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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-17403.
ROOSEVELT FINANCIAL GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 43-1498200
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 ROOSEVELT PARKWAY, CHESTERFIELD, MISSOURI 63017
(Address of principal executive offices) (Zip Code)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (314) 532-6200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
6 1/2% NON-CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A, PAR VALUE
$.01 PER SHARE
(Title of Classes)
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 twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
As of March 8, 1996, there were issued and outstanding 42,100,617 shares of
the Registrant's Common Stock. The aggregate market value of the voting stock
held by nonaffiliates of the Registrant, computed by reference to the closing
price of such stock as of March 8, 1996, was $737,917,806. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the Registrant that such person is an affiliate of the
Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
PART III of Form 10-K--Portions of Proxy Statement for the 1996 Annual
Meeting of Stockholders.
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The purpose of this amendment on Form 10-K/A to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 (the "Form 10-K") of
Roosevelt Financial Group, Inc., is to amend certain items of the Form 10-K as
follows:
Item 1. Business
The first two sentences of the penultimate paragraph of "Liability
Composition" on page 3 have been deleted.
The penultimate sentence of "Penchant for Simplicity" on page 7 has been
revised.
The first paragraph of "Private-Issue Certificates" on page 13 has
been revised and the second paragraph of "Private-Issue Certificates" on page 13
has been added.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The last paragraph of "Results of Operations" on page 37 has been
deleted.
The first and third paragraphs of "Provision for Losses on Loans" on
page 40 have been added.
Item 8. Financial Statements and Supplementary Data.
The last sentence of "Investment and Mortgage--Backed Securities," in
Note (1), on page 62, has been added.
The last item of the table in Note (3), "Commitments to Extend Credit,"
on page 68, has been added.
The penultimate paragraph of Note (3), " Commitments to Extend Credit,"
on page 70, has been added.
The "Gross loans" table in Note (6) on page 74 has been revised to
reflect contractual maturities.
The last sentence of Note (15), on page 85, has been revised.
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ROOSEVELT FINANCIAL GROUP, INC.
1995 ANNUAL REPORT ON FORM 10K
TABLE OF CONTENTS
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Page
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PART I................................................................................. 1
Item 1. BUSINESS..................................................................... 1
General...................................................................... 1
Roosevelt's Philosophy and Operating Strategy................................ 1
Forward Looking Statements................................................... 8
Acquisitions................................................................. 9
Lending Activities........................................................... 9
Investment and Mortgage-Backed Securities.................................... 13
Classified Assets, Loan Delinquencies and Defaults........................... 17
Provisions for Losses on Loans and Real Estate Owned......................... 17
Deposits and Other Sources of Funds.......................................... 20
Asset/ Liability Management.................................................. 21
Subsidiaries................................................................. 21
Regulation................................................................... 22
Competition.................................................................. 29
Management of Registrant and Its Subsidiaries................................ 31
Employees.................................................................... 31
Item 2. PROPERTIES.................................................................. 32
Item 3. LEGAL PROCEEDINGS........................................................... 32
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................... 33
PART II................................................................................ 33
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS.... 33
Common Stock................................................................. 33
Payment of Dividends......................................................... 33
Item 6. SELECTED FINANCIAL DATA..................................................... 34
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................... 36
General...................................................................... 36
Results of Operations........................................................ 36
Financial Condition.......................................................... 45
Asset Quality................................................................ 47
Asset/Liability Management................................................... 48
Liquidity and Capital Resources.............................................. 51
Impact of Inflation and Changing Prices...................................... 52
Accounting and Regulatory Developments....................................... 52
Selected Quarterly Financial Data............................................ 54
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................. 56
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................... 92
PART III............................................................................... 92
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................... 92
Item 11. EXECUTIVE COMPENSATION...................................................... 92
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 92
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 92
PART IV................................................................................ 92
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............ 92
SIGNATURES................................................................... 96
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PART I
ITEM 1. BUSINESS
GENERAL
Roosevelt Financial Group, Inc. (Roosevelt or the Company) is a Delaware
corporation which was organized in 1988 by Roosevelt Bank, a federal savings
bank (the Bank) for the purpose of becoming a thrift institution holding company
for the Bank. The Bank is a federally chartered stock savings bank with 79 full
service offices. The Bank has 38 offices serving the St. Louis metropolitan
area, including Alton and Granite City, Illinois and nine offices serving the
Kansas City metropolitan area. The remaining 32 offices are located in Staunton,
Illinois and Pittsburgh, Kansas and the Missouri cities of Hannibal(2),
Springfield(3), Columbia, Union, Warrenton, St. James, Washington, Sikeston,
Dexter, Malden, Poplar Bluff, Hayti, Portageville, Cape Girardeau, Mexico,
Jefferson City, Trenton, Marshall, Sedalia, Clinton, Maryville, St. Joseph,
Nevada, Lamar, Joplin(2) and Kirksville. Incorporated as a Missouri chartered
mutual savings and loan in 1924, the Bank converted to a federally chartered
savings and loan in 1935. In 1987, the Bank became a stock savings and loan and,
one year later, converted to a stock savings bank, changing its name to
Roosevelt Bank, a federal savings bank.
Effective December 30, 1988, the Bank completed the holding company
reorganization of the Bank and the Company acquired all of the issued and
outstanding shares of common stock of the Bank. The principal asset of the
Company is the outstanding stock of the Bank, a wholly owned subsidiary. The
Company's common stock is traded on the Nasdaq Stock Market under the symbol
"RFED".
Roosevelt's business consists primarily of attracting deposits from the general
public and using those deposits, together with borrowings and other funds, to
acquire real estate and consumer loans and mortgage-backed securities, to
perform loan servicing functions for others, and to provide other retail banking
and financial services to consumers.
The Company and the Bank are subject to examination and comprehensive regulation
and oversight by the Office of Thrift Supervision (the OTS) and by the Federal
Deposit Insurance Corporation (the FDIC). The Bank is further subject to
regulations of the Board of Governors of the Federal Reserve System (the Federal
Reserve Board) governing reserves required to be maintained against transaction
accounts. The Bank is a member of the Federal Home Loan Bank (FHLB) of Des
Moines, which is one of the 12 regional banks constituting the Federal Home Loan
Bank System (the FHLB System) and its deposits are insured by the Savings
Association Insurance Fund (SAIF) to the maximum extent permitted by the FDIC.
Roosevelt's executive offices are located at 900 Roosevelt Parkway,
Chesterfield, Missouri 63017, and its telephone number is (314) 532-6200.
Unless otherwise indicated, references herein to Roosevelt or the Company
include the Bank and its subsidiaries on a consolidated basis.
ROOSEVELT'S PHILOSOPHY AND OPERATING STRATEGY
The Company's philosophies regarding the evolution of the composition of its
balance sheet, risk avoidance techniques utilized during times of significant
market volatility and current operating strategies are discussed in the
following paragraphs of this section.
Occasionally, over the past ten years, some observers have inaccurately compared
Roosevelt to wholesale companies which, by design, avoided the retail business.
By contrast, Roosevelt's capital markets activities were a prudent and
disciplined reaction to conditions and opportunities within its retail markets.
Roosevelt's Management strongly endorses a continued growth of its diversified,
yet retail-based, operation.
Because Roosevelt dealt successfully with so much excess liquidity over the past
ten years, the Bank has developed a core competency related to managing interest
rate risk and capital market instruments. Unlike many in the capital markets,
Roosevelt has only dealt with derivatives and securities as risk reducing tools.
None of Roosevelt's activities with derivatives have been a business in and of
itself wherein speculation or pursuit of profit was the goal.
Based upon the above, Roosevelt has not experienced problems with derivatives as
others have. Relative to other banks,
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Roosevelt's expertise in this area has enabled it to lower its overall risk
profile. Roosevelt's current liquidity position and its abilities in the capital
markets stand as strengths which can support and enhance its current and future
retail efforts.
Dating back to 1986, there is a deeply rooted preference toward retail banking
in all of Roosevelt's operating policies. Reading the various policies together,
one can envision that Roosevelt's Management believes the ideal balance sheet
has virtually all assets being comprised of high quality loans originated within
the Bank's retail markets. Also, ideally, this asset base would be financed
almost exclusively with core retail deposits and equity.
ASSET COMPOSITION
During the late 1980's, Roosevelt's Management was preoccupied with the
transformation from a traditional thrift. Significant changes included
increasing capital, reducing exposure to the commercial real estate market,
reducing interest rate risk, expanding asset generation capability to other than
merely residential mortgages and enhancing the physical plant and technology
platform to compete more effectively in the retail arena.
In pursuit of the ideal balance sheet, Roosevelt was only equipped to originate
real estate mortgages. On the single-family portion of the business, Roosevelt's
competition was dominated by thrifts which were technically insolvent. The
operations of these competitors drove down available loan yields. The only hope
for profitability was dependent upon funding the asset with very short-term
liabilities in order to play the yield curve. These competitors did engage in
such rate speculation. The only alternative would have been to close their
company and to surrender their keys to the government. Roosevelt's discipline
prevented it from joining in on what was believed to be unsafe and unsound
practices.
At that time, Roosevelt's alternatives also included commercial mortgage
originations. A review of that market showed that borrowers were demanding, and
receiving, loan terms which included thin single-family type margins, no
recourse to the borrower and no requirement of a down payment or a real equity
contribution to their project. Within such scenarios, the best a lender could
have hoped for was getting their money back with a very small return relative to
the risk. Unfortunately, as often as not, many of the projects failed. Without a
significant down payment to protect, borrowers were only too happy to give their
"white elephant" to the bank. Without legal recourse to the borrower, the
bankers could do little more than turn their attention to hiring crews of REO
workout specialists.
Roosevelt abstained from this activity as well. It was viewed that making such
loans would have been tantamount to the granting of free Call and Put options.
If the project succeeded, the borrower could Call the value away by paying the
loan back but keeping all of the profit. If the project failed, the borrower
could Put the underwater project back to the lender by not repaying the loan,
whose balance would then be much greater than the value of the collateral.
Roosevelt believes that viewing financial transactions in terms of such an
options perspective is a very good beginning to managing risk. Roosevelt tries
to avoid situations wherein the downside greatly exceeds the potential upside in
a given transaction.
The discussion above explains why Roosevelt was uninterested in growing its
balance sheet with mortgage loans regardless of whether the loans were backed by
single-family or commercial real estate. Such circumstances caused Roosevelt's
liquidity to grow. Also, significant declines in interest rates during 1986 and
after the October 1987 stock market crash caused significant prepayment of a lot
of the Bank's existing mortgages. Accordingly, liquidity grew even more.
The challenge for Roosevelt was to find ways to invest the liquidity without
taking significant credit risk, without taking material interest rate risk and
still preserving at least some spread. Roosevelt found part of the answer in its
knowledge of the mortgage market.
It appeared that "Wall Street" was oblivious to mortgage prepayment risk until
the mid-to-late 1980's. The first acknowledgement by institutional investors was
merely one of panic and avoidance. With every announcement of huge losses at
several Wall Street firms--the market abandoned the purchase of mortgages. As
prices fell relative to Treasurys, the yield spreads widened substantially.
Roosevelt merely acknowledged that its huge build up in liquidity had occurred
during a time of great investment opportunity in mortgage-backed securities
(MBS) which promised wide risk-adjusted spreads.
The decision to invest a portion of that liquidity in MBS was not a difficult
leap to make. Accordingly, Roosevelt moved a
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lot of its liquidity into MBS and ended up with an asset base comprised of fewer
loans and more securities than typical for a bank. With every passing month, the
existing asset base (comprised of both loans and securities) threw off
additional liquidity. Accordingly, the new liquidity was invested in more
securities. Unfortunately, Management did not see the mortgage origination
market become rational until after Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC)
and, accordingly, supplied the money to shut down the thrifts during 1990. By
that time, this process had caused Roosevelt's loans to represent only about 20%
of assets.
LIABILITY COMPOSITION
During this time, Roosevelt also had difficulty growing its retail deposits. To
attract a new household, the Bank needed a competitive checking account product.
Being competitive meant providing the services expected by the typical customer.
Roosevelt's physical plant and technology platform were inadequate. Not enough
branches had drive-up windows, the lobbies were too small and the Bank did not
have a single ATM.
During the late 1980's through about 1991, Roosevelt attacked these problems
aggressively by installing an entirely new data processing system and putting
ATM's in every branch, by remodeling a number of branches and trying to make
sure every location had a drive-up facility, and by actually closing a couple of
offices and building some entirely new facilities for the first time in over ten
years. While these steps helped competitiveness prospectively, they did nothing
to impact the position in 1991 wherein both the loan and the deposit portfolios
were smaller than management had wished.
During the 1992-1994 era, the Company quadrupled in size to over $8 billion.
Such activities gave the Bank even more opportunities to improve its physical
plant and technology platform. Management thought the merger and acquisition
opportunities were historically attractive and exerted great effort in making
the most of the opportunities. At one point, both the First Nationwide and the
Savings of America deposit acquisitions were nearly lost. However, being nimble
and flexible made the difference. Roosevelt conveyed a willingness to accept
entirely cash on the asset side of the transactions. Both of the California
companies found real value in the proposal because they were having difficulty
finding loan growth.
With those two transactions, deposits grew $1.3 billion. The $1.3 billion in
cash increased Roosevelt's excess liquidity position. Being risk averse and
preoccupied with acquisition integration, the Company did not try to
substantially increase its loan purchase/origination program in desperation.
Management felt that the assets were kept safe and available for future
opportunities by buying MBS.
While much of the growth during that period of time also came in the form of
whole companies, most of the companies had limited asset generation capability
and excess liquidity. Management did not mind such scenarios because it was
easier to see how profitability could be improved quickly. Also, such
characteristics helped Management to control asset quality during a period of
rapid acquisition growth. However, every acquisition seemed to move the Bank
further away from more typical loan-to-deposit or loan-to-asset ratios.
Everyone at Roosevelt today believes that the primary opportunity in building
high returns is the conversion of the lower margin securities into higher margin
relationship-based retail assets. Such is the focus of Roosevelt's stand-alone
business plan. Such would undoubtedly be the focus in either a "merger-of-
equals" transaction or in the motivations of a straight forward acquiror.
Management does not believe it should make material investments in mortgage
securities on a held-to-maturity basis, unless there is an insufficient supply
of loans with superior risk-return opportunities.
At December 31, 1995, Roosevelt owned $3.4 billion of MBS held to maturity. The
monthly cash flows from this portfolio can fund a great deal of loan growth. If
loan volumes are sufficient, this portfolio will be on an immediate and steady
decline from here forward.
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THE PAST AS A GOOD PREDICTOR OF THE FUTURE
At December 31, 1995, Roosevelt had invested $1.4 billion in MBS carried as
available for sale (AFS). This portfolio should be looked at as the Bank's
typical liquidity/securities portfolio. The size of such holdings is likely to
be relatively constant and not decline with an increased ability to originate
loans. This investment represented approximately 16% of total assets at December
31, 1995. At a similar point in time, the five largest Missouri commercial banks
owned securities positions averaging more than 25% of total assets. Accordingly,
Roosevelt's Management does not believe that its portfolio of securities carried
as available for sale constitutes either an unusual activity for a bank or an
unusually large concentration for a bank of Roosevelt's size.
Roosevelt's approach within the AFS portfolio is also similar to the goals of
other conservative banks in that it seeks to minimize both credit risk and
interest rate risk. Regarding credit risk, Roosevelt seeks only government
agency-backed, AAA-rated or AA-rated paper. Regarding interest rate risk,
Roosevelt seeks to maintain a weighted average duration within the overall
portfolio of less than six months. On both an outright dollars basis and as a
percentage of the AFS portfolio, Roosevelt has experienced less in the way of
market value adjustments to equity pursuant to Statement of Financial Accounting
Standards No. 115 (SFAS 115) than most other banks.
INTEREST RATE RISK
Roosevelt has a very simple philosophy regarding interest rate risk (IRR).
First and foremost--Roosevelt tries to avoid IRR. By definition, Roosevelt
believes IRR is the extent to which an entity can be negatively impacted by a
change in interest rates. Accordingly, Roosevelt endeavors to maintain a
position wherein it will not suffer any material impact from 1) a parallel rise
in interest rates; 2) a parallel decline in interest rates; 3) a steepening of
the yield curve; or 4) a flattening of the yield curve.
It is appropriate to tie this concept of seeking to avoid interest risk with the
concept discussed earlier regarding Management's "ideal balance sheet." If the
assets were all retail home equity lines of credit, wherein the rates were not
capped and fluctuated with the Prime rate; and, all of the liabilities were core
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retail deposits, made up exclusively of transaction accounts without maturities-
- -then Management believes that there would be very little IRR.
However, based upon its recent history, Roosevelt does not enjoy an ideal
balance sheet. Transaction accounts make up only about 25% of total deposits.
Management is currently trying to grow its transaction account base as rapidly
as can be deemed prudent. Acquiring or merging with companies with large
amounts of transaction accounts is considered to be a prudent supplementary
strategy as long as the prices of the merger partners are not excessive.
Also, Roosevelt's asset base has a relatively small balance of home equity lines
of credit. In fact, Roosevelt's limited capabilities historically to originate
short term retail loans forced the Bank to buy mortgage- and asset-backed
securities to supplement its balance sheet.
WHAT ROOSEVELT BUYS AND WHEN
When looking for opportunities in the securities market, Roosevelt has tried to
follow a "keep it simple" strategy. Accordingly, all things being equal, the
Bank has sought high quality assets whose characteristics cause the management
of interest rate risk to be simple.
The asset owned by the Bank for several years which best fits that description
is an asset-backed security issued by a subsidiary of Navistar. This particular
security was rated AAA by the major rating agencies at issuance and has
continued to enjoy such ratings since that time. Its rate floats monthly at a
fixed spread over one month LIBOR without any periodic or life caps limiting
possible rate adjustments. This investment has performed extremely well for
Roosevelt by providing at least a 1.00% spread over the Bank's marginal
borrowing costs and frequently providing over a 2.00% spread over the Bank's
marginal retail costs. There has been no level of interest rates or slope in the
yield curve which has challenged the profitability of this investment.
Unfortunately, investments such as the one described above are sufficiently rare
that other types of assets had to be considered. The type of asset most readily
available and most similar to the Navistar security described above, has been
the floating-rate mortgage-backed security. These floating-rate MBS have been
either directly issued by FNMA or FHLMC, or, they have
4
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been collateralized by such credits in sufficient magnitude to gain AAA ratings
from the major rating agencies. There has been a long enough history of such
securities, without credit downgrades, that Management is comfortable with its
assertion that, on a bond by bond basis, the credit risk has been diffused.
Regarding the IRR of owning such securities, the key is that the rates float on
a monthly or quarterly basis over LIBOR. Accordingly, the yield on such
securities can fluctuate without a periodic cap in order to mirror the Bank's
fluctuating short-term funding costs. The sole IRR of these securities is
related to them having a lifetime cap. Roosevelt typically buys such securities
when the particular lifetime cap is several hundred basis points above the then
current rate. Accordingly, properly managed, Roosevelt believes that owning such
securities is also a relatively low risk activity.
The remainder of Roosevelt's AFS portfolio is comprised of more typical
adjustable-rate MBS and, to a much more limited extent, fixed-rate MBS.
Roosevelt's daily purchase decisions are highly driven by assessing which
available security type is providing the highest risk-adjusted spread on that
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day. However, Roosevelt has a strong preference for simplicity and safety.
Accordingly, if floating-rate, adjustable-rate and fixed-rate agency MBS are all
offering exactly 1.00% spreads over the yield on comparable duration Treasurys,
then Management would generally buy the floating-rate security.
If there was a so-called normal, upwardly sloping, yield curve on that day,
Management would be accepting the lowest outright yield. This is true because
floating-rate MBS typically are compared to the shortest (lowest yielding)
Treasurys; adjustable-rate MBS are typically compared to Treasurys whose
maturities are less short; and, fixed-rate MBS are typically compared to longer
duration (higher yielding) Treasurys. Such a fact demonstrates that Roosevelt's
Management is seldom interested in the outright yield of a security in its AFS
portfolio. By ignoring outright yields, Management begins to demonstrate how it
is different from the managements of certain other banks. By being indifferent
to outright yield--by focusing only on the risk-adjusted spread over the yield
of a comparable duration Treasury security--Management becomes less vulnerable
to skilled bond salesmen. A few extra basis points in yield will not cause
Roosevelt's Management to think the bond is a better investment.
In order for Roosevelt to buy an adjustable-rate MBS in lieu of a floating-rate
MBS, the adjustable-rate security would need to promise a wider spread over its
comparable duration Treasury security than that promised by the floating-rate
security. In order for Roosevelt to buy a fixed-rate MBS in lieu of an
adjustable-rate MBS, it too would need to promise a yet wider spread over its
comparable duration Treasury. These facts illustrate two points. First, all
things being equal, Roosevelt will own the shortest term assets in the AFS
portfolio which accordingly will require the least effort to manage the IRR.
Secondly, Roosevelt's analysis reveals that fixed-rate MBS spreads are seldom as
wide as are adjustable-rate MBS spreads. Due to this second point, fixed-rate
MBS will generally represent a minority of the AFS portfolio. This is also the
reason why Roosevelt's MBS held to maturity portfolio is also dominated by
adjustable-rate securities--which typically carry less inherent risk.
ASSESSING IRR
Due to all of the above, Roosevelt's management believes that its AFS portfolio
embodies less IRR than a typical bank's portfolio of agency and corporate
securities. In viewing the balance sheets of publicly traded bank holding
companies, Roosevelt's Management has noticed significant changes in the value
of the securities portfolios at these other institutions when interest rates
change. Due to SFAS 115, such IRR can create considerable volatility within
stockholders' equity. With the benefit of a long track record, Management's
confidence is bolstered by noticing that the total market value of all of
Roosevelt's assets, and the assets within its AFS portfolio, do not change
materially with changes in interest rates. As noted earlier, relatively few
banks can make this claim.
Another key to Roosevelt's success is the manner in which it assesses IRR. When
evaluating either a security for purchase or a pre-existing portfolio of
securities, Roosevelt assesses risk by noting the current market value and the
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predicted market values under eight different scenarios--wherein rates are
assumed to be 1%, 2%, 3% or 4% higher and 1%, 2%, 3% or 4% lower. Whenever the
value of a security varies in a material way with changes in rates of only 1% or
2%, then Roosevelt deems that the security or the portfolio has material risk
and needs to be addressed accordingly.
This manner of assessing risk has enabled Roosevelt to maintain a stable and
relatively event-risk-free portfolio. As an example, during the early 1990's the
FHLB system issued various "structured notes". Most of these longer term notes
carried
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rates which adjusted over time pursuant to a predetermined formula. Many
portfolio managers heard "agency issuer" and "adjustable-rate" and they felt
that their risk assessment was completed. The "agency issuer" status meant that
credit risk should not be an issue. Thinking only about a repricing "GAP" table,
the "adjustable-rate" status meant that interest rate risk must have been nil.
However, these bonds are not risk free. With many of the bonds, as with the
supposedly short-term CMO market, the effective maturity dates could change
dramatically based on the environment. The differing possible environmental
situations could cause the bonds to perform poorly by floating the rate relative
to the lowest of a number of indexes or by invoking structural caps that meant
that the rates effectively could only float down rather than up. While the
details of each situation were varied, the issuers were all motivated by
shifting the risks of volatility to unsuspecting portfolio managers.
Usually, these bonds offered higher yields at issue than the yields of other
floating-rate agency paper. Roosevelt's multi-scenario value analysis revealed
that under various scenarios, the bonds could have declined in value
considerably. In short, the more volatile the scenario, the worse the bonds
would perform. Roosevelt's practice of evaluating risk versus reward over a
wide range of scenarios, prevented it from buying any of these securities.
MANAGING IRR
The preceding discussion explains conceptually what Roosevelt buys and how it
measures IRR. The next question is: How does Roosevelt mitigate or manage the
IRR? The answer lies in the same type of multi-scenario value analysis as
described above.
In a simple example, say the position is expected to lose $6 million in
unrecognized market value with a 1% permanent and parallel shift upward in the
yield curve. This is the type of situation which would exist if the portfolio
contained some longer dated assets which were not funded by longer dated
liabilities.
In this situation, the Bank may try to create a longer dated liability out of a
pool of short-term liabilities. This can be accomplished by entering into a
pay-fixed swap agreement. Such would entail Roosevelt agreeing to pay a fixed
rate of interest for a period of ten years to a very high quality "primary
dealer" in return for the receipt of a variable rate of interest on the exact
same notional amount of liability. This type of interest rate swap will gain in
value if rates rise. Depending upon the level of interest rates, a $100 million
pay-fixed swap may provide the desired $6 million gain if rates move up 1.0%.
This gain will offset the potential losses depicted earlier and cause the net
value of the Company to be unaffected by the potential rise in interest rates.
On a cash flow and accounting basis, the fixed-rate being paid on the swap
should match up advantageously with the fixed-rate being earned on the asset.
Also, the variable-rate being received on the swap should match up with the
variable-rate being paid on the underlying short-term liability. Accordingly, a
1.0% rise in rates will cause the Bank's funding cost to rise, but, that rise
will be offset by the increase in the variable-rate received from the swap
counterparty.
PENCHANT FOR SIMPLICITY
The swap agreement described above clearly qualifies to be called a
"derivative." Long before "derivatives" became a dirty word, due to the misuse
by unwary practitioners, Roosevelt has limited its usage. Ideally, Roosevelt
would like to fund short-term assets with short-term liabilities. It would like
to fund intermediate-term assets with intermediate-term liabilities. And, it
would like to fund long-term assets with long-term liabilities. As much as is
possible, Roosevelt does just that.
Frequently, however, the assets with the richest risk-adjusted spreads do not
always come in the exact same volume and maturity as the liabilities with the
lowest risk-adjusted cost. Accordingly, mismatches of some magnitude are usually
present. The mismatches are typically mitigated by some instrument which
qualifies to be called a derivative. However, it is a primary goal of Roosevelt
to not only maintain a low risk profile, but, to utilize swaps and other
derivatives as little as possible. Growth in Roosevelt's retail business is
expected to lessen the necessity for swaps.
Underscoring Management's success in this regard is the fact that the total swap
portfolio at December 31, 1995 (when the Company has over $9 billion in assets)
is less than it was on December 31, 1990 (when the Company had barely over $2
6
<PAGE>
billion in assets). Also, as of January 31, 1996, Roosevelt had closed out its
financial futures positions which further underscores Management's desire to
simplify its position and to look more like a traditional bank. Management
believes that future successes in building its retail business can lead to a
continued decline in its use of derivatives without changing its low risk
profile.
IMBEDDED OPTIONS
It was discussed above how paying a fixed rate of interest on a swap might
offset the risk of owning longer term MBS in a scenario when rates rose 1%.
However, Roosevelt's multi-scenario analysis also considers other possible
outcomes--like a 3% decline in rates.
In this declining rate scenario, the Bank would still pay the same fixed rate on
the swap, short-term funding costs would decline to offset the decline in the
variable rate to be received from the swap counterparty, but, the fixed rates
being received on the mortgages would be in definite peril. With much lower
interest rates being available, the fixed-rate mortgages would likely refinance.
This example explains the primary problem with owning mortgages. If rates
decline, the value of the mortgage goes up for obvious reasons. However,
prepayments will rise and the effective maturity of the mortgage will shorten.
Accordingly, the increase in value decelerates as rates decline. In this
scenario, your great yielding 7-year bond just became a 5-year bond thereby
blunting its value rise. If rates fall a full 3%, most of the MBS would be
expected to prepay inside of one year. No matter how low your funding costs go,
there will be no gain in value to offset the considerable loss in value on the
pay-fixed swap position.
This asymmetry is clearly skewed for the customer and against the mortgage-
holder. As rates rise, the values decline for obvious reasons. However, as
rates rise, prepayments slow down causing the effective maturity of the mortgage
to lengthen. Accordingly, the decline in value accelerates as rates rise--
because your underwater 7-year bond just became an underwater 8-year bond. If
rates rise further, it can become an underwater 10-year bond.
Roosevelt's strategy to avoid the scenarios just described is to buy options to
offset the options it essentially gives away when it makes or buys a mortgage.
The primary source of options bought by Roosevelt are floor and cap agreements.
These agreements are similar to swaps whereby they are negotiated with
counterparties.
When 3-month LIBOR was approximately 9.5%, Roosevelt bought a floor from a high
quality counterparty that agreed to pay Roosevelt if LIBOR fell below an 8%
"floor" rate. Roosevelt made one up-front premium payment to acquire the
option. That payment was then amortized over the life of the floor agreement.
With LIBOR at 10%, Roosevelt got no cash flow from the floor and the downside
was limited to what was paid for the protection (a cost of owning a mortgage
portfolio).
However, the upside for Roosevelt on this option was virtually unlimited. At
inception, Roosevelt would get no cash flow unless LIBOR (10%) declined more
than 2% to go below the floor rate of 8%. If LIBOR declined to 5%, Roosevelt
would enjoy a 3% spread on the predetermined notional amount of the contract.
LIBOR actually declined nearer to 3% during 1993 and the Bank's floor position
kept it from being hurt by prepayments.
The more LIBOR fell, the more cash flow Roosevelt would gain. On this contract,
Roosevelt had a limited downside (the premium) to match off against a limited
upside to the value of a mortgage. However, the contract had an unlimited
upside in value as LIBOR fell to offset the unlimited potential decline in value
of the swap as rates fell. Accordingly, this option (the floor) offset the
prepayment option imbedded in the mortgage.
Roosevelt also acknowledges the need for option protection as rates rise. Such
are needed to either offset the accelerating decline in the value of mortgages
as rates rise or to offset the periodic caps in adjustable-rate mortgages which
can prevent the full upward adjustment in the rates. Roosevelt acquired cap
agreements for this scenario.
With cap agreements, Roosevelt's downside is, again, limited to the premium paid
at execution. This premium is again amortized over the life of the agreement as
a cost of doing business. At December 31, 1995, LIBOR is a little over 5%.
7
<PAGE>
Roosevelt owns some caps with a 7% cap rate. With such agreements, Roosevelt
will receive a spread from the counterparty if LIBOR goes above 7%. As rates
begin to rise toward the cap rate, the value of Roosevelt's position begins to
rise. Roosevelt's upside is unlimited because the potential rise in LIBOR is
unlimited.
Roosevelt believes that whenever an investor owns a mortgage portfolio (loans or
securities), it should own some options to neutralize the prepayment and cap
risks. Roosevelt has perpetually owned options in a magnitude in proportion to
its mortgage holdings. An important factor in Roosevelt's success is that it
only buys options--it never sells or writes options (other than to its mortgage
customers via their ability to prepay). With Roosevelt's options (caps, floors,
etc.) the downside is limited and finite--just as is the cost of buying fire
insurance on your home. However, the potential upside is unlimited. In this
regard, these options are better than homeowners insurance, because such
insurance does have limits to its coverage or potential payoff.
CURRENT OPERATING STRATEGIES
Roosevelt's Management believes that the long-term value of a financial
institution is related to having strong relationships with its customers whereby
a household seeks to derive most of its financial services from a single vendor
(like Roosevelt). To position itself in this manner, Roosevelt's business plan
emphasizes 1) the origination of a higher percentage of its assets; 2) the
diversification of the balance sheet away from only mortgage and real estate
related assets; 3) the expansion of its retail deposit base with a simultaneous
shift within that deposit base toward checking and transaction accounts; and 4)
growth in fee income by providing other services such as insurance, brokerage
and mortgage loan servicing for other investors.
Subject to the favorable resolution of the tax bad debt reserve recapture issue,
which is included in proposed legislation currently under consideration by the
United States Congress, the Company may choose to voluntarily convert to a
commercial bank holding company structure as soon as practical. Failing the
passage of legislation facilitating the conversion to a commercial bank, the
Company may consider either acquiring an existing commercial bank or chartering
a new commercial bank. See "Regulation - Insurance of Accounts and Regulation by
the FDIC" for further discussion of the pending legislation.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-K or future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. The
Company wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors- including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors- could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake- and specifically disclaims any obligation- to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
8
<PAGE>
ACQUISITIONS
A substantial portion of the Company's growth since 1990 has occurred as a
result of acquisitions. The following table summarizes Roosevelt's acquisitions
since the formation of the Bank in 1987. The Company expects to continue
informal discussions with other banking and thrift institutions regarding their
acquisition by the Company.
<TABLE>
<CAPTION>
Acquisition Date
Name Acquired Loans Deposits Assets Branches
- ----------------------------------------------- ----------------- -------- -------- ------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
Home Federal Savings of Alton.................. March 19, 1990 $ 67.2 $ 12.1 $ 99.1 4
Hannibal Mutual Loan and Building Association.. October 18, 1991 7.8 17.8 18.0 1
Conservative Bank, FSB......................... November 9, 1992 41.5 61.2 64.5 4
First Granite City Savings and Loan............ November 9, 1992 43.4 42.0 49.2 2
Brookside Savings Bank, FSB.................... December 1, 1992 16.1 145.7 218.7 1
First Nationwide (branch purchases)............ June 11, 1993 -- 591.1 -- 11
Home Savings of America (branch purchases)..... November 8, 1993 -- 738.1 -- 13
Home Federal Bancorp of Missouri, Inc.......... April 22, 1994 480.7 466.5 532.7 9
Farm & Home Financial Corporation.............. June 30, 1994 1,843.3 2,094.7 3,173.5 27
WSB Bancorp, Inc............................... October 20, 1995 80.9 80.8 96.9 2
Kirsksville Bancshares, Inc.................... December 29, 1995 69.4 101.9 130.7 1
</TABLE>
LENDING ACTIVITIES
The Company's lending activities are principally conducted through the
origination and purchase of loans.
Residential Lending - The Company's origination activities are generally focused
on communities in Missouri, southern Illinois, and eastern Kansas in which its
branches are located and in other midwestern states through its correspondent
network. Primary emphasis is on mortgage loans secured by existing one- to four-
family residential properties. At December 31, 1995, loans secured by
residential real estate totaled $3.3 billion, which represented 92.35% of the
Company's loan portfolio.
The Company follows a residential loan pricing discipline that results in loan
yields comparable to investments of other Company assets. The methodology takes
into consideration duration of the loan, prepayment risks, servicing costs, and
credit risk. In underwriting residential real estate loans, the Company
evaluates both the borrower's ability to make monthly payments and the value of
the property securing the loan. Under Federal regulations, a real estate loan
may not exceed 100% of the appraised value of the property securing the loan at
the time of origination. The Company has adopted a policy of generally limiting
the loan-to-value ratio on originated loans and refinanced loans, depending upon
loan type, and generally requiring that all loans exceeding 80% of the appraised
value of the property or its purchase price, whichever is less, be insured by a
mortgage insurance company approved by the Federal Home Loan Mortgage
Corporation (FHLMC) in an amount sufficient to reduce the Company's exposure to
no greater than such 80% level.
In addition to interest earned on loans, the Company receives fees in connection
with the origination of loans, loan commitments, late payments, and other
miscellaneous services. The amounts of such fees vary from time to time,
generally depending on competitive conditions in the mortgage market.
As described below, the Company currently offers several types of residential
loans.
Adjustable-Rate Mortgage Loans - The Company originates secured adjustable-rate
mortgage loans (ARMs) in principal amounts of up to $750,000, depending upon
loan type, loan-to-value ratio, and term. The majority of adjustable-rate
mortgage loans which have been originated by the Company are held in its
portfolio. ARM loans offered consist of a variety of types, with interest rate
adjustments ranging from one month to 10 years. The ARMs provide for adjustments
to the interest rate based upon the one or three year U.S. Treasury Bill Index
adjusted to constant maturity, plus a margin which is determined at the time of
application and remains constant for the life of the loan. Interest rate
adjustments are limited to a maximum of 2% per year and a maximum of 6% over the
life of the loan on both one-year and the three-year adjustable mortgages.
9
<PAGE>
Fixed-Rate Loans - The Company also originates secured fixed-rate mortgage loans
in principal amounts of up to $750,000, depending upon loan type, loan-to-value
ratio, and term. The Company's fixed-rate loans generally have terms from 15 to
30 years with monthly payments which fully amortize the principal and interest
over the life of the loan. The Company may occasionally originate
balloon/interest reset mortgages that are fixed-rate.
FHA/VA Loans - The Company originates FHA insured and VA guaranteed single
family mortgage loans. Guidelines for processing, underwriting, and closing of
these loans, which typically have terms to maturity of 25 to 30 years, are
established by the FHA and the VA.
The types of loans which the Company may originate are restricted by the Home
Owners Loan Act and other laws and are regulated by the OTS. Federal
regulations permit Roosevelt to originate or purchase loans and loan
participations secured by real estate located in any part of the United States.
Roosevelt's residential lending is primarily concentrated in the geographical
location of its branches and in other midwestern states through the Company's
correspondent network.
Commercial Real Estate and Construction Lending - Loans originated by the
Company generally are secured by first liens on the properties to which they
relate. The Company also purchases real estate loans and loan participations
from selected sellers. The Company focuses its originations on properties
located within its retail markets of Missouri, southern Illinois and eastern
Kansas.
At December 31, 1995, loans secured by commercial real estate (including multi-
family residential properties) and construction lending totaled $149.5 million
of which loans secured by commercial real estate totaled $137.5 million,
representing 3.83% of the Company's total loan portfolio. The Company's
portfolio of commercial real estate loans is secured by liens on office
buildings, apartments, land, and shopping centers.
Consumer Lending - Federal regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans up to a maximum of 35%
of the institution's total assets less permissible investments in commercial
paper and corporate debt. In addition, federal thrift institutions have lending
authority above the 35% limit for certain consumer loans such as home equity
loans, property improvement loans and mobile home loans.
The Company offers various variable-rate and fixed-rate consumer loans,
including automobile, marine, recreational vehicle, home improvement, unsecured
personal, and home equity loans. The Company also offers loans to its
depositors on the security of their deposit accounts.
Substantially all consumer loans made directly to the borrower are originated in
branches within the states of Missouri and Illinois. Roosevelt has placed a
renewed emphasis on the origination of consumer loans due to their generally
higher yielding nature. During the second half of 1995, Roosevelt began
purchasing "A" quality indirect auto lease paper originated by a leasing
company. These loans are secured by the types of autos which generally hold
their value well and have good mechanical histories. Indirect auto lease
originations totaled $16.7 million during 1995.
At December 31, 1995, the Company's consumer loan balances totaled $125.6
million which represented 3.49% of the Company's total loan portfolio.
10
<PAGE>
Loan Portfolio Composition The following table sets forth information
concerning the composition of the Company's loan portfolio in dollar amounts and
in percentages by type of loan at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------
1995 1994 1993
------------------- ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
Residential..................................... $3,320,098 92.35% $2,887,992 92.48% $2,465,592 89.78%
Commercial...................................... 137,507 3.83 132,316 4.24 144,295 5.25
Construction.................................... 11,969 0.33 18,489 0.59 95,550 3.48
---------- ----- ---------- ----- ---------- -----
Total real estate loans held to maturity....... 3,469,574 96.51 3,038,797 97.31 2,705,437 98.51
CONSUMER LOANS.................................... 125,633 3.49 84,013 2.69 40,831 1.49
---------- ----- ---------- ----- ---------- -----
Total loans.................................... 3,595,207 100.0% 3,122,810 100.0% 2,746,268 100.0%
===== ===== =====
LESS:
Loans in process................................ 4,266 28,348 59,146
Deferred fees and discounts (premiums).......... (8,806) (604) 6,256
Allowance for losses............................ 21,855 22,915 9,056
---------- ---------- ----------
Loans, net.................................... $3,577,892 $3,072,151 $2,671,810
========== ========== ==========
<CAPTION>
------------------------------------------
1992 1991
------------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
<S> <C> <C> <C> <C>
REAL ESTATE LOANS:
Residential..................................... $2,141,863 88.36% $2,074,657 88.56%
Commercial...................................... 134,321 5.54 109,551 4.68
Construction.................................... 109,627 4.52 121,877 5.20
---------- ----- ---------- -----
Total real estate loans held to maturity....... 2,385,811 98.42 2,306,085 98.44
CONSUMER LOANS.................................... 38,381 1.58 36,489 1.56
---------- ----- ---------- -----
Total loans.................................... 2,424,192 100.0% 2,342,574 100.0%
===== =====
LESS:
Loans in process................................ 41,833 44,928
Deferred fees and discounts (premiums).......... 21,835 29,443
Allowance for losses............................ 10,753 8,336
---------- ----------
Loans, net.................................... $2,349,771 $2,259,867
========== ==========
</TABLE>
11
<PAGE>
The following table shows the composition of the Company's fixed- and
adjustable-rate loans at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------
1995 1994 1993
--------------------- ------------------ ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
---------- ------- -------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS:
Real estate:
Residential.................................... $ 1,226,691 34.12% $ 1,107,604 35.47% $ 1,171,453 42.66%
Commercial..................................... 74,271 2.07 77,164 2.47 82,209 2.99
Construction................................... 1,202 .03 -- -- -- --
---------- ------ ---------- ----- ---------- -----
Total fixed-rate real estate loans........... 1,302,164 36.22 1,184,768 37.94 1,253,662 45.65
Consumer..................................... 58,645 1.63 28,715 0.92 22,680 0.83
---------- ------ ---------- ----- ---------- -----
Total fixed-rate loans....................... 1,360,809 37.85 1,213,483 38.86 1,276,342 46.48
---------- ------ ---------- ----- ---------- -----
ADJUSTABLE-RATE LOANS:
Real estate:
Residential................................... 2,093,407 58.23 1,780,388 57.01 1,294,139 47.12
Commercial.................................... 63,236 1.76 55,152 1.77 62,086 2.26
Construction.................................. 10,767 0.30 18,489 0.59 95,550 3.48
---------- ------ --------- ------ ---------- ------
Total adjustable-rate real estate loans...... 2,167,410 60.29 1,854,029 59.37 1,451,775 52.86
Consumer...................................... 66,988 1.86 55,298 1.77 18,151 0.66
---------- ------ --------- ------ ---------- ------
Total adjustable-rate loans.................. 2,234,398 62.15 1,909,327 61.14 1,469,926 53.52
---------- ------ --------- ------ ---------- ------
Total loans.................................. 3,595,207 100.00% 3,122,810 100.00% 2,746,268 100.00%
====== ====== ======
LESS:
Loans in process................................ 4,266 28,348 59,146
Deferred fees and discounts (premiums).......... (8,806) (604) 6,256
Allowance for losses............................ 21,855 22,915 9,056
---------- --------- ---------
Loans, net................................... $ 3,577,892 $ 3,072,151 $ 2,671.810
========== ========= =========
<CAPTION>
--------------------------------------------------
1992 1991
--------------------- ------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------- -------- -------
<S> <C> <C> <C> <C>
FIXED-RATE LOANS:
Real estate:
Residential.................................... $ 1,437,122 59.29% $ 1,261,219 53.84%
Commercial..................................... 82,275 3.39 72,995 3.12
Construction................................... -- -- -- --
---------- ------- ---------- ------
Total fixed-rate real estate loans........... 1,519,397 62.68 1,334,214 56.96
Consumer..................................... 25,396 1.05 21,128 0.90
---------- ------- ---------- ------
Total fixed-rate loans....................... 1,544,793 63.73 1,355,342 57.86
---------- ------- ---------- ------
ADJUSTABLE-RATE LOANS:
Real estate:
Residential................................... 704,741 29.07 813,438 34.73
Commercial.................................... 52,046 2.15 36,556 1.56
Construction.................................. 109,627 4.52 121,877 5.20
---------- ------- ---------- ------
Total adjustable-rate real estate loans...... 866,414 35.74 971,871 41.49
Consumer...................................... 12,985 0.53 15,361 0.65
---------- ------- ---------- ------
Total adjustable-rate loans.................. 879,399 36.27 987,232 42.14
---------- ------- ---------- ------
Total loans.................................. 2,424,192 100.00% 2,342,574 100.00%
======= ======
LESS:
Loans in process................................ 41,833 44,928
Deferred fees and discounts (premiums).......... 21,835 29,443
Allowance for losses............................ 10,753 8,336
--------- ---------
Loans, net................................... $ 2,349,771 $ 2,259,867
========= =========
</TABLE>
12
<PAGE>
INVESTMENT AND MORTGAGE-BACKED SECURITIES
The Company invests in short-term investments such as United States Treasury
securities and United States agency securities, commercial paper, short-term
corporate debt securities, and overnight federal funds. The Company is required
by federal regulations to maintain a minimum amount of liquid assets that may be
invested in specific securities and is also permitted to make certain other
securities investments. The balance of the investment securities maintained by
the Company in excess of regulatory requirements reflects management's objective
of maintaining liquidity at a level that assures the availability of adequate
funds, taking into account anticipated cash flows and available sources of
credit, for meeting withdrawal requests and loan commitments and making other
investments. See "Regulation-Liquidity."
The acquisition of mortgage-backed securities is designed to (i) generate
positive interest rate spreads on large principal balances with minimal
administrative expense, (ii) lower the credit risk of the Company's loan
portfolio, and (iii) enable the Company to use these mortgage-backed securities
as collateral for financings in the capital markets. Mortgage-backed
securities acquired by the Company for investment typically consist of FHLMC
mortgage participation certificates (FHLMC Certificates), FNMA mortgage pass-
through certificates (FNMA Certificates) and/or GNMA fully-modified, pass-
through mortgage-backed certificates (GNMA Certificates), and private issue
pass-through certificates, each of which is described below.
FHLMC Certificates - FHLMC Certificates represent undivided interests in
specified pools of fixed, variable, or adjustable rate, conventional residential
mortgage loans or participation interests in conventional residential mortgage
loans purchased by FHLMC. FHLMC guarantees to each registered holder of a FHLMC
Certificate the timely payment of interest. FHLMC also guarantees to each
registered holder of a FHLMC Certificate the ultimate collection by such holder
of principal thereof, but, except in certain cases, does not guarantee the
timely payment of principal thereof. The obligations of FHLMC are not backed by,
nor entitled to, the full faith and credit of the United States. Neither the
United States nor any agency or instrumentality of the United States is
obligated to finance the operations of FHLMC or to assist FHLMC in any other
manner. There is currently an active secondary market for FHLMC Certificates,
but there is no assurance that this market will continue in the future.
FNMA Certificates - FNMA Certificates represent undivided interests in specified
pools of fixed, variable, or adjustable rate one- to four-family residential
mortgage loans. FNMA guarantees the timely payment of scheduled principal and
interest (at the applicable certificate rate). The obligations of FNMA under its
guarantees are obligations solely of FNMA and are not backed by, nor entitled
to, the full faith and credit of the United States. Neither the United States
nor any agency or instrumentality of the United States is obligated to finance
FNMA's operations or to assist FNMA in any other manner. There is currently an
active secondary market for FNMA Certificates, but there can be no assurance
that this market will continue in the future.
GNMA Certificates - GNMA Certificates are issued and serviced by a mortgage
banking company or financial institution approved by GNMA as a seller-servicer
of Federal Housing Administration (FHA) insured mortgage notes or Veterans
Administration (VA) guaranteed mortgage notes. The full and timely payment of
principal of, and interest on, each GNMA Certificate is guaranteed by GNMA,
which obligation is backed by the full faith and credit of the United States.
Each GNMA Certificate evidences a fractional undivided interest in a pool of FHA
insured mortgage notes and VA guaranteed mortgage notes secured by mortgages on
single family dwellings. There is currently an active secondary market for GNMA
Certificates, but there is no assurance that this market will continue in the
future.
Private-Issue Certificates - Private pass-through certificates represent
primarily undivided interests in specified pools of fixed, variable or
adjustable rate one-to-four family residential mortgage loans. Such securities
are issued by private entities such as commercial banks, thrifts, and other
financial entities. At December 31, 1995, the Company's $2.7 billion portfolio
of private pass-throughs was primarily comprised of adjustable rate securities.
The repricing characteristics of such securities were primarily tied to the one
year constant maturity treasury rate. These securities are not guaranteed or
insured by any government agency. Instead, the credit risk on such securities is
lowered through mortgage pool insurance, letters of credit, guarantees, or
subordinated interests.
At December 31, 1995 there were approximately $1.3 billion of private issue
pass-through certificates with unrealized losses totaling $21.8 million. None of
the unrealized losses exceeded $2.0 million or 5% of the respective security
balance.
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.
13
<PAGE>
Should general interest-rate levels decline, the mortgage-backed securities
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 securities 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 of 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 of 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 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 and iii) the rating assigned to each
security by independent national rating agencies.
14
<PAGE>
SECURITIES AVAILABLE FOR SALE
The following table sets forth information concerning the Company's securities
available for sale portfolio at the dates indicated, at fair value:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1995 1994 1993
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Investment Securities:
U.S. Government and agency obligations.. $ 11,085 $ -- $ 46,317
Corporate securities.................... 16,763 -- --
FHLB stock.............................. 132,009 109,136 81,352
--------- --------- ---------
159,857 109,136 127,669
--------- --------- ---------
Mortgage-backed Securities:
Mortgage-backed certificates............ 1,372,947 1,533,312 1,411,195
Other................................... 60,701 59,703 147,870
Derivative financial instruments:
Interest rate exchange agreements....... (6,528) 3,476 (27,242)
Interest rate cap agreements............ 8,738 57,897 4,144
Interest rate floor agreements.......... 10,746 1,582 2,243
Exchange traded options................. -- 593 --
--------- --------- ---------
1,446,604 1,656,563 1,538,210
--------- --------- ---------
$1,606,461 $1,765,699 $1,665,879
========= ========= =========
</TABLE>
The following schedule illustrates the maturities of the Company's securities
available for sale portfolio at December 31, 1995.
<TABLE>
<CAPTION>
DUE AFTER ONE DUE AFTER FIVE
DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER NO STATED
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS MATURITY TOTAL
------------- ----------- ------------ ---------- ----------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government and agency obligations. $ 1,493 $ 5,548 $ 3,025 $ 1,019 $ -- $ 11,085
Corporate securities................... 1,262 4,480 10,977 44 -- 16,763
FHLB stock............................. -- -- -- -- 132,009 132,009
------ ------- ------- ------- ------- --------
2,755 10,028 14,002 1,063 132,009 159,857
------ ------- ------- ------- ------- --------
Mortgage-backed Securities:
Mortgage-backed certificates........... 689 1,814 498 1,369,946 -- 1,372,947
Other.................................. -- -- -- 60,701 -- 60,701
Derivative financial instruments:
Interest rate exchange agreements...... -- -- -- (6,528) -- (6,528)
Interest rate cap agreements........... -- -- -- 8,738 -- 8,738
Interest rate floor agreements......... -- -- -- 10,746 -- 10,746
------ ------- ------- ---------- -------- ----------
689 1,814 498 1,443,603 -- 1,446,604
------ ------- ------- ---------- -------- ----------
$3,444 $11,842 $14,500 $1,444,666 $132,009 $1,606,461
====== ======= ======= ========== ======== ==========
Weighted average yield.................. 5.91% 6.92% 9.95% 7.94% 6.50% 7.83%
====== ======= ======= ========== ======== ==========
</TABLE>
15
<PAGE>
SECURITIES HELD TO MATURITY
The following table sets forth information concerning the Company's securities
held to maturity portfolio at the dates indicated, at cost:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Investment Securities:
U.S. Government and agency obligations.... $ 113,554 $ 115,500 $ 2,426
Corporate securities...................... 5,632 41,273 50,701
---------- ---------- ----------
119,186 156,773 53,127
---------- ---------- ----------
Mortgage-backed Securities:
Mortgage-backed certificates.............. 384,795 459,190 417,165
Private pass-throughs..................... 2,705,311 2,271,272 2,172,624
Collateralized mortgage obligations....... 340,848 388,827 --
---------- ---------- ----------
3,430,954 3,119,289 2,589,789
---------- ---------- ----------
$3,550,140 $3,276,062 $2,642,916
========== ========== ==========
</TABLE>
At December 31, 1995, the Company held certain mortgage-backed securities
classified as held to maturity (which are included in the preceding securities
held to maturity composition table) whose aggregate book value by issuer
exceeded ten percent of stockholders' equity. Such investments are detailed as
follows:
<TABLE>
<CAPTION>
Issuer Carrying value Market value
------ -------------- ------------
(dollars in thousands)
----------------------
<S> <C> <C>
Resolution Trust Corporation $470,235 $464,871
Ryland Mortgage Securities Corporation 423,421 424,537
Saxon Mortgage Securities Corporation 194,756 195,424
Merrill Lynch Mortgage Investors, Inc. 186,175 185,374
Donaldson, Lufkin & Jenrette Securities Corp. 174,963 175,026
Capstead Securities Corporation 165,716 164,782
Nomura Asset Capital Corporation 156,750 153,908
Securitized Asset Sales, Inc. 154,008 154,849
Greenwich Capital Acceptance, Inc. 135,595 139,503
Sears Mortgage Securities 120,012 118,879
Residential Funding Corporation 90,721 90,421
ITT Federal 83,917 84,596
Citicorp Mortgage Securities, Inc. 71,272 67,873
Guardian Savings & Loan Association 70,831 67,733
Salomon Brothers Mortgage Services 68,065 71,356
Bear Stearns Mortgage Acceptance 64,206 64,391
Paine Webber Mortgage Acceptance Corp. 61,209 62,711
Glendale Federal Bank 58,078 58,051
</TABLE>
16
<PAGE>
The following schedule illustrates the maturities of the Company's securities
held to maturity portfolio at December 31, 1995.
<TABLE>
<CAPTION>
DUE AFTER ONE DUE AFTER FIVE
DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS TOTAL
---------- ---------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government and agency obligations.... $ 4,480 $ 109,074 $ -- $ -- $ 113,554
Corporate securities...................... 5,632 -- -- -- 5,632
--------- --------- ---------- ---------- ----------
10,112 109,074 -- -- 119,186
--------- --------- ---------- ---------- ----------
Mortgage-backed Securities:
Mortgage-backed certificates............... 25,363 178,222 6,090 175,120 384,795
Private pass-throughs...................... -- 55,668 261 2,649,382 2,705,311
Collateralized mortgage obligations........ -- -- -- 340,848 340,848
--------- --------- ---------- ---------- ----------
25,363 233,890 6,351 3,165,350 3,430,954
--------- --------- ---------- ---------- ----------
$ 35,475 $ 342,964 $ 6,351 $ 3,165,350 $ 3,550,140
========= ========= ========== ========== ==========
Weighted average yield 5.20% 6.25% 9.05% 7.52% 7.37%
==== ==== ==== ==== ====
</TABLE>
CLASSIFIED ASSETS, LOAN DELINQUENCIES AND DEFAULTS
Federal regulations provide for the classification of loans, debt, equity
securities, and other assets considered to be of lesser quality as
"substandard", "doubtful" or "loss" assets. The regulations require institutions
to classify their own assets and to establish prudent general allowances for
losses for assets classified "substandard" or "doubtful." The OTS may require
the establishment of a general allowance for losses based on assets classified
as "substandard" and "doubtful" or based on the general quality of the asset
portfolio of an institution. For the portion of assets classified as "loss," an
institution is required to either establish specific allowances of 100% of the
amount classified or charge such amount off its books. Assets which do not
currently expose the institution to sufficient risk to warrant classification in
one of the aforementioned categories but possess potential weaknesses are
required to be designated "special mention" by management.
When a borrower fails to make a required payment on the loan, the Company
attempts to cause the delinquency to be cured by contacting the borrower. In the
case of residential loans, telephone contacts are normally made after a payment
is 19 days past due. In most cases, delinquencies are cured promptly. If the
delinquency is not cured by the 30th day, written contacts or personal calls are
made to the borrower. If the delinquency continues for a period of 90 days, the
Company usually institutes appropriate action to foreclose the property. If
foreclosed, the property is sold at public auction and may be purchased by the
Company. Under Missouri law, subject to rights of redemption and certain
homestead and other exemptions, property normally may be foreclosed after
payments become more than 31 days past due, by publishing or posting appropriate
notices of the foreclosure action during a subsequent period of 20 days.
Delinquent consumer loans are generally handled in a similar manner, except that
initial telephone contacts are made when the payment is five days past due. The
Company's procedures for repossession and sale of consumer collateral are
subject to various requirements under Missouri consumer protection laws. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset Quality" for further discussion.
PROVISIONS FOR LOSSES ON LOANS AND REAL ESTATE OWNED
The Company establishes valuation allowances for anticipated losses on loans,
foreclosed assets, and real estate acquired for development and sale, as
described below. Although management believes it uses the best available
information in establishing valuation allowances, future provisions for loss
charged to expense may be necessary if circumstances differ substantially from
the assumptions currently used.
Loans - The allowance for loan losses is maintained at an amount considered
adequate to provide for losses. The provision
17
<PAGE>
for loan losses charged to expense is based on periodic analysis of the loan
portfolio by management. In this regard, management considers various risk
factors including, but not limited to, general economic conditions, loan
portfolio composition, prior loss experience, and independent appraisals. In
addition to an allowance for losses on identified problem loans, an overall
unallocated allowance is maintained to provide for unidentified credit losses.
In estimating such losses, management considers various risk factors including
geographic location, loan collateral, and prior loss experience.
The allowance for loan losses increased significantly during 1994 when compared
to prior years. After combining the Roosevelt, Farm & Home, and Home Federal
loan portfolios which resulted in a combined portfolio approximately five times
the size of Roosevelt's March 31, 1994 portfolio (approximately $650 million to
$3.0 billion), management determined it was necessary to substantially increase
the allowance for loan losses to achieve higher and more conservative coverage
levels. Factors considered by management in determining the necessity and amount
of the provision necessary to bring the overall allowance to the desired level
were i) the need to conform Farm & Home's coverage ratio (ratio of allowance for
loan losses to total gross loans) of .24% at December 31, 1993, to that of
Roosevelt's which was .61% at the comparable date. This resulted in an
additional required provision of approximately $7.3 million, ii) the previously
discussed five fold increase in the size of the overall loan portfolio coupled
with the fact that, at the time, Roosevelt management had no previous track
record of managing a portfolio of that size, and iii) the Farm & Home and Home
Federal mergers effectively doubled the overall size of the entity resulting in
the Company moving up to a new peer group whose average allowance for loan
losses as a percentage of total loans far exceeded the allowances of the
unadjusted combined entity. Also, since just prior to the merger, both Farm &
Home and Roosevelt had recently been through examinations by the OTS, the
Company initiated conversations with the OTS to obtain their concurrence with
the planned addition to the allowance for loan losses. Such concurrence was
received and the resulting $11.4 million provision was recorded.
Real Estate Owned - Real estate owned includes properties acquired through
foreclosure and properties acquired for development and sale. Real estate
acquired through foreclosure is transferred to real estate owned at the lower of
cost or estimated fair value, which represents the new recorded basis of the
property. Subsequently, properties are evaluated and any additional declines in
value are provided for in an allowance for losses on real estate. Real estate
acquired for development and sale is carried at the lower of cost or estimated
fair value.
While the valuation allowances for losses on loans, foreclosed assets, and real
estate acquired for development and sale are considered adequate, the Company's
allowances are subject to review by the FDIC and OTS. In the course of their
periodic examinations the Company may be instructed to establish additional
general or specific reserves in addition to the amounts previously established.
18
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1995 1994 1993
----------------------------------------------------------------------------
CATEGORY'S CATEGORY'S CATEGORY'S
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT
------ ---------- ------ ---------- ------ --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of period................. $ 22,915 $ 9,056 $ 10,753 $ 9,063
Charge-offs:
Residential.................................... 3,177 358 824 468
Commercial real estate......................... 155 696 1,535 1,611
Consumer....................................... 114 33 169 66
Construction................................... 87 -- -- --
------- ------ ------ ------
3,533 1,087 2,528 2,145
------- ------ ------ ------
Recoveries:
Residential.................................... 3 16 -- --
Commercial real estate......................... 74 5 125 21
Consumer....................................... 30 10 -- 184
Construction................................... -- -- -- --
------- ------- ------ ------
107 31 125 205
------- ------- ------ ------
Net charge-offs............................... 3,426 1,056 2,403 1,940
Additions charged to operations................. 1,200 12,432 706 2,648
Additions acquired through acquisitions......... 1,166 2,483 -- 982
------- ------- ------ ------
Balance at end of period........................ $ 21,855 $ 22,915 $ 9,056 $ 10,753
======= ======= ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period.... .10% .04% .09% .13%
======= ======= ====== ======
Allowance distribution:
Residential.................................... $ 17,309 92.4% $17,570 92.5% $ 4,245 89.8% $ 4,208
Commercial real estate......................... 4,220 3.8 4,776 4.2 4,463 5.2 5,835
Consumer....................................... 326 3.5 410 2.7 348 1.5 710
Construction................................... -- .3 159 .6 -- 3.5 --
------- ------ ------- ------ ------ ------ ------
$ 21,855 100.0% $22,915 100.0% $ 9,056 100.0% $ 10,753
======= ====== ======= ====== ====== ====== ======
<CAPTION>
--------------------------------------
1992 1991
--------------------------------------
CATEGORY'S CATEGORY'S
PERCENT PERCENT
OF TOTAL OF TOTAL
LOANS AMOUNT LOANS
------------ ------ ----------
<S>............................................. <C> <C> <C>
Balance at beginning of period................. $ 8,107
Charge-offs:
Residential.................................... 995
Commercial real estate......................... 743
Consumer....................................... 171
Construction................................... --
-----
1,909
-----
Recoveries:
Residential.................................... --
Commercial real estate......................... --
Consumer....................................... 29
Construction................................... --
-----
29
-----
Net charge-offs............................... 1,880
Additions charged to operations................. 2,695
Additions acquired through acquisitions......... 141
-----
Balance at end of period........................ $ 9,063
=====
Ratio of net charge-offs during the period to
average loans outstanding during the period.... .10%
=====
Allowance distribution:
Residential.................................... 88.4% $ 3,143 88.5%
Commercial real estate......................... 5.5 5,477 4.7
Consumer....................................... 1.6 443 1.6
Construction................................... 4.5 -- 5.2
----- ----- -----
100.0% $ 9,063 100.0%
===== ===== =====
</TABLE>
19
<PAGE>
DEPOSITS AND OTHER SOURCES OF FUNDS
Deposit accounts have traditionally been a principal source of the Company's
funds for use in lending and for other general business purposes. In addition to
deposits, the Company derives funds from loan repayments, loan sales, cash flows
generated from operations (including interest credited to deposit accounts), net
deposit inflows, FHLB advances, and collateralized borrowings. Borrowings may be
used on a short-term basis to compensate for seasonal reductions in deposits or
for deposit inflows at less than projected levels and may be used on a longer
term basis to support expanded lending activities. The availability of funds
from loan sales is influenced by general interest rates.
Deposits - The Company attracts both short-term and long-term deposits from the
general public by offering a wide assortment of accounts and rates. The Company
offers regular passbook accounts, checking accounts, various money market
accounts, fixed interest rate certificates with varying maturities, negotiated
rate certificates of deposit in minimum amounts of $100,000 ("Jumbo" accounts),
and individual retirement accounts. The Company does not generally seek to
attract Jumbo accounts or brokered deposits.
The Company's variety of deposit accounts has allowed it to remain competitive
and respond to changes in consumer demands. The Company has become more subject
to short-term fluctuations in deposit flows, as many customers have become more
interest rate conscious. The ability of the Company to attract and maintain
deposits, which affects its cost of funds, will continue to be significantly
affected by market conditions.
The following table sets forth the deposit flows of Roosevelt during the periods
indicated. Net withdrawals refers to the amount of deposits (exclusive of
interest credited) during a period less the amount of withdrawals during the
period. The net withdrawals during 1995, 1994, and 1993 reflect management's
strategy of conservatively pricing most deposits to better control Roosevelt's
cost of funds and a general trend in the industry of deposit outflows caused by
depositors seeking improved yields in a relatively low interest rate
environment. Deposit flows at savings institutions may also be influenced by
external factors such as governmental credit policies.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1994 1993
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net withdrawals............................... $(346,551) $(711,218) $ (580,974)
Deposits assumed from acquisitions............ 182,566 468,877 1,431,501
Deposits sold................................. -- (68,134) (277,182)
Deposit change from branch exchange........... -- -- 63,944
Interest credited............................. 172,774 132,330 147,989
Unearned discount on brokered certificates.... (117) -- --
Net adjustment related to purchase method of
accounting.................................. (564) (3,962) (4,763)
---------- ---------- ----------
Net increase (decrease) in deposits........... 8,108 (182,107) 780,515
Beginning balance............................. 4,899,389 5,081,496 4,300,981
---------- ---------- ----------
Ending balance................................ $4,907,497 $4,899,389 $5,081,496
========== ========== ==========
Percent increase (decrease) 0.2% (3.6)% 18.1%
========== ========== ==========
</TABLE>
20
<PAGE>
Borrowings - Roosevelt's other sources of funds include advances from the FHLB
of Des Moines, securities sold under agreements to repurchase, and longer-term
borrowings such as its mortgage-backed bonds and subordinated notes. These
borrowings totaled $2.4 billion, $1.1 billion and $47.5 million and $1.7
billion, $1.2 billion and $47.4 million at December 31, 1995 and 1994,
respectively.
As a member of the FHLB of Des Moines, the Company is required to own capital
stock in the FHLB of Des Moines and is authorized to apply for advances from the
FHLB of Des Moines. All long-term FHLB advances must be for the purpose of
financing residential housing. Members must meet community lending standards
established by Federal Housing Finance Board (FHFB) regulations to have
continued access to long-term FHLB advances. The Company does not expect that
these limitations will have a significant impact on its access to long-term
advances. Each FHLB credit program has its own interest rate, which may be fixed
or variable, and range of maturities. The FHLB of Des Moines may prescribe
additional acceptable uses to which these advances may be put, as well as
limitations on the size of the advances and repayment provisions. See
"Regulation--Federal Home Loan Bank System."
The form of agreement to repurchase securities sold used by the Company is a
sale of securities to primary dealers with a commitment to repurchase securities
at a predetermined price at a future date, typically ranging between 30 days and
90 days from the date of the initial sale. The Company may substantially
increase its borrowings under agreements to repurchase securities sold.
See Notes 11, 12, 13 and 14 of Notes to Consolidated Financial Statements for
further information regarding deposits and other borrowings.
ASSET/LIABILITY MANAGEMENT
The long-term profitability of the Company depends not only on the success of
the services it offers to its customers and the quality of its loans and
investments, but also the extent to which its earnings and net market value are
affected by changes in interest rates. Roosevelt's asset and liability
management strategy attempts to reduce the variability in net interest income
and net market value caused by interest rate changes.
One means of reducing the effect of interest rate volatility on net interest
income is to shorten asset maturities. In recent years, Roosevelt has attempted
to do this by emphasizing the origination and purchase of adjustable-rate
mortgage loans and the purchase of adjustable-rate mortgage-backed securities.
In addition to the origination and purchase of adjustable-rate loans and
investments discussed above, the Company will also utilize derivative financial
instruments; such as interest exchange agreements, interest rate cap and floor
agreements and, to a much lesser extent, interest rate futures contracts to help
manage its interest rate risk.
At December 31, 1995, interest-sensitive assets of $6.1 billion and interest-
sensitive liabilities of $6.2 billion were scheduled to mature or reprice within
one year. A conventional measure of interest rate sensitivity for thrift
institutions is to divide the difference between assets maturing or repricing
within one year and total liabilities maturing or repricing within one year by
total assets - "one year gap". Such gap at December 31, 1995 was a negative
0.50%. At December 31, 1995, Roosevelt had entered into interest rate exchange
agreements and interest rate cap and floor agreements with notional values of
$1.2 billion and $4.1 billion, respectively. Without these instruments
Roosevelt's one year gap at December 31, 1995 would have been a negative 1.51%.
See "Business - Roosevelt's Philosophy and Operating Strategy", "Management's
Discussion and Analysis of Financial Condition and Results of Operations -Asset/
Liability Management" and Note 15 to Notes to Consolidated Financial Statements
for further information regarding the Company's interest rate risk management
practices.
SUBSIDIARIES
Roosevelt is permitted, through the Bank, to invest in the capital stock,
obligations, or other specified types of securities of subsidiaries (referred to
as "service corporations") and to make loans to such subsidiaries, and joint
ventures in which such subsidiaries are participants, in an aggregate amount not
exceeding 2% of the Bank's assets. The Bank may invest an
21
<PAGE>
additional 1% of its assets in service corporation activities that serve
primarily specified community or inner-city developments. Federal regulations
also permit institutions to make specified types of loans to such service
corporation subsidiaries (other than special-purpose finance subsidiaries), in
which the institution owns more than 10% of the stock, in an aggregate amount
not exceeding 50% of the institution's regulatory capital. In addition, federal
savings associations are permitted to invest unlimited amounts in subsidiaries
that are engaged solely in activities that the association may conduct. At
December 31, 1995, the Bank's investment in service corporations was
approximately $2.3 million.
Roosevelt Financial Services, Inc. (prior to 1994 known as Roosevelt Insurance
Agency, Inc.) is a diversified general insurance agency. It provides life,
health, property, casualty, commercial insurance coverages, and tax deferred
annuities and other investment products to Roosevelt's customers and the general
public. Stocks and bonds are offered to the Bank's customers on a discount basis
through a clearing broker/dealer. Mutual funds are offered to the Bank's
customers and the general public by registered representatives through an
arrangement between Roosevelt Financial Services, Inc. and a registered
broker/dealer.
H.F.S. Corporation is a service corporation which was acquired through the
merger with Home Bancorp. H.F.S. Corporation has the authority to invest and
participate in various activities such as the acquisition and development of
property into residential building lots.
F&H Realty, a subsidiary of Roosevelt Financial Group, Inc., is a Missouri-
chartered real estate investment company. It owns real estate held for
investment or for the purpose of developing and selling lots, primarily for
single-family dwellings. It was formed in December 1992 and was later
transferred to the Company under the name Farm & Home as a dividend-in-kind from
the Bank, previously known as Farm & Home Savings Association.
REGULATION
The Bank is a Federally chartered savings bank, the deposits of which are
Federally insured up to applicable limits by the FDIC and are backed by the full
faith and credit of the United States Government. Accordingly, the Bank is
subject to broad Federal regulation and oversight extending to all its
operations. The Bank is a member of the FHLB of Des Moines and is subject to
certain limited regulation by the Federal Reserve Board. As the savings and loan
holding company of the Bank, Roosevelt is also subject to Federal regulation and
oversight. The purpose of this regulation of Roosevelt and other holding
companies is to protect subsidiary savings associations. Certain of these
regulatory requirements and restrictions are discussed below and elsewhere in
this document.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS
The OTS, as the primary Federal regulatory agency, and the FDIC, as insurer and
back-up regulator, have extensive supervisory authority over the operations of
savings associations. The Bank is required to file periodic reports with the OTS
and may be examined periodically by the OTS and FDIC. The Bank was most recently
examined by the OTS and the FDIC in April, 1995. All Federally insured savings
associations are subject to an on-site, full-scope examination by either the
FDIC or the OTS at least once every 12 months. All savings associations are
subject to an annual assessment to fund the operations of the OTS. The general
assessment, to be paid on a semi-annual basis, is computed based upon the
savings association's total assets, as reported in the association's latest
quarterly thrift financial report. The Bank's OTS assessment for 1995 was $1.2
million.
The OTS' pervasive regulatory authority is backed by extensive enforcement
authority over all savings associations and their holding companies, including
the Bank and Roosevelt. This enforcement authority includes among other things,
the ability to impose operational restrictions, to commence cease-and-desist
proceedings, to assess civil money penalties and to initiate proceedings to
remove individuals from their positions and prohibit them from service with any
savings association. Such actions may generally be initiated to prevent,
terminate or remedy violations of laws, regulations or unsafe or unsound
practices. Additional grounds include failure to file accurate and timely
reports with the OTS.
In addition, the investment, lending and branching authority of the Bank is
prescribed by Federal laws and regulations, and it is prohibited from engaging
in any activities not permitted by such laws and regulations. For instance, no
savings institution
22
<PAGE>
may invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by Federal associations in loans secured by non-
residential real property may not exceed 400% of regulatory capital, except with
approval of the OTS. The Bank is in compliance with each of these noted
restrictions.
The Bank's general permissible lending limit for loans-to-one borrower is equal
to 15% of unimpaired capital and surplus (except for loans fully secured by
certain readily marketable collateral, in which case this limit is increased to
25% of unimpaired capital and surplus). At December 31, 1995, the Bank's lending
limit under this restriction was $80.4 million. The Bank is in compliance with
the loans-to-one borrower limitation.
The OTS, as well as the other Federal banking agencies, have adopted guidelines
establishing safety and soundness standards. Any institution which fails to
comply with these standards must submit a compliance plan. A failure to submit a
plan or to comply with an approved plan will subject the institution to further
enforcement action. The OTS and the other Federal banking agencies have also
proposed additional guidelines on asset quality and earnings standards. No
assurance can be given as to the final form of the proposed guidelines.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the SAIF, which is administered by the FDIC. Savings
deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC assesses deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC insured institutions. It may
also prohibit any FDIC insured institution from engaging in any activity the
FDIC determines by regulation or order to pose a serious risk to the FDIC. The
FDIC also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based system
under which all insured depository institutions are placed into one of nine
categories and assessed insurance premiums based on their level of capital and
supervisory evaluation. The assessment schedule for Bank Insurance Fund (BIF)
and SAIF insured institutions ranged from .23% to .31% of deposits during the
first half of 1995. Under this system, institutions classified as well
capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or
core capital to risk-weighted assets (Tier 1 risk-based capital) of at least 6%
and a risk-based capital ratio of at least 10%) and considered healthy would pay
the lowest premium while institutions that are less than adequately capitalized
(i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based
capital ratio of less than 8%) and considered of substantial supervisory concern
would pay the highest premium. Risk classification of all insured institutions
will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase such assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. In addition the FDIC may impose special assessments on SAIF members to
repay amounts borrowed from the United States Treasury or for any other reason
deemed necessary by the FDIC.
As in the case with the SAIF, the FDIC is authorized to adjust the insurance
premium rates for banks that are insured by the BIF of the FDIC in order to
maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits. As a
result of the BIF reaching its statutory reserve ratio the FDIC revised the
premium schedule for BIF insured institutions to provide a range of .04% to .31%
of deposits. The revisions became effective in the third quarter of 1995. The
BIF premium schedule was further revised, effective January 1996, to provide a
range of 0% to .27% with an annual minimum assessment of $2,000. As a result of
these adjustments, BIF insured institutions will generally pay lower premiums.
The FDIC also noted that the SAIF is not expected to attain the designated
reserve ratio until the year 2002. As a result, SAIF insured members will
generally be subject to higher deposit insurance premiums than BIF insured
institutions until, all things being equal, the SAIF attains the required
reserve ratio.
The effect of this disparity on the Bank and other SAIF members is uncertain at
this time. It may have the effect of permitting
23
<PAGE>
BIF member banks to offer loan and deposit products on more attractive terms
than SAIF members due to the cost savings achieved through lower premiums,
thereby placing SAIF members at a competitive disadvantage. In order to
eliminate this disparity, a number of proposals to recapitalize the SAIF were
considered by the United States Congress in 1995. Proposed legislation under
consideration by the United States Congress provides for a one-time assessment
to be imposed on all deposits assessed at the SAIF rates, as of March 31, 1995,
in order to recapitalize the SAIF and eliminate the disparity. The BIF and SAIF
would be merged into one fund as soon as practicable but no later than January
1, 1998. The special assessment rate is anticipated to range from .80% to .90%.
Based on the Bank's level of SAIF deposits at March 31, 1995 (including the
effect of the acquisition of Washington Savings Bank and Kirksville Federal
Savings), and assuming a special assessment of .90%, the Bank's assessment would
be approximately $36.5 million on a pre-tax basis. If the legislation is
enacted, it is anticipated the assessment would be payable in 1996. Accordingly,
this special assessment would significantly increase noninterest expense and
adversely affect the Bank's results of operations. Conversely, depending on the
Bank's capital level and supervisory rating, and assuming, although there can be
no assurance, that if the insurance premium levels for BIF and SAIF members are
again equalized, deposit insurance premiums could decrease significantly to as
low as .04% for future periods.
As part of the legislation, the United States Congress is considering requiring
all Federal thrift institutions, such as the Bank, to either convert to a
national bank or a state chartered bank by January 1, 1998. In addition,
Roosevelt would no longer be regulated as a thrift holding company, but rather
as a bank holding company. The OTS would also be abolished and its functions
transferred among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and therefore no assurance can be given as to
whether or in what form the legislation will be enacted or its effect on
Roosevelt and the Bank.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings associations, such as the Bank, are required to
maintain a minimum level of regulatory capital. The OTS has established capital
standards, including a tangible capital requirement, a leverage ratio (or core
capital) requirement and a risk-based capital requirement applicable to such
savings associations. Under Federal law all three requirements must be generally
as stringent as the comparable capital requirements for national banks.
Tangible Capital - The capital regulations require tangible capital of at least
1.5% of adjusted total assets (as defined by regulation). Tangible capital
generally includes common stockholders' equity and retained income and certain
noncumulative perpetual preferred stock. In addition, all intangible assets,
other than a limited amount of purchased mortgage servicing rights, must be
deducted from tangible capital.
The OTS regulations establish special tangible capital requirements for savings
associations that own subsidiaries. In determining compliance with the capital
requirements, all subsidiaries engaged solely in activities permissible for
national banks or engaged in certain other activities solely as an agent for its
customers, are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership, including the
assets of includable subsidiaries in which the association has a minority
interest that are not consolidated for generally accepted accounting principles.
For excludable subsidiaries, the debt and equity investments in such
subsidiaries must be deducted from assets and capital. The Bank, at December 31,
1995, had a $2.3 million net investment in subsidiaries which the Bank deducted
from capital for the purpose of computing its capital compliance.
At December 31, 1995, the Bank had tangible capital of approximately $474.7
million, or 5.26% of adjusted total assets, which is approximately $339.2
million above the minimum requirement of 1.50% adjusted total assets in effect
on that date.
Core Capital - The capital standards also require core capital equal to at least
3% of adjusted total assets. Core capital generally consists of tangible capital
plus certain intangible assets. At December 31, 1995, the Bank had $2.4 million
of core deposit intangibles included in core capital under these tests and had
core capital equal to approximately $477.1 million, or 5.28% of adjusted total
assets, which is $206.1 million above the minimum leverage ratio requirement of
3% in effect on that date. As a result of the prompt corrective action
provisions discussed below, however, a savings association must maintain a core
capital level of at least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it
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to maintain a 3% ratio.
Risk-Based Capital - The OTS risk-based requirement requires savings
associations to have total capital of at least 8% of risk-weighted assets. Total
capital consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain permanent and maturing capital
instruments that do not qualify as core capital and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets.
Supplementary capital may be used to satisfy the risk-based requirement only to
the extent of core capital. The OTS is also authorized to require a savings
association to maintain additional risk-based capital to account for
concentration of credit risk and the risk of non-traditional activities. At
December 31, 1995, the Bank did not have any capital instruments that qualified
as supplementary capital and had $18.6 million of general loss allowances, which
was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for the
purpose of calculating risk-based capital, in addition to the adjustments
required for calculating core capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio. In
addition, reciprocal holdings of qualifying capital instruments are excluded.
The Bank had no such exclusions from capital and assets at December 31, 1995.
In determining the amount of risk-weighted assets, all assets, including the
credit equivalent amount of certain off-balance sheet items, will be multiplied
by a risk weight ranging from 0% to 100% based on the risks inherent in the type
of asset. For example, the OTS has assigned a risk weight of 50% for performing
and prudently underwritten permanent one- to four-family first mortgage loans
not more than 90 days past due and with a loan-to-value ratio of not more than
80% at origination unless insured to such ratio by an insurer approved by the
FNMA or FHLMC.
On December 31, 1995, the Bank had total risk-weighted capital of approximately
$495.7 million (including $18.6 million of general loss allowances). The Bank
had risk-weighted assets of $3.3 billion (including $232.2 million in credit
equivalent amounts of converted off-balance sheet items) for total risk-weighted
capital of 14.60% of risk-weighted assets. This amount was approximately $224.1
million above the 8% requirement in effect on that date.
Every savings association with more than normal interest rate risk is required
to deduct from its total capital, for purposes of determining compliance with
such requirement, an amount equal to 50% of its interest-rate risk exposure
multiplied by the present value of its assets. This exposure is a measure of the
potential decline in the net portfolio value of a savings association, greater
than 2% of the present value of its assets, based upon a hypothetical 200 basis
point increase or decrease in interest rates (whichever results in a greater
decline). Net portfolio value is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. The regulation provides for
a two quarter lag between calculating interest rate risk and recognizing any
deduction from capital. The OTS recently announced that it will delay the
effective date of the regulation until it evaluates the process by which an
association may appeal an interest-rate risk capital deduction determination. If
the regulation had been in effect at December 31, 1995, the Bank would have had
no such deduction from total capital on such date.
The OTS and the FDIC are authorized and, under certain circumstances required,
to take certain actions against associations that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than a 4% core and Tier 1 risk-based capital ratios and less than an
8% risk-based capital ratio). Any such association must submit a capital
restoration plan and until such plan is approved by the OTS may not increase it
assets, acquire another institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The OTS is
authorized to impose the additional restrictions, discussed below, that are
applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited capital maintenance guarantee with respect to the institution's
achievement of its capital requirements. In any bankruptcy proceedings by
Roosevelt, any claim against Roosevelt under such a guarantee would have
priority over the claims of unsecured creditors.
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Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be subjected
by the OTS to one or more of a number of additional specified actions and
operating restrictions which may cover all aspects of its operations and include
a forced merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized.
The OTS is also generally authorized to reclassify an association into a lower
capital category and impose the restrictions applicable to such category if the
OTS determines that an association is in an unsafe or unsound condition or is
engaged in an unsafe or unsound practice.
The imposition by the OTS of any of these measures on the Bank may have
substantial adverse effect on the Bank's operations and profitability and the
value of Roosevelt's common and preferred stock. Roosevelt stockholders do not
have preemptive rights, and therefore, if Roosevelt is directed by the OTS or
the FDIC to issue additional shares of common or preferred stock, such issuance
may result in the dilution in the percentage of ownership of the stockholders of
Roosevelt.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions on associations, including the Bank,
with respect to their ability to make capital distributions, which include
dividends, stock redemptions or repurchases, cash-out mergers, interest payments
on certain convertible debt, and other transactions charged to the capital
account. As of December 31, 1995, the Bank would have been permitted to pay
dividends of $166.6 million consistent with these restrictions, subject to
giving the notice referred to below and receiving no objection from the OTS.
Generally, associations such as the Bank that before and after the proposed
distribution meet or exceed their capital requirements, may make capital
distributions during any calendar year up to the greater of 100% of net income
for the year-to-date plus 50% of the amount by which the lesser of the
association's tangible, core, or risk-based capital exceeds its requirement for
such capital component, as measured at the beginning of the calendar year, or
75% of net income for the most recent four quarter period. However, an
association deemed to be in need of more than normal supervision by the OTS may
have its dividend authority restricted.
Associations proposing to make any capital distribution must submit written
notice to the OTS 30 days prior to such distribution. Associations that do not
meet minimum capital requirements that propose to make any capital distribution
must obtain OTS approval prior to making such distributions. The OTS may object
to the distribution during that 30-day period based on safety and soundness
concerns.
Finally, OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock, if as a result, the net worth
of the association would be reduced below the amount required to be maintained
for the liquidation account established in connection with its mutual stock
conversion.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated,
however, it will generally regard as permissible that amount of capital
distributions that do not exceed 50% of the institution's excess regulatory
capital plus net income to date during the calendar year. A savings association
may not make a capital distribution without prior approval of the OTS and the
FDIC if it is undercapitalized before, or as a result of, such a distribution.
As under the current rule, the OTS may object to a capital distribution if it
would constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what
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form the proposed regulations may be adopted.
LIQUIDITY
Each savings association, including the Bank, is required to maintain an average
daily balance of liquid assets equal to a certain percentage of the sum of its
average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. This liquid asset ratio requirement may vary from
time to time (between 4% an 10%) depending on the economic conditions and
savings flows of all savings associations. At the present time, the minimum
liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers' acceptances and short-term United States Treasury obligations)
currently must constitute at least 1% of an association's average daily balance
of net withdrawable deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset ratio
requirement. At December 31, 1995, the Bank was in compliance with both
requirements.
QUALIFIED THRIFT LENDER TEST
All savings associations, including the Bank, are required to meet a qualified
thrift lender (QTL) test to avoid certain restrictions on their operations. The
QTL test requires a savings association to have at least 65% of its portfolio
assets (which consist of total assets less intangibles, properties used to
conduct the savings association's business and liquid assets not exceeding 20%
of total assets) in qualified thrift investments and to meet that test on a
monthly average for nine out of every 12 months on a rolling basis. Such assets
primarily consist of residential housing related loans and investments. As of
December 31, 1995, the Bank had a QTL ratio of 97.8%, which was in compliance
with the 65% QTL test, and has always been in compliance with the QTL
requirement.
Any savings association that fails to meet the test must convert to a national
bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If
the association does not requalify and converts to a national bank charter, it
must remain SAIF insured until the FDIC permits it to transfer to the BIF, which
generally cannot occur until the SAIF reaches its designated reserve ratio. If
an association that fails the test has not yet requalified and has not converted
to a national bank, its new investments and activities are limited to those
permissible for a national bank and it is limited to national bank branching
rights in its home state. In addition, the association is immediately ineligible
to receive any new FHLB borrowings and is subject to national bank limits for
payment of dividends. If such association has not requalified or converted to a
national bank within three years after the failure, it must divest of all
investments and cease all activities not permissible for a national bank. In
addition, it must repay promptly any outstanding FHLB borrowings, which may
result in prepayment penalties. If any association that fails the QTL test is
controlled by a holding company, then within one year after the failure, the
holding company must register as a bank holding company and become subject to
all restrictions on bank holding companies.
TRANSACTION WITH AFFILIATES
Transactions between a savings association, such as the Bank or any of its
subsidiaries, and its affiliates are subject to numerous restrictions.
Generally, such transactions must be on terms at least as favorable to the Bank
as those prevailing at the time for comparable transactions with nonaffiliated
companies. Most transactions are also subject to quantitative ceilings, and many
must be secured by eligible collateral. In addition, savings associations are
prohibited from investing in the securities of an affiliate (other than a
subsidiary) or extending credit to an affiliate engaged in activities not
permissible for a bank holding company. For these purposes, an affiliate is
defined as a company that controls, or is under common control with, the Bank
but does not include a subsidiary of the Bank unless specially determined by OTS
or the Federal Reserve Board. None of the Bank's subsidiaries have been so
designated.
Certain transactions with directors, officers or controlling persons are also
subject to conflict of interest regulations enforced by the OTS. These conflict
of interest regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must be
made on terms substantially the same as for loans to unaffiliated individuals.
HOLDING COMPANY REGULATION
Roosevelt is a unitary savings and loan holding company subject to regulatory
oversight by the OTS. As such, Roosevelt is required to register and file
reports with the OTS and is subject to regulation and examination by the OTS. In
addition, the
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OTS has enforcement authority over Roosevelt and its non-savings association
subsidiaries which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to any subsidiary savings association, such
as the Bank.
As a unitary savings and loan holding company, Roosevelt generally is not
subject to activity restrictions. If Roosevelt acquired control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of Roosevelt and any of its
subsidiaries (other than the Bank or any other SAIF insured savings association)
would become subject to such restrictions unless such other associations each
qualifies as a QTL and was acquired in a supervisory acquisition.
If the Bank fails the QTL test, Roosevelt must obtain the approval of the OTS
prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure Roosevelt must register as, and will become subject to,
the restrictions applicable to bank holding companies. The activities authorized
for a bank holding company are more limited than are the activities authorized
for a unitary or multiple savings and loan holding company.
Roosevelt must obtain approval from the OTS before acquiring control of any
other SAIF insured association. Such acquisitions are generally prohibited if
they result in a multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate acquisitions may
be permitted based on specific state authorization or in a supervisory
acquisition of a failing savings association.
FEDERAL SECURITIES LAW
The stock of Roosevelt is registered with the Securities and Exchange Commission
(SEC) under the Securities Exchange Act of 1934, as amended (the Exchange Act).
Roosevelt is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Roosevelt stock held by persons who are affiliates within the meaning of the
Exchange Act (generally officers, directors, and principal stockholders) of
Roosevelt may not be resold without registration or unless sold in accordance
with certain resale restrictions. If Roosevelt meets specified current public
information requirements, each affiliate of Roosevelt generally is able to sell
in the public market, without registration, a limited number of shares in any
three-month period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain non-
interest-bearing reserves at specified levels against their transaction accounts
(primarily checking, NOW and Super NOW checking accounts). At December 31, 1995
Roosevelt was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of Des Moines which is one of 12 regional FHLBs
that regulate the home financing credit function of savings associations. Each
FHLB serves as a reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members (i.e.,
advances) in accordance with policies and procedures established by the board of
directors of the FHLB. These policies and procedures are subject to the
regulation and oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral as determined
by the FHLB. In addition, all long-term advances are required to provide funds
for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the FHLB of
Des Moines. At December 31, 1995 the Bank had approximately $132.0 million in
FHLB of Des Moines stock, which was in compliance with this requirement.
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The FHLBs are required to provide funds for the resolution of troubled savings
associations and to contribute to low and moderately priced housing programs
through direct loans or interest subsidies on advances targeted for community
investment and low-and moderate-income housing projects. These contributions
have adversely affected the level of FHLB dividends paid and could continue to
do so in the future. For 1995 dividends paid by the FHLB of Des Moines to the
Bank totaled $8.6 million, $6.0 million paid as a cash dividend and $2.6 million
paid in the form of a stock dividend.
TAXATION
For Federal income tax purposes, Roosevelt reports its income and expenses using
the accrual method of tax accounting and uses the calendar year as its tax year.
Except for the bad debt reserve deduction Roosevelt is subject to Federal income
tax, under existing provisions of the Internal Revenue Service Code, in
generally the same manner as other corporations.
Missouri-based thrift institutions, such as the Bank, are subject to a special
financial institutions tax, based on net income without regard to net operating
loss carryforwards, at the rate of 7% of net income. This tax is in lieu of all
other state taxes on thrift institutions, on their property, capital or income.
As a Delaware business corporation, Roosevelt is required to file annual returns
with and pay annual fees to the State of Delaware. Roosevelt is also subject to
an annual franchise tax imposed by the State of Delaware based on the number of
authorized shares of its common stock. If and to the extent Roosevelt carries on
activities in other states, it may in certain circumstances be subject to such
states' tax laws.
COMMUNITY REINVESTMENT ACT
The Community Reinvestment Act (CRA) requires financial institutions regulated
by the Federal financial supervisory agencies to ascertain and help meet the
credit needs of their delineated communities, including low-income and moderate-
income neighborhoods within those communities, while maintaining safe and sound
banking practices. The agencies evaluate an institution's CRA performance based
on a four-tiered descriptive rating system and are required to make public an
institution's rating and written evaluation. The four possible ratings of
meeting community credit needs are outstanding, satisfactory, needs to improve,
and substantial noncompliance.
Many factors play a role in assessing a financial institution's CRA performance.
The institution's regulator must consider its financial capacity and size, legal
impediments, local economic conditions and demographics, including the
competitive environment in which it operates. The evaluation does not rely on
absolute standards and the institutions are not required to perform specific
activities or to provide specific amounts or types of credit.
During 1995, the Bank received a satisfactory rating from the OTS. This rating
reflects Roosevelt's commitment to meeting the credit needs of the communities
it serves. The Bank maintains a CRA statement for public viewing, as well as an
annual CRA highlights document. These documents describe the Bank's credit
programs and services, community outreach activities, public comments and other
efforts to meet community credit needs.
COMPETITION
The Company faces strong competition both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks, and mortgage
bankers making loans secured by real estate located in the Company's market
area. Commercial banks and finance companies, including finance company
affiliates of automobile manufacturers, provide vigorous competition in consumer
lending. The Company competes for real estate and other loans principally on the
basis of the interest rates and loan fees it charges, the types of loans it
originates, and the quality of services it provides to borrowers.
The Company faces substantial competition in attracting deposits from other
savings institutions, commercial banks, money market and mutual funds, credit
unions, and other investment vehicles. The ability of the Company to attract and
retain deposits depends on its ability to provide investment opportunities that
satisfy the requirements of investors as to rate of return, liquidity, risk, and
other factors. The Company attracts a significant amount of deposits through its
branch offices, primarily from the communities in which those branch offices are
located; therefore, competition for those deposits is principally from
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other savings institutions and commercial banks located in the same communities.
The Company competes for these deposits by offering a variety of deposit
accounts at competitive rates, convenient business hours, and convenient branch
locations with interbranch deposit and withdrawal privileges at each.
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MANAGEMENT OF REGISTRANT AND ITS SUBSIDIARIES
The following table sets forth certain information with respect to each
executive officer of the Company and the Bank as of March 8, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
Stanley J. Bradshaw 38 President and Chief Executive Officer
Anat Bird 44 Senior Executive Vice President and
Chief Operating Officer
Gary W. Douglass 45 Executive Vice President and
Chief Financial Officer
Daniel G. O'Donnell 40 Executive Vice President,
General Counsel, and Secretary
</TABLE>
The following is a description of the principal occupation and employment of the
executive officers of the Company and the Bank during at least the last five
years. Except as otherwise indicated, all officers of the Company have held
their positions since the formation of the Company in 1988.
Stanley J. Bradshaw - Mr. Bradshaw joined Roosevelt in 1985 as Vice President
and Chief Lending Officer and in 1987 was elected Senior Vice President and
Chief Investment Officer. During 1988, he was elected Executive Vice President
and became Roosevelt's Chief Operating Officer. He joined the Board of Directors
and became President and Chief Executive Officer in 1991.
Anat Bird - Mrs. Bird joined the Company and the Bank as Senior Executive Vice
President and Chief Operating Officer in July 1995. In January 1991, Mrs. Bird
founded the Financial Institutions Consulting Group (FIGC) at BDO Seidman, New
York, New York and developed and managed FIGC through June 1994. In June 1994,
Mrs. Bird Founded SCB Forums, LTD. (SCB), a financial institutions consulting
firm located in New York City and the successor to FinExc Group, L.L.C.
Gary W. Douglass - Mr. Douglass joined the Company and the Bank as Executive
Vice President and Chief Financial Officer on March 9, 1995. Prior to joining
the Company and the Bank, Mr. Douglass was a partner for Deloitte & Touche LLP,
a big six international accounting firm where he was the partner in charge of
the accounting and auditing function and financial institution practice of the
firm's St. Louis office.
Daniel G. O'Donnell - Mr. O'Donnell was named Executive Vice President in
December 1993 previously serving as Senior Vice President since November 1991.
Since November 1991, he was Real Estate Group Manager, General Counsel and
Secretary. He joined the Bank in May 1986 as Vice President and General Counsel.
He was named Secretary in 1987 and Interim Real Estate Group Manager in May
1991.
EMPLOYEES
At December 31, 1995, the Company had a total of 1245 employees, including 171
part-time employees. None of the Company's employees are represented by a
collective bargaining group. Management considers its employee relations to be
good.
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ITEM 2. PROPERTIES
The Company's home office, which is a leased facility, is located in
Chesterfield, Missouri. The Company's mortgage loan servicing office is located
in Nevada, Missouri and is owned by the Company. In addition to these, the
company has an additional 77 branch offices, of which 73 are located in the
State of Missouri, three are located in the State of Illinois, and one is
located in the State of Kansas. 37 of these offices are located in the St. Louis
metropolitan area of which 28 branches are owned by the Company and 9 are
leased. The leases expire from 1996 through 2010. Nine of these offices are
located in the Kansas City metropolitan area of which four branches are owned by
the Company and five are leased. The leases expire from 1997 to 2014. The
remaining 31 offices are located in Staunton, Illinois and Pittsburgh, Kansas
and the Missouri cities of Hannibal(2), Springfield(3), Columbia, Union,
Warrenton, St. James, Washington, Sikeston, Dexter, Malden, Poplar Bluff, Hayti,
Portageville, Cape Girardeau, Mexico, Jefferson City, Trenton, Marshall,
Sedalia, Clinton, Maryville, St. Joseph, Lamar, Joplin(2) and Kirksville. 24 of
these offices are owned by the Company and seven offices are leased. The leases
expire from 1996 through 2009. The Company's net investment in its home and
branch offices, premises, equipment, and leaseholds was $52.5 million at
December 31, 1995.
ITEM 3. LEGAL PROCEEDINGS
Roosevelt has certain litigation and claims in process resulting from activities
arising from normal operations. In the opinion of management, none of these
matters is likely to have a material adverse effect on its financial position.
Among the matters referred to above and as a result of the acquisition of Farm &
Home which was completed in June 1994, the Company has become successor to
certain legal proceedings which involved Farm & Home. The following is a
discussion of such proceedings. Prior to 1985, the Southbend Subdivision was
developed by Farm & Home Savings and a co-developer on property owned by Farm &
Home Savings adjacent to a toxic waste disposal site near Houston, Texas (the
Brio Site). As a result of action by the U.S. Environmental Protection Agency
(the EPA), a task force made up of eleven major corporations that contributed
waste to the site (the Brio Site Task Force) agreed in 1989 to remediate the
Brio Site, including any off-site contamination related to the Brio Site. It is
anticipated that once a final remediation plan is approved, the Brio Site Task
Force will be responsible for carrying out the planned remediation. Neither Farm
& Home, Farm & Home Savings nor the Company has ever been a member of the Brio
Site Task Force, nor has the EPA, to date, designated any of them a "potentially
responsible party" with respect to the Brio Site or any remediation thereof.
Farm & Home Savings has been named in a number of lawsuits by various parties
claiming personal injury and property damage from exposure to the Brio Site
wastes as a result of Farm & Home's development of Southbend Subdivision. These
claims have involved homeowners and their children who lived in the Southbend
Subdivision as well as others who have visited the subdivision or attended Weber
Elementary School, which was located within the Southbend Subdivision, and
others who either played on ball fields that were in close proximity to the
subdivision or in some cases lived in neighboring subdivisions (the Claims).
Pursuant to a Release and Settlement Agreement entered into in May 1987 (the
1987 Settlement Agreement), United States Fire Insurance Company, North River
Insurance Company and Commonwealth Lloyds Insurance Company of Texas (the
Insurance Companies) have been defending and indemnifying Farm & Home Savings
(and the Company as successor to Farm & Home Savings) against the Claims. The
1987 Settlement Agreement provided that in consideration of Farm & Home Savings'
payment to the Insurance Companies of $12.5 million the Insurance Companies
would defend and pay on behalf of Farm & Home Savings all damages and
settlements (without limitation as to time frame or dollar amount) arising out
of past, present and future claims and demands in connection with the Southbend
Subdivision's proximity to the Brio Site, and also arising out of, resulting
from, or relating to the alleged hazardous wastes at the Brio Site. In the
course of defending Farm & Home Savings against the Claims, a further dispute
arose between Farm & Home Savings and the Insurance Companies arising out of the
Insurance Companies' demand that Farm & Home Savings contribute toward the
Insurance Companies' program of purchasing all of the residential lots and homes
in the Southbend Subdivision. This dispute was resolved following litigation on
March 30, 1993 pursuant to a second settlement agreement (the 1993 Settlement
Agreement, and, together with the 1987 Settlement Agreement, the Settlement
Agreements). Under the terms of the 1993 Settlement Agreement the parties
affirmed that the 1987 Settlement Agreement remains in full force and effect and
the Insurance Companies agreed to assume the exclusive obligation and
responsibility for acquiring the lots and homes in the Southbend Subdivision. In
addition, Farm & Home Savings agreed to pay the Insurance Companies a total of
$9.7 million
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over four years. Farm & Home's costs associated with the 1993 Settlement
Agreement have been reflected in its consolidated financial statements for the
year ended December 31, 1992.
Thereafter, the Insurance Companies issued a reservation of rights with respect
to certain Claims filed in 1993. As a result of this reservation, Farm & Home
Savings initiated a declaratory judgement action regarding the Insurance
Companies' obligations under the 1987 Settlement Agreement. This declaratory
judgement action has been terminated pursuant to a further settlement agreement
between the Company and the Insurance Companies by which the Insurance Companies
have agreed to continue to defend and indemnify the Company against all pending
Claims, subject to the Insurance Companies' right to reassert their reservation
of rights in the future.
Currently, there are approximately nine hundred Claims pending against Farm &
Home Savings involving the Southbend Subdivision and/or the Brio Site, and it is
possible that in the future additional claims may be filed by others. While the
outcome of the Claims and any future claims cannot be predicted with certainty,
based upon consultation with outside counsel, it is the belief of the Company
that, pursuant to the Settlement Agreements, the Insurance Companies are
responsible for the payment of all Claims and that the risk of significant loss
to the Company related thereto would be remote.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the quarter ended December 31, 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
COMMON STOCK
Roosevelt's common stock is traded on the Nasdaq Stock Market under the symbol
RFED. As of December 31, 1995, there were 41,991,701 shares of common stock
issued and outstanding held by 5,796 shareholders.
The following table, adjusted for the 200% stock dividend on May 18, 1994, sets
forth the high, low and closing sales prices for the common stock as reported by
the Nasdaq Stock Market, as well as the dividends paid, for 1995 and 1994.
<TABLE>
<CAPTION>
STOCK PRICE
-------------------------------------
COMMON STOCK DATA HIGH LOW CLOSE DIVIDENDS
---- --- ----- ---------
<S> <C> <C> <C> <C>
1995
First quarter........................ $17.250 $14.750 $15.750 $0.14
Second quarter....................... 18.625 15.750 16.688 0.14
Third quarter........................ 18.875 15.250 17.625 0.14
Fourth quarter....................... 19.375 15.875 19.375 0.14
1994
First quarter........................ $15.833 $13.917 $14.750 $0.10
Second quarter....................... 18.250 14.328 16.000 0.11
Third quarter........................ 17.375 16.000 16.688 0.11
Fourth quarter....................... 16.875 12.750 15.000 0.11
</TABLE>
PAYMENT OF DIVIDENDS
Payment of future dividends is subject to a declaration by Roosevelt's Board of
Directors. Factors considered in determining the size of dividends are the
amount and stability of profits, adequacy of capitalization, and expected asset
and liability growth of the Bank.
33
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
ROOSEVELT FINANCIAL GROUP, INC.
FIVE-YEAR SUMMARY
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At or for the year ended December 31, 1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL CONDITION
Total assets.................................. $ 9,013,061 $ 8,431,866 $ 7,595,161 $ 6,038,732 $ 5,756,199
Securities available for sale................. 1,606,461 1,765,699 1,665,879 52,399 46,997
Securities held to maturity................... 3,550,140 3,276,062 2,642,916 2,219,147 2,487,141
Loans......................................... 3,577,892 3,072,151 2,671,810 2,349,771 2,259,867
Deposits...................................... 4,907,497 4,899,389 5,081,496 4,300,981 4,184,323
Other borrowings.............................. 3,507,475 2,963,449 1,975,661 1,319,154 1,222,457
Stockholders' equity.......................... 496,906 441,626 378,462 288,545 254,396
SUMMARY OF OPERATIONS
Total interest income......................... 647,316 533,368 486,940 439,173 503,801
Total interest expense........................ 466,433 347,574 321,490 314,728 394,315
Provision for losses on loans................. 1,200 12,432 706 2,648 2,695
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for losses on loans......................... 179,683 173,362 164,744 121,797 106,791
---------- ---------- ---------- ---------- ----------
Retail banking fees........................... 10,706 8,682 6,260 4,870 3,150
Insurance and brokerage sales commissions..... 7,506 6,538 5,737 4,347 3,159
Loan servicing fees (expenses), net........... 8,911 7,359 (11,145) 8,392 11,191
Net gain (loss) from financial instruments.... 5,468 (39,120) 10,646 11,394 374
Unrealized losses on impairment of mortgage-
backed securities held to maturity.......... (27,063) -- -- -- --
Recognition of financial futures losses....... (34,827) -- -- -- --
Other......................................... 3,016 5,337 2,759 1,790 5,337
---------- ---------- ---------- ---------- ----------
Total noninterest income (loss)........... (26,283) (11,204) 14,257 30,793 23,211
---------- ---------- ---------- ---------- ----------
Total noninterest expense................. 87,666 115,576 98,598 100,452 87,994
---------- ---------- ----------- ---------- ----------
Income before income tax expense,
extraordinary item, and cumulative
effect of change in accounting principles... 65,734 46,582 80,403 52,138 42,008
Income tax expense............................ 20,616 15,026 27,134 17,887 14,612
Extraordinary item, net....................... -- (7,849) (1,908) (3,796) (1,662)
Cumulative effect of change in accounting
principles.................................. -- -- (6,489)(1) -- (16,321)(2)
---------- ---------- ---------- ---------- ----------
Net income.................................... $ 45,118 $ 23,707 $ 44,872 $ 30,455 $ 9,413
========== ========== ========== ========== ==========
Net income attributable to common stock....... $ 40,875 $ 18,523 $ 41,057 $ 28,866 $ 5,029
========== ========== ========== ========== ==========
PER SHARE DATA:
Primary earnings per share:
Income before extraordinary item and
cumulative effect of change in
accounting principles...................... $ 1.01 $ 0.70 $ 1.54 $ 1.09 $ 1.09
Extraordinary item.......................... -- (0.21) (0.06) (0.13) (0.06)
Cumulative effect of change
in accounting principles................... -- -- (0.20) -- (0.65)
---------- ---------- ---------- ---------- ----------
Net income............................... $ 1.01 $ 0.49 $ 1.28 $ 0.96 $ 0.38
========== ========== ========== ========== ==========
Fully-diluted earnings per share:
Income before extraordinary item and
cumulative effect of change
in accounting principles................... $ 0.99 $ 0.68 $ 1.32 $ 0.99 $ 1.09
Extraordinary item.......................... -- (0.20) (0.05) (0.11) (0.06)
Cumulative effect of change in
accounting principles...................... -- -- (0.16) -- (0.65)
---------- ---------- ---------- ---------- ----------
Net income.............................. $ 0.99 $ 0.48 $ 1.11 $ 0.88 $ 0.38
========== ========== ========== ========== ==========
Pro Forma amounts assuming the change in
accounting principle is applied
retroactively (2):
Net income................................ N/A N/A N/A N/A $ 25,734
========== ========== ========== ========== ==========
Earnings per share....................... N/A N/A N/A N/A $ 1.03
========== ========== ========== ========== ==========
</TABLE>
34
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
ROOSEVELT FINANCIAL GROUP, INC.
FIVE-YEAR SUMMARY
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<S> <C> <C> <C> <C> <C>
Other Data:
Ratio of net interest income to general
and administrative expense................. 2.06x(4) 1.67x(3) 1.82x 1.55x 1.44x
Effective net spread during the period....... 2.05% 2.29% 2.40% 2.32% 2.01%
Nonperforming assets to total assets,
end of period.............................. 0.90 0.41 0.46 0.78 0.89
Return on assets (ratio of net income to
average total assets)...................... 0.49(4) 0.28(3) 0.61 0.54 0.16
Return on equity (ratio of net income to
average stockholders' equity).............. 9.93(4) 5.85(3) 12.86 11.11 3.55
Equity-to-assets ratio (ratio of average
stockholders' equity to average total
assets).................................... 4.97 4.80 4.75 4.84 4.64
Cash dividends per share of common stock..... $ 0.56 $ 0.43 $ 0.31 $ 0.21 $ 0.20
Dividends on common stock payout ratio
(dividends paid per share of common stock
divided by primary net income per share)... 55.45%(4) 58.81%(3) 18.72% 18.63% 90.41%
Book value per share, end of year............ $10.60 $ 9.79 $ 9.18 $ 9.29 $ 8.67
</TABLE>
(1) During December, 1993, Roosevelt adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," on a prospective basis. As a result, Roosevelt
recorded a $6.5 million charge, net of applicable income taxes, as a cumulative
effect of a change in accounting principle to reflect an other than temporary
impairment of certain interest-only stripped coupon mortgage-backed pass-through
certificates and collateralized mortgage obligation residual interests. See Note
2 of the Notes to Consolidated Financial Statements.
(2) During 1991, Roosevelt changed its method of amortizing cost in excess of
fair value of net assets acquired. Prior to 1991, Roosevelt amortized the cost
in excess of fair value of net assets acquired (goodwill) on a straight line
basis over a 15 year life. On January 1, 1991, Roosevelt adopted the provisions
of Statement of Financial Accounting Standards No. 72, "Accounting for Certain
Acquisitions of Banking and Thrift Institutions" (SFAS 72) and amortizes
goodwill over the life of the long-term interest-bearing assets acquired. Such
adoption was allowed as a result of the Financial Accounting Standards Board
Emerging Issues Task Force Consensus No. 89-19 which permitted retroactive
application for purchase business combinations that occurred prior to the
issuance of SFAS 72. Roosevelt recorded a $16.3 million cumulative effect of a
change in accounting principle in 1991.
(3) Includes a $57.3 million net expense (net of income tax benefit) of merger-
related expenses as a result of the acquisition of Farm & Home. Such merger-
related expenses included $11.4 million in provision for losses on loans, $38.4
million of net loss from financial instruments, $3.7 million in provision for
real estate losses, $6.3 million in compensation and employee benefits,
occupancy expense of $5.9 million, transaction related fees of $7.0 million, and
$1.8 million of other expenses. This amount was reduced by the income tax effect
of $25.0 million. An extraordinary item totaling $7.8 million was recorded
related to the early extinguishment of debt. Not including such charges for
1994, the ratio of net interest income to general and administrative expense
would have been 2.08x, return on assets would have been 0.96%, return on equity
would have been 20.01%, and the dividend on common stock payout ratio would have
been 18.40%.
(4) Excluding the impact of the impairment charge related to certain mortgage-
backed securities of $27.1 million, the recognition of futures losses of $34.8
million and merger-related expenses of $1.6 million, the ratio of net interest
income to general and administrative expense would have been 2.10x, return on
assets would have been 0.95%, return on equity would have been 18.96% and the
dividend on common stock payout ratio would have been 27.59%.
35
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto, and with reference to the
discussion of the operations and other financial information presented elsewhere
in this report.
The Company's consolidated financial statements have been significantly impacted
by its acquisition activity, particularly in 1994 and 1993. In 1995, the Company
completed two additional acquisitions which did not have a significant impact on
the 1995 consolidated financial statements. See Note 2 of Notes to Consolidated
Financial Statements and "Business -Acquisitions" for further discussion.
RESULTS OF OPERATIONS
Roosevelt's operating results depend primarily upon its net interest income,
which is the difference between the interest income earned on its interest
earning assets (loans, mortgage-backed securities and investment securities) and
the interest expense paid on its interest bearing liabilities (deposits and
borrowings). Operating results are also significantly affected by provisions for
losses on loans, noninterest income and noninterest expense. Each of these
factors is significantly affected not only by Roosevelt's policies, but, to
varying degrees, by general economic and competitive conditions and by policies
of Federal regulatory authorities.
Roosevelt reported net income of $45.1 million for 1995 compared with $23.7
million for 1994 and $44.9 million for 1993. Net income on a fully diluted per
share basis was $0.99 for 1995 compared with $.48 for 1994 and $1.11 for 1993.
Net income for 1995 was negatively impacted by a charge to earnings of $27.1
million ($17.8 million, net of income taxes) for unrealized losses on the
impairment of mortgage-backed securities and by the recognition of losses on
financial futures which totaled $34.8 million ($22.1 million, net of income
taxes).
Net income for 1994 was impacted by merger expenses related to the acquisition
of Farm & Home Financial Corporation (Farm & Home). The components of the merger
related expenses (in millions) are as follows:
<TABLE>
<S> <C>
Provision for losses on loans........... $11.4
Net loss from financial instruments..... 38.4
Provision for real estate losses........ 3.7
Compensation and employee benefits...... 6.3
Occupancy............................... 5.9
Transaction related fees................ 7.0
Other................................... 1.8
-----
Income before income tax expense
and extraordinary item................ 74.5
Income tax expense...................... 25.0
-----
Income before extraordinary item....... 49.5
Extraordinary item (net of tax effect).. 7.8
-----
Total.................................. $57.3
=====
</TABLE>
In connection with the acquisition of Farm & Home and a review of the combined
loan portfolio, including the increased concentration of loans in various
geographic areas, and after discussion with the OTS regarding the level of the
allowance for loan losses as compared to a new peer group as a result of the
dramatic increase in size, management recorded an $11.4 million addition to the
allowance. Net loss from financial instruments totaled $38.4 million and
included $25.6 million in loss from the sale of Farm & Home fixed-rate mortgage-
backed securities that did not meet Roosevelt's asset/liability management
objectives. In addition, $8.9 million of the loss on financial instruments
resulted from the cancellation of interest rate exchange agreements of Farm &
Home. As a result of Roosevelt's desire to accelerate the disposition of Farm &
Home's real estate owned portfolio, Roosevelt increased its estimate of reserves
required to record its real estate owned portfolio at its estimated fair value
which resulted in the additional $3.7 million provision. Compensation and
employee benefits expense totaling $6.3 million related to the severance
benefits for the Farm & Home executives and the Missouri and Texas employees
whose employment did not continue with the combined entity after June 30, 1994.
Occupancy expense totaled $5.9 million and was comprised of losses on the
termination of 11 facility leases, including the write-off of leasehold
improvements associated with the leases, and anticipated losses on the sale of
two closed branch facilities. Transaction related fees totaled $7.0 million and
36
<PAGE>
included advisory, legal, and accounting fees. Other expenses totaled $1.8
million and related to other miscellaneous costs such as printing, travel and
lodging. The extraordinary item related to early extinguishment of debt and
totaled $7.8 million, net of applicable income taxes. Roosevelt recorded a $4.6
million loss due to the retirement of $60.9 million of 10.125% mortgage-backed
bonds. A loss of $2.6 million was recorded as a result of the redemption of Farm
& Home's 13.0% debentures. Additionally, a loss of $637,000 was recorded as a
result of the prepayment of $101.0 million of Federal Home Loan Bank (FHLB) of
Des Moines advances.
Net income for 1993 was impacted by $27.1 million of additional amortization of
purchased mortgage servicing rights as a result of significant loan prepayments
during the period.
NET INTEREST INCOME
Net interest income of $180.9 million for 1995 was down 2.6% from $185.8 million
for 1994. The decrease in net interest income was primarily the result of the
average interest rates paid on interest bearing liabilities increasing more than
the average interest rates earned on interest earning assets. The average rate
earned on interest earning assets increased 76 basis points from 6.58% for 1994
to 7.34% for 1995. The average rate paid on interest bearing liabilities
increased 107 basis points from 4.41% for 1994 to 5.48% for 1995. The effective
net interest rate spread decreased 24 basis points from 2.29% for 1994 to 2.05%
for 1995, primarily as a result of severe retail deposit pricing pressure
(unrelated to the outright level of interest rates) in the Company's market
areas during 1995. The decrease in net interest income due to the decreasing
average spread was partially offset by a growth in interest earning assets and
interest bearing liabilities. The average balance of interest earning assets and
interest bearing liabilities increased 8.8% and 8.1%, respectively, during 1995
as compared to 1994.
Net interest income of $185.8 million for 1994 was up 12.3% from $165.5 million
for 1993. Most of the growth in net interest income was the result of internal
growth in 1994 and the acquisition of Home Federal Bancorp of Missouri, Inc.
(Home Federal). The average balance of interest-earning assets and interest-
bearing liabilities increased 17.7% and 17.6%, respectively, during 1994 as
compared to 1993. The effective net interest rate spread decreased 11 basis
points from 2.40% for 1993 to 2.29% for 1994, primarily as a result of the
narrower effective spread earned on the Company's asset growth in 1994 compared
to 1993.
37
<PAGE>
The following table presents Roosevelt's average consolidated balance sheets and
reflects the average yield on assets and the average cost of liabilities for the
periods indicated. Average rates earned and paid are derived by dividing income
or expense by the average balance of assets and liabilities, respectively.
<TABLE>
<CAPTION>
Year Ending December 31,
-----------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------ ------------------------------
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate % Balance Expense Rate % Balance Expense Rate %
---------- -------- --------- ---------- -------- -------- ---------- -------- --------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Cash equivalents................. $ 18.2 $ 1.0 5.49% $ 62.8 $ 2.4 3.82% $ 143.4 $ 4.6 3.21%
Securities held for trading...... -- -- -- 120.6 6.5 5.39 389.6 19.5 5.01
Securities available for sale (1) 1,815.2 134.9 7.44 2,035.1 138.0 6.78 716.4 47.1 6.57
Securities held to maturity....... 3,683.1 259.3 7.04 2,939.5 179.1 6.09 2,964.1 205.7 6.94
Securities purchased under
agreement to resell.............. -- -- -- 21.7 0.9 4.15 57.5 2.1 3.65
Loans (2) (3)..................... 3,301.8 252.1 7.64 2,922.9 206.5 7.06 2,611.6 207.9 7.96
------- ----- ------- ----- ------- -----
Total interest-earning assets. 8,818.3 $ 647.3 7.34% 8,102.6 $ 533.4 6.58% 6,882.6 $ 486.9 7.08%
----- ---- ----- -----
Other assets...................... 327.2 322.2 464.5
------- ------- -------
$ 9,145.5 $ 8,424.8 $ 7,347.1
======= ======= =======
Liabilities
Deposits:
NOW and money market accounts
(4)............................ $ 835.8 $ 24.5 2.93% $ 1,049.2 $ 25.3 2.41% $ 925.5 $ 23.7 2.56%
Passbook savings deposits....... 350.5 8.1 2.31 411.2 9.8 2.38 326.4 8.6 2.63
Time deposits (4)............... 3,615.7 210.3 5.82 3,552.6 173.6 4.89 3,277.6 192.2 5.86
------- ----- ------- ----- ------- -----
4,802.0 242.9 5.06 5,013.0 208.7 4.16 4,529.5 224.5 4.96
Borrowings:
Securities sold under
agreements to repurchase....... 1,426.1 84.5 5.93 1,193.7 53.3 4.47 1,277.5 47.8 3.74
Advances from FHLB.............. 2,236.9 134.1 5.99 1,579.1 75.8 4.80 706.9 29.4 4.16
Other borrowings............... 47.4 4.9 10.34 90.5 9.8 10.83 185.0 19.7 10.65
------- ----- ------- ----- ------- -----
Total interest-bearing
liabilities.................. 8,512.4 466.4 5.48 7,876.3 347.6 4.41 6,698.9 321.4 4.80
------ ------- ------ ------- ------ -----
Other liabilities 178.9 143.8 299.3
------- ------- -------
8,691.3 8,020.1 6,998.2
Stockholders' equity.............. 454.2 404.7 348.9
------- ------- -------
Total liabilities and
stockholders' equity........... $ 9,145.5 $ 8,424.8 $ 7,347.1
======= ======= =======
Net interest income............... $ 180.9 $ 185.8 $ 165.5
===== ===== =====
Interest rate spread (5).......... 1.86% 2.17% 2.28%
===== ===== =====
Effective net spread (6).......... 2.05% 2.29% 2.40%
===== ===== =====
</TABLE>
(1) The securities available for sale are included in the following table at
historical cost with the corresponding average rate calculated based upon
historical balances.
(2) Average balances include non accrual loans. Interest on such loans is
included in interest income upon receipt.
(3) Interest includes amortization of deferred loan fees.
(4) Includes the effect of interest rate exchange agreements.
(5) Equals average rate earned on all assets minus average rate paid on all
liabilities.
(6) Net interest income divided by average balance of all interest earning
assets.
At December 31, 1995, the weighted average yield on interest-earning assets was
7.53% and the weighted average cost on interest-bearing liabilities was 5.62%.
38
<PAGE>
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 attributable 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>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1995 V. 1994 1994 V. 1993
--------------------------------------- ---------------------------------------
INCREASE INCREASE
(DECREASE) TOTAL (DECREASE) TOTAL
DUE TO INCREASE DUE TO INCREASE
------------------------ ------------------------
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
---------- ---------- ------------ ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans................................... $ 26,763 $ 18,841 $ 45,604 $ 24,776 $ (26,150) $ (1,374)
Securities held for trading............. (6,460) -- (6,460) (13,477) 415 (13,062)
Securities available for sale........... (15,584) 12,534 (3,050) 91,149 (208) 90,941
Securities held to maturity............. 45,560 34,534 80,094 (1,150) (25,388) (26,538)
Securities purchased under
agreements to resell................... (887) -- (887) (1,325) 85 (1,240)
Other earning assets.................... (1,792) 439 (1,353) (5,491) 3,192 (2,299)
------ ---- ------ ------ ------ ------
Total interest income................. $ 47,600 $ 66,348 $ 113,948 $ 94,482 $ (48,054) $ 46,428
------ ------ ------- ------- ------- ------
Interest expense:
Deposits................................ $ (8,427) $ 42,073 $ 33,646 $ 20,561 $ (12,976) $ 7,585
Securities sold under
agreements to repurchase............... 10,378 20,876 31,254 (3,137) 8,654 5,517
Advances from
Federal Home Loan Bank................. 31,582 26,685 58,267 36,335 10,019 46,354
Other borrowings........................ (4,602) (326) (4,928) (9,694) (173) (9,867)
Interest rate exchange agreements....... (1,015) 1,635 620 (6,026) (17,479) (23,505)
------ ----- ------ ------- ------- -------
Total interest expense................ 27,916 90,943 118,859 38,039 (11,955) 26,084
------ ------ ------- ------- ------- -------
Change in net interest income............ $ 19,684 $ (24,595) $ (4,911) $ 56,443 $ (36,099) $ 20,344
====== ======= ====== ======= ======= =======
</TABLE>
39
<PAGE>
PROVISION FOR LOSSES ON LOANS
The provision for losses on loans charged to earnings is based upon management's
judgement of the amount necessary to maintain the allowance for loan losses at
a level adequate to absorb probable losses. As part of the process for
determining the adequacy of the allowance for loan losses, management performs
quarterly detailed reviews to identify risks inherent in the loan portfolio and
to assess the overall quality of the portfolio as well as to determine the
amounts of allowances and provisions to be reported.
The provision for loan losses was $1.2 million for 1995, $12.4 million for 1994
and $706,000 for 1993. During the three month period ended June 30,
1994,Roosevelt recorded an $11.7 million increase in the provision for losses on
loans. After combining the Roosevelt, Farm & Home and Home Federal loan
portfolios which resulted in a combined portfolio approximately five times the
size of Roosevelt's March 31, 1994 portfolio (approximately $650 million to $3.0
billion), management determined it was necessary to substantially increase the
allowance for loan losses to achieve higher and more conservative coverage
levels. Factors considered by management in determining the necessity and amount
of the provision necessary to bring the overall allowance to the desired level
were i) the need to conform Farm & Home's coverage ratio (ratio of allowance for
loan losses to total gross loans) of .24% at December 31, 1993 to that of
Roosevelt's which was .61% at the comparable date, ii) the previously discussed
five fold increase in the size of the overall loan portfolio coupled with the
fact that, at the time, Roosevelt management had no previous track record of
managing a portfolio that size and iii) the Farm & Home and Home Federal mergers
effectively doubled the overall size of the entity resulting in Roosevelt moving
up to a new peer group whose average allowance for loan losses as a percentage
of total loans far exceeded the allowances of the unadjusted combined entity.
Also, since just prior to the merger, both Farm & Home and Roosevelt had
recently been through examinations by the OTS, Roosevelt initiated conversations
with the OTS to obtain their concurrence with the planned addition to the
allowance for loan losses. Such concurrence was received and the resulting $11.4
million provision was recorded.
The provision for 1995 of 1.2 million reflects a more normalized level of
provision compared to the large 1994 provision discussed above. The 1995
provision reflects the Company's strong level of reserves and overall strong
asset quality. See the caption entitled "Asset Quality" under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NONINTEREST INCOME (LOSS)
Noninterest income (loss) was $(26.3) million for 1995 as compared to $(11.2)
million for 1994 and $14.3 million for 1993. The following is a discussion of
the major components of noninterest income (loss):
Retail Banking Fees - Retail banking fees are comprised of service charges
related to deposit accounts (principally returned checks and ATM fees); fees for
money orders, travelers checks, etc. and fees related to the telephone bill
paying service offered to the Bank's depositors. Retail banking fees increased
$2.0 million, or 23.0% from $8.7 million for 1994 to $10.7 million for 1995 as a
result of increases in fees for returned checks and ATM usage driven primarily
by an overall increase in the utilization of the retail banking services offered
by the Bank. Retail banking fees increased $2.4 million, or 38.7% from $6.3
million for 1993 to $8.7 million for 1994. Approximately $2.0 million of this
increase is the result of deposit acquisitions which were integrated in the
later part of 1993 and the acquisition of Home Federal in April 1994. The
remaining increase of approximately $400,000 is attributable to an overall
increase in the utilization of the retail banking services offered by the Bank.
Insurance and Brokerage Sales Commissions - The Bank offers a broad range of
insurance and investment products, including tax deferred annuities, to the
general public and its customers through its wholly owned subsidiary, Roosevelt
Financial Services, Inc. Insurance and brokerage sales commissions increased
$968,000, or 14.8% from $6.5 million in 1994 to $7.5 million for 1995. This
followed an increase of $801,000, or 14.0% from $5.7 million for 1993 to $6.5
million for 1994. The positive trend in insurance and brokerage sales
commissions is primarily the result of an increase in the sales volume of
commission generating products, principally annuities, as the Bank successfully
increases its penetration of its existing customer base as well as attracts new
customers.
Loan Servicing Fees (Expenses), Net - Loan servicing fees, which primarily
consists of loan servicing revenue, net of the amortization of purchased
mortgage servicing rights, increased $1.5 million, or 21.1% from $7.4 million
for 1994 to $8.9 million for 1995. This increase is primarily due to a gain of
$1.5 million in 1995 from the sale of $3.3 million book value of purchased
mortgage servicing rights (underlying mortgage loans had an unpaid principal
balance of approximately $471.0 million). Included in loan servicing fees for
1994 are gains from the sale of loans held for sale of $666,000. The
amortization of purchased mortgage servicing rights totaled $4.2 million and
$5.6 million for 1995 and 1994, respectively. During 1995, the balance of
mortgage loans serviced by Roosevelt for others decreased from approximately
$2.8 billion at December 31, 1994 to $2.0 billion at December 31, 1995. This
decrease resulted from the normal amortization of the principal balance of
mortgage loans outstanding and the sale of purchased mortgage servicing rights
discussed previously. Mortgage servicing operations continue to be an important
component of Roosevelt's operations and are expected to result in increasing
loan servicing fees in the future as a result of the planned acquisition in
early 1996 of several packages of mortgage servicing rights which will add
approximately $2.7 billion of mortgage loans to Roosevelt's servicing portfolio.
Loan servicing fees increased to $7.4 million for 1994 from an expense of $11.1
million in 1993. The loan servicing expense for 1993 resulted from amortization
of purchased mortgage servicing rights totaling $36.2 million due to significant
prepayments of the mortgage loans being serviced. Loan servicing fees included a
gain from loans held for sale of $7.3 million for 1993.
40
<PAGE>
Net Gain (Loss) from Financial Instruments - In the conduct of its business
operations, Roosevelt has determined the need to sell or terminate certain
assets, liabilities or off-balance sheet positions due to various unforeseen
events. Fundamental to the conduct of such sale or termination activities is the
effect such transactions will have on the future volatility of the Company's net
market value. Consequently, in pursuing such sale or termination activities,
Roosevelt does not seek net gains in a reporting period to the detriment of
earnings in future periods. Following is a discussion of the assets, liabilities
and off-balance sheet items that were sold and/ or terminated during 1995, 1994
and 1993.
Net gain (loss) from financial instruments is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1995 1994 1993
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Mortgage-backed securities held to maturity.... $ -- $ (231) $ (663)
Investment securities held to maturity......... -- 209 --
Mortgage-backed securities held for trading.... -- (4,545) 2,668
Mortgage-backed securities available for sale.. 16,547 (17,160) 14,659
Investment securities available for sale....... -- (115) 60
Cancellation cost of interest rate
exchange agreements......................... -- (8,910) (4,496)
Options expense................................ (11,079) (8,368) (1,582)
------- ------- ------
$ 5,468 $(39,120) $10,646
======= ======= ======
</TABLE>
The principal reasons for the net change of approximately $44.6 million between
1995 and 1994 are discussed below. In conjunction with the Company's acquisition
of Farm and Home in 1994, certain fixed-rate mortgage-backed securities
available for sale were sold at a net loss of $25.6 million. During 1995, the
Company sold certain of its adjustable- and fixed-rate mortgage-backed
securities and recognized a net gain of $16.5 million on these sales by taking
advantage of option adjusted spread differentials existing in the market place
at the dates of the respective sales. The principal reasons for the net change
of approximately $49.8 million between 1994 and 1993 are discussed below. 1994
included a net loss of $25.6 million related to portfolio restructuring in
conjunction with the Company's acquisition of Farm & Home as discussed earlier.
During 1993, like 1995, the Company took advantage of the then existing option
adjusted spread differentials to recognize approximately $14.7 million in net
gains from sales from its mortgage-backed securities available for sale
portfolio.
Recognition of Financial Futures Losses - In accordance with the Company's
accounting policy for financial futures contracts discussed in Note 1, the
Company recognized a $34.8 million loss on such contracts during 1995. The loss
was recognized as the Company does not expect to be able to continue to
consistently achieve high correlation as measured using the " cumulative dollar
approach " which has become the accepted accounting practice since Statement of
Financial Accounting Standards No. 80, " Accounting for Futures Contracts," does
not define how correlation is to be measured. The Company believes that the
futures contracts have accomplished their economic risk management objective of
substantially mitigating the interest rate risk of owning mortgage-backed
securities as evidenced by the relatively insignificant size of the Company's
SFAS 115 stockholders' equity component. This charge had no impact upon total
stockholders' equity since both the futures contracts and the related mortgage-
backed securities have been marked to market through stockholders' equity at
each reporting period as required by SFAS 115. Subsequent to year end, the
Company closed out all of its futures positions and maintained its interest rate
risk management position by principally redesignating existing liability
interest rate exchange agreements to the available for sale portfolio.
Unrealized Losses on Impairment of Mortgage-backed Securities - 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
41
<PAGE>
the loans underlying the securities. Effective November 1994, Bank of America
assumed servicing responsibilities from the RTC. Guardian was a niche player in
the California mortgage market whose lending decisions relied more on the value
of the mortgaged property and the borrower's equity in the property and less on
the borrower's income and credit standing. All collateral underlying the
Guardian Securities have the following loan pool characteristics:
. First lien, 30-year, six-month adjustable-rate loans tied to either the
cost of funds index, one-year constant maturity treasury rate, or LIBOR.
. 100% of the loans were originated in California.
. The weighted average loan-to-value ratio at origination was approximately
66%.
Beginning in mid-1993 and continuing currently, the loan pools backing the
securities have been affected by high delinquency and foreclosure rates, and
higher than anticipated losses on the ultimate disposition of real estate
acquired through foreclosure (REO). This has resulted in rating agency
downgrades, principally in April and May, 1994 and again in July and September,
1995 to the current ratings reflected in the tables on page 44 and substantial
deterioration in the amount of the loss absorption capacity provided by the
subordinated classes.
At December 31, 1994 and March 31, 1995, the Guardian securities owned by the
Company were performing according to their contractual terms, and all realized
losses from the disposition of REO were being absorbed by the subordinate
classes (or in the case of Pool 1990-7 at March 31, 1995, by unamortized
purchase discounts). However, to the extent that subsequent to March 31, 1995,
the pools continue to realize losses on the disposition of REO at levels
comparable to the then current rate, the remaining balances of the subordinate
classes may not be adequate to protect the Company from incurring some credit
losses on certain of its ten pools. As a result of this deterioration and the
continuing receipt of subsequent information, the Company 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 at
December 31, 1995 in the Guardian Securities is approximately $70.8 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............................................. (15.1)
Desecuritization of Guardian Pool 1990-9 (see discussion below)............. (33.6)
-----
Investment in Guardian Securities, December 31, 1995........................ $ 70.8
=====
</TABLE>
Subsequent to March 31, 1995, the date of the impairment charge, through
December 31, 1995 the following events have occurred with respect to the
Guardian Securities and Lehman 91-4.
. During the quarter ended June 30, 1995, the Company completed its
planned desecuritization of Guardian Pool 1990-9 and has assumed
servicing of the underlying whole loans and REO properties received
through the
42
<PAGE>
desecuritization. As a result of this process, $1.1 million
representing principal, interest and servicing related funds advanced
by previous servicers to certificate holders on properties which were
in REO at the time of the desecuritization was reimbursed to the
servicer, $28.8 million was transferred to mortgage loans and $2.7
million (net of $4.9 million of charge-offs discussed below) was
transferred to residential REO. REO properties and properties in
foreclosure were written down $4.9 million to their estimated fair
values by charges to existing unallocated REO reserves ($1.4 million)
and loan loss reserves ($1.8 million) and to existing unamortized
purchase discounts ($1.7 million).
. As expected, there were several additional rating agency downgrades,
principally related to those Guardian pools that are no longer
protected by remaining credit enhancement and which had been
determined to be other than temporarily impaired and written down to
estimated fair value by the Company during the quarter ended March 31,
1995.
. As expected, based on the low levels remaining at March 31, 1995, the
subordination protection related to Guardian Pools 1990-2, 1990-4 and
1990-5 was fully absorbed.
. The remaining four pools (Guardian 89-11, 90-1, 90-8 and Lehman 91-4),
determined at March 31, 1995 to be other than temporarily impaired and
written down to estimated fair value, continue to perform according to
their contractual terms and are protected by remaining subordination
ranging from 3.79% to 11.66% of the remaining unpaid principal
balances of the pools. Such remaining subordination percentages
compare to original subordination percentages ranging from 8.50% to
23.00%.
. The two remaining Guardian pools (89-10 and 91-2), which are not
considered to be other than temporarily impaired, continue to perform
according to their contractual terms and are protected by remaining
subordination of 14.32% and 22.53%, respectively. These remaining
subordination levels compare to 8.50% and 17.00%, respectively, at the
date of issuance of the securities.
. In excess of $15.0 million in net principal payments have been
received since March 31, 1995.
Accordingly, at December 31, 1995, management continues to believe that the
recorded investment in the above mentioned Guardian and Lehman pools is
recoverable.
43
<PAGE>
Presented below is information at December 31, 1995 relating to Roosevelt's
investment in the Guardian pools, segregated between the seven pools determined
to be other than temporarily impaired and the two pools which, in the opinion of
management, continue to be adequately protected from loss through substantial
remaining subordination. The immediately succeeding table also includes
information related to Lehman 91-4 which has been determined to be other than
temporarily impaired.
POOLS DETERMINED TO BE OTHER THAN TEMPORARILY IMPAIRED
------------------------------------------------------
December 31, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Subordination As a Regarding Roosevelt's Interests Percent of Pools
------------------------------------
Pool Issue Rating Percent of Pool Balance Original Par Remaining Remaining Current or Less Than
------------------------- -----------------------
Number Date Agency At Issue Current At Issue Current At Issue Par Investment 90 Days Delinquent
- ------ ---- ------ -------- ------- -------- ------- -------- --- ---------- ------------------
GUARDIAN POOLS
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
89-11 11/30/89 S & P AA CCC 8.50% 11.66% $33,750 $ 8,494 $ 6,547 76%
Moody Aa2 B1
90-1 1/30/90 S & P AA CC 8.50% 3.79% 3,000 828 622 73%
Moody Aa2 B3
90-2 2/27/90 S & P AA D 8.50% -- 27,500 7,175 5,059 73%
Moody Aa2 Caa
90-4 4/30/90 S & P AA D 8.75% -- 46,428 14,133 10,459 68%
Moody Aa2 Caa
90-5 5/31/90 S & P AA D 8.75% -- 45,000 15,174 11,892 74%
Moody Aa2 Caa
90-7 7/25/90 S & P AA D 8.75% -- 68,025 22,035 16,018 71%
Moody Aa2 Caa
90-8 9/21/90 S & P AAA CCC 14.00% 9.86% 15,000 5,091 3,924 68%
------ ----- -----
Moody Aaa B3
Total Guardian $238,703 $72,930 $54,521
======== ======= =======
LEHMAN POOL
- -----------
91-4 7/30/91 S & P AA CCC 23.00% 3.44% $14,000 $10,404 $ 5,548 76%
======= ======= =======
Moody Aa3 Caa
</TABLE>
GUARDIAN POOLS DETERMINED TO BE ADEQUATELY PROTECTED BY REMAINING CREDIT
------------------------------------------------------------------------
ENHANCEMENT
-----------
December 31, 1995
(dollars in thousands)
<TABLE>
<CAPTION>
Subordination As a Regarding Roosevelt's Interests Percent of Pools
----------------------------------
Pool Issue Rating Percent of Pool Balance Original 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% 14.32% $ 9,000 $ 1,765 $ 1,784 71%
Moody Aa2 Ba3
91-2 3/28/91 S & P AA BBB 17.00% 22.53% 39,831 14,527 $14,526 71%
------ ------ -------
Moody Aaa Baa3
Totals $48,831 $16,292 $16,310
======= ======= =======
</TABLE>
44
<PAGE>
NONINTEREST EXPENSE
General and Administrative - General and administrative expense decreased $23.3
million, or 21.0% to $87.7 million for 1995 as compared to $111.0 million for
1994. The major reasons for the decrease in 1995 are due to 1994 including
$19.8 million of merger-related costs and the fact that 1995 general and
administrative expense was also positively impacted by efficiencies totaling
$6.3 million realized as a result of the Farm & Home merger. The merger
expenses related primarily to $5.2 million in severance expense (included in
"Compensation and employee benefits"), $5.3 million in costs to dispose of
excess facilities incident to the acquisition of Farm & Home (included in
"Occupancy") and $9.3 million of transaction costs (included in "Other").
General and administrative expense increased $19.9 million, or 21.8% to $111.0
million for 1994 as compared to $91.1 million for 1993. As discussed
previously, 1994 was negatively impacted by $19.8 million of merger related
expenses a result of the acquisition of Farm & Home. The increase in expenses
during 1994 due to the increased volume of savings transactions which were
integrated during late 1993 and in the Home Federal acquisition were offset by
efficiencies achieved as a result of cost savings subsequent to the acquisition
of Farm & Home.
Provision for Real Estate Losses - Provisions for real estate losses totaled
$4.6 million and $4.2 million for 1994 and 1993, respectively. During 1994, in
connection with the acquisition of Farm & Home, a provision of $3.7 million was
established. This provision represented a 25% reduction in net carrying value
of REO to accommodate a change in strategy whereby Roosevelt would accelerate
the disposition of Farm & Home's real estate portfolio. Additionally, during
1994, a $839,000 provision was recorded related to six non-residential real
estate properties. The 1993 provision for real estate losses includes $2.8
million recorded for specific losses on 11 non-residential properties located in
Texas and $1.4 million to increase the general valuation allowance on certain
real estate owned.
Litigation Settlements - During 1993, a $3.3 million charge was recorded related
to the execution of a settlement agreement of a lawsuit originally filed against
Farm & Home in 1989. Roosevelt, under the name of Farm & Home, reached a
settlement agreement with its insurance carriers regarding insurance coverage
for various claims and lawsuits arising from participation in the development of
the Southbend Subdivision. See Item 3. "Legal Proceedings".
INCOME TAXES
Income taxes include Federal income taxes and applicable state income taxes.
Roosevelt's effective tax rates were 31.4%, 32.3% and 33.7% for 1995, 1994 and
1993, respectively. The principal reasons for the Company's effective tax rate
being below the statutory rate for each year are the resolution of Federal tax
issues after completion of examinations by the Internal Revenue Service.
EXTRAORDINARY ITEMS
Roosevelt recorded losses on extraordinary items of $7.8 million and $1.9
million, net of income taxes, for 1994 and 1993, respectively. The $7.8 million
loss for 1994 was the result of three transactions. First, Roosevelt recorded a
loss totaling $4.6 million relating to the retirement of the 10.125% mortgage-
backed bonds. Second, Roosevelt recorded a loss totaling $2.6 million relating
to the retirement of the 13.0% subordinated debentures previously issued by Farm
& Home. Third, Roosevelt recorded a loss totaling $637,000 relating to the
prepayment of advances from FHLB of Des Moines originally entered into by Farm &
Home.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
Farm & Home adopted the provisions of SFAS 115 on January 1, 1994. Such
adoption by Farm & Home resulted in a pretax charge to operations of $9.8
million to reflect the other than temporary impairment of certain interest-only
stripped mortgage-backed pass-through certificates and collateralized mortgage
obligation residual interests. As Roosevelt had adopted SFAS 115 at December
31, 1993, the $6.5 million net of tax charge by Farm & Home was recorded as a
cumulative effect of a change in accounting principle, and reflected in the
consolidated statement of operations of Roosevelt for 1993.
FINANCIAL CONDITION
Total assets increased $581.2 million or 6.9% to $9.0 billion at December
31,1995 from $8.4 billion at December 31,1994. The major source of such increase
was loans which increased $505.7 million. During 1995, the Company focused on
increasing loans by originating approximately $688.6 million and purchasing
$321.1 million in loans. Acquisitions during 1995 also added approximately
$150.3 million in loans. These increases were offset by principal repayments
totaling $699.3 million. The originations and purchases during 1995 were
primarily adjustable-rate loans. Securities available for sale decreased $159.2
million due to sales and principal repayments of such securities exceeding
purchases. Securities held to maturity increased
45
<PAGE>
$274.1 million during 1995 as the Company was able to grow this portfolio and
achieve desirable yields on such growth. Purchases in this portfolio were also
primarily adjustable-rate securities.
Total liabilities increased $525.9 million or 6.6% to $8.5 billion at December
31, 1995 from $8.0 billion at December 31, 1994. Deposits increased $8.1 million
during 1995. Deposits acquired through acquisitions during 1995 totaling $182.6
million and interest credited totaling $172.8 million were almost totally offset
by net withdrawals of $346.6 million. The principal reasons for the net
withdrawals were Roosevelt's strategy of conservatively pricing most deposits to
better control Roosevelt's cost of funds and a general trend in the industry of
deposit outflows caused by depositors seeking improved yields in a relatively
low interest rate environment. Securities sold under agreements to repurchase
decreased $125.3 million during 1995 as a result of the Company being able to
obtain lower funding costs from FHLB advances which increased $669.2 million
during 1995. Such increase funded the asset growth of the Company during 1995.
46
<PAGE>
ASSET QUALITY
Maintaining a low level of nonperforming assets is critical to the success of a
financial institution. As the percentage of assets that are classified as
nonperforming assets changes, so do expectations regarding interest income,
potential provisions for losses and operating expenses incurred to manage and
resolve these assets.
The following table sets forth the amounts and categories of nonperforming
assets. Loans are placed on nonaccrual 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 of these
securities (approximately 74% of the unpaid principal balances at December 31,
1995) in this table when the credit enhancement, in the form of subordination,
is exhausted even though a substantial portion of the underlying loans
(approximately 71% at December 31, 1995) 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>
DECEMBER 31,
------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(dollars in thousands)
Nonperforming Assets
<S> <C> <C> <C> <C> <C>
Nonaccruing loans:
Residential........................... $ 7,895 $ 5,666 $ 9,524 $ 12,249 $ 13,006
Commercial real estate................ 1,415 1,626 985 7,988 2,471
Consumer.............................. 193 269 217 217 278
------ ------ ------ ------ ------
Total............................. 9,503 7,561 10,726 20,454 15,755
------ ------ ------ ------ ------
Accruing loans delinquent more
than 90 days:
Residential........................... 10,500 4,598 4,056 2,110 2,115
Commercial real estate................ -- 482 -- -- --
Consumer.............................. -- -- -- 4 14
Land.................................. -- -- 360 394 141
------ ------ ------ ------ ------
Total............................. 10,500 5,080 4,416 2,508 2,270
------ ------ ------ ------ ------
Troubled-debt restructurings:
Commercial real estate................ 661 2,757 2,127 1,363 1,288
------ ------ ------ ------ ------
Foreclosed/Repossessed assets:
Residential........................... 5,340 2,703 1,373 2,049 4,690
Commercial real estate................ 11,483 16,085 15,998 20,500 26,320
Consumer.............................. 11 -- -- 16 43
------ ------ ------ ------ ------
Total............................. 16,834 18,788 17,371 22,565 31,053
------ ------ ------ ------ ------
Total nonperforming
loans and REO................... 37,498 34,186 34,640 46,890 50,366
Total nonperforming loans
and REO as a percentage
of total assets................. .42% .41% .46% .78% .89%
====== ====== ====== ====== ======
Other than temporarily impaired
mortgage-backed securities with
approximately 71% of the underlying
loans either current or less
than 90 days delinquent................ 43,429 -- -- -- --
------ ------ ------ ------ ------
Total "nonperforming assets"............ $80,927 $34,186 $34,640 $ 46,890 $ 50,366
====== ====== ====== ====== ======
Total "nonperforming assets"
as a percentage of total assets........ .90% .41% .46% .78% .89%
====== ====== ====== ====== ======
</TABLE>
Nonperforming assets have increased $46.7 million to $80.9 million at December
31, 1995 as compared to $34.2 millon at December 31, 1994. The overall increase
in non-performing assets is due primarily to the inclusion in the table of $43.4
million of "other than temporarily impaired" private issuer mortgage-backed
securities where the Company's credit
47
<PAGE>
enhancement has been fully absorbed. Non-accruing residential loans increased
$1.4 million, accruing residential loans delinquent more than 90 days increased
$3.3 million and foreclosed residential real estate assets increased $589,000 as
a result of the desecuritization (and related transfer of servicing of the
underlying collateral) of a private issuer mortgage-backed security pool
completed in the quarter ended June 30, 1995. See the caption entitled
"Unrealized Losses on Impairment of Mortgage-Backed Securities Held to Maturity"
under the heading "Results of Operations" for further details. In addition to
the impact of the desecuritization of the private issuer mortgage-backed
security pool, non-accruing residential loans, accruing residential loans
delinquent more than 90 days and residential foreclosed assets increased
$801,000, $2.6 million and $2.0 million, respectively during 1995. Such
increases are due primarily to a larger loan portfolio and are not considered
trends in the loan portfolio. Commercial real estate troubled debt
restructurings decreased $2.1 million as a result of the repayment of the
outstanding principal on a loan secured by a nursing home. Commercial real
estate foreclosed assets decreased $4.6 million primarily as a result of sales
of the properties during 1995.
Not included in the preceding table are certain pools of private issuer
mortgage-backed securities with a carrying value of $16.6 million which were
performing according to their contractual terms at December 31,1995. 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 reduced to the point where the Company
concluded it was not probable that the securities would 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 amount of currently performing, other
than temporarily impaired mortgage-backed securities at March 31, 1995 to such
amount at December 31, 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.............................................. (6.4)
Addition of Guardian Pools 1990-2, 1990-4 and 1990-5 to the nonperforming
asset table as subordination protection was absorbed
between March 31, 1995 and December 31, 1995............................. (29.4)
Amount of currently performing, other than temporarily impaired -----
mortgage-backed securities at December 31, 1995.......................... $ 16.6
=====
</TABLE>
To monitor the credit risk inherent in its private issuer mortgage-backed
security portfolio, the Company tracks the major factors effecting the
performance of its portfolio 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 and iii) the rating assigned to each
security by independent national rating agencies.
ASSET/LIABILITY MANAGEMENT
The Company's primary objective regarding asset/liability management is to
position the Company such that changes in interest rates do not have a material
adverse impact upon net interest income or the net market value of the Company.
See Note 3 - Fair Value Consolidated Balance Sheets of the Notes to Consolidated
Financial Statements for additional information regarding the calculation of net
market value. The Company's primary strategy for accomplishing its
asset/liability management objective is achieved by matching the weighted
average maturities of assets, liabilities, and off-balance sheet items (duration
matching). Integral to the duration matching strategy is the use of derivative
financial instruments such as interest rate exchange agreements, interest rate
cap and floor agreements and, to a much more limited extent, financial futures
contracts. The Company uses derivative financial instruments solely for risk
management purposes. None of the Company's derivative instruments are what are
termed leveraged instruments. These types of instruments are riskier than the
derivatives used by the Company in that they have embedded options that enhance
their performance in certain circumstances but dramatically reduce their
performance in other circumstances. The Company is not a dealer nor does it make
a market in such instruments. The Company does not trade the instruments and
the Board of Directors' approved policy governing the Company's use of these
instruments strictly forbids speculation of any kind.
Net market value is calculated by adjusting stockholders' equity for differences
between the estimated fair values and the
48
<PAGE>
carrying values (historical cost basis) of the Company's assets, liabilities,
and off-balance sheet items. Net market value, as calculated by the Company and
presented herein, should not be confused with the value of the Company's stock
or of the amounts distributable to stockholders in connection with a sale of the
Company or in the unlikely event of its liquidation. The economic net market
value (including the estimated value of demand deposits) as calculated by the
Company increased to approximately $481.5 million at December 31, 1995 as
compared to approximately $404.0 million at December 31, 1994. To measure the
impact of interest rate changes, the Company recalculates its net market value
on a pro forma basis assuming instantaneous, permanent parallel shifts in the
yield curve, in varying amounts both upward and downward. Larger increases or
decreases in the Company's net market value as a result of these assumed
interest rate changes indicate greater levels of interest rate sensitivity than
do smaller increases or decreases in net market value. The Company endeavors to
maintain a position whereby it experiences no material change in net market
value as a result of assumed 100 and 200 basis point increases and decreases in
general levels of interest rates.
The 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 flow from the institution's assets,
liabilities, and off-balance sheet contracts. Under the OTS regulation, an
institution's "normal" level of interest rate risk in the event of this assumed
change in interest rates is a decrease in the institution's net portfolio value
in an amount not exceeding two percent of the present value of its assets. 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 recently announced that it will delay the effectiveness of the
regulation until it adopts the process by which an association may appeal an
interest rate risk capital deduction determination.
Utilizing this measurement concept, the interest rate risk of the Company at
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Basis point changes in interest rates.............. -200 -100 +100 +200
Change in net market value due to changes in
interest rates (Company methodology)............. $ (12,070) $(6,306) $(10,714) $ (40,127)
Interest rate exposure deemed "normal" by the OTS.. $(180,261) N/A N/A $(180,261)
</TABLE>
The Company's operating strategy is designed to avoid material negative changes
in net market value. As of December 31, 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 unrealized market value 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
primarily to borrowers prepaying their loans resulting in the Company's assets
repricing down more quickly than the Company can reprice its liabilities.
49
<PAGE>
MATURITY GAP ANALYSIS
Thrift institutions have historically presented a Gap Table as a measure of
interest rate risk. The Gap Table presents the projected maturities and periods
to repricing of a thrift's rate sensitive assets and liabilities. The OTS has
concluded such an analysis has limitations, however, for reasons of consistency
the following discussion presents the Company's traditional Maturity Gap
Analysis.
The Company's one year cumulative gap, which represents the difference between
the amount of interest sensitive assets maturing or repricing in one year and
the amount of interest sensitive liabilities maturing or repricing in the same
period was (0.50)% at December 31, 1995. A negative cumulative gap indicates
that interest sensitive liabilities exceed interest sensitive assets at a
specific date. In a rising interest rate environment institutions with negative
maturity gaps generally will experience a more rapid increase in interest
expense paid on liabilities than the interest income earned on assets.
Conversely, in an environment of falling interest rates, interest expense paid
on liabilities will generally decrease more rapidly than the interest income
earned on assets. A positive gap will have the opposite effect.
The following table presents the projected maturities and periods to repricing
of the Company's rate sensitive assets and liabilities as of December 31, 1995,
adjusted to account for anticipated prepayments.
<TABLE>
<CAPTION>
OVER 3 OVER 1 OVER 3
MONTHS YEAR YEARS
UP TO 3 THROUGH THROUGH THROUGH OVER
MONTHS 1 YEAR 3 YEARS 5 YEARS 5 YEARS TOTAL
---------- ---------- ---------- ---------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Mortgage loans and mortgage-backed
securities:
Balloon and adjustable rate first
mortgage loans...................... $2,572,916 $2,477,196 $ 603,266 $186,788 $ 27,509 $5,867,675
One to four family residential first
mortgages and contracts............. 303,270 254,786 700,181 398,074 579,684 2,235,995
Five or more family residential and
nonresidential first mortgages and
contracts........................... 68,069 20,558 34,770 13,697 9,961 147,055
Second mortgages..................... 165 128 265 68 18 644
Non-mortgage loans:
Consumer............................. 80,726 10,595 22,513 6,386 2,358 122,578
Commercial........................... 2,092 657 260 46 -- 3,055
Investments and interest bearing
deposits............................ 266,705 5,696 4,836 2,009 12,935 292,181
Premiums (discounts) and deferred
loan fees, net....................... 16,100 7,872 9,314 4,277 20,585 58,148
---------- ---------- ---------- -------- -------- ----------
Total rate sensitive assets........... 3,310,043 2,777,488 1,375,405 611,345 653,050 8,727,331
---------- ---------- ---------- -------- -------- ----------
LIABILITIES:
Fixed maturity deposits............ 620,344 1,584,419 989,452 398,472 87,228 3,679,915
NOW, Super NOW, and other
transaction accounts.............. 35,344 31,810 57,257 45,806 183,223 353,440
Money market deposit accounts...... 544,872 -- -- -- -- 544,872
Passbook accounts.................. 32,927 29,634 53,342 42,673 170,694 329,270
FHLB advances...................... 1,899,950 361,932 113,256 -- 2,000 2,377,138
Other borrowings................... 986,064 96,750 -- -- 47,523 1,130,337
---------- ---------- ---------- -------- -------- ----------
Total rate sensitive liabilities...... 4,119,501 2,104,545 1,213,307 486,951 490,668 8,414,972
Effect of interest rate exchange
agreements on rate sensitive
liabilities.......................... (101,000) 10,000 (40,000) 210,000 (79,000) --
---------- ---------- ---------- -------- -------- ----------
Total rate sensitive liabilities
adjusted for impact of interest
rate exchange agreements............. 4,018,501 2,114,545 1,173,307 696,951 411,668 8,414,472
---------- ---------- ---------- -------- -------- ----------
Maturity gap.......................... $ (708,458) $ (662,943) $ 202,098 $ (85,606) $ 241,382 $ 312,359
======== ======== ======= ======= ======= =======
Gap as a percent of total assets...... (7.86)% 7.36% 2.24% (.95)% 2.68%
====== ==== ==== ===== ====
Cumulative maturity gap............... $ (708,458) $ (45,515) $ 156,583 $ 70,977 $ 312,359
======== ======= ======= ====== =======
Cumulative gap as a percent of
total assets......................... (7.86)% (.50)% 1.74% .79% 3.47%
====== ===== ==== === ====
</TABLE>
50
<PAGE>
In preparing the table above, it has been assumed that (i) balloon and
adjustable-rate first mortgage loans will prepay at a rate of 18% per year, (ii)
fixed-rate first mortgage loans on residential properties of five or more units
and nonresidential properties will prepay at a rate of 10% per year, (iii) fixed
maturity deposits will not be withdrawn prior to maturity, (iv) passbook and NOW
accounts will be withdrawn at a rate of approximately 10% in each of the first
two periods and at other assumed rates ranging from 20% to 100% thereafter, (v)
fixed-rate mortgage loans on one- to four-family residences with terms to
maturity of 10 years or less will prepay at a rate of 20% per year, (vi) second
mortgage loans on one- to four-family residences will prepay at a rate of 30%
per year, and (vii) fixed-rate first mortgage loans on one- to four-family
residential properties with remaining terms to maturity of over 10 years will
prepay annually as follows:
<TABLE>
<CAPTION>
MORTGAGE LOAN PREPAYMENT ASSUMPTIONS
-------------------------------------------------
INTEREST RATE OVER 10 TO 20 YEARS 20 YEARS AND OVER
- ------------- ------------------------- ----------------------
<S> <C> <C>
Less than 8%................. 20.00 20.00
8 to 10%..................... 24.00 24.00
10 to 12%.................... 23.00 23.00
12 to 14%.................... 23.00 23.00
14 to 16%.................... 23.00 23.00
16% and over................. 23.00 23.00
</TABLE>
The above assumptions do not necessarily indicate the impact of general interest
rate movements. Accordingly, certain assets and liabilities indicated as
repricing within a stated period may in fact reprice at different times and at
different rate levels.
The amounts in the table could be significantly effected by external factors,
such as prepayment rates other than those assumed, early withdrawals of
deposits, changes in the correlation of various interest-bearing instruments,
and competition. Additionally, decisions by the Company to sell assets, retire
debt, or cancel interest rate exchange arrangements early would also change the
maturity/repricing and spread relationships.
LIQUIDITY AND CAPITAL RESOURCES
OTS regulations require federally insured savings institutions to maintain a
specified ratio (presently 5.0%) of cash and short-term United States
Government, government agency, and other specified securities to net
withdrawable accounts and borrowings due within one year. The Company has
maintained liquidity in excess of required amounts having had ratios of 5.64%,
5.91%, and 6.04% at December 31, 1995, 1994, and 1993, respectively.
The Company's cash flows are comprised of cash flows from operating, investing
and financing activities. Cash flows provided by operating activities,
consisting primarily of interest received on investments (principally loans and
mortgage-backed securities) less interest paid on deposits and other short-term
borrowings, were $112.6 million for the year ended December 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
$453.0 million for the year ended December 31, 1995. Net cash related to
financing activities, consisting of proceeds, net of repayments, from FHLB
advances, proceeds from securities sold under agreements to repurchase and
excess of savings deposits withdrawals over receipts, provided $333.7 million
for the year ended December 31, 1995.
At December 31, 1995, the Company had commitments outstanding to originate
fixed-rate mortgage loans of approximately $54.0 million and adjustable-rate
mortgages of approximately $45.5 million. At December 31, 1995, the Company had
outstanding commitments to purchase adjustable-rate mortgage loans of
approximately $123.3 million. At December 31, 1995, the Company had outstanding
commitments to purchase and sell mortgage-backed securities of approximately
$329.1 million and $178.9 million, respectively. The Company expects to satisfy
such commitments through its primary source of funds.
OTS regulations impose various restrictions or requirements on associations with
respect to their ability to pay dividends or make other distributions of
capital. The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers,
interest payments on certain convertible debt, and other transactions charged to
the capital account. Tier 1 associations, which are associations that before
and after the proposed distribution meet or exceed their fully phased-in capital
requirements, may make capital distributions during any calendar year up to the
greater of 100% of net income for the year-to-
51
<PAGE>
date plus 50% of the amount by which the lesser of the association's tangible,
core, or total capital exceeds its fully phased-in capital requirement, as
measured at the beginning of the calendar year. As of December 31, 1995, the
Bank's excess capital over its fully phased-in core capital requirement was
approximately $206.1 million. The Company is also subject to Delaware law which
limits dividends to an amount equal to the excess of a corporation's net assets
over paid-in capital or, if there is no excess, to its net profits for the
current and immediately preceding fiscal year. See "Regulation -- Limitations
on Dividends and Other Capital Distributions."
Certain liquidity risks are inherent in asset/liability management. Such risks
include, among others, changes in interest rates, which can cause margin calls
or collateral calls on reverse repurchase agreements and mortgage-backed bonds,
respectively, as a result of changes in the value of collateral, and timing
delays when the receipt of interest, principal or repayments on loans and
mortgage-backed securities does not correspond with the timing of the funding of
the related liability. The Company has implemented policies through which it
endeavors to manage these liquidity risks. Liquidity is maintained at levels
which exceed the amounts required for regulatory purposes. In addition, a
majority of the mortgage-backed bonds issued by the Company utilize a defeasance
structure. This feature reduces and stabilizes the amount of collateral that
the Company is required to maintain as security for the bonds.
IMPACT OF INFLATION AND CHANGING PRICES
Unlike most industrial companies, virtually all of the assets and liabilities of
a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than do
the general levels of inflation. Interest rates do not necessarily move in the
same direction or in the same magnitude as the price of goods and services. In
the current interest rate environment, liquidity and the maturity structure of
the Company's assets and liabilities are critical to the maintenance of
acceptable performance levels.
The consolidated financial statements and related financial data presented
herein have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in the
relative purchasing power over time due to inflation.
ACCOUNTING AND REGULATORY DEVELOPMENTS
During October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123," Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans and also applies
to transactions in which an entity issues its equity instruments to acquire
goods or services from nonemployees. SFAS 123 defines a fair value-based method
of accounting for an employee stock option or similar equity instruments and
encourages all entities to adopt that method of accounting. However, it also
allows an entity to continue to measure compensation cost for those plans using
the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). SFAS 123 is effective for transactions entered into in fiscal years
beginning after December 15, 1995. Pro forma disclosures required for entities
that elect to continue to measure compensation cost using APB 25 must include
the effect of all awards granted in fiscal years that begin after December 15,
1994. Roosevelt plans to continue to measure compensation cost using APB 25,
therefore the adoption of SFAS No. 123 will not have any impact on the Company's
financial condition or results of operations.
During May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS 122 requires
that an institution which sells or securitizes loans it has originated or
purchased and maintains the servicing rights to capitalize the cost of the
rights to service such loans. As the Company is not currently selling or
securitizing any loans that is 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. SFAS No. 122 should be applied prospectively for fiscal years beginning
after December 15, 1995. The Company anticipates adopting SFAS No. 122 on
January 1, 1996. When adopted, the Company does not anticipate that this
provision will have a significant impact on its financial statements.
During March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS 121). SFAS 121 provides guidance for the
recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles, and goodwill related both to assets to be held and
used and assets to be disposed of. SFAS 121 requires entities to perform
separate calculations for assets
52
<PAGE>
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 a significant impact on its financial
statements.
The deposits of the Bank are presently insured by the Savings Association
Insurance Fund (SAIF) and the Bank Insurance Fund (BIF), which 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
former range of.23% to .31% of deposits for both BIF and SAIF insured
institutions) in anticipation of the BIF achieving its statutory reserve ratio.
The lower premiums for BIF members became effective during the third quarter of
1995 after FDIC verification that the BIF achieved the statutory reserve ratio
on March 31, 1995. As a result, BIF members generally will pay lower premiums
than the SAIF members. 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. Proposed legislation under consideration by
the United States Congress provides for a one-time assessment to be imposed on
all deposits assessed at the SAIF rates, as of March 31, 1995, in order to
recapitalize the SAIF and eliminate the disparity. The BIF and SAIF would be
merged into one fund as soon as practicable but no later than January 1, 1998.
The special assessment rate is anticipated to range from .80% to .90%. Based on
the Bank's level of SAIF deposits at March 31, 1995 (including the effect of the
acquisition of Washington Savings Bank and Kirksville Federal Savings Bank), and
assuming a special assessment of .90%, the Bank's assessment would be
approximately $37.2 million on a pre-tax basis. If the legislation is enacted,
as to which there can be no assurance, it is anticipated the assessment would be
payable in 1996. Accordingly, this special assessment would significantly
increase non-interest expense and adversely effect Roosevelt Bank's results of
operations. Conversely, depending upon the Bank's capital level and supervisory
rating, and assuming, although there can be no assurance, that the insurance
premium levels for BIF and SAIF members are again equalized, deposit insurance
premiums could decrease significantly for future periods. Effective January,
1996 the BIF premium structure was further revised to provide a range of .04% to
.27%, with a minimum annual assessment of $2,000.
53
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTERS ENDED IN 1995
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- --------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total interest income.............................. $ 156,553 $ 162,665 $ 163,429 $ 164,669
Total interest expense............................. 108,123 116,893 120,700 120,717
------- ------- ------- -------
Net interest income............................... 48,430 45,772 42,729 43,952
Provision for losses on loans...................... (300) (300) (300) (300)
Noninterest income (loss) excluding
net gain (loss) from financial instruments........ (19,480) 7,443 8,872 (28,586)
Net gain (loss) from financial instruments......... 1,508 911 934 2,115
Noninterest expense................................ (21,493) (21,740) (20,875) (23,558)
Income (loss) before income tax expense
and extraordinary item............................ 8,665 32,086 31,360 (6,377)
Income tax expense (benefit)....................... 2,978 11,027 10,610 (3,999)
------- ------- ------- -------
Net income (loss).................................. $ 5,687 $ 21,059 $ 20,750 $ (2,378)
======= ======= ======= =======
Net income (loss) attributable to common stock..... $ 4,615 $ 20,002 $ 19,693 $ (3,435)
======= ======= ======= =======
Primary earnings (loss) per share.................. $ 0.12 $ 0.49 $ 0.48 $ (0.08)
======= ======= ======= =======
Fully-diluted earnings (loss) per share............ $ 0.12 $ 0.46 $ 0.46 $ (0.08)
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED IN 1994
----------------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total interest income.............................. $ 120,246 $129,997 $ 138,305 $ 144,820
Total interest expense............................. 76,705 82,879 90,712 97,278
------- ------- ------- -------
Net interest income............................... 43,541 47,118 47,593 47,542
Provision for losses on loans...................... (150) (11,682) (300) (300)
Noninterest income excluding net gain (loss) from
financial instruments............................. 5,559 7,612 7,249 7,496
Net gain (loss) from financial instruments......... (867) (38,364) 128 (17)
Noninterest expense................................ (23,634) (45,711) (20,731) (20,919)
Provision for real estate losses................... (839) (3,742) -- --
------- ------- ------- -------
Income (loss) before income tax expense
and extraordinary item............................ 23,610 (44,769) 33,939 33,802
Income tax expense (benefit)....................... 8,129 (14,943) 11,523 10,317
------- ------ ------- -------
Income (loss) before extraordinary item............ 15,481 (29,826) 22,416 23,485
Extraordinary item................................. -- (7,849) -- --
------- ------ ------- -------
Net income (loss).................................. $ 15,481 $(37,675) $ 22,416 $ 23,485
======= ====== ======= =======
Net income (loss) attributable to common stock..... $ 14,282 $(38,578) $ 21,474 $ 22,414
======= ====== ======= =======
Primary earnings per share:
Income (loss) before extraordinary item........... $ 0.44 $ (0.70) $ 0.54 $ 0.55
Extraordinary item................................ -- (0.18) -- --
------- ------ ------- -------
Net income (loss)................................ $ 0.44 $ (0.88) $ 0.54 $ 0.55
======= ====== ======= =======
Fully-diluted earnings per share:
Income (loss) before extraordinary item........... $ 0.38 $ (0.70) $ 0.50 $ 0.52
Extraordinary item................................ -- (0.18) -- --
------- ------ ------- -------
Net income (loss)................................ $ 0.38 $ (0.88) $ 0.50 $ 0.52
======= ====== ======= =======
</TABLE>
54
<PAGE>
See discussion of impairment charge on certain mortgage-backed securities during
the quarter ended March 31, 1995 and the recognition of financial futures losses
during the quarter ended December 31, 1995 in "Management's Discussion and
Analysis -Results of Operations."
See discussion of the merger-related expenses recorded during the quarter ended
June 30, 1994 in connection with the Farm & Home acquisition in "Management's
Discussion And Analysis -- Results of Operations."
55
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Roosevelt Financial Group, Inc.
Chesterfield, Missouri:
We have audited the accompanying consolidated balance sheets of Roosevelt
Financial Group, Inc. and subsidiaries (the Company) as of December 31, 1995 and
1994, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Roosevelt Financial
Group, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 5 to the consolidated financial statements, as of
December 31, 1993, the Company changed its method of accounting for certain
investments in debt securities to conform with the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
We have also audited, in accordance with generally accepted auditing standards,
the supplemental fair value consolidated balance sheets of the Company as of
December 31, 1995 and 1994. As described in Note 3, the supplemental fair value
consolidated balance sheets have been prepared by management to present relevant
financial information that is not provided by the historical cost consolidated
balance sheets and is not intended to be a presentation in conformity with
generally accepted accounting principles. In addition, the supplemental fair
value consolidated balance sheets do not purport to present the net realizable,
liquidation, or market value of the Company as a whole. Furthermore, amounts
ultimately realized by the Company from the disposal of assets may vary
significantly from the fair values presented. In our opinion, the supplemental
fair value consolidated balance sheets referred to above present fairly, in all
material respects, the information set forth therein.
/S/KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
St. Louis, Missouri
January 16, 1996
56
<PAGE>
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................ $ 15,433 $ 22,106
Securities available for sale:
Investment securities.......................................... 159,857 109,136
Mortgage-backed securities..................................... 1,446,604 1,656,563
Securities held to maturity:
Investment securities.......................................... 119,186 156,773
Mortgage-backed securities..................................... 3,430,954 3,119,289
Loans............................................................ 3,577,892 3,072,151
Real estate owned................................................ 15,433 15,315
Office properties and equipment, net............................. 52,466 53,483
Other assets..................................................... 195,236 227,050
--------- ---------
$ 9,013,061 $ 8,431,866
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits......................................................... $ 4,907,497 $ 4,899,389
Securities sold under agreements to repurchase................... 1,082,814 1,208,127
Advances from Federal Home Loan Bank............................. 2,377,138 1,707,938
Other borrowings................................................. 47,523 47,384
Other liabilities................................................ 101,183 127,402
--------- ---------
Total liabilities......................................... 8,516,155 7,990,240
--------- ---------
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 December 31, 1995 and 1994, respectively.................. 13 13
Common stock - $.01 par value; 90,000,000 shares authorized;
41,991,701 shares issued and outstanding at December 31,
1995 and 40,173,527 shares and 40,163,527 shares issued
and outstanding, respectively, at December 31, 1994.......... 420 402
Paid-in capital................................................ 262,381 255,655
Retained earnings - subject to certain restrictions............ 223,606 191,359
Treasury stock, at cost; 10,000 shares at December 31, 1994.... -- (150)
Unrealized gain (loss) on securities available for sale,
net of taxes................................................. 12,019 (5,653)
Unamortized restricted stock awards............................ (1,533) --
--------- ---------
Total stockholders' equity................................ 496,906 441,626
--------- ---------
$ 9,013,061 $ 8,431,866
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
57
<PAGE>
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share information)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans....................................................................... $252,071 $206,467 $207,841
Securities available for sale............................................... 134,965 138,015 47,074
Securities held to maturity................................................. 259,262 179,168 205,706
Securities held for trading................................................. -- 6,460 19,522
Other....................................................................... 1,018 3,258 6,797
------- ------- -------
Total interest income.................................................... 647,316 533,368 486,940
------- ------- -------
Interest expense:
Deposits.................................................................... 233,836 200,190 192,605
Other borrowings............................................................ 223,508 138,915 96,911
Interest rate exchange agreements, net...................................... 9,089 8,469 31,974
------- ------- -------
Total interest expense................................................. 466,433 347,574 321,490
------- ------- -------
Net interest income.................................................. 180,883 185,794 165,450
Provision for losses on loans................................................. 1,200 12,432 706
------- ------- -------
Net interest income after provision for losses on loans.. 179,683 173,362 164,744
------- ------- -------
Noninterest income (loss):
Retail banking fees......................................................... 10,706 8,682 6,260
Insurance and brokerage sales commissions................................... 7,506 6,538 5,737
Loan servicing fees (expenses), net......................................... 7,401 7,359 (11,145)
Net gain (loss) from financial instruments.................................. 5,468 (39,120) 10,646
Gain on sales of real estate acquired for development and sale.. 1,656 3,414 746
Gain on sale of loan servicing rights....................................... 1,510 -- --
Unrealized losses on impairment of mortgage-backed securities... (27,063) -- --
Recognition of financial futures losses..................................... (34,827) -- --
Other....................................................................... 1,360 1,923 2,013
------- ------- -------
Total noninterest income (loss)......................................... (26,283) (11,204) 14,257
------- -------- -------
Noninterest expense:
General and administrative:
Compensation and employee benefits........................................ 34,780 42,570 38,970
Occupancy................................................................. 18,758 23,939 17,385
Federal deposit insurance premiums........................................ 11,743 12,018 9,896
Other..................................................................... 22,385 32,468 24,857
------- ------- -------
Total general and administrative........................................ 87,666 110,995 91,108
Provision for real estate losses............................................ -- 4,581 4,238
Litigation settlements...................................................... -- -- 3,252
------ ------- ------
Total noninterest expense............................................... 87,666 115,576 98,598
------ -------- ------
Income before income tax expense, extraordinary item,
and cumulative effect of change in accounting principle............. 65,734 46,582 80,403
Income tax expense............................................................ 20,616 15,026 27,134
------ ------ ------
Income before extraordinary item and cumulative effect
of change in accounting principle................................... 45,118 31,556 53,269
Extraordinary item, net of income tax effect.................................. -- (7,849) (1,908)
Cumulative effect of change in accounting principle........................... -- -- (6,489)
------ ------ ------
Net income........................................................... $ 45,118 $ 23,707 $ 44,872
====== ====== ======
Net income attributable to common stock.............................. $ 40,875 $ 18,523 $ 41,057
====== ====== ======
Per share data:
Primary earnings per share:
Income before extraordinary item and cumulative
effect of change in accounting principle................................ $ 1.01 $ 0.70 $ 1.54
Extraordinary item, net of income tax effect.............................. -- (0.21) (0.06)
Cumulative effect of change in accounting principle....................... -- -- (0.20)
----- ----- -----
Net income........................................................... $ 1.01 $ 0.49 $ 1.28
===== ===== =====
Fully diluted earnings per share:
Income before extraordinary item and cumulative
effect of change in accounting principle................................ $ 0.99 $ 0.68 $ 1.32
Extraordinary item, net of income tax effect.............................. -- (0.20) (0.05)
Cumulative effect of change in accounting principle....................... -- -- (0.16)
----- ----- -----
Net income........................................................... $ 0.99 $ 0.48 $ 1.11
===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
58
<PAGE>
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(DOLLARS IN THOUSANDS)
<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, 1992. 1,526,049 $ 15 8,823,507 $ 88 $ 135,084 $ 153,424
Net income (including pooled company)............. -- -- -- -- -- 44,872
Issuance of 920,000 shares of 6.5%
non-cumulative perpetual
convertible preferred stock..................... 920,000 9 -- -- 44,176 --
Exchange of common stock for preferred stock...... 80,000 1 (119,025) (1) (28) --
Exercise of incentive stock options and
non-qualified stock options...................... -- -- 72,775 1 649 --
Amortization of restricted stock awards........... -- -- -- -- -- --
Cash dividends declared (including
pooled company):
Common stock.................................. -- -- -- -- -- (7,686)
Preferred stock............................... -- -- -- -- -- (3,815)
Unrealized gain on securities available
for sale, net (including pooled company)........ -- -- -- -- -- --
Other pre-merger transactions of
pooled company................................... (33,609) -- 1,514,665 15 98 (15)
----------- --------- ---------- -------- ----------- -----------
Balance, December 31, 1993........................ 2,492,440 25 10,291,922 103 179,979 186,780
Net income (including pooled company)............. -- -- -- -- -- 23,707
Issuance of 319,000 shares of 6.5%
non-cumulative 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 --
Issuance of common stock through stock
options and employee stock plans................. -- -- 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 loss on 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 40,173,527 402 255,655 191,359
Net income........................................ -- -- -- -- -- 45,118
Purchase of common stock for treasury............. -- -- -- -- -- --
Issuance of common stock through stock
options and employee stock plans................ -- -- 243,763 3 1,531 (1,572)
Issuance of common stock in the acquisition of
Kirksville Bancshares, Inc...................... -- -- 1,521,435 15 5,426 15,475
Exchange of preferred stock for common stock...... (18,000) -- 52,976 -- (231) --
Amortization of restricted stock awards........... -- -- -- -- -- --
Cash dividends declared:
Common stock.................................... -- -- -- -- -- (22,531)
Preferred stock................................. -- -- -- -- -- (4,243)
Unrealized gain on securities available
for sale, net.................................... -- -- -- -- -- --
----------- -------- ---------- -------- ---------- ----------
Balance, December 31, 1995........................ 1,301,000 $ 13 41,991,701 $ 420 $ 262,381 $ 223,606
========== ======== ========== ======== ========== ==========
<CAPTION>
Unrealized
gain (loss) on
securities
available for Unamortized Total
Treasury stock sale, net restricted stockholders'
-------------------------- ----------- -------------- --------------
Shares Amount of taxes stock awards equity
--------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992............................. -- $ -- $ -- $ (66) $ 288,545
Net income (including pooled company).................. -- -- -- -- 44,872
Issuance of 920,000 shares of 6.5% non-cumulative
perpetual convertible preferred stock................. -- -- -- -- 44,185
Exchange of common stock for preferred stock........... -- -- -- -- (28)
Exercise of incentive stock options and non-qualified
stock options......................................... -- -- -- -- 650
Amortization of restricted stock awards................ -- -- -- 66 66
Cash dividends declared (including pooled company):
Common stock....................................... -- -- -- -- (7,686)
Preferred stock.................................... -- -- -- -- (3,815)
Unrealized gain on securities available
for sale, net (including pooled company)............. -- -- 11,575 -- 11,575
Other pre-merger transactions of pooled company........ -- -- -- -- 98
--------- ------- -------- --------- -----------
Balance, December 31, 1993............................. -- -- 11,575 -- 378,462
Net income (including pooled company).................. -- -- -- -- 23,707
Issuance of 319,000 shares of 6.5% non-cumulative
perpetual convertible preferred stock................ -- -- -- -- 21,273
Issuance of common stock in the acquisition of
Home Federal Bancorp of Missouri, Inc................ -- -- -- -- 48,231
Issuance of common stock through stock options and
employee stock plans................................. -- -- -- -- 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 loss on securities available
for sale, net (including pooled company)............. -- -- (17,228) -- (17,228)
Other pre-merger transactions of pooled company........ -- -- -- -- 514
--------- ------- -------- --------- -----------
Balance, December 31, 1994............................. (10,000) (150) (5,653) -- 441,626
Net income............................................. -- -- -- -- 45,118
Purchase of common stock for treasury.................. (214,500) (3,426) -- -- (3,426)
Issuance of common stock through stock options and
employee stock plans................................. 209,976 3,345 -- (1,621) 1,686
Issuance of common stock in the acquisition of
Kirksville Bancshares, Inc............................ -- -- -- -- 20,916
Exchange of preferred stock for common stock........... 14,524 231 -- -- --
Amortization of restricted stock awards................ -- -- -- 88 88
Cash dividends declared:
Common stock......................................... -- -- -- -- (22,531)
Preferred stock...................................... -- -- -- -- (4,243)
Unrealized gain on securities available for
sale, net............................................. -- -- 17,672 -- 17,672
--------- ------- -------- --------- -----------
Balance, December 31, 1995............................. -- $ -- $ 12,019 $ (1,533) $ 496,906
========= ======= ======== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
59
<PAGE>
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................................... $ 45,118 $ 23,707 $ 44,872
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary loss on early extinguishment of debt........................ -- 12,165 2,963
Cumulative effect of change in accounting principle....................... -- -- 9,831
Depreciation and amortization............................................. 4,294 5,814 4,260
Amortization of discounts and premiums, net............................... 10,379 16,301 23,463
(Increase) decrease in accrued interest receivable........................ (7,645) (2,310) 2,401
Increase (decrease) in accrued interest payable........................... 11,119 (1,023) (3,943)
Provision for losses on loans and real estate............................. 1,200 17,013 4,944
Unrealized losses on impairment of mortgage-backed securities............. 27,063 -- --
Recognition of financial futures losses................................... 34,827 -- --
(Increase) decrease in securities held for trading, net................... -- (87,138) 28,729
Decrease in securities held for sale, net................................. -- -- 58,688
Decrease (increase) in loans receivable held for sale, net................ -- 86,579 (59,536)
Decrease in outstanding checks, net....................................... -- -- (37,416)
Other, net................................................................ (13,749) (2,963) (27,400)
------------ ------------ -----------
Net cash provided by operating activities................................ 112,606 68,145 51,856
------------ ------------ -----------
Cash flows from investing activities:
Principal payments and maturities of securities available for sale.......... 126,291 313,775 --
Principal payments and maturities of securities held to maturity............ 835,059 783,067 917,679
Principal payments on loans................................................. 699,307 727,348 1,191,068
Proceeds from sales of securities available for sale........................ 945,941 2,633,590 --
Proceeds from sales of securities held to maturity.......................... -- -- 25,021
Proceeds from sales of loans................................................ -- -- 34,447
Purchase of securities available for sale................................... (737,735) (2,905,255) --
Purchase of securities held to maturity..................................... (1,234,320) (1,385,293) (2,336,020)
Purchase of loans........................................................... (321,097) (146,772) (684,807)
Originations of loans....................................................... (688,576) (680,794) (783,211)
Fees paid for interest rate cap and floor agreements available for sale..... -- (20,638) --
Settlements of financial futures available for sale......................... (71,091) 39,423 --
Net proceeds from sales of real estate...................................... 10,889 9,253 22,771
Purchase of office properties and equipment................................. (2,402) (7,556) (10,005)
Sale (purchase) of purchased mortgage servicing rights, net................. 3,971 -- (14,660)
Cash and cash equivalents from acquisition, net of cash paid................ (19,201) 31,087 1,401,792
Payments on sales or exchanges of branch deposits, net...................... -- (67,337) (206,405)
Proceeds from sale of loan production facilities............................ -- 75,150 --
------------ ------------ -----------
Net cash used in investing activities.................................... (452,964) (600,952) (442,330)
------------ ------------ -----------
Cash flows from financing activities:
Repayment of mortgage-backed bonds.......................................... -- (60,820) (521)
Repayment of FHLB advances.................................................. -- (100,980) --
Redemption of subordinated notes............................................ -- (31,022) --
Proceeds from FHLB advances................................................. 15,513,000 14,551,256 4,142,700
Principal payments on FHLB advances......................................... (14,851,000) (14,015,000) (3,285,700)
Fees paid for interest rate cap and floor agreements........................ -- (14,440) (39,023)
Excess of deposit withdrawals over receipts................................. (173,894) (578,888) (437,748)
(Decrease) increase in securities sold under agreements to repurchase, net.. (125,313) 617,726 (59,571)
Proceeds from issuance of preferred stock................................... -- 21,273 44,185
Proceeds from exercise of stock options..................................... 1,107 6,459 748
Purchase of treasury stock.................................................. (3,426) (150) --
Cash dividends paid......................................................... (26,789) (18,056) (11,501)
------------ ------------ -----------
Net cash provided by financing activities................................. 333,685 377,358 353,569
------------ ------------ -----------
Net decrease in cash and cash equivalents.................................... (6,673) (155,449) (36,905)
Cash and cash equivalents at beginning of year............................... 22,106 177,555 214,460
------------ ------------ -----------
Cash and cash equivalents at end of year..................................... $ 15,433 $ 22,106 $ 177,555
============ ============ ===========
</TABLE>
60
<PAGE>
SUPPLEMENTAL DISCLOSURES RELATED TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS
The Company paid interest of $455.3 million, $348.6 million, and $325.4 million
during 1995, 1994, and 1993, respectively. The Company paid income taxes of
$37.1 million, $6.5 million, and $10.9 million during 1995, 1994, and 1993,
respectively.
Cash and cash equivalents obtained from acquisitions, net of cash paid, are
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Fair value of assets purchased.............................................. $ (98,763) $ (556,990) $ (34,560)
Liabilities assumed......................................................... 73,731 491,755 1,436,352
Issuance of common stock.................................................... -- 48,231 --
-------- --------- ----------
Cash (paid) received from acquisition....................................... (25,032) (17,004) 1,401,792
Cash and cash equivalents acquired.......................................... 5,831 48,091 --
-------- --------- ----------
Cash and cash equivalents from acquisition,
net of cash paid........................................................... $ (19,201) $ 31,087 $ 1,401,792
======== ========= ==========
</TABLE>
Noncash investing and financing activities are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Noncash transfers from securities held for trading to:
Securities available for sale.............................................. $ -- $ 242,429 $ --
Securities held for sale................................................... -- -- 221,760
Noncash transfers from securities available for
sale to securities held to maturity........................................ -- 107,318 --
Noncash transfers from securities held for
sale to securities available for sale...................................... -- -- 744,962
Noncash transfers from securities held to maturity to
securities available for sale.............................................. 85,165 26,368 830,172
Desecuritization resulting in transfer of mortgage-backed
securities held to maturity to loans and real estate owned................. 33,603 -- --
Redesignation of interest rate swap to securities available for sale........ 4,369 -- --
Defeasance of mortgage-backed bonds......................................... -- -- 72,375
</TABLE>
See accompanying notes to consolidated financial statements.
61
<PAGE>
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Roosevelt
Financial Group, Inc. (the Company); its two wholly-owned subsidiaries,
Roosevelt Bank (the Bank) and F & H Realty (Realty), a Missouri-chartered real
estate investment company; and the Bank's wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the 1994 and 1993
consolidated financial statements to conform to the 1995 presentation. Results
of operations of companies acquired and accounted for as purchases are included
from their respective dates of acquisition. When acquired in a pooling of
interests transaction, current and prior period financial statements are
restated to include the accounts of the acquired companies, if significant.
Investment and Mortgage-Backed Securities
Effective December 31,1993, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). This statement requires investments in debt and
equity securities to be segregated into the following three categories: trading,
held to maturity, and available for sale.
Trading securities are purchased and held principally for the purpose of
reselling them within a short period of time. Their unrealized gains and losses
are included in earnings.
Securities classified as held to maturity are accounted for at cost, adjusted
for the amortization of premiums and accretion of discounts which are recognized
in interest income over the period to maturity for investment securities, or the
estimated life of mortgage-backed securities using the level-yield method,
because the Company has both the intent and the ability to hold such securities
to maturity. Unrealized losses in the debt securities portfolio are recognized
if any market valuation differences are deemed to be other than temporary.
Securities not classified as either trading or held to maturity are considered
to be available for sale. Gains and losses realized on the sale of these
securities are based on the specific identification method. Unrealized gains and
losses on available for sale securities are excluded from earnings and reported
as a net amount in a separate component of stockholders' equity until realized.
Unrealized losses on all debt securities are recognized if any market valuation
differences are deemed to be other than temporary.
Derivative Financial Instruments
The Company uses derivative financial instruments to reduce its exposure to
interest rate risk. These instruments include interest rate exchange agreements,
interest rate cap and floor agreements, and to a much lesser extent, interest
rate collar agreements and financial futures contracts, including options on
such futures contracts. The interest rate exchange agreements and the interest
rate cap and floor agreements have the effect of changing the interest rate
characteristics of the assets or liabilities to which they are designated. The
financial futures contracts
62
<PAGE>
are entered into to achieve a position whereby the estimated exposure of a
certain position to interest rate movements is offset by approximately equal,
but opposite, results in the financial futures contracts.
Interest rate exchange agreements, interest rate cap, floor and collar
agreements and financial futures contracts are designated against either
securities available for sale or short-term borrowings or deposits. Agreements
or contracts designated against securities available for sale are included at
their market value in the securities available for sale portfolio. Any mark to
market adjustments are reported as a separate component of stockholders' equity,
net of tax. The changes in market value of such agreements or contracts
designated against short term borrowings or deposits are not reported on the
consolidated balance sheets.
The interest differential paid or received on interest rate exchange agreements
is recorded as a component of interest expense, net. The purchase premium of
interest rate cap, floor, and collar agreements is capitalized and amortized on
a straight line basis over the original term of the respective agreement. No
purchase premium is paid at the time an interest rate exchange agreement is
entered into. Gains and losses from terminated interest rate exchange agreements
and interest rate cap, floor and collar agreements are recognized, consistent
with the gain or loss on the asset or liability it is designated against. Where
the asset or liability was not sold or paid off, the gains or losses are
deferred and amortized on a straight line basis as an increase or decrease to
expense over the original term of the agreements or the remaining life of the
asset or liability, whichever is less.
Gains or losses on financial futures contracts which qualify as hedges are
deferred. The unamortized balance of such deferred gains or losses is applied to
the carrying value of the hedged items. Amortization of the net deferred gains
or losses is applied to the interest component of the hedged items using the
level-yield method. Gains or losses in the market value of financial futures
contracts which do not qualify for hedge accounting are recognized currently.
Loans
Loans are stated at the principal amount outstanding, net of deferred loan fees,
allowance for losses, and any discounts or premiums on purchased loans. The
deferred fees, discounts, and premiums are amortized using the level-yield
method over the estimated life of the loan.
Generally, a loan is classified as nonaccrual and the accrual of interest on
such loan is discontinued when the contractual payment of principal or interest
has become more than 90 days past due or management has serious doubts about
further collectibility of principal or interest, even though the loan is
currently performing. When a loan is placed on nonaccrual status, accrued but
unpaid interest is reversed. Generally, loans are restored to accrual status
when the obligation is brought current, has performed in accordance with the
contractual terms for a reasonable period of time, and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.
Effective January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended by Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures"
(collectively SFAS 114). SFAS 114 addresses the accounting by creditors for
impairment of certain loans by specifying how the allowance for loan losses
related to such loans should be determined. As SFAS 114 does not apply to
residential mortgage and consumer loans which are collectively evaluated for
impairment and represent in excess of 95% of the Company's total loan portfolio,
the initial and continuing application of SFAS 114 has had no significant impact
on the Company's consolidated financial statements. Relative to the Company's
commercial real estate loan portfolio, a loan is considered to be impaired when
it is probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impairment is measured based on
the underlying value of the collateral.
63
<PAGE>
Loans Serviced for Others
Servicing fees related to loans serviced for others are recognized when loan
payments are received. Ancillary income from loan servicing is recorded when
received. Operational costs to service such loans are charged to expense as
incurred and are included in general and administrative expenses in the
accompanying consolidated statements of operations.
The costs of purchased mortgage servicing rights are capitalized and are
amortized over the estimated remaining lives of the underlying loans using the
level-yield method. The carrying value of purchased mortgage servicing rights is
periodically evaluated in relation to estimated future servicing revenues.
Amortization of purchased mortgage servicing rights is recorded as a component
of "Loan servicing fees (expenses), net" in the consolidated statements of
operations.
During May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.122, "Accounting for Mortgage Servicing
Rights" (SFAS 122). SFAS 122 requires that an institution which sells or
securitizes loans it has originated or purchased, and maintains the servicing
rights, to capitalize the cost of the rights to service such loans. As the
Company 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 consolidated 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, effective
January 1, 1996, the Company does not anticipate that this provision will have a
significant impact on its consolidated financial statements.
Real Estate Owned
Real estate owned includes properties acquired through foreclosure and
properties acquired for development and sale. Real estate acquired through
foreclosure is transferred to real estate owned at the lower of cost or
estimated fair value, which represents the new recorded basis of the property.
Subsequently, properties are evaluated and any additional declines in value are
provided for in an allowance for losses on real estate. Real estate acquired for
development and sale is carried at the lower of cost or estimated fair value.
Allowances for Losses
Allowances for losses on loans and real estate owned are established when a loss
is probable and can be reasonably estimated. These allowances are provided based
on past experience and the prevailing market conditions. Management's evaluation
of loss considers various factors including, but not limited to, general
economic conditions, loan portfolio composition, prior loss experience,
estimated sales price, and holding and selling costs.
Management believes that the allowances for losses on loans and real estate
owned are adequate. While management uses available information to recognize
losses, future additions to the allowances may be necessary based on changes in
economic conditions.
Office Properties and Equipment
Office properties and equipment are stated at cost, less accumulated
depreciation and leasehold amortization. Depreciation of office buildings and
improvements and furniture and equipment is computed on the straight-line method
over the estimated useful lives of the related assets. Leasehold improvements
are amortized over the shorter of their estimated useful lives or the term of
the related lease.
64
<PAGE>
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Earnings Per Share
Net income for primary earnings per share is adjusted for the dividends on
convertible preferred stock. The average number of common shares and common
equivalent shares outstanding for 1995, 1994, and 1993 was 40,620,932,
37,943,933, and 32,049,577, respectively.
Fully diluted earnings per share has been computed using the weighted average
number of common shares and common equivalent shares, including the effect of
the assumed conversion of convertible preferred stock into common stock. The
average number of common shares and common equivalent shares outstanding for
1995, 1994, and 1993 for the purpose of calculating fully diluted earnings per
share was 45,541,197, 39,005,360, and 40,395,649, respectively.
Cash Flows
For the purpose of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and other highly liquid debt instruments with an
initial maturity of three months or less.
(2) BUSINESS COMBINATIONS
During the fourth quarter of 1995, the Company completed the acquisitions of
Kirksville Bancshares, Inc. (Kirksville) and WSB Bancorp, Inc. (WSB). A total of
1,521,435 shares of the Company's common stock was issued in connection with the
Kirksville transaction, which was accounted for as a pooling of interests. The
Company paid a total cash consideration of approximately $25.0 million in a
purchase transaction to acquire WSB. Total assets of the acquired institutions
were approximately $227.6 million. The effect of these transactions were not
material to the consolidated financial statements and operating results of the
acquired entities are included since the respective acquisition dates.
65
<PAGE>
On June 30, 1994, the Company completed the acquisition of Farm & Home Financial
Corporation (Farm & Home) whose assets totaled $3.1 billion. As a result of this
transaction, the Company issued 17,993,838 shares of common stock. The
transaction was accounted for as a pooling of interests and, accordingly, the
consolidated financial statements of the Company have been restated to include
the results of Farm & Home for all periods presented. Total income,
extraordinary items, and net income for the Company and Farm & Home after the
effect of the restatement for SFAS 115 (discussed further below) and prior to
the combination were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1993
----
(in thousands)
<S> <C>
COMPANY
Total income (1)........................ $ 94,528
Extraordinary items (net of income tax
effect)................................ (1,908)
Net income.............................. 36,190
FARM & HOME
Total income (1)........................ 85,179
Net income.............................. 8,682
COMBINED
Total income (1)........................ 179,707
Extraordinary items (net of income tax
effect)................................ (1,908)
Net income.............................. 44,872
</TABLE>
(1) Net interest income and noninterest income.
Farm & Home adopted the provisions of SFAS 115 on January 1, 1994. Such adoption
by Farm & Home resulted in a pretax charge to operations of $9.8 million ($6.5
million net of tax) to reflect an other than temporary impairment of certain
interest-only stripped coupon mortgage-backed pass-through certificates and
collateralized mortgage obligation residual interests. As the Company had
adopted SFAS 115 at December 31, 1993, the $6.5 million net of tax charge by
Farm & Home, which was recorded as a cumulative effect of a change in accounting
principle, was reflected in the consolidated statement of operations of the
Company for 1993.
On April 22, 1994, the Company completed the acquisition of Home Federal Bancorp
of Missouri, Inc. (Home Bancorp). 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 of $68.3 million. Home Bancorp's total consolidated assets
were $532.7 million and savings deposits were $466.5 million. The transaction
was accounted for under the purchase method of accounting and resulted in an
intangible asset related to the deposit accounts of approximately $13.8 million.
On November 8, 1993, the Company completed the acquisition of the 17 eastern
Missouri retail banking branches of Home Savings of America. The Company
received net cash totaling approximately $709.4 million. Gross proceeds totaled
$733.3 million, which represented the amount of deposit accounts acquired by the
Company and accrued but unpaid interest on such accounts. This amount was
reduced by approximately $23.9 million, which was paid by the Company for the
acquisition of certain loans made by Savings of America primarily secured by
deposit accounts, real property, furniture and fixtures related to the branch
locations, and a tax deductible intangible asset related to the deposit accounts
of approximately $7.7 million.
On June 11, 1993, the Company completed the acquisition of the Missouri retail
banking franchise of First Nationwide Bank of San Francisco, California (First
Nationwide). The Company received net cash totaling approximately $588.1
million. Gross proceeds totaled $595.1 million, which represented the amount of
deposit accounts acquired by the Company and accrued but unpaid interest on such
accounts. This amount was reduced by approximately $7.0 million, which was paid
by the Company for the acquisition of certain loans made by First Nationwide
primarily secured by deposit accounts, real property, furniture and fixtures
related to the branch locations, and a tax deductible intangible asset related
to the deposit accounts of approximately $75,000.
66
<PAGE>
Other acquisition and sale activity of Farm & Home during 1994 and 1993 is
summarized as follows:
<TABLE>
<CAPTION>
Nature Items Sold,
Date of Transactions Purchased or Exchanged Cash Consideration
- ---- --------------- ---------------------- ------------------
<S> <C> <C> <C>
July 1, 1994 Sale of loan production $75.2 million of Texas home builder Received $75.2 million
business in Texas lines of credit and six land acquisition
and development/rehab loans
June 24, 1994 Sale of Corpus Christi, Texas $54.8 million of branch deposits Paid $53.9 million
branch facility and deposit and $927,000 of related deposit
accounts account loans and furniture and
fixtures
June 3, 1994 Sale of deposit accounts $13.6 million of branch deposits Paid $13.4 million
of branch and $177,000 of related deposit
account loans
December 17, 1993 Sale of two Austin, Texas $260.0 million of branch deposits Paid $251.0 million
and four San Antonio, Texas and $9.0 million of branch facilities
branch facilities and deposit accounts and deposit related deposit account
loans and furniture and fixtures
November 19, 1993 Purchase of two retail banking $107.5 million of branch deposits Received $104.3 million
branches in Springfield, Missouri and $1.0 million of related deposit
loans, furniture and fixtures, and a
$2.2 million tax deductible core
deposit intangible
April 12, 1993 Sale of Harrisonville, Texas $18.7 million of branch deposits and Paid $18.5 million
branch facility and deposits $190,000 of related deposit account loans
and furniture and fixtures
March 5, 1993 Exchange of two branch facilities $133.9 million of branch deposits and Received $63.1 million
and deposit accounts from three related deposit account loans and
branch facilities in Texas furniture and fixtures exchanged for
for two branch facilities and $198.1 million of branch deposits, $863,000
accounts and five branch facilities of related deposit account loans, and a
in Missouri $711,000 tax deductible core deposit
intangible
</TABLE>
67
<PAGE>
(3) FAIR VALUE CONSOLIDATED BALANCE SHEETS
The Company's primary objective in managing interest rate risk is to position
the Company such that changes in interest rates do not have a material adverse
impact upon the net market value of the Company. Net market value considers
the fair value of financial instruments (assets, liabilities, and off-balance-
sheet items), in contrast to the accompanying consolidated balance sheets which
are historical cost based. The estimated fair values of the Company's assets
and liabilities, and the related carrying amounts from the accompanying
consolidated balance sheets, are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents............................................$ 15,433 $ 15,433 $ 22,106 $ 22,106
Securities available for sale:
Investment securities.............................................. 159,857 159,857 109,136 109,136
Mortgage-backed securities......................................... 1,433,648 1,433,648 1,593,015 1,593,015
Interest rate exchange, cap, and floor agreements.................. 12,956 12,956 62,955 62,955
Options............................................................ -- -- 593 593
Securities held to maturity:
Investment securities.............................................. 119,186 120,517 156,773 156,170
Mortgage-backed securities......................................... 3,430,954 3,431,341 3,119,289 2,996,829
Loans................................................................ 3,577,892 3,708,014 3,072,151 2,995,981
Office properties and equipment, net................................. 52,466 53,262 53,483 52,980
Deferred losses on interest rate exchange agreements................. 20,831 -- 21,243 --
Unamortized fees on interest rate
caps, floors, and collar........................................... 38,049 37,302 43,318 18,913
Other assets......................................................... 151,789 159,548 177,804 220,530
--------- --------- --------- ---------
$ 9,013,061 $ 9,131,878 $ 8,431,866 $ 8,229,208
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits.................. $ 4,907,497 $ 4,954,183 $ 4,899,389 $ 4,815,151
Securities sold under agreements to repurchase....................... 1,082,814 1,083,048 1,208,127 1,206,478
Advances from Federal Home Loan Bank................................. 2,377,138 2,378,419 1,707,938 1,687,847
Other borrowings..................................................... 47,523 50,260 47,384 46,876
Deferred gains on interest rate exchange agreements.................. 5,661 -- 16,673 --
Interest rate exchange agreements.................................... -- 108,698 -- 18,487
Other liabilities.................................................... 95,522 95,292 110,729 102,668
Total liabilities.................................................. 8,516,155 8,669,900 7,990,240 7,877,507
--------- --------- --------- ---------
Net market value..................................................... -- 461,978 -- 351,701
Stockholders' equity................................................. 496,906 -- 441,626 --
--------- --------- --------- ---------
$ 9,013,061 $ 9,131,878 $ 8,431,866 $ 8,229,208
========= ========= ========= =========
NON-FINANCIAL INSTRUMENTS:
Demand deposits.....................................................$ -- $ 19,552 $ -- $ 52,231
Commitments to extend credit........................................$ 225,324 $ 225,752 $ 57,422 $ 57,201
======== ======== ======== ========
</TABLE>
68
<PAGE>
Net market value is not intended to represent the value of the Company's stock
or the amounts distributable to stockholders in connection with a sale of the
Company or in the unlikely event of its liquidation. Such amounts ascribe no
value to intangible assets or to the going concern value of the enterprise.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents - Due to the short-term nature of these financial
instruments, carrying value approximates fair value.
Investment securities and mortgage-backed securities - Fair values are based on
quoted market prices or dealer quotes. Where such quotes are not available,
fair value is estimated using quoted market prices for similar agreements and
securities, or in limited instances discounted cash flow analyses. Stock in the
Federal Home Loan Bank is valued at cost, which represents redemption value and
approximates fair value.
Loans - The fair value of loans is estimated by discounting future cash flows at
market interest rates for loans of similar credit risk, terms and maturities,
taking into consideration repricing characteristics and prepayment risk.
Office properties and equipment - The fair value of office properties is
estimated based upon in-house appraised values for the Company's properties.
The net book value of office equipment is assumed to approximate its fair value.
Other assets and liabilities - The estimated fair value of other assets, which
includes intangibles and real estate owned and other liabilities represents the
sum of all contractual financial receivables or obligations adjusted for the tax
effects.
Deposits with defined maturities - The fair value of certificates of deposit
accounts is based on the discounted values of contractual cash flows using rates
currently offered in the marketplace for accounts of similar remaining
maturities.
Deposits without defined maturities - For the purposes of calculating "Net
Market Value," no consideration is given to the economic value of the Bank's
long-term relationships with its depositors. For deposit liabilities without
defined maturities, fair value is assumed to be the amount payable on demand at
the reporting date. By ignoring what is commonly referred to as a core deposit
intangible, no consideration is given to the present value of the Company's
expected future profitability derived from those customer relationships.
However, such value as calculated by the Company is disclosed, net of applicable
income taxes, under the heading "Non-Financial Instruments." The aforementioned
value has been calculated by comparing the rates paid on deposits to a rate paid
on a wholesale borrowing having a maturity equal to the expected maturity of the
deposits reduced by the cost to service and insure such deposits.
Securities sold under agreements to repurchase - Fair values are based on the
discounted value of contractual cash flows using dealer quoted rates for
agreements of similar terms and maturities.
Advances from Federal Home Loan Bank - The fair value of advances from the
Federal Home Loan Bank (FHLB) is based on discounted values of contractual cash
flows using rates currently offered in the marketplace for instruments with
similar terms and maturities.
Other borrowings - Fair values are based on quoted market prices, dealer quotes,
or on the discounted values of contractual cash flows using market derived
spreads.
Interest rate exchange agreements - The fair values of interest rate exchange
agreements, which includes swaps, caps, and floors, are estimated by comparing
the contractual rates the Company is paying or receiving to market rates quoted
on new agreements with similar maturities by counterparties of similar
creditworthiness. Changes in
69
<PAGE>
the fair values and carrying values of existing agreements are included in
the fair values of the assets or liabilities being hedged.
Commitments to extend credit - The fair value of commitments is estimated
using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan commitments,
fair value also considers the difference between current levels of interest
rates and the committed rates.
Income taxes - The estimated income tax effects arising from the
differences between fair values and tax bases of financial instruments is
calculated and included in the fair value disclosure of other assets or
other liabilities. The effect of the restoration to taxable income of the
Bank's bad debt reserves for income tax purposes resulting from the
unlikely event of liquidation has not been included.
(4) SECURITIES AVAILABLE FOR SALE
The amortized cost and market value of securities available for sale at December
31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Government and agency obligations.. $ 10,671 $ 439 $ (25) $ 11,085
Corporate securities.................... 14,882 1,887 (6) 16,763
--------- --------- --------- ----------
25,553 2,326 (31) 27,848
FHLB stock.............................. 132,009 -- -- 132,009
--------- --------- --------- ----------
157,562 2,326 (31) 159,857
--------- --------- --------- ----------
Mortgage-backed Securities:
Mortgage-backed certificates:
GNMA................................... 694,541 17,996 (538) 711,999
FNMA................................... 342,405 4,440 (313) 346,532
FHLMC.................................. 308,839 6,380 (803) 314,416
Other................................... 59,512 3,090 (1,901) 60,701
Derivative financial instruments:
Interest rate exchange agreements...... (4,294) -- (2,234) (6,528)
Interest rate cap agreements........... 23,997 -- (15,259) 8,738
Interest rate floor agreements......... 4,271 6,475 -- 10,746
--------- --------- --------- ----------
1,429,271 38,381 (21,048) 1,446,604
--------- --------- --------- ----------
$ 1,586,833 $ 40,707 $ (21,079) $ 1,606,461
========= ========= ========= ==========
</TABLE>
70
<PAGE>
The amortized cost and market value of securities available for sale at December
31, 1994 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Investment Securities:
FHLB stock........................... $ 109,136 $ -- $ -- $ 109,136
--------- --------- --------- ---------
Mortgage-backed Securities:
Mortgage-backed certificates:
GNMA.............................. 693,362 68 (30,698) 662,732
FNMA.............................. 493,412 41 (18,002) 475,451
FHLMC............................. 408,640 8 (13,519) 395,129
Other................................ 60,584 2,105 (2,986) 59,703
Derivative financial instruments:
Interest rate exchange agreements.. -- 3,476 -- 3,476
Interest rate cap agreements....... 31,426 26,471 -- 57,897
Interest rate floor agreements..... 5,191 -- (3,609) 1,582
Financial futures.................. (28,447) 28,447 -- --
Exchange traded options............ 81 512 -- 593
--------- --------- --------- ---------
1,664,249 61,128 (68,814) 1,656,563
--------- --------- --------- ---------
$1,773,385 $ 61,128 $ (68,814) $1,765,699
========= ========= ========= =========
</TABLE>
The amortized cost and market value of debt securities available for sale at
December 31, 1995, by contractual maturity, are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
----------- -----------
(in thousands)
<S> <C> <C>
Due in one year or less................. $ 2,753 $ 2,755
Due after one year through five years... 9,866 10,028
Due after five years through ten years.. 11,889 14,002
Due after ten years..................... 1,045 1,063
--------- ---------
25,553 27,848
Mortgage-backed securities.............. 1,429,271 1,446,604
--------- ---------
$ 1,454,824 $ 1,474,452
========= =========
</TABLE>
At December 31, 1995 and 1994, accrued interest receivable on securities
available for sale totaled $8.0 million and $7.3 million, respectively.
Securities available for sale with an amortized cost and approximate market
value of $1.1 billion and $1.3 billion at December 31,1995 and 1994,
respectively were pledged to secure deposits, securities sold under agreements
to repurchase, other borrowings and interest rate exchange agreements.
Gross realized gains on the sale of or early redemption by the issuer of
securities available for sale totaled $25.6 million, $26.3 million and $25.9
million for 1995, 1994 and 1993, respectively. Gross realized losses on such
securities totaled $9.1 million, $43.6 million, and $11.2 million for 1995, 1994
and 1993, respectively.
71
<PAGE>
(5) SECURITIES HELD TO MATURITY
The amortized cost and market value of securities held to maturity at December
31,1995 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Government and agency obligations.. $ 113,554 $ 1,242 $ -- $ 114,796
Corporate securities.................... 5,632 89 -- 5,721
--------- -------- -------- ---------
119,186 1,331 -- 120,517
--------- -------- -------- ---------
Mortgage-backed Securities:
Mortgage-backed certificates:
GNMA.................................. 13,895 177 (243) 13,829
FNMA.................................. 131,874 1,919 (422) 133,371
FHLMC................................. 239,026 3,287 (742) 241,571
Private pass-throughs.................. 2,705,311 21,618 (21,758) 2,705,171
Collateralized mortgage obligations.... 340,848 2,556 (6,005) 337,399
--------- -------- -------- ---------
3,430,954 29,557 (29,170) 3,431,341
--------- -------- -------- ---------
$ 3,550,140 $ 30,888 $ (29,170) $ 3,551,858
========= ======== ======== =========
</TABLE>
The amortized cost and market value of securities held to maturity at December
31, 1994 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Government and agency obligations.. $ 115,500 $ 208 $ (1,814) $ 113,894
Corporate securities.................... 41,273 1,127 (124) 42,276
--------- -------- -------- ---------
156,773 1,335 (1,938) 156,170
--------- -------- -------- ---------
Mortgage-backed Securities:
Mortgage-backed certificates:
GNMA.................................. 16,595 20 (722) 15,893
FNMA.................................. 169,820 677 (4,194) 166,303
FHLMC................................. 272,775 1,191 (6,991) 266,975
Private pass-throughs.................. 2,271,272 678 (96,423) 2,175,527
Collateralized mortgage obligations.... 388,827 906 (17,602) 372,131
--------- -------- -------- ---------
3,119,289 3,472 (125,932) 2,996,829
--------- -------- -------- ---------
$ 3,276,062 $ 4,807 $ (127,870) $ 3,152,999
========= ======== ======== =========
</TABLE>
72
<PAGE>
The amortized cost and market value of securities held to maturity at December
31, 1995, by contractual maturity, are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
------------ ------------
(in thousands)
<S> <C> <C>
Due in one year or less................. $ 10,112 $ 10,204
Due after one year through five years... 109,074 110,313
Due after five years through ten years.. -- --
Due after ten years..................... -- --
--------- ---------
119,186 120,517
Mortgage-backed securities 3,430,954 3,431,341
--------- ---------
$ 3,550,140 $ 3,551,858
========= =========
</TABLE>
At December 31, 1995 and 1994, accrued interest receivable on securities held to
maturity totaled $23.1 million and $19.3 million, respectively.
Securities held to maturity with an amortized cost and approximate market value
of $1.4 billion and $1.3 billion at December 31,1995 and 1994, respectively,
were pledged to secure securities sold under agreements to repurchase, other
borrowings and interest rate exchange agreements.
During 1995, certain private issuer mortgage-backed securities held by the
Company were determined to be other than temporarily impaired. As a result, the
Company recorded a $27.1 million pre-tax write-down ($17.8 million after tax)
to reflect the impairment of such securities. The amount of the write-down was
based on discounted cash flow analyses performed by management (based upon
assumptions regarding delinquency levels, foreclosure rates, and loss ratios on
REO disposition in the underlying portfolio). Discounted cash flow analyses
were utilized to estimate fair value due to the absence of a ready market for
the securities.
On November 15, 1995, the Financial Accounting Standards Board issued a special
report, "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities, Questions and Answers" (the Report).
The Report was issued as an aid in understanding and implementing SFAS 115. The
Report provided transition guidance for an enterprise that adopted SFAS 115
prior to the issuance of the Report. The guidance allowed a one-time
reassessment of the classification of securities as of a single measurement date
without tainting the classification of the remaining held to maturity debt
securities. Such reassessment and transfers were to be completed no later than
December 31, 1995. On December 31, 1995, the Company transferred into the
available for sale portfolio from the held to maturity category mortgage-backed
securities with a recorded and market value of $67.5 million and investment
securities with a recorded and market value of $17.6 million.
Effective December 31, 1993, the Company adopted the provisions of SFAS 115 on a
prospective basis. As a result, mortgage-backed and investment securities with
an amortized cost of approximately $1.6 billion were transferred into the
available for sale portfolio. At December 31, 1993, these securities were
adjusted to reflect the excess market value over amortized cost of $18.3
million. Additionally, a tax liability of $6.7 million was recorded to reflect
the tax effect of the adjustment to market. The net increase of $11.6 million
was recorded as an unrealized gain and included as a separate component of
stockholders' equity. In addition, the Company recorded a pretax charge to
operations of $9.8 million to reflect an other than temporary impairment of
certain interest-only stripped coupon mortgage-backed pass-through certificates
and collateralized mortgage obligation residual interests. The resultant $6.5
million impairment was recorded as a cumulative effect of a change in accounting
principle, net of tax, in the consolidated statement of operations of the
Company for the year ended December 31, 1993.
73
<PAGE>
(6) LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
----------- -----------
(in thousands)
<S> <C> <C>
Real Estate:
Residential................................... $ 3,320,098 $ 2,887,992
Construction.................................. 11,969 18,489
Commercial.................................... 137,507 132,316
Consumer loans................................. 125,633 84,013
---------- ----------
3,595,207 3,122,810
Add (Deduct):
Loans in process.............................. (4,266) (28,348)
Purchased loan premiums....................... 17,359 10,848
Unearned discounts............................ (9,105) (9,369)
Deferred loan costs (fees).................... 552 (875)
Allowance for losses.......................... (21,855) (22,915)
---------- ----------
$ 3,577,892 $ 3,072,151
========== ==========
Weighted average interest rate at end of year.. 7.58% 7.43%
==== ====
</TABLE>
Gross loans at December 31, 1995, by contractual maturity or repricing date,
were as follows (in thousands):
<TABLE>
<S> <C>
Adjustable-rate loans:
Due within one year........................... $ 24,819
After one but within five years............... 68,965
After five but within ten years............... 99,035
After ten years............................... 2,041,579
----------
2,234,398
==========
Fixed-rate loans:
Due within one year........................... 27,208
After one but within five years............... 128,746
After five but within ten years............... 121,653
After ten years............................... 1,083,202
1,360,809
----------
$ 3,595,207
==========
</TABLE>
At December 31, 1995 and 1994, accrued interest receivable on loans totaled
approximately $22.3 million and $18.4 million, respectively.
Nonaccrual loans totaled $9.5 million and $7.6 million at December 31, 1995 and
1994, respectively. If interest on these loans had been recognized, such income
would have been $1.1 million and $686,000 for 1995 and 1994, respectively.
During 1995 and 1994, these nonaccrual loans contributed $203,000 and $221,000
to interest income,respectively. In addition, at December 31, 1995 and 1994, the
Company had troubled debt restructurings aggregating $661,000 and $2.8 million,
respectively. During 1995 and 1994, these troubled debt restructurings
contributed $175,000 and $184,000 to interest income, respectively. Had these
loans not been restructured interest income would have been $211,000 and
$222,000 for 1995 and 1994, respectively.
As of December 31, 1995, the Company had outstanding commitments to originate
fixed-rate mortgage loans of approximately $54.0 million, adjustable-rate
mortgage loans of approximately $45.5 million, fixed-rate residential
construction loans of approximately $1.9 million, and adjustable-rate
residential construction loans of approximately $300,000. The Company also had
outstanding commitments to purchase adjustable-rate mortgage loans of
approximately $123.3 million. Commitments to extend credit may involve, to
varying degrees, elements of credit risk and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The amount of credit loss
in the event of nonperformance by the other party to the commitment is
represented by the contractual amount of the commitment. Interest rate risk on
commitments to extend credit results from the possibility that interest rates
may have moved unfavorably from the position of the Company since the time the
commitment was made.
74
<PAGE>
The Company services loans for its own account and also services loans for
third-party investors under loan servicing agreements. Pursuant to these
agreements, the Company typically collects from the borrower monthly payments of
principal and interest on mortgage loans and additional amounts towards payment
of real estate taxes and insurance. The Company retains its servicing fee from
such payments and remits the balance of the principal and interest payments to
the investors in the mortgage loans or associated mortgage-backed securities.
At December 31, 1995 and 1994, the Company serviced 78,698 loans totaling $5.0
billion and 83,537 loans totaling $5.3 billion, respectively. Of these amounts,
$3.0 billion and $2.5 billion were serviced on the Company's own behalf at
December 31, 1995 and 1994, respectively.
Activity in purchased mortgage servicing rights, which is recorded in other
assets in the accompanying consolidated balance sheets, is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year.................................. $ 22,556 $ 28,117 $ 49,647
Purchases................................................... 812 -- 14,660
Sales....................................................... (3,273) -- --
Amortization................................................ (4,233) (5,561) (36,190)
------- ------- -------
Balance, end of year........................................ $ 15,862 $ 22,556 $ 28,117
======= ======= =======
</TABLE>
(7) REAL ESTATE OWNED
Real estate owned is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
-------- --------
(in thousands)
<S> <C> <C>
Acquired through foreclosure................................ $ 19,098 $ 19,282
Acquired for development and sale........................... 705 2,517
------ ------
19,803 21,799
Less allowance for losses................................... (4,370) (6,484)
------ ------
$ 15,433 $ 15,315
====== ======
</TABLE>
(8) ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year.................................. $ 22,915 $ 9,056 $ 10,753
Provision charged to expense................................ 1,200 12,432 706
Additions acquired through acquisitions..................... 1,166 2,483 --
Charge-offs, net............................................ (3,426) (1,056) (2,403)
------- ------- -------
Balance, end of year........................................ $ 21,855 $ 22,915 $ 9,056
======= ======= =======
</TABLE>
75
<PAGE>
Activity in the allowance for losses on real estate owned is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1994 1993
---------- -------- -------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year.......................................... $ 6,484 $ 3,737 $ 4,776
Provision for real estate losses.................................... -- 4,581 4,238
Additions acquired through acquisitions............................. -- 197 --
Charge-offs......................................................... (2,114) (2,031) (5,277)
------ ------ ------
Balance, end of year................................................ $ 4,370 $ 6,484 $ 3,737
====== ====== ======
</TABLE>
(9) OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1994
--------- ---------
(in thousands)
<S> <C> <C>
Land, office buildings and improvements............... $ 53,601 $ 53,463
Furniture and equipment............................... 23,056 20,085
Leasehold improvements................................ 4,349 4,339
------- -------
81,006 77,887
Less accumulated depreciation and amortization........ 28,540 24,404
------- -------
$ 52,466 $ 53,483
======= =======
</TABLE>
Depreciation and amortization expense on office properties and equipment totaled
$4.3 million, $5.8 million, and $4.3 million for 1995, 1994, and 1993,
respectively.
The Company and its subsidiaries lease certain premises and equipment under
operating leases which expire through the year 2014, with certain lease
agreements containing renewal options. Minimum lease payments (in thousands) for
the years ending December 31 are summarized as follows:
<TABLE>
<S> <C>
1996................................................................$ 2,839
1997................................................................ 2,658
1998................................................................ 2,349
1999................................................................ 1,115
2000................................................................ 669
2001 through 2014................................................... 2,647
-------
$ 12,277
=======
</TABLE>
Rent expense totaled $2.8 million, $4.7 million, and $4.3 million for 1995,
1994, and 1993, respectively.
76
<PAGE>
(10) INTANGIBLE ASSETS
Intangible assets and fair value in excess of cost of net assets acquired
(negative goodwill), included in other assets and other liabilities,
respectively, in the accompanying consolidated balance sheets are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994
-------- -------
(in thousands)
<S> <C> <C>
Intangible assets:
Goodwill............................................... $ 671 $ 671
Core deposit intangibles............................... 33,457 27,380
------ -------
34,128 28,051
Less accumulated amortization.......................... 4,896 2,569
------ -------
29,232 25,482
Negative goodwill, net of accumulated amortization....... (4,173) (5,281)
------ ------
$ 25,059 $ 20,201
====== ======
</TABLE>
The presentation of intangible assets in accordance with generally accepted
accounting principles does not recognize the future economic benefits associated
with certain of the Company's intangible assets whose amortization is tax
deductible. Such intangible assets approximated $9.0 million at December 31,
1995. The future benefits associated with such tax deductible intangibles is
approximately $3.2 million.
Goodwill (including negative goodwill) and core deposit intangibles resulted
from business combinations which were accounted for using the purchase method of
accounting and from branch deposit acquisitions. These intangibles are amortized
on a straight line basis over the period that it is expected to be benefited,
not to exceed ten years. Intangible assets are periodically reviewed for
possible impairment when events or changed circumstances affect the underlying
basis of the assets.
(11) DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------
1995 1994
-------------------------------------- ------------------------------------
PERCENT AVERAGE PERCENT AVERAGE
AMOUNT OF TOTAL RATE AMOUNT OF TOTAL RATE
----------- -------- ------ ----------- --------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
NOW................................ $ 343,036 7.0% 0.96% $ 335,261 6.8% 1.12%
Passbook........................... 327,219 6.7 2.31 396,002 8.1 2.29
Money market demand................ 555,277 11.3 4.12 558,991 11.4 3.06
--------- ----- ---------- -----
Total demand deposits 1,225,532 25.0 2.75 1,290,254 26.3 2.32
--------- ----- ---------- -----
Certificates of deposit:
2.00% to 4.00%..................... 44,903 .9 3.78 787,244 16.1 3.72
4.00% to 6.00%..................... 2,278,911 46.4 5.40 1,976,308 40.3 4.89
6.00% to 8.00%..................... 1,324,401 27.0 6.53 719,146 14.7 6.76
8.00% to 10.00%.................... 33,207 .7 9.03 121,448 2.5 8.63
10.00% & above..................... 674 -- 11.16 4,439 .1 11.05
--------- ---- --------- -----
Total certificates of deposit 3,682,096 75.0 5.82 3,608,585 73.7 5.14
--------- ----- ---------- -----
Unearned discount on brokered
certificates....................... (117) -- -- -- -- --
Net adjustment related to purchase
method of accounting............... (14) -- -- 550 -- --
--------- ----- --------- ----
$ 4,907,497 100.0% 5.05% $ 4,899,389 100.0% 4.38%
========= ===== ==== ========== ===== =====
</TABLE>
77
<PAGE>
The scheduled maturities of certificates of deposit are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1995 1994
---------------------------- --------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
-------------- -------- ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Due within:
One year...................................... $ 2,204,654 59.9% $ 1,998,163 55.4%
Two years..................................... 741,149 20.1 725,953 20.1
Three years................................... 250,594 6.8 406,549 11.3
Four years.................................... 279,177 7.6 174,495 4.8
Five years.................................... 119,912 3.3 230,928 6.4
Thereafter.................................... 86,610 2.3 72,497 2.0
--------- ----- --------- -----
$ 3,682,096 100.0% $ 3,608,585 100.0%
========= ===== ========= =====
</TABLE>
At December 31, 1995 and 1994, accrued interest payable on deposits totaled $7.2
million and $6.7 million, respectively.
Certificate of deposit accounts with balances of $100,000 or greater totaled
$262.8 million and $207.4 million at December 31, 1995 and 1994, respectively.
At December 31, 1995, $48.0 million will mature within three months, $59.3
million will mature in three to six months, $66.8 million will mature in six
months to one year, and $88.7 million will mature after one year.
Interest expense on deposits by type is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
---- ------ ----
(in thousands)
<S> <C> <C> <C>
Passbook..................................................... $ 8,063 $ 9,821 $ 8,527
NOW and money market demand.................................. 22,782 23,706 21,933
Certificates of deposit...................................... 202,991 166,663 162,145
------- ------- --------
$ 233,836 $ 200,190 $ 192,605
======= ======= ========
</TABLE>
(12) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Mortgage-backed securities sold under agreements to repurchase are treated as
financings. The securities underlying the agreements are book entry securities
and are delivered, by appropriate entry, to the major investment banking firms
(dealers) used in the transactions. The dealers may have sold, loaned, or
otherwise disposed of such securities to other parties in the normal course of
their operations, and have agreed to resell to the Company the same securities
or substantially identical securities at the maturities of the agreements.
The carrying value and market value of securities sold under agreements to
repurchase are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
------------------------------------------------------------------
1995 1994
------------------------------------------------------------------
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
----- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C>
Agreements involving:
Same securities...................................... $ 897,261 $ 928,600 $1,056,386 $1,147,100
Substantially identical securities................... 185,553 186,600 151,741 152,400
--------- --------- --------- ---------
1,082,814 1,115,200 1,208,127 1,299,500
Accrued interest payable............................ 5,534 -- 5,388 --
--------- --------- --------- ---------
$1,088,348 $1,115,200 $1,213,515 $1,299,500
========= ========= ========= =========
</TABLE>
78
<PAGE>
The scheduled maturities of securities sold under agreements to repurchase are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
----------- -----------
(in thousands)
<S> <C> <C>
Maturing within 30 days............................................... $ 951,602 $ 1,158,127
30 - 90 days.......................................................... 34,462 --
Over 90 days.......................................................... 96,750 50,000
--------- ---------
$ 1,082,814 $ 1,208,127
========= =========
</TABLE>
Financial data pertaining to the weighted average cost, the level of securities
sold under agreements to repurchase, and the related interest expense were as
follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1995 1994 1993
------------- ----------- -----------
<S> <C> <C> <C>
Weighted average interest rate at end of year............... 5.84% 5.96% 3.42%
Weighted daily average interest rate during the year........ 5.93 4.47 3.74
Daily average of securities sold under
agreements to repurchase................................ $1,426,101 $1,193,671 $1,277,514
Maximum securities sold under agreements to
repurchase at any month end............................. 1,685,869 1,650,963 1,493,445
Interest expense during the year............................ 84,557 53,303 47,786
</TABLE>
79
<PAGE>
(13) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the FHLB are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
1995 1994
------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
DUE IN AMOUNT RATE AMOUNT RATE
- ------ ---------- ------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
1995.................................... $ -- --% $ 738,000 5.95%
1996.................................... 2,077,000 5.74 420,000 5.42
1997.................................... 165,756 6.57 415,756 6.32
1998.................................... 57,500 5.73 57,500 5.55
2000.................................... 75,000 5.76 75,000 5.97
2003.................................... 2,000 6.39 2,000 6.39
--------- ---------
2,377,256 5.80 1,708,256 5.90
Net adjustment related to purchase
method of accounting (118) (318)
---------- -- ---------- --
$ 2,377,138 5.80% $ 1,707,938 5.90%
========== ==== ========== ====
</TABLE>
Financial data pertaining to the weighted average cost, the level of FHLB
advances and the related interest expense were as follows (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1995 1994 1993
------------ ------------ -------
<S> <C> <C> <C>
Weighted average interest rate at end of year.................. 5.80% 5.90% 4.13%
Weighted daily average interest rate during the year........... 5.99 4.80 4.17
Daily average of FHLB advances................................. $2,236,899 $1,579,100 $ 706,900
Maximum FHLB advances at any month end......................... 2,460,000 1,857,000 1,050,000
Interest expense during the year............................... 134,073 75,800 29,452
</TABLE>
The Company is required to maintain mortgage-backed securities with a market
value of 100% of outstanding collateralized advances and qualifying loans with
principal balances aggregating 150% of outstanding noncollateralized advances.
FHLB stock is also pledged as collateral for these advances.
During April 1994, the Company terminated a $100.0 million advance from the FHLB
while restructuring its portfolio in order to maintain the Company's then
existing interest rate position. This resulted in a pretax loss totaling
approximately $980,000 in 1994, which has been recorded, net of its tax effect,
as an extraordinary item.
80
<PAGE>
(14) OTHER BORROWINGS
<TABLE>
<CAPTION>
Other borrowings are summarized as follows: DECEMBER 31,
------------------------------
1995 1994
------------ -----------
(in thousands)
<S> <C> <C>
Mortgage-backed bonds (net of unamortized discounts
of $92,000 and $96,000 at December 31, 1995 and 1994,
respectively), 10.125% due April 15, 2018.................. $ 19,664 $ 19,660
Subordinated notes, 9.5% due August 1, 2002.................. 27,859 27,724
------ ------
$ 47,523 $ 47,384
====== ======
</TABLE>
The payment of principal and interest on the 9.5% notes is subordinated at all
times to any indebtedness of the Company outstanding or incurred after the date
of issuance. The subordinated notes are callable at the option of the Company
after August 1, 1995 at par plus accrued interest. In the indenture relating to
the subordinated notes, the Company is restricted as to the amounts of
additional indebtedness it may incur and the amount of dividends and other
distributions it may pay to its stockholders.
During 1994 and 1993, the Company repurchased and defeased mortgage-backed bonds
totaling $54.3 million and $72.9 million, respectively. This resulted in pretax
losses totaling approximately $7.2 million and $3.0 million in 1994 and 1993,
respectively, which have been recorded, net of their tax effect, as an
extraordinary item.
During 1991, the Company, under the name Farm & Home, issued $31.0 million of
13.0% subordinated debentures in exchange for all of its then existing 13.0%
Series A Cumulative Exchangeable Preferred Stock. The debentures, which were
recorded net of discount of $4.0 million, had a net book value of $27.0 million
at December 31, 1993, were scheduled to mature in 2016, and had an effective
interest rate of 13.58%. In June 1994, using the proceeds from the issuance of
319,000 shares of preferred stock and cash reserves, these debentures were
called at par. This resulted in a pretax loss totaling $4.0 million which has
been recorded, net of its tax effect, as an extraordinary item.
(15) INTEREST RATE RISK MANAGEMENT
The Company's primary objective regarding asset and liability management is to
position the Company such that changes in interest rates do not have a material
adverse effect on net interest income or the net market value of the Company.
The Company's primary strategy for accomplishing its asset and liability
management objectives is achieved by matching the weighted average maturities of
assets, liabilities, and off-balance sheet items (duration matching). Integral
to the duration matching strategy is the use of derivative financial instruments
such as interest rate exchange agreements, interest rate cap and floor
agreements and, to a much lesser extent, interest rate collar agreements and
financial futures contracts.
The Company uses derivative financial instruments solely for risk management
purposes. None of the Company's derivative instruments are what are termed
leveraged instruments. These types of instruments are riskier than the
derivatives used by the Company in that they have embedded options that enhance
their performance in certain circumstances but dramatically reduce their
performance in other circumstances. The Company is not a dealer nor does it make
a market in such instruments. The Company does not trade the instruments and
the Board of Directors' approved policy governing the Company's use of these
instruments strictly forbids speculation of any kind.
81
<PAGE>
The risks generally associated with interest rate exchange agreements are also
the same as for interest rate cap, floor, and collar agreements. Such risks are
the risk that the counterparty in the agreement may default ("credit risk"), the
risk that at the time of any such default, interest rates may have moved
favorably from the perspective of the nondefaulting party ("market risk") and
the risk that interest accrued and due to the Company previously reflected in
the consolidated balance sheets may not be received as a result of the default.
The Company's interest rate exchange agreements and interest rate cap and floor
agreements have been entered into with nationally recognized commercial and
investment banking firms or the FHLB. As such, the Company does not anticipate
nonperformance by the counterparties. Financial futures contracts are subject to
similar market risks as are interest rate exchange agreements; however, credit
risk is substantially mitigated due to the requirement that participants settle
changes in the value of their positions daily.
Interest rate exchange agreements are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------------
NOTIONAL AVERAGE AVERAGE WEIGHTED
PRINCIPAL RATE RATE AVERAGE FAIR
AMOUNT RECEIVED PAID MATURITY VALUE
------ -------- ---- -------- -----
<S> <C> <C> <C> <C> <C>
Available for sale:
Fixed interest paid........... $ 260,000 5.84% 6.27% 4.25 yrs $ (6,528)
------- ------
Interest-bearing liabilities:
Fixed interest paid........... 795,000 5.88 8.99 5.82 yrs (122,468)
Variable interest
rate paid................... 159,000 7.36 5.94 6.05 yrs 13,770
------- --------
954,000 6.13 8.48 (108,698)
------- ---------
Total....................... $ 1,214,000 6.06% 8.01% $ (115,226)
========= ==== ==== =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------------------------
NOTIONAL AVERAGE AVERAGE WEIGHTED
PRINCIPAL RATE RATE AVERAGE FAIR
AMOUNT RECEIVED PAID MATURITY VALUE
------ -------- ---- -------- -----
<S> <C> <C> <C> <C> <C>
Available for sale:
Fixed interest rate paid $ 275,000 5.61% 4.81% 9 mos $ 3,476
------- -----
Interest-bearing liabilities:
Fixed interest rate paid...... 1,140,000 6.09 8.12 5.10 yrs (11,921)
Variable interest
rate paid................... 159,000 7.36 5.57 7.05 yrs (6,566)
--------- -------
1,299,000 6.25 7.81 (18,487)
--------- -------
Total........................ $ 1,574,000 6.13% 7.28% $ (15,011)
========= ==== ==== =======
</TABLE>
Typically, the Company pays a fixed rate of interest for a fixed period of time
and receives a variable rate of interest indexed to the three month London
Interbank Offered Rate (LIBOR). Changes in the variable rates in the Company's
interest rate exchange agreements are designed to offset changes in the
Company's yield received on securities available for sale and the cost of short-
term deposits and other borrowings.
82
<PAGE>
Interest rate cap, floor and collar agreements are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
NOTIONAL AVERAGE CURRENT WEIGHTED
OUTSTANDING PRINCIPAL CAP INDEX AVERAGE CARRYING FAIR
DECEMBER 31, AMOUNT RATE RATE MATURITY VALUE VALUE
- ------------ --------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
CAPS:
1995 Available for sale $ 2,152,500 8.15% 5.85% 3.40 yrs $ 23,997 $ 8,738
Interest-bearing
liabilities......... 400,000 9.63 5.88 8.93 yrs 12,876 6,135
------- ------ ------
Total ............... $ 2,552,500 8.38% 5.85% 4.26 yrs $ 36,873 $ 14,873
========= ==== ==== ====== ======
1994 Available for sale $ 2,152,500 8.15% 5.93% 4.40 yrs $ 31,426 $ 57,897
Interest-bearing
liabilities......... 400,000 9.63 6.19 9.93 yrs 14,320 13,278
------- ------ ------
Total................ $ 2,552,500 8.38% 5.97% 5.26 yrs $ 45,746 $ 71,175
========= ==== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
NOTIONAL AVERAGE CURRENT WEIGHTED
PRINCIPAL FLOOR INDEX AVERAGE CARRYING FAIR
AMOUNT RATE RATE MATURITY VALUE VALUE
--------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
FLOORS:
1995 Available for sale $ 615,000 5.12% 4.76% 5.06 yrs $ 4,271 $ 10,746
Interest-bearing
liabilities.............. 955,000 5.32 5.01 6.27 yrs 25,035 31,116
------- ------- -------
Total..................... $ 1,570,000 5.24% 4.91% 5.80 yrs $ 29,306 $ 41,862
========== ==== ==== ======= =======
1994 Available for sale...... $ 615,000 5.12% 4.67% 6.06 yrs $ 5,191 $ 1,582
Interest-bearing
liabilities.......... 955,000 5.32 5.02 7.27 yrs 28,788 5,584
------- ------- -------
Total................. $ 1,570,000 5.24% 4.88% 6.80 yrs $ 33,979 $ 7,166
========== ==== ==== ======= =======
</TABLE>
<TABLE>
<CAPTION>
NOTIONAL AVERAGE CURRENT WEIGHTED
PRINCIPAL FLOOR/CAP INDEX AVERAGE CARRYING FAIR
AMOUNT RATE RATE MATURITY VALUE VALUE
--------- -------- ------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
COLLAR:
1995 Interest-bearing
liabilities.......... $ 25,000 5.25%/ 5.88% 2.84 yrs $ 138 $ 51
10.25%
1994 Interest-bearing
liabilities.......... $ 25,000 5.25%/ 6.06% 3.84 yrs $ 210 $ 51
10.25%
</TABLE>
83
<PAGE>
Changes in the notional amounts of interest rate exchange, cap, floor and collar
agreements were as follows (in thousands):
<TABLE>
<CAPTION>
INTEREST INTEREST INTEREST INTEREST
RATE EXCHANGE RATE CAP RATE FLOOR RATE COLLAR
AGREEMENTS AGREEMENTS AGREEMENTS AGREEMENTS
-------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Notional balance at December 31, 1993 $ 1,605,250 $ 1,846,500 $ 1,670,000 $ 25,000
Purchases -- 706,000 -- --
Terminations and maturities (31,250) -- (100,000) --
---------- ---------- ---------- -------
Notional balance at December 31, 1994 1,574,000 2,552,500 1,570,000 25,000
Maturities (360,000) -- -- --
---------- ---------- ---------- -------
Notional balance at December 31, 1995 $ 1,214,000 $ 2,552,500 $ 1,570,000 $ 25,000
========== ========== ========== =======
</TABLE>
At December 31, 1995, unamortized fees related to the purchase of interest rate
cap, floor, and collar agreements totaled $62.0 million. The annual
amortization of the unamortized fees is summarized as follows (in thousands):
<TABLE>
<CAPTION>
INTEREST-
AVAILABLE BEARING
FOR SALE LIABILITIES TOTAL
---------- ----------- --------
<S> <C> <C> <C>
1996................................................. $ 7,421 $ 5,269 $ 12,690
1997................................................. 5,441 5,263 10,704
1998................................................. 3,335 5,020 8,355
1999................................................. 2,178 4,502 6,680
2000................................................. 1,552 4,502 6,054
2001 through 2005.................................... 4,047 13,493 17,540
------ ------ ------
$ 23,974 $ 38,049 $ 62,023
====== ====== ======
</TABLE>
The Company has terminated interest rate exchange and floor agreements which
have resulted in deferred gains and losses. At December 31, 1995, net deferred
losses totaled approximately $15.2 million. The annual amortization of the
deferred net losses is summarized as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996.................................................. $ 1,764
1997.................................................. 2,484
1998.................................................. 3,570
1999.................................................. 2,765
2000.................................................. 2,503
2001 through 2002..................................... 2,084
------
$ 15,170
======
</TABLE>
The Company also utilizes short positions in financial futures contracts to
reduce the interest rate risk of certain adjustable rate agency mortgage-backed
securities in the available for sale portfolio. Each short position is a
contract representing a commitment to sell a $1.0 million, ninety day maturity
Eurodollar deposit. Futures contract price changes settle on a daily basis
whereby the Company either makes or receives a cash payment. Such cash receipt
or payment is recorded against the change in the value of certain adjustable
rate agency mortgage-backed securities held in the available for sale portfolio.
84
<PAGE>
Futures contracts utilized to reduce the interest rate risk of certain
adjustable rate government agency mortgage-backed securities in the available
for sale portfolio are summarized as follows:
<TABLE>
<CAPTION>
Contracts
--------------------------------------------------
Face Deferred
Number Amount Gain
------ ------ --------
(dollars in millions)
<S> <C> <C> <C>
December 31, 1995 4,115 $ 4,115 $ --
December 31, 1994 11,072 $11,072 $28.4
</TABLE>
In accordance with the Company's accounting policy for financial futures
contracts discussed in Note 1, the Company recognized a $34.8 million loss on
such contracts during 1995. The loss was recognized as the Company does not
expect to continue to consistently achieve high correlation as measured using
the " cumulative dollar approach " which has become the accepted accounting
practice since Statement of Financial Accounting Standards No. 80, " Accounting
for Futures Contracts," does not define how correlation is to be measured. The
Company believes that the futures contracts have accomplished their economic
risk management objective of substantially mitigating the interest rate risk of
owning mortgage-backed securities as evidenced by the relatively insignificant
size of the Company's SFAS 115 stockholders' equity component. This charge had
no impact upon total stockholders' equity since both the futures contracts and
the related mortgage-backed securities have been marked to market through
stockholders' equity at each reporting period as required by SFAS 115.
Subsequent to year end, the Company closed out 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.
(16) NET GAIN (LOSS) FROM FINANCIAL INSTRUMENTS
Net gain (loss) from financial instruments is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Mortgage-backed securities held to maturity....................... $ -- $ (231) $ (663)
Investment securities held to maturity............................ -- 209 --
Mortgage-backed securities held for trading....................... -- (4,545) 2,668
Mortgage-backed securities available for sale..................... 16,547 (17,160) 14,659
Investment securities available for sale.......................... -- (115) 60
Cancellation cost of interest rate exchange agreements............ -- (8,910) (4,496)
Options expense................................................... (11,079) (8,368) (1,582)
------- ------- ------
$ 5,468 $ (39,120) $ 10,646
======= ======= ======
</TABLE>
(17) INCOME TAXES
If certain conditions are met, savings and loan associations and savings banks
are allowed special bad debt deductions in determining taxable income based on
either specified experience formulas or on a percentage of taxable income before
such deduction. Bad debt deductions in excess of actual losses are tax-
preference items, and are subject to a minimum tax. The Company used the
percentage of taxable income method for 1995, 1994, and 1993 in determining the
bad debt deduction for tax purposes.
85
<PAGE>
Income tax expense (benefit) before extraordinary item and the cumulative effect
of change in accounting principle is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993
-------- --------- --------
(in thousands)
<S> <C> <C> <C>
Current:
Federal.................................................... $ 9,442 $ 28,840 $ 11,186
1,743
State...................................................... 458 2,021
Deferred: 12,994
Federal.................................................... 10,309 (14,805) 1,211
State...................................................... 407 (1,030)
------- -------- -------
$ 20,616 $ 15,026 $ 27,134
======= ======= =======
</TABLE>
The reasons for the difference between the expected income taxes, computed at
the statutory rate of 35% and the actual income taxes are summarized as follows:
<TABLE>
d<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
-------- ------ ------
(in thousands)
<S> <C> <C> <C>
Computed "expected" income tax.......................... $ 23,007 $ 16,304 $ 28,141
State income taxes, net of federal tax benefit.......... 562 644 1,920
Resolution of federal tax issues........................ (2,188) (3,110) (1,709)
Nondeductible acquisition costs......................... 101 2,469 --
Other, net.............................................. (866) (1,281) (1,218)
------ ------ ------
$ 20,616 $ 15,026 $ 27,134
====== ====== ======
</TABLE>
The components of the deferred tax assets and deferred tax liabilities are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
------ ------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Unrealized losses on securities.............. $ 12,506 $ 18,270
Litigation settlement........................ 1,604 2,365
Purchased mortgage service rights............ 3,704 2,241
Provision for losses on loans................ 7,412 9,456
Other........................................ 4,278 6,325
------ ------
Total deferred tax assets................... 29,504 38,657
------ ------
Deferred tax liabilities:
FHLB stock dividends......................... 8,203 7,210
Purchase accounting adjustments.............. 2,294 --
Bad debt reserves in excess of base year..... 4,792 3,755
Deferred income.............................. 7,275 8,876
Other........................................ 2,346 3,506
------ ------
Total deferred tax liabilities.............. 24,910 23,347
------ ------
Net deferred tax asset.................... $ 4,594 $ 15,310
====== ======
</TABLE>
Retained earnings at December 31, 1995 included earnings of approximately $93.0
million representing tax bad debt deductions, net of actual bad debts and bad
debt recoveries, for which no provision for Federal income taxes has been made.
If these amounts are used for any purpose other than to absorb loan losses, they
will be subject to Federal income taxes at the then prevailing corporate rate.
86
<PAGE>
(18) STOCKHOLDERS' EQUITY
Preferred Stock
On March 2, 1993, the Company completed the public offering of 920,000 shares of
6.5% non-cumulative perpetual convertible preferred stock with a liquidation
preference of $50 per share. The net proceeds from the issuance totaled $44.2
million. Each share of preferred stock is convertible, at the option of the
holder, into shares of the Company's common stock, par value $.01 per share at a
conversion price of $40 per share of common stock, subject to adjustment in
certain events. The preferred stock is redeemable, at the option of the
Company, in whole at any time or in part, from time to time, on or after May 16,
1997 at $50 per share, plus accrued and unpaid dividends.
On August 17, 1993, the Company issued 80,000 additional shares of 6.5% non-
cumulative perpetual convertible preferred stock. These newly issued shares
were exchanged for 119,025 shares of common stock of the Company. The market
value of the preferred stock issued was equal to that of the common stock being
exchanged.
On June 30, 1994, the Company completed the offering of 319,000 shares of 6.5%
non-cumulative perpetual convertible preferred stock. The net proceeds from the
issuance totaled $21.3 million. The net proceeds from the offering, together
with other cash on hand, were used for the early retirement of 13.0%
subordinated debentures issued by the Company under the name Farm & Home.
Stock Repurchase Program
On December 15, 1994, the Board of Directors of Roosevelt Financial Group, Inc.
authorized the Company to acquire up to 1,750,000 shares of its own common
stock, subject to market conditions, prior to December 31, 1997. The stock
repurchased is to be held in treasury in order to fund, from time to time, the
Company's benefit programs. Shares of stock repurchased may also be retired,
from time to time, if not needed for other corporate purposes. Through December
31, 1995, 224,500 shares of common stock of the Company have been repurchased
pursuant to the stock repurchase program at a weighted average price of $15.93.
Common Stock Split
On March 29, 1994, the Company declared a three-for-one common stock split in
the form of a 200% common stock dividend payable on May 18, 1994 to stockholders
of record on May 2, 1994. Under the terms of the stock split, stockholders
received a dividend of two shares for every one share held on the record date.
Common shares outstanding for the periods presented, average shares utilized in
computing earnings per share and all stock option information has been adjusted
to reflect the split.
87
<PAGE>
(19) REGULATORY CAPITAL REQUIREMENTS
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)
requires that an institution meet three specific capital requirements: a
leverage ratio of core capital to total adjusted assets, a tangible capital
ratio expressed as a percent of total tangible assets and a risk-based capital
standard expressed as a percent of risk-adjusted assets. As of December 31,
1995, the Bank exceeded all regulatory capital standards, as follows (dollars in
millions):
<TABLE>
<CAPTION>
ACTUAL REQUIREMENT EXCESS CAPITAL
-------------------------------------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital......................... $ 474.7 5.26% $ 135.5 1.50% $ 339.2 3.76%
Core Capital............................. 477.1 5.28 271.0 3.00 206.1 2.28
Risk-based Capital....................... 495.7 14.60 271.6 8.00 224.1 6.60
</TABLE>
A reconciliation at December 31, 1995 of stockholders equity and regulatory
risk-based capital follows (in thousands):
<TABLE>
<S> <C>
Stockholders' equity of the Bank......... $ 515,355
Unrealized gains on available for sale
securities............................. (10,986)
General valuation allowances............. 18,622
Assets required to be deducted - intangible assets and
nonincludable subsidiaries............. (29,638)
Qualifying intangible assets............. 2,369
-------
Regulatory risk-based capital of the Bank $ 495,722
=======
</TABLE>
The Office of Thrift Supervision (OTS) has adopted a rule incorporating an
interest rate risk component into its risk-based capital requirements which
utilizes a methodology to measure the interest rate risk exposure of
institutions. This exposure is a measure of the potential decline in the net
portfolio value of the institution based upon the effect of an assumed 200 basis
point increase or decrease in interest rates. "Net portfolio value" is the
present value of the expected net cash flow from the institution's assets,
liabilities and off-balance sheet contracts. Under the OTS regulation, an
institution's "normal" level of interest rate risk in the event of this assumed
change in interest rates is a decrease in the institution's net portfolio value
in an amount not exceeding two percent of the present value of its assets. The
amount of the required 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 recently announced that it will delay
the effectiveness of the regulation until it adopts the process by which an
institution may appeal an interest rate risk capital deduction determination.
Utilizing this measurement concept, the Bank's interest rate risk at December
31, 1995 would not be greater than normal as defined by the OTS, thus not
requiring any additional risk-based capital.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) was
signed into law on December 19, 1991. Regulations implementing the prompt
corrective action provisions of FDICIA became effective on December 19, 1992.
In addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the Federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting, and operations. The prompt corrective
action regulations define specific capital categories based on an institution's
capital ratios. The capital categories, in declining order, are "well
capitalized", "adequately capitalized", "undercapitalized", "significantly
undercapitalized" and "critically undercapitalized". To be considered "well
capitalized", an institution must generally have a leverage (core) ratio of at
least 5%, a Tier 1 risk-based capital ratio of at least 6%, and a total risk-
based capital ratio of at least 10%. At December 31, 1995, the Bank's capital
levels would result in a determination of "well capitalized" under the prompt
corrective action regulations of FDICIA.
The Bank may not declare or pay a cash dividend on, or repurchase, any of its
common stock if the effect thereof would cause the capital of the Bank to be
reduced below either the amount required for its liquidation account established
at the time of its conversion from mutual to stock form of ownership or the
capital requirements imposed by the OTS. As of December 31, 1995, the Bank was
in compliance with these requirements.
88
<PAGE>
(20) STOCK OPTION AND INCENTIVE PLAN
The 1986 Stock Option and Incentive Plan (Plan) was adopted to enable the
Company to attract and retain key personnel. The Plan provides for the granting
of incentive stock options, nonqualified stock options, restricted stock awards,
and stock appreciation rights. The Plan authorizes the issuance of up to
4,500,000 shares of the Company's common stock. In addition, the 1994 Non-
Employee Director Stock Option Plan authorizes the issuance of up to 150,000
shares of the Company's common stock.
The Company accounts for stock-based compensation under the Plan in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and, accordingly, recognizes no compensation expense as the exercise
price of the Company's employee stock options equal the market price of the
underlying stock on the date of grant. In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Upon adoption in
1996, the Company will elect the pro forma disclosure alternative provided in
SFAS 123. Thus, such adoption will not have any impact on the Company's
financial condition or results of operations.
Information on the Company's stock options are summarized as follows:
<TABLE>
<CAPTION>
AVERAGE PRICE PER SHARE OPTION
SHARES PER SHARE PRICE RANGE
-------- --------- -----------
<S> <C> <C> <C>
Outstanding and exercisable
at December 31, 1992 2,483,380 $ 5.61
Granted 138,000 13.73
Exercised (249,366) 3.33
Cancelled (7,539) 3.66
------
Outstanding and exercisable
at December 31, 1993 2,364,475 15.77 $3.00-13.75
Granted 205,500 13.89
Exercised (1,420,347) 4.63
Cancelled -- --
-------
Outstanding and exercisable
at December 31, 1994 1,149,628 7.67 $3.00-15.50
Assumed in merger 93,506 4.09
Granted 150,000 16.54
Forfeited (9,000) 16.08
Exercised (349,680) 4.53
--------
Outstanding and exercisable
at December 31, 1995 1,034,454 $ 9.62 $3.00-18.00
========= =======
</TABLE>
(21) EMPLOYEE BENEFITS PROGRAMS
Substantially all employees are included in a trusted defined benefit pension
plan. Benefits contemplated by the plan are funded through payments of the
Financial Institutions Retirement Fund, which operates a multi-employer plan and
does not report relative plan assets and actuarial liabilities of the individual
participating companies. The cost of funding is charged to current operations.
There is no unfunded liability for past service. In addition, the Company
maintains a retirement plan for outside directors. Pension expense totaled
$1,367,000, $359,000, and $205,000 for 1995, 1994, and 1993, respectively.
The Company maintains a thrift savings plan, qualify under Section 401(k) of the
Internal Revenue Code, administered by the Financial Institutions Thrift Plan,
and covering substantially all employees. Participants may designate up to 15%
of their annual compensation as their contribution to the plan. Contributions
by employees of up to 6% of their annual compensation are partially or fully
matched by the Company based on each employee's number of years of service.
Matching contribution by the Company totaled $936,000, $866,000, and $779,000
for 1995, 1994, and 1993, respectively.
The Company also sponsors an Employee Stock Ownership Plan (ESOP) which covers
substantially all employees with more than one year of employment who have
attained the age of twenty-one. The ESOP provides for a grant of the Company's
stock equal to 1% of the annual compensation of each eligible employee up to
annual compensation of $75,000. Contributions are made on December 31 of each
year of all eligible employees on that date. Dividends on shares held in each
employees's account are reinvested. Contributions made to the ESOP by the
Company totaled $247,000, $448,000, and $842,000 for 1995, 1994 and 1993,
respectively.
89
<PAGE>
In addition, the Company sponsors an unfunded retiree medical, dental, and death
benefits plan covering eligible employees who retired prior to July 1, 1990 and
retired directors from Farm & Home. The plan is contributory with retiree
contributions adjusted from time to time. The Company accounts for the plan in
accordance with Statement of Financial Accounting Standards No. 106, "Employers
Accounting for Postretirement Benefits Other than Pensions" (SFAS 106). The
plan's impact on the Company's consolidated financial statements are not
material, therefore the disclosures required by SFAS 106 are not presented.
(22) LITIGATION
The Company and its subsidiaries are subject to a number of lawsuits and claims,
some of which involve substantial amounts arising out of the conduct of its
business. Management, after review and consultation with outside legal counsel,
is of the opinion that the ultimate disposition of such litigation and claims
will not have a material adverse effect of the Company's consolidated financial
statements.
(23) PARENT COMPANY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1994
---------- ----------
(in thousands)
<S> <C> <C>
CONDENSED BALANCE SHEETS
Assets:
Cash...................................................................... $ 2,616 $ 2,090
Investment in subsidiaries................................................ 517,080 465,192
Investment securities available for sale.................................. 2,531 --
Other assets.............................................................. 4,946 4,172
-------- --------
$ 527,173 $ 471,454
======== ========
Liabilities and Stockholders' Equity:
Subordinated notes....................................................... $ 27,859 $ 27,724
Other liabilities........................................................ 2,408 2,104
Stockholders' equity..................................................... 496,906 441,626
-------- --------
$ 527,173 $ 471,454
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Interest income............................................................. $ 82 $ 241 $ 431
Interest expense............................................................ 2,867 5,276 7,079
------- ------- -------
Net interest expense....................................................... (2,785) (5,035) (6,648)
Equity in earnings of subsidiaries.......................................... 47,388 36,548 50,021
General and administrative expenses......................................... (683) (7,469) (1,543)
------- ------- -------
Income before income taxes and extraordinary item.......................... 43,920 24,044 41,830
Income tax (benefit)........................................................ (1,198) (2,280) (3,042)
------- ------- -------
Income before extraordinary item........................................... 45,118 26,324 44,872
Extraordinary item, net of income tax effect................................ -- (2,617) --
------- ------- -------
Net income................................................................. $ 45,118 $ 23,707 $ 44,872
======= ======= =======
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income.............................................. $ 45,118 $ 23,707 $ 44,872
Equity in earnings of subsidiaries...................... (47,388) (36,548) (50,021)
Extraordinary loss on early extinguishment of debt...... -- 3,965 --
Other, net.............................................. 1,317 270 (9,456)
-------- -------- --------
Net cash used in operating activities................ (953) (8,606) (14,605)
-------- -------- --------
Cash flows from investing activities:
Dividends received...................................... 52,050 45,650 7,500
Additional investment in subsidiary.................... (21,463) (19,036) (44,613)
-------- -------- --------
Net cash provided by (used in) investing activities.. 30,587 26,614 (37,113)
-------- -------- --------
Cash flows from financing activities:
Redemption of subordinated notes........................ -- (31,022) --
Cash dividends paid..................................... (26,789) (18,056) (11,501)
Proceeds from issuance of preferred stock............... -- 21,273 44,185
Costs from exchange of stock............................ -- -- (28)
Purchase of treasury stock.............................. (3,426) (150) --
Exercise of stock options............................... 1,107 6,459 748
-------- -------- --------
Net cash (used in) provided by financing activities.. (29,108) (21,496) 33,404
-------- -------- --------
Net increase (decrease) in cash...................... 526 (3,488) (18,314)
Cash at beginning of year............................... 2,090 5,578 23,892
-------- -------- --------
Cash at end of year..................................... $ 2,616 $ 2,090 $ 5,578
======== ======== ========
</TABLE>
91
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months prior to the
date of the most recent financial statements reporting a change in accountants
and/or reporting disagreements on any matter of accounting principle or
financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors of the Registrant is incorporated herein by
reference from the Company's definitive Proxy Statement for the 1996 Annual
Meeting of Stockholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year. The compensation report and performance
graph included in the Proxy Statement pursuant to Items 402 (k) and 402 (l) of
Regulation S-K are specifically not incorporated by reference herein.
Information concerning executive officers of the Registrant is provided herein
under Item 1 of Part I.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the 1996 Annual
Meeting of Stockholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year. The compensation report and performance
graph included in the Proxy Statement pursuant to Items 402 (k) and 402 (l) of
Regulation S-K are specifically not incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference from the Company's definitive
Proxy Statement for the 1996 Annual Meeting of Stockholders, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and transactions is incorporated
herein by reference from the Company's definitive Proxy Statement for the 1996
Annual Meeting of Stockholders, a copy of which will be filed not later than 120
days after the close of the fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements:
- --------
The Index to Consolidated Financial Statements appears at Item 8, Financial
Statements and Supplementary Data.
(a) (2) Financial Statement Schedules:
- --------
All financial statement schedules have been omitted as the required information
is inapplicable or has been included in the Notes to Consolidated Financial
Statements.
92
<PAGE>
(a) (3) Exhibits:
- --------
<TABLE>
<CAPTION>
REGULATION
S-K EXHIBIT
NUMBER DOCUMENT
- --------- --------
<S> <C>
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession
3 Certificate of Incorporation.
Filed as Exhibit 4.1 to the Registrant's
Registration Statement No. 33-79308 and
incorporated herein by reference.
Bylaws. Filed as Exhibit 3 to the
Registrant's Annual Report on
Form 10-K for the year ended
December 31, 1988 and incorporated
herein by reference.
4 Instruments defining the rights of
security holders, including
indentures:
Specimen common stock certificate.
Filed as Exhibit 4 to the
Registrant's Annual Report on
Form 10-K for the year ended
December 31, 1988 and
incorporated herein by reference.
Form of Certificate of Designation of 6 1/2%
Non-Cumulative Convertible Preferred Stock,
Series A. Filed as Exhibit 4.3 to the
Registrant's Registration Statement No.
33-76738 and incorporated herein by reference.
Specimen stock certificate of 6 1/2% Non-Cumulative
Convertible Preferred Stock, Series A.
Filed as
</TABLE>
93
<PAGE>
<TABLE>
<S> <C>
Exhibit 4.4 to the Registrant's
Registration Statement No. 33-76738
and incorporated herein by reference.
Form of Certificate of Designation of
6 1/2% Non-Cumulative Convertible Preferred
Stock, Series F. Filed as Exhibit 4.15 to
the Registrant's Registration Statement
No. 33-79308 and incorporated herein by reference.
Specimen stock certificate of 6 1/2% Non-Cumulative
Convertible Preferred Stock, Series F. Filed as
Exhibit 4.16 to the Registrant's Registration
Statement No. 33-79308 and incorporated herein by
reference.
Indenture, dated July 30, 1992,
with respect to the Registrant's
9 1/2% Subordinated Notes, due
August 1, 2002. Filed as Exhibit 4.1
to the Registrant's Registration Statement
No. 33-49108 and incorporated herein by
reference.
Indenture, dated April 15, 1988,
with respect to the Registrant's
10 1/8% Mortgage-Backed Bonds,
due April 15, 2018/*/
9 Voting trust agreement
10 Material Contracts:
Amended and Restated 1986 Stock Option
and Incentive Plan. Filed as Exhibit
4.9 to the Registrant's Registration
Statement No. 33-82864 and incorporated
herein by reference.
1988 Non-Employee Directors Retirement
Pension Plan. Filed as Exhibit
4.9 to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1988 and
incorporated herein by reference.
1994 Non-Employee Director
Stock Option Plan. Filed as Exhibit
4.10 to the Registrant's Annual
Report on Form 10-K for the year
ended December 31, 1994 and
incorporated herein by reference.
Roosevelt Bank Supplemental
Pension Plan. Filed as Exhibit
4.10 to the Registrant's Annual
Report on Form 10-K for the year ended
Decemeber 31, 1994 and incorporated
herein by reference.
Roosevelt Bank Management Deferred
Compensation Plan. Filed as Exhibit
4.10 to the Registrant's Annual Report
on Form 10-K for the year ended
December 31, 1994 and incorporated
herein by reference.
Roosevelt Financial Group, Inc.Not applicable
Retirement Pension Plan for Outside Directors
</TABLE>
94
<PAGE>
<TABLE>
<S> <C>
11 Statements re computation of
per share earnings**
12 Statements re computation of
ratios
13 Annual report to security holders
16 Letter re changes in certifying accountant
18 Letter re changes in accounting principles
21 Subsidiaries of the registrant**
22 Published report regarding matters submitted
to vote of security holders
23 Consents of experts
24 Power of attorney
27 Financial Data Schedule
28 Information from reports furnished
to state insurance regulatory authorities
99 Additional exhibits
* In accordance with Item 601 (b) (4) (iii) of Regulation S-K,
Registrant hereby agrees to furnish a copy of this instrument to the SEC upon request.
** Previously Filed.
</TABLE>
95
<PAGE>
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: July 30, 1996 By: /s/ Gary W. Douglass
-- ----------------------------------
Gary W. Douglass
Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
--------- ------------------------------------------------
<S> <C>
10 Roosevelt Financial Group, Inc. Retirement
Pension Plan for Outside Directors*
11 Statements re computation of per share earnings*
21 Subsidiaries of the registrant*
23 Consents of experts
</TABLE>
____________
* Previously Filed
<PAGE>
Exhibit 23
Independent Auditors' Consent
-----------------------------
The Board of Directors
Roosevelt Financial Group, Inc,:
We consent to incorporation by reference in the registration statements No.
33-39140, No. 33-65722, No. 33-82864, No. 33-92106, and No. 33-97590 on Form S-8
of Roosevelt Financial Group, Inc. (Roosevelt) of our report dated January 16,
1996, relating to the consolidated balance sheets of Roosevelt Financial Group,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1995, which report
appears in the December 31, 1995 annual report on Form 10-K of Roosevelt.
Our report refers to a change during 1993 in the method of accounting for
certain investments in debt securities. Additionally, our report stated that the
supplemental fair value consolidated balance sheets of Roosevelt have been
prepared by management to present relevant financial information that is not
provided by the historical cost consolidated balance sheets and is not intended
to be a presentation in conformity with generally accepted accounting
principles. The supplemental fair value consolidated balance sheets do not
purport to present the net realizable, liquidation, or market value of Roosevelt
as a whole. Furthermore, amounts ultimately realized by Roosevelt from the
disposal of assets may vary significantly from the fair values presented.
/s/ KPMG PEAT MARWICK L.L.P
St. Louis, Missouri
March 11, 1996
