to investments in nonresidential real estate loans.
At September 30, 1996, the Savings Bank had no investments which were affected
by the foregoing limitations.
Under Ohio law, an out-of-state savings institution or holding company
may charter or otherwise acquire an Ohio-chartered savings institution or
holding company if the Division determines that the laws of such other state
permit an Ohio-chartered savings institution or holding company to charter or
otherwise acquire an in-state savings institution or holding company on terms
that are, on the whole, substantially no more restrictive than Ohio law. Any
such acquisition would require the out-of-state entity to apply to the Division
and receive Division approval.
TAXATION
FEDERAL TAXATION
GENERAL. The Company and the Savings Bank are subject to the
generally applicable corporate tax provisions of the Internal Revenue Code of
1986, as amended (the "Code"), and the Savings Bank is subject to certain
additional provisions of the Code which apply to thrifts and other types of
financial institutions. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive discussion of the tax rules applicable to the Savings Bank.
FISCAL YEAR. The Company and the Savings Bank file a consolidated
federal income tax return on the basis of a fiscal year ending on September 30.
-37-
<PAGE> 39
BAD DEBT RESERVES. Under Section 593 of the Code, until the first tax
year beginning on or after January 1, 1996, thrift institutions such as the
Savings Bank, which met certain definitional tests primarily relating to their
assets and the nature of their business, were permitted to establish a tax
reserve for bad debts and to make annual additions thereto, which additions,
within specified limitations, could be deducted in arriving at their taxable
income. The Savings Bank's deduction with respect to "qualifying loans," which
are generally loans secured by certain interests in real property, were
computed using an amount based on the Savings Bank's actual loss experience
(the "Experience Method") or a percentage equal to 8.0% of the Savings Bank's
taxable income (the "PTI Method") computed without regard to this deduction and
with additional modifications and reduced by the amount of any permitted
addition to the non-qualifying reserve.
Under recently enacted legislation, the PTI Method was repealed. If
an institution is not a "large" thrift institution, i.e., the quarterly average
of the institution's total assets or of the consolidated group of which it is a
member exceeds $500 million for the year, the institution will continue to be
permitted to use the Experience Method. In addition, the institution is
required to recapture (i.e., take into income) over a multi-year period its
"applicable excess reserves," i.e., the balance of its reserve for losses on
qualifying loans and nonqualifying loans, as of the close of its last tax year
beginning before January 1, 1996, over the greater of (a) balance of such
reserves as of December 31, 1987 or (b) in the case of an institution which is
not a "large" thrift institution, an amount that would have been the balance of
such reserves as of the close of its last tax year beginning before January 1,
1996, had the institution always computed the additions to its reserves using
the experience method. The institution would not be required to recapture its
supplemental reserves or its pre-1988 reserves, even if the institution later
became a supplemental reserves or its pre-1988 reserves, even if the
institution later became a "large" bank. Under the legislation, such recapture
requirements would be suspended for each of two successive taxable years
beginning January 1, 1997 if the principle amount of residential loans made by
the institution during each such year is not less than the average of the
principal amounts of such loans made by the institution during its six taxable
years preceding January 1, 1996. As of June 30, 1996, the Savings Bank's bad
debt reserve subject to recapture over a six-year period totaled approximately
$250,000.
If the Savings Bank ceases to qualify as a "bank" (as defined in Code
Section 581) or converts to a credit union, the pre-1988 reserves and
supplemental reserves are restored to income ratably over a six-year period,
beginning in the tax year the association no longer qualifies as a bank. The
balance of the pre-1988 reserve are also subject to recapture in the case of
certain excess distributions to (including distributions on liquidation and
dissolution), or redemptions of stockholders.
DISTRIBUTIONS. If the Savings Bank distributes cash or property to
its stockholders, and the distribution is treated as being from its accumulated
bad debt reserves, the distribution will cause the Savings Bank to have
additional taxable income. A distribution is deemed to have been made from
accumulated bad debt reserves to the extent that (a) the
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<PAGE> 40
reserves exceed the amount that would have been accumulated on the basis of
actual loss experience, and (b) the distribution is a "non-qualified
distribution." A distribution with respect to stock is a non-dividend
distribution to the extent that, for federal income tax purposes, (i) it is in
redemption of shares, (ii) it is pursuant to a liquidation of the institution,
or (iii) in the case of a current distribution, together with all other such
distributions during the taxable year, it exceeds the institution's current and
post-1951 accumulated earnings and profits. The amount of additional taxable
income created by a non-dividend distribution is an amount that when reduced by
the tax attributable to it is equal to the amount of the distribution.
MINIMUM TAX. The Code imposes an alternative minimum tax at a rate of
20%. The alternative minimum tax generally applies to a base of regular
taxable income plus certain tax preferences ("alternative minimum taxable
income" or "AMTI") and is payable to the extent such AMTI is in excess of an
exemption amount. The Code provides that an item of tax preference is the
excess of the bad debt deduction allowable for a taxable year pursuant to the
percentage of taxable income method over the amount allowable under the
experience method. Other items of tax preference that constitute AMTI include
(a) tax-exempt interest on newly issued (generally, issued on or after August
8, 1986) private activity bonds other than certain qualified bonds and (b) 75%
of the excess (if any) of (i) adjusted current earnings as defined in the Code,
over (ii) AMTI (determined without regard to this preference and prior to
reduction by net operating losses).
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back
net operating losses ("NOLs") to the preceding three taxable years and forward
to the succeeding 15 taxable years. This provision applies to losses incurred
in taxable years beginning after 1986. At September 30, 1996, the Savings Bank
had no NOL carryforwards for federal income tax purposes.
CAPITAL GAINS AND CORPORATE DIVIDENDS-RECEIVED DEDUCTION. Corporate
net capital gains are taxed at a maximum rate of 34%. The corporate
dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf. However, a corporation may deduct 100% of dividends from a
member of the same affiliated group of corporations.
OTHER MATTERS. Federal legislation is introduced from time to time
that would limit the ability of individuals to deduct interest paid on mortgage
loans. Individuals are currently not permitted to deduct interest on consumer
loans. Significant increases in tax rates or further restrictions on the
deductibility of mortgage interest could adversely affect the Savings Bank.
-39-
<PAGE> 41
The Savings Bank's federal income tax returns have not been audited by
the Internal revenue Service ("IRS") in recent years and its federal income tax
returns for the tax years ended September 30, 1995, 1994 and 1993 are open
under the statute of limitations and are subject to review by the IRS.
STATE TAXATION
The Company is subject to an Ohio tax based on the greater of its tax
liability as determined under separate net worth and net income computations.
The Company will exclude its investment in Kenwood in determining its tax
liability under the net worth computation. The tax liability under the net
worth computation will be computed at .596% of the Company's net taxable value.
The tax liability under the net income method will be computed at a graduated
rate not exceeding 9.12% of the Company's Ohio taxable income.
The Savings Bank is subject to an Ohio franchise tax based on its
equity capital plus certain reserve amounts. Total capital for this purpose is
reduced by certain exempted assets. The resultant net taxable value was taxed
at a rate of 1.5% for 1996.
-40-
<PAGE> 42
ITEM 2. PROPERTIES.
At September 30, 1996, Kenwood conducted its business from its
headquarters and main office in Cincinnati, Ohio and one loan origination
office located in Cincinnati, Ohio. The following table sets forth the net
book value (including leasehold improvement, furnishings and equipment) and
certain other information with respect to the offices of Kenwood at September
30, 1996.
<TABLE>
<CAPTION>
Net Book
Value of Amount of
Description/Address Leased/Owned Property Deposits
------------------------------------------- ------------- ------------------ ---------------------
(In Thousands)
<S> <C> <C> <C>
7711 Montgomery Road
Cincinnati, Ohio 45236 Owned $348 $41,636
10999 Reed Hartman Highway
Cincinnati, Ohio 45242 Leased 14 --
(loan origination office) ---- -----
Total $362 $41,636
=== ======
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any pending legal proceedings other
than nonmaterial legal proceedings occurring in the ordinary course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
-41-
<PAGE> 43
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information required herein, to the extent applicable, is
incorporated by reference from page 47 of the Company's 1996 Annual Report to
Stockholders ("1996 Annual Report").
ITEM 6. SELECTED FINANCIAL DATA.
The information required herein is incorporated by reference from page
four to six of the 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The information required herein is incorporated by reference from
pages seven to 20 of the 1996 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required herein is incorporated by reference from
pages four to six and 23 to 46 of the 1996 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On April 27, 1995, the Board of Directors of the Savings Bank
terminated the services of Grant Thornton LLP as the Savings Bank's independent
auditors. At the same meeting, the Board of Director selected the accounting
firm of Clark, Schaefer, Hackett & Co. ("Clark, Shaefer") to serve as
independent auditors for the Savings Bank for the fiscal year ending September
30, 1995. Clark, Shaefer has continued to serve as independent auditors for
the Savings Bank since such selection and also serves as independent auditors
to the Company.
In connection with their audit for fiscal 1994 and during subsequent
interim periods prior to their termination, there were no disagreements with
Grant Thornton LLP on any matter of accounting principles or practices,
financial statement disclosures, or auditing scope or procedure.
Grant Thornton LLP's report on the financial statements for fiscal
1994 did not contain an adverse opinion or disclaimer of opinion and was not
qualified as to uncertainty, audit scope or accounting principles.
-42-
<PAGE> 44
During the Savings Bank's two most recent fiscal years and the
subsequent interim periods preceding the selection of Clark, Schaefer, the
Savings Bank did not consult Clark, Schaefer regarding the application of
accounting principles, either contemplated or proposed, the type of audit
opinion that might be rendered on the Savings Bank's financial statements or
any other matters that would be required to be reported herein.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required herein is incorporated by reference from
pages five to eight of the Company's definitive proxy statement to be filed
within 120 days of the Company's fiscal year end (September 30, 1996)
("Definitive Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
pages 17 to 20 of the Company's Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required herein is incorporated by reference from
pages two to four of the Company's Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required herein is incorporated by reference from page
21 of the Company's Definitive Proxy Statement.
-43-
<PAGE> 45
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) The following financial statements are incorporated by
reference from Item 8 hereof (see Exhibit 13):
Reports of Independent Certified Public Accountants
Consolidated Statement of Financial Condition as of September
30, 1996 and 1995
Consolidated Statements of Income for the Fiscal Periods Ended
September 30, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the Fiscal
Periods Ended September 30, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Fiscal Periods
ended September 30, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) All schedules for which provision is made in the applicable
accounting regulation of the SEC are omitted because of the absence of
conditions under which they are required or because the required information is
included in the consolidated financial statements and related notes thereto.
-44-
<PAGE> 46
(3) The following exhibits are filed as part of this Form 10-K,
and this list includes the Exhibit Index.
<TABLE>
<CAPTION>
No. Description
- ------ ---------------------------------------------------------------
<S> <C>
2.1 Plan of Conversion and Agreement and Plan of Reorganization1/
3.1 Certificate of Incorporation of Kenwood Bancorp, Inc.1/
3.2 Bylaws of Kenwood Bancorp, Inc.1/
4.1 Specimen Stock Certificate of Kenwood Bancorp, Inc.1/
10.1 1992 Stock Incentive Plan1/
10.2 1992 Directors' Stock Option Plan1/
10.3 1992 Management Recognition Plan1/
10.4 Kenwood Bancorp, Inc. Employee Stock Ownership Plan and Trust1/
13.0 1996 Annual Report to Stockholders, specified portion (pp. 4 to 47) of the Company's
Annual Report to Stockholders for the year ended September 30, 1996.
21.0 Subsidiaries of the Registrant - Reference is made to "Item 1. Business" for the required
information
23.1 Consent of Clark, Schaefer, Hackett & Co.
23.2 Consent of Grant Thornton LLP.
27.0 Financial Data Schedule
</TABLE>
- -------------------------------
1/ Incorporated herein by reference from the Company's Registration
Statement on Form S-1 (Registration No. 333-2698) filed by the Company
with the Securities and Exchange Commission ("SEC") on March 22, 1996,
as subsequently amended.
(b) The Company filed a Current Report on Form 8-K ("Form 8-K")
with the SEC on July 1, 1996. In Item 5 of the Form 8-K, the Company reported
that on June 28, 1996, the Savings Bank announced that the Company completed
its stock offering in connection with the Savings Bank's conversion from the
mutual holding company form of organization to the stock holding company form
of organization. In Item 7 (c) of the Form 8-K, the Company included as an
exhibit the Company's press release dated June 28, 1996.
-45-
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
KENWOOD BANCORP, INC.
By: /s/ Thomas W. Burns
----------------------------------
Thomas W. Burns
Executive Vice President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Robert P. Isler December 26, 1996
- -------------------------------
Robert P. Isler
President and Chairman of the
Board
/s/ Thomas W. Burns December 26, 1996
- ------------------------------
Thomas W. Burns
Executive Vice President and
Chief Executive Officer
(principal executive and
financial officer)
/s/ Richard C. Kent December 26, 1996
- ------------------------------
Richard C. Kent
Director
<PAGE> 48
/s/ Donald G. Ashcraft December 26, 1996
- ------------------------------
Donald G. Ashcraft
Director
/s/ P. Lincoln Mitchell December 26, 1996
- ------------------------------
P. Lincoln Mitchell
Secretary and Director
- ------------------------------
James N. Murphy
Director
<PAGE> 1
EXHIBIT 13.0
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(Dollars in Thousands)
The following tables set forth certain financial and other data of the
Company at the dates and for the periods indicated. For additional financial
information about the Company, reference is made to "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company and related notes included
elsewhere herein.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA(1):
Total assets $50,231 $48,309 $42,578 $38,655 $35,051
Interest-bearing deposits in other financial
institutions(2) 1,938 3,449 3,723 7,165 7,364
Investment securities - at cost 1,994 1,991 1,989 1,010 --
Investment securities available for sale - at market 486 1,006 -- -- --
Mortgage-backed securities - at cost 245 7,311 8,150 5,773 433
Mortgage-backed securities available for sale -
at market 4,529 -- -- -- --
Loans receivable, net 30,009 32,559 27,594 22,657 24,824
Loan held for sale 9,322 213 -- 1,017 1,386
Deposits 41,636 44,428 38,837 35,171 32,454
FHLB advances 3,653 194 212 -- --
Stockholders' equity(3) 4,239 3,216 3,205 3,101 2,288
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
-------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA(1):
Total interest income $3,423 $3,194 $2,511 $2,559 $2,673
Total interest expense 2,534 2,310 1,621 1,600 1,835
----- ----- ----- ----- -----
Net interest income 889 884 890 959 838
Provision for losses on loans 14 12 11 27 23
----- ----- ----- ----- -----
Net interest income after provision
for losses on loans 875 872 879 932 815
Other income 221 62 79 352 247
General, administrative and other expense 1,248 807 726 660 556
----- ----- ----- ----- -----
Income (loss) before income taxes (152) 127 232 624 506
Federal income taxes (48) 46 72 212 163
------ ----- ----- ----- -----
Net income (loss) $ (104) $ 81 $ 160 $ 412 $ 343
===== === ==== ===== =====
Earnings (loss) per share(4) $ (.37) $.53 $1.06 $ N/A $ N/A
====== === ==== ==== ====
Dividends per share(4) $ .49 $.56 $1.06 $ N/A $ N/A
====== === ==== ==== ====
</TABLE>
4
<PAGE> 2
<TABLE>
<CAPTION>
At or For the Year Ended September 30,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING RATIOS(1)(5):
Return on average assets(6) (.21)% .18% .39% 1.12% 1.04%
Return on average equity(6) (2.81) 2.52 5.07 15.29 16.21
Average equity to average assets 7.62 6.98 7.76 7.31 6.44
Equity to assets at end of period 8.44 6.66 7.53 8.02 6.53
Interest rate spread(7) 1.54 1.65 1.94 2.30 2.26
Net interest margin(7) 1.88 1.96 2.32 2.64 2.60
Average interest-earning assets to average
interest-bearing liabilities 106.42 106.07 109.09 107.78 105.86
Net interest income after provision for
losses on loans to total general
administrative and other expenses(6)(8) 70.1 108.05 121.07 141.21 146.58
General, administrative and other
expenses to average total assets(6)(8) 2.57 1.76 1.86 1.78 1.69
Non-performing loans to total loans at
end of period(9) -- -- .12 .21 .41
Non-performing assets to total
assets at end of period(9) -- -- .08 .19 .31
Allowance for loan losses to total
loans at end of period .24 .25 .25 .25 .13
</TABLE>
- -----------------------
(1) Financial condition data and operating data as of and for the year
ended September 30, 1992 are those of the Mutual Association prior to
the MHC Reorganization. Financial condition data and operating data
as of and for the years ended September 30, 1993, 1994, 1995 and up
through June 28, 1996 are those of the Savings Bank prior to the
Conversion and Reorganization.
(2) Includes certificates of deposit.
(3) Consists solely of retained earnings as of September 30, 1992.
(4) Earnings per share and dividends per share are not applicable for the
years ended September 30, 1993 and 1992, as the Mutual Association
converted to the stock form of ownership on November 13, 1992.
(5) With the exception of end of period ratios, all ratios are based on
average monthly balances during the periods.
(Footnotes continued on following page)
5
<PAGE> 3
(6) Excluding the one-time SAIF recapitalization assessment of $289,000 in
fiscal 1996, return on average assets was .19%, return on average
equity was 2.53%, net interest income after provision for losses on
loans to general administrative and other expenses was 91.24% and
general, administrative and other expenses to average total assets was
1.97%, respectively, for the year ended September 30, 1996.
(7) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average rate
on interest-bearing liabilities. Net interest margin represents net
interest income as a percentage of average interest-earning assets.
(8) Includes effect of the one-time SAIF recapitalization assessment of
$289,000.
(9) Non-performing loans consist of non-accrual loans and accruing loans
that are contractually past due 90 days or more, and non-performing
assets consist of non-performing loans and real estate acquired by
foreclosure or deed-in-lieu thereof.
6
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company, through the Savings Bank, is primarily engaged in
attracting deposits from the general public and using those and other available
sources of funds to originate permanent loans secured by one-to-four family
residences located primarily in Hamilton County in southwestern Ohio. To a
lesser extent, the Savings Bank also originates consumer and other loans
(primarily home equity lines of credit), residential construction loans and
loans which are secured by existing multi-family residential and nonresidential
real estate, as well as invests in interest-bearing deposits in other financial
institutions (including certificates of deposit), mortgage-backed securities
and U.S. Government and federal agency obligations.
The profitability of the Company depends primarily on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, principally loans, mortgage-backed securities and
investment securities, and interest expense on savings deposits and borrowings.
The Company's net income also is dependent on the level of its other income,
including gains on the sale of loans and other assets, servicing fees and other
fees, and its general, administrative and other expense, such as employee
compensation and benefits, occupancy and equipment expense, deposit insurance
premiums, franchise taxes and miscellaneous other expenses, as well as federal
income tax expense.
In general, financial institutions are vulnerable to an increase in
interest rates to the extent that interest-bearing liabilities mature or
reprice more rapidly than interest-earning assets. The lending activities of
financial institutions, including the Savings Bank, have historically
emphasized the origination of long-term, fixed-rate loans secured by
single-family residences, and the primary source of funds of such institutions
has been deposits, which largely mature or are subject to repricing within a
short period of time. This factor, in combination with substantial investments
in long-term, fixed-rate loans, has historically caused the income earned by
the Savings Bank on its loan portfolio to adjust more slowly to changes in
interest rates than its cost of funds. While having liabilities that reprice
more frequently than assets is generally beneficial to net interest income in
times of declining interest rates, such an asset/liability mismatch is
generally detrimental during periods of rising interest rates. To reduce the
effect of adverse changes in interest rates on its operations, the Savings Bank
has implemented the asset and liability management policies described below.
ASSET AND LIABILITY MANAGEMENT
The Savings Bank's Board of Directors has in recent years implemented
various asset and liability management policies designed to better match the
maturities and repricing
7
<PAGE> 5
terms of the Savings Bank's interest-earning assets and interest-bearing
liabilities in order to minimize the adverse effects on the Savings Bank's
results of operations of material and prolonged increases in interest rates.
Such policies include (i) emphasizing investment in adjustable-rate
single-family residential loans; (ii) selling long-term, fixed-rate
single-family residential loans into the secondary market; and (iii) managing
interest expense through the utilization of core deposits and outside
borrowings.
As a result of implementing the assets portfolio aspects of those
policies, at September 30, 1996, $21.1 million, or 53.0%, of the Company's
total loan portfolio consisted of adjustable-rate loans. In addition, as of
such date, $20.9 million, or 54.0%, of the Company's portfolio of single-family
residential mortgage loans consisted of adjustable-rate loans. However, due to
competitive pressures in its primary market area, as of September 30, 1996, the
Company's core deposits (passbook, money market and NOW accounts) amounted to
$7.8 million, or only 18.8% of total deposits. This percentage is a slight
improvement from fiscal 1995 but is significantly below its target core
deposits of 30% of total deposits.
The effect of interest rate changes on a financial institution's
assets and liabilities may be analyzed by examining the extent to which such
assets and liabilities are "interest rate sensitive" and by monitoring an
institution's interest rate sensitivity "gap." An asset or liability is said
to be interest rate sensitive within a specific time period if it will mature
or reprice within that time period. The interest rate sensitivity "gap" is
defined as the difference between interest-earning assets and interest-bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered
negative when the amount of interest rate sensitive liabilities exceeds
interest rate sensitive assets. During a period of falling interest rates, a
positive gap would tend to adversely affect net interest income, while a
negative gap would tend to result in an increase in net interest income.
During a period of rising interest rates, a positive gap would tend to result
in an increase in net interest income while a negative gap would tend to affect
net interest income adversely.
Notwithstanding the foregoing asset and liability strategies, the
Company's one-year interest rate sensitivity gap amounted to (28.46)% of total
assets at September 30, 1996. The one-year interest rate sensitivity gap is
defined as the difference between the Company's interest-earning assets which
are scheduled to mature or reprice within one year and its interest-bearing
liabilities which are scheduled to mature or reprice within one year. At
September 30, 1996, the Company's interest-earning assets maturing or repricing
within one year totalled $13.4 million while the Company's interest-bearing
liabilities maturing or repricing within one year totalled $27.7 million,
providing an excess of interest-bearing liabilities over interest-earning
assets of $14.3 million. At September 30, 1996, the percentage of the
Company's interest-earning assets to interest-bearing liabilities maturing or
repricing within one year was 48.3%. While the Company's one-year interest
rate sensitivity gap is considered by management and the Board of Directors to
be within the
8
<PAGE> 6
intended range of acceptable positions based upon management's asset and
liability management strategy, the Board plans to continue to follow policies
that are designed to better match the maturities and repricing terms of the
Company's portfolio.
The following table presents the difference between the Savings Bank's
interest-earning assets and interest-bearing liabilities within specified
maturities at September 30, 1996. This table does not necessarily indicate the
impact of general interest rate movements on the Savings Bank's net interest
income because the repricing of certain assets and liabilities is subject to
competitive and other limitations. 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.
<TABLE>
<CAPTION>
Over
Over One Three Over Ten
Through Through Over Five Through Over
One Year Three Five Through Twenty Twenty
or Less Years Years Ten Years Years Years Total
----------- --------- --------- ---------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate mortgages:
Adjustable-rate(1)(2) $7,276 $12,816 $1,275 $ -- $ -- $ -- $21,367
Fixed-rate(1)(3) 11 218 3,433 7,620 3,964 2,675 17,921
Other loans(1) 41 2 43
Mortgage-backed securities(1) 4,190 339 245 4,774
Investment securities and other
earning assets(4) 1,843 1,575 1,000 -- -- 430 4,848
------ ------ ----- ----- ------ ----- ------
Total interest-earning assets $13,361 $14,948 $5,710 $7,620 $ 3,964 $3,350 $48,953
====== ====== ===== ===== ====== ===== ======
Interest-bearing liabilities:
Passbook savings(5) $ 633 $ 1,026 $ 688 $ 856 $ 567 $ 161 $ 3,931
NOW accounts and demand 423 464 124 167 91 16 1,285
deposits(5)
Money market deposits(5) 1,597 534 254 122 85 24 2,616
Certificates of deposit(5) 21,945 7,709 4,150 -- -- -- 33,804
FHLB advances 3,060 130 146 317 -- -- 3,653
------ ----- ------ ------ ------ ------ ------
Total interest-bearing $27,658 $ 9,863 $ 5,362 $ 1,462 $ 743 $ 201 $45,289
====== ====== ====== ====== ====== ====== ======
liabilities
Interest rate sensitivity gap $(14,297) $ 5,085 $ 348 $ 6,158 $ 3,221 $3,149 $ 3,664
======= ====== ====== ====== ====== ===== ======
Cumulative interest rate $(14,297) $(9,212) $(8,864) $(2,706) $ 515 $3,664 $ 3,664
======= ====== ====== ====== ====== ===== ======
sensitivity gap
Percentage of cumulative gap to
total assets (28.46)% (18.34)% (17.65)% (5.39)% 1.03% 7.29% 7.29%
====== ====== ====== ====== ====== ===== ======
Cumulative ratio of
interest-earning assets to
interest-bearing liabilities 48.31% 75.45% 79.33% 93.90% 101.14% 108.09% 108.09%
====== ====== ====== ====== ====== ====== ======
</TABLE>
- ------------------------
(1) The dollar amount of loans and mortgage-backed securities reflected
within a repricing period includes the scheduled amortization with
respect to fixed-rate loans and mortgage-backed securities and the
scheduled repricing with respect to adjustable-rate loans and
mortgage-backed securities.
(2) Includes all adjustable-rate single-family residential (including
loans designated as held for sale) and multi-family residential and
non-residential real estate loans, net of the undisbursed portion of
loans in process, allowance for loan losses and deferred loan
origination fees.
(Footnotes continued on following page)
9
<PAGE> 7
(3) Includes all fixed-rate single-family residential (including loans
designated as held for sale) and multi-family residential and
non-residential real estate loans, net of the undisbursed portion of
loans in process, allowance for loan losses and deferred loan
origination fees.
(4) Includes interest-bearing deposits, investment securities and FHLB of
Cincinnati stock.
(5) Based on the following decay rate assumptions: (i) passbook decay will
occur at the following annual rates during the time periods shown in
the above table: 17%, 17%, 16%, 14%, 14% and 14%; (ii) NOW and demand
deposit account decay will occur at the following annual rates during
the time periods shown in the above table: 37%, 32%, 17%, 17%, 17%
and 17%; (iii) money market decay will occur at the following annual
rates during the time periods shown in the above table: 79%, 31%,
31%, 31%, 31% and 31%; and (iv) certificates of deposit will not be
withdrawn prior to maturity.
Management also presently monitors and evaluates the potential impact
of interest rate changes upon the market value of the Savings Bank's portfolio
equity and the level of net interest income on a quarterly basis. In August
1993, the OTS adopted a final rule incorporating an interest rate risk
component into the risk-based capital rules. Under the rule, an institution
with a greater than "normal" level of interest rate risk will be subject to a
deduction of its interest rate component from total capital for purposes of
calculating the risk-based capital requirement. An institution with a greater
than "normal" interest rate risk is defined as an institution that would suffer
a loss of net portfolio value ("NPV") exceeding 2.0% of the estimated market
value of its assets in the event of a 200 basis point increase or decrease in
interest rates. NPV is the difference between incoming and outgoing discounted
cash flows from assets, liabilities, and off-balance sheet contracts. A
resulting change in NPV of more than 2% of the estimated market value of an
institution's assets will require the institution to deduct from its capital
50% of that excess change. The rule provides that the OTS will calculate the
interest rate risk component quarterly for each institution. The OTS has
recently indicated that no institution will be required to deduct capital for
interest rate risk until further notice.
10
<PAGE> 8
The following table presents the Savings Bank's NPV as of September
30, 1996, as calculated by the OTS, based on information provided to the OTS by
the Company.
<TABLE>
<CAPTION>
Net Portfolio Value
---------------------------------------------------------------------------------------------------
Estimated
Change in NPV as a Change as a
Interest Rates Estimated Percentage Amount Percentage
(basis points) NPV of Assets of Change of Assets
--------------- ------------ ------------ ----------- --------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
+400 $ 844 1.84% $(3,651) (7.26)%
+300 1,869 3.95 (2,626) (5.23)
+200 2,868 5.89 (1,627) (3.24)
+100 3,769 7.54 (726) (1.45)
-- 4,495 8.80 -- --
-100 4,992 9.60 496 .98
-200 5,221 9.92 725 1.44
-300 5,273 9.93 777 1.55
-400 5,355 9.99 859 1.71
</TABLE>
Certain shortcomings are inherent in the method of analysis presented
in both the computation of NPV and in the analysis presented in the prior table
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. Although certain assets and liabilities may have
similar maturities or periods within which they will reprice, they may react
differently to changes in market interest rates. 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, adjustable-rate mortgages have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. The proportion of adjustable-rate loans could be reduced in future
periods if market interest rates would decrease and remain at lower levels for
a sustained period, due to increased refinance activity. Further, in the event
of a change in interest rates, prepayment and early withdrawal levels would
likely deviate significantly from those assumed in the table. Finally, the
ability of many borrowers to service their adjustable-rate debt may decrease in
the event of a sustained interest rate increase.
CHANGES IN FINANCIAL CONDITION
The Company had total assets of $50.2 million at September 30, 1996,
an increase of $1.9 million, or 3.9%, from September 30, 1995. The growth in
total assets was primarily
11
<PAGE> 9
funded by the proceeds from the Conversion and Reorganization, which amounted
to $1.2 million. The remaining growth was funded by advances from the FHLB of
Cincinnati.
Liquid assets (i.e. cash, interest-bearing deposits, and certificates
of deposit) decreased $1.6 million, or 38.9%, during the year ended September
30, 1996. This reduction in liquid assets reflected the Company's emphasis on
loan growth as the funds were used for loan originations, some of which are
held for sale. At September 30, 1996, the Savings Bank's regulatory liquidity
amounted to 8.9%, which exceeded the minimum OTS requirement of 5% by $1.7
million. See "- Liquidity and Capital Resources."
Loans receivable (including loans held for sale) increased $6.6
million, or 20.0%, to total $39.3 million at September 30, 1996, as compared to
$32.8 million at September 30, 1995. Loan originations of $25.6 million were
offset by loan sales of $12.6 million and repayments of $6.4 million. The
Company has seen a significant increase in its secondary market activity, due
primarily to the lower interest rate environment and the consumer demand for
fixed rate loan products, but also to the growth of the Company's mortgage
loan origination office and additional loan originators. The Company is also
in the process of selling approximately $8.0 million in adjustable rate loans
to a mortgage company. The proceeds from the sale will be used to originate
loans, purchase investments and repay FHLB advances. The sale was completed in
November 1996 with a recognized gain of $72,000, net of deferred costs.
As of September 30, 1996, the Company's allowance for loan losses
amounted to $95,000, which represented an increase of $14,000 over the
allowance for loan losses maintained at September 30, 1995. The increase in
the provision for loan losses in 1996 was solely attributable to the
aforementioned growth in the loan portfolio and the inherent risk related to
mortgage lending. As of September 30, 1996, the allowance for loan loss
consisted entirely of a general loss allowance, which is includable as a
component of regulatory risk-based capital. As of such date, the allowance for
loan losses amounted to .24% of total loans. As of September 30, 1996, the
Company had no non-performing loans. Management will continue to monitor its
allowance for loan losses and make additions to the allowance through the
provision for loan losses as economic conditions dictate. Although the Savings
Bank maintains its allowance for loan losses at a level which it considers to
be adequate to provide for loan losses, there can be no assurance that future
losses will not exceed estimated amounts or that additional provisions for loan
losses will not be required in the future. See Note 1 of the Notes to
Financial Statements.
Mortgage-backed securities (including securities available for sale)
decreased by $2.5 million, or 34.7%, during the year ended September 30, 1996.
As of December 31, 1995, the Company had transferred all of its adjustable rate
mortgage-backed securities from held to maturity to available for sale in order
to provide the Company with additional flexibility in the future to sell
individual securities if it chooses to do so. During the year ended September
30, 1996, the Company sold $1.7 million of mortgage-backed securities at a loss
of $2,000. The Company also purchased $513,000 of available for sale
mortgage-backed
12
<PAGE> 10
securities during the year ended September 30, 1996, and had principal
repayments of $1.3 million during such period. At September 30, 1996, the
Company had classified $4.5 million of its mortgage-backed securities as
available for sale and had net unrealized gains with respect to such securities
of $30,000.
Investment securities (including securities classified as available
for sale) decreased $517,000, or 17.3%, during the year ended September 30,
1996. The Company replaced two investments that were called during fiscal 1996
with similar investments and sold one investment at a gain of $13,000 during
the year ended September 30, 1996. As of September 30, 1996, the Company had
classified $486,000 of its investment securities as available for sale and had
net unrealized losses of $13,000 with respect to such investment securities.
Total deposits amounted to $41.6 million at September 30, 1996, a
decrease of $2.8 million, or 6.3%, from the $44.4 million in deposits as of
September 30, 1995. Deposits which are subject to daily repricing (passbook,
statement savings, money market and checking accounts), increased by $1.1
million, or 15.8%, from September 30, 1995 to September 30, 1996. The increase
in deposit accounts subject to daily repricing was due to new products offered
by the Company, which included automated teller machine access, debit card
availability, statement savings, and tiered interest rates on demand accounts
based on outstanding balances. During the year ended September 30, 1996,
certificates of deposit decreased $3.9 million, or 10.3%, as compared to the
year ended September 30, 1995. The reduction in certificates was due to
consumer demand for other types of savings vehicles. The Company has generally
not engaged in offering the highest rates available in its deposit market
except upon specific occasions when market conditions have created
opportunities to attract longer-term deposits.
The Company had FHLB advances of $3.7 million at September 30, 1996, a
significant increase in the balance outstanding at September 30, 1995 of
$194,000. The increase in borrowings were used to fund the loan growth and the
reduction in deposits as discussed above. The Company has used FHLB advances
as a short term funding of the asset growth versus offering special rates on
short term deposits. The average rate paid on the FHLB advances amounted to
5.48% for the year ended September 30, 1996.
Stockholders' equity increased $1.0 million, or 31.8%, to $4.2 million
at September 30, 1996 from $3.2 million as of September 30, 1995. The increase
was due primarily to the proceeds from the Conversion and Reorganization of the
Company which was completed in June 1996. Total proceeds from the Conversion,
net of the unearned shares in the Company's employee stock ownership plan
("ESOP"), was $1.2 million. The increase was partially offset by $62,000 of
dividends declared during the year ended September 30, 1996, and the net loss
of the Company for fiscal 1996 of $126,000.
13
<PAGE> 11
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID
The following table presents for the periods indicated the total
dollar amount of interest from average interest-earning assets and the
resultant yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates, and the net interest margin.
The table does not reflect any effect of income taxes. All average balances
are based on month-end balances.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------
1996 1995
---------------------------------- ------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
--------- ---------- ---------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable(1) $35,234 $2,670 7.58% $30,792 $2,402 7.80%
Mortgage-backed securities(2) 7,055 457 6.48 7,847 452 5.76
Investment securities(2) 3,046 189 6.20 2,477 140 5.65
Other interest-earning assets(3) 1,829 107 5.85 3,933 200 5.09
------ ----- ------ -----
Total interest-earning assets 47,164 $3,423 7.26% 45,049 $3,194 7.09%
===== ====== ===== ====
Non-interest-earning assets 1,410 928
------ ------
Total assets $48,574 $45,977
====== ======
INTEREST-BEARING LIABILITIES:
Deposits $43,006 $2,462 5.72% $41,753 $2,267 5.43%
FHLB advances 1,313 72 5.48 720 43 5.97
------ ----- ------ -----
Total interest-bearing liabilities 44,319 $2,534 5.72% 42,473 $2,310 5.44%
===== ====== ===== ====
NON-INTEREST-BEARING LIABILITIES: 552 293
------ ------
Total liabilities 44,871 42,766
Stockholders' equity 3,703 3,211
------ ------
Total liabilities and
stockholders' equity $48,574 $45,977
====== ======
Net interest income; interest
rate spread $ 889 1.54% $ 884 1.65%
===== ====== ===== ====
Net interest margin(4) 1.88% 1.96%
====== ====
Average interest-earning assets
to average interest-bearing
liabilities 106.42% 106.07%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------- At September 30,
1994 1996
---------------------------------------- ----------------
Average Yield/ Yield/
Balance Interest Rate Rate
---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable(1) $23,884 $1,836 7.69% 7.46%
Mortgage-backed securities(2) 6,866 385 5.61 6.63
Investment securities(2) 2,000 101 5.05 6.00
Other interest-earning assets(3) 5,669 189 3.33 5.53
------ ----- ----
Total interest-earning assets 38,419 $2,511 6.54% 7.21%
===== ====== ====
Non-interest-earning assets 694
------
Total assets $39,113
======
INTEREST-BEARING LIABILITIES:
Deposits $34,698 $1,597 4.60% 5.64%
FHLB advances 521 24 4.61 5.46
------ -----
Total interest-bearing liabilities 35,219 $1,621 4.60% 5.63%
===== ====== =====
NON-INTEREST-BEARING LIABILITIES: 741
------
Total liabilities 35,960
Stockholders' equity 3,153
------
Total liabilities and
stockholders' equity $39,113
======
Net interest income; interest
rate spread $ 890 1.94% 1.58%
===== ====== ====
Net interest margin(4) 2.32%
======
Average interest-earning assets
to average interest-bearing
liabilities 109.09%
======
</TABLE>
- ---------------------------
(1) Includes loans held for sale.
(2) Includes securities classified as available for sale.
(3) Consists primarily of interest-bearing deposits (including
certificates of deposit).
(4) Net interest margin is net interest income divided by average
interest-earning assets.
14
<PAGE> 12
RATE/VOLUME ANALYSIS
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Company's interest income and expense during the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (change in volume multiplied by prior year rate), (ii) changes in rate
(change in rate multiplied by prior year volume), and (iii) total change in
rate and volume. The combined effect of changes in both rate and volume has
been allocated proportionately to the change due to rate and the change due to
volume.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
---------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
-------------------- Increase ---------------------- Increase
Rate Volume (Decrease) Rate Volume (Decrease)
------- -------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans(1) $ (79) $ 347 $ 268 $ 35 $ 531 $566
Mortgage-backed securities(2) 51 (46) 5 12 55 67
Investment securities(2) 17 32 49 15 24 39
Other interest-earnings assets(3) 14 (107) (93) 69 (58) 11
---- ---- --- --- --- ---
Total interest-earning assets $ 3 $ 226 $ 229 $ 131 $ 552 $683
==== ===== ==== === === ===
INTEREST-BEARING LIABILITIES:
Deposits $ 127 $ 68 $ 195 $ 345 $ 325 $670
FHLB advances (6) 35 29 10 9 19
----- ----- ---- --- --- ---
Total interest-bearing
liabilities $ 121 $ 103 $ 224 $ 355 $ 334 689
=== ===== ==== === === ---
Decrease in net interest income $ 5 $ (6)
==== ===
</TABLE>
- ---------------------------------
(1) Includes loans held for sale.
(2) Includes securities classified as available for sale.
(3) Consists primarily of interest-bearing deposits (including
certificates of deposit).
RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995
The Company reported a net loss for the year ended September 30, 1996
of $104,000. The loss reflects the one-time SAIF recapitalization assessment
of $289,000 which was accounted for in the fourth quarter of the Company's
current fiscal year. Prior to this assessment, the Company would have reported
net income of $99,000, as compared to $81,000 of net income for the year ended
September 30, 1995, an increase of $17,000, or 21.0% from fiscal 1995. The
increase in net income prior to the SAIF assessment resulted primarily from a
slight increase in net interest income and from an increase in gain on sale
15
<PAGE> 13
of loans, partially offset by an increase in general administrative and other
expenses, as well as an increase in the provision for loan losses.
Interest income increased $229,000, or 7.2%, to $3.4 million for the
year ended September 30, 1996, from $3.2 million for the year ended September
30, 1995. Interest income on loans increased $268,000, or 11.2%, to $2.7
million for the year ended September 30, 1996. The increase in interest on
loans was due to the increase in the average balance outstanding on loans of
$4.4 million for the year ended September 30, 1996, offset by a reduction in
the average yield from 7.80% at September 30, 1995 to 7.58% at September 30,
1996. The reduction in average yield was due to the lower interest rates seen
in the mortgage market during fiscal 1996. Interest income on mortgage-backed
securities increased $5,000, or 1.1%, to $457,000 for the year ended September
30, 1996. Such increase was due to an increase in the average yield earned
thereon from 5.76% to 6.48% as the adjustable rate mortgage-backed securities
adjusted upwards during fiscal 1996. The increase in interest on
mortgage-backed securities was partially offset by a reduction in the average
balance of mortgage-backed securities as the Company sold $1.7 million of
mortgage-backed securities along with normal repayments of $1.3 million during
fiscal 1996. Interest income on investments increased $49,000, or 35.0%,
during fiscal 1996 due to an increase in average balances outstanding from $2.5
million to $3.1 million year-to-year, and the average yield increase from 5.65%
during fiscal 1995 to 6.20% during fiscal 1996. Interest income on other
interest earning assets decreased $93,000, or 46.5%, to $107,000, for the year
ended September 30, 1996 from $200,000 for the year ended September 30, 1995.
The decrease in interest income during the year ended September 30, 1996, was
also due to the reduction in the average balance outstanding of $2.1 million,
as the Company converted other interest earning assets into loans and
investments which earned higher yields.
Interest expense increased $224,000, or 9.7%, to $2.5 million for the
year ended September 30, 1996 as compared to $2.3 million for the year ended
September 30, 1995. Interest expense on deposits increased $195,000, or 8.6%,
to $2.5 million for the year ended September 30, 1996. This increase was due
to the increase in the average balance of deposits outstanding year-to-year as
well as an increase in the average rate of 29 basis points. Interest expense
on FHLB advances increased $29,000, or 67.4%, during fiscal 1996 due
exclusively to the increase in the average balance outstanding offset by a
reduction in the average rate paid thereon. The Company has used the
availability of the FHLB advances to fund the recent outflow of deposits and to
fund loan demand.
As a result of the foregoing changes in interest income and interest
expense, net interest income has increased $5,000, or less than 1%, during the
year ended September 30, 1996 as compared to the year ended September 30, 1995.
The interest rate spread decreased from 1.65% during 1995, to 1.54% during
fiscal 1996, while the net interest margin decreased from 1.96% during fiscal
1995 to 1.88% during fiscal 1996. The decrease in the Company's interest rate
spread and net interest margin resulted from a faster increase
16
<PAGE> 14
in rates paid by the Company on its interest bearing liabilities than in the
rates earned on its interest earning assets, which is partially due to the
Company's negative gap position.
The Company's provision for losses on loans totalled $14,000 for the
year ended September 30, 1996, as compared to $12,000 for the year ended
September 30, 1995. The provision for the year ended September 30, 1996 was
influenced by the increase in the total loan portfolio and the related inherent
risk in mortgage lending.
Other income increased by $159,000, or 300.56%, during the year ended
September 30, 1996, as compared to the year ended September 30, 1995. The
increase was due primarily to the $147,000 increase in gain on sale of mortgage
loans in the secondary market during fiscal 1996 over the level achieved during
fiscal 1995. The Company also recognized an $11,000 gain on sale of available
for sale securities during fiscal 1996 with no such corresponding sales in
fiscal 1995. The current interest market and the demand for fixed rate loans
allowed the Company to increase its secondary market activity during fiscal
1996. During the year ended September 30, 1996, the Company originated $13.2
million in loans originated for sale on the secondary market, as compared to
$3.4 million for the year ended September 30, 1995. The ability to generate
gains from the sale of loans and investments is dependent on market and
economic conditions and, accordingly, there can be no assurance that gains
similar to those reported in the current fiscal year can be achieved in the
future.
General, administrative and other expenses increased $441,000, or
54.6%, for the year ended September 30, 1996, as compared to the year ended
September 30, 1995. Included as part of this increase is the one-time SAIF
assessment of $289,000, which if excluded, would have shown an increase of
$152,000, or 18.8%, in such expenses compared to fiscal 1995. This increase
was due primarily to a $65,000, or 17.5%, increase in employee compensation and
benefits, and an increase in other operating expenses of $58,000 or 29.9%,
during fiscal 1996. The increase in employee compensation and benefits
resulted from normal merit pay increases coupled with the growth in the
Company's mortgage loan origination staff. Other operating expenses increased
during fiscal 1996 due primarily to a full year of costs associated with the
mortgage loan origination office which was opened in March 1995.
The Company reported a benefit for federal income taxes of $48,000 for
the year ended September 30, 1996, due to the loss before income taxes of
$152,000. The loss before income taxes was due to the one-time SAIF assessment
discussed previously. The effective tax rates for the years ended September
30, 1996 and 1995, were 31.6% and 36.2%, respectively.
17
<PAGE> 15
RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED SEPTEMBER 30, 1995 AND
SEPTEMBER 30, 1994
Net income for the year ended September 30, 1995 totalled $81,000, a
decrease of $79,000 or 49.4% from the $160,000 in net income recorded for the
year ended September 30, 1994. The decline in net income resulted primarily
from a $21,000 decrease in gain on sale of mortgage loans and an $81,000
increase in general, administrative and other expense, which were partially
offset by a $26,000 decrease in the federal income tax provision.
Interest income on loans for the year ended September 30, 1995
increased by $566,000, or 30.8%, due to a $6.9 million, or 28.9%, increase in
the average balance of loans outstanding year-to-year and, to a much lesser
extent, an 11 basis point increase in the average yield earned thereon.
Interest income on mortgage-backed securities increased by $67,000, or 17.4%,
due to an increase of approximately $981,000, or 14.3%, in the average balance
outstanding year-to-year. Interest income on investment securities and other
interest-earning assets increased by $50,000, or 17.2%.
Interest expense on deposits increased by $670,000, or 42.0%, during
the year ended September 30, 1995. This increase was the result of an increase
of $7.1 million, or 20.3%, in the average balance of deposits outstanding
year-to-year as well as an increase in the average rate paid thereon of 83
basis points. Interest expense on borrowings increased by $19,000, or 79.2%,
for the year ended September 30, 1995, as compared to the year ended September
30, 1994. This increase was the result of a $199,000, or 38.2%, increase in
average balance of FHLB advances outstanding year-to-year coupled with an
increase in the average rate paid thereon of 136 basis points.
As a result of the foregoing changes in interest income and interest
expense, net interest income decreased by $6,000, or .7%, during the year ended
September 30, 1995, as compared to the year ended September 30, 1994. The
interest rate spread decreased from 1.94% during fiscal 1994 to 1.65% during
fiscal 1995, while the net interest margin decreased from 2.32% during fiscal
1994 to 1.96% during fiscal 1995.
The Company's provision for losses on loans totalled $12,000 for the
year ended September 30, 1995, as compared to $11,000 for the year ended
September 30, 1994. The provision during fiscal 1995 was influenced by
management's assessment of current and anticipated economic conditions and was
primarily the result of loan portfolio growth during the year.
18
<PAGE> 16
Other income decreased by $17,000, or 21.5%, during the year ended
September 30, 1995, as compared to the year ended September 30, 1994. This
decrease was due primarily to a decline of $21,000 in gain on sale of mortgage
loans. The Savings Bank's secondary market activities declined during fiscal
1995, primarily as a result of the rising interest rate environment, as
previously discussed.
General, administrative and other expense increased by $81,000, or
11.2%, during the year ended September 30, 1995, as compared to the year ended
September 30, 1994, due primarily to a $48,000, or 14.8%, increase in employee
compensation and benefits. Such increase resulted from normal merit pay
increases coupled with a $13,000 decline in deferred loan origination costs due
to the decline in loan origination volume year-to-year. Occupancy and
equipment expense increased by $16,000, or 17.0%, due primarily to the leasing
of additional office space for the Savings Bank's mortgage banking operations,
while federal deposit insurance premiums increased by $10,000, or 12.5%, due to
deposit growth.
The provision for federal income taxes decreased by $26,000, or 36.1%,
during the year ended September 30, 1995, as compared to the year ended
September 30, 1994, due primarily to a decrease in income before income taxes
of $105,000, or 45.3%. The Savings Bank's effective tax rates amounted to
36.2% and 31.0% during the years ended September 30, 1995 and 1994,
respectively. The increase in the effective tax rate from fiscal 1994 to
fiscal 1995 was due to a change in the estimated rate on deferred income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Savings Bank is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of U.S.
Government, federal agency and other investments having maturities of five
years or less. Current OTS regulations require that a savings institution
maintain liquid assets of not less than 5% of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less, of
which short-term liquid assets must consist of not less than 1%. Monetary
penalties may be imposed for failure to meet applicable liquidity requirements.
The liquidity of the Savings Bank, as measured by the ratio of cash,
cash equivalents (not committed, pledged or required to liquidate specific
liabilities), investment and qualifying mortgage-backed securities to the sum
of total deposits plus borrowings payable within one year, was 10.0% at
September 30, 1996, as compared to 13.7% and 14.9% at September 30, 1995 and
1994, respectively. At September 30, 1996, the Savings Bank's "liquid" assets
totalled approximately $2.0 million, which was $1.5 million in excess of the
current OTS minimum requirement.
The Company's liquidity, represented by cash and cash equivalents, is
a product of its operating, investing and financing activities. The Company's
primary sources of funds are deposits, borrowings, amortization, prepayments
and maturities of outstanding loans and mortgage-backed securities, maturities
of investment and mortgage-backed securities and
19
<PAGE> 17
other short-term investments, sales of loans and securities and funds provided
from operations. While scheduled loan and mortgage-backed securities
amortization and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Company manages the pricing of its deposits to maintain a
steady deposit balance. In addition, the Company invests excess funds in
overnight deposits and other short-term interest-earning assets which provides
liquidity to meet lending requirements. The Company generates cash through the
retail deposit market and, to the extent deemed necessary, utilizes borrowings
for liquidity purposes (primarily consisting of advances from the FHLB of
Cincinnati). At September 30, 1996, the Company had $3.7 million of
outstanding advances from the FHLB of Cincinnati. Furthermore, the Company has
access to the Federal Reserve Bank discount window.
Liquidity management is both a daily and long-term function of
business management. Excess liquidity is generally invested in short-term
investments such as overnight deposits. On a longer-term basis, the Company
maintains a strategy of investing in various loans, mortgage-backed securities
and investment securities. The Company uses its sources of funds primarily to
meet its ongoing commitments, to pay maturing savings certificates and savings
withdrawals, fund loan commitments and maintain a portfolio of investment and
mortgage-backed securities.
At September 30, 1996, the Company had outstanding commitments to
originate residential real estate loans of approximately $413,000. At the same
date, the total amount of certificates of deposit which were scheduled to
mature by September 30, 1997 was $21.9 million. The Company believes that it
has adequate resources to fund all of its commitments and that it can adjust
the rates on savings certificates to retain deposits in changing interest rate
environments.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in relative purchasing
power over time due to inflation.
Unlike most industrial companies, virtually all of the Company's
assets and liabilities are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution's
performance than does the effect of inflation.
20
<PAGE> 18
[CLARK, SCHAEFER, HACKETT & CO. LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Kenwood Bancorp Inc. and Subsidiary:
We have audited the accompanying consolidated statements of financial condition
of Kenwood Bancorp Inc. (formerly Kenwood Savings and Loan Association) and
Subsidiary as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. The financial statements are the responsibility of the Bancorp's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Kenwood Savings and
Loan Association as of September 30, 1994 were audited by other auditors whose
report dated November 16, 1994 expressed an unqualified opinion on those
statements.
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 weather the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kenwood Bancorp Inc.
and Subsidiary as of September 30, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ CLARK, SCHAEFER, HACKETT & CO.
Cincinnati, Ohio
November 1, 1996
- 21 -
<PAGE> 19
[GRANT THORNTON LLP LETTERHEAD]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Kenwood Bancorp Inc. and Subsidiary:
We have audited the accompanying consolidated statements of financial condition
of Kenwood Bancorp Inc. (formerly Kenwood Savings and Loan Association) and
Subsidiary as of September 30, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Bancorp's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Kenwood Savings and
Loan Association as of September 30, 1994 were audited by other auditors whose
report dated November 16, 1994 expressed an unqualified opinion on those
statements.
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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Kenwood Bancorp
Inc. and Subsidiary as of September 30, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ GRANT THRONTON LLP
Cincinnati, Ohio
November 1, 1996
- 22 -
<PAGE> 20
KENWOOD BANCORP INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
September 30, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
Assets
-------
1996 1995
---- ----
<S> <C> <C>
Cash and due from banks $ 588 689
Interest-bearing deposits in other
financial institutions 1,558 2,119
------ ------
Cash and cash equivalents 2,146 2,808
Certificates of deposit in other financial
institutions 380 1,330
Investment securities - held to maturity, at
amortized cost, approximate market value
of $1,959 and $1,971 as of September 30,
1996 and 1995 1,994 1,991
Investment securities - available for sale
(amortized cost of $499 and $999 at
September 30, 1996 and 1995) 486 1,006
Mortgage-backed securities - held to maturity,
at cost, approximate market value of $250
and $7,364 at September 30, 1996 and 1995 245 7,311
Mortgage backed securities - available for
sale (amortized cost of $4,499 at September 30,
1996) 4,529 -
Loans receivable 30,009 32,559
Loans held for sale - at lower of cost or market 9,322 213
Property and equipment, net 362 380
Federal Home Loan Bank stock - at cost 430 401
Accrued interest receivable:
Loans 199 144
Mortgage-backed securities 26 38
Investments and interest-bearing deposits 20 29
Prepaid expenses and other assets 74 70
Prepaid Federal income taxes 9 29
------ ------
Total assets $ 50,231 48,309
====== ======
</TABLE>
See accompanying notes to financial statements.
- 23 -
<PAGE> 21
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
------------------------------------
1996 1995
---- ----
<S> <C> <C>
Deposits $ 41,636 44,428
Advances from the Federal Home Loan Bank 3,653 194
Accounts payable on mortgage loans serviced
for others 37 107
Advances by borrowers for taxes and insurance 215 181
Other liabilities 417 85
Deferred federal income taxes 34 98
------ ------
Total liabilities 45,992 45,093
------ ------
Commitments - -
Stockholders' equity
Preferred stock - authorized 1,000,000
shares of $ .10 par value, none issued - -
Common stock - authorized 4,000,000 shares
$ .01 and $ .10 par value, 295,133 and
and 151,656 shares issued and outstanding
at September 30, 1996 and 1995 3 15
Additional paid-in capital 1,771 452
Retained earnings - substantially restricted 2,597 2,763
Shares acquired by Management Recognition
Plan (18) (19)
Less unearned ESOP shares (126) -
Unrealized gain on available for sale
securities, net of income taxes 12 5
------ ------
Total stockholders' equity 4,239 3,216
------ ------
Total liabilities and stockholders equity $ 50,231 48,309
====== ======
</TABLE>
- 24 -
<PAGE> 22
KENWOOD BANCORP INC. AND SUBSIDIARY
Consolidated Statements of Operations
Year Ended September 30,
(In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $2,670 2,402 1,836
Mortgage-backed securities 457 452 385
Investment securities 189 140 101
Interest-bearing deposits and other 107 200 189
----- ----- -----
Total interest income 3,423 3,194 2,511
Interest expense:
Deposits 2,462 2,267 1,597
Borrowings 72 43 24
----- ----- -----
Total interest expense 2,534 2,310 1,621
----- ----- -----
Net interest income 889 884 890
Provision for losses on loans 14 12 11
----- ----- -----
Net interest income after
provision for losses on
loans 875 872 879
Other income:
Gain on sale of mortgage loans 193 46 67
Gain on sale of investments 11 - -
Other operating 17 16 12
----- ----- -----
Total other income 221 62 79
General, administrative and other expense:
Employee compensation and benefits 437 372 324
Occupancy and equipment 124 110 94
Federal deposit insurance premiums 393 90 80
Franchise taxes 42 41 40
Other 252 194 188
----- ----- -----
Total general, administrative
and other expense 1,248 807 726
----- ----- -----
Income (loss) before income
taxes (benefits) (152) 127 232
Federal income taxes (benefits)
Current 19 26 66
Deferred (67) 20 6
----- ----- -----
(48) 46 72
----- ----- -----
Net Income (loss) $ (104) 81 160
===== ===== =====
Earnings per share, restated for effects
of conversion from mutual holding company $ (.37) .29 .57
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
- 25 -
<PAGE> 23
KENWOOD BANCORP INC. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years Ended September 30, 1996, 1995 and 1994
(In Thousands)
<TABLE>
<CAPTION>
Unrealized
Gain on
Additional Available Shares Unearned
Common Paid-In Retained for Sale Acquired ESOP
Stock Capital Earnings Securities By MRP Shares Total
----- ------- -------- ---------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 $ 15 436 2,671 - (21) - 3,101
Issuance of shares under stock
option plan - 16 - - - - 16
Amortization of MRP expense - - - - 3 - 3
Net income for the year
ended September 30, 1994 - - 160 - - - 160
Cash dividends of $1.06 per share - - (75) - - - (75)
--- --- ----- --- --- --- -----
Balance at September 30, 1994 15 452 2,756 - (18) - 3,205
Amortization of MRP expense - - - - (1) - (1)
Net income for the year ended
September 30, 1995 - - 81 - - - 81
Increase in unrealized gain on
available sale securities -
net of tax - - - 5 - - 5
Cash dividends of $.56 per share - - (74) - - - (74)
--- ----- ----- --- --- --- -----
Balance at September 30, 1995 15 452 2,763 5 (19) - 3,216
Amortization of MRP expense - - - - 1 - 1
Net loss for the year ended
September 30, 1996 - - (104) - - - (104)
Increase in unrealized gain on
available for sale securities
net of tax - - - 7 - - 7
Cash dividends of $.49 per share - - (62) - - - (62)
Shares acquired by ESOP - - - - - (126) (126)
Reorganization with issuance of
common stock in second step
conversion (12) 1,319 - - - - 1,307
--- ----- ----- --- --- --- -----
Balance at September 30, 1996 $ 3 1,771 2,597 12 (18) (126) 4,239
=== ===== ===== === === === =====
</TABLE>
The accompanying notes are an integral part of these statements.
- 26 -
<PAGE> 24
KENWOOD BANCORP INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Year Ended September 30,
(In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) for the year $ (104) 81 160
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 30 21 37
Loans disbursed for sale in the
secondary market (13,218) (3,388) (5,997)
Proceeds from sale of loans in
the secondary market 12,788 3,221 7,081
Gain on sale of mortgage loans (193) (46) (67)
Gain on sale of investments (11) - -
Federal Home Loan Bank stock dividends (29) (24) (17)
Amortization of deferred loan origination
(fees) costs (39) (14) 8
Amortization of expense of management
recognition plan 1 (1) 3
Provision for losses on loans 14 12 11
Increase (decrease) in cash due to changes in:
Accrued interest receivable (34) (25) (67)
Prepaid expenses and other assets (4) (9) (6)
Accounts payable on mortgage loans serviced
on others (70) 66 (29)
Other liabilities 332 (3) (10)
Federal income taxes:
Current 20 14 (99)
Deferred (67) 36 6
-------- ------- -------
Net cash provided by (used in) operating
activities (584) (59) 1,014
------- ------- -------
Cash flows from investing activities:
Principal repayments on loans and mortgage-backed
securities 7,777 6,469 8,567
Loan disbursements (12,356) (10,593) (12,812)
Purchase of mortgage-backed securities - - (3,090)
Purchase of mortgage-backed securities available
for sale (513) - -
Proceeds from sale of mortgage-backed securities
available for sale 1,743 - -
Proceeds from sale of real estate acquired
through foreclosure - - 24
Maturity of investment securities 500 - 1,000
Purchase of investment securities (500) - (1,987)
Maturity of investment securities available
for sale 500 - -
Purchase of investment securities available
for sale (500) (1,000) -
Proceeds from sale of investment securities
available for sale 513 - -
Purchase of Federal Home Loan Bank stock - (50) (3)
Purchase of office premises and equipment (12) (9) (15)
(Increase) decrease in certificates of deposit
in other financial institutions 950 725 (619)
------ ------ ------
Net cash used in investing activities (1,898) (4,458) (8,935)
------ ------ ------
Net cash flows used in operating and
investing activities (subtotal carried
forward) (2,482) (4,517) (7,921)
------ ------ ------
</TABLE>
See accompanying notes to financial statements.
- 27 -
<PAGE> 25
KENWOOD BANCORP INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (Continued)
Years Ended September 30,
(In Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net cash flows used in operating and
investing activities (subtotal
brought forward $ (2,482) (4,517) (7,921)
Cash flows from financing activities:
Net increase (decrease) in deposits (2,792) 5,591 3,666
Proceeds from Federal Home Loan Bank advances 6,000 - 1,725
Repayment of Federal Home Loan Bank advances (2,541) (18) (1,513)
Advances by borrowers for taxes and insurance 34 48 30
Net proceeds from the issuance of common stock 1,181 - -
Proceeds from exercise of stock options - - 16
Dividends paid on common stock (62) (74) (75)
------ ------ ------
Net cash provided by financing activities 1,820 5,547 3,849
------ ------ ------
Net increase (decrease) in cash and cash equivalents (662) 1,030 (4,072)
Cash and cash equivalents at beginning of year 2,808 1,778 5,850
------ ------ ------
Cash and cash equivalents at end of year $ 2,146 2,808 1,778
====== ====== ======
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the year for:
Federal income taxes $ (2) 12 98
====== ====== ======
Interest on deposits and borrowings $ 2,533 2,301 1,594
====== ====== ======
Supplemental disclosure of noncash investing
activities:
Transfers of investment securities to
available for sale classification $ 7,253 - -
====== ====== =====
Change in unrealized gains (losses) on securities
available for sale - net of related tax effects 7 5 -
====== ====== =====
</TABLE>
See accompanying notes to financial statements.
- 28 -
<PAGE> 26
KENWOOD BANCORP INC. AND SUBSIDIARY
Notes to Financial Statements
1. Organization and Summary of Significant Accounting Policies:
The following describes the organization and the significant accounting
policies followed in the preparation of these financial statements.
Certain amounts in the financial statements have been reclassified from
previously issued financial statements to conform to the presentation
included herein.
Nature of operations and principles of consolidation
Kenwood Bancorp Inc. (the Bancorp) is a holding company formed in
1996 in conjunction with the "second step" conversion of Kenwood
Savings Bank from a mutual holding company to a stock savings bank
on June 28, 1996. The Bancorp's financial statements include the
accounts of its wholly-owned subsidiary, Kenwood Savings Bank. All
significant intercompany transactions have been eliminated.
Kenwood Savings Bank is a state chartered savings bank and a member
of the Federal Home Loan Bank system (FHLB) and subject to
regulation by the Office of Thrift Supervision (OTS), an office of
the U.S. Department of Treasury. As a member of the FHLB system,
Kenwood Savings Bank maintains a required investment in capital
stock of the Federal Home Loan Bank of Cincinnati.
The Bancorp's business consists of attracting deposits from the
general public and applying those funds in the origination of
residential, consumer and nonresidential loans.
Savings accounts are insured by the Savings Association Insurance
Fund (SAIF), a division of the Federal Deposit Insurance
Corporation (FDIC), within certain limitations. Semi-annual
premiums are required by the SAIF for the insurance of such savings
accounts.
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 disclosure of contingent assets and
liabilities at the date of the financial statements and that affect
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Areas
where management's estimates and assumptions are more susceptible
to change in the near term include the allowance for loan losses
and the fair value of certain securities.
Concentrations of credit risk
The Bancorp grants first mortgage and other loans to customers
located primarily in the Metropolitan Cincinnati area.
Accordingly, a substantial portion of its debtor's ability to
honor their contracts is dependent upon the financial health of the
local economy and market.
Management may at times, maintain deposit accounts with financial
institutions in excess of federal deposit insurance limits.
Cash and cash equivalents
For the purpose of presentation in the statements of cash flows,
the Bancorp considers all highly liquid debt instruments with
original maturity when purchased of three months or less to be cash
equivalents.
- 29 -
<PAGE> 27
Investment and mortgage-backed securities
The Bancorp adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities," as of October 1, 1994. Statement No. 115 requires the
classification of investments in debt and equity securities into
three categories; held to maturity, trading, and available for
sale. Debt securities that the Bancorp has the positive intent and
ability to hold to maturity are classified as held to maturity
securities and reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of
selling in the near-term are classified as trading securities and
reported at fair value, with unrealized gains and losses included
in earnings.
The Bancorp has no trading securities. Debt and equity securities
that are not classified as either held to maturity securities or
trading securities are classified as available for sale securities
and reported at fair value, with unrealized gains or losses
excluded from earnings and reported as a separate component of
equity, net of deferred taxes. At the date of implementation of
Statement No. 115, the Bancorp had not identified any investments
or mortgage-backed securities as available for sale.
The Bancorp designates investment securities and mortgage-backed
securities as held to maturity or available for sale upon
acquisition. At December 31, 1995, the Bancorp made a one-time
reassessment of the classification of certain mortgage-backed
securities in accordance with "A Guide to Implementation of
Statement No. 115 on Accounting for Certain Investments in Debt and
Equity Securities" issued in November 1995. The Bancorp
transferred mortgage-backed securities with an amortized cost of
$7.2 million from the held-to-maturity classification to the
available for sale classification to the available for sale
classification at December 31, 1995 to reflect management's intent
as to the classification of these securities. Gains or losses on
the sales of investment securities and mortgage-backed securities
available for sale are determined on the specific identification
method.
Premiums and discounts on investment securities and mortgage-backed
securities are amortized or accreted using the interest method over
the expected lives of the related securities.
Loans receivable
Loans held in portfolio are stated at the principal amount
outstanding, adjusted for deferred loan origination fees and costs,
the allowance for loan losses, and premiums and discounts on loans
purchased. Premiums and discounts on loans purchased are amortized
and accreted to operations using the interest method over the
estimated life of the underlying loans.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the
related loan.
Interest in accrued as earned unless the collectibility of the loan
is in doubt. Uncollectible interest on loans that are
contractually past due is charged off, or an allowance is
established based on management's periodic evaluation. 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 has returned to normal, in
which case the loan is returned to accrual status.
- 30 -
<PAGE> 28
Loans held for sale are carried at the lower of cost or market,
determined in the aggregate. In computing cost, deferred loan
origination fees and costs are aggregated with the principal
balances of the related loans. At September 30, 1996 and 1995,
loans held for sale were carried at cost.
The Bancorp will either sell the related servicing on loans or
retain the servicing on loans sold and agree to remit to the
investor loan principal and interest at agreed-upon rates. These
rates can differ from the loan's contractual interest rate
resulting in a "yield differential." In addition to previously
deferred loan origination fees and cash gains, gains on sale of
loans can represent the present value of the future yield
differential less a normal servicing fee, capitalized over the
estimated life of the loans sold. Normal servicing fees are
determined by reference to the stipulated minimum servicing fee set
forth by the government agencies to whom the loans are sold. Such
servicing fees are representative of the Bancorp's normal servicing
costs. The resulting capitalized excess servicing fee is amortized
to operations over the life of the loans using the interest method.
If prepayments are higher than expected, an immediate charge to
operations is made. If prepayments are lower, then the related
adjustments are made prospectively.
It is the Bancorp's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, trends in
the level of delinquent and problem loans, adverse situations that
may affect the borrower's ability to repay the estimated value of
any underlying collateral and current and anticipated economic
conditions in the primary lending area. When the collection of a
loan becomes doubtful, or otherwise troubled, the Bancorp records a
loan loss provision equal to the difference between the fair value
of the property securing the loan and the loan's carrying value.
Major loans and major lending areas are reviewed periodically to
determine potential problems at an early date. The allowance for
loan losses is increased by charges to earnings and decreased by
charge-off (net of recoveries). The amount of actual write-offs
could differ from the estimate.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 114, "Accounting
by Creditors for Impairment of a Loan". This standard amends
Statement No. 5 to clarify that a creditor should evaluate the
collectibility of both contractual interest and contractual
principal on all loans when assessing the need for a loss accrual.
In October 1994, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosure", which amends Statement No. 114 to allow a creditor to
use existing methods for recognizing interest income on impaired
loans. The statements are effective for the fiscal year beginning
October 1, 1995 and the adoption of these statements did not have a
material effect on the Bancorp's financial statements.
A loan is defined as impaired under SFAS No. 114 when it is
probable that a creditor will be unable to collect all amounts due
according to contractual terms of the loan agreement. In applying
the provisions of SFAS No. 114, the Bancorp considers its
investment in one-to-four family residential loans and consumer
loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. With respect to the
Bancorp's investment in impaired multi-family and non-residential
real estate loans, such loans are collateral dependent and as a
result are carried as a practical expedient at the lower of cost or
fair value.
It is the Bancorp's policy to consider collateral dependent loans
which are more than ninety days delinquent to constitute more than
a minimum delay in repayment and evaluated for impairment under
SFAS No. 114 at
- 31 -
<PAGE> 29
that time. Interest on impaired loans is reported on the cash
basis. Impaired loans would be charged off in the same manner as
all loans subject to charge off. At September 30, 1996, the
Bancorp had no loans that would be defined as impaired under SFAS
No. 114.
Foreclosed real estate
Real estate properties acquired through, or in lieu of, loan
foreclosures are initially recorded at lower of cost or fair value
less estimated costs to sell at the date of foreclosure.
Subsequent declines in value are charged to operations. The
Bancorp has no real estate acquired by foreclosure at September
30, 1996 and 1995.
Property and equipment
Property and equipment are carried at cost, less accumulated
depreciation and amortization computed by straight-line and
accelerated methods over the estimated useful lives of the
respective assets.
Income taxes
The Bancorp accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Under
this standard, deferred tax assets and liabilities represent the
tax effects of the temporary differences in the basis of certain
assets and liabilities for tax and financial statement purposes,
calculated at currently effective tax rates, of future deductible
or taxable amounts attributable to events that have been recognized
on a cumulative basis in the financial statements.
The Bancorp's principal temporary differences between pretax
financial income and taxable income result from different methods
of accounting for deferred loan origination fees and costs, Federal
Home Loan Bank stock dividends, the accretion of unearned discounts
arising from loans sold in a reciprocal loan sale transaction, the
general loan loss allowance and the post-1987 percentage of
earnings bad debt deduction. For certain assets acquired after
December 31, 1980, a temporary difference is also recognized for
depreciation utilizing accelerated methods for Federal income tax
purposes.
Off balance sheet instruments
In the ordinary course of business the Bancorp has entered into
off-balance sheet financial instruments consisting of commitments
to extend credit and commitments under line of credit loans. Such
financial instruments are recorded in the financial statements when
they are funded or related fees are incurred or received.
Recent accounting pronouncements
In May 1995, the Financial Accounting Standards Board Issued
Statement of Financial Accounting Standards No. 122, "Accounting
for Mortgage Servicing Rights". This statement requires that a
mortgage banking enterprise recognize as separate assets rights to
service mortgage loans for others, however those servicing rights
are acquired. A mortgage banking enterprise that acquires mortgage
servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing
rights retained would allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans based on their
relative fair value. Statement No. 122 is effective for fiscal
years beginning after December 15, 1995. Management is currently
assessing the impact of this standard.
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting No. 123, "Accounting for
Stock-Based
- 32 -
<PAGE> 30
Compensation". This statement establishes accounting and reporting
standards for stock-based employee compensation plans including
stock options. The statement defines a "fair value based method"
for employee stock options and encourages all entities to adopt
that method for such options. However, it allows an entity to
continue to measure compensation cost for those plans using the
"intrinsic value based method" of accounting prescribed by APB
Opinion No. 25. Entities electing to remain with the accounting in
Opinion 25 must make proforma disclosures of net income and
earnings per share, as if the fair value method of accounting
defined in this statement had been applied. SFAS No. 123 is
effective for transactions entered into in fiscal years that begin
after December 15, 1995, and therefore will not be applied until
fiscal year ended September 30, 1997. Management is currently
assessing the impact of this standard.
In June 1996, the FASB issued SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" which established accounting and reporting standards
for transfers and servicing of financial assets and extinguishments
of liabilities. The standards are based on a consistent
application of a financial components approach that focuses on
control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. SFAS No. 125 provides
consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings.
SFAS No. 125 supercedes SFAS No. 122. SFAS No. 125 is effective
for transactions occurring after December 31, 1996. Management is
currently assessing the impact of this standard.
Earnings per share
Earnings per share for the fiscal years ended September 30, 1996,
1995 and 1994 is based on net income (loss) divided by 282,521,
282,521 and 282,288 weighted average shares outstanding during the
respective period. Weighted average shares for fiscal years 1995
and 1994 were adjusted for the reorganization from the mutual
holding company form to the stock holding company form effected in
the 1996 fiscal year. There is no material dilutive effect
attendant to the Stock Option Plan.
Reclassification
Certain reclassifications were made to the prior years financial
statements to conform to the current year presentation.
- 33 -
<PAGE> 31
2. Investments and Mortgage-Backed Securities:
The amortized cost, gross unrealized gains, gross unrealized losses, and
approximate market values of investment securities held to maturity at
September 30, are summarized as follows:
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government
agency obligations $ 1,994 - 35 1,959
===== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government
agency obligations $ 1,991 9 29 1,971
====== ===== ====== =====
</TABLE>
At each of the dates presented, all investment securities held to
maturity are due within one to five years.
The amortized costs, gross unrealized gains, gross unrealized losses,
and market value of investment securities available for sale at
September 30, are summarized as follows:
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government
agency obligations $ 499 - 13 486
===== ====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government
agency obligations $ 999 7 - 1,006
===== ===== ====== =====
</TABLE>
The amortized cost and market value of investment securities available
for sale at September 30, by contractual maturity are shown below:
<TABLE>
<CAPTION>
1996 1995
-------------------------- -------------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one to five years $ 499 486 - -
Due in five to ten - - 500 506
After ten years - - 499 500
--- --- --- ---
$ 499 486 999 1,006
=== === === =====
</TABLE>
- 34 -
<PAGE> 32
The amortized cost, gross unrealized gains, gross unrealized losses, and market
value of mortgage-backed securities held to maturity at September 30, are
summarized as follows:
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Government National
Mortgage Association $ 245 5 - 250
=== ==== ==== ===
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation $ 397 - 1 396
Federal National
Mortgage Association 881 7 - 888
Government National
Mortgage Association 6,033 55 8 6,080
----- ---- ---- -----
$ 7,311 62 9 7,364
===== ==== ==== =====
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses, and
market value of mortgage backed securities available for sale at
September 30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation $ 348 - 9 $ 339
Federal National
Mortgage Association 560 13 - 573
Government National
Mortgage Association 3,591 28 2 3,617
----- ----- ----- -----
$ 4,499 41 11 $ 4,529
===== ===== ===== =====
</TABLE>
The amortized cost and market value of all mortgage-backed securities at
September 30, by contractual terms to maturity is shown below. Expected
maturities will differ from contractual maturities because borrowers may
generally prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
1996 1995
--------------------- --------------------
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one to five years $ 348 339 397 396
Due after twenty years 4,396 4,440 6,914 6,968
----- ----- ----- -----
$4,744 4,779 7,311 7,364
===== ===== ===== =====
</TABLE>
- 35 -
<PAGE> 33
Proceeds and resulting gains and loses realized from sale of investments and
mortgage-backed securities from the year ended September 30, 1996 were as
follows:
<TABLE>
<CAPTION>
Net
Gross Gross Gross Realized
Proceeds Gains Losses Gain/(Loss)
-------- ----- ------ -----------
<S> <C> <C> <C> <C>
Investments $ 513 13 - 13
Mortgage-backed
securities 1,743 - 2 (2)
----- ----- --- -----
$ 2,256 13 2 $ 11
===== ==== === ===
</TABLE>
3. Loans Receivable:
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
One-to-four family residential real estate $ 37,699 31,464
Multi-family residential real estate 126 239
Construction 1,016 226
Nonresidential real estate 142 232
Home equity line of credit 817 366
Consumer and other 43 341
------ ------
39,843 32,868
Add/(less):
Undisbursed portion of loans-in-process (502) (61)
Deferred loan origination costs 85 46
Allowance for loan losses (95) (81)
----- -----
$ 39,331 32,772
====== ======
</TABLE>
The Bancorp's lending efforts have historically focused on one-to-four
family and multi-family residential real estate loans, which comprise
approximately $38.3 million, or 97% of the total loan portfolio at
September 30, 1996 and $31.9 million, or 97% of the total loan portfolio
at September 30, 1995. Generally, such loans have been underwritten on
the basis of no more than an 80% loan-to-value ratio, which has
historically provided the Bancorp with adequate collateral coverage in
the event of default. Any loan with loan to value exceeding 80%
requires PMI insurance. Nevertheless, the Bancorp, as with any lending
institution, is subject to the risk that residential real estate values
could deteriorate in its primary lending area of southwestern Ohio,
thereby impairing collateral values. However, management is of the
belief that real estate values in the Bancorp's primary lending area are
presently stable.
As discussed previously, the Bancorp has sold certain whole loans and
participating interests in the loans in the secondary market, retaining
servicing on the loans sold. Loans sold and serviced for others totaled
approximately $18.2 million, $20.3 million, and $22.7 million at
September 30, 1996, 1995 and 1994. All of the loans held for sale at
September 30, 1996, will be sold with the servicing not retained by the
Bancorp.
The activity in the allowance for loan losses at September 30 is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 81 69 60
Charge-offs - - (2)
Provision for loan losses 14 12 11
--- --- ---
Ending balance $ 95 81 69
=== === ===
</TABLE>
- 36 -
<PAGE> 34
At September 30, 1996, the Bancorp's allowance for loan losses was
comprised solely of a general loan loss allowance, which is includible
as a component of regulatory risk-based capital.
The Bancorp had no non-accrual loans at September 30, 1996 and 1995.
The balance of loans not accruing interest at September 30, 1994 was
$33,000.
4. Property and Equipment:
Property and equipment consist of the following at September 30:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land and improvements $ 148 148
Building and improvements 325 325
Furniture and equipment 172 160
--- ---
645 633
Less accumulated depreciation
and amortization 283 253
--- ---
$ 362 380
=== ===
</TABLE>
- 37 -
<PAGE> 35
e 5. Deposits:
Deposits on account bearing interest and certificates by original
maturity are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------- --------------------------------------------
Weighted Percent Weighted Percent
Average of Average of
Rate Amount Deposits Rate Amount Deposits
---- ------ -------- ---- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Passbook savings 2.94% $ 1,396 3.35% 2.95% 1,509 3.40%
Statement savings 4.55 2,535 6.09 3.85 401 .90
Demand deposits 3.73 1,285 3.09 3.39 741 1.67
Money market deposits 3.65 2,616 6.28 3.67 4,082 9.19
Christmas club - - - - 29 0.06
----- ----- ----- -----
7,832 18.81 6,762 15.22
Certificates
3 month 5.25 1,007 2.42 5.31 1,190 2.68
6 month 5.17 2,612 6.27 5.62 3,367 7.58
11 month 5.34 2,831 6.80 6.19 4,948 11.14
12 month 5.39 3,915 9.40 5.94 3,389 7.63
18 month 5.58 1,258 3.02 6.02 2,518 5.67
18 month IRA 5.92 113 0.27 4.98 128 0.29
22 month 6.66 4,999 12.01 6.99 3,495 7.87
24 month 6.30 5,236 12.57 6.13 5,817 13.09
30 month 6.27 1,465 3.52 5.94 1,743 3.92
36 month 6.25 3,046 7.32 6.02 3,476 7.82
60 month 6.52 7,322 17.59 6.66 7,595 17.09
----- ----- ----- -----
33,804 81.19 37,666 84.78
------ ----- ------ -----
41,636 100.00% 44,428 100.00%
====== ======= ====== ======
</TABLE>
- 38 -
<PAGE> 36
Interest expense on deposits at September 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Passbook $ 45 50 62
Certificates of deposit 2,179 2,016 1,284
NOW, money market deposit
accounts and statement savings 238 201 251
----- ----- -----
$ 2,462 2,267 1,597
===== ===== =====
</TABLE>
Maturities of outstanding certificates of deposit at September 30 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Less than one year $ 21,945 19,829
One year to three years 7,709 14,007
More than three years 4,150 3,830
------ ------
$ 33,804 37,666
====== ======
</TABLE>
The aggregate amount of certificates of deposit in denominations of
$100,000 or more was $3.5 million and $4.0 million at September 30, 1996
and 1995 respectively. Deposit accounts exceeding $100,000 are not
federally insured.
Financial Instruments:
The following fair value disclosures are made in accordance with the
requirements of SFAS No. 107, "Disclosure about Fair Value of Financial
Instruments." SFAS No. 107 requires the disclosure of fair value
information about both on-and-off-balance sheet financial instruments
where it is practical to estimate that value. In cases where quoted
market prices were not available, fair values were based on estimates
using present value of other valuation methods, as described below. The
use of different assumptions (e.g., discount rates and cash flow
estimates) and estimation methods could have a significant effect on
fair value amounts. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Bancorp could realize in a
current market exchange. Because SFAS No. 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements, any aggregation of the fair value amounts
presented would not represent the underlying value of the Bancorp.
The following methods and assumptions were used in estimating the fair
values of financial instruments, cash, interest bearing deposits and
investment in FHLB stock. The carrying value of cash and interest
bearing deposits approximates those assets' fair value.
Investments and mortgage-backed securities
For investment securities (debt instruments) and mortgage-backed
securities, fair values are based on quoted market prices, where
available. If a quoted market price is not available, fair value is
estimated using quoted market prices of comparable instruments.
Loans receivable
The fair value of the loan portfolio is estimated by evaluating
homogeneous categories of loans with similar financial characteristics.
Loans are segregated by types, such as residential mortgage, commercial
real estate, and consumer. Each loan category is further segmented into
fixed and adjustable rate interest, terms, and by performing and
nonperforming categories.
- 39 -
<PAGE> 37
The fair value of performing loads, except residential mortgage loans,
is calculated by discounting contractual cash flows using estimated
market discount rates which reflect the credit and interest rate risk
inherent in the loan. For performing residential mortgage loans, fair
value is estimated by discounting contractual cash flows adjusted for
prepayment estimates using discount rates based on secondary market
sources. The fair value for significant nonperforming loans is based on
recent internal or external appraisals. Assumptions regarding credit
risk, cash flow, and discount rates are judgmentally determined by using
available market information.
Savings accounts
The fair values of passbook accounts, NOW accounts, and money market
savings and demand deposits approximates their carrying values. The
fair value of fixed maturity certificates of deposit is estimated using
a discounted cash flow calculation that applies interest rates currently
offered for deposits of similar remaining maturities.
Commitments to extend credit
The fair value of commitments to extend credit approximates the
contractual amount due to the comparability of current levels of
interest rates and the committed rates.
Fair values for off-balance-sheet lending commitments are based on fees
currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the counterparties' credit
standings.
The estimated fair values of the Bancorp's financial instruments at
September 30, 1996, are as follows:
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------
Carrying Fair
Amounts Value
------- -----
<S> <C> <C>
Financial assets:
Cash and interest bearing deposits $ 2,146 $2,146
Certificates of deposit 380 380
Investment securities available
for sale 486 486
Investment securities held to
maturity 1,994 1,959
Loans receivable 39,331 39,520
Mortgage-backed securities
available for sale 4,529 4,529
Mortgage-backed securities held
to maturity 245 250
Investment in FHLB stock 430 430
Financial liabilities:
Savings accounts 41,636 41,860
Federal Home Loan Bank advances 3,653 3,653
<CAPTION>
Contractual Fair
Amount Value
------ -----
<S> <C> <C>
Unrecognized financial instruments
Commitments to extend credit 1,301 1,301
</TABLE>
- 40 -
<PAGE> 38
6. Advances From the Federal Home Loan Bank:
Pursuant to a collateral agreement with the FHLB advances are secured by
all stock owned in the FHLB and qualifying first mortgage loans totaling
150% of the advanced balance.
Advances consist of the following at September 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Short term (advances at variable rates
(5.45% at September 30, 1996) $ 3,000 -
Long term note (interest at 5.65%) 175 194
Long term note (interest at 5.45%) 478 -
----- ---
$ 3,653 194
===== ===
</TABLE>
Maturities on these advances at September 30, 1996, are as follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
1997 $ 3,060
1998 63
1999 67
2000 71
2001 75
Subsequent years 317
-----
$ 3,653
=====
</TABLE>
Interest expense on borrowed funds was $72,000 and $43,000 for the years
ended September 30, 1996 and 1995.
7. Benefit plans
The Bancorp maintains a 401(k) profit sharing plan which covers all
employees who have attained the age of 20 1/2 and have completed six
months of service. Employer contributions are made at the discretion of
the Board of Directors. The Bancorp's contribution to such plan totaled
approximately $12,000, $8,000 and $14,000 for the years ended September
30, 1996, 1995 and 1994 respectively.
Additionally, in conjunction with the initial public offering, the
Bancorp adopted a Management Recognition Plan (MRP). The MRP purchased
2,070 shares of the common stock issued in the offering which were
converted to 4,027 shares in the second step conversion. Common stock
granted under the MRP will vest ratably over a five-year period,
commencing on the date of grant. During fiscal 1995, the Bancorp
granted additional 140 shares to plan participants and recognized a
credit of approximately $1,000 of amortization expense. Total shares
granted under the plan total 941 shares as of September 30, 1996. The
Bancorp recognized $1,000 and $3,000 of amortization expense in 1996 and
1994 respectively.
The Bancorp has a Stock Option Plan that provides for the issuance of
2,070 shares of authorized, but unissued shares. Shares exercised under
option totaled 1,656 leaving 414 unexercised shares under option at an
exercise price of $10. The unexercised shares were converted to 805
unexercised shares in the second step conversion.
Concurrent with the conversion from the mutual holding company form to
the stock holding company form or organization, on June 29, 1996,
Kenwood Savings Bank established an Employee Stock Ownership Plan (ESOP)
which provides retirement benefits for substantially all employees who
have completed one year of service and have attained age 21. The ESOP
initially acquired 12,612 shares of common stock in the conversion
offering. The funds used by the ESOP to purchase the stock were
provided by a loan from the Bancorp which will be repaid by
contributions to the
- 41 -
<PAGE> 39
ESOP by the company in the future. Management intends to allocate these
shares to eligible employees' accounts over the next ten years. No
shares have been allocated as of September 30, 1996.
8. Federal Income Taxes:
The provision for federal income taxes (benefits) differs from the
amounts computed at the statutory corporate tax rate as follows at
September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Federal income taxes (benefit) at
the statutory rate $ (52) 42 79
Other, primarily surtax exemptions 4 (9) (7)
Effect of change in estimated tax rate
for deferred taxes - 13 -
---- ---- -----
Federal income tax provision (benefit) per
financial statements $ (48) 46 72
===== ==== ====
Effective tax rate 31.6% 36.2% 31.0%
===== ====== ======
</TABLE>
Deferred federal income tax expense results from temporary differences
in the recognition of revenue and expense for tax reporting and
financial reporting purposes. A reconciliation of the sources of the
Bancorp's temporary differences at the statutory corporate tax rate to
the amount of deferred tax expense is as follows at September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Effect of temporary differences at statutory
corporate tax rate:
Loan origination fees deferred for financial
reporting but recognized currently for
tax purposes $ 11 5 7
Federal Home Loan Bank stock dividends 8 8 4
Unearned discount on loans purchased in
reciprocal sale transaction (2) (4) (7)
SAIF assessment not deductible until paid (80) - -
Effective of change in estimated tax rate
for deferred taxes - 13 -
Other (4) (2) 2
---- --- --
Deferred Federal income tax expense (benefit)
per financial statements $ (67) 20 6
==== === ==
</TABLE>
The composition of the Bancorp's net deferred tax liability at September
30 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on temporary
differences at statutory rate:
Deferred loan origination fees (costs) $ 24 13
Federal Home Loan Bank stock dividends 54 46
Unearned discount on loans purchased in
reciprocal sale transaction 21 23
SAIF assessment not deductible until paid (80) -
Unrealized gain on investments available
for sale 5 2
Book/tax depreciation 14 16
General loan loss allowance (26) (22)
Percentage of earnings bad debt deduction 22 20
--- ---
Net deferred tax liability $ 34 98
=== ===
</TABLE>
- 42 -
<PAGE> 40
The Kenwood Savings Bank is allowed a special bad debt deduction,
generally limited to 8% of otherwise taxable income, and subject to
certain limitations based on aggregate loans and deposit account
balances at the end of the year. If the amounts that qualify as
deductions for federal income taxes are later used for purposes other
than bad debt losses, including distributions in liquidation, such
distributions will be subject to federal income taxes at the then
current corporate income tax rate. Retained earnings at September 30,
1996 include approximately $250,000 for which federal income taxes have
not been provided. The approximate amount of unrecognized deferred tax
liability relating to the cumulative bad debt deduction was
approximately $100,000 at September 30, 1996.
A bill repealing the thrift bad debt reserve has been signed into law
and is effective for taxable years beginning after December 31, 1995.
All saving banks and thrifts will be required to account for tax
reserves for bad debts in the same manner as banks. Such entities with
assets less than $500 million will be required to maintain a moving
average experience based reserve and no longer will be able to calculate
a reserve based on a percentage of taxable income.
Tax reserves accumulated after 1987 will automatically be subject to
recapture. The recapture will be done in equal amounts over six years
beginning in 1997 and can be deferred up to two years, depending on the
level of loans originated.
As a result of the tax law change, the Bancorp is expected to ultimately
recapture approximately $80,000 of tax reserves accumulated after 1987,
results in addition tax payments of $22,000. The recapture of these
reserves will not result in any significant income statement effect to
the Bancorp. Pre-1988 tax reserves will not have to be recaptured
unless the thrift or successor institution liquidates, redeems shares or
pays a dividend in excess of earnings and profits.
9. Commitments:
The Bancorp is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
their customers including commitments to extend credit. Such
commitments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the statement
of financial condition. The contract or notional amounts of the
commitments reflect the extent of the Bancorp's involvement in such
financial instruments.
The Bancorp's 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 contractual notional amount of those
instruments. The Bancorp uses the same credit policies in making
commitments and conditional obligations as those utilized for
on-balance-sheet instruments.
The following schedule lists commitments and off-balance-sheet items at
September 30, 1996 and 1995.
<TABLE>
<CAPTION>
Unused
Loan Home Equity
Commitments Line of Credit
----------- --------------
<S> <C> <C>
September 30, 1996 $ 413 888
September 30, 1995 946 445
</TABLE>
In the opinion of management, the loan commitments equaled or exceeded
prevalent market interest rates as of September 30, 1996, and all
commitments will be funded via cash flow from operations and existing
excess liquidity. Of the total loan commitments, $267,000 was fixed
rate residential loans, with rates ranging from 7.50% to 8.125%,
$207,000 of which were designated for sale. Management expects no
losses as a result of these transactions.
The Bancorp leases office space for its loan origination office under
annual lease with monthly lease expense of $1,370. Rent expense for
the
- 43 -
<PAGE> 41
year ended September 30, 1996, and 1995, totaled $14,280 and $8,000.
Future minimum rents are $5,480 for 1997. The lease in renewable on an
annual basis.
10. Capital Requirements:
The Savings Bank is subject to minimum regulatory capital requirements
promulgated by the OTS. The minimum capital standards generally require
the maintenance of regulatory capital sufficient to meet each of three
tests, hereinafter described as the tangible capital requirement, the
core capital requirement and the risk-based capital requirement.
The tangible capital requirement provides for minimum tangible capital
(defined as stockholders' equity less all intangible assets) equal to
1.5% of adjusted total assets. The core capital requirement provides
for minimum core capital (tangible capital plus certain forms of
supervisory goodwill and other qualifying intangible assets) equal to
3.0% of adjusted total assets. The risk-based capital requirement
currently provides for the maintenance of core capital plus general loss
allowances equal to 8.0% of risk-weighted assets. In computing
risk-weighted assets, the Savings Bank multiplies the value of each
asset on its statement of financial condition by a defined
risk-weighting factor, e.g., one-to-four family residential loans carry
a risk-weighted factor of 50%.
As of September 30, 1996, the Savings Bank's regulatory capital exceed
all minimum capital requirements as shows in the following table:
<TABLE>
<CAPTION>
Regulatory Capital
Taxable Core Risk-based
Capital Percent Capital Percent Capital Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Capital under generally
accepted accounting
principles $ 4,007 - 4,007 - 4,007 -
Unrealized gain on
available for sale
securities (12) - (12) - (12) -
General valuation
allowances - - - - 95 -
------ --- ------ --- ----- ----
Regulatory capital
computed 3,995 7.9 3,995 7.9 4,090 18.5
Minimum capital
requirements 757 1.5 1,513 3.0 1,767 8.0
----- ---- ----- ---- ----- -----
Regulatory capital-
excess 3,238 6.4 2,482 4.9 2,323 10.5
===== ==== ===== ==== ===== =====
</TABLE>
11. Reorganization and Change of Corporate Form:
On June 28, 1996, Kenwood Savings Bank, and Ohio-chartered stock savings
and loan association ("Kenwood" or the "Savings Bank") completed its
reorganization from the mutual holding company form of organization to
the stock holding company form of organization. Pursuant to the terms
of a Plan of Conversion and Agreement and Plan of Reorganization adopted
by Kenwood and Kenwood Federal Mutual Holding company, a federally
chartered mutual holding company (the "Mutual Holding Company"), (i)
Kenwood incorporated Kenwood Bancorp, Inc. (the "Bancorp") as a wholly
owned subsidiary of Kenwood, (ii) the Mutual Holding Company converted
to an interim federal stock savings institution and simultaneously
merged with and into Kenwood, pursuant to which the Mutual Holding
Company ceased to exist and the 81,000 or 53.4% on the shares of common
stock of Kenwood held by the Mutual Holding Company were and (iii) an
interim institution ("Interim") formed as a wholly owned subsidiary of
the Bancorp, merged with and into Kenwood. As a result of the merger of
the Interim with and into Kenwood, Kenwood became a wholly owned
subsidiary of the Bancorp and the outstanding shares of common stock of
Kenwood which amounted to 70,756 shares or 46.6% (other than those held
by the Mutual Holding Company) were converted pursuant to a specified
exchange ratio into shares of common stock of the Bancorp (collectively,
the "Conversion and Reorganization"). In connection with the foregoing,
Kenwood amended its articles of incorporation to change its corporate
title from "Kenwood Savings and Loan
- 44 -
<PAGE> 42
Association" to "Kenwood Savings Bank" and the Bancorp also offered and
sold additional shares of its common stock to certain depositors and
employee benefit plans of Kenwood (the "Offering").
In November 1992, The Kenwood Savings and Loan Association (Kenwood)
completed its reorganization pursuant to its plan of reorganization (the
Plan) into a federally-chartered mutual holding company. The Plan was
approved by the Board of Directors, Kenwood's members, the Office of
Thrift Supervision, and the Federal Deposit Insurance Corporation prior
to its implementation.
In accordance with the Reorganization, Kenwood organized Kenwood Savings
and Loan Association (the Association), a state-chartered, stock savings
and loan association, and transferred all but $100,000 of its assets and
all of its liabilities to the Association in exchange for 81,000 shares
of common stock, $ .10 par value per share, and reorganized from a
state-chartered mutual savings and loan association to a
federally-chartered mutual holding company known as Kenwood Federal
Mutual Holding Company (the Company).
Concurrent with the Reorganization, the Association issued an additional
69,000 shares of its common stock to members of the public at $10 per
share.
The rights of the Savings Banks depositors in liquidation in the
conversion to stock form are maintained by the Savings Bank in an amount
equal to the retained earnings of the Savings Bank reflected in the
statement of financial condition used in the conversion offering
circular. The liquidation account will be maintained for the benefit of
eligible savings account holders who maintained deposit accounts in the
Savings Bank after conversion.
12. Summarized Financial Information of the Parent Company:
The following condensed financial statements summarize the financial
position of Kenwood Bancorp, Inc. as of September 30, 1996, and the
results of its operations for the year ended September 30, 1996.
KENWOOD BANCORP, INC.
Statement of Financial Condition
(In Thousands)
<TABLE>
<S> <C>
Assets:
Cash $ 239
Investment in Kenwood Savings Bank 926
-----
$ 1,165
=====
Liabilities and stockholders' equity:
Liabilities:
Accounts payable - Kenwood Savings Bank $ 6
-----
Stockholders' equity:
Common stock 3
Additional paid in capital 1,304
Retained earnings (22)
Less unearned ESOP shares (126)
-----
1,159
-----
1,165
=====
Statement of Income
-------------------
Interest income $ 2
Director's fees (3)
-----
Net loss $ 1
=====
</TABLE>
- 45 -
<PAGE> 43
13. SAIF Special Assessment:
The deposits of the Savings Bank are presently insured by the SAIF,
which together with the BIF, are the two insurance funds administered by
the FDIC. On November 8, 1995, the FDIC revised the premium schedule
for BIF-insured banks to provide a range of .00% to .31% of deposits (as
compared to the current range of .23% to 31.% of deposits for
SAIF-insured institutions) due to the BIF achieving its statutory
reserve ratio. As a result, BIF members generally would pay
substantially lower premiums than SAIF members. It was previously
anticipated that the SAIF will not be adequately recaptialized until
2002, absent a substantial increase in premium rates or the imposition
of special assessments or other significant developments.
On September 30, 1996, the President signed an omnibus appropriations
package which included the recapitalization of the Savings Association
Insurance Fund (SAIF). All SAIF members will be required to pay a
one-time assessment of 65.7 cents per $100 in deposits held on March 31,
1995. Savings Bank's special assessment will be approximately $289,000.
The assessment was charged against earnings during the 1996 fiscal year
and is being carried as a payable until actually paid during the first
quarter of the 1997 fiscal year. Beginning January 1, 1997, SAIF
members will be assessed a premium of 6.4 cents per $100 of deposits to
cover the FICO obligation plus a regular insurance premium. At the
present time the regular insurance premium which applies to Bancorp is 3
cents per $100 of deposits. Other provisions of the appropriations
package require the Treasury Department to provide Congress, by March
31, 1997, with a report on merging of the bank and thrift charters and
merging the SAIF and Bank Insurance Fund (BIF) by January 1, 1999,
provided that the bank and thrift charters have been merged by that
date. It also required BIF and SAIF members to begin sharing the FICO
obligation on a pro-rata basis at the earlier of January 1, 2000, or
when the BIF and SAIF funds are merged.
- 46 -
<PAGE> 44
STOCK INFORMATION
The reorganization of the Savings Bank into the mutual holding company
form of organization was completed effective November 13, 1992. In connection
with the reorganization, the Savings Bank issued 69,000 shares of common stock
to certain members of the general public at the initial price of $10.00 per
share and an additional 81,000 shares of common stock to Kenwood Federal Mutual
Holding Company. On June 28, 1996, the Savings Bank completed its
reorganization into the stock holding company form of organization. In
connection therewith, shares of common stock of the Savings Bank were converted
into shares of common stock of the Company, the Savings Bank's newly formed
stock holding company, pursuant to a specified exchange ratio. In addition,
the Company also offered and sold additional shares of common stock to certain
depositors and employee benefit plans of the Savings Bank.
At December 16, 1996, and as a result of the foregoing, the Company had
295,133 shares of common stock outstanding which were held by approximately 185
stockholders. There is no active and liquid public trading market for shares
of the Company's common stock.
During fiscal 1994, 1995 and 1996, the Boards of Directors of the
Savings Bank and the Company declared and paid cash dividends as follows:
<TABLE>
<CAPTION>
AMOUNT PER
DECLARATION DATE SHARE(2) RECORD DATE DISTRIBUTION DATE
---------------------------- ----------- ------------------ ---------------------
<S> <C> <C> <C>
October 14, 1993(1) .07 November 1, 1993 November 15, 1993
December 9, 1993(1) .26 December 31, 1993 January 17, 1994
January 13, 1994(1) .07 February 1, 1994 February 15, 1994
April 7, 1994(1) .07 May 1, 1994 May 16, 1994
July 14, 1994(1) .07 August 1, 1994 August 16, 1994
October 13, 1994(1) .07 November 1, 1994 November 15, 1994
January 12, 1995 .07 February 1, 1995 February 15, 1995
April 13, 1995 .07 May 1, 1995 May 15, 1995
July 6, 1995 .07 August 1, 1995 August 15, 1995
October 5, 1995 .07 November 1, 1995 November 15, 1995
January 11, 1996(1) .07 February 1, 1996 February 15, 1996
April 11, 1996(1) .07 May 1, 1996 May 15, 1996
July 9, 1996 .07 August 1, 1996 August 15, 1996
</TABLE>
- ----------------------
(1) Cash dividends were waived by Kenwood Federal Mutual Holding Company.
(2) Cash dividends declared per share prior to June 28, 1996, have been
adjusted to account for the exchange of one share of the Bank's common
stock for 1.9463 shares of the Company's common stock in the Conversion
and Reorganization.
47
<PAGE> 45
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
DIRECTORS
Robert P. Isler President and Chairman of the Board of Kenwood Bancorp, Inc. and Kenwood
Savings Bank
P. Lincoln Mitchell Secretary of Kenwood Bancorp, Inc. and Kenwood Savings
Bank and Real Estate Appraiser
James N. Murphy Owner of Kenwood Pharmacy
Richard C. Kent Owner of Kent Insurance Agency, Inc.
Donald G. Ashcraft Owner of Vintage Title Agency, Inc.
EXECUTIVE OFFICERS
Robert P. Isler President and Chairman of the Board of Kenwood Bancorp,
Inc. and Kenwood Savings Bank
Thomas W. Burns Executive Vice President and Chief Executive Officer of
Kenwood Bancorp, Inc. and Kenwood Savings Bank
P. Lincoln Mitchell Secretary of Kenwood Bancorp, Inc. and Kenwood Savings
Bank
</TABLE>
OFFICE LOCATIONS
7711 Montgomery Road
Cincinnati, Ohio 45236
10999 Reed Hartman Highway
Cincinnati, Ohio 45242
(loan origination office)
48
<PAGE> 46
CORPORATE INFORMATION
CORPORATE HEADQUARTERS: ANNUAL MEETING:
Kenwood Bancorp, Inc. January 30, 1997, 4:00 p.m.
7711 Montgomery Road Kenwood Bancorp, Inc.
Cincinnati, Ohio 45326 7711 Montgomery Road
(513) 791-2834 Cincinnati, Ohio 45236
TRANSFER AGENT AND REGISTRAR:
The Provident Bank
One East Fourth Street
Cincinnati, Ohio 45202
INDEPENDENT AUDITORS:
Clark, Schaefer, Hackett & Co.
105 East Fourth Street
16th Floor
Cincinnati, Ohio 45273-9287
SPECIAL LEGAL COUNSEL:
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W., 12th Floor
Washington, D.C. 20005
49
<PAGE> 1
EXHIBIT 23.1
[CLARK, SCHAEFER, HACKETT & COMPANY LETTERHEAD]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated November 1, 1996, on the
Consolidated Financial Statements of Kenwood Bancorp, Inc., in the Annual
Report on Form 10-K of Kenwood Bancorp, Inc., for the year ended September 30,
1996.
/s/ CLARK, SCHAEFER, HACKETT & CO.
Cincinnati, Ohio
December 24, 1996
<PAGE> 1
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
We have issued our report dated November 16, 1994, accompanying the
financial statements of Kenwood Savings and Loan Association contained in the
Annual Report on Form 10-K for the year ended September 30, 1996 ("Form 10-K")
of Kenwood Bancorp, Inc. to be filed with the Securities and Exchange
Commission on or about December 30, 1996. We consent to the use of the
aforementioned report in the Form 10-K.
/s/ GRANT THRONTON LLP
Cincinnati, Ohio
December 24, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 588
<INT-BEARING-DEPOSITS> 1558
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5015
<INVESTMENTS-CARRYING> 2239
<INVESTMENTS-MARKET> 2209
<LOANS> 39331
<ALLOWANCE> 95
<TOTAL-ASSETS> 50231
<DEPOSITS> 41636
<SHORT-TERM> 3000
<LIABILITIES-OTHER> 703
<LONG-TERM> 653
0
0
<COMMON> 3
<OTHER-SE> 4236
<TOTAL-LIABILITIES-AND-EQUITY> 50231
<INTEREST-LOAN> 2670
<INTEREST-INVEST> 646
<INTEREST-OTHER> 107
<INTEREST-TOTAL> 3423
<INTEREST-DEPOSIT> 2467
<INTEREST-EXPENSE> 2534
<INTEREST-INCOME-NET> 889
<LOAN-LOSSES> 14
<SECURITIES-GAINS> 11
<EXPENSE-OTHER> 1248
<INCOME-PRETAX> (152)
<INCOME-PRE-EXTRAORDINARY> (152)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (104)
<EPS-PRIMARY> (.37)
<EPS-DILUTED> (.37)
<YIELD-ACTUAL> 7.26
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 140
<ALLOWANCE-OPEN> 81
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 95
<ALLOWANCE-DOMESTIC> 95
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
