-----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, Gf3jciQC3TGN2IUjCvYywGKvG4bgh/9+hcC6b6QRfdoESHeESYSCbsx+hsvsn6eX IvFqLfHF6o39l/jrsAD0RQ== 0000950114-97-000146.txt : 19970317 0000950114-97-000146.hdr.sgml : 19970317 ACCESSION NUMBER: 0000950114-97-000146 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970314 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-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-17403 FILM NUMBER: 97557071 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-K/A 1 ROOSEVELT FINANCIAL GROUP, INC. FORM 10-K/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-17403. ROOSEVELT FINANCIAL GROUP, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 43-1498200 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 900 ROOSEVELT PARKWAY, CHESTERFIELD, MISSOURI 63017 (Address of principal executive offices) (Zip Code) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (314) 532-6200 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE 6 1/2% NON-CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A AND SERIES F, PAR VALUE $.01 PER SHARE (Title of Classes) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES X NO ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] As of February 28, 1997, there were issued and outstanding 42,644,404 shares of the Registrant's Common Stock. The aggregate market value of the voting stock held by nonaffiliates of the Registrant, computed by reference to the closing price of such stock as of February 28, 1997, was $980,821,292. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant that such person is an affiliate of the Registrant.) DOCUMENTS INCORPORATED BY REFERENCE PART III of Form 10-K--Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders. 2 The purpose of this amendment on Form 10-K/A to the Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "Form 10-K") of Roosevelt Financial Group, Inc., is to amend certain items of the Form 10-K as follows: Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The last nine paragraphs under the caption "Liquidity and Capital Resources" have been added to discuss the nature and potential impact of the Company's share repurchase program and preferred stock redemption. Item 8. Financial Statements and Supplementary Data The next to last sentence in the second paragraph under the caption "Stock Repurchase Program" to Note 18 has been added to reflect the maximum amount per share that the Company can pay for share repurchases in accordance with the terms of its merger agreement with Mercantile Bancorporation. The last sentence of Note 5 on page 65 has been added to indicate that as a result of the Company's December, 1996 decision to reclassify its entire securities portfolio from held to maturity to available for sale, it will be precluded from prospectively classifying any securities as held to maturity for a minimum period of one year. A paragraph to Note 4 on page 64 has been added to disclose the outstanding commitments to purchase and sell mortgage-backed securities at December 31, 1996. 3 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto, and with reference to the discussion of the operations and other financial information presented elsewhere in this report. RESULTS OF OPERATIONS Roosevelt's operating results depend primarily upon its net interest income, which is the difference between the interest income earned on its interest earning assets (loans, mortgage-backed securities and investment securities) and the interest expense paid on its interest bearing liabilities (deposits and borrowings). Operating results are also significantly affected by provisions for losses on loans, noninterest income and noninterest expense. Each of these factors is significantly affected not only by Roosevelt's operating strategies, but, to varying degrees, by general economic and competitive conditions and by policies of federal regulatory authorities. Two of Roosevelt's operating strategies impacted net income in each of the three years ended December 31, 1996. The first of these strategies was growth through acquisition. In 1994 the Company acquired Farm and Home Financial Corporation and Home Federal Bancorp of Missouri increasing its assets by $3.7 billion. These acquisitions, which were preceded by seven others in the four years preceding 1994 and followed by a total of five smaller acquisitions in 1995 and 1996, dramatically increased Roosevelt's retail customer base and provided opportunities to improve its physical plant and technology platforms necessary to maintain and grow a retail customer base. The second strategy impacting operating results was internal growth via development of a diversified, retail-based operation. Actions taken to achieve this latter strategy primarily affected operating results in 1996 and included the sale of marginally profitable assets, the repayment of higher cost wholesale liabilities and the removal of derivative positions which had been designated as synthetic alterations of some of the assets sold or the liabilities repaid. Roosevelt reported net income of $9.7 million for 1996 compared with $27.1 million for 1995 and $41.7 million for 1994. Net income on a fully diluted per share basis was $0.13 for 1996 compared with $0.56 for 1995 and $0.94 for 1994. Net income in 1996 was adversely impacted by a $27.4 million pre-tax charge imposed by the Federal Deposit Insurance Corporation (FDIC) in order to recapitalize the Savings Association Insurance Fund; an $80.5 million pre-tax charge related to the termination of interest rate exchange agreements which had been designated as synthetic alterations of short-term wholesale borrowings that were repaid during the year; and a $1.5 million after-tax charge related to the extinguishment of the Company's long-term debt. Net income in 1995 was adversely impacted by pre-tax charges of $71.0 million and $27.1 million resulting from marking to market the Company's financial futures positions used to reduce the interest rate risk of certain mortgage-backed securities in the available for sale portfolio and for unrealized losses on the impairment of mortgage-backed securities, respectively, and by an after-tax charge of approximately $1.6 million for merger expenses related to the acquisition of WSB Bancorp, Inc. and Kirksville Bancshares, Inc. For a further discussion of expenses related to the termination of interest rate exchange agreements and financial futures, see "Results of Operations--Net Gain (Loss) from Financial Instruments" and Note 15 of the Notes to Consolidated Financial Statements. Net income for 1994 was impacted by merger related expenses related to the acquisition of Farm & Home Financial Corporation (Farm & Home). The components of the merger related expenses (in millions) are as follows: Provision for losses on loans $ 11.4 Net loss from financial instruments 38.4 Provision for real estate losses 3.7 Compensation and employee benefits 6.3 Occupancy 5.9 Transaction related fees 7.0 Other 1.8 ------ Income before income tax expense and extraordinary item 74.5 Income tax expense 25.0 ------ Income before extraordinary item 49.5 Extraordinary item (net of tax effect) 7.8 ------ Total $ 57.3 ======
29 4 In connection with the acquisition of Farm & Home and a review of the combined loan portfolio, including the increased concentration of loans in various geographic areas, and after discussion with the OTS regarding the level of the allowance for loan losses as compared to a new peer group as a result of the dramatic increase in size, management recorded an $11.4 million addition to the allowance. Net loss from financial instruments totaled $38.4 million and included $25.6 million in loss from the sale of Farm & Home fixed-rate mortgage-backed securities that did not meet Roosevelt's asset/liability management objectives. In addition, $8.9 million of the loss on financial instruments resulted from the cancellation of interest rate exchange agreements of Farm & Home. As a result of Roosevelt's desire to accelerate the disposition of Farm & Home's real estate owned portfolio, Roosevelt increased its estimate of reserves required to record its real estate owned portfolio at its estimated fair value which resulted in the additional $3.7 million provision. Compensation and employee benefits expense totaling $6.3 million related to the severance benefits for the Farm & Home executives and the Missouri and Texas employees whose employment did not continue with the combined entity after June 30, 1994. Occupancy expense totaled $5.9 million and was comprised of losses on the termination of 11 facility leases, including the write-off of leasehold improvements associated with the leases, and anticipated losses on the sale of two closed branch facilities. Transaction related fees totaled $7.0 million and included advisory, legal, and accounting fees. Other expenses totaled $1.8 million and related to other miscellaneous costs such as printing, travel and lodging. The extraordinary item related to early extinguishment of debt and totaled $7.8 million, net of applicable income taxes. Roosevelt recorded a $4.6 million loss due to the retirement of $60.9 million of 10.125% mortgage-backed bonds. A loss of $2.6 million was recorded as a result of the redemption of Farm & Home's 13.0% debentures. Additionally, a loss of $637,000 was recorded as a result of the prepayment of $101.0 million of Federal Home Loan Bank (FHLB) of Des Moines advances. NET INTEREST INCOME Net interest income in 1996 was $177.6 million, a decline of $3.8 million or 2.1% from the $181.4 million recorded in 1995. A change in the composition of interest-bearing assets and liabilities, a decline in overall interest rates earned and paid and small decreases in the average balances of interest-bearing assets and liabilities all contributed to the decline in net interest income. Consistent with its strategy to develop its retail businesses, the Company grew its higher yielding loan portfolios and its lower costing deposit balances while at the same time shrinking its lower yielding investment portfolios and higher costing wholesale borrowings. These actions contributed to an increase in net interest income due to volume changes of $6.5 million. However, this favorable impact was more than offset by a $10.3 million decrease in net interest income resulting from a net decline in yield earned on assets of 5 basis points partially offset by a 3 basis points decline in the cost of all interest bearing liabilities. While the overall decline in interest rates proved beneficial for gross interest-bearing liabilities it increased the cost of interest rate exchange agreements which had been utilized by the Company, prior to the cancellation on September 30, 1996, to manage its interest rate risk. Under the terms of these agreements, the Company generally paid a fixed rate of interest and received a variable rate. The lower interest rates resulted in an increased cost in 1996. Ignoring the impact of the interest rate exchange agreements, the Company's cost of funds would have declined 15 basis points from 1995. As a result of the above items, the effective net interest rate spread decreased 4 basis points from 2.06% in 1995 to 2.02% in 1996. Net interest income of $181.4 million for 1995 was down 2.3% from $185.7 million for 1994. The decrease in net interest income was primarily the result of the average interest rates paid on interest bearing liabilities increasing more than the average interest rates earned on interest earning assets. The average rate earned on interest earning assets increased 77 basis points from 6.58% for 1994 to 7.35% for 1995. The average rate paid on interest bearing liabilities increased 107 basis points from 4.41% for 1994 to 5.48% for 1995. The effective net interest rate spread decreased 23 basis points from 2.29% for 1994 to 2.06% for 1995, primarily as a result of severe retail deposit pricing pressure (unrelated to the outright level of interest rates) in the Company's market areas during 1995. The decrease in net interest income due to the decreasing average spread was partially offset by a growth in interest earning assets and interest bearing liabilities. The average balance of interest earning assets and interest bearing liabilities increased 8.8% and 8.1%, respectively, during 1995 as compared to 1994. 30 5 The following table presents Roosevelt's average consolidated balance sheets and reflects the average yield on assets and the average cost of liabilities for the periods indicated. Average rates earned and paid are derived by dividing income or expense by the average balance of assets and liabilities, respectively.
Year Ending December 31, ------------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------- ---------------------------- --------------------------- Interest Interest Interest Average Income/ Average Average Income/ Average Average Income/ Average Balance Expense Rate % Balance Expense Rate % Balance Expense Rate % ------- ------- ------ ------- ------- ------ ------- ------- ------ (dollars in millions) Assets Cash equivalents $ 35.1 $ 1.8 5.15% $ 18.2 $ 1.0 5.49% $ 62.8 $ 2.4 3.82% Securities held for trading -- -- -- -- -- -- 120.6 6.5 5.39 Securities available for sale 1,516.6 109.8 7.24 1,815.2 135.4 7.46 2,035.1 137.9 6.78 Securities held to maturity 3,191.5 225.4 7.06 3,683.1 259.3 7.04 2,939.5 179.1 6.09 Securities purchased under agreement to resell -- -- -- -- -- -- 21.7 0.9 4.15 Loans 4,029.0 303.3 7.53 3,301.8 252.1 7.64 2,922.9 206.5 7.06 ------- ----- ------- ----- ------- ----- Total interest-earning assets 8,772.2 640.3 7.30% 8,818.3 647.8 7.35% 8,102.6 533.3 6.58% ----- ---- ----- ---- ----- ---- Other assets 417.0 327.2 322.2 ------- ------- ------- $ 9,189.2 $ 9,145.5 $ 8,424.8 ======= ======= ======= Liabilities Deposits: NOW and money market accounts $ 1,014.2 30.5 3.01% $ 835.8 22.7 2.73% $ 1,049.2 23.7 2.26% Passbook savings deposits 304.7 7.0 2.31 350.5 8.1 2.31 411.2 9.8 2.38 Time deposits 3,690.4 212.3 5.75 3,615.7 203.0 5.61 3,552.6 166.7 4.69 ------- ----- ------- ----- ------- ----- 5,009.3 249.8 4.99 4,802.0 233.8 4.87 5,013.0 200.2 3.99 Borrowings: Securities sold under agreements to repurchase 857.9 54.8 6.39 1,426.1 89.6 6.29 1,193.7 58.0 4.86 Advances from FHLB 2,598.5 155.0 5.96 2,236.9 138.1 6.17 1,579.1 79.6 5.04 Other borrowings 29.7 3.1 10.26 47.4 4.9 10.34 90.5 9.8 10.83 ------- ----- ------- ----- ------- ----- Total interest-bearing liabilities 8,495.4 462.7 5.45% 8,512.4 466.4 5.48% 7,876.3 347.6 4.41% ----- ---- ----- ---- ----- ---- Other liabilities 178.2 178.9 143.8 ------- ------- ------- 8,673.6 8,691.3 8,020.1 Stockholders' equity 515.6 454.2 404.7 ------- ------- ------- Total liabilities and stockholders' equity $ 9,189.2 $ 9,145.5 $ 8,424.8 ======= ======= ======= Net interest income $ 177.6 $ 181.4 $ 185.7 ===== ===== ===== Interest rate spread 1.85% 1.87% 2.17% ==== ==== ==== Effective net spread 2.02% 2.06% 2.29% ==== ==== ==== The securities available for sale are included in the following table at historical cost with the corresponding average rate calculated based upon historical balances. Average balances include non accrual loans. Interest on such loans is included in interest income upon receipt. Interest includes amortization of deferred loan fees. Includes the effect of interest rate exchange agreements. Equals average rate earned on all assets minus average rate paid on all liabilities. Net interest income divided by average balance of all interest earning assets.
At December 31, 1996, the weighted average yield on interest-earning assets was 7.48% and the weighted average cost on interest-bearing liabilities was 5.14%. 31 6 The following table presents the dollar amount of changes in interest income and interest expense for major components of interest earning assets and interest bearing liabilities. It distinguishes between changes related to volume and those due to changes in interest rates. For each category of interest income and interest expense, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by prior year rate) and (ii) changes in rate (i.e., changes in rate multiplied by prior year volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated to the change due to rate.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1996 v. 1995 1995 v. 1994 --------------------------------- ----------------------------------- INCREASE INCREASE (DECREASE) (DECREASE) DUE TO TOTAL DUE TO TOTAL ---------------------- INCREASE ----------------------- INCREASE VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) ---------- -------- ---------- ---------- -------- ---------- (IN THOUSANDS) Interest income: Loans $ 55,518 $ (4,285) $ 51,233 $ 26,763 $ 18,841 $ 45,604 Securities available for sale (22,663) (2,997) (25,660) (15,584) 13,095 (2,489) Securities held to maturity (34,579) 732 (33,847) 45,560 34,534 80,094 Securities held for trading -- -- -- (6,460) -- (6,460) Securities purchased under agreements to resell -- -- -- (887) -- (887) Other earning assets 944 (154) 790 (1,792) 439 (1,353) ------- ------- ------- ------- ------- ------- Total interest income $ (780) $ (6,704) $ (7,484) $ 47,600 $ 66,909 $ 114,509 ------- ------- ------- ------- ------- ------- Interest expense: Deposits $ 10,097 $ 5,887 $ 15,984 $ (8,427) $ 42,073 $ 33,646 Securities sold under agreements to repurchase (33,687) (3,730) (37,417) 10,378 20,876 31,254 Advances from Federal Home Loan Bank 21,677 (11,661) 10,016 31,582 26,685 58,267 Other borrowings (1,837) -- (1,837) (4,602) (326) (4,928) Interest rate exchange agreements (3,539) 13,084 9,545 (1,015) 1,635 620 ------- ------- ------- ------- ------- ------- Total interest expense (7,289) 3,580 (3,709) 27,916 90,943 118,859 ------- ------- ------- ------- ------- ------- Change in net interest income $ 6,509 $ (10,284) $ (3,775) $ 19,684 $ (24,034) $ (4,350) ======= ======= ======= ======= ======= =======
32 7 PROVISION FOR LOSSES ON LOANS The provision for losses on loans charged to earnings is based upon management's judgement of the amount necessary to maintain the allowance for loan losses at a level adequate to absorb probable losses. As part of the process for determining the adequacy of the allowance for loan losses, management performs quarterly detailed reviews to identify risks inherent in the loan portfolio and to assess the overall quality of the portfolio as well as to determine the amounts of allowances and provisions to be reported. The provision for loan losses was $1.3 million for 1996, $1.2 million for 1995 and $12.4 million for 1994. During the three month period ended June 30, 1994,Roosevelt recorded an $11.4 million increase in the provision for losses on loans. After combining the Roosevelt, Farm & Home and Home Federal loan portfolios which resulted in a combined portfolio approximately five times the size of Roosevelt's March 31, 1994 portfolio (approximately $650 million to $3.0 billion), management determined it was necessary to substantially increase the allowance for loan losses to achieve higher and more conservative coverage levels. Factors considered by management in determining the necessity and amount of the provision necessary to bring the overall allowance to the desired level were i) the need to conform Farm & Home's coverage ratio (ratio of allowance for loan losses to total gross loans) of .24% at December 31, 1993 to that of Roosevelt's which was .61% at the comparable date, ii) the previously discussed five fold increase in the size of the overall loan portfolio coupled with the fact that, at the time, Roosevelt management had no previous track record of managing a portfolio that size and iii) the Farm & Home and Home Federal mergers effectively doubled the overall size of the entity resulting in Roosevelt moving up to a new peer group whose average allowance for loan losses as a percentage of total loans far exceeded the allowances of the unadjusted combined entity. Also, since just prior to the merger, both Farm & Home and Roosevelt had recently been through examinations by the OTS, Roosevelt initiated conversations with the OTS to obtain their concurrence with the planned addition to the allowance for loan losses. Such concurrence was received and the resulting $11.4 million provision was recorded. The provisions for 1996 and 1995 reflect a more normalized level of provision compared to the large 1994 provision discussed above. The 1996 and 1995 provisions reflect the Company's strong level of reserves and overall strong asset quality. See the caption entitled "Asset Quality" under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." NONINTEREST INCOME (LOSS) Noninterest income (loss) was $(36.0) million for 1996 as compared to $(55.1) million for 1995 and $17.3 million for 1994. The following is a discussion of the major components of noninterest income (loss): Retail Banking Fees - Retail banking fees are comprised of service charges related to deposit accounts, fees for money orders, travelers checks, etc. and fees related to the telephone bill paying service offered to the Bank's depositors. Retail banking fees increased $6.5 million, or 60.3% from $10.7 million for 1995 to $17.2 million for 1996. Retail banking fees increased $2.0 million, or 23.3% from $8.7 million for 1994 to $10.7 million for 1995. Growth in both years is a result of the Company's successful efforts to develop and grow its retail based operations which resulted in an overall increase in utilization of these services offered by the Bank. Insurance and Brokerage Sales Commissions - The Company offers a broad range of insurance and investment products, including tax deferred annuities and mutual fund products, to the general public and its customers through Roosevelt Financial Services, Inc. Insurance and brokerage sales commissions increased $988,000, or 13.1% from $7.5 million in 1995 to $8.5 million for 1996. This followed an increase of $968,000, or 14.8% from $6.5 million for 1994 to $7.5 million for 1995. The positive trend in insurance and brokerage sales commissions is primarily the result of an increase in the sales volume of commission generating products as the Company successfully increases its penetration of its existing customer base as well as attracts new customers. Loan Servicing Fees (Expenses), Net - Loan servicing fees, which primarily consists of loan servicing revenue, net of the amortization of purchased mortgage servicing rights, increased $3.6 million, or 48.4% from $7.4 million for 1995 to $11.0 million for 1996. This increase is due primarily to several purchases of loan servicing rights in 1996 that totaled $41.9 million which represented $3.5 billion in unpaid principal balances. Loan servicing fees in 1995 increased $1.5 million, or 21.1% from $7.4 million recorded in 1994 primarily as a result of a $1.5 million gain realized upon the sale of $3.3 million book value of purchased mortgage servicing rights. The amortization of purchased mortgage servicing rights totaled $6.6 million, $4.2 million and $5.6 million for 1996, 1995 and 1994, respectively. During 1995, the balance of mortgage loans serviced by Roosevelt for others decreased from approximately $2.8 billion at December 31, 1994 to $2.0 billion at December 31, 1995. This decrease resulted from the normal amortization of the principal balance of mortgage loans outstanding and the sale of purchased mortgage servicing rights discussed previously. 33 8 Net Gain (Loss) from Financial Instruments - In the conduct of its business operations, Roosevelt has determined the need to sell or terminate certain assets, liabilities or off-balance sheet positions due to various unforeseen events. Fundamental to the conduct of such sale or termination activities is the effect such transactions will have on the future volatility of the Company's net market value. Consequently, in pursuing such sale or termination activities, Roosevelt does not seek net gains in a reporting period to the detriment of earnings in future periods. Following is a discussion of the assets, liabilities and off-balance sheet items that were sold and/or terminated during 1996, 1995 and 1994. Net gain (loss) from financial instruments is as follows:
Year Ended December 31, ------------------------------------------------- 1996 1995 1994 ---------- ----------- ---------- (in thousands) Mortgage-backed securities held to maturity $ -- $ -- $ (231) Investment securities held to maturity -- -- 209 Mortgage-backed securities held for trading -- -- (4,545) Mark to market of financial futures contracts -- (71,022) 39,508 Mortgage-backed securities available for sale 8,466 23,885 (28,208) Investment securities available for sale 719 -- (115) Cancellation cost of interest rate exchange, cap and floor agreements (See Note 15) (70,711) -- (8,910) Options expense (15,108) (11,079) (8,368) -------- --------- -------- $ (76,634) $ (58,216) $ (10,660) ======== ========= ========
The net loss from financial instruments increased $18.4 million in 1996 as compared to 1995. In 1996, the Company ceased using financial futures contracts as a means of reducing the interest rate risk of certain mortgage-backed securities in its available for sale portfolio. Hence, no amount of mark to market gains or losses were realized in 1996. As part of its retail transition strategy, the Company sold in 1996 those securities which were determined to be marginally profitable. This, and prevailing market conditions, contributed to the decline in net gains on sales of mortgage-backed and investment securities. As discussed more fully in the following paragraphs the Company terminated all of its interest rate exchange agreements in 1996. Options expense increased in 1996 primarily as a result of the purchase of new interest rate cap agreements to reduce the interest rate risk of adjustable rate mortgage-backed securities. The principal causes of the $47.6 million increase in net loss between 1995 and 1994 include: a $110.5 million decline in the market value of financial futures contracts; a $52.2 million increase in net gains on sales of mortgage-backed and investment securities resulting from favorable option-adjusted spread differentials in the market place at the dates of their respective sales; and a decline in cancellation costs of interest rate exchange agreements. The $8.9 million cancellation cost realized in 1994 related to the Company's acquisition of Farm and Home Savings as previously discussed. As a result of its continuing transition to a more retail-oriented institution, the Company was able to substantially reduce in 1996, principally during the third and fourth quarters, its need for derivative financial instruments in managing its interest rate risk. Accordingly, the Company terminated all of its interest rate exchange agreements, $970 million notional amount of its interest rate floor agreements and $500 million notional amount of its interest rate cap agreements. The terminations of the interest rate exchange agreements were accounted for in accordance with the provisions of Emerging Issues Task Force Issue 84-7 (EITF 84-7) which requires that gains or losses on the termination of such agreements be recognized when the offsetting gain or loss is recognized on the designated asset or liability. That is, to the extent that the designated assets or liabilities still exist, any gain or loss on the termination of the agreement designated as a synthetic alteration would be deferred and amortized over the shorter term of the remaining contractual life of the agreement or the remaining life of the asset or liability. During the third quarter 1996, interest rate exchange agreements designated against available for sale fixed rate mortgage-backed securities were cancelled resulting in a $16.1 million gain which was recognized as the above mentioned assets against which the agreements had been designated were concurrently sold. The remaining interest rate exchange agreements designated against short-term wholesale borrowings were also cancelled at a cost of $68.0 million which costs were deferred to be amortized because the underlying liabilities against which the agreements had been designated still existed at September 30, 1996. Efforts to further the previously discussed retail transition continued in the fourth quarter of 1996 and resulted in shrinkage in the Company's total assets by $1.3 billion. This shrinkage resulted primarily from the sale of investment and mortgage-backed securities with the proceeds being utilized to further reduce short-term wholesale borrowings. Further, the Company completed two acquisitions of thrifts during October of 1996 which further reduced such borrowings by replacing them as a funding source with the acquired retail deposits. Upon repayment of the designated short-term wholesale borrowings, all existing net deferred swap cancellation costs and certain other deferred gains and losses related to previously terminated interest rate cap and floor agreements in total amounting to $80.5 million were recognized during the fourth quarter of 1996. The terminations of the $970 million notional amount interest rate floor and $500 million notional amount cap agreements were accounted for in accordance with the provisions of Issue 8A of the American Institute of Certified Public Accountants Issues Paper "Accounting for Options" (Issues Paper). In accordance with the conclusions expressed in the Issues Paper, the excess of the unamortized time value of the options (the premium) over the amount of cash received upon termination amounting to $6.4 million was recognized in earnings when the options were terminated. During August 1996, the Staff of the Securities and Exchange Commission (Staff) performed a regular review of the Company's 1995 Form 10-K in conjuction with Registration Statements on Form S-4 filed by the Company related to three then-pending acquisitions. As a result of this review, the Staff questioned the Company's original accounting treatment surrounding the deferral and recognition of gains and losses on financial futures contracts used to reduce the interest rate risk of certain mortgage backed 34 9 securities in the Company's available for sale portfolio. The Company originally recognized a $34.8 million charge to fourth quarter 1995 earnings regarding the cessation of deferral accounting. At issue was the Staff's contention that the financial futures contracts did not meet the "high correlation" criteria of Statement of Financial Accounting Standards No. 80 "Accounting for Futures Contracts", thus not qualifying for deferral accounting from the inception of the hedge in March 1994 and requiring the recognition of subsequent gains and losses in income. The Company originally ceased deferral accounting when management concluded that high correlation measured using the "cumulative dollar approach" was unlikely to be achieved on a consistent basis. Accordingly, at the Staff's request, the Company in 1996 restated its 1994 and 1995 consolidated financial statements to reflect the cessation of deferral accounting, from the inception of the hedge, with respect to the aforementioned financial futures contracts. The restatement had the effect of increasing previously reported 1994 net income and decreasing previously reported 1995 net income by $18.0 million (on a fully-diluted per share basis, an increase of $0.48 for 1994 and a decrease of $0.43 for 1995). This restatement was one of the timing of recognition of gains and losses in the Statement of Operations and had no impact on total stockholders' equity at any date since both the financial futures contracts and the related mortgage-backed securities have been previously marked to market through stockholders' equity at each reporting period. Subsequent to December 31, 1995, the Company terminated all of its financial futures positions and maintained its interest rate risk management position by principally redesignating existing interest rate exchange agreements to the available for sale portfolio. Such interest rate exchange agreements were utilized prior to the redesignation to manage the interest rate risk of short-term wholesale borrowings. In connection with its acquisition of Farm and Home in 1994, the Company sold securities, primarily mortgage-backed securities, repaid portions of Farm and Home's debt and terminated various interest rate exchange agreements all as part of its efforts to rebalance its asset/liability mix following the acquisition. These actions, and a net improvement in the fair value of financial futures all contributed to the $10.7 million net loss from financial instruments in 1994. Options expense is comprised of amortization of the premiums paid for various interest rate cap, floor and collar agreements. The increase in options expense from 1995 to 1996 and 1994 to 1995 is primarily attributable to increased notional amounts of interest cap agreements necessitated by the generation of larger balances of adjustable rate assets in need of interest rate cap protection. Unrealized Losses on Impairment of Mortgage-backed Securities - The Company purchased ownership interests in ten pools of privately issued adjustable-rate mortgage-backed securities issued in 1989 through 1991 by Guardian Savings and Loan Association (Guardian). All of such Guardian pools in which the Company purchased and currently holds an ownership interest were rated AA or AAA by Standard & Poors and Aa2 or Aaa by Moodys, at the date of issuance of the securities. Guardian issued its securities with several classes available for purchase. Certain classes are subordinate to the position of senior classes in that such subordinate classes absorb all credit losses and must be completely eliminated before any losses flow to senior position holders. The Guardian securities purchased by the Company (the Guardian Securities) were purchases of the most senior positions, thus intended to be protected by the subordination credit enhancement feature. Guardian was placed in conservatorship on June 21, 1991 by the Office of Thrift Supervision, which appointed the Resolution Trust Corporation (RTC) as conservator. Subsequent to the conservatorship, the RTC replaced Guardian as the servicer for the loans underlying the securities. Effective November 1994, Bank of America assumed servicing responsibilities from the RTC. Guardian was a niche player in the California mortgage market whose lending decisions relied more on the value of the mortgaged property and the borrower's equity in the property and less on the borrower's income and credit standing. All collateral underlying the Guardian Securities have the following loan pool characteristics: * First lien, 30-year, six-month adjustable-rate loans tied to either the cost of funds index, one-year constant maturity treasury rate, or LIBOR. * 100% of the loans were originated in California. * The weighted average loan-to-value ratio at origination was approximately 66%. Beginning in mid-1993 and continuing currently, the loan pools backing the securities have been affected by high delinquency and foreclosure rates, and higher than anticipated losses on the ultimate disposition of real estate acquired through foreclosure (REO). This has resulted in rating agency downgrades, principally in April and May, 1994 and again in 1995 and 1996 to the current ratings reflected in the tables on page 38 and substantial deterioration in the amount of the loss absorption capacity provided by the subordinated classes. 35 10 At December 31, 1994 and March 31, 1995, the Guardian securities owned by the Company were performing according to their contractual terms, and all realized losses from the disposition of REO were being absorbed by the subordinate classes (or in the case of Pool 1990-7 at March 31, 1995, by unamortized purchase discounts). However, to the extent that subsequent to March 31, 1995, the pools continue to realize losses on the disposition of REO at levels comparable to the then current rate, the remaining balances of the subordinate classes may not be adequate to protect the Company from incurring some credit losses on certain of its ten pools. As a result of this deterioration and the continuing receipt of subsequent information, the Company has determined that the underlying investments represented by seven pools in which, subsequent to March 31, 1995, the subordination protection has been either totally eliminated or has become potentially inadequate should be considered "other than temporarily" impaired under the provisions of Statement of Financial Accounting Standards No. 115. As a result of this determination, the Company recorded a $22.0 million pre-tax write-down ($14.4 million after tax or approximately $0.32 per share) for the three months ended March 31, 1995 to reflect the impairment of these seven pools. The amount of the write-down was based on discounted cash flow analyses performed by management (based upon assumptions regarding delinquency levels, foreclosure rates and loss ratios on REO disposition in the underlying portfolio). Discounted cash flow analyses were utilized to estimate fair value due to the absence of a ready market for the Guardian Securities. In addition to the Guardian Securities discussed above, the Company has an investment of approximately $4.5 million at December 31, 1996 after the write-down discussed below, in another private issuer mortgage-backed security, LB Multifamily Mortgage Trust Series 1991-4 (Lehman 91-4), possessing similar performance characteristics to the Guardian Securities that has also been determined to be other than temporarily impaired. Accordingly, the Company has recorded a $5.1 million pre-tax write-down ($3.4 million after tax or approximately $0.08 per share) to reflect the impairment of this security at March 31, 1995. Management believes that these write-downs are adequate based upon its evaluation. As reflected in the following table, the Company's remaining investment at December 31, 1996 in the Guardian Securities is approximately $55.3 million, after the desecuritization of Guardian Pool 1990-9 discussed below:
(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 (30.6) Desecuritization of Guardian Pool 1990-9 (see discussion below) (33.6) ------ Investment in Guardian Securities, December 31, 1996 $ 55.3 ======
Subsequent to March 31, 1995, the date of the impairment charge, through December 31, 1996 the following events have occurred with respect to the Guardian Securities and Lehman 91-4. * During the quarter ended June 30, 1995, the Company completed its planned desecuritization of Guardian Pool 1990-9 and has assumed servicing of the underlying whole loans and REO properties received through the desecuritization. As a result of this process, $1.1 million representing principal, interest and servicing related funds advanced by previous servicers to certificate holders on properties which were in REO at the time of the desecuritization was reimbursed to the servicer, $28.8 million was transferred to mortgage loans and $2.7 million (net of $4.9 million of charge-offs discussed below) was transferred to residential REO. REO properties and properties in foreclosure were written down $4.9 million to their estimated fair values by charges to existing unallocated REO reserves ($1.4 million) and loan loss reserves ($1.8 million) and to existing unamortized purchase discounts ($1.7 million). * As expected, there were several additional rating agency downgrades, principally related to those Guardian pools that are no longer protected by remaining credit enhancement and which had been determined to be other than temporarily impaired and written down to estimated fair value by the Company during the quarter ended March 31, 1995. * As expected, based on the low levels remaining at March 31, 1995, the subordination protection related to Guardian Pools 1990-1, 1990-2, 1990-4, 1990-5, 1990-7, 1990-8 and Lehman 1991-4 was fully absorbed. * The remaining pool Guardian 89-11, determined at March 31, 1995 to be other than temporarily impaired and written down to estimated fair value, continues to perform according to the contractual terms and is protected by the remaining subordination of 7.88% of the remaining unpaid principal balance of the pool. Such remaining subordination percentage compares to the original subordination percentage of 8.50%. 36 11 * The two remaining Guardian pools (89-10 and 91-2), which are not considered to be other than temporarily impaired, continue to perform according to their contractual terms and are protected by remaining subordination of 7.85% and 18.87%, respectively. These remaining subordination levels compare to 8.50% and 17.00%, respectively, at the date of issuance of the securities. * In excess of $30.0 million in net principal payments have been received since March 31, 1995. Accordingly, at December 31, 1996, management continues to believe that the recorded investment in the above mentioned Guardian and Lehman pools is recoverable. 37 12 Presented below is information at December 31, 1996 relating to Roosevelt's investment in the Guardian pools, segregated between the seven pools determined to be other than temporarily impaired and the two pools which, in the opinion of management, continue to be adequately protected from loss through substantial remaining subordination. The immediately succeeding table also includes information related to Lehman 91-4 which has been determined to be other than temporarily impaired. POOLS DETERMINED TO BE OTHER THAN TEMPORARILY IMPAIRED December 31, 1996 (dollars in thousands)
Subordination As a Regarding Roosevelt's Interests Percent of ------------------------------- Rating Pool Balance Original Percent of Pools Pool Issue --------------------------- -------------------- Par Remaining Remaining Current or Less Than Number Date Agency At Issue Current At Issue Current At Issue Par Investment 90 Days Delinquent - ------ ---- ------ -------- ------- -------- ------- -------- --- ---------- ------------------ GUARDIAN POOLS - -------------- 89-11 11/30/89 S & P AA CCC 8.50% 7.88% $ 33,750 $ 7,095 $ 5,134 74% Moody Aa2 B3 90-1 1/30/90 S & P AA D 8.50% -- 3,000 605 462 78% Moody Aa2 Caa 90-2 2/27/90 S & P AA D 8.50% -- 27,500 5,154 3,820 82% Moody Aa2 Caa 90-4 4/30/90 S & P AA D 8.75% -- 46,428 10,165 7,970 72% Moody Aa2 Caa 90-5 5/31/90 S & P AA D 8.75% -- 45,000 11,930 9,880 76% Moody Aa2 Caa 90-7 7/25/90 S & P AA D 8.75% -- 68,025 16,074 12,436 75% Moody Aa2 Caa 90-8 9/21/90 S & P AAA C 14.00% -- 15,000 3,956 2,801 71% Moody Aaa B3 -------- ------- ------- Total Guardian $238,703 $54,979 $42,503 ======== ======= ======= LEHMAN POOL - ----------- 91-4 7/30/91 S & P AA D 23.00% -- $ 14,000 $8,615 $4,459 84% Moody Aa3 Caa ======== ======= =======
GUARDIAN POOLS DETERMINED TO BE ADEQUATELY PROTECTED BY REMAINING CREDIT ENHANCEMENT December 31, 1996 (dollars in thousands)
Subordination As a Regarding Roosevelt's Interests Percent of ------------------------------- Rating Pool Balance Original Percent of Pools Pool Issue --------------------------- -------------------- Par Remaining Remaining Current or Less Than Number Date Agency At Issue Current At Issue Current At Issue Par Investment 90 Days Delinquent - ------ ---- ------ -------- ------- -------- ------- -------- --- ---------- ------------------ 89-10 10/27/89 S & P CCC CCC 8.50% 7.85% $ 9,000 $ 1,405 $ 1,420 83% Moody B3 Ba3 91-2 3/28/91 S & P AA BB 17.00% 18.87% 39,831 11,330 $11,330 73% Moody Aaa Baa3 ------- ------- ------- Totals $48,831 $12,735 $12,750 ======= ======= =======
38 13 NONINTEREST EXPENSE General and Administrative - General and administrative expense increased $35.7 million to $123.4 million for 1996 as compared to $87.7 million for 1995. General and administrative expense in 1996 was adversely impacted by a $27.4 million pre-tax charge imposed by the Federal Deposit Insurance Corporation (FDIC) in order to recapitalize the Savings Association Insurance Fund. Without this charge, general and administrative expense in 1996 would have increased $8.3 million , or 9.5% to $96.0 million for 1996 versus $87.7 for 1995. This increase was due primarily to a $7.5 million increase in compensation and employee benefits and a $4.1 million increase in other noninterest expense which was partially offset by a $2.6 million decrease in federal insurance premiums. The increases in compensation and employee benefits and other noninterest expense is primarily attributable to increased costs associated with the mobilization of the Bank's retail efforts. The decrease in federal insurance premiums resulted from reductions in the rates charged by the FDIC on the Company's deposits insured by both the Bank Insurance Fund and the Savings Association Insurance Fund. The Legislation enacted to recapitalize the Savings Association Insurance Fund also provided for further reductions in premiums charged for deposits insured by the Savings Association Insurance Fund beginning January, 1997. As a result, the Company expects to realize further declines in the cost of federal deposit insurance premiums thereafter. General and administrative expense decreased $23.3 million, or 21.0% to $87.7 million for 1995 as compared to $111.0 million for 1994. The major reasons for the decrease in 1995 are due to 1994 including $19.8 million of merger-related costs and the fact that 1995 general and administrative expense was also positively impacted by efficiencies totaling $6.3 million realized as a result of the Farm & Home merger. The merger expenses related primarily to $5.2 million in severance expense (included in "Compensation and employee benefits"), $5.3 million in costs to dispose of excess facilities incident to the acquisition of Farm & Home (included in "Occupancy") and $9.3 million of transaction costs (included in "Other"). Provision for Real Estate Losses - Provisions for real estate losses totaled $4.6 million for 1994. During 1994, in connection with the acquisition of Farm & Home, a provision of $3.7 million was established. This provision represented a 25% reduction in net carrying value of REO to accommodate a change in strategy whereby Roosevelt would accelerate the disposition of Farm & Home's real estate portfolio. Additionally, during 1994, a $839,000 provision was recorded related to six non-residential real estate properties. INCOME TAXES Income taxes include federal income taxes and applicable state income taxes. Roosevelt's effective tax rates were 34.4%, 27.5% and 33.9% for 1996, 1995 and 1994, respectively. The principal reasons for the Company's effective tax rate being below the statutory rate for each year are the resolution of federal tax issues after completion of examinations by the Internal Revenue Service. EXTRAORDINARY ITEMS Roosevelt recorded losses on extraordinary items of $1.5 million and $7.8 million, net of income taxes, for 1996 and 1994, respectively. The 1996 loss was the result of two transactions. First, the Company called its 9.5% subordinated notes resulting in an $812,000 pre-tax loss. Second, the Company defeased its remaining 10.125% mortgage-backed bonds resulting in a pre-tax loss of approximately $1.4 million. The $7.8 million loss for 1994 was the result of three transactions. First, Roosevelt recorded a loss totaling $4.6 million relating to the retirement of a portion of its 10.125% mortgage-backed bonds. Second, Roosevelt recorded a loss totaling $2.6 million relating to the retirement of the 13.0% subordinated debentures previously issued by Farm & Home. Third, Roosevelt recorded a loss totaling $637,000 relating to the prepayment of advances from FHLB of Des Moines originally entered into by Farm & Home. FINANCIAL CONDITION Total assets decreased $1.2 billion or 13.5% to $7.8 billion at December 31, 1996 from $9.0 billion at December 31, 1995. In 1996 the Company continued to focus on its strategies of originating a larger percentage of its assets, diversifying its balance sheet from only mortgage and real estate related assets and expanding its retail deposit base with a simultaneous shift within that base toward checking and transaction accounts. Additional strategies to further the transition were undertaken primarily in the third and fourth quarters and included the removal of marginally profitable assets, lessening the use of higher cost wholesale fundings, simplifying the balance sheet by using fewer derivatives as synthetic alterations and increasing the capital to assets ratio so as to be better positioned to take advantage of future opportunities. All of these strategies were part of the Company's continuing efforts to transition itself from a traditional thrift to a full service retail bank and resulted not only in balance sheet shrinkage but also in changes in the composition of the balance sheet. The Company originated approximately $1.4 billion and purchased an additional $291.6 million of loans in 1996 as compared to originations and purchases of $688.6 million and $321.1 million in 1995. Additionally, the Company securitized and sold approximately $210.0 million of long term fixed rate mortgages in 1996 and experienced principal repayments of approximately $897.0 million contributing to the growth in net loans in 1996 of $720.6 million. The 1996 originations included $796.6 million of adjustable rate mortgage loans, $318.4 million of fixed rate mortgage loans, $226.2 million of adjustable rate consumer loans and $65.6 million of fixed rate consumer loans. Consumer loans totaled $348.3 million or 8.1% of gross loans 39 14 at December 31, 1996 versus $125.6 million or 3.5% at December 31, 1995. Total net loans were $4.3 billion or 55.1% of total assets at December 31, 1996 as compared to $3.6 billion or 39.7% at December 31, 1995. The Company's total investment portfolios declined $2.0 billion or 38.8% to $3.2 billion at December 31, 1996 as compared to $5.2 billion at December 31, 1995. The Company transferred all held to maturity investment portfolios to the available for sale portfolio in December of 1996. This action was undertaken to provide the Company maximum flexibility to manage its portfolio. Proceeds from the sale of securities were used to fund loan originations and to repay short-term higher cost wholesale borrowings. Total investment securities represented 40.5% of total assets at December 31, 1996, down from 57.2% at December 31, 1995. Total liabilities declined $1.2 billion or 14.3% to $7.3 billion at December 31, 1996 versus $8.5 billion at December 31, 1995. Growth in deposits of $439.6 million (including $228.2 million resulting from the three acquisitions completed in 1996) was more than offset by reductions in securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, and other borrowings totaling $1.7 billion. Total deposits represented 73.3% of total liabilities at December 31, 1996, as compared to 57.6% at December 31, 1995. The composition of deposits also changed. Demand deposits at December 31, 1996 represented 27.6% of total deposits as compared to 25.0% at December 31, 1995. Proceeds from the sales of mortgage loans and investment securities were used to repay, primarily in the fourth quarter, short-term higher cost wholesale borrowings. 40 15 ASSET QUALITY Maintaining a low level of nonperforming assets is critical to the success of a financial institution. As the percentage of assets that are classified as nonperforming assets changes, so do expectations regarding interest income, potential provisions for losses and operating expenses incurred to manage and resolve these assets. The following table sets forth the amounts and categories of nonperforming assets. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful. Troubled debt restructurings involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates. Foreclosed assets include assets acquired in settlement of loans. "Other than temporarily impaired" mortgage-backed securities represent private issuer mortgage-backed securities that have been determined to be "other than temporarily impaired" under the provisions of Statement of Financial Accounting Standards No. 115 and for which the previously existing credit enhancement support, in the form of subordination, has been totally absorbed and therefore any future losses will flow directly to the Company as a senior position holder. These securities were issued with several classes available for purchase. Certain classes are subordinate to the position of senior classes in that such subordinate classes absorb all credit losses and must be completely eliminated before any losses flow to senior position holders. The securities purchased by the Company were purchases of the most senior positions, thus intended to be protected by the subordination credit enhancement feature. In an attempt toward a conservative presentation, the Company includes the entire estimated fair value of these securities (approximately 74% of the unpaid principal balances at December 31, 1996) in this table when the credit enhancement, in the form of subordination, is exhausted even though a substantial portion of the underlying loans (approximately 76% at December 31, 1996) are either current or less than 90 days delinquent. In addition, the remaining amount of "other than temporarily impaired" mortgage-backed securities that continue to be protected by remaining credit enhancement, but for which the Company has concluded it is probable that such credit enhancement will be absorbed before the duration of the underlying security, are disclosed in the paragraphs following the table as other potential problem assets. See the caption entitled "Unrealized Losses on Impairment of Mortgage-Backed Securities Held to Maturity" under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further details.
December 31, --------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (dollars in thousands) Nonperforming Assets Nonaccruing loans: Residential $ 9,659 $ 7,895 $ 5,666 $ 9,524 $ 12,249 Commercial real estate 1,968 1,415 1,626 985 7,988 Consumer 597 193 269 217 217 ------ ------ ------ ------ ------ Total 12,224 9,503 7,561 10,726 20,454 ------ ------ ------ ------ ------ Accruing loans delinquent more than 90 days: Residential 10,126 10,500 4,598 4,056 2,110 Commercial real estate -- -- 482 -- -- Consumer -- -- -- -- 4 Land -- -- -- 360 394 ------ ------ ------ ------ ------ Total 10,126 10,500 5,080 4,416 2,508 ------ ------ ------ ------ ------ Troubled-debt restructurings: Commercial real estate 53 661 2,757 2,127 1,363 ------ ------ ------ ------ ------ Foreclosed/Repossessed assets: Residential 4,761 5,340 2,703 1,373 2,049 Commercial real estate 7,804 11,483 16,085 15,998 20,500 Consumer 238 11 -- -- 16 ------ ------ ------ ------ ------ Total 12,803 16,834 18,788 17,371 22,565 ------ ------ ------ ------ ------ Total nonperforming loans and REO 35,206 37,498 34,186 34,640 46,890 Total nonperforming loans and REO as a percentage of total assets .45% .42% .41% .46% .78% ====== ====== ====== ====== ====== Other than temporarily impaired mortgage-backed securities with approximately 76% of the underlying loans either current or less than 90 days delinquent 41,828 43,429 -- -- -- ------ ------ ------ ------ ------ Total "nonperforming assets" $77,034 $ 80,927 $ 34,186 $ 34,640 $ 46,890 ====== ====== ====== ====== ====== Total "nonperforming assets" as a percentage of total assets .99% .90% .41% .46% .78% ====== ======== ====== ====== ======
Nonperforming assets have decreased $3.9 million to $77.0 million at December 31, 1996 as compared to $80.9 millon at December 31, 1995. Non-accruing loans increased $2.7 million, accruing loans delinquent more than 90 days decreased $374,000 and foreclosed repossessed assets decreased $4.0 million. Other than temporarily impaired mortgage-backed securities decreased $1.6 million. For a further discussion of such securities, see the caption entitled "Unrealized Losses on Impairment of Mortgage-Backed Securities Held to Maturity" under the heading "Results of Operations" for further details. 41 16 Not included in the preceding table is a private issuer mortgage-backed security with a carrying value of $5.1 million which was performing according to its contractual terms at December 31,1996. However, this security was determined by the Company to be "other than temporarily impaired" and written down to fair value, since at March 31, 1995, the subordination protection had been reduced to the point where the Company concluded it was not probable that the security would continue to perform to 100% of its contractual terms over the course of its remaining life. The security will be included in the preceding non-performing asset table in future periods when, and if, the remaining subordination is exhausted. The following table is a reconciliation of the amount of currently performing, other than temporarily impaired mortgage-backed securities at March 31, 1995 to such amount at December 31, 1996.
(in millions) Amount of currently performing, other than temporarily impaired mortgage-backed securities at March 31, 1995 $ 52.4 Principal payments received (9.4) Addition of Guardian Pools 1990-1,1990-2, 1990-4, 1990-5, 1990-7, 1990-8 and Lehman Pool 91-4 to the nonperforming asset table as subordination protection was absorbed between March 31, 1995 and December 31, 1996 (37.9) Amount outstanding of the currently performing, other than temporarily ---- impaired mortgage-backed security at December 31, 1996 $ 5.1 ====
To monitor the credit risk inherent in its private issuer mortgage-backed security portfolio, the Company tracks the major factors effecting the performance of its portfolio including i) a review of delinquencies, foreclosures, repossessions, and recovery rates relative to the underlying mortgage loans collateralizing each security, ii) the level of available subordination or other credit enhancement and iii) the rating assigned to each security by independent national rating agencies. ASSET/LIABILITY MANAGEMENT The Company's primary objective regarding asset/liability management is to position the Company such that changes in interest rates do not have a material adverse impact upon net interest income or the net market value of the Company. See Note 3 - Fair Value Consolidated Balance Sheets of the Notes to Consolidated Financial Statements for additional information regarding the calculation of net market value. The Company's primary strategy for accomplishing its asset/liability management objective is achieved by matching the weighted average maturities of assets, liabilities, and off-balance sheet items (duration matching). A portion of the duration matching strategy has involved, more historically than currently, the use of derivative financial instruments such as interest rate exchange agreements, interest rate cap and floor agreements and, to a much more limited extent, financial futures contracts. The Company uses derivative financial instruments solely for risk management purposes. None of the Company's derivative instruments are what are termed leveraged instruments. These types of instruments are riskier than the derivatives used by the Company in that they have embedded options that enhance their performance in certain circumstances but dramatically reduce their performance in other circumstances. The Company is not a dealer nor does it make a market in such instruments. The Company does not trade the instruments and the Board of Directors' approved policy governing the Company's use of these instruments strictly forbids speculation of any kind. Net market value as prescribed by Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments" (SFAS 107) is calculated by adjusting stockholders' equity for differences between the estimated fair values and the carrying values (historical cost basis) of the Company's assets, liabilities, and off-balance sheet items. Net market value, as calculated by the Company and presented herein, should not be confused with the value of the Company's stock or of the amounts distributable to stockholders in connection with a sale of the Company or in the unlikely event of its liquidation. Under SFAS 107 certain valuations, such as the estimated value of demand deposits, are not considered as part of the net market value calculation. As a result the Company calculates an economic net market which is comprised of net market value as calculated under SFAS 107 plus the estimated value of demand deposits. The economic net market value (including the estimated value of demand deposits totaling $33.2 million and $19.6 million at December 31, 1996 and 1995, respectively) as calculated by the Company increased to approximately $557.6 million at December 31, 1996 as compared to approximately $481.5 million at December 31, 1995. To measure the impact of interest rate changes, the Company recalculates its net market value on a pro forma basis assuming instantaneous, permanent parallel shifts in the yield curve, in varying amounts both upward and downward. Larger increases or decreases in the Company's net market value as a result of these assumed interest rate changes indicate greater levels of interest rate sensitivity than do smaller increases or decreases in net market value. The Company endeavors to maintain a position whereby it experiences no material change in net market 42 17 value as a result of assumed 100 and 200 basis point increases and decreases in general levels of interest rates. The OTS issued a regulation, effective January 1, 1994, which uses a similar methodology to measure the interest rate risk exposure of thrift institutions. This exposure is a measure of the potential decline in the net portfolio value of the institution based upon the effect of an assumed 200 basis point increase or decrease in interest rates. "Net portfolio value" is the present value of the expected net cash flow from the institution's assets, liabilities, and off-balance sheet contracts. Under the OTS regulation, an institution's "normal" level of interest rate risk in the event of this assumed change in interest rates is a decrease in the institution's net portfolio value in an amount not exceeding two percent of the present value of its assets. The regulation provides for a two quarter lag between calculating interest rate risk and recognizing any deduction from capital. The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to the 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in net portfolio value) and (b) its "normal" level of exposure which is two percent of the present value of its assets. The OTS recently announced that it will delay the effectiveness of the regulation until it adopts the process by which an association may appeal an interest rate risk capital deduction determination. Utilizing this measurement concept, the interest rate risk of the Company at December 31, 1996 is as follows:
(DOLLARS IN THOUSANDS) Basis point changes in interest rates -200 -100 +100 +200 Change in net market value due to changes in interest rates (Company methodology) $(18,066) $ (3,812) $(11,229) $(38,463) Interest rate exposure deemed "normal" by the OTS $(155,928) N/A N/A $(155,928)
The Company's operating strategy is designed to avoid material negative changes in net market value. As of December 31, 1996, the Company believes it has accomplished its objectives as the pro forma changes in net market value brought about by changes in interest rates are not material relative to the Company's net market value. A net unrealized market value loss when rates increase indicates the duration of the Company's assets is slightly longer than the duration of the Company's liabilities. A loss when rates decrease is due primarily to borrowers prepaying their loans resulting in the Company's assets repricing down more quickly than the Company can reprice its liabilities. 43 18 MATURITY GAP ANALYSIS Thrift institutions have historically presented a Gap Table as a measure of interest rate risk. The Gap Table presents the projected maturities and periods to repricing of a thrift's rate sensitive assets and liabilities. The OTS has concluded such an analysis has limitations, however, for reasons of consistency the following discussion presents the Company's traditional Maturity Gap Analysis. The Company's one year cumulative gap, which represents the difference between the amount of interest sensitive assets maturing or repricing in one year and the amount of interest sensitive liabilities maturing or repricing in the same period was (2.51%) at December 31, 1996. A negative cumulative gap indicates that interest sensitive liabilities exceed interest sensitive assets at a specific date. In a rising interest rate environment institutions with negative maturity gaps generally will experience a more rapid increase in interest expense paid on liabilities than the interest income earned on assets. Conversely, in an environment of falling interest rates, interest expense paid on liabilities will generally decrease more rapidly than the interest income earned on assets. A positive gap will have the opposite effect. The following table presents the projected maturities and periods to repricing of the Company's rate sensitive assets and liabilities as of December 31, 1996, adjusted to account for anticipated prepayments.
Over 3 Over 1 Over 3 Months Year Years Up to 3 Through Through Through Over Months 1 Year 3 Years 5 Years 5 Years Total -------- --------- --------- --------- --------- ------- (Dollars in Thousands) ASSETS: Mortgage loans and mortgage-backed securities: Balloon and adjustable rate first mortgage loans $ 1,723,549 $ 2,445,512 $ 604,528 $ 227,306 $ 15,625 $ 5,016,520 One to four family residential first mortgages and contracts 186,969 147,191 429,465 281,251 586,266 1,631,142 Five or more family residential and nonresidential first mortgages and contracts 62,830 32,011 58,772 16,277 13,144 183,034 Second mortgages 787 124 163 28 14 1,116 Non-mortgage loans: Consumer 228,681 20,735 45,990 11,626 20,185 327,217 Commercial 13,723 2,681 4,233 426 -- 21,063 Investments and interest bearing deposits 206,380 4,218 8,548 10,651 1,031 230,828 Premiums (discounts) and deferred loan fees, net 23,027 12,252 6,966 3,488 12,293 58,026 ---------- --------- --------- ------- ------- --------- Total rate sensitive assets 2,445,946 2,664,724 1,158,665 551,053 648,558 7,468,946 ---------- --------- --------- ------- ------- --------- LIABILITIES: Fixed maturity deposits 753,849 1,610,511 1,165,995 238,506 102,544 3,871,405 NOW, Super NOW, and other transaction accounts 29,906 36,044 64,880 51,905 207,617 390,352 Money market deposit accounts 796,046 -- -- -- -- 796,046 Passbook accounts 27,202 26,207 47,172 37,737 150,950 289,268 FHLB advances 1,607,756 216,000 9,500 2,500 2,000 1,837,756 Other borrowings 3,095 -- -- -- -- 3,095 ---------- --------- --------- ------- ------- --------- Total rate sensitive liabilities 3,217,854 1,888,762 1,287,547 330,648 463,111 7,187,922 Effect of interest rate floor agreements on rate sensitive liabilities 350,000 (150,000) (200,000) -- -- -- ---------- --------- --------- ------- ------- --------- Total rate sensitive liabilities adjusted for impact of interest rate floor agreements 3,567,854 1,738,762 1,087,547 330,648 463,111 7,187,922 ---------- --------- --------- ------- ------- --------- Maturity gap $ (1,121,908) $ 925,962 $ 71,118 $ 220,405 $ 185,447 $ 281,024 ========== ========= ========= ======= ======= ========= Gap as a percent of total assets (14.39)% 11.88% (.91)% 2.83% 2.38% ========== ========= ========= ======= ======= Cumulative maturity gap $ (1,121,908) $ (195,946) $ (124,828) $ 95,577 $ 281,024 ========== ========= ========= ======= ======= Cumulative gap as a percent of total assets (14.39)% (2.51)% (1.60)% 1.23% 3.61% ========== ========= ========= ======= =======
44 19 In preparing the table above, it has been assumed that (i) balloon and adjustable-rate first mortgage loans will prepay at a rate of 18% per year, (ii) fixed-rate first mortgage loans on residential properties of five or more units and nonresidential properties will prepay at a rate of 10% per year, (iii) fixed maturity deposits will not be withdrawn prior to maturity, (iv) passbook and NOW accounts will be withdrawn at a rate of approximately 10% in each of the first two periods and at other assumed rates ranging from 20% to 100% thereafter, (v) fixed-rate mortgage loans on one- to four-family residences with terms to maturity of 10 years or less will prepay at a rate of 20% per year, (vi) second mortgage loans on one- to four-family residences will prepay at a rate of 30% per year, and (vii) fixed-rate first mortgage loans on one- to four-family residential properties with remaining terms to maturity of over 10 years will prepay annually as follows:
PREPAYMENT ASSUMPTIONS MORTGAGE LOAN -------------------------------------------------- INTEREST RATE OVER 10 TO 20 YEARS 20 YEARS AND OVER - ------------- --------------------- ------------------- Less than 8% 8.00% 8.00% 8 to 10% 23.00 23.00 10 to 12% 22.00 22.00 12 to 14% 22.00 22.00 14 to 16% 22.00 22.00 16% and over 22.00 22.00
The above assumptions do not necessarily indicate the impact of general interest rate movements. Accordingly, certain assets and liabilities indicated as repricing within a stated period may in fact reprice at different times and at different rate levels. The amounts in the table could be significantly affected by external factors, such as prepayment rates other than those assumed, early withdrawals of deposits, changes in the correlation of various interest-bearing instruments, and competition. Additionally, decisions by the Company to sell assets, retire debt, or cancel interest rate exchange arrangements early would also change the maturity/repricing and spread relationships. LIQUIDITY AND CAPITAL RESOURCES OTS regulations require federally insured savings institutions to maintain a specified ratio (presently 5.0%) of cash and short-term United States Government, government agency, and other specified securities to net withdrawable accounts and borrowings due within one year. The Company has maintained liquidity in excess of required amounts having had ratios of 5.05%, 5.64%, and 5.91% at December 31, 1996, 1995, and 1994, respectively. The Company's cash flows are comprised of cash flows from operating, investing and financing activities. Cash flows provided by operating activities, consisting primarily of interest received on investments (principally loans and mortgage-backed securities) less interest paid on deposits and other short-term borrowings, were $125.2 million for the year ended December 31, 1996 Net cash related to investing activities, consisting primarily of purchases of mortgage-backed securities and originations and purchases of loans, offset by principal repayments on mortgage-backed securities and loans and sales of mortgage-backed securities available for sale, provided $1.5 billion for the year ended December 31, 1996. Net cash related to financing activities, consisting of proceeds, net of repayments, from FHLB advances, proceeds from securities sold under agreements to repurchase and excess of deposits receipts over withdrawals, utilized $1.6 billion for the year ended December 31, 1996. At December 31, 1996, the Company had commitments outstanding to originate fixed-rate mortgage loans of approximately $27.8 million and adjustable-rate mortgages of approximately $66.5 million. At December 31, 1996, the Company had outstanding commitments to purchase and sell mortgage-backed securities of approximately $199.3 million and $160.0 million, respectively. The Company expects to satisfy such commitments through its primary source of funds. OTS regulations impose various restrictions or requirements on associations with respect to their ability to pay dividends or make other distributions of capital. The OTS utilizes a three-tiered approach to permit associations, based on their capital level and supervisory condition, to make capital distributions which include dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt, and other transactions charged to the capital account. Tier 1 associations, which are associations that before and after the proposed distribution meet or exceed their fully phased-in capital requirements, may make capital distributions during any calendar year up to the greater of 100% of net income for the year-to-date plus 50% of the amount by which the lesser of the association's tangible, core, or total capital exceeds its fully phased-in capital requirement, as measured at the beginning of the calendar year. As of December 31, 1996, the Bank's excess capital over its fully phased-in core capital requirement was approximately $192.0 million. The Company is also subject to Delaware law which limits dividends to an amount equal to the excess of a corporation's net assets over paid-in capital or, if there is no excess, to its net profits for the current and immediately preceding fiscal year. See "Regulation -- Limitations on Dividends and Other Capital Distributions." 45 20 Certain liquidity risks are inherent in asset/liability management. Such risks include, among others, changes in interest rates, which can cause margin calls on reverse repurchase agreements as a result of changes in the value of collateral, and timing delays when the receipt of interest, principal or repayments on loans and mortgage-backed securities does not correspond with the timing of the funding of the related liability. The Company has implemented policies through which it endeavors to manage these liquidity risks. Liquidity is maintained at levels which exceed the amounts required for regulatory purposes. The Company's merger agreement with Mercantile Bancorporation Inc. requires the redemption of all the Company's issued and outstanding shares of preferred stock on May 16, 1997. In addition, under the same agreement, Roosevelt is required to use its reasonable best efforts, subject to prudent business practices, to acquire in open market transactions prior to the closing date of the planned merger up to 6,998,380 of its own common shares at a cost per share in each transaction not to exceed $22.00. The Company anticipates that prior to the above mentioned redemption date, most if not all, existing preferred shareholders will elect to convert their preferred shares into common shares due to the significant currently existing value differential between post-conversion shares and the $50.00 per share redemption price. To the extent that certain preferred shareholders allow their shares to be redeemed at $50.00 per share by not electing conversion prior to the May 16, 1997 redemption date, such redemptions, if any, are anticipated to be funded by the Company from either then existing cash on hand or with funds provided from dividends from Roosevelt Bank. To the extent that all preferred shareholders elect to convert their shares into common stock prior to the May 16, 1997 redemption date, total stockholders' equity of the Company will not be impacted by such conversion. Any actual cash redemptions will have the impact of reducing the Company's stockholders' equity by the redemption price of $50.00 per share plus accrued and unpaid dividends for each share of preferred stock so redeemed. The Company's above mentioned share repurchases are being conducted pursuant to a stock repurchase program authorized by the Board of Directors of Roosevelt Financial Group, Inc. on December 15, 1994 and expanded by that same board on January 2, 1997 and is discussed in more detail in the following paragraphs. On December 15, 1994, the Board of Directors of Roosevelt Financial Group, Inc. authorized the Company to acquire up to 1,750,000 shares of its own common stock, subject to market conditions, prior to December 31, 1997. The stock repurchased is to be held in treasury in order to fund, from time to time, the Company's benefit programs. Shares of stock repurchased may also be retired, from time to time, if not needed for other corporate purposes. Through December 31, 1996, 281,500 shares of common stock of the Company have been repurchased pursuant to the stock repurchase program at a weighted average price of $15.98 per share. On January 2, 1997, the Board of Directors of the Company authorized an expansion of the capacity of the above mentioned stock repurchase plan by an additional 5,529,880 shares. This expansion, when coupled with the remaining authorization prior to the expansion (1,468,500 shares), resulted in a total authorization of 6,998,380 shares, the number of shares that the Company has agreed to use its reasonable best efforts, subject to prudent business practices, to acquire in open market transactions prior to the closing date of its planned merger with Mercantile Bancorporation Inc. The cost per share in each such transaction cannot exceed $22.00. Subsequent to December 31, 1996 and through February 13, 1997, an additional 1,600,000 shares have been repurchased at a weighted average price of $21.08. The above mentioned share repurchases to date have been funded by the Company from dividends from Roosevelt Bank. As a result of the recent trading range of Roosevelt's common stock exceeding the $22.00 per share maximum specified in the merger agreement, above which the Company is precluded from executing any repurchase transactions, the Company cannot predict the amount, if any, of additional share repurchases which may be accomplished prior to the anticipated closing date of the merger. To the extent that the price of the Company's common stock falls to $22.00 or below, the Company anticipates future repurchases will be funded by either then existing cash on hand at the Company, or with funds provided to the Company from dividends from Roosevelt Bank. With respect to potential future dividends from Roosevelt Bank, the Company does not intend to allow the Bank to declare any such dividends that would result in the Bank not being classified as well capitalized under existing regulatory capital adequacy guidelines. Future share repurchases, if any, prior to the anticipated effective date of the merger with Mercantile, are expected to reduce total shareholders' equity of the Company only in the unlikely event that such shares are not reissued in connection with either Company benefit programs or to fund the anticipated conversion, prior to May 16, 1997, of the Company's existing preferred stock into common stock. The potential funding by the Company of future share repurchases or preferred stock redemptions, if any, utilizing Roosevelt Bank dividends as a funding source is not anticipated to have a material adverse impact on the Company's future operating income or earnings per share. IMPACT OF INFLATION AND CHANGING PRICES Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than do the general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. In the current interest rate environment, liquidity and the maturity structure of the Company's assets and liabilities are critical to the maintenance of acceptable performance levels. 46 The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power over time due to inflation. IMPACT OF PROSPECTIVE ACCOUNTING PRONOUNCEMENTS During June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities" (SFAS 125). SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under the financial components approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. The financial components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with pledge of collateral. SFAS 125 extends the "available-for-sale" or "trading" approach in SFAS 115 to nonsecurity financial assets that can contractually be prepaid or otherwise settled in such a way that the holder of the asset would not recover substantially all of its recorded investment. Thus, nonsecurity financial assets (no matter how acquired) such as loans, other receivables, interest-only strips or residual interests in securitization trusts that are subject to prepayment risk that could prevent recovery of substantially all of the recorded amount are to be reported at fair value with the change in fair value accounted for depending on the asset's classification as "available-for-sale" or "trading". SFAS 125 also amends SFAS 115 to prevent a security from being classified as held-to-maturity if the security can be prepaid or otherwise settled in such a way that the holder of the security would not recover substantially all of its recorded investment. SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. Also, the extension of the SFAS 115 approach to certain nonsecurity financial assets and the amendment to SFAS 115 is effective for financial assets held on or acquired after January 1, 1997. Reclassifications that are necessary because of the amendment do not call into question an entity's intent to hold other debt securities to maturity in the future. The adoption of SFAS 125 is not expected to have a material impact on the Company's financial statements. 47 21 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS ENDED IN 1996 --------------------------------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 ---------- --------- ---------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Total interest income $ 166,143 $ 162,280 $ 160,588 $ 151,300 Total interest expense 119,769 118,984 117,257 106,714 -------- -------- -------- -------- Net interest income 46,374 43,296 43,331 44,586 Provision for losses on loans (300) (300) (300) (362) Noninterest income excluding net gain (loss) from financial instruments 8,177 9,755 11,022 11,713 Net gain (loss) from financial instruments 341 521 1,781 (79,277) Noninterest expense (21,718) (23,428) (52,858) (25,405) -------- -------- -------- -------- Income (loss) before income tax expense and extraordinary item 32,874 29,844 2,976 (48,745) Income tax expense (benefit) 11,309 10,116 1,016 (16,606) -------- -------- -------- -------- Income (loss) before extraordinary item 21,565 19,728 1,960 (32,139) Extraordinary item -- -- (1,452) -- -------- -------- -------- -------- Net income (loss) $ 21,565 $ 19,728 $ 508 $ (32,139) ======== ======== ======== ======== Net income (loss) attributable to common stock $ 20,508 $ 18,671 $ (541) $ (33,186) ======== ======== ======== ======== Primary earnings per share: Income (loss) before extraordinary item $ 0.48 $ 0.44 $ 0.02 $ (0.76) Extraordinary item -- -- (0.03) -- -------- -------- -------- -------- Net income (loss) $ 0.48 $ 0.44 $ (0.01) $ (0.76) ======== ======== ======== ======== Fully-diluted earnings per share: Income (loss) before extraordinary item $ 0.46 $ 0.42 $ 0.02 $ (0.76) Extraordinary item -- -- (0.03) -- -------- -------- -------- -------- Net income (loss) $ 0.46 $ 0.42 $ (0.01) $ (0.76) ======== ======== ======== ======== QUARTERS ENDED IN 1995 --------------------------------------------------------------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 ---------- --------- ---------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Total interest income $ 156,436 $ 162,576 $ 163,920 $ 164,863 Total interest expense 108,123 116,893 120,700 120,717 -------- -------- -------- -------- Net interest income 48,313 45,683 43,220 44,146 Provision for losses on loans (300) (300) (300) (300) Noninterest income (loss) excluding net gain (loss) from financial instruments (19,480) 7,443 8,872 6,241 Net gain (loss) from financial instruments (32,804) (22,935) 1,620 (4,097) Noninterest expense (21,493) (21,740) (20,875) (23,558) -------- -------- -------- -------- Income (loss) before income tax expense and extraordinary item (25,764) 8,151 32,537 22,432 Income tax expense (benefit) (9,589) 2,291 11,040 6,516 -------- -------- -------- -------- Net income (loss) $ (16,175) $ 5,860 $ 21,497 $ 15,916 ======== ======== ======== ======== Net income (loss) attributable to common stock $ (17,247) $ 4,803 $ 20,440 $ 14,859 ======== ======== ======== ======== Primary earnings (loss) per share $ (0.43) $ 0.12 $ 0.50 $ 0.37 ======== ======== ======== ======== Fully-diluted earnings (loss) per share $ (0.43) $ 0.12 $ 0.47 $ 0.35 ======== ======== ======== ========
Net gain (loss) from financial instruments for the quarter ended December 31, 1996 was impacted by the recognition of previously deferred expense related to the termination of interest rate exchange, cap and floor agreements of $80.5 million. Noninterest expense for the quarter ended September 30, 1996 was impacted by the one-time SAIF assessment of $27.4 million. See notes 15 and 19 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis-Results of Operations" for further discussion. 48 22 Net gain (loss) from financial instruments was impacted by $(34.0) million, $(27.8) million, $135,000 and $(9.5) million for the quarters ended March 31, June 30, September 30 and December 31, 1995, respectively as a result of the mark to market of the Company's financial futures positions used to reduce the interest rate risk of certain mortgage-backed securities in the available for sale portfolio. Non-interest income for the quarter ended March 31, 1995 was impacted by a $27.1 million impairment charge related to certain mortgage-backed securities. See Notes 5 and 15 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis-Results of Operations" for further discussion. 49 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors Roosevelt Financial Group, Inc. Chesterfield, Missouri: We have audited the accompanying consolidated balance sheets of Roosevelt Financial Group, Inc. and subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Roosevelt Financial Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. We have also audited, in accordance with generally accepted auditing standards, the supplemental fair value consolidated balance sheets of the Company as of December 31, 1996 and 1995. As described in Note 3, the supplemental fair value consolidated balance sheets have been prepared by management to present relevant financial information that is not provided by the historical cost consolidated balance sheets and is not intended to be a presentation in conformity with generally accepted accounting principles. In addition, the supplemental fair value consolidated balance sheets do not purport to present the net realizable, liquidation, or market value of the Company as a whole. Furthermore, amounts ultimately realized by the Company from the disposal of assets may vary significantly from the fair values presented. In our opinion, the supplemental fair value consolidated balance sheets referred to above present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP St. Louis, Missouri January 20, 1997 50 24 ROOSEVELT FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands)
December 31, -------------------------------- 1996 1995 ----------- ----------- ASSETS Cash and cash equivalents $ 48,642 $ 15,433 Securities available for sale: Investment securities 183,227 159,857 Mortgage-backed securities 2,974,530 1,446,604 Securities held to maturity: Investment securities -- 119,186 Mortgage-backed securities -- 3,430,954 Loans 4,298,469 3,577,892 Real estate owned 12,438 15,433 Office properties and equipment, net 54,966 52,466 Other assets 224,140 195,236 --------- --------- $ 7,796,412 $ 9,013,061 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 5,347,071 $ 4,907,497 Securities sold under agreements to repurchase 3,095 1,082,814 Advances from Federal Home Loan Bank 1,837,756 2,377,138 Other borrowings -- 47,523 Other liabilities 111,063 101,183 --------- --------- Total liabilities 7,298,985 8,516,155 --------- --------- Stockholders' equity: Preferred stock - $.01 par value; $50 preference value; 6.5% non-cumulative perpetual convertible; aggregate preference value of $64,441 and $65,050 at December 31, 1996 and 1995, respectively; 3,000,000 shares authorized and 1,288,825 and 1,301,000 shares issued and outstanding at December 31, 1996 and 1995, respectively 13 13 Common stock - $.01 par value; 90,000,000 shares authorized; 44,183,124 and 41,991,701 shares issued and outstanding at December 31, 1996 and 1995, respectively 442 420 Paid-in capital 298,283 262,381 Retained earnings - subject to certain restrictions 202,550 223,606 Unrealized gain (loss) on securities available for sale, net of taxes (2,226) 12,019 Unamortized restricted stock awards (1,635) (1,533) --------- --------- Total stockholders' equity 497,427 496,906 --------- --------- $ 7,796,412 $ 9,013,061 ========= ========= See accompanying notes to consolidated financial statements.
51 25 ROOSEVELT FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share information)
Year Ended December 31, --------------------------------------------------------- 1996 1995 1994 --------- --------- --------- Interest income: Loans $ 303,304 $ 252,071 $ 206,467 Securities available for sale 109,784 135,444 137,933 Securities held to maturity 225,415 259,262 179,168 Securities held for trading -- -- 6,460 Other 1,808 1,018 3,258 --------- --------- --------- Total interest income 640,311 647,795 533,286 --------- --------- --------- Interest expense: Deposits 249,820 233,836 200,190 Other borrowings 194,270 223,508 138,915 Interest rate exchange agreements, net 18,634 9,089 8,469 --------- --------- --------- Total interest expense 462,724 466,433 347,574 --------- --------- --------- Net interest income 177,587 181,362 185,712 Provision for losses on loans 1,262 1,200 12,432 --------- --------- --------- Net interest income after provision for losses on loans 176,325 180,162 173,280 --------- --------- --------- Noninterest income (loss): Retail banking fees 17,157 10,706 8,682 Insurance and brokerage sales commissions 8,494 7,506 6,538 Loan servicing fees, net 10,982 7,401 7,359 Net loss from financial instruments (76,634) (58,216) (10,660) Gain on sales of real estate acquired for development and sale 1,633 1,656 3,414 Gain on sale of loan servicing rights -- 1,510 -- Unrealized losses on impairment of mortgage-backed securities -- (27,063) -- Other 2,401 1,360 1,923 --------- --------- --------- Total noninterest income (loss) (35,967) (55,140) 17,256 --------- --------- --------- Noninterest expense: General and administrative: Compensation and employee benefits 42,304 34,780 42,570 Occupancy 18,081 18,758 23,939 Federal deposit insurance premiums 9,145 11,743 12,018 Savings Association Insurance Fund special assessment 27,410 -- -- Other 26,469 22,385 32,468 --------- --------- --------- Total general and administrative 123,409 87,666 110,995 Provision for real estate losses -- -- 4,581 --------- --------- --------- Total noninterest expense 123,409 87,666 115,576 --------- --------- --------- Income before income tax expense and extraordinary items 16,949 37,356 74,960 Income tax expense 5,835 10,258 25,384 --------- --------- --------- Income before extraordinary items 11,114 27,098 49,576 Extraordinary items (1,452) -- (7,849) --------- --------- --------- Net income $ 9,662 $ 27,098 $ 41,727 ========= ========= ========= Net income attributable to common stock $ 5,452 $ 22,855 $ 36,543 ========= ========= ========= Per share data: Primary earnings per share: Income before extraordinary items $ 0.16 $ 0.56 $ 1.17 Extraordinary items (0.03) -- (0.21) ------- ------- ------- Net income $ 0.13 $ 0.56 $ 0.96 ======= ======= ======= Fully diluted earnings per share: Income before extraordinary items $ 0.16 $ 0.56 $ 1.15 Extraordinary items (0.03) -- (0.21) ------- ------- ------- Net income $ 0.13 $ 0.56 $ 0.94 ======= ======= ======= See accompanying notes to consolidated financial statements.
52 26 ROOSEVELT FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (DOLLARS IN THOUSANDS)
Preferred stock Common stock -------------------- ----------------------- Paid-in Retained Shares Amount Shares Amount capital earnings ---------- ------ ---------- ------ -------- -------- Balance, December 31, 1993 2,492,440 $ 25 10,291,922 $103 $179,979 $186,780 Net income (including pooled company) -- -- -- -- -- 41,727 Issuance of 319,000 shares of 6.5% non-cumulative perpetual convertible preferred stock 319,000 3 -- -- 21,270 -- Issuance of common stock in the acquisition of Home Federal Bancorp of Missouri, Inc. -- -- 1,121,142 11 48,220 -- Issuance of common stock for stock options and employee stock plans -- -- 1,294,991 13 5,932 -- Three-for-one stock split -- -- 25,157,436 252 (252) -- Cash dividends declared (including pooled company): Common stock -- -- -- -- -- (13,944) Preferred stock -- -- -- -- -- (5,184) Purchase of common stock for treasury -- -- -- -- -- -- Unrealized loss on securities available for sale, net (including pooled company) -- -- -- -- -- -- Other pre-merger transactions of pooled company (1,492,440) (15) 2,308,036 23 506 -- ---------- ---- ---------- ---- -------- -------- Balance, December 31, 1994 1,319,000 13 40,173,527 402 255,655 209,379 Net income -- -- -- -- -- 27,098 Purchase of common stock for treasury -- -- -- -- -- -- Issuance of common stock for stock options and employee stock plans -- -- 243,763 3 1,531 (1,572) Issuance of common stock in the acquisition of Kirksville Bancshares, Inc. -- -- 1,521,435 15 5,426 15,475 Exchange of preferred stock for common stock (18,000) -- 52,976 -- (231) -- Amortization of restricted stock awards -- -- -- -- -- -- Cash dividends declared: Common stock -- -- -- -- -- (22,531) Preferred stock -- -- -- -- -- (4,243) Unrealized gain on securities available for sale, net -- -- -- -- -- -- ---------- ---- ---------- ---- -------- -------- Balance, December 31, 1995 1,301,000 13 41,991,701 420 262,381 223,606 Net income -- -- -- -- -- 9,662 Purchase of common stock for treasury -- -- -- -- -- -- Issuance of common stock for stock options and employee stock plans -- -- 219,991 2 2,748 (205) Issuance of common stock for acquisitions -- -- 1,925,776 19 33,155 -- Exchange of preferred stock for common stock (12,175) -- 45,656 1 (1) -- Amortization of restricted stock awards -- -- -- -- -- -- Cash dividends declared: Common stock -- -- -- -- -- (26,303) Preferred stock -- -- -- -- -- (4,210) Unrealized loss on securities available for sale, net -- -- -- -- -- -- ---------- ---- ---------- ---- -------- -------- Balance, December 31, 1996 1,288,825 $ 13 44,183,124 $442 $298,283 $202,550 ========== ==== ========== ==== ======== ======== See accompanying notes to consolidated financial statements. 52
ROOSEVELT FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (DOLLARS IN THOUSANDS)
Unrealized gain (loss) on securities Treasury stock available for Unamortized Total ------------------------- sale, net restricted stockholders' Shares Amount of taxes 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 Issuance of common stock for stock options and employee stock plans -- -- -- -- 5,945 Three-for-one stock split -- -- -- -- -- Cash dividends declared (including pooled company): Common stock -- -- -- -- (13,944) Preferred stock -- -- -- -- (5,184) Purchase of common stock for treasury (10,000) (150) -- -- (150) Unrealized loss on securities available for sale, net (including pooled company) -- -- (35,248) -- (35,248) Other pre-merger transactions of pooled company -- -- -- -- 514 --------- ------- ------------ -------- ---------- Balance, December 31, 1994 (10,000) (150) (23,673) -- 441,626 Net income -- -- -- -- 27,098 Purchase of common stock for treasury (214,500) (3,426) -- -- (3,426) Issuance of common stock for stock options and employee stock plans 209,976 3,345 -- (1,621) 1,686 Issuance of common stock in the acquisition of Kirksville Bancshares, Inc. -- -- -- -- 20,916 Exchange of preferred stock for common stock 14,524 231 -- -- -- Amortization of restricted stock awards -- -- -- 88 88 Cash dividends declared: Common stock -- -- -- -- (22,531) Preferred stock -- -- -- -- (4,243) Unrealized gain on securities available for sale, net -- -- 35,692 -- 35,692 --------- ------- ------------ -------- ---------- Balance, December 31, 1995 -- -- 12,019 (1,533) 496,906 Net income -- -- -- -- 9,662 Purchase of common stock for treasury (57,000) (923) -- -- (923) Issuance of common stock for stock options and employee stock plans 57,000 923 -- (242) 3,226 Issuance of common stock for acquisitions -- -- -- -- 33,174 Exchange of preferred stock for common stock -- -- -- -- -- Amortization of restricted stock awards -- -- -- 140 140 Cash dividends declared: Common stock -- -- -- -- (26,303) Preferred stock -- -- -- -- (4,210) Unrealized loss on securities available for sale, net -- -- (14,245) -- (14,245) --------- ------- ------------ -------- ---------- Balance, December 31, 1996 -- $ -- $ (2,226) $ (1,635) $ 497,427 ========= ======= ============ ======== ========== See accompanying notes to consolidated financial statements.
53 27 ROOSEVELT FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, ---------------------------------------------------- 1996 1995 1994 ----------- ------------ ------------ Cash flows from operating activities: Net income $ 9,662 $ 27,098 $ 41,727 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on early extinguishment of debt 1,452 -- 7,849 Recognition of previously deferred expense related to the termination of interest rate exchange agreements 80,468 -- -- Depreciation and amortization 4,668 4,294 5,814 Amortization of discounts and premiums, net 41,709 9,900 16,383 Decrease (increase) in accrued interest receivable 8,169 (7,645) (2,310) (Decrease) increase in accrued interest payable (14,845) 11,119 (1,023) Provision for losses on loans and real estate 1,262 1,200 17,013 Unrealized losses on impairment of mortgage-backed securities -- 27,063 -- (Increase) in securities held for trading, net -- -- (87,138) Decrease in loans receivable held for sale, net -- -- 86,579 Other, net (7,371) (31,514) 22,674 ----------- ------------ ------------ Net cash provided by operating activities 125,174 41,515 107,568 ----------- ------------ ------------ Cash flows from investing activities: Principal payments and maturities of securities available for sale 228,942 126,291 313,775 Principal payments and maturities of securities held to maturity 941,702 835,059 783,067 Principal payments on loans 897,046 699,307 727,348 Proceeds from sales of securities available for sale 2,317,700 945,941 2,633,590 Proceeds from sales of loans 30,211 -- -- Purchase of securities available for sale (617,089) (737,735) (2,905,255) Purchase of securities held to maturity (573,971) (1,234,320) (1,312,918) Purchase of loans (291,556) (321,097) (146,772) Originations of loans (1,406,742) (688,576) (680,794) Fees paid for interest rate cap and floor agreements, net (43,642) -- (35,078) Net proceeds from sales of real estate 10,408 10,889 9,253 Purchase of office properties and equipment (4,890) (2,402) (7,556) (Purchase) sale of purchased mortgage servicing rights, net (41,846) 3,971 -- Cash and cash equivalents from acquisitions, net of cash paid 11,303 (19,201) 31,087 Payments on sales or exchanges of branch deposits, net -- -- (67,337) Proceeds from sale of loan production facilities -- -- 75,150 ----------- ------------ ------------ Net cash provided by (used in) investing activities 1,457,576 (381,873) (582,440) ----------- ------------ ------------ Cash flows from financing activities: Repayment of mortgage-backed bonds -- -- (60,820) Redemption of subordinated notes (28,750) -- (31,022) Defeasance of mortgage-backed bonds (21,048) -- (72,375) Proceeds from FHLB advances 17,952,500 15,513,000 14,551,256 Principal payments on FHLB advances (18,500,000) (14,851,000) (14,115,980) Fees paid for termination of interest rate exchange agreements, net (50,791) -- -- Excess of deposit receipts over withdrawals (withdrawals over receipts) 210,162 (173,894) (578,888) (Decrease) increase in securities sold under agreements to repurchase, net (1,082,098) (125,313) 617,726 Proceeds from issuance of preferred stock -- -- 21,273 Proceeds from exercise of stock options 1,920 1,107 6,459 Purchase of treasury stock (923) (3,426) (150) Cash dividends paid (30,513) (26,789) (18,056) ----------- ------------ ------------ Net cash (used in) provided by financing activities (1,549,541) 333,685 319,423 ----------- ------------ ------------ Net increase (decrease) in cash and cash equivalents 33,209 (6,673) (155,449) Cash and cash equivalents at beginning of year 15,433 22,106 177,555 ----------- ------------ ------------ Cash and cash equivalents at end of year $ 48,642 $ 15,433 $ 22,106 =========== ============ ============
(Continued) 54 28 SUPPLEMENTAL DISCLOSURES RELATED TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS The Company paid interest of $477.6 million, $455.3 million, and $348.6 million during 1996, 1995, and 1994, respectively. The Company paid income taxes of $28.7 million, $37.1 million, and $6.5 million during 1996, 1995, and 1994, respectively. Cash and cash equivalents obtained from acquisitions, net of cash paid, are summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------------------------------- 1996 1995 1994 ---- ---- ---- (in thousands) Fair value of assets purchased $(267,477) $ (98,763) $ (556,990) Liabilities assumed 234,303 73,731 491,755 Issuance of common stock 33,174 -- 48,231 --------- --------- ----------- Cash received (paid) from acquisitions -- (25,032) (17,004) Cash and cash equivalents acquired 11,303 5,831 48,091 --------- -------- ----------- Cash and cash equivalents from acquisitions, net of cash paid $ 11,303 $ (19,201) $ 31,087 ========= ========= =========== Noncash investing and financing activities are summarized below: YEAR ENDED DECEMBER 31, --------------------------------------------------- 1996 1995 1994 ---- ---- ---- (in thousands) Noncash transfers from securities held for trading to securities available for sale $ -- $ -- $ 242,429 Noncash transfers from securities available for sale to securities held to maturity -- -- 107,318 Noncash transfers from securities held to maturity to securities available for sale 3,169,728 85,165 26,368 Desecuritization resulting in transfer of mortgage-backed securities held to maturity to loans and real estate owned -- 33,603 -- Securitization of loans held for sale 210,083 -- -- Redesignation of interest rate exchange and cap agreements to securities available for sale 42,131 4,369 -- See accompanying notes to consolidated financial statements.
55 29 ROOSEVELT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Roosevelt Financial Group, Inc. (the Company); its three wholly-owned subsidiaries, Roosevelt Bank (the Bank), Missouri State Bank and Trust Company (MSB), a Missouri-chartered bank, and F & H Realty (Realty), a Missouri-chartered real estate investment company; and the Bank's and MSB's wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 1995 and 1994 consolidated financial statements to conform to the 1996 presentation. Results of operations of companies acquired and accounted for as purchases are included from their respective dates of acquisition. When acquired in a pooling of interests transaction, current and prior period financial statements are restated to include the accounts of the acquired companies, if significant. In preparing the consolidated financial statements, management of the Company is required to make estimates and assumptions which significantly affect the reported amounts in the consolidated financial statements. Significant estimates which are particularly susceptible to change in a short period of time include the determination of the allowances for losses on loans and real estate. Investment and Mortgage-Backed Securities At the time of purchase, debt and equity securities are segregated into one of three categories: trading, held to maturity, or available for sale. Trading securities are purchased and held principally for the purpose of reselling them within a short period of time. Unrealized gains and losses on trading securities are included in earnings. Securities classified as held to maturity are accounted for at cost, adjusted for the amortization of premiums and accretion of discounts which are recognized in interest income over the period to maturity for investment securities, or the estimated life of mortgage-backed securities using the level-yield method because the Company has both the ability and the intent to hold such securities to maturity. Securities not classified as either trading or held to maturity are considered to be available for sale. Gains and losses realized on the sale of these securities are based on the specific identification method. Unrealized gains and losses on available for sale securities are excluded from earnings and reported as a net amount as a separate component of stockholders' equity until realized. Unrealized losses on all debt securities are recognized if any market valuation differences are deemed to be other than temporary. Derivative Financial Instruments The Company uses derivative financial instruments as part of its overall interest rate risk strategy. Derivative financial instruments which have been utilized by the Company include interest rate exchange agreements (swaps), interest rate cap, floor, and collar agreements, and to a lesser extent, financial futures contracts. Interest rate swap, cap, floor, and collar agreements have been used to synthetically alter the rate and/or term characteristics of specified interest-bearing assets or liabilities. Financial futures contracts have been used to achieve a position whereby the estimated exposure of a certain position to interest rate movements is offset by approximately equal, but opposite, results in the financial futures contracts. 56 30 Interest rate swaps are agreements to exchange interest payment streams on an agreed upon notional amount. Typically, the Company pays a fixed rate and receives a variable rate based upon a specified floating rate index. The Company makes no interest payments on its interest rate cap, floor, and collar agreements but is entitled to receive an interest payment on an agreed upon notional amount when the agreements are "in the money" (e.g. when the specified floating rate index exceeds or falls below, respectively, a rate specified in the agreement). All such receipts or payments are recorded as a net component of interest expense in the accompanying consolidated financial statements. The Company has entered into interest rate swap, cap, floor, or collar agreements with nationally recognized commercial and investment banking firms or the Federal Home Loan Bank. Typically, the Company pays a fee (premium) to enter an interest rate cap, floor, or collar agreement which is capitalized and then amortized over the life of the agreement on a straight-line basis. No such premium is paid to enter into swap agreements. At the time the agreements are initiated, the Company designates which assets or liabilities are being synthetically altered by the agreement. Agreements which have been designated against available for sale assets are thereafter reported at their fair value with unrealized gains or losses reflected as a separate component of stockholders' equity. Agreements designated against other interest-bearing assets or liabilities are reported at amortized cost. Gains and losses resulting from terminated interest rate swap agreements or interest rate cap, floor, and collar agreements that are in the money are recognized consistent with the gain or loss on the asset or liability that was being synthetically altered by the agreement. To the extent that the designated asset or liability still exists, any gain or loss on the termination of the agreement is deferred and amortized over the shorter term of the remaining contractual life of the agreement or remaining life of the asset or liability. Gains and losses resulting from terminated interest rate cap, floor, and collar agreements that are not in the money are recognized at the time of termination. Interest rate cap, floor, and collar agreements may be redesignated to different assets or liabilities during their lives. At the time of redesignation, the agreements are marked-to-market with the resulting gain or loss being deferred and amortized as if the agreement were canceled. Gains or losses on financial futures contracts which qualify as hedges are deferred. The unamortized balance of such deferred gains or losses is applied to the carrying value of the hedged items. Amortization of the net deferred gains or losses is applied to the interest component of the hedged items using the level-yield method. Gains or losses in the market value of financial futures contracts which do not qualify for hedge accounting are recognized currently. Loans Loans are stated at the principal amount outstanding, net of deferred loan fees, allowance for losses, and any discounts or premiums on purchased loans. The deferred fees, discounts, and premiums are amortized using the level-yield method over the estimated life of the loan. Generally, a loan is classified as nonaccrual and the accrual of interest on such loan is discontinued when the contractual payment of principal or interest has become more than 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. When a loan is placed on nonaccrual status, accrued but unpaid interest is reversed. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (collectively SFAS 114). SFAS 114 addresses the accounting by creditors for impairment of certain loans by specifying how the allowance for loan losses related to such loans should be determined. As SFAS 114 does not apply to residential 57 31 mortgage and consumer loans which are collectively evaluated for impairment and which represent in excess of 95% of the Company's total loan portfolio, the initial and continuing application of SFAS 114 has had no significant impact on the Company's consolidated financial statements. Relative to the Company's commercial real estate loan portfolio, a loan is considered to be impaired when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment is measured based on the underlying value of the collateral. Loans Serviced for Others Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). Accordingly, the Company recognizes as separate assets the rights to service mortgage loans, whether the rights are acquired through purchases of servicing or through the origination or purchase of loans with a definitive plan to sell or securitize the loans with servicing retained. The fair value of capitalized servicing rights assigned to such purchased or originated loans is based upon the present value of estimated future cash flows associated with the servicing. SFAS 122 also requires that an enterprise assess its capitalized mortgage servicing rights for impairment based upon the fair value of those rights. For purposes of measuring impairment, the Company stratifies its servicing rights based upon the interest rate characteristics of the underlying loans, and compares the fair value for each strata to the unamortized recorded value. The fair value is based upon the net present value of expected future cash flows discounted at a rate commensurate with the risks involved. The Company's adoption of SFAS 122 did not have a material impact on the Company's consolidated financial statements. Servicing fees related to loans serviced for others are recognized when loan payments are received. Ancillary income from loan servicing is recorded when received. Operational costs to service such loans are charged to expense as incurred and are included in general and administrative expenses in the accompanying consolidated statements of operations. The capitalized costs of mortgage servicing rights are amortized over the estimated remaining lives of the underlying loans using the level-yield method. Amortization of mortgage servicing rights is recorded as a component of "Loan servicing fees, net" in the consolidated statements of operations. Real Estate Owned Real estate owned includes properties acquired through foreclosure and properties acquired for development and sale. Real estate acquired through foreclosure is transferred to real estate owned at fair value, which represents the new recorded basis of the property. Subsequently, properties are evaluated and any additional declines in value are provided for in an allowance for losses on real estate. Real estate acquired for development and sale is carried at the lower of cost or net realizable value. Allowances for Losses Allowances for losses on loans and real estate owned are established when a loss is probable and can be reasonably estimated. These allowances are provided based on past experience and the prevailing market conditions. Management's evaluation of loss considers various factors including, but not limited to, general economic conditions, loan portfolio composition, prior loss experience, estimated sales price, and holding and selling costs. Provisions for loan losses are recorded to maintain the Company's overall allowance for loan losses within an acceptable range to cover probable credit losses inherent in the portfolio. Management believes that the allowances for losses on loans and real estate owned are adequate. While management uses available information to recognize losses, future additions to the allowances may be necessary based on changes in economic conditions. 58 32 Office Properties and Equipment Office properties and equipment are stated at cost, less accumulated depreciation and leasehold amortization. Depreciation of office buildings and improvements and furniture and equipment is computed on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease. Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings Per Share Net income for primary earnings per share is adjusted for the dividends on convertible preferred stock. The average number of common shares and common equivalent shares outstanding for 1996, 1995, and 1994 was 42,698,851, 40,620,932, and 37,943,933, respectively. Fully diluted earnings per share has been computed using the weighted average number of common shares and common equivalent shares, including the effect of the assumed conversion of convertible preferred stock into common stock, if dilutive. The average number of common shares and common equivalent shares outstanding for 1996, 1995, and 1994 for the purpose of calculating fully diluted earnings per share was 42,731,792, 40,628,697, and 39,005,360, respectively. Cash Flows For the purpose of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and other highly liquid debt instruments with an initial maturity of three months or less. Impact of Prospective Accounting Pronouncements During June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities" (SFAS 125). SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under the financial components approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. The financial components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with pledge of collateral. SFAS 125 extends the "available-for-sale" or "trading" approach in SFAS 115 to nonsecurity financial assets that can contractually be prepaid or otherwise settled in such a way that the holder of the asset would not recover substantially all of its recorded investment. Thus, nonsecurity financial assets (no matter how acquired) such as loans, other receivables, interest-only strips, or residual interests in securitization trusts that are subject to 59 33 prepayment risk that could prevent recovery of substantially all of the recorded amount are to be reported at fair value with the change in fair value accounted for depending on the asset's classification as "available-for-sale" or "trading". SFAS 125 also amends SFAS 115 to prevent a security from being classified as held-to-maturity if the security can be prepaid or otherwise settled in such a way that the holder of the security would not recover substantially all of its recorded investment. SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. Also, the extension of the SFAS 115 approach to certain nonsecurity financial assets and the amendment to SFAS 115 is effective for financial assets held on or acquired after January 1, 1997. Reclassifications that are necessary because of the amendment do not call into question an entity's intent to hold other debt securities to maturity in the future. The adoption of SFAS 125 is not expected to have a material impact on the Company's financial statements. (2) BUSINESS COMBINATIONS During the fourth quarter of 1996, the Company completed the acquisitions of Community Charter Corporation (CCC), Sentinel Financial Corporation (Sentinel), and Mutual Bancompany, Inc. (Mutual). A total of 1,925,776 shares of the Company's common stock were issued in connection with these acquisitions. Total assets of the acquired institutions were approximately $269.4 million. These transactions were structured to qualify as tax free reorganizations and were accounted for under the purchase method of accounting. Operating results of the acquired entities are included in the accompanying consolidated statements of operations from their respective acquisition dates and are not material to the consolidated financial statements. During the fourth quarter of 1995, the Company completed the acquisitions of Kirksville Bancshares, Inc. (Kirksville) and WSB Bancorp, Inc. (WSB). A total of 1,521,435 shares of the Company's common stock were issued in connection with the Kirksville transaction, which was accounted for as a pooling of interests. The Company paid a total cash consideration of approximately $25.0 million in a purchase transaction to acquire WSB. Total assets of the acquired institutions were approximately $227.6 million. These transactions were structured to qualify as tax free reorganizations. The effect of these transactions was not material to the consolidated financial statements and operating results of the acquired entities are included since the respective acquisition dates. On June 30, 1994, the Company completed the acquisition of Farm & Home Financial Corporation (Farm & Home) whose assets totaled $3.1 billion. As a result of this transaction, the Company issued 17,993,838 shares of common stock. The transaction was structured to qualify as a tax free reorganization. The transaction was accounted for as a pooling of interests and, accordingly, the consolidated financial statements of the Company include the results of Farm & Home for all periods presented. Other acquisition and sale activity of Farm & Home during 1994 is summarized as follows:
Nature Items Sold, Date of Transactions Purchased, or Exchanged Cash Consideration - ---- --------------- ----------------------- ------------------ July 1, 1994 Sale of loan production $75.2 million of Texas home builder Received $75.2 million business in Texas lines of credit and six land acquisition and development/rehab loans June 24, 1994 Sale of Corpus Christi, Texas $54.8 million of branch deposits Paid $53.9 million branch facility and deposit and $927,000 of related deposit accounts account loans and furniture and fixtures June 3, 1994 Sale of deposit accounts $13.6 million of branch deposits Paid $13.4 million of branch and $177,000 of related deposit account loans
60 34 On April 22, 1994, the Company completed the acquisition of Home Federal Bancorp of Missouri, Inc. (Home Bancorp). Each holder of the common stock of Home Bancorp received 0.4945 of a share of common stock of the Company on a pre-split basis and $7.50 in cash for each share of Home Bancorp common stock held for a total consideration of $68.3 million. Home Bancorp's total consolidated assets were $532.7 million. The transaction was structured to qualify as a tax free reorganization. The transaction was accounted for under the purchase method of accounting. Operating results of Home Bancorp are included since the acquisition date. 61 35 (3) FAIR VALUE CONSOLIDATED BALANCE SHEETS The Company's primary objective in managing interest rate risk is to position the Company such that changes in interest rates do not have a material adverse impact upon the net market value of the Company. Net market value considers the fair value of financial instruments (assets, liabilities, and off-balance-sheet items), in contrast to the accompanying consolidated balance sheets which are historical cost based. The estimated fair values of the Company's assets and liabilities, and the related carrying amounts from the accompanying consolidated balance sheets, are as follows (in thousands):
DECEMBER 31, 1996 DECEMBER 31, 1995 -------------------------- --------------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----------- ----------- ----------- ----------- ASSETS: Cash and cash equivalents $ 48,642 $ 48,642 $ 15,433 $ 15,433 Securities available for sale: Investment securities 183,227 183,227 159,857 159,857 Mortgage-backed securities 2,915,521 2,915,521 1,433,648 1,433,648 Interest rate exchange, cap, and floor agreements 59,009 59,009 12,956 12,956 Securities held to maturity: Investment securities -- -- 119,186 120,517 Mortgage-backed securities -- -- 3,430,954 3,431,341 Loans 4,298,469 4,387,911 3,577,892 3,708,014 Office properties and equipment, net 54,966 55,762 52,466 53,262 Deferred losses on interest rate exchange agreements -- -- 20,831 -- Unamortized fees on interest rate cap, floor, and collar agreements 14,004 10,378 38,049 37,302 Other assets 222,574 199,326 151,789 159,548 ----------- ----------- ----------- ----------- $ 7,796,412 $ 7,859,776 $ 9,013,061 $ 9,131,878 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits $ 5,347,071 $ 5,355,106 $ 4,907,497 $ 4,954,183 Securities sold under agreements to repurchase 3,095 3,095 1,082,814 1,083,048 Advances from Federal Home Loan Bank 1,837,756 1,837,556 2,377,138 2,378,419 Other borrowings -- -- 47,523 50,260 Deferred gains on interest rate exchange agreements -- -- 5,661 -- Interest rate exchange agreements -- -- -- 108,698 Other liabilities 111,063 139,629 95,522 95,292 ----------- ----------- ----------- ----------- Total liabilities 7,298,985 7,335,386 8,516,155 8,669,900 Net market value -- 524,390 -- 461,978 Stockholders' equity 497,427 -- 496,906 -- ----------- ----------- ----------- ----------- $ 7,796,412 $ 7,859,776 $ 9,013,061 $ 9,131,878 =========== =========== =========== =========== NON-FINANCIAL INSTRUMENTS: Demand deposits $ -- $ 33,161 $ -- $ 19,552 Commitments to extend credit $ 111,584 $ 111,498 $ 225,324 $ 225,752 =========== =========== =========== ===========
62 36 Net market value is not intended to represent the value of the Company's stock or the amounts distributable to stockholders in connection with a sale of the Company or in the unlikely event of its liquidation. Such amounts ascribe no value to intangible assets or to the going concern value of the enterprise. The following methods and assumptions were used by the Company in estimating fair value disclosures: Cash and cash equivalents - Due to the short-term nature of these financial instruments, carrying value approximates fair value. Investment securities and mortgage-backed securities - Fair values are based on quoted market prices or dealer quotes. Where such quotes are not available, fair value is estimated using quoted market prices for similar securities, or in limited instances discounted cash flow analyses. Stock in the Federal Home Loan Bank is valued at cost, which represents redemption value and approximates fair value. Interest rate exchange, cap, floor, and collar agreements - The fair values of these agreements, are estimated by comparing the contractual rates the Company is paying or receiving to market rates quoted on new agreements with similar maturities by counterparties of similar creditworthiness. Loans - The fair value of loans is estimated by discounting future cash flows at market interest rates for loans of similar credit risk, terms, and maturities, taking into consideration repricing characteristics and prepayment risk. Office properties and equipment - The fair value of office properties is estimated based upon in-house appraised values for the Company's properties. The net book value of office equipment is assumed to approximate its fair value. Other assets and liabilities - The estimated fair value of other assets, which includes intangibles, and real estate owned, and other liabilities represents the sum of all contractual financial receivables or obligations adjusted for the tax effects. Deposits with defined maturities - The fair value of certificates of deposit accounts is based on the discounted values of contractual cash flows using rates currently offered in the marketplace for accounts of similar remaining maturities. Deposits without defined maturities - For the purposes of calculating "Net Market Value," no consideration is given to the economic value of the Bank's long-term relationships with its depositors. For deposit liabilities without defined maturities, fair value is assumed to be the amount payable on demand at the reporting date. By ignoring what is commonly referred to as a core deposit intangible, no consideration is given to the present value of the Company's expected future profitability derived from those customer relationships. However, such value as calculated by the Company is disclosed, net of applicable income taxes, under the heading "Non-Financial Instruments." The aforementioned value has been calculated by comparing the rates paid on deposits to a rate paid on a wholesale borrowing having a maturity equal to the expected maturity of the deposits reduced by the cost to service and insure such deposits. Securities sold under agreements to repurchase - Fair values are based on the discounted value of contractual cash flows using dealer quoted rates for agreements of similar terms and maturities. Advances from Federal Home Loan Bank - The fair value of advances from the Federal Home Loan Bank (FHLB) is based on discounted values of contractual cash flows using rates currently offered in the marketplace for instruments with similar terms and maturities. Other borrowings - Fair values are based on quoted market prices, dealer quotes, or on the discounted values of contractual cash flows using market derived spreads. 63 37 Commitments to extend credit - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Income taxes - The estimated income tax effects arising from the differences between fair values and tax bases of financial instruments is calculated and included in the fair value disclosure of other assets or other liabilities. The effect of the restoration to taxable income of the Bank's bad debt reserves for income tax purposes resulting from the unlikely event of liquidation has not been included. (4) SECURITIES AVAILABLE FOR SALE The amortized cost and market value of securities available for sale at December 31, 1996 are summarized as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----------- ---------- ---------- ---------- (in thousands) Investment Securities: U.S. Government and agency obligations $ 12,113 $ 292 $ (7) $ 12,398 Corporate securities 14,280 1,041 (284) 15,037 --------- ------ ------- --------- 26,393 1,333 (291) 27,435 FHLB stock 155,792 -- -- 155,792 --------- ------ ------- --------- 182,185 1,333 (291) 183,227 --------- ------ ------- --------- Mortgage-backed Securities: Mortgage-backed certificates: GNMA 105,705 2,481 (251) 107,935 FNMA 128,557 1,713 (456) 129,814 FHLMC 135,524 2,207 (1,510) 136,221 Private pass-throughs 2,331,504 18,713 (15,600) 2,334,617 Collateralized mortgage obligations 170,219 1,889 (3,747) 168,361 Other 35,274 3,942 (643) 38,573 Derivative financial instruments: Interest rate cap agreements 71,410 550 (14,627) 57,333 Interest rate floor agreements 145 1,531 -- 1,676 --------- ------ ------- --------- 2,978,338 33,026 (36,834) 2,974,530 --------- ------ ------- --------- $3,160,523 $34,359 $(37,125) $3,157,757 ========= ====== ======= =========
64 38 The amortized cost and market value of securities available for sale at December 31, 1995 are summarized as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----------- ---------- ---------- ---------- (in thousands) Investment Securities: U.S. Government and agency obligations $ 10,671 $ 439 $ (25) $ 11,085 Corporate securities 14,882 1,887 (6) 16,763 --------- ------ ------- --------- 25,553 2,326 (31) 27,848 FHLB stock 132,009 -- -- 132,009 --------- ------ ------- --------- 157,562 2,326 (31) 159,857 --------- ------ ------- --------- Mortgage-backed Securities: Mortgage-backed certificates: GNMA 694,541 17,996 (538) 711,999 FNMA 342,405 4,440 (313) 346,532 FHLMC 308,839 6,380 (803) 314,416 Other 59,512 3,090 (1,901) 60,701 Derivative financial instruments: Interest rate exchange agreements (4,294) -- (2,234) (6,528) Interest rate cap agreements 23,997 -- (15,259) 8,738 Interest rate floor agreements 4,271 6,475 -- 10,746 --------- ------ ------- --------- 1,429,271 38,381 (21,048) 1,446,604 --------- ------ ------- --------- $1,586,833 $40,707 $(21,079) $1,606,461 ========= ====== ======= =========
The amortized cost and market value of debt securities available for sale at December 31, 1996, by contractual maturity, are summarized as follows:
AMORTIZED MARKET COST VALUE --------- ------- (in thousands) Due in one year or less $ 3,860 $ 3,868 Due after one year through five years 21,374 22,220 Due after five years through ten years 1,126 1,313 Due after ten years 33 34 ---------- ---------- 26,393 27,435 Mortgage-backed securities 2,978,338 2,974,530 ---------- ---------- $ 3,004,731 $ 3,001,965 ========== ==========
At December 31, 1996 and 1995, accrued interest receivable on securities available for sale totaled $19.9 million and $8.0 million, respectively. Securities available for sale with an amortized cost and approximate market value of $1.2 billion and $1.1 billion at December 31, 1996 and 1995, respectively, were pledged to secure deposits and advances from the FHLB. At December 31, 1996, the Company had outstanding commitments to purchase and sell mortgage-backed securities of approximately $199.3 million and $160.0 million, respectively. Gross realized gains on the sale of or early redemption by the issuer of securities available for sale totaled $27.8 million, $25.0 million, and $15.4 million for 1996, 1995, and 1994, respectively. Gross realized losses on such securities totaled $18.6 million, $1.1 million, and $43.6 million for 1996, 1995, and 1994, respectively. 65 29 (5) SECURITIES HELD TO MATURITY In December 1996, the Company reclassified its entire investment and mortgage-backed securities portfolios from held to maturity to available for sale. The securities transferred consisted of investment securities with approximate amortized cost and market values of $114.3 million and $114.9 million, respectively, and mortgage-backed securities with approximate amortized cost and market values of $3.1 billion. This action was taken to provide the Company maximum flexibility to manage its portfolio. As a result of the Company's decision to reclassify its entire securities portfolio from held to maturity to available for sale, it will not be able to classify any securities as held to maturity for a minimum period of one year from the initial reclassification date. The amortized cost and market value of securities held to maturity at December 31, 1995 are summarized as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ----------- ---------- ---------- ---------- (in thousands) Investment Securities: U.S. Government and agency obligations $ 113,554 $ 1,242 $ -- $ 114,796 Corporate securities 5,632 89 -- 5,721 --------- ------- ------- --------- 119,186 1,331 -- 120,517 --------- ------- ------- --------- Mortgage-backed Securities: Mortgage-backed certificates: GNMA 13,895 177 (243) 13,829 FNMA 131,874 1,919 (422) 133,371 FHLMC 239,026 3,287 (742) 241,571 Private pass-throughs 2,705,311 21,618 (21,758) 2,705,171 Collateralized mortgage obligations 340,848 2,556 (6,005) 37,399 --------- ------- -------- --------- 3,430,954 29,557 (29,170) 3,431,341 --------- ------- -------- --------- $ 3,550,140 $ 30,888 $ (29,170) $ 3,551,858 ========= ======= ======== ==========
At December 31, 1995, accrued interest receivable on securities held to maturity totaled $23.1 million. Securities held to maturity with an amortized cost and approximate market value of $1.4 billion at December 31, 1995, were pledged to secure securities sold under agreements to repurchase, other borrowings, and interest rate exchange agreements. During 1995, certain private issuer mortgage-backed securities held by the Company were determined to be other than temporarily impaired. As a result, the Company recorded a $27.1 million pre-tax write-down ($17.8 million after tax) to reflect the impairment of such securities. The amount of the write-down was based on discounted cash flow analyses performed by management (based upon assumptions regarding delinquency levels, foreclosure rates, and loss ratios on REO disposition in the underlying portfolio). Discounted cash flow analyses were utilized to estimate fair value due to the absence of a ready market for the securities. On November 15, 1995, the FASB issued a special report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities, Questions and Answers" (the Report). The Report was issued as an aid in understanding and implementing SFAS 115. The Report provided transition guidance for an enterprise that adopted SFAS 115 prior to the issuance of the Report. The guidance allowed a one-time reassessment of the classification of securities as of a single measurement date without tainting the classification of the remaining held to maturity debt securities. Such reassessment and transfers were to be completed no later than December 31, 1995. On December 31, 1995, the Company transferred into the available for sale portfolio from the held to maturity category mortgage-backed securities with an amortized cost and market value of $67.5 million and investment securities with an amortized cost and market value of $17.6 million. 66 40 (6) LOANS Loans are summarized as follows:
DECEMBER 31, ------------------------------ 1996 1995 ----------- ----------- (in thousands) Real Estate: Residential $ 3,791,145 $ 3,320,098 Commercial 153,375 137,507 Construction 27,876 11,969 Consumer loans 348,280 125,633 ---------- ---------- 4,320,676 3,595,207 Add (Deduct): Loans in process (10,131) (4,266) Purchased loan premiums 21,914 17,359 Unearned discounts (12,283) (9,105) Deferred loan costs 1,012 552 Allowance for losses (22,719) (21,855) ---------- ---------- $ 4,298,469 $ 3,577,892 ========== ========== Weighted average interest rate at end of year 7.69% 7.58% ==== ====
Gross loans at December 31, 1996, by contractual maturity, were as follows (in thousands):
Residential Commercial Construction Consumer Total ----------- ---------- ------------ -------- ----- Adjustable-rate loans: Due within one year $ 31,088 $ 4,553 $ 7,282 $ 138,245 $ 181,168 After one but within five years 9,438 14,274 1,762 8,528 34,002 After five but within ten years 32,430 11,616 138 59,530 103,714 After ten years 2,525,202 14,356 -- 6,533 2,546,091 --------- ------- ------- -------- ---------- 2,598,158 44,799 9,182 212,836 2,864,975 --------- ------- ------- -------- ---------- Fixed-rate loans: Due within one year 11,370 7,239 17,705 18,179 54,493 After one but within five years 33,017 55,413 989 90,879 180,298 After five but within ten years 104,116 38,654 -- 5,442 148,212 After ten years 1,044,484 7,270 -- 20,944 1,072,698 --------- ------- ------- -------- ---------- 1,192,987 108,576 18,694 135,444 1,455,701 --------- ------- ------- -------- ---------- $ 3,791,145 $ 153,375 $ 27,876 $ 348,280 $ 4,320,676 ========= ======= ======= ======== ==========
At December 31, 1996 and 1995, accrued interest receivable on loans totaled approximately $25.7 million and $22.3 million, respectively. Nonaccrual loans totaled $12.2 million, $9.5 million, and $7.6 million at December 31, 1996, 1995, and 1994, respectively. If interest on these loans had been recognized, such income would have been $924,000, $1.1 million, and $686,000 for 1996, 1995, and 1994, respectively. During 1996, 1995, and 1994 these nonaccrual loans contributed $246,000, $203,000, and $221,000 to interest income, respectively. In addition, at December 31, 1996, 1995, and 1994 the Company had troubled debt restructurings aggregating $53,000, $661,000, and $2.8 million, respectively. During 1996, 1995, and 1994, these troubled debt restructurings contributed $22,000, $175,000, and $184,000 to interest income, respectively. Had these loans not been restructured, interest income would have been $26,000, $211,000, and $222,000 for 1996, 1995, and 1994, respectively. As of December 31, 1996, the Company had outstanding commitments to originate fixed-rate mortgage loans of approximately $27.8 million, adjustable-rate mortgage loans of approximately $66.5 million, fixed-rate residential construction loans of approximately $11.3 million, and adjustable-rate residential construction loans of approximately $4.3 million. The Company also had outstanding commitments to originate fixed-rate non-residential construction loans of approximately $484,000 and variable-rate non-residential construction loans of approximately $1.2 million. Commitments to extend credit may involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The amount of credit loss in the event of nonperformance by the other party to the commitment is represented by the contractual amount of the commitment. Interest rate risk on commitments to extend credit results from the possibility that interest rates may have moved unfavorably from the position of the Company since the time the commitment was made. 67 41 The Company services mortgage loans for its own account and also services mortgage loans for third-party investors under loan servicing agreements. Pursuant to these agreements, the Company typically collects from the borrower monthly payments of principal and interest on mortgage loans and additional amounts towards payment of real estate taxes and insurance. The Company retains its servicing fee from such payments and remits the balance of the principal and interest payments to the investors in the mortgage loans or associated mortgage-backed securities. At December 31, 1996 and 1995, the Company serviced 116,882 mortgage loans totaling $8.4 billion and 78,698 mortgage loans totaling $5.0 billion, respectively. Of these amounts, $3.5 billion and $3.0 billion were serviced on the Company's own behalf at December 31, 1996 and 1995, respectively. Activity in mortgage servicing rights originated and purchased, which is recorded in other assets in the accompanying consolidated balance sheets, is summarized as follows:
Year Ended December 31, --------------------------------------- 1996 1995 1994 --------- -------- -------- (in thousands) Balance, beginning of year $ 15,862 $ 22,556 $ 28,117 Purchases 41,846 812 -- Originations 1,252 -- -- Sales -- (3,273) -- Amortization (6,570) (4,233) (5,561) ------ ------ ------ Balance, end of year $ 52,390 $ 15,862 $ 22,556 ====== ====== ======
(7) REAL ESTATE OWNED Real estate owned is summarized as follows:
December 31, ----------------------- 1996 1995 -------- -------- (in thousands) Acquired through foreclosure $ 14,511 $ 19,098 Acquired for development and sale 216 705 ------- ------- 14,727 19,803 Less allowance for losses (2,289) (4,370) ------- ------- $ 12,438 $ 15,433 ======= =======
(8) ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE Activity in the allowance for loan losses is summarized as follows:
Year Ended December 31, --------------------------------------- 1996 1995 1994 --------- -------- -------- (in thousands) Balance, beginning of year $ 21,855 $ 22,915 $ 9,056 Provision charged to expense 1,262 1,200 12,432 Additions acquired through acquisitions 1,242 1,166 2,483 Charge-offs, net (1,640) (3,426) (1,056) -------- ------- ------- Balance, end of year $ 22,719 $ 21,855 $ 22,915 ======== ======= =======
68 42 Activity in the allowance for losses on real estate owned is summarized as follows:
Year Ended December 31, --------------------------------------- 1996 1995 1994 --------- -------- -------- (in thousands) Balance, beginning of year $ 4,370 $ 6,484 $ 3,737 Provision for real estate losses -- -- 4,581 Additions acquired through acquisitions -- -- 197 Charge-offs (2,081) (2,114) (2,031) ------- ------ ------ Balance, end of year $ 2,289 $ 4,370 $ 6,484 ======= ====== ======
(9) OFFICE PROPERTIES AND EQUIPMENT, NET Office properties and equipment are summarized as follows:
December 31, ----------------------- 1996 1995 -------- -------- (in thousands) Land, office buildings, and improvements $ 55,527 $ 53,601 Furniture and equipment 26,987 23,056 Leasehold improvements 4,774 4,349 ------ ------ 87,288 81,006 Less accumulated depreciation and amortization 32,322 28,540 ------ ------ $ 54,966 $ 52,466 ====== ======
Depreciation and amortization expense on office properties and equipment totaled $4.7 million, $4.3 million, and $5.8 million, for 1996, 1995, and 1994, respectively. The Company and its subsidiaries lease certain premises and equipment under operating leases which expire through the year 2014, with certain lease agreements containing renewal options. Minimum lease payments (in thousands) for the years ending December 31 are summarized as follows:
1997 $ 3,106 1998 2,750 1999 1,508 2000 1,009 2001 776 2002 through 2014 2,136 ------ $ 11,285 ======
Rent expense totaled $3.1 million, $2.8 million, and $4.7 million for 1996, 1995, and 1994, respectively. 69 43 (10) INTANGIBLE ASSETS Intangible assets and fair value in excess of cost of net assets acquired (negative goodwill), included in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets are summarized as follows:
December 31, ----------------------- 1996 1995 -------- -------- (in thousands) Intangible assets: Goodwill $ 4,259 $ 671 Core deposit intangibles 41,156 33,457 ------ ------ 45,415 34,128 Less accumulated amortization 7,670 4,896 ------ ------ 37,745 29,232 Negative goodwill, net of accumulated amortization (3,569) (4,173) ------ ------ $ 34,176 $ 25,059 ====== ======
The presentation of intangible assets in accordance with generally accepted accounting principles does not recognize the future economic benefit associated with certain of the Company's intangible assets whose amortization is tax deductible. Such intangible assets approximated $8.2 million at December 31, 1996. The future benefit associated with such tax deductible intangibles is approximately $2.9 million. Goodwill (including negative goodwill) and core deposit intangibles resulted from business combinations which were accounted for using the purchase method of accounting and from branch deposit acquisitions. These intangibles are amortized on a straight line basis over the period that it is expected to be benefited, not to exceed ten years. Intangible assets are periodically reviewed for possible impairment when events or changed circumstances affect the underlying basis of the assets. (11) DEPOSITS Deposits are summarized as follows:
DECEMBER 31, -------------------------------------------------------------------------------- 1996 1995 ------------------------------------ ------------------------------------- PERCENT AVERAGE PERCENT AVERAGE AMOUNT OF TOTAL RATE AMOUNT OF TOTAL RATE ----------- -------- ------- ----------- -------- ------- (dollars in thousands) Demand deposits: NOW $ 390,352 7.3% 0.81% $ 343,036 7.0% 0.96% Passbook 289,268 5.4 2.31 327,219 6.7 2.31 Money market demand 796,046 14.9 4.19 555,277 11.3 4.12 --------- ---- --------- ----- Total demand deposits 1,475,666 27.6 2.93 1,225,532 25.0 2.75 --------- ---- --------- ----- Certificates of deposit: 2.00% to 3.99% 3,929 .1 2.76 44,903 .9 3.78 4.00% to 5.99% 2,826,377 52.9 5.44 2,278,911 46.4 5.40 6.00% to 7.99% 1,010,813 18.9 6.52 1,324,401 27.0 6.53 8.00% to 9.99% 29,164 .5 8.88 33,207 .7 9.03 10.00% & above 699 -- 11.11 674 -- 11.16 --------- ---- --------- ----- Total certificates of deposit 3,870,982 72.4 5.75 3,682,096 75.0 5.82 --------- ---- --------- ----- Unearned discount on brokered certificates (49) -- (117) -- -- Net adjustment related to purchase method of accounting 472 -- (14) -- -- --------- ----- --------- ----- $ 5,347,071 100.0% 4.97% $ 4,907,497 100.0% 5.05% ========= ===== ==== ========= ===== ====
70 44 The scheduled maturities of certificates of deposit are summarized as follows:
DECEMBER 31, ----------------------------------------------------------------- 1996 1995 -------------------------------- ---------------------------- PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL ------------ -------- ----------- -------- (dollars in thousands) Due within: One year $ 2,364,151 61.2% $ 2,204,654 59.9% Two years 625,054 16.1 741,149 20.1 Three years 540,614 13.9 250,594 6.8 Four years 135,908 3.4 279,177 7.6 Five years 102,673 2.7 119,912 3.3 Thereafter 102,582 2.7 86,610 2.3 --------- ----- --------- ----- $ 3,870,982 100.0% $ 3,682,096 100.0% ========= ===== ========= =====
At December 31, 1996 and 1995, accrued interest payable on deposits totaled $8.2 million and $7.2 million, respectively. Certificate of deposit accounts with balances of $100,000 or greater totaled $332.2 million and $262.8 million at December 31, 1996 and 1995, respectively. At December 31, 1996, $63.8 million will mature within three months, $70.3 million will mature in three to six months, $84.4 million will mature in six months to one year, and $113.7 million will mature after one year. Interest expense on deposits by type is summarized as follows:
Year Ended December 31, --------------------------------------- 1996 1995 1994 --------- -------- -------- (in thousands) Passbook $ 7,035 $ 8,063 $ 9,821 NOW and money market demand 30,501 22,782 23,706 Certificates of deposit 212,284 202,991 166,663 ------- ------- ------- $ 249,820 $ 233,836 $ 200,190 ======= ======= =======
(12) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE Mortgage-backed securities sold under agreements to repurchase are treated as financings. The securities underlying the agreements are book entry securities and are delivered, by appropriate entry, to the major investment banking firms (dealers) used in the transactions. The dealers may have sold, loaned, or otherwise disposed of such securities to other parties in the normal course of their operations, and have agreed to resell to the Company the same securities or substantially identical securities at the maturities of the agreements. The carrying value and market value of securities sold under agreements to repurchase are summarized as follows:
DECEMBER 31, ------------------------------------------------------ 1996 1995 ----------------------- ------------------------ CARRYING MARKET CARRYING MARKET VALUE VALUE VALUE VALUE ----- ----- ----- ----- (in thousands) Agreements involving: Same securities $ 3,095 $ 4,018 $ 897,261 $ 928,600 Substantially identical securities -- -- 185,553 186,600 ------ ------ --------- --------- 3,095 4,018 1,082,814 1,115,200 Accrued interest payable 8 -- 5,534 -- ------ ------ --------- --------- $ 3,103 $ 4,018 $ 1,088,348 $ 1,115,200 ====== ====== ========= =========
71 45 At December 31, 1996 and 1995, the scheduled maturities of securities sold under agreements to repurchase are summarized as follows:
December 31, ---------------------- 1996 1995 ------- ----------- (in thousands) Maturing within 30 days $ 3,095 $ 951,602 30 - 90 days -- 34,462 Over 90 days -- 96,750 ------ --------- $ 3,095 $ 1,082,814 ====== =========
Financial data pertaining to the weighted average cost, the level of securities sold under agreements to repurchase, and the related interest expense is as follows:
AT OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ----------- ----------- (dollars in thousands) Weighted average interest rate at end of year 3.70% 5.84% 5.96% Weighted daily average interest rate during the year 5.50 5.93 4.47 Daily average of securities sold under agreements to repurchase $ 857,924 $1,426,101 $1,193,671 Maximum securities sold under agreements to repurchase at any month end 1,235,970 1,685,869 1,650,963 Interest expense during the year 47,140 84,557 53,303
72 46 (13) ADVANCES FROM FEDERAL HOME LOAN BANK Advances from the FHLB are summarized as follows:
DECEMBER 31, -------------------------------------------------------- 1996 1995 ------------------------ ------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE DUE IN AMOUNT RATE AMOUNT RATE - ------ -------- ------ -------- ------ (dollars in thousands) 1996 $ -- --% $ 2,077,000 5.74% 1997 1,113,756 5.74 165,756 6.57 1998 569,500 5.43 57,500 5.73 1999 75,000 5.56 -- -- 2000 77,500 5.60 75,000 5.76 2003 2,000 6.39 2,000 6.39 ---------- ---------- 1,837,756 5.63 2,377,256 5.80 Net adjustment related to purchase method of accounting -- -- (118) -- ---------- ---- ---------- $ 1,837,756 5.63% $ 2,377,138 5.80% ========== ==== ========== ====
Financial data pertaining to the weighted average cost, the level of FHLB advances, and the related interest expense is as follows:
AT OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ----------- ----------- (dollars in thousands) Weighted average interest rate at end of year 5.63% 5.80% 5.90% Weighted daily average interest rate during the year 5.55 5.99 4.80 Daily average of FHLB advances $ 2,598,545 $ 2,236,899 $ 1,579,100 Maximum FHLB advances at any month end 2,868,756 2,460,000 1,857,000 Interest expense during the year 144,089 134,073 75,800
The Company is required to maintain mortgage-backed securities with a market value of 100% of outstanding collateralized advances and qualifying loans with principal balances aggregating 150% of outstanding noncollateralized advances. FHLB stock is also pledged as collateral for these advances. During April 1994, the Company terminated a $100.0 million advance from the FHLB while restructuring its portfolio in order to maintain the Company's then existing interest rate position. This resulted in a pretax loss totaling approximately $980,000 in 1994, which has been recorded, net of its tax effect, as an extraordinary item. 73 47 (14) OTHER BORROWINGS Other borrowings are summarized as follows:
December 31, ------------------------ 1996 1995 --------- -------- (in thousands) Mortgage-backed bonds (net of unamortized discount of $92 at December 31, 1995) 10.125% due April 15, 2018 $ -- $ 19,664 Subordinated notes, 9.5% due August 1, 2002 -- 27,859 -------- ------- $ -- $ 47,523 ======== =======
During 1996, the Company called the subordinated notes at par plus accrued interest. This resulted in a pretax loss totaling approximately $812,000, representing the write off of a previously unamortized debt discount which has been recorded, net of its tax effect, as an extraordinary item. Also during 1996, the Company defeased mortgage-backed bonds totaling $19.7 million. During 1994, the Company repurchased and defeased mortgage-backed bonds totaling $54.3 million. These transactions resulted in pretax losses totaling approximately $1.4 million and $7.2 million in 1996 and 1994, respectively, which have been recorded, net of their tax effects, as extraordinary items. During 1991, the Company, under the name Farm & Home, issued $31.0 million of 13.0% subordinated debentures in exchange for all of its then existing 13.0% Series A Cumulative Exchangeable Preferred Stock. The debentures, which were recorded net of discount of $4.0 million, had a net book value of $27.0 million at December 31, 1993, were scheduled to mature in 2016, and had an effective interest rate of 13.58%. In June 1994, using the proceeds from the issuance of 319,000 shares of preferred stock and cash reserves, these debentures were called at par. This resulted in a pretax loss totaling $4.0 million which has been recorded, net of its tax effect, as an extraordinary item. (15) INTEREST RATE RISK MANAGEMENT The Company's primary objective regarding asset and liability management is to position the Company such that changes in interest rates do not have a material adverse effect on net interest income or the net market value of the Company. The Company's primary strategy for accomplishing its asset and liability management objectives is achieved by matching the weighted average maturities of assets, liabilities, and off-balance sheet items (duration matching). A portion of the duration matching strategy has involved, more historically than currently, the use of derivative financial instruments such as interest rate exchange agreements, interest rate cap and floor agreements and, to a much lesser extent, interest rate collar agreements and financial futures contracts. The Company uses derivative financial instruments solely for risk management purposes. None of the Company's derivative instruments are what are termed leveraged instruments. These types of instruments are riskier than the derivatives used by the Company in that they have embedded options that enhance their performance in certain circumstances, but dramatically reduce their performance in other circumstances. The Company is not a dealer nor does it make a market in such instruments. The Company does not trade the instruments and the Board of Directors' approved policy governing the Company's use of these instruments strictly forbids speculation of any kind. 74 48 The risks generally associated with interest rate exchange agreements are also the same as for interest rate cap, floor, and collar agreements. Such risks are the risk that the counterparty in the agreement may default ("credit risk"), the risk that at the time of any such default, interest rates may have moved favorably from the perspective of the nondefaulting party ("market risk") and the risk that interest accrued and due to the Company previously reflected in the consolidated balance sheets may not be received as a result of the default. The Company's interest rate exchange agreements and interest rate cap and floor agreements have been entered into with nationally recognized commercial and investment banking firms or the FHLB. As such, the Company does not anticipate nonperformance by the counterparties. Financial futures contracts are subject to similar market risks as interest rate exchange agreements; however, credit risk is substantially mitigated due to the requirement that participants settle changes in the value of their positions daily. The Company cancelled all of its interest rate exchange agreements during the third quarter of 1996, accordingly there are no such agreements outstanding at December 31, 1996. Interest rate exchange agreements at December 31, 1995 are summarized as follows:
DECEMBER 31, 1995 ------------------------------------------------------------------- NOTIONAL AVERAGE AVERAGE WEIGHTED PRINCIPAL RATE RATE AVERAGE FAIR DESIGNATED AGAINST AMOUNT RECEIVED PAID MATURITY VALUE - ------------------ --------- -------- ------- -------- ----- (dollars in thousands) Fixed rate available for sale mortgage-backed securities: Fixed interest rate paid $ 260,000 5.84% 6.27% 4.25 yrs $ (6,528) ---------- ---------- Short-term wholesale borrowings maturing or repricing within 100 days or less: Fixed interest rate paid 795,000 5.88 8.99 5.82 yrs (122,468) Variable interest rate paid 159,000 7.36 5.94 6.05 yrs 13,770 ---------- ---------- 954,000 6.13 8.48 (108,698) ---------- ---------- Total $1,214,000 6.06% 8.01% $ (115,226) ========== ==== ==== ==========
75 49 Interest rate cap, floor, and collar agreements are summarized as follows (dollars in thousands):
NOTIONAL AVERAGE CURRENT WEIGHTED CAPS: PRINCIPAL CONTRACT INDEX AVERAGE AMORTIZED FAIR DESIGNATED AGAINST AMOUNT RATE RATE MATURITY COST VALUE - ------------------ ---------- -------- ------- -------- --------- ----- Adjustable rate available for sale mortgage-backed securities December 31, 1996 $3,302,500 8.50% 5.58% 6.22 yrs. $ 71,410 $ 57,333 ========== ==== ==== ======== ======== December 31, 1995 $2,152,500 8.15% 5.85% 3.40 yrs. $ 23,997 $ 8,738 ========== ==== ==== ======== ======== Short-term wholesale borrowings maturing or repricing within 100 days or less December 31, 1996 $ -- --% --% -- $ -- $ -- ========== ==== ==== ======== ======== December 31, 1995 $ 400,000 9.63% 5.88% 8.92 yrs. $ 12,876 $ 6,135 ========== ==== ==== ======== ======== FLOORS: DESIGNATED AGAINST - ------------------ Adjustable rate available for sale mortgage-backed securities December 31, 1996 $ 150,000 7.50% 5.52% .61 yrs. $ 145 $ 1,676 ========== ==== ==== ======== ======== December 31, 1995 $ 615,000 5.12% 4.76% 5.06 yrs. $ 4,271 $ 10,746 ========== ==== ==== ======== ======== Interest-bearing retail deposits December 31, 1996 $ 450,000 6.33% 5.50% 4.52 yrs. $ 13,938 $ 10,327 ========== ==== ==== ======== ======== December 31, 1995 $ 955,000 5.32% 5.01% 6.27 yrs. $ 25,035 $ 31,116 ========== ==== ==== ======== ======== COLLAR: DESIGNATED AGAINST - ------------------ Interest-bearing retail deposits December 31, 1996 $ 25,000 5.25%/10.25% 5.88% 1.84 yrs. $ 66 $ 51 ========== =========== ==== ======== ======== December 31, 1995 $ 25,000 5.25%/10.25% 5.88% 2.84 yrs. $ 138 $ 51 ========== =========== ==== ======== ========
76 50 Changes in the notional amounts of interest rate exchange, cap, floor, and collar agreements and related recognized net losses were as follows.
INTEREST INTEREST INTEREST INTEREST RATE EXCHANGE RATE CAP RATE FLOOR RATE COLLAR AGREEMENTS AGREEMENTS AGREEMENTS AGREEMENTS ------------- ---------- ---------- ---------- (in thousands) Notional balance at December 31, 1994 $ 1,574,000 $ 2,552,500 $ 1,570,000 $ 25,000 Maturities (360,000) -- -- -- ----------- ----------- ----------- -------- Notional balance at December 31, 1995 1,214,000 2,552,500 1,570,000 25,000 Purchases 100,000 1,500,000 -- -- Maturities -- (250,000) -- -- Terminations (1,314,000) (500,000) (970,000) -- ----------- ----------- ----------- -------- Notional balance at December 31, 1996 $ -- $ 3,302,500 $ 600,000 $ 25,000 =========== =========== =========== ========
As a result of its continuing transition to a more retail-oriented institution, the Company was able to substantially reduce in 1996, principally during the third and fourth quarters, its need for derivative financial instruments in managing its interest rate risk. Accordingly, the Company terminated all of its interest rate exchange agreements, $970 million notional amount of its interest rate floor agreements, and $500 million notional amount of its interest rate cap agreements. The terminations of the interest rate exchange agreements were accounted for in accordance with the provisions of Emerging Issues Task Force Issue 84-7 (EITF 84-7) which requires that gains or losses on the termination of such agreements be recognized when the offsetting gain or loss is recognized on the designated asset or liability. That is, to the extent that the designated assets or liabilities still exist, any gain or loss on the termination of the agreement designated as a synthetic alteration would be deferred and amortized over the shorter term of the remaining contractual life of the agreement or the remaining life of the asset or liability. During the third quarter 1996, interest rate exchange agreements designated against available for sale fixed rate mortgage-backed securities were cancelled resulting in a $16.1 million gain which was recognized as the above mentioned assets against which the agreements had been designated were concurrently sold. The remaining interest rate exchange agreements designated against short-term wholesale borrowings were also cancelled at a cost of $68.0 million which costs were deferred to be amortized because the underlying liabilities against which the agreements had been designated still existed at September 30, 1996. Efforts to further the previously discussed retail transition continued in the fourth quarter of 1996 and resulted in shrinkage in the Company's total assets by $1.3 billion. This shrinkage resulted primarily from the sale of investment and mortgage-backed securities with the proceeds being utilized to further reduce short-term wholesale borrowings. Further, the Company completed two acquisitions of thrifts during October of 1996 which further reduced such borrowings by replacing them as a funding source with the acquired retail deposits. Upon repayment of the designated short-term wholesale borrowings, all existing net deferred swap cancellation costs and certain other deferred gains and losses related to previously terminated interest rate cap and floor agreements in total amounting to $80.5 million were recognized during the fourth quarter of 1996. The terminations of the $970 million notional amount interest rate floor and $500 million notional amount cap agreements were accounted for in accordance with the provisions of Issue 8A of the American Institute of Certified Public Accountants Issues Paper "Accounting for Options" (Issues Paper). In accordance with the conclusions expressed in the Issues Paper, the excess of the unamortized time value of the options (the premium) over the amount of cash received upon termination amounting to $6.4 million was recognized in earnings when the options were terminated. The recognized net losses referred to above totaling $70.7 million are reflected in the caption "Net Gain (Loss) from Financial Instruments" in the accompanying consolidated financial statements (see Note 16). 77 51 At December 31, 1996, unamortized fees related to the purchase of interest rate cap, floor, and collar agreements totaled $85.6 million. The annual amortization of the unamortized fees is summarized as follows (in thousands):
INTEREST- AVAILABLE BEARING FOR SALE LIABILITIES TOTAL --------- ----------- ----- 1997 $ 11,608 $ 2,618 $ 14,226 1998 10,960 2,375 13,335 1999 9,411 1,864 11,275 2000 8,329 1,864 10,193 2001 7,312 1,864 9,176 2002 through 2006 23,935 3,419 27,354 -------- -------- -------- $ 71,555 $ 14,004 $ 85,559 ======== ======== ========
Prior to 1996, the Company utilized short positions in financial futures contracts to reduce the interest rate risk of certain adjustable rate agency mortgage-backed securities in the available for sale portfolio. Each short position is a contract representing a commitment to sell a $1.0 million, ninety day maturity Eurodollar deposit. Futures contract price changes settle on a daily basis whereby the Company either makes or receives a cash payment. Such cash receipt or payment is recorded against the change in the value of certain adjustable rate agency mortgage-backed securities held in the available for sale portfolio. Futures contracts utilized to reduce the interest rate risk of certain adjustable rate government agency mortgage-backed securities in the available for sale portfolio are summarized as follows:
Contracts ------------------------------------------------------- Recognized Face Gain Number Amount (Loss) ------ ------ ---------- (Dollars in Millions) At or for the Year Ended: December 31, 1996 -- $ -- $ -- December 31, 1995 4,115 $ 4,115 $ (71.0) December 31, 1994 11,072 $ 11,072 $ 39.5
During August 1996, the Staff of the Securities and Exchange Commission (Staff) performed a regular review of the Company's 1995 Form 10-K in conjuction with Registration Statements on Form S-4 filed by the Company related to three pending acquisitions. As a result of this review, the Staff questioned the Company's original accounting treatment surrounding the deferral and recognition of gains and losses on financial futures contracts used to reduce the interest rate risk of certain mortgage backed securities in the Company's available for sale portfolio. The Company originally recognized a $34.8 million charge to fourth quarter 1995 earnings regarding the cessation of deferral accounting. At issue was the Staff's contention that the financial futures contracts did not meet the "high correlation" criteria of Statement of Financial Accounting Standards No. 80 "Accounting for Futures Contracts", thus not qualifying for deferral accounting from the inception of the hedge in March 1994 and requiring the recognition of subsequent gains and losses in income. The Company originally ceased deferral accounting when management concluded that high correlation measured using the "cumulative dollar approach" was unlikely to be achieved on a consistent basis. Accordingly, at the Staff's request, the Company in 1996 restated its 1994 and 1995 consolidated financial statements to reflect the cessation of deferral accounting, from the inception of the hedge, with respect to the aforementioned financial futures contracts. The restatement had the effect of increasing previously reported 1994 net income and decreasing previously reported 1995 net income by 78 52 $18.0 million (on a fully-diluted per share basis, an increase of $0.48 for 1994 and a decrease of $0.43 for 1995). This restatement was one of the timing of recognition of gains and losses in the Statement of Operations and had no impact on total stockholders' equity at any date since both the financial futures contracts and the related mortgage-backed securities had been previously marked to market through stockholders' equity at each reporting period. Subsequent to December 31, 1995, the Company terminated all of its financial futures positions and maintained its interest rate risk management position by principally redesignating existing interest rate exchange agreements to the available for sale portfolio. Such interest rate exchange agreements were utilized prior to the redesignation to manage the interest rate risk of short-term wholesale borrowings. (16) NET GAIN (LOSS) FROM FINANCIAL INSTRUMENTS Net gain (loss) from financial instruments is summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ---- ---- ---- (in thousands) Mortgage-backed securities held to maturity $ -- $ -- $ (231) Investment securities held to maturity -- -- 209 Mortgage-backed securities held for trading -- -- (4,545) Mark to market of financial futures contracts -- (71,022) 39,508 Mortgage-backed securities available for sale 8,466 23,885 (28,208) Investment securities available for sale 719 -- (115) Cancellation cost of interest rate exchange, cap, and floor agreements (See Note 15) (70,711) -- (8,910) Options expense (15,108) (11,079) (8,368) ------- --------- ------- $ (76,634) $ (58,216) $ (10,660) ======= ========= =======
(17) INCOME TAXES Prior to 1996, if certain conditions were met, savings and loan associations and savings banks were allowed special bad debt deductions in determining taxable income based on either specified experience formulas or on a percentage of taxable income before such deduction. Bad debt deductions in excess of actual losses were tax-preference items, and were subject to a minimum tax. The Company used the percentage of taxable income method for 1995 and 1994 in determining the bad debt deduction for tax purposes. The special bad debt deduction accorded thrift institutions is covered under Section 593 of the Internal Revenue Code (IRC). On August 20, 1996, the Small Business Job Protection Act of 1996 (the Act) was signed into law. This Act included the repeal of certain portions of Section 593 effective for tax years beginning after December 31, 1995. As a result, thrift institutions are no longer allowed a percentage method bad debt deduction. The repeal of the thrift reserve method generally requires thrift institutions to recapture into income the portion of tax bad debt reserves accumulated since 1987 (base year reserve). The recapture will generally be taken into income ratably over six tax years. However, if the Company meets a residential loan requirement for tax years beginning in 1996 and 1997, recapture of the reserve can be deferred until the tax year beginning in 1998. At December 31, 1996, the Company had bad debts deducted for tax purposes in excess of the base year reserve of approximately $15.3 million. The Company has recognized a deferred income tax liability for this amount. Certain events covered by IRC Section 593(e), which was not repealed, will trigger a recapture of the base year reserve. The base year reserve of thrift institutions would be recaptured if a thrift ceases to qualify as a bank for federal income tax purposes. The base year reserves of thrift institutions also remain subject to income tax penalty provisions which, in general, require recapture upon certain stock redemptions of, and excess distributions to, stockholders. At December 31, 1996, retained earnings included approximately $93.0 million of base year reserves, for which no deferred federal income tax liability has been recognized. 79 53 Income tax expense (benefit) before extraordinary items is summarized as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ---- ---- ---- (in thousands) Current: Federal $ 2,962 $ (437) $ 38,520 State -- (21) 2,699 Deferred: Federal 2,873 10,309 (14,805) State -- 407 (1,030) ----- ------ ------- $ 5,835 $ 10,258 $ 25,384 ===== ====== =======
The reasons for the difference between the expected income taxes, computed at the federal statutory rate of 35%, and the actual income taxes are summarized as follows:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---- ---- ---- (in thousands) Computed "expected" income tax $ 5,932 $ 13,075 $ 26,236 State income taxes, net of federal tax benefit -- 278 1,085 Resolution of federal tax issues (241) (2,188) (3,110) Nondeductible acquisition costs -- 101 2,469 Other, net 144 (1,008) (1,296) ----- ------- ------- $ 5,835 $ 10,258 $ 25,384 ===== ======= =======
The components of the deferred tax assets and deferred tax liabilities are summarized as follows:
DECEMBER 31, ------------------------ 1996 1995 ---- ---- (in thousands) Deferred tax assets: Unrealized losses on securities $ 6,470 $ 12,506 Litigation settlement 843 1,604 Purchased mortgage service rights 4,527 3,704 Provision for losses on loans 7,306 7,412 Other 6,271 4,278 ------ ------ Total deferred tax assets 25,417 29,504 ------ ------ Deferred tax liabilities: FHLB stock dividends 8,228 8,203 Purchase accounting adjustments 1,943 2,294 Bad debt reserves in excess of base year 5,858 4,792 Deferred income 3,624 7,275 Other 4,043 2,346 ------- ------ Total deferred tax liabilities 23,696 24,910 ------- ------ Net deferred tax asset $ 1,721 $ 4,594 ======= ======
A valuation allowance would be provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. The Company has not established a valuation allowance as of December 31, 1996 or 1995, due to management's belief that all criteria for recognition have been met, including the existence of a history of taxes paid sufficient to support the realization of deferred tax assets. 80 54 (18) STOCKHOLDERS' EQUITY Preferred Stock Each share of the Company's preferred stock is convertible, at the option of the holder, into 3.75 shares of the Company's common stock, par value $.01 per share. The preferred stock is redeemable, at the option of the Company, in whole at any time or in part, from time to time, on or after May 16, 1997 at $50 per share, plus accrued and unpaid dividends. As part of the merger agreement with Mercantile Bancorporation Inc. (See Note 24), the Company is required to redeem its preferred stock on May 16, 1997. Stock Repurchase Program On December 15, 1994, the Board of Directors of Roosevelt Financial Group, Inc. authorized the Company to acquire up to 1,750,000 shares of its own common stock, subject to market conditions, prior to December 31, 1997. The stock repurchased is to be held in treasury in order to fund, from time to time, the Company's benefit programs. Shares of stock repurchased may also be retired, from time to time, if not needed for other corporate purposes. Through December 31, 1996, 281,500 shares of common stock of the Company have been repurchased pursuant to the stock repurchase program at a weighted average price of $15.98 per share. On January 2, 1997, the Board of Directors of the Company authorized an expansion of the capacity of the above-mentioned stock repurchase plan by an additional 5,529,880 shares. This expansion, when coupled with the remaining authorization prior to the expansion (1,468,500 shares), resulted in a total authorization of 6,998,380 shares, the number of shares that the Company has agreed to use its reasonable best efforts, subject to prudent business practices, to acquire in open market transactions prior to the closing date of its planned merger with Mercantile Bancorporation Inc. (See Note 24). The cost per share in each such transaction cannot exceed $22.00. Subsequent to December 31, 1996 and through February 13, 1997, an additional 1,600,000 shares have been repurchased at a weighted average price of $21.08 per share (unaudited). (19) REGULATORY CAPITAL REQUIREMENTS AND OTHER MATTERS The Company and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and the subsidiary banks' capital amounts and classifications are also subject to quantitative judgements by the regulators about components, risk-weightings and other factors. Management believes, as of December 31, 1996 the Company and the subsidiary banks' meet all capital adequacy requirements. The subsidiary banks are also subject to the regulatory framework for prompt corrective action. The most recent notification from the regulatory agencies categorized the banks as well capitalized. To be categorized as well capitalized, the banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since the dates of the aforementioned notifications that management believes have changed the banks' category. 81 55 The Company and the banks' actual and required capital amounts and ratios as of December 31, 1996 are as follows:
REQUIREMENTS TO BE WELL-CAPITALIZED CAPITAL UNDER PROMPT AND CORRECTIVE ACTUAL REQUIREMENTS ACTION PROVISIONS ---------------------- ---------------------- --------------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ------ -------- ------- -------- ------- (DOLLARS IN MILLIONS) Total Capital: Roosevelt Financial Group, Inc. $ 480.9 12.52% $ 307.3 8.00% N/A N/A Roosevelt Bank 444.2 11.75 302.5 8.00 $ 378.1 10.00% Missouri State Bank 8.0 13.35 4.8 8.00 6.0 10.00 Tangible Capital: Roosevelt Bank 423.2 5.44 116.6 1.50 N/A N/A Core (Leverage) Capital: Roosevelt Bank 425.3 5.47 233.3 3.00 N/A N/A Tier I Capital: Roosevelt Financial Group, Inc. 461.9 12.02 153.7 4.00 N/A N/A Roosevelt Bank 425.3 11.25 N/A N/A 226.9 6.00 Missouri State Bank 7.3 12.11 2.4 4.00 3.6 6.00 Tier I Capital: Roosevelt Bank 425.3 5.47 N/A N/A 388.8 5.00 Missouri State Bank 7.3 14.37 N/A N/A 2.5 5.00 To risk-weighted assets. To adjusted total assets. To average adjusted assets.
The Office of Thrift Supervision (OTS) has adopted a rule incorporating an interest rate risk component into its risk-based capital requirements which utilizes a methodology to measure the interest rate risk exposure of institutions. This exposure is a measure of the potential decline in the net portfolio value of the institution based upon the effect of an assumed 200 basis point increase or decrease in interest rates. "Net portfolio value" is the present value of the expected net cash flow from the institution's assets, liabilities and off-balance sheet contracts. Under the OTS regulation, an institution's "normal" level of interest rate risk in the event of this assumed change in interest rates is a decrease in the institution's net portfolio value in an amount not exceeding two percent of the present value of its assets. The amount of the required deduction is one-half of the difference between (a) the institution's actual calculated exposure to the 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in net portfolio value) and (b) its "normal" level of exposure which is two percent of the present value of its assets. The OTS recently announced that it will delay the effectiveness of the regulation until it adopts the process by which an institution may appeal an interest rate risk capital deduction determination. Utilizing this measurement concept, the Bank's interest rate risk at December 31, 1996 would not be greater than normal as defined by the OTS, thus not requiring any additional risk-based capital. In September, 1996 legislation was enacted to recapitalize the Savings Association Insurance Fund (SAIF). The legislation provided for a one-time assessment to be imposed on all deposits assessed at the SAIF rates, as of March 31, 1995. The special assessment ratio was established at 0.657% of deposits by the Federal Deposit Insurance Corporation and resulted in an assessment of $27.4 million or $17.8 million after the effect of taxes. 82 56 (20) STOCK OPTION AND INCENTIVE PLAN The 1986 Stock Option and Incentive Plan (Plan) was adopted to enable the Company to attract and retain key personnel. The Plan, which terminated January 29, 1997, provided for the granting of incentive stock options, nonqualified stock options, restricted stock awards, and stock appreciation rights. The Plan authorized the issuance of up to 4,500,000 shares of the Company's common stock. The 1994 Non-Employee Director Stock Option Plan authorizes the issuance of up to 150,000 shares of the Company's common stock. The Company accounts for stock-based compensation under the Plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and, accordingly, recognizes no compensation expense as the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Upon adoption in 1996, the Company elected the pro forma disclosure alternative provided in SFAS 123 versus the recognition provisions. Information on the Company's stock options are summarized as follows:
AVERAGE PRICE PER SHARE OPTION SHARES PER SHARE PRICE RANGE ------------ ------------- ---------------- Outstanding and exercisable at December 31, 1993 2,364,475 $ 5.26 $3.00-13.75 Granted 205,500 13.89 Exercised (1,420,347) 4.63 ---------- Outstanding and exercisable at December 31, 1994 1,149,628 7.67 $3.00-15.50 Assumed in merger 93,506 4.09 Granted 150,000 16.54 Forfeited (9,000) 16.08 Exercised (349,680) 4.53 ---------- Outstanding and exercisable at December 31, 1995 1,034,454 9.62 $3.00-18.00 Assumed in mergers 182,553 6.73 Granted 148,800 19.81 Exercised (194,527) 9.89 ---------- ------ Outstanding and exercisable at December 31, 1996 1,171,280 $ 10.42 $3.00-20.62 ========== ======
The Company's stock options outstanding and exercisable at December 31, 1996 by range of exercise prices, is further detailed as follows:
SHARES PER SHARE OPTION UNDER AVERAGE PRICE PRICE RANGE OPTION PER SHARE ---------------- ------ ------------- $ 3.00 - $ 4.99 233,288 $ 4.04 5.00 - 8.99 416,562 6.80 9.00 - 11.99 14,230 9.27 12.00 - 14.99 196,400 13.71 15.00 - 17.99 164,000 16.34 18.00 - 21.00 146,800 19.95 --------- ------ 1,171,280 $10.42 ========= ======
Presented below is pro forma net income and earnings per share, as required by SFAS 123, determined as if the Company had accounted for stock options granted in 1996 and 1995 under the provisions of SFAS 123. For purposes of providing the pro forma disclosures required under SFAS 123, the fair value of stock options granted in 1996 and 1995 were estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was originally developed for use in estimating the fair value of traded options which have different characteristics than the Company's employee stock options. The model is also sensitive to changes in the subjective assumptions which can materially affect the fair value estimate. As a result, management believes that the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options. The following weighted-average assumptions were used in the option pricing model: a risk-free interest rate of 6.22% and 4.83% for 1996 and 1995, respectively; an expected life of the option of 4.9 years and 5 years for 1996 and 1995, respectively; and an expected dividend yield of 3.18% and 3.40% and a volatility factor 25.41% and 32.92% for 1996 and 1995, respectively. For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. 83 57 Had compensation cost for the Company's stock-based compensation plans been determined consistent with the recognition provisions of SFAS 123, net income and earnings per share would have been as follows:
Year Ended December 31, ----------------------- (In thousands, except per share amounts) 1996 1995 ---- ---- Pro forma net income $ 8,957 $ 26,598 Pro forma earnings per share: Primary $ 0.11 $ 0.55 Fully diluted $ 0.11 $ 0.55
Due to the inclusion of only 1996 and 1995 option grants, the effects of applying SFAS 123 in 1996 and 1995 may not be representative of the pro forma impact in future years. (21) EMPLOYEE BENEFITS PROGRAMS Substantially all employees are included in a trusteed defined benefit pension plan. Benefits contemplated by the plan are funded through payments to the Financial Institutions Retirement Fund, which operates a multi-employer plan and does not report relative plan assets and actuarial liabilities of the individual participating companies. The cost of funding is charged to current operations. There is no unfunded liability for past service. In addition, the Company maintains a retirement plan for outside directors. Pension expense totaled $1,580,000, $1,367,000, and $359,000 for 1996, 1995, and 1994, respectively. The Company maintains a thrift savings plan, qualifying under Section 401(k) of the Internal Revenue Code, administered by the Financial Institutions Thrift Plan, and covering substantially all employees. Participants may designate up to 15% of their annual compensation as their contribution to the plan. Contributions by employees of up to 6% of their annual compensation are partially or fully matched by the Company based on each employee's number of years of service. Matching contributions by the Company totaled $1,110,000, $936,000, and $866,000 for 1996, 1995, and 1994, respectively. The Company also sponsors an Employee Stock Ownership Plan (ESOP) which covers substantially all employees with more than one year of employment who have attained the age of twenty-one. The ESOP provides for a grant of the Company's stock equal to 1% of the annual compensation of each eligible employee up to annual compensation of $75,000. Contributions are made on December 31 of each year for all eligible employees on that date. Dividends on shares held in each employee's account are reinvested. Contributions made to the ESOP by the Company totaled $302,000, $247,000, and $448,000 for 1996, 1995, and 1994, respectively. In addition, the Company sponsors an unfunded retiree medical, dental, and death benefits plan covering eligible employees who retired prior to July 1, 1990 and retired directors from Farm & Home. The plan is contributory with retiree contributions adjusted from time to time. The Company accounts for the plan in accordance with Statement of Financial Accounting Standards No. 106, "Employers Accounting for Postretirement Benefits Other than Pensions" (SFAS 106). The plan's impact on the Company's consolidated financial statements is not material, therefore the disclosures required by SFAS 106 are not presented. (22) LITIGATION The Company and its subsidiaries are subject to a number of lawsuits and claims, some of which involve substantial amounts arising out of the conduct of its business. Management, after review and consultation with outside legal counsel, is of the opinion that the ultimate disposition of such litigation and claims will not have a material adverse effect of the Company's consolidated financial statements. 84 58 (23) PARENT COMPANY FINANCIAL INFORMATION
1996 DECEMBER 31, 1995 - --------------------------------------------------------------------------------------- (in thousands) CONDENSED BALANCE SHEETS Assets: Cash $ 31,091 $ 2,616 Investment in subsidiaries 467,066 517,080 Investment securities available for sale -- 2,531 Other assets 1,627 4,946 -------- -------- $ 499,784 $ 527,173 ======== ======== Liabilities and Stockholders' Equity: Subordinated notes $ -- $ 27,859 Other liabilities 2,357 2,408 Stockholders' equity 497,427 496,906 -------- -------- $ 499,784 $ 527,173 ======== =========
Year Ended December 31, -------------------------------------- 1996 1995 1994 -------- --------- ---------- (in thousands) CONDENSED STATEMENTS OF OPERATIONS Interest income $ 330 $ 82 $ 241 Interest expense 1,672 2,867 5,276 ------ ------- ------- Net interest expense (1,342) (2,785) (5,035) Dividends received from subsidiaries 81,050 52,050 45,650 Equity in undistributed earnings (losses) of subsidiaries (69,402) (22,682) 8,918 Other income 25 1 -- General and administrative expenses (927) (684) (7,469) ------ ------- ------- Income before income tax benefit and extraordinary item 9,404 25,900 42,064 Income tax benefit (784) (1,198) (2,280) ------ ------- ------- Income before extraordinary item 10,188 27,098 44,344 Extraordinary item, net of income tax effect (526) -- (2,617) ------ ------- ------- Net income $ 9,662 $ 27,098 $ 41,727 ====== ======= =======
85 59
Year Ended December 31, -------------------------------------- 1996 1995 1994 -------- --------- ---------- (in thousands) CONDENSED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income $ 9,662 $ 27,098 $ 41,727 Equity in earnings of subsidiaries (11,648) (29,368) (54,568) Extraordinary loss on early extinguishment of debt 812 -- 3,965 Other, net 4,334 517 270 ------- -------- ------- Net cash provided by (used in) operating activities 3,160 (1,753) (8,606) ------- -------- ------- Cash flows from investing activities: Dividends received 81,050 52,050 45,650 Additional investment in subsidiary -- (21,463) (19,036) Proceeds from maturities and sales of securities available for sale 2,531 800 -- ------- -------- ------- Net cash provided by investing activities 83,581 31,387 26,614 ------- -------- ------- Cash flows from financing activities: Redemption of subordinated notes (28,750) -- (31,022) Cash dividends paid (30,513) (26,789) (18,056) Proceeds from issuance of preferred stock -- -- 21,273 Purchase of treasury stock (923) (3,426) (150) Exercise of stock options 1,920 1,107 6,459 ------- -------- ------- Net cash used in financing activities (58,266) (29,108) (21,496) ------- -------- ------- Net increase (decrease) in cash 28,475 526 (3,488) Cash at beginning of year 2,616 2,090 5,578 ------- -------- ------- Cash at end of year $ 31,091 $ 2,616 $ 2,090 ======= ======== =======
(24) PLANNED MERGER WITH MERCANTILE BANCORPORATION INC. Roosevelt Financial Group, Inc. announced on December 23, 1996 its plans to merge with Mercantile Bancorporation Inc. Pursuant to the merger agreement, shareholders of the Company will be able to elect to receive either $22 in cash or .4211 shares of Mercantile Bancorporation Inc. common stock, up to 13 million shares. Plans call for the merger, which is subject to the approval of shareholders of the Company and all appropriate regulatory agencies, to be completed in mid-1997. 86 60 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. March 14, 1997 By /s/ Gary W. Douglass ------------------------------------- Gary W. Douglass Executive Vice President and Chief Financial Officer 86 EX-23 2 CONSENT OF EXPERT 1 Exhibit 23 ---------- Independent Auditors' Consent ----------------------------- The Board of Directors Roosevelt Financial Group, Inc.: We consent to incorporation by reference in the registration statements No. 33-39140, No. 33-65722, No. 33-82864, No. 33-92106, No. 33-95930, No. 33-97590, and No. 333-4499 on Form S-8 of Roosevelt Financial Group, Inc. (Roosevelt) of our report dated January 20, 1997, relating to the consolidated balance sheets of Roosevelt Financial Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 Annual Report on Form 10-K of Roosevelt. Our report states that the supplemental fair value consolidated balance sheets of Roosevelt have been prepared by management to present relevant financial information that is not provided by the historical cost consolidated balance sheets and is not intended to be a presentation in conformity with generally accepted accounting principles. The supplemental fair value consolidated balance sheets do not purport to present the net realizable, liquidation, or market value of Roosevelt as a whole. Furthermore, amounts ultimately realized by Roosevelt from the disposal of assets may vary significantly from the fair values presented. /s/ KPMG Peat Marwick LLP St. Louis, Missouri March 14, 1997 -----END PRIVACY-ENHANCED MESSAGE-----