<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[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, 1996 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 AND
SERIES F, 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
------ ------
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 February 28, 1997, there were issued and outstanding 42,644,404 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 February 28, 1997, was $980,821,292. (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 1997 Annual
Meeting of Stockholders.
<PAGE> 2
<TABLE>
ROOSEVELT FINANCIAL GROUP, INC.
1996 ANNUAL REPORT ON FORM 10K
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
PART I 1
Item 1. BUSINESS 1
General 1
Forward Looking Statements 2
Acquisitions 3
Lending Activities 3
Investment and Mortgage-Backed Securities 7
Classified Assets, Loan Delinquencies and Defaults 11
Provisions for Losses on Loans and Real Estate Owned 11
Deposits and Other Sources of Funds 14
Asset/ Liability Management 15
Subsidiaries 15
Regulation 16
Competition 23
Management of Registrant and Its Subsidiaries 24
Employees 24
Item 2. PROPERTIES 25
Item 3. LEGAL PROCEEDINGS 25
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
PART II 26
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS 26
Common Stock 26
Payment of Dividends 26
Item 6. SELECTED FINANCIAL DATA 27
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 29
General 29
Results of Operations 29
Financial Condition 39
Asset Quality 41
Asset/Liability Management 42
Liquidity and Capital Resources 45
Impact of Inflation and Changing Prices 46
Accounting and Regulatory Developments 46
Selected Quarterly Financial Data 47
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 49
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 86
PART III 86
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 86
Item 11. EXECUTIVE COMPENSATION 86
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 86
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 86
PART IV 86
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K 86
SIGNATURES 90
</TABLE>
<PAGE> 3
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 at December 31, 1996. The Bank has 37 offices
serving the St. Louis metropolitan area, including Alton and Granite City,
Illinois and ten 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 a holding company
reorganization of the Bank and the Company acquired all of the issued and
outstanding shares of common stock of the Bank. On December 2, 1996, the
Company reorganized as both a thrift institution holding company and a bank
holding company and thereafter acquired all of the issued and outstanding
shares of common stock of Community Charter Corporation, Inc., the holding
company of Missouri State Bank (MSB) which has two offices in the city of
St. Louis, Missouri. The principal assets of the Company are the common
stock of the Bank and MSB, both of which are wholly-owned subsidiaries. The
Company's common stock is traded on the Nasdaq National Market under the
symbol "RFED".
On December 23, 1996, Roosevelt Financial Group, Inc. announced its
plans to merge with Mercantile Bancorporation Inc. (MTL). Pursuant to the
agreement, Roosevelt shareholders will be able to elect to receive either
$22 in cash or .4211 shares of common stock (subject to the issuance of
a maximum number of shares of MTL common stock). Plans call for the
merger, which is subject to the approval of Roosevelt shareholders and all
appropriate regulatory agencies, to be completed in mid-1997.
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 Federal Reserve Board and the Office of
Thrift Supervision (the OTS), respectively. MSB is subject to examination
and comprehensive regulation and oversight by the Missouri Division of
Finance (MDF) and the Federal Deposit Insurance Corporation (FDIC). The
deposits of the Company's banking subsidiaries are primarily insured by
the Savings Association Insurance Fund (SAIF) and, to a lesser extent, by
the Bank Insurance Fund (BIF). As such, the Bank subsidiaries are subject
to regulation 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 and MSB on a consolidated basis.
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.
<PAGE> 4
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.
2
<PAGE> 5
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 Company in 1988.
<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
Kirksville Bancshares, Inc. December 29, 1995 69.4 101.9 130.7 1
Mutual Bancompany, Inc. October 25, 1996 37.3 41.4 48.8 1
Sentinel Financial Corporation October 31, 1996 81.2 119.7 143.8 2
Community Charter Corporation December 2, 1996 54.0 67.2 76.8 2
</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, 1996,
loans secured by residential real estate totaled $3.8 billion, which
represented 87.74% of the Company's loan portfolio.
The Company's residential loan pricing discipline 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
generally 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.
3
<PAGE> 6
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 Bank may originate are restricted by the Home
Owner's Loan Act and other laws and are regulated by the OTS. MSB is
similarly restricted by Missouri law and regulation by MDF. Roosevelt is
permitted 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, 1996, loans secured by commercial real estate (including
multi-family residential properties) and construction lending totaled $181.3
million of which loans secured by commercial real estate totaled $153.4
million, representing 3.55% 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, mobile home
loans, credit card loans and deposit secured loans.
The Company offers various variable-rate and fixed-rate consumer loans,
including automobile, marine, recreational vehicle, home improvement,
unsecured personal, credit card 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 $34.9 million during 1996.
During the second half of 1996, Roosevelt entered into an agreement with a
third party to solicit, administer and service credit card accounts.
Underwriting guidelines have been established by Roosevelt. Two types of
cards are offered; VISA Gold, which provides a $15,000 unsecured line of
credit and VISA Classic which provides a $5,000 unsecured line of credit.
Credit card originations resulting from this agreement totaled $165.1 million
during 1996.
At December 31, 1996, the Company's consumer loan balances totaled $348.3
million which represented 8.07% of the Company's total loan portfolio.
4
<PAGE> 7
<TABLE>
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.
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- ------------------- ------------------- ------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REAL ESTATE LOANS:
Residential $3,791,145 87.74% $3,320,098 92.35% $2,887,992 92.48% $2,465,592 89.78% $2,141,863 88.36%
Commercial 153,375 3.55 137,507 3.83 132,316 4.24 144,295 5.25 134,321 5.54
Construction 27,876 0.64 11,969 0.33 18,489 0.59 95,550 3.48 109,627 4.52
---------- ------ ---------- ------ ---------- ------ ---------- ------ --------- ------
Total real estate
loans held to
maturity 3,972,396 91.93 3,469,574 96.51 3,038,797 97.31 2,705,437 98.51 2,385,811 98.42
CONSUMER LOANS 348,280 8.07 125,633 3.49 84,013 2.69 40,831 1.49 38,381 1.58
---------- ------ ---------- ------ ---------- ------ ---------- ------ --------- ------
Total loans 4,320,676 100.00% 3,595,207 100.00% 3,122,810 100.00% 2,746,268 100.00% 2,424,192 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process 10,131 4,266 28,348 59,146 41,833
Deferred fees and
discounts (premiums) (10,643) (8,806) (604) 6,256 21,835
Allowance for losses 22,719 21,855 22,915 9,056 10,753
---------- ---------- ---------- ---------- ----------
Loans, net $4,298,469 $3,577,892 $3,072,151 $2,671,810 $2,349,771
========== ========== ========== ========== ==========
</TABLE>
5
<PAGE> 8
<TABLE>
The following table shows the composition of the Company's fixed- and
adjustable-rate loans at the dates indicated.
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- ------------------- ------------------- ------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS:
Real estate:
Residential $1,192,987 27.61% $1,226,691 34.12% $1,107,604 35.47% $1,171,453 42.66% $1,437,122 59.29%
Commercial 108,576 2.51 74,271 2.07 77,164 2.47 82,209 2.99 82,275 3.39
Construction 18,694 .43 1,202 .03 -- -- -- -- -- --
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total fixed-rate
real estate
loans 1,320,257 30.55 1,302,164 36.22 1,184,768 37.94 1,253,662 45.65 1,519,397 62.68
Consumer 135,444 3.14 58,645 1.63 28,715 0.92 22,680 0.83 25,396 1.05
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total fixed-rate
loans 1,455,701 33.69 1,360,809 37.85 1,213,483 38.86 1,276,342 46.48 1,544,793 63.73
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
ADJUSTABLE-RATE LOANS:
Real estate:
Residential 2,598,158 60.13 2,093,407 58.23 1,780,388 57.01 1,294,139 47.12 704,741 29.07
Commercial 44,799 1.04 63,236 1.76 55,152 1.77 62,086 2.26 52,046 2.15
Construction 9,182 .21 10,767 0.30 18,489 0.59 95,550 3.48 109,627 4.52
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total adjustable-
rate real estate
loans 2,652,139 61.38 2,167,410 60.29 1,854,029 59.37 1,451,775 52.86 866,414 35.74
Consumer 212,836 4.93 66,988 1.86 55,298 1.77 18,151 0.66 12,985 0.53
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total adjustable-
rate loans 2,864,975 66.31 2,234,398 62.15 1,909,327 61.14 1,469,926 53.52 879,399 36.27
---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------
Total loans 4,320,676 100.00% 3,595,207 100.00% 3,122,810 100.00% 2,746,268 100.00% 2,424,192 100.00%
====== ====== ====== ====== ======
LESS:
Loans in process 10,131 4,266 28,348 59,146 41,833
Deferred fees and
discounts (premiums) (10,643) (8,806) (604) 6,256 21,835
Allowance for losses 22,719 21,855 22,915 9,056 10,753
---------- ---------- ---------- ---------- ----------
Loans, net $4,298,469 $3,577,892 $3,072,151 $2,671,810 $2,349,771
========== ========== ========== ========== ==========
</TABLE>
6
<PAGE> 9
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, 1996, the Company's $2.3
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 nor 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, 1996, there were approximately $1.1 billion of private issue
pass-through certificates with related unrealized losses totaling $15.3
million. None of the individual unrealized losses exceeded $1.3 million or
5.4% 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. 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,
7
<PAGE> 10
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.
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,
----------------------------------------
1996 1995 1994
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Investment Securities:
U.S. Government and agency obligations $ 12,398 $ 11,085 $ --
Corporate securities 15,037 16,763 --
FHLB stock 155,792 132,009 109,136
---------- ---------- ----------
183,227 159,857 109,136
---------- ---------- ----------
Mortgage-backed Securities:
Mortgage-backed certificates 373,970 1,372,947 1,533,312
Private pass-throughs 2,334,617 -- --
Collateralized mortgage obligations 168,361 -- --
Other 38,573 60,701 59,703
Derivative financial instruments:
Interest rate exchange agreements -- (6,528) 3,476
Interest rate cap agreements 57,333 8,738 57,897
Interest rate floor agreements 1,676 10,746 1,582
Exchange traded options -- -- 593
---------- ---------- ----------
2,974,530 1,446,604 1,656,563
---------- ---------- ----------
$ 3,157,757 $ 1,606,461 $ 1,765,699
========== ========== ==========
</TABLE>
8
<PAGE> 11
The following schedule illustrates the contractual maturities of the
Company's securities available for sale portfolio at December 31, 1996.
<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 $ 1,999 $ 10,399 $ -- $ -- $ -- $ 12,398
Corporate securities 1,869 11,821 1,313 34 -- 15,037
FHLB stock -- -- -- -- 155,792 155,792
------- -------- ------- ---------- -------- ----------
3,868 22,220 1,313 34 155,792 183,227
------- -------- ------- ---------- -------- ----------
Mortgage-backed Securities:
Mortgage-backed certificates 10,258 61,439 10,464 291,809 -- 373,970
Private pass-throughs -- 25,046 246 2,309,325 -- 2,334,617
Collateralized mortgage obligations 161 2,962 -- 165,238 -- 168,361
Other -- -- -- 38,573 -- 38,573
Derivative financial instruments:
Interest rate cap agreements -- 5,818 51,515 -- -- 57,333
Interest rate floor agreements 1,676 -- -- -- -- 1,676
------- -------- ------- ---------- -------- ----------
12,095 95,265 62,225 2,804,945 -- 2,974,530
------- -------- ------- ---------- -------- ----------
$ 15,963 $ 117,485 $ 63,538 $ 2,804,979 $ 155,792 $ 3,157,757
======= ======== ======= ========== ======== ==========
Weighted average yield 6.15% 6.63% 7.80% 7.37% 7.00% 7.42%
==== ==== ==== ==== ==== ====
</TABLE>
9
<PAGE> 12
At December 31, 1996, the Company held certain mortgage-backed securities
classified as available for sale (which are included in the preceding
securities available for sale composition table) whose amortized cost by
issuer exceeded ten percent of the Company's stockholders' equity. Such
investments are detailed as follows:
<TABLE>
<CAPTION>
Issuer Amortized Cost Market Value
------ -------------- ------------
(in thousands)
<S> <C> <C>
Resolution Trust Corporation $ 329,177 $ 325,570
Prudential Home Mortgage Services 324,229 323,518
Ryland Mortgage Securities Corporation 275,557 275,277
Saxon Mortgage Securities Corporation 137,950 137,936
Capstead Securities Corporation 195,920 195,395
Nomura Asset Capital Corporation 127,605 125,103
Securitized Asset Sales, Inc. 106,614 107,500
Sears Mortgage Securities 87,991 87,322
Greenwich Capital Acceptance, Inc. 87,178 90,617
Donaldson, Lufkin & Jenrette Securities Corp. 72,039 74,183
Citicorp Mortgage Securities, Inc. 65,488 65,994
Residential Funding Corporation 60,414 59,861
Guardian Savings & Loan Association 55,253 57,045
</TABLE>
SECURITIES HELD TO MATURITY
The following table sets forth information concerning the Company's
securities held to maturity portfolio at the dates indicated, at
amortized cost:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Investment Securities:
U.S. Government and agency obligations $ -- $ 113,554 $ 115,500
Corporate securities -- 5,632 41,273
------ --------- ---------
-- 119,186 156,773
------ --------- ---------
Mortgage-backed Securities:
Mortgage-backed certificates -- 384,795 459,190
Private pass-throughs -- 2,705,311 2,271,272
Collateralized mortgage obligations -- 340,848 388,827
------ --------- ---------
-- 3,430,954 3,119,289
------ --------- ---------
$ -- $ 3,550,140 $ 3,276,062
====== ========= =========
</TABLE>
In December 1996, the Company reclassified its entire investment and
mortgage-backed securities portfolio from held to maturity to available for
sale. The securities transferred consisted of investment securities with
approximate amortized cost and market values of $114.3 million and
$114.9 million, respectively and mortgage-backed securities with
approximate amortized cost and market values of $3.1 billion. This action
was taken to provide the Company maximum flexibility to manage its
portfolio.
10
<PAGE> 13
CLASSIFIED ASSETS, LOAN DELINQUENCIES AND DEFAULTS
Federal regulations provide for the classification of loans, debt and 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 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.
11
<PAGE> 14
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 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 net realizable 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 regulatory authorities. 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.
12
<PAGE> 15
<TABLE>
The following table sets forth an analysis of the Company's allowance for
loan losses.
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------------------
CATEGORY'S CATEGORY'S CATEGORY'S CATEGORY'S CATEGORY'S
PERCENT PERCENT PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period $ 21,855 $ 22,915 $ 9,056 $10,753 $ 9,063
Charge-offs:
Residential 1,930 3,177 358 824 468
Commercial real estate 13 155 696 1,535 1,611
Consumer 230 114 33 169 66
Construction -- 87 -- -- --
------- ------- ------- ------ -------
2,173 3,533 1,087 2,528 2,145
------- ------- ------- ------ -------
Recoveries:
Residential 497 3 16 -- --
Commercial real estate -- 74 5 125 21
Consumer 36 30 10 -- 184
Construction -- -- -- -- --
------- ------- ------- ------ -------
533 107 31 125 205
------- ------- ------- ------ -------
Net charge-offs 1,640 3,426 1,056 2,403 1,940
Additions charged to
operations 1,262 1,200 12,432 706 2,648
Additions acquired
through acquisitions 1,242 1,166 2,483 -- 982
------- ------- ------- ------ -------
Balance at end of period 22,719 $ 21,855 $ 22,915 $ 9,056 $ 10,753
======= ======= ======= ====== =======
Ratio of net charge-offs
during the period to
average loans outstanding
during the period .04% .10% .04% .09% .13%
======= ======= ======= ====== =======
Allowance distribution:
Residential $ 15,827 87.8% $ 17,309 92.4% $ 17,570 92.5% $ 4,245 89.8% $ 4,208 88.4%
Commercial real estate 4,017 3.5 4,220 3.8 4,776 4.2 4,463 5.2 5,835 5.5
Consumer 2,767 8.1 326 3.5 410 2.7 348 1.5 710 1.6
Construction 108 .6 -- .3 159 .6 -- 3.5 -- 4.5
------- ----- ------- ----- ------- ----- ------ ----- ------- -----
$ 22,719 100.0% $ 21,855 100.0% $ 22,915 100.0% $ 9,056 100.0% $ 10,753 100.0%
======= ===== ======= ===== ======= ===== ====== ===== ======= =====
</TABLE>
13
<PAGE> 16
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 and
securities sales, cash flows generated from operations (including interest
credited to deposit accounts), 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.
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 checking accounts, various money market accounts, regular
passbook 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 the Company during the
periods indicated. Net deposits (withdrawals) refers to the amount of
deposits (exclusive of interest credited) during a period less the amount of
withdrawals during the period. The net deposit inflows during 1996 resulted
from an aggressive marketing campaign by the Company to attract retail
deposits, especially checking and money market accounts. The net deposit
outflows in 1995 and 1994 resulted from conservative pricing and a general
industry trend of 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>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995 1994
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net deposits (withdrawals) $ 24,756 $ (346,551) $ (711,218)
Deposits assumed from acquisitions 228,242 182,566 468,877
Deposits sold -- -- (68,134)
Interest credited 186,022 172,774 132,330
Unearned discount on brokered certificates 68 (117) --
Net adjustment related to purchase method of
accounting 486 (564) (3,962)
--------- --------- ---------
Net increase (decrease) in deposits 439,574 8,108 (182,107)
Beginning balance 4,907,497 4,899,389 5,081,496
--------- --------- ---------
Ending balance $ 5,347,071 $ 4,907,497 $ 4,899,389
========= ========= =========
Percent increase (decrease) 9.0 % 0.2 % (3.6) %
=== === =====
</TABLE>
14
<PAGE> 17
Borrowings - The Company's other sources of funds include securities sold
under agreements to repurchase, advances from the FHLB of Des Moines, and
longer-term borrowings such as its mortgage-backed bonds and subordinated
notes. These borrowings totaled $3.1 million, $1.8 billion and $0.00, and
$1.1 billion, $2.4 billion and $47.5 million at December 31, 1996 and 1995,
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.
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.
See "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
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, 1996, the Bank is in compliance with the
requirements.
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 Roosevelt's customers on a
discount basis through a clearing broker/dealer. Mutual funds are offered to
the Roosevelt's customers and the general public by registered representatives
through an arrangement between Roosevelt Financial Services, Inc. and a
registered broker/dealer.
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.
15
<PAGE> 18
REGULATION
The Company currently has two financial institution subsidiaries, the Bank,
which is a Federally chartered savings bank, and MSB, a Missouri chartered bank
and trust company. The deposits of the Bank and Missouri State Bank are
federally insured up to applicable limits by the FDIC and are backed by the
full faith and credit of the United States Government. 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 (the FRB). The Company is also subject
to federal regulation and oversight as a bank holding company. Missouri State
Bank is subject to extensive regulation, supervision and examination by the
Missouri Division of Finance (the MDF) and the FDIC, which are its state and
primary federal banking regulators, respectively. As with the Bank, this
supervision governs the activities which it can engage in. Certain of these
regulatory requirements and restrictions are discussed below and elsewhere in
this document. See "Bank Holding Company Regulation".
FEDERAL REGULATION OF FINANCIAL INSTITUTIONS
The OTS, as the primary federal regulatory agency of the Bank, 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. Missouri State Bank is also required to
file periodic reports with the MDF and the FDIC and is periodically
examined by such agencies. The Bank was most recently examined by the OTS
and the FDIC in April, 1996. 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
1996 was $1.2 million.
The pervasive regulatory authority of the federal banking regulators is backed
by extensive enforcement authority over all FDIC-insured institutions,
including the Bank and Missouri State Bank. 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 federal banking
regulators.
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, 1996,
the Bank's lending limit under this restriction was $66.2 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.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the SAIF and Missouri State Bank is a member of the
BIF, each of which is administered by the FDIC. Their 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 BIF or
the SAIF. 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 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) ratio 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
16
<PAGE> 19
institutions will be made by the FDIC for each semi-annual assessment
period. The Bank and Missouri State Bank qualify as "well-capitalized".
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%. The SAIF rates, however, were not adjusted.
At the time the FDIC revised the BIF premium schedule, it noted that, absent
legislative action (as discussed below), the SAIF would not attain the
designated reserve ratio until the year 2002. As a result, SAIF insured
members would continue to be generally subject to higher deposit insurance
premiums than BIF insured institutions until, all things being equal, the SAIF
attained the required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage caused
thereby, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provided 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. It also provided for the merger of the BIF and SAIF on
January 1, 1999, if no savings association then exists. The special
assessment ratio was established at 0.657% of deposits by the FDIC and
resulted in an assessment to the Bank of $27.4 million or $17.8 million
after the effect of taxes. This special assessment, which was paid in
November 1996, significantly increased noninterest expense and adversely
affected the Bank's results of operations for 1996.
Prior to the enactment of the legislation, a portion of the SAIF assessment
was used to repay obligations issued by a federally chartered corporation to
provide financing (FICO) for resolving the thrift crisis in the 1980's.
Although the SAIF assessment schedule was equalized with the BIF assessment
schedule, effective October 1, 1996, SAIF-insured institutions continue
to be subject to a FICO assessment as a result of this continuing obligation.
The legislation also now requires assessments to be made on BIF-assessable
deposits for this purpose, effective January 1, 1997, however, that assessment
will be limited to 20% of the rate imposed on SAIF assessable deposits until
the earlier of December 31, 1999 or when no savings association continues to
exist, thereby imposing a greater burden on SAIF member institutions such as
the Bank. Thereafter, assessments on BIF-member institutions will be made on
the same basis as SAIF-member institutions. The rates established by the FDIC
to implement this requirement for all FDIC-insured institutions are 6.48 basis
points assessment on SAIF deposits and 1.30 basis points on BIF deposits until
BIF insured institutions participate fully in the assessment. These rates may
be revised in the future based upon changes in the BIF and SAIF assessment
base.
REGULATORY CAPITAL REQUIREMENTS
Federally insured financial institutions, such as the Bank and Missouri State
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. Missouri State Bank is
also subject to a core capital and risk-based capital requirement established
by the FDIC that are similar to that imposed on the Bank.
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 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.
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<PAGE> 20
At December 31, 1996, the Bank had tangible capital of approximately $423.2
million, or 5.44% of adjusted total assets, which is approximately $306.6
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, 1996, the
Bank had $2.0 million of core deposit intangibles included in core capital
under these tests and had core capital equal to approximately $425.3 million,
or 5.47% of adjusted total assets, which is $192.0 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, all FDIC insured
institutions must maintain a core capital level of at least 4% to be
considered adequately capitalized unless its supervisory condition is such to
allow it to maintain a 3% ratio. Missouri State Bank was also in compliance
with its core capital requirement on such date.
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 federal banking
regulators are 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, 1996, the Bank did
not have any capital instruments that qualified as supplementary capital and
had $18.9 million of general loss allowances, which was less than 1% of
risk-weighted assets.
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, 1996, the Bank had total risk-weighted capital of
approximately $444.2 million (including $18.9 million of general loss
allowances). The Bank had risk-weighted assets of $3.8 billion (including
$162.8 million in credit equivalent amounts of converted off-balance sheet
items) for total risk-weighted capital of 11.75% of risk-weighted assets.
This amount was approximately $141.7 million above the 8% requirement in
effect on that date. Missouri State Bank was also in compliance with its
requirement on such 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,
1996, the Bank would have had no such deduction from total capital on such
date.
An FDIC-insured institution's primary federal regulator is authorized and,
under certain circumstances required, to take certain actions against
institutions that fail to meet their capital requirements. The regulator is
generally required to take action to restrict the activities of an
"undercapitalized institution" (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 institution must submit a capital restoration plan
and until such plan is approved by its regulator 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 regulator
is authorized to impose the additional restrictions, discussed below, that are
applicable to significantly undercapitalized institutions.
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
the Company, any claim against the Company under such a guarantee would have
priority over the claims of unsecured creditors.
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<PAGE> 21
Any institution 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 its regulator 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 institution. An
institution 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 institutions. In addition, a receiver (or conservator with
the concurrence of the FDIC) must be appointed for an institution, with
certain limited exceptions, within 90 days after it becomes critically
undercapitalized.
An institution's primary federal regulator is also generally authorized to
reclassify an institution into a lower capital category and impose the
restrictions applicable to such category if it determines that an institution
is in an unsafe or unsound condition or is engaged in an unsafe or unsound
practice.
The imposition 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, 1996, the Bank would have been
permitted to pay dividends of $70.8 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. Missouri State Bank is generally
authorized to pay dividends out of current and retained earnings.
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.
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 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% and 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, 1996, the Bank was in compliance
with both requirements.
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<PAGE> 22
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, 1996, the Bank had a QTL ratio of 98.6%,
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. 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.
TRANSACTION WITH AFFILIATES
Transactions between an FDIC-insured institution, such as the Bank or Missouri
State 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 FRB. 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 laws and regulations enforced by federal
banking regulators. These 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 unless made pursuant to an employee benefits
program.
BANK HOLDING COMPANY REGULATION
General - As a bank holding company, Roosevelt is subject to comprehensive
regulation by the FRB under the Bank Holding Company Act of 1956 (the BHCA).
Roosevelt is required to file reports with the FRB and is subject to regular
inspections by the FRB. The FRB also has extensive enforcement authority over
bank holding companies, including, among other things, the ability to assess
civil money penalties, to issue cease and desist or removal orders and to
require that a holding company divest subsidiaries (including its bank
subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
Under FRB policy, a bank holding company must serve as a source of strength
for its subsidiary banks. Under this policy the FRB may require, and has
required in the past, a holding company to contribute additional capital to an
undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain FRB approval before: (i)
acquiring, directly or indirectly, ownership or control of any voting shares
of another bank or bank holding company if, after such acquisition, it would
own or control more than 5% of such shares (unless it already owns or controls
the majority of such shares); (ii) acquiring all or substantially all of the
assets of another bank or bank holding company; or (iii) merging or
consolidating with another bank holding company.
The BHCA prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or
managing or controlling banks. The list of activities permitted by the FRB
includes, among other things, operating a savings institution (such as the
Bank), mortgage company, finance company, credit card company or factoring
company; performing certain data processing operations; providing certain
investment and financial advice; underwriting and acting as an insurance
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<PAGE> 23
agent for certain types of credit-related insurance; leasing property on a
full-payout, non-operating basis; selling money orders, travelers' checks and
United States Savings Bonds; real estate and personal property appraising;
providing tax planning and preparation services; and, subject to certain
limitations, providing securities brokerage services for customers. The scope
of permissible activities may be expanded from time to time by the FRB. Such
activities may also be affected by federal legislation.
Interstate Banking and Branching - In 1994, the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the Riegle-Neal Act) was enacted to
ease restrictions on interstate banking. Effective September 29, 1995, the
Riegle-Neal Act allows the FRB to approve an application of an adequately
capitalized and adequately managed bank holding company to acquire control of,
or acquire all or substantially all of the assets of, a bank located in a
state other than such holding company's home state, without regard to whether
the transaction is prohibited by the laws of any state. The FRB may not
approve the acquisition of a bank that has not been in existence for the
minimum time period (not exceeding five years) specified by the statutory law
of the host state. The Riegle-Neal Act also prohibits the FRB from approving
an application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in
any state in which the target bank maintains a branch. The Riegle-Neal Act
does not affect the authority of states to limit the percentage of total
insured deposits in the state which may be held or controlled by a bank or
bank holding company to the extent such limitation does not discriminate
against out-of-state banks or bank holding companies. Individual states may
also waive the 30% state-wide concentration limit contained in the Riegle-Neal
Act.
Additionally, beginning on June 1, 1997, the federal banking agencies will be
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state
of one of the banks opts out of the Riegle-Neal Act by adopting a law after
the date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which
applies equally to all out-of-state banks and expressly prohibits merger
transactions involving out-of-state banks. Interstate acquisitions of
branches will be permitted only if the law of the state in which the branch is
located permits such acquisitions. Interstate mergers and branch acquisitions
will also be subject to the nationwide and statewide insured deposit
concentration amounts described above.
The Riegle-Neal Act authorizes the Office of the Comptroller of the Currency
and the FDIC to approve interstate branching de novo by national and state
banks, respectively, only in states which specifically allow for such
branching. The Riegle-Neal Act also requires the appropriate federal banking
agencies to prescribe regulations by June 1, 1997 which prohibit any
out-of-state bank from using the interstate branching authority primarily for
the purpose of deposit production. These regulations must include guidelines
to ensure that interstate branches operated by an out-of-state bank in a host
state are reasonably helping to meet the credit needs of the communities which
they serve. The State of Missouri has not yet authorized interstate merger
transactions or de novo interstate branching.
Any future acquisitions of thrift institutions by Roosevelt will continue to
be subject to the HOLA. As a federal thrift institution, the Bank, subject to
certain conditions, has nationwide branching authority.
Dividends - The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a
bank holding company should pay cash dividends only to the extent that its net
income for the past year is sufficient to cover both the cash dividends and a
rate of earning retention that is consistent with the holding company's
capital needs, asset quality and overall financial condition. The FRB also
indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the FRB, the FRB may prohibit
a bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized".
Bank holding companies are required to give the FRB prior written notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding
12 months, is equal to 10% or more of their consolidated net worth. The FRB
may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe or unsound practice or would violate any
law, regulation, FRB order, or any condition imposed by, or written agreement
with, the FRB. This notification requirement does not apply to any company
that meets the well-capitalized standard for commercial banks, has a safety
and soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
Capital Requirements - The FRB has established capital requirements for bank
holding companies that generally parallel the capital requirements for
national banks and federal thrift institutions such as the Bank.
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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 FRB 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, 1996 the Bank
and Missouri State Bank were in compliance with these reserve requirements.
The balances maintained to meet the reserve requirements imposed by the FRB
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 FRB 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, 1996 the Bank had approximately $155.8 million
in FHLB of Des Moines stock, which was in compliance with this requirement.
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 1996 cash dividends paid by the FHLB of Des Moines
to the Bank totaled $10.1 million, all of which was paid as a cash dividend.
TAXATION
For federal income tax purposes, Roosevelt reports its income and expenses
using the accrual method of accounting and uses the calendar year as its
tax year. 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
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<PAGE> 25
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 1996, 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. Missouri State
Bank also received a satisfactory rating on its latest CRA examination.
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 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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<PAGE> 26
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 February 28, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
Stanley J. Bradshaw 39 Chairman, President and
Chief Executive Officer
Anat Bird 45 Senior Executive Vice President and
Chief Operating Officer
Gary W. Douglass 46 Executive Vice President and
Chief Financial Officer
</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. During
1996, he was appointed Chairman of the Board of Directors at the Company and
the Bank and now carries the title of Chairman, President and Chief Executive
Officer.
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., 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.
EMPLOYEES
At December 31, 1996, the Company had a total of 1,357 employees, including
178 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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<PAGE> 27
ITEM 2. PROPERTIES
The Company's headquarters, which is a leased facility, is located in
Chesterfield, Missouri. The Company's mortgage loan servicing office (owned)
is located in Nevada, Missouri and a consumer loan servicing office (leased)
is located in Creve Coeur, Missouri. In addition to these, the Company has an
additional 81 branch offices, of which 76 are located in the State of
Missouri, four are located in the State of Illinois, and one is located in the
State of Kansas. 39 of these offices are located in the St. Louis
metropolitan area of which 29 branches are owned by the Company and 10 are
leased. The leases expire from 1997 through 2010. Ten of these offices are
located in the Kansas City metropolitan area of which four branches are owned
by the Company and six are leased. The leases expire from 1997 to 2014. The
remaining 32 offices are located in Staunton, Illinois and Pittsburgh, Kansas
and the Missouri cities of Hannibal(2), Springfield(3), Columbia, Nevada,
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. 26 of these offices are owned by the Company and six offices are
leased. The leases expire from 1997 through 2009. The Company's net
investment in its home and branch offices, premises, equipment, and leaseholds
was $55.0 million at December 31, 1996.
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 Financial Corporation (Farm & Home) which was completed in June 1994,
the Company has become successor to certain legal proceedings which involved
Farm & Home Savings Association, a Farm & Home subsidiary (Farm & Home
Savings). 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). Neither Farm & Home,
Farm & Home Savings nor the Company has been designated a "potentially
responsible party" with respect to the Brio Site or any remediation thereof.
Farm & Home Savings (and the Bank as successor to 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 Savings' 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 settlement agreements dated May 1987 and March 1993 between Farm &
Home, Farm & Home Savings, and United States Fire Insurance Company, North
River Insurance Company and Commonwealth Lloyds Insurance Company of Texas
(the Insurance Companies), the Insurance Companies have been defending and
indemnifying Farm & Home Savings (and the Bank as successor to Farm & Home
Savings) against the Claims and have agreed to assume the exclusive obligation
and responsibility for acquiring the lots and homes in the Southbend
Subdivision. The 1987 settlement agreement provided that 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.
The Insurance Companies issued a reservation of rights to certain Claims filed
in 1993. Pursuant to a further settlement agreement, the Insurance Companies
have agreed to continue to defend and indemnify the Bank 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,
1996.
25
<PAGE> 28
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 National Market under the
symbol "RFED". As of December 31, 1996, there were 44,183,124 shares of
common stock issued and outstanding held by 6,469 shareholders.
The following table 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 1996 and 1995.
<TABLE>
<CAPTION>
STOCK PRICE
----------------------------
COMMON STOCK DATA HIGH LOW CLOSE DIVIDENDS
---- --- ----- ---------
<S> <C> <C> <C> <C>
1996
First quarter $19.250 $17.000 $18.500 $0.155
Second quarter 19.750 17.875 19.250 0.155
Third quarter 18.875 15.625 17.125 0.155
Fourth quarter 21.000 16.875 21.000 0.155
1995
First quarter $17.250 $14.750 $15.750 $0.140
Second quarter 18.625 15.750 16.688 0.140
Third quarter 18.875 15.250 17.625 0.140
Fourth quarter 19.375 15.875 19.375 0.140
</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. Roosevelt's ability to pay dividends
is also limited by regulatory restrictions and the ability of the Bank and
Missouri State Bank to make capital distributions to Roosevelt. See
"Business -- Regulation -- Limitations on Dividends and Other Capital
Distributions" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
26
<PAGE> 29
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
ROOSEVELT FINANCIAL GROUP, INC.
FIVE-YEAR SUMMARY
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<CAPTION>
At or for the year ended December 31, 1996 1995 1994 1993 1992
(dollars in thousands, except per share data) ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL CONDITION
Total assets $ 7,796,412 $ 9,013,061 $ 8,431,866 $ 7,595,161 $ 6,038,732
Securities available for sale 3,157,757 1,606,461 1,765,699 1,665,879 52,399
Securities held to maturity -- 3,550,140 3,276,062 2,642,916 2,219,147
Loans 4,298,469 3,577,892 3,072,151 2,671,810 2,349,771
Deposits 5,347,071 4,907,497 4,899,389 5,081,496 4,300,981
Other borrowings 1,840,851 3,507,475 2,963,449 1,975,661 1,319,154
Stockholders' equity 497,427 496,906 441,626 378,462 288,545
SUMMARY OF OPERATIONS
Total interest income $ 640,311 $ 647,795 $ 533,286 $ 486,940 $ 439,173
Total interest expense 462,724 466,433 347,574 321,490 314,728
Provision for losses on loans 1,262 1,200 12,432 706 2,648
---------- ---------- ---------- ---------- ----------
Net interest income after provision
for losses on loans 176,325 180,162 173,280 164,744 121,797
---------- ---------- ---------- ---------- ----------
Retail banking fees 17,157 10,706 8,682 6,260 4,870
Insurance and brokerage sales commissions 8,494 7,506 6,538 5,737 4,347
Loan servicing fees (expenses), net 10,982 7,401 7,359 (11,145) 8,392
Net gain (loss) from financial instruments (76,634) (58,216) (10,660) 10,646 11,394
Unrealized losses on impairment of mortgage-
backed securities held to maturity -- (27,063) -- -- --
Other 4,034 4,526 5,337 2,759 1,790
---------- ---------- ---------- ---------- ----------
Total noninterest income (loss) (35,967) (55,140) 17,256 14,257 30,793
---------- ---------- ---------- ---------- ----------
Total noninterest expense 123,409 87,666 115,576 98,598 100,452
---------- ---------- ---------- ---------- ----------
Income before income tax expense,
extraordinary items, and cumulative
effect of change in accounting principles 16,949 37,356 74,960 80,403 52,138
Income tax expense 5,835 10,258 25,384 27,134 17,887
Extraordinary items, net (1,452) -- (7,849) (1,908) (3,796)
Cumulative effect of change in accounting
principles -- -- -- (6,489)<F1> --
---------- ---------- ---------- ---------- ----------
Net income $ 9,662 $ 27,098 $ 41,727 $ 44,872 $ 30,455
========== ========== ========== ========== ==========
Net income attributable to common stock $ 5,452 $ 22,855 $ 36,543 $ 41,057 $ 28,866
========== ========== ========== ========== ==========
PER SHARE DATA:
Primary earnings per share:
Income before extraordinary items and
cumulative effect of change in
accounting principle $ 0.16 $ 0.56 $ 1.17 $ 1.54 $ 1.09
Extraordinary items (0.03) -- (0.21) (0.06) (0.13)
Cumulative effect of change
in accounting principle -- -- -- (0.20) --
---------- ---------- ---------- ---------- ----------
Net income $ 0.13 $ 0.56 $ 0.96 $ 1.28 $ 0.96
========== ========== ========== ========== ==========
Fully-diluted earnings per share:
Income before extraordinary items and
cumulative effect of change
in accounting principle $ 0.16 $ 0.56 $ 1.15 $ 1.32 $ 0.99
Extraordinary items (0.03) -- (0.21) (0.05) (0.11)
Cumulative effect of change in
accounting principle -- -- -- (0.16) --
---------- ---------- ---------- ---------- ----------
Net income $ 0.13 $ 0.56 $ 0.94 $ 1.11 $ 0.88
========== ========== ========== ========== ==========
27
<PAGE> 30
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
<CAPTION>
ROOSEVELT FINANCIAL GROUP, INC.
FIVE-YEAR SUMMARY
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<S> <C> <C> <C> <C> <C>
Other Data:
Ratio of net interest income to general
and administrative expense 1.44x<F4> 2.07x<F3> 1.67x<F2> 1.82x 1.55x
Effective net spread during the period 2.02% 2.06% 2.29% 2.40% 2.32%
Nonperforming assets to total assets,
end of period 0.99 0.90 0.41 0.46 0.78
Return on assets (ratio of net income to
average total assets) 0.11<F4> 0.30<F3> 0.49<F2> 0.61 0.54
Return on equity (ratio of net income to
average stockholders' equity) 1.87<F4> 5.97<F3> 10.30<F2> 12.86 11.11
Equity-to-assets ratio (ratio of average
stockholders' equity to average total
assets) 5.61 4.97 4.80 4.75 4.84
Cash dividends per share of common stock $ 0.62 $ 0.56 $ 0.43 $ 0.31 $ 0.21
Dividends on common stock payout ratio
(dividends paid per share of common stock
divided by primary net income per share) 476.92%<F4> 100.00%<F3> 44.79%<F2> 18.72% 18.63%
Book value per share, end of year $ 10.15 $ 10.60 $ 9.79 $ 9.18 $ 9.29
<FN>
<F1> 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.
<F2> 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. Also
included are gains resulting from the mark to market of the Company's
financial futures positions used to reduce the interest rate risk of certain
mortgage-backed securities in the available for sale portfolio totaling $39.5
million ($25.1 million, net of income taxes). Not including the
aforementioned charges and gains 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%.
<F3> Such ratios for 1995 include the impact of the impairment charge related
to certain mortgage-backed securities of $27.1 million, losses resulting from
the mark to market of the Company's financial futures positions used to
reduce the interest rate risk of certain mortgage-backed securities in the
available for sale portfolio totaling $71.0 million and merger related
expenses of $1.6 million. If such expenses (net of income tax benefit) were
not included, the ratio of net interest income to general and administrative
expense would have been 2.11x, 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%.
<F4> Such ratios for 1996 include the impact of the one-time SAIF assessment
of $27.4 million, the extraordinary items related to the early extinguishment
of debt of $1.5 million and the recognition of previously deferred expense
related to the termination of interest rate exchange agreements of $80.5
million. If such expenses (net of tax benefit) were not included, the ratio
of net interest income to general and administrative expense would have been
1.85x, return on assets would have been 0.88%, return on equity would have
been 15.75% and the dividend on common stock payout ratio would have been
34.4%.
</TABLE>
28
<PAGE> 31
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.
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
operating strategies, but, to varying degrees, by general economic and
competitive conditions and by policies of federal regulatory authorities.
Two of Roosevelt's operating strategies impacted net income in each of the
three years ended December 31, 1996. The first of these strategies was
growth through acquisition. In 1994 the Company acquired Farm and Home
Financial Corporation and Home Federal Bancorp of Missouri increasing its
assets by $3.7 billion. These acquisitions, which were preceded by seven
others in the four years preceding 1994 and followed by a total of five
smaller acquisitions in 1995 and 1996, dramatically increased Roosevelt's
retail customer base and provided opportunities to improve its physical plant
and technology platforms necessary to maintain and grow a retail customer
base. The second strategy impacting operating results was internal growth
via development of a diversified, retail-based operation. Actions taken to
achieve this latter strategy primarily affected operating results in 1996 and
included the sale of marginally profitable assets, the repayment of higher
cost wholesale liabilities and the removal of derivative positions which had
been designated as synthetic alterations of some of the assets sold or the
liabilities repaid.
Roosevelt reported net income of $9.7 million for 1996 compared with $27.1
million for 1995 and $41.7 million for 1994. Net income on a fully diluted
per share basis was $0.13 for 1996 compared with $0.56 for 1995 and $0.94 for
1994. Net income in 1996 was adversely impacted by a $27.4 million pre-tax
charge imposed by the Federal Deposit Insurance Corporation (FDIC) in order
to recapitalize the Savings Association Insurance Fund; an $80.5 million
pre-tax charge related to the termination of interest rate exchange
agreements which had been designated as synthetic alterations of short-term
wholesale borrowings that were repaid during the year; and a $1.5 million
after-tax charge related to the extinguishment of the Company's
long-term debt. Net income in 1995 was adversely impacted by pre-tax charges
of $71.0 million and $27.1 million resulting from marking to market the
Company's financial futures positions used to reduce the interest rate risk
of certain mortgage-backed securities in the available for sale portfolio
and for unrealized losses on the impairment of mortgage-backed securities,
respectively, and by an after-tax charge of approximately $1.6 million for
merger expenses related to the acquisition of WSB Bancorp, Inc. and
Kirksville Bancshares, Inc. For a further discussion of expenses related to
the termination of interest rate exchange agreements and financial futures,
see "Results of Operations--Net Gain (Loss) from Financial Instruments" and
Note 15 of the Notes to Consolidated Financial Statements.
Net income for 1994 was impacted by merger related 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>
29
<PAGE> 32
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 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 INTEREST INCOME
Net interest income in 1996 was $177.6 million, a decline of $3.8 million or
2.1% from the $181.4 million recorded in 1995. A change in the composition
of interest-bearing assets and liabilities, a decline in overall interest
rates earned and paid and small decreases in the average balances of
interest-bearing assets and liabilities all contributed to the decline in net
interest income. Consistent with its strategy to develop its retail
businesses, the Company grew its higher yielding loan portfolios and its
lower costing deposit balances while at the same time shrinking its lower
yielding investment portfolios and higher costing wholesale borrowings.
These actions contributed to an increase in net interest income due to volume
changes of $6.5 million. However, this favorable impact was more than offset
by a $10.3 million decrease in net interest income resulting from a net
decline in yield earned on assets of 5 basis points partially offset by a 3
basis points decline in the cost of all interest bearing liabilities. While
the overall decline in interest rates proved beneficial for gross
interest-bearing liabilities it increased the cost of interest rate exchange
agreements which had been utilized by the Company, prior to the cancellation
on September 30, 1996, to manage its interest rate risk. Under the terms of
these agreements, the Company generally paid a fixed rate of interest and
received a variable rate. The lower interest rates resulted in an increased
cost in 1996. Ignoring the impact of the interest rate exchange agreements,
the Company's cost of funds would have declined 15 basis points from 1995.
As a result of the above items, the effective net interest rate spread
decreased 4 basis points from 2.06% in 1995 to 2.02% in 1996.
Net interest income of $181.4 million for 1995 was down 2.3% from $185.7
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 77
basis points from 6.58% for 1994 to 7.35% 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 23 basis
points from 2.29% for 1994 to 2.06% 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.
30
<PAGE> 33
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,
-------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ---------------------------
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 $ 35.1 $ 1.8 5.15% $ 18.2 $ 1.0 5.49% $ 62.8 $ 2.4 3.82%
Securities held for trading -- -- -- -- -- -- 120.6 6.5 5.39
Securities available for sale <F1> 1,516.6 109.8 7.24 1,815.2 135.4 7.46 2,035.1 137.9 6.78
Securities held to maturity 3,191.5 225.4 7.06 3,683.1 259.3 7.04 2,939.5 179.1 6.09
Securities purchased under agreement
to resell -- -- -- -- -- -- 21.7 0.9 4.15
Loans <F2> <F3> 4,029.0 303.3 7.53 3,301.8 252.1 7.64 2,922.9 206.5 7.06
------- ----- ------- ----- ------- -----
Total interest-earning assets 8,772.2 640.3 7.30% 8,818.3 647.8 7.35% 8,102.6 533.3 6.58%
----- ---- ----- ---- ----- ----
Other assets 417.0 327.2 322.2
------- ------- -------
$ 9,189.2 $ 9,145.5 $ 8,424.8
======= ======= =======
Liabilities
Deposits:
NOW and money market accounts $ 1,014.2 30.5 3.01% $ 835.8 22.7 2.73% $ 1,049.2 23.7 2.26%
Passbook savings deposits 304.7 7.0 2.31 350.5 8.1 2.31 411.2 9.8 2.38
Time deposits 3,690.4 212.3 5.75 3,615.7 203.0 5.61 3,552.6 166.7 4.69
------- ----- ------- ----- ------- -----
5,009.3 249.8 4.99 4,802.0 233.8 4.87 5,013.0 200.2 3.99
Borrowings:
Securities sold under agreements
to repurchase <F4> 857.9 54.8 6.39 1,426.1 89.6 6.29 1,193.7 58.0 4.86
Advances from FHLB <F4> 2,598.5 155.0 5.96 2,236.9 138.1 6.17 1,579.1 79.6 5.04
Other borrowings 29.7 3.1 10.26 47.4 4.9 10.34 90.5 9.8 10.83
------- ----- ------- ----- ------- -----
Total interest-bearing
liabilities 8,495.4 462.7 5.45% 8,512.4 466.4 5.48% 7,876.3 347.6 4.41%
----- ---- ----- ---- ----- ----
Other liabilities 178.2 178.9 143.8
------- ------- -------
8,673.6 8,691.3 8,020.1
Stockholders' equity 515.6 454.2 404.7
------- ------- -------
Total liabilities and stockholders'
equity $ 9,189.2 $ 9,145.5 $ 8,424.8
======= ======= =======
Net interest income $ 177.6 $ 181.4 $ 185.7
===== ===== =====
Interest rate spread <F5> 1.85% 1.87% 2.17%
==== ==== ====
Effective net spread <F6> 2.02% 2.06% 2.29%
==== ==== ====
<FN>
<F1> The securities available for sale are included in the following table at
historical cost with the corresponding average rate calculated based upon
historical balances.
<F2> Average balances include non accrual loans. Interest on such loans is
included in interest income upon receipt.
<F3> Interest includes amortization of deferred loan fees.
<F4> Includes the effect of interest rate exchange agreements.
<F5> Equals average rate earned on all assets minus average rate paid on all
liabilities.
<F6> Net interest income divided by average balance of all interest earning
assets.
</TABLE>
At December 31, 1996, the weighted average yield on interest-earning assets
was 7.48% and the weighted average cost on interest-bearing liabilities was
5.14%.
31
<PAGE> 34
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,
----------------------------------------------------------------------
1996 v. 1995 1995 v. 1994
--------------------------------- -----------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
---------------------- INCREASE ----------------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
---------- -------- ---------- ---------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 55,518 $ (4,285) $ 51,233 $ 26,763 $ 18,841 $ 45,604
Securities available for sale (22,663) (2,997) (25,660) (15,584) 13,095 (2,489)
Securities held to maturity (34,579) 732 (33,847) 45,560 34,534 80,094
Securities held for trading -- -- -- (6,460) -- (6,460)
Securities purchased under
agreements to resell -- -- -- (887) -- (887)
Other earning assets 944 (154) 790 (1,792) 439 (1,353)
------- ------- ------- ------- ------- -------
Total interest income $ (780) $ (6,704) $ (7,484) $ 47,600 $ 66,909 $ 114,509
------- ------- ------- ------- ------- -------
Interest expense:
Deposits $ 10,097 $ 5,887 $ 15,984 $ (8,427) $ 42,073 $ 33,646
Securities sold under
agreements to repurchase (33,687) (3,730) (37,417) 10,378 20,876 31,254
Advances from
Federal Home Loan Bank 21,677 (11,661) 10,016 31,582 26,685 58,267
Other borrowings (1,837) -- (1,837) (4,602) (326) (4,928)
Interest rate exchange agreements (3,539) 13,084 9,545 (1,015) 1,635 620
------- ------- ------- ------- ------- -------
Total interest expense (7,289) 3,580 (3,709) 27,916 90,943 118,859
------- ------- ------- ------- ------- -------
Change in net interest income $ 6,509 $ (10,284) $ (3,775) $ 19,684 $ (24,034) $ (4,350)
======= ======= ======= ======= ======= =======
</TABLE>
32
<PAGE> 35
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 $1.3 million for 1996, $1.2 million for
1995 and $12.4 million for 1994. During the three month period ended June
30, 1994,Roosevelt recorded an $11.4 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 provisions for 1996 and 1995 reflect a more normalized level of provision
compared to the large 1994 provision discussed above. The 1996 and 1995
provisions reflect 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 $(36.0) million for 1996 as compared to $(55.1)
million for 1995 and $17.3 million for 1994. 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, 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 $6.5 million, or 60.3% from $10.7
million for 1995 to $17.2 million for 1996. Retail banking fees increased
$2.0 million, or 23.3% from $8.7 million for 1994 to $10.7 million for 1995.
Growth in both years is a result of the Company's successful efforts to
develop and grow its retail based operations which resulted in an overall
increase in utilization of these services offered by the Bank.
Insurance and Brokerage Sales Commissions - The Company offers a broad range
of insurance and investment products, including tax deferred annuities and
mutual fund products, to the general public and its customers through
Roosevelt Financial Services, Inc. Insurance and brokerage sales commissions
increased $988,000, or 13.1% from $7.5 million in 1995 to $8.5 million for
1996. This followed an increase of $968,000, or 14.8% from $6.5 million for
1994 to $7.5 million for 1995. The positive trend in insurance and brokerage
sales commissions is primarily the result of an increase in the sales volume
of commission generating products as the Company 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 $3.6 million, or 48.4% from $7.4 million
for 1995 to $11.0 million for 1996. This increase is due primarily to several
purchases of loan servicing rights in 1996 that totaled $41.9 million
which represented $3.5 billion in unpaid principal balances. Loan
servicing fees in 1995 increased $1.5 million, or 21.1% from $7.4 million
recorded in 1994 primarily as a result of a $1.5 million gain realized
upon the sale of $3.3 million book value of purchased mortgage servicing
rights. The amortization of purchased mortgage servicing rights totaled
$6.6 million, $4.2 million and $5.6 million for 1996, 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.
33
<PAGE> 36
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 1996, 1995 and 1994.
Net gain (loss) from financial instruments is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
---------- ----------- ----------
(in thousands)
<S> <C> <C> <C>
Mortgage-backed securities held to maturity $ -- $ -- $ (231)
Investment securities held to maturity -- -- 209
Mortgage-backed securities held for trading -- -- (4,545)
Mark to market of financial futures contracts -- (71,022) 39,508
Mortgage-backed securities available for sale 8,466 23,885 (28,208)
Investment securities available for sale 719 -- (115)
Cancellation cost of interest rate exchange, cap
and floor agreements (See Note 15) (70,711) -- (8,910)
Options expense (15,108) (11,079) (8,368)
-------- --------- --------
$ (76,634) $ (58,216) $ (10,660)
======== ========= ========
</TABLE>
The net loss from financial instruments increased $18.4 million in
1996 as compared to 1995. In 1996, the Company ceased using financial
futures contracts as a means of reducing the interest rate risk of
certain mortgage-backed securities in its available for sale portfolio.
Hence, no amount of mark to market gains or losses were realized in
1996. As part of its retail transition strategy, the Company sold in
1996 those securities which were determined to be marginally profitable.
This, and prevailing market conditions, contributed to the decline in net
gains on sales of mortgage-backed and investment securities. As discussed
more fully in the following paragraphs the Company terminated all of its
interest rate exchange agreements in 1996. Options expense increased in
1996 primarily as a result of the purchase of new interest rate cap agreements
to reduce the interest rate risk of adjustable rate mortgage-backed
securities. The principal causes of the $47.6 million increase in net
loss between 1995 and 1994 include: a $110.5 million decline in the
market value of financial futures contracts; a $52.2 million increase
in net gains on sales of mortgage-backed and investment securities
resulting from favorable option-adjusted spread differentials in the
market place at the dates of their respective sales; and a decline in
cancellation costs of interest rate exchange agreements. The $8.9 million
cancellation cost realized in 1994 related to the Company's acquisition
of Farm and Home Savings as previously discussed.
As a result of its continuing transition to a more retail-oriented
institution, the Company was able to substantially reduce in 1996,
principally during the third and fourth quarters, its need for derivative
financial instruments in managing its interest rate risk.
Accordingly, the Company terminated all of its interest rate exchange
agreements, $970 million notional amount of its interest rate floor
agreements and $500 million notional amount of its interest rate cap
agreements. The terminations of the interest rate exchange agreements were
accounted for in accordance with the provisions of Emerging Issues Task Force
Issue 84-7 (EITF 84-7) which requires that gains or losses on the termination
of such agreements be recognized when the offsetting gain or loss is
recognized on the designated asset or liability. That is, to the extent that
the designated assets or liabilities still exist, any gain or loss on the
termination of the agreement designated as a synthetic alteration would be
deferred and amortized over the shorter term of the remaining contractual
life of the agreement or the remaining life of the asset or liability.
During the third quarter 1996, interest rate exchange agreements designated
against available for sale fixed rate mortgage-backed securities were
cancelled resulting in a $16.1 million gain which was recognized as the above
mentioned assets against which the agreements had been designated were
concurrently sold.
The remaining interest rate exchange agreements designated against short-term
wholesale borrowings were also cancelled at a cost of $68.0 million which
costs were deferred to be amortized because the underlying liabilities
against which the agreements had been designated still existed at
September 30, 1996. Efforts to further the previously discussed retail
transition continued in the fourth quarter of 1996 and resulted in
shrinkage in the Company's total assets by $1.3 billion. This shrinkage
resulted primarily from the sale of investment and mortgage-backed
securities with the proceeds being utilized to further reduce short-term
wholesale borrowings. Further, the Company completed two acquisitions of
thrifts during October of 1996 which further reduced such borrowings by
replacing them as a funding source with the acquired retail deposits.
Upon repayment of the designated short-term wholesale borrowings, all
existing net deferred swap cancellation costs and certain other deferred
gains and losses related to previously terminated interest rate cap and
floor agreements in total amounting to $80.5 million were recognized
during the fourth quarter of 1996.
The terminations of the $970 million notional amount interest rate floor and
$500 million notional amount cap agreements were accounted for in accordance
with the provisions of Issue 8A of the American Institute of Certified Public
Accountants Issues Paper "Accounting for Options" (Issues Paper). In
accordance with the conclusions expressed in the Issues Paper, the excess of
the unamortized time value of the options (the premium) over the amount of
cash received upon termination amounting to $6.4 million was recognized in
earnings when the options were terminated.
During August 1996, the Staff of the Securities and Exchange Commission
(Staff) performed a regular review of the Company's 1995 Form 10-K in
conjuction with Registration Statements on Form S-4 filed by the Company
related to three then-pending acquisitions.
As a result of this review, the Staff questioned the Company's original
accounting treatment surrounding the deferral and recognition of gains and
losses on financial futures contracts used to reduce the interest rate risk
of certain mortgage backed
34
<PAGE> 37
securities in the Company's available for sale portfolio. The Company
originally recognized a $34.8 million charge to fourth quarter 1995 earnings
regarding the cessation of deferral accounting.
At issue was the Staff's contention that the financial futures contracts did
not meet the "high correlation" criteria of Statement of Financial Accounting
Standards No. 80 "Accounting for Futures Contracts", thus not qualifying for
deferral accounting from the inception of the hedge in March 1994 and
requiring the recognition of subsequent gains and losses in income. The
Company originally ceased deferral accounting when management concluded that
high correlation measured using the "cumulative dollar approach" was unlikely
to be achieved on a consistent basis.
Accordingly, at the Staff's request, the Company in 1996 restated its 1994
and 1995 consolidated financial statements to reflect the cessation of
deferral accounting, from the inception of the hedge, with respect to the
aforementioned financial futures contracts. The restatement had the effect
of increasing previously reported 1994 net income and decreasing previously
reported 1995 net income by $18.0 million (on a fully-diluted per share
basis, an increase of $0.48 for 1994 and a decrease of $0.43 for 1995). This
restatement was one of the timing of recognition of gains and losses in the
Statement of Operations and had no impact on total stockholders' equity at
any date since both the financial futures contracts and the related
mortgage-backed securities have been previously marked to market through
stockholders' equity at each reporting period.
Subsequent to December 31, 1995, the Company terminated all of its financial
futures positions and maintained its interest rate risk management position
by principally redesignating existing interest rate exchange agreements to
the available for sale portfolio. Such interest rate exchange agreements
were utilized prior to the redesignation to manage the interest rate risk of
short-term wholesale borrowings.
In connection with its acquisition of Farm and Home in 1994, the Company sold
securities, primarily mortgage-backed securities, repaid portions of Farm and
Home's debt and terminated various interest rate exchange agreements all as
part of its efforts to rebalance its asset/liability mix following the
acquisition. These actions, and a net improvement in the fair value of
financial futures all contributed to the $10.7 million net loss from
financial instruments in 1994.
Options expense is comprised of amortization of the premiums paid for various
interest rate cap, floor and collar agreements. The increase in options
expense from 1995 to 1996 and 1994 to 1995 is primarily attributable to
increased notional amounts of interest cap agreements necessitated by the
generation of larger balances of adjustable rate assets in need of interest
rate cap protection.
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 its securities with several classes available for purchase.
Certain classes are subordinate to the position of senior classes in that
such subordinate classes absorb all credit losses and must be completely
eliminated before any losses flow to senior position holders. The Guardian
securities purchased by the Company (the Guardian Securities) were
purchases of the most senior positions, thus intended to be protected by the
subordination credit enhancement feature.
Guardian was placed in conservatorship on June 21, 1991 by the Office of
Thrift Supervision, which appointed the Resolution Trust Corporation (RTC) as
conservator. Subsequent to the conservatorship, the RTC replaced Guardian as
the servicer for the loans underlying the securities. Effective November
1994, Bank of America assumed servicing responsibilities from the RTC.
Guardian was a niche player in the California mortgage market whose lending
decisions relied more on the value of the mortgaged property and the
borrower's equity in the property and less on the borrower's income and
credit standing. All collateral underlying the Guardian Securities have the
following loan pool characteristics:
* 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 1995 and 1996 to
the current ratings reflected in the tables on page 38 and substantial
deterioration in the amount of the loss absorption capacity provided by the
subordinated classes.
35
<PAGE> 38
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 $4.5 million at December 31, 1996 after the
write-down discussed below, in another private issuer mortgage-backed
security, LB Multifamily Mortgage Trust Series 1991-4 (Lehman 91-4),
possessing similar performance characteristics to the Guardian Securities
that has also been determined to be other than temporarily impaired.
Accordingly, the Company 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, 1996 in the Guardian Securities is approximately $55.3 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 (30.6)
Desecuritization of Guardian Pool 1990-9 (see discussion below) (33.6)
------
Investment in Guardian Securities, December 31, 1996 $ 55.3
======
</TABLE>
Subsequent to March 31, 1995, the date of the impairment charge, through
December 31, 1996 the following events have occurred with respect to the
Guardian Securities and Lehman 91-4.
* During the quarter ended June 30, 1995, the Company completed its
planned desecuritization of Guardian Pool 1990-9 and has assumed
servicing of the underlying whole loans and REO properties
received through the desecuritization. As a result of this
process, $1.1 million representing principal, interest and
servicing related funds advanced by previous servicers to
certificate holders on properties which were in REO at the time
of the desecuritization was reimbursed to the servicer, $28.8
million was transferred to mortgage loans and $2.7 million (net
of $4.9 million of charge-offs discussed below) was transferred
to residential REO. REO properties and properties in
foreclosure were written down $4.9 million to their estimated
fair values by charges to existing unallocated REO reserves
($1.4 million) and loan loss reserves ($1.8 million) and to
existing unamortized purchase discounts ($1.7 million).
* As expected, there were several additional rating agency
downgrades, principally related to those Guardian pools that
are no longer protected by remaining credit enhancement and
which had been determined to be other than temporarily impaired
and written down to estimated fair value by the Company during
the quarter ended March 31, 1995.
* As expected, based on the low levels remaining at March 31, 1995,
the subordination protection related to Guardian Pools 1990-1,
1990-2, 1990-4, 1990-5, 1990-7, 1990-8 and Lehman 1991-4 was
fully absorbed.
* The remaining pool Guardian 89-11, determined at March 31, 1995 to
be other than temporarily impaired and written down to estimated
fair value, continues to perform according to the contractual
terms and is protected by the remaining subordination of 7.88%
of the remaining unpaid principal balance of the pool. Such
remaining subordination percentage compares to the original
subordination percentage of 8.50%.
36
<PAGE> 39
* 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 7.85% and 18.87%, respectively.
These remaining subordination levels compare to 8.50% and
17.00%, respectively, at the date of issuance of the securities.
* In excess of $30.0 million in net principal payments have been
received since March 31, 1995.
Accordingly, at December 31, 1996, management continues to believe that the
recorded investment in the above mentioned Guardian and Lehman pools is
recoverable.
37
<PAGE> 40
Presented below is information at December 31, 1996 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.
<TABLE>
POOLS DETERMINED TO BE OTHER THAN TEMPORARILY IMPAIRED
December 31, 1996
(dollars in thousands)
<CAPTION>
Subordination As a Regarding Roosevelt's Interests
Percent of -------------------------------
Rating Pool Balance Original Percent of Pools
Pool Issue --------------------------- -------------------- 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% 7.88% $ 33,750 $ 7,095 $ 5,134 74%
Moody Aa2 B3
90-1 1/30/90 S & P AA D 8.50% -- 3,000 605 462 78%
Moody Aa2 Caa
90-2 2/27/90 S & P AA D 8.50% -- 27,500 5,154 3,820 82%
Moody Aa2 Caa
90-4 4/30/90 S & P AA D 8.75% -- 46,428 10,165 7,970 72%
Moody Aa2 Caa
90-5 5/31/90 S & P AA D 8.75% -- 45,000 11,930 9,880 76%
Moody Aa2 Caa
90-7 7/25/90 S & P AA D 8.75% -- 68,025 16,074 12,436 75%
Moody Aa2 Caa
90-8 9/21/90 S & P AAA C 14.00% -- 15,000 3,956 2,801 71%
Moody Aaa B3 -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Guardian $238,703 $54,979 $42,503
======== ======= =======
<CAPTION>
LEHMAN POOL
- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
91-4 7/30/91 S & P AA D 23.00% -- $ 14,000 $8,615 $4,459 84%
Moody Aa3 Caa ======== ======= =======
</TABLE>
<TABLE>
GUARDIAN POOLS DETERMINED TO BE ADEQUATELY PROTECTED BY REMAINING CREDIT ENHANCEMENT
December 31, 1996
(dollars in thousands)
<CAPTION>
Subordination As a Regarding Roosevelt's Interests
Percent of -------------------------------
Rating Pool Balance Original Percent of Pools
Pool Issue --------------------------- -------------------- Par Remaining Remaining Current or Less Than
Number Date Agency At Issue Current At Issue Current At Issue Par Investment 90 Days Delinquent
- ------ ---- ------ -------- ------- -------- ------- -------- --- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
89-10 10/27/89 S & P CCC CCC 8.50% 7.85% $ 9,000 $ 1,405 $ 1,420 83%
Moody B3 Ba3
91-2 3/28/91 S & P AA BB 17.00% 18.87% 39,831 11,330 $11,330 73%
Moody Aaa Baa3 ------- ------- -------
Totals $48,831 $12,735 $12,750
======= ======= =======
</TABLE>
38
<PAGE> 41
NONINTEREST EXPENSE
General and Administrative - General and administrative expense increased
$35.7 million to $123.4 million for 1996 as compared to $87.7 million for
1995. General and administrative expense in 1996 was adversely impacted by a
$27.4 million pre-tax charge imposed by the Federal Deposit Insurance
Corporation (FDIC) in order to recapitalize the Savings Association Insurance
Fund. Without this charge, general and administrative expense in 1996 would
have increased $8.3 million , or 9.5% to $96.0 million for 1996 versus $87.7
for 1995. This increase was due primarily to a $7.5 million increase in
compensation and employee benefits and a $4.1 million increase in other
noninterest expense which was partially offset by a $2.6 million decrease in
federal insurance premiums. The increases in compensation and employee
benefits and other noninterest expense is primarily attributable to increased
costs associated with the mobilization of the Bank's retail efforts. The
decrease in federal insurance premiums resulted from reductions in the rates
charged by the FDIC on the Company's deposits insured by both the Bank
Insurance Fund and the Savings Association Insurance Fund. The Legislation
enacted to recapitalize the Savings Association Insurance Fund also provided
for further reductions in premiums charged for deposits insured by the
Savings Association Insurance Fund beginning January, 1997. As a result, the
Company expects to realize further declines in the cost of federal deposit
insurance premiums thereafter.
General and administrative expense 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").
Provision for Real Estate Losses - Provisions for real estate losses totaled
$4.6 million for 1994. 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.
INCOME TAXES
Income taxes include federal income taxes and applicable state income taxes.
Roosevelt's effective tax rates were 34.4%, 27.5% and 33.9% for 1996, 1995
and 1994, 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 $1.5 million and $7.8
million, net of income taxes, for 1996 and 1994, respectively. The 1996 loss
was the result of two transactions. First, the Company called its 9.5%
subordinated notes resulting in an $812,000 pre-tax loss. Second, the
Company defeased its remaining 10.125% mortgage-backed bonds resulting in a
pre-tax loss of approximately $1.4 million. 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 a portion of its 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.
FINANCIAL CONDITION
Total assets decreased $1.2 billion or 13.5% to $7.8 billion at December 31,
1996 from $9.0 billion at December 31, 1995. In 1996 the Company continued
to focus on its strategies of originating a larger percentage of its assets,
diversifying its balance sheet from only mortgage and real estate related
assets and expanding its retail deposit base with a simultaneous shift within
that base toward checking and transaction accounts. Additional strategies to
further the transition were undertaken primarily in the third and fourth
quarters and included the removal of marginally profitable assets, lessening
the use of higher cost wholesale fundings, simplifying the balance sheet by
using fewer derivatives as synthetic alterations and increasing the capital
to assets ratio so as to be better positioned to take advantage of future
opportunities. All of these strategies were part of the Company's continuing
efforts to transition itself from a traditional thrift to a full service
retail bank and resulted not only in balance sheet shrinkage but also in
changes in the composition of the balance sheet.
The Company originated approximately $1.4 billion and purchased an additional
$291.6 million of loans in 1996 as compared to originations and purchases of
$688.6 million and $321.1 million in 1995. Additionally, the Company
securitized and sold approximately $210.0 million of long term fixed rate
mortgages in 1996 and experienced principal repayments of approximately
$897.0 million contributing to the growth in net loans in 1996 of $720.6
million. The 1996 originations included $796.6 million of adjustable rate
mortgage loans, $318.4 million of fixed rate mortgage loans, $226.2 million
of adjustable rate consumer loans and $65.6 million of fixed rate consumer
loans. Consumer loans totaled $348.3 million or 8.1% of gross loans
39
<PAGE> 42
at December 31, 1996 versus $125.6 million or 3.5% at December 31, 1995.
Total net loans were $4.3 billion or 55.1% of total assets at December 31,
1996 as compared to $3.6 billion or 39.7% at December 31, 1995.
The Company's total investment portfolios declined $2.0 billion or 38.8% to
$3.2 billion at December 31, 1996 as compared to $5.2 billion at December 31,
1995. The Company transferred all held to maturity investment portfolios to
the available for sale portfolio in December of 1996. This action was
undertaken to provide the Company maximum flexibility to manage its
portfolio. Proceeds from the sale of securities were used to fund loan
originations and to repay short-term higher cost wholesale borrowings. Total
investment securities represented 40.5% of total assets at December 31, 1996,
down from 57.2% at December 31, 1995.
Total liabilities declined $1.2 billion or 14.3% to $7.3 billion at December
31, 1996 versus $8.5 billion at December 31, 1995. Growth in deposits of
$439.6 million (including $228.2 million resulting from the three
acquisitions completed in 1996) was more than offset by reductions in
securities sold under agreements to repurchase, advances from the Federal
Home Loan Bank, and other borrowings totaling $1.7 billion. Total deposits
represented 73.3% of total liabilities at December 31, 1996, as compared to
57.6% at December 31, 1995. The composition of deposits also changed.
Demand deposits at December 31, 1996 represented 27.6% of total deposits as
compared to 25.0% at December 31, 1995. Proceeds from the sales of mortgage
loans and investment securities were used to repay, primarily in the fourth
quarter, short-term higher cost wholesale borrowings.
40
<PAGE> 43
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, 1996) in this table when the credit
enhancement, in the form of subordination, is exhausted even though a
substantial portion of the underlying loans (approximately 76% at December
31, 1996) are either current or less than 90 days delinquent. In addition,
the remaining amount of "other than temporarily impaired" mortgage-backed
securities that continue to be protected by remaining credit enhancement, but
for which the Company has concluded it is probable that such credit
enhancement will be absorbed before the duration of the underlying security,
are disclosed in the paragraphs following the table as other potential
problem assets. See the caption entitled "Unrealized Losses on Impairment of
Mortgage-Backed Securities Held to Maturity" under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
further details.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonperforming Assets
Nonaccruing loans:
Residential $ 9,659 $ 7,895 $ 5,666 $ 9,524 $ 12,249
Commercial real estate 1,968 1,415 1,626 985 7,988
Consumer 597 193 269 217 217
------ ------ ------ ------ ------
Total 12,224 9,503 7,561 10,726 20,454
------ ------ ------ ------ ------
Accruing loans delinquent more
than 90 days:
Residential 10,126 10,500 4,598 4,056 2,110
Commercial real estate -- -- 482 -- --
Consumer -- -- -- -- 4
Land -- -- -- 360 394
------ ------ ------ ------ ------
Total 10,126 10,500 5,080 4,416 2,508
------ ------ ------ ------ ------
Troubled-debt restructurings:
Commercial real estate 53 661 2,757 2,127 1,363
------ ------ ------ ------ ------
Foreclosed/Repossessed assets:
Residential 4,761 5,340 2,703 1,373 2,049
Commercial real estate 7,804 11,483 16,085 15,998 20,500
Consumer 238 11 -- -- 16
------ ------ ------ ------ ------
Total 12,803 16,834 18,788 17,371 22,565
------ ------ ------ ------ ------
Total nonperforming
loans and REO 35,206 37,498 34,186 34,640 46,890
Total nonperforming loans
and REO as a percentage
of total assets .45% .42% .41% .46% .78%
====== ====== ====== ====== ======
Other than temporarily impaired
mortgage-backed securities with
approximately 76% of the underlying
loans either current or less
than 90 days delinquent 41,828 43,429 -- -- --
------ ------ ------ ------ ------
Total "nonperforming assets" $77,034 $ 80,927 $ 34,186 $ 34,640 $ 46,890
====== ====== ====== ====== ======
Total "nonperforming assets"
as a percentage of total assets .99% .90% .41% .46% .78%
====== ======== ====== ====== ======
</TABLE>
Nonperforming assets have decreased $3.9 million to $77.0 million at December
31, 1996 as compared to $80.9 millon at December 31, 1995. Non-accruing
loans increased $2.7 million, accruing loans delinquent more than 90 days
decreased $374,000 and foreclosed repossessed assets decreased $4.0
million. Other than temporarily impaired mortgage-backed securities
decreased $1.6 million. For a further discussion of such securities, see
the caption entitled "Unrealized Losses on Impairment of Mortgage-Backed
Securities Held to Maturity" under the heading "Results of Operations" for
further details.
41
<PAGE> 44
Not included in the preceding table is a private issuer mortgage-backed
security with a carrying value of $5.1 million which was performing according
to its contractual terms at December 31,1996. However, this security was
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 security would continue to perform to 100% of its contractual terms
over the course of its remaining life. The security 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, 1996.
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Amount of currently performing, other than temporarily impaired
mortgage-backed securities at March 31, 1995 $ 52.4
Principal payments received (9.4)
Addition of Guardian Pools 1990-1,1990-2, 1990-4, 1990-5, 1990-7, 1990-8
and Lehman Pool 91-4 to the nonperforming asset table as subordination
protection was absorbed between March 31, 1995 and December 31, 1996 (37.9)
Amount outstanding of the currently performing, other than temporarily ----
impaired mortgage-backed security at December 31, 1996 $ 5.1
====
</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). A portion of the duration
matching strategy has involved, more historically than currently, 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 as prescribed by Statement of Financial Accounting Standards
No. 107 "Disclosures about Fair Value of Financial Instruments" (SFAS 107) is
calculated by adjusting stockholders' equity for differences between the
estimated fair values and the carrying values (historical cost basis) of the
Company's assets, liabilities, and off-balance sheet items. Net market
value, as calculated by the Company and presented herein, should not be
confused with the value of the Company's stock or of the amounts
distributable to stockholders in connection with a sale of the Company or in
the unlikely event of its liquidation. Under SFAS 107 certain valuations,
such as the estimated value of demand deposits, are not considered as part of
the net market value calculation. As a result the Company calculates an
economic net market which is comprised of net market value as calculated
under SFAS 107 plus the estimated value of demand deposits. The economic net
market value (including the estimated value of demand deposits totaling $33.2
million and $19.6 million at December 31, 1996 and 1995, respectively) as
calculated by the Company increased to approximately $557.6 million at
December 31, 1996 as compared to approximately $481.5 million at December 31,
1995. To measure the impact of interest rate changes, the Company
recalculates its net market value on a pro forma basis assuming
instantaneous, permanent parallel shifts in the yield curve, in varying
amounts both upward and downward. Larger increases or decreases in the
Company's net market value as a result of these assumed interest rate changes
indicate greater levels of interest rate sensitivity than do smaller
increases or decreases in net market value. The Company endeavors to
maintain a position whereby it experiences no material change in net market
42
<PAGE> 45
value as a result of assumed 100 and 200 basis point increases and decreases
in general levels of interest rates.
The OTS issued a regulation, effective January 1, 1994, which uses a similar
methodology to measure the interest rate risk exposure of thrift
institutions. This exposure is a measure of the potential decline in the net
portfolio value of the institution based upon the effect of an assumed 200
basis point increase or decrease in interest rates. "Net portfolio value" is
the present value of the expected net cash flow from the institution's
assets, liabilities, and off-balance sheet contracts. Under the OTS
regulation, an institution's "normal" level of interest rate risk in the
event of this assumed change in interest rates is a decrease in the
institution's net portfolio value in an amount not exceeding two percent of
the present value of its assets. 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, 1996 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) $(18,066) $ (3,812) $(11,229) $(38,463)
Interest rate exposure deemed "normal" by the OTS $(155,928) N/A N/A $(155,928)
</TABLE>
The Company's operating strategy is designed to avoid material negative
changes in net market value. As of December 31, 1996, the Company believes
it has accomplished its objectives as the pro forma changes in net market
value brought about by changes in interest rates are not material relative to
the Company's net market value. A net 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.
43
<PAGE> 46
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 (2.51%) at December 31, 1996. 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, 1996, 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 $ 1,723,549 $ 2,445,512 $ 604,528 $ 227,306 $ 15,625 $ 5,016,520
One to four family residential first
mortgages and contracts 186,969 147,191 429,465 281,251 586,266 1,631,142
Five or more family residential and
nonresidential first mortgages and
contracts 62,830 32,011 58,772 16,277 13,144 183,034
Second mortgages 787 124 163 28 14 1,116
Non-mortgage loans:
Consumer 228,681 20,735 45,990 11,626 20,185 327,217
Commercial 13,723 2,681 4,233 426 -- 21,063
Investments and interest bearing
deposits 206,380 4,218 8,548 10,651 1,031 230,828
Premiums (discounts) and deferred
loan fees, net 23,027 12,252 6,966 3,488 12,293 58,026
---------- --------- --------- ------- ------- ---------
Total rate sensitive assets 2,445,946 2,664,724 1,158,665 551,053 648,558 7,468,946
---------- --------- --------- ------- ------- ---------
LIABILITIES:
Fixed maturity deposits 753,849 1,610,511 1,165,995 238,506 102,544 3,871,405
NOW, Super NOW, and other
transaction accounts 29,906 36,044 64,880 51,905 207,617 390,352
Money market deposit accounts 796,046 -- -- -- -- 796,046
Passbook accounts 27,202 26,207 47,172 37,737 150,950 289,268
FHLB advances 1,607,756 216,000 9,500 2,500 2,000 1,837,756
Other borrowings 3,095 -- -- -- -- 3,095
---------- --------- --------- ------- ------- ---------
Total rate sensitive liabilities 3,217,854 1,888,762 1,287,547 330,648 463,111 7,187,922
Effect of interest rate floor
agreements on rate sensitive
liabilities 350,000 (150,000) (200,000) -- -- --
---------- --------- --------- ------- ------- ---------
Total rate sensitive liabilities
adjusted for impact of interest
rate floor agreements 3,567,854 1,738,762 1,087,547 330,648 463,111 7,187,922
---------- --------- --------- ------- ------- ---------
Maturity gap $ (1,121,908) $ 925,962 $ 71,118 $ 220,405 $ 185,447 $ 281,024
========== ========= ========= ======= ======= =========
Gap as a percent of total assets (14.39)% 11.88% (.91)% 2.83% 2.38%
========== ========= ========= ======= =======
Cumulative maturity gap $ (1,121,908) $ (195,946) $ (124,828) $ 95,577 $ 281,024
========== ========= ========= ======= =======
Cumulative gap as a percent of
total assets (14.39)% (2.51)% (1.60)% 1.23% 3.61%
========== ========= ========= ======= =======
</TABLE>
44
<PAGE> 47
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>
PREPAYMENT ASSUMPTIONS
MORTGAGE LOAN --------------------------------------------------
INTEREST RATE OVER 10 TO 20 YEARS 20 YEARS AND OVER
- ------------- --------------------- -------------------
<S> <C> <C>
Less than 8% 8.00% 8.00%
8 to 10% 23.00 23.00
10 to 12% 22.00 22.00
12 to 14% 22.00 22.00
14 to 16% 22.00 22.00
16% and over 22.00 22.00
</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 affected 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
5.05%, 5.64%, and 5.91% at December 31, 1996, 1995, and 1994, 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 $125.2 million for the year
ended December 31, 1996 Net cash related to investing activities, consisting
primarily of purchases of mortgage-backed securities 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, provided $1.5 billion for the year ended December 31, 1996. Net cash
related to financing activities, consisting of proceeds, net of repayments,
from FHLB advances, proceeds from securities sold under agreements to
repurchase and excess of deposits receipts over withdrawals, utilized $1.6
billion for the year ended December 31, 1996.
At December 31, 1996, the Company had commitments outstanding to originate
fixed-rate mortgage loans of approximately $27.8 million and adjustable-rate
mortgages of approximately $66.5 million. At December 31, 1996, the Company
had outstanding commitments to purchase and sell mortgage-backed securities
of approximately $199.3 million and $160.0 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-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, 1996, the Bank's excess capital over its fully phased-in core
capital requirement was approximately $192.0 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."
45
<PAGE> 48
Certain liquidity risks are inherent in asset/liability management. Such
risks include, among others, changes in interest rates, which can cause
margin calls on reverse repurchase agreements 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.
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.
IMPACT OF PROSPECTIVE ACCOUNTING PRONOUNCEMENTS
During June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinquishments of
Liabilities" (SFAS 125). SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities based on consistent application of a financial components
approach that focuses on control. It distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. Under the
financial components approach, after a transfer of financial assets, an
entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The financial
components approach focuses on the assets and liabilities that exist after
the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not
meet the criteria for a sale, the transfer is accounted for as a secured
borrowing with pledge of collateral.
SFAS 125 extends the "available-for-sale" or "trading" approach in SFAS 115
to nonsecurity financial assets that can contractually be prepaid or
otherwise settled in such a way that the holder of the asset would not
recover substantially all of its recorded investment. Thus, nonsecurity
financial assets (no matter how acquired) such as loans, other receivables,
interest-only strips or residual interests in securitization trusts that are
subject to prepayment risk that could prevent recovery of substantially all
of the recorded amount are to be reported at fair value with the change in
fair value accounted for depending on the asset's classification as
"available-for-sale" or "trading". SFAS 125 also amends SFAS 115 to prevent
a security from being classified as held-to-maturity if the security can be
prepaid or otherwise settled in such a way that the holder of the security
would not recover substantially all of its recorded investment.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not
permitted. Also, the extension of the SFAS 115 approach to certain
nonsecurity financial assets and the amendment to SFAS 115 is effective for
financial assets held on or acquired after January 1, 1997.
Reclassifications that are necessary because of the amendment do not call
into question an entity's intent to hold other debt securities to maturity in
the future. The adoption of SFAS 125 is not expected to have a material
impact on the Company's financial statements.
46
<PAGE> 49
<TABLE>
SELECTED QUARTERLY FINANCIAL DATA
(UNAUDITED)
<CAPTION>
QUARTERS ENDED IN 1996
---------------------------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total interest income $ 166,143 $ 162,280 $ 160,588 $ 151,300
Total interest expense 119,769 118,984 117,257 106,714
-------- -------- -------- --------
Net interest income 46,374 43,296 43,331 44,586
Provision for losses on loans (300) (300) (300) (362)
Noninterest income excluding net gain (loss) from
financial instruments 8,177 9,755 11,022 11,713
Net gain (loss) from financial instruments 341 521 1,781 (79,277)
Noninterest expense (21,718) (23,428) (52,858) (25,405)
-------- -------- -------- --------
Income (loss) before income tax expense
and extraordinary item 32,874 29,844 2,976 (48,745)
Income tax expense (benefit) 11,309 10,116 1,016 (16,606)
-------- -------- -------- --------
Income (loss) before extraordinary item 21,565 19,728 1,960 (32,139)
Extraordinary item -- -- (1,452) --
-------- -------- -------- --------
Net income (loss) $ 21,565 $ 19,728 $ 508 $ (32,139)
======== ======== ======== ========
Net income (loss) attributable to common stock $ 20,508 $ 18,671 $ (541) $ (33,186)
======== ======== ======== ========
Primary earnings per share:
Income (loss) before extraordinary item $ 0.48 $ 0.44 $ 0.02 $ (0.76)
Extraordinary item -- -- (0.03) --
-------- -------- -------- --------
Net income (loss) $ 0.48 $ 0.44 $ (0.01) $ (0.76)
======== ======== ======== ========
Fully-diluted earnings per share:
Income (loss) before extraordinary item $ 0.46 $ 0.42 $ 0.02 $ (0.76)
Extraordinary item -- -- (0.03) --
-------- -------- -------- --------
Net income (loss) $ 0.46 $ 0.42 $ (0.01) $ (0.76)
======== ======== ======== ========
<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 $ 156,436 $ 162,576 $ 163,920 $ 164,863
Total interest expense 108,123 116,893 120,700 120,717
-------- -------- -------- --------
Net interest income 48,313 45,683 43,220 44,146
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 6,241
Net gain (loss) from financial instruments (32,804) (22,935) 1,620 (4,097)
Noninterest expense (21,493) (21,740) (20,875) (23,558)
-------- -------- -------- --------
Income (loss) before income tax expense
and extraordinary item (25,764) 8,151 32,537 22,432
Income tax expense (benefit) (9,589) 2,291 11,040 6,516
-------- -------- -------- --------
Net income (loss) $ (16,175) $ 5,860 $ 21,497 $ 15,916
======== ======== ======== ========
Net income (loss) attributable to common stock $ (17,247) $ 4,803 $ 20,440 $ 14,859
======== ======== ======== ========
Primary earnings (loss) per share $ (0.43) $ 0.12 $ 0.50 $ 0.37
======== ======== ======== ========
Fully-diluted earnings (loss) per share $ (0.43) $ 0.12 $ 0.47 $ 0.35
======== ======== ======== ========
</TABLE>
Net gain (loss) from financial instruments for the quarter ended December 31,
1996 was impacted by the recognition of previously deferred expense related
to the termination of interest rate exchange, cap and floor agreements of $80.5
million. Noninterest expense for the quarter ended September 30, 1996 was
impacted by the one-time SAIF assessment of $27.4 million. See notes 15 and 19
of Notes to Consolidated Financial Statements and "Management's Discussion and
Analysis-Results of Operations" for further discussion.
47
<PAGE> 50
Net gain (loss) from financial instruments was impacted by $(34.0) million,
$(27.8) million, $135,000 and $(9.5) million for the quarters ended March 31,
June 30, September 30 and December 31, 1995, respectively as a result of the
mark to market of the Company's financial futures positions used to reduce
the interest rate risk of certain mortgage-backed securities in the available
for sale portfolio. Non-interest income for the quarter ended March 31, 1995
was impacted by a $27.1 million impairment charge related to certain
mortgage-backed securities. See Notes 5 and 15 of Notes to Consolidated
Financial Statements and "Management's Discussion and Analysis-Results of
Operations" for further discussion.
48
<PAGE> 51
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, 1996
and 1995, 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, 1996. 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, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
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, 1996 and 1995. 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.
KPMG Peat Marwick LLP
St. Louis, Missouri
January 20, 1997
49
<PAGE> 52
<TABLE>
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<CAPTION>
December 31,
--------------------------------
1996 1995
----------- -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 48,642 $ 15,433
Securities available for sale:
Investment securities 183,227 159,857
Mortgage-backed securities 2,974,530 1,446,604
Securities held to maturity:
Investment securities -- 119,186
Mortgage-backed securities -- 3,430,954
Loans 4,298,469 3,577,892
Real estate owned 12,438 15,433
Office properties and equipment, net 54,966 52,466
Other assets 224,140 195,236
--------- ---------
$ 7,796,412 $ 9,013,061
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 5,347,071 $ 4,907,497
Securities sold under agreements to repurchase 3,095 1,082,814
Advances from Federal Home Loan Bank 1,837,756 2,377,138
Other borrowings -- 47,523
Other liabilities 111,063 101,183
--------- ---------
Total liabilities 7,298,985 8,516,155
--------- ---------
Stockholders' equity:
Preferred stock - $.01 par value; $50 preference value; 6.5% non-cumulative
perpetual convertible; aggregate preference value of $64,441 and $65,050
at December 31, 1996 and 1995, respectively; 3,000,000 shares authorized
and 1,288,825 and 1,301,000 shares issued and outstanding
at December 31, 1996 and 1995, respectively 13 13
Common stock - $.01 par value; 90,000,000 shares authorized;
44,183,124 and 41,991,701 shares issued
and outstanding at December 31, 1996 and 1995, respectively 442 420
Paid-in capital 298,283 262,381
Retained earnings - subject to certain restrictions 202,550 223,606
Unrealized gain (loss) on securities available for sale,
net of taxes (2,226) 12,019
Unamortized restricted stock awards (1,635) (1,533)
--------- ---------
Total stockholders' equity 497,427 496,906
--------- ---------
$ 7,796,412 $ 9,013,061
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
50
<PAGE> 53
<TABLE>
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share information)
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Interest income:
Loans $ 303,304 $ 252,071 $ 206,467
Securities available for sale 109,784 135,444 137,933
Securities held to maturity 225,415 259,262 179,168
Securities held for trading -- -- 6,460
Other 1,808 1,018 3,258
--------- --------- ---------
Total interest income 640,311 647,795 533,286
--------- --------- ---------
Interest expense:
Deposits 249,820 233,836 200,190
Other borrowings 194,270 223,508 138,915
Interest rate exchange agreements, net 18,634 9,089 8,469
--------- --------- ---------
Total interest expense 462,724 466,433 347,574
--------- --------- ---------
Net interest income 177,587 181,362 185,712
Provision for losses on loans 1,262 1,200 12,432
--------- --------- ---------
Net interest income after provision for losses on loans 176,325 180,162 173,280
--------- --------- ---------
Noninterest income (loss):
Retail banking fees 17,157 10,706 8,682
Insurance and brokerage sales commissions 8,494 7,506 6,538
Loan servicing fees, net 10,982 7,401 7,359
Net loss from financial instruments (76,634) (58,216) (10,660)
Gain on sales of real estate acquired for development and sale 1,633 1,656 3,414
Gain on sale of loan servicing rights -- 1,510 --
Unrealized losses on impairment of mortgage-backed securities -- (27,063) --
Other 2,401 1,360 1,923
--------- --------- ---------
Total noninterest income (loss) (35,967) (55,140) 17,256
--------- --------- ---------
Noninterest expense:
General and administrative:
Compensation and employee benefits 42,304 34,780 42,570
Occupancy 18,081 18,758 23,939
Federal deposit insurance premiums 9,145 11,743 12,018
Savings Association Insurance Fund special assessment 27,410 -- --
Other 26,469 22,385 32,468
--------- --------- ---------
Total general and administrative 123,409 87,666 110,995
Provision for real estate losses -- -- 4,581
--------- --------- ---------
Total noninterest expense 123,409 87,666 115,576
--------- --------- ---------
Income before income tax expense and extraordinary items 16,949 37,356 74,960
Income tax expense 5,835 10,258 25,384
--------- --------- ---------
Income before extraordinary items 11,114 27,098 49,576
Extraordinary items (1,452) -- (7,849)
--------- --------- ---------
Net income $ 9,662 $ 27,098 $ 41,727
========= ========= =========
Net income attributable to common stock $ 5,452 $ 22,855 $ 36,543
========= ========= =========
Per share data:
Primary earnings per share:
Income before extraordinary items $ 0.16 $ 0.56 $ 1.17
Extraordinary items (0.03) -- (0.21)
------- ------- -------
Net income $ 0.13 $ 0.56 $ 0.96
======= ======= =======
Fully diluted earnings per share:
Income before extraordinary items $ 0.16 $ 0.56 $ 1.15
Extraordinary items (0.03) -- (0.21)
------- ------- -------
Net income $ 0.13 $ 0.56 $ 0.94
======= ======= =======
See accompanying notes to consolidated financial statements.
</TABLE>
51
<PAGE> 54
<TABLE>
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS)
<CAPTION>
Preferred stock Common stock
-------------------- -----------------------
Paid-in Retained
Shares Amount Shares Amount capital earnings
---------- ------ ---------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 2,492,440 $ 25 10,291,922 $103 $179,979 $186,780
Net income (including pooled company) -- -- -- -- -- 41,727
Issuance of 319,000 shares of 6.5% non-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 for 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 40,173,527 402 255,655 209,379
Net income -- -- -- -- -- 27,098
Purchase of common stock for treasury -- -- -- -- -- --
Issuance of common stock for 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
Net income -- -- -- -- -- 9,662
Purchase of common stock for treasury -- -- -- -- -- --
Issuance of common stock for stock options and
employee stock plans -- -- 219,991 2 2,748 (205)
Issuance of common stock for acquisitions -- -- 1,925,776 19 33,155 --
Exchange of preferred stock for common stock (12,175) -- 45,656 1 (1) --
Amortization of restricted stock awards -- -- -- -- -- --
Cash dividends declared:
Common stock -- -- -- -- -- (26,303)
Preferred stock -- -- -- -- -- (4,210)
Unrealized loss on securities available for sale, net -- -- -- -- -- --
---------- ---- ---------- ---- -------- --------
Balance, December 31, 1996 1,288,825 $ 13 44,183,124 $442 $298,283 $202,550
========== ==== ========== ==== ======== ========
See accompanying notes to consolidated financial statements.
52
</TABLE>
<TABLE>
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(DOLLARS IN THOUSANDS)
<CAPTION>
Unrealized
gain (loss)
on securities
Treasury stock available for Unamortized Total
------------------------- sale, net restricted stockholders'
Shares Amount of taxes stock awards equity
---------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 -- $ -- $ 11,575 $ -- $ 378,462
Net income (including pooled company) -- -- -- -- 41,727
Issuance of 319,000 shares of 6.5% non-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 for 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) -- -- (35,248) -- (35,248)
Other pre-merger transactions of pooled company -- -- -- -- 514
--------- ------- ------------ -------- ----------
Balance, December 31, 1994 (10,000) (150) (23,673) -- 441,626
Net income -- -- -- -- 27,098
Purchase of common stock for treasury (214,500) (3,426) -- -- (3,426)
Issuance of common stock for 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 -- -- 35,692 -- 35,692
--------- ------- ------------ -------- ----------
Balance, December 31, 1995 -- -- 12,019 (1,533) 496,906
Net income -- -- -- -- 9,662
Purchase of common stock for treasury (57,000) (923) -- -- (923)
Issuance of common stock for stock options
and employee stock plans 57,000 923 -- (242) 3,226
Issuance of common stock for acquisitions -- -- -- -- 33,174
Exchange of preferred stock for common stock -- -- -- -- --
Amortization of restricted stock awards -- -- -- 140 140
Cash dividends declared:
Common stock -- -- -- -- (26,303)
Preferred stock -- -- -- -- (4,210)
Unrealized loss on securities available for sale, net -- -- (14,245) -- (14,245)
--------- ------- ------------ -------- ----------
Balance, December 31, 1996 -- $ -- $ (2,226) $ (1,635) $ 497,427
========= ======= ============ ======== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
52
<PAGE> 55
<TABLE>
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1996 1995 1994
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,662 $ 27,098 $ 41,727
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary loss on early extinguishment of debt 1,452 -- 7,849
Recognition of previously deferred expense related to the
termination of interest rate exchange agreements 80,468 -- --
Depreciation and amortization 4,668 4,294 5,814
Amortization of discounts and premiums, net 41,709 9,900 16,383
Decrease (increase) in accrued interest receivable 8,169 (7,645) (2,310)
(Decrease) increase in accrued interest payable (14,845) 11,119 (1,023)
Provision for losses on loans and real estate 1,262 1,200 17,013
Unrealized losses on impairment of mortgage-backed securities -- 27,063 --
(Increase) in securities held for trading, net -- -- (87,138)
Decrease in loans receivable held for sale, net -- -- 86,579
Other, net (7,371) (31,514) 22,674
----------- ------------ ------------
Net cash provided by operating activities 125,174 41,515 107,568
----------- ------------ ------------
Cash flows from investing activities:
Principal payments and maturities of securities available for sale 228,942 126,291 313,775
Principal payments and maturities of securities held to maturity 941,702 835,059 783,067
Principal payments on loans 897,046 699,307 727,348
Proceeds from sales of securities available for sale 2,317,700 945,941 2,633,590
Proceeds from sales of loans 30,211 -- --
Purchase of securities available for sale (617,089) (737,735) (2,905,255)
Purchase of securities held to maturity (573,971) (1,234,320) (1,312,918)
Purchase of loans (291,556) (321,097) (146,772)
Originations of loans (1,406,742) (688,576) (680,794)
Fees paid for interest rate cap and floor agreements, net (43,642) -- (35,078)
Net proceeds from sales of real estate 10,408 10,889 9,253
Purchase of office properties and equipment (4,890) (2,402) (7,556)
(Purchase) sale of purchased mortgage servicing rights, net (41,846) 3,971 --
Cash and cash equivalents from acquisitions, net of cash paid 11,303 (19,201) 31,087
Payments on sales or exchanges of branch deposits, net -- -- (67,337)
Proceeds from sale of loan production facilities -- -- 75,150
----------- ------------ ------------
Net cash provided by (used in) investing activities 1,457,576 (381,873) (582,440)
----------- ------------ ------------
Cash flows from financing activities:
Repayment of mortgage-backed bonds -- -- (60,820)
Redemption of subordinated notes (28,750) -- (31,022)
Defeasance of mortgage-backed bonds (21,048) -- (72,375)
Proceeds from FHLB advances 17,952,500 15,513,000 14,551,256
Principal payments on FHLB advances (18,500,000) (14,851,000) (14,115,980)
Fees paid for termination of interest rate exchange agreements, net (50,791) -- --
Excess of deposit receipts over withdrawals (withdrawals over receipts) 210,162 (173,894) (578,888)
(Decrease) increase in securities sold under agreements
to repurchase, net (1,082,098) (125,313) 617,726
Proceeds from issuance of preferred stock -- -- 21,273
Proceeds from exercise of stock options 1,920 1,107 6,459
Purchase of treasury stock (923) (3,426) (150)
Cash dividends paid (30,513) (26,789) (18,056)
----------- ------------ ------------
Net cash (used in) provided by financing activities (1,549,541) 333,685 319,423
----------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 33,209 (6,673) (155,449)
Cash and cash equivalents at beginning of year 15,433 22,106 177,555
----------- ------------ ------------
Cash and cash equivalents at end of year $ 48,642 $ 15,433 $ 22,106
=========== ============ ============
</TABLE>
(Continued)
53
<PAGE> 56
SUPPLEMENTAL DISCLOSURES RELATED TO THE CONSOLIDATED STATEMENTS OF
CASH FLOWS
The Company paid interest of $477.6 million, $455.3 million, and $348.6
million during 1996, 1995, and 1994, respectively. The Company paid income
taxes of $28.7 million, $37.1 million, and $6.5 million during 1996, 1995,
and 1994, respectively.
<TABLE>
Cash and cash equivalents obtained from acquisitions, net of cash paid, are
summarized as follows:
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Fair value of assets purchased $(267,477) $ (98,763) $ (556,990)
Liabilities assumed 234,303 73,731 491,755
Issuance of common stock 33,174 -- 48,231
--------- --------- -----------
Cash received (paid) from acquisitions -- (25,032) (17,004)
Cash and cash equivalents acquired 11,303 5,831 48,091
--------- -------- -----------
Cash and cash equivalents from acquisitions,
net of cash paid $ 11,303 $ (19,201) $ 31,087
========= ========= ===========
Noncash investing and financing activities are summarized below:
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Noncash transfers from securities held for
trading to securities available for sale $ -- $ -- $ 242,429
Noncash transfers from securities available for
sale to securities held to maturity -- -- 107,318
Noncash transfers from securities held to maturity to
securities available for sale 3,169,728 85,165 26,368
Desecuritization resulting in transfer of mortgage-backed
securities held to maturity to loans and real estate owned -- 33,603 --
Securitization of loans held for sale 210,083 -- --
Redesignation of interest rate exchange and cap agreements to
securities available for sale 42,131 4,369 --
See accompanying notes to consolidated financial statements.
</TABLE>
54
<PAGE> 57
ROOSEVELT FINANCIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Roosevelt
Financial Group, Inc. (the Company); its three wholly-owned subsidiaries,
Roosevelt Bank (the Bank), Missouri State Bank and Trust Company (MSB), a
Missouri-chartered bank, and F & H Realty (Realty), a Missouri-chartered real
estate investment company; and the Bank's and MSB's wholly-owned
subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation. Certain reclassifications have been made to
the 1995 and 1994 consolidated financial statements to conform to the 1996
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.
In preparing the consolidated financial statements, management of the Company
is required to make estimates and assumptions which significantly affect
the reported amounts in the consolidated financial statements. Significant
estimates which are particularly susceptible to change in a short period
of time include the determination of the allowances for losses on loans and
real estate.
Investment and Mortgage-Backed Securities
At the time of purchase, debt and equity securities are segregated into one
of three categories: trading, held to maturity, or available for sale.
Trading securities are purchased and held principally for the purpose of
reselling them within a short period of time. Unrealized gains and losses
on trading securities 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 ability and the intent to
hold such securities to maturity.
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 as 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 as part of its overall
interest rate risk strategy. Derivative financial instruments which have
been utilized by the Company include interest rate exchange agreements
(swaps), interest rate cap, floor, and collar agreements, and to a lesser
extent, financial futures contracts. Interest rate swap, cap, floor, and
collar agreements have been used to synthetically alter the rate and/or term
characteristics of specified interest-bearing assets or liabilities.
Financial futures contracts have been used 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.
55
<PAGE> 58
Interest rate swaps are agreements to exchange interest payment streams on an
agreed upon notional amount. Typically, the Company pays a fixed rate and
receives a variable rate based upon a specified floating rate index. The
Company makes no interest payments on its interest rate cap, floor, and collar
agreements but is entitled to receive an interest payment on an agreed upon
notional amount when the agreements are "in the money" (e.g. when the
specified floating rate index exceeds or falls below, respectively, a rate
specified in the agreement). All such receipts or payments are recorded as a
net component of interest expense in the accompanying consolidated financial
statements.
The Company has entered into interest rate swap, cap, floor, or collar
agreements with nationally recognized commercial and investment banking firms
or the Federal Home Loan Bank. Typically, the Company pays a fee (premium)
to enter an interest rate cap, floor, or collar agreement which is capitalized
and then amortized over the life of the agreement on a straight-line basis.
No such premium is paid to enter into swap agreements. At the time the
agreements are initiated, the Company designates which assets or liabilities
are being synthetically altered by the agreement. Agreements which have been
designated against available for sale assets are thereafter reported at their
fair value with unrealized gains or losses reflected as a separate component
of stockholders' equity. Agreements designated against other
interest-bearing assets or liabilities are reported at amortized cost.
Gains and losses resulting from terminated interest rate swap agreements or
interest rate cap, floor, and collar agreements that are in the money are
recognized consistent with the gain or loss on the asset or liability that
was being synthetically altered by the agreement. To the extent that the
designated asset or liability still exists, any gain or loss on the
termination of the agreement is deferred and amortized over the shorter term
of the remaining contractual life of the agreement or remaining life of the
asset or liability. Gains and losses resulting from terminated interest
rate cap, floor, and collar agreements that are not in the money are
recognized at the time of termination. Interest rate cap, floor, and
collar agreements may be redesignated to different assets or liabilities
during their lives. At the time of redesignation, the agreements are
marked-to-market with the resulting gain or loss being deferred and
amortized as if the agreement were canceled.
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
56
<PAGE> 59
mortgage and consumer loans which are collectively evaluated for impairment
and which 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.
Loans Serviced for Others
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights"
(SFAS 122). Accordingly, the Company recognizes as separate assets the
rights to service mortgage loans, whether the rights are acquired through
purchases of servicing or through the origination or purchase of loans with a
definitive plan to sell or securitize the loans with servicing retained. The
fair value of capitalized servicing rights assigned to such purchased or
originated loans is based upon the present value of estimated future cash
flows associated with the servicing. SFAS 122 also requires that an
enterprise assess its capitalized mortgage servicing rights for impairment
based upon the fair value of those rights. For purposes of measuring
impairment, the Company stratifies its servicing rights based upon the
interest rate characteristics of the underlying loans, and compares the fair
value for each strata to the unamortized recorded value. The fair value is
based upon the net present value of expected future cash flows discounted at
a rate commensurate with the risks involved. The Company's adoption of SFAS
122 did not have a material impact on the Company's consolidated financial
statements.
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 capitalized costs of mortgage servicing rights are amortized over the
estimated remaining lives of the underlying loans using the level-yield
method. Amortization of mortgage servicing rights is recorded as a component
of "Loan servicing fees, net" in the consolidated statements of operations.
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 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 net realizable 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.
Provisions for loan losses are recorded to maintain the Company's overall
allowance for loan losses within an acceptable range to cover probable credit
losses inherent in the portfolio.
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.
57
<PAGE> 60
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.
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 1996, 1995, and 1994 was 42,698,851,
40,620,932, and 37,943,933, 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, if
dilutive. The average number of common shares and common equivalent shares
outstanding for 1996, 1995, and 1994 for the purpose of calculating fully
diluted earnings per share was 42,731,792, 40,628,697, and 39,005,360,
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.
Impact of Prospective Accounting Pronouncements
During June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinquishments of
Liabilities" (SFAS 125). SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments
of liabilities based on consistent application of a financial components
approach that focuses on control. It distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. Under the
financial components approach, after a transfer of financial assets, an
entity recognizes all financial and servicing assets it controls and
liabilities it has incurred and derecognizes financial assets it no longer
controls and liabilities that have been extinguished. The financial
components approach focuses on the assets and liabilities that exist after
the transfer. Many of these assets and liabilities are components of
financial assets that existed prior to the transfer. If a transfer does not
meet the criteria for a sale, the transfer is accounted for as a secured
borrowing with pledge of collateral.
SFAS 125 extends the "available-for-sale" or "trading" approach in SFAS 115
to nonsecurity financial assets that can contractually be prepaid or
otherwise settled in such a way that the holder of the asset would not
recover substantially all of its recorded investment. Thus, nonsecurity
financial assets (no matter how acquired) such as loans, other receivables,
interest-only strips, or residual interests in securitization trusts that are
subject to
58
<PAGE> 61
prepayment risk that could prevent recovery of substantially all of
the recorded amount are to be reported at fair value with the change in
fair value accounted for depending on the asset's classification as
"available-for-sale" or "trading". SFAS 125 also amends SFAS 115 to prevent
a security from being classified as held-to-maturity if the security can be
prepaid or otherwise settled in such a way that the holder of the security
would not recover substantially all of its recorded investment.
SFAS 125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Earlier or retroactive application is not
permitted. Also, the extension of the SFAS 115 approach to certain
nonsecurity financial assets and the amendment to SFAS 115 is effective for
financial assets held on or acquired after January 1, 1997.
Reclassifications that are necessary because of the amendment do not call
into question an entity's intent to hold other debt securities to maturity in
the future. The adoption of SFAS 125 is not expected to have a material
impact on the Company's financial statements.
(2) BUSINESS COMBINATIONS
During the fourth quarter of 1996, the Company completed the acquisitions of
Community Charter Corporation (CCC), Sentinel Financial Corporation
(Sentinel), and Mutual Bancompany, Inc. (Mutual). A total of 1,925,776
shares of the Company's common stock were issued in connection with these
acquisitions. Total assets of the acquired institutions were approximately
$269.4 million. These transactions were structured to qualify as tax free
reorganizations and were accounted for under the purchase method of
accounting. Operating results of the acquired entities are included in the
accompanying consolidated statements of operations from their respective
acquisition dates and are not material to the consolidated financial
statements.
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 were 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. These
transactions were structured to qualify as tax free reorganizations. The
effect of these transactions was not material to the consolidated financial
statements and operating results of the acquired entities are included since
the respective acquisition dates.
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 structured to qualify as a tax free
reorganization. The transaction was accounted for as a pooling of interests
and, accordingly, the consolidated financial statements of the Company
include the results of Farm & Home for all periods presented.
<TABLE>
Other acquisition and sale activity of Farm & Home during 1994 is summarized
as follows:
<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
</TABLE>
59
<PAGE> 62
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. The transaction was structured to
qualify as a tax free reorganization. The transaction was accounted for
under the purchase method of accounting. Operating results of Home Bancorp
are included since the acquisition date.
60
<PAGE> 63
(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, 1996 DECEMBER 31, 1995
-------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents $ 48,642 $ 48,642 $ 15,433 $ 15,433
Securities available for sale:
Investment securities 183,227 183,227 159,857 159,857
Mortgage-backed securities 2,915,521 2,915,521 1,433,648 1,433,648
Interest rate exchange, cap, and floor agreements 59,009 59,009 12,956 12,956
Securities held to maturity:
Investment securities -- -- 119,186 120,517
Mortgage-backed securities -- -- 3,430,954 3,431,341
Loans 4,298,469 4,387,911 3,577,892 3,708,014
Office properties and equipment, net 54,966 55,762 52,466 53,262
Deferred losses on interest rate exchange agreements -- -- 20,831 --
Unamortized fees on interest rate
cap, floor, and collar agreements 14,004 10,378 38,049 37,302
Other assets 222,574 199,326 151,789 159,548
----------- ----------- ----------- -----------
$ 7,796,412 $ 7,859,776 $ 9,013,061 $ 9,131,878
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits $ 5,347,071 $ 5,355,106 $ 4,907,497 $ 4,954,183
Securities sold under agreements to repurchase 3,095 3,095 1,082,814 1,083,048
Advances from Federal Home Loan Bank 1,837,756 1,837,556 2,377,138 2,378,419
Other borrowings -- -- 47,523 50,260
Deferred gains on interest rate exchange agreements -- -- 5,661 --
Interest rate exchange agreements -- -- -- 108,698
Other liabilities 111,063 139,629 95,522 95,292
----------- ----------- ----------- -----------
Total liabilities 7,298,985 7,335,386 8,516,155 8,669,900
Net market value -- 524,390 -- 461,978
Stockholders' equity 497,427 -- 496,906 --
----------- ----------- ----------- -----------
$ 7,796,412 $ 7,859,776 $ 9,013,061 $ 9,131,878
=========== =========== =========== ===========
NON-FINANCIAL INSTRUMENTS:
Demand deposits $ -- $ 33,161 $ -- $ 19,552
Commitments to extend credit $ 111,584 $ 111,498 $ 225,324 $ 225,752
=========== =========== =========== ===========
</TABLE>
61
<PAGE> 64
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:
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
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.
Interest rate exchange, cap, floor, and collar agreements - The fair values
of these agreements, 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.
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.
62
<PAGE> 65
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, 1996 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Government and agency obligations $ 12,113 $ 292 $ (7) $ 12,398
Corporate securities 14,280 1,041 (284) 15,037
--------- ------ ------- ---------
26,393 1,333 (291) 27,435
FHLB stock 155,792 -- -- 155,792
--------- ------ ------- ---------
182,185 1,333 (291) 183,227
--------- ------ ------- ---------
Mortgage-backed Securities:
Mortgage-backed certificates:
GNMA 105,705 2,481 (251) 107,935
FNMA 128,557 1,713 (456) 129,814
FHLMC 135,524 2,207 (1,510) 136,221
Private pass-throughs 2,331,504 18,713 (15,600) 2,334,617
Collateralized mortgage obligations 170,219 1,889 (3,747) 168,361
Other 35,274 3,942 (643) 38,573
Derivative financial instruments:
Interest rate cap agreements 71,410 550 (14,627) 57,333
Interest rate floor agreements 145 1,531 -- 1,676
--------- ------ ------- ---------
2,978,338 33,026 (36,834) 2,974,530
--------- ------ ------- ---------
$3,160,523 $34,359 $(37,125) $3,157,757
========= ====== ======= =========
</TABLE>
63
<PAGE> 66
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>
The amortized cost and market value of debt securities available for sale
at December 31, 1996, by contractual maturity, are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- -------
(in thousands)
<S> <C> <C>
Due in one year or less $ 3,860 $ 3,868
Due after one year through five years 21,374 22,220
Due after five years through ten years 1,126 1,313
Due after ten years 33 34
---------- ----------
26,393 27,435
Mortgage-backed securities 2,978,338 2,974,530
---------- ----------
$ 3,004,731 $ 3,001,965
========== ==========
</TABLE>
At December 31, 1996 and 1995, accrued interest receivable on securities
available for sale totaled $19.9 million and $8.0 million, respectively.
Securities available for sale with an amortized cost and approximate market
value of $1.2 billion and $1.1 billion at December 31, 1996 and 1995,
respectively, were pledged to secure deposits and advances from the FHLB.
Gross realized gains on the sale of or early redemption by the issuer of
securities available for sale totaled $27.8 million, $25.0 million, and $15.4
million for 1996, 1995, and 1994, respectively. Gross realized losses on
such securities totaled $18.6 million, $1.1 million, and $43.6 million for
1996, 1995, and 1994, respectively.
64
<PAGE> 67
(5) SECURITIES HELD TO MATURITY
In December 1996, the Company reclassified its entire investment and
mortgage-backed securities portfolios from held to maturity to available for
sale. The securities transferred consisted of investment securities with
approximate amortized cost and market values of $114.3 million and $114.9
million, respectively, and mortgage-backed securities with approximate
amortized cost and market values of $3.1 billion. This action was taken to
provide the Company maximum flexibility to manage its portfolio.
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) 37,399
--------- ------- -------- ---------
3,430,954 29,557 (29,170) 3,431,341
--------- ------- -------- ---------
$ 3,550,140 $ 30,888 $ (29,170) $ 3,551,858
========= ======= ======== ==========
</TABLE>
At December 31, 1995, accrued interest receivable on securities held to
maturity totaled $23.1 million.
Securities held to maturity with an amortized cost and approximate market
value of $1.4 billion at December 31, 1995, 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 FASB 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 an amortized cost and market value of $67.5 million and investment
securities with an amortized cost and market value of $17.6 million.
65
<PAGE> 68
(6) LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
----------- -----------
(in thousands)
<S> <C> <C>
Real Estate:
Residential $ 3,791,145 $ 3,320,098
Commercial 153,375 137,507
Construction 27,876 11,969
Consumer loans 348,280 125,633
---------- ----------
4,320,676 3,595,207
Add (Deduct):
Loans in process (10,131) (4,266)
Purchased loan premiums 21,914 17,359
Unearned discounts (12,283) (9,105)
Deferred loan costs 1,012 552
Allowance for losses (22,719) (21,855)
---------- ----------
$ 4,298,469 $ 3,577,892
========== ==========
Weighted average interest rate at end of year 7.69% 7.58%
==== ====
</TABLE>
Gross loans at December 31, 1996, by contractual maturity, were as follows
(in thousands):
<TABLE>
<CAPTION>
Residential Commercial Construction Consumer Total
----------- ---------- ------------ -------- -----
<S> <C> <C> <C> <C> <C>
Adjustable-rate loans:
Due within one year $ 31,088 $ 4,553 $ 7,282 $ 138,245 $ 181,168
After one but within five years 9,438 14,274 1,762 8,528 34,002
After five but within ten years 32,430 11,616 138 59,530 103,714
After ten years 2,525,202 14,356 -- 6,533 2,546,091
--------- ------- ------- -------- ----------
2,598,158 44,799 9,182 212,836 2,864,975
--------- ------- ------- -------- ----------
Fixed-rate loans:
Due within one year 11,370 7,239 17,705 18,179 54,493
After one but within five years 33,017 55,413 989 90,879 180,298
After five but within ten years 104,116 38,654 -- 5,442 148,212
After ten years 1,044,484 7,270 -- 20,944 1,072,698
--------- ------- ------- -------- ----------
1,192,987 108,576 18,694 135,444 1,455,701
--------- ------- ------- -------- ----------
$ 3,791,145 $ 153,375 $ 27,876 $ 348,280 $ 4,320,676
========= ======= ======= ======== ==========
</TABLE>
At December 31, 1996 and 1995, accrued interest receivable on loans totaled
approximately $25.7 million and $22.3 million, respectively.
Nonaccrual loans totaled $12.2 million, $9.5 million, and $7.6 million at
December 31, 1996, 1995, and 1994, respectively. If interest on these loans
had been recognized, such income would have been $924,000, $1.1 million, and
$686,000 for 1996, 1995, and 1994, respectively. During 1996, 1995, and 1994
these nonaccrual loans contributed $246,000, $203,000, and $221,000 to
interest income, respectively. In addition, at December 31, 1996, 1995, and
1994 the Company had troubled debt restructurings aggregating $53,000,
$661,000, and $2.8 million, respectively. During 1996, 1995, and 1994, these
troubled debt restructurings contributed $22,000, $175,000, and $184,000 to
interest income, respectively. Had these loans not been restructured,
interest income would have been $26,000, $211,000, and $222,000 for 1996,
1995, and 1994, respectively.
As of December 31, 1996, the Company had outstanding commitments to originate
fixed-rate mortgage loans of approximately $27.8 million, adjustable-rate
mortgage loans of approximately $66.5 million, fixed-rate residential
construction loans of approximately $11.3 million, and adjustable-rate
residential construction loans of approximately $4.3 million. The Company
also had outstanding commitments to originate fixed-rate non-residential
construction loans of approximately $484,000 and variable-rate
non-residential construction loans of approximately $1.2 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.
66
<PAGE> 69
The Company services mortgage loans for its own account and also services
mortgage 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, 1996 and 1995, the
Company serviced 116,882 mortgage loans totaling $8.4 billion and 78,698
mortgage loans totaling $5.0 billion, respectively. Of these amounts, $3.5
billion and $3.0 billion were serviced on the Company's own behalf at
December 31, 1996 and 1995, respectively.
Activity in mortgage servicing rights originated and purchased, which is
recorded in other assets in the accompanying consolidated balance sheets, is
summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 15,862 $ 22,556 $ 28,117
Purchases 41,846 812 --
Originations 1,252 -- --
Sales -- (3,273) --
Amortization (6,570) (4,233) (5,561)
------ ------ ------
Balance, end of year $ 52,390 $ 15,862 $ 22,556
====== ====== ======
</TABLE>
(7) REAL ESTATE OWNED
Real estate owned is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Acquired through foreclosure $ 14,511 $ 19,098
Acquired for development and sale 216 705
------- -------
14,727 19,803
Less allowance for losses (2,289) (4,370)
------- -------
$ 12,438 $ 15,433
======= =======
</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,
---------------------------------------
1996 1995 1994
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 21,855 $ 22,915 $ 9,056
Provision charged to expense 1,262 1,200 12,432
Additions acquired through acquisitions 1,242 1,166 2,483
Charge-offs, net (1,640) (3,426) (1,056)
-------- ------- -------
Balance, end of year $ 22,719 $ 21,855 $ 22,915
======== ======= =======
</TABLE>
67
<PAGE> 70
Activity in the allowance for losses on real estate owned is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 4,370 $ 6,484 $ 3,737
Provision for real estate losses -- -- 4,581
Additions acquired through acquisitions -- -- 197
Charge-offs (2,081) (2,114) (2,031)
------- ------ ------
Balance, end of year $ 2,289 $ 4,370 $ 6,484
======= ====== ======
</TABLE>
(9) OFFICE PROPERTIES AND EQUIPMENT, NET
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Land, office buildings, and improvements $ 55,527 $ 53,601
Furniture and equipment 26,987 23,056
Leasehold improvements 4,774 4,349
------ ------
87,288 81,006
Less accumulated depreciation and amortization 32,322 28,540
------ ------
$ 54,966 $ 52,466
====== ======
</TABLE>
Depreciation and amortization expense on office properties and equipment
totaled $4.7 million, $4.3 million, and $5.8 million, for 1996, 1995, and
1994, 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>
<CAPTION>
<S> <C>
1997 $ 3,106
1998 2,750
1999 1,508
2000 1,009
2001 776
2002 through 2014 2,136
------
$ 11,285
======
</TABLE>
Rent expense totaled $3.1 million, $2.8 million, and $4.7 million for 1996,
1995, and 1994, respectively.
68
<PAGE> 71
(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,
-----------------------
1996 1995
-------- --------
(in thousands)
<S> <C> <C>
Intangible assets:
Goodwill $ 4,259 $ 671
Core deposit intangibles 41,156 33,457
------ ------
45,415 34,128
Less accumulated amortization 7,670 4,896
------ ------
37,745 29,232
Negative goodwill, net of accumulated amortization (3,569) (4,173)
------ ------
$ 34,176 $ 25,059
====== ======
</TABLE>
The presentation of intangible assets in accordance with generally accepted
accounting principles does not recognize the future economic benefit
associated with certain of the Company's intangible assets whose amortization
is tax deductible. Such intangible assets approximated $8.2 million at
December 31, 1996. The future benefit associated with such tax deductible
intangibles is approximately $2.9 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,
--------------------------------------------------------------------------------
1996 1995
------------------------------------ -------------------------------------
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 $ 390,352 7.3% 0.81% $ 343,036 7.0% 0.96%
Passbook 289,268 5.4 2.31 327,219 6.7 2.31
Money market demand 796,046 14.9 4.19 555,277 11.3 4.12
--------- ---- --------- -----
Total demand deposits 1,475,666 27.6 2.93 1,225,532 25.0 2.75
--------- ---- --------- -----
Certificates of deposit:
2.00% to 3.99% 3,929 .1 2.76 44,903 .9 3.78
4.00% to 5.99% 2,826,377 52.9 5.44 2,278,911 46.4 5.40
6.00% to 7.99% 1,010,813 18.9 6.52 1,324,401 27.0 6.53
8.00% to 9.99% 29,164 .5 8.88 33,207 .7 9.03
10.00% & above 699 -- 11.11 674 -- 11.16
--------- ---- --------- -----
Total certificates of deposit 3,870,982 72.4 5.75 3,682,096 75.0 5.82
--------- ---- --------- -----
Unearned discount on brokered
certificates (49) -- (117) -- --
Net adjustment related to purchase
method of accounting 472 -- (14) -- --
--------- ----- --------- -----
$ 5,347,071 100.0% 4.97% $ 4,907,497 100.0% 5.05%
========= ===== ==== ========= ===== ====
</TABLE>
69
<PAGE> 72
The scheduled maturities of certificates of deposit are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1996 1995
-------------------------------- ----------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ -------- ----------- --------
(dollars in thousands)
<S> <C> <C> <C> <C>
Due within:
One year $ 2,364,151 61.2% $ 2,204,654 59.9%
Two years 625,054 16.1 741,149 20.1
Three years 540,614 13.9 250,594 6.8
Four years 135,908 3.4 279,177 7.6
Five years 102,673 2.7 119,912 3.3
Thereafter 102,582 2.7 86,610 2.3
--------- ----- --------- -----
$ 3,870,982 100.0% $ 3,682,096 100.0%
========= ===== ========= =====
</TABLE>
At December 31, 1996 and 1995, accrued interest payable on deposits totaled
$8.2 million and $7.2 million, respectively.
Certificate of deposit accounts with balances of $100,000 or greater totaled
$332.2 million and $262.8 million at December 31, 1996 and 1995,
respectively. At December 31, 1996, $63.8 million will mature within three
months, $70.3 million will mature in three to six months, $84.4 million will
mature in six months to one year, and $113.7 million will mature after one
year.
Interest expense on deposits by type is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1996 1995 1994
--------- -------- --------
(in thousands)
<S> <C> <C> <C>
Passbook $ 7,035 $ 8,063 $ 9,821
NOW and money market demand 30,501 22,782 23,706
Certificates of deposit 212,284 202,991 166,663
------- ------- -------
$ 249,820 $ 233,836 $ 200,190
======= ======= =======
</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,
------------------------------------------------------
1996 1995
----------------------- ------------------------
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
----- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C>
Agreements involving:
Same securities $ 3,095 $ 4,018 $ 897,261 $ 928,600
Substantially identical securities -- -- 185,553 186,600
------ ------ --------- ---------
3,095 4,018 1,082,814 1,115,200
Accrued interest payable 8 -- 5,534 --
------ ------ --------- ---------
$ 3,103 $ 4,018 $ 1,088,348 $ 1,115,200
====== ====== ========= =========
</TABLE>
70
<PAGE> 73
At December 31, 1996 and 1995, the scheduled maturities of securities sold
under agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
------- -----------
(in thousands)
<S> <C> <C>
Maturing within 30 days $ 3,095 $ 951,602
30 - 90 days -- 34,462
Over 90 days -- 96,750
------ ---------
$ 3,095 $ 1,082,814
====== =========
</TABLE>
Financial data pertaining to the weighted average cost, the level of
securities sold under agreements to repurchase, and the related interest
expense is as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Weighted average interest rate at end of year 3.70% 5.84% 5.96%
Weighted daily average interest rate during the year 5.50 5.93 4.47
Daily average of securities sold under
agreements to repurchase $ 857,924 $1,426,101 $1,193,671
Maximum securities sold under agreements to
repurchase at any month end 1,235,970 1,685,869 1,650,963
Interest expense during the year 47,140 84,557 53,303
</TABLE>
71
<PAGE> 74
(13) ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the FHLB are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1996 1995
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
DUE IN AMOUNT RATE AMOUNT RATE
- ------ -------- ------ -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C>
1996 $ -- --% $ 2,077,000 5.74%
1997 1,113,756 5.74 165,756 6.57
1998 569,500 5.43 57,500 5.73
1999 75,000 5.56 -- --
2000 77,500 5.60 75,000 5.76
2003 2,000 6.39 2,000 6.39
---------- ----------
1,837,756 5.63 2,377,256 5.80
Net adjustment related to purchase
method of accounting -- -- (118) --
---------- ---- ----------
$ 1,837,756 5.63% $ 2,377,138 5.80%
========== ==== ========== ====
</TABLE>
Financial data pertaining to the weighted average cost, the level of FHLB
advances, and the related interest expense is as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Weighted average interest rate at end of year 5.63% 5.80% 5.90%
Weighted daily average interest rate during the year 5.55 5.99 4.80
Daily average of FHLB advances $ 2,598,545 $ 2,236,899 $ 1,579,100
Maximum FHLB advances at any month end 2,868,756 2,460,000 1,857,000
Interest expense during the year 144,089 134,073 75,800
</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.
72
<PAGE> 75
(14) OTHER BORROWINGS
Other borrowings are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
--------- --------
(in thousands)
<S> <C> <C>
Mortgage-backed bonds (net of unamortized discount
of $92 at December 31, 1995)
10.125% due April 15, 2018 $ -- $ 19,664
Subordinated notes, 9.5% due August 1, 2002 -- 27,859
-------- -------
$ -- $ 47,523
======== =======
</TABLE>
During 1996, the Company called the subordinated notes at par plus accrued
interest. This resulted in a pretax loss totaling approximately $812,000,
representing the write off of a previously unamortized debt discount which
has been recorded, net of its tax effect, as an extraordinary item. Also
during 1996, the Company defeased mortgage-backed bonds totaling $19.7
million. During 1994, the Company repurchased and defeased mortgage-backed
bonds totaling $54.3 million. These transactions resulted in pretax losses
totaling approximately $1.4 million and $7.2 million in 1996 and 1994,
respectively, which have been recorded, net of their tax effects, as
extraordinary items.
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). A portion of the duration matching strategy has involved, more
historically than currently, 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.
73
<PAGE> 76
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 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.
The Company cancelled all of its interest rate exchange agreements during the
third quarter of 1996, accordingly there are no such agreements outstanding
at December 31, 1996. Interest rate exchange agreements at December 31, 1995
are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------
NOTIONAL AVERAGE AVERAGE WEIGHTED
PRINCIPAL RATE RATE AVERAGE FAIR
DESIGNATED AGAINST AMOUNT RECEIVED PAID MATURITY VALUE
- ------------------ --------- -------- ------- -------- -----
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Fixed rate available for sale
mortgage-backed securities:
Fixed interest rate paid $ 260,000 5.84% 6.27% 4.25 yrs $ (6,528)
---------- ----------
Short-term wholesale
borrowings maturing or
repricing within 100 days or less:
Fixed interest rate 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>
74
<PAGE> 77
Interest rate cap, floor, and collar agreements are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
NOTIONAL AVERAGE CURRENT WEIGHTED
CAPS: PRINCIPAL CONTRACT INDEX AVERAGE AMORTIZED FAIR
DESIGNATED AGAINST AMOUNT RATE RATE MATURITY COST VALUE
- ------------------ ---------- -------- ------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Adjustable rate available for
sale mortgage-backed securities
December 31, 1996 $3,302,500 8.50% 5.58% 6.22 yrs. $ 71,410 $ 57,333
========== ==== ==== ======== ========
December 31, 1995 $2,152,500 8.15% 5.85% 3.40 yrs. $ 23,997 $ 8,738
========== ==== ==== ======== ========
Short-term wholesale borrowings
maturing or repricing
within 100 days or less
December 31, 1996 $ -- --% --% -- $ -- $ --
========== ==== ==== ======== ========
December 31, 1995 $ 400,000 9.63% 5.88% 8.92 yrs. $ 12,876 $ 6,135
========== ==== ==== ======== ========
FLOORS:
DESIGNATED AGAINST
- ------------------
Adjustable rate available for
sale mortgage-backed securities
December 31, 1996 $ 150,000 7.50% 5.52% .61 yrs. $ 145 $ 1,676
========== ==== ==== ======== ========
December 31, 1995 $ 615,000 5.12% 4.76% 5.06 yrs. $ 4,271 $ 10,746
========== ==== ==== ======== ========
Interest-bearing retail deposits
December 31, 1996 $ 450,000 6.33% 5.50% 4.52 yrs. $ 13,938 $ 10,327
========== ==== ==== ======== ========
December 31, 1995 $ 955,000 5.32% 5.01% 6.27 yrs. $ 25,035 $ 31,116
========== ==== ==== ======== ========
COLLAR:
DESIGNATED AGAINST
- ------------------
Interest-bearing retail deposits
December 31, 1996 $ 25,000 5.25%/10.25% 5.88% 1.84 yrs. $ 66 $ 51
========== =========== ==== ======== ========
December 31, 1995 $ 25,000 5.25%/10.25% 5.88% 2.84 yrs. $ 138 $ 51
========== =========== ==== ======== ========
</TABLE>
75
<PAGE> 78
Changes in the notional amounts of interest rate exchange, cap, floor, and
collar agreements and related recognized net losses were as follows.
<TABLE>
<CAPTION>
INTEREST INTEREST INTEREST INTEREST
RATE EXCHANGE RATE CAP RATE FLOOR RATE COLLAR
AGREEMENTS AGREEMENTS AGREEMENTS AGREEMENTS
------------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
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
Purchases 100,000 1,500,000 -- --
Maturities -- (250,000) -- --
Terminations (1,314,000) (500,000) (970,000) --
----------- ----------- ----------- --------
Notional balance at December 31, 1996 $ -- $ 3,302,500 $ 600,000 $ 25,000
=========== =========== =========== ========
</TABLE>
As a result of its continuing transition to a more retail-oriented
institution, the Company was able to substantially reduce in 1996,
principally during the third and fourth quarters, its need for derivative
financial instruments in managing its interest rate risk.
Accordingly, the Company terminated all of its interest rate exchange
agreements, $970 million notional amount of its interest rate floor
agreements, and $500 million notional amount of its interest rate cap
agreements. The terminations of the interest rate exchange agreements were
accounted for in accordance with the provisions of Emerging Issues Task Force
Issue 84-7 (EITF 84-7) which requires that gains or losses on the termination
of such agreements be recognized when the offsetting gain or loss is
recognized on the designated asset or liability. That is, to the extent that
the designated assets or liabilities still exist, any gain or loss on the
termination of the agreement designated as a synthetic alteration would be
deferred and amortized over the shorter term of the remaining contractual
life of the agreement or the remaining life of the asset or liability.
During the third quarter 1996, interest rate exchange agreements designated
against available for sale fixed rate mortgage-backed securities were
cancelled resulting in a $16.1 million gain which was recognized as the above
mentioned assets against which the agreements had been designated were
concurrently sold. The remaining interest rate exchange agreements
designated against short-term wholesale borrowings were also cancelled at a
cost of $68.0 million which costs were deferred to be amortized because the
underlying liabilities against which the agreements had been designated still
existed at September 30, 1996.
Efforts to further the previously discussed retail transition continued in
the fourth quarter of 1996 and resulted in shrinkage in the Company's total
assets by $1.3 billion. This shrinkage resulted primarily from the sale of
investment and mortgage-backed securities with the proceeds being utilized to
further reduce short-term wholesale borrowings. Further, the Company
completed two acquisitions of thrifts during October of 1996 which further
reduced such borrowings by replacing them as a funding source with the
acquired retail deposits. Upon repayment of the designated short-term
wholesale borrowings, all existing net deferred swap cancellation costs and
certain other deferred gains and losses related to previously terminated
interest rate cap and floor agreements in total amounting to $80.5 million
were recognized during the fourth quarter of 1996.
The terminations of the $970 million notional amount interest rate floor and
$500 million notional amount cap agreements were accounted for in accordance
with the provisions of Issue 8A of the American Institute of Certified Public
Accountants Issues Paper "Accounting for Options" (Issues Paper). In
accordance with the conclusions expressed in the Issues Paper, the excess of
the unamortized time value of the options (the premium) over the amount of
cash received upon termination amounting to $6.4 million was recognized in
earnings when the options were terminated.
The recognized net losses referred to above totaling $70.7 million are
reflected in the caption "Net Gain (Loss) from Financial Instruments" in the
accompanying consolidated financial statements (see Note 16).
76
<PAGE> 79
At December 31, 1996, unamortized fees related to the purchase of interest
rate cap, floor, and collar agreements totaled $85.6 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>
1997 $ 11,608 $ 2,618 $ 14,226
1998 10,960 2,375 13,335
1999 9,411 1,864 11,275
2000 8,329 1,864 10,193
2001 7,312 1,864 9,176
2002 through 2006 23,935 3,419 27,354
-------- -------- --------
$ 71,555 $ 14,004 $ 85,559
======== ======== ========
</TABLE>
Prior to 1996, the Company utilized 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.
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
-------------------------------------------------------
Recognized
Face Gain
Number Amount (Loss)
------ ------ ----------
(Dollars in Millions)
<S> <C> <C> <C>
At or for the Year Ended:
December 31, 1996 -- $ -- $ --
December 31, 1995 4,115 $ 4,115 $ (71.0)
December 31, 1994 11,072 $ 11,072 $ 39.5
</TABLE>
During August 1996, the Staff of the Securities and Exchange Commission
(Staff) performed a regular review of the Company's 1995 Form 10-K in
conjuction with Registration Statements on Form S-4 filed by the Company
related to three pending acquisitions. As a result of this review, the Staff
questioned the Company's original accounting treatment surrounding the deferral
and recognition of gains and losses on financial futures contracts used to
reduce the interest rate risk of certain mortgage backed securities in the
Company's available for sale portfolio. The Company originally recognized a
$34.8 million charge to fourth quarter 1995 earnings regarding the cessation of
deferral accounting.
At issue was the Staff's contention that the financial futures contracts did
not meet the "high correlation" criteria of Statement of Financial Accounting
Standards No. 80 "Accounting for Futures Contracts", thus not qualifying for
deferral accounting from the inception of the hedge in March 1994 and
requiring the recognition of subsequent gains and losses in income. The
Company originally ceased deferral accounting when management concluded that
high correlation measured using the "cumulative dollar approach" was unlikely
to be achieved on a consistent basis.
Accordingly, at the Staff's request, the Company in 1996 restated its 1994
and 1995 consolidated financial statements to reflect the cessation of
deferral accounting, from the inception of the hedge, with respect to the
aforementioned financial futures contracts. The restatement had the effect
of increasing previously reported 1994 net income and decreasing previously
reported 1995 net income by
77
<PAGE> 80
$18.0 million (on a fully-diluted per share basis, an increase of $0.48 for 1994
and a decrease of $0.43 for 1995). This restatement was one of the timing of
recognition of gains and losses in the Statement of Operations and had no impact
on total stockholders' equity at any date since both the financial futures
contracts and the related mortgage-backed securities had been previously marked
to market through stockholders' equity at each reporting period.
Subsequent to December 31, 1995, the Company terminated all of its financial
futures positions and maintained its interest rate risk management position
by principally redesignating existing interest rate exchange agreements to
the available for sale portfolio. Such interest rate exchange agreements were
utilized prior to the redesignation to manage the interest rate risk of
short-term wholesale borrowings.
(16) NET GAIN (LOSS) FROM FINANCIAL INSTRUMENTS
Net gain (loss) from financial instruments is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Mortgage-backed securities held to maturity $ -- $ -- $ (231)
Investment securities held to maturity -- -- 209
Mortgage-backed securities held for trading -- -- (4,545)
Mark to market of financial futures contracts -- (71,022) 39,508
Mortgage-backed securities available for sale 8,466 23,885 (28,208)
Investment securities available for sale 719 -- (115)
Cancellation cost of interest rate exchange,
cap, and floor agreements (See Note 15) (70,711) -- (8,910)
Options expense (15,108) (11,079) (8,368)
------- --------- -------
$ (76,634) $ (58,216) $ (10,660)
======= ========= =======
</TABLE>
(17) INCOME TAXES
Prior to 1996, if certain conditions were met, savings and loan associations
and savings banks were 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 were tax-preference items, and were subject to a
minimum tax. The Company used the percentage of taxable income method for
1995 and 1994 in determining the bad debt deduction for tax purposes.
The special bad debt deduction accorded thrift institutions is covered under
Section 593 of the Internal Revenue Code (IRC). On August 20, 1996, the
Small Business Job Protection Act of 1996 (the Act) was signed into law.
This Act included the repeal of certain portions of Section 593 effective
for tax years beginning after December 31, 1995. As a result, thrift
institutions are no longer allowed a percentage method bad debt deduction.
The repeal of the thrift reserve method generally requires thrift
institutions to recapture into income the portion of tax bad debt reserves
accumulated since 1987 (base year reserve). The recapture will generally be
taken into income ratably over six tax years. However, if the Company meets
a residential loan requirement for tax years beginning in 1996 and 1997,
recapture of the reserve can be deferred until the tax year beginning in
1998. At December 31, 1996, the Company had bad debts deducted for tax
purposes in excess of the base year reserve of approximately $15.3 million.
The Company has recognized a deferred income tax liability for this amount.
Certain events covered by IRC Section 593(e), which was not repealed, will
trigger a recapture of the base year reserve. The base year reserve of
thrift institutions would be recaptured if a thrift ceases to qualify as a
bank for federal income tax purposes. The base year reserves of thrift
institutions also remain subject to income tax penalty provisions which, in
general, require recapture upon certain stock redemptions of, and excess
distributions to, stockholders. At December 31, 1996, retained earnings
included approximately $93.0 million of base year reserves, for which no
deferred federal income tax liability has been recognized.
78
<PAGE> 81
Income tax expense (benefit) before extraordinary items is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 2,962 $ (437) $ 38,520
State -- (21) 2,699
Deferred:
Federal 2,873 10,309 (14,805)
State -- 407 (1,030)
----- ------ -------
$ 5,835 $ 10,258 $ 25,384
===== ====== =======
</TABLE>
The reasons for the difference between the expected income taxes, computed at
the federal statutory rate of 35%, and the actual income taxes are summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Computed "expected" income tax $ 5,932 $ 13,075 $ 26,236
State income taxes, net of federal tax benefit -- 278 1,085
Resolution of federal tax issues (241) (2,188) (3,110)
Nondeductible acquisition costs -- 101 2,469
Other, net 144 (1,008) (1,296)
----- ------- -------
$ 5,835 $ 10,258 $ 25,384
===== ======= =======
</TABLE>
The components of the deferred tax assets and deferred tax liabilities are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Deferred tax assets:
Unrealized losses on securities $ 6,470 $ 12,506
Litigation settlement 843 1,604
Purchased mortgage service rights 4,527 3,704
Provision for losses on loans 7,306 7,412
Other 6,271 4,278
------ ------
Total deferred tax assets 25,417 29,504
------ ------
Deferred tax liabilities:
FHLB stock dividends 8,228 8,203
Purchase accounting adjustments 1,943 2,294
Bad debt reserves in excess of base year 5,858 4,792
Deferred income 3,624 7,275
Other 4,043 2,346
------- ------
Total deferred tax liabilities 23,696 24,910
------- ------
Net deferred tax asset $ 1,721 $ 4,594
======= ======
</TABLE>
A valuation allowance would be provided on deferred tax assets when it is
more likely than not that some portion of the assets will not be realized.
The Company has not established a valuation allowance as of December 31,
1996 or 1995, due to management's belief that all criteria for
recognition have been met, including the existence of a history of
taxes paid sufficient to support the realization of deferred tax assets.
79
<PAGE> 82
(18) STOCKHOLDERS' EQUITY
Preferred Stock
Each share of the Company's preferred stock is convertible, at the option of
the holder, into 3.75 shares of the Company's common stock, par value $.01
per share. 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. As part of the merger
agreement with Mercantile Bancorporation Inc. (See Note 24), the Company
is required to redeem its preferred stock on May 16, 1997.
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, 1996, 281,500 shares of common stock of the Company
have been repurchased pursuant to the stock repurchase program at a
weighted average price of $15.98 per share.
On January 2, 1997, the Board of Directors of the Company authorized an
expansion of the capacity of the above-mentioned stock repurchase plan by an
additional 5,529,880 shares. This expansion, when coupled with the
remaining authorization prior to the expansion (1,468,500 shares), resulted in
a total authorization of 6,998,380 shares, the number of shares that the
Company has agreed to use its reasonable best efforts, subject to prudent
business practices, to acquire in open market transactions prior to the
closing date of its planned merger with Mercantile Bancorporation Inc. (See
Note 24). Subsequent to December 31, 1996 and through February 13, 1997,
an additional 1,600,000 shares have been repurchased at a weighted average
price of $21.08 per share (unaudited).
(19) REGULATORY CAPITAL REQUIREMENTS AND OTHER MATTERS
The Company and the subsidiary banks are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines, the Company and the subsidiary
banks must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company and the
subsidiary banks' capital amounts and classifications are also subject to
quantitative judgements by the regulators about components, risk-weightings
and other factors. Management believes, as of December 31, 1996 the Company
and the subsidiary banks' meet all capital adequacy requirements.
The subsidiary banks are also subject to the regulatory framework for prompt
corrective action. The most recent notification from the regulatory agencies
categorized the banks as well capitalized. To be categorized as well
capitalized, the banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following
table. There are no conditions or events since the dates of the
aforementioned notifications that management believes have
changed the banks' category.
80
<PAGE> 83
The Company and the banks' actual and required capital amounts and ratios as
of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
REQUIREMENTS TO BE WELL-CAPITALIZED
CAPITAL UNDER PROMPT AND CORRECTIVE
ACTUAL REQUIREMENTS ACTION PROVISIONS
---------------------- ---------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- ------ -------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Total Capital:<F1>
Roosevelt Financial Group, Inc. $ 480.9 12.52% $ 307.3 8.00% N/A N/A
Roosevelt Bank 444.2 11.75 302.5 8.00 $ 378.1 10.00%
Missouri State Bank 8.0 13.35 4.8 8.00 6.0 10.00
Tangible Capital: <F2>
Roosevelt Bank 423.2 5.44 116.6 1.50 N/A N/A
Core (Leverage) Capital: <F2>
Roosevelt Bank 425.3 5.47 233.3 3.00 N/A N/A
Tier I Capital: <F1>
Roosevelt Financial Group, Inc. 461.9 12.02 153.7 4.00 N/A N/A
Roosevelt Bank 425.3 11.25 N/A N/A 226.9 6.00
Missouri State Bank 7.3 12.11 2.4 4.00 3.6 6.00
Tier I Capital:
Roosevelt Bank <F2> 425.3 5.47 N/A N/A 388.8 5.00
Missouri State Bank <F3> 7.3 14.37 N/A N/A 2.5 5.00
<FN>
<F1> To risk-weighted assets.
<F2> To adjusted total assets.
<F3> To average adjusted assets.
</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, 1996 would
not be greater than normal as defined by the OTS, thus not requiring any
additional risk-based capital.
In September, 1996 legislation was enacted to recapitalize the Savings
Association Insurance Fund (SAIF). The legislation provided for a one-time
assessment to be imposed on all deposits assessed at the SAIF rates, as of
March 31, 1995. The special assessment ratio was established at 0.657% of
deposits by the Federal Deposit Insurance Corporation and resulted in an
assessment of $27.4 million or $17.8 million after the effect of taxes.
81
<PAGE> 84
(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, which terminated
January 29, 1997, provided for the granting of incentive stock options,
nonqualified stock options, restricted stock awards, and stock
appreciation rights. The Plan authorized the issuance of up to 4,500,000
shares of the Company's common stock. 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 equals
the market price of the underlying stock on the date of grant. In October
1995, the FASB issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). Upon adoption in 1996,
the Company elected the pro forma disclosure alternative provided in SFAS 123
versus the recognition provisions.
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, 1993 2,364,475 $ 5.26 $3.00-13.75
Granted 205,500 13.89
Exercised (1,420,347) 4.63
----------
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
Assumed in mergers 182,553 6.73
Granted 148,800 19.81
Exercised (194,527) 9.89
---------- ------
Outstanding and exercisable
at December 31, 1996 1,171,280 $ 10.42 $3.00-20.62
========== ======
</TABLE>
The Company's stock options outstanding and exercisable at December 31,
1996 by range of exercise prices, is further detailed as follows:
<TABLE>
<CAPTION>
SHARES
PER SHARE OPTION UNDER AVERAGE PRICE
PRICE RANGE OPTION PER SHARE
---------------- ------ -------------
<S> <C> <C> <C>
$ 3.00 - $ 4.99 233,288 $ 4.04
5.00 - 8.99 416,562 6.80
9.00 - 11.99 14,230 9.27
12.00 - 14.99 196,400 13.71
15.00 - 17.99 164,000 16.34
18.00 - 21.00 146,800 19.95
--------- ------
1,171,280 $10.42
========= ======
</TABLE>
Presented below is pro forma net income and earnings per share, as required
by SFAS 123, determined as if the Company had accounted for stock options
granted in 1996 and 1995 under the provisions of SFAS 123. For purposes of
providing the pro forma disclosures required under SFAS 123, the fair value
of stock options granted in 1996 and 1995 were estimated at the date of grant
using the Black-Scholes option pricing model. The Black-Scholes option pricing
model was originally developed for use in estimating the fair value of traded
options which have different characteristics than the Company's employee
stock options. The model is also sensitive to changes in the subjective
assumptions which can materially affect the fair value estimate. As a
result, management believes that the Black-Scholes model may not necessarily
provide a reliable single measure of the fair value of employee stock
options.
The following weighted-average assumptions were used in the option pricing
model: a risk-free interest rate of 6.22% and 4.83% for 1996 and 1995,
respectively; an expected life of the option of 4.9 years and 5 years
for 1996 and 1995, respectively; and an expected dividend yield of 3.18%
and 3.40% and a volatility factor 25.41% and 32.92% for 1996 and 1995,
respectively. For purposes of the pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options'
vesting period.
82
<PAGE> 85
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with the recognition provisions of SFAS 123, net income
and earnings per share would have been as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
(In thousands, except per share amounts) 1996 1995
---- ----
<S> <C> <C>
Pro forma net income $ 8,957 $ 26,598
Pro forma earnings per share:
Primary $ 0.11 $ 0.55
Fully diluted $ 0.11 $ 0.55
</TABLE>
Due to the inclusion of only 1996 and 1995 option grants, the effects of
applying SFAS 123 in 1996 and 1995 may not be representative of the pro forma
impact in future years.
(21) EMPLOYEE BENEFITS PROGRAMS
Substantially all employees are included in a trusteed defined benefit
pension plan. Benefits contemplated by the plan are funded through payments
to 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 $1,580,000, $1,367,000, and $359,000 for
1996, 1995, and 1994, respectively.
The Company maintains a thrift savings plan, qualifying 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 contributions by the Company totaled
$1,110,000, $936,000, and $866,000 for 1996, 1995, and 1994, 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 for all eligible employees on that date. Dividends
on shares held in each employee's account are reinvested. Contributions made
to the ESOP by the Company totaled $302,000, $247,000, and $448,000 for 1996,
1995, and 1994, respectively.
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 is 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.
83
<PAGE> 86
<TABLE>
(23) PARENT COMPANY FINANCIAL INFORMATION
<CAPTION>
1996 DECEMBER 31, 1995
- ---------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
CONDENSED BALANCE SHEETS
Assets:
Cash $ 31,091 $ 2,616
Investment in subsidiaries 467,066 517,080
Investment securities available for sale -- 2,531
Other assets 1,627 4,946
-------- --------
$ 499,784 $ 527,173
======== ========
Liabilities and Stockholders' Equity:
Subordinated notes $ -- $ 27,859
Other liabilities 2,357 2,408
Stockholders' equity 497,427 496,906
-------- --------
$ 499,784 $ 527,173
======== =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1995 1994
-------- --------- ----------
(in thousands)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Interest income $ 330 $ 82 $ 241
Interest expense 1,672 2,867 5,276
------ ------- -------
Net interest expense (1,342) (2,785) (5,035)
Dividends received from subsidiaries 81,050 52,050 45,650
Equity in undistributed earnings (losses) of subsidiaries (69,402) (22,682) 8,918
Other income 25 1 --
General and administrative expenses (927) (684) (7,469)
------ ------- -------
Income before income tax benefit and extraordinary item 9,404 25,900 42,064
Income tax benefit (784) (1,198) (2,280)
------ ------- -------
Income before extraordinary item 10,188 27,098 44,344
Extraordinary item, net of income tax effect (526) -- (2,617)
------ ------- -------
Net income $ 9,662 $ 27,098 $ 41,727
====== ======= =======
</TABLE>
84
<PAGE> 87
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1996 1995 1994
-------- --------- ----------
(in thousands)
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 9,662 $ 27,098 $ 41,727
Equity in earnings of subsidiaries (11,648) (29,368) (54,568)
Extraordinary loss on early extinguishment of debt 812 -- 3,965
Other, net 4,334 517 270
------- -------- -------
Net cash provided by (used in) operating activities 3,160 (1,753) (8,606)
------- -------- -------
Cash flows from investing activities:
Dividends received 81,050 52,050 45,650
Additional investment in subsidiary -- (21,463) (19,036)
Proceeds from maturities and sales of securities available for sale 2,531 800 --
------- -------- -------
Net cash provided by investing activities 83,581 31,387 26,614
------- -------- -------
Cash flows from financing activities:
Redemption of subordinated notes (28,750) -- (31,022)
Cash dividends paid (30,513) (26,789) (18,056)
Proceeds from issuance of preferred stock -- -- 21,273
Purchase of treasury stock (923) (3,426) (150)
Exercise of stock options 1,920 1,107 6,459
------- -------- -------
Net cash used in financing activities (58,266) (29,108) (21,496)
------- -------- -------
Net increase (decrease) in cash 28,475 526 (3,488)
Cash at beginning of year 2,616 2,090 5,578
------- -------- -------
Cash at end of year $ 31,091 $ 2,616 $ 2,090
======= ======== =======
</TABLE>
(24) PLANNED MERGER WITH MERCANTILE BANCORPORATION INC.
Roosevelt Financial Group, Inc. announced on December 23, 1996 its plans to
merge with Mercantile Bancorporation Inc. Pursuant to the merger agreement,
shareholders of the Company will be able to elect to receive either $22 in cash
or .4211 shares of Mercantile Bancorporation Inc. common stock, up to 13 million
shares. Plans call for the merger, which is subject to the approval of
shareholders of the Company and all appropriate regulatory agencies, to be
completed in mid-1997.
85
<PAGE> 88
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/Prospectus 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/Prospectus
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/Prospectus 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/Prospectus
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/Prospectus 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/Prospectus 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.
86
<PAGE> 89
<TABLE>
(a) (3) Exhibits:
- --------
<CAPTION>
SEQUENTIALLY
PAGE NUMBER
WHERE
ATTACHED
EXHIBITS
REGULATION ARE LOCATED
S-K EXHIBIT IN THIS FORM
NUMBER DOCUMENT 10-K REPORT
- ----------- -------- ------------
<C> <S> <C>
2 Plan of acquisition, reorganization,
arrangement, liquidation or succession Not applicable
Filed as Exhibit's to the Registrant's
Current Report on Form 8-K reporting
the event of December 22, 1996 and
incorporated herein by reference.
3 Certificate of Incorporation.
Filed as Exhibit 4.1 to the Registrant's
Registration Statement No. 33-79308 and
incorporated herein by reference. Not applicable
Bylaws. Filed as Exhibit 3.2 to the
Registrant's Registration Statement
No. 33-20337 incorporated herein
by reference. Not applicable
4 Instruments defining the rights of
security holders, including
indentures:
Specimen common stock certificate.
Filed as Exhibit 4 to the
Registrant's Registration
Statement No. 33-20337
incorporated herein by reference. Not applicable
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. Not applicable
Specimen stock certificate of 6 1/2% Non-Cumulative
Convertible Preferred Stock, Series A.
Filed as Exhibit 4.4 to the Registrant's
Registration Statement No. 33-76738
and incorporated herein by reference. Not applicable
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. Not applicable
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. Not applicable
87
<PAGE> 90
9 Voting trust agreement Not applicable
10 Material Contracts:
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. Not applicable
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. Not applicable
Roosevelt Bank Supplemental
Pension 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. Not applicable
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. Not applicable
Roosevelt Financial Group, Inc.
Retirement Pension Plan for Outside Directors Page
Employment Agreement between the Registrant,
Mercantile Bancorporation Inc. and Stanley
J. Bradshaw Exhibit 10.1
Transition Employment Agreement between the
Registrant, Mercantile Bancorporation Inc.
and Anat Bird Exhibit 10.2
Transition Employment Agreement between the
Registrant, Mercantile Bancorporation Inc.
and Gary W. Douglass Exhibit 10.3
11 Statements re computation of
per share earnings Exhibit 11
12 Statements re computation of
ratios Not applicable
13 Annual report to security holders Not applicable
16 Letter re changes in certifying accountant Not applicable
88
<PAGE> 91
18 Letter re changes in accounting principles Not applicable
21 Subsidiaries of the registrant Exhibit 21
22 Published report regarding matters submitted
to vote of security holders Not applicable
23 Consents of experts Exhibit 23
24 Power of attorney Not applicable
27 Financial Data Schedule Exhibit 27
99 Additional exhibits Not applicable
<FN>
<F*> In accordance with Item 601 (b) (2) (iii) of Regulation S-K,
Registrant hereby agrees to furnish a copy of any omitted
schedule to the agreement to the SEC upon request.
</TABLE>
89
<PAGE> 92
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant had duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized in the
City of Chesterfield, County of St. Louis, State of Missouri, on the
day of March, 1996.
ROOSEVELT FINANCIAL GROUP, INC.
By /s/ Stanley J. Bradshaw
-------------------------------------
Stanley J. Bradshaw
Director, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ------------------------------------------------------------------- ----
<C> <S> <C>
/s/ Stanley Bradshaw Director, President March 4, 1997
- ---------------------------------------------------- and Chief Executive
Stanley J. Bradshaw Officer
/s/ Anat Bird Director, Senior Executive March 4, 1997
- ---------------------------------------------------- Vice President and Chief
Anat Bird Operating Officer
/s/ Gary W. Douglass Executive Vice President March 4, 1997
- ---------------------------------------------------- and Chief Financial Officer
Gary W. Douglass
/s/ Clarence M. Turley, Jr. Director March 4, 1997
- ----------------------------------------------------
Clarence M. Turley, Jr.
/s/ Hiram S. Liggett, Jr. Director March 4, 1997
- ----------------------------------------------------
Hiram S. Liggett, Jr.
/s/Patricia M. Gammon Director March 4, 1997
- ----------------------------------------------------
Patricia M. Gammon
/s/ Alvin D. Vitt Director March 4, 1997
- ----------------------------------------------------
Alvin D. Vitt
</TABLE>
90
<PAGE> 1
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
this 22 day of December, 1996, by and between Roosevelt Financial Group, Inc.
-- --------
(the "Company"), Mercantile Bancorporation, Inc. ("Mercantile") and Stanley
J. Bradshaw (the "Employee").
WHEREAS, the Company has entered into an Agreement and Plan of
Reorganization of even date herewith (the "Definitive Agreement") with
Mercantile, pursuant to which Mercantile will acquire (the "Acquisition")
the Company and its wholly-owned subsidiary, Roosevelt Bank (the "Bank");
WHEREAS, the Acquisition represents a significant acquisition for
Mercantile;
WHEREAS, Mercantile has expressed a desire to retain the Employee as a
member of its Management Executive Committee and a belief that it is
essential for Mercantile to retain the Employee for the future management
and growth of the assets acquired in the Acquisition, and Mercantile has
expressed the intention that the Employee shall have a key role with respect
to Mercantile's strategic activities in the future;
WHEREAS, it is a condition of Mercantile's entering into the Definitive
Agreement that Mercantile be assured that the Employee will be available for
long term service with Mercantile after the Acquisition;
WHEREAS, it is appropriate to provide the Employee with a material
inducement to enter into this Agreement by which he will undergo a change in
status and undertake both to continue his chief executive responsibilities
with respect to the Bank and expanded duties with respect to Mercantile's
banking operations in the St. Louis, Missouri, area; and
WHEREAS, the board of directors of the Company and the Executive Committee
of the board of directors of Mercantile have approved and authorized the
execution of this Agreement with the Employee;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
-----------
(a) The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Company (or its successors) that are part of the
consolidated group of the Company (or its successors) for federal income
tax reporting.
(b) The term "Date of Termination" means the date upon which the
Employee's employment with the Bank ceases, as specified in a notice of
termination pursuant to Section 8 of this Agreement.
<PAGE> 2
(c) The term "Effective Time" means immediately prior to the
consummation of the Acquisition as provided in the Definitive Agreement.
(d) The term "Effective Date" means the date on which the
Acquisition is consummated as provided in the Definitive Agreement.
(e) The term "Involuntary Termination" means the termination of
the employment of Employee (i) by the Bank without his express written consent;
or (ii) by the Employee by reason of a material diminution of or interference
with his duties, responsibilities or benefits, including (without limitation)
any of the following actions unless consented to in writing by the Employee:
(1) a requirement that the Employee be based at any place other than
Chesterfield, Missouri, or within 50 miles thereof, except for reasonable
travel on Company or Bank business; (2) a material demotion of the Employee;
or (3) a reduction in the Employee's salary or a material adverse change in
the Employee's perquisites, benefits, contingent benefits or vacation, other
than as part of an overall program applied uniformly and with equitable
effect to all members of the senior management of the Bank or the Company.
The term "Involuntary Termination" does not include Termination for Cause
or termination of employment due to death or permanent disability, or
suspension or temporary or permanent prohibition from participation in the
conduct of the affairs of a depository institution under Section 8 of the
Federal Deposit Insurance Act.
(f) The terms "Termination for Cause" and "Terminated For Cause"
mean termination of the employment of the Employee with the Bank because of
the Employee's personal dishonesty, incompetence, willful misconduct, breach
of a fiduciary duty involving personal profit, intentional failure to perform
material stated duties, willful violation of any law, rule, or regulation
(other than traffic violations or similar offenses) or final cease-and-desist
order, or (except as provided below) material breach of any provision of this
Agreement. No act or failure to act by the Employee shall be considered
willful unless the Employee acted or failed to act with an absence of good
faith and without a reasonable belief that his action or failure to act was
in the best interest of the Company.
2. Term. The term of this Agreement shall be a period of three years
----
commencing on the Effective Time, subject to earlier termination as provided
herein (the "Employment Period").
3. Employment. The Employee is currently employed as Chief Executive
----------
Officer of the Bank. From and after the Effective Date, during the Employment
Period, the Employee shall serve as President and Chief Executive Officer of
the Bank, pending integration of the Bank with and into Mercantile's banking
and/or other affiliates, and thereafter as head of Mercantile's St. Louis-based
mortgage banking operations. As such, the Employee shall render administrative
and management services as are customarily performed by persons situated in
similar executive capacities, and shall have such other powers and duties as
the Chief Executive Officer of Mercantile may prescribe from time to time.
The Employee shall also serve as a member of the Management Executive Committee
of Mercantile. The Employee shall report solely to the chief executive officer
of Mercantile. The Employee shall devote his best efforts and reasonable
time and attention to the business and affairs of the Bank and/or other
Consolidated Subsidiaries to the extent necessary to discharge his
responsibilities hereunder. The Employee may (i) serve on
2
<PAGE> 3
corporate or charitable boards or committees, and (ii) manage personal
investments, so long as such activities do not interfere materially with
performance of his responsibilities hereunder.
4. Cash Compensation.
-----------------
(a) Salary. Mercantile agrees to pay, or cause the Bank or
------
appropriate other Consolidated Subsidiaries to pay, the Employee during the
term of this Agreement a base salary (the "Annual Base Salary") the annualized
amount of which shall be not less than FOUR HUNDRED TWENTY-FIVE THOUSAND
DOLLARS ($425,000). The Annual Base Salary shall be paid no less frequently
than monthly and shall be subject to customary tax withholding.
(b) Annual Bonus. During the Employment Period, in addition to Annual
------------
Base Salary, the Employee will be eligible to receive, (I) for each fiscal year
of Mercantile during which the Employee is employed, an annual bonus (the
"Annual Bonus") in an amount to be determined by Mercantile's board of
directors, but in no event shall the amount of the Annual Bonus during the
first fiscal year during which the Employee is employed (the "First Fiscal
Year") be less than the product of (x) .55 and (y) the Annual Base Salary
(the "Minimum Bonus") and (II) for that portion of any fiscal year of
Mercantile other than the First Fiscal Year during which the Employee is
employed for less than twelve full months, an amount equal to the product of
(x) the Annual Bonus paid to the Employee during the Employment Period, and
(y) a fraction, the numerator of which is the number of days in such fiscal
year during which the Employee is employed by Mercantile, and the denominator
of which is 365. Each such Annual Bonus shall be paid in cash in a manner and
at a time in accordance with Mercantile's customary practices with respect
to other peer employees of Mercantile.
(c) Expenses. The Employee shall be entitled to receive prompt
--------
reimbursement for all reasonable expenses incurred by the Employee in
performing services under this Agreement in accordance with the policies and
procedures applicable to the executive officers of Mercantile, provided that
-------------
the Employee accounts for such expenses as required under such policies and
procedures.
5. Benefits.
--------
(a) Participation in Benefit Plans. The Employee shall be entitled to
------------------------------
participate, to the same extent as executive officers of Mercantile and the
Consolidated Subsidiaries generally, in all qualified and nonqualified plans
of Mercantile and the Consolidated Subsidiaries relating to pension,
retirement, thrift, profit-sharing, savings, group or other life insurance,
hospitalization, medical and dental coverage, travel and accident insurance,
education, and other retirement or employee benefits or combinations thereof.
In addition, the Employee shall be entitled to be considered for benefits
under all of the stock and stock option related plans in which the executive
officers of Mercantile are eligible or become eligible to participate.
(b) Fringe Benefits. The Employee shall be eligible to participate in,
---------------
and receive benefits under, any other fringe benefit plans or perquisites which
are or may become generally available to the executive officers of Mercantile,
including but not limited to supplemental retirement, incentive compensation,
supplemental medical or life insurance plans, physical examinations, and tax
preparation services.
3
<PAGE> 4
(c) Restricted Stock. At the Effective Time, the Company shall grant
----------------
to the Employee 100,000 shares of restricted stock of the Company, which
shares shall vest annually in equal portions over a period of three years
following the Effective Date, provided that vesting shall accelerate so that
-------------
all shares vest immediately in the event that the Employee dies or becomes
permanently disabled during such period but vesting shall not accelerate in
the event of a change in control of Mercantile.
(d) Credit For Prior Service. Following the Acquisition, the Employee
------------------------
shall receive full credit for prior service with the Company and the Bank
under employee benefit plans of Mercantile, all as more fully set out in
Section 5.08 of the Definitive Agreements for all purposes other than
determining the amount of benefit accruals under any defined benefit plans
of Mercantile.
6. Vacations; Leave. The Employee shall be entitled to annual paid
----------------
vacation in accordance with the policies established by the board of directors
of Mercantile and the board of directors of the Bank for executive officers,
and to voluntary leaves of absence, with or without pay, from time to time
at such times and upon such conditions as the Board of Directors may determine
in its discretion.
7. Termination of Employment.
-------------------------
(a) Involuntary Termination. If the Employee experiences an
-----------------------
Involuntary Termination at any time, (i) Mercantile shall pay to the
Employee:
A. The sum of (1) the Employee's Annual Base Salary through the Date
of Termination to the extent not theretofore paid ("Accrued Salary") and (2)
the product of (x) the Annual Bonus paid or payable, including any bonus or
portion thereof which has been earned but deferred (and annualized for any
fiscal year of Mercantile consisting of less than twelve full months or during
which the Employee was employed for less than twelve full months), for the
most recently completed fiscal year during the Employment Period, if any, or,
in the event that a fiscal year of Mercantile has not been completed during
the Employment Period as of the Date of Termination, the Minimum Bonus, and
(y) a fraction, the numerator of which is the number of days in the current
fiscal year of Mercantile through the Date of Termination, and the denominator
of which is 365 (the sum of the amounts described in clauses (1) and (2)
shall be hereinafter referred to as the "Accrued Obligations"); and
B. The greater of (1) the amount equal to the product of (i) the
number of months remaining in the Employment Period on the Date of
Termination (the "Continuation Period"), divided by twelve and (ii) the sum
of (x) the Employee's Annual Base Salary and (y) the Annual Bonus paid or
payable (but not less than the Minimum Bonus) for the most recently completed
fiscal year of Mercantile during the Employment Period (the "Recent Annual
Bonus"), or, in the event that a fiscal year has not been completed during
the Employment Period as of the Date of Termination, the Minimum Bonus, and
(2) the amount equal to the sum of (x) the Employee's Annual Base Salary and
(y) the Recent Annual Bonus, payable, in each case, in 24 equal semi-monthly
installments (the "Termination Payment"); and
4
<PAGE> 5
(ii) For the greater of (1) twelve months or (2) the number of months
remaining in the Employment Period on the Date of Termination, or such longer
period as may be provided by the terms of the appropriate plan, program,
practice or policy (the "Benefit Continuation Period"), Mercantile shall after
the Employee's Date of Termination continue benefits to the Employee at least
equal to those which would have been provided to him in accordance with the
plans, programs, practices and policies described in Section 5(a) of this
Agreement if the Employee's employment had not been terminated; provided,
---------
however, that if the Employee become reemployed with another employer and is
- -------------
eligible to receive medical or other welfare benefits under another employer
provided plan, the medical and other welfare benefits described herein shall
be secondary to those provided under such other plan during such applicable
period of eligibility. For purposes of determining eligibility (but not the
time of commencement of benefits) of the Employee for retiree benefits
pursuant to such plans, practices, programs, and policies, the Employee
shall be considered to have remained employed during the Benefit Continuation
Period and to have returned on the last day of such period; and
(iii) The Employee shall be deemed to be a continuing employee of
Mercantile for purposes of the vesting of the restricted stock referred to
in Section 5(d) of this Agreement until the third anniversary of the
Effective Date.
(b) Termination for Cause. In the event of Termination for Cause,
---------------------
Mercantile shall have no further obligation to the Employee under this
Agreement after the Date of Termination. In the event of a simultaneous
Termination for Cause and voluntary termination of employment or resignation
by the Employee, the Employee shall be considered to have been Terminated
for Cause.
(c) Voluntary Termination. The Employee may terminate his employment
---------------------
voluntarily at any time by a notice pursuant to Section 8 of this Agreement. In
the event that the Employee voluntarily terminates his employment, Mercantile
shall be obligated to the Employee for the amount of his Annual Base Salary
and benefits only through the Date of Termination, at the time such payments
are due, and Mercantile shall have no further obligation to the Employee.
(d) Death. In the event of the death of the Employee while employed
-----
under this Agreement and prior to any termination of employment, Mercantile
shall pay to the Employee's estate, or such person as the Employee may have
previously designated in writing, an amount of cash equal to the product of
SIX HUNDRED FIFTY-EIGHT THOUSAND SEVEN HUNDRED FIFTY DOLLARS ($658,750)
multiplied by a fraction with a numerator equal to the number of days elapsed
prior to the date of death during the calendar year in which death occurs and
a denominator of 365, reduced by (ii) the amount of Annual Base Salary and
bonus paid to the Employee prior to the date of death during such calendar
year.
8. Notice of Termination. In the event that Mercantile desires to
---------------------
terminate the employment of the Employee during the term of this Agreement,
Mercantile shall deliver to the Employee a written notice of termination,
stating whether such termination constitutes Termination for Cause or
Involuntary Termination, setting forth in reasonable detail the facts and
circumstances that are the basis for the termination, and specifying the date
upon which
5
<PAGE> 6
employment shall terminate, which date shall be at least 30 days after the date
upon which the notice is delivered, except in the case of Termination for
Cause. In the event that the Employee determines in good faith that he has
experienced an Involuntary Termination of his employment, he shall send a
written notice to Mercantile stating the circumstances that constitute such
Involuntary Termination and the date upon which his employment shall have
ceased due to such Involuntary Termination. In the event that the Employee
desires to effect a Voluntary Termination, he shall deliver a written notice to
Mercantile, stating the date upon which employment shall terminate, which date
shall be at least 30 days after the date upon which the notice is delivered,
unless the parties agree to a date sooner.
9. Attorneys Fees. From and after the Effective Date during the Employment
--------------
Period, Mercantile shall pay all legal fees and related expenses (including
the costs of experts, evidence and counsel) when and as incurred by the
Employees as a result of (i) the Employee's contesting or disputing any
termination of employment, or (ii) the Employee's seeking to obtain or
enforce any right or benefit provided by this Agreement or by any other plan
or arrangement maintained by Mercantile under which the Employee is or may be
entitled to receive benefits; provided that Mercantile's obligation to pay
-------------
such fees and expenses is subject to the Employee's prevailing with respect
to the matters in dispute in any action initiated by the Employee or the
Employee's having been determined to have acted reasonably and in good faith
with respect to any action initiated by Mercantile.
10. No Assignments; Mercantile as Successor.
---------------------------------------
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
---------
however, that Mercantile shall require any successor or assignee (whether
- -------------
direct or indirect, by purchase, merger, consolidation or otherwise) to
expressly assume and agree to perform this Agreement in the same manner
and to the same extent that Mercantile would have been required to perform
it if no such succession or assignment had taken place. Failure of
Mercantile to obtain such an assumption agreement prior to the effectiveness
of any such succession or assignment shall be a breach of this Agreement and
shall entitle the Employee to compensation and benefits from Mercantile in
the same amount and on the same terms as the compensation pursuant to Section
7(b) hereof. For purposes of implementing the provisions of this Section 10(a),
the date on which any such succession becomes effective shall be deemed the
Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
(c) Upon the consummation of the Acquisition, for all purposes under
this Agreement, the Company shall be deemed to be Mercantile and the
Consolidated Subsidiaries shall be those of Mercantile.
6
<PAGE> 7
11. Certain Reduction of Payments by Mercantile.
-------------------------------------------
(a) For purposes of this Section 11, (i) a "Payment" shall mean
any payment or distribution in the nature of compensation to or for the benefit
of the Employee, whether paid or payable pursuant to this Agreement or
otherwise; (ii) "Separation Payment" shall mean a Payment paid or payable
pursuant to this Agreement (disregarding this Section); (iii) "Net After Tax
Receipt" shall mean the Present Value of a Payment net of all taxes imposed
on the Employee with respect thereto under Sections 1 and 4999 of the Internal
Revenue Code of 1986, as amended (the "Code"), determined by applying the
highest marginal rate under Section 1 of the Code which applied to the
Employee's taxable income for the immediately preceding taxable year; (iv)
"Present Value" shall mean such value determined in accordance with Section
280G(d)(4) of the Code; and (v) "Reduced Amount" shall mean the greatest
aggregate amount of Separation Payments which (a) is less than the sum of all
Separation Payments and (b) results in aggregate Net After Tax Receipts which
are equal to or greater than the Net After Tax Receipts which would result
if the Employee were paid the sum of all Separation Payments.
(b) Anything in this Agreement to the contrary notwithstanding, in
the event KPMG Peat Marwick LLP or such other nationally recognized
certified public accounting firm designated by the Employee (the "Accounting
Firm") shall determine that receipt of all Payments would subject the
Employee to tax under Section 4999 of the Code, it shall determine whether
some amount of Separation Payments would meet the definition of a "Reduced
Amount." If the Accounting Firm determines that there is a Reduced Amount,
the aggregate Separation Payments shall be reduced to such Reduced Amount.
All fees payable to the Accounting Firm shall be paid solely by Mercantile.
(c) If the Accounting Firm determines that aggregate Separation
Payments should be reduced to the Reduced Amount, Mercantile shall promptly
give the Employee notice to that effect and a copy of the detailed calculation
thereof, and the Employee may then elect, in his sole discretion, which and
how much of the Separation Payments shall be eliminated or reduced (as long
as after election the Present Value of the aggregate Separation Payments
equals the Reduced Amount), and shall advise Mercantile in writing of his
election within ten days of his receipt of notice. If no such election is made
by the Employee within such ten-day period, Mercantile may elect which of such
Separation Payments shall be eliminated or reduced (as long as after such
election the Present Value of the aggregate Separation Payments equals the
Reduced Amount) and shall notify the Employee promptly of such election. All
determinations made by the Accounting Firm under this Section 11 shall be
binding upon Mercantile and the Employee and shall be made within 60 days of
a termination of employment of the Employee. As promptly as practicable
following such determination, Mercantile shall pay to or distribute for the
benefit of the Employee such Separation Payments as are then due to the
Employee under this Agreement and shall promptly pay to or distribute for the
benefit of the Employee in the future such Separation Payments as become due
to the Employee under this Agreement.
(d) While it is the intention of Mercantile to reduce the amounts
payable or distributable to the Employee hereunder only if the aggregate Net
After Tax Receipts to an Employee would thereby be increased, as a result
of the uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that amounts will have been paid or distributed by Mercantile to or for
7
<PAGE> 8
the benefit of the Employee pursuant to this Agreement which should not have
been so paid or distributed ("Overpayment") or that additional amounts which
will have not been paid or distributed by Mercantile to or for the benefit of
the Employee pursuant to this Agreement could have been so paid or distributed
("Underpayment"), in each case consistent with the calculation of the Reduced
Amount hereunder. In the event that the Accounting Firm, based upon the
assertion of a deficiency by the Internal Revenue Service against Mercantile
or the Employee which deficiency the Accounting Firm believes has a high
probability of success, determines that an Overpayment has been made, any
such Overpayment paid or distributed by Mercantile to or for the
benefit of the Employee shall be treated for all purposes as a loan to the
Employee which the Employee shall repay to Mercantile together with interest
at the applicable federal rate provided for in Section 7872(f)(2) of the Code;
provided, however, that no such loan shall be deemed to have been made and no
- -----------------------
amount shall be payable by the Employee to Mercantile if and to the extent
such deemed loan and payment would not either reduce the amount on which the
Employee is subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes. In the event that the Accounting Firm,
based upon controlling precedent or substantial authority, determines that an
Underpayment has occurred, any such Underpayment shall be promptly paid by
Mercantile to or for the benefit of the Employee together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code.
12. Confidential Information. The Employee shall hold in a fiduciary
------------------------
capacity for the benefit of Mercantile and the Bank all secret or confidential
information, knowledge or data ("Confidential Information") relating to
Mercantile or the Bank or any of their affiliated companies, and their
respective businesses, which shall have been obtained by the Employee during
the Employee's employment by Mercantile or any of its affiliated companies
and which shall not be or become public knowledge (other than by acts by the
Employee or representatives of the Employee in violation of this Agreement).
After termination of the Employee's employment, the Employee shall not, without
the prior written consent of Mercantile or as may otherwise be required by law
or legal process, communicate or divulge any such information, knowledge or data
to anyone other than Mercantile and those designated by it. In no event shall
an asserted violation of the provisions of this Section 9 constitute a basis
for deferring or withholding any amounts otherwise payable to the Employee
under this Agreement. Confidential Information shall not include information,
knowledge or data which (i) is in the Employee's possession at the date of
this Agreement which she has no reason to believe is subject to any
confidentiality agreement or other obligation of confidentiality to Mercantile
or another party, (ii) is or becomes generally available to the public other
than as a result of unauthorized disclosure by Mercantile or a Consolidated
Subsidiary thereof, or representative of either, (iii) is or becomes available
to Mercantile from a source other than Mercantile, provided that the Employee
-------------
does not know or have reason to believe that such source is bound by a
confidentiality agreement or other obligation of confidentiality to Mercantile,
(iv) is independently developed by the Employee without reference to any
information obtained from Mercantile, or (v) is required to disclosed by law.
13. Covenant Not To Engage In Competitive or Other Detrimental Activities.
---------------------------------------------------------------------
(a) The Employee covenants that from and after the Effective Date he
will not compete with Mercantile, the Bank and/or their affiliates and further
covenants that he will not take any action which is detrimental to Mercantile,
the Bank and/or their affiliated companies
8
<PAGE> 9
(i) during the Employment Period, and (ii) if the Employee's employment
terminates for any reason (other than the Employee's death) or no reason during
the Employment Period, until the later of (i) the third anniversary of the
Effective Date or (ii) the first anniversary of the Date of Termination.
(b) For purposes of paragraph (a) of this Section 13, the Employee
shall be deemed to be competing with Mercantile, Bank and/or their affiliated
companies at any time if the Employee accepts employment with, or serves as
an agent, employee, or director of, or a consultant to, a competitor of
Mercantile, Bank and/or their affiliated companies, or during such time the
Employee acquires or has an interest (direct or indirect) in any firm,
corporation or enterprise engaged in a business which is in competition with
Mercantile, Bank and/or their affiliated companies, or at any time, either
during employment or thereafter, the Employee divulges any information
concerning Mercantile, Bank and/or their affiliated companies which is or could
be of aid to any such competitor. The mere ownership of a less than a 3%
debt and/or equity interest in a competing company whose stock is
publicly held shall not be considered as having the prohibited interest in a
competitor, and neither shall the mere ownership of a less than a 10% debt
and/or equity interest in a competing company whose stock is not publicly
held. For purposes of this Agreement, any commercial bank, savings and loan
association, securities broker or dealer, or other business or financial
institution that is principally engaged in the business of offering any service
at the time offered by Mercantile, Bank and/or their affiliated companies, and
which conducts business in any locations encompassed within the areas
circumscribed by circles, of which the radii are 50 miles and the mid-points
are the geographic centers of any community in which Mercantile and/or its
affiliated companies conduct business operations shall be deemed to be a
competitor.
(c) Should Mercantile reasonable and in good faith believe that the
Employee has violated any of the foregoing provisions, it shall give the
Employee written notice to such effect, stating the reasons(s) for its belief,
and pending a final determination as to whether there has been a violation
may, without penalty or risk of claim for actual or punitive damages, suspend
payment of any further amount which might otherwise become payable hereunder
after thirty (30) days of giving such notice. Mercantile shall, in an
expeditious manner, determine from all information available to it whether
the Employee violated any of the foregoing covenants, and if Mercantile in
good faith concludes that the Employee has violated this Agreement, the
Employee shall not be entitled to any further payment hereunder.
(d) The Employee represents, acknowledges and agrees (i) that his
experience and capabilities are such that he can obtain employment in activities
which do not violate such agreement and that the enforcement by way of
injunction of the agreement not to compete will not prevent the Employee from
earning a livelihood, (ii) that Mercantile and Bank do not have an adequate
remedy at law for a breach or threatened breach by the Employee of the
covenants in this Section and may obtain injunctive and other equitable relief,
in addition to receiving its actual damages and any other remedies that may
be available to it hereunder or at law or by statute, (iii) that the covenants
herein contained are reasonable and necessary for the proper protection of
Mercantile, and (iv) that if any provision or part of any such covenant is
invalidated, the remainder shall nevertheless continue to be valid and fully
enforceable, and if a court determines that the term of the covenant is too
long or the area covered thereby too great,
9
<PAGE> 10
so that the covenant as written is unenforceable, the covenant shall be
modified to encompass the longest duration and largest geographic area that the
court deems enforceable under the law.
14. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Company at its home
office, to the attention of the Board of Directors with a copy to the Secretary
of Mercantile, or, if to the Employee, to such home or other address as the
Employee has most recently provided in writing to Mercantile.
15. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties, except as herein
otherwise provided.
16. Headings. The headings used in this Agreement are included solely for
--------
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
17. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
18. Governing Law. This Agreement shall be governed by the laws of the
-------------
State of Missouri.
19. Arbitration. Any dispute or controversy arising under or in connection
-----------
with this Agreement shall be settled exclusively by arbitration in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction.
10
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: Roosevelt Financial Group, Inc.
/s/ /s/
- -------------------------- -----------------------------------
Secretary By:
Its:
Attest: Mercantile Bancorporation Inc.
/s/ /s/
- -------------------------- -----------------------------------
Secretary By:
Its:
Employee
/s/ Stanley J. Bradshaw
-----------------------------------
Stanley J. Bradshaw
<PAGE> 1
TRANSITION EMPLOYMENT AGREEMENT
-------------------------------
THIS TRANSITION EMPLOYMENT AGREEMENT (the "Agreement") is made and
entered into as of this 22 day of December, 1996, by and between Roosevelt
-- --------
Financial Group, Inc. (the "Company"), Mercantile Bancorporation, Inc.
("Mercantile") and Anat Bird (the "Employee").
WHEREAS, the Company has entered into an Agreement and Plan of
Reorganization of even date herewith (the "Definitive Agreement") with
Mercantile, pursuant to which Mercantile will acquire (the "Acquisition")
the Company and its wholly-owned subsidiary, Roosevelt Bank (the "Bank");
WHEREAS, it is essential for the integration of the Bank's operations
into Mercantile's banking operations that the Employee continue to serve during
a transition period to perform such executive duties as are necessary to
ensure a successful integration; and
WHEREAS, recognizing that the Employee may not have long-term opportunities
with the Bank following the Acquisition, and that during such transition
period, the Employee is likely to serve in a different capacity than prior
to the Acquisition, it is necessary and appropriate to provide an incentive
to the Employee to provide services during such transition period,
WHEREAS, the Employee is willing to enter into this Agreement and to
provide services during such transition period, and
WHEREAS, the board of directors of the Company and the Executive
Committee of the board of directors of Mercantile have approved and
authorized the execution of this Agreement with the Employee;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
-----------
(a) The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Company (or its successors) that are part of the
consolidated group of the Company (or its successors) for federal income tax
reporting.
(b) The term "Date of Termination" means the date upon which the
Employee's employment with the Bank ceases, as specified in a notice of
termination pursuant to Section 7 of this Agreement.
(c) The term "Effective Date" means the effective date of the
Acquisition as provided in the Definitive Agreement.
(d) The term "Involuntary Termination" means the termination of the
employment of Employee (i) by the Bank without her express written consent;
or (ii) by the Employee by
<PAGE> 2
reason of any of the following actions unless consented to in writing by the
Employee: (1) a requirement that the Employee be based at any place other than
Chesterfield, Missouri, or within 50 miles thereof, except for reasonable
travel on Company or Bank business; (2) a reduction in the Employee's salary
or a material adverse change in the Employee's perquisites, benefits,
contingent benefits or vacation, other than as part of an overall program
applied uniformly and with equitable effect to all members of the senior
management of the Bank or the Company; or (3) a requirement that the Employee
provide services of a nature that is not consistent with the level of
executive responsibilities carried out by the Employee prior to the
Acquisition, provided that, following the Acquisition, changes to the
-------------
Employee's title and lines of responsibility shall not constitute "Involuntary
Termination" so long as the Employee retains a rank and a level of executive
duties and functions similar to those she held prior to the Acquisition. The
term "Involuntary Termination" does not include Termination for Cause or
termination of employment due to death or permanent disability, or suspension
or temporary or permanent prohibition from participation in the conduct of
the affairs of a depository institution under Section 8 of the Federal
Deposit Insurance Act.
(e) The terms "Termination for Cause" and "Terminated For Cause"
mean termination of the employment of the Employee with the Bank because of
the Employee's personal dishonesty, incompetence, willful misconduct, breach of
a fiduciary duty involving personal profit, intentional failure to perform
material stated duties, willful violation of any law, rule, or regulation
(other than traffic violations or similar offenses) or final cease-and-desist
order, or (except as provided below) material breach of any provision of
this Agreement. No act or failure to act by the Employee shall be considered
willful unless the Employee acted or failed to act with an absence of good
faith and without a reasonable belief that her action or failure to act was
in the best interest of the Company.
2. Employment.
----------
(a) Mercantile agrees to continue the Employee in its employ, and
the Employee hereby agrees to remain in the employ of Mercantile subject to
the terms and conditions of this Agreement, for the period commencing on the
Effective Date and ending on the first anniversary of such date (the
"Employment Period").
(b) The Employee is, and, during the Employment Period, shall be
employed as chief operating officer of the Bank pending integration of the
Bank with and into another banking subsidiary of Mercantile and thereafter in
another senior management position with Mercantile. As such, the Employee
shall render administrative and management services as are customarily
performed by persons situated in similar executive capacities, and/or other
services relating to the integration of the Bank's operations into Mercantile's
banking operations as superior officers or the board of directors of
Mercantile or the board of directors of the Bank may prescribe from time to
time, provided that such other services shall be of an executive level
-------------
consistent with the Employee's executive responsibilities prior to the
Acquisition. The Employee shall also render services to any subsidiary or
subsidiaries of Mercantile or the Bank as requested by Mercantile or the Bank
from time to time consistent with her executive position. The Employee shall
devote her best efforts and reasonable time and attention to the business
and affairs of Mercantile and the Bank to the extent necessary to discharge
her responsibilities hereunder. The Employee may (i) serve on corporate or
charitable boards or committees, (ii) manage personal investments,
2
<PAGE> 3
and (iii) engage in any activities engaged in by the Employee prior to the
Acquisition, including but not limited to giving speeches, facilitating
seminars and meetings and writing books and articles, so long as such
activities do not interfere materially with performance of her responsibilities
hereunder and are approved in advance by Mercantile, which approval shall not
be unreasonably withheld.
3. Cash Compensation.
-----------------
(a) Base Salary. The Company agrees to pay the Employee during the
-----------
Employment Period an annual base salary (the "Annual Base Salary") of not
less than TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000). The Annual Base
Salary shall be paid no less frequently than monthly and shall be subject to
customary tax withholding.
(b) Annual Bonus. During the Employment Period, in addition to
------------
Annual Base Salary, the Employee shall be entitled to receive, (I) for each
fiscal year of Mercantile during which the Employee is employed, an annual
bonus (the "Annual Bonus") in an amount to be determined by Mercantile's
board of directors, but in no event shall the amount of the Annual Bonus
during the first fiscal year during which the Employee is employed (the "First
Fiscal Year") be less than the product of (x) .30 and (y) the Annual Base
Salary (the "Minimum Bonus") and (II) for that portion of any fiscal year of
Mercantile other than the First Fiscal Year during which the Employee is
employed for less than twelve full months, an amount equal to the product of
(x) the Annual Bonus paid to the Employee during the Employment Period, and
(y) a fraction the numerator of which is the number of days in such fiscal
year during which the Employee is employed by Mercantile and the denominator of
which is 365. Each such Annual Bonus shall be paid in cash in a manner and at
a time in accordance with Mercantile's customary practices with respect to
other peer employees of Mercantile.
(c) Special Bonus. To induce the Employee to continue in the employ
-------------
of the Company from and after the date hereof through and including the date
immediately preceding the Effective Date, the Company agrees to pay to the
Employee the sum of FIVE HUNDRED THOUSAND DOLLARS ($500,000) in cash on such
date.
(d) Expenses. The Employee shall be entitled to receive prompt
--------
reimbursement for all reasonable expenses incurred by the Employee in
performing services under this Agreement in accordance with the policies
and procedures applicable to the executive officers of the Company and the
Bank, provided that the Employee accounts for such expenses as required under
-------------
such policies and procedures.
4. Benefit Plans.
-------------
(a) Participation. The Employee shall be entitled to participate,
-------------
to the same extent as senior officers of Mercantile generally, in all
qualified and nonqualified plans of Mercantile relating to pension,
retirement, thrift, profit-sharing, savings, group or other life insurance,
hospitalization, medical and dental coverage, travel and accident insurance,
education, cash bonuses, and other retirement or employee benefits or
combinations thereof. In addition, the Employee shall be entitled to be
considered for benefits under all of the stock and stock
3
<PAGE> 4
option related plans in which senior officers of Mercantile are eligible or
become eligible to participate.
(b) Credit for Prior Service. Following the Acquisition, the
------------------------
Employee shall receive full credit for prior service with the Company and the
Bank under Employee Benefit Plans of Mercantile, all as more fully set out in
Section 5.08 of the Definitive Agreement, for purposes other than determining
the amount of benefit accruals under any defined benefit plans of Mercantile.
5. Vacations; Leave. The Employee shall be entitled to annual paid
----------------
vacation in accordance with the policies established by the board of directors
of the Company and the board of directors of the Bank for executive officers,
and to voluntary leaves of absence, with or without pay, from time to time
at such times and upon such conditions as the board of directors may determine
in its discretion.
6. Termination of Employment.
-------------------------
(a) Involuntary Termination. In the event of Involuntary
Termination at any time following the Effective Date, the Company (or any of
the Consolidated Subsidiaries on the Company's behalf) shall (i) pay to the
Employee the aggregate of the following amounts:
A. The sum of (1) the Employee's Annual Base Salary through the
Date of Termination to the extent not theretofore paid ("Accrued Salary") and
(2) the product of (x) the Annual Bonus paid or payable, including any bonus
or portion thereof which has been earned but deferred (and annualized for any
fiscal year of Mercantile consisting of less than twelve full months or during
which the Employee was employed for less than twelve full months), for the
most recently completed fiscal year during the Employment Period, if any, or,
in the event that a fiscal year of Mercantile has not been completed during
the Employment Period as of the Date of Termination, the Minimum Bonus, and
(y) a fraction, the numerator of which is the number of days in the current
fiscal year of Mercantile through the Date of Termination, and the denominator
of which is 365 (the sum of the amounts described in clauses (1) and (2) shall
be hereinafter referred to as the "Accrued Obligations"); and
B. An amount equal to the sum of (x) the Employee's Annual Base
Salary and (y) the Minimum Bonus, payable, in each case, in 24 equal semi-
monthly installments (the "Termination Payment"); and
(ii) Provide for the Employee for the twelve month period following
the Date of Termination (the "Benefit Continuation Period"), Mercantile shall
continue benefits to the Employee at least equal to those which would have
been provided to her in accordance with the plans, programs, practices and
policies described in Section 4(a) of this Agreement if the Employee's
employment had not been terminated; provided, however, that if the Employee
-----------------------
becomes reemployed with another employer and is eligible to receive medical or
other welfare benefits under another employer provided plan, the medical and
other welfare benefits described herein shall be secondary to those provided
under such other plan during such applicable period of eligibility. For
purposes of determining eligibility (but not the time of commencement of
benefits) of the Employee for retiree benefits pursuant to such plans,
practices, programs and
4
<PAGE> 5
policies, the Employee shall be considered to have remained employed during
the Benefit Continuation Period and to have retired on the last day of such
period (the "Other Benefits").
(b) Termination for Cause. In the event of Termination for Cause,
---------------------
the Company shall have no further obligation to the Employee under this
Agreement after the Date of Termination. In the event of a simultaneous
Termination for Cause and voluntary termination of employment or resignation
by the Employee, the Employee shall be considered to have been Terminated for
Cause.
(c) Voluntary Termination. The Employee may terminate her
---------------------
employment voluntarily at any time by a notice pursuant to Section 7 of this
Agreement. In the event that the Employee voluntarily terminates her
employment prior to the first anniversary of the Effective Date, Mercantile
shall be obligated to the Employee for the amount of the Accrued Obligations
through the Date of Termination, at the time such payments are due, and
Mercantile shall have no further obligation to the Employee. In the event
that the Employee voluntarily terminates her employment on or after the
first anniversary of the Effective Date this Agreement shall terminate without
further obligations to the Employee, other than for payment of Accrued
Obligations, the Termination Payment and the timely payment or provision of
Other Benefits, payable in 24 equal, semi-monthly installments.
(d) Death. In the event of the death of the Employee while
-----
employed under this Agreement and prior to any termination of employment,
Mercantile shall pay to the Employee's estate, or such person as the Employee
may have previously designated in writing, an amount of cash equal to (i) the
product of THREE HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($325,000) multiplied
by a fraction with a numerator equal to the number of days elapsed prior to
the date of death during the calendar year in which death occurs and a
denominator of 365, reduced by (ii) the amount of Annual Base Salary and cash
bonus paid to the Employee during such year prior to the date of death.
7. Notice of Termination. In the event that Mercantile desires to
---------------------
terminate the employment of the Employee during the term of this Agreement,
Mercantile shall deliver to the Employee a written notice of termination,
stating whether such termination constitutes Termination for Cause or
Involuntary Termination, setting forth in reasonable detail the facts and
circumstances that are the basis for the termination, and specifying the
date upon which employment shall terminate, which date shall be at least 30
days after the date upon which the notice is delivered, except in the case
of Termination for Cause. In the event that the Employee determines in good
faith that she has experienced an Involuntary Termination of her employment,
she shall send a written notice to Mercantile stating the circumstances that
constitute such Involuntary Termination and the date upon which her employment
shall have ceased due to such Involuntary Termination. In the event that the
Employee desires to effect a Voluntary Termination, she shall deliver a written
notice to Mercantile, stating the date upon which employment shall terminate,
which date shall be at least 30 days after the date upon which the notice is
delivered, unless the parties agree to a date sooner.
8. Attorneys Fees. From and after the Effective Date during the
--------------
Employment Period, Mercantile shall pay all legal fees and related expenses
(including the costs of experts, evidence and counsel) when and as incurred by
the Employee as a result of (i) the Employee's contesting
5
<PAGE> 6
or disputing any termination of employment, or (ii) the Employee's seeking to
obtain or enforce any right or benefit provided by this Agreement or by any
other plan or arrangement maintained by the Company (or its successors) or
the Consolidated Subsidiaries under which the Employee is or may be entitled
to receive benefits; provided that Mercantile's obligation to pay such fees
-------------
and expenses is subject to the Employee's prevailing with respect to the
matters in dispute in any action initiated by the Employee or the Employee's
having been determined to have acted reasonably and in good faith with
respect to any action initiated by Mercantile.
9. No Assignments; Mercantile as Successor.
---------------------------------------
(a) This Agreement is personal to each of the parties hereto,
and neither party may assign or delegate any of its rights or obligations
hereunder without first obtaining the written consent of the other party;
provided, however, that Mercantile shall require any successor or assignee
(whether direct or indirect, by purchase, merger, consolidation or otherwise)
to expressly assume and agree to perform this Agreement in the same manner and
to the same extent that Mercantile would have been required to perform it if
no such succession or assignment had taken place. Failure of Mercantile to
obtain such an assumption agreement prior to the effectiveness of any such
succession or assignment shall be a breach of this Agreement and shall entitle
the Employee to compensation and benefits from Mercantile in the same amount
and on the same terms as the compensation pursuant to Section 6 hereof. For
purposes of implementing the provisions of this Section 9(a), the date on
which any such succession becomes effective shall be deemed the Date of
Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
(c) Upon the consummation of the Acquisition, for all purposes
under this Agreement, the Company shall be deemed to be Mercantile and the
Consolidated Subsidiaries shall be those of Mercantile.
10. Certain Reduction of Payments by Mercantile.
-------------------------------------------
(a) For purposes of this Section 10, (i) a "Payment" shall mean
any payment or distribution in the nature of compensation to or for the
benefit of the Employee, whether paid or payable pursuant to this Agreement
or otherwise; (ii) "Separation Payment" shall mean a Payment paid or
payable pursuant to this Agreement (disregarding this Section); (iii) "Net
After Tax Receipt" shall mean the Present Value of a Payment net of all taxes
imposed on the Employee with respect thereto under Sections 1 and 4999 of the
Internal Revenue Code of 1986, as amended (the "Code"), determined by applying
the highest marginal rate under Section 1 of the Code which applied to the
Employee's taxable income for the immediately preceding taxable year; (iv)
"Present Value" shall mean such value determined in accordance with Section
280G(d)(4) of the Code; and (v) "Reduced Amount" shall mean the greatest
aggregate amount of Separation Payments which (a) is less than the sum of all
Separation Payments and (b) results in aggregate Net After Tax Receipts which
are equal to or greater than the Net After Tax Receipts which would result if
the Employee were paid the sum of all Separation Payments.
6
<PAGE> 7
(b) Anything in this Agreement to the contrary notwithstanding, in
the event KPMG Peat Marwick LLP or such other nationally recognized certified
public accounting firm designated by the Employee (the "Accounting Firm")
shall determine that receipt of all Payments would subject the Employee to
tax under Section 4999 of the Code, it shall determine whether some amount of
Separation Payments would meet the definition of a "Reduced Amount." If the
Accounting Firm determines that there is a Reduced Amount, the aggregate
Separation Payments shall be reduced to such Reduced Amount. All fees payable
to the Accounting Firm shall be paid solely by Mercantile.
(c) If the Accounting Firm determines that aggregate Separation
Payments should be reduced to the Reduced Amount, Mercantile shall promptly
give the Employee notice to that effect and a copy of the detailed calculation
thereof, and the Employee may then elect, in her sole discretion, which and
how much of the Separation Payments shall be eliminated or reduced (as long as
after election the present value of the aggregate Separation Payments equals
the Reduced Amount), and shall advise Mercantile in writing of her election
within ten days of her receipt of notice. If no such election is made by the
Employee within such ten-day period, Mercantile may elect which of such
Separation Payments shall be eliminated or reduced (as long as after such
election the present value of the aggregate Separation Payments equals the
Reduced Amount) and shall notify the Employee promptly as such election. All
determinations made by the Accounting Firm under this Section shall be binding
upon Mercantile and the Employee and shall be made within 60 days of a
termination of employment of the Employee. As promptly as practicable
following such determination, Mercantile shall pay to or distribute for the
benefit of the Employee such Separation Payments as are then due to the
Employee under this Agreement and shall promptly pay to or distribute for the
benefit of the Employee in the future such Separation Payments as become due
to the Employee under this Agreement.
(d) While it is the intention of Mercantile to reduce the amounts
payable or distributable to the Employee hereunder only if the aggregate Net
After Tax Receipts to an Employee would thereby be increased, as a result of
the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
amounts will have been paid or distributed by Mercantile to or for the benefit
of the Employee pursuant to this Agreement which should not have been so paid
or distributed ("Overpayment") or that additional amounts which will have not
been paid or distributed by Mercantile to or for the benefit of the Employee
pursuant to this Agreement could have been so paid or distributed
("Underpayment"), in each case consistent with the calculation of the
Reduced Amount hereunder. In the event that the Accounting Firm, based upon
the assertion of a deficiency by the Internal Revenue Service against
Mercantile or the Employee which deficiency the Accounting Firm believes has a
high probability of success, determines that an Overpayment has been made,
any such Overpayment paid or distributed by Mercantile to or for the benefit
of the Employee shall be treated for all purposes as a loan to the Employee
which the Employee shall repay to Mercantile together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the Code;
provided, however, that no such loan shall be deemed to have been made and no
amount shall be payable by the Employee to Mercantile if and to the extent such
deemed loan and payment would not either reduce the amount on which the
Employee is subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes. In the event that the Accounting Firm, based
upon controlling precedent or substantial authority, determines that an
Underpayment has occurred, any such Underpayment
7
<PAGE> 8
shall be promptly paid by Mercantile to or for the benefit of the Employee
together with interest at the applicable federal rate provided for in
Section 7872(f)(2) of the Code.
11. Confidential Information. The Employee shall hold in a fiduciary
------------------------
capacity for the benefit of Mercantile and Bank all secret or confidential
information, knowledge or data relating to Mercantile or Bank or any of their
affiliated companies, and their respective businesses, which shall have been
obtained by the Employee during the Employee's employment by Mercantile or
any of its affiliated companies and which shall not be or become public
knowledge (other than by acts by the Employee or representatives of the
Employee in violation of this Agreement). After termination of the Employee's
employment, the Employee shall not, without the prior written consent of
Mercantile or as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone other
than Mercantile and those designated by it. In no event shall an asserted
violation of the provisions of this Section 11 constitute a basis for deferring
or withholding any amounts otherwise payable to the Employee under this
Agreement. Confidential Information shall not include information, knowledge or
data which (i) is in the Employee's possession at the date of this Agreement
which she has no reason to believe is subject to any confidentiality agreement
or other obligation of confidentiality to Mercantile or another party, (ii)
is or becomes generally available to the public other than as a result of
unauthorized disclosure by Mercantile or a Consolidated Subsidiary thereof,
or representative of either, (iii) is or becomes available to Mercantile from
a source other than Mercantile, provided that the Employee does not know or
-------------
have reason to believe that such source is bound by a confidentiality
agreement or other obligation of confidentiality to Mercantile, (iv) is
dependently developed by the Employee without reference to any information
obtained from Mercantile, or (v) is required to disclose by law.
12. Covenant Not To Engage in Competitive or Other Detrimental Activities.
---------------------------------------------------------------------
(a) The Employee covenants that from and after the Effective Date
she will not compete with Mercantile, Bank and/or their affiliates and
further covenants that she will not take any action which is detrimental to
Mercantile, Bank and/or their affiliated companies (i) during the Employment
Period, and (ii) if the Employee's employment terminates for any reason (other
than the Employee's death) or no reason during the Employment Period, for
a period of one year beginning on the Date of Termination.
(b) For purposes of paragraph (a) of this Section 12, the Employee
shall be deemed to be competing with Mercantile, Bank and/or their affiliated
companies at any time if the Employee accepts employment with, or serves as
an agent, employee, or director of, or a consultant to, a competitor of
Mercantile, Bank and/or their affiliated companies, or during such time the
Employee acquires or has an interest (direct or indirect) in any firm,
corporation or enterprise engaged in a business which is in competition with
Mercantile, Bank and/or their affiliated companies, or at any time, either
during employment or thereafter, the Employee divulges any information
concerning Mercantile, Bank and/or their affiliated companies which is or
could be of aid to any such competitor. The mere ownership of a less than a
3% debt and/or equity interest in a competing company whose stock is publicly
held shall not be considered as having the prohibited interest in a
competitor, and neither shall the mere ownership of a less than a 10% debt
and/or equity interest in a competing company whose stock is not publicly
held. For purposes of this Agreement, any commercial bank, savings and loan
8
<PAGE> 9
association, securities broker or dealer, or other business or financial
institution that is principally engaged in the business of offering any
service at the time offered by Mercantile, Bank and/or their affiliated
companies, and which conducts business in any locations encompassed within
the areas circumscribed by circles, of which the radii are 50 miles and the
mid-points are the geographic centers of any community in which Mercantile
and/or its affiliated companies conduct business operations shall be deemed
to be a competitor.
(c) Should Mercantile reasonably and in good faith believe that the
Employee has violated any of the foregoing provisions, it shall give the
Employee written notice to such effect, stating the reasons(s) for its belief,
and pending a final determination as to whether there has been a violation
may, without penalty or risk of claim for actual or punitive damages, suspend
payment of any further amount which might otherwise become payable hereunder
after thirty (30) days of giving such notice. Mercantile shall, in an
expeditious manner, determine from all information available to it whether
the Employee violated any of the foregoing covenants, and if Mercantile in
good faith concludes that the Employee has violated this Agreement, the
Employee shall not be entitled to any further payment hereunder.
(d) The Employee represents, acknowledges and agrees (i) that her
experience and capabilities are such that she can obtain employment in
activities which do not violate such agreement and that the enforcement by
way of injunction of the agreement not to compete will not prevent the
Employee from earning a livelihood, (ii) that Mercantile and Bank do not have
an adequate remedy at law for a breach or threatened breach by the Employee
of the covenants in this Section and may obtain injunctive and other equitable
relief, in addition to receiving its actual damages and any other remedies
that may be available to it hereunder or at law or by statute, (iii) that the
covenants herein contained are reasonable and necessary for the proper
protection of Mercantile, and (iv) that if any provision or part of any such
covenant is invalidated, the remainder shall nevertheless continue to be
valid and fully enforceable, and if a court determines that the term of the
covenant is too long or the area covered thereby too great, so that the
covenant as written is unenforceable, the covenant shall be modified to
encompass the longest duration and largest geographic area that the court
deems enforceable under the law.
13. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in this Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Company and/or
Mercantile at its home office, to the attention of the board of directors with
a copy to the Secretary of the Company and/or Mercantile, or, if to the
Employee, to such home or other address as the Employee has most recently
provided in writing to the Company.
14. Amendments. No amendments or additions to this Agreement shall
----------
be binding unless in writing and signed by both parties, except as herein
otherwise provided.
15. Headings. The headings used in this Agreement are included solely
--------
for convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
9
<PAGE> 10
16. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. Governing Law. This Agreement shall be governed by the laws of the
-------------
State of Missouri.
18. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: Roosevelt Financial Group, Inc.
/s/ /s/
- ----------------------------- -------------------------------
Secretary By:
Its:
Attest: Mercantile Bancorporation, Inc.
/s/ /s/
- ----------------------------- -------------------------------
Secretary By:
Its:
Employee
/s/ Anat Bird
-------------------------------
Anat Bird
10
<PAGE> 1
TRANSITION EMPLOYMENT AGREEMENT
-------------------------------
THIS TRANSITION EMPLOYMENT AGREEMENT (the "Agreement") is made and entered
into as of this 22 day of December, 1996, by and between Roosevelt Financial
-- --------
Group, Inc. (the "Company"), Mercantile Bancorporation, Inc. ("Mercantile")
and Gary W. Douglass (the "Employee").
WHEREAS, the Company has entered into an Agreement and Plan of
Reorganization of even date herewith (the "Definitive Agreement") with
Mercantile, pursuant to which Mercantile will acquire (the "Acquisition") the
Company and its wholly-owned subsidiary, Roosevelt Bank (the "Bank"):
WHEREAS, it is essential for the integration of the Bank's operations
into Mercantile's banking operations that the Employee continue to serve during
a transition period to perform such executive duties as are necessary to ensure
a successful integration; and
WHEREAS, recognizing that it is not anticipated that the Employee will have
long-term opportunities with the Bank following the Acquisition, and that
during such transition period, the Employee is likely to serve in a different
capacity than prior to the Acquisition, it is necessary and appropriate to
provide an incentive to the Employee to provide services during such transition
period.
WHEREAS, the Employee is willing to enter into this Agreement and to
provide services during such transition period, and
WHEREAS, the board of directors of the Company and the Executive Committee
of the board of directors of Mercantile has approved and authorized the
execution of this Agreement with the Employee;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
-----------
(a) The term "Consolidated Subsidiaries" means any subsidiary or
subsidiaries of the Company (or its successors) that are part of the
consolidated group of the Company (or its successors) for federal income tax
reporting.
(b) The term "Date of Termination" means the date upon which the
Employee's employment with the Bank ceases, as specified in a notice of
termination pursuant to Section 7 of this Agreement.
(c) The term "Effective Date" means the effective date of the
Acquisition as provided in the Definitive Agreement.
(d) The term "Involuntary Termination" means the termination of the
employment of Employee (i) by the Bank without his express written consent; or
(ii) by the Employee by
<PAGE> 2
reason of any of the following actions unless consented to in writing by the
Employee: (1) a requirement that the Employee be based at any place other than
Chesterfield, Missouri, or within 50 miles thereof, except for reasonable
travel on Company or Bank business; (2) a reduction in the Employee's salary or
a material adverse change in the Employee's perquisites, benefits, contingent
benefits or vacation, other than as part of an overall program applied
uniformly and with equitable effect to all members of the senior management of
the Bank or the Company; or (3) a requirement that the Employee provide
services of a nature that is not consistent with the level of executive
responsibilities carried out by the Employee prior to the Acquisition, provided
--------
that, following the Acquisition, changes to the Employee's title and lines of
- ----
responsibility shall not constitute "Involuntary Termination" so long as the
Employee retains a rank and a level of executive duties and functions similar
to those he held prior to the Acquisition. The term "Involuntary Termination"
does not include Termination for Cause or termination of employment due to
death or permanent disability, or suspension or temporary or permanent
prohibition from participation in the conduct of the affairs of a depository
institution under Section 8 of the Federal Deposit Insurance Act.
(e) The terms "Termination for Cause" and "Terminated For Cause"
mean termination of the employment of the Employee with the Bank because of the
Employee's personal dishonesty, incompetence, willful misconduct, breach of a
fiduciary duty involving personal profit, intentional failure to perform
material stated duties, willful violation of any law, rule, or regulation
(other than traffic violations or similar offenses) or final cease-and-desist
order, or (except as provided below) material breach of any provision of this
Agreement. No act or failure to act by the Employee shall be considered willful
unless the Employee acted or failed to act with an absence of good faith and
without a reasonable belief that his action or failure to act was in the best
interest of the Company.
2. Employment.
----------
(a) Mercantile agrees to continue the Employee in its employ, and the
Employee hereby agrees to remain in the employ of Mercantile subject to the
terms and conditions of this Agreement, for the period commencing on the
Effective Date and ending on the second anniversary of such date (the
"Employment Period")
(b) The Employee is, and, during the Employment Period, shall be
employed as chief financial officer of the Bank pending integration of Bank with
and into banking and/or other subsidiaries of Mercantile and thereafter in
another senior management position within Mercantile. As such, the Employee
shall render administrative and management services as are customarily performed
by persons situated in similar executive capacities, and/or other services
relating to the integration of the Bank's operations into Mercantile's banking
operations as superior officers or the Board of Directors or the board of
directors of the Bank may prescribe from time to time, provided that such other
-------------
services shall be of an executive level consistent with the Employee's
executive responsibilities prior to the Acquisitions. The Employee shall also
render services to any subsidiary or subsidiaries of Mercantile or the Bank as
requested by Mercantile or the Bank from time to time consistent with his
executive position. The Employee shall devote his best efforts and reasonable
time and attention to the business and affairs of Mercantile and the Bank to the
extent necessary to discharge his responsibilities hereunder. The Employee may
(i) serve on corporate or charitable boards or committees, and (ii) manage
2
<PAGE> 3
personal investments, so long as such activities do not interfere materially
with performance of his responsibilities hereunder.
3. Cash Compensation.
-----------------
(a) Base Salary. The Company agrees to pay the Employee during the
----------
Employment Period an annual base salary (the "Annual Base Salary") of not less
than TWO HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($225,000). The Annual Base
Salary shall be paid no less frequently than monthly and shall be subject to
customary tax withholding.
(b) Annual Bonus. During the Employment Period, in addition to Annual
------------
Base Salary, the Employee will be eligible to receive, (I) for each fiscal year
of Mercantile during which the Employee is employed, an annual bonus (the
"Annual Bonus") in an amount to be determined by Mercantile's board of
directors, but in no event shall the amount of the Annual Bonus during the first
fiscal year during which the Employee is employed (the "First Fiscal Year") be
less than the product of (x) .30 and (y) the Annual Base Salary (the "Minimum
Bonus") and (II) for that portion of any fiscal year of Mercantile other than
the First Fiscal Year during which the Employee is employed for less than twelve
full months, an amount equal to the product of (x) the Annual Bonus paid to the
Employee during the Employment Period, and (y) a fraction, the numerator of
which is the number of days in such fiscal year during which the Employee is
employed by Mercantile, and the denominator of which is 365. Each such Annual
Bonus shall be paid in cash in a manner and at a time in accordance with
Mercantile's customary practices with respect ot other peer Employees of
Mercantile.
(c) Special Bonus. To induce the Employee to continue in the employ
-------------
of the Company from and after the date hereof through and including the date
immediately preceding the Effective Date, the Company agrees to pay to the
Employee the sum of $225,000 in cash on such date.
(d) Expenses. The Employee shall be entitled to receive prompt
--------
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with the policies and procedures
applicable to the senior officers of Mercantile, provided that the Employee
-------------
accounts for such expenses as required under such policies and procedures.
4. Benefit Plans.
-------------
(a) Participation. The Employee shall be entitled to participate,
-------------
to the same extent as senior officers of Mercantile generally, in all qualified
and nonqualified plans of Mercantile relating to pension, retirement, thrift,
profit-sharing, savings, group or other life insurance, hospitalization, medical
and dental coverage, travel and accident insurance, education, cash bonuses, and
other retirement or employee benefits or combinations thereof. In addition, the
Employee shall be entitled to be considered for benefits under all of the stock
and stock option related plans in which senior officers of Mercantile are
eligible or become eligible to participate.
(b) Credit for Prior Service. Following the Acquisition, the Employee
------------------------
shall receive full credit for prior service with the Company and the Bank under
Employee benefit
3
<PAGE> 4
plans of Mercantile, all as more fully set out in Section 5.08 of the
Definitive Agreement for all purposes other than determining the amount of
benefit accruals under any defined benefit plan of Mercantile.
5. Vacations: Leave. The Employee shall be entitled to annual paid vacation
----------------
in accordance with the policies established by the board of directors of the
Company and the board of directors of the Bank for executive officers, and to
voluntary leaves of absence, with or without pay, from time to time at such
times and upon such conditions as the Board of Directors may determine in
its discretion.
6. Termination of Employment.
-------------------------
(a) Involuntary Termination. In the event of Involuntary Termination
-----------------------
at any time following the Effective Date, the Company (or any of the
Consolidated Subsidiaries on the Company's behalf) shall (i) pay to the Employee
the aggregate of the following amounts:
A. The sum of (1) the Employee's Annual Base Salary through the Date
of Termination to the extent not theretofore paid ("Accrued Salary") and (2)
the product of (x) the Annual Bonus paid or payable, including any bonus or
portion thereof which has been earned but deferred (and annualized for any
fiscal year of Mercantile consisting of less than twelve full months or during
which the Employee was employed for less than twelve full months), for the
most recently completed fiscal year during the Employment Period, if any, or,
in the event that a fiscal year of Mercantile has not been completed during
the Employment Period as of the Date of Termination, the Minimum Bonus, and
(y) a fraction, the numerator of which is the number of days in the current
fiscal year of Mercantile through the Date of Termination, and the denominator
of which is 365 (the sum of the amounts described in clauses (1) and (2) shall
be hereinafter referred to as the "Accrued Obligations"); and
B. An amount equal to the sum of (x) the Employee's Annual Base
Salary and (y) the Annual Bonus paid or payable for the most recently completed
fiscal year of Mercantile during the Employment Period (but not less than the
Minimum Bonus), or, in the event that a fiscal year has not been completed
during the Employment Period as of the Date of Termination, the Minimum Bonus,
payable in 24 equal semi-monthly installments (the "Termination Payment"); and
(ii) For the twelve month period following the Date of Termination
(the "Benefit Continuation Period"), Mercantile shall continue benefits to the
Employee at least equal to those which would have been provided to him in
accordance with the plans, programs, practices and policies described in Section
4(a) of this Agreement if the Employee's employment had not been terminated;
provided, however, that if the Employee becomes reemployed with another
employer and is eligible to receive medical or other welfare benefits under
another employer provided plan, the medical and other welfare benefits described
herein shall be secondary to those provided under such other plan during such
applicable period of eligibility. For purposes of determining eligibility (but
not the time of commencement of benefits) of the Employee for retiree benefits
pursuant to such plans, practices, programs and policies, the Employee shall be
considered to have remained employed during the Benefit Continuation Period and
to have retired on the last day of such period (the "Other Benefits").
4
<PAGE> 5
(b) Termination for Cause. In the event of Termination for Cause, the
---------------------
Company shall have no further obligation to the Employee under this Agreement
after the Date of Termination. In the event of a simultaneous Termination for
Cause and voluntary termination of employment or resignation by the Employee,
the Employee shall be considered to have been Terminated for Cause.
(c) Voluntary Termination. The Employee may terminate his employment
---------------------
voluntarily at any time by a notice pursuant to Section 7 of this Agreement.
In the Event that the Employee voluntarily terminates his employment prior to
the first anniversary of the Effective Date, Mercantile shall be obligated to
the Employee for the amount of the Accrued Obligations through the date of
termination, at the time such payments are due, and Mercantile shall have no
further obligation to the Employee. In the event that the Employee voluntarily
terminates his employment on or after the first anniversary of the Effective
Date, this Agreement shall terminate without further obligations to the
Employee, other than payment of Accrued Obligations, the Termination Payment and
the timely payment or provision of Other Benefits, payable in 24 equal, semi-
monthly installments.
(d) Death. In the event of the death of the Employee while employed
-----
under this Agreement and prior to any termination of employment, Mercantile
shall pay to the Employee's estate, or such person as the Employee may have
previously designated in writing, an amount of cash equal to (i) the product
of TWO HUNDRED NINETY-TWO THOUSAND FIVE HUNDRED DOLLARS ($292,500) multiplied
by a fraction with a numerator equal to the number of days elapsed prior to the
date of death during the calendar year in which death occurs and a denominator
of 365, reduced by (ii) the amount of Annual Base Salary and cash bonus paid to
the Employee during such year prior to the date of death.
7. Notice of Termination. In the event that Mercantile desires to terminate
---------------------
the employment of the Employee during the term of this Agreement, Mercantile
shall deliver to the Employee a written notice of termination, stating whether
such termination constitutes Termination for Cause or Involuntary Termination,
setting forth in reasonable detail the facts and circumstances that are the
basis for the termination, and specifying the date upon which employment shall
terminate, which date shall be at least 30 days after the date upon which the
notice is delivered, except in the case of Termination for Cause. In the event
that the Employee determines in good faith that he has experienced an
Involuntary Termination of his employment, he shall send a written notice to
Mercantile stating the circumstances that constitute such Involuntary
Termination and the date upon which his employment shall have ceased due to
such Involuntary Termination. In the event that the Employee desires to
effect a Voluntary Termination, he shall deliver a written notice to Mercantile,
stating the date upon which employment shall terminate, which date shall be
at least 30 days after the date upon which the notice is delivered, unless the
parties agree to a date sooner.
8. Attorneys Fees. From and after the Effective Date during the Employment
--------------
Period, Mercantile shall pay all legal fees and related expenses (including the
costs of experts, evidence and counsel) when and as incurred by the Employee as
a result of (i) the Employee's contesting or disputing any termination of
employment, or (ii) the Employee's seeking to obtain or enforce any right or
benefit provided by this Agreement or by any other plan or arrangement
maintained
5
<PAGE> 6
by the Company (or its successors) or the Consolidated Subsidiaries under which
the Employee is or may be entitled to receive benefits; provided that
-------------
Mercantile's obligation to pay such fees and expenses is subject to the
Employee's prevailing with respect to the matters in dispute in any action
initiated by the Employee or the Employee's having been determined to have
acted reasonably and in good faith with respect to any action initiated by
Mercantile.
9. No Assignments; Mercantile as Successor.
---------------------------------------
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that Mercantile shall require any successor or assignee (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that Mercantile would have been required to perform it if no
such succession or assignment had taken place. Failure of Mercantile to obtain
such an assumption agreement prior to the effectiveness of any such succession
or assignment shall be a breach of the Agreement and shall entitle the Employee
to compensation and benefits from Mercantile in the same amount and on the same
terms as the compensation pursuant to Section 6 hereof. For purposes of
implementing the provisions of this Section 9(a), the date on which any such
succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and
legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
(c) Upon the consummation of the Acquisition, for all purposes under
this Agreement, the Company shall be deemed to be Mercantile and the
Consolidated Subsidiaries shall be those of Mercantile.
10. Certain Reduction of Payments by Mercantile.
-------------------------------------------
(a) For purposes of this Section 10, (i) a "Payment" shall mean any
payment or distribution in the nature of compensation to or for the benefit of
the Employee, whether paid or payable pursuant to this Agreement or otherwise;
(ii) "Separation Payment" shall mean a Payment paid or payable pursuant to this
Agreement (disregarding this Section); (iii) "Net After Tax Receipt" shall mean
the Present Value of a Payment net of all taxes imposed on the Employee with
respect thereto under Sections 1 and 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), determined by applying the highest marginal rate under
Section 1 of the Code which applied to the Employee's taxable income for the
immediately preceding taxable year; (iv) "Present Value" shall mean such
value determined in accordance with Section 280G(d)(4) of the Code; and (v)
"Reduced Amount" shall mean the greatest aggregate amount of Separation Payments
which (a) is less than the sum of all Separation Payments and (b) results in
aggregate Net After Tax Receipts which are equal to or greater than the Net
After Tax Receipts which would result if the Employee were paid the sum of all
Separation Payments.
(b) Anything in this Agreement to the contrary notwithstanding, in the
event KPMG Peat Marwick LLP or such other nationally recognized certified
public accounting firm
6
<PAGE> 7
designated by the Employee (the "Accounting Firm") shall determine that receipt
of all Payments would subject the Employee to tax under Section 4999 of the
Code, it shall determine whether some amount of Separation Payments would meet
the definition of a "Reduced Amount." If the Accounting Firm determines that
there is a Reduced Amount, the aggregate Separation Payments shall be reduced
to such Reduced Amount. All fees payable to the Accounting Firm shall be paid
solely by Mercantile.
(c) If the Accounting Firm determines that aggregate Separation
Payments should be reduced to the Reduced Amount, Mercantile shall promptly
give the Employee notice to that effect and a copy of the detailed calculation
thereof, and the Employee may then elect, in his sole discretion, which and
how much of the Separation Payments shall be eliminated or reduced (as long as
after election the present value of the aggregate Separation Payments equals the
Reduced Amount), and shall advise Mercantile in writing of his election within
ten days of his receipt of notice. If no such election is made by the Employee
within such ten-day period, Mercantile may elect which of such Separation
Payments shall be eliminated or reduced (as long as after such election the
present value of the aggregate Separation Payments equals the Reduced Amount)
and shall notify the Employee promptly as such election. All determinations
made by the Accounting Firm under this Section shall be binding upon Mercantile
and the Employee and shall be made within 60 days of a termination of
employment of the Employee. As promptly as practicable following such
determination, Mercantile shall pay to or distribute for the benefit of the
Employee such Separation Payments as are then due to the Employee under this
Agreement and shall promptly pay to or distribute for the benefit of the
Employee in the future such Separation Payments as become due to the Employee
under this Agreement.
(d) While it is the intention of Mercantile to reduce the amounts
payable or distributable to the Employee hereunder only if the aggregate Net
After Tax Receipts to an Employee would thereby be increased, as a result of
the uncertainty in the application of Section 4999 of the Code at the time of
the initial determination by the Accounting Firm hereunder, it is possible that
amounts will have been paid or distributed by Mercantile to or for the benefit
of the Employee pursuant to this Agreement which should not have been so paid
or distributed ("Overpayment") or that additional amounts which will have not
been paid or distributed by Mercantile to or for the benefit of the Employee
pursuant to this Agreement could have been so paid or distributed
("Underpayment"), in each case consistent with the calculation of the Reduced
Amount hereunder. In the event that the Accounting Firm, based upon the
assertion of a deficiency by the Internal Revenue Service against Mercantile or
the Employee which deficiency the Accounting Firm believes has a high
probability of success, determines that an Overpayment has been made, any such
Overpayment paid or distributed by Mercantile to or for the benefit of the
Employee shall be treated for all purposes as a loan to the Employee which the
Employee shall repay to Mercantile together with interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code; provided, however,
that no such loan shall be deemed to have been made and no amount shall be
payable by the Employee to Mercantile if and to the extent such deemed loan and
payment would not either reduce the amount on which the Employee is subject to
tax under Section 1 and Section 4999 of the Code or generate a refund of such
taxes. In the event that the Accounting Firm, based upon controlling precedent
or substantial authority, determines that an Underpayment has occurred, any such
Underpayment shall be promptly paid by Mercantile to or for the benefit of the
Employee together with interest at the applicable federal rate provided for in
Section 7872(f)(2) of the Code.
7
<PAGE> 8
11. Confidential Information. The Employee shall hold in a fiduciary
------------------------
capacity for the benefit of Mercantile and Bank all secret or confidential
information, knowledge or data relating to Mercantile or Bank or any of their
affiliated companies, and their respective businesses, which shall have been
obtained by the Employee during the Employee's employment by Mercantile or any
of its affiliated companies and which shall not be or become public knowledge
(other than by acts by the Employee or representatives of the Employee in
violation of this Agreement). After termination of the Employee's employment,
the Employee shall not, without the prior written consent of Mercantile or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than Mercantile and those
designated by it. In no event shall an asserted violation of the provisions of
this Section 11 constitute a basis for deferring or withholding any amounts
otherwise payable to the Employee under this Agreement. Confidential
Information shall not include information, knowledge or data which (i) is in the
Employee's possession at the date of this Agreement which she has no reason to
believe is subject to any confidentiality agreement or other obligation of
confidentiality to Mercantile or another party, (ii) is or becomes generally
available to the public other than as a result of unauthorized disclosure by
Mercantile or a Consolidated Subsidiary thereof, or representative of either,
(iii) is or becomes available to Mercantile from a source other than Mercantile,
provided that the Employee does not know or have reason to believe that such
- -------------
source is bound by a confidentiality agreement or other obligation of
confidentiality to Mercantile, (iv) is independently developed by the Employee
without reference to any information obtained from Mercantile, or (v) is
required to disclosed by law.
12. Covenant Not To Engage in Competitive or Other Detrimental Activities.
---------------------------------------------------------------------
(a) The Employee covenants that from and after the Effective Date he
will not compete with Mercantile, Bank and/or their affiliates and further
covenants that he will not take any action which is detrimental to Mercantile,
Bank and/or their affiliated companies (i) during the Employment Period, and
(ii) if the Employee's employment terminates for any reason (other than the
Employee's death) or no reason during the Employment Period, for a period of
one year beginning on the Date of Termination.
(b) For purposes of paragraph (a) of this Section 10, the Employee
shall be deemed to be competing with Mercantile, Bank and/or their affiliated
companies at any time if the Employee accepts employment with, or serves as
an agent, employee, or director of, or a consultant to, a competitor of
Mercantile, Bank and/or their affiliated companies, or during such time the
Employee acquires or has an interest (direct or indirect) in any firm,
corporation or enterprise engaged in a business which is in competition with
Mercantile, Bank and/or their affiliated companies, or at any time, either
during employment or thereafter, the Employee divulges any information
concerning Mercantile, Bank and/or their affiliated companies which is or could
be of aid to any such competitor. The mere ownership of a less than a 3% debt
and/or equity interest in a competing company whose stock is publicly held
shall not be considered as having the prohibited interest in a competitor,
and neither shall the mere ownership of a less than a 10% debt and/or equity
interest in a competing company whose stock is not publicly held. For purposes
of this Agreement, any commercial bank, savings and loan association, securities
broker or dealer, or other business or financial institution that is principally
engaged in the business of offering any service at the time offered by
Mercantile, Bank and/or their affiliated companies, and which conducts
business in any locations
8
<PAGE> 9
encompassed within the areas circumscribed by circles, of which the radii
are 50 miles and the mid-points are the geographic centers of any community
in which Mercantile and/or its affiliated companies conduct business operations
shall be deemed to be a competitor.
(c) Should Mercantile reasonably and in good faith believe that
the Employee has violated any of the foregoing provisions, it shall give the
Employee written notice to such effect, stating the reason(s) for its belief,
and pending a final determination as to whether there has been a violation
may, without penalty or risk of claim for actual or punitive damages, suspend
payment of any further amount which might otherwise become payable hereunder
after thirty (30) days of giving such notice. Mercantile shall, in an
expeditious manner, determine from all information available to it whether
the Employee violated any of the foregoing covenants, and if Mercantile in
good faith concludes that the Employee has violated this Agreement, the
Employee shall not be entitled to any further payment hereunder.
(d) The Employee represents, acknowledges and agrees (i) that his
experience and capabilities are such that he can obtain employment in activities
which do not violate such agreement and that the enforcement by way of
injunction of the agreement not to compete will not prevent the Employee
from earning a livelihood, (ii) that Mercantile and Bank do not have an
adequate remedy at law for a breach or threatened breach by the Employee of the
covenants in this Section and may obtain injunctive and other equitable
relief, in addition to receiving its actual damages and any other remedies
that may be available to it hereunder or at law or by statute, (iii) that the
covenants herein contained are reasonable and necessary for the proper
protection of mercantile, and (iv) that if any provision or part of any such
covenant is invalidated, the remainder shall nevertheless continue to be
valid and fully enforceable, and if a court determines that the term of the
covenant is too long or the area covered thereby too great, so that the
covenant as written is unenforceable, the covenant shall be modified to
encompass the longest duration and largest geographic area that the court deems
enforceable under the law.
13. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when personally delivered or sent by
certified mail, return receipt requested, postage prepaid, to the Company
and/or Mercantile at its home office, to the attention of the Board of
Directors with a copy to the Secretary of the Company and/Mercantile, or, if
to the Employee, to such home or other address as the Employee has most
recently provided in writing to the Company or Mercantile.
14. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties, except as herein
otherwise provided.
15. Headings. The headings used in this Agreement are included solely for
--------
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
9
<PAGE> 10
17. Governing Law. This Agreement shall be governed by the laws of the
-------------
State of Missouri.
18. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: Roosevelt Financial Group, Inc.
/s/
- --------------------------------- --------------------------------
Secretary By:
Its:
Attest: Mercantile Bancorporation, Inc.
/s/ /s/
- ---------------------------------- --------------------------------
Secretary By:
Its:
Employee
/s/ Gary W. Douglass
--------------------------------
Gary W. Douglass
10
<PAGE> 1
EXHIBIT 11
<TABLE>
ROOSEVELT FINANCIAL GROUP, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<CAPTION>
For the years ended
----------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
COMPUTATION OF PRIMARY EARNINGS PER SHARE:
Weighted average number of
common shares outstanding 42,391,515 40,312,001 37,547,154
Add common stock equivalents for shares
issuable under stock option plan <F1> 207,336 308,931 397,779
---------- ---------- ----------
Weighted average number of shares outstanding
adjusted for common stock equivalents 42,698,851 40,620,932 37,943,933
========== ========== ==========
Net income $ 9,662 $ 27,098 $ 41,727
Subtract dividends on convertible preferred stock ( 4,210) ( 4,243) ( 5,184)
------- ------- -------
Net income attributable to common stock $ 5,452 $ 22,855 $ 36,543
======= ======= =======
Primary earnings per share $0.13 $0.56 $0.96
===== ===== =====
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE:
Weighted average number of
common shares outstanding 42,391,515 40,312,001 38,590,969
Add common stock equivalents for shares
issuable under stock option plan <F2> 340,277 316,696 414,391
Add assumed conversion of convertible
preferred stock into common stock 4,866,492 4,878,750 4,946,250
Subtract assumed conversion of convertible preferred
stock if effect of assumed conversion is anti-dilutive (4,866,492) (4,878,750) (4,946,250)
---------- ---------- ----------
Weighted average number of shares outstanding
adjusted for common stock equivalents 42,731,792 40,628,697 39,005,360
========== ========== ==========
Net income $ 9,662 $ 27,098 $ 41,727
Subtract dividends on convertible preferred stock if
effect of assumed conversion is anti-dilutive (4,210) (4,243) (5,184)
------- ------- -------
Adjusted net income $ 5,452 $ 22,855 $ 36,543
======= ======= =======
Fully diluted earnings per share $0.13 $0.56 $0.94
===== ===== =====
<FN>
<F1> Additional shares issuable were derived under the "treasury stock
method" using average market price during the period.
<F2> Additional shares issuable were derived under the "treasury stock
method" using the higher of the average market price during the period or
the market price at the end of the period.
</TABLE>
<PAGE> 1
EXHIBIT 21
<TABLE>
SUBSIDIARIES OF THE REGISTRANT
<CAPTION>
Parent Subsidiary Ownership Organization
- ---------------------------------- ------------------------------------ --------- ------------
<S> <C> <C> <C>
Roosevelt Financial Group, Inc. Roosevelt Bank 100% Federal
Roosevelt Financial Group, Inc. F & H Realty 100% Missouri
Roosevelt Financial Group, Inc. Missouri State Bank 100% Missouri
Roosevelt Bank RTRAC Leasing, Inc. 100% Missouri
Roosevelt Bank Caltrop Corporation 100% Missouri
Roosevelt Bank WFS Corporation 100% Missouri
Roosevelt Bank Kaysal, Inc. 100% Missouri
Roosevelt Bank Sentinel Insurance Agency, Inc. 100% Missouri
Roosevelt Bank Claywood Financial 100% Missouri
Caltrop Corporation Fortune Homes, Inc. 100% Missouri
Caltrop Corporation Consolidated Insurance Services, Inc. 100% Delaware
Caltrop Corporation Lakewood Oaks Golf Club, Ltd. 100% Missouri
Missouri State Bank Roosevelt Financial Services, Inc. 100% Missouri
Roosevelt Financial Services, Inc. Roosevelt Investment Services, Inc. 100% Missouri
</TABLE>
<PAGE> 1
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, No. 33-95930, No. 33-97590,
and No. 333-4499 on Form S-8 of Roosevelt Financial Group, Inc. (Roosevelt) of
our report dated January 20, 1997, relating to the consolidated balance sheets
of Roosevelt Financial Group, Inc. and subsidiaries as of December 31, 1996
and 1995, 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, 1996, which report appears in the December 31, 1996 Annual Report
on Form 10-K of Roosevelt.
Our report states 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 LLP
St. Louis, Missouri
March 3, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 26,299
<INT-BEARING-DEPOSITS> 22,343
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 3,157,757
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 4,321,188
<ALLOWANCE> 22,719
<TOTAL-ASSETS> 7,796,412
<DEPOSITS> 5,347,071
<SHORT-TERM> 1,116,851
<LIABILITIES-OTHER> 111,063
<LONG-TERM> 724,000
0
64,441
<COMMON> 238,297
<OTHER-SE> 198,689
<TOTAL-LIABILITIES-AND-EQUITY> 7,796,412
<INTEREST-LOAN> 303,304
<INTEREST-INVEST> 335,199
<INTEREST-OTHER> 1,808
<INTEREST-TOTAL> 640,311
<INTEREST-DEPOSIT> 249,820
<INTEREST-EXPENSE> 462,724
<INTEREST-INCOME-NET> 177,587
<LOAN-LOSSES> 1,262
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 123,409
<INCOME-PRETAX> 16,949
<INCOME-PRE-EXTRAORDINARY> 11,114
<EXTRAORDINARY> (1,452)
<CHANGES> 0
<NET-INCOME> 9,662
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 2.02
<LOANS-NON> 12,224
<LOANS-PAST> 10,126
<LOANS-TROUBLED> 53
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 21,855
<CHARGE-OFFS> (2,173)
<RECOVERIES> 533
<ALLOWANCE-CLOSE> 22,719
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 18,987
</TABLE>
