SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-22838
SENTINEL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 43-1656550
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Walnut Street, Kansas City, Missouri 64106
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (816) 474-9800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained,
to the best of the Registrant's knowledge, in definitive proxy or other
information statements incorporated by reference in Part III of this Form
10-KSB or any amendments to this Form 10-KSB.
The registrant's revenues for the fiscal year ended June 30, 1996 were
$11,004,110.
At the present time, there is no established market in which shares of
the registrant's Common Stock are regularly traded, nor are there any
uniformly quoted prices for such shares. The last trade of shares of the
Common Stock known by management and between parties unaffiliated with the
registrant was on April 15, 1996 at $22.50 per share.
As of September 1, 1996, there were issued and outstanding 513,423 shares
of the registrant's Common Stock. The aggregate value of the Common Stock
outstanding held by nonaffiliates of the registrant on September 1, 1996 was
$11,552,018 million (513,423 shares at $22.50 per share). For purposes of
this calculation, officers and directors of the registrant are considered
nonaffiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format (check one)
Yes No X
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<PAGE>
PART I
Item 1. Description of Business
General
Sentinel Financial Corporation ("Sentinel Financial"), a Delaware
corporation, was incorporated on September 23, 1993 for the purpose of
becoming the holding company for Sentinel Federal Savings and Loan Association
of Kansas City ("Sentinel Federal" or the "Association") (Sentinel Financial
and Sentinel Federal shall at times be referred to as the "Company") upon
Sentinel Federal's conversion from a federal mutual to a federal stock savings
and loan association ("Conversion"). The Conversion was completed on January
7, 1994. Sentinel Financial has not engaged in any significant activity other
than holding the stock of Sentinel Federal. Accordingly, the information set
forth in this report, including financial statements and related data, relates
primarily to Sentinel Federal and its subsidiaries.
Sentinel Federal was organized in 1919 as a Missouri mutual savings and
loan association under the name "Baptist Savings and Loan Association of
Kansas City." In 1935, Sentinel Federal converted to a federally chartered
savings and loan association and changed its name to "Sentinel Federal Savings
and Loan Association of Kansas City." Sentinel Federal is regulated by the
Office of Thrift Supervision ("OTS") and its deposits are insured up to
applicable limits under the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). Sentinel Federal also is a
member of the Federal Home Loan Bank ("FHLB") System.
The Association's principal business consists of attracting deposits from
the general public, originating loans secured primarily by owner-occupied
residential properties and purchasing mortgage-related securities through the
secondary market. Approximately 96.2% of the Association's first mortgage
loans are secured by properties located within Missouri. The Association's
residential real estate mortgage loans amounted to $78.5 million or 95.0% of
the Association's net loan portfolio at June 30, 1996. To a significantly
lesser extent, the Association also originates consumer, commercial real
estate, and commercial business loans.
Supervisory Agreement
On December 20, 1989, Sentinel Federal entered into a Supervisory
Agreement with the OTS as a result of OTS criticisms of Sentinel Federal's
policies and operations and its reduced capital position. In May, 1990,
Sentinel Federal also signed a Capital Plan agreement as a result of its low
level of core capital. The Capital Plan was terminated on June 1, 1994 due to
increases in capital levels primarily as a result of the initial public
offering. However, the Supervisory Agreement remains in effect until
terminated by the OTS. The Supervisory Agreement requires Sentinel Federal to
follow certain limitations primarily relating to the Association's internal
operations, lending activities and investments.
Pending Acquisition
On March 22, 1996, Sentinel Financial and the Association entered into an
Agreement and Plan of Merger ("Merger Agreement") with Roosevelt Financial
Group, Inc. ("Roosevelt"), and its wholly-owned subsidiary, Roosevelt Bank, a
federal savings bank ("Roosevelt Bank"), that will result in the merger of
Sentinel Financial with and into Roosevelt and the Association with Roosevelt
Bank. The Merger Agreement provides that each share of Sentinel Financial's
common stock will be exchanged for 1.4231 shares of Roosevelt's common stock,
subject to certain adjustments. Consummation of the acquisition is subject to
several conditions, including approval by the stockholders of Sentinel
Financial.
1
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<PAGE>
Proposed Federal Legislation
Effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the Bank Insurance Fund ("BIF"). Under the new assessment
schedule, approximately 92% of BIF members pay the statutory minimum annual
assessment of $2,000. With respect to financial institutions that are members
of the SAIF, the FDIC has retained the existing rate schedule of 23 to 31
basis points. The Association is a member of the SAIF rather than the BIF.
SAIF premiums may not be reduced for several years because the SAIF has lower
reserves than the BIF. Because deposit insurance premiums are often
a significant component of noninterest expense for insured depository
institutions, the reduction in BIF premiums may place the Association at a
competitive disadvantage since BIF-insured institutions (such as most
commercial banks) may be able to offer more attractive loan rates, deposit
rates, or both.
Proposed federal legislation would recapitalize the SAIF and resolve the
current premium disparity by requiring savings institutions like the
Association to pay a one-time assessment to increase SAIF's reserves to $1.25
per $100 of deposits. Such assessment is expected to be approximately 68
basis points on the amount of deposits held by a SAIF-member institution. The
payment of a one-time fee would have the effect of immediately reducing
the capital and pre-tax earnings of SAIF-member institutions by the amount of
the fee. Based on the Association's assessable deposits of $123.3 million at
June 30, 1996, a one-time assessment of 68 basis points would equal
approximately $838,000 on a pre-tax basis, or $515,000 after tax. Management
cannot predict whether any legislation imposing such a fee will be enacted,
or, if enacted, the amount or timing of any one-time fee or whether ongoing
SAIF premiums will be reduced to a level equal to that of BIF premiums. See
"REGULATION."
Selected Consolidated Financial Information
Since Sentinel Financial had not commenced operations prior to the mutual
to stock conversion of the Association on January 7, 1994, the financial
information before that date presented herein is that of the Association and
its subsidiary. This information is qualified in its entirety by reference to
the detailed information and Consolidated Financial Statements and notes
thereto appearing elsewhere in this Report.
At June 30,
1992 1993 1994 1995 1996
(In thousands)
SELECTED FINANCIAL
CONDITION DATA:
Total assets $161,054 $156,600 $154,560 $161,914 $143,842
Loans receivable,
net 95,529 80,043 72,278 80,956 82,693
Mortgage-backed
securities, net 31,982 60,725 73,096 68,941 51,520
Investment
securities 15,574 10,924 4,322 6,246 4,619
Securities and loans
available for sale 13,319 1,090 1,058 1,856 1,577
Savings deposits 144,685 138,585 131,504 126,440 123,253
Advances from FHLB 9,500 10,000 10,450 21,850 7,000
Stockholders' equity/
retained earnings,
substantially
restricted 4,254 5,106 9,904 10,615 11,668
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<PAGE>
At June 30,
1992 1993 1994 1995 1996
(In thousands)
SELECTED OPERATIONS DATA:
Total interest
and dividend income $12,953 $10,793 $9,418 $10,422 $11,004
Total interest
expense 9,733 7,740 6,948 7,344 7,527
_______ _______ ______ _______ _______
Net interest income 3,220 3,053 2,470 3,078 3,477
Provision for
losses on loans 27 154 42 -- --
_______ _______ ______ _______ _______
Net interest income
after provision
for loan losses 3,193 2,899 2,428 3,078 3,477
Service fee income 157 156 147 124 126
Gain on sale of
securities and
loans, net 124 275 35 30 129
Other noninterest
income 173 433 267 256 232
_______ _______ ______ _______ _______
Total noninterest
income 454 864 449 410 487
_______ _______ ______ _______ _______
General and
administrative
expenses 2,511 2,418 2,671 2,602 3,351
Provision for losses
on real estate
acquired through
foreclosure 37 24 (43) -- --
_______ _______ _______ _______ _______
Income before income
taxes and
cumulative effect
of change in
accounting principle 1,135 1,345 418 886 613
Income taxes 426 548 45 283 (315)
______ _______ ______ _______ _______
Income before cumulative
effect of change
in accounting
principle 709 797 373 603 928
Cumulative effect of
change in accounting
principle 49 55 191 27 --
_______ ________ ______ _______ _______
Net income $ 758 $ 852 $ 564 $ 630 $ 928
======= ======== ====== ======= =======
Earnings per share:
Income before
extraordinary item
and cumulative
effect of change
in accounting
principle $ __ $ -- $ 0.52(1) $ 1.25 $ 1.81
Cumulative effect
of change
in accounting
principle -- -- -- 0.06 --
_______ ________ _______ ______ ______
Net income -- -- $ 0.52 $ 1.31 $ 1.81
======= ======== ====== ====== ======
________________
1) From January 7, 1994, the date of completion of the conversion of
Sentinel Federal from mutual to stock form of ownership.
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<PAGE>
At June 30,
1992 1993 1994 1995 1996
(Dollars in thousands)
OTHER DATA:
Average total assets $159,404 $157,595 $155,206 $157,875 $153,342
Average total
liabilities 155,482 152,804 147,701 147,616 142,200
Interest rate spread
information:
Average during year 1.89% 1.75% 1.33% 1.61% 1.81%
End of year 2.20 1.70 1.49 1.59 2.07
Net interest margin 2.06 1.97 1.61 1.98 2.28
Average interest-earning
assets to average
interest-bearing
liabilities 102.70 104.30 106.21 107.67 109.66
Nonperforming assets to
total assets
at end of year 0.02 0.39 0.18 0.08 0.12
Equity to total
assets at end of year 2.64 3.26 6.41 6.56 7.73
Return on assets
(ratio of net income
to average total
assets) 0.48 0.54 0.36 0.40 0.61
Return on equity
(ratio of net
income to
average equity) 19.33 17.78 7.51 6.14 8.33
Equity-to-assets ratio
(ratio of average
equity to average
total assets) 2.46 3.04 4.84 6.50 7.27
General and administrative
expenses as a percent
of average total
assets 1.58 1.53 1.72 1.65 2.19
Ratio of net interest
income to general
and administrative
expenses 0.78 0.79 1.01 0.85 1.04
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<PAGE>
Lending Activities
General. The primary lending activity of the Association is originating
one - to - four family adjustable and fixed-rate residential loans, based on
the Association's and Federal Home Loan Mortgage Corporation ("FHLMC")/Federal
National Mortgage Association ("FNMA") underwriting standards.
The types of loans historically originated by the Association include
single-family and multi-family residential loans, residential lot and
construction loans, home equity loans, commercial real estate loans and
savings account loans. The Association attracts retail deposits from the
general public and invests those deposits, together with funds generated from
operating income, primarily in one- to four-family mortgage loans and
mortgage-related securities. The Association's revenues are derived
principally from interest on its mortgage loan and mortgage-related securities
portfolios. The Association's primary sources of funds are proceeds from
deposits, FHLB advances and from principal and interest payments on loans and
mortgage-related securities.
The Association requires that mortgage loans be secured by first or
second liens on one - to - four family residential dwellings. The primary
purpose of the loans is for the purchase or refinancing or construction of
these properties. As of June 30, 1996, $75.9 million, or 91.8% of the
Association's loan portfolio, consisted of loans secured by one - to - four
family residential properties, $3.1 million, or 3.7% of loans, consisted of
commercial real estate and $2.7 million, or 3.2%, consisted of multi-family
permanent loans.
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<PAGE>
Loan Portfolio Analysis. The following table sets forth the composition
of the Association's loan portfolio by type of loan at the dates indicated.
At June 30,
1994 1995 1996
Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Conventional
mortgage $64,162 88% $70,680 85% $71,025 84
Federal Housing
Administration
and Veterans'
Administration 7,098 10 6,377 8 6,333 8
Commercial 604 1 2,195 3 2,576 3
Construction 267 -- 1,235 2 1,627 2
_______ ___ ______ ___ ______ ___
Total mortgage
loans 72,131 99 80,487 98 81,561 97
_______ ___ ______ ___ ______ ___
Other Loans:
Home equity and
second mortgage
loans 286 -- 864 1 1,951 3
Automobile loans 47 -- 47 -- 138 --
Other 386 1 477 1 396 --
_______ ___ ______ ___ ______ ___
Total other
loans 719 1 1,388 2 2,485 3
_______ ___ ______ ___ ______ ___
Total loans 72,850 100% 81,875 100% 84,046 100%
_______ === ______ === ______ ===
Less:
Undisbursed
loan funds 121 452 943
Unearned loan
fees, net 132 148 91
Allowance for
loan losses 319 319 319
Total loans
receivable,
net $72,278 $80,956 $82,693
======= ======= =======
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<PAGE>
One- to Four-Family Residential Loans. The primary lending activity of
the Association is the origination of mortgage loans to enable borrowers to
purchase, refinance or construct single family homes. Management believes
that the policy of focusing on one - to - four family residential mortgage
loans has been successful in contributing to interest income while keeping
delinquencies and losses to a minimum. At June 30, 1996, approximately $75.9
million, or 91.8%, of the Association's total loan portfolio consisted of
loans secured by one-to four-family residential real estate.
The Association presently originates both fixed and adjustable rate
mortgage loans secured by one - to - four family properties with loan terms of
15 to 30 years. In 1985, the Association began originating adjustable rate
mortgage ("ARM") loans indexed to various indices. Until 1989 the Association
used primarily the monthly media cost of funds index. Since 1989 all ARMs are
indexed to the U.S. Treasury Index, with margins ranging from 250% to 300%
over the index, repricing annually with no negative amortization. The
Association also originates adjustable rate loans that adjust after either the
third or fifth year and thereafter adjust annually. Minimum and maximum
lifetime rates are established based on competitive factors at the time of
origination and collateral type. Borrower demand for ARMs versus fixed rate
mortgage loans is a function of 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 mortgage loans and the
first year interest rates and loan fees for ARMs. The relative amount of
fixed rate mortgage loans and ARMs that can be originated at any time is
largely determined by the demand for each in a competitive environment.
Additionally, all of the Association's adjustable rate loans using the
U.S. Treasury one year constant maturity index contain provisions allowing
conversion of the loan to a fixed rate loan, subject to certain qualifying
conditions. While this particular feature permits the borrower to convert to
a fixed rate loan, the Association has not experienced significant prepayment
as a result of this option. Converted loans that do not meet the
Association's yield requirements are sold to the FHLMC to limit interest rate
risk.
During the year ended June 30, 1996, the Association's total mortgage
loan originations were $29.3 million of which 18.2% were subject to periodic
interest rate adjustments and 81.8% were long-term, fixed rate loans. See
"-- Loan Originations, Sales and Purchases."
The Association's long-term, fixed-rate loans are originated with terms
of between 15 to 30 years, amortized on a monthly basis with principal and
interest due each month. At June 30, 1996, the Association had $38.4 million
of long-term, fixed-rate mortgage loans in its portfolio or 46.4% of its total
loan portfolio.
The Association also engages in mortgage banking activities. These
activities include the origination and sale of whole loans to investors and
the FHLMC. Loans are sold to generate fee income and maintain market share.
During the fiscal years ended June 30, 1994, 1995 and 1996 the Association
sold $6.6 million, $3.6 million and $11.5 million of originated loans.
The Association offers ARMs at market rates that may be below the fully
indexed rate. At June 30, 1996, the initial interest rate being offered on
the Association's ARMs ranged from 5.25% to 5.75% per annum. The
periodic interest rate cap (the maximum amount by which the interest rate may
be increased or decreased in a given period) on the Association's ARMs is
generally 200 basis points annually and the lifetime interest rate cap is
generally 600 basis points over the initial interest rate of the loan. The
Association underwrites ARMs based on the borrower's ability to repay the loan
using the first year adjusted rate to qualify the borrower or second year
adjusted rate to qualify the borrower at fully indexed rates based on various
underwriting criteria. As a result, the potential for delinquencies and
defaults on ARMs is lessened.
The Association's fixed rate loan portfolio contains due-on-sale clauses
providing that the Association may declare the unpaid amount due and payable
upon the sale of the property securing the loan. The Association enforces
these due-on-sale clauses to the extent permitted by law. Thus, average loan
maturity (which the Association estimates is between eight to ten years) is a
function of, among other factors, the level of purchase and sale activity
in the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.
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<PAGE>
The Association requires title insurance insuring the status of its lien
on all of the real estate secured loans and also requires that fire and
extended coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the lesser of the loan balance or
the replacement cost of the improvements. There the value of the land,
exclusive of the improvements, exceeds the amount of the loan on the real
estate, the Association may make exceptions to its property insurance
requirements.
Multi-Family Loans. In addition to originating single-family residential
real estate loans, the Association also originates loans secured by
multi-family dwelling units (five or more units). At June 30, 1996, the
Association's total multi-family loans were $2.7 million, or 3.2% of the
Association's total loan portfolio, secured by multi-family dwelling units
located in the Association's primary market area. The loan-to-value and
equity standards imposed by the Association are determined on a case-by-case
basis. Loans secured by multi-family residential real estate are generally
larger and involve a greater degree of risk than single-family residential
mortgage loans.
Certain types of lending are considered to be more risk adverse than
others and, in determination of an institution's capital ratios, are accorded
a lower risk weight. The effect of applying this lower rate of risk is to
reduce the capital requirements for the amount of the particular loan. For
instance, a loan with a 100% risk weight requires that the institution satisfy
the full capital requirement for such lending; while a loan with a 50% risk
weight needs only one-half the capital of the 100% weighted loan. Since the
lower risk weights are accorded to more secure lending, this weighting
encourages safe, non-speculative lending.
Multi-family housing loans are normally assigned a 100% risk weight by
federal regulations. However, OTS regulations assign a 50% risk weight to
"qualifying multi-family mortgage loans," i.e., loans with an existing
property having five to 36 dwelling units with an initial loan-to-value ratio
of not more than 80% where an average annual occupancy rate of 80% or more has
existed for at least one year. See "REGULATION -- Federal Regulation of
Savings Associations -- Capital Requirements."
Multi-family lending is generally considered to involve a higher degree
of risk than permanent residential one - to - four family 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 Association generally attempts to mitigate the
risks associated with multi-family lending by, among other things, lending on
collateral located in its market area and generally to individuals who reside
in its market.
Construction Loans. The Association originates residential construction
mortgage loans to residential owner-occupants (custom construction loans) and
to local contractors building residential properties for resale (speculative
construction loans). At June 30, 1996, the Association had construction loans
of $1.6 million outstanding.
Construction lending is generally considered to involve a higher degree
of credit risk than long-term financing of residential properties. An
institution's risk of loss on a construction loan is dependent largely upon
the accuracy of the initial estimate of the property's value at completion of
construction or the borrower's ability to absorb additional expenses in the
event that costs to complete construction are in excess of the initial cost
estimate. If the estimate of construction cost and the marketability of the
property upon completion of the project prove to be inaccurate, the
institution may be compelled to advance additional funds to complete the
structure. If estimated costs or value proves to be inaccurate, the
institution may be confronted with a property as collateral which is
insufficient to assure full repayment. Commercial Real Estate Loans. The
Association had $2.6 million in commercial real estate loans at June 30, 1996.
The Association's commercial loan activity is limited in scope and activity at
this time.
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Loan Maturity and Repricing
<TABLE>
The following table sets forth certain information at June 30, 1996 regarding the dollar amount of
loans maturing or repricing in the Association's portfolio based on their contractual terms to maturity, but
does not include scheduled payments or potential prepayments. Demand loans, loans having no stated schedule
of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Loan balances
do not include undisbursed loan proceeds, unearned discounts, unearned income and allowance for loan losses.
Within After One Year After 3 Years After 5 Years
One Year Through 3 Years Through 5 Years Through 10 Years Beyond 10 Years Total
(In thousands)
Real estate
<S> <C> <C> <C> <C> <C> <C>
mortgage $ 2 $1,622 $ 701 $5,343 $69,751 $77,419
Commercial
real estate -- 500 -- 1,312 764 2,576
Construction 893 -- -- -- 734 1,627
Automobile 3 35 100 -- -- 138
Savings account
loans 220 91 24 -- -- 35
Other 6 126 390 1,115 314 1,951
______ ______ ______ ______ _______ _______
Total loans $1,124 $2,374 $1,215 $7,770 $71,563 $84,046
====== ====== ====== ====== ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
June 30, 1997, which have fixed interest rates and have floating or adjustable
interest rates.
Fixed- Floating- or
Rates Adjustable-Rates
(In thousands)
Real estate mortgage $33,986 $43,431
Commercial real estate 1,939 637
Construction 140 594
Automobile 135 --
Savings account loans 115 --
Other 1,945 --
------- -------
Total $38,260 $44,662
======= =======
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<PAGE>
Loan Solicitation and Processing. The Association's primary sources of
loans include referrals, brokers, contractors, repeat business from existing
and former borrowers.
Once an application for a mortgage loan is received by the Association, a
credit and property analysis is completed, including obtaining a credit report
from reporting agencies, verification of income and deposits, and asset and
liabilities. An appraisal of the property offered as collateral is undertaken
by a fee appraiser approved by the Association and licensed or certified by
the State of Missouri.
The completed loan file is then submitted for underwriting. Once
underwritten, the loan is submitted to the appropriate committee for review
and approval. Single-family residential loans up to $250,000 may be approved
by the Loan Committee. Approval of the Board of Directors is required for the
Association to make a loan in excess of $250,000.
Loan Originations, Sales and Purchases. The Association originates
fixed- and adjustable-rate residential mortgage loans that meet or exceed the
applicable underwriting requirements of the Association or FNMA and FHLMC. In
addition, as a portfolio lender, the Association also originates fixed and
adjustable-rate loans that are underwritten to the Association's standards,
but may not immediately qualify for sale in the secondary market.
The following table shows total loans originated, purchased, sold and
repaid during the periods indicated.
Year Ended June 30,
1994 1995 1996
(Dollars in thousands)
Total loans at beginning
of period $80,563 $72,850 $81,875
Loans originated:
Single-family
residential 18,364 19,121 28,120
Multi-family residential
and commercial real
estate -- 1,491 500
Other loans 129 578 676
_______ ______ _______
Total loans originated 18,493 21,190 29,296
Loans sold (6,518) (3,636) (11,482)
Loan principal
repayments (19,688) (8,529) (15,643)
_______ ______ _______
Net loan activity (7,713) 9,025 2,171
_______ ______ _______
Total loans at end
of period $72,850 $81,875 $84,046
======= ======= =======
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<PAGE>
Loan Commitments. The Association issues commitments for fixed- and
adjustable-rate single-family residential mortgage loans conditioned upon the
occurrence of certain events. Such commitments are made on specified terms
and conditions and are honored for up to 180 days from approval. The
Association had outstanding net loan commitments of approximately $1.2 million
at June 30, 1996.
Loan Origination and Other Fees. The Association, in most instances,
receives loan origination fees which are a percentage of the principal amount
of the mortgage loan charged to the borrower for funding the loan.
The amount of points charged by the Association varies, though the range
generally is between one and two and one half points. Current accounting
standards require fees received (net of certain loan origination costs) for
originating loans to be deferred and amortized into interest income over the
contractual life of the loan. Net deferred fees associated with loans that
are sold are recognized as an adjustment to gain or loss at the time of sale.
On loans not sold, the Association had $91,400 of net deferred loan fees at
June 30, 1996.
Delinquencies. A report containing delinquencies of all loans is
reviewed monthly by the Board of Directors. Procedures taken with respect to
delinquent loans differ depending on the particular circumstances of the
loan. The Association's procedures provide that when a loan becomes
delinquent, the borrower is contacted, usually by phone, within 15 to 30 days.
When the loan is over 30 days delinquent, the borrower is contacted in
writing. Typically, the Association will initiate foreclosure action against
the borrower when principal and interest become 90 days or more delinquent.
In any event, interest income is reduced by the full amount of accrued and
uncollected interest on most loans once they become 90 days delinquent, go
into foreclosure or are otherwise determined to be uncollectible. An
allowance for loss is established when, in the opinion of management, the net
fair value of the property collateralizing the loan is less than the
outstanding principal and the collectibility of the loan's principal
becomes uncertain. In some instances, the collateral underlying residential
and commercial real estate loans in the Association's portfolio has been
insufficient to cover the book value and cost of selling the property. As of
June 30, 1996, the Association had $168,000 of loans accounted for on a
nonaccrual basis (i.e., loans upon which management believes the future
collectibility of interest is uncertain).
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The following table sets forth information with respect to the
Association's nonperforming assets at the dates indicated. At the dates
shown, the Association had no restructured loans within the meaning of
Statement of Financial Accounting Standards No. 15 titled "Accounting by
Debtors and Creditors of Troubled Debt Restructurings."
At June 30,
1992 1993 1994 1995 1996
(Dollars in thousands)
Loans accounted for on
a nonaccrual basis:
Real estate -
Residential $657 $508 $243 $14 $168
______ ____ _____ ____ _____
Total 657 508 243 14 168
Accruing loans which
are contractually past
due 90 days or more:
Real estate -
Residential 82 -- 28 121 47
Total 82 -- 28 121 47
Total of nonaccrual and 90
days past due loans 739 508 271 135 215
Real estate owned (net) 741 104 -- -- --
______ ____ _____ ____ _____
Total nonperforming
assets $1,480 $612 $271 $135 $215
====== ==== ==== ==== ====
Total loans delinquent 90 days
or more to net loans 0.77% 0.64% 0.14% 0.17% 0.26%
Total loans delinquent 90 days
or more to total assets 0.46% 0.32% 0.07% 0.08% 0.15%
Total nonperforming assets
to total assets 0.92% 0.39% 0.18% 0.08% 0.12%
Interest income that would have been recorded for the year ended June 30,
1996 had nonaccruing loans been current in accordance with their original
terms amounted to approximately $168,100. The amount of interest included
in the results of operations on such loans for the year ended June 30, 1996
amounted to approximately $6,300.
Asset Classifications. The OTS has adopted regulations that require each
insured savings association to review and classify its assets on a regular
basis. In addition, in connection with examinations of insured institutions,
OTS examiners have authority to identify problem assets and, if appropriate,
require them to be classified. There are three classifications for problem
assets: substandard, doubtful and loss. Substandard assets must 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
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uncollectible and of such little value that its continuance as an asset of the
institution is not warranted. Assets classified as substandard or doubtful
require the institution to establish general allowances for these asset
losses. If an asset or portion thereof is classified loss, the insured
institution must either establish specific allowances for the portion of the
asset classified as loss in the amount of 100% of the portion of the asset
classified loss or charge off such amount. A portion of 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 generally do not qualify as regulatory capital.
At June 30, 1995 and 1996 the aggregate amounts of the Association's
classified assets, and of the Association's general and specific loss
allowances and charge-offs for the period then ended, were as follows:
At June 30,
1995 1996
(In thousands)
Doubtful $ -- $ --
Substandard assets -- --
Special mention 58 --
General loss allowances 318 319
Specific loss allowances -- --
Real Estate Owned. Real estate acquired by the Association as a result
of foreclosure or by deed in lieu of foreclosure is classified as real estate
owned until it is sold. When property is acquired it is recorded at the lower
of the cost or fair value. At June 30, 1996, the Association had no
properties classified as real estate owned.
Allowance for Loan Losses. It is management's policy to maintain
adequate allowances for estimated losses on known and inherent risks in the
loan portfolio. Generally, the allowances are based on, among other things,
the size and composition of the loan portfolio, historical loan loss
experience, evaluation of economic conditions in general and in various
sectors of the Association's customer base, detailed analysis of individual
loans for which collectibility may not be assured and determination of the
existence and realizable value of the collateral and guarantees securing the
loan.
The Association's management evaluates the need to establish an allowance
for loan losses based on a review of all loans for which full collectibility
may not be reasonably assured and considers, among other matters, the
estimated market value of the underlying collateral of problem loans, prior
loss experience, economic conditions and overall portfolio quality. These
provisions for losses are charged against income in the year they are
established.
The Association believes it has established its existing allowance for
loan losses in accordance with generally accepted accounting principles
("GAAP") as of June 30, 1996. However, there can be no assurance that
the loan portfolio in the future, will not require the Association to increase
its allowance for loan losses, thereby adversely affecting the financial
condition and earnings.
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<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated.
At June 30,
1994 1995 1996
% of % of % of
Loans Loans Loans
in Each in Each in Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
(Dollars in thousands)
Real estate --
mortgage:
Residential $ 51 98% $ 38 94% $ 37 92
Commercial 17 1 49 3 52 3
Construction 1 -- 12 1 16 2
Consumer 2 1 5 2 10 3
Unallocated 247 N/A 214 N/A 204 N/A
____ ___ ____ ___ ____ ___
Total allowance
for loan
losses $318 100% $318 100% $319 100%
==== === ==== === ==== ===
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<PAGE>
The following table sets forth an analysis of the Association's gross
allowance for possible loan losses for the periods indicated. Where specific
loan loss reserves have been established, any difference between the loss
reserve and the amount of loss realized has been charged or credited to
current income.
Year Ended June 30,
1992 1993 1994 1995 1996
(Dollars in thousands)
Allowance at
beginning of
period $ 155 $ 147 $ 278 $ 318 $ 318
_____ _____ _____ _____ ______
Provision for
loan losses 27 154 42 -- --
_____ _____ _____ _____ ______
Recoveries:
Residential real
estate -- -- -- -- 1
Commercial real
estate -- -- -- -- --
Consumer -- -- -- -- --
_____ _____ _____ _____ ______
Total recoveries -- -- -- -- 1
_____ _____ _____ _____ ______
Charge-offs:
Residential real
estate 27 23 2 -- --
Commercial real
estate -- -- -- -- --
Construction -- -- -- -- --
Consumer 8 -- -- -- --
_____ _____ _____ _____ ______
Total charge-offs 35 23 2 -- --
_____ _____ _____ _____ ______
Net charge-offs 35 23 2 -- (1)
_____ _____ _____ _____ ______
Balance at end of
period $ 147 $278 $ 318 $ 318 $ 319
===== ==== ===== ===== ======
Ratio of allowance to total
loans outstanding at the
end of the period 0.15% 0.15% 0.44% 0.39% 0.39%
Ratio of net charge-offs to
average loans outstanding
during the period 0.08 0.04 -- -- --
Investment Activities
Federally chartered savings institutions have authority to invest in
various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies and of state and municipal governments,
deposits at the FHLB, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Subject to
various restrictions, such savings institutions may also invest a portion of
their assets in commercial paper, corporate debt securities and mutual funds,
the assets of which conform to the investments that federally chartered
savings institutions are otherwise authorized to make directly. Savings
institutions are also required to maintain minimum levels of liquid assets
which vary from time to time. See "REGULATION -- Federal Regulation of
Savings Associations -- Federal Home Loan Bank System." The Association may
decide to increase its liquidity above the required levels depending upon the
availability of funds and comparative yields on investments in relation
to return on loans.
The Board of Directors sets the investment policy of the Association.
This policy dictates that investments will be made with the intent of holding
them to maturity and will be made based on the safety of the principal amount,
liquidity requirements of the Association and the return on the investments.
The Association's policy does not permit investment in non-investment grade
bonds. It permits investment in various types of liquid assets permissible
under OTS regulation, which include U.S. Treasury obligations, securities of
various federal agencies, certain certificates of deposits of insured banks,
repurchase agreements and federal funds.
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To supplement lending activities in periods of deposit growth, declining
loan demand or significant prepayments, the Association has invested in
residential mortgage-related securities. Although such securities are held
for investment, they can serve as collateral for borrowings and, through
repayments, as a source of liquidity. For information regarding the carrying
and market values of the Association's mortgage-related securities portfolio,
see Note 4 of the Notes to Consolidated Financial Statements contained in Item
7 hereof. The Association generally invests in mortgaged-backed securities
guaranteed by the FHLMC and the FNMA.
As of June 30, 1996, the Association's portfolio included $51.5 million
of mortgage-related securities purchased as investments to supplement the
Association's mortgage lending activities. All mortgage-related securities
are comprised of adjustable-rates. As of June 30, 1996, the Association owned
no collateralized mortgage obligations.
The Association also invests government bonds and agency securities
insured by a government-sponsored agency. Since 1989, the Association has
focused its investment activity on the purchase of short-term or adjustable-
rate instruments. Management intends to continue to concentrate investments
in adjustable rate products subject to adequate liquidity and investment
margins. As a result of this activity, as of June 30, 1996 over 97.5% of the
Association's mortgage-related investments, including portfolio single-family
loans, are adjustable in nature.
The Association's investment portfolio is an important component of the
Association's overall operations. The portfolio is segregated by the intended
holding period of a particular investment in accordance with the Association's
policy, GAAP and applicable federal regulations. As of June 30, 1996, all of
the Association's mortgage-related portfolio is classified as held to
maturity. The Association has also invested from time to time in assets
classified as available for sale. Such securities are generally adjustable
rate in nature or have relatively short maturities. All investments are
extensively monitored on a regular basis with current market valuation
reviewed at least quarterly. By internal policy the Association limits assets
available for sale to 15% of total assets and a stop loss limit of $250,000
applies to all assets in this category.
Investment decisions are approved by the Asset Liability Committee which
meets on a regular basis. The Asset Liability Committee acts within policies
established by the Board of Directors.
The following table sets forth the Association's investment securities
portfolio at carrying value at the dates indicated.
At June 30,
1994 1995 1996
Carrying Percent of Carrying Percent of Carrying Percent of
Value (1) Portfolio Value (1) Portfolio Value (1) Portfolio
(Dollars in Thousands)
Held to
maturity:
FNMA $45,648 59.55% $44,159 60.89% $32,838 60.13%
FHLMC 27,331 35.66 24,714 34.08 18,629 34.11
U.S. Government
treasury and
obligations
of U.S.
Government
agencies 2,494 3.25 2,498 3.44 2,000 3.66
Other 117 0.15 67 0.09 53 0.10
------- ------ ----- ---- ----- ----
Total held
to
maturity 75,590 98.62 71,439 98.51 53,520 98.00
Available for sale:
U.S. Government
treasury and
obligations of
U.S. Government
agencies 1,058 1.38 1,083 1.49 1,093 2.00
Other 3 -- -- -- -- --
------- ------- ------ ----- ------ -----
Total available
for sale 1,061 1.38 1,083 1.49 1,093 2.00
-------- ------- --------- ------ -------- -------
Total $76,651 100.00% $72,522 100.00% $54,613 100.00%
======== ========= ======= ======= ======= ========
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The table below sets forth certain information regarding the carrying
value, weighted average yields and maturities or periods to repricing of the
Savings Bank's investment and mortgage-backed securities at June 30, 1996.
Amount Due or Repricing within:
Over One to
One Year or Less Five Years
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
(Dollars in thousands)
Held to maturity:
FNMA $32,838 6.95% $ -- --%
FHLMC 17,352 6.86 1,277 5.23
U.S. Government treasury
and obligations of U.S.
Government agencies 2,000 4.78 -- --
Other 53 3.17 -- --
_______ ____ _______ ____
Total held to maturity 52,243 6.84 1,277 5.23
Available for sale:
U.S. Government treasury
and obligations of U.S.
Government agencies 1,093 4.58 $ -- --
_______ ____ _______ ____
Total available for sale 1,093 4.58 -- --
_______ ____ _______ ____
Total $53,336 6.79% $ 1,277 5.23%
======= ==== ======= ====
Deposit Activities and Other Sources of Funds
General. The Association's primary sources of funds are deposits, FHLB
advances, proceeds from principal and interest payments on loans and
mortgage-related securities and proceeds from loan sales. Deposits and loan
repayments are the major source of the Association's funds for lending and
other investment purposes. Loan repayments are a relatively stable source of
funds, while deposit inflows and outflows and loan prepayments are
significantly influenced by general level of 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, or on a longer
term basis for interest rate risk management.
Deposit Accounts. The Association's goal for savings activity is to
retain its current deposit base while attempting to reduce the overall cost of
the current deposit base. Any deposit growth is limited to not more than
interest credited or the total balance sheet projection in the Association's
original Capital Plan and the amount of interest credited as required under
the Supervisory Agreement. The Association offers a variety of deposit
accounts having a range of interest rates and terms. The Association's
deposits consist of passbook, money market, and certificate accounts. The
flow of deposits is influenced significantly by general economic conditions,
changes in the money market and prevailing interest rates, and competition.
The interest rates the Association pays on its deposits is determined at least
weekly and is based on market conditions. The Association relies primarily on
customer service and long-standing relationships with customers to attract and
retain these deposits. Individual certificate accounts in excess of $100,000
are not actively solicited by the Association or by any agent or broker acting
on behalf of the Association nor does the Association pay substantially higher
interest rates on such accounts.
In the unlikely event the Association is liquidated, depositors will be
entitled to full payment of their deposit accounts prior to any payment being
made to the shareholders. The majority of the Association's depositors are
residents of the State of Missouri.
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The following table sets forth information concerning the Association's
time deposits and other interest-bearing deposits at June 30, 1996.
Percentage
Interest Minimum of Total
Rate Term Category Amount Balance Deposits
(In thousands)
2.50% None NOW Accounts $100 $ 2,985 2.42%
4.40 None Money Market and
Super NOW Accounts 1,000 19,051 15.46
2.72 None Statement Christmas Club, 50, 20, 50 8,817 7.15
Passbook
Certificates of Deposit
2.72 90 Day 90-day passbook 500 -- --
5.14 4 - 6 Months Fixed term, fixed rate 500 10,609 8.61
5.30 7 -12 Months Fixed term, fixed rate 500 19,443 15.77
5.30 13 - 24 Months Fixed term, fixed rate 500 10,967 8.90
5.87 25 - 48 Months Fixed term, fixed rate 500 20,121 16.33
5.63 49 - 120 Months Fixed term, fixed rate 500 31,261 25.36
________ ______
$123,253 100.00%
========== =======
As of June 30, 1996, the Association did not have any "jumbo"certificates
of deposit (i.e., certificate of deposits with minimum balances of $100,000
and negotiable interest rates).
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<TABLE>
Deposit Flow. The following table sets forth the balances of savings deposits in the various types of
savings accounts offered by the Association at the dates indicated.
At June 30,
1994 1995 1996
Percent Percent Percent
of of Increase of Increase
Amount Total Amount Total (Decrease) Amount Total (Decrease)
(Dollars in thousands)
Non-interest-
bearing $ -- --% $ -- --% $ -- $ -- --% $ --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW checking 3,178 2.42 3,236 2.56 58 2,985 2.42 (251)
Regular
savings
accounts 11,751 8.66 10,395 8.22 (1,356) 8,817 7.15 (1,578)
Money market
deposit 20,385 15.50 18,564 14.68 (1,821) 19,051 15.46 487
Fixed-rate
certificates
which mature
in the year
ending:
Within 1
year 47,548 36.43 43,807 34.65 (3,741) 54,495 44.21 10,688
After 1 year,
but within
2 years 18,691 14.21 23,759 18.79 5,068 20,219 16.40 (3,540)
After 2 years,
but within
5 years 29,480 22.42 22,760 18.00 (6,720) 14,653 11.89 (8,107)
Certificates
maturing
thereafter 471 0.36 3,919 3.10 3,448 3,033 2.46 (886)
________ ______ ________ ______ _______ ________ ______ _______
Total $131,504 100.00% $126,440 100.00% $(5,064) $123,253 100.00% $(3,187)
======== ====== ======== ====== ======= ======== ====== =======
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The following table sets forth the savings activities of the Association
for the periods indicated.
Year Ended June 30,
1994 1995 1996
(In thousands)
Beginning balance $138,585 $131,504 $126,440
________ ________ ________
Net increase (decrease)
before interest
credited (13,219) (10,189) (8,275)
Interest credited 6,138 5,125 5,088
________ ________ ________
Net increase (decrease)
in savings deposits (7,081) (5,064) (3,187)
________ ________ ________
Ending balance $131,504 $126,440 $123,253
======== ======== ========
Time Deposits by Rates. The following table sets forth the time deposits
in the Association classified by rates as of the dates indicated.
June 30,
1994 1995 1996
(In thousands)
5.00% and below $56,679 $22,064 $ 6,256
5.01 - 6.00% 10,585 25,583 49,134
6.01 - 7.00% 12,032 32,519 26,750
7.01 - 11.00% 16,848 14,078 10,260
11.01 - 13.00% 46 -- --
_______ _______ _______
Total $96,190 $94,244 $92,400
======= ======= =======
The following table sets forth the amount and maturities of time deposits
at June 30, 1996.
Amount Due
Less Than 1-2 2-3 3-4 After
One Year Years Years Years 4 Years Total
(In thousands)
5.00% and below $ 5,677 $ 362 $ 217 $ -- $ -- $ 6,256
5.01 - 6.00% 32,454 9,663 4,858 937 1,222 49,134
6.01 - 7.00% 13,835 6,426 820 2,460 3,209 26,750
7.01 - 11.00% 2,529 3,768 2,537 619 807 10,260
_______ _______ ______ ______ ______ _______
Total $54,495 $20,219 $8,432 $4,016 $5,238 $92,400
======= ======= ====== ====== ====== =======
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Borrowings. Savings deposits are the primary source of funds for the
Association's lending and investment activities and for its general business
purposes. The Association has in the past, however, relied upon advances from
the FHLB-Des Moines to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. The FHLB-Des Moines has served as one of the
Association's primary borrowing sources. Advances from the FHLB- Des Moines
are typically secured by the Association's mortgage-backed securities which is
held by the Association. At June 30, 1996, the Association had $7.0 million
in advances from the FHLB-Des Moines.
The FHLB functions as a central reserve bank providing credit for savings
and loan associations and certain other member financial institutions. As a
member, the Association is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its mortgage loans and other assets (principally securities which are
obligations of, or guaranteed by, the United States) provided certain
standards related to creditworthiness have been met. Advances are made
pursuant to several different programs. Each credit program has its own
interest rate and range of maturities. Depending on the program, limitations
on the amount of advances are based either on a fixed percentage of an
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness. The FHLB-Des Moines determines specific lines of credit for
each member institution.
The following table sets forth certain information regarding borrowed
funds for the dates indicated:
At or For the Year
Ended June 30,
1994 1995 1996
(Dollars in thousands)
FHLB-Des Moines advances:
Average balance outstanding $9,471 $16,150 $13,483
Maximum amount outstanding
at any month end during
the period 11,000 21,850 21,450
Balance outstanding at end
of period 10,450 21,850 7,000
Weighted average interest
rate during the period 6.77% 6.48% 5.44%
Weighted average interest
rate at the end of period 5.42 6.26 6.11
Subsidiaries
Sentinel Insurance Agency, Inc. ("Sentinel Insurance") is the
wholly-owned subsidiary of Sentinel Federal. As of June 30, 1996, Sentinel
Federal's equity investment in the subsidiary was approximately $5,000.
Currently, the only activity of Sentinel Insurance is the sale of tax deferred
annuities. Sentinel Insurance sold its remaining book of property and
casualty insurance during fiscal 1993, which represented an insignificant
portion of its insurance operations. For the years ended June 30, 1994, 1995
and 1996 sales of annuities resulted in additional income from insurance
commissions of $163,000, $101,000 and $39,000, respectively.
Claywood Financial Services, Sentinel Federal's other wholly-owned
subsidiary, is inactive.
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REGULATION
General
The Association is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the HOLA and, in certain respects, the Federal Deposit Insurance Act
("FDIA") and the regulations issued by the OTS and the FDIC to implement these
statutes. These laws and regulations delineate the nature and extent of the
activities in which federal savings associations may engage. Lending
activities and other investments must comply with various statutory and
regulatory capital requirements. In addition, the Association's relationship
with its depositors and borrowers is also regulated to a great extent,
especially in such matters as the ownership of deposit accounts and the form
and content of the Association's mortgage documents. The Association must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other financial
institutions. There are periodic examinations by the OTS and the FDIC to
review the Association's compliance with various regulatory requirements. The
regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such policies, whether by the OTS, the FDIC or
Congress, could have a material adverse impact on the Company, the Association
and their operations. The Company, as a savings and loan holding company, is
also required to file certain reports with, and otherwise comply with the
rules and regulations of, the OTS.
Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the Department of
the Treasury subject to the general oversight of the Secretary of the
Treasury. The OTS generally possesses the supervisory and regulatory duties
and responsibilities formerly vested in the Federal Home Loan Bank Board.
Among other functions, the OTS issues and enforces regulations affecting
federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12 FHLBs,
is under the jurisdiction of the Federal Housing Finance Board ("FHFB"). The
designated duties of the FHFB are to supervise the FHLBs, to ensure that the
FHLBs carry out their housing finance mission, to ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets, and to
ensure that the FHLBs operate in a safe and sound manner.
The Association, as a member of the FHLB-Des Moines, is required to
acquire and hold shares of capital stock in the FHLB-Des Moines in an amount
equal to the greater of (i) 1.0% of the aggregate outstanding principal amount
of residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each year, or (ii) 1/20 of its advances (borrowings) from
the FHLB-Des Moines. The Association is in compliance with this requirement
with an investment in FHLB-Des Moines stock of $1.9 million at June 30, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Des Moines.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency established originally to insure the deposits, up to prescribed
statutory limits, of federally insured banks and to preserve the safety and
soundness of the banking industry. In 1989 the FDIC also became the insurer,
up to the prescribed limits, of the deposit accounts held at federally insured
savings associations and established two separate insurance funds: the BIF and
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the SAIF. As insurer of deposits, the FDIC has examination, supervisory and
enforcement authority over all savings associations.
The Association's accounts are insured by the SAIF. The FDIC insures
deposits at the Association to the maximum extent permitted by law. The
Association currently pays deposit insurance premiums to the FDIC based on a
risk-based assessment system established by the FDIC for all SAIF-member
institutions. Under applicable regulations, institutions are assigned to one
of three capital groups that 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, 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
currently ranging from .23% for well capitalized, financially sound
institutions with only a few minor weaknesses to .31% for undercapitalized
institutions that pose a substantial risk of loss to the SAIF unless effective
corrective action is taken. Until the second half of 1995, the same matrix
applied to BIF-member institutions. The FDIC is authorized to raise
assessment rates in certain circumstances. The Association's assessments
expensed for the year ended June 30, 1996, totalled $367,000.
Effective January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the BIF. Under the new assessment schedule, rates were
reduced to a range of 0 to 27 basis points, with approximately 92% of BIF
members paying the statutory minimum annual assessment rate of $2,000. With
respect to SAIF member institutions, the FDIC has retained the existing rate
schedule of 23 to 31 basis points. The Association is a member of the SAIF
rather than the BIF.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged
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 termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Association.
Liquidity Requirements. Under OTS regulations, each savings institution
is required to maintain an average daily balance of liquid assets (cash,
certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 5.0%) of its net withdrawable accounts plus short-term
borrowings. OTS regulations also require each savings institution to maintain
an average daily balance of short-term liquid assets at a specified percentage
(currently 1.0%) of the total of its net withdrawable savings accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet liquidity requirements.
Prompt Corrective Action. Under the FDIA, each federal banking agency is
required to implement asystem of prompt corrective action for institutions
that it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to
be (i) "well capitalized" if it has a total risk-based capital ratio of 10.0%
or more, has a Tier I risk-based capital ratio of 6.0% or more, has a leverage
ratio of 5.0% or more and is not subject to specified requirements 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 I risk-based capital ratio of 4.0% or more and a leverage 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 I risk-based capital ratio that
is less than 4.0% or a leverage 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 I risk-based
23
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capital ratio that is less than 3.0% or a leverage 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%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next lower
category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity.
(The OTS may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.)
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the 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. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory and
discretionary restrictions on its operations.
At June 30, 1996, the Association was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the
federal banking regulatory agencies to prescribe, by regulation, standards for
all insured depository institutions relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and
(vi) compensation, fees and benefits. The federal banking agencies adopted
regulations and Interagency Guidelines Prescribing Standards for Safety and
Soundness ("Guidelines") to implement safety and soundness standards required
by the FDIA. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The agencies also
proposed asset quality and earnings standards which, if adopted in final,
would be added to the Guidelines. If the OTS determines that the Association
fails to meet any standard prescribed by the Guidelines, the agency may
require the Association to submit to the agency an acceptable plan to achieve
compliance with the standard, as required by the FDIA. OTS regulations
establish deadlines for the submission and review of such safety and soundness
compliance plans.
Qualified Thrift Lender Test. All savings associations are required to
meet a qualified thrift lender ("QTL") test to avoid certain restrictions on
their operations. A savings institution that fails to become or remain a QTL
shall either become a national bank or be subject to the following
restrictions on its operations: (i) the association may not make any new
investment or engage in activities that would not be permissible for national
banks; (ii) the association may not establish any new branch office where a
national bank located in the savings institution's home state would not be
able to establish a branch office; (iii) the association shall be ineligible
to obtain new advances from any FHLB; and (iv) the payment of dividends by the
association shall be subject to the rules regarding the statutory and
regulatory dividend restrictions applicable to national banks. Also,
beginning three years after the date on which the savings institution ceases
to be a QTL, the savings institution would be prohibited from retaining any
investment or engaging in any activity not permissible for a national bank and
would be required to repay any outstanding advances to any FHLB. In addition,
within one year of the date on which a savings association controlled by a
company ceases to be a QTL, the company must register as a bank holding
company and become subject to the rules applicable to such companies. A
savings institution may requalify as a QTL if it thereafter complies with the
QTL test.
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); FHLB stock; and direct
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or 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 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 June 30, 1996, the qualified thrift
investments of the Association were approximately 96.0% of its portfolio
assets.
Capital Requirements. Under OTS regulations a savings association must
satisfy three minimum capitalrequirements: core capital, tangible capital and
risk-based capital. Savings associations must meet all of the standards in
order to comply with the capital requirements. The Company is not subject to
any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage ratio
(defined as the ratio of core capital to adjusted total assets). Core capital
is defined to include common stockholders' equity, noncumulative perpetual
preferred stock and any related surplus, and minority interests in equity
accounts of consolidated subsidiaries, less (i) any intangible assets, except
for certain qualifying intangible assets; (ii) certain mortgage servicing
rights; and (iii) equity and debt investments in subsidiaries that are not
"includable subsidiaries," which is defined as subsidiaries engaged solely in
activities not impermissible for a national bank, engaged in activities
impermissible for a national bank but only as an agent for its customers, or
engaged solely in mortgage-banking activities. In calculating adjusted total
assets, adjustments are made to total assets to give effect to the exclusion
of certain assets from capital and to account appropriately for the
investments in and assets of both includable and nonincludable subsidiaries.
Institutions that fail to meet the core capital requirement would be required
to file with the OTS a capital plan that details the steps they will take to
reach compliance. In addition, the OTS's prompt corrective action regulation
provides that a savings institution that has a leverage ratio of less than 4%
(3% for institutions receiving the highest CAMEL examination rating) will be
deemed to be "undercapitalized" and may be subject to certain restrictions.
See "-- Federal Regulation of Savings Associations -- Prompt Corrective
Action."
As required by federal law, the OTS has proposed a rule revising its
minimum core capital requirement to be no less stringent than that imposed on
national banks. The OTS has proposed that only those savings associations
rated a composite one (the highest rating) under the CAMEL rating system for
savings associations will be permitted to operate at or near the regulatory
minimum leverage ratio of 3%. All other savings associations will be required
to maintain a minimum leverage ratio of 4% to 5%. The OTS will assess each
individual savings association through the supervisory process on a
case-by-case basis to determine the applicable requirement. No assurance can
be given as to the final form of any such regulation, the date of its
effectiveness or the requirement applicable to the Association.
Savings associations also must maintain "tangible capital" not less than
1.5% of the Association's adjusted total assets. "Tangible capital" is
defined, generally, as core capital minus any "intangible assets" other than
purchased mortgage servicing rights.
Each savings institution must maintain total risk-based capital equal to
at least 8% of risk-weighted assets. Total risk-based capital consists of the
sum of core and supplementary capital, provided that supplementary capital
cannot exceed core capital, as previously defined. Supplementary capital
includes (i) permanent capital instruments such as cumulative perpetual
preferred stock, perpetual subordinated debt and mandatory convertible
subordinated debt, (ii) maturing capital instruments such as subordinated
debt, intermediate-term preferred stock and mandatory convertible subordinated
debt, subject to an amortization schedule, and (iii) general valuation loan
and lease loss allowances up to 1.25% of risk-weighted assets.
The risk-based capital regulation assigns each balance sheet asset held
by a savings institution to one of four risk categories based on the amount of
credit risk associated with that particular class of assets. Assets not
included for purposes of calculating capital are not included in calculating
risk-weighted assets. The categories range from 0% for cash and securities
that are backed by the full faith and credit of the U.S. Government to 100%
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for repossessed assets or assets more than 90 days past due. Qualifying
residential mortgage loans (including multi-family mortgage loans) are
assigned a 50% risk weight. Consumer, commercial, home equity and residential
construction loans are assigned a 100% risk weight, as are nonqualifying
residential mortgage loans and that portion of land loans and nonresidential
construction loans that do not exceed an 80% loan-to-value ratio. The book
value of assets in each category is multiplied by the weighing factor (from 0%
to 100%) assigned to that category. These products are then totalled to
arrive at total risk-weighted assets. Off-balance sheet items are included in
risk-weighted assets by converting them to an approximate balance sheet
"credit equivalent amount" based on a conversion schedule. These credit
equivalent amounts are then assigned to risk categories in the same manner as
balance sheet assets and included risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200 basis point increase or
decrease in market interest rates divided by the estimated economic value of
the association's assets, as calculated in accordance with guidelines set
forth by the OTS. A savings association whose measured interest rate risk
exposure exceeds 2% must deduct an interest rate risk component in calculating
its total capital under the risk-based capital rule. The interest rate risk
component is an amount equal to one-half of the difference between the
institution's measured interest rate risk and 2%, multiplied by the estimated
economic value of the association's assets. That dollar amount is deducted
from an association's total capital in calculating compliance with its
risk-based capital requirement. Under the rule, there is a two quarter lag
between the reporting date of an institution's financial data and the
effective date for the new capital requirement based on that data. A savings
association with assets of less than $300 million and risk-based capital
ratios in excess of 12% is not subject to the interest rate risk component,
unless the OTS determines otherwise. The rule also provides that the Director
of the OTS may waive or defer an association's interest rate risk component on
a case-by-case basis. Under certain circumstances, a savings association may
request an adjustment to its interest rate risk component if it believes that
the OTS-calculated interest rate risk component overstates its interest rate
risk exposure. In addition, certain "well-capitalized" institutions may
obtain authorization to use their own interest rate risk model to calculate
their interest rate risk component in lieu of the OTS-calculated amount. The
OTS has postponed the date that the component will first be deducted from an
institution's total capital until savings associations become familiar with
the process for requesting an adjustment to its interest rate risk component.
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The following table presents the Association's capital levels as of
June 30, 1996.
At June 30, 1996
Percent of
Amount Assets
(Dollars in thousands)
Tangible capital $11,144 7.73%
Minimum required
tangible capital 2,161 1.50
_______ _____
Excess $ 8,983 6.23%
======= =====
Core capital $11,144 7.73%
Minimum required core
capital 4,323 3.00
_______ _____
Excess $ 6,821 4.73%
======= =====
Risk-based capital $11,463 20.52%
Minimum risk-based
capital requirement 4,469 8.00
_______ _____
Excess $ 6,994 12.52%
======= =====
Limitations on Capital Distributions. OTS regulations impose uniform
limitations on the ability of all savings associations to engage in various
distributions of capital such as dividends, stock repurchases and cash-out
mergers. In addition, OTS regulations require the Association to give the OTS
30 days' advance notice of any proposed declaration of dividends, and the OTS
has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully phased-in
capital requirement (both before and after the proposed capital distribution).
Tier 1 savings association may make (without application but upon prior notice
to, and no objection made by, the OTS) capital distributions during a calendar
year up to 100% of its net income to date during the calendar year plus
one-half its surplus capital ratio (i.e., the amount of capital in excess of
its fully phased-in requirement) at the beginning of the calendar year or the
amount authorized for a Tier 2 association. Capital distributions in excess
of such amount require advance notice to the OTS. A Tier 2 savings
association has capital equal to or in excess of its minimum capital
requirement but below its fully phased-in capital requirement (both before and
after the proposed capital distribution). Such an association may make
(without application) capital distributions up to an amount equal to 75% of
its net income during the previous four quarters depending on how close the
association is to meeting its fully phased-in capital requirement. Capital
distributions exceeding this amount require prior OTS approval. Tier 3
associations are savings associations with capital below the minimum capital
requirement (either before or after the proposed capital distribution). Tier
3 associations may not make any capital distributions without prior approval
from the OTS.
The Association is currently meeting the criteria to be designated a Tier
1 association and, consequently, could at its option (after prior notice to,
and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the
beginning of the calendar year less any distributions previously paid during
the year.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Association's unimpaired capital and
surplus, plus an additional 10% of unimpaired capital and surplus, if such
loan is secured by readily-marketable collateral, which is defined to include
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certain financial instruments and bullion. The OTS by regulation has amended
the loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At June 30, 1996, the
Association's limit on loans to one borrower was $1.8 million. At June 30,
1996, the Association's largest aggregate amount of loans to one borrower was
$1.1 million.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings associations
also must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings association of
its ownership control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the association or is
inconsistent with sound banking practices or with the purposes of the FDIA.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings association to divest itself of control of the subsidiary. The
FDIC also may determine by regulation or order that any specific activity
poses a serious threat to the SAIF. If so, it may require that no SAIF member
engage in that activity directly.
Transactions with Affiliates. Savings associations must comply with
Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company under
common control are considered affiliates of the subsidiary savings association
under the HOLA. Generally, Sections 23A and 23B: (i) limit the extent to
which the insured association or its subsidiaries may engage in certain
covered transactions with an affiliate to an amount equal to 10% of such
institution's capital and surplus and place an aggregate limit on all such
transactions with affiliates to an amount equal to 20% of such capital 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, the purchase of assets, the issuance of a guarantee and
similar types of transactions.
Three additional rules apply to savings associations: (i) a savings
association may not make any loan or other extension of credit to an affiliate
unless that affiliate is engaged only in activities permissible for bank
holding companies; (ii) a savings association may not purchase or invest in
securities issued by an affiliate (other than securities of a subsidiary); and
(iii) the OTS may, for reasons of safety and soundness, impose more stringent
restrictions on savings associations but may not exempt transactions from or
otherwise abridge Section 23A or 23B. Exemptions from Section 23A or 23B may
be granted only by the Federal Reserve Board, as is currently the case with
respect to all FDIC-insured banks. The Association has not been significantly
affected by the rules regarding transactions with affiliates.
The Association's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the Federal
Reserve Act, and Regulation O thereunder. Among other things, these
regulations require that such loans be made on terms and conditions
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Association may
make to such persons based, in part, on the Association's capital position,
and requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
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Savings and Loan Holding Company Regulation
General. Sentinel Financial is a unitary savings and loan holding
company within the meaning of the HOLA. As such, the Company is registered
with the OTS and subject to OTS regulations, examinations, supervision and
reporting requirements. The Company is required to file certain reports with,
and otherwise comply with the regulations of, the OTS and the Securities and
Exchange Commission ("SEC"). As a subsidiary of a savings and loan holding
company, the Association is subject to certain restrictions in its dealings
with the Company and with other companies affiliated with the Company and also
are subject to regulatory requirements and provisions as federal institutions.
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved
by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions. If
the Company acquires control of another savings association as a separate
subsidiary other than in a supervisory acquisition, it would become a multiple
savings and loan holding company. There generally are more restrictions on
the activities of a multiple savings and loan holding company than on those of
a unitary savings and loan holding company. The HOLA provides that, among
other things, no multiple savings and loan holding company or subsidiary
thereof which is not an insured association shall commence or continue for
more than two years after becoming a multiple savings and loan association
holding company or subsidiary thereof, any business activity other than: (i)
furnishing or performing management services for a subsidiary insured
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a
subsidiary insured institution, (iv) holding or managing properties used or
occupied by a subsidiary insured institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by
regulation as of March 5, 1987 to be engaged in by multiple holding companies
or (vii) those activities authorized by the Federal Reserve Board as
permissible for bank holding companies, unless the OTS by regulation,
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above also must be approved by the OTS
prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The HOLA requires any savings and loan
holding company that controls a savings association that fails the QTL test,
as explained under "-- Federal Regulation of Savings Associations -- Qualified
Thrift Lender Test," must, within one year after the date on which the
association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. The Company and the Association report their income on a fiscal
year basis using the accrual method of accounting and will be subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Association's reserve for bad debts
discussed below. The following discussion of tax matters is intended only as
a summary and does not purport to be a comprehensive description of the tax
rules applicable to the Association or the Company.
Tax Bad Debt Reserves. For taxable years beginning prior to January 1,
1996, savings institutions such as the Association which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
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debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Association's deduction with respect to "qualifying loans," which
are generally loans secured by certain interests in real property, may have
been computed using an amount based on the Association's actual loss
experience, or a percentage equal to 8% of the Association's taxable income,
computed with certain modifications and reduced by the amount of any permitted
additions to the nonqualifying reserve. The Association's deduction with
respect to nonqualifying loans was computed under the experience method, which
essentially allows a deduction based on the Association's actual loss
experience over a period of several years. Each year the Association selected
the most favorable way to calculate the deduction attributable to an addition
to the tax bad debt reserve. The Association used the percentage method bad
debt deduction for the taxable years ended December 31, 1995, 1994 and 1993.
However, the use of the percentage method for the taxable year ended December
31, 1995 resulted in no bad debt deduction because of other limitations in the
computation.
Recently enacted legislation repealed the reserve method of accounting
for bad debt reserves for tax years beginning after December 31, 1995. As
result, savings associations will no longer be able to calculate their
deduction for bad debts using the percentage-of-taxable-income method.
Instead, savings associations will be required to compute their deduction
based on specific charge-offs during the taxable year or, if the savings
association or its controlled group had assets of less than $500 million,
based on actual loss experience over a period of years. This legislation also
requires savings associations to recapture into income over a six-year period
their post- 1987 additions to their bad debt tax reserves, thereby generating
additional tax liability. At June 30, 1996, the Association's post-1987
reserves totalled approximately $61,000. The recapture may be suspended for
up to two years if, during those years, the institution satisfies a
residential loan requirement. The Association anticipates that it will meet
the residential loan requirement for the taxable year ending December 31,
1996.
Under prior law, if the Association failed to satisfy the qualifying
thrift definitional tests in any taxable year, it would be unable to make
additions to its bad debt reserve. Instead, the Association would be required
to deduct bad debts as they occur and would additionally be required to
recapture its bad debt reserve deductions ratably over a multi-year period.
At June 30, 1996, the Association's total bad debt reserve for tax purposes
was approximately $1.9 million. Among other things, the qualifying thrift
definitional tests required the Association to hold at least 60% of its assets
as "qualifying assets." Qualifying assets generally include cash, obligations
of the United States or any agency or instrumentality thereof, certain
obligations of a state or political subdivision thereof, loans secured by
interests in improved residential real property or by savings accounts,
student loans and property used by the Association in the conduct of its
banking business. Under current law, a savings association will not be
required to recapture its pre-1988 bad debt reserves if it ceases to meet the
qualifying thrift definitional tests.
Distributions. To the extent that the Association makes "nondividend
distributions" to the Company that are considered as made: (i) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount distributed
will be included in the Association's taxable income. Nondividend
distributions include distributions in excess of the Association's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However, dividends paid out
of the Association's current or accumulated earnings and profits, as
calculated for federal income tax purposes, will not be considered to result
in a distribution from the Association's bad debt reserve. Thus, any
dividends to the Company that would reduce amounts appropriated to the
Association's bad debt reserve and deducted for federal income tax purposes
would create a tax liability for the Association. The amount of additional
taxable income attributable to an Excess Distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, the Association makes a "nondividend distribution,"
then approximately one and one-half times the amount so used would be
includable in gross income for federal income tax purposes, assuming a 35%
corporate income tax rate (exclusive of state and local taxes). See
"REGULATION" for limits on the payment of dividends by the Association. The
Association does not intend to pay dividends that would result in a recapture
of any portion of its tax bad debt reserve.
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Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the tax bad
debt reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. In addition,
only 90% of AMTI can be offset by net operating loss carryovers. AMTI is
increased by an amount equal to 75% of the amount by which the Association's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Association,
whether or not an Alternative Minimum Tax ("AMT") is paid.
Dividends-Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Association as a member of
the same affiliated group of corporations. The corporate dividends-received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Association will not file a
consolidated tax return, except that if the Company or the Association owns
more than 20% of the stock of a corporation distributing a dividend, then 80%
of any dividends received may be deducted.
Other Federal Tax Matters. Other recent changes in the federal tax
system could also affect the business of the Association. These changes
include limitations on the deduction of personal interest paid or accrued by
individual taxpayers, limitations on the deductibility of losses attributable
to investment in certain passive activities and limitations on the
deductibility of contributions to individual retirement accounts. The
Association does not believe these changes will have a material effect on its
operations.
There have not been any Internal Revenue Service audits of the
Association's Federal income tax returns or audits of the Association's state
income tax returns during the past five years.
Missouri Taxation
Missouri-based thrift institutions, such as the Association, are subject
to a special financial institutions tax, based on net income without regard to
net operating loss carryforwards, at the rate of 7% of net income. This tax
is in lieu of certain other state taxes on thrift institutions, on their
property, capital or income, except taxes on tangible personal property owned
by the Association and held for lease or rental to others and on real estate,
contributions paid pursuant to the Unemployment Compensation Law of Missouri,
social security taxes, sales taxes and use taxes. In addition, Sentinel
Federal is entitled to credit against this tax all taxes paid to the State of
Missouri or any political subdivision except taxes on tangible personal
property owned by the Association and held for lease or rental to others and
on real estate, contributions paid pursuant to the Unemployment Compensation
Law of Missouri, social security taxes, sales and use taxes, and taxes imposed
by the Missouri Financial Institutions Tax Law. Missouri thrift institutions
are not subject to the regular state corporate income tax.
The Association, along with several other savings and loans located in
the State of Missouri, challenged the constitutionality of the state
intangible tax as applied to savings and loans. In 1981, the Missouri Supreme
Court upheld the Association's prior claim to refund the state intangible
taxes paid to the state. The Supreme Court's decision paved the way for the
Association to pursue reimbursement of the taxes previously paid totalling
approximately $523,500 including accrued interest on the remaining balance due
from the state. Beginning in the 1987 tax year, the Association utilized an
offset against state taxes due to reduce the Association's total claim.
According to management, substantially all the offset amount has been utilized
and an estimated total offset of approximately $8,000 remains for future use.
For additional information regarding taxation, see Note 11 of Notes to
Consolidated Financial Statements contained in Item 7 hereof.
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Competition
The Association competes for both loans and deposits. The Kansas City
area has a high density of financial institutions, some of which are larger
and have greater financial resources than the Association, and all of which
are competitors of the Association to varying degrees. The Association faces
significant competition both in making mortgage loans and attracting deposits.
The Association's competition for loans comes principally from savings and
loan associations, savings banks, mortgage banking companies, insurance
companies, and commercial banks. Its most direct competition for deposits has
historically come from savings and loan associations, commercial banks, and
credit unions. The Association faces additional competition for deposits from
short-term money market funds and other corporate and government securities.
Personnel
As of June 30, 1996, the Association had 32 full-time employees and 1
part-time employees. The Association believes that employees play a vital
role in the success of a service company and that the Association's
relationship with its employees is good. The employees are not represented by
a collective bargaining unit.
Item 2. Description of Property
The Association's main office is owned by the Association and is located
at 1001 Walnut Street, Kansas City, Missouri 64106. The Association has one
branch office in North Kansas City, Missouri, which is leased. The lease
expires in December 31, 1997. At June 30, 1996, the net book value of the
Association's property, fixtures, furniture and equipment was $363,000.
Item 3. Legal Proceedings
Periodically, there have been various claims and lawsuits involving the
Association as a defendant, such as claims to enforce liens, condemnation
proceedings on properties in which the Association holds security interests,
claims involving the making and servicing of real property loans and other
issues incident to the Association's business. In the opinion of management
and the Association's legal counsel, no significant loss is expected from any
of such pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1996.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's voting common stock is not regularly or actively traded in
any established market, and there are no regularly quoted bid and asked prices
for such stock. Because there is no established market for the common stock,
reliable information is not readily available regarding recent prices for
transactions in such stock. As of September 24, 1996, there were 253
stockholders of record as evidenced by the number of stock certificates which
have been issued, and 513,423 shares issued and outstanding.
The Company has never paid dividends on its common stock. The payment of
cash dividends by the Company is dependent primarily on the ability of the
Association to pay dividends to the Company. Under Federal regulations, the
dollar amount of dividends a federal savings association may pay is dependent
upon the association's capital surplus position and recent net income.
Generally, if an association satisfies its regulatory capital requirements, it
may make dividend payments up to the limits prescribed in the OTS regulations.
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However, institutions that have converted to the stock form of ownership may
not declare or pay a dividend on, or repurchase any of, its common stock if
the effect thereof would cause the regulatory capital of the institution to be
reduced below the amount required for the liquidation account which was
established in accordance with OTS regulations and the Association's Plan of
Conversion. In addition, earnings of the Association appropriated to bad debt
reserves and deducted for federal income tax purposes are not available for
payment of cash dividends without payment of taxes at the then current tax
rate by the Association on the amount removed from the reserves for such
distributions. The Association does not contemplate any distribution that
would limit the Association's bad debt deduction or create federal tax
liabilities.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operation
General
Management's discussion and analysis of results of operations is intended
to assist in understanding the financial condition and results of operations
of the Company. The information contained in this section should be read in
conjunction with the Consolidated Financial Statements and the accompanying
Notes to Consolidated Financial Statements contained in Item 7 hereof.
Operating Strategy
The primary goal of management is to enhance operations through increased
profitability, while minimizing risk factors. The Company's results of
operations are dependent primarily on net interest income, which is the
difference between the income earned on its interest-earning assets, such as
loans and investments, and the cost of its interest-bearing liabilities,
consisting of deposits and borrowings. The Company's net income is also
affected by, among other items, fee income, insurance commissions, provisions
for loan losses and operating expenses. The Company's results of operations
are also significantly impacted by general economic and competitive
conditions, particularly changes in market interest rates, government policies
and local housing activity.
In guiding the operations of Sentinel, the Company's management has
implemented various strategies designed to continue its profitability while
maintaining the safety and soundness of the Company. These strategies
include: (i) emphasizing increased production of one - to - four family
loans; (ii) controlling operating expenses; and (iii) improving customer
service. Historically, Sentinel has been predominately a one - to - four
family lender. As such, it has developed expertise in mortgage loan
underwriting and origination. Sentinel has established methods to expand its
loan origination through contacts with realtors, and past and present
customers. The Company also uses advertising and community involvement to
gain exposure within the communities it operates. Sentinel emphasizes the
origination of adjustable rate mortgage ("ARM") and fixed rate loans. Loan
originations are primarily concentrated in the Company's local community.
At June 30, 1996, Sentinel's ratio of non-performing assets to total
assets was 0.12%. Sentinel continues to remain focused on maintaining
acceptable asset quality through sound underwriting and effective collection
procedures.
Managing the Balance Sheet. Historically, Sentinel has sought to
maintain a stable growth pattern. Since 1989, and the implementation of the
Supervisory Agreement, growth has been significantly restricted. As a result,
the Company incurred shrinkage of total assets between June 30, 1988 and June
30, 1996 of 15.5%. This lack of asset growth coupled with improved earnings
and the January 7, 1994 stock conversion has allowed total capital to increase
from 1.51% to 7.73% of total assets as of June 30, 1996.
Controlling Operating Expenses. The Company monitors its operating
expenses and seeks to control them while maintaining the necessary personnel
to service its customers through its two office locations. Historically,
operating expenses have been kept at or below 1.70% of average assets. During
the period ending June 30, 1996 non-interest expenses averaged 2.19% of
average assets.
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Managing Interest-Rate Risk. In order to reduce the impact of
fluctuating interest rates on the Company's net interest income, Sentinel's
management utilizes several techniques. These techniques include (i)
emphasizing the origination of adjustable rate loans; (ii) maintaining a
short-term investment portfolio; (iii) investing primarily in adjustable rate
mortgage-related securities; and (iv) lengthening deposit maturities when
warranted.
This business strategy is consistent with an operating philosophy that
includes: (i) increasing lending department production and efficiency; (ii)
increasing market share; (iii) and improving customer services; and (iv)
improving the Company's retail marketing strategy.
Comparison of Financial Condition at June 30, 1995 and 1996
Total assets decreased $18.1 million from $161.9 million at June 30, 1995
to $143.8 million at June 30, 1996. The Company's asset size primarily
reflects management's focus on mortgage loan production and managed reduction
in the mortgage-backed securities portfolio. The Company's net loans
receivable increased $1.7 million from $81.0 million at June 30, 1995 to $82.7
million at June 30, 1996. During this period, mortgage-related securities
decreased $17.4 million.
Total deposits declined moderately during fiscal year 1996 when compared
with June 30, 1995. At June 30, 1995, total deposits were $126.4 million
compared to $123.3 million at June 30, 1996. This reduction was primarily the
result of management's efforts to reduce the overall cost of deposits, and
capital growth during the period. During fiscal 1996, total account
withdrawals exceeded deposits by $8.3 million. Approximately $5.1 million of
interest was credited to accounts resulting in a net decrease of $3.2 million
in total deposits. Advance balances from the Federal Home Loan Bank ("FHLB")
decreased from $21.9 million at June 30, 1995 to $7.0 million at June 30,
1996.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1995 and
1996
General. Net income for the fiscal year ended June 30, 1996 was $928,000
compared with $630,000 for fiscal year 1995, representing a 47.3% increase.
The increase was primarily attributable to an income tax benefit relating to
the treatment of net operating loss carry forwards, recorded during the third
quarter. Non-interest expense increased $749,000, or 28.7%, during the year
ended June 30, 1996. The increase in non-interest expense was the result of
several unusual items, including merger related expenses, litigation expenses,
and the recording of a loss reflecting the difference between the amortized
cost and the current fair market value of the Company's downtown office
building.
Net Interest Income. Net interest income increased $399,000 to $3.5
million for the year ended June 30, 1996, compared with $3.1 million for
fiscal 1995. The increase in net interest income reflects an increase in the
Company's net interest margin from 1.98% for the year ended June 30, 1995 to
2.28% for the year ended June 30, 1996. The increase in net interest income
is primarily the result of two areas of operations. First, yields on
adjustable-rate loans and mortgage-related securities repriced upward during
the period. Second, a portion of the Company's higher costing longer-term
certificates of deposits matured while the overall deposit mix shifted away
from long-term certificates to intermediate- and shorter-term certificates of
deposit, slowing the overall rise in interest expense.
Interest Income. Interest income for the year ended June 30, 1996 was
$11.0 million compared with $10.4 million for fiscal 1995, representing an
increase of $600,000, or 5.6%. The average yield on interest-earning assets
increased from 6.69% for the year ended June 30, 1995 to 7.23% for fiscal
year 1996. Net loans receivable increased $1.7 million for the year ended
June 30, 1996 as a result of higher origination levels. Portfolio loan
repayments increased from $8.5 million during fiscal year ended June 30, 1995
to $16.0 million during the year ended June 30, 1996. During these same
periods total loan production increased significantly, while portfolio loan
production rose slightly from $17.6 million during the year ended June 30,
1995 to $17.8 million for the year ended June 30, 1996.
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Interest on mortgage-related securities decreased $271,000, or 6.5%, as a
result of a significant decline in the overall balance of the portfolio. The
balance of mortgage-related securities declined from $68.9 million as of June
30, 1995 to $51.5 million as of June 30, 1996. During the fiscal year ended
June 30, 1996 no additional mortgage-related securities were purchased by the
Company.
Income from the investment portfolio decreased $177,000, or 56.9%, from
$312,000 in fiscal 1995 to $134,000 in fiscal 1996 primarily due to the
maturity of a portion of the portfolio.
Interest Expense. Interest expense increased $183,000, or 2.5%, for the
year ended June 30, 1996, compared with fiscal 1995. The increase was the net
effect of a decline in interest expense relating to FHLB advances and a rise
in interest expense relating to savings and certificate accounts. Average
interest-bearing liabilities were $138.8 million for the year ended June 30,
1996 compared with $144.7 million for fiscal 1995. The average rate paid
increased from 5.07% in the year ended June 30, 1995 to 5.42% in the year
ended June 30, 1996. The rise in interest expense was less than the increase
in interest income due to the Company's efforts to reduce deposit costs and
the increased use of intermediate-term certificates of deposit and shorter
term FHLB advances.
Provisions for Loan Losses. Provisions for loan losses are charged to
earnings to bring the total loss allowance to a level considered adequate by
management to provide for losses based on prior loss experience, volume and
type of lending conducted by the Company, industry standards and past due
loans in the Company's portfolio. Management also considers general economic
conditions and other factors relating to the collectability of the Company's
loan portfolio.
During the year ended June 30, 1996, the Company provided no additional
allowance for loan losses. The provision for loan losses was $1,000 in fiscal
1995. As a result of recoveries of $1,000 during fiscal 1996, at June 30,
1996, the total allowance for loan losses was $319,000, or .39% of total loans
outstanding. Provisions are made based on management's analysis of the
various factors which affect the loan portfolio and management's desire to
hold the allowance at a level considered adequate to provide for losses and
fleet industry standards. Management performs a detailed analysis of the
Company's loan portfolio, including reviews of the Company's write-off history
and an analysis of the Company's allowance for losses as compared with
industry and peer averages. At June 30, 1996, the allowance for possible loan
losses was $319,000 and represented 189.7% of total non-accrual loans and
loans past due more than 90 days. At June 30, 1995, the allowance for loan
losses was $318,000 and represented 235.56% of total non-accrual loans and
loans past due more than 90 days. While management believes the allowance for
loan losses at June 30, 1996 is adequate to cover all losses inherent in the
loan portfolio, there can be no assurance that in the future the Company's
allowance will not require further increases.
Other Income. Other income increase $77,000 from $410,000 for the year
ended June 30, 1995 to $487,000 for the year ended June 30, 1996. This
increase was principally the result of increased income from loan sales and
increased fee income on loans originated for the Company's loan portfolio.
During the period, the Company also experienced increased rental income
through increased occupancy at its downtown office facility. Conversely, the
Company experienced reduced commissions earned on the sales of tax deferred
annuity products by the Company's second-tier subsidiary, Sentinel Insurance
Agency, Inc.
Other Expense. Other expenses increased from $2.6 million as of June 30,
1995 to $3.4 million as of June 30, 1996. This $749,000 increase was the
result of several unusual items during the period.
The Company recorded a $242,000 loss provision to reflect the difference
between the current fair market value and the recorded book value of the 1001
Walnut Street Office Building. This activity reflected the Association's
intent to close this facility after completion of a new North Kansas City
Office.
During the year ended June 30, 1996, a former employee of the Company
filed a sexual harassment suit against the Company. The suit was settled
resulting in an expense of $145,000 to the Company.
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In connection with the merger with Roosevelt, the Company has incurred
expenses relating to the evaluation and negotiation of the transaction.
During the fiscal year ending June 30, 1996, total merger related expenses
were approximately $135,000.
Income Taxes. During fiscal 1996, the Company reversed previously
established accruals relating to a tax position taken in prior years. The
Company's 1991 and 1992 tax returns were filed with appropriate disclosure of
the use of the positions taken. As of March 15, 1996, the three year statute
of limitations expired. As a result of the reversal of previously established
tax liabilities, the Company recorded an after-tax benefit of $601,000.
Income taxes payable of June 30, 1996, without consideration of the benefit
derived from the statue expiration, were $112,000.
Comparison of Operating Results for the Fiscal Years Ended June 30, 1995 and
1994
General. Net income for the fiscal year ended June 30, 1995 was $630,000
compared with $564,000 for fiscal year 1994, representing a 11.70% increase.
The increase was primarily attributable to the Company's efforts to reduce
overall liability costs and increase loan balances during the period.
Non-interest expense increased $142,000, or 5.38%, during the fiscal year
ended June 30, 1995.
Net Interest Income. Net interest income increased $608,000 to $3.1
million for the year ended June 30, 1995, compared with $2.4 million for
fiscal year 1994. The increase in net interest income reflects an increase in
the Company's net interest margin from 1.61% for the fiscal year ended June
30, 1994 to 1.98% for the fiscal year ended June 30, 1995. The increase in
net interest income is primarily the result of two areas of operations.
First, portfolio loan balances have increased $8.7 million or 12.01%. Second,
lower rate, ARM mortgage-backed securities balances declined $4.2 million or
5.68%. While interest expense increased during the period, the Company was
less aggressive in pricing retail deposits and utilized lower cost, FHLB
advances, including an open line of credit, to lessen the impact of a rising
interest rate environment during the fiscal year ended June 30, 1995.
Interest Income. Interest income for the year ended June 30, 1995 was
$10.4 million compared with $9.4 million for fiscal year 1994, representing a
increase of $1.0 million, or 10.64%. The average yield on interest- earning
assets increased from 6.15% for the year ended June 30, 1994 to 6.69% for
fiscal year 1995. Net loans receivable increased $8.7 million for the year
ended June 30, 1995 as a result of higher origination levels and significantly
lower loan prepayments during the period. Portfolio loan prepayments declined
from $19.7 million during fiscal year ended June 30, 1994 to $8.5 million
during the period ended June 30, 1995. During these same periods total
portfolio loan production rose from $12.0 million during fiscal year ended
June 30, 1994 to $ 17.6 million for the year ended June 30, 1995.
Interest on mortgage-related securities increased $963,000 or 29.84%, as
a result of increased interest rates during the period. While the average
balance of mortgage-related securities increased approximately $3.5 million,
in the year ended June 30, 1995, the actual balance declined from $73.1
million as of June 30, 1994 to $68.9 million as of June 30, 1995. The Company
continued to purchase mortgage-related securities through the first half of
the fiscal year ended June 30, 1995. Subsequent to the first six months of
the fiscal year, no additional purchases have been made and the actual balance
declined during the remainder of the period.
Income from the investment portfolio increased $58,000 or 22.75% from
$253,941 in 1994 to $311,710 in 1995 primarily as the result of the purchase
of United States Treasury in February and March 1994.
Interest Expense. Interest expense increased $396,000, or 5.70%, for the
year ended June 30, 1995, compared with fiscal year 1994. The increase is
primarily attributable to increased interest rates during the period. Average
interest-bearing liabilities were $144.7 million for the year ended June 30,
1995 compared with $144.3 million for fiscal year 1994. The average rate paid
increased from 4.82% in the year ended June 30, 1994 to 5.07% in the year
ended June 30, 1995. The rise in interest expense was less than the increase
in interest income due to the Company's efforts to reduce deposit costs and
the increased use of shorter term FHLB advances.
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<PAGE>
Provisions for Loan Losses. For June 30, 1995 and 1994, the Company
provided $0 and $42,000, respectively, for losses. During the fiscal year
ended June 30, 1995, the Company provided no additional allowance for loan
losses. Thus the total allowance for loan losses remained $318,000 or .39%
of total loans outstanding. These provisions were made based on management's
analysis of the various factors which affect the loan portfolio and
management's desire to hold the allowance at a level considered adequate to
provide for losses and meet industry standards. Management performs a
detailed analysis of the Company's loan portfolio, including reviews of the
Company's write-off history and an analysis of the Company's allowance for
losses as compared with industry and peer averages. At June 30, 1995, the
allowance for possible loan losses was $318,000 and represented 235.56% of
total non-accrual loans and loans past due more than 90 days. At June 30,
1994, the allowance for loan losses was $318,000 and represented 117.34% of
total non-accrual loans and loans past due more than 90 days.
Other Income. Other income decreased $39,000 from $449,000 for the
fiscal year ended June 30, 1994 to $410,000 for the fiscal year ended June 30,
1995. This decrease was principally the result of reduced commissions earned
on the sales of tax deferred annuity products by the Company's second-tier
subsidiary, Sentinel Insurance Agency Inc. Gains on sales of assets held for
sale and securities available for sale, net were $84,000 in the year ended
June 30, 1995 as compared to $35,000 in the year ended June 30, 1994. As of
June 30, 1995, the Company's available for sale portfolio included one $1.1
million adjustable rate FHLB agency debenture.
Other Expense. Other expenses increased from $2.5 million for the year
ended June 30, 1994 to $2.6 million for the year ended June 30, 1995. This
$142,000 increase is primarily attributable to a $113,000 increase in salaries
and employee benefits attributable to a full year of amortization of deferred
compensation on the Company's Employee Stock Ownership Plan ("ESOP") and
Management Recognition and Development Plans ("MRDP").
Income Taxes. Income tax expense increased $238,000 from $45,000 for
fiscal year ended June 30, 1994 to $283,000 for fiscal year ended June 30,
1995 as a result of increased taxable income from $418,000 for fiscal year
ended June 30, 1994 to $886,000 for fiscal year ended June 30, 1995, a
reduction in the utilization of Missouri intangible tax credit carry forwards,
and a reduction in the amount of valuation allowance on deferred tax assets.
Management expects to resolve certain income tax issues during fiscal 1996
which may substantially reduce the Company's income tax expense for 1996.
However, there can be no assurance that such income tax benefit will occur.
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Average Balances, Interest and Average Yields/Cost
The following table sets forth, for the periods indicated, information
regarding average balances of assets and liabilities as well as the total
dollar amounts of interest income from average interest-earning assets and
interest expense on average interest-bearing liabilities, resultant yields,
interest rate spread, net interest margin, and ratio of average
interest-earning assets to average interest-bearing liabilities. Average
balances for a period have been calculated using the average of month-end
balances during such period. Management does not believe that the use of
month-end balances instead of daily balances has caused any material
difference in the information presented.
Years Ended June 30,
1994 1995
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning
assets(1):
Mortgage loans $73,552 $5,682 7.73% $74,249 $5,698 7.67%
Consumer loans 710 51 7.18 1,045 79 7.56
Commercial business
loans 739 57 7.71 978 78 7.98
_______ ______ ____ _______ ______ ____
Total net loans 75,001 5,790 7.72 76,272 5,855 7.68
Mortgage-related
securities 69,289 3,227 4.66 72,510 4,190 5.78
Investment
securities 3,585 147 4.10 3,624 168 4.64
Interest-bearing
deposits in
other banks 3,519 103 2.93 1,592 66 4.15
Other earning assets 1,848 151 8.17 1,848 143 7.74
_______ ______ ____ _______ ______ ____
Total interest-
earning assets 153,242 $9,418 6.15% 155,846 $10,422 6.69%
====== ==== ======= ====
Non-interest-earning
assets:
Premises and
equipment, net 878 $ 810
Real estate owned,
net 52 0
Other non-interest-
earning assets 1,034 1,219
________ ________
Total assets $155,206 $157,875
======== ========
Interest-bearing
liabilities:
Passbook accounts $ 12,298 $ 326 2.65 $10,831 $297 2.74
Negotiable order
of withdrawal
("NOW") accounts 3,585 81 2.26 3,061 72 2.35
Money market
accounts 20,286 596 2.94 19,168 785 4.10
Certificates of
deposit 98,637 5,136 5.21 95,533 5,144 5.38
_______ ______ ____ _______ ______ ____
Total deposits 134,806 6,139 4.55 128,593 6,298 4.90
Years Ended June 30,
1996
Interest
Average and Yield/
Balance Dividends Cost
(Dollars in thousands)
Interest-earning
assets(1):
Mortgage loans $ 79,341 $6,281 7.92%
Consumer loans 2,173 168 7.73
Commercial business
loans 2,623 210 8.01
________ _____ ____
Total net loans 84,137 6,659 7.91
Mortgage-related
securities 60,230 3,919 6.51
Investment
securities 3,281 158 4.82
Interest-bearing
deposits in
other banks 2,681 134 5.00
Other earning assets 1,867 134 7.18
________ _____ ____
Total interest-
earning assets 152,196 11,004 7.23
====== ====
Non-interest-earning
assets:
Premises and
equipment, net 663
Real estate owned,
net --
Other non-interest-
earning assets 483
________
Total assets $153,342
========
Interest-bearing
liabilities:
Passbook accounts $ 8,798 $252 2.86
Negotiable order
of withdrawal
("NOW") accounts 3,416 69 2.02
Money market
accounts 19,644 909 4.63
Certificates of
deposit 93,453 5,563 5.95
________ _____ ____
Total deposits 125,311 6,793 5.42
(table continued on following page)
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<PAGE>
Years Ended June 30,
1994 1995
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Interest-earning
assets(1):
Other interest-
bearing liabilities 9,471 641 6.77 16,150 1,046 6.48
Termination of
interest rate swaps -- 168 -- -- -- --
_______ _____ ____ _______ _____ ____
Total interest-
bearing
liabilities 144,277 6,948 4.82 144,743 7,344 5.07
_____ _____
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits -- --
Other liabilities 3,424 2,873
_______ _______
Total liabilities 147,701 147,616
Stockholders' equity 7,505 10,259
_______ _______
Total liabilities
and stockholders'
equity $155,206 $157,875
======== ========
Net interest income $2,470 $3,078
====== =======
Interest rate spread 1.33% 1.61%
Net interest margin 1.61% 1.98%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 106.21% 107.67%
Years Ended June 30,
1996
Interest
Average and Yield/
Balance Dividends Cost
(Dollars in thousands)
Other interest-
bearing liabilities 13,483 734 5.44
Termination of
interest rate swaps -- -- --
________ _____ ____
Total interest-
bearing
liabilities 138,794 7,527 5.42
_____
Non-interest-bearing
liabilities:
Non-interest-bearing
deposits --
Other liabilities 3,406
_______
Total liabilities 142,200
Stockholders' equity 11,142
_______
Total liabilities and
and stockholders'
equity $153,342
========
Net interest income $3,477
======
Interest rate spread 1.81%
Net interest margin 2.28%
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 109.66%
(1) Does not include interest on nonaccrual loans or loans 90 days or more
past due.
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<PAGE>
Yields Earned and Rates Paid
The following table sets forth (on a consolidated basis) for the periods
and at the date indicated, the weighted average yields earned on the
Association's assets and the weighted average interest rates paid on the
Association's liabilities, together with the net interest margin.
Year Ended June 30, At June 30,
1994 1995 1996 1996
Weighted average yield on:
Loan portfolio 7.72% 7.68% 7.92% 8.14%
Mortgage-related
securities 4.67 5.78 6.51 6.88
Investment portfolio 4.10 4.64 4.82 6.75
All interest-earning
assets 6.15 6.69 7.23 7.53
Weighted average rate paid
on:
Deposits 4.55 4.90 5.42 5.42
Advances from FHLB 6.77 6.48 5.44 6.11
All interest-bearing
liabilities 4.82 5.07 5.42 5.46
Interest rate spread
(spread between
weighted average rate on
all interest-earning
assets and all interest-
bearing liabilities) 1.33 1.61 1.81 2.07
Net interest margin (net
interest income
(expense) as a percentage
of average interest-
earning assets) 1.61 1.98 2.28 2.54
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<PAGE>
Rate/Volume Table
The following table sets forth the effects of changing rates and volumes
on net interest income of the Association. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume);
and (iii) changes in rate/volume (change in rate multiplied by change in
volume).
1995 Compared to 1994 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
(In thousands)
Interest-earning
assets:
Mortgage loans(1) $ (44) $ 54 $ 6 $ 16 $186 $391 $ 6 $583
Consumer loans(1) 3 24 1 28 2 85 2 89
Commercial business
loans(1) 2 18 1 21 -- 131 1 132
_____ ______ ______ ______ ____ ____ ____ ____
Total loans(1) (39) 96 8 65 188 607 9 804
Mortgage-related
securities 766 164 32 962 529 (710) (90) (271)
Investment and
trading
securities 19 2 45 66 7 (16) (1) (10)
Interest-bearing
deposits 43 (56) (68) (81) 14 45 9 68
Other earning assets (8) -- -- (8) (10) 1 -- (9)
_____ ______ ______ ______ ____ ____ ____ ____
Total net change in
income on interest-
earning assets 781 206 17 1,004 728 (73) (73) 582
_____ ______ ______ ______ ____ ____ ____ ____
Interest-bearing
liabilities:
Interest-bearing
deposits 472 (283) (30) 159 669 (161) (13) 495
FHLB advances (28) 452 (19) 405 (168) (173) 29 (312)
Termination of
interest
rate swaps -- -- (168) (168) -- -- -- --
_____ ______ ______ ______ ____ ____ ____ ____
Total net change in
expense on interest-
bearing liabilities 444 169 (217) 396 501 (334) 16 183
_____ ______ ______ ______ ____ ____ ____ ____
Net change in net
interest income $ 337 $ 37 $ 234 $ 608 $227 $261 ($89) $399
===== ====== ====== ====== ==== ==== === ====
(1) Does not include interest on loans 90 days or more past due.
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Asset and Liability Management
The matching of 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 the amount of
interest-earning assets anticipated, based upon certain assumptions, to mature
or reprice within a specific time period and the amount of interest-bearing
liabilities anticipated, based upon certain assumptions, to mature or reprice
within that 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 the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income while a positive gap would tend to adversely affect net interest
income.
Prior to June 30, 1991, the Association had typically maintained a
negative one-year gap position. This position had generally resulted in a
positive impact during a declining rate environment and a negative impact
during a rising rate environment. Since that period the association has
typically maintained a positive gap position. The one-year gap can be
described as the difference between interest-earning assets and
interest-bearing liabilities that reprice during a one-year time frame. The
Association's one-year adjusted gap position has moved from a negative 3.4% as
of June 30, 1991, to a positive 11.03% as of June 30, 1996. The change from a
negative to a positive gap position was the result several factors including
among other items, substantially increased capital levels, significant
prepayment of fixed rate mortgage loans and investment in adjustable rate
mortgage related securities. Although the one-year gap ratio is used as a
measure of interest rate risk, the Association also employs other asset
liability techniques including measuring the market value of the Association's
portfolio equity position and the use of a planning model to project
Association activities under a given interest rate environment. The use of
several separate techniques helps reduce the risks associated with using one
monitoring tool. There can be no assurance that any of the Association's
monitoring techniques can or will reflect market conditions due to the impact
of external events such as market competition, the Treasury yield curve and
other market forces. The models are used, however, to assist management in
evaluating the risks relative to net income expectations. Mortgage prepayment
rates and core deposit decay rates are based on OTS tables with some variance
based on the Association's portfolio experience.
Certain shortcomings are inherent in the method of analysis presented in
the following table. For example, although certain assets and liabilities may
have similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as ARM loans,
have features that restrict changes in interest rates on a short-term basis
over the life of the asset. Further, in the event of a change in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their debt may decrease in the event of
an interest rate increase.
The Association's analysis of its interest-rate sensitivity incorporates
certain assumptions concerning the amortization of loans and other
interest-earning assets and the withdrawal of deposits. The interest-rate
sensitivity of the Association's assets and liabilities illustrated in the
table could vary substantially if different assumptions were used or if actual
experience differs from the assumptions used. The Association relies upon an
internal gap report and an internal market value of portfolio equity ("MVPE")
analysis which utilize OTS and management assumptions. These assumptions
include a fixed rate mortgage loan constant prepayment rate approximating
12.50%. Adjustable-rate mortgage loans and mortgage-related securities are
also assigned constant prepayment rates, however, these instruments generally
reprice in one year or less and appear in the appropriate gap column.
42
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The following table presents the Association's interest sensitivity gap
between interest-earning assets and interest-bearing liabilities at June 30,
1996.
Within
Six 6 Months 1-3 3-5
Months to One Year Years Years
(Dollars in thousands)
Interest-earning assets:
Fixed-rate mortgage
loans(1) $ 1,534 $ 1,569 $10,439 $ 9,850
ARM loans(1) 17,494 16,689 4,911 5,266
Mortgage-related securities 32,269 18,158 1,093 --
Other loans(1) 166 110 167 2,014
Investment securities and
interest-bearing deposits 3,809 2,000 -- --
_______ _______ _______ ______
Total rate sensitive
assets 55,272 38,526 16,610 17,130
Interest-bearing liabilities:
Deposits:
Regular savings and NOW
accounts 1,737 1,359 3,298 2,620
Money market deposit
accounts 7,252 7,252 2,835 1,468
Certificates of deposit 32,021 22,124 26,186 9,519
Other 2,500 2,000 2,500 --
_______ _______ _______ ______
Total rate sensitive
liabilities 43,510 32,735 34,819 13,607
_______ _______ _______ ______
Excess (deficiency) of
interest sensitive assets
over interest sensitive
liabilities $11,762 $ 5,791 $(18,209) $ 3,523
======= ======= ======== =======
Cumulative excess
(deficiency) of interest
sensitive assets $11,762 $17,554 $ (655) $ 2,868
======= ======= ======== =======
Cumulative ratio of
interest-earning
assets to interest-bearing
liabilities 1.27% 1.23% 0.99% 1.02%
Interest sensitivity gap to
total assets 8.18 4.03 -12.66 2.45
Ratio of interest-earning
assets to interest-bearing
liabilities 1.27 1.18 0.48 1.26
Ratio of cumulative gap
to total assets 8.18 12.20 -0.46 2.00
Over
6-10 10
Years Years Total
(Dollars in thousands)
Interest-earning assets:
Fixed-rate mortgage
loans(1) $ 7,260 $ 5,240 $ 35,892
ARM loans(1) 366 -- 44,726
Mortgage-related securities -- -- 51,520
Other loans(1) 28 -- 2,485
Investment securities and
interest-bearing deposits -- -- 5,809
_______ _______ ________
Total rate sensitive
assets 7,654 5,240 140,432
Interest-bearing liabilities:
Deposits:
Regular savings and NOW
accounts 1,608 1,181 11,802
Money market deposit
accounts 197 46 19,051
Certificates of deposit 2,551 -- 92,400
Other -- -- 7,000
_______ ______ ________
Total rate sensitive
liabilities 4,356 1,227 130,253
_______ ______ ________
Excess (deficiency) of
interest sensitive assets
over interest sensitive
liabilities $ 3,298 $ 4,013 $10,179
======= ======= =======
Cumulative excess
(deficiency) of interest
sensitive assets $ 6,166 $10,179 $10,179
======= ======= =======
Cumulative ratio of
interest-earning
assets to interest-bearing
liabilities 1.05% 1.08% 1.08%
Interest sensitivity gap to
total assets 2.29 2.79 7.08
Ratio of interest-earning
assets to interest-bearing
liabilities 1.76 4.27 1.08
Ratio of cumulative gap
to total assets 4.29 7.08 7.08
(1) Excludes undisbursed loan funds, unearned loans fees, net and
allowance for loan losses.
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Liquidity and Capital Resources
The Association's primary sources of funds are customer deposits,
proceeds from principal and interest payments on loans, interest payments on
mortgage-related and investment securities, proceeds from sales of loans,
maturing securities and FHLB advances. While maturities and scheduled
amortization of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates,
economic conditions and competition.
The Association must maintain an adequate level of liquidity to ensure
the availability of sufficient funds to support loan growth and deposit
withdrawals, to satisfy financial commitments and to take advantage of
investment opportunities. The Association generally maintains sufficient cash
and short-term investments to meet short-term liquidity needs. At June 30,
1996, cash (including interest-bearing deposits) and securities available for
sale totalled $3.7 million, or 2.5% of total assets, and mortgage-related and
investment securities that matured in one year or less totalled $2.0 million,
or 1.3% of total assets. In addition, the Association maintains a credit
facility with the FHLB- Des Moines, which provides for immediately available
advances. Advances under this credit facility totalled $7.0 million at June
30, 1996.
The OTS requires a savings institution to maintain an average daily
balance of liquid assets (cash and eligible investments) equal to at least
5.0% of the average daily balance of its net withdrawable deposits and short-
term borrowings. In addition, short-term liquid assets currently must
constitute 1.0% of the sum of net withdrawable deposit accounts plus
short-term borrowings. The Association's actual short- and long-term
liquidity ratios at June 30, 1996 were 2.6% and 6.1%, respectively. The
Association consistently maintains liquidity levels in excess of regulatory
requirements, and believes this is an appropriate strategy for proper asset
and liability management.
The primary investing activity of the Association is the origination of
mortgage loans and the purchase of mortgage-related securities. During the
years ended June 30, 1994, 1995 and 1996, the Association originated loans in
the amounts of $18.5 million, $21.2 million, and $29.3 million, respectively,
and purchased mortgage-related securities in the amounts of $31.0 million,
$10.0 million and $0, respectively. At June 30, 1996, the Association had
loan commitments and undisbursed equity lines of credit totalling $1.2 million
and undisbursed loans in process totalling $943,000. The Association
anticipates that it will have sufficient funds available to meet its current
loan origination commitments. Certificates of deposit that are scheduled to
mature in less than one year from June 30, 1996 totalled $54.5 million.
Historically, the Association has been able to retain a significant amount of
its deposits as they mature. In addition, management of the Association
believes that it can adjust the offering rates of savings certificates to
retain deposits in changing interest rate environments.
Proposed federal legislation to recapitalize the SAIF would require
savings associations like the Association to pay a one-time assessment to
increase the SAIF's reserves to $1.25 per $100 of deposits. Such assessment
is expected to be approximately 68 basis points on the amount of deposits held
by a SAIF-member institution. Based on the Association's assessable deposits
of $123.3 million at June 30, 1996, a one-time assessment of 68 basis points
would equal approximately $838,000 on a pre-tax basis, or $515,000 after tax.
The Association believes that it has adequate resources to pay such assessment
from cash and other liquid investments, including short-term investment
securities.
The Association is required to maintain specific amounts of capital
pursuant to OTS requirements. As of June 30, 1996, the Association was in
compliance with all regulatory capital requirements which were effective as of
such date with tangible, core and risk-based capital ratios of 7.73%, 7.73%
and 20.52%, respectively. For a detailed discussion of regulatory capital
requirements, see "REGULATION -- Federal Regulation of Savings Associations --
Capital Requirements" under Item 1 of this report.
44
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<PAGE>
New Accounting Standards
See Note 1 of Notes to Consolidated Financial Statements contained in
Item 7 hereof for a discussion of new accounting standards.
45
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<PAGE>
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
No disagreement with the Company's independent accountants on accounting
and financial disclosure has occurred during the past 24 months.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The Company's Board of Directors is composed of seven members. The
Company's Bylaws provide that directors will be elected for terms of three
years, one-third of whom are elected annually. Each director of the Company
is also a director of the Association. The following tables sets forth
information with respect to the Directors and executive officers of the
Company and the Association.
Directors of the Company and the Association
Age at Current
June 30, Director Term
Name 1996 Since(1) Expires
Donald E. Kuenzi, M.D. 69 1981 1997
Craig D. Laemmli 33 1990 1998
John H. Grow 72 1990 1998
Glennon E. McFarland 68 1992 1996
Willard S. Norton 64 1990 1996
Robert C. Taul 71 1968 1997
Ron C. Castle 47 1994 1997
(1) Includes prior service on the Board of Directors of the Association.
Executive Officers of the Company and the Association
Age at
June 30, Position
Name 1996 Corporation Association
Craig D. Laemmli 33 President and Chief President and Chief
Executive Officer Executive Officer
John C. Spencer 44 Executive Vice Vice President/
President Secretary
Controller and
Secretary
Biographical Information
Donald E. Kuenzi, M.D., the Chairman of the Board of the Association, has
been a director of the Association since 1981. Dr. Kuenzi is retired from his
family medical practice after 37 years of practice.
Craig D. Laemmli joined Sentinel Federal in 1989 and has served as
President and Chief Executive Officer since 1990. Prior to being appointed
President and Chief Executive Officer, Mr. Laemmli served as Executive Vice
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President/Operations. Mr. Laemmli is a Director of the Kansas City League of
Savings Institutions. Prior to his employment at Sentinel Federal, Mr.
Laemmli was an Assistant Examiner/Examiner-in-Charge with the OTS.
John H. Grow has been affiliated with the Association for over 40 years
and has served in various capacities, including holding the offices of Senior
Vice President/Treasurer and Chief Financial Officer. Mr. Grow retired in
April, 1993.
Glennon E. McFarland is a retired judge of the Criminal Division, Circuit
Court of the State of Missouri where he served for over 17 years.
Willard S. Norton is an engineer and Chairman of the Board, Chief
Executive Officer and a majority owner of Norton & Schmidt Consulting
Engineer, Inc., Kansas City, Missouri where he has been employed for over 26
years.
Robert C. Taul has served as a director of Sentinel Federal for over 25
years. He is a retired automobile dealer.
Ron C. Castle is Senior Vice President of Curry Investment Co.
John C. Spencer has been with the Association since 1970 and has served
as Executive Vice President, Controller and Secretary since June 1993. Prior
to being appointed to his current positions, Mr. Spencer served as Vice
President, Controller and Secretary from November 1985 to September 1990 and
as Assistant Vice President from March 1982 to October 1985.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act") requires the Company's executive officers and directors, and
persons who own more than 10% of any registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
SEC. Executive officers, directors and greater than 10% shareholders are
required by regulation to furnish the Company with copies of all Section 16(a)
forms they file.
Based solely on its review of the copies of such forms it has received
and written representations provided to the Company by the above referenced
persons, the Company believes that all filing requirements applicable to its
reporting officers, directors and greater than 10% shareholders were properly
and timely complied with during the fiscal year ended June 30, 1996.
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Item 10. Executive Compensation
Summary Compensation Table. The following information is furnished for
the Chief Executive Officer of the Company. No other executive officer of the
Company or the Association received salary and bonuses in excess of $100,000
during the year ended June 30, 1996.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards
Name and Restricted
Principal Other Annual Stock
Position Year Salary Bonus Compensation Award(s)
($) ($) ($)(1) ($)(2)
Craig D. Laemmli 1996 $55,629 -- -- --
President and Chief
Executive Officer 1995 55,963 -- -- --
1994 55,963 -- -- $48,450
All Other
Compensa-
Options tion
(#) ($)(3)(4)
3,000 $1,252
-- 1,259
15,403 1,259
(1) Does not include perquisites which did not exceed $50,000 or 10% of
salary and bonus.
(2) Represents the value of the shares of Common Stock awarded pursuant to
the Management Recognition and Development Plan ("MRDP") on the date of
grant, January 7, 1994. Such shares vest in three annual installments
beginning on January 7, 1995. The dollar value of the unvested shares on
June 30, 1996 was $50,738. Dividends may be paid on restricted stock
subject to the discretion of the MRDP Committee.
(3) Does not include amounts payable to Mr. Laemmli pursuant to an employment
agreement in event of a "change in control" of the Company. See "--
Employment Agreement."
(4) Represents a contribution by the Association to the 401(k) Plan for the
benefit of Mr. Laemmli.
Options Grants in Last Fiscal Year
The following table sets forth information regarding stock option grants
to Mr. Laemmli during the year ended June 30, 1996.
Percent of
Number of Total Options
Securities Granted to
Underlying Employees in Exercise Expiration
Name Options Granted (#) Fiscal Year Price ($) Date
Craig D. Laemmli 1,000 75% $13.00 10/18/2005
2,000 75% $14.00 12/20/2005
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Option Exercise/Value Table
The following information with respect to options exercised during the
fiscal year ended June 30, 1996 and remaining unexercised at the end of the
fiscal year, is presented for Mr. Laemmli.
Shares Number of Securities
Acquired on Value Underlying Unexercised Options
Name Exercise (#) Realized($) Exercisable Unexercisable
Craig D. Laemmli -- -- 18,403 --
Value of Unexercised
In-the-Money Options
at Fiscal Year End($)(1)
Exercisable Unexercisable
Craig D. Laemmli $219,038 --
___________________
(1) The value of unexercised in-the-money options is calculated using a fair
market value of $22.50 per share as of June 30, 1996, based on the last
known open market trade on or before such date.
Employment Agreement. Effective January 7, 1994, the Company and the
Association entered into a three-year employment agreement with Craig D.
Laemmli who serves as President and Chief Executive Officer of the Company and
the Association. The agreement provides for an initial salary for Mr. Laemmli
of $52,061 which will be paid by the Association and which may be increased at
the discretion of the Board of Directors or an authorized committee of the
Board. Under the agreement, Mr. Laemmli's salary may not be decreased during
the term of the employment agreement without his prior written consent. The
agreement is terminable by the Association for just cause at any time or in
certain events specified by OTS regulations. The employment agreement
provides for severance payments and other benefits in the event of involuntary
termination of employment in connection with any change in control of the
Association and the Company. Severance payments also will be provided on a
similar basis in connection with a voluntary termination of employment where,
subsequent to a change in control, Mr. Laemmli is assigned duties inconsistent
with his position, duties, responsibilities and status immediately prior to
such change in control. The term "change in control" is defined in the
agreement as, among other things, any time during the period of employment
when a change of control is deemed to have occurred under regulations of the
OTS or a change in the composition of more than a majority of the Board of
Directors of the Company occurs. The merger of Sentinel Financial with
Roosevelt will constitute a change in control under Mr. Laemmli's employment
agreement.
The severance payment pursuant to the agreement will equal 2.99 Mr.
Laemmli's base compensation, as defined in Section 280G of the Internal
Revenue Code of 1986, as amended ("Code"), during the preceding five years.
Such amount will be paid within five business days following the termination
of employment, unless Mr. Laemmli elects to receive equal monthly installments
over a three-year period. Assuming the compensation of Mr. Laemmli is not
increased, Mr. Laemmli would be entitled to severance payments of
approximately $155,662 in the event of a change in control of the Association
and the Company. Section 280G of the Code, states that severance payments
which equal or exceed three times the base compensation of the individual are
deemed to be "excess parachute payments" if they are contingent upon a change
in control. Individuals receiving excess parachute payments are subject to a
20% excise tax on the amount of such excess payments, and the Association and
the Company are not entitled to deduct the amount of such excess payments.
The agreement restricts Mr. Laemmli's right to compete against the
Association and the Company for one year from the date of termination of the
agreement if he voluntarily terminates his employment, except in the event of
a change in control, or if the Association or the Company terminate his
employment for cause.
Directors' Compensation
Members of the Board of Directors of the Association receive a fee of
$300 per meeting. Currently, no fees are paid to members of the Company's
Board of Directors.
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Item 11. Security Ownership of Certain Beneficial Owners and Management
Persons and groups who beneficially own in excess of 5% of the Company's
Common Stock are required to file certain reports disclosing such ownership
pursuant to the Exchange Act. Based on such reports, the following table sets
forth, as of September 1, 1996, certain information as to those persons who
were beneficial owners of more than 5% of the outstanding shares of Common
Stock. Management knows of no persons other than those set forth below who
beneficially owned more than 5% of the outstanding shares of Common Stock at
September 1, 1996. The following table also sets forth, as of September 1,
1996, information as to the shares of Common Stock beneficially owned by each
director, by the Chief Executive Officer of the Company and by all executive
officers and directors of the Company as a group.
Number of Shares Percent of Shares
Name Beneficially Owned (1) Outstanding
Beneficial Owners of More Than 5%
James F. Dierberg 51,105(2) 9.95%
Individual Retirement Account
39 Glen Eagles Drive
St. Louis, Missouri 63124
Jeffrey S. Halis 31,999(3) 6.23
500 Park Avenue
Fifth Floor
New York, New York 10022
Sentinel Federal Savings 25,500(4) 5.00
and Loan Association
Employee Stock
Ownership Plan Trust
Craig D. Laemmli 32,739(5) 6.16
1001 Walnut Street
Kansas City, Missouri 64106
(table continued on following page)
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<PAGE>
Number of Shares Percent of Shares
Name Beneficially Owned (1) Outstanding
Directors
John H. Grow 7,990 1.54%
Glennon E. McFarland 9,490 1.83
Willard S. Norton 11,740 2.27
Donald E. Kuenzi, M.D. 17,890 3.46
Robert C. Taul 11,490 2.22
Ron C. Castle 1,000 .19
Named Executive Officers
Craig D. Laemmli* 32,739(5) 6.16
All Officers and
Directors as a
Group (13 persons) 108,925(6) 19.52%
____________________
* Mr. Laemmli is also a director of the Company.
1) Includes all shares held directly as well as by spouses, other immediate
family members, in trust and other forms of indirect ownership, over
which shares the named persons possess voting and investment power.
This table also includes shares of Sentinel Financial Common Stock
subject to outstanding options exercisable within 60 days pursuant to the
Sentinel Stock Option Plan and shares allocated to participants' accounts
under the Association's MRDPs and the Sentinel Federal ESOP.
2) This information is based on records maintained by Sentinel Financial and
information from a Schedule 13D filed with the SEC in June 1994.
3) This information is based on records maintained by Sentinel Financial and
information from a Schedule 13D filed with the SEC in February 1994.
4) The ESOP purchased 25,500 shares of the Sentinel Financial Common Stock
for the exclusive benefit of participating employees with funds borrowed
from Sentinel Financial in connection with the Association's mutual to
stock conversion. ESOP shares are held in a suspense account for
allocation among participants on the basis of compensation as the loan is
repaid. A committee appointed by the Sentinel Financial Board (the "ESOP
Committee") administers the ESOP. The Sentinel Financial Board has
appointed Directors Laemmli, Grow and Norton, as trustees for the ESOP
(the "ESOP Trustee"). The Board may instruct the ESOP Trustee regarding
investments of funds contributed to the ESOP. The ESOP Trustee must vote
all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Unallocated shares will be voted by the
ESOP Trustee as directed by the ESOP Committee. The ESOP Committee is
composed of Directors Laemmli, Grow and Norton.
5) This information is based on records maintained by Sentinel Financial and
information from a Schedule 13D filed with the SEC in September 1995.
(c) Changes in Control
Except for the Merger Agreement with Roosevelt, the Corporation is
not aware of any arrangements, including any pledge by any person
of securities of the Corporation, the operation of which may at a
subsequent date result in a change in control of the Corporation.
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Item 12. Certain Relationships and Related Transactions
Federal regulations require that all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and must not involve more than the
normal risk of repayment or present other unfavorable features. The
Association is therefore prohibited from making any new loans or extensions of
credit to the Association's executive officers and directors and at different
rates or terms than those offered to the general public and has adopted a
policy to this effect.
PART IV
Item 13. Exhibits, List Reports on Form 8-K
(a) Exhibits
2 Agreement and Plan of Merger dated as of March 22, 1996 by
and among Roosevelt Financial Group, Inc., Roosevelt Bank,
a federal savings bank, Sentinel Financial Corporation, and
Sentinel Federal Savings and Loan Association of Kansas
City (incorporated by reference to the Registrant's Current
Report on Form 8-K filed on April 1, 1996)
3(a) Certificate of Incorporation of Sentinel Financial
Corporation (Incorporated by reference to Exhibit 3.1 to
the Registrant's Registration Statement on Form S-1 (File
No. 69888))
3(b) Bylaws of Sentinel Financial Corporation (Incorporated by
reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 (File No. 69888))
10(a) Employment Agreement of Craig D. Laemmli (Incorporated by
reference to the Registrant's Annual Report on Form 10-KSB
for the year ended June 30, 1995)
10(b) Registrant's 1994 Stock Option Plan (Incorporated herein
by reference to the Registrant's 1995 Annual Meeting Proxy
Statement dated September 19, 1994)
10(c) Sentinel Federal Savings and Loan Association of Kansas
City Management Recognition and Development Plans
(Incorporated herein by reference to the Registrant's 1995
Annual Meeting Proxy Statement dated September 19, 1994)
(21) Subsidiaries of the Registrant
(23) Auditor's Consent
(27) Financial Data Schedule
(b) Report on Form 8-K
The Registrant filed a Current Report on Form 8-K on April 1,
1996 in which it reported under Item 5 entering into a definitive
merger agreement with Roosevelt Financial Group, Inc.
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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.
SENTINEL FINANCIAL CORPORATION
Date: September 30, 1996 By: /s/ Craig D. Laemmli
Craig D. Laemmli
President and Chief
Executive Officer (Duly
Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Craig D. Laemmli September 30, 1996
Craig D. Laemmli
President, Chief Executive
Officer and Director
(Principal Executive and
Financial Officer)
By: /s/ John C. Spencer September 30, 1996
John C. Spencer
Executive Vice President,
Controller and Secretary
(Principal Accounting Officer)
By: /s/ Donald E. Kuenzi, M.D. September 30, 1996
Donald E. Kuenzi, M.D.
Chairman of the Board
By: /s/ John H. Grow September 30, 1996
John H. Grow
Director
By: /s/ Glennon E. McFarland September 30, 1996
Glennon E. McFarland
Director
By:/s/ Willard S. Norton September 30, 1996
Willard S. Norton
Director
By:/s/ Robert C. Taul September 30, 1996
Robert C. Taul
Director
By:/s/ Ron Castle September 30, 1996
Ron Castle
Director
PAGE
<PAGE>
Exhibit 21
Subsidiaries of the Registrant
Parent
Sentinel Financial Corporation
Percentage Jurisdiction or
Subsidiaries (a) of Ownership State of Incorporation
Sentinel Federal Savings and Loan
Association of Kansas City 100% United States
Sentinel Insurance Agency, Inc. (b) 100% Missouri
Claywood Financial Services (b) 100% Missouri
(a) The operation of the Company's wholly owned subsidiaries are included in
the Company's Financial Statements contained in Item 7. of this Annual
Report on Form 10-KSB.
(b) Wholly-owned subsidiary of Sentinel Federal Savings and Loan Association
of Kansas City.
PAGE
<PAGE>
Exhibit 23
Auditor's Consent
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No. 33-
89184 of Sentinel Financial Corporation on Form S-8 of our report dated August
15, 1996, appearing in this Annual Report on Form 10-K of Sentinel Financial
Corporation for the year ended June 30, 1996.
/s/Deloitte & Touche LLP
Kansas City, Missouri
September 26, 1996
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 913558
<INT-BEARING-DEPOSITS> 1655753
<FED-FUNDS-SOLD> 50000
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