<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 #0-17403
ROOSEVELT FINANCIAL GROUP, INC.
---------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 43-1498200
--------------------------------- ------------------------
(State or other Jurisdiction (I.R.S. Employer ID No.)
of incorporation or organization)
900 ROOSEVELT PARKWAY, CHESTERFIELD, MISSOURI 63017
---------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (314) 532-6200
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 7, 1996
---------------------- -----------------------------------
Common Stock 43,340,137
Par Value $.01
<PAGE> 2
<TABLE>
INDEX
ROOSEVELT FINANCIAL GROUP, INC.
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
- Consolidated Balance Sheets 2
- Consolidated Statements of Operations 3
- Consolidated Statements of Stockholders'
Equity 4
- Consolidated Statements of Cash Flows 5
- Notes to Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Report on Form 8-K 26
Signatures 27
Exhibit Index 28
Exhibit 29
</TABLE>
<PAGE> 3
<TABLE>
ROOSEVELT FINANCIAL GROUP, INC.
Consolidated Balance Sheets
(dollars in thousands, except share data) (Unaudited)
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 46,006 $ 15,433
Securities available for sale:
Investment securities 168,717 159,857
Mortgage-backed securities 959,980 1,446,604
Securities held to maturity:
Investment securities 114,018 119,186
Mortgage-backed securities 3,195,976 3,430,954
Loans held for sale 252,387 --
Loans 3,962,766 3,577,892
Real estate owned 14,679 15,433
Office properties and equipment, net 53,008 52,466
Other assets 280,025 195,236
---------- ----------
$9,047,562 $9,013,061
========== ==========
Liabilities and Stockholders' Equity:
Deposits $5,062,359 $4,907,497
Securities sold under agreements to repurchase 405,344 1,082,814
Advances from Federal Home Loan Bank 2,868,756 2,377,138
Other borrowings -- 47,523
Other liabilities 205,236 101,183
---------- ----------
Total Liabilities 8,541,695 8,516,155
---------- ----------
Stockholders' equity:
Preferred stock - $.01 par value; $50 preference value; 6.5% non-cumulative
perpetual convertible; aggregate preference value of $65,005 and $65,050
at September 30, 1996 and December 31, 1995, respectively; 3,000,000
shares authorized and 1,300,100 and 1,301,000 issued and outstanding at
September 30, 1996 and December 31, 1995, respectively 13 13
Common stock - $.01 par value; 90,000,000 shares authorized;
42,157,516 and 41,991,701 shares issued and outstanding at September 30,
1996 and December 31, 1995, respectively 422 420
Paid-in capital 264,274 262,381
Retained earnings - subject to certain restrictions 242,452 223,606
Unrealized gain (loss) on securities available for sale, net of taxes (89) 12,019
Unamortized restricted stock awards (1,205) (1,533)
---------- ----------
Total Stockholders' Equity 505,867 496,906
---------- ----------
$9,047,562 $9,013,061
========== ==========
See accompanying notes to consolidated financial statements
</TABLE>
2
<PAGE> 4
<TABLE>
ROOSEVELT FINANCIAL GROUP, INC.
Consolidated Statements of Operations
(dollars in thousands, except per share information) (Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 77,393 $ 63,472 $222,700 $184,234
Securities available for sale 23,074 32,669 78,019 104,824
Securities held to maturity 59,515 67,487 187,040 193,070
Other 606 292 1,252 804
--------- -------- -------- --------
Total interest income 160,588 163,920 489,011 482,932
--------- -------- -------- --------
Interest expense:
Deposits 62,514 59,907 184,633 172,538
Other borrowings 49,560 58,054 155,420 167,650
Interest rate exchange agreements, net 5,183 2,739 15,957 5,528
--------- -------- -------- --------
Total interest expense 117,257 120,700 356,010 345,716
--------- -------- -------- --------
Net interest income 43,331 43,220 133,001 137,216
Provision for losses on loans 300 300 900 900
--------- -------- -------- --------
Net interest income after
provision for losses on loans 43,031 42,920 132,101 136,316
--------- -------- -------- --------
Noninterest income (loss):
Retail banking fees 4,422 2,850 11,009 8,078
Insurance and brokerage sales commissions 2,750 1,792 6,468 5,908
Loan servicing fees, net 3,065 1,822 7,798 5,966
Gain on sale of purchased mortgage servicing rights -- 1,510 -- 1,510
Net gain (loss) from financial instruments 1,781 1,620 2,643 (54,119)
Unrealized losses on impairment of
mortgage-backed securities held to maturity -- -- -- (27,063)
Other 785 898 3,679 2,436
--------- -------- -------- --------
Total noninterest income (loss) 12,803 10,492 31,597 (57,284)
--------- -------- -------- --------
Noninterest expense:
Compensation and employee benefits 11,302 8,676 31,821 25,887
Occupancy 4,767 4,358 13,158 13,015
Federal insurance premiums 2,306 2,575 6,912 8,998
SAIF assessment 27,410 -- 27,410 --
Other 7,073 5,266 18,703 16,208
--------- -------- -------- --------
Total noninterest expense 52,858 20,875 98,004 64,108
--------- -------- -------- --------
Income before income tax expense
and extraordinary items 2,976 32,537 65,694 14,924
Income tax expense 1,016 11,040 22,441 3,742
--------- -------- -------- --------
Income before extraordinary items 1,960 21,497 43,253 11,182
Extraordinary items (1,452) -- (1,452) --
--------- -------- -------- --------
Net income $ 508 $ 21,497 $ 41,801 $ 11,182
========= ======== ======== ========
Net income (loss) attributable
to common stock $ (548) $ 20,440 $ 38,631 $ 7,996
========= ======== ======== ========
Primary earnings per share:
Income before extraordinary items $ 0.02 $ 0.50 $ 0.94 $ 0.20
Extraordinary items (0.03) -- (0.03) --
--------- -------- -------- --------
Net income (loss) $ (0.01) $ 0.50 $ 0.91 $ 0.20
========= ======== ======== ========
Fully-diluted earnings per share:
Income before extraordinary items $ 0.02 $ 0.47 $ 0.91 $ 0.20
Extraordinary items (0.03) -- (0.03) --
--------- -------- -------- --------
Net income (loss) $ (0.01) $ 0.47 $ 0.88 $ 0.20
========= ======== ======== ========
Dividends Paid $ 0.155 $ 0.14 $ 0.465 $ 0.42
========= ======== ======== ========
See accompanying notes to consolidated financial statements
</TABLE>
3
<PAGE> 5
<TABLE>
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands) (Unaudited)
<CAPTION>
Unreal-
ized
gain
(loss) on Un-
secur- amor-
ities tized
available Res- Total
Preferred Stock Common Stock Treasury Stock for tricted Stock-
---------------- ----------------- Paid-in Retained ---------------- sale, net Stock holders'
Shares Amount Shares Amount Capital Earnings Shares Amount of taxes Awards Equity
--------- ------ --------- ------ -------- -------- --------- ------ --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 1,319,000 $13 40,173,527 $402 $255,655 $209,379 (10,000) $ (150) $(23,673) $ -- $441,626
Net income -- -- -- -- -- 27,098 -- -- -- -- 27,098
Purchase of common stock
for treasury -- -- -- -- -- -- (214,500) (3,426) -- -- (3,426)
Issuance of common stock
through stock options
and employee stock plans -- -- 243,763 3 1,531 (1,572) 209,976 3,345 -- (1,621) 1,686
Issuance of common stock
in the acquisition of
Kirksville Bancshares, Inc. -- -- 1,521,435 15 5,426 15,475 -- -- -- -- 20,916
Exchange of preferred stock for
common stock (18,000) -- 52,976 -- (231) -- 14,524 231 -- -- --
Amortization of restricted
stock awards -- -- -- -- -- -- -- -- -- 88 88
Cash dividends declared:
Common stock -- -- -- -- -- (22,531) -- -- -- -- (22,531)
Preferred stock -- -- -- -- -- (4,243) -- -- -- -- (4,243)
Unrealized gains on securities
available for sale, net -- -- -- -- -- -- -- -- 35,692 -- 35,692
--------- --- ---------- ---- -------- -------- -------- ------ -------- ------- --------
Balance, December 31, 1995 1,301,000 13 41,991,701 420 262,381 223,606 -- -- 12,019 (1,533) 496,906
Net income -- -- -- -- -- 41,801 -- -- -- -- 41,801
Purchase of common stock for
treasury -- -- -- -- -- -- (57,000) (923) -- -- (923)
Issuance of common stock through
stock options and employee
stock plans -- -- 162,440 2 1,893 (205) 57,000 923 -- 236 2,849
Exchange of preferred stock
for common stock (900) -- 3,375 -- -- -- -- -- -- -- --
Amortization of restricted
stock awards -- -- -- -- -- -- -- -- -- 92 92
Cash dividends declared:
Common stock -- -- -- -- -- (19,580) -- -- -- -- (19,580)
Preferred stock -- -- -- -- -- (3,170) -- -- -- -- (3,170)
Unrealized losses on securities
available for sale, net -- -- -- -- -- -- -- -- (12,108) -- (12,108)
--------- --- ---------- ---- -------- -------- -------- ------ -------- ------- --------
Balance, September 30, 1996 1,300,100 $13 42,157,516 $422 $264,274 $242,452 -- $ -- $ (89) $(1,205) $505,867
========= === ========== ==== ======== ======== ======== ====== ======== ======= ========
See accompanying notes to consolidated financial statements
</TABLE>
4
<PAGE> 6
<TABLE>
ROOSEVELT FINANCIAL GROUP, INC.
Consolidated Statements of Cash Flows
(dollars in thousands) (Unaudited)
<CAPTION>
Nine Months Ended
September 30,
1996 1995
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 41,801 $ 11,182
Adjustments to reconcile net income to net cash provided by operating activities:
Extraordinary loss on early extinguishment of debt 1,452 --
Accrual of SAIF special assessment 27,410 --
Depreciation and amortization 3,390 3,142
Amortization of discounts and premiums, net 27,363 5,344
Increase in accrued interest receivable (1,277) (8,515)
Increase (decrease) in accrued interest payable (11,182) 8,641
Provision for losses on loans 900 900
Unrealized losses on impairment of mortgage-backed securities held to maturity -- 27,063
Other, net (1,560) (33,519)
------------ -----------
Net cash provided by operating activities 88,297 14,238
------------ -----------
Cash flows from investing activities:
Principal payments and maturities of securities available for sale 139,243 87,176
Principal payments and maturities of securities held to maturity 803,143 554,735
Principal payments on loans 658,410 444,746
Proceeds from sales of securities available for sale 879,425 806,101
Purchase of securities available for sale (561,610) (736,643)
Purchase of securities held to maturity (573,971) (1,145,331)
Purchase of loans (287,264) (302,088)
Originations of loans (1,022,183) (376,952)
Net proceeds from sales of real estate 7,415 7,095
Purchase of mortgage servicing rights (36,069) --
Purchase of office properties and equipment (3,985) (2,250)
------------ -----------
Net cash provided by (used in) investing activities 2,554 (663,411)
------------ -----------
Cash flows from financing activities:
Proceeds from FHLB advances 14,575,500 12,330,000
Principal payments on FHLB advances (14,084,000) (11,721,000)
Redemption of subordinated notes (28,750) --
Defeasance of mortgage-backed bonds (21,048) --
Proceeds received from termination of interest rate exchange agreements 16,029 --
Fees paid for interest rate cap agreements (49,290) --
Excess of deposit receipts over withdrawals (withdrawals over receipts) 154,502 (127,159)
(Decrease) increase in securities sold under agreements to repurchase, net (677,470) 160,648
Proceeds from exercise of stock options 1,814 547
Purchase of treasury stock (923) (3,426)
Cash dividends paid (22,750) (20,075)
Net increase in advances from borrowers for taxes and insurance 76,108 52,437
------------ -----------
Net cash provided by (used in) financing activities (60,278) 671,972
------------ -----------
Net increase in cash and cash equivalents 30,573 22,799
Cash and cash equivalents at beginning of period 15,433 21,901
------------ -----------
Cash and cash equivalents at end of period $ 46,006 $ 44,700
============ ===========
Supplemental disclosures of cash flow information:
Payments during the period for:
Interest $ 367,192 $ 337,075
Income taxes 28,698 33,475
Noncash investing and financing activities:
Desecuritization resulting in transfer of mortgage-backed securities held to
maturity to loans receivable held to maturity and real estate owned -- 33,603
Redesignation of interest rate exchange and cap agreements to securities
available for sale 3,235 --
See accompanying notes to consolidated financial statements
</TABLE>
5
<PAGE> 7
ROOSEVELT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Roosevelt
Financial Group, Inc. (the Company), its wholly-owned subsidiaries,
Roosevelt Bank (the Bank) and F & H Realty (Realty) and the Bank's
wholly-owned subsidiaries as of September 30, 1996 and December 31, 1995 and
for the three month and nine month periods ended September 30, 1996 and 1995.
In the opinion of management, the preceding unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial condition of the
Company as of September 30, 1996 and December 31, 1995 and the results of its
operations for the three month and nine month periods ended September 30, 1996
and 1995.
The preceding unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do
not include all information and footnotes necessary for a fair presentation
of financial condition, results of operations and cash flows in conformity
with generally accepted accounting principles. The following material under
the heading "Management's Discussion and Analysis of Financial Condition and
Results of Operations" is written with the presumption that the users of the
interim financial statements have read, or have access to, the Company's
latest audited consolidated financial statements and notes thereto, together
with Management's Discussion and Analysis of Financial Condition and Results
of Operations as of December 31, 1995 and for the three year period then
ended. Therefore, only material changes in financial condition and results
of operations are discussed in the remainder of Part I.
When necessary, reclassifications have been made to prior period
balances to conform to the current period presentation.
During August 1996, the Staff of the Securities and Exchange Commission
(Staff) performed a regular review of the Company's 1995 Form 10-K in
conjunction with Registration Statements on Form S-4 filed by the Company
related to the three pending acquisitions.
As a result of this review, the Staff questioned the Company's original
accounting treatment surrounding the deferral and recognition of gains and
losses on financial futures contracts used to reduce the interest rate risk
of certain mortgage backed securities in the Company's available for sale
portfolio. The Company originally recognized a $34.8 million charge to
fourth quarter 1995 earnings regarding the cessation of deferral accounting.
At issue was the Staff's contention that the financial futures
contracts did not meet the "high correlation" criteria of Statement of
Financial Accounting Standards No. 80, "Accounting for Futures Contracts",
thus not qualifying for deferral accounting from the inception of the hedge
in March 1994 and requiring the recognition of subsequent gains and losses in
income. The Company originally ceased deferral accounting when management
concluded that high correlation measured using the "cumulative dollar
approach" was unlikely to be achieved on a consistent basis.
Accordingly, at the Staff's request, the Company has restated its 1995
consolidated financial statements to reflect the cessation of deferral
accounting, from the inception of the hedge, with respect to the
aforementioned financial futures contracts. The restatement had the effect
of increasing previously reported net income for the three month period ended
September 30, 1995 by $747,000 and decreasing previously reported net income
for the nine month period ended September 30, 1995 by $36.3 million. This
restatement is one of the timing of recognition of gains and losses in the
Statement of Operations and has no impact on total stockholders' equity at
any date since both the financial futures contracts and the related
mortgage-backed securities had been previously marked to market through
stockholder's equity at each reporting period.
Subsequent to December 31, 1995, the Company terminated all of its
financial futures positions and maintained its interest rate risk management
position by principally redesignating existing interest rate exchange
agreements to the available for sale portfolio. Such interest rate exchange
agreements were utilized prior to the redesignation to manage the interest
rate risk of short-term borrowings.
6
<PAGE> 8
NOTE 2 - ACQUISITIONS
On April 16, 1996, the Company announced the execution of a definitive
agreement to acquire Community Charter Corporation (CCC), a commercial bank
holding company, in a stock-for-stock transaction. CCC is the parent company
of Missouri State Bank and Trust Company (MSB), which serves the St. Louis
metropolitan area. The Company does not plan to merge MSB into its existing
wholly-owned subsidiary, Roosevelt Bank. Instead, the Company will own MSB
as a separate legal entity, which will continue to be regulated by the
Missouri Division of Finance. In the transaction each holder of the common
stock of CCC will receive 1.6 shares of the Company common stock for each
share of CCC. The transaction was approved by the stockholders of CCC at a
shareholders meeting on October 23, 1996. It is anticipated that the
transaction will close in the later part of the fourth quarter of 1996. It
is not known at this time as to whether the transaction will be accounted for
under the pooling of interests method or purchase method of accounting. In
order to apply pooling of interests accounting to this transaction, the
Company would be required to rescind its existing stock repurchase plan
described in Note 7 prior to consummation of the transaction. CCC's
consolidated total assets were approximately $67.6 million at September 30,
1996.
On October 25, 1996, the Company completed the merger of Mutual
Bancompany, Inc. (Mutual), with assets totaling approximately $48.8 million.
In addition, as of such date, Mutual Savings Bank, a wholly-owned subsidiary of
Mutual, merged with and into Roosevelt Bank. Pursuant to the Merger Agreement,
each holder of the common stock of Mutual, par value of $.01 per share, received
1.3235 shares of the common stock of the Company, par value $.01 per share.
The transaction was structured to qualify as a tax free reorganization and
was accounted for under the purchase method of accounting.
On October 31, 1996, the Company completed the merger of Sentinel
Financial Corporation (Sentinel), with assets totaling approximately $143.8
million. In addition, as of such date, Sentinel Federal Savings and Loans
Association, a wholly-owned subsidiary of Sentinel, merged with and into
Roosevelt Bank. Pursuant to the Merger Agreement, each holder of the common
stock of Sentinel, par value of $.01 per share, received 1.4231 shares of the
common stock of the Company, par value $.01 per share. The transaction was
structured to qualify as a tax free reorganization and was accounted for
under the purchase method of accounting.
7
<PAGE> 9
NOTE 3 -SECURITIES AVAILABLE FOR SALE
The amortized cost and market value of securities available for sale at
September 30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Government and agency obligations $ 1,235 $ 278 $ -- $ 1,513
Corporate securities 12,924 1,245 (253) 13,916
---------- ------- -------- ----------
14,159 1,523 (253) 15,429
FHLB stock 153,288 -- -- 153,288
---------- ------- -------- ----------
167,447 1,523 (253) 168,717
---------- ------- -------- ----------
Mortgage-backed Securities:
Mortgage-backed certificates:
GNMA 446,363 5,149 (393) 451,119
FNMA 203,944 649 (322) 204,271
FHLMC 226,496 355 (663) 226,188
Other 51,453 2,437 (1,911) 51,979
Derivative financial instruments:
Interest rate cap agreements 29,468 2,226 (8,275) 23,419
Interest rate floor agreements 2,973 1,873 (1,842) 3,004
---------- ------- -------- ----------
960,697 12,689 (13,406) 959,980
---------- ------- -------- ----------
$1,128,144 $14,212 $(13,659) $1,128,697
========== ======= ======== ==========
</TABLE>
Gross realized gains and gross realized losses on sales of securities
available for sale are summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
-------- -------
<S> <C> <C>
Gross realized gains $ 31,557 $16,158
Gross realized losses (15,579) (378)
-------- -------
$ 15,978 $15,780
======== =======
</TABLE>
8
<PAGE> 10
NOTE 4 - SECURITIES HELD TO MATURITY
The amortized cost and market value of securities held to maturity at
September 30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Government and agency obligations $ 110,331 $ 687 $ -- $ 111,018
Corporate securities 3,687 11 -- 3,698
---------- ------- -------- ----------
114,018 698 -- 114,716
---------- ------- -------- ----------
Mortgage-backed Securities:
Mortgage-backed certificates:
GNMA 10,975 112 (172) 10,915
FNMA 69,243 1,107 (315) 70,035
FHLMC 75,318 1,755 (706) 76,367
Private pass-throughs 2,581,821 17,526 (21,095) 2,578,252
Collateralized mortgage obligations 458,619 3,345 (4,560) 457,404
---------- ------- -------- ----------
3,195,976 23,845 (26,848) 3,192,973
---------- ------- -------- ----------
$3,309,994 $24,543 $(26,848) $3,307,689
========== ======= ======== ==========
</TABLE>
NOTE 5 - LOANS HELD FOR SALE
Residential loans held for sale were $252.4 million at September 30,
1996. Such loans are carried at the lower of cost or market determined on an
aggregate basis. Gains and losses are recorded in noninterest income as a
component of net gain (loss) on financial instruments.
NOTE 6 - COMMON STOCK DIVIDENDS AND PREFERRED STOCK DIVIDENDS
On October 24, 1996, the Board of Directors declared the Company's
thirty-fifth common stock cash dividend in the amount of 15.5 cents per share
payable November 29, 1996 to stockholders of record on November 15, 1996.
On September 26, 1996, the Board of Directors declared the regular quarterly
cash dividend on the Company's Series A and Series F 6.5% non-cumulative
perpetual convertible preferred stock in the amount of 81.25 cents per share
payable November 15, 1996 to stockholders of record on November 5, 1996.
NOTE 7 - STOCK REPURCHASE PROGRAM
On December 15, 1994, the Board of Directors of Roosevelt Financial
Group, Inc. authorized the Company to acquire up to 1,750,000 shares of its
own common stock or common equivalents, subject to market conditions, prior
to December 31, 1997. The stock repurchased is to be held in treasury in
order to fund the Company's benefit programs or for other corporate purposes.
Shares of stock repurchased may also be retired, from time to time, if not
needed for other corporate purposes. Through September 30, 1996, 281,500
shares of common stock of the Company have been repurchased at market prices
pursuant to the stock repurchase program.
NOTE 8 - IMPAIRMENT OF MORTGAGE-BACKED SECURITIES HELD TO MATURITY
At March 31, 1995, certain private issuer mortgage-backed securities
held by the Company were determined to be other than temporarily impaired, as
defined by Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities" (SFAS 115). As a
result, the Company recorded a $27.1 million pre-tax write-down ($17.8
million after tax or $0.40 per share) for the three months ended March 31,
1995, to reflect the impairment of such securities. The amount of the
write-down was based on discounted cash flow analyses performed by management
(based upon assumptions regarding delinquency levels, foreclosure rates and
loss ratios on REO disposition in the underlying portfolio). Discounted cash
flow analyses were utilized
9
<PAGE> 11
to estimate fair value due to the absence of a ready market for the securities.
Each of the securities deemed to be impaired were rated CCC by Standard & Poors
and Ba1, Ba2 or Ba3 by Moodys at March 31, 1995. Refer to the caption entitled
"Unrealized Losses on Impairment of Mortgage-Backed Securities Held to Maturity"
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for further information regarding the affected
mortgage-backed securities and related write-down.
NOTE 9 - EARNINGS PER SHARE
Net income for primary earnings per share is adjusted for the dividends
on convertible preferred stock. Primary earnings per share have been
computed based on the weighted average number of common shares outstanding
and common stock equivalents arising from the assumed exercise of outstanding
stock options unless their effect would be anti-dilutive. Common stock
equivalents are computed under the treasury stock method. Average common and
common stock equivalents outstanding, for the three month periods ended
September 30, 1996 and 1995 were 42,387,024 and 40,645,389, respectively.
Average common and common stock equivalents outstanding, for the nine month
periods ended September 30, 1996 and 1995 were 42,402,662 and 40,596,697,
respectively.
Fully-diluted earnings per share have been computed using the weighted
average number of common shares and common stock equivalents, which include
the effect of the assumed conversion of the 6.5% non-cumulative convertible
preferred stock into common stock. Net income has not been adjusted for the
preferred stock dividend for the purposes of the fully-diluted earnings per
share calculation. Average common and common stock equivalents outstanding,
for the purpose of calculating fully-diluted earnings per share, for the
three month periods ended September 30, 1996 and 1995 were 42,387,715 and
45,552,569, respectively. Average common and common stock equivalents
outstanding, for the purpose of calculating fully-diluted earnings per share,
for the nine month periods ended September 30, 1996 and 1995 were 47,289,616
and 45,503,357, respectively.
NOTE 10 - ACCOUNTING PRONOUNCEMENTS
During June 1996, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinquishments of
Liabilities" (SFAS 125). SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities based on consistent application of a financial components
approach that focuses on control. It distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. Under the
financial components approach, after a transfer of financial assets, an
entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The financial
components approach focuses on the assets and liabilities that exist after
the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not
meet the criteria for a sale, the transfer is accounted for as a secured
borrowing with pledge of collateral.
SFAS 125 extends the "available-for-sale" or "trading" approach in SFAS
115 to nonsecurity financial assets that can contractually be prepaid or
otherwise settled in such a way that the holder of the asset would not
recover substantially all of its recorded investment. Thus, nonsecurity
financial assets (no matter how acquired) such as loans, other receivables,
interest-only strips or residual interests in securitization trusts that are
subject to prepayment risk that could prevent recovery of substantially all
of the recorded amount are to be reported at fair value with the change in
fair value accounted for depending on the asset's classification as
"available-for-sale" or "trading". SFAS 125 also amends SFAS 115 to prevent
a security from being classified as held-to-maturity if the security can be
prepaid or otherwise settled in such a way that the holder of the security
would not recover substantially all of its recorded investment.
SFAS 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is
to be applied prospectively. Earlier or retroactive application is not
permitted. Also, the extension of the SFAS 115 approach to certain
nonsecurity financial assets and the amendment to SFAS 115 is effective for
financial assets held on or acquired after January 1, 1997.
Reclassifications that are necessary because of the amendment do not call
into question an entity's intent to hold other debt securities to maturity in
the future. The adoption of SFAS 125 is not expected to have a material
impact on the Company's financial statements.
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and, accordingly, recognizes no compensation expense as the
exercise price of the Company's employee stock options equal the market price
of the underlying stock on the date of grant. In October 1995, the FASB
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123). Upon adoption in 1996, the Company
elected the pro forma disclosure alternative provided in SFAS 123. Such
adoption did not have any impact on the Company's financial statements.
10
<PAGE> 12
During May 1995, the FASB issued Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122).
SFAS 122 requires that an institution which sells or securitizes loans it has
originated or purchased and maintains the servicing rights to capitalize the
cost of the rights to service such loans. As the Company generally has not
retained servicing on any loans that have been originated and subsequently sold,
the aforementioned provision of SFAS 122 does not have any significant impact on
the Company's financial statements. SFAS 122 also requires that an enterprise
assess its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. SFAS 122 should be applied prospectively for
fiscal years beginning after December 15, 1995. The Company's adoption of
SFAS 122, effective January 1, 1996, did not have a significant impact on
the Company's financial statements.
During March 1995, the FASB issued Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS 121 provides
guidance for the recognition and measurement of impairment of long-lived
assets, certain identifiable intangibles, and goodwill related both to assets
to be held and used and assets to be disposed of. SFAS 121 requires entities
to perform separate calculations for assets to be held and used to determine
whether recognition of an impairment loss is required and, if so, to measure
the impairment. SFAS 121 requires long-lived assets and certain identifiable
intangibles to be disposed of to be reported at the lower of carrying amount
or fair value less costs to sell, except for assets covered by the provisions
of APB Opinion No. 30 "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions". SFAS 121 is effective
for financial statements issued for fiscal years beginning after December 15,
1995, although earlier application is encouraged. The Company's adoption of
SFAS 121, effective January 1, 1996, did not have a significant impact on the
Company's financial statements.
11
<PAGE> 13
ROOSEVELT FINANCIAL GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will
likely result", "are expected to", "will continue", "is anticipated",
"estimate", "project" or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company wishes to caution readers not to
place undue reliance on any such forward-looking statements, which speak only
as of the date made, and to advise readers that various factors, including
regional and national economic conditions, substantial changes in levels of
market interest rates, credit and other risks of lending and investment
activities and competitive and regulatory factors, could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
RESULTS OF OPERATIONS
Net Income
- ----------
The Company recorded net income totaling $508,000 in the three month
period ended September 30, 1996 as compared to $21.5 million for the three
month period ended September 30, 1995. After giving consideration to the
dividend on the Company's preferred stock, this resulted in a fully diluted
per share net income (loss) of ($0.01) and $0.47, respectively. Net income in
the three month period ended September 30, 1996 was adversely impacted by a
$27.4 million pre-tax charge imposed by the Federal Deposit Insurance
Corporation (FDIC) in order to recapitalize the Savings Association Insurance
Fund and by a $1.5 million after-tax charge related to the early
extinguishment of the Company's long-term debt. Beginning on January 1, 1997,
the Company's deposit insurance premiums will decline from its current 23 basis
points to approximately 6.4 basis points. Without these charges, net income and
fully diluted earnings per share would have been $19.7 million and $0.42,
respectively as compared to $21.5 million and $0.47 for the three month period
ended September 30, 1995.
The Company recorded net income and fully diluted earnings per share of
$41.8 million and $0.88 for the nine month period ended September 30, 1996 as
compared to $11.2 million and $0.20 for the same period in 1995. Net income
for the nine month period ended September 30, 1996 was adversely impacted by
the $27.4 million pre-tax charge imposed by the FDIC and by the $1.5 million
after-tax charge related to early extinguishments of the Company's long-term
debt. Without these charges, net income and fully diluted earnings per share
for the nine months ended September 30, 1996 would have been $61.1 million
and $1.29, respectively. Net income for the nine month period ended
September 30, 1995 was adversely impacted by the recognition of $57.5 million
pre-tax losses resulting from the mark to market of the Company's financial
futures positions used to reduce the interest rate risk in the available for
sale portfolio and by a $27.1 million pre-tax charge for unrealized losses on
impairment of certain mortgage-backed securities. Excluding these charges,
net income and fully diluted earnings per share would have been $74.5 million
and $1.64, respectively. For a discussion of issues relating to financial
futures positions see Note 1 - Basis of Presentation to the Notes to
Consolidated Financial Statements. For a discussion of the issues relating to
the unrealized losses see "Unrealized Losses on Impairment of Mortgage-Backed
Securities Held to Maturity".
12
<PAGE> 14
Interest Income
- ---------------
Interest income decreased $3.3 million to $160.6 million for the three
month period ended September 30, 1996 as compared to $163.9 million for the
three month period ended September 30, 1995. Interest income on loans
increased $13.9 million primarily as a result of an increase in the average
balance of loans from $3.4 billion for the three months ended September 30,
1995 to $4.1 billion for the three months ended September 30, 1996 which was
partially offset by a decline in the average yield on such loans from 7.57%
for the three months ended September 30, 1995 to 7.48% for the three months
ended September 30, 1996. The increase in the average balance of loans is
primarily attributable to the Company's continuing efforts to originate a
greater portion of its assets in the form of mortgage and consumer loans, as
well as strong demand for such loans in the Company's retail markets. The
slight decrease in the average yield of the Company's loan portfolio resulted
from continuing prepayments of higher yielding loans with such loans being
replaced with loans carrying low introductory rates, which until they adjust
provide a relatively low spread to the marginal cost of funds. Interest
income on securities available for sale decreased $9.6 million primarily as a
result of a decrease in the average balance of such securities outstanding by
approximately $406.7 million when comparing the 1996 period to the 1995
period. The decrease of the Company's available for sale portfolio to
partially fund the above mentioned loan growth is consistent with the
Company's retail strategy. Interest income from securities held to maturity
decreased $8.0 million when comparing the three month period ended September
30, 1996 to the same 1995 period primarily due to a decrease in the average
balance of such securities outstanding by approximately $443.1 million when
comparing the two periods.
Interest income increased $6.1 million to $489.0 million for the nine
month period ended September 30, 1996 as compared to $482.9 million for the
nine month period ended September 30, 1995. Interest income on loans
increased $38.5 million primarily as a result of an increase in the average
balances of loans from $3.2 billion for the nine months ended September 30,
1995 to $3.9 billion for the nine months ended September 30, 1996. The
increase in the average balances of loans is primarily attributable to the
Company's continuing efforts to originate a greater portion of its assets in
the form of mortgage and consumer loans, as well as strong demand for such
loans in the Company's retail markets. Interest income on securities
available for sale decreased $26.8 million primarily as a result of a
decrease in the average balance of such securities outstanding by
approximately $454.0 million when comparing the nine month period ended
September 30, 1996 to the same period in 1995. The decrease of the Company's
available for sale portfolio to partially fund the above mentioned loan
growth is consistent with the Company's retail strategy. Interest income
from securities held to maturity decreased $6.0 million when comparing the
nine month period ended September 30, 1996 to the same period in 1995. Such
decrease was due primarily to a $136.6 million decrease in the average
balance of such securities outstanding offset partially by an increase in the
yields realized from 7.00% to 7.04%.
Interest Expense
- ----------------
Interest expense decreased $3.4 million to $117.3 million for the three
month period ended September 30, 1996 as compared to $120.7 million for the
same period in 1995. Interest expense on deposits increased $2.6 million
when comparing the three month period ended September 30, 1996 to the same
1995 period. Such increase primarily resulted from an increase in the
average balance of deposits from $4.8 billion for the three months ended
September 30, 1995 to $5.0 billion for the three months ended September 30,
1996 which was partially offset by a decrease in the average rates paid on
those deposits for the same time periods from 5.04% to 4.98%. The increase in
the average balance of deposits is consistent with and results from the
Company's retail strategy, while the decrease in the average rates paid on
such deposits is reflective of the prevailing market rates determined by
competitive factors in the Company's market areas. Retail deposits are an
attractively priced source of funds compared to non-retail alternatives and
competition for such deposits in the Company's market areas is intense.
Interest expense on other borrowings, which is comprised of securities sold
under agreements to repurchase, advances from the Federal Home Loan Bank,
subordinated debentures, and mortgage-backed bonds decreased $8.5 million
when comparing the three month period ended September 30, 1996 to the same
period in 1995. This decrease resulted from a $297.8 million decrease in
average borrowings and a decrease in the average rates paid (excluding the
effect of interest rate exchange agreements) from 6.04% to 5.59% during
the period. The decrease in the average balance outstanding during the
period is consistent with the Bank's strategy of growing retail deposits
and results in part from the early retirement of $28.8 million of
subordinated debentures and the defeasance of $19.8 million of
mortgage-backed bonds during the three month period ended September 30,
1996. The decrease in the average rates paid on the Company's other
short-term borrowings is primarily attributable to the Federal Reserve
Board's reduction of short-term interest rates in December 1995 and January
1996. Interest expense on interest rate exchange agreements increased $2.4
million for the 1996 period when compared to the 1995 period. Approximately
$1.1 million of such increase was the result of decreased amortization in
the current period of deferred gains on terminated interest rate exchange
agreements. Such deferred gains which were being amortized in the three
month period ended September 30, 1995, thus reducing interest expense, were
13
<PAGE> 15
fully amortized prior to the current three month period, thereby causing
interest expense on a comparative quarter over quarter basis to increase. The
remaining $1.3 million increase in interest rate exchange agreement expense for
1996 when compared to 1995 is due primarily to a decrease in the variable rates
received on such agreements resulting principally from the Federal Reserve
Board's decision to reduce short-term interest rates in December 1995 and
January 1996.
Interest expense increased $10.3 million to $356.0 million for the nine
month period ended September 30, 1996 as compared to $345.7 million for the
same period in 1995. Interest expense on deposits increased $12.1 million
when comparing the nine month period ended September 30, 1996 to the same
1995 period. Such increase was primarily the result of an increase in the
average rates paid on deposits from 4.79% for the nine months ended September
30, 1995 to 4.98% for the nine months ended September 30, 1996 and to a
lesser extent an increase in the average balances of such deposits for the
same time periods from $4.8 billion to $4.9 billion. Despite the Federal
Reserve Board's reduction in short term interest rates in December of 1995
and again in January 1996, competition for retail deposits in the Bank's
market areas required the payment of higher rates to retain maturing deposits
and attract new depositors, primarily during the first six months of the nine
month period ended September 30, 1996 as compared to the same period of 1995.
Interest expense on other borrowings decreased $12.2 million when comparing
the nine month period ended September 30, 1996 to the same period in 1995.
Such decrease resulted from a decrease in the average rates paid (excluding
the effect of interest rate exchange agreements) on such borrowings from 6.03%
to 5.59%, partially offset by a slight increase in the average balances of these
borrowings of $204,000 during the period. The decrease in the average rates
paid on the Company's other short-term borrowings is primarily attributable to
the Federal Reserve Board's reduction of short-term interest rates in December
1995 and January 1996. Interest expense on interest rate exchange agreements
increased $10.4 million for the 1996 period when compared to the 1995 period.
Approximately $4.2 million of such increase was a result of decreased
amortization of deferred gains in the current period on terminated interest rate
exchange agreements. Such deferred gains which were being amortized in the nine
month period ended September 30, 1995, thus reducing interest expense, were
fully amortized prior to the current nine month period, thereby causing interest
expense on a comparative nine month period to increase. The remaining $6.2
million increase in interest rate exchange agreement expense for 1996 when
compared to 1995 is due primarily to a decrease in the variable rates received
on such agreements resulting principally from the Federal Reserve Board's
reduction in short-term interest rates in December 1995 and January 1996.
14
<PAGE> 16
Average Balances, Interest Rates and Yields
- -------------------------------------------
The following table presents at the date and for the periods indicated
the Company's average interest-earning assets, average interest-bearing
liabilities, interest income and expense and average rates earned and paid.
Average rates earned and paid are derived by dividing income or expense by the
average balance of assets and liabilities, respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
1996 1995
------------------------------------------- -------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE
BALANCE EXPENSE % BALANCE EXPENSE %
------- -------- ------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash equivalents $ 47.3 $ 0.6 5.13% $ 20.9 $ 0.3 5.58%
Securities available for sale<F1> 1,306.6 23.1 7.06 1,713.3 32.6 7.51
Securities held to maturity 3,380.6 59.5 7.04 3,823.7 67.5 7.06
Loans<F2><F3> 4,138.6 77.4 7.48 3,352.2 63.5 7.57
-------- ------ -------- ------
Total interest-earning assets 8,873.1 $160.6 7.24% 8,910.1 $163.9 7.36%
------ ----- ------ -----
Other assets 418.0 347.7
-------- --------
$9,291.1 $9,257.8
======== ========
Liabilities
Deposits:
NOW and money market accounts $1,042.2 $ 8.0 3.07% $ 817.4 $ 5.7 2.81%
Passbook savings deposits 296.9 1.7 2.33 337.4 2.0 2.33
Time deposits 3,677.5 52.8 5.74 3,596.4 52.2 5.80
-------- ------ -------- ------
5,016.6 62.5 4.98 4,751.2 59.9 5.04
Borrowings:
Securities sold under agreement to
repurchase<F4> 881.0 14.7 6.67 1,360.7 21.7 6.38
Advances from FHLB<F4> 2,644.8 39.5 5.97 2,438.9 37.9 6.22
Other borrowings 23.5 0.6 10.25 47.5 1.2 10.27
-------- ------ -------- ------
Total interest-bearing
liabilities 8,565.9 $117.3 5.48% 8,598.3 $120.7 5.62%
------ ----- ------ -----
Other liabilities 205.7 203.5
-------- --------
8,771.6 8,801.8
Stockholders' equity: 519.5 456.0
-------- --------
Total liabilities and
stockholders' equity $9,291.1 $9,257.8
======== ========
Net interest income $ 43.3 $ 43.2
====== ======
Interest rate spread<F5> 1.76% 1.74%
===== =====
Effective net spread<F6> 1.95% 1.94%
===== =====
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
1996 1995
------------------------------------------- -------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE
BALANCE EXPENSE % BALANCE EXPENSE %
------- -------- ------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash equivalents $ 32.7 $ 1.3 5.10% $ 19.0 $ 0.8 5.63%
Securities available for sale<F1> 1,431.3 78.0 7.27 1,885.3 104.8 7.39
Securities held to maturity 3,542.3 187.0 7.04 3,678.9 193.1 7.00
Loans<F2><F3> 3,918.8 222.7 7.58 3,241.3 184.2 7.58
-------- ------ -------- ------
Total interest-earning assets 8,925.1 $489.0 7.31% 8,824.5 $482.9 7.30%
------ ----- ------ -----
Other assets 409.7 319.8
-------- --------
$9,334.8 $9,144.3
======== ========
Liabilities
Deposits:
NOW and money market accounts $ 977.1 $ 21.9 2.99% $ 831.5 $ 16.5 2.64%
Passbook savings deposits 309.1 5.3 2.30 357.8 6.1 2.29
Time deposits 3,653.6 157.4 5.74 3,617.4 149.9 5.53
-------- ------ -------- ------
4,939.8 184.6 4.98 4,806.7 172.5 4.79
Borrowings:
Securities sold under agreement to
repurchase<F4> 1,033.3 50.6 6.53% 1,471.5 68.7 6.22
Advances from FHLB<F4> 2,637.9 117.8 5.95 2,191.7 100.9 6.14
Other borrowings 39.5 3.0 10.26 47.5 3.6 10.28
-------- ------ -------- ------
Total interest-bearing
liabilities 8,650.5 $356.0 5.49% 8,517.4 $345.7 5.41%
------ ----- ------ -----
Other liabilities 172.8 177.3
-------- --------
8,823.3 8,694.7
Stockholders' equity: 511.5 449.6
-------- --------
Total liabilities and
stockholders' equity $9,334.8 $9,144.3
======== ========
Net interest income $133.0 $137.2
====== ======
Interest rate spread<F5> 1.82% 1.89%
===== =====
Effective net spread<F6> 1.99% 2.07%
===== =====
<FN>
- --------------------
<F1> The securities available for sale are included in the following table at
historical cost with the corresponding average rate calculated upon
historical balances.
<F2> Average balances include non accrual loans. Interest on such loans
is included in interest income upon receipt.
<F3> Interest includes amortization of deferred loan fees.
<F4> Includes the effect of interest rate exchange agreements.
<F5> Equals average rate earned on all assets minus average rate paid on
all liabilities.
<F6> Net interest income annualized divided by average balances of all
interest earning assets.
</TABLE>
At September 30, 1996, the weighted average yield on interest-earning
assets was 7.33% and the weighted average cost on interest-bearing
liabilities was 5.43%.
15
<PAGE> 17
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
and interest-bearing liabilities. It distinguishes between changes related
to volume and those due to changes in interest rates. For each category of
interest income and interest expense, information is provided on changes
attributed to (i) changes in volume (i.e., changes in volume multiplied by
prior year rate) and (ii) changes in rate (i.e., changes in rate multiplied
by prior year volume). For purposes of this table, changes attributable to
both rate and volume, which cannot be segregated, have been allocated to the
change due to rate.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 VS. 1995 1996 VS. 1995
------------------------------------- ------------------------------------
INCREASE (DECREASE) TOTAL INCREASE (DECREASE) TOTAL
DUE TO INCREASE DUE TO INCREASE
(DOLLARS IN THOUSANDS) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------ ---- ---------- ------ ---- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Securities available for sale $(8,546) $(1,049) $(9,595) $(27,312) $ 507 $(26,805)
Securities held to maturity (7,821) (151) (7,972) (7,137) 1,107 (6,030)
Loans 14,889 (968) 13,921 38,511 (45) 38,466
Other earning assets 368 (54) 314 580 (132) 448
------- ------- ------- -------- ------- --------
Total interest income $(1,110) $(2,222) $(3,332) $ 4,642 $ 1,437 $ 6,079
------- ------- ------- -------- ------- --------
Interest expense:
Deposits $ 3,345 $ (738) $ 2,607 $ 4,775 $ 7,320 $ 12,095
Securities sold under agreements to
repurchase (7,152) (1,014) (8,166) (19,485) (3,364) (22,849)
Advances from Federal Home Loan Bank 3,085 (2,796) 289 20,069 (8,833) 11,236
Other borrowings (617) -- (617) (617) -- (617)
Interest rate exchange agreements (523) 2,967 2,444 (94) 10,523 10,429
------- ------- ------- -------- ------- --------
Total interest expense $(1,862) $(1,581) $(3,443) $ 4,648 $ 5,646 $ 10,294
------- ------- ------- -------- ------- --------
Change in net interest income $ 752 $ (641) $ 111 $ (6) $(4,209) $ (4,215)
======= ======= ======= ======== ======= ========
</TABLE>
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans charged to earnings is based upon
management's judgement of the amount necessary to maintain the allowance for
loan losses at a level adequate to absorb probable losses. As part of the
process for determining the adequacy of the allowance for loan losses,
management performs quarterly detailed reviews to identify risks inherent in
the loan portfolio and to assess the overall quality of the portfolio as well
as to determine the amounts of allowances and provisions to be reported.
Based on the above mentioned analysis, the provision for losses on loans
recorded for the three and nine month periods ended September 30, 1996
remained unchanged from the same periods in 1995 in the amounts of $300,000 and
$900,000, respectively.
Noninterest Income (Loss)
- -------------------------
Retail Banking Fees
Retail banking fees increased $1.6 million to $4.4 million for the three
month period ended September 30, 1996 compared to $2.9 million for the three
month period ended September 30, 1995. Retail banking fees increased $2.9
million to $11.0 million for the nine month period ended September 30, 1996
compared to $8.1 million for the nine month period ended September 30, 1995.
The increases resulted from increased levels of transaction account
activities, primarily ATM fees, returned check fees, telephone banking fees
and the Company's recently introduced credit card and debit card programs.
Insurance and Brokerage Sales Commissions
Insurance and brokerage sales commissions increased to $2.8 million for the
three month period ended September 30, 1996 when compared to $1.8 million for
the three month period ended September 30, 1995. Insurance and brokerage
sales commissions increased to $6.5 million for the nine month period ended
September 30, 1996 when compared to $5.9 million for the nine month period
ended September 30, 1995. The quarter to quarter increase resulted from
increased sales primarily of mutual funds and to a lesser extent annuities
and insurance products. While overall investment product sales volumes
increased on a year over year basis, the change in mix, driven by market
conditions, was to mutual funds, which generally pay lower sales commissions.
16
<PAGE> 18
Loan Servicing Fees, Net
Loan servicing fees, net, increased to $3.1 million for the three month
period ended September 30, 1996 compared to $1.8 million for the three month
period ended September 30, 1995. Loan servicing fees, net increased to $7.8
million for the nine month period ended September 30, 1996 compared to $6.0
million for the nine month period ended September 30, 1995. Such increases
were primarily the result of the acquisition of approximately $2.2 billion
of GNMA mortgage servicing rights during the second quarter of 1996. This
purchase increased the total size of Roosevelt's servicing portfolio by
greater than 40% to approximately $7.5 billion, or approximately 110,000 loans.
Gain on Sale of Purchased Mortgage Servicing Rights
During the three month period ended September 30, 1995, the Company sold
the servicing rights on certain pools of loans (approximately $471.0 million
in related unpaid principal balances ) serviced for third party investors
under loan servicing agreements. The Company recorded a gain of $1.5 million
on the sale of such servicing rights whose unamortized value was
approximately $3.1 million at the date of the sale.
Net Gain (Loss) from Financial Instruments
In the conduct of its business operations, the Company has determined
the need to sell or terminate certain assets, liabilities, or off-balance
sheet positions due to various unforeseen events. Fundamental to the conduct
of such sale or termination activities is the effect such transactions will
have on the future volatility of the net market value of the Company.
Consequently, in pursuing these sale or termination of activities, the
Company does not seek net gains in a reporting period to the detriment of
earnings in future periods.
Net gain (loss) from financial instruments is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Mark to market of financial
futures contracts $ -- $ 135 $ -- $(61,569)
Loans held for sale (2,401) -- (2,401) --
Mortgage-backed securities
available for sale 8,546 4,235 15,978 15,780
Options expense (4,364) (2,750) (10,934) (8,330)
------- ------- -------- --------
$ 1,781 $ 1,620 $ 2,643 $(54,119)
======= ======= ======== ========
</TABLE>
Unrealized Losses on Impairment of Mortgage-Backed Securities Held To
Maturity
The Company purchased ownership interests in ten pools of privately
issued adjustable rate mortgage-backed securities issued in 1989 through 1991
by Guardian Savings and Loan Association ("Guardian"). All of such Guardian
pools in which the Company purchased and currently holds an ownership
interest were rated AA or AAA by Standard & Poors and Aa2 or Aaa by Moodys,
at the date of issuance of the securities.
Guardian issued their securities with several classes available for
purchase. Certain classes are subordinate to the position of senior classes
in that such subordinate classes absorb all credit losses and must be
completely eliminated before any losses flow to senior position holders. The
Guardian securities purchased by the Company (the "Guardian Securities") were
purchases of the most senior positions, thus intended to be protected by the
subordination credit enhancement feature.
17
<PAGE> 19
Guardian was placed in conservatorship on June 21, 1991 by the Office of
Thrift Supervision, which appointed the Resolution Trust Corporation ("RTC")
as conservator. Subsequent to the conservatorship, the RTC replaced Guardian
as the servicer for the loans underlying the securities. Effective November
1994, Bank of America assumed servicing responsibilities from the RTC.
Guardian was a niche player in the California mortgage market whose lending
decisions relied more on the value of the mortgaged property and the
borrower's equity in the property and less on the borrower's income and
credit standing. All collateral underlying the Guardian Securities have the
following loan pool characteristics:
* First lien, 30 year, six month adjustable rate loans tied to either the
cost of funds index, one year constant maturity treasury rate, or LIBOR.
* 100% of the loans were originated in California.
* The weighted average loan to value ratio at origination was
approximately 66%.
Beginning in mid-1993 and continuing currently, the loan pools backing
the securities have been affected by high delinquency and foreclosure rates,
and higher than anticipated losses on the ultimate disposition of real estate
acquired through foreclosure ("REO"). This has resulted in rating agency
downgrades, principally in 1994 and again in 1995 and 1996 to the current
ratings reflected in the tables on page 20 and substantial deterioration in
the amount of the loss absorption capacity provided by the subordinated
classes.
At December 31, 1994 and March 31, 1995, the Guardian securities owned by
the Company were performing according to their contractual terms, and all
realized losses from the disposition of REO were being absorbed by the
subordinate classes (or in the case of Pool 1990-7 at March 31, 1995, by
unamortized purchase discounts). However, to the extent that subsequent to
March 31, 1995, the pools continue to realize losses on the disposition of
REO at levels comparable to the then current rate, the remaining balances of
the subordinate classes may not be adequate to protect the Company from
incurring some credit losses on certain of its ten pools. As a result of
this deterioration and the continuing receipt of subsequent information, the
Company determined that the underlying investments represented by seven pools
in which, subsequent to March 31, 1995, the subordination protection has been
either totally eliminated or has become potentially inadequate should be
considered "other than temporarily" impaired under the provisions of
Statement of Financial Accounting Standards No. 115. As a result of this
determination, the Company recorded a $22.0 million pre-tax write-down ($14.4
million after tax or approximately $0.32 per share) for the three months
ended March 31, 1995 to reflect the impairment of these seven pools. The
amount of the write-down was based on discounted cash flow analyses performed
by management (based upon assumptions regarding delinquency levels,
foreclosure rates and loss ratios on REO disposition in the underlying
portfolio). Discounted cash flow analyses were utilized to estimate fair
value due to the absence of a ready market for the Guardian Securities.
In addition to the Guardian Securities discussed above, the Company has
an investment of approximately $4.6 million at September 30, 1996 after the
write-down discussed below, in another private issuer mortgage-backed
security, LB Multifamily Mortgage Trust Series 1991-4 ("Lehman 91-4"),
possessing similar performance characteristics to the Guardian Securities
that has also been determined to be other than temporarily impaired.
Accordingly, the Company recorded a $5.1 million pre-tax write-down ($3.4
million after tax or approximately $0.08 per share) to reflect the impairment
of this security at March 31, 1995.
Management believes that these write-downs are adequate based upon its
evaluation.
As reflected in the following table, the Company's remaining investment at
September 30, 1996 in the Guardian Securities is approximately $58.2 million,
after the desecuritization of Guardian Pool 1990-9 discussed below:
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Investment in Guardian Securities, March 31, 1995 $118.9
Purchase of remaining senior position of Pool 1990-9 .6
Net principal payments received (27.7)
Desecuritization of Guardian Pool 1990-9
(see discussion on following page) (33.6)
------
Investment in Guardian Securities, September 30, 1996 $ 58.2
======
</TABLE>
18
<PAGE> 20
Subsequent to March 31, 1995, the date of the impairment charge and through
September 30, 1996 the following events have occurred with respect to the
Guardian Securities and Lehman 91-4.
* During the quarter ended June 30, 1995, the Company completed its planned
desecuritization of Guardian Pool 1990-9 and has assumed servicing of
the underlying whole loans and REO properties received through the
desecuritization. As a result of this process, $1.1 million representing
principal, interest and servicing related funds advanced by previous
servicers to certificate holders on properties which were in REO at the
time of the desecuritization was reimbursed to the servicer, $28.8 million
was transferred to mortgage loans and $2.7 million (net of $4.9 million of
charge-offs discussed below) was transferred to residential REO. REO
properties and properties in foreclosure were written down $4.9 million to
their estimated fair values by charges to existing unallocated REO
reserves ($1.4 million) and loan loss reserves ($1.8 million) and to
existing unamortized purchase discounts ($1.7 million).
* As expected, there were several additional rating agency downgrades,
principally related to those Guardian pools that are no longer protected
by remaining credit enhancement and which had been determined to be other
than temporarily impaired and written down to estimated fair value by the
Company during the quarter ended March 31, 1995.
* As expected, based on the low levels remaining at March 31, 1995, the
subordination protection related to Guardian Pools 1990-1, 1990-2,
1990-4, 1990-5 and Lehman 1991-4 was fully absorbed.
* The remaining two pools Guardian 89-11, and 90-8, determined at March 31,
1995 to be other than temporarily impaired and written down to estimated
fair value, continue to perform according to their contractual terms and
are protected by remaining subordination of 9.37% and 2.80%, respectively,
of the remaining unpaid principal balances of the pools. Such remaining
subordination percentages compare to original subordination percentages of
8.50% and 14.00%, respectively.
* The two remaining Guardian pools (89-10 and 91-2), which are not
considered to be other than temporarily impaired, continue to perform
according to their contractual terms and are protected by remaining
subordination of 8.81% and 19.42%, respectively. These remaining
subordination levels compare to 8.50% and 17.00%, respectively, at the
date of issuance of the securities.
* $27.7 million in net principal payments have been received since March 31,
1995.
Accordingly, at September 30, 1996, management continues to believe that the
recorded investment in the above mentioned Guardian and Lehman pools is
recoverable.
19
<PAGE> 21
Presented below is information at September 30, 1996 relating to the
Company's investment in the Guardian pools, segregated between the seven
pools determined to be other than temporarily impaired and the two pools
which, in the opinion of management, continue to be adequately protected from
loss through substantial remaining subordination. The immediately succeeding
table also includes information related to Lehman 91-4 which has been
determined to be other than temporarily impaired.
<TABLE>
POOLS DETERMINED TO BE OTHER THAN TEMPORARILY IMPAIRED
September 30, 1996
(dollars in thousands)
<CAPTION>
Subordination As a Regarding Roosevelt's Interests
Rating Percent of Pool Balance ------------------------------------ Percent of Pools
Pool Issue ------------------------- ----------------------- Original Par Remaining Remaining Current or Less Than
Number Date Agency At Issue Current At Issue Current At Issue Par Investment 90 Days Delinquent
- ------ ---- ------ -------- ------- -------- ------- -------- --- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GUARDIAN POOLS
- --------------
89-11 11/30/89 S & P AA CC 8.50% 9.37% $ 33,750 $ 7,349 $ 5,390 72%
Moody Aa2 B1
90-1 1/30/90 S & P AA D 8.50% -- 3,000 638 483 80%
Moody Aa2 Caa
90-2 2/27/90 S & P AA D 8.50% -- 27,500 5,733 4,070 76%
Moody Aa2 Caa
90-4 4/30/90 S & P AA D 8.75% -- 46,428 11,023 8,514 75%
Moody Aa2 Caa
90-5 5/31/90 S & P AA D 8.75% -- 45,000 12,630 10,283 74%
Moody Aa2 Caa
90-7 7/25/90 S & P AA D 8.75% -- 68,025 17,131 12,986 77%
Moody Aa2 Caa
90-8 9/21/90 S & P AAA C 14.00% 2.80% 15,000 4,149 2,978 72%
Moody Aaa B3 ----------------------------------
Total Guardian $238,703 $58,653 $44,704
==================================
LEHMAN POOL
- -----------
91-4 7/30/91 S & P AA D 23.00% -- $ 14,000 $ 8,839 $ 4,629 81%
Moody Aa3 Caa ==================================
</TABLE>
<TABLE>
GUARDIAN POOLS DETERMINED TO BE ADEQUATELY PROTECTED BY REMAINING CREDIT ENHANCEMENT
September 30, 1996
(dollars in thousands)
<CAPTION>
Subordination As a Regarding Roosevelt's Interests
Rating Percent of Pool Balance ------------------------------------ Percent of Pools
Pool Issue ------------------------- ----------------------- Original Par Remaining Remaining Current or Less Than
Number Date Agency At Issue Current At Issue Current At Issue Par Investment 90 Days Delinquent
- ------ ---- ------ -------- ------- -------- ------- -------- --- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
89-10 10/27/89 S & P AA CCC 8.50% 8.81% $ 9,000 $ 1,491 $ 1,507 79%
Moody Aa2 B3
91-2 3/28/91 S & P AA BB 17.00% 19.42% 39,831 11,975 $11,975 72%
Moody Aaa Baa3 -------- ------- -------
Totals $ 48,831 $13,466 $13,482
==================================
</TABLE>
20
<PAGE> 22
Noninterest Expense
- -------------------
General and Administrative Expense
General administrative expense in the three- and nine-month periods ended
September 30, 1996 was adversely impacted by a $27.4 million pre-tax charge
associated with recapitalizing the Savings Association Insurance Fund. For a
further discussion of this one-time charge see the section entitled "Results of
Operations, Net Income". Without this charge, general and administrative
expense would have been $25.4 million and $70.6 million for the three and nine
month periods ended September 30, 1996, respectively as compared to $20.9
million and $64.1 million for the three and nine month periods ended September
30, 1995, respectively. The following discussion is based upon a comparison of
the 1996 and 1995 periods without the special assessment.
General and administrative expense increased $4.5 million to $25.4
million for the three month period ended September 30, 1996 as compared to
$20.9 million for the three month period ended September 30, 1995. Such
increase was due primarily to a $2.6 million increase in compensation and
employee benefits and a $1.9 million increase in other noninterest expense
which was partially offset by a $269,000 decrease in federal insurance
premiums. The increases in compensation and employee benefits and other
noninterest expense is primarily attributable to increased costs associated
with the mobilization of the Bank's retail efforts. The decrease in Federal
insurance premiums resulted from reductions in the rates charged by the
Federal Deposit Insurance Corporation on the Company's deposits insured by
both the Bank Insurance Fund and the Savings Association Insurance Fund. The
legislation enacted to recapitalize the Savings Association Insurance Fund also
provided for a further reduction in premiums charged for deposits insured by
the Savings Association Insurance Fund beginning in January, 1997. As a
result, the Company expects to realize further declines in the cost of
Federal deposit insurance premiums thereafter.
General and administrative expense increased $6.5 million to $70.6
million for the nine month period ended September 30, 1996 as compared to
$64.1 million for the nine month period ended September 30, 1995. Such
increase was due primarily to a $5.9 million increase in compensation and
employee benefits and a $2.5 million increase in other noninterest expense
which was partially offset by a $2.1 million decrease in federal deposit
insurance premiums. The explanations of the fluctuations are the same as
those described above for the three month periods.
FINANCIAL CONDITION
Consistent with its desire to accelerate the benefit to shareholders
from the retail transition, the Company took additional steps in the quarter
ended September 30, 1996 toward the goal of simplifying the balance sheet and
producing future performance results consistent with high performance retail
banks. These steps included the early extinguishment of its previously
outstanding 9.5% subordinated debentures and its 10.125% mortgage-backed bonds;
shrinkage of its balance sheet by $280 million; reduction of its mortgage-backed
securities holdings by $459 million; and the sale (for fourth quarter
settlement) of approximately $325 million of fixed rate mortgage-backed
securities and $250 million of fixed rate mortgage loans (servicing retained)
from recent production. The aforementioned sales of fixed rate mortgage-backed
securities and loans substantially reduced the Company's interest rate risk
thus enabling the Company to terminate all of its interest rate exchange
agreements and certain interest rate floor agreements during the quarter ended
September 30, 1996. The earnings impact of the sales for fourth quarter
settlement and the related hedge adjustments were recorded, as appropriate, in
the quarter ended September 30, 1996 as a component of net gain (loss) from
financial instruments. The cancellation costs associated with the termination
of the Company's interest rate exchange agreements, which amounted to
approximately $67 million are being deferred and amortized as an adjustment to
interest expense over the shorter of the contractual life of the agreement or
the remaining lives of the liabilities they were hedging. For purposes of the
Company's net market value calculation (see page 23), the marked to market
values of the interest rate exchange agreements had already been factored into
the historical net market value calculations. The deferred cancellation costs
are also factored into the value at September 30, 1996.
Total assets were $9.0 billion and total liabilities were $8.5 billion
both at September 30, 1996 and December 31, 1995. However, due to the
Company's continuing efforts to transition the Bank into a full service
retail oriented bank, the composition of the balance sheet changed
significantly during the nine month period ended September 30, 1996. Net
loans accounted for 47% of total assets at September 30, 1996 as compared to
only 40% at December 31, 1995. During the nine month period ended September
30, 1996, the Company originated $1.0 billion and purchased an additional
$287.0 million of mortgage and consumer loans. The new loans were funded in
part by principal payments on loans of $658.4 million and net reductions in
securities available for sale and held to maturity of $477.8 million and
$240.1 million, respectively. Contributing to the decrease in securities
available for sale were sales of $879.4 million and repayments of $139.2
which were offset partially by purchases of $561.6 million. Principal
payments of $803.1 million less purchases of $574.0 million contributed to
the decline in securities held to maturity. Other assets increased primarily
as a result of payments for purchased mortgage servicing rights totaling
$36.1 million and fees paid for interest rate cap agreements totaling $49.3
million.
The composition of liabilities also changed during the nine month period
ended September 30, 1996. Deposits accounted for 59% of total liabilities at
September 30, 1996 as compared to 58% at December 31, 1995. Other
borrowings, primarily advances from the Federal Home Loan Bank and securities
sold under agreements to repurchase, accounted for 38% of total liabilities
at September 30, 1996 compared to 41% at December 31, 1995.
In July 1996, the Company redeemed early, at par, its 9.5% subordinated
debentures in the amount of $28.8 million. The debentures, which had
approximately $500,000 of unamortized discount attributable to issuance
costs, were issued in 1992 and were otherwise set to mature on August 1, 2002.
In September, 1996, the Company defeased its 10.125% mortgage-backed bonds in
the amount of $19.8 million. The bonds, which were issued in 1988, were
otherwise set to mature on April 15, 2018. As a result of these actions, the
Company recorded an extraordinary charge to net income, net of taxes, of
approximately $1.5 million in the three month period ending September 30,
1996.
21
<PAGE> 23
ASSET QUALITY
The following table sets forth the amounts and categories of
non-performing assets. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful. Troubled debt
restructurings involve forgiving a portion of interest or principal on any loans
or making loans at a rate materially less than that of market rates. Foreclosed
assets include assets acquired in settlement of loans. "Other than temporarily
impaired" mortgage-backed securities represent private issuer mortgage-backed
securities that have been determined to be "other than temporarily impaired"
under the provisions of SFAS 115 and for which the previously existing credit
enhancement support, in the form of subordination, has been totally absorbed
and therefore any future losses will flow directly to the Company as a senior
position holder. These securities were issued with several classes available
for purchase. Certain classes are subordinate to the position of senior
classes in that such subordinate classes absorb all credit losses and must be
completely eliminated before any losses flow to senior position holders. The
securities purchased by the Company were purchases of the most senior
positions, thus intended to be protected by the subordination credit
enhancement feature. In an attempt toward a conservative presentation, the
Company includes the entire estimated fair value of these securities
(approximately 73% of the unpaid principal balances at September 30, 1996) in
this table when the credit enhancement, in the form of subordination, is
exhausted even though a substantial portion of the underlying loans
(approximately 76% at September 30, 1996) are either current or less than 90
days delinquent. In addition, the remaining amount of "other than
temporarily impaired" mortgage-backed securities that continue to be
protected by remaining credit enhancement, but for which the Company has
concluded it is probable that such credit enhancement will be absorbed before
the duration of the underlying security, are disclosed in the paragraphs
following the table as other potential problem assets. See the caption
entitled "Unrealized Losses on Impairment of Mortgage-Backed Securities Held
to Maturity" under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for further details.
<TABLE>
<CAPTION>
NONPERFORMING ASSETS SEPTEMBER 30, DECEMBER 31,
(in thousands) 1996 1995
------------- ------------
<S> <C> <C>
NONACCRUING LOANS:
Residential $ 8,783 $ 7,895
Commercial real estate 1,714 1,415
Consumer 381 193
------- -------
Total 10,878 9,503
------- -------
ACCRUING LOANS DELINQUENT MORE THAN 90 DAYS:
Residential 7,781 10,500
------- -------
TROUBLED-DEBT RESTRUCTURINGS:
Commercial real estate 56 661.
------- -------
FORECLOSED ASSETS:
Residential 4,720 5,340
Commercial real estate 10,398 11,483
Consumer 92 11
------- -------
Total 15,210 16,834
------- -------
Sub-total 33,925 37,498
------- -------
SUB-TOTAL NONPERFORMING ASSETS
AS A PERCENTAGE OF TOTAL ASSETS .37% .42%
======= =======
"OTHER THAN TEMPORARILY IMPAIRED" MORTGAGE-BACKED
SECURITIES WITH APPROXIMATELY 76% OF THE UNDERLYING
LOANS EITHER CURRENT OR LESS THAN 90 DAYS DELINQUENT 40,964 43,429
------- -------
Total non-performing assets $74,889 $80,927
======= =======
TOTAL AS A PERCENTAGE OF TOTAL
ASSETS .83% .90%
======= =======
</TABLE>
Not included in the preceding table are certain pools of private issuer
mortgage-backed securities with a carrying value of $8.4 million which were
performing according to their contractual terms at September 30, 1996.
However, these securities were determined by the Company to be "other than
temporarily impaired" and written down to fair value, since at March 31,
1995, the subordination protection had been substantially reduced to the
point where the Company concluded it was probable that the securities would
not continue to perform to 100% of their contractual terms over the course of
their remaining lives. These securities will be included in the preceding
non-performing asset table in future periods when, and if, the remaining
subordination is exhausted.
22
<PAGE> 24
The following table is a reconciliation of the amount of currently
performing, other than temporarily impaired mortgage-backed securities at
March 31, 1995 to such amount at September 30, 1996.
<TABLE>
<CAPTION>
in millions
-----------
<S> <C>
Amount of currently performing, other than temporarily impaired
mortgage-backed securities at March 31, 1995 $ 52.4
Principal payments received (9.1)
Addition of Guardian Pools 1990-1, 1990-2, 1990-4, 1990-5, 1990-7
and Lehman Pool 91-4 to the non-performing asset table as
subordination protection was absorbed since March 31, 1995 (34.9)
------
Amount of currently performing, other than temporarily impaired
mortgage-backed securities at September 30, 1996 $ 8.4
======
</TABLE>
ASSET/LIABILITY MANAGEMENT
The Company's primary objective regarding asset/liability management is
to position the Company such that changes in interest rates do not have a
material adverse impact upon net interest income or the net market value of
the Company. The Company's primary strategy for accomplishing its
asset/liability management objective is achieved by matching the weighted
average maturities of assets, liabilities, and off-balance sheet items
(duration matching). Integral to the duration matching strategy is the use
of derivative financial instruments such as interest rate exchange agreements
and interest rate cap and floor agreements. The Company uses derivative
financial instruments solely for risk management purposes. None of the
Company's derivative instruments are what are termed leveraged instruments.
These types of instruments are riskier than the derivatives used by the
Company in that they have embedded options that enhance their performance in
certain circumstances but dramatically reduce their performance in other
circumstances. The Company is not a dealer nor does it make a market in such
instruments. The Company does not trade the instruments and the Board of
Directors' approved policy governing the Company's use of these instruments
strictly forbids speculation of any kind.
Net market value is calculated by adjusting stockholders' equity for
differences between the estimated fair values and the carrying values
(historical cost basis) of the Company's assets, liabilities, and off-balance
sheet items. Net market value, as calculated by the Company and presented
herein, should not be confused with the value of the Company's stock or of
the amounts distributable to stockholders in connection with a sale of the
Company or in the unlikely event of its liquidation. The economic net market
value (including the estimated value of demand deposits) as calculated by the
Company increased to approximately $516.4 million at September 30, 1996 as
compared to approximately $481.5 million at December 31, 1995. To measure
the impact of interest rate changes, the Company recalculates its net market
value on a pro forma basis assuming instantaneous, permanent parallel shifts
in the yield curve, in varying amounts both upward and downward. Larger
increases or decreases in the Company's net market value as a result of these
assumed interest rate changes indicate greater levels of interest rate
sensitivity than do smaller increases or decreases in net market value. The
Company endeavors to maintain a position whereby it experiences no material
change in net market value as a result of assumed 100 and 200 basis point
increases and decreases in general levels of interest rates. The table below
reconciles stockholders' equity to the Company's calculation of net market
value since the date of its acquisition of Farm & Home Financial Corporation,
June 30, 1994.
<TABLE>
<CAPTION>
6/30/94 9/30/94 12/31/94 3/31/95 6/30/95
------- ------- -------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Stockholders' Equity $412.1 $423.1 $ 441.6 $438.9 $452.4
Market Value Adjustments
Assets (49.9) (75.6) (129.7) (41.0) 33.6
Liabilities 62.4 84.7 118.0 62.4 8.5
Other<F*> (38.7) (35.4) (25.9) (46.9) (66.2)
------ ------ ------- ------ ------
"Net Market Value" $385.9 $396.8 $ 404.0 $413.4 $428.3
====== ====== ======= ====== ======
<CAPTION>
9/30/95 12/31/95 3/31/96 6/30/96 9/30/96
------- -------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Stockholders' Equity $463.2 $496.9 $ 509.1 $516.3 $505.9
Market Value Adjustments
Assets 38.0 70.7 41.3 29.6 40.8
Liabilities 8.3 (18.3) 8.6 23.7 36.8
Other<F*> (71.8) (67.8) (69.3) (65.3) (67.1)
------ ------ ------- ------ ------
"Net Market Value" $437.7 $481.5 $ 489.7 $504.3 $516.4
====== ====== ======= ====== ======
<FN>
<F*> Includes off-balance sheet and other items.
</TABLE>
Management believes that the stable but rising level of net market value
during this period of considerable interest rate volatility provides evidence
that the Company's asset/liability management activities have greatly diminished
the interest rate risk of the Company.
The OTS issued a regulation, effective January 1, 1994, which uses a
similar methodology to measure the interest rate risk exposure of thrift
institutions. This exposure is a measure of the potential decline in the net
portfolio value of the institution based upon the effect of an assumed 200
basis point increase or decrease in interest rates. "Net portfolio value" is
the present value of the expected net cash flow from the institution's
assets, liabilities, and off-balance sheet contracts. Under the OTS
regulation, an institution's "normal" level of interest rate risk in the
event of this assumed change in interest rates is a decrease in the
institution's net portfolio value in an amount not exceeding two percent of
the present value of its assets.
23
<PAGE> 25
Utilizing this measurement concept, the interest rate risk of the Company
at September 30, 1996, which reflects that the Company's level of
interest rate risk is far below that which is considered "normal" under OTS
regulations, is as follows:
<TABLE>
<CAPTION>
(unaudited)
------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Basis point changes in interest rates -200 -100 +100 +200
Changes in net market value due to changes in
interest rates (Company methodology) $ 4,012 $11,406 $(34,935) $ (94,671)
Interest rate exposure deemed "normal" by the OTS $(180,951) N/A N/A $(180,951)
</TABLE>
The Company's operating strategy is designed to avoid material changes
in net market value as a result of fluctuations in interest rates. As of
September 30, 1996, the Company believes it has accomplished its objectives
as the pro forma changes in net market value brought about by changes in
interest rates are not material relative to the Company's net market value.
A net gain (loss) when rates decrease (increase) indicates the duration of
the Company's assets is slightly longer than the duration of the Company's
liabilities.
LIQUIDITY AND CAPITAL RESOURCES
OTS regulations require federally insured savings institutions to
maintain a specified ratio (presently 5.0%) of cash and short-term United
States Government, government agency, and other specified securities to net
withdrawable accounts and borrowings due within one year. The Company has
maintained liquidity ratios in excess of the required amounts during the nine
month period ended September 30, 1996 and during 1995.
The Company's cash flows are comprised of cash flows from operating,
investing and financing activities. Cash flows provided by operating
activities, consisting primarily of interest received on investments
(principally loans and mortgage-backed securities) less interest paid on
deposits and other short-term borrowings, were $88.3 million for the nine
month period ended September 30, 1996. Cash flows provided by investing
activities, consisting primarily of purchases of mortgage-backed securities
held to maturity and available for sale and originations and purchases of
loans, offset by principal repayments on mortgage-backed securities and loans
and sales of mortgage-backed securities available for sale, were $2.6 million
for the nine month period ended September 30, 1996. Net cash related to
financing activities, consisting of proceeds, net of repayments, from FHLB
advances, proceeds from securities sold under agreements to repurchase and
excess of deposit receipts over withdrawals utilized $60.3 million for the
nine month period ended September 30, 1996.
At September 30, 1996, the Company had commitments outstanding to
originate fixed-rate mortgage loans of approximately $29.3 million and
adjustable-rate mortgages of approximately $101.6 million. At September 30,
1996, the Company had outstanding commitments to purchase mortgage-backed
securities of approximately $54.9 million and to sell mortgage-backed
securities of $561.7 million. The Company expects to employ the net excess
funds generated from the completion of the aforementioned transactions to
further reduce wholesale borrowings.
24
<PAGE> 26
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
(FIRREA) requires that an institution meet three specific capital
requirements: a leverage ratio of core capital to total adjusted assets, a
tangible capital ratio expressed as a percent of total tangible assets and a
risk-based capital standard expressed as a percent of risk-adjusted assets.
As of September 30, 1996, the Bank exceeded all regulatory capital standards
as follows (dollars in millions):
<TABLE>
<CAPTION>
REQUIREMENT ACTUAL EXCESS CAPITAL
----------------- ------------------ -----------------
CAPITAL STANDARD AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $135.4 1.50% $469.7 5.20% $334.3 3.70%
Core Capital $270.9 3.00% $471.8 5.23% $200.9 2.23%
Risk-based Capital $298.3 8.00% $490.6 13.16% $192.3 5.16%
</TABLE>
25
<PAGE> 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings
-------------------------------------------
None
Item 2. Changes in Securities
-------------------------------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
-------------------------------------------
None
Item 5. Other Information
-------------------------------------------
None
Item 6. Exhibits and Reports on Form 8-K
-------------------------------------------
(a) Exhibit
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
for which this report is filed.
26
<PAGE> 28
SIGNATURES
Pursuant to the requirements 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.
ROOSEVELT FINANCIAL GROUP, INC.
-------------------------------------------------
REGISTRANT
DATE: NOVEMBER 13, 1996 BY: /S/STANLEY J. BRADSHAW
-------------------------------------
STANLEY J. BRADSHAW
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DATE: NOVEMBER 13, 1996 BY: /S/GARY W. DOUGLASS
-------------------------------------
GARY W. DOUGLASS
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
27
<PAGE> 29
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
27 Financial Data Schedule
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 22,643
<INT-BEARING-DEPOSITS> 23,363
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,128,697
<INVESTMENTS-CARRYING> 3,309,994
<INVESTMENTS-MARKET> 3,307,689
<LOANS> 4,236,624
<ALLOWANCE> 21,471
<TOTAL-ASSETS> 9,047,562
<DEPOSITS> 5,062,359
<SHORT-TERM> 2,354,600
<LIABILITIES-OTHER> 205,236
<LONG-TERM> 919,500
0
65,005
<COMMON> 199,704
<OTHER-SE> 241,158
<TOTAL-LIABILITIES-AND-EQUITY> 9,047,562
<INTEREST-LOAN> 222,700
<INTEREST-INVEST> 265,059
<INTEREST-OTHER> 1,252
<INTEREST-TOTAL> 489,011
<INTEREST-DEPOSIT> 184,633
<INTEREST-EXPENSE> 356,010
<INTEREST-INCOME-NET> 133,001
<LOAN-LOSSES> 900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 98,004
<INCOME-PRETAX> 65,694
<INCOME-PRE-EXTRAORDINARY> 43,253
<EXTRAORDINARY> (1,452)
<CHANGES> 0
<NET-INCOME> 41,801
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.88
<YIELD-ACTUAL> 1.99
<LOANS-NON> 10,878
<LOANS-PAST> 7,781
<LOANS-TROUBLED> 56
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 21,757
<CHARGE-OFFS> (601)
<RECOVERIES> 15
<ALLOWANCE-CLOSE> 21,471
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 18,816
</TABLE>
