Holding Company Docket Number H-2215
OFFICE OF THRIFT SUPERVISION
DEPARTMENT OF THE TREASURY
Washington, D.C. 20552
For the Quarter Ended March 31, 1996
____________________________
Current Report H-(b)11
_____________________________
Filed pursuant to Section 10(b)(2) of the Home Owners' Loan Act of 1933, as
amended and 12 C.F.R. Section 584.1(a).
Sentinel Financial Corporation
__________________________________________________________________________
Legal Name of Registrant
Delaware
__________________________________________________________________________
State or Other Jurisdiction of Incorporation or Organization
1001 Walnut Street, Kansas City, Missouri 64106
__________________________________________________________________________
Address of Principal Executive Office Zip Code
John F. Breyer, Jr., Esq.
Breyer & Aguggia
601 13th Street, N.W.
Suite 1120 South
Washington D.C. 20005
__________________________________________________________________________
Name and Address of Person to Whom Communications are to be Sent
CERTIFICATION
Pursuant to the requirements of Section 10(b)(2) of the Home Owners' Loan Act
of 1933, as amended, the Registrant making this Current Report has caused
this filing to be signed on its behalf by the undersigned, duly authorized.
SENTINEL FINANCIAL CORPORATION
The undersigned principal executive or principal financial officer of the
Registrant making this Current Report acknowledges and certifies that the
information contained herein, including forms or exhibits checked or listed
below, has been carefully reviewed, and that such information is true,
correct, and complete (to the best of his knowledge and belief).
Included:
________ Form 1: Subsidiaries of Registrant
________ Form 2: Investment in Savings Associations or SLHCs
________ Form 3: Multiple SLHC Investments
________ Form 4(a): Directors, Officers, Partners, Trustees, and Others
________ Form 4(b): Partnership/Contribution of Capital
________ Form 4(c): Trust/Beneficial Interest
________ Form 5: Investment in Nonaffiliated Thrifts or SLHCs
________ Form 6: Interlocking Directors and Officers - Voting Rights
of a Mutual Association
________ Form 7: Interlocking Directors and Officers - Control or
Managerial Influence
________ Form 8: Classification of Registrant
________ Form 9: Dividend Summary
________ Form 10: Taxes
________ Form 11: Debt or Borrowings Secured by Pledge of
Nonwithdrawable Stock
________ Form 12: Increase in Amount of Securities Outstanding
________ Form 13: Treasury Stock
X Other Form 10-Q for March 31, 1996
________
Attest:
_______________________________ ___________________________________
Craig D. Laemmli John C. Spencer
President Corporate Secretary
Sentinel Financial Corporation Sentinel Financial Corporation
Date: May 14, 1996
______________________________
OFFICE OF THRIFT SUPERVISION
DEPARTMENT OF THE TREASURY
Washington, D.C. 20552
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
X ACT OF 1934
___
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
___ ACT OF 1934
For the transition period from _________________ to ________________________
For Quarter Ended Office of Thrift Supervision
March 31, 1996 Docket Number: 02020
Sentinel Financial Corporation
______________________________
(Exact name of registrant as specified in its charter)
United States 43-1656550
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1001 Walnut Kansas City, MO 64106
_______________________________________ ______________
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (816) 474-9800
_________________
__________________________________________________________________________
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all documents
and reports required to be filed by Sections 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
____ ____
Number of shares outstanding of common stock
as of May 14, 1996
$.01 Par Value Common Stock 492,294
______________________________ ____________
Class Outstanding
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ____________________ to ______________________
Commission File Number 0-22838
______________________
SENTINEL FINANCIAL CORPORATION
_________________________________
DELAWARE 43-1656550
_______________ _____________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1001 Walnut, Kansas City, Missouri 64106
_______________________________________ __________
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code .. (816) 474-9800
________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 and 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
_____ ____.
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of May 14, 1996 $.01 par value 492,294 common
shares. _____________ _________
SENTINEL FINANCIAL CORPORATION
INDEX
Page Number
_____________
PART I - CONSOLIDATED FINANCIAL INFORMATION
Consolidated Balance Sheets at
March 31, 1996 (Unaudited) and
June 30, 1995 1-2
Consolidated Statements of Income
for the Three and Nine Months Ended March 31, 1996
and 1995 (Unaudited) 3-4
Consolidated Statements of Stockholders'
Equity for the Nine Months ended March 31, 1996
(Unaudited) 5
Consolidated Statements of Cash Flows
for the Nine Months Ended March 31, 1996
and 1995 (Unaudited) 6-7
Notes to Consolidated Financial
Statements (Unaudited) 8-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-18
Part II - OTHER INFORMATION 19
SIGNATURES 20
SENTINEL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS MARCH 31, 1996 JUNE 30, 1995
(Unaudited)
CASH AND CASH EQUIVALENTS $4,317,812 $3,748,119
INVESTMENT SECURITIES
- HELD TO MATURITY 1,999,496 2,498,094
- AVAILABLE FOR SALE 1,093,125 1,082,814
CAPITAL STOCK OF FEDERAL HOME
LOAN BANK, At cost 1,885,500 1,848,300
MORTGAGE-BACKED SECURITIES
- HELD TO MATURITY 55,423,644 68,940,693
ASSETS HELD FOR SALE, Net 799,991 773,026
LOANS RECEIVABLE, net 81,321,335 80,956,440
PREMISES AND EQUIPMENT, net 777,697 790,241
ACCRUED INTEREST RECEIVABLE 977,891 1,034,296
DEFERRED INCOME TAXES 73,494 77,000
OTHER ASSETS 55,579 165,147
TOTAL ASSETS $148,725,564 $161,914,170
LIABILITIES AND STOCKHOLDERS'
EQUITY
LIABILITIES:
DEPOSITS $125,558,567 $126,439,826
ADVANCE PAYMENTS BY BORROWERS
FOR TAXES AND INSURANCE 778,826 1,352,340
INCOME TAXES PAYABLE 32,345 751,426
ACCRUED AND OTHER LIABILITIES 834,372 905,345
ADVANCES FROM FEDERAL HOME LOAN BANK 10,000,000 21,850,000
TOTAL LIABILITIES 137,204,110 151,298,937
COMMITMENTS AND CONTINGENT
LIABILITIES
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, NO PAR, 500,000
SHARES AUTHORIZED, NO SHARES
ISSUED OR OUTSTANDING - -
COMMON STOCK, $.01 PAR VALUE,
2,000,000 SHARES
AUTHORIZED, 513,423 SHARES ISSUED 5,134 5,134
ADDITIONAL PAID-IN CAPITAL 4,602,678 4,602,678
RETAINED EARNINGS-SUBSTANTIALLY
RESTRICTED 7,127,556 6,299,468
UNREALIZED LOSS ON INVESTMENT
SECURITIES - AVAILABLE FOR SALE,
net of tax (2,628) (9,433)
UNEARNED COMPENSATION-EMPLOYEE STOCK
OWNERSHIP PLAN (173,036) (206,114)
UNEARNED COMPENSATION-MANAGEMENT
RECOGNITION PLANS (38,250) (76,500)
-1-
TOTAL STOCKHOLDERS' EQUITY 11,521,454 10,615,233
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $148,725,564 $161,914,170
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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SENTINEL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
1996 1995 1996 1995
(Unaudited) (Unaudited)
INTEREST INCOME:
LOANS RECEIVABLE $1,639,895 $1,462,691 $4,897,768 $4,238,960
MORTGAGE-RELATED
ECURITIES 947,411 1,069,739 3,051,649 3,060,724
INVESTMENT SECURITIES 69,451 74,676 221,234 236,469
OTHER INTEREST-CASH AND
CASH EQUIVALENTS 37,403 17,222 95,489 44,445
TOTAL INTEREST INCOME 2,694,160 2,624,328 8,266,140 7,580,598
INTEREST EXPENSE:
DEPOSITS 1,679,600 1,579,748 5,132,431 4,617,971
ADVANCES FROM FEDERAL
HOME LOAN BANK AND
OTHER INTEREST EXPENSE 56,692 295,044 597,087 718,170
TOTAL INTEREST EXPENSE 1,736,292 1,874,792 5,729,518 5,336,141
NET INTEREST INCOME 957,868 749,536 2,536,622 2,244,457
PROVISION FOR LOSSES ON
LOANS 0 0 0 0
NET INTEREST INCOME AFTER
PROVISION FOR LOSSES
ON LOANS 957,868 749,536 2,536,622 2,244,457
OTHER INCOME:
INSURANCE COMMISSIONS 6,353 15,685 25,624 86,216
GAIN ON SALE OF LOANS
HELD FOR SALE, NET 34,906 5,900 117,252 12,135
LOAN SERVICING AND OTHER
FEES, NET 35,770 29,566 96,858 92,206
OTHER 60,647 32,323 133,403 68,246
TOTAL OTHER INCOME 137,676 83,474 373,137 258,803
OTHER EXPENSE:
SALARIES AND EMPLOYEE
BENEFITS 342,482 311,680 965,769 928,261
FEDERAL INSURANCE PREMIUMS 91,128 95,315 276,709 317,178
PROFESSIONAL AND OTHER
OUTSIDE SERVICES 166,497 94,021 326,544 237,894
OCCUPANCY OF PREMISES 70,793 77,354 197,065 204,038
-3-
PROVISION FOR (RECOVERY OF)
LOSSES ON REAL ESTATE
OWNED 0 0 0 0
OFFICE SUPPLIES AND RELATED
EXPENSES 35,943 38,153 113,276 102,145
LOCOM ADJUSTMENT ON
PREMISES AND EQUIPMENT 242,000 0 242,000 0
OTHER, NET 292,257 48,012 420,515 131,526
TOTAL OTHER EXPENSES 1,241,100 664,535 2,541,878 1,921,042
INCOME (LOSS) BEFORE
INCOME TAX EXPENSE,
EXTRAORDINARY ITEMS
AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE (145,556) 168,475 367,881 582,218
INCOME TAX EXPENSE
(BENEFIT) (657,727) 32,439 (460,207) 178,251
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 512,171 136,036 828,088 403,967
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE 0 0 0 27,000
NET INCOME 512,171 $136,036 $828,088 $430,967
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $1.04 $ 0.28 $1.69 $0.84
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE $0.06
NET INCOME 1.04 $0.28 $1.69 $0.90
WEIGHTED AVERAGE SHARES
OUTSTANDING 490,583 481,669 488,800 479,643
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-4-
SENTINEL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
NET
UNREALIZED
LOSS ON UNEARNED
RETAINED INVESTMENT COMPENSATION
ADDITIONAL EARNINGS- SECURITIES UNEARNED MANAGEMENT TOTAL
COMMON STOCK PAID-IN SUBSTANTIALLY AVAILABLE COMPENSATION RECOGNITION STOCKHOLDERS'
SHARES AMOUNT CAPITAL RESTRICTED FOR SALE ESOP PLANS EQUITY
BALANCE JULY 1, 1995 513,423 $5,134 $4,602,678 $6,299,468 ($9,433) ($206,114) ($76,500) $10,615,233
NET INCOME - - - $828,088 - - - 828,088
COMPENSATION RELATED TO
MANAGEMENT RECOGNITION
PLANS - - - - - - $38,250 38,250
COMPENSATION RELATED TO
EMPLOYEE STOCK OWNERSHIP
PLAN - - - - - 33,078 - 33,078
CHANGE IN UNREALIZED
LOSS ON INVESTMENT
SECURITIES-AVAILABLE
FOR SALE, net of tax - - - - $6,805 - - 6,805
_________ ________ _________ __________ _____________ ____________ __________ ______________
BALANCE
MARCH 31, 1996 513,423 $5,134 $4,602,678 $7,127,556 ($2,628) ($173,036) ($38,250) $11,521,454
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-5-
SENTINEL FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
MARCH 31
(Unaudited)
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $828,088 $430,967
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
AMORTIZATION OF PREMIUMS AND DISCOUNTS
ON MORTGAGE-RELATED BACKED SECURITIES AND
INVESTMENT SECURITIES, NET 276,777 245,582
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 0 (27,000)
NET LOAN ORIGINATION FEES CAPITALIZED 97,946 15,288
AMORTIZATION OF NET DEFERRED LOAN
ORIGINATION FEES (148,641) (14,384)
GAIN ON SALE OF LOANS HELD FOR SALE, NET (117,262) (12,135)
DEPRECIATION 91,209 86,753
LOCOM ADJUSTMENT ON PREMISES AND EQUIPMENT 242,000 0
AMORTIZATION OF UNEARNED COMPENSATION
EXPENSE RELATED
TO MANAGEMENT RECOGNITION PLANS 38,250 38,250
COMPENSATION EXPENSE RELATED TO ESOP 33,078 0
ORIGINATION OF LOANS HELD FOR SALE (10,180,367) (1,709,668)
PROCEEDS FROM SALE OF LOANS HELD FOR SALE 10,153,402 1,437,478
PROVISION FOR DEFERRED INCOME TAXES 0 0
CHANGES IN:
ACCRUED INTEREST RECEIVABLE 56,405 (40,381)
OTHER ASSETS 109,568 (103,450)
INCOME TAXES PAYABLE (719,081) (8,830)
ACCRUED AND OTHER LIABILITIES (70,973) 5,332
OTHER, NET (37,200) 105,330
NET CASH PROVIDED BY OPERATING ACTIVITIES 653,199 449,132
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM MATURITIES OF INVESTMENT
SECURITIES 500,000 0
PRINCIPAL COLLECTED ON MORTGAGE-
RELATED SECURITIES 13,238,870 11,491,949
PURCHASES OF MORTGAGE-RELATED SECURITIES 0 (9,999,383)
PRINCIPAL COLLECTED ON LOANS
RECEIVABLE, NET OF LOAN ORIGINATION (196,938) (4,009,647)
PURCHASES OF PREMISES AND EQUIPMENT (320,665) (62,283)
PROCEEDS FROM SALES OF REAL ESTATE OWNED 0 109,882
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 13,221,267 (2,469,482)
-6-
CASH FLOWS FROM FINANCING ACTIVITIES:
INTEREST CREDITED 3,876,907 3,821,616
PAYMENTS FOR DEPOSITS, NET (4,758,166) (7,585,122)
NET DECREASE IN ADVANCE PAYMENTS BY
BORROWERS FOR TAXES AND INSURANCE (573,514) (334,260)
PROCEEDS FROM ADVANCES FROM FEDERAL
HOME LOAN BANK 24,050,000 45,535,500
REPAYMENTS ON ADVANCES FROM
FEDERAL HOME LOAN BANK (35,900,000) (35,735,500)
PRINCIPAL COLLECTED ON NOTE RECEIVABLE
FROM ESOP 0 22,525
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (13,304,773) 5,724,759
INCREASE IN CASH AND CASH EQUIVALENTS 569,693 3,704,409
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 3,748,119 1,824,949
END OF PERIOD $4,317,812 $5,529,358
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
INCOME TAX PAYMENTS $192,653 $110,938
INTEREST PAYMENTS $3,811,149 $3,821,616
LOANS TRANSFERRED TO REAL ESTATE OWNED $0 $272,192
TRANSFERS OF LOANS RECEIVABLE TO
ASSETS HELD FOR SALE $799,991 $77,600
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
CHANGE IN UNREALIZED LOSS ON
INVESTMENTS $10,311 ($18,963)
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-7-
SENTINEL FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization
The Consolidated Financial Statements include the accounts of the
Registrant, Sentinel Financial Corporation (the Company), and its wholly-
owned subsidiary, Sentinel Federal Savings and Loan Association of Kansas
City, (the Association). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Sentinel Financial Corporation was organized on September 29, 1993 for the
purpose of serving as a holding company by acquiring all of the capital
stock of the Association upon its conversion from a mutual to a stock
savings and loan. The Company did not engage in any significant business
activities from the time of its organization (September 29, 1993) through
the completion of the Association's mutual to stock conversion (January
1994) at which time it acquired all of the capital stock of the
Association.
Sentinel Financial Corporation concurrently completed an initial public
offering of its common stock, the proceeds of which were substantially
utilized to acquire all the capital stock issued by the Association in
connection with its mutual to stock conversion.
The conversion of the Association from the mutual to stock form of
organization, which was completed on January 7, 1994, did not result in any
intangible assets, including goodwill. Sentinel Financial Corporation's
acquisition of the Association, which was completed on January 7, 1994, is
accounted for at historical cost, in a manner similar to the "pooling-of-
interest" method of accounting for business combinations. The application
of the "pooling-of-interest" accounting method records the assets and
liabilities of the merged companies on a historical cost basis. Therefore,
intangible assets, including goodwill, were not recorded as a result of
this transaction.
The Company's loan to the ESOP is reflected as a reduction of stockholders'
equity and will be reduced as principal repayment of the loan is made. The
loan is to be repaid in seven equal annual installments. The Company is
expected to make discretionary contributions to the ESOP in at least an
amount equal to the principal and interest payments on the associated loan.
Such contributions will be reflected as employee compensation expense.
The restricted stock awards to the management recognition plans is
considered unearned compensation and is deducted from stockholders' equity.
The awards vest ratably over a three year period and will result in a
charge to compensation expense ratably over the vesting period and a
corresponding reduction of the charge against stockholders' equity.
-8-
2. Basis of Presentation
The Consolidated Balance Sheet as of March 31, 1996, the Consolidated
Statements of Operations for the three and nine month periods ending March
31, 1996 and 1995, and the Consolidated Statements of Cash Flows for the
nine month periods ended March 31, 1996 and 1995 have been prepared by the
Company, without audit, and therefore do not include information or
footnotes necessary for a complete presentation of consolidated financial
condition, results of operations, and cash flows in conformity with
generally accepted accounting principles. It is suggested that these
Consolidated Financial Statements be read in conjunction with the June 30,
1995 Financial Statements and notes thereto included with the Company's
Annual Report to Stockholders. However, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for the
fair presentation of the consolidated financial statements have been
included. The results of operations for the nine months ended March 31,
1996 are not necessarily indicative of the results which may be expected
for the entire year.
II. Earnings Per Share
Earnings per share for the period ended March 31, 1996 has been calculated
based on the weighted average number of shares outstanding during the
period.
3. Statement of Financial Accounting Standards No. 114 & No. 118
In October, 1994, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 118, Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures which
became effective for the Association beginning July 1, 1995. This
Statement amends SFAS No. 114, Accounting by Creditors For Impairment of a
Loan, which requires a lender to consider a loan to be impaired if the
lender believes it is probable that it will be unable to collect all
principal and interest due according to the contractual terms of the loan.
If a loan is impaired, the lender will be required to record a loss
valuation allowance equal to the present value of the estimated future cash
flows discounted at the loan's effective rate or based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. This accounting change significantly changed the
accounting by lenders previously allowed under SFAS No. 15. The imple-
mentation of this Statement had no effect on the Association.
4. Statement of Financial Accounting Standards No. 122
In May 1995, the FASB issue SFAS No. 122, Accounting for Mortgage Servicing
Rights, which will become effective for the Company beginning July 1, 1996.
This Statement amends SFAS No. 65, Accounting for Certain Mortgage Banking
Activities, to require that a mortgage banking enterprise recognize as
separate assets rights to service mortgage loans for others, however those
servicing rights are acquired. This Statement requires that a company
-9-
assess its capitalized mortgage servicing rights for impairment based on
the fair value of those rights. Based upon the present status of the
Association's servicing portfolio, management believes that the implemen-
tation of this Statement will have minimal effect on the Company.
5. Statement of Financial Accounting Standards No. 123
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" which requires increased disclosure of compen-
sation expense arising from both fixed and performance stock compensation
plans. Such expense will be measured as the fair value of the award at the
date it is granted using an option-pricing model that takes into account
the exercise price and expected term of the option, the current price of
the underlying stock its expected volatility, expected dividends on the
stock and the expected risk-free rate of return during the term of the
option. The compensation cost would be recognized over the service period,
usually the period from the grant date to the vesting date. SFAS No. 123
encourages rather than requires, companies to adopt a new method that
accounts for stock compensation awards based on their estimated fair value
at the date they are granted. Companies would be permitted, however, to
continue accounting under APB Opinion No. 25 which requires compensation
cost for stock based employee compensation plans be recognized based on the
difference, if any, between the quoted market price of the stock and the
amount an employee must pay to acquire the stock. The Company will
continue to apply APB Opinion No. 25 in its financial statements and will
disclose pro forma net income and earnings per share in a footnote to the
1996 annual report, determined as if the Company applied the new method.
Management has not yet completed its evaluation of the effect this
Statement will have on financial statement disclosures.
6. Loans Receivable
As of June 30, 1995 loans totaling approximately $14,000, were on nonaccrual
status and as of March 31, 1996 there were no loans on non-accrual status.
Gross interest income would have been increased by $300 and $0 as of June
30, 1995 and March 31, 1996, respectively, for nonaccrual loans. Loans are
placed on nonaccrual status when, in the opinion of management, the full
timely collection of principal or interest is in doubt.
The Association did not engage in any troubled debt restructurings during
the year ended June 30, 1995 or the nine months ended March 31, 1996.
At June 30, 1995 and March 31, 1996, the Association has an allowance for
loan losses of approximately $318,000.
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Sentinel Financial Corporation is a Delaware corporation organized on
September 29, 1993. The Holding Company is engaged in the business of
directing and planning the activities of Sentinel Federal Savings and Loan
Association of Kansas City, (Association) the holding company's wholly-
owned subsidiary and primary asset.
The operating results of the Association depend primarily on its net
interest income, which is the difference between interest income on
interest-earning assets, primarily loans and investment securities, and
interest expense on interest-bearing liabilities, primarily deposits and
Federal Home Loan Bank advances.
Merger Announcement
On March 22, 1996, the Company announced the execution of a definitive
agreement to merge with Roosevelt Financial Group, Inc., the holding
company of Roosevelt Bank (Roosevelt). The transaction will result in the
merger of the Association into Roosevelt Bank. Roosevelt Bank is a
federal savings bank with an asset base of $ 9 billion. Roosevelt has
offices located throughout the state of Missouri with additional locations
in Illinois and Kansas. Roosevelt's home office is located in St. Louis,
Missouri.
The transaction is intended to be structured as a tax-free reorganization
and accounted for utilizing the pooling of interest method. Under the
definitive agreement Sentinel Shareholders will receive 1.4231 shares of
Roosevelt stock for each share of the Company's common stock. The
transaction is subject to Sentinel shareholder approval and approval of
the Office of Thrift Supervision.
Merger Related Expenses
During the March quarter the company incurred expenses relating to the
evaluation and negotiation of the above noted merger agreement. These
expenses included, among others, legal fees of approximately $63,000. The
Company consulted with special counsel with respect to legal duties, the
terms of the merger agreement and related issues.
Sentinel retained Trident Financial Corporation to act as its financial
advisor and to render a fairness opinion in connection with the merger.
Fees totaling $35,000 were incurred for Trident's services.
-11-
Provision for Loss on Real Estate Investment
On October 1, 1995 the Company submitted an application to the Office of
Thrift Supervision to relocate its North Kansas City office, close the 1001
Walnut Street office and merge its home office functions into the new North
Kansas City office. On January 11, 1996, the Association received
notification that the Office of Thrift Supervision does not take
Supervisory objection to the application. As a result of final OTS
approval and the pending closing of the downtown office facility, the
Company established a $242,000 loss provision to reflect the difference
between the current market value of the 1001 Walnut Street office and the
recorded book value.
Income Tax Benefit
During the March quarter, the Company reversed previously established tax
accruals relating to the treatment of Net Operating Loss (NOL) carry
forwards. The company's 1991-2 tax returns were filed with appropriate
notice of the use of these NOLs. As of March 15, 1996 ,the three year
statute of limitations expired. As a result of the reversal of
previously established tax accruals, the company recorded an after tax
benefit of $601,245. The company also recorded a $137,323 increase in
interest income to reflect the reversal of previously recorded interest
expense related to the NOL treatment.
Provision for Loss Litigation
On September 11, 1995, a former employee of the Company filed a sexual
harassment suit against the Company. The Company was notified of the suit
during the March quarter. Based on discussions with counsel, a provision
of $150,000 was established to provide for anticipated defense costs.
While the Company believes that the suit is without merit, the magnitude
of the claim could be substantial and the outcome of the litigation cannot
be determined at this time.
Liquidity and Capital Resources
Liquidity Resources:
The Association's primary sources of funds are deposits, Federal Home Loan
Bank Advances and proceeds from principal and interest payments on loans,
mortgage-backed securities and investment securities. While maturities and
scheduled amortization of loans and mortgage-backed securities are a
predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates, economic conditions and
competition. Dependent on the current economic conditions, the Association
receives additional funds through unscheduled prepayments of mortgage loans
and mortgage-backed securities.
To support the company's liquid asset position, the Association purchases
liquidity-qualified instruments as an investment function. These
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instruments may include FDIC insured certificates of deposits, bankers'
acceptances and U.S. Government or agency instruments that are liquidity-
qualified under OTS regulations.
The primary investing activity of the Association is the origination and
purchase of mortgage loans and mortgage-backed securities for investment
purposes.
The OTS requires a savings institution to maintain an average daily balance
of liquid assets (cash and eligible investments) equal to at least 5% of the
average daily balance of its net withdrawable deposits and short-term
borrowings. In addition, short-term liquid assets must constitute 1% of
the sum of net withdrawable deposit accounts plus short-term borrowings.
The Association's actual liquidity ratios were 5.14% and 6.71% as of the
period ended March 31, 1995 and 1996, respectively. The Association's short-
term liquidity ratio was 1.36% and 3.30%, respectively.
Managing the Association's liquidity levels is a daily and a long-term
function of the Association and its Asset Liability Committee. Cash flows
are monitored by the Association on a regular basis. Cash flow planning is
utilized to enhance the Association's earnings where possible. Management
maintains that the Association has access to ample funds to meet any
unforeseen liquidity needs of the near future.
Capital Resources:
The Association is required to maintain specific amounts of capital. As of
March 31, 1996, The Association was in compliance with all regulatory capital
requirements which were effective as of such date.
The Association's capital requirements and actual capital under Office of
Thrift Supervision (OTS) regulations are as follows as of March 31, 1996.
(000's Omitted)
AMOUNT % OF
_________ ASSETS
________
TANGIBLE CAPITAL:
ACTUAL $11,013 7.39%
REQUIRED 2,235 1.50%
EXCESS $8,778 5.89%
CORE CAPITAL:
ACTUAL $11,013 7.39%
REQUIRED 4,470 3.00%
EXCESS $6,543 4.39%
RISK-BASED CAPITAL:
ACTUAL $11,332 20.01%
REQUIRED 4,517 8.00%
EXCESS $6,815 12.01%
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Proposed Federal Legislation:
Congress has recently considered various proposals which, if
implemented, would have a material effect on financial institutions in
general, and the Association in particular. These proposals include, among
others: (i) the consolidation of the four Federal banking agencies (the
Federal Reserve Board, OTS, FDIC, and the Office of the Comptroller of the
Currency), (ii) the imposition of a one-time assessment on all SAIF-member
institutions, like the Association and (iii) requiring all thrifts, like
the Association, to convert to a national or state bank charter (which may
result in adverse income tax consequences if a thrift's bad debt reserve
would be required to be recaptured into income). The outcome of these
various proposals is uncertain and the Association is unable to determine
the extent to which legislation, if enacted, would affect its business.
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COMPARISON OF OPERATING RESULTS FOR THE
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
General. The Association's net income for the three months ended March 31,
1996 was $512,171 compared with $136,036 for the three months ended March
31, 1995. The increase is attributed to certain non-recurring items
discussed above. Net interest income increased from $749,536 for the three
month period ended March 31, 1995 to $957,868 for the three month period
ended March 31, 1996.
Net Interest Income. Net interest income for the three month period ended
March 31, 1996 was $957,868 representing a 27.79% increase from the period
ended March 31, 1995. The increase in net interest income reflects an
increase in the Association's net interest income as a percentage of assets
from 1.86% for the three month period ending March 31, 1995 to 2.57% for
the three month period ended March 31, 1996. The increase in net interest
income is primarily attributable to the non-recurring income related to
the Net Operating Loss Carry forwards(NOLs) as discussed above. During the
period upward repricing yields on adjustable rate loans and a significant
reduction in the level of FHLB Advances also contributed to improved core
earnings.
Interest Income. Interest income for the three months ended March 31, 1996
was $2.7 million compared with $2.6 million for the three months ended
March 31, 1995, representing an increase of $69,832 or 2.66%. The average
yield on interest-earning assets increased from 6.92% as of March 31, 1995
to 7.44% as of March 31, 1996.
The Association's interest on loans receivable increased $177,204 from
$1.46 million during the three months ended March 31, 1995 to $1.6 million
during the three months ended March 31, 1995. Yield increased during the
period from 7.81% in 1995 to 8.13% in 1996.
Interest income on mortgage-backed securities decreased $122,328. The
average balance of mortgage-backed securities decreased approximately $15.9
million, in the three months ended March 31, 1996 compared to the three
months ended March 31, 1995. The decline in the balance of the Mortgage-
backed securities portfolio is the result of normal scheduled amortization
and unscheduled prepayments. The Company has not purchased any additional
securities during the period. The average yield on mortgage-backed
securities increased from 6.1% as of March 31, 1995 to 6.7% as of March 31,
1996. Income from the investment portfolio decreased by $5,225.
Interest Expense. Interest expense for the three months ended March 31,
1996 was $1.7 million compared with $1.9 million for the three months ended
March 31, 1995, representing an decrease of $138,500 or 7.39%. The lower
interest expense for the period was the result of lower FHLB Advance
balances and the reversal of previous interest expense related to the above
discussed NOLs.
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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. During the period no additional loan loss provisions were
established.
Other Income. Other income for the three month period ended March 31, 1996
was $137,676. Gain on assets held for sale was $34,906 for the same
period.
Other Expense. Other expenses for the three month period ended March 31,
1996 totaled $1.2 million. Other expenses consisted of compensation
related expenses, building and maintenance expenses, federal insurance
premiums, audit and OTS examination fees, and other general and
administrative expenses.
Other non-reoccurring expenses included during the period are discussed
under the Management Discussion and Analysis of Financial Condition and
Results of Operations section. These items include Merger Expenses,
Provision for Loss on Real Estate Investment and Provision for Loss Legal
Expense.
There is currently a disparity in the Federal Insurance Premiums between
banks and Savings Institutions (BIF/SAIF). A one time assessment payment
to increase SAIFs reserves to $1.25 per $ 100 of deposits will be
required by all SAIF - member institutions including the Association. Such
assessment is estimated to be between 85 and 90 basis points on the amount
of deposits held by each SAIF member institution. Based on the Associations'
assessable deposits of $128.3 million, a one time assessment of 90 basis
points would require a one-time expense of approximately $710,000 after tax
impact.
Income Taxes: During the period the Company recorded a net tax benefit to
reflect the reversal of previous tax accruals noted above. Exclusive of
the reversal the effective income tax rate was 38.5%
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COMPARISON OF OPERATING RESULTS FOR THE
NINE MONTHS ENDED MARCH 31, 1996 AND 1995
General. The Association's net income for the nine months ended March 31,
1996 was $828,088 compared with $430,967 for the nine months ended March
31, 1995. The increase was primarily attributable to certain non-
reoccurring items as discussed under previous section of this report.
Net interest income rose from $2.2 million for the nine month period ended
March 31, 1995 to $2.5 million for the nine month period ended March 31,
1996.
Net Interest Income. Net interest income for the nine month period ended
March 31, 1996 was $2.5 million, representing a 13.02% increase from the
period ended March 31, 1995. The increase in net interest income reflects
an increase in the Association's net interest income as a percentage of
assets from 1.86% for the nine month period ending March 31, 1995 to 2.27%
for the nine month period ended March 31, 1996. The increase in net
interest income is attributable to several factors, including the reversal
of previously accrued interest expense related the NOLs. During the period
upward repricing yields on adjustable rate loans and mortgage-backed
securities contributed to improved net interest income.
Interest Income. Interest income for the nine months ended March 31, 1996
was $8.3 million compared with $7.6 million for the nine months ended March
31, 1995, representing an increase of $685,542 or 9.04%. The average yield
on interest-earning assets increased from 6.92% for the nine months ended
March 31, 1995 to 7.44% for the nine months ended March 31, 1996.
The Association's interest on loans receivable increased $658,808 during
the nine months ended March 31, 1996. Yield increased during the period
from 7.81% in 1994 to 8.13% in 1995.
Interest on mortgage-backed securities decreased $9,075. The average
balance of mortgage-backed securities decreased approximately $15.9
million, in the nine months ended March 31, 1996 compared to the nine
months ended March 31, 1995. The decline in the balance of the mortgage-
backed securities portfolio is the result of normal scheduled amortization
and unscheduled prepayments. The Company has not purchased any additional
securities during the period. The average yield on mortgage-backed
securities increased from 6.1% as of March 31, 1995 to 6.7% as of March 31,
1996. Income from the investment portfolio decreased by $15,235.
Interest Expense. Interest expense for the nine months ended March 31,
1996 was $5.7 million compared with $5.3 million for the nine months ended
March 31, 1995, representing an increase of $393,377 or 7.37%. The higher
interest expense for the period was the result of higher prevailing
interest rates during the period. The degree of the increase in interest
expense was muted by the reversal of previously recorded interest expense
relating the NOLs.
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Provisions for Losses. Provisions for loan losses are charged to earnings
to bring the total loss allowance to a level considered adequate by
management.
Other Income. Other income for the nine month period ended March 31, 1996
was $373,137. Income from gain on sale of assets held for sale was
$117,252.
Other Expense. Other expenses for the nine month period ended March 31,
1996 totaled $2.5 million. Other expenses consisted of compensation
related expenses, building and maintenance expenses, federal insurance
premiums, audit and OTS examination fees, and other general and
administrative expenses.
Other nonrecurring expenses included during the period are discussed under
the Management Discussion and Analysis of Financial Condition and Results
of Operations section. These items include Merger Expenses, Provision for
Loss on Real Estate Investment and Provision for Loss Litigation.
Income Taxes: During the period the Company recorded a net tax benefit to
reflect the reversal of previous tax accruals noted above. Exclusive of
the reversal the effective income tax rate was 38.5%
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SENTINEL FINANCIAL CORPORATION
PART II
Item 1. Legal Proceedings
See Disclosure on Part I
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
See proxy card.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Registrant filed a report on Form 8-K during the
period January 1, 1996 through March 31, 1996.
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SENTINEL FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned
thereunto duly authorized.
Sentinel Financial Corporation
(Registrant)
Date: By:
Craig Laemmli
President
Chief Executive Officer
Date: By:
John C. Spencer
Executive Vice President
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