<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A-2
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
---------------------------
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 August 10, 1995
------------------ ------------------------------------
Common Stock 40,271,719
Par Value $.01
<PAGE>
Introductory Statement
- ----------------------
During August 1996, the Staff of the Securities and Exchange Commission (Staff)
performed a regular review of the 1995 Form 10-K of Roosevelt Financial Group,
Inc. (Company) in conjunction with Registration Statements on Form S-4 filed by
the Company related to 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 1994 and 1995
consolidated financial statements to reflect the cessation of deferral
accounting, from the inception of the
<PAGE>
hedge, with respect to the aforementioned financial futures contracts. The
restatement had the effect of decreasing previously reported net income for the
quarter ended June 30, 1995 by $15.2 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 futures
contracts and the related mortgage-backed securities have been previously marked
to market through stockholders' equity at each reporting period. Other
appropriate conforming changes to reflect the restatement have been made
throughout this document.
Subsequent to December 31, 1995, the Company terminated all of its 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
interest-bearing deposits and other short-term borrowings.
<PAGE>
INDEX
ROOSEVELT FINANCIAL GROUP, INC.
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (Unaudited)
- Consolidated Balance Sheets 2
- Consolidated Statements of Income 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 11
PART II. OTHER INFORMATION 28
SIGNATURES 29
<PAGE>
ROOSEVELT FINANCIAL GROUP, INC.
Consolidated Balance Sheets
(In thousands, except share data)(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Assets
Cash.......................................................................... $ 50,909 $ 21,901
Interest-bearing deposits..................................................... 205 205
Mortgage-backed securities:
Available for sale........................................................... 1,614,931 1,656,563
Held to matruity............................................................. 3,509,289 3,119,289
Investment securities-held to matruity........................................ 132,665 156,773
Loans receivable-held to maturity............................................. 3,264,738 3,072,151
Stock in Federal Home Loan Bank............................................... 111,113 109,136
Office properties and equipment, net.......................................... 53,475 53,483
Accrued income and other assets............................................... 223,736 242,365
----------- -----------
Total Assets $ 8,961,061 $ 8,431,866
=========== ===========
Liabilities and Stockholders' Equity
Savings deposits.............................................................. $ 4,785,619 $ 4,899,389
Mortgage-backed bonds......................................................... 19,662 19,660
Securities sold under agreements to repurchase................................ 1,355,370 1,208,127
FHLB advances................................................................. 2,163,038 1,707,938
Subordinated notes............................................................ 27,792 27,724
Accrued expenses and other liabilities........................................ 157,230 127,402
----------- -----------
Total Liabilities 8,508,711 7,990,240
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value, 6.5% non-cumulative perpetual
convertible: 3,000,000 shares authorized and 1,301,000 and 1,319,000 shares
issued and outstanding at June 30, 1995 and December 31, 1994,
respectively................................................................ 13 13
Common stock - $.01 par value; 90,000,000 shares authorized;
40,296,695 shares issuced and outstanding at June 30, 1995 and
40,173,527 shares and 40,163,527 shares issued and outstanding,
respectively, at December 31, 1994.......................................... 403 402
Paid-in capital............................................................... 256,199 255,655
Retained earnings - subject to certain restrictions........................... 184,371 209,379
Treasury stock, at cost; 10,000 shares at December 31, 1994................... -- (150)
Unrealized gain (loss) on mortgage-backed securities available for sale, net.. 12,804 (23,673)
Unamortized restricted stock awards........................................... (1,440) --
----------- -----------
Total Stockholders' Equity................................................... 452,350 441,626
----------- -----------
$ 8,961,061 $ 8,431,866
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE>
ROOSEVELT FINANCIAL GROUP, INC.
Consolidated Statements of Income
(In thousands, except per share data) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable ................................................................ $ 61,822 $ 51,559 $120,762 $ 98,172
Mortgage-backed securities:
Held to maturity ........................................................... 63,211 40,431 120,677 78,666
Available for sale ......................................................... 33,004 30,587 68,336 57,592
Held for trading ........................................................... -- 2,785 -- 6,457
Investment securities:
Held to maturity ........................................................... 2,358 1,023 4,906 2,162
Available for sale ......................................................... -- 366 -- 936
Securities purchased under agreements to resell ................................. -- -- -- 393
Other ........................................................................... 2,181 3,239 4,331 5,858
-------- -------- -------- --------
Total interest income ...................................................... 162,576 129,990 319,012 250,236
-------- -------- -------- --------
Interest expense:
Savings deposits, net ........................................................... 58,240 49,834 112,631 96,308
Advances from Federal Home Loan Bank ............................................ 32,134 17,945 62,017 32,581
Securities sold under agreements to repurchase .................................. 22,951 9,764 45,140 17,544
Interest rate exchange agreements ............................................... 2,349 2,419 2,789 6,088
Subordinated notes .............................................................. 716 1,769 1,433 3,539
Mortgage-backed bonds ........................................................... 503 1,148 1,006 3,524
-------- -------- -------- --------
Total interest expense ..................................................... 116,893 82,879 225,016 159,584
-------- -------- -------- --------
Net interest income ................................................... 45,683 47,111 93,996 90,652
Provision for losses on loans ........................................................ 300 11,682 600 11,832
-------- -------- -------- --------
Net interest income after provision for losses on loans ............... 45,383 35,429 93,396 78,820
-------- -------- -------- --------
Noninterest income (loss):
Net loss from financial instruments ............................................. (22,935) (33,485) (55,739) (31,858)
Loan servicing fees, net ........................................................ 2,102 1,779 4,144 3,725
Gross profit-insurance agency ................................................... 2,105 1,457 4,116 3,209
Retail banking fees ............................................................. 2,696 2,081 5,228 3,870
Gain on sales of real estate acquired for development and sale .................. 198 1,283 936 1,151
Unrealized losses on impairment of mortgage-backed securities held to maturity .. -- -- (27,063) --
Other ........................................................................... 342 1,012 602 1,647
-------- -------- -------- --------
Total noninterest income (loss) ............................................ (15,492) (25,873) (67,776) (18,256)
-------- -------- -------- --------
Noninterest expense:
General and administrative:
Compensation and employee benefits ............................................ 8,578 16,102 17,211 26,567
Occupancy ..................................................................... 4,376 10,450 8,657 15,208
Advertising ................................................................... 448 660 1,033 1,197
Federal insurance premiums .................................................... 3,212 3,155 6,423 6,106
Other ......................................................................... 5,126 15,344 9,909 20,698
-------- -------- -------- --------
Total general and administrative ........................................... 21,740 45,711 43,233 69,776
Provision for real estate losses ................................................ -- 3,742 -- 4,581
-------- -------- -------- --------
Total noninterest expense .................................................. 21,740 49,453 43,233 74,357
-------- -------- -------- --------
Income (loss) before income tax expense and extraordinary items ....... 8,151 (39,897) (17,613) (13,793)
Income tax expense (benefit) ......................................................... 2,291 (13,165) (7,298) (4,126)
-------- -------- -------- --------
Income (loss) before extraordinary items .............................. 5,860 (26,732) (10,315) (9,667)
Extraordinary items .................................................................. -- (7,849) -- (7,849)
-------- -------- -------- --------
Net income (loss) ..................................................... $ 5,860 $(34,581) $(10,315) $(17,516)
======== ======== ======== ========
Net income (loss) attributable to common stock ........................ $ 4,803 $(35,484) $(12,444) $(19,618)
======== ======== ======== ========
Primary earnings per share:
Income (loss) before extraordinary items .............................. $ 0.12 $ (0.71) $ (0.31) $ (0.33)
Extraordinary items ................................................... -- (0.20) -- (0.22)
-------- -------- -------- --------
Net income (loss) ................................................ $ 0.12 $ (0.91) $ (0.31) $ (0.55)
======== ======== ======== ========
Fully-diluted earnings per share:
Income (loss) before extraordinary items .............................. $ 0.12 $ (0.71) $ (0.31) $ (0.33)
Extraordinary items ................................................... -- (0.20) -- (0.22)
-------- -------- -------- --------
Net income (loss) ................................................ $ 0.12 $ (0.91) $ (0.31) $ (0.55)
======== ======== ======== ========
Dividends paid per share ............................................................. $ 0.14 $ 0.11 $ 0.28 $ 0.21
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------ ------------------- Paid-in Retained
Shares Amount Shares Amount Capital Earnings
---------- ------- ----------- ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 ------------------------------------ 2,492,440 $ 25 10,291,922 $ 103 $ 179,979 $ 186,780
Net income (including pooled company)-------------------------- -- -- -- -- -- 41,727
Issuance of 319,000 shares of 6.5% non-cumula-
tive perpetual convertible preferred stock ---------------- 319,000 3 -- -- 21,270 --
Issuance of common stock in the acquisition of
Home Federal Bancorp of Missouri, Inc. -------------------- -- -- 1,121,142 11 48,220 --
Exercise of incentive stock options and non-
qualified stock options ----------------------------------- -- -- 1,294,991 13 5,932 --
Three-for-one stock split ------------------------------------- -- -- 25,157,436 252 (252) --
Cash dividends declared (including pooled
company):
Common stock ------------------------------------------- -- -- -- -- -- (13,944)
Preferred stock ---------------------------------------- -- -- -- -- -- (5,184)
Purchase of common stock for treasury ------------------------- -- -- -- -- -- --
Unrealized losses on mortgage-backed securities
available for sale, net (including pooled
company) -------------------------------------------------- -- -- -- -- -- --
Other pre-merger transactions of pooled company (1,492,440) (15) 2,308,036 23 506 --
---------- ------- ----------- ------ --------- ----------
Balance, December 31, 1994------------------------------------- 1,319,000 13 40,173,527 402 255,655 209,379
Net income ---------------------------------------------------- -- -- -- -- -- (10,315)
Purchase of common stock for treasury ------------------------- -- -- -- -- -- --
Issuance of common stock pursuant to employee
stock ownership plan -------------------------------------- -- -- 746 -- 11 (14)
Issuance of restricted stock ---------------------------------- -- -- 66,040 1 1,130 --
Exercise of incentive stock options and non-
qualified stock options ----------------------------------- -- -- 32,850 -- 110 (1,305)
Surrender of common stock for exercise of
stock options -------------------------------------------- -- -- (29,444) -- (476) --
Exchange of preferred stock for common stock -- (18,000) -- 52,976 -- (231) --
Amortization of restricted stock awards ----------------------- -- -- -- -- -- --
Cash dividends declared:
Common stock ---------------------------------------------- -- -- -- -- -- (11,245)
Preferred stock ------------------------------------------- -- -- -- -- -- (2,129)
Unrealized gain on mortgage-backed securities
available for sale, net ----------------------------------- -- -- -- -- -- --
---------- ------- ----------- ------ --------- ----------
Balance, June 30, 1995 ---------------------------------------- 1,301,000 $ 13 40,296,695 $ 403 $ 256,199 $ 184,371
========== ======= =========== ====== ========= ==========
<CAPTION>
Unrealized
gains (losses)
on mortgage-
backed
Treasury Stock securities Unamortized Total
--------------------- available Restricted Stockholders'
Shares Amount for sale, net Stock Awards Equity
---------- ---------- ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 ------------------------------------ -- $ -- $ 11,575 $ -- $ 378,462
Net income (including pooled company)-------------------------- -- -- -- -- 41,727
Issuance of 319,000 shares of 6.5% non-cumula-
tive perpetual convertible preferred stock ---------------- -- -- -- -- 21,273
Issuance of common stock in the acquisition of
Home Federal Bancorp of Missouri, Inc. -------------------- -- -- -- -- 48,231
Exercise of incentive stock options and non-
qualified stock options ----------------------------------- -- -- -- -- 5,945
Three-for-one stock split ------------------------------------- -- -- -- -- --
Cash dividends declared (including pooled
company):
Common stock ------------------------------------------- -- -- -- -- (13,944)
Preferred stock ---------------------------------------- -- -- -- -- (5,184)
Purchase of common stock for treasury ------------------------- (10,000) (150) -- -- (150)
Unrealized losses on mortgage-backed securities
available for sale, net (including pooled
company) -------------------------------------------------- -- -- (35,248) -- (35,248)
Other pre-merger transactions of pooled company -- -- -- -- 514
---------- ---------- ---------------- -------------- -------------
Balance, December 31, 1994------------------------------------- (10,000) (150) (23,673) -- 441,626
Net income ---------------------------------------------------- -- -- -- -- (10,315)
Purchase of common stock for treasury ------------------------- (164,500) (2,653) -- -- (2,653)
Issuance of common stock pursuant to employee
stock ownership plan -------------------------------------- 9,338 154 -- -- 151
Issuance of restricted stock ---------------------------------- 20,000 320 -- (1,451) --
Exercise of incentive stock options and non-
qualified stock options ----------------------------------- 130,638 2,098 -- -- 903
Surrender of common stock for exercise of
stock options -------------------------------------------- -- -- -- -- (476)
Exchange of preferred stock for common stock -- 14,524 231 -- -- --
Amortization of restricted stock awards ----------------------- -- -- -- 11 11
Cash dividends declared:
Common stock ---------------------------------------------- -- -- -- -- (11,245)
Preferred stock ------------------------------------------- -- -- -- -- (2,129)
Unrealized gain on mortgage-backed securities
available for sale, net ----------------------------------- -- -- 36,477 -- 36,477
---------- ---------- ---------------- -------------- -------------
Balance, June 30, 1995 ---------------------------------------- -- $ -- $ 12,804 $ (1,440)$ 452,350
========== ========== ================ ============== =============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
ROOSEVELT FINANCIAL GROUP, INC.
Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1995 1994
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................................................... $(10,315) (17,516)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Extraordinary loss on early extinguishment of debt ......................................... -- 12,134
Depreciation ............................................................................... 2,069 2,535
Amortization of (discounts) and premiums, net .............................................. 1,815 29,811
(Increase) decrease in accrued interest receivable ......................................... (5,299) 3,298
Decrease in accrued interest payable ....................................................... (201) (819)
Provision for losses on loans and real estate .............................................. 600 16,413
Unrealized losses on impairment of mortgage-backed securities held to maturity ............. 27,063 --
Net decrease in securities held for trading ................................................ -- 929
Net decrease in loans held for sale ........................................................ -- 63,835
Decrease in income taxes payable ........................................................... (10,477) (18,405)
Other, net ................................................................................. (18,982) 15,599
------------ -----------
Net cash provided by (used in) operating activities ................................... (13,727) 107,814
------------ -----------
Cash flows from investing activities:
Principal payments on:
Mortgage-backed securities available for sale .............................................. 49,163 214,048
Mortgage-backed securities held to maturity ................................................ 277,015 463,622
Loans receivable held to maturity .......................................................... 227,485 514,546
Proceeds from sales of:
Mortgage-backed securities available for sale .............................................. 738,622 1,338,508
Investment securities available for sale ................................................... -- 11,833
Loans receivable ........................................................................... -- 3,896
Proceeds from maturities and calls of investment securities held to maturity .................... 38,322 24,764
Purchases of:
Mortgage-backed securities available for sale .............................................. (686,727) (1,675,826)
Mortgage-backed securities held to maturity ................................................ (732,939) (550,154)
Investment securities held to maturity ..................................................... (13,304) (14,479)
Loans receivable held to maturity .......................................................... (171,623) (13,735)
Originations of loans receivable ................................................................ (198,877) (475,004)
Net proceeds from sales of real estate .......................................................... 4,917 3,833
Purchase of office properties & equipment ....................................................... (999) (5,953)
Purchase of stock in FHLB ....................................................................... (1,977) (23,036)
Cash acquired from acquisition .................................................................. -- 48,091
Acquisition of Home Federal Bancorp ............................................................. -- (17,004)
------------ -----------
Net cash used in investing activities ................................................. (470,922) (152,050)
------------ -----------
Cash flows from financing activities:
Repurchase of mortgage-backed bonds ............................................................. -- (60,820)
Proceeds from FHLB advances ..................................................................... 8,718,000 6,871,756
Repayment of FHLB advances ...................................................................... (8,263,000) (6,713,000)
Excess of savings deposits withdrawals over receipts ............................................ (113,726) (445,933)
Increase in securities sold under agreements to repurchase, net ................................. 147,243 237,425
Proceeds from issuance of preferred stock ....................................................... -- 21,273
Proceeds from stock option exercises ............................................................ 427 745
Purchase of treasury stock ...................................................................... (2,653) --
Cash dividends paid ............................................................................. (13,389) (8,152)
Net increase in advances from borrowers for taxes and insurance ................................. 40,755 35,682
------------ -----------
Net cash provided by (used in) financing activities ................................... 513,657 (61,024)
------------ -----------
Net increase (decrease) in cash and cash equivalents ................................................. 29,008 (105,260)
Cash and cash equivalents at beginning of period ..................................................... 21,901 177,350
------------ -----------
Cash and cash equivalents at end of period ........................................................... $50,909 $72,090
------------ -----------
Supplemental disclosures of cash flow information:
Interest credited to savings deposits ............................................................ $84,380 $76,899
Payments during the period for:
Interest ................................................................................... 225,217 160,403
Income taxes ............................................................................... 23,850 6,542
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 --
Transfers from securities held for trading to securities available for sale ..................... -- 153,860
Unrealized gain (loss) on mortgage-backed securities available for sale, net .................... 36,477 (10,953)
Assets acquired, net of cash and cash equivalents ............................................... -- 483,886
Liabilities assumed ............................................................................. -- 491,755
Common stock issued for Home Federal Bancorp .................................................... -- 48,231
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ROOSEVELT FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Roosevelt Financial Group, Inc. (the Company), its wholly owned subsidiary,
Roosevelt Bank, a Federal Savings Bank (the Bank) and the Bank's wholly owned
subsidiaries as of June 30, 1995 and for the three and six month periods ended
June 30, 1995 and 1994.
In the opinion of management, the preceding unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals and the other than temporary impairment writedown of certain private
issuer mortgage-backed securities discussed further in Note 4 and under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations") necessary for a fair presentation of the financial condition of
the Company as of June 30, 1995 and the results of its operations for the three
month and six month periods ended June 30, 1995 and 1994.
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
financial statements and notes thereto, together with Management's Discussion
and Analysis of Financial Condition and Results of Operations as of December 31,
1994 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 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 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 1994
and 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 decreasing
previously reported net income for the three month and six month periods ended
June 30, 1995 by $15.2 million and $37.1 million, respectively. This restatement
is one of the timing of recognition of gains and losses in the Statement of
Operations and had no impact on total stockholders' equity since both the
financial futures contracts and the related mortgage-backed securities had been
previously marked to market through stockholders' equity.
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
interest-bearing deposits and other short-term borrowings.
Note 2 - 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 June 30, 1995 and 1994
were 40,571,773 and 39,005,013, respectively. Average common and common stock
equivalents outstanding for the six month periods ended June 30, 1995 and 1994
were 40,572,321 and 35,577,324, 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 June 30, 1995 and 1994 were 45,444,773 and 42,741,183,
respectively. Average common and common stock equivalents outstanding, for the
purpose of calculating fully-diluted earnings per share for the six month
periods ended June 30, 1995 and 1994 were 45,478,751 and 41,444,767,
respectively.
6
<PAGE>
Note 3 - Common Stock Dividends and Preferred Stock Dividends
On July 27, 1995, the Board of Directors declared the Company's
thirtieth common stock cash dividend, in the amount of 14 cents per share
payable August 31, 1995 to stockholders of record on August 15, 1995. On June
27, 1995, the Board of Directors declared the regular quarterly cash dividend on
the Company's Series A and Series F 6.5% non-cumulative convertible preferred
stock, in the amount of 81.25 cents per share payable August 15, 1995 to
stockholders of record on August 4, 1994.
Note 4 - Impairment of Mortgage-backed Securities Held to Maturity
At March 31, 1995, certain private issuer mortgage-backed securities
held by the Company were classified as other than temporarily impaired. 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.
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 5 - Accounting Pronouncement
Effective January 1, 1995, the Company adopted the Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan" (SFAS 114) and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures" (SFAS 118) which amends SFAS 114.
SFAS 114 (as amended by SFAS 118) defines the recognition criterion for
loan impairment and the measurement methods for certain impaired loans and loans
whose terms have been modified in troubled debt restructurings ("restructured
loan"). SFAS 118 amended SFAS 114 to allow a creditor to use existing methods
for recognizing interest income on an impaired loan. The Company has elected to
continue to use its existing nonaccrual methods for recognizing interest on
impaired loans. Such methods are: 1) If collection of all interest according to
the contractual terms of the loan agreement is in doubt, but collection of the
principal balance is not in doubt, interest payments are recorded as interest
income; 2) However, if collection of interest and some or all of the principal
balance is in doubt, interest payments if actually received are applied as
principal reductions. As SFAS 114 does not apply to residential mortgage loans
and consumer installment loans (which are collectively evaluated for impairment)
which comprise approximately 95.8% of the Company's total loans at December 31,
1994, the initial application of SFAS 114 and SFAS 118 had no impact on the
Company's financial position or results of operations.
At June 30, 1995, the recorded investment in loans (principally
commercial real estate) that are considered to be impaired under SFAS 114 was
$1.4 million (which have an allowance of $460,000 under SFAS 114). Income
recorded for the six months ended June 30, 1995 on loans evaluated for
impairment in accordance with SFAS 114 and SFAS 118 was insignificant.
A loan is considered to be impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement. The Bank performs
a review of all potential problem credits to determine if the impairment
criteria have been met. If the impairment criteria have been met, a reserve is
calculated according to the provisions of the SFAS 114. The Bank charges
principal off at the earlier of (1) when a total loss of principal has been
deemed to have occurred or (2) when collection efforts have ceased.
During March 1995, the Financial Accounting Standards Board (FASB)
issued SFAS No. 121 "Accounting
7
<PAGE>
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. SFAS 121 is effective for financial
statements issued for fiscal years beginning after December 15, 1995, although
earlier application is encouraged. The Company does not anticipate that the
adoption of SFAS 121 will have any significant impact on its financial
statements.
During May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65" (SFAS 122). SFAS 122
amends SFAS 65 to require that an institution which sells or securitizes loans
it has originated or purchased and maintains the servicing rights should
capitalize the cost of the rights to service such loans. As the Company is not
currently selling or securitizing any loans that it has originated or purchased,
the aforementioned provision of SFAS 122 will not have any 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. When adopted, the Company does not anticipate that this
provision will have any significant impact on its financial statements.
Note 6 - Legal Proceedings
As a result of the acquisition of Farm & Home Financial Corporation,
which was completed in June 1994, the Company and its subsidiary have become
successor to certain legal proceedings involving claims arising out of the
Southbend Subdivision, which was developed by Farm & Home Savings and a co-
developer prior to 1985 on property adjacent to a toxic waste disposal site near
Houston, Texas (Brio Site). There have been no significant developments
regarding these claims and pursuant to certain settlement agreements the
Insurance Companies are still providing defense and indemnification for these
claims and accordingly the risk of significant loss to the Company as a result
of such claims still remains remote. Also with regard to the Newly-Asserted
Claims, and any future claims against Farm & Home Savings (or against Roosevelt
as successor) as discussed in the Company's Form 10-K for 1994, as to which
coverage may be disputed in the future by the Insurance Companies, Roosevelt
still may be required to fund the defense of such claims and might choose to
contribute toward their settlement or might suffer an adverse judgement.
However, while the magnitude of any such claims could be substantial, and the
outcome of such potential litigation cannot be predicted with certainty, the
Company still believes that the risk of their being held primarily liable for
any such claims is remote.
8
<PAGE>
Note 7 - Mortgage-Backed Securities
Available for sale - The amortized cost and market value of mortgage-backed
securities available for sale at June 30, 1995 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- ------
<S> <C> <C> <C> <C>
GNMA...................................... $ 789,248 $ 18,888 $ (1,704) $ 806,432
----------- -------- --------- -----------
FNMA...................................... 363,086 3,369 (1,394) 365,061
------- ----- ------ -------
FHLMC..................................... 346,934 3,549 (1,987) 348,496
------- ----- ------ -------
Private pass-throughs..................... 17,663 -- (655) 17,008
------ -- ---- ------
Mutual fund............................... 25,000 1,379 -- 26,379
------ ----- -- ------
Interest-only stripped coupon mortgage-
backed certificates...................... 12,114 148 (2,559) 9,703
------ --- ------ -----
Collateralized mortgage obligation
residual interests....................... 4,320 1,308 (519) 5,109
----- ----- ---- -----
Principal-only stripped coupon mortgage-
backed certificates...................... 3,345 -- (167) 3,178
----- -- ---- -----
Interest rate swap, cap, and floor
agreements............................... 32,443 7,228 (6,106) 33,565
------ ----- ------ ------
$ 1,594,153 $ 35,869 $ (15,091) $ 1,614,931
========= ====== ======= =========
</TABLE>
Gross realized gains and gross realized losses on sales of mortgage-backed
securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30
------------------------------
1995 1994
---------- ----------
<S> <C> <C>
Gross realized gains $ 11,935 $ 11,684
---------- ----------
Gross realized losses (390) (37,349)
---------- ----------
$ 11,545 $ (25,665)
========== ==========
</TABLE>
9
<PAGE>
Held to maturity - the amortized cost and market value of mortgage-backed
securities held to maturity at June 30, 1995 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- -------
<S> <C> <C> <C> <C>
GNMA.......................................... $ 15,672 $ 129 $ (359) $ 15,442
----------- --------- ----------- ----------
FNMA.......................................... 158,259 1,579 (989) 158,849
------- ----- ---- -------
FHLMC......................................... 264,281 2,742 (1,877) 265,146
------- ----- ------ -------
Private pass-throughs......................... 2,713,034 16,687 (46,590) 2,683,131
--------- ------ ------- ---------
Collateralized mortgage obligations........... 358,043 1,667 (8,953) 350,757
------- ----- ------ -------
$ 3,509,289 $ 22,804 $ (58,768) $3,473,325
=========== ========= =========== ==========
</TABLE>
There were no sales of mortgage-backed securities held to maturity during the
six month periods ended June 30, 1995 and 1994.
Note 8 - Investment Securities
Held to maturity - The amortized cost and market value of investment securities
held to maturity are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------- ---------- ---------- -------
<S> <C> <C> <C> <C>
U.S. Government and agency obligations.............. $ 115,309 $ 538 $ -- $ 115,847
--------- ------- ------ ---------
Corporate securities................................ 17,356 1,855 19,211
------ ----- ------
$ 132,665 $ 2,393 $ -- $ 135,058
========= ======= ====== =========
</TABLE>
There were no sales of investment securities held to maturity for the six month
period ended June 30, 1995.
Gross realized gains on sales of investment securities held to maturity were
$209,000 for the six month period ended June 30, 1994.
10
<PAGE>
ROOSEVELT FINANCIAL GROUP, INC.
MANAGEMENT'S DISCUSSION and ANALYSIS OF
FINANCIAL CONDITION and RESULTS OF OPERATIONS
FINANCIAL CONDITION
Capital Ratios
- --------------
The capital regulations of the Office of Thrift Supervision (OTS) require
institutions to maintain tangible capital equal to 1.5% of adjusted total assets
and to maintain core capital equal to 3% of adjusted total assets. Additionally,
institutions are required to maintain total capital (core capital plus
supplementary capital) of at least 8% of risk-weighted assets. These capital
requirements must be no less stringent than those applicable to national banks.
General loan loss reserves totaling approximately $18.2 million are included as
capital for purposes of meeting the risk-based capital requirements.
The Bank's compliance at June 30, 1995 with the fully phased-in requirements is
illustrated as follows:
<TABLE>
<CAPTION>
Regulatory
Requirement Bank's Capital Excess Capital
---------------- ---------------- ----------------
Capital Standard Amount Percent Amount Percent Amount Percent
---------------- ------ -------- ------ -------- ------ --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital...... $135 1.50% $437 4.87% $302 3.37%
Core Capital.......... $270 3.00% $440 4.90% $170 1.90%
Risk-based Capital.... $251 8.00% $445 14.21% $194 6.21%
</TABLE>
Acquisitions
- ------------
On June 16, 1995, the Company announced the execution of a definitive
agreement with Kirksville Bancshares, Inc. (Kirksville), the holding company for
Kirksville Federal Savings Bank. The transaction will result in the merger of
Kirksville Federal Savings Bank into Roosevelt Bank. At June 30, 1995,
Kirksville had total assets of approximately $136.8 million. In the transaction,
each holder of the common stock of Kirksville will receive 2.4437 shares of
common stock of the Company. The transaction is subject to the approval of the
shareholders of Kirksville and federal banking regulators. The transaction is
structured to qualify as a tax-free reorganization and will qualify for the
pooling of interests method of accounting.
On April 12, 1995, the Company announced the execution of a definitive
agreement with WSB Bancorp, Inc. (WSB), the holding company for Washington
Savings Bank, a federal savings bank. The transaction will result in the merger
of Washington Savings Bank, a federal savings bank with and into Roosevelt Bank.
At June 30, 1995, WSB had total assets of approximately $96.9 million. In the
transaction, WSB shareholders will receive $22.75 in cash for each share of WSB
common stock. The transaction is subject to the approval of the shareholders of
WSB and federal banking regulators. The transaction is structured to qualify as
a tax-free reorganization for the Company and will be accounted for under the
purchase method of accounting.
On June 30, 1994, the Company completed the merger with Farm & Home
Financial Corporation (Farm & Home) with assets totaling $3.1 billion. In
addition as of such date, Farm & Home Savings Association, a Missouri chartered
stock savings and loan association and wholly-owned subsidiary of Farm & Home,
merged with and into Roosevelt Bank. Pursuant to the Merger Agreement, each
holder of the common stock of Farm & Home, par value $.01 per share, received
2.01 shares of common stock of the Company, par value $.01 per share. As a
result of this transaction the Company issued 17,993,838 shares of common stock.
The transaction was structured to qualify as a tax-free reorganization and was
accounted for as a pooling of interests. Accordingly, the consolidated financial
statements of the Company have been restated to include the results of Farm &
Home for the March, 1994 period.
On April 22, 1994, the Company completed the acquisition of Home
Federal Bancorp of Missouri, Inc. (Home Bancorp). Pursuant to the Merger
Agreement each holder of the common stock of Home Bancorp received 0.4945 of a
share of common stock of the Company on a pre-split basis and $7.50 in cash for
each share of Home Bancorp common stock held for a total consideration
11
<PAGE>
of $68.3 million. Home Bancorp's total consolidated assets were $532.7 million
and savings deposits were $466.5 million. The transaction was structured to
qualify as a tax- free reorganization and was accounted for under the purchase
method of accounting. The transaction resulted in the recording of a tax
deductible intangible asset related to the deposit accounts of approximately
$13.8 million.
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
Statement of Financial Accounting Standards No. 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 (approximately 74% unpaid principal balances at
June 30, 1995) of these securities in this table when the enhancement, in the
form of subordination, is exhausted even though a substantial portion
(approximately 75% at June 30, 1995) of the underlying loans 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>
Non-Performing Assets June 30, December 31,
(in thousands) 1995 1994
----------- ------------
<S> <C> <C>
Non-accruing loans:
Residential..................................... $ 7,872 $ 5,666
Commercial real estate.......................... 1,427 1,626
Consumer........................................ 254 269
--------- ---------
Total......................................... 9,553 7,561
--------- ---------
Accruing loans delinquent more than 90 days:
Residential..................................... 5,138 5,080
--------- ---------
Troubled Debt Restructurings:
Commercial real estate........................ 2,747 2,757
--------- ---------
Foreclosed assets:
Residential..................................... 6,006 2,703
Commercial real estate.......................... 13,007 16,085
--------- ---------
Total......................................... 19,013 18,788
--------- ---------
Sub-total..................................... 36,451 34,186
--------- ---------
Sub-total as a percentage of total assets .41% .41%
========= =========
"Other than temporarily impaired" mortgage-backed
securities with approximately 75% of the
underlying loans either current or less than
90 days delinquent: 30,475 --
--------- ---------
Total non-performing assets $ 66,926 $ 34,186
========= =========
Total as a percentage of total
assets........................................... .75% .41%
========= =========
</TABLE>
Non-performing assets increased $32.7 million to $66.9 million at June
30, 1995 as compared to $34.2 million at December 31, 1994. The overall increase
in non-performing assets is due primarily to the inclusion in the table of $30.5
million "other than temporarily impaired" private issuer mortgage-backed
securities where the Company's credit enhancement has been fully absorbed.
12
<PAGE>
In addition, during the three months ended June 30, 1995, the Company completed
its planned desecuritization of a pool of private issuer mortgage-backed
securities with a carrying value of $33.6 million immediately prior to
desecuritization. As a result of this process, non-accruing residential loans
and foreclosed real estate increased by $1.9 million and $2.7 million,
respectively. See the caption entitled "Unrealized Losses on Impairment of
Mortgage-Backed Securities Held to Maturity" under the heading "Results of
Operations" for further details. As of June 30, 1995 the allowance for losses
for the various loan portfolios was $20.9 million. For the six months ended June
30, 1995, gross interest income which would have been recorded had the non-
accruing loans been current in accordance with their original terms amounted to
approximately $566,000. Approximately $108,000 in interest income was received
on such loans for the same period. Interest on loans involved in troubled debt
restructurings that would have been recorded as income for the six months ended
June 30, 1995, had the loans been current in accordance with their original
terms, totaled approximately $139,000. Interest on such loans that was actually
recorded as income for the six months ended June 30, 1995 was approximately
$116,000.
Not included in the preceding table are certain pools of private issuer
mortgage-backed securities with a carrying value of $36.4 million which were
performing according to their contractual terms at June 30, 1995. 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.
The following table is a reconciliation of the comparable amount of other than
temporarily impaired mortgage-backed securities at March 31, 1995 to the amount
disclosed in the first sentence in this paragraph at June 30, 1995.
<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.................................................... (2.6)
Inclusion of Guardian Pool 1990-5 in nonperforming asset table as
subordination protection was absorbed during the quarter ended June 30, 1995... (13.4)
Amount of currently performing, other than temporarily
impaired mortgage-backed securities at June 30, 1995........................... $ 36.4
</TABLE>
The analysis of the changes in the Allowance for Loan Losses from March 31, 1995
to June 30, 1995 is as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Balance at March 31, 1995................................................. $22,737
Provision for Losses on Loans............................................. 300
Charge-offs............................................................... (2,137)
Balance at June 30, 1995.................................................. $20,900
</TABLE>
13
<PAGE>
Amount of Assets and Liabilities
- --------------------------------
The total assets of the Company increased $529.2 million to $8.961
billion at June 30, 1995 from $8.432 billion at December 31, 1994. The mortgage-
backed securities portfolios increased $348.4 million through net purchases
during the period. The increases in these portfolios were primarily in the form
of adjustable rate mortgage-backed securities. Loans receivable increased $192.6
million as a result of originations and purchases during the period exceeding
principal repayments. Total liabilities increased $518.5 million to $8.509
billion from $7.990 billion for the same period. An increase in FHLB advances
totaling $455.1 million and the increase in securities sold under agreements to
repurchase totaling $147.2 million funded the purchase of assets during the six
month period ended June 30, 1995.
RESULTS OF OPERATIONS
The Company recorded net income totaling $5.9 million for the three
month period ended June 30, 1995 as compared to a net loss totaling $34.6
million for the three month period ended June 30, 1994. Net income for the 1995
period was impacted by the recognition of losses resulting from the mark to
market of the Company's financial futures positions used to reduce the interest
rate risk of certain mortgage-backed securities in the available for sale
portfolio totaling $27.8 million. The net loss for the 1994 period was primarily
the result of charges incurred related to the completion of the Farm & Home and
Home Bancorp acquisitions during this period. The Company recorded a net loss
totaling $10.3 million for the six month period ended June 30, 1995, when
compared to a net loss totaling $17.5 million for the six month period ended
June 30, 1994. Net income for the six month period ended June 30, 1995 was
impacted by the recognition of losses resulting from the mark to market of the
Company's financial futures positions used to reduce the interest rate risk of
certain mortgage-backed securities in the available for sale portfolio totaling
$61.7 million and by $27.1 million of unrealized losses on impairment of certain
mortgage-backed securities.For a discussion of the 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". The items contributing to the net loss for the
three month period ended June 30, 1994 as discussed above, also contributed to
the loss for the six month period ended June 30, 1994.
Net Interest Income
- -------------------
Net interest income decreased approximately $1.4 million to $45.7
million for the three month period ended June 30, 1995, as compared to $47.1
million for the three month period ended June 30, 1994. The net decrease was the
result of the offsetting effects of an increase in average interest earning
assets in excess of the increase in average interest bearing liabilities which
resulted in a $7.5 million increase in net interest income but which was more
than offset by the excess of the increase in the average cost of interest
bearing liabilities over the increase in the yield on interest earning assets
which resulted in $8.9 million decrease net interest income. Average interest
earning assets increased $800 million from $8.0 billion for the three month
period ended June 30, 1994 to $8.8 billion for the three month period ended June
30, 1995 while interest-bearing liabilities increased $600 million from $7.9
billion for the three month period ended June 30, 1994 to $8.5 billion for the
three month period ended June 30, 1995. The yield on average interest earning
assets increased from 6.48% for the three month period ended June 30, 1994 to
7.37% for the three month period ended June 30, 1995 while the rate paid on
average interest bearing liabilities increased from 4.21% for the three month
period ended June 30, 1994 to 5.49% for the three month period ended June 30,
1995.
The Company's growth in interest earning assets was somewhat impeded
during the three month period ended June 30, 1995 as a result of the impairment
charge on certain private issuer mortgage-backed securities recorded in the
three months ended March 31, 1995. The negative rate variance was principally
the result of a short-term lag related to the repricing of the Company's
adjustable rate loans and mortgage-backed securities in relation to the short-
term borrowings and retail deposits that fund these assets and the general
increase in the cost of retail deposits compared to comparable treasury yields.
Net interest income increased approximately $3.3 million to $94.0
million for the six month period ended June 30, 1995 as compared to $90.7
million for the six month period ended June 30, 1994. The net increase was the
result of the offsetting effects of an increase in average interest earning
assets in excess of the increase in average interest bearing liabilities which
resulted in a $20.7 million increase in net interest income but which was
partially offset by the excess of the increase in the average cost of interest
bearing liabilities over the increase in the yield on interest earning assets
which resulted in a $17.4 million decrease in net interest income. Average
interest earning assets increased $1.0 billion from $7.8 billion during the six
month period ended June 30, 1994 to $8.8 billion during the six month period
ended June 30, 1995. The yield on average interest earning assets increased from
6.44% during the six month period ended June 30, 1994 to 7.27% during the six
month period ended June 30,1995 while the average rate paid on interest bearing
liabilities increased from 4.19% for the six month period ended June 30, 1994 to
5.31% for the six month
14
<PAGE>
period ended June 30, 1995. The factors discussed above regarding the reasons
for the changes in average balances and rates are also applicable to the six
month period ended June 30, 1995 with the exception of the impact of the
impairment charge which did not impact the growth in interest-earning assets
during the three months ended March 31, 1995.
15
<PAGE>
Analysis of Changes in Net Interest Income (Volume/Rate)
- --------------------------------------------------------
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 Six Months Ended
June 30, June 30,
1995 vs. 1994 1995 vs. 1994
------------------------------------ ------------------------------------
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:
Loans receivable....................... $ 4,717 $ 5,546 $ 10,263 $ 13,749 $ 8,841 $ 22,590
Mortgage-backed securities
Held to maturity...................... 11,976 10,804 22,780 22,595 19,416 42,011
Available for sale.................... (935) 3,352 2,417 4,230 6,514 10,744
Held for trading...................... (2,785) -- (2,785) (6,457) -- (6,457)
Investment securities:
Held to maturity...................... 1,785 (450) 1,335 4,181 (1,437) 2,744
Available for sale.................... (366) -- (366) (936) -- (936)
Securities purchased under
agreements to resell.................. -- -- -- (393) -- (393)
Other earning assets................... (1,291) 233 (1,058) (2,138) 611 (1,527)
-------- -------- -------- -------- --------- --------
Total interest income............... $ 13,101 $ 19,485 $ 32,586 $ 34,831 $ 33,945 $ 68,776
-------- -------- -------- -------- --------- --------
Interest expense:
Savings deposits, net.................. $ (3,292) $ 11,698 $ 8,406 $ (4,164) $ 20,487 $ 16,323
Advances from Federal Home Loan Bank... 5,952 8,237 14,189 12,241 17,195 29,436
Securities sold under agreements
to repurchase......................... 4,988 8,199 13,187 11,155 16,441 27,596
Interest rate exchange agreements...... (371) 301 (70) (533) (2,766) (3,299)
Subordinated notes..................... (1053) -- (1,053) (2,106) -- (2,106)
Mortgage-backed bonds.................. (645) -- (645) (2,518) -- (2,518)
-------- -------- -------- -------- --------- --------
Total interest expense.............. $ 5,579 $ 28,435 $ 34,014 $ 14,075 $ 51,357 $ 65,432
-------- -------- -------- -------- --------- --------
Change in net interest income........... $ 7,522 $ (8,950) $ (1,428) $ 20,756 $ (17,412) $ 3,344
======== ======== ======== ======== ========= ========
</TABLE>
16
<PAGE>
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 June 30,
------------------------------------------------------------------
1995 1994
--------------------------------- -------------------------------
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:
Interest-earning assets:
Loans receivable (1) (2)........................... $3,219.1 $ 61.8 7.68% $2,949.3 $ 51.6 6.99%
Mortgage-backed securities:
Held to maturity................................. 3,548.6 63.2 7.13 2,737.9 40.4 5.91
Available for sale............................... 1,790.6 33.0 7.37 1,847.1 30.6 6.63
Held for trading................................. -- -- -- 194.7 2.8 5.72
Investment securities:
Held to maturity................................. 136.5 2.4 6.91 49.7 1.0 8.23
Available for sale............................... -- -- -- 31.1 0.4 5.14
Securities purchased under agreement to resell..... -- -- -- -- -- --
Other earning assets............................... 128.0 2.2 6.82 214.0 3.2 6.00
-------- -------- -------- -------- -------- --------
All interest earning assets........................ 8,822.8 162.6 7.37% 8,023.8 130.0 6.48%
-------- -------- -------- --------
Non-interest earning assets.......................... 313.1 272.9
-------- --------
Total assets....................................... $9,135.9 $8,296.7
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and money market accounts (3).................. $ 828.3 $ 5.9 2.86% $1,250.9 $ 7.2 2.32%
Passbook savings deposits.......................... 355.5 2.0 2.29 431.4 2.6 2.41
Time deposits (3).................................. 3,636.4 52.7 5.79 3,478.9 42.5 4.89
Advances from FHLB................................. 2,125.7 32.1 6.05 1,596.1 17.9 4.50
Securities sold under agreements to repurchase..... 1,523.4 23.0 6.03 1,008.7 9.8 3.88
Subordinated notes................................. 27.8 0.7 10.32 58.7 1.8 12.39
Mortgage-backed bonds.............................. 19.7 0.5 10.23 46.1 1.1 10.31
-------- -------- -------- -------- -------- --------
All interest bearing liabilities................... 8,516.8 116.9 5.49% 7,870.8 82.9 4.21%
-------- -------- -------- --------
Non-interest bearing liabilities..................... 174.1 28.2
-------- --------
Total liabilities.................................. 8,690.9 7,899.0
Stockholders' equity................................. 445.0 397.7
-------- --------
Total liabilities and stockholders' equity........... $9,135.9 $8,296.7
======== ========
Net interest income.................................. $ 45.7 $ 47.1
======== ========
Interest rate spread (4)............................. 1.88% 2.27%
======== ========
Effective net spread (5)............................. 2.07% 2.35%
======== ========
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------
1995 1994
--------------------------------- -------------------------------
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:
Interest-earning assets:
Loans receivable (1) (2)........................... $3,185.8 $ 120.8 7.58% $2,794.2 $ 98.2 7.02%
Mortgage-backed securities:
Held to maturity................................. 3,459.6 120.7 6.98 2,687.7 78.7 5.85
Available for sale............................... 1,861.3 68.3 7.34 1,734.0 57.6 6.64
Held for trading................................. -- -- -- 241.3 6.4 5.33
Investment securities:
Held to maturity................................. 146.9 4.9 6.68 50.0 2.2 8.64
Available for sale............................... -- -- -- 35.6 0.9 5.62
Securities purchased under agreement to resell..... -- -- -- 22.6 0.4 3.46
Other earning assets............................... 128.1 4.3 6.76 201.2 5.8 5.86
-------- -------- -------- -------- -------- --------
All interest earning assets........................ 8,781.7 319.0 7.27% 7,766.6 250.2 6.44%
-------- -------- -------- --------
Non-interest earning assets.......................... 305.9 330.1
-------- --------
Total assets....................................... $9,087.6 $8,096.7
======== ========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and money market accounts (3).................. $ 838.6 $ 11.3 2.69% $1,129.5 $ 14.3 2.53%
Passbook savings deposits.......................... 368.0 4.2 2.28 400.0 4.8 2.40
Time deposits (3).................................. 3,627.9 100.0 5.51 3,523.6 83.3 4.73
Advances from FHLB................................. 2,068.0 62.0 6.00 1,503.8 32.6 4.34
Securities sold under agreements to repurchase..... 1,526.9 45.1 5.91 934.0 17.6 3.76
Subordinated notes................................. 27.8 1.4 10.33 58.6 3.5 12.06
Mortgage-backed bonds.............................. 19.7 1.0 10.23 70.3 3.5 10.17
-------- -------- -------- -------- -------- --------
All interest bearing liabilities................... 8,476.9 225.0 5.31% 7,619.8 159.6 4.19%
-------- -------- -------- --------
Non-interest bearing liabilities..................... 164.2 89.7
-------- --------
Total liabilities.................................. 8,641.1 7,709.5
Stockholders' equity................................. 446.5 387.2
-------- --------
Total liabilities and stockholders' equity........... $9,087.6 $8,096.7
======== ========
Net interest income.................................. $ 94.0 $ 90.6
======== ======
Interest rate spread (4)............................. 1.96% 2.25%
======== ========
Effective net spread (5)............................. 2.14% 2.33%
======== ========
</TABLE>
- --------------------------------------------------
(1) Average balances include non-accrual loans. Interest on such loans is
included in interest income upon receipt.
(2) Interest includes amortization of deferred loan fees.
(3) Includes the effect of interest rate exchange agreements.
(4) Equals average rate earned on all assets minus average rate paid on all
liabilities.
(5) Annualized Net interest income divided by average balance of all interest
earning
assets.
At June 30, 1995 the weighted average yield on interest-earning assets was
7.37% and the weighted average cost on interest-bearing liabilities was 5.52%.
17
<PAGE>
Provision for Losses on Loans
- -----------------------------
The provision for losses on loans decreased to $300,000 for the three
month period ended June 30, 1995 compared to $11.7 million for the three month
period ended June 30, 1994. During the three month period ended June 30, 1994 it
was determined that an increase in the general allowance for loan losses was
necessary after discussion with and the concurrence of the Office of Thrift
Supervision. The above mentioned decrease in the provision also impacted the six
month period ended June 30, 1995.
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 of such transactions will have on
the future volatility of the net market value of the Company. Consequently, in
pursuing such 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 Six Months Ended
June 30, June 30,
1995 1994 1995 1994
-------- -------- -------- --------
(in millions)
<S> <C> <C> <C> <C>
Mortgage-backed securities
held for trading............................ $ -- $ (1,914) $ -- $ (4,491)
Mark to market of financial
futures contracts........................... (27,752) 7,840 (61,704) 10,334
Mortgage-backed securities
available for sale.......................... 7,567 (28,554) 11,545 (25,665)
Cancellation costs of interest rate
exchange agreements......................... -- (8,910) -- (8,910)
Options expense.............................. $(2,750) $(1,947) $(5,580) $(3,126)
------- -------- ------- --------
(22,935) (33,485) (55,739) (31,858)
======== ======== ======== ========
</TABLE>
Mortgage-Backed Securities Held For Trading During both the three and
six month periods ended June 30, 1995, the Company did not have any mortgage-
backed securities held for trading. Consequently, there were no gains or losses
on securities held for trading during these periods. During the later part of
1994, the Company had determined that it could not support the portfolio
turnover ratios required to classify mortgage-backed securities as held for
trading. Effective July 1, 1994, the securities held for trading portfolio was
transferred to the available for sale portfolio at the estimated fair value of
the securities which were then held. During the three month period ended June
30, 1994, the Company recorded a loss on mortgage-backed securities held for
trading totaling $1.9 million. During the six month period ended June 30, 1994,
the Company recorded a loss on mortgage-backed securities held for trading
totaling $4.5 million.
Mark to Market of Financial Futures Contracts - During the three month
and six month periods ended June 30, 1995 losses of $27.8 million and $61.7
million, respectively, resulted from the mark to market of the Company's
financial futures positions used to reduce the interest rate risk of certain
mortgage-backed securities in the available for sale portfolio. For further
discussion see Note 1 - Basis of Presentation to the Notes to Consolidated
Financial Statements.
Mortgage-backed Securities Available For Sale During the three month
period ended June 30, 1995, the Company recorded a $7.6 million gain on the sale
of mortgage-backed securities available for sale. During the three month period
ended June 30, 1994, the Company recorded a loss on the sale mortgage-backed
securities available for sale totaling $28.6 million. As a result of the
integration of Roosevelt and Farm & Home during the three month period ended
June 30, 1994, it was determined that certain fixed-rate mortgage-backed
securities classified available for sale would be sold and their related hedges
would be cancelled or redesignated resulting in a net loss. In addition to these
transactions, the Company had also sold certain mortgage-backed securities
classified available for sale during the three month period ended March 31,
1994, resulting in a gain totaling $2.9 million.
During the six month period ended June 30, 1995, the Company recorded
an $11.5 million gain on the sale of mortgage-backed securities available for
sale.
18
<PAGE>
Cancellation Costs Of Interest Rate Exchange Agreements During the
three month period ended June 30, 1994, Farm & Home prepaid a $100 million
Federal Home Loan Bank advance and sold its Corpus Christi branch savings
deposits. As a result of a reduction in these liabilities certain interest rate
exchange agreements were cancelled. Such cancellations resulted in an $8.9
million loss.
Options Expense Options expense increased to $2.8 million for the three
month period ended June 30, 1995 when compared to $1.9 million for the three
month period ended June 30, 1994. Options expense increased to $5.6 million for
the six month period ended June 30, 1995 when compared to $3.1 million for the
six month period ended June 30, 1994. The options expense for the three month
and six month periods ended June 30, 1995 was comprised of the amortization of
transaction fees paid for interest rate cap, floor, and collar agreements.
Gross Profit Insurance Agency
- -----------------------------
Gross profit insurance agency increased to $2.1 million for the three
month period ended June 30, 1995 when compared to $1.5 million for the three
month period ended June 30, 1994. Gross profit insurance agency increased to
$4.1 million for the six month period ended June 30, 1995 when compared to $3.2
million for the six month period ended June 30, 1994. The increases are
primarily the result of increased sales volume of commission generating
products.
Retail Banking Fees
- -------------------
Retail banking fees increased $615,000 to $2.7 million for the three
month period ended June 30, 1995 compared to $2.1 million for the three month
period ended June 30, 1994. Of this increase approximately $122,000 is
attributable to fees received as a result of the acquisition of Home Federal in
April, 1994. The remaining increase of approximately $493,000 is attributable to
an overall increase in the utilization of the retail banking services offered by
the Bank. Retail banking fees increased $1.4 million to $5.2 million for the six
month period ended June 30, 1995 compared to $3.9 million for the six month
period ended June 30, 1994. Of this increase approximately $501,000 is
attributable to additional fees received as a result of the acquisition of Home
Federal in April, 1994. The remaining increase of approximately $857,000 is
attributable to an overall increase in the utilization of the retail banking
services offered by the Bank.
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.
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:
19
<PAGE>
. 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 April and May, 1994 to the current ratings reflected
in the tables on pages 22 and 23 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 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 has 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 $6.0 million at March 31, 1995 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 has
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
in the Guardian Securities is approximately $79.0 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....................................... (7.0)
Desecuritization of Guardian Pool 1990-9 (see discussion below)....... (33.6)
------
Investment in Guardian Securities, June 30, 1995...................... $ 78.9
======
</TABLE>
During the quarter ended June 30, 1995, the Company completed its
planned desecuritization of Guardian
20
<PAGE>
Pool 1990-9 and is currently in the process of assuming 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 certficateholders 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 ($1.7 million).
21
<PAGE>
Presented below is information as of June 30, 1996 relating to the Company's
investment in the Guardian pools, segragated between the seven pools determined
to be impaired and the two pools which, in the opinion of management, continue
to be adequately protected from loss through substantial remaining
subordination. The immediately succeeding table also includes information
----------------------------------------------------------
related to Lehman 91-4 which has been determined to be other than temporarily
- -----------------------------------------------------------------------------
impaired.
- --------
POOLS DETERMINED TO BE OTHER THAN TEMPORARILY IMPAIRED
- --------------------------------------------------------------------------------
June 30, 1995
($s in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Subordination As a Regarding Roosevelt's Interests
Rating Percent of Pool Balance ----------------------------------- Percentage 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> <C>
GUARDIAN POOLS
- --------------
89-11 11/30/89 S & P AA CCC 8.50% 13.16% $ 33,750 $ 9,363 $ 7,424 73%
Moody Aa2 Ba1
90-1 1/30/90 S & P AA CCC 8.50% 7.75% 3,000 902 695 69%
Moody Aa2 Ba2
90-2 2/27/90 S & P AA CCC 8.50% 0.43% 27,500 8,175 5,733 75%
Moody Aa2 Ba3
90-4 4/30/90 S & P AA CCC 8.75% 1.65% 46,428 16,697 12,051 67%
Moody Aa2 Ba3
90-5 5/31/90 S & P AA CCC 8.75% -- 45,000 16,628 12,701 76%
Moody Aa2 Caa
90-7 7/25/90 S & P AA CCC 8.75% -- 68,025 24,448 17,774 75%
Moody Aa2 Caa
90-8 9/21/90 S & P AAA CCC 14.00% 11.75% 15,000 5,782 4,617 71%
Moody Aaa Ba1
-----------------------------------
Total Guardian $ 238,703 $ 81,996 $ 60,995
-------- =========== ========== ==========
LEHMAN
- ------
91-4 7/30/91 S & P AA CCC 23.00% 7.16% $ 14,000 $ 10,709 $ 5,859 70%
---- ------- ----- -- --- ----- ---- =========== ========== ========== ---
Moody Aa3 Caa
----- --- ---
</TABLE>
22
<PAGE>
GUARDIAN POOLS DETERMINED TO BE ADEQUATELY PROTECTED BY REMAINING CREDIT
- --------------------------------------------------------------------------------
ENHANCEMENT
- --------------------------------------------------------------------------------
June 30, 1995
($s in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Subordination As a Regarding Roosevelt's Interests
Rating Percent of Pool Balance ----------------------------------- Percentage 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> <C>
89-10 10/27/89 S & P AA BBB 8.50% 16.14% $ 9,000 $ 1,973 $ 1,994 76%
Moody Aa2 Ba1
91-2 3/28/91 S & P AAA BBB 17.00% 23.78% 39,831 15,889 15,889 72%
Moody Aaa Baa1
----------------------------------------------------------------------------------
Totals $ 48,831 $ 17,862 $ 17,883
=========== ========== ==========
</TABLE>
23
<PAGE>
Since mortgage-backed securities are asset-backed, they are subject to
inherent risks based upon the future performance of the underlying collateral
(i.e., mortgage loans) for these securities. Among these risks are prepayment
risk and interest-rate risk. Should general interest-rate levels decline, the
mortgage-backed security portfolio would be subject to i) prepayments as
borrowers typically would seek to obtain financing at lower rates, ii) a decline
in interest income received on adjustable-rate mortgage-backed securities, and
iii) an increase in fair value of fixed rate mortgage-backed securities.
Conversely, should general interest rate levels increase, the mortgage-backed
security portfolio would be subject to i) a longer term to maturity as borrowers
would be less likely to prepay their loans, ii) an increase in interest income
received on adjustable-rate mortgage backed securities, iii) a decline in fair
value of fixed-rate mortgage-backed securities, and iv) a decline in fair value
of adjustable-rate mortgage-backed securities to an extent dependent upon the
level of interest-rate increases, the time period to the next interest-rate
repricing date for the individual security and the applicable periodic (annual
and/or lifetime) cap which could limit the degree to which the individual
security could reprice within a given time period.
Unlike U.S. Government agency mortgage-backed securities which include
a full guarantee of principal and interest, private issuer mortgage-backed
securities are generally structured with a senior ownership position and
subordinate ownership position(s) providing credit support for the senior
position. In a limited number of cases, this support is provided through letters
of credit or cash reserves. Given the structure of the private issuer mortgage-
backed securities, the Company has credit risk in addition to interest-rate risk
and prepayment risk discussed above. In this regard, management has instituted a
monitoring system tracking the major factors affecting the performance of a
private issuer mortgage-backed security including i) a review of delinquencies,
foreclosures, repossessions and recovery rates relative to the underlying
mortgage loans collateralizing each security, ii) the level of available
subordination or other credit enhancement, iii) an assessment of the servicer of
the underlying mortgage portfolio and iv) the rating assigned to each security
by independent national rating agencies. This process has indicated that, with
the exception of the seven Guardian pools and the additional security determined
to be impaired, the remainder of the Company's private issuer mortgage-backed
securities portfolio continues to perform according to the contractual terms of
the securities. At June 30, 1995, approximately 98% of the Company's mortgage-
backed security portfolio is comprised of AA or AAA-rated private issuer product
or government agency issued product.
General and Administrative Expense
- ----------------------------------
General and administrative expense decreased $24.0 million to $21.7
million for the three month period ended June 30, 1995 when compared to $45.7
million for the three month period ended June 30, 1994. General and
administrative expense decreased $26.6 million to $43.2 million for the six
month period ended June 30, 1995 compared to $69.8 million for the six month
period ended June 30, 1994.
These decreases are primarily attributable to decreases in compensation
and employee benefits, occupancy, and other general administrative expense
resulting foremost from $19.8 million of nonrecurring charges for transaction
costs, severance expense, and costs to dispose of excess facilities incident to
the acquisition of Farm & Home during the three month period ended June 30,
1994.
Excluding such nonrecurring charges, general and administrative expense
decreased $4.2 million and $6.7 million for the three and six month periods
ended June 30, 1995, respectively when compared to the same periods in 1994.
These net decreases are primarily attributable to overall efficiencies realized
after the June 30, 1994 merger with Farm & Home.
Provision For Real Estate Losses
- --------------------------------
Provisions for real estate losses amounted to $3.7 million for the
three month period ended June 30, 1994 and $4.6 million for the six month period
ended June 30, 1994. The $3.7 million provision for the three month period ended
June 30, 1994 is the result of an addition to the general valuation allowance
for possible future losses on foreclosed real estate established in connection
with the acquisition of Farm & Home. Such addition represented a 25% reduction
in net carrying value to accommodate a strategy of accelerating the disposition
of Farm & Home's real estate owned portfolio. In addition to this provision for
the six month period ended June 30, 1994 Farm & Home recorded an $839,000
provision for specific valuation allowances on six non-residential real estate
properties.
24
<PAGE>
Recent Developments
- -------------------
The deposits of Roosevelt Bank are presently insured by the Savings
Association Insurance Fund ("SAIF"), which together with the Bank Insurance Fund
("BIF"), are the two insurance funds administered by the Federal Deposit
Insurance Corporation ("FDIC"). On August 8, 1995, the FDIC revised the premium
schedule for BIF-insured banks to provide a range of .04% to .31% of deposits
(as compared to the current range of .23% to .31% of deposits for both BIF and
SAIF-insured institutions) in anticipation of the BIF achieving its statutory
reserve ratio. As a result, BIF members generally would pay lower premiums than
the SAIF members. The lower premiums for BIF members are expected to take effect
no later than in the third quarter of 1995. It is anticipated that the SAIF will
not be adequately recapitalized until 2002, absent a substantial increase in
premium rates or the imposition of special assessments or other significant
developments, such as a merger of the SAIF and the BIF. As a result of this
disparity, SAIF members could be placed at a significant competitive
disadvantage to BIF members due to higher costs for deposit insurance. A
recapitalization plan under consideration by the Treasury Department, the FDIC,
the OTS and the Congress reportedly provides for a one-time assessment of .85%
to .90% to be imposed on all deposits assessed at the SAIF rates in order to
recapitalized the SAIF and eliminate disparity. No assurance can be given,
however, as to whether the recapitalization plan will be implemented or as to
the nature or extent of any competitive disadvantage which may be experienced by
SAIF member institutions.
25
<PAGE>
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 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).
Net market value is calculated by adjusting stockholders' equity for
differences between the estimated fair values and the carrying values
(historical cost basis) for 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 as
calculated by the Company increased to $428.3 million at June 30, 1995 as
compared to $404.0 million at December 31, 1994.
To measure the impact of interest rate changes, the Company
recalculates the net market value on a pro forma basis assuming instantaneous,
permanent parallel shifts in the yield curve of both up and down 100, 200, 300
and 400 basis points, or eight separate calculations. Larger increases or
decreases in the net market value of the Company as a result of these interest
rate changes represents greater interest rate risk than do smaller increases or
decreases in net market value. The Company endeavors to maintain a position
where it experiences no material change in net market value as a result of
assumed 100 and 200 basis point increases and decreases in interest rates.
The OTS recently 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 flows 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. The
regulation provides for a two quarter lag between calculating interest rate risk
and recognizing any deduction from capital. The amount of that deduction is one-
half of the difference between (a) the institution's actual calculated exposure
to the 200 basis point interest rate increase or decrease (whichever results in
the greater pro forma decrease in net portfolio value) and (b) its "normal"
level of exposure which is two percent of the present value of its assets. The
OTS announced that it will delay the effective date of the regulation until it
adopts the process by which an institution may appeal an interest rate risk
capital deduction determination. It is not known at this time when such
regulation will become effective.
Utilizing this measurement concept, the interest rate risk of the Company at
June 30, 1995 is as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
(unaudited)
------------------------------------
<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)................ $ (30,387) $(11,019) $(7,322) $ (32,923)
OTS "normal" level of interest rate exposure.......... $(179,221) N/A N/A $(179,221)
</TABLE>
The Company's operating strategy is designed to avoid material negative
or positive changes in net market value. As of June 30, 1995, 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 loss when rates increase
indicates the duration of the Company's assets is slightly longer than the
duration of the Company's liabilities. A loss when rates decrease is due to
borrowers prepaying their loans resulting in the Company's assets repricing down
more quickly than the Company can reprice its liabilities.
26
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LIQUIDITY AND CAPITAL RESOURCES
Federal 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 in excess of required amounts having had ratios of 5.65% and 5.91% at
June 30, 1995 and December 31, 1994, respectively.
The Company's cash flows are comprised of cash flows from operating,
investing and financing activities. Cash flows used in operating activities,
consisting primarily of interest received on investments less interest paid on
deposits, were $13.7 million for the six month period ended June 30, 1995. Also
included in the operating activities of the Company are the unrealized losses on
impairment of mortgage-backed securities held to maturity recorded during the
three month period ended March 31, 1995. Net cash related to 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, utilized $470.9 million for
the six month period ended June 30, 1995. Net cash related to financing
activities, consisting of proceeds net of repayments from FHLB advances,
proceeds from securities sold under agreements to repurchase, excess of savings
deposits withdrawals over receipts, and a net increase in advances from
borrowers for taxes and insurance, provided $513.7 million for the six month
period ended June 30, 1995.
At June 30, 1995, the Company had commitments outstanding to originate
fixed-rate mortgage loans of approximately $46.9 million and adjustable-rate
mortgages of approximately $38.2 million. The Company expects to satisfy these
commitments through its primary sources of funds.
27
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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
___________________________________________
None
28
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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 hereunto duly authorized.
ROOSEVELT FINANCIAL GROUP, INC.
Date: September 12, 1996 By: /s/ Gary W. Douglass
----------------------------------
Gary W. Douglass
Executive Vice President and
Chief Financial Officer
