-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HYA1Q13IRdQeHPdgtWNsxLhbzIKLgL6fnF3Rn9tPl72QWxQe5x1cdnUGJb1UKVnJ WGfYCcvjZyNVPQYx9fUJWQ== 0000950109-96-005949.txt : 19960916 0000950109-96-005949.hdr.sgml : 19960916 ACCESSION NUMBER: 0000950109-96-005949 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19960913 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ROOSEVELT FINANCIAL GROUP INC CENTRAL INDEX KEY: 0000830055 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 431498200 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-17403 FILM NUMBER: 96629446 BUSINESS ADDRESS: STREET 1: 900 ROOSEVELT PKWY CITY: CHESTERFIELD STATE: MO ZIP: 63017 BUSINESS PHONE: 3145326200 MAIL ADDRESS: STREET 1: 900 ROOSEVELT PKWY STREET 2: 900 ROOSEVELT PKWY CITY: CHESTERFIELD STATE: MO ZIP: 63017 10-Q/A 1 10-Q/A SEP 30, 1995 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1995 ----------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to __________________ Commission File #0-17403 ROOSEVELT FINANCIAL GROUP, INC. ---------------------------------------- (Exact name of registrant as specified in its charter) Delaware 43-1498200 ---------------------------------- ------------------------ (State or other Jurisdiction (I.R.S. Employer ID No.) of incorporation or organization) 900 Roosevelt Parkway, Chesterfield, Missouri 63017 --------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (314) 532-6200 ----------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at November 7, 1995 ------------------- --------------------------------- Common Stock 40,276,506 Par Value $.01 INTRODUCTORY STATEMENT During August 1996, the Staff of the Securities and Exchange Commission (Staff) performed a regular review of the 1995 Form 10-K of Roosevelt Financial Group, Inc. (Company) in conjunction with Registration Statements on Form S-4 filed by the Company related to three pending acquisitions. As a result of this review, the Staff questioned the Company's original accounting treatment surrounding the deferral and recognition of gains and losses on financial futures contracts used to reduce the interest rate risk of certain mortgage backed securities in the Company's available for sale portfolio. The Company originally recognized a $34.8 million charge to fourth quarter 1995 earnings regarding the cessation of deferral accounting. At issue was the Staff's contention that the financial futures contracts did not meet the "high correlation" criteria of Statement of Financial Accounting Standards No. 80, "Accounting for Futures Contracts", thus not qualifying for deferral accounting from the inception of the hedge in March 1994 and requiring the recognition of subsequent gains and losses in income. The Company originally ceased deferral accounting when management concluded that high correlation measured using the "cumulative dollar approach" was unlikely to be achieved on a consistent basis. Accordingly, at the Staff's request, the Company has restated its 1994 and 1995 consolidated financial statements to reflect the cessation of deferral accounting, from the inception of the hedge, with respect to the aforementioned financial futures contracts. The restatement had the effect of increasing previously reported net income for the quarter ended September 30, 1995 by $747,000. This restatement is one of the timing of recognition of gains and losses in the Statement of Operations and has no impact on total stockholders' equity at any date since both the futures contracts and the related mortgage-backed securities have been previously marked to market through stockholders' equity at each reporting period. Other appropriate conforming changes to reflect the restatement have been made throughout this document. Subsequent to December 31, 1995, the Company terminated all of its futures positions and maintained its interest rate risk management position by principally redesignating existing interest rate exchange agreements to the available for sale portfolio. Such interest rate exchange agreements were utilized prior to the redesignation to manage the interest rate risk of interest-bearing deposits and other short-term borrowings. INDEX ROOSEVELT FINANCIAL GROUP, INC.
PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) - Consolidated Balance Sheets 2 - Consolidated Statements of Income 3 - Consolidated Statements of Stockholders' Equity 4 - Consolidated Statements of Cash Flows 5 - Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II. OTHER INFORMATION 26 SIGNATURES 27
ROOSEVELT FINANCIAL GROUP, INC. Consolidated Balance Sheets (In thousands, except share data) (Unaudited)
September 30, December 31, 1995 1994 --------------- -------------- Assets Cash ------------------------------------------------------------------------------------ $ 44,700 $ 21,901 Interest-bearing deposits --------------------------------------------------------------- 105 205 Mortgage-backed securities: Available for sale------------------------------------------------------------------ 1,537,912 1,656,563 Held to maturity-------------------------------------------------------------------- 3,666,633 3,119,289 Investment securities - held to maturity ------------------------------------------------ 131,614 156,773 Loans receivable - held to maturity ----------------------------------------------------- 3,358,665 3,072,151 Stock in Federal Home Loan Bank --------------------------------------------------------- 127,463 109,136 Office properties and equipment, net ---------------------------------------------------- 53,634 53,483 Accrued income and other assets --------------------------------------------------------- 232,124 242,365 --------------- -------------- Total Assets $ 9,152,850 $ 8,431,866 =============== ============== Liabilities and Stockholders' Equity Savings deposits ------------------------------------------------------------------------ $ 4,772,084 $ 4,899,389 Mortgage-backed bonds ------------------------------------------------------------------- 19,663 19,660 Securities sold under agreements to repurchase ------------------------------------------ 1,368,776 1,208,127 FHLB advances --------------------------------------------------------------------------- 2,317,088 1,707,938 Subordinated notes ---------------------------------------------------------------------- 27,825 27,724 Accrued expenses and other liabilities -------------------------------------------------- 184,250 127,402 --------------- -------------- Total Liabilities 8,689,686 7,990,240 --------------- -------------- Commitments and contingencies Stockholders' equity: Preferred stock - $.01 par value, 6.5% non-cumulative perpetual convertible: 3,000,000 shares authorized and 1,301,000 and 1,319,000 shares issued and outstanding at September 30, 1995 and December 31, 1994, respectively -------------------------------------------------------------------- 13 13 Common stock - $.01 par value: 90,000,000 shares authorized; 40,296,665 shares and 40,271,689 shares issued and outstanding, respectively, at September 30, 1995 and 40,173,527 shares and 40,163,527 shares issued and outstanding, respectively, at December 31, 1994 ----------------------------- 403 402 Paid-in capital -------------------------------------------------------------------- 256,186 255,655 Retained earnings - subject to certain restrictions -------------------------------- 198,928 209,379 Treasury stock, at cost; 24,976 shares at September 30, 1995 and 10,000 shares at December 31, 1994 ----------------------------------------------------- (385) (150) Unrealized gain (loss) on mortgage-backed securities available for sale, net ------- 9,423 (23,673) Unamortized restricted stock awards ------------------------------------------------ (1,404) -- --------------- -------------- Total Stockholders' Equity 463,164 441,626 --------------- -------------- $ 9,152,850 $ 8,431,866 =============== ==============
See accompanying notes to consolidated financial statements 2 ROOSEVELT FINANCIAL GROUP, INC. Consolidated Statements of Income (In thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1995 1994 1995 1994 ---------- ---------- ---------- ---------- Interest income: Loans receivable ----------------------------------------------------- $ 63,472 $ 53,290 $ 184,234 $ 151,462 Mortgage-backed securities: Held to maturity --------------------------------------------------- 65,125 44,256 185,802 122,922 Available for sale ------------------------------------------------- 30,447 35,408 98,783 93,000 Held for trading --------------------------------------------------- -- 2 -- 6,459 Investment securities: Held to maturity --------------------------------------------------- 2,362 1,933 7,268 4,095 Available for sale ------------------------------------------------- -- 281 -- 1,217 Securities purchased under agreements to resell ---------------------- -- 488 -- 881 Other ---------------------------------------------------------------- 2,514 2,605 6,845 8,463 ---------- ---------- ---------- ---------- Total interest income ---------------------------------------------- 163,920 138,263 482,932 388,499 ---------- ---------- ---------- ---------- Interest expense: Savings deposits, net ------------------------------------------------ 59,907 51,792 172,538 148,100 Advances from Federal Home Loan Bank --------------------------------- 36,545 20,435 98,562 53,016 Securities sold under agreements to repurchase ----------------------- 20,289 15,688 65,429 33,232 Interest rate exchange agreements ------------------------------------ 2,739 1,274 5,528 7,362 Subordinated notes --------------------------------------------------- 717 1,020 2,150 4,559 Mortgage-backed bonds ------------------------------------------------ 503 503 1,509 4,027 ---------- ---------- ---------- ---------- Total interest expense --------------------------------------------- 120,700 90,712 345,716 250,296 ---------- ---------- ---------- ---------- Net interest income ---------------------------------------------- 43,220 47,551 137,216 138,203 Provision for losses on loans ------------------------------------------ 300 300 900 12,132 ---------- ---------- ---------- ---------- Net interest income after provision for losses on loans----------- 42,920 47,251 136,316 126,071 ---------- ---------- ---------- ---------- Noninterest income (loss): Net gain (loss) from financial instruments -------------------------- 1,620 2,553 (54,119) (29,305) Loan servicing fees, net -------------------------------------------- 1,822 1,677 5,966 5,402 Gain on sale of purchased mortgage servicing rights ----------------- 1,510 -- 1,510 -- Gross profit-insurance agency --------------------------------------- 1,792 1,333 5,908 4,542 Retail banking fees ------------------------------------------------- 2,850 2,421 8,078 6,291 Gain on sales of real estate acquired for development and sale------- 427 1,350 1,363 2,501 Unrealized losses on impairment of mortgage-backed securities held to maturity--------------------------------------------------- -- -- (27,063) -- Other --------------------------------------------------------------- 471 468 1,073 1,684 ---------- ---------- ---------- ---------- Total noninterest income (loss) ----------------------------------- 10,492 9,802 (57,284) (8,885) ---------- ---------- ---------- ---------- Noninterest expense: General and administrative: Compensation and employee benefits --------------------------------- 8,676 7,978 25,887 34,545 Occupancy ---------------------------------------------------------- 4,358 4,669 13,015 19,446 Advertising -------------------------------------------------------- 327 382 1,360 1,579 Federal insurance premiums ----------------------------------------- 2,575 2,999 8,998 9,105 Other -------------------------------------------------------------- 4,939 4,703 14,848 25,401 ---------- ---------- ---------- ---------- Total general and administrative --------------------------------- 20,875 20,731 64,108 90,076 Provision for real estate losses ------------------------------------- -- -- -- 4,581 ---------- ---------- ---------- ---------- Total noninterest expense ------------------------------------------ 20,875 20,731 64,108 94,657 ---------- ---------- ---------- ---------- Income before income tax expense and extraordinary items---------- 32,537 36,322 14,924 22,529 Income tax expense ----------------------------------------------------- 11,040 12,393 3,742 8,267 ---------- ---------- ---------- ---------- Income before extraordinary items -------------------------------- 21,497 23,929 11,182 14,262 Extraordinary items ---------------------------------------------------- -- -- -- (7,849) ---------- ---------- ---------- ---------- Net income ------------------------------------------------------- $ 21,497 $ 23,929 $ 11,182 $ 6,413 ========== ========== ========== ========== Net income (loss) attributable to common stock-------------------- $ 20,440 $ 22,987 $ 7,996 $ 3,369 ---------- ---------- ---------- ---------- Primary earnings per share: Income before extraordinary items -------------------------------- $ 0.50 $ 0.57 $ 0.20 $ 0.30 Extraordinary items ---------------------------------------------- -- -- -- (0.21) ---------- ---------- ---------- ---------- Net income ----------------------------------------------------- $ 0.50 $ 0.57 $ 0.20 $ 0.09 ========== ========== ========== ========== Fully-diluted earnings per share: Income before extraordinary items -------------------------------- $ 0.47 $ 0.53 $ .20 $ 0.30 Extraordinary items ---------------------------------------------- -- -- -- (0.21) ---------- ---------- ---------- ---------- Net income ----------------------------------------------------- $ 0.47 $ 0.53 $ .20 $ 0.09 ========== ========== ========== ========== Dividends paid per share ----------------------------------------------- $ 0.14 $ 0.11 $ 0.42 $ 0.32 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements 3 ROOSEVELT FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Dollars in thousands) (Unaudited)
Preferred Stock Common Stock ---------------------------- ---------------------------- Shares Amount Shares Amount ------------ ------------ ------------ ------------ Balance, December 31, 1993------------------------------------- 2,492,440 $ 25 10,291,922 $ 103 Net income (including pooled company)-------------------------- -- -- -- -- Issuance of 319,000 shares of 6.5% non-cumulative perpetual convertible preferred stock------------------------ 319,000 3 -- -- Issuance of common stock in the acquisition of Home Federal Bancorp of Missouri, Inc.----------------------- -- -- 1,121,142 11 Exercise of incentive stock options and non-qualified stock options---------------------------------- -- -- 1,294,991 13 Three-for-one stock split-------------------------------------- -- -- 25,157,436 252 Cash dividends declared (including pooled company): Common stock------------------------------------------------- -- -- -- -- Preferred stock---------------------------------------------- -- -- -- -- Purchase of common stock for treasury-------------------------- -- -- -- -- Unrealized losses on mortgage-backed securities available for sale, net (including pooled company)----------- -- -- -- -- Other pre-merger transactions of pooled company---------------- (1,492,440) (15) 2,308,036 23 ------------ ------------ ------------ ------------ Balance, December 31, 1994------------------------------------- 1,319,000 13 40,173,527 402 Net income----------------------------------------------------- -- -- -- -- Purchase of common stock for treasury-------------------------- -- -- -- -- Issuance of common stock pursuant to employee stock ownership plan----------------------------------------- -- -- 746 -- Issuance of restricted stock----------------------------------- -- -- 66,040 1 Exercise of incentive stock options and non-qualified stock options---------------------------------- -- -- 32,850 -- Surrender of common stock for exercise of stock options------------------------------------------------ -- -- (29,474) -- Exchange of preferred stock for common stock------------------- (18,000) -- 52,976 -- Amortization of restricted stock awards------------------------ -- -- -- -- Cash dividends declared: Common stock------------------------------------------------- -- -- -- -- Preferred stock---------------------------------------------- -- -- -- -- Unrealized gain on mortgage-backed securities available for sale, net-------------------------------------- -- -- -- -- ------------ ------------ ------------ ------------ Balance, September 30, 1995------------------------------------ 1,301,000 $ 13 40,296,665 $ 403 ============ ============ ============ ============
Treasury Stock Paid-in Retained ---------------------------- Capital Earnings Shares Amount ------------ ------------ ------------ ------------ Balance, December 31, 1993------------------------------------- $ 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------------------------ 21,270 -- -- -- Issuance of common stock in the acquisition of Home Federal Bancorp of Missouri, Inc.----------------------- 48,220 -- -- -- Exercise of incentive stock options and non-qualified stock options---------------------------------- 5,932 -- -- -- Three-for-one stock split-------------------------------------- (252) -- -- -- Cash dividends declared (including pooled company): Common stock------------------------------------------------- -- (13,944) -- -- Preferred stock---------------------------------------------- -- (5,184) -- -- Purchase of common stock for treasury-------------------------- -- -- (10,000) (150) Unrealized losses on mortgage-backed securities available for sale, net (including pooled company)----------- -- -- -- -- Other pre-merger transactions of pooled company---------------- 506 -- -- -- ------------ ------------ ------------ ------------ Balance, December 31, 1994------------------------------------- 255,655 209,379 (10,000) (150) Net income----------------------------------------------------- -- 11,182 -- -- Purchase of common stock for treasury-------------------------- -- -- (214,500) (3,426) Issuance of common stock pursuant to employee stock ownership plan----------------------------------------- 11 (14) 9,338 154 Issuance of restricted stock----------------------------------- 1,130 -- 20,000 320 Exercise of incentive stock options and non-qualified stock options---------------------------------- 97 (1,559) 155,662 2,486 Surrender of common stock for exercise of stock options------------------------------------------------ (476) -- -- -- Exchange of preferred stock for common stock------------------- (231) -- 14,524 231 Amortization of restricted stock awards------------------------ -- -- -- -- Cash dividends declared: Common stock------------------------------------------------- -- (16,874) -- -- Preferred stock---------------------------------------------- -- (3,186) -- -- Unrealized gain on mortgage-backed securities available for sale, net-------------------------------------- -- -- -- -- ------------ ------------ ------------ ------------ Balance, September 30, 1995------------------------------------ $ 256,186 $ 198,928 (24,976) $ (385) ============ ============ ============ ============
Unrealized gains (losses) on mortgage- backed securities Unamortized Total available Restricted Stockholders for sale, net Stock Awards Equity ------------- -------------- -------------- 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 Exercise of incentive stock options and non-qualified stock options------------------------------------ -- -- 5,945 Three-for-one stock split---------------------------------------- -- -- -- Cash dividends declared (including pooled company): Common stock--------------------------------------------------- -- -- (13,944) Preferred stock------------------------------------------------ -- -- (5,184) Purchase of common stock for treasury---------------------------- -- -- (150) Unrealized losses on mortgage-backed securities available for sale, net (including pooled company)------------- (35,248) -- (35,248) Other pre-merger transactions of pooled company------------------ -- -- 514 ------------- -------------- -------------- Balance, December 31, 1994--------------------------------------- (23,673) -- 441,626 Net income------------------------------------------------------- -- -- 11,182 Purchase of common stock for treasury---------------------------- -- -- (3,426) Issuance of common stock pursuant to employee stock ownership plan------------------------------------------- -- -- 151 Issuance of restricted stock------------------------------------- -- (1,451) -- Exercise of incentive stock options and non-qualified stock options------------------------------------ -- -- 1,024 Surrender of common stock for exercise of stock options-------------------------------------------------- -- -- (476) Exchange of preferred stock for common stock--------------------- -- -- -- Amortization of restricted stock awards-------------------------- -- 47 47 Cash dividends declared: Common stock--------------------------------------------------- -- -- (16,874) Preferred stock------------------------------------------------ -- -- (3,186) Unrealized gain on mortgage-backed securities available for sale, net---------------------------------------- 33,096 -- 33,096 ------------- -------------- -------------- Balance, September 30, 1995-------------------------------------- $ 9,423 $ (1,404) $ 463,164 ============= ============== ==============
See accompanying notes to consolidated financial statements 4 ROOSEVELT FINANCIAL GROUP, INC. Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Nine Months Ended September 30, 1995 1994 ----------- ---------- Cash flows from operating activities: Net income -------------------------------------------------------------------------- $ 11,182 $ 6,413 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on early extinguishment of debt ----------------------------- -- 12,134 Depreciation ------------------------------------------------------------------- 3,142 4,114 Amortization of (discounts) and premiums, net ---------------------------------- 5,344 13,430 Increase in accrued interest receivable ---------------------------------------- (8,515) (2,973) Increase (decrease) in accrued interest payable -------------------------------- 8,641 (1,676) Provision for losses on loans and real estate ---------------------------------- 900 16,713 Unrealized losses on impairment of mortgage-backed securities held to maturity-- 27,063 -- Net increase in securities held for trading ------------------------------------ -- (35,680) Net decrease in loans held for sale -------------------------------------------- -- 72,631 Decrease in income taxes payable ----------------------------------------------- (11,012) (8,917) Other, net --------------------------------------------------------------------- (22,507) (2,922) ----------- ---------- Net cash provided by operating activities --------------------------------- 14,238 73,267 ----------- ---------- Cash flows from investing activities: Principal payments on: Mortgage-backed securities available for sale ---------------------------------- 87,176 258,731 Mortgage-backed securities held to maturity ------------------------------------ 510,413 619,353 Loans receivable held to maturity ---------------------------------------------- 444,746 757,394 Proceeds from sales of: Mortgage-backed securities available for sale ---------------------------------- 806,101 1,910,050 Investment securities available for sale --------------------------------------- -- 41,842 Loans receivable --------------------------------------------------------------- -- 13,498 Proceeds from maturities and calls of investment securities held to maturity -------- 44,322 29,764 Purchases of: Mortgage-backed securities available for sale ---------------------------------- (718,316) (2,519,166) Mortgage-backed securities held to maturity ------------------------------------ (1,127,589) (920,198) Investment securities held to maturity ----------------------------------------- (17,742) (126,211) Loans receivable held to maturity ---------------------------------------------- (302,088) (101,253) Originations of loans receivable ---------------------------------------------------- (376,952) (561,832) Net proceeds from sales of real estate ---------------------------------------------- 7,095 6,939 Purchase of office properties & equipment ------------------------------------------- (2,250) (6,005) Purchase of stock in FHLB ----------------------------------------------------------- (18,327) (23,036) Cash acquired from acquisition ------------------------------------------------------ -- 48,091 Acquisition of Home Federal Bancorp ------------------------------------------------- -- (17,004) ----------- ---------- Net cash used in investing activities ------------------------------------- (663,411) (589,043) ----------- ---------- Cash flows from financing activities: Repurchase of mortgage-backed bonds ------------------------------------------------- -- (60,820) Redemption of subordinated debt ----------------------------------------------------- -- (31,022) Proceeds from FHLB advances --------------------------------------------------------- 12,330,000 11,800,256 Repayment of FHLB advances ---------------------------------------------------------- (11,721,000) (11,524,000) Excess of savings deposits withdrawals over receipts -------------------------------- (127,159) (556,299) Increase in securities sold under agreements to repurchase, net --------------------- 160,648 670,929 Proceeds from issuance of preferred stock ------------------------------------------- -- 21,273 Proceeds from stock option exercises ------------------------------------------------ 547 5,836 Purchase of treasury stock ---------------------------------------------------------- (3,426) -- Cash dividends paid ----------------------------------------------------------------- (20,075) (13,643) Net increase in advances from borrowers for taxes and insurance --------------------- 52,437 49,980 ----------- ---------- Net cash provided by financing activities --------------------------------- 671,972 362,490 ----------- ---------- Net increase (decrease) in cash and cash equivalents ------------------------------------- 22,799 (153,286) Cash and cash equivalents at beginning of period ----------------------------------------- 21,901 177,350 ----------- ---------- Cash and cash equivalents at end of period ----------------------------------------------- $ 44,700 $ 24,064 =========== ========== Supplemental disclosures of cash flow information: Interest credited to savings deposits ------------------------------------------------ $ 128,937 $ 94,809 Payments during the period for: Interest ----------------------------------------------------------------------- 337,075 251,972 Income taxes ------------------------------------------------------------------- 33,475 6,542 Noncash investing and financing activities: Desecuritization resulting in transfer of mortgage-backed securities held to maturity to loans receivable held to maturity and real estate owned ------------------------- 33,603 -- Transfers from securities held for trading to securities ---------------------------- -- 190,972 Unrealized gain (loss) on mortgage-backed securities available for sale, net -------- 33,096 (23,505) Assets acquired, net of cash and cash equivalents ----------------------------------- -- 483,886 Liabilities assumed ----------------------------------------------------------------- -- 491,755 Common stock issued for Home Federal Bancorp ---------------------------------------- -- 48,231
See accompanying notes to consolidated financial statements 5 ROOSEVELT FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of Presentation The accompanying consolidated financial statements include the accounts of Roosevelt Financial Group, Inc. (the Company), its wholly owned subsidiary, Roosevelt Bank, (the Bank) and the Bank's wholly owned subsidiaries as of September 30, 1995 and for the three and nine month periods ended September 30, 1995 and 1994. In the opinion of management, the preceding unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals and the other than temporary impairment write-down of certain private issuer mortgage-backed securities discussed further in Note 6 and under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations") necessary for a fair presentation of the financial condition of the Company as of September 30, 1995 and the results of its operations for the three month and nine month periods ended September 30, 1995 and 1994. The preceding unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. The following material under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is written with the presumption that the users of the interim financial statements have read, or have access to, the Company's latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 1994 and for the three year period then ended. Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Part I. When necessary, reclassifications have been made to prior period balances to conform to current period presentation. During August 1996, the Staff of the Securities and Exchange Commission (Staff) performed a regular review of the Company's 1995 Form 10-K in conjunction with Registration Statements on Form S-4 filed by the Company related to three pending acquisitions. As a result of this review, the Staff questioned the Company's original accounting treatment surrounding the deferral and recognition of gains and losses on financial futures contracts used to reduce the interest rate risk of certain mortgage backed securities in the Company's available for sale portfolio. The Company originally recognized a $34.8 million charge to fourth quarter 1995 earnings regarding the cessation of deferral accounting. At issue was the Staff's contention that the financial futures contracts did not meet the "high correlation" criteria of Statement of Financial Accounting Standards No. 80, "Accounting for Futures Contracts", thus not qualifying for deferral accounting from the inception of the hedge in March 1994 and requiring the recognition of subsequent gains and losses in income. The Company originally ceased deferral accounting when management concluded that high correlation measured using the "cumulative dollar approach" was unlikely to be achieved on a consistent basis. Accordingly, at the Staff's request, the Company has restated its 1994 and 1995 consolidated financial statements to reflect the cessation of deferral accounting, from the inception of the hedge, with respect to the aforementioned financial futures contracts. The restatement had the effect of increasing previously reported net income for the three month period ended September 30, 1995 by $747,000 and decreasing previously reported net income for the nine month period ended September 30, 1995 by $36.3 million. This restatement is one of the timing of recognition of gains and losses in the Statement of Operations and had no impact on total stockholders' equity since both the financial futures contracts and the related mortgage-backed securities had been previously marked to market through stockholders' equity. Subsequent to December 31, 1995, the Company terminated all of its financial futures positions and maintained its interest rate risk management position by principally redesignating existing interest rate exchange agreements to the available for sale portfolio. Such interest rate exchange agreements were utilized prior to the redesignation to manage the interest rate risk of interest-bearing deposits and other short-term borrowings. Note 2 - Mortgage-Backed Securities Available for sale - The amortized cost and market value of mortgage-backed securities available for sale at September 30, 1995 are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------- ---------- ---------- ------- GNMA....................................... $ 771,677 $ 19,255 $ (976) $ 789,936 FNMA....................................... 337,040 4,715 (454) 341,301 FHLMC...................................... 323,073 4,719 (1,268) 326,524 Private issuer pass-throughs............... 16,827 -- (697) 16,130 Mutual fund................................ 25,000 1,535 -- 26,535 Interest-only stripped coupon mortgage- backed certificates....................... 11,268 303 (1,835) 9,736 Collateralized mortgage obligation residual interests........................ 3,468 1,504 (279) 4,693 Principal-only stripped coupon mortgage- backed certificates....................... 3,295 -- (167) 3,128 Interest rate swap, cap, and floor agreements................................ 30,355 3,976 (14,402) 19,929 --------- ------ ------- --------- $ 1,521,983 $ 36,007 $ (20,078) $ 1,537,912 ========= ====== ======= =========
6 Gross realized gains and gross realized losses on sales of mortgage-backed securities available for sale are summarized as follows:
Nine Months Ended September 30, 1995 ------------------------------------ 1995 1994 -------- -------- Gross realized gains........................................ $ 16,158 $ 12,587 Gross realized losses....................................... (378) (35,644) ------ ------- $ 15,780 $ (23,057) ====== =======
Held to maturity - The amortized cost and market value of mortgage-backed securities held to maturity at September 30, 1995 are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value -------- ---------- ---------- ------- GNMA................................... $ 14,937 $ 155 $ (300) $ 14,792 FNMA................................... 197,362 1,549 (1,243) 197,668 FHLMC.................................. 252,370 2,538 (1,280) 253,628 Private issuer pass-throughs........... 2,857,150 18,655 (47,444) 2,828,361 Collateralized mortgage obligations.... 344,814 1,838 (4,998) 341,654 --------- ------ ------- --------- $ 3,666,633 $ 24,735 $ (55,265) $3,636,103 ========= ====== ======= =========
There were no sales of mortgage-backed securities held to maturity during the nine month period ended September 30, 1995. Note 3- Investment Securities Held to maturity - The amortized cost and market value of investment securities held to maturity are summarized as follows:
Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value --------- ---------- ---------- ---------- U.S. Government and agency obligations....... $ 114,242 $ 1,009 $ (1) $ 115,250 Corporate securities......................... 17,372 1,808 -- 19,180 ------- ----- --- ------- $ 131,614 $ 2,817 $ (1) $ 134,430 ======= ===== === =======
There were no sales of investment securities held to maturity for the nine month period ended September 30, 1995. Note 4 - Common Stock Dividends and Preferred Stock Dividends On October 26, 1995, the Board of Directors declared the Company's thirty first common stock cash dividend, in the amount of 14 cents per share payable November 30, 1995 to stockholders of record on November 15, 1995. On September 28, 1995, the Board of Directors declared the regular quarterly cash dividend on the Company's Series A and Series F 6.5% non-cumulative perpetual convertible preferred stock, in the amount of 81.25 cents per share payable November 15, 1995 to stockholders of record on November 3, 1995. 7 Note 5 - Stock Repurchase Program On December 15, 1994, the Board of Directors of Roosevelt Financial Group, Inc. authorized the Company to acquire up to 1,750,000 shares of its own common stock or common equivalents, subject to market conditions, prior to December 31, 1997. The stock repurchased is to be held in treasury in order to fund, 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 September 30, 1995, 224,500 shares of common stock of the Company have been repurchased pursuant to the stock repurchase program at a weighted average price of $15.93. Note 6 - Impairment of Mortgage-backed Securities Held to Maturity At March 31, 1995, certain private issuer mortgage-backed securities held by the Company were determined to be other than temporarily impaired, as defined in Statement of Financial Accounting Standards No. 115. As a result, the Company recorded a $27.1 million pre-tax write-down ($17.8 million after tax or $0.40 per share) for the three months ended March 31, 1995, to reflect the impairment of such securities. The amount of the write-down was based on discounted cash flow analyses performed by management (based upon assumptions regarding delinquency levels, foreclosure rates and loss ratios on REO disposition in the underlying portfolio). Discounted cash flow analyses were utilized to estimate fair value due to the absence of a ready market for the securities. Each of the securities deemed to be impaired were rated CCC by Standard & Poors and Ba1, Ba2 or Ba3 by Moodys at March 31, 1995. Refer to the caption entitled "Unrealized Losses on Impairment of Mortgage-Backed Securities Held to Maturity" under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further information regarding the affected mortgage-backed securities and related write-down. Note 7 - Earnings Per Share Net income for primary earnings per share is adjusted for the dividends on convertible preferred stock. Primary earnings per share have been computed based on the weighted average number of common shares outstanding and common stock equivalents arising from the assumed exercise of outstanding stock options unless their effect would be anti-dilutive. Common stock equivalents are computed under the treasury stock method. Average common and common stock equivalents outstanding for the three month periods ended September 30, 1995 and 1994 were 40,645,389 and 40,109,251, respectively. Average common and common stock equivalents outstanding for the nine month periods ended September 30, 1995 and 1994 were 40,596,697 and 37,087,966, respectively. Fully-diluted earnings per share have been computed using the weighted average number of common shares and common stock equivalents, which include the effect of the assumed conversion of the 6.5% non-cumulative convertible preferred stock into common stock. Net income has not been adjusted for the preferred stock dividend for the purposes of the fully-diluted earnings per share calculation. Average common and common stock equivalents outstanding, for the purpose of calculating fully-diluted earnings per share, for the three month periods ended September 30, 1995 and 1994 were 45,552,569 and 45,050,227, respectively. Average common and common stock equivalents outstanding, for the purpose of calculating fully-diluted earnings per share for the nine month periods ended September 30, 1995 and 1994 were 45,503,357 and 42,646,248, respectively. Note 8 - Legal Proceedings As a result of the acquisition of Farm & Home Financial Corporation, which was completed in June 1994, the Company and its subsidiary have become successor to certain legal proceedings involving claims arising out of the Southbend Subdivision, which was developed by Farm & Home Savings and a co- developer prior to 1985 on property adjacent to a toxic waste disposal site near Houston, Texas (Brio Site). There have been no significant developments regarding these claims and pursuant to certain settlement agreements the Insurance Companies are still providing defense and indemnification for these claims. The risk of significant loss to the Company as a result of such claims still remains remote. Also with regard to the Newly-Asserted Claims, and any future claims against Farm & Home Savings (or against Roosevelt as successor) as discussed in the Company's Form 10-K for 1994, as to which coverage may be disputed in the future by the Insurance Companies, Roosevelt still may be required to fund the defense of such claims and might choose to contribute toward their settlement or might suffer an adverse judgement. However, while the magnitude of any such claims could be substantial, and the outcome of such potential litigation cannot be predicted with certainty, 8 the Company continues to believe that the risk of their being held primarily liable for any such claims is remote. Note 9 - Accounting Pronouncements Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" (SFAS 114) and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (SFAS 118), which amends SFAS 114. SFAS 114 (as amended by SFAS 118) defines the recognition criterion for loan impairment and the measurement methods for certain impaired loans and loans whose terms have been modified in troubled debt restructurings ("restructured loan"). SFAS 118 amended SFAS 114 to allow a creditor to use existing methods for recognizing interest income on an impaired loan. The Company has elected to continue to use its existing nonaccrual methods for recognizing interest on impaired loans. Such methods are: 1) If collection of all interest according to the contractual terms of the loan agreement is in doubt, but collection of the principal balance is not in doubt, interest payments are recorded as interest income; 2) However, if collection of interest and some or all of the principal balance is in doubt, interest payments, if actually received, are applied as principal reductions. As SFAS 114 does not apply to residential mortgage loans and consumer installment loans (which are collectively evaluated for impairment) which comprise approximately 95.8% and 96.0% of the Company's total loans at December 31, 1994 and September 30, 1995, respectively, the initial and continuing application of SFAS 114 and SFAS 118 has had no significant impact on the Company's financial position or results of operations. A loan is considered to be impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Bank performs a review of all potential problem credits to determine if the impairment criteria have been met. If the impairment criteria have been met, impairment is measured based on the fair value of collateral and a reserve is calculated according to the provisions of SFAS 114. The Bank charges-off principal at the earlier of (1) when a total loss of principal has been deemed to have occurred or (2) when collection efforts have ceased. At September 30, 1995, the recorded investment in loans (principally commercial real estate) that are considered to be impaired under SFAS 114 and are included within nonperforming assets was $1.4 million (which have an allowance of $460,000 under SFAS 114). The average recorded investment in loans that are considered to be impaired was $1.4 million for the three and nine month periods ended September 30, 1995. Income recorded for the three and nine month periods ended September 30, 1995 on loans evaluated for impairment in accordance with SFAS 114 and SFAS 118 was insignificant. During March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS 121 provides guidance for the recognition and measurement of impairment of long-lived assets, certain identifiable intangibles, and goodwill related both to assets to be held and used and assets to be disposed of. SFAS 121 requires entities to perform separate calculations for assets to be held and used to determine whether recognition of an impairment loss is required and, if so, to measure the impairment. SFAS 121 requires long-lived assets and certain identifiable intangibles to be disposed of to be reported at the lower of carrying amount or fair value less costs to sell, except for assets covered by the provisions of APB Opinion No. 30. SFAS 121 is effective for financial statements issued for fiscal years beginning after December 15, 1995, although earlier application is encouraged. The Company does not anticipate that the adoption of SFAS 121 will have a significant impact on its financial statements. During May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing Rights" (SFAS 122). SFAS 122 amends SFAS No. 65 to require that an institution which sells or securitizes loans it has originated or purchased and maintains the servicing rights to capitalize the cost of the rights to service such loans. As the Company is not currently selling or securitizing any loans that it has originated or purchased, the aforementioned provision of SFAS 122 will not have any impact on the Company's financial statements. SFAS 122 also requires that an enterprise assess its capitalized mortgage servicing rights for impairment based on the fair value of those rights. SFAS No. 122 should be applied prospectively for fiscal years beginning after December 15, 1995. The Company anticipates adopting SFAS No. 122 on January 1, 1996. When adopted, the Company does not anticipate that this provision will have a significant impact on its financial statements. 9 ROOSEVELT FINANCIAL GROUP, INC. MANAGEMENT'S DISCUSSION and ANALYSIS OF FINANCIAL CONDITION and RESULTS OF OPERATIONS FINANCIAL CONDITION Capital Ratios - -------------- The capital regulations of the Office of Thrift Supervision (OTS) require institutions to maintain tangible capital equal to 1.5% of adjusted total assets and to maintain core capital equal to 3% of adjusted total assets. Additionally, institutions are required to maintain total capital (core capital plus supplementary capital) of at least 8% of risk-weighted assets. These capital requirements must be no less stringent than those applicable to national banks. General loan loss reserves totaling approximately $18.7 million are included as capital for purposes of meeting the risk-based capital requirements. The Bank's compliance at September 30, 1995 with the requirements is illustrated as follows:
Regulatory Requirement Bank's Capital Excess Capital ----------------- ----------------- ----------------- Capital Standard Amount Percent Amount Percent Amount Percent ---------------- ------ ------- ------ ------- ------ ------- (dollars in millions) Tangible Capital..... $137 1.50% $452 4.93% $315 3.43% Core Capital......... $275 3.00% $454 4.95% $179 1.95% Risk-based Capital... $252 8.00% $462 14.68% $210 6.68%
Acquisitions - ------------ On June 16, 1995, the Company announced the execution of a definitive agreement with Kirksville Bancshares, Inc. (Kirksville), the holding company for Kirksville Federal Savings Bank. The transaction will result in the merger of Kirksville Federal Savings Bank into Roosevelt Bank. At September 30, 1995, Kirksville had total assets of approximately $136.2 million. In the transaction, each holder of the common stock of Kirksville will receive 2.4437 shares of common stock of the Company. The transaction is subject to the approval of federal banking regulators, which was received on October 24, 1995. The transaction is structured to qualify as a tax-free reorganization and will qualify for the pooling of interests method of accounting. On October 20, 1995, the Company completed the acquisition of WSB Bancorp, Inc. (WSB), the holding company for Washington Savings Bank, a federal savings bank. Pursuant to the Merger Agreement each holder of the common stock of WSB received $22.75 in cash for each share of WSB common stock resulting in a total consideration of $25.0 million. The transaction was structured to qualify as a tax-free reorganization and was accounted for under the purchase method of accounting. WSB's total consolidated assets were $97.0 million and its savings deposits were $77.4 million at September 30, 1995. On June 30, 1994, the Company completed the merger with Farm & Home Financial Corporation (Farm & Home) with assets totaling $3.1 billion. In addition as of such date, Farm & Home Savings Association, a Missouri chartered stock savings and loan association and wholly-owned subsidiary of Farm & Home, merged with and into Roosevelt Bank. Pursuant to the Merger Agreement, each holder of the common stock of Farm & Home, par value $.01 per share, received 2.01 shares of common stock of the Company, par value $.01 per share. As a result of this transaction the Company issued 17,993,838 shares of common stock. The transaction was structured to qualify as a tax-free reorganization and was accounted for as a pooling of interests. Accordingly, the consolidated financial statements of the Company have been restated to include the results of Farm & Home for the March, 1994 period. On April 22, 1994, the Company completed the acquisition of Home Federal Bancorp of Missouri, Inc. (Home Bancorp). Pursuant to the Merger Agreement each holder of the common stock of Home Bancorp received 0.4945 of a share of common stock of the Company on a pre-split basis and $7.50 in cash for each share of Home Bancorp common stock held for a total consideration 10 of $68.3 million. Home Bancorp's total consolidated assets were $532.7 million and savings deposits were $466.5 million. The transaction was structured to qualify as a tax- free reorganization and was accounted for under the purchase method of accounting. The transaction resulted in the recording of a tax deductible intangible asset related to the deposit accounts of approximately $13.8 million. Asset Quality - ------------- The following table sets forth the amounts and categories of non- performing assets. Loans are placed on non-accrual status when the collection of principal and/or interest becomes doubtful. Troubled debt restructurings involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates. Foreclosed assets include assets acquired in settlement of loans. "Other than temporarily impaired" mortgage- backed securities represent private issuer mortgage-backed securities that have been determined to be "other than temporarily impaired" under the provisions of Statement of Financial Accounting Standards No. 115 and for which the previously existing credit enhancement support, in the form of subordination, has been totally absorbed and therefore any future losses will flow directly to the Company as a senior position holder. These securities were issued with several classes available for purchase. Certain classes are subordinate to the position of senior classes in that such subordinate classes absorb all credit losses and must be completely eliminated before any losses flow to senior position holders. The securities purchased by the Company were purchases of the most senior positions, thus intended to be protected by the subordination credit enhancement feature. In an attempt toward a conservative presentation, the Company includes the entire estimated fair value of these securities (approximately 73% of the unpaid principal balances at September 30, 1995) in this table when the credit enhancement, in the form of subordination, is exhausted even though a substantial portion of the underlying loans (approximately 72% at September 30, 1995) are either current or less than 90 days delinquent. In addition, the remaining amount of "other than temporarily impaired" mortgage-backed securities that continue to be protected by remaining credit enhancement, but for which the Company has concluded it is probable that such credit enhancement will be absorbed before the duration of the underlying security, are disclosed in the paragraphs following the table as other potential problem assets. See the caption entitled "Unrealized Losses on Impairment of Mortgage-Backed Securities Held to Maturity" under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further details.
Non-Performing Assets September 30, December 31, (in thousands) 1995 1994 ------------- ------------ Non-accruing loans: Residential.......................................... $ 6,384 $ 5,666 Commercial real estate............................... 1,366 1,626 Consumer............................................. 221 269 ------------- ------------ Total.............................................. 7,971 7,561 ------------- ------------ Accruing loans delinquent more than 90 days: Residential.......................................... 9,433 5,080 ------------- ------------ Troubled Debt Restructurings: Commercial real estate............................. 667 2,757 ------------- ------------ Foreclosed assets: Residential.......................................... 5,550 2,703 Commercial real estate............................... 12,208 16,085 ------------- ------------ Total.............................................. 17,758 18,788 ------------- ------------ Sub-total.......................................... 35,829 34,186 ------------- ------------ Sub-total non-performing assets as a percentage of total assets.................................. .39% .41% ============= ============ "Other than temporarily impaired" mortgage-backed securities with approximately 72% of the underlying loans either current or less than 90 days delinquent........................................... 45,761 -- ------------- ------------ Total non-performing assets............................ $ 81,590 $ 34,186 ============= ============ Total as a percentage of total assets.................. .89% .41% ============= ============
11 Non-performing assets increased $47.4 million to $81.6 million at September 30, 1995 as compared to $34.2 million at December 31, 1994. The overall increase in non-performing assets is due primarily to the inclusion in the table of $45.8 million of "other than temporarily impaired" private issuer mortgage-backed securities where the Company's credit enhancement has been fully absorbed. As expected, based on the low remaining amounts at June 30, 1995, the subordination protection related to Guardian Pools 1990-2 and 1990-4 (see page 20) was fully absorbed during the quarter ended September 30, 1995, resulting in an additional $16.7 million being added to the non-performing asset table during the quarter. In addition, the increases in non-accruing residential loans, accruing residential loans delinquent more than 90 days and foreclosed residential real estate at September 30, 1995 compared to December 31, 1994, are primarily the result of the desecuritization (and related transfer of servicing of the underlying collateral) of a private issuer mortgage-backed security pool completed in the quarter ended June 30, 1995. See the caption entitled "Unrealized Losses on Impairment of Mortgage-Backed Securities Held to Maturity" under the heading "Results of Operations" for further details. Commercial real estate troubled debt restructurings decreased $2.1 million as a result of the repayment of the outstanding principal on a loan secured by a nursing home. For the nine months ended September 30, 1995, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to approximately $430,000. Approximately $53,000 in interest income was recorded on such loans for the same period. Interest on loans involved in troubled debt restructurings that would have been recorded as income for the nine months ended September 30, 1995, had the loans been current in accordance with their original terms, totaled approximately $192,000. Interest on such loans that was actually recorded as income for the nine months ended September 30, 1995 was approximately $160,000. Not included in the preceding table are certain pools of private issuer mortgage-backed securities with a carrying value of $17.8 million which were performing according to their contractual terms at September 30, 1995. However, these securities were determined by the Company to be "other than temporarily impaired" and written down to fair value, since at March 31, 1995, the subordination protection had been substantially reduced to the point where the Company concluded it was probable that the securities would not continue to perform to 100% of their contractual terms over the course of their remaining lives. These securities will be included in the preceding non-performing asset table in future periods when, and if, the remaining subordination is exhausted. The following table is a reconciliation of the amount of currently performing, other than temporarily impaired mortgage-backed securities at June 30, 1995 to such amount at September 30, 1995.
in millions ----------- Amount of currently performing, other than temporarily impaired mortgage-backed securities at June 30, 1995 ......................... $ 36.4 Principal payments received ......................................... (1.9) Addition of Guardian Pools 1990-2 and 1990-4 to the non-performing asset table as subordination protection was absorbed during the quarter ended September 30, 1995 .................................... (16.7) Amount of currently performing, other than temporarily impaired ---- mortgage-backed securities at September 30, 1995 .................... $ 17.8 =====
12 Amount of Assets and Liabilities - -------------------------------- The total assets of the Company increased $721.0 million or 8.6% to $9.153 billion at September 30, 1995 from $8.432 billion at December 31, 1994. The mortgage-backed securities portfolios increased $428.7 million or 9.0% to $5.205 billion at September 30, 1995 from $4.776 billion at December 31, 1994 through net purchases. The increase in this portfolio was primarily in the form of adjustable rate mortgage-backed securities. Loans receivable increased $286.5 million or 9.3% to $3.359 billion at September 30, 1995 from $3.072 billion at December 31, 1994 as a result of originations and purchases during the period exceeding principal repayments. Such increase was primarily in the adjustable rate loan categories. Total liabilities increased $699.4 million or 8.8% to $8.690 billion from $7.990 billion at December 31, 1994. FHLB advances increased $609.2 million or 35.7% to $2.317 billion at September 30, 1995 from $1.708 billion at December 31, 1994. Securities sold under agreements to repurchase increased $160.6 million or 13.3% to $1.369 billion at September 30, 1995 from $1.208 billion at December 31, 1994. Such borrowings funded the resulting asset growth during the nine month period ended September 30, 1995. RESULTS OF OPERATIONS The Company recorded net income totaling $21.5 million for the three month period ended September 30, 1995 as compared to $23.9 million for the three month period ended September 30, 1994. The decrease in net income totaling $2.4 million for the three month period ended September 30, 1995 was due primarily to a decrease in net interest income totaling $4.3 million which was partially offset by an increase in noninterest income totaling $690,000. The Company recorded net income totaling $11.2 million for the nine month period ended September 30, 1995, as compared to $6.4 million for the nine month period ended September 30, 1994. Net income for the nine month period ended September 30, 1995 was negatively impacted by the losses resulting from the mark to market of the Company's financial futures positions used to reduce the interest rate risk of certain mortgage-backed securities in the available for sale portfolio totaling $61.6 million and by $27.1 million of unrealized losses on impairment of certain mortgage-backed securities. For a discussion of the issues relating to financial futures positions see Note 1 -- Basis of Presentation to the Notes to Consolidated Financial Statements. For a discussion of the issues relating to the unrealized losses see "Unrealized Losses on Impairment of Mortgage-Backed Securities Held to Maturity". Net income for the nine month period ended September 30, 1994 was impacted by merger related transactions which occurred during the three month period ended June 30, 1994. As a result of the acquisition of Farm & Home, merger related expenses totaling $57.3 million (net of income tax benefit) were incurred, including $11.4 million in provision for losses on loans, $38.4 million in net losses from financial instrument transactions, $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. These amounts were reduced by the income tax effect of $25.0 million. Additionally, an extraordinary item totaling $7.8 million was recorded related to the early extinguishment of debt. Net Interest Income - ------------------- Net interest income decreased approximately $4.3 million or 9.1% to $43.2 million for the three month period ended September 30, 1995, as compared to $47.6 million for the three month period ended September 30, 1994. Net interest income increased $2.7 million as a result of an increase in average interest earning assets totaling $538.7 million and average interest bearing liabilities totaling $475.3 million (volume). Net interest income decreased $7.0 million as a result of a decrease in the effective net spread to 1.94% for the three month period ended September 30, 1995 from 2.27% for the three month period ended September 30, 1994 (rate). The negative rate variance was principally the result of the continuing competitive retail deposit pricing pressure in the Company's market areas, and to a lesser extent, a short-term lag related to the repricing of the Company's adjustable rate loans and mortgage- backed securities in relation to the short-term borrowings and retail deposits that fund these assets. Net interest income decreased approximately $987,000 to $9.1 million or 0.72% for the nine month period ended September 30, 1995 as compared to $138.2 million for the nine month period ended September 30, 1994. Net interest income increased $21.6 million as a result of an increase in average interest earning assets totaling $856.4 million and average interest bearing liabilities totaling $729.8 million (volume). Net interest income decreased $7.0 million as a result of a decrease in the effective net spread to 2.07% for the nine month period ended September 30, 1995 from 2.31% for the nine month period ended September 30, 1994 (rate). The factors discussed above regarding the reasons for the changes in average balances and rates are also applicable to the nine month period ended September 30, 1995 with the exception of the impact of the impairment charge which did not impact the growth in interest-earning assets during the three months ended March 31, 1995. 13 Analysis of Changes in Net Interest Income (Volume/Rate) - -------------------------------------------------------- The following table presents the dollar amount of changes in interest income and interest expense for major components of interest earning assets and interest bearing liabilities. It distinguishes between changes related to volume and those due to changes in interest rates. For each category of interest income and interest expense, information is provided on changes attributed to (i) changes in volume (i.e., changes in volume multiplied by prior year rate) and (ii) changes in rate (i.e., changes in rate multiplied by prior year volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated to the change due to rate.
Three Months Ended Nine Months Ended September 30 September 30 1995 vs. 1994 1995 vs. 1994 ------------------------------------------ ------------------------------------------ Increase (Decrease) Total Increase (Decrease) Total Due to Increase Due to Increase Volume Rate (Decrease) Volume Rate (Decrease) ------------ ------------ ------------ ------------ ------------ ------------ (Dollars in Thousands) Interest income: Loans receivable...................... $ 6,147 $ 4,035 $ 10,182 $ 19,913 $ 12,859 $ 32,772 Mortgage-backed securities: Held to maturity..................... 12,291 8,578 20,869 34,896 27,984 62,880 Available for sale................... (9,553) 4,592 (4,961) (5,456) 11,239 5,783 Held for trading..................... (2) -- (2) (6,459) -- (6,459) Investment securities: Held to maturity..................... 307 122 429 4,052 (879) 3,173 Available for sale................... (281) -- (281) (1,217) -- (1,217) Securities purchased under agreements to resell................. (488) -- (488) (881) -- (881) Other earning assets.................. 448 (539) (91) (1,996) 378 (1,618) ------------ ------------ ------------ ------------ ------------ ------------ Total interest income.............. $ 8,869 $ 16,788 $ 25,657 $ 42,852 $ 51,581 $ 94,433 ------------ ------------ ------------ ------------ ------------ ------------ Interest expense: Savings deposits, net.................. $ (2,890) $ 11,005 8,115 $ (7,022) $ 31,460 24,438 Advances from Federal Home Loan Bank... 9,718 6,392 16,110 21,778 23,768 45,546 Securities sold under agreements to repurchase......................... (237) 4,838 4,601 11,914 20,283 32,197 Interest rate exchange agreements...... (190) 1,655 1,465 (794) (1,040) (1,834) Subordinated notes..................... (252) (51) (303) (2,096) (313) (2,409) Mortgage-backed bonds.................. -- -- -- (2,545) 27 (2,518) ------------ ------------ ------------ ------------ ------------ ------------ Total interest expense............. $ 6,149 $ 23,839 $ 29,988 $ 21,235 $ 74,185 $ 95,420 ------------ ------------ ------------ ------------ ------------ ------------ Change in net interest income........... $ 2,720 $ (7,051) $ (4,331) $ 21,617 $ (22,608) $ (987) ============ ============ ============ ============ ============ ============
14 Average Balances, Interest Rates and Yields - ------------------------------------------- The following table presents at the date and for the periods indicated the Company's average interest-earning assets, average interest-bearing liabilities, interest income and expense and average rates earned and paid. Average rates earned and paid are derived by dividing income or expense by the average balance of assets and liabilities, respectively.
Three Months Ended September 30, ---------------------------------------------------------------------------------- 1995 1994 --------------------------------------- --------------------------------------- Interest Average Interest Average Average Income/ Rate Average Income/ Rate Balance Expense % Balance Expense % ----------- ----------- ----------- ----------- ----------- ----------- (dollars in millions) Assets: Interest earning assets: Loans receivable (1)(2)...................... $ 3,352.2 $ 63.5 7.57 % $ 3,005.5 $ 53.3 7.09 % Mortgage-backed securities: Held to maturity.......................... 3,691.8 65.1 7.06 2,889.4 44.3 6.13 Available for sale(3)..................... 1,587.2 30.4 7.66 2,172.7 35.4 6.53 Held for trading.......................... -- -- -- -- -- -- Investment securities: Held to maturity.......................... 131.9 2.4 7.16 113.8 1.9 6.79 Available for sale(3)..................... -- -- -- 23.6 0.3 4.77 Securities purchased under agreement to resell................................. -- -- -- 41.0 0.5 4.76 Other earning assets......................... 147.0 2.5 6.84 125.4 2.6 8.31 ----------- ----------- ----------- ----------- ----------- ----------- All interest earning assets.................. 8,910.1 163.9 7.36 % 8,371.4 138.3 6.61 % Non-interest earning assets..................... 347.7 ----------- ----------- 315.1 ----------- ----------- ----------- ----------- Total assets................................. $ 9,257.8 $ 8,686.5 =========== =========== Liabilities and stockholders' equity: Interest bearing liabilities: NOW and money market accounts (4)............ $ 817.4 $ 6.3 3.07 % $ 1,021.6 $ 5.5 2.15 % Passbook savings deposits.................... 337.4 2.0 2.33 434.5 2.6 2.38 Time deposits (4)............................ 3,596.4 54.4 6.05 3,575.9 45.0 5.03 Advances from FHLB........................... 2,438.9 36.5 5.99 1,652.9 20.4 4.95 Securities sold under agreement to repurchase............................. 1,360.7 20.3 5.96 1,381.5 15.7 4.54 Subordinated notes........................... 27.8 0.7 10.31 36.9 1.0 11.05 Mortgage-backed bonds........................ 19.7 0.5 10.23 19.7 0.5 10.24 ----------- ----------- ----------- ----------- ----------- ----------- All interest bearing liabilities............. 8,598.3 120.7 5.62 % 8,123.0 90.7 4.47 % Non-interest bearing liabilities................ 203.5 ----------- ----------- 145.9 ----------- ----------- ----------- ----------- Total liabilities............................ 8,801.8 8,268.9 Stockholders' equity............................ 456.0 417.6 ----------- ----------- Total liabilities and stockholders' equity... $ 9,257.8 $ 8,686.5 =========== =========== Net interest income............................. $ 43.2 $ 47.6 =========== =========== Interest rate spread (5)........................ 1.74 % 2.14 % =========== =========== Effective net spread (6)........................ 1.94 % 2.27 % =========== ===========
Nine Months Ended September 30, ---------------------------------------------------------------------------------- 1995 1994 --------------------------------------- --------------------------------------- Interest Average Interest Average Average Income/ Rate Average Income/ Rate Balance Expense % Balance Expense % ----------- ----------- ----------- ----------- ----------- ----------- (dollars in millions) Assets: Interest earning assets: Loans receivable (1)(2)...................... $ 3,241.3 $ 184.2 7.58 % $ 2,864.6 $ 151.5 7.05 % Mortgage-backed securities: Held to maturity.......................... 3,537.0 185.8 7.00 2,754.9 122.9 5.95 Available for sale(3)..................... 1,769.9 98.8 7.44 1,880.2 93.0 6.60 Held for trading.......................... -- -- -- 160.9 6.4 5.35 Investment securities: Held to maturity.......................... 141.9 7.3 6.83 71.3 4.1 7.66 Available for sale(3)..................... -- -- -- 31.6 1.2 5.14 Securities purchased under agreement to resell................................. -- -- -- 28.7 0.9 4.08 Other earning assets......................... 134.4 6.8 6.79 175.9 8.5 6.42 ----------- ----------- ----------- ----------- ----------- ----------- All interest earning assets.................. 8,824.5 482.9 7.30 % 7,968.1 388.5 6.50 % Non-interest earning assets..................... 319.8 ----------- ----------- 325.2 ----------- ----------- ----------- ----------- Total assets................................. $ 9,144.3 $ 8,293.3 =========== =========== Liabilities and stockholders' equity: Interest bearing liabilities: NOW and money market accounts (4)............ $ 831.5 $ 17.5 2.81 % $ 1,093.6 $ 19.7 2.41 % Passbook savings deposits.................... 357.8 6.2 2.29 411.5 7.5 2.41 Time deposits (4)............................ 3,617.4 154.4 5.69 3,541.0 128.3 4.83 Advances from FHLB........................... 2,191.7 98.6 6.00 1,553.5 53.0 4.55 Securities sold under agreement to repurchase............................. 1,471.5 65.4 5.93 1,083.2 33.2 4.09 Subordinated notes........................... 27.8 2.1 10.32 51.4 4.6 11.83 Mortgage-backed bonds........................ 19.7 1.5 10.23 53.4 4.0 10.05 ----------- ----------- ----------- ----------- ----------- ----------- All interest bearing liabilities............. 8,517.4 345.7 5.41 % 7,787.6 250.3 4.28 % Non-interest bearing liabilities................ 177.3 ----------- ----------- 108.3 ----------- ----------- ----------- ----------- Total liabilities............................ 8,694.7 7,895.9 Stockholders' equity............................ 449.6 397.4 ----------- ----------- Total liabilities and stockholders' equity... $ 9,144.3 $ 8,293.3 =========== =========== Net interest income............................. $ 137.2 $ 138.2 =========== =========== Interest rate spread (5)........................ 1.89 % 2.22 % =========== =========== Effective net spread (6)........................ 2.07 % 2.31 % =========== ===========
- -------------------------------------------------------------------------- (1) Average balances include non-accrual loans. Interest on such loans is included in interest income upon receipt. (2) Interest includes amortization of deferred loan fees. (3) The available for sale mortgage-backed and investment securities are included in the preceding table at historical cost with the corresponding average rate calculated based upon historical balances. (4) Includes the effect of interest rate exchange agreements. (5) Equals average rate earned on all assets minus average rate paid on all liabilities. (6) Annualized net interest income divided by average balance of all interest earning assets. At September 30, 1995 the weighted average yield on interest-earning assets was 7.39% and the weighted average cost on interest-bearing liabilities was 5.55%. 15 Provision for Losses on Loans - ----------------------------- The provision for losses on loans recorded for the three month period ended September 30, 1995 remained unchanged from the three month period ended September 30, 1994 in the amount of $300,000. The provision for losses on loans decreased to $900,000 for the nine month period ended September 30, 1995 compared to $12.1 million for the nine month period ended September 30, 1994. After combining the Roosevelt, Farm & Home and Home Federal loan portfolios in the second quarter of 1994, the Company concluded that an increase in the allowance for loan losses was necessary and appropriate. Such increase was discussed with and concurred on by the Office of Thrift Supervision and resulted in an additional $11.4 million provision being recorded in the quarter ended June 30, 1994. Net Gain (Loss) from Financial Instruments - ------------------------------------------ In the conduct of its business operations, the Company has determined the need to sell or terminate certain assets, liabilities, or off-balance sheet positions due to various unforeseen events. Fundamental to the conduct of such sale or termination activities is the effect such transactions will have on the future volatility of the net market value of the Company. Consequently, in pursuing these sale or termination of activities, the Company does not seek net gains in a reporting period to the detriment of earnings in future periods. Net gain (loss) from financial instruments is summarized as follows:
Three Months Ended Nine Months Ended September 30, September 30, 1995 1994 1995 1994 ------ ------ ------ ------ (in millions) Mortgage-backed securities held for trading.......................... $ -- $ -- $ -- $ (4,491) Mark to market of financial futures contracts.......................... 135 2,578 (61,569) 12,912 Mortgage-backed securities available for sale........................ 4,235 2,608 15,780 (23,057) Cancellation costs of interest rate exchange agreements........................ -- -- -- (8,910) Options expense............................. (2,750) (2,633) (8,330) (5,759) ------ ------ ------ ------- $ 1,620 $2,553 (54,119) $(29,305) ======= ====== ======= ========
Mortgage-Backed Securities Held For Trading During the three month periods ended September 30, 1995 and 1994, and the nine month period ended September 30, 1995, the Company did not have any mortgage-backed securities held for trading. Consequently, there were no gains or losses on securities held for trading during these periods. During 1994, the Company concluded that it no longer had reasonable expectations that its previous portfolio would continue to be sold in the "near term" or "short term" as contemplated by SFAS No. 115. Accordingly, effective July 1, 1994, the securities held for trading portfolio was transferred to the available for sale portfolio at the estimated fair value of the securities which were then held. During the nine month period ended September 30, 1994, the Company recorded a loss on mortgage-backed securities held for trading totaling $4.5 million. Mark to Market of Financial Futures Contracts During the three month and nine month periods ended September 30, 1995 gains of $135,000 and losses of $61.6 million, respectively, resulted from the mark to market of the Company's financial futures positions used to reduce the interest rate risk of certain mortgage-backed securities in the available for sale portfolio. For further discussion see Note 1 - Basis of Presentation to the Notes to Consolidated Financial Statements. Mortgage-backed Securities Available For Sale During the three month period ended September 30, 1995, the Company recorded a $4.2 million gain on the sale of mortgage-backed securities available for sale. During the nine month period ended September 30, 1995, the Company recorded an $15.8 million gain on the sale of mortgage-backed securities available for sale. During the nine month period ended September 30, 1994, the Company recorded a loss on the sale mortgage-backed securities available for sale totaling $23.1 million resulting primarily from merger related transactions in the June 1994 quarter. As a result of the integration of Roosevelt and Farm & Home during the three month period ended June 30, 1994, it was determined that certain fixed-rate mortgage- backed securities classified available for sale would be sold and their related hedges would be cancelled or redesignated resulting in a net loss totaling $28.6 million. 16 Cancellation Costs Of Interest Rate Exchange Agreements During the three month period ended June 30, 1994, Farm & Home prepaid a $101 million Federal Home Loan Bank advance. Such prepayment altered the Company's exposure to interest rate risk. Consequently, the related interest rate exchange agreements were cancelled. The cancellation of the interest rate exchange agreements resulted in a $5.7 million after tax loss. Options Expense Options expense increased to $2.8 million for the three month period ended September 30, 1995 when compared to $2.6 million for the three month period ended September 30, 1994. Options expense increased to $8.3 million for the nine month period ended September 30, 1995 when compared to $5.8 million for the nine month period ended September 30, 1994. The options expense for the three month and nine month periods ended September 30, 1995 resulted from the amortization of transaction fees paid for interest rate cap, floor, and collar agreements. Loan Servicing Fees, Net - ------------------------ Loan servicing fees increased to $1.8 million for the three month period ended September 30, 1995 when compared to $1.7 million for the three month period ended September 30, 1994. Loan servicing fees increased to $6.0 million for the nine month period ended September 30, 1995 when compared to $5.4 million for the nine month period ended September 30, 1994. Such fees have remained relatively stable as the size of the Bank's loan servicing portfolios have not fluctuated significantly except for the sale of servicing which took place near the end of September 1995 and is discussed more fully in the immediately succeeding caption. Gain on Sale of Purchased Mortgage Servicing Rights - --------------------------------------------------- During the three month period ended September 30,1995, the Company sold the servicing rights on certain pools of loans (approximately $471.0 million in related unpaid principal balances) serviced for third party investors under loan servicing agreements. The Company recorded a gain of $1.5 million on the sale of such servicing rights whose unamortized value was approximately $3.1 million at the date of the sale. Gross Profit Insurance Agency - ----------------------------- Gross profit insurance agency increased to $1.8 million for the three month period ended September 30, 1995 when compared to $1.3 million for the three month period ended September 30, 1994. Gross profit insurance agency increased to $5.9 million for the nine month period ended September 30, 1995 when compared to $4.5 million for the nine month period ended September 30, 1994. The increases are primarily the result of increased sales volume of commission generating products, principally annuities. Retail Banking Fees - ------------------- Retail banking fees increased $429,000 to $2.9 million for the three month period ended September 30, 1995 compared to $2.4 million for the three month period ended September 30, 1994. The increase is attributable to an overall increase in the utilization of the retail banking services offered by the Bank. Retail banking fees increased $1.8 million to $8.1 million for the nine month period ended September 30, 1995 compared to $6.3 million for the nine month period ended September 30, 1994. Of this increase, approximately $501,000 is attributable to additional fees received as a result of the acquisition of Home Federal in April, 1994. The remaining increase of approximately $1.3 million is attributable to an overall increase in the utilization of the retail banking services offered by the Bank. Unrealized Losses on Impairment of Mortgage-Backed Securities Held To Maturity - ------------------------------------------------------------------------------ The Company purchased ownership interests in ten pools of privately issued adjustable rate mortgage-backed securities issued in 1989 through 1991 by Guardian Savings and Loan Association ("Guardian"). All of such Guardian pools in which the Company purchased and currently holds an ownership interest were rated AA or AAA by Standard & Poors and Aa2 or Aaa by Moodys, at the date of issuance of the securities. 17 Guardian issued their securities with several classes available for purchase. Certain classes are subordinate to the position of senior classes in that such subordinate classes absorb all credit losses and must be completely eliminated before any losses flow to senior position holders. The Guardian securities purchased by the Company (the "Guardian Securities") were purchases of the most senior positions, thus intended to be protected by the subordination credit enhancement feature. Guardian was placed in conservatorship on June 21, 1991 by the Office of Thrift Supervision, which appointed the Resolution Trust Corporation ("RTC") as conservator. Subsequent to the conservatorship, the RTC replaced Guardian as the servicer for the loans underlying the securities. Effective November 1994, Bank of America assumed servicing responsibilities from the RTC. Guardian was a niche player in the California mortgage market whose lending decisions relied more on the value of the mortgaged property and the borrower's equity in the property and less on the borrower's income and credit standing. All collateral underlying the Guardian Securities have the following loan pool characteristics: . First lien, 30 year, six month adjustable rate loans tied to either the cost of funds index, one year constant maturity treasury rate, or LIBOR. . 100% of the loans were originated in California. . The weighted average loan to value ratio at origination was approximately 66%. Beginning in mid-1993 and continuing currently, the loan pools backing the securities have been affected by high delinquency and foreclosure rates, and higher than anticipated losses on the ultimate disposition of real estate acquired through foreclosure ("REO"). This has resulted in rating agency downgrades, principally in April and May, 1994 and again in July and September, 1995 to the current ratings reflected in the tables on pages 20 and 21 and substantial deterioration in the amount of the loss absorption capacity provided by the subordinated classes. At December 31, 1994 and March 31, 1995, the Guardian securities owned by the Company were performing according to their contractual terms, and all realized losses from the disposition of REO were being absorbed by the subordinate classes (or in the case of Pool 1990-7 at March 31, 1995, by unamortized purchase discounts). However, to the extent that subsequent to March 31, 1995, the pools continue to realize losses on the disposition of REO at levels comparable to the then current rate, the remaining balances of the subordinate classes may not be adequate to protect the Company from incurring some credit losses on certain of its ten pools. As a result of this deterioration and the continuing receipt of subsequent information, the Company has determined that the underlying investments represented by seven pools in which, subsequent to March 31, 1995, the subordination protection has been either totally eliminated or has become potentially inadequate should be considered "other than temporarily" impaired under the provisions of Statement of Financial Accounting Standards No. 115. As a result of this determination, the Company recorded a $22.0 million pre-tax write-down ($14.4 million after tax or approximately $0.32 per share) for the three months ended March 31, 1995 to reflect the impairment of these seven pools. The amount of the write-down was based on discounted cash flow analyses performed by management (based upon assumptions regarding delinquency levels, foreclosure rates and loss ratios on REO disposition in the underlying portfolio). Discounted cash flow analyses were utilized to estimate fair value due to the absence of a ready market for the Guardian Securities. In addition to the Guardian Securities discussed above, the Company has an investment of approximately $6.0 million at March 31, 1995 after the write- down discussed below, in another private issuer mortgage-backed security, LB Multifamily Mortgage Trust Series 1991-4 ("Lehman 91-4"), possessing similar performance characteristics to the Guardian Securities that has also been determined to be other than temporarily impaired. Accordingly, the Company has recorded a $5.1 million pre-tax write-down ($3.4 million after tax or approximately $0.08 per share) to reflect the impairment of this security at March 31, 1995. Management believes that these write-downs are adequate based upon its evaluation. 18 As reflected in the following table, the Company's remaining investment in the Guardian Securities is approximately $74.8 million, after the desecuritization of Guardian Pool 1990-9 discussed below:
(in millions) Investment in Guardian Securities, March 31, 1995........................ $118.9 Purchase of remaining senior position of Pool 1990-9..................... .6 Net principal payments received.......................................... (11.1) Desecuritization of Guardian Pool 1990-9 (see discussion below).......... (33.6) ----- Investment in Guardian Securities, September 30, 1995.................... $ 74.8 =====
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 certficateholders on properties which were in REO at the time of the desecuritization was reimbursed to the servicer, $28.8 million was transferred to mortgage loans and $2.7 million (net of $4.9 million of charge-offs discussed below) was transferred to residential REO. REO properties and properties in foreclosure were written down $4.9 million to their estimated fair values by charges to existing unallocated REO reserves ($1.4 million) and loan loss reserves ($1.8 million) and to existing unamortized purchase discounts ($1.7 million). During the quarter ended September 30, 1995, the following events have occurred with respect to the Guardian Securities and Lehman 91-4. . 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 June 30, 1995, the subordination protection related to Guardian Pools 1990-2 and 1990-4 were fully absorbed. . The remaining four pools (Guardian 89-11, 90-1, 90-8 and Lehman 91-4), determined at March 31, 1995 to be other than temporarily impaired and written down to estimated fair value, continue to perform according to their contractual terms and are protected by remaining subordination ranging from 6.85% to 12.75% of the remaining unpaid principal balances of the pools. Such remaining subordination percentages compare to original subordination percentages ranging from 8.50% to 14.00%. . The two remaining Guardian pools (89-10 and 91-2), which are not considered to be other than temporarily impaired, continue to perform according to their contractual terms and are protected by remaining subordination of 14.86% and 23.01%, respectively. These remaining subordination levels compare to 8.50% and 17.00%, respectively, at the date of issuance of the securities. . In excess of $4.0 million in net principal payments were received during the quarter. Accordingly, at September 30, 1995, management continues to believe that the recorded investment in the above mentioned Guardian and Lehman pools is recoverable. 19 Presented below is information as of September 30, 1995 relating to the Company's investment in the Guardian pools, segregated between the seven pools determined to be other than temporarily impaired and the two pools which, in the opinion of management, continue to be adequately protected from loss through substantial remaining subordination. The immediately succeeding table also includes information related to Lehman 91-4 which has been determined to be other than temporarily impaired.
POOLS DETERMINED TO BE OTHER THAN TEMPORARILY IMPAIRED - ------------------------------------------------------------------------------------------------------------------------------------ September 30, 1995 ($ in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ Subordination As a Regarding Roosevelt's Interests Rating Percent of Pool Balance ------------------------------------- Percent of Pools Pool Issue ------------------------- ----------------------- Original Par Remaining Remaining Current or Less Than Number Date Agency At Issue Current At Issue Current At Issue Par Investment 90 Days Delinquent - ------ ------ ------ -------- ------- -------- ------- ------------ --------- ---------- ------------------ GUARDIAN POOLS - -------------- 89-11 11/30/89 S & P AA CCC 8.50% 12.75% $ 33,750 $ 9,105 $ 7,163 75% Moody Aa2 B1 90-1 1/30/90 S & P AA CC 8.50% 6.65% 3,000 851 644 72% Moody Aa2 B2 90-2 2/27/90 S & P AA D 8.50% - 27,500 7,647 5,389 77% Moody Aa2 Caa 90-4 4/30/90 S & P AA D 8.75% - 46,428 15,730 11,264 67% Moody Aa2 Caa 90-5 5/31/90 S & P AA D 8.75% - 45,000 15,843 12,124 74% Moody Aa2 Caa 90-7 7/25/90 S & P AA D 8.75% - 68,025 23,494 16,984 72% Moody Aa2 Caa 90-8 9/21/90 S & P AAA CCC 14.00% 11.05% 15,000 5,388 4,222 71% Moody Aaa B1 ------------------------------------ Total Guardian $ 238,703 $ 78,058 $ 57,790 ========= ========= ========= LEHMAN POOL - ----------- 91-4 7/30/90 S & P AA CCC 23.00% 7.22% $ 14,000 $ 10,630 $ 5,778 71% Moody Aa3 Caa ========= ========= =========
20
GUARDIAN POOLS DETERMINED TO BE ADEQUATELY PROTECTED BY REMAINING CREDIT ENHANCEMENT - ------------------------------------------------------------------------------------------------------------------------------------ September 30, 1995 ($ In Thousands) - ------------------------------------------------------------------------------------------------------------------------------------ Subordination As a Regarding Roosevelt's Interests Rating Percent of Pool Balance ----------------------------------- Percent of Pools Pool Issue -------------------------- ----------------------- Original Par Remaining Remaining Current or Less Than Number Date Agency At Issue Current At Issue Current At Issue Par Investment 90 Days Delinquent - ------ ------ ------ -------- ------- ----------- --------- ------------ --------- ----------- --------------------- 89-10 10/27/89 S & P AA BBB- 8.50% 14.86% $ 9,000 $ 1,836 $ 1,855 72% Moody Aa2 Ba3 91-2 3/28/91 S & P AAA BBB 17.00% 23.01% 39,831 15,132 15,132 72% Moody Aaa Baa3 ----------------------------------- Totals $ 48,831 $ 16,968 $ 16,987 ========== ========== ==========
21 Since mortgage-backed securities are asset-backed, they are subject to inherent risks based upon the future performance of the underlying collateral (i.e., mortgage loans) for these securities. Among these risks are prepayment risk and interest-rate risk. Should general interest-rate levels decline, the mortgage-backed security portfolio would be subject to i) prepayments as borrowers typically would seek to obtain financing at lower rates, ii) a decline in interest income received on adjustable-rate mortgage-backed securities, and iii) an increase in fair value of fixed rate mortgage-backed securities. Conversely, should general interest rate levels increase, the mortgage-backed security portfolio would be subject to i) a longer term to maturity as borrowers would be less likely to prepay their loans, ii) an increase in interest income received on adjustable-rate mortgage backed securities, iii) a decline in fair value of fixed-rate mortgage-backed securities, and iv) a decline in fair value of adjustable-rate mortgage-backed securities to an extent dependent upon the level of interest-rate increases, the time period to the next interest-rate repricing date for the individual security and the applicable periodic (annual and/or lifetime) cap which could limit the degree to which the individual security could reprice within a given time period. Unlike U.S. Government agency mortgage-backed securities which include a full guarantee of principal and interest, private issuer mortgage-backed securities are generally structured with a senior ownership position and subordinate ownership position(s) providing credit support for the senior position. In a limited number of cases, this support is provided through letters of credit or cash reserves. Given the structure of the private issuer mortgage- backed securities, the Company has credit risk in addition to interest-rate risk and prepayment risk discussed above. In this regard, management has instituted a monitoring system tracking the major factors affecting the performance of a private issuer mortgage-backed security including i) a review of delinquencies, foreclosures, repossessions and recovery rates relative to the underlying mortgage loans collateralizing each security, ii) the level of available subordination or other credit enhancement, iii) an assessment of the servicer of the underlying mortgage portfolio and iv) the rating assigned to each security by independent national rating agencies. This process has indicated that, with the exception of the seven Guardian pools and the additional security (Lehman 91-4) determined to be impaired, the remainder of the Company's private issuer mortgage-backed securities portfolio continues to perform according to the contractual terms of the securities. At September 30, 1995, approximately 98% of the Company's mortgage-backed security portfolio is comprised of AA or AAA-rated private issuer product or government agency issued product. General and Administrative Expense - ---------------------------------- General and administrative expense increased $144,000 to $20.9 million for the three month period ended September 30, 1995 when compared to $20.7 million for the three month period ended September 30, 1994. Such increase was due primarily to an increase in compensation and employee benefits partially offset by a decrease in federal insurance premiums. Compensation and employee benefits increased $698,000 as a result of normal wage increases and additions to staff. Federal insurance premiums decreased $424,000 primarily due to a refund of federal insurance premiums received during the three month period ended September 30, 1995 related to certain of its savings deposits which are insured by the Bank Insurance Fund (BIF). This refund resulted from the BIF achieving its statutory reserve ratio on June 30, 1995. General and administrative expense decreased $26.0 million to $64.1 million for the nine month period ended September 30, 1995 compared to $90.1 million for the nine month period ended September 30, 1994. These decreases are primarily attributable to decreases in compensation and employee benefits, occupancy, and other general administrative expenses resulting from merger related expenses totaling $24.7 million incident to the acquisition of Farm & Home during the three month period ended June 30, 1994. Excluding such merger related expenses, compensation and employee benefits decreased by $2.3 million as a result of efficiencies realized after the June 30, 1994 merger with Farm & Home totaling $3.8 million partially offset by normal wage increases and additions to staff totaling $1.5 million. Additionally, occupancy and other general administrative charges decreased by $531,000 and $1.8 million, respectively, as the result of efficiencies realized after the June 30, 1994 merger with Farm & Home. Further, the factors affecting federal insurance premiums for the three month period ended September 30, 1995 also impacted the nine month period ended September 30, 1995. 22 Provision For Real Estate Losses - -------------------------------- Provisions for real estate losses totaled $4.6 million for the nine month period ended September 30, 1994. During the three month period ended June 30, 1994, an addition of $3.7 million to the general valuation allowance for possible future losses on foreclosed real estate was established in connection with the acquisition of Farm & Home. Such addition represented a 25% reduction in net carrying value to accommodate a strategy of accelerating the disposition of Farm & Home's real estate owned portfolio. In addition to this provision, during the six month period ended June 30, 1994, Farm & Home recorded an $839,000 provision for specific valuation allowances on six non-residential real estate properties. Recent Developments - ------------------- The deposits of the Bank are presently insured by the Savings Association Insurance Fund (SAIF), and the Bank Insurance Fund (BIF), which are the two insurance funds administered by the Federal Deposit Insurance Corporation (FDIC). On August 8, 1995, the FDIC revised the premium schedule for BIF insured banks to provide a range of .04% to .31% of deposits (as compared to the former range of .23% to .31% of deposits for both BIF and SAIF insured institutions) in anticipation of the BIF achieving its statutory reserve ratio. The lower premiums for BIF members became effective during the third quarter of 1995 after FDIC verification that the BIF achieved the statutory reserve ratio on March 31, 1995. As a result, BIF members generally will pay lower premiums than the SAIF members. It is anticipated that the SAIF will not be adequately recapitalized until 2002, absent a substantial increase in premium rates or the imposition of special assessments or other significant developments, such as a merger of the SAIF and the BIF. As a result of this disparity, SAIF members could be placed at a significant competitive disadvantage to BIF members due to higher costs for deposit insurance. Proposed legislation under consideration by the United States Congress provides for a one-time assessment to be imposed on all deposits assessed at the SAIF rates, as of June 30, 1995, in order to recapitalize the SAIF and eliminate the disparity. The BIF and SAIF would be merged effective January 1, 1998. The special assessment rate is anticipated to be .85% to .90%. Based upon the Bank's level of SAIF deposits at June 30, 1995 (including the pro forma effect of the acquisition of Kirksville Bancshares, Inc. which is expected to close prior to year-end), and assuming a special assessment of .90%, the Bank's assessment would be approximately $35.9 million on a pre-tax basis. If the legislation is enacted, it is anticipated the assessment would be payable in early 1996. Accordingly, this special assessment would significantly increase non-interest expense and adversely effect Roosevelt Bank's results of operations. Conversely, depending upon the Bank's capital level and supervisory rating, and assuming, although there can be no assurance, that the insurance premium levels for BIF and SAIF members are again equalized, deposit insurance premiums could decrease significantly to as low as .04% for future periods. As part of the legislation, the Congress is considering requiring all federal thrift institutions, such as the Bank, to either convert to a national bank or a state chartered depository institution by January 1, 1998. In addition, Roosevelt would no longer be regulated as a thrift holding company, but rather as a bank holding company. The OTS would also be abolished and its functions transferred among the other federal banking regulators. Certain aspects of the legislation remain to be resolved and therefore no assurance can be given as to whether or in what form the legislation will be enacted or its effect on the Company and the Bank. 23 ASSET/LIABILITY MANAGEMENT The Company's primary objective regarding Asset/Liability Management is to position the Company such that changes in interest rates do not have a material adverse impact upon the net market value of the Company. The Company's primary strategy for accomplishing its Asset/Liability Management objective is achieved by matching the weighted average maturities of assets, liabilities and off-balance sheet items (duration matching). Net market value is calculated by adjusting stockholders' equity for differences between the estimated fair values and the carrying values (historical cost basis) for the Company's assets, liabilities and off-balance sheet items. Net market value, as calculated by the Company and presented herein, should not be confused with the value of the Company's stock or of the amounts distributable to stockholders in connection with a sale of the Company or in the unlikely event of its liquidation. The economic net market value as calculated by the Company increased to $437.7 million at September 30, 1995 as compared to $404.0 million at December 31, 1994. To measure the impact of interest rate changes, the Company recalculates the net market value on a pro forma basis assuming instantaneous, permanent parallel shifts in the yield curve of both up and down 100, 200, 300 and 400 basis points, or eight separate calculations. Larger increases or decreases in the net market value of the Company as a result of these interest rate changes represent greater interest rate risk than do smaller increases or decreases in net market value. The Company endeavors to maintain a position where it experiences no material change in net market value as a result of assumed 100 and 200 basis point increases and decreases in interest rates. The OTS recently issued a regulation, which utilizes a similar methodology to measure the interest rate risk exposure of thrift institutions. This exposure is a measure of the potential decline in the net portfolio value of the institution based upon the effect of an assumed 200 basis point increase or decrease in interest rates. "Net portfolio value" is the present value of the expected net cash flows from the institution's assets, liabilities, and off- balance sheet contracts. Under the OTS regulation, an institution's "normal" level of interest rate risk in the event of this assumed change in interest rates is a decrease in the institution's net portfolio value in an amount not exceeding two percent of the present value of its assets. The regulation provides for a two quarter lag between calculating interest rate risk and recognizing any deduction from capital. The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to the 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in net portfolio value) and (b) its "normal" level of exposure which is two percent of the present value of its assets. The OTS announced that it has delayed the effective date of the regulation until it evaluates the process by which an institution may appeal an interest rate risk capital deduction determination. It is uncertain as to when the evaluation may be completed. Utilizing this measurement concept, the interest rate risk of the Company at September 30, 1995 is as follows and reflects that the Company's level of interest rate risk is far below that which is considered "normal" by the OTS in its regulation.
(dollars in thousands) (unaudited) ------------------------------- Basis point changes in interest rates................ -200 -100 +100 +200 Changes in net market value due to changes in interest rates (Company methodology)............... $ (27,804) $(11,531) $(5,556) $ (29,501) OTS "normal" level of interest rate exposure......... $ (183,057) N/A N/A $(183,057)
The Company's operating strategy is designed to avoid material changes in net market value as a result of fluctuations in interest rates. As of September 30, 1995, the Company believes it has accomplished its objectives as the pro forma changes in net market value brought about by changes in interest rates are not material relative to the Company's net market value. A net loss when rates increase indicates the duration of the Company's assets is slightly longer than the duration of the Company's liabilities. A loss when rates decrease is due to borrowers prepaying their loans resulting in the Company's assets repricing down more quickly than the Company can reprice its liabilities. 24 LIQUIDITY AND CAPITAL RESOURCES Federal regulations require federally insured savings institutions to maintain a specified ratio (presently 5.0%) of cash and short-term United States government, government agency and other specified securities to net withdrawable accounts and borrowings due within one year. The Company has maintained liquidity in excess of required amounts having had ratios of 5.67% and 5.91% at September 30, 1995 and December 31, 1994, respectively. The Company's cash flows are comprised of cash flows from operating, investing and financing activities. Cash flows 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 $14.2 million for the nine month period ended September 30, 1995. Also included in the operating activities of the Company are the unrealized losses on impairment of mortgage-backed securities held to maturity recorded during the three month period ended March 31, 1995. Net cash related to investing activities, consisting primarily of purchases of mortgage-backed securities held to maturity and available for sale and originations and purchases of loans, offset by principal repayments on mortgage-backed securities and loans and sales of mortgage-backed securities available for sale, utilized $663.4 million for the nine month period ended September 30, 1995. Net cash related to financing activities, consisting of proceeds, net of repayments, from FHLB advances, proceeds from securities sold under agreements to repurchase, excess of savings deposits withdrawals over receipts, and a net increase in advances from borrowers for taxes and insurance, provided $672.0 million for the nine month period ended September 30, 1995. At September 30, 1995, the Company had commitments outstanding to originate fixed-rate mortgage loans of approximately $39.4 million and adjustable-rate mortgages of approximately $27.9 million. The Company expects to satisfy these commitments through its primary sources of funds. 25 PART II OTHER INFORMATION Item 1. Legal Proceedings ------------------------------------------- None Item 2. Changes in Securities ------------------------------------------- None Item 3. Defaults Upon Senior Securities ------------------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders ------------------------------------------- None Item 5. Other Information ------------------------------------------- None Item 6. Exhibits and Reports on Form 8-K ------------------------------------------- None 26 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned hereunto duly authorized. ROOSEVELT FINANCIAL GROUP, INC. Date: September 12, 1996 By: /s/ Gary W. Douglass ---------------------------------- Gary W. Douglass Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----