-----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, A/QTJENA0apVt23JZy2NWfgrHCfD7eu4B/zwncKqQB/k+85xbrh5ccoTrc8SRD7u l+5f2uNVxwl9xcfzSQEj9g== 0000950114-97-000116.txt : 19970306 0000950114-97-000116.hdr.sgml : 19970306 ACCESSION NUMBER: 0000950114-97-000116 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970305 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-17403 FILM NUMBER: 97550551 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 1 ROOSEVELT FINANCIAL GROUP, INC. FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 0-17403. ROOSEVELT FINANCIAL GROUP, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 43-1498200 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 900 ROOSEVELT PARKWAY, CHESTERFIELD, MISSOURI 63017 (Address of principal executive offices) (Zip Code) (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE): (314) 532-6200 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE 6 1/2% NON-CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A AND SERIES F, PAR VALUE $.01 PER SHARE (Title of Classes) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. YES X NO ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[ ] As of February 28, 1997, there were issued and outstanding 42,644,404 shares of the Registrant's Common Stock. The aggregate market value of the voting stock held by nonaffiliates of the Registrant, computed by reference to the closing price of such stock as of February 28, 1997, was $980,821,292. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant that such person is an affiliate of the Registrant.) DOCUMENTS INCORPORATED BY REFERENCE PART III of Form 10-K--Portions of Proxy Statement for the 1997 Annual Meeting of Stockholders. 2 ROOSEVELT FINANCIAL GROUP, INC. 1996 ANNUAL REPORT ON FORM 10K TABLE OF CONTENTS
Page ---- PART I 1 Item 1. BUSINESS 1 General 1 Forward Looking Statements 2 Acquisitions 3 Lending Activities 3 Investment and Mortgage-Backed Securities 7 Classified Assets, Loan Delinquencies and Defaults 11 Provisions for Losses on Loans and Real Estate Owned 11 Deposits and Other Sources of Funds 14 Asset/ Liability Management 15 Subsidiaries 15 Regulation 16 Competition 23 Management of Registrant and Its Subsidiaries 24 Employees 24 Item 2. PROPERTIES 25 Item 3. LEGAL PROCEEDINGS 25 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25 PART II 26 Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS 26 Common Stock 26 Payment of Dividends 26 Item 6. SELECTED FINANCIAL DATA 27 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 29 General 29 Results of Operations 29 Financial Condition 39 Asset Quality 41 Asset/Liability Management 42 Liquidity and Capital Resources 45 Impact of Inflation and Changing Prices 46 Accounting and Regulatory Developments 46 Selected Quarterly Financial Data 47 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 49 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 86 PART III 86 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 86 Item 11. EXECUTIVE COMPENSATION 86 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 86 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 86 PART IV 86 Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 86 SIGNATURES 90
3 PART I ITEM 1. BUSINESS GENERAL Roosevelt Financial Group, Inc. (Roosevelt or the Company) is a Delaware corporation which was organized in 1988 by Roosevelt Bank, a federal savings bank (the Bank) for the purpose of becoming a thrift institution holding company for the Bank. The Bank is a federally chartered stock savings bank with 79 full service offices at December 31, 1996. The Bank has 37 offices serving the St. Louis metropolitan area, including Alton and Granite City, Illinois and ten offices serving the Kansas City metropolitan area. The remaining 32 offices are located in Staunton, Illinois and Pittsburgh, Kansas and the Missouri cities of Hannibal(2), Springfield(3), Columbia, Union, Warrenton, St. James, Washington, Sikeston, Dexter, Malden, Poplar Bluff, Hayti, Portageville, Cape Girardeau, Mexico, Jefferson City, Trenton, Marshall, Sedalia, Clinton, Maryville, St. Joseph, Nevada, Lamar, Joplin(2) and Kirksville. Incorporated as a Missouri chartered mutual savings and loan in 1924, the Bank converted to a federally chartered savings and loan in 1935. In 1987, the Bank became a stock savings and loan and, one year later, converted to a stock savings bank, changing its name to Roosevelt Bank, a federal savings bank. Effective December 30, 1988, the Bank completed a holding company reorganization of the Bank and the Company acquired all of the issued and outstanding shares of common stock of the Bank. On December 2, 1996, the Company reorganized as both a thrift institution holding company and a bank holding company and thereafter acquired all of the issued and outstanding shares of common stock of Community Charter Corporation, Inc., the holding company of Missouri State Bank (MSB) which has two offices in the city of St. Louis, Missouri. The principal assets of the Company are the common stock of the Bank and MSB, both of which are wholly-owned subsidiaries. The Company's common stock is traded on the Nasdaq National Market under the symbol "RFED". On December 23, 1996, Roosevelt Financial Group, Inc. announced its plans to merge with Mercantile Bancorporation Inc. (MTL). Pursuant to the agreement, Roosevelt shareholders will be able to elect to receive either $22 in cash or .4211 shares of common stock (subject to the issuance of a maximum number of shares of MTL common stock). Plans call for the merger, which is subject to the approval of Roosevelt shareholders and all appropriate regulatory agencies, to be completed in mid-1997. Roosevelt's business consists primarily of attracting deposits from the general public and using those deposits, together with borrowings and other funds, to acquire real estate and consumer loans and mortgage-backed securities, to perform loan servicing functions for others, and to provide other retail banking and financial services to consumers. The Company and the Bank are subject to examination and comprehensive regulation and oversight by the Federal Reserve Board and the Office of Thrift Supervision (the OTS), respectively. MSB is subject to examination and comprehensive regulation and oversight by the Missouri Division of Finance (MDF) and the Federal Deposit Insurance Corporation (FDIC). The deposits of the Company's banking subsidiaries are primarily insured by the Savings Association Insurance Fund (SAIF) and, to a lesser extent, by the Bank Insurance Fund (BIF). As such, the Bank subsidiaries are subject to regulation by the FDIC. Roosevelt's executive offices are located at 900 Roosevelt Parkway, Chesterfield, Missouri 63017, and its telephone number is (314) 532-6200. Unless otherwise indicated, references herein to Roosevelt or the Company include the Bank and its subsidiaries and MSB on a consolidated basis. CURRENT OPERATING STRATEGIES Roosevelt's management believes that the long-term value of a financial institution is related to having strong relationships with its customers whereby a household seeks to derive most of its financial services from a single vendor (like Roosevelt). To position itself in this manner, Roosevelt's business plan emphasizes 1) the origination of a higher percentage of its assets; 2) the diversification of the balance sheet away from only mortgage and real estate related assets; 3) the expansion of its retail deposit base with a simultaneous shift within that deposit base toward checking and transaction accounts; and 4) growth in fee income by providing other services such as insurance, brokerage and mortgage loan servicing for other investors. 4 FORWARD-LOOKING STATEMENTS When used in this Form 10-K or future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, substantial changes in levels of market interest rates, credit and other risks of lending and investment activities and competitive and regulatory factors could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from those anticipated or projected. The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements. 2 5 ACQUISITIONS A substantial portion of the Company's growth since 1990 has occurred as a result of acquisitions. The following table summarizes Roosevelt's acquisitions since the formation of the Company in 1988.
Acquisition Date Name Acquired Loans Deposits Assets Branches - ----------------------------------------- ------------------ ------- -------- ------ -------- (dollars in millions) Home Federal Savings of Alton March 19, 1990 $ 67.2 $ 12.1 $ 99.1 4 Hannibal Mutual Loan and Building Association October 18, 1991 7.8 17.8 18.0 1 Conservative Bank, FSB November 9, 1992 41.5 61.2 64.5 4 First Granite City Savings and Loan November 9, 1992 43.4 42.0 49.2 2 Brookside Savings Bank, FSB December 1, 1992 16.1 145.7 218.7 1 First Nationwide (branch purchases) June 11, 1993 -- 591.1 -- 11 Home Savings of America (branch purchases) November 8, 1993 -- 738.1 -- 13 Home Federal Bancorp of Missouri, Inc. April 22, 1994 480.7 466.5 532.7 9 Farm & Home Financial Corporation June 30, 1994 1,843.3 2,094.7 3,173.5 27 WSB Bancorp, Inc. October 20, 1995 80.9 80.8 96.9 2 Kirksville Bancshares, Inc. December 29, 1995 69.4 101.9 130.7 1 Mutual Bancompany, Inc. October 25, 1996 37.3 41.4 48.8 1 Sentinel Financial Corporation October 31, 1996 81.2 119.7 143.8 2 Community Charter Corporation December 2, 1996 54.0 67.2 76.8 2
LENDING ACTIVITIES The Company's lending activities are principally conducted through the origination and purchase of loans. Residential Lending - The Company's origination activities are generally focused on communities in Missouri, southern Illinois, and eastern Kansas in which its branches are located and in other midwestern states through its correspondent network. Primary emphasis is on mortgage loans secured by existing one- to four-family residential properties. At December 31, 1996, loans secured by residential real estate totaled $3.8 billion, which represented 87.74% of the Company's loan portfolio. The Company's residential loan pricing discipline takes into consideration duration of the loan, prepayment risks, servicing costs, and credit risk. In underwriting residential real estate loans, the Company evaluates both the borrower's ability to make monthly payments and the value of the property securing the loan. Under federal regulations, a real estate loan may not exceed 100% of the appraised value of the property securing the loan at the time of origination. The Company has adopted a policy of generally limiting the loan-to-value ratio on originated loans and refinanced loans, depending upon loan type, and generally requiring that all loans exceeding 80% of the appraised value of the property or its purchase price, whichever is less, be insured by a mortgage insurance company approved by the Federal Home Loan Mortgage Corporation (FHLMC) in an amount sufficient to reduce the Company's exposure to no greater than such 80% level. In addition to interest earned on loans, the Company receives fees in connection with the origination of loans, loan commitments, late payments, and other miscellaneous services. The amounts of such fees vary from time to time, generally depending on competitive conditions in the mortgage market. As described below, the Company currently offers several types of residential loans. Adjustable-Rate Mortgage Loans - The Company originates secured adjustable-rate mortgage loans (ARMs) in principal amounts of up to $750,000, depending upon loan type, loan-to-value ratio, and term. The majority of adjustable-rate mortgage loans which have been originated by the Company are held in its portfolio. ARM loans offered consist of a variety of types, with interest rate adjustments ranging from one month to 10 years. The ARMs generally provide for adjustments to the interest rate based upon the one or three year U.S. Treasury Bill Index adjusted to constant maturity, plus a margin which is determined at the time of application and remains constant for the life of the loan. Interest rate adjustments are limited to a maximum of 2% per year and a maximum of 6% over the life of the loan on both one-year and the three-year adjustable mortgages. 3 6 Fixed-Rate Loans - The Company also originates secured fixed-rate mortgage loans in principal amounts of up to $750,000, depending upon loan type, loan-to-value ratio, and term. The Company's fixed-rate loans generally have terms from 15 to 30 years with monthly payments which fully amortize the principal and interest over the life of the loan. The Company may occasionally originate balloon/interest reset mortgages that are fixed-rate. FHA/VA Loans - The Company originates FHA insured and VA guaranteed single family mortgage loans. Guidelines for processing, underwriting, and closing of these loans, which typically have terms to maturity of 25 to 30 years, are established by the FHA and the VA. The types of loans which the Bank may originate are restricted by the Home Owner's Loan Act and other laws and are regulated by the OTS. MSB is similarly restricted by Missouri law and regulation by MDF. Roosevelt is permitted to originate or purchase loans and loan participations secured by real estate located in any part of the United States. Roosevelt's residential lending is primarily concentrated in the geographical location of its branches and in other midwestern states through the Company's correspondent network. Commercial Real Estate and Construction Lending - Loans originated by the Company generally are secured by first liens on the properties to which they relate. The Company also purchases real estate loans and loan participations from selected sellers. The Company focuses its originations on properties located within its retail markets of Missouri, southern Illinois and eastern Kansas. At December 31, 1996, loans secured by commercial real estate (including multi-family residential properties) and construction lending totaled $181.3 million of which loans secured by commercial real estate totaled $153.4 million, representing 3.55% of the Company's total loan portfolio. The Company's portfolio of commercial real estate loans is secured by liens on office buildings, apartments, land, and shopping centers. Consumer Lending - Federal regulations permit federally chartered thrift institutions to make secured and unsecured consumer loans up to a maximum of 35% of the institution's total assets, less permissible investments in commercial paper and corporate debt. In addition, federal thrift institutions have lending authority above the 35% limit for certain consumer loans such as home equity loans, property improvement loans, mobile home loans, credit card loans and deposit secured loans. The Company offers various variable-rate and fixed-rate consumer loans, including automobile, marine, recreational vehicle, home improvement, unsecured personal, credit card and home equity loans. The Company also offers loans to its depositors on the security of their deposit accounts. Substantially all consumer loans made directly to the borrower are originated in branches within the states of Missouri and Illinois. Roosevelt has placed a renewed emphasis on the origination of consumer loans due to their generally higher yielding nature. During the second half of 1995, Roosevelt began purchasing "A" quality indirect auto lease paper originated by a leasing company. These loans are secured by the types of autos which generally hold their value well and have good mechanical histories. Indirect auto lease originations totaled $34.9 million during 1996. During the second half of 1996, Roosevelt entered into an agreement with a third party to solicit, administer and service credit card accounts. Underwriting guidelines have been established by Roosevelt. Two types of cards are offered; VISA Gold, which provides a $15,000 unsecured line of credit and VISA Classic which provides a $5,000 unsecured line of credit. Credit card originations resulting from this agreement totaled $165.1 million during 1996. At December 31, 1996, the Company's consumer loan balances totaled $348.3 million which represented 8.07% of the Company's total loan portfolio. 4 7 Loan Portfolio Composition The following table sets forth information concerning the composition of the Company's loan portfolio in dollar amounts and in percentages by type of loan at the dates indicated.
DECEMBER 31, ---------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------- ------------------- ------------------- ------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (DOLLARS IN THOUSANDS) REAL ESTATE LOANS: Residential $3,791,145 87.74% $3,320,098 92.35% $2,887,992 92.48% $2,465,592 89.78% $2,141,863 88.36% Commercial 153,375 3.55 137,507 3.83 132,316 4.24 144,295 5.25 134,321 5.54 Construction 27,876 0.64 11,969 0.33 18,489 0.59 95,550 3.48 109,627 4.52 ---------- ------ ---------- ------ ---------- ------ ---------- ------ --------- ------ Total real estate loans held to maturity 3,972,396 91.93 3,469,574 96.51 3,038,797 97.31 2,705,437 98.51 2,385,811 98.42 CONSUMER LOANS 348,280 8.07 125,633 3.49 84,013 2.69 40,831 1.49 38,381 1.58 ---------- ------ ---------- ------ ---------- ------ ---------- ------ --------- ------ Total loans 4,320,676 100.00% 3,595,207 100.00% 3,122,810 100.00% 2,746,268 100.00% 2,424,192 100.00% ====== ====== ====== ====== ====== LESS: Loans in process 10,131 4,266 28,348 59,146 41,833 Deferred fees and discounts (premiums) (10,643) (8,806) (604) 6,256 21,835 Allowance for losses 22,719 21,855 22,915 9,056 10,753 ---------- ---------- ---------- ---------- ---------- Loans, net $4,298,469 $3,577,892 $3,072,151 $2,671,810 $2,349,771 ========== ========== ========== ========== ==========
5 8 The following table shows the composition of the Company's fixed- and adjustable-rate loans at the dates indicated.
DECEMBER 31, ---------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------------- ------------------- ------------------- ------------------- -------------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- (DOLLARS IN THOUSANDS) FIXED-RATE LOANS: Real estate: Residential $1,192,987 27.61% $1,226,691 34.12% $1,107,604 35.47% $1,171,453 42.66% $1,437,122 59.29% Commercial 108,576 2.51 74,271 2.07 77,164 2.47 82,209 2.99 82,275 3.39 Construction 18,694 .43 1,202 .03 -- -- -- -- -- -- ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total fixed-rate real estate loans 1,320,257 30.55 1,302,164 36.22 1,184,768 37.94 1,253,662 45.65 1,519,397 62.68 Consumer 135,444 3.14 58,645 1.63 28,715 0.92 22,680 0.83 25,396 1.05 ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total fixed-rate loans 1,455,701 33.69 1,360,809 37.85 1,213,483 38.86 1,276,342 46.48 1,544,793 63.73 ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ADJUSTABLE-RATE LOANS: Real estate: Residential 2,598,158 60.13 2,093,407 58.23 1,780,388 57.01 1,294,139 47.12 704,741 29.07 Commercial 44,799 1.04 63,236 1.76 55,152 1.77 62,086 2.26 52,046 2.15 Construction 9,182 .21 10,767 0.30 18,489 0.59 95,550 3.48 109,627 4.52 ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total adjustable- rate real estate loans 2,652,139 61.38 2,167,410 60.29 1,854,029 59.37 1,451,775 52.86 866,414 35.74 Consumer 212,836 4.93 66,988 1.86 55,298 1.77 18,151 0.66 12,985 0.53 ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total adjustable- rate loans 2,864,975 66.31 2,234,398 62.15 1,909,327 61.14 1,469,926 53.52 879,399 36.27 ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ Total loans 4,320,676 100.00% 3,595,207 100.00% 3,122,810 100.00% 2,746,268 100.00% 2,424,192 100.00% ====== ====== ====== ====== ====== LESS: Loans in process 10,131 4,266 28,348 59,146 41,833 Deferred fees and discounts (premiums) (10,643) (8,806) (604) 6,256 21,835 Allowance for losses 22,719 21,855 22,915 9,056 10,753 ---------- ---------- ---------- ---------- ---------- Loans, net $4,298,469 $3,577,892 $3,072,151 $2,671,810 $2,349,771 ========== ========== ========== ========== ==========
6 9 INVESTMENT AND MORTGAGE-BACKED SECURITIES The Company invests in short-term investments such as United States Treasury securities and United States agency securities, commercial paper, short-term corporate debt securities, and overnight federal funds. The Company is required by federal regulations to maintain a minimum amount of liquid assets that may be invested in specific securities and is also permitted to make certain other securities investments. The balance of the investment securities maintained by the Company in excess of regulatory requirements reflects management's objective of maintaining liquidity at a level that assures the availability of adequate funds, taking into account anticipated cash flows and available sources of credit, for meeting withdrawal requests and loan commitments and making other investments. See "Regulation-Liquidity." The acquisition of mortgage-backed securities is designed to (i) generate positive interest rate spreads on large principal balances with minimal administrative expense, (ii) lower the credit risk of the Company's loan portfolio, and (iii) enable the Company to use these mortgage-backed securities as collateral for financings in the capital markets. Mortgage-backed securities acquired by the Company for investment typically consist of FHLMC mortgage participation certificates (FHLMC Certificates), FNMA mortgage pass-through certificates (FNMA Certificates) and/or GNMA fully-modified, pass- through mortgage-backed certificates (GNMA Certificates), and private issue pass-through certificates, each of which is described below. FHLMC Certificates - FHLMC Certificates represent undivided interests in specified pools of fixed, variable, or adjustable rate, conventional residential mortgage loans or participation interests in conventional residential mortgage loans purchased by FHLMC. FHLMC guarantees to each registered holder of a FHLMC Certificate the timely payment of interest. FHLMC also guarantees to each registered holder of a FHLMC Certificate the ultimate collection by such holder of principal thereof, but, except in certain cases, does not guarantee the timely payment of principal thereof. The obligations of FHLMC are not backed by, nor entitled to, the full faith and credit of the United States. Neither the United States nor any agency or instrumentality of the United States is obligated to finance the operations of FHLMC or to assist FHLMC in any other manner. There is currently an active secondary market for FHLMC Certificates, but there is no assurance that this market will continue in the future. FNMA Certificates - FNMA Certificates represent undivided interests in specified pools of fixed, variable, or adjustable rate one- to four-family residential mortgage loans. FNMA guarantees the timely payment of scheduled principal and interest (at the applicable certificate rate). The obligations of FNMA under its guarantees are obligations solely of FNMA and are not backed by, nor entitled to, the full faith and credit of the United States. Neither the United States nor any agency or instrumentality of the United States is obligated to finance FNMA's operations or to assist FNMA in any other manner. There is currently an active secondary market for FNMA Certificates, but there can be no assurance that this market will continue in the future. GNMA Certificates - GNMA Certificates are issued and serviced by a mortgage banking company or financial institution approved by GNMA as a seller-servicer of Federal Housing Administration (FHA) insured mortgage notes or Veterans Administration (VA) guaranteed mortgage notes. The full and timely payment of principal of, and interest on, each GNMA Certificate is guaranteed by GNMA, which obligation is backed by the full faith and credit of the United States. Each GNMA Certificate evidences a fractional undivided interest in a pool of FHA insured mortgage notes and VA guaranteed mortgage notes secured by mortgages on single family dwellings. There is currently an active secondary market for GNMA Certificates, but there is no assurance that this market will continue in the future. Private-Issue Certificates - Private pass-through certificates represent primarily undivided interests in specified pools of fixed, variable or adjustable rate one-to-four family residential mortgage loans. Such securities are issued by private entities such as commercial banks, thrifts, and other financial entities. At December 31, 1996, the Company's $2.3 billion portfolio of private pass-throughs was primarily comprised of adjustable rate securities. The repricing characteristics of such securities were primarily tied to the one year constant maturity treasury rate. These securities are not guaranteed nor insured by any government agency. Instead, the credit risk on such securities is lowered through mortgage pool insurance, letters of credit, guarantees, or subordinated interests. At December 31, 1996, there were approximately $1.1 billion of private issue pass-through certificates with related unrealized losses totaling $15.3 million. None of the individual unrealized losses exceeded $1.3 million or 5.4% of the respective security balance. Since mortgage-backed securities are asset-backed, they are subject to inherent risks based upon the future performance of the underlying collateral (i.e., mortgage loans) for these securities. Among these risks, are prepayment risk and interest-rate risk. Should general interest-rate levels decline, the mortgage-backed securities portfolio would be subject to i) prepayments as borrowers typically would seek to obtain financing at lower rates, ii) a decline in interest income received on adjustable-rate mortgage-backed securities, and iii) an increase in fair value of fixed rate mortgage-backed securities. Conversely, should general interest rate levels increase, 7 10 the mortgage-backed securities portfolio would be subject to i) a longer term to maturity as borrowers would be less likely to prepay their loans, ii) an increase in interest income received on adjustable-rate mortgage-backed securities, iii) a decline in fair value of fixed-rate mortgage-backed securities, and iv) a decline in fair value of adjustable-rate mortgage-backed securities to an extent dependent upon the level of interest-rate increases, the time period of the next interest rate repricing date for the individual security and the applicable periodic (annual and/or lifetime) cap which could limit the degree to which the individual security could reprice within a given time period. Unlike U.S. Government agency mortgage-backed securities which include a full guarantee of principal and interest, private issuer mortgage-backed securities are generally structured with a senior ownership position and subordinate ownership position(s) providing credit support of the senior position. In a limited number of cases, this support is provided through letters of credit or cash reserves. Given the structure of the private issuer mortgage-backed securities, the Company has credit risk in addition to interest-rate and prepayment risk discussed above. In this regard, management has instituted a monitoring system tracking the major factors affecting the performance of a private issuer mortgage-backed security including i) a review of delinquencies, foreclosures, repossessions and recovery rates relative to the underlying mortgage loans collateralizing each security, ii) the level of available subordination or other credit enhancement and iii) the rating assigned to each security by independent national rating agencies. SECURITIES AVAILABLE FOR SALE The following table sets forth information concerning the Company's securities available for sale portfolio at the dates indicated, at fair value:
DECEMBER 31, ---------------------------------------- 1996 1995 1994 ------ ------ ------ (in thousands) Investment Securities: U.S. Government and agency obligations $ 12,398 $ 11,085 $ -- Corporate securities 15,037 16,763 -- FHLB stock 155,792 132,009 109,136 ---------- ---------- ---------- 183,227 159,857 109,136 ---------- ---------- ---------- Mortgage-backed Securities: Mortgage-backed certificates 373,970 1,372,947 1,533,312 Private pass-throughs 2,334,617 -- -- Collateralized mortgage obligations 168,361 -- -- Other 38,573 60,701 59,703 Derivative financial instruments: Interest rate exchange agreements -- (6,528) 3,476 Interest rate cap agreements 57,333 8,738 57,897 Interest rate floor agreements 1,676 10,746 1,582 Exchange traded options -- -- 593 ---------- ---------- ---------- 2,974,530 1,446,604 1,656,563 ---------- ---------- ---------- $ 3,157,757 $ 1,606,461 $ 1,765,699 ========== ========== ==========
8 11 The following schedule illustrates the contractual maturities of the Company's securities available for sale portfolio at December 31, 1996.
DUE AFTER ONE DUE AFTER FIVE DUE WITHIN BUT WITHIN BUT WITHIN DUE AFTER NO STATED ONE YEAR FIVE YEARS TEN YEARS TEN YEARS MATURITY TOTAL ---------- ------------ ------------- --------- ---------- ------- (in thousands) Investment Securities: U.S. Government and agency obligations $ 1,999 $ 10,399 $ -- $ -- $ -- $ 12,398 Corporate securities 1,869 11,821 1,313 34 -- 15,037 FHLB stock -- -- -- -- 155,792 155,792 ------- -------- ------- ---------- -------- ---------- 3,868 22,220 1,313 34 155,792 183,227 ------- -------- ------- ---------- -------- ---------- Mortgage-backed Securities: Mortgage-backed certificates 10,258 61,439 10,464 291,809 -- 373,970 Private pass-throughs -- 25,046 246 2,309,325 -- 2,334,617 Collateralized mortgage obligations 161 2,962 -- 165,238 -- 168,361 Other -- -- -- 38,573 -- 38,573 Derivative financial instruments: Interest rate cap agreements -- 5,818 51,515 -- -- 57,333 Interest rate floor agreements 1,676 -- -- -- -- 1,676 ------- -------- ------- ---------- -------- ---------- 12,095 95,265 62,225 2,804,945 -- 2,974,530 ------- -------- ------- ---------- -------- ---------- $ 15,963 $ 117,485 $ 63,538 $ 2,804,979 $ 155,792 $ 3,157,757 ======= ======== ======= ========== ======== ========== Weighted average yield 6.15% 6.63% 7.80% 7.37% 7.00% 7.42% ==== ==== ==== ==== ==== ====
9 12 At December 31, 1996, the Company held certain mortgage-backed securities classified as available for sale (which are included in the preceding securities available for sale composition table) whose amortized cost by issuer exceeded ten percent of the Company's stockholders' equity. Such investments are detailed as follows:
Issuer Amortized Cost Market Value ------ -------------- ------------ (in thousands) Resolution Trust Corporation $ 329,177 $ 325,570 Prudential Home Mortgage Services 324,229 323,518 Ryland Mortgage Securities Corporation 275,557 275,277 Saxon Mortgage Securities Corporation 137,950 137,936 Capstead Securities Corporation 195,920 195,395 Nomura Asset Capital Corporation 127,605 125,103 Securitized Asset Sales, Inc. 106,614 107,500 Sears Mortgage Securities 87,991 87,322 Greenwich Capital Acceptance, Inc. 87,178 90,617 Donaldson, Lufkin & Jenrette Securities Corp. 72,039 74,183 Citicorp Mortgage Securities, Inc. 65,488 65,994 Residential Funding Corporation 60,414 59,861 Guardian Savings & Loan Association 55,253 57,045
SECURITIES HELD TO MATURITY The following table sets forth information concerning the Company's securities held to maturity portfolio at the dates indicated, at amortized cost:
DECEMBER 31, --------------------------------------------------- 1996 1995 1994 -------- -------- -------- (in thousands) Investment Securities: U.S. Government and agency obligations $ -- $ 113,554 $ 115,500 Corporate securities -- 5,632 41,273 ------ --------- --------- -- 119,186 156,773 ------ --------- --------- Mortgage-backed Securities: Mortgage-backed certificates -- 384,795 459,190 Private pass-throughs -- 2,705,311 2,271,272 Collateralized mortgage obligations -- 340,848 388,827 ------ --------- --------- -- 3,430,954 3,119,289 ------ --------- --------- $ -- $ 3,550,140 $ 3,276,062 ====== ========= =========
In December 1996, the Company reclassified its entire investment and mortgage-backed securities portfolio from held to maturity to available for sale. The securities transferred consisted of investment securities with approximate amortized cost and market values of $114.3 million and $114.9 million, respectively and mortgage-backed securities with approximate amortized cost and market values of $3.1 billion. This action was taken to provide the Company maximum flexibility to manage its portfolio. 10 13 CLASSIFIED ASSETS, LOAN DELINQUENCIES AND DEFAULTS Federal regulations provide for the classification of loans, debt and equity securities, and other assets considered to be of lesser quality as "substandard", "doubtful" or "loss" assets. The regulations require institutions to classify their own assets and to establish prudent general allowances for losses for assets classified "substandard" or "doubtful." The OTS may require the establishment of a general allowance for losses based on assets classified as "substandard" and "doubtful" or based on the general quality of the asset portfolio of an institution. For the portion of assets classified as "loss," an institution is required to either establish specific allowances of 100% of the amount classified or charge such amount off its books. Assets which do not currently expose the institution to sufficient risk to warrant classification in one of the aforementioned categories but possess potential weaknesses are required to be designated "special mention" by management. When a borrower fails to make a required payment on the loan, the Company attempts to cause the delinquency to be cured by contacting the borrower. In the case of residential loans, telephone contacts are normally made after a payment is 19 days past due. In most cases, delinquencies are cured promptly. If the delinquency is not cured by the 30th day, written contacts or personal calls are made to the borrower. If the delinquency continues for a period of 90 days, the Company usually institutes appropriate action to foreclose the property. If foreclosed, the property is sold at public auction and may be purchased by the Company. Under Missouri law, subject to rights of redemption and certain homestead and other exemptions, property normally may be foreclosed after payments become more than 31 days past due, by publishing or posting appropriate notices of the foreclosure action during a subsequent period of 20 days. Delinquent consumer loans are generally handled in a similar manner, except that initial telephone contacts are made when the payment is five days past due. The Company's procedures for repossession and sale of consumer collateral are subject to various requirements under Missouri consumer protection laws. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset Quality" for further discussion. PROVISIONS FOR LOSSES ON LOANS AND REAL ESTATE OWNED The Company establishes valuation allowances for anticipated losses on loans, foreclosed assets, and real estate acquired for development and sale, as described below. Although management believes it uses the best available information in establishing valuation allowances, future provisions for loss charged to expense may be necessary if circumstances differ substantially from the assumptions currently used. Loans - The allowance for loan losses is maintained at an amount considered adequate to provide for losses. The provision for loan losses charged to expense is based on periodic analysis of the loan portfolio by management. In this regard, management considers various risk factors including, but not limited to, general economic conditions, loan portfolio composition, prior loss experience, and independent appraisals. In addition to an allowance for losses on identified problem loans, an overall unallocated allowance is maintained to provide for unidentified credit losses. In estimating such losses, management considers various risk factors including geographic location, loan collateral, and prior loss experience. The allowance for loan losses increased significantly during 1994 when compared to prior years. After combining the Roosevelt, Farm & Home, and Home Federal loan portfolios which resulted in a combined portfolio approximately five times the size of Roosevelt's March 31, 1994 portfolio (approximately $650 million to $3.0 billion), management determined it was necessary to substantially increase the allowance for loan losses to achieve higher and more conservative coverage levels. Factors considered by management in determining the necessity and amount of the provision necessary to bring the overall allowance to the desired level were i) the need to conform Farm & Home's coverage ratio (ratio of allowance for loan losses to total gross loans) of .24% at December 31, 1993, to that of Roosevelt's which was .61% at the comparable date. This resulted in an additional required provision of approximately $7.3 million, ii) the previously discussed five fold increase in the size of the overall loan portfolio coupled with the fact that, at the time, Roosevelt management had no previous track record of managing a portfolio of that size, and iii) the Farm & Home and Home Federal mergers effectively doubled the overall size of the entity resulting in the Company moving up to a new peer group whose average allowance for loan losses as a percentage of total loans far exceeded the allowances of the unadjusted combined entity. Also, since just prior to the merger, both Farm & Home and Roosevelt had recently been through examinations by the OTS, the Company initiated conversations with the OTS to obtain their concurrence with the planned addition to the allowance for loan losses. Such concurrence was received and the resulting $11.4 million provision was recorded. 11 14 Real Estate Owned - Real estate owned includes properties acquired through foreclosure and properties acquired for development and sale. Real estate acquired through foreclosure is transferred to real estate owned at estimated fair value, which represents the new recorded basis of the property. Subsequently, properties are evaluated and any additional declines in value are provided for in an allowance for losses on real estate. Real estate acquired for development and sale is carried at the lower of cost or estimated net realizable value. While the valuation allowances for losses on loans, foreclosed assets, and real estate acquired for development and sale are considered adequate, the Company's allowances are subject to review by regulatory authorities. In the course of their periodic examinations, the Company may be instructed to establish additional general or specific reserves in addition to the amounts previously established. 12 15 The following table sets forth an analysis of the Company's allowance for loan losses.
DECEMBER 31, --------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 --------------------------------------------------------------------------------------------------- CATEGORY'S CATEGORY'S CATEGORY'S CATEGORY'S CATEGORY'S PERCENT PERCENT PERCENT PERCENT PERCENT OF TOTAL OF TOTAL OF TOTAL OF TOTAL OF TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ---------- (DOLLARS IN THOUSANDS) Balance at beginning of period $ 21,855 $ 22,915 $ 9,056 $10,753 $ 9,063 Charge-offs: Residential 1,930 3,177 358 824 468 Commercial real estate 13 155 696 1,535 1,611 Consumer 230 114 33 169 66 Construction -- 87 -- -- -- ------- ------- ------- ------ ------- 2,173 3,533 1,087 2,528 2,145 ------- ------- ------- ------ ------- Recoveries: Residential 497 3 16 -- -- Commercial real estate -- 74 5 125 21 Consumer 36 30 10 -- 184 Construction -- -- -- -- -- ------- ------- ------- ------ ------- 533 107 31 125 205 ------- ------- ------- ------ ------- Net charge-offs 1,640 3,426 1,056 2,403 1,940 Additions charged to operations 1,262 1,200 12,432 706 2,648 Additions acquired through acquisitions 1,242 1,166 2,483 -- 982 ------- ------- ------- ------ ------- Balance at end of period 22,719 $ 21,855 $ 22,915 $ 9,056 $ 10,753 ======= ======= ======= ====== ======= Ratio of net charge-offs during the period to average loans outstanding during the period .04% .10% .04% .09% .13% ======= ======= ======= ====== ======= Allowance distribution: Residential $ 15,827 87.8% $ 17,309 92.4% $ 17,570 92.5% $ 4,245 89.8% $ 4,208 88.4% Commercial real estate 4,017 3.5 4,220 3.8 4,776 4.2 4,463 5.2 5,835 5.5 Consumer 2,767 8.1 326 3.5 410 2.7 348 1.5 710 1.6 Construction 108 .6 -- .3 159 .6 -- 3.5 -- 4.5 ------- ----- ------- ----- ------- ----- ------ ----- ------- ----- $ 22,719 100.0% $ 21,855 100.0% $ 22,915 100.0% $ 9,056 100.0% $ 10,753 100.0% ======= ===== ======= ===== ======= ===== ====== ===== ======= =====
13 16 DEPOSITS AND OTHER SOURCES OF FUNDS Deposit accounts have traditionally been a principal source of the Company's funds for use in lending and for other general business purposes. In addition to deposits, the Company derives funds from loan repayments, loan and securities sales, cash flows generated from operations (including interest credited to deposit accounts), FHLB advances, and collateralized borrowings. Borrowings may be used on a short-term basis to compensate for seasonal reductions in deposits or for deposit inflows at less than projected levels and may be used on a longer-term basis to support expanded lending activities. Deposits - The Company attracts both short-term and long-term deposits from the general public by offering a wide assortment of accounts and rates. The Company offers checking accounts, various money market accounts, regular passbook accounts, fixed interest rate certificates with varying maturities, negotiated rate certificates of deposit in minimum amounts of $100,000 ("Jumbo" accounts), and individual retirement accounts. The Company does not generally seek to attract Jumbo accounts or brokered deposits. The Company's variety of deposit accounts has allowed it to remain competitive and respond to changes in consumer demands. The Company has become more subject to short-term fluctuations in deposit flows, as many customers have become more interest rate conscious. The ability of the Company to attract and maintain deposits, which affects its cost of funds, will continue to be significantly affected by market conditions. The following table sets forth the deposit flows of the Company during the periods indicated. Net deposits (withdrawals) refers to the amount of deposits (exclusive of interest credited) during a period less the amount of withdrawals during the period. The net deposit inflows during 1996 resulted from an aggressive marketing campaign by the Company to attract retail deposits, especially checking and money market accounts. The net deposit outflows in 1995 and 1994 resulted from conservative pricing and a general industry trend of depositors seeking improved yields in a relatively low interest rate environment. Deposit flows at savings institutions may also be influenced by external factors such as governmental credit policies.
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------- 1996 1995 1994 ------------ ------------ ------------ (IN THOUSANDS) Net deposits (withdrawals) $ 24,756 $ (346,551) $ (711,218) Deposits assumed from acquisitions 228,242 182,566 468,877 Deposits sold -- -- (68,134) Interest credited 186,022 172,774 132,330 Unearned discount on brokered certificates 68 (117) -- Net adjustment related to purchase method of accounting 486 (564) (3,962) --------- --------- --------- Net increase (decrease) in deposits 439,574 8,108 (182,107) Beginning balance 4,907,497 4,899,389 5,081,496 --------- --------- --------- Ending balance $ 5,347,071 $ 4,907,497 $ 4,899,389 ========= ========= ========= Percent increase (decrease) 9.0 % 0.2 % (3.6) % === === =====
14 17 Borrowings - The Company's other sources of funds include securities sold under agreements to repurchase, advances from the FHLB of Des Moines, and longer-term borrowings such as its mortgage-backed bonds and subordinated notes. These borrowings totaled $3.1 million, $1.8 billion and $0.00, and $1.1 billion, $2.4 billion and $47.5 million at December 31, 1996 and 1995, respectively. As a member of the FHLB of Des Moines, the Company is required to own capital stock in the FHLB of Des Moines and is authorized to apply for advances from the FHLB of Des Moines. All long-term FHLB advances must be for the purpose of financing residential housing. Members must meet community lending standards established by Federal Housing Finance Board (FHFB) regulations to have continued access to long-term FHLB advances. The Company does not expect that these limitations will have a significant impact on its access to long-term advances. Each FHLB credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLB of Des Moines may prescribe additional acceptable uses to which these advances may be put, as well as limitations on the size of the advances and repayment provisions. See "Regulation--Federal Home Loan Bank System." The form of agreement to repurchase securities sold used by the Company is a sale of securities to primary dealers with a commitment to repurchase securities at a predetermined price at a future date, typically ranging between 30 days and 90 days from the date of the initial sale. See Notes 11, 12, 13 and 14 of Notes to Consolidated Financial Statements for further information regarding deposits and other borrowings. ASSET/LIABILITY MANAGEMENT The long-term profitability of the Company depends not only on the success of the services it offers to its customers and the quality of its loans and investments, but also the extent to which its earnings and net market value are affected by changes in interest rates. Roosevelt's asset and liability management strategy attempts to reduce the variability in net interest income and net market value caused by interest rate changes. One means of reducing the effect of interest rate volatility on net interest income is to shorten asset maturities. In recent years, Roosevelt has attempted to do this by emphasizing the origination and purchase of adjustable-rate mortgage loans and the purchase of adjustable-rate mortgage-backed securities. In addition to the origination and purchase of adjustable-rate loans and investments discussed above, the Company will also utilize derivative financial instruments; such as interest exchange agreements, interest rate cap and floor agreements and, to a much lesser extent, interest rate futures contracts to help manage its interest rate risk. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management" and Note 15 to Notes to Consolidated Financial Statements for further information regarding the Company's interest rate risk management practices. SUBSIDIARIES Roosevelt is permitted, through the Bank, to invest in the capital stock, obligations, or other specified types of securities of subsidiaries (referred to as "service corporations") and to make loans to such subsidiaries, and joint ventures in which such subsidiaries are participants, in an aggregate amount not exceeding 2% of the Bank's assets. The Bank may invest an additional 1% of its assets in service corporation activities that serve primarily specified community or inner-city developments. Federal regulations also permit institutions to make specified types of loans to such service corporation subsidiaries (other than special-purpose finance subsidiaries), in which the institution owns more than 10% of the stock, in an aggregate amount not exceeding 50% of the institution's regulatory capital. In addition, federal savings associations are permitted to invest unlimited amounts in subsidiaries that are engaged solely in activities that the association may conduct. At December 31, 1996, the Bank is in compliance with the requirements. Roosevelt Financial Services, Inc. (prior to 1994 known as Roosevelt Insurance Agency, Inc.) is a diversified general insurance agency. It provides life, health, property, casualty, commercial insurance coverages, and tax deferred annuities and other investment products to Roosevelt's customers and the general public. Stocks and bonds are offered to Roosevelt's customers on a discount basis through a clearing broker/dealer. Mutual funds are offered to the Roosevelt's customers and the general public by registered representatives through an arrangement between Roosevelt Financial Services, Inc. and a registered broker/dealer. F&H Realty, a subsidiary of Roosevelt Financial Group, Inc., is a Missouri-chartered real estate investment company. It owns real estate held for investment or for the purpose of developing and selling lots, primarily for single-family dwellings. It was formed in December 1992 and was later transferred to the Company under the name Farm & Home as a dividend-in-kind from the Bank, previously known as Farm & Home Savings Association. 15 18 REGULATION The Company currently has two financial institution subsidiaries, the Bank, which is a Federally chartered savings bank, and MSB, a Missouri chartered bank and trust company. The deposits of the Bank and Missouri State Bank are federally insured up to applicable limits by the FDIC and are backed by the full faith and credit of the United States Government. The Bank is subject to broad federal regulation and oversight extending to all its operations. The Bank is a member of the FHLB of Des Moines and is subject to certain limited regulation by the Federal Reserve Board (the FRB). The Company is also subject to federal regulation and oversight as a bank holding company. Missouri State Bank is subject to extensive regulation, supervision and examination by the Missouri Division of Finance (the MDF) and the FDIC, which are its state and primary federal banking regulators, respectively. As with the Bank, this supervision governs the activities which it can engage in. Certain of these regulatory requirements and restrictions are discussed below and elsewhere in this document. See "Bank Holding Company Regulation". FEDERAL REGULATION OF FINANCIAL INSTITUTIONS The OTS, as the primary federal regulatory agency of the Bank, and the FDIC, as insurer and back-up regulator, have extensive supervisory authority over the operations of savings associations. The Bank is required to file periodic reports with the OTS and may be examined periodically by the OTS and FDIC. Missouri State Bank is also required to file periodic reports with the MDF and the FDIC and is periodically examined by such agencies. The Bank was most recently examined by the OTS and the FDIC in April, 1996. All savings associations are subject to an annual assessment to fund the operations of the OTS. The general assessment, to be paid on a semi-annual basis, is computed based upon the savings association's total assets, as reported in the association's latest quarterly thrift financial report. The Bank's OTS assessment for 1996 was $1.2 million. The pervasive regulatory authority of the federal banking regulators is backed by extensive enforcement authority over all FDIC-insured institutions, including the Bank and Missouri State Bank. This enforcement authority includes among other things, the ability to impose operational restrictions, to commence cease-and-desist proceedings, to assess civil money penalties and to initiate proceedings to remove individuals from their positions and prohibit them from service with any savings association. Such actions may generally be initiated to prevent, terminate or remedy violations of laws, regulations or unsafe or unsound practices. Additional grounds include failure to file accurate and timely reports with the federal banking regulators. The Bank's general permissible lending limit for loans-to-one borrower is equal to 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At December 31, 1996, the Bank's lending limit under this restriction was $66.2 million. The Bank is in compliance with the loans-to-one borrower limitation. The OTS, as well as the other federal banking agencies, have adopted guidelines establishing safety and soundness standards. Any institution which fails to comply with these standards must submit a compliance plan. A failure to submit a plan or to comply with an approved plan will subject the institution to further enforcement action. INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC The Bank is a member of the SAIF and Missouri State Bank is a member of the BIF, each of which is administered by the FDIC. Their deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC assesses deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC insured institutions. It may also prohibit any FDIC insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the BIF or the SAIF. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based on their level of capital and supervisory evaluation. The assessment schedule for BIF and SAIF insured institutions ranged from .23% to .31% of deposits during the first half of 1995. Under this system, institutions classified as well-capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets (Tier 1 risk-based capital) ratio of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy would pay the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern would pay the highest premium. Risk classification of all insured 16 19 institutions will be made by the FDIC for each semi-annual assessment period. The Bank and Missouri State Bank qualify as "well-capitalized". The FDIC is authorized to increase such assessment rates, on a semiannual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. In addition the FDIC may impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. As in the case with the SAIF, the FDIC is authorized to adjust the insurance premium rates for banks that are insured by the BIF of the FDIC in order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching its statutory reserve ratio the FDIC revised the premium schedule for BIF insured institutions to provide a range of .04% to .31% of deposits. The revisions became effective in the third quarter of 1995. The BIF premium schedule was further revised, effective January 1996, to provide a range of 0% to .27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised the BIF premium schedule, it noted that, absent legislative action (as discussed below), the SAIF would not attain the designated reserve ratio until the year 2002. As a result, SAIF insured members would continue to be generally subject to higher deposit insurance premiums than BIF insured institutions until, all things being equal, the SAIF attained the required reserve ratio. In order to eliminate this disparity and any competitive disadvantage caused thereby, legislation to recapitalize the SAIF was enacted in September 1996. The legislation provided for a one-time assessment to be imposed on all deposits assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the SAIF. It also provided for the merger of the BIF and SAIF on January 1, 1999, if no savings association then exists. The special assessment ratio was established at 0.657% of deposits by the FDIC and resulted in an assessment to the Bank of $27.4 million or $17.8 million after the effect of taxes. This special assessment, which was paid in November 1996, significantly increased noninterest expense and adversely affected the Bank's results of operations for 1996. Prior to the enactment of the legislation, a portion of the SAIF assessment was used to repay obligations issued by a federally chartered corporation to provide financing (FICO) for resolving the thrift crisis in the 1980's. Although the SAIF assessment schedule was equalized with the BIF assessment schedule, effective October 1, 1996, SAIF-insured institutions continue to be subject to a FICO assessment as a result of this continuing obligation. The legislation also now requires assessments to be made on BIF-assessable deposits for this purpose, effective January 1, 1997, however, that assessment will be limited to 20% of the rate imposed on SAIF assessable deposits until the earlier of December 31, 1999 or when no savings association continues to exist, thereby imposing a greater burden on SAIF member institutions such as the Bank. Thereafter, assessments on BIF-member institutions will be made on the same basis as SAIF-member institutions. The rates established by the FDIC to implement this requirement for all FDIC-insured institutions are 6.48 basis points assessment on SAIF deposits and 1.30 basis points on BIF deposits until BIF insured institutions participate fully in the assessment. These rates may be revised in the future based upon changes in the BIF and SAIF assessment base. REGULATORY CAPITAL REQUIREMENTS Federally insured financial institutions, such as the Bank and Missouri State Bank, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations. Missouri State Bank is also subject to a core capital and risk-based capital requirement established by the FDIC that are similar to that imposed on the Bank. Tangible Capital - The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). Tangible capital generally includes common stockholders' equity and certain noncumulative perpetual preferred stock. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital. The OTS regulations establish special tangible capital requirements for savings associations that own subsidiaries. In determining compliance with the capital requirements, all subsidiaries engaged solely in activities permissible for national banks or engaged in certain other activities solely as an agent for its customers, are "includable" subsidiaries that are consolidated for capital purposes in proportion to the association's level of ownership, including the assets of includable subsidiaries in which the association has a minority interest that are not consolidated for generally accepted accounting principles. For excludable subsidiaries, the debt and equity investments in such subsidiaries must be deducted from assets and capital. 17 20 At December 31, 1996, the Bank had tangible capital of approximately $423.2 million, or 5.44% of adjusted total assets, which is approximately $306.6 million above the minimum requirement of 1.50% adjusted total assets in effect on that date. Core Capital - The capital standards also require core capital equal to at least 3% of adjusted total assets. Core capital generally consists of tangible capital plus certain intangible assets. At December 31, 1996, the Bank had $2.0 million of core deposit intangibles included in core capital under these tests and had core capital equal to approximately $425.3 million, or 5.47% of adjusted total assets, which is $192.0 million above the minimum leverage ratio requirement of 3% in effect on that date. As a result of the prompt corrective action provisions discussed below, however, all FDIC insured institutions must maintain a core capital level of at least 4% to be considered adequately capitalized unless its supervisory condition is such to allow it to maintain a 3% ratio. Missouri State Bank was also in compliance with its core capital requirement on such date. Risk-Based Capital - The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital and general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The federal banking regulators are also authorized to require a savings association to maintain additional risk-based capital to account for concentration of credit risk and the risk of non-traditional activities. At December 31, 1996, the Bank did not have any capital instruments that qualified as supplementary capital and had $18.9 million of general loss allowances, which was less than 1% of risk-weighted assets. In determining the amount of risk-weighted assets, all assets, including the credit equivalent amount of certain off-balance sheet items, will be multiplied by a risk weight ranging from 0% to 100% based on the risks inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for performing and prudently underwritten permanent one- to four-family first mortgage loans not more than 90 days past due and with a loan-to-value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the FNMA or FHLMC. On December 31, 1996, the Bank had total risk-weighted capital of approximately $444.2 million (including $18.9 million of general loss allowances). The Bank had risk-weighted assets of $3.8 billion (including $162.8 million in credit equivalent amounts of converted off-balance sheet items) for total risk-weighted capital of 11.75% of risk-weighted assets. This amount was approximately $141.7 million above the 8% requirement in effect on that date. Missouri State Bank was also in compliance with its requirement on such date. Every savings association with more than normal interest rate risk is required to deduct from its total capital, for purposes of determining compliance with such requirement, an amount equal to 50% of its interest-rate risk exposure multiplied by the present value of its assets. This exposure is a measure of the potential decline in the net portfolio value of a savings association, greater than 2% of the present value of its assets, based upon a hypothetical 200 basis point increase or decrease in interest rates (whichever results in a greater decline). Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The regulation provides for a two quarter lag between calculating interest rate risk and recognizing any deduction from capital. The OTS recently announced that it will delay the effective date of the regulation until it evaluates the process by which an association may appeal an interest-rate risk capital deduction determination. If the regulation had been in effect at December 31, 1996, the Bank would have had no such deduction from total capital on such date. An FDIC-insured institution's primary federal regulator is authorized and, under certain circumstances required, to take certain actions against institutions that fail to meet their capital requirements. The regulator is generally required to take action to restrict the activities of an "undercapitalized institution" (generally defined to be one with less than a 4% core and Tier 1 risk-based capital ratios and less than an 8% risk-based capital ratio). Any such institution must submit a capital restoration plan and until such plan is approved by its regulator may not increase it assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The regulator is authorized to impose the additional restrictions, discussed below, that are applicable to significantly undercapitalized institutions. As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized association must agree that it will enter into a limited capital maintenance guarantee with respect to the institution's achievement of its capital requirements. In any bankruptcy proceedings by the Company, any claim against the Company under such a guarantee would have priority over the claims of unsecured creditors. 18 21 Any institution that fails to comply with its capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be subjected by its regulator to one or more of a number of additional specified actions and operating restrictions which may cover all aspects of its operations and include a forced merger or acquisition of the institution. An institution that becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized institutions. In addition, a receiver (or conservator with the concurrence of the FDIC) must be appointed for an institution, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. An institution's primary federal regulator is also generally authorized to reclassify an institution into a lower capital category and impose the restrictions applicable to such category if it determines that an institution is in an unsafe or unsound condition or is engaged in an unsafe or unsound practice. The imposition of any of these measures on the Bank may have substantial adverse effect on the Bank's operations and profitability and the value of Roosevelt's common and preferred stock. Roosevelt stockholders do not have preemptive rights, and therefore, if Roosevelt is directed by the OTS or the FDIC to issue additional shares of common or preferred stock, such issuance may result in the dilution in the percentage of ownership of the stockholders of Roosevelt. LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS OTS regulations impose various restrictions on associations, including the Bank, with respect to their ability to make capital distributions, which include dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt, and other transactions charged to the capital account. As of December 31, 1996, the Bank would have been permitted to pay dividends of $70.8 million consistent with these restrictions, subject to giving the notice referred to below and receiving no objection from the OTS. Generally, associations such as the Bank that before and after the proposed distribution meet or exceed their capital requirements, may make capital distributions during any calendar year up to the greater of 100% of net income for the year-to-date plus 50% of the amount by which the lesser of the association's tangible, core, or risk-based capital exceeds its requirement for such capital component, as measured at the beginning of the calendar year, or 75% of net income for the most recent four quarter period. However, an association deemed to be in need of more than normal supervision by the OTS may have its dividend authority restricted. Missouri State Bank is generally authorized to pay dividends out of current and retained earnings. Associations proposing to make any capital distribution must submit written notice to the OTS 30 days prior to such distribution. Associations that do not meet minimum capital requirements that propose to make any capital distribution must obtain OTS approval prior to making such distributions. The OTS may object to the distribution during that 30-day period based on safety and soundness concerns. The OTS has proposed regulations that would revise the current capital distribution restrictions. Under the proposal a savings association may make a capital distribution without notice to the OTS (unless it is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2 rating, is not of supervisory concern and would remain adequately capitalized (as defined in the OTS prompt corrective action regulations) following the proposed distribution. Savings associations that would remain adequately capitalized following the proposed distribution but do not meet the other noted requirements must notify the OTS 30 days prior to declaring a capital distribution. The OTS stated, however, it will generally regard as permissible that amount of capital distributions that do not exceed 50% of the institution's excess regulatory capital plus net income to date during the calendar year. A savings association may not make a capital distribution without prior approval of the OTS and the FDIC if it is undercapitalized before, or as a result of, such a distribution. As under the current rule, the OTS may object to a capital distribution if it would constitute an unsafe or unsound practice. No assurance may be given as to whether or in what form the proposed regulations may be adopted. LIQUIDITY Each savings association, including the Bank, is required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. This liquid asset ratio requirement may vary from time to time (between 4% and 10%) depending on the economic conditions and savings flows of all savings associations. At the present time, the minimum liquid asset ratio is 5%. In addition, short-term liquid assets (e.g., cash, certain time deposits, certain bankers' acceptances and short-term United States Treasury obligations) currently must constitute at least 1% of an association's average daily balance of net withdrawable deposit accounts and current borrowings. Penalties may be imposed upon associations for violations of either liquid asset ratio requirement. At December 31, 1996, the Bank was in compliance with both requirements. 19 22 QUALIFIED THRIFT LENDER TEST All savings associations, including the Bank, are required to meet a qualified thrift lender (QTL) test to avoid certain restrictions on their operations. The QTL test requires a savings association to have at least 65% of its portfolio assets (which consist of total assets less intangibles, properties used to conduct the savings association's business and liquid assets not exceeding 20% of total assets) in qualified thrift investments and to meet that test on a monthly average for nine out of every 12 months on a rolling basis. Such assets primarily consist of residential housing related loans and investments. As of December 31, 1996, the Bank had a QTL ratio of 98.6%, which was in compliance with the 65% QTL test, and has always been in compliance with the QTL requirement. Any savings association that fails to meet the test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If the association does not requalify and converts to a national bank charter, it must remain SAIF insured until the FDIC permits it to transfer to the BIF. If an association that fails the test has not yet requalified and has not converted to a national bank, its new investments and activities are limited to those permissible for a national bank and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. TRANSACTION WITH AFFILIATES Transactions between an FDIC-insured institution, such as the Bank or Missouri State Bank or any of its subsidiaries, and its affiliates are subject to numerous restrictions. Generally, such transactions must be on terms at least as favorable to the Bank as those prevailing at the time for comparable transactions with nonaffiliated companies. Most transactions are also subject to quantitative ceilings, and many must be secured by eligible collateral. In addition, savings associations are prohibited from investing in the securities of an affiliate (other than a subsidiary) or extending credit to an affiliate engaged in activities not permissible for a bank holding company. For these purposes, an affiliate is defined as a company that controls, or is under common control with, the Bank but does not include a subsidiary of the Bank unless specially determined by OTS or the FRB. None of the Bank's subsidiaries have been so designated. Certain transactions with directors, officers or controlling persons are also subject to conflict of interest laws and regulations enforced by federal banking regulators. These regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals unless made pursuant to an employee benefits program. BANK HOLDING COMPANY REGULATION General - As a bank holding company, Roosevelt is subject to comprehensive regulation by the FRB under the Bank Holding Company Act of 1956 (the BHCA). Roosevelt is required to file reports with the FRB and is subject to regular inspections by the FRB. The FRB also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Under FRB policy, a bank holding company must serve as a source of strength for its subsidiary banks. Under this policy the FRB may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank. Under the BHCA, a bank holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. The BHCA prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the FRB includes, among other things, operating a savings institution (such as the Bank), mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance 20 23 agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers' checks and United States Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers. The scope of permissible activities may be expanded from time to time by the FRB. Such activities may also be affected by federal legislation. Interstate Banking and Branching - In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Riegle-Neal Act) was enacted to ease restrictions on interstate banking. Effective September 29, 1995, the Riegle-Neal Act allows the FRB to approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company's home state, without regard to whether the transaction is prohibited by the laws of any state. The FRB may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. The Riegle-Neal Act also prohibits the FRB from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. The Riegle-Neal Act does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the Riegle-Neal Act. Additionally, beginning on June 1, 1997, the federal banking agencies will be authorized to approve interstate merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks opts out of the Riegle-Neal Act by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches will be permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions will also be subject to the nationwide and statewide insured deposit concentration amounts described above. The Riegle-Neal Act authorizes the Office of the Comptroller of the Currency and the FDIC to approve interstate branching de novo by national and state banks, respectively, only in states which specifically allow for such branching. The Riegle-Neal Act also requires the appropriate federal banking agencies to prescribe regulations by June 1, 1997 which prohibit any out-of-state bank from using the interstate branching authority primarily for the purpose of deposit production. These regulations must include guidelines to ensure that interstate branches operated by an out-of-state bank in a host state are reasonably helping to meet the credit needs of the communities which they serve. The State of Missouri has not yet authorized interstate merger transactions or de novo interstate branching. Any future acquisitions of thrift institutions by Roosevelt will continue to be subject to the HOLA. As a federal thrift institution, the Bank, subject to certain conditions, has nationwide branching authority. Dividends - The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB's view that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the FRB, the FRB may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized". Bank holding companies are required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. This notification requirement does not apply to any company that meets the well-capitalized standard for commercial banks, has a safety and soundness examination rating of at least a "2" and is not subject to any unresolved supervisory issues. Capital Requirements - The FRB has established capital requirements for bank holding companies that generally parallel the capital requirements for national banks and federal thrift institutions such as the Bank. 21 24 FEDERAL SECURITIES LAW The stock of Roosevelt is registered with the Securities and Exchange Commission (SEC) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Roosevelt is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Roosevelt stock held by persons who are affiliates within the meaning of the Exchange Act (generally officers, directors, and principal stockholders) of Roosevelt may not be resold without registration or unless sold in accordance with certain resale restrictions. If Roosevelt meets specified current public information requirements, each affiliate of Roosevelt generally is able to sell in the public market, without registration, a limited number of shares in any three-month period. FEDERAL RESERVE SYSTEM The FRB requires all depository institutions to maintain non-interest-bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts). At December 31, 1996 the Bank and Missouri State Bank were in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements that may be imposed by the OTS. Savings associations are authorized to borrow from the Federal Reserve Bank "discount window," but FRB regulations require associations to exhaust other reasonable alternative sources of funds, including FHLB borrowings, before borrowing from the Federal Reserve Bank. FEDERAL HOME LOAN BANK SYSTEM The Bank is a member of the FHLB of Des Moines which is one of 12 regional FHLBs that regulate the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB. These policies and procedures are subject to the regulation and oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing. As a member, the Bank is required to purchase and maintain stock in the FHLB of Des Moines. At December 31, 1996 the Bank had approximately $155.8 million in FHLB of Des Moines stock, which was in compliance with this requirement. The FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to low and moderately priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low-and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. For 1996 cash dividends paid by the FHLB of Des Moines to the Bank totaled $10.1 million, all of which was paid as a cash dividend. TAXATION For federal income tax purposes, Roosevelt reports its income and expenses using the accrual method of accounting and uses the calendar year as its tax year. Roosevelt is subject to federal income tax under existing provisions of the Internal Revenue Service Code in generally the same manner as other corporations. Missouri-based thrift institutions, such as the Bank, are subject to a special financial institutions tax, based on net income without regard to net operating loss carryforwards at the rate of 7% of net income. This tax is in lieu of all other state taxes on thrift institutions on their property, capital or income. As a Delaware business corporation, Roosevelt is required to file annual returns with and pay annual fees to the State of Delaware. Roosevelt is also subject to an annual franchise tax imposed by the State of Delaware based on the number of authorized shares of its common stock. If and to the extent Roosevelt carries on activities in other states, it may in certain circumstances be subject to such states' tax laws. COMMUNITY REINVESTMENT ACT The Community Reinvestment Act (CRA) requires financial institutions regulated by the federal financial supervisory agencies to ascertain and help meet the credit needs of their delineated communities, including low-income and moderate-income neighborhoods within those communities, while maintaining safe and sound banking practices. The agencies evaluate an institution's CRA performance based on a four-tiered descriptive rating system and are required to make public an institution's rating and written evaluation. The four possible ratings 22 25 of meeting community credit needs are outstanding, satisfactory, needs to improve, and substantial noncompliance. Many factors play a role in assessing a financial institution's CRA performance. The institution's regulator must consider its financial capacity and size, legal impediments, local economic conditions and demographics, including the competitive environment in which it operates. The evaluation does not rely on absolute standards and the institutions are not required to perform specific activities or to provide specific amounts or types of credit. During 1996, the Bank received a satisfactory rating from the OTS. This rating reflects Roosevelt's commitment to meeting the credit needs of the communities it serves. The Bank maintains a CRA statement for public viewing, as well as an annual CRA highlights document. These documents describe the Bank's credit programs and services, community outreach activities, public comments and other efforts to meet community credit needs. Missouri State Bank also received a satisfactory rating on its latest CRA examination. COMPETITION The Company faces strong competition both in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other savings institutions, commercial banks, and mortgage bankers making loans secured by real estate located in the Company's market area. Commercial banks and finance companies, including finance company affiliates of automobile manufacturers, provide vigorous competition in consumer lending. The Company competes for real estate and other loans principally on the basis of the interest rates and loan fees it charges, the types of loans it originates, and the quality of services it provides to borrowers. The Company faces substantial competition in attracting deposits from other savings institutions, commercial banks, money market and mutual funds, credit unions, and other investment vehicles. The ability of the Company to attract and retain deposits depends on its ability to provide investment opportunities that satisfy the requirements of investors as to rate of return, liquidity, risk, and other factors. The Company attracts a significant amount of deposits through its branch offices, primarily from the communities in which those branch offices are located; therefore, competition for those deposits is principally from other savings institutions and commercial banks located in the same communities. The Company competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours, and convenient branch locations with interbranch deposit and withdrawal privileges at each. 23 26 MANAGEMENT OF REGISTRANT AND ITS SUBSIDIARIES The following table sets forth certain information with respect to each executive officer of the Company and the Bank as of February 28, 1997.
NAME AGE POSITION HELD - ---- --- ------------- Stanley J. Bradshaw 39 Chairman, President and Chief Executive Officer Anat Bird 45 Senior Executive Vice President and Chief Operating Officer Gary W. Douglass 46 Executive Vice President and Chief Financial Officer
The following is a description of the principal occupation and employment of the executive officers of the Company and the Bank during at least the last five years. Except as otherwise indicated, all officers of the Company have held their positions since the formation of the Company in 1988. Stanley J. Bradshaw - Mr. Bradshaw joined Roosevelt in 1985 as Vice President and Chief Lending Officer and in 1987 was elected Senior Vice President and Chief Investment Officer. During 1988, he was elected Executive Vice President and became Roosevelt's Chief Operating Officer. He joined the Board of Directors and became President and Chief Executive Officer in 1991. During 1996, he was appointed Chairman of the Board of Directors at the Company and the Bank and now carries the title of Chairman, President and Chief Executive Officer. Anat Bird - Mrs. Bird joined the Company and the Bank as Senior Executive Vice President and Chief Operating Officer in July 1995. In January 1991, Mrs. Bird founded the Financial Institutions Consulting Group (FIGC) at BDO Seidman, New York, New York and developed and managed FIGC through June 1994. In June 1994, Mrs. Bird Founded SCB Forums, LTD., a financial institutions consulting firm located in New York City and the successor to FinExc Group, L.L.C. Gary W. Douglass - Mr. Douglass joined the Company and the Bank as Executive Vice President and Chief Financial Officer on March 9, 1995. Prior to joining the Company and the Bank, Mr. Douglass was a partner for Deloitte & Touche LLP, a big six international accounting firm where he was the partner in charge of the accounting and auditing function and financial institution practice of the firm's St. Louis office. EMPLOYEES At December 31, 1996, the Company had a total of 1,357 employees, including 178 part-time employees. None of the Company's employees are represented by a collective bargaining group. Management considers its employee relations to be good. 24 27 ITEM 2. PROPERTIES The Company's headquarters, which is a leased facility, is located in Chesterfield, Missouri. The Company's mortgage loan servicing office (owned) is located in Nevada, Missouri and a consumer loan servicing office (leased) is located in Creve Coeur, Missouri. In addition to these, the Company has an additional 81 branch offices, of which 76 are located in the State of Missouri, four are located in the State of Illinois, and one is located in the State of Kansas. 39 of these offices are located in the St. Louis metropolitan area of which 29 branches are owned by the Company and 10 are leased. The leases expire from 1997 through 2010. Ten of these offices are located in the Kansas City metropolitan area of which four branches are owned by the Company and six are leased. The leases expire from 1997 to 2014. The remaining 32 offices are located in Staunton, Illinois and Pittsburgh, Kansas and the Missouri cities of Hannibal(2), Springfield(3), Columbia, Nevada, Union, Warrenton, St. James, Washington, Sikeston, Dexter, Malden, Poplar Bluff, Hayti, Portageville, Cape Girardeau, Mexico, Jefferson City, Trenton, Marshall, Sedalia, Clinton, Maryville, St. Joseph, Lamar, Joplin(2) and Kirksville. 26 of these offices are owned by the Company and six offices are leased. The leases expire from 1997 through 2009. The Company's net investment in its home and branch offices, premises, equipment, and leaseholds was $55.0 million at December 31, 1996. ITEM 3. LEGAL PROCEEDINGS Roosevelt has certain litigation and claims in process resulting from activities arising from normal operations. In the opinion of management, none of these matters is likely to have a material adverse effect on its financial position. Among the matters referred to above and as a result of the acquisition of Farm & Home Financial Corporation (Farm & Home) which was completed in June 1994, the Company has become successor to certain legal proceedings which involved Farm & Home Savings Association, a Farm & Home subsidiary (Farm & Home Savings). The following is a discussion of such proceedings. Prior to 1985, the Southbend Subdivision was developed by Farm & Home Savings and a co-developer on property owned by Farm & Home Savings adjacent to a toxic waste disposal site near Houston, Texas (the Brio Site). Neither Farm & Home, Farm & Home Savings nor the Company has been designated a "potentially responsible party" with respect to the Brio Site or any remediation thereof. Farm & Home Savings (and the Bank as successor to Farm & Home Savings) has been named in a number of lawsuits by various parties claiming personal injury and property damage from exposure to the Brio Site wastes as a result of Farm & Home Savings' development of Southbend Subdivision. These claims have involved homeowners and their children who lived in the Southbend Subdivision as well as others who have visited the subdivision or attended Weber Elementary School, which was located within the Southbend Subdivision, and others who either played on ball fields that were in close proximity to the subdivision or in some cases lived in neighboring subdivisions (the Claims). Pursuant to settlement agreements dated May 1987 and March 1993 between Farm & Home, Farm & Home Savings, and United States Fire Insurance Company, North River Insurance Company and Commonwealth Lloyds Insurance Company of Texas (the Insurance Companies), the Insurance Companies have been defending and indemnifying Farm & Home Savings (and the Bank as successor to Farm & Home Savings) against the Claims and have agreed to assume the exclusive obligation and responsibility for acquiring the lots and homes in the Southbend Subdivision. The 1987 settlement agreement provided that the Insurance Companies would defend and pay on behalf of Farm & Home Savings all damages and settlements (without limitation as to time frame or dollar amount) arising out of past, present and future claims and demands in connection with the Southbend Subdivision's proximity to the Brio Site, and also arising out of, resulting from, or relating to the alleged hazardous wastes at the Brio Site. The Insurance Companies issued a reservation of rights to certain Claims filed in 1993. Pursuant to a further settlement agreement, the Insurance Companies have agreed to continue to defend and indemnify the Bank against all pending Claims, subject to the Insurance Companies' right to reassert their reservation of rights in the future. Currently, there are approximately nine hundred Claims pending against Farm & Home Savings involving the Southbend Subdivision and/or the Brio Site, and it is possible that in the future additional claims may be filed by others. While the outcome of the Claims and any future claims cannot be predicted with certainty, based upon consultation with outside counsel, it is the belief of the Company that, pursuant to the settlement agreements, the Insurance Companies are responsible for the payment of all Claims and that the risk of significant loss to the Company related thereto would be remote. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 1996. 25 28 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS COMMON STOCK Roosevelt's common stock is traded on the Nasdaq National Market under the symbol "RFED". As of December 31, 1996, there were 44,183,124 shares of common stock issued and outstanding held by 6,469 shareholders. The following table sets forth the high, low and closing sales prices for the common stock as reported by the Nasdaq Stock Market, as well as the dividends paid, for 1996 and 1995.
STOCK PRICE ---------------------------- COMMON STOCK DATA HIGH LOW CLOSE DIVIDENDS ---- --- ----- --------- 1996 First quarter $19.250 $17.000 $18.500 $0.155 Second quarter 19.750 17.875 19.250 0.155 Third quarter 18.875 15.625 17.125 0.155 Fourth quarter 21.000 16.875 21.000 0.155 1995 First quarter $17.250 $14.750 $15.750 $0.140 Second quarter 18.625 15.750 16.688 0.140 Third quarter 18.875 15.250 17.625 0.140 Fourth quarter 19.375 15.875 19.375 0.140
PAYMENT OF DIVIDENDS Payment of future dividends is subject to a declaration by Roosevelt's Board of Directors. Factors considered in determining the size of dividends are the amount and stability of profits, adequacy of capitalization, and expected asset and liability growth of the Bank. Roosevelt's ability to pay dividends is also limited by regulatory restrictions and the ability of the Bank and Missouri State Bank to make capital distributions to Roosevelt. See "Business -- Regulation -- Limitations on Dividends and Other Capital Distributions" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 26 29 ITEM 6. SELECTED FINANCIAL DATA ROOSEVELT FINANCIAL GROUP, INC. FIVE-YEAR SUMMARY SELECTED CONSOLIDATED FINANCIAL INFORMATION
At or for the year ended December 31, 1996 1995 1994 1993 1992 (dollars in thousands, except per share data) ------------ ------------ ------------ ------------ ------------ SUMMARY OF FINANCIAL CONDITION Total assets $ 7,796,412 $ 9,013,061 $ 8,431,866 $ 7,595,161 $ 6,038,732 Securities available for sale 3,157,757 1,606,461 1,765,699 1,665,879 52,399 Securities held to maturity -- 3,550,140 3,276,062 2,642,916 2,219,147 Loans 4,298,469 3,577,892 3,072,151 2,671,810 2,349,771 Deposits 5,347,071 4,907,497 4,899,389 5,081,496 4,300,981 Other borrowings 1,840,851 3,507,475 2,963,449 1,975,661 1,319,154 Stockholders' equity 497,427 496,906 441,626 378,462 288,545 SUMMARY OF OPERATIONS Total interest income $ 640,311 $ 647,795 $ 533,286 $ 486,940 $ 439,173 Total interest expense 462,724 466,433 347,574 321,490 314,728 Provision for losses on loans 1,262 1,200 12,432 706 2,648 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for losses on loans 176,325 180,162 173,280 164,744 121,797 ---------- ---------- ---------- ---------- ---------- Retail banking fees 17,157 10,706 8,682 6,260 4,870 Insurance and brokerage sales commissions 8,494 7,506 6,538 5,737 4,347 Loan servicing fees (expenses), net 10,982 7,401 7,359 (11,145) 8,392 Net gain (loss) from financial instruments (76,634) (58,216) (10,660) 10,646 11,394 Unrealized losses on impairment of mortgage- backed securities held to maturity -- (27,063) -- -- -- Other 4,034 4,526 5,337 2,759 1,790 ---------- ---------- ---------- ---------- ---------- Total noninterest income (loss) (35,967) (55,140) 17,256 14,257 30,793 ---------- ---------- ---------- ---------- ---------- Total noninterest expense 123,409 87,666 115,576 98,598 100,452 ---------- ---------- ---------- ---------- ---------- Income before income tax expense, extraordinary items, and cumulative effect of change in accounting principles 16,949 37,356 74,960 80,403 52,138 Income tax expense 5,835 10,258 25,384 27,134 17,887 Extraordinary items, net (1,452) -- (7,849) (1,908) (3,796) Cumulative effect of change in accounting principles -- -- -- (6,489) -- ---------- ---------- ---------- ---------- ---------- Net income $ 9,662 $ 27,098 $ 41,727 $ 44,872 $ 30,455 ========== ========== ========== ========== ========== Net income attributable to common stock $ 5,452 $ 22,855 $ 36,543 $ 41,057 $ 28,866 ========== ========== ========== ========== ========== PER SHARE DATA: Primary earnings per share: Income before extraordinary items and cumulative effect of change in accounting principle $ 0.16 $ 0.56 $ 1.17 $ 1.54 $ 1.09 Extraordinary items (0.03) -- (0.21) (0.06) (0.13) Cumulative effect of change in accounting principle -- -- -- (0.20) -- ---------- ---------- ---------- ---------- ---------- Net income $ 0.13 $ 0.56 $ 0.96 $ 1.28 $ 0.96 ========== ========== ========== ========== ========== Fully-diluted earnings per share: Income before extraordinary items and cumulative effect of change in accounting principle $ 0.16 $ 0.56 $ 1.15 $ 1.32 $ 0.99 Extraordinary items (0.03) -- (0.21) (0.05) (0.11) Cumulative effect of change in accounting principle -- -- -- (0.16) -- ---------- ---------- ---------- ---------- ---------- Net income $ 0.13 $ 0.56 $ 0.94 $ 1.11 $ 0.88 ========== ========== ========== ========== ========== 27 30 ITEM 6. SELECTED FINANCIAL DATA, CONTINUED ROOSEVELT FINANCIAL GROUP, INC. FIVE-YEAR SUMMARY SELECTED CONSOLIDATED FINANCIAL INFORMATION Other Data: Ratio of net interest income to general and administrative expense 1.44x 2.07x 1.67x 1.82x 1.55x Effective net spread during the period 2.02% 2.06% 2.29% 2.40% 2.32% Nonperforming assets to total assets, end of period 0.99 0.90 0.41 0.46 0.78 Return on assets (ratio of net income to average total assets) 0.11 0.30 0.49 0.61 0.54 Return on equity (ratio of net income to average stockholders' equity) 1.87 5.97 10.30 12.86 11.11 Equity-to-assets ratio (ratio of average stockholders' equity to average total assets) 5.61 4.97 4.80 4.75 4.84 Cash dividends per share of common stock $ 0.62 $ 0.56 $ 0.43 $ 0.31 $ 0.21 Dividends on common stock payout ratio (dividends paid per share of common stock divided by primary net income per share) 476.92% 100.00% 44.79% 18.72% 18.63% Book value per share, end of year $ 10.15 $ 10.60 $ 9.79 $ 9.18 $ 9.29 During December, 1993, Roosevelt adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," on a prospective basis. As a result, Roosevelt recorded a $6.5 million charge, net of applicable income taxes, as a cumulative effect of a change in accounting principle to reflect an other than temporary impairment of certain interest-only stripped coupon mortgage-backed pass-through certificates and collateralized mortgage obligation residual interests. Includes a $57.3 million net expense(net of income tax benefit) of merger-related expenses as a result of the acquisition of Farm & Home. Such merger-related expenses included $11.4 million in provision for losses on loans, $38.4 million of net loss from financial instruments, $3.7 million in provision for real estate losses, $6.3 million in compensation and employee benefits, occupancy expense of $5.9 million, transaction related fees of $7.0 million, and $1.8 million of other expenses. This amount was reduced by the income tax effect of $25.0 million. An extraordinary item totaling $7.8 million was recorded related to the early extinguishment of debt. Also included are gains resulting from the mark to market of the Company's financial futures positions used to reduce the interest rate risk of certain mortgage-backed securities in the available for sale portfolio totaling $39.5 million ($25.1 million, net of income taxes). Not including the aforementioned charges and gains for 1994, the ratio of net interest income to general and administrative expense would have been 2.08x, return on assets would have been 0.96%, return on equity would have been 20.01%, and the dividend on common stock payout ratio would have been 18.40%. Such ratios for 1995 include the impact of the impairment charge related to certain mortgage-backed securities of $27.1 million, losses resulting from the mark to market of the Company's financial futures positions used to reduce the interest rate risk of certain mortgage-backed securities in the available for sale portfolio totaling $71.0 million and merger related expenses of $1.6 million. If such expenses (net of income tax benefit) were not included, the ratio of net interest income to general and administrative expense would have been 2.11x, return on assets would have been 0.95%, return on equity would have been 18.96% and the dividend on common stock payout ratio would have been 27.59%. Such ratios for 1996 include the impact of the one-time SAIF assessment of $27.4 million, the extraordinary items related to the early extinguishment of debt of $1.5 million and the recognition of previously deferred expense related to the termination of interest rate exchange agreements of $80.5 million. If such expenses (net of tax benefit) were not included, the ratio of net interest income to general and administrative expense would have been 1.85x, return on assets would have been 0.88%, return on equity would have been 15.75% and the dividend on common stock payout ratio would have been 34.4%.
28 31 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto, and with reference to the discussion of the operations and other financial information presented elsewhere in this report. RESULTS OF OPERATIONS Roosevelt's operating results depend primarily upon its net interest income, which is the difference between the interest income earned on its interest earning assets (loans, mortgage-backed securities and investment securities) and the interest expense paid on its interest bearing liabilities (deposits and borrowings). Operating results are also significantly affected by provisions for losses on loans, noninterest income and noninterest expense. Each of these factors is significantly affected not only by Roosevelt's operating strategies, but, to varying degrees, by general economic and competitive conditions and by policies of federal regulatory authorities. Two of Roosevelt's operating strategies impacted net income in each of the three years ended December 31, 1996. The first of these strategies was growth through acquisition. In 1994 the Company acquired Farm and Home Financial Corporation and Home Federal Bancorp of Missouri increasing its assets by $3.7 billion. These acquisitions, which were preceded by seven others in the four years preceding 1994 and followed by a total of five smaller acquisitions in 1995 and 1996, dramatically increased Roosevelt's retail customer base and provided opportunities to improve its physical plant and technology platforms necessary to maintain and grow a retail customer base. The second strategy impacting operating results was internal growth via development of a diversified, retail-based operation. Actions taken to achieve this latter strategy primarily affected operating results in 1996 and included the sale of marginally profitable assets, the repayment of higher cost wholesale liabilities and the removal of derivative positions which had been designated as synthetic alterations of some of the assets sold or the liabilities repaid. Roosevelt reported net income of $9.7 million for 1996 compared with $27.1 million for 1995 and $41.7 million for 1994. Net income on a fully diluted per share basis was $0.13 for 1996 compared with $0.56 for 1995 and $0.94 for 1994. Net income in 1996 was adversely impacted by a $27.4 million pre-tax charge imposed by the Federal Deposit Insurance Corporation (FDIC) in order to recapitalize the Savings Association Insurance Fund; an $80.5 million pre-tax charge related to the termination of interest rate exchange agreements which had been designated as synthetic alterations of short-term wholesale borrowings that were repaid during the year; and a $1.5 million after-tax charge related to the extinguishment of the Company's long-term debt. Net income in 1995 was adversely impacted by pre-tax charges of $71.0 million and $27.1 million resulting from marking to market the Company's financial futures positions used to reduce the interest rate risk of certain mortgage-backed securities in the available for sale portfolio and for unrealized losses on the impairment of mortgage-backed securities, respectively, and by an after-tax charge of approximately $1.6 million for merger expenses related to the acquisition of WSB Bancorp, Inc. and Kirksville Bancshares, Inc. For a further discussion of expenses related to the termination of interest rate exchange agreements and financial futures, see "Results of Operations--Net Gain (Loss) from Financial Instruments" and Note 15 of the Notes to Consolidated Financial Statements. Net income for 1994 was impacted by merger related expenses related to the acquisition of Farm & Home Financial Corporation (Farm & Home). The components of the merger related expenses (in millions) are as follows: 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 32 In connection with the acquisition of Farm & Home and a review of the combined loan portfolio, including the increased concentration of loans in various geographic areas, and after discussion with the OTS regarding the level of the allowance for loan losses as compared to a new peer group as a result of the dramatic increase in size, management recorded an $11.4 million addition to the allowance. Net loss from financial instruments totaled $38.4 million and included $25.6 million in loss from the sale of Farm & Home fixed-rate mortgage-backed securities that did not meet Roosevelt's asset/liability management objectives. In addition, $8.9 million of the loss on financial instruments resulted from the cancellation of interest rate exchange agreements of Farm & Home. As a result of Roosevelt's desire to accelerate the disposition of Farm & Home's real estate owned portfolio, Roosevelt increased its estimate of reserves required to record its real estate owned portfolio at its estimated fair value which resulted in the additional $3.7 million provision. Compensation and employee benefits expense totaling $6.3 million related to the severance benefits for the Farm & Home executives and the Missouri and Texas employees whose employment did not continue with the combined entity after June 30, 1994. Occupancy expense totaled $5.9 million and was comprised of losses on the termination of 11 facility leases, including the write-off of leasehold improvements associated with the leases, and anticipated losses on the sale of two closed branch facilities. Transaction related fees totaled $7.0 million and included advisory, legal, and accounting fees. Other expenses totaled $1.8 million and related to other miscellaneous costs such as printing, travel and lodging. The extraordinary item related to early extinguishment of debt and totaled $7.8 million, net of applicable income taxes. Roosevelt recorded a $4.6 million loss due to the retirement of $60.9 million of 10.125% mortgage-backed bonds. A loss of $2.6 million was recorded as a result of the redemption of Farm & Home's 13.0% debentures. Additionally, a loss of $637,000 was recorded as a result of the prepayment of $101.0 million of Federal Home Loan Bank (FHLB) of Des Moines advances. NET INTEREST INCOME Net interest income in 1996 was $177.6 million, a decline of $3.8 million or 2.1% from the $181.4 million recorded in 1995. A change in the composition of interest-bearing assets and liabilities, a decline in overall interest rates earned and paid and small decreases in the average balances of interest-bearing assets and liabilities all contributed to the decline in net interest income. Consistent with its strategy to develop its retail businesses, the Company grew its higher yielding loan portfolios and its lower costing deposit balances while at the same time shrinking its lower yielding investment portfolios and higher costing wholesale borrowings. These actions contributed to an increase in net interest income due to volume changes of $6.5 million. However, this favorable impact was more than offset by a $10.3 million decrease in net interest income resulting from a net decline in yield earned on assets of 5 basis points partially offset by a 3 basis points decline in the cost of all interest bearing liabilities. While the overall decline in interest rates proved beneficial for gross interest-bearing liabilities it increased the cost of interest rate exchange agreements which had been utilized by the Company, prior to the cancellation on September 30, 1996, to manage its interest rate risk. Under the terms of these agreements, the Company generally paid a fixed rate of interest and received a variable rate. The lower interest rates resulted in an increased cost in 1996. Ignoring the impact of the interest rate exchange agreements, the Company's cost of funds would have declined 15 basis points from 1995. As a result of the above items, the effective net interest rate spread decreased 4 basis points from 2.06% in 1995 to 2.02% in 1996. Net interest income of $181.4 million for 1995 was down 2.3% from $185.7 million for 1994. The decrease in net interest income was primarily the result of the average interest rates paid on interest bearing liabilities increasing more than the average interest rates earned on interest earning assets. The average rate earned on interest earning assets increased 77 basis points from 6.58% for 1994 to 7.35% for 1995. The average rate paid on interest bearing liabilities increased 107 basis points from 4.41% for 1994 to 5.48% for 1995. The effective net interest rate spread decreased 23 basis points from 2.29% for 1994 to 2.06% for 1995, primarily as a result of severe retail deposit pricing pressure (unrelated to the outright level of interest rates) in the Company's market areas during 1995. The decrease in net interest income due to the decreasing average spread was partially offset by a growth in interest earning assets and interest bearing liabilities. The average balance of interest earning assets and interest bearing liabilities increased 8.8% and 8.1%, respectively, during 1995 as compared to 1994. 30 33 The following table presents Roosevelt's average consolidated balance sheets and reflects the average yield on assets and the average cost of liabilities for the periods indicated. Average rates earned and paid are derived by dividing income or expense by the average balance of assets and liabilities, respectively.
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 34 The following table presents the dollar amount of changes in interest income and interest expense for major components of interest earning assets and interest bearing liabilities. It distinguishes between changes related to volume and those due to changes in interest rates. For each category of interest income and interest expense, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by prior year rate) and (ii) changes in rate (i.e., changes in rate multiplied by prior year volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated to the change due to rate.
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 35 PROVISION FOR LOSSES ON LOANS The provision for losses on loans charged to earnings is based upon management's judgement of the amount necessary to maintain the allowance for loan losses at a level adequate to absorb probable losses. As part of the process for determining the adequacy of the allowance for loan losses, management performs quarterly detailed reviews to identify risks inherent in the loan portfolio and to assess the overall quality of the portfolio as well as to determine the amounts of allowances and provisions to be reported. The provision for loan losses was $1.3 million for 1996, $1.2 million for 1995 and $12.4 million for 1994. During the three month period ended June 30, 1994,Roosevelt recorded an $11.4 million increase in the provision for losses on loans. After combining the Roosevelt, Farm & Home and Home Federal loan portfolios which resulted in a combined portfolio approximately five times the size of Roosevelt's March 31, 1994 portfolio (approximately $650 million to $3.0 billion), management determined it was necessary to substantially increase the allowance for loan losses to achieve higher and more conservative coverage levels. Factors considered by management in determining the necessity and amount of the provision necessary to bring the overall allowance to the desired level were i) the need to conform Farm & Home's coverage ratio (ratio of allowance for loan losses to total gross loans) of .24% at December 31, 1993 to that of Roosevelt's which was .61% at the comparable date, ii) the previously discussed five fold increase in the size of the overall loan portfolio coupled with the fact that, at the time, Roosevelt management had no previous track record of managing a portfolio that size and iii) the Farm & Home and Home Federal mergers effectively doubled the overall size of the entity resulting in Roosevelt moving up to a new peer group whose average allowance for loan losses as a percentage of total loans far exceeded the allowances of the unadjusted combined entity. Also, since just prior to the merger, both Farm & Home and Roosevelt had recently been through examinations by the OTS, Roosevelt initiated conversations with the OTS to obtain their concurrence with the planned addition to the allowance for loan losses. Such concurrence was received and the resulting $11.4 million provision was recorded. The provisions for 1996 and 1995 reflect a more normalized level of provision compared to the large 1994 provision discussed above. The 1996 and 1995 provisions reflect the Company's strong level of reserves and overall strong asset quality. See the caption entitled "Asset Quality" under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." NONINTEREST INCOME (LOSS) Noninterest income (loss) was $(36.0) million for 1996 as compared to $(55.1) million for 1995 and $17.3 million for 1994. The following is a discussion of the major components of noninterest income (loss): Retail Banking Fees - Retail banking fees are comprised of service charges related to deposit accounts, fees for money orders, travelers checks, etc. and fees related to the telephone bill paying service offered to the Bank's depositors. Retail banking fees increased $6.5 million, or 60.3% from $10.7 million for 1995 to $17.2 million for 1996. Retail banking fees increased $2.0 million, or 23.3% from $8.7 million for 1994 to $10.7 million for 1995. Growth in both years is a result of the Company's successful efforts to develop and grow its retail based operations which resulted in an overall increase in utilization of these services offered by the Bank. Insurance and Brokerage Sales Commissions - The Company offers a broad range of insurance and investment products, including tax deferred annuities and mutual fund products, to the general public and its customers through Roosevelt Financial Services, Inc. Insurance and brokerage sales commissions increased $988,000, or 13.1% from $7.5 million in 1995 to $8.5 million for 1996. This followed an increase of $968,000, or 14.8% from $6.5 million for 1994 to $7.5 million for 1995. The positive trend in insurance and brokerage sales commissions is primarily the result of an increase in the sales volume of commission generating products as the Company successfully increases its penetration of its existing customer base as well as attracts new customers. Loan Servicing Fees (Expenses), Net - Loan servicing fees, which primarily consists of loan servicing revenue, net of the amortization of purchased mortgage servicing rights, increased $3.6 million, or 48.4% from $7.4 million for 1995 to $11.0 million for 1996. This increase is due primarily to several purchases of loan servicing rights in 1996 that totaled $41.9 million which represented $3.5 billion in unpaid principal balances. Loan servicing fees in 1995 increased $1.5 million, or 21.1% from $7.4 million recorded in 1994 primarily as a result of a $1.5 million gain realized upon the sale of $3.3 million book value of purchased mortgage servicing rights. The amortization of purchased mortgage servicing rights totaled $6.6 million, $4.2 million and $5.6 million for 1996, 1995 and 1994, respectively. During 1995, the balance of mortgage loans serviced by Roosevelt for others decreased from approximately $2.8 billion at December 31, 1994 to $2.0 billion at December 31, 1995. This decrease resulted from the normal amortization of the principal balance of mortgage loans outstanding and the sale of purchased mortgage servicing rights discussed previously. 33 36 Net Gain (Loss) from Financial Instruments - In the conduct of its business operations, Roosevelt has determined the need to sell or terminate certain assets, liabilities or off-balance sheet positions due to various unforeseen events. Fundamental to the conduct of such sale or termination activities is the effect such transactions will have on the future volatility of the Company's net market value. Consequently, in pursuing such sale or termination activities, Roosevelt does not seek net gains in a reporting period to the detriment of earnings in future periods. Following is a discussion of the assets, liabilities and off-balance sheet items that were sold and/or terminated during 1996, 1995 and 1994. Net gain (loss) from financial instruments is as follows:
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 37 securities in the Company's available for sale portfolio. The Company originally recognized a $34.8 million charge to fourth quarter 1995 earnings regarding the cessation of deferral accounting. At issue was the Staff's contention that the financial futures contracts did not meet the "high correlation" criteria of Statement of Financial Accounting Standards No. 80 "Accounting for Futures Contracts", thus not qualifying for deferral accounting from the inception of the hedge in March 1994 and requiring the recognition of subsequent gains and losses in income. The Company originally ceased deferral accounting when management concluded that high correlation measured using the "cumulative dollar approach" was unlikely to be achieved on a consistent basis. Accordingly, at the Staff's request, the Company in 1996 restated its 1994 and 1995 consolidated financial statements to reflect the cessation of deferral accounting, from the inception of the hedge, with respect to the aforementioned financial futures contracts. The restatement had the effect of increasing previously reported 1994 net income and decreasing previously reported 1995 net income by $18.0 million (on a fully-diluted per share basis, an increase of $0.48 for 1994 and a decrease of $0.43 for 1995). This restatement was one of the timing of recognition of gains and losses in the Statement of Operations and had no impact on total stockholders' equity at any date since both the financial futures contracts and the related mortgage-backed securities have been previously marked to market through stockholders' equity at each reporting period. Subsequent to December 31, 1995, the Company terminated all of its financial futures positions and maintained its interest rate risk management position by principally redesignating existing interest rate exchange agreements to the available for sale portfolio. Such interest rate exchange agreements were utilized prior to the redesignation to manage the interest rate risk of short-term wholesale borrowings. In connection with its acquisition of Farm and Home in 1994, the Company sold securities, primarily mortgage-backed securities, repaid portions of Farm and Home's debt and terminated various interest rate exchange agreements all as part of its efforts to rebalance its asset/liability mix following the acquisition. These actions, and a net improvement in the fair value of financial futures all contributed to the $10.7 million net loss from financial instruments in 1994. Options expense is comprised of amortization of the premiums paid for various interest rate cap, floor and collar agreements. The increase in options expense from 1995 to 1996 and 1994 to 1995 is primarily attributable to increased notional amounts of interest cap agreements necessitated by the generation of larger balances of adjustable rate assets in need of interest rate cap protection. Unrealized Losses on Impairment of Mortgage-backed Securities - The Company purchased ownership interests in ten pools of privately issued adjustable-rate mortgage-backed securities issued in 1989 through 1991 by Guardian Savings and Loan Association (Guardian). All of such Guardian pools in which the Company purchased and currently holds an ownership interest were rated AA or AAA by Standard & Poors and Aa2 or Aaa by Moodys, at the date of issuance of the securities. Guardian issued its securities with several classes available for purchase. Certain classes are subordinate to the position of senior classes in that such subordinate classes absorb all credit losses and must be completely eliminated before any losses flow to senior position holders. The Guardian securities purchased by the Company (the Guardian Securities) were purchases of the most senior positions, thus intended to be protected by the subordination credit enhancement feature. Guardian was placed in conservatorship on June 21, 1991 by the Office of Thrift Supervision, which appointed the Resolution Trust Corporation (RTC) as conservator. Subsequent to the conservatorship, the RTC replaced Guardian as the servicer for the loans underlying the securities. Effective November 1994, Bank of America assumed servicing responsibilities from the RTC. Guardian was a niche player in the California mortgage market whose lending decisions relied more on the value of the mortgaged property and the borrower's equity in the property and less on the borrower's income and credit standing. All collateral underlying the Guardian Securities have the following loan pool characteristics: * First lien, 30-year, six-month adjustable-rate loans tied to either the cost of funds index, one-year constant maturity treasury rate, or LIBOR. * 100% of the loans were originated in California. * The weighted average loan-to-value ratio at origination was approximately 66%. Beginning in mid-1993 and continuing currently, the loan pools backing the securities have been affected by high delinquency and foreclosure rates, and higher than anticipated losses on the ultimate disposition of real estate acquired through foreclosure (REO). This has resulted in rating agency downgrades, principally in April and May, 1994 and again in 1995 and 1996 to the current ratings reflected in the tables on page 38 and substantial deterioration in the amount of the loss absorption capacity provided by the subordinated classes. 35 38 At December 31, 1994 and March 31, 1995, the Guardian securities owned by the Company were performing according to their contractual terms, and all realized losses from the disposition of REO were being absorbed by the subordinate classes (or in the case of Pool 1990-7 at March 31, 1995, by unamortized purchase discounts). However, to the extent that subsequent to March 31, 1995, the pools continue to realize losses on the disposition of REO at levels comparable to the then current rate, the remaining balances of the subordinate classes may not be adequate to protect the Company from incurring some credit losses on certain of its ten pools. As a result of this deterioration and the continuing receipt of subsequent information, the Company has determined that the underlying investments represented by seven pools in which, subsequent to March 31, 1995, the subordination protection has been either totally eliminated or has become potentially inadequate should be considered "other than temporarily" impaired under the provisions of Statement of Financial Accounting Standards No. 115. As a result of this determination, the Company recorded a $22.0 million pre-tax write-down ($14.4 million after tax or approximately $0.32 per share) for the three months ended March 31, 1995 to reflect the impairment of these seven pools. The amount of the write-down was based on discounted cash flow analyses performed by management (based upon assumptions regarding delinquency levels, foreclosure rates and loss ratios on REO disposition in the underlying portfolio). Discounted cash flow analyses were utilized to estimate fair value due to the absence of a ready market for the Guardian Securities. In addition to the Guardian Securities discussed above, the Company has an investment of approximately $4.5 million at December 31, 1996 after the write-down discussed below, in another private issuer mortgage-backed security, LB Multifamily Mortgage Trust Series 1991-4 (Lehman 91-4), possessing similar performance characteristics to the Guardian Securities that has also been determined to be other than temporarily impaired. Accordingly, the Company has recorded a $5.1 million pre-tax write-down ($3.4 million after tax or approximately $0.08 per share) to reflect the impairment of this security at March 31, 1995. Management believes that these write-downs are adequate based upon its evaluation. As reflected in the following table, the Company's remaining investment at December 31, 1996 in the Guardian Securities is approximately $55.3 million, after the desecuritization of Guardian Pool 1990-9 discussed below:
(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 39 * The two remaining Guardian pools (89-10 and 91-2), which are not considered to be other than temporarily impaired, continue to perform according to their contractual terms and are protected by remaining subordination of 7.85% and 18.87%, respectively. These remaining subordination levels compare to 8.50% and 17.00%, respectively, at the date of issuance of the securities. * In excess of $30.0 million in net principal payments have been received since March 31, 1995. Accordingly, at December 31, 1996, management continues to believe that the recorded investment in the above mentioned Guardian and Lehman pools is recoverable. 37 40 Presented below is information at December 31, 1996 relating to Roosevelt's investment in the Guardian pools, segregated between the seven pools determined to be other than temporarily impaired and the two pools which, in the opinion of management, continue to be adequately protected from loss through substantial remaining subordination. The immediately succeeding table also includes information related to Lehman 91-4 which has been determined to be other than temporarily impaired. 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 41 NONINTEREST EXPENSE General and Administrative - General and administrative expense increased $35.7 million to $123.4 million for 1996 as compared to $87.7 million for 1995. General and administrative expense in 1996 was adversely impacted by a $27.4 million pre-tax charge imposed by the Federal Deposit Insurance Corporation (FDIC) in order to recapitalize the Savings Association Insurance Fund. Without this charge, general and administrative expense in 1996 would have increased $8.3 million , or 9.5% to $96.0 million for 1996 versus $87.7 for 1995. This increase was due primarily to a $7.5 million increase in compensation and employee benefits and a $4.1 million increase in other noninterest expense which was partially offset by a $2.6 million decrease in federal insurance premiums. The increases in compensation and employee benefits and other noninterest expense is primarily attributable to increased costs associated with the mobilization of the Bank's retail efforts. The decrease in federal insurance premiums resulted from reductions in the rates charged by the FDIC on the Company's deposits insured by both the Bank Insurance Fund and the Savings Association Insurance Fund. The Legislation enacted to recapitalize the Savings Association Insurance Fund also provided for further reductions in premiums charged for deposits insured by the Savings Association Insurance Fund beginning January, 1997. As a result, the Company expects to realize further declines in the cost of federal deposit insurance premiums thereafter. General and administrative expense decreased $23.3 million, or 21.0% to $87.7 million for 1995 as compared to $111.0 million for 1994. The major reasons for the decrease in 1995 are due to 1994 including $19.8 million of merger-related costs and the fact that 1995 general and administrative expense was also positively impacted by efficiencies totaling $6.3 million realized as a result of the Farm & Home merger. The merger expenses related primarily to $5.2 million in severance expense (included in "Compensation and employee benefits"), $5.3 million in costs to dispose of excess facilities incident to the acquisition of Farm & Home (included in "Occupancy") and $9.3 million of transaction costs (included in "Other"). Provision for Real Estate Losses - Provisions for real estate losses totaled $4.6 million for 1994. During 1994, in connection with the acquisition of Farm & Home, a provision of $3.7 million was established. This provision represented a 25% reduction in net carrying value of REO to accommodate a change in strategy whereby Roosevelt would accelerate the disposition of Farm & Home's real estate portfolio. Additionally, during 1994, a $839,000 provision was recorded related to six non-residential real estate properties. INCOME TAXES Income taxes include federal income taxes and applicable state income taxes. Roosevelt's effective tax rates were 34.4%, 27.5% and 33.9% for 1996, 1995 and 1994, respectively. The principal reasons for the Company's effective tax rate being below the statutory rate for each year are the resolution of federal tax issues after completion of examinations by the Internal Revenue Service. EXTRAORDINARY ITEMS Roosevelt recorded losses on extraordinary items of $1.5 million and $7.8 million, net of income taxes, for 1996 and 1994, respectively. The 1996 loss was the result of two transactions. First, the Company called its 9.5% subordinated notes resulting in an $812,000 pre-tax loss. Second, the Company defeased its remaining 10.125% mortgage-backed bonds resulting in a pre-tax loss of approximately $1.4 million. The $7.8 million loss for 1994 was the result of three transactions. First, Roosevelt recorded a loss totaling $4.6 million relating to the retirement of a portion of its 10.125% mortgage-backed bonds. Second, Roosevelt recorded a loss totaling $2.6 million relating to the retirement of the 13.0% subordinated debentures previously issued by Farm & Home. Third, Roosevelt recorded a loss totaling $637,000 relating to the prepayment of advances from FHLB of Des Moines originally entered into by Farm & Home. FINANCIAL CONDITION Total assets decreased $1.2 billion or 13.5% to $7.8 billion at December 31, 1996 from $9.0 billion at December 31, 1995. In 1996 the Company continued to focus on its strategies of originating a larger percentage of its assets, diversifying its balance sheet from only mortgage and real estate related assets and expanding its retail deposit base with a simultaneous shift within that base toward checking and transaction accounts. Additional strategies to further the transition were undertaken primarily in the third and fourth quarters and included the removal of marginally profitable assets, lessening the use of higher cost wholesale fundings, simplifying the balance sheet by using fewer derivatives as synthetic alterations and increasing the capital to assets ratio so as to be better positioned to take advantage of future opportunities. All of these strategies were part of the Company's continuing efforts to transition itself from a traditional thrift to a full service retail bank and resulted not only in balance sheet shrinkage but also in changes in the composition of the balance sheet. The Company originated approximately $1.4 billion and purchased an additional $291.6 million of loans in 1996 as compared to originations and purchases of $688.6 million and $321.1 million in 1995. Additionally, the Company securitized and sold approximately $210.0 million of long term fixed rate mortgages in 1996 and experienced principal repayments of approximately $897.0 million contributing to the growth in net loans in 1996 of $720.6 million. The 1996 originations included $796.6 million of adjustable rate mortgage loans, $318.4 million of fixed rate mortgage loans, $226.2 million of adjustable rate consumer loans and $65.6 million of fixed rate consumer loans. Consumer loans totaled $348.3 million or 8.1% of gross loans 39 42 at December 31, 1996 versus $125.6 million or 3.5% at December 31, 1995. Total net loans were $4.3 billion or 55.1% of total assets at December 31, 1996 as compared to $3.6 billion or 39.7% at December 31, 1995. The Company's total investment portfolios declined $2.0 billion or 38.8% to $3.2 billion at December 31, 1996 as compared to $5.2 billion at December 31, 1995. The Company transferred all held to maturity investment portfolios to the available for sale portfolio in December of 1996. This action was undertaken to provide the Company maximum flexibility to manage its portfolio. Proceeds from the sale of securities were used to fund loan originations and to repay short-term higher cost wholesale borrowings. Total investment securities represented 40.5% of total assets at December 31, 1996, down from 57.2% at December 31, 1995. Total liabilities declined $1.2 billion or 14.3% to $7.3 billion at December 31, 1996 versus $8.5 billion at December 31, 1995. Growth in deposits of $439.6 million (including $228.2 million resulting from the three acquisitions completed in 1996) was more than offset by reductions in securities sold under agreements to repurchase, advances from the Federal Home Loan Bank, and other borrowings totaling $1.7 billion. Total deposits represented 73.3% of total liabilities at December 31, 1996, as compared to 57.6% at December 31, 1995. The composition of deposits also changed. Demand deposits at December 31, 1996 represented 27.6% of total deposits as compared to 25.0% at December 31, 1995. Proceeds from the sales of mortgage loans and investment securities were used to repay, primarily in the fourth quarter, short-term higher cost wholesale borrowings. 40 43 ASSET QUALITY Maintaining a low level of nonperforming assets is critical to the success of a financial institution. As the percentage of assets that are classified as nonperforming assets changes, so do expectations regarding interest income, potential provisions for losses and operating expenses incurred to manage and resolve these assets. The following table sets forth the amounts and categories of nonperforming assets. Loans are placed on nonaccrual status when the collection of principal and/or interest becomes doubtful. Troubled debt restructurings involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates. Foreclosed assets include assets acquired in settlement of loans. "Other than temporarily impaired" mortgage-backed securities represent private issuer mortgage-backed securities that have been determined to be "other than temporarily impaired" under the provisions of Statement of Financial Accounting Standards No. 115 and for which the previously existing credit enhancement support, in the form of subordination, has been totally absorbed and therefore any future losses will flow directly to the Company as a senior position holder. These securities were issued with several classes available for purchase. Certain classes are subordinate to the position of senior classes in that such subordinate classes absorb all credit losses and must be completely eliminated before any losses flow to senior position holders. The securities purchased by the Company were purchases of the most senior positions, thus intended to be protected by the subordination credit enhancement feature. In an attempt toward a conservative presentation, the Company includes the entire estimated fair value of these securities (approximately 74% of the unpaid principal balances at December 31, 1996) in this table when the credit enhancement, in the form of subordination, is exhausted even though a substantial portion of the underlying loans (approximately 76% at December 31, 1996) are either current or less than 90 days delinquent. In addition, the remaining amount of "other than temporarily impaired" mortgage-backed securities that continue to be protected by remaining credit enhancement, but for which the Company has concluded it is probable that such credit enhancement will be absorbed before the duration of the underlying security, are disclosed in the paragraphs following the table as other potential problem assets. See the caption entitled "Unrealized Losses on Impairment of Mortgage-Backed Securities Held to Maturity" under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further details.
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 44 Not included in the preceding table is a private issuer mortgage-backed security with a carrying value of $5.1 million which was performing according to its contractual terms at December 31,1996. However, this security was determined by the Company to be "other than temporarily impaired" and written down to fair value, since at March 31, 1995, the subordination protection had been reduced to the point where the Company concluded it was not probable that the security would continue to perform to 100% of its contractual terms over the course of its remaining life. The security will be included in the preceding non-performing asset table in future periods when, and if, the remaining subordination is exhausted. The following table is a reconciliation of the amount of currently performing, other than temporarily impaired mortgage-backed securities at March 31, 1995 to such amount at December 31, 1996.
(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 45 value as a result of assumed 100 and 200 basis point increases and decreases in general levels of interest rates. The OTS issued a regulation, effective January 1, 1994, which uses a similar methodology to measure the interest rate risk exposure of thrift institutions. This exposure is a measure of the potential decline in the net portfolio value of the institution based upon the effect of an assumed 200 basis point increase or decrease in interest rates. "Net portfolio value" is the present value of the expected net cash flow from the institution's assets, liabilities, and off-balance sheet contracts. Under the OTS regulation, an institution's "normal" level of interest rate risk in the event of this assumed change in interest rates is a decrease in the institution's net portfolio value in an amount not exceeding two percent of the present value of its assets. The regulation provides for a two quarter lag between calculating interest rate risk and recognizing any deduction from capital. The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to the 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in net portfolio value) and (b) its "normal" level of exposure which is two percent of the present value of its assets. The OTS recently announced that it will delay the effectiveness of the regulation until it adopts the process by which an association may appeal an interest rate risk capital deduction determination. Utilizing this measurement concept, the interest rate risk of the Company at December 31, 1996 is as follows:
(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 46 MATURITY GAP ANALYSIS Thrift institutions have historically presented a Gap Table as a measure of interest rate risk. The Gap Table presents the projected maturities and periods to repricing of a thrift's rate sensitive assets and liabilities. The OTS has concluded such an analysis has limitations, however, for reasons of consistency the following discussion presents the Company's traditional Maturity Gap Analysis. The Company's one year cumulative gap, which represents the difference between the amount of interest sensitive assets maturing or repricing in one year and the amount of interest sensitive liabilities maturing or repricing in the same period was (2.51%) at December 31, 1996. A negative cumulative gap indicates that interest sensitive liabilities exceed interest sensitive assets at a specific date. In a rising interest rate environment institutions with negative maturity gaps generally will experience a more rapid increase in interest expense paid on liabilities than the interest income earned on assets. Conversely, in an environment of falling interest rates, interest expense paid on liabilities will generally decrease more rapidly than the interest income earned on assets. A positive gap will have the opposite effect. The following table presents the projected maturities and periods to repricing of the Company's rate sensitive assets and liabilities as of December 31, 1996, adjusted to account for anticipated prepayments.
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 47 In preparing the table above, it has been assumed that (i) balloon and adjustable-rate first mortgage loans will prepay at a rate of 18% per year, (ii) fixed-rate first mortgage loans on residential properties of five or more units and nonresidential properties will prepay at a rate of 10% per year, (iii) fixed maturity deposits will not be withdrawn prior to maturity, (iv) passbook and NOW accounts will be withdrawn at a rate of approximately 10% in each of the first two periods and at other assumed rates ranging from 20% to 100% thereafter, (v) fixed-rate mortgage loans on one- to four-family residences with terms to maturity of 10 years or less will prepay at a rate of 20% per year, (vi) second mortgage loans on one- to four-family residences will prepay at a rate of 30% per year, and (vii) fixed-rate first mortgage loans on one- to four-family residential properties with remaining terms to maturity of over 10 years will prepay annually as follows:
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 48 Certain liquidity risks are inherent in asset/liability management. Such risks include, among others, changes in interest rates, which can cause margin calls on reverse repurchase agreements as a result of changes in the value of collateral, and timing delays when the receipt of interest, principal or repayments on loans and mortgage-backed securities does not correspond with the timing of the funding of the related liability. The Company has implemented policies through which it endeavors to manage these liquidity risks. Liquidity is maintained at levels which exceed the amounts required for regulatory purposes. IMPACT OF INFLATION AND CHANGING PRICES Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than do the general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the price of goods and services. In the current interest rate environment, liquidity and the maturity structure of the Company's assets and liabilities are critical to the maintenance of acceptable performance levels. The consolidated financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power over time due to inflation. IMPACT OF PROSPECTIVE ACCOUNTING PRONOUNCEMENTS During June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities" (SFAS 125). SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under the financial components approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. The financial components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with pledge of collateral. SFAS 125 extends the "available-for-sale" or "trading" approach in SFAS 115 to nonsecurity financial assets that can contractually be prepaid or otherwise settled in such a way that the holder of the asset would not recover substantially all of its recorded investment. Thus, nonsecurity financial assets (no matter how acquired) such as loans, other receivables, interest-only strips or residual interests in securitization trusts that are subject to prepayment risk that could prevent recovery of substantially all of the recorded amount are to be reported at fair value with the change in fair value accounted for depending on the asset's classification as "available-for-sale" or "trading". SFAS 125 also amends SFAS 115 to prevent a security from being classified as held-to-maturity if the security can be prepaid or otherwise settled in such a way that the holder of the security would not recover substantially all of its recorded investment. SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. Also, the extension of the SFAS 115 approach to certain nonsecurity financial assets and the amendment to SFAS 115 is effective for financial assets held on or acquired after January 1, 1997. Reclassifications that are necessary because of the amendment do not call into question an entity's intent to hold other debt securities to maturity in the future. The adoption of SFAS 125 is not expected to have a material impact on the Company's financial statements. 46 49 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. 47 50 Net gain (loss) from financial instruments was impacted by $(34.0) million, $(27.8) million, $135,000 and $(9.5) million for the quarters ended March 31, June 30, September 30 and December 31, 1995, respectively as a result of the mark to market of the Company's financial futures positions used to reduce the interest rate risk of certain mortgage-backed securities in the available for sale portfolio. Non-interest income for the quarter ended March 31, 1995 was impacted by a $27.1 million impairment charge related to certain mortgage-backed securities. See Notes 5 and 15 of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis-Results of Operations" for further discussion. 48 51 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEPENDENT AUDITORS' REPORT The Board of Directors Roosevelt Financial Group, Inc. Chesterfield, Missouri: We have audited the accompanying consolidated balance sheets of Roosevelt Financial Group, Inc. and subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Roosevelt Financial Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. We have also audited, in accordance with generally accepted auditing standards, the supplemental fair value consolidated balance sheets of the Company as of December 31, 1996 and 1995. As described in Note 3, the supplemental fair value consolidated balance sheets have been prepared by management to present relevant financial information that is not provided by the historical cost consolidated balance sheets and is not intended to be a presentation in conformity with generally accepted accounting principles. In addition, the supplemental fair value consolidated balance sheets do not purport to present the net realizable, liquidation, or market value of the Company as a whole. Furthermore, amounts ultimately realized by the Company from the disposal of assets may vary significantly from the fair values presented. In our opinion, the supplemental fair value consolidated balance sheets referred to above present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP St. Louis, Missouri January 20, 1997 49 52 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.
50 53 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.
51 54 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.
52 55 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) 53 56 SUPPLEMENTAL DISCLOSURES RELATED TO THE CONSOLIDATED STATEMENTS OF CASH FLOWS The Company paid interest of $477.6 million, $455.3 million, and $348.6 million during 1996, 1995, and 1994, respectively. The Company paid income taxes of $28.7 million, $37.1 million, and $6.5 million during 1996, 1995, and 1994, respectively. 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.
54 57 ROOSEVELT FINANCIAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of Roosevelt Financial Group, Inc. (the Company); its three wholly-owned subsidiaries, Roosevelt Bank (the Bank), Missouri State Bank and Trust Company (MSB), a Missouri-chartered bank, and F & H Realty (Realty), a Missouri-chartered real estate investment company; and the Bank's and MSB's wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 1995 and 1994 consolidated financial statements to conform to the 1996 presentation. Results of operations of companies acquired and accounted for as purchases are included from their respective dates of acquisition. When acquired in a pooling of interests transaction, current and prior period financial statements are restated to include the accounts of the acquired companies, if significant. In preparing the consolidated financial statements, management of the Company is required to make estimates and assumptions which significantly affect the reported amounts in the consolidated financial statements. Significant estimates which are particularly susceptible to change in a short period of time include the determination of the allowances for losses on loans and real estate. Investment and Mortgage-Backed Securities At the time of purchase, debt and equity securities are segregated into one of three categories: trading, held to maturity, or available for sale. Trading securities are purchased and held principally for the purpose of reselling them within a short period of time. Unrealized gains and losses on trading securities are included in earnings. Securities classified as held to maturity are accounted for at cost, adjusted for the amortization of premiums and accretion of discounts which are recognized in interest income over the period to maturity for investment securities, or the estimated life of mortgage-backed securities using the level-yield method because the Company has both the ability and the intent to hold such securities to maturity. Securities not classified as either trading or held to maturity are considered to be available for sale. Gains and losses realized on the sale of these securities are based on the specific identification method. Unrealized gains and losses on available for sale securities are excluded from earnings and reported as a net amount as a separate component of stockholders' equity until realized. Unrealized losses on all debt securities are recognized if any market valuation differences are deemed to be other than temporary. Derivative Financial Instruments The Company uses derivative financial instruments as part of its overall interest rate risk strategy. Derivative financial instruments which have been utilized by the Company include interest rate exchange agreements (swaps), interest rate cap, floor, and collar agreements, and to a lesser extent, financial futures contracts. Interest rate swap, cap, floor, and collar agreements have been used to synthetically alter the rate and/or term characteristics of specified interest-bearing assets or liabilities. Financial futures contracts have been used to achieve a position whereby the estimated exposure of a certain position to interest rate movements is offset by approximately equal, but opposite, results in the financial futures contracts. 55 58 Interest rate swaps are agreements to exchange interest payment streams on an agreed upon notional amount. Typically, the Company pays a fixed rate and receives a variable rate based upon a specified floating rate index. The Company makes no interest payments on its interest rate cap, floor, and collar agreements but is entitled to receive an interest payment on an agreed upon notional amount when the agreements are "in the money" (e.g. when the specified floating rate index exceeds or falls below, respectively, a rate specified in the agreement). All such receipts or payments are recorded as a net component of interest expense in the accompanying consolidated financial statements. The Company has entered into interest rate swap, cap, floor, or collar agreements with nationally recognized commercial and investment banking firms or the Federal Home Loan Bank. Typically, the Company pays a fee (premium) to enter an interest rate cap, floor, or collar agreement which is capitalized and then amortized over the life of the agreement on a straight-line basis. No such premium is paid to enter into swap agreements. At the time the agreements are initiated, the Company designates which assets or liabilities are being synthetically altered by the agreement. Agreements which have been designated against available for sale assets are thereafter reported at their fair value with unrealized gains or losses reflected as a separate component of stockholders' equity. Agreements designated against other interest-bearing assets or liabilities are reported at amortized cost. Gains and losses resulting from terminated interest rate swap agreements or interest rate cap, floor, and collar agreements that are in the money are recognized consistent with the gain or loss on the asset or liability that was being synthetically altered by the agreement. To the extent that the designated asset or liability still exists, any gain or loss on the termination of the agreement is deferred and amortized over the shorter term of the remaining contractual life of the agreement or remaining life of the asset or liability. Gains and losses resulting from terminated interest rate cap, floor, and collar agreements that are not in the money are recognized at the time of termination. Interest rate cap, floor, and collar agreements may be redesignated to different assets or liabilities during their lives. At the time of redesignation, the agreements are marked-to-market with the resulting gain or loss being deferred and amortized as if the agreement were canceled. Gains or losses on financial futures contracts which qualify as hedges are deferred. The unamortized balance of such deferred gains or losses is applied to the carrying value of the hedged items. Amortization of the net deferred gains or losses is applied to the interest component of the hedged items using the level-yield method. Gains or losses in the market value of financial futures contracts which do not qualify for hedge accounting are recognized currently. Loans Loans are stated at the principal amount outstanding, net of deferred loan fees, allowance for losses, and any discounts or premiums on purchased loans. The deferred fees, discounts, and premiums are amortized using the level-yield method over the estimated life of the loan. Generally, a loan is classified as nonaccrual and the accrual of interest on such loan is discontinued when the contractual payment of principal or interest has become more than 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. When a loan is placed on nonaccrual status, accrued but unpaid interest is reversed. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan", as amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures" (collectively SFAS 114). SFAS 114 addresses the accounting by creditors for impairment of certain loans by specifying how the allowance for loan losses related to such loans should be determined. As SFAS 114 does not apply to residential 56 59 mortgage and consumer loans which are collectively evaluated for impairment and which represent in excess of 95% of the Company's total loan portfolio, the initial and continuing application of SFAS 114 has had no significant impact on the Company's consolidated financial statements. Relative to the Company's commercial real estate loan portfolio, a loan is considered to be impaired when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment is measured based on the underlying value of the collateral. Loans Serviced for Others Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" (SFAS 122). Accordingly, the Company recognizes as separate assets the rights to service mortgage loans, whether the rights are acquired through purchases of servicing or through the origination or purchase of loans with a definitive plan to sell or securitize the loans with servicing retained. The fair value of capitalized servicing rights assigned to such purchased or originated loans is based upon the present value of estimated future cash flows associated with the servicing. SFAS 122 also requires that an enterprise assess its capitalized mortgage servicing rights for impairment based upon the fair value of those rights. For purposes of measuring impairment, the Company stratifies its servicing rights based upon the interest rate characteristics of the underlying loans, and compares the fair value for each strata to the unamortized recorded value. The fair value is based upon the net present value of expected future cash flows discounted at a rate commensurate with the risks involved. The Company's adoption of SFAS 122 did not have a material impact on the Company's consolidated financial statements. Servicing fees related to loans serviced for others are recognized when loan payments are received. Ancillary income from loan servicing is recorded when received. Operational costs to service such loans are charged to expense as incurred and are included in general and administrative expenses in the accompanying consolidated statements of operations. The capitalized costs of mortgage servicing rights are amortized over the estimated remaining lives of the underlying loans using the level-yield method. Amortization of mortgage servicing rights is recorded as a component of "Loan servicing fees, net" in the consolidated statements of operations. Real Estate Owned Real estate owned includes properties acquired through foreclosure and properties acquired for development and sale. Real estate acquired through foreclosure is transferred to real estate owned at fair value, which represents the new recorded basis of the property. Subsequently, properties are evaluated and any additional declines in value are provided for in an allowance for losses on real estate. Real estate acquired for development and sale is carried at the lower of cost or net realizable value. Allowances for Losses Allowances for losses on loans and real estate owned are established when a loss is probable and can be reasonably estimated. These allowances are provided based on past experience and the prevailing market conditions. Management's evaluation of loss considers various factors including, but not limited to, general economic conditions, loan portfolio composition, prior loss experience, estimated sales price, and holding and selling costs. Provisions for loan losses are recorded to maintain the Company's overall allowance for loan losses within an acceptable range to cover probable credit losses inherent in the portfolio. Management believes that the allowances for losses on loans and real estate owned are adequate. While management uses available information to recognize losses, future additions to the allowances may be necessary based on changes in economic conditions. 57 60 Office Properties and Equipment Office properties and equipment are stated at cost, less accumulated depreciation and leasehold amortization. Depreciation of office buildings and improvements and furniture and equipment is computed on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease. Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings Per Share Net income for primary earnings per share is adjusted for the dividends on convertible preferred stock. The average number of common shares and common equivalent shares outstanding for 1996, 1995, and 1994 was 42,698,851, 40,620,932, and 37,943,933, respectively. Fully diluted earnings per share has been computed using the weighted average number of common shares and common equivalent shares, including the effect of the assumed conversion of convertible preferred stock into common stock, if dilutive. The average number of common shares and common equivalent shares outstanding for 1996, 1995, and 1994 for the purpose of calculating fully diluted earnings per share was 42,731,792, 40,628,697, and 39,005,360, respectively. Cash Flows For the purpose of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and other highly liquid debt instruments with an initial maturity of three months or less. Impact of Prospective Accounting Pronouncements During June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities" (SFAS 125). SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Under the financial components approach, after a transfer of financial assets, an entity recognizes all financial and servicing assets it controls and liabilities it has incurred and derecognizes financial assets it no longer controls and liabilities that have been extinguished. The financial components approach focuses on the assets and liabilities that exist after the transfer. Many of these assets and liabilities are components of financial assets that existed prior to the transfer. If a transfer does not meet the criteria for a sale, the transfer is accounted for as a secured borrowing with pledge of collateral. SFAS 125 extends the "available-for-sale" or "trading" approach in SFAS 115 to nonsecurity financial assets that can contractually be prepaid or otherwise settled in such a way that the holder of the asset would not recover substantially all of its recorded investment. Thus, nonsecurity financial assets (no matter how acquired) such as loans, other receivables, interest-only strips, or residual interests in securitization trusts that are subject to 58 61 prepayment risk that could prevent recovery of substantially all of the recorded amount are to be reported at fair value with the change in fair value accounted for depending on the asset's classification as "available-for-sale" or "trading". SFAS 125 also amends SFAS 115 to prevent a security from being classified as held-to-maturity if the security can be prepaid or otherwise settled in such a way that the holder of the security would not recover substantially all of its recorded investment. SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. Also, the extension of the SFAS 115 approach to certain nonsecurity financial assets and the amendment to SFAS 115 is effective for financial assets held on or acquired after January 1, 1997. Reclassifications that are necessary because of the amendment do not call into question an entity's intent to hold other debt securities to maturity in the future. The adoption of SFAS 125 is not expected to have a material impact on the Company's financial statements. (2) BUSINESS COMBINATIONS During the fourth quarter of 1996, the Company completed the acquisitions of Community Charter Corporation (CCC), Sentinel Financial Corporation (Sentinel), and Mutual Bancompany, Inc. (Mutual). A total of 1,925,776 shares of the Company's common stock were issued in connection with these acquisitions. Total assets of the acquired institutions were approximately $269.4 million. These transactions were structured to qualify as tax free reorganizations and were accounted for under the purchase method of accounting. Operating results of the acquired entities are included in the accompanying consolidated statements of operations from their respective acquisition dates and are not material to the consolidated financial statements. During the fourth quarter of 1995, the Company completed the acquisitions of Kirksville Bancshares, Inc. (Kirksville) and WSB Bancorp, Inc. (WSB). A total of 1,521,435 shares of the Company's common stock were issued in connection with the Kirksville transaction, which was accounted for as a pooling of interests. The Company paid a total cash consideration of approximately $25.0 million in a purchase transaction to acquire WSB. Total assets of the acquired institutions were approximately $227.6 million. These transactions were structured to qualify as tax free reorganizations. The effect of these transactions was not material to the consolidated financial statements and operating results of the acquired entities are included since the respective acquisition dates. On June 30, 1994, the Company completed the acquisition of Farm & Home Financial Corporation (Farm & Home) whose assets totaled $3.1 billion. As a result of this transaction, the Company issued 17,993,838 shares of common stock. The transaction was structured to qualify as a tax free reorganization. The transaction was accounted for as a pooling of interests and, accordingly, the consolidated financial statements of the Company include the results of Farm & Home for all periods presented. 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
59 62 On April 22, 1994, the Company completed the acquisition of Home Federal Bancorp of Missouri, Inc. (Home Bancorp). Each holder of the common stock of Home Bancorp received 0.4945 of a share of common stock of the Company on a pre-split basis and $7.50 in cash for each share of Home Bancorp common stock held for a total consideration of $68.3 million. Home Bancorp's total consolidated assets were $532.7 million. The transaction was structured to qualify as a tax free reorganization. The transaction was accounted for under the purchase method of accounting. Operating results of Home Bancorp are included since the acquisition date. 60 63 (3) FAIR VALUE CONSOLIDATED BALANCE SHEETS The Company's primary objective in managing interest rate risk is to position the Company such that changes in interest rates do not have a material adverse impact upon the net market value of the Company. Net market value considers the fair value of financial instruments (assets, liabilities, and off-balance-sheet items), in contrast to the accompanying consolidated balance sheets which are historical cost based. The estimated fair values of the Company's assets and liabilities, and the related carrying amounts from the accompanying consolidated balance sheets, are as follows (in thousands):
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 =========== =========== =========== ===========
61 64 Net market value is not intended to represent the value of the Company's stock or the amounts distributable to stockholders in connection with a sale of the Company or in the unlikely event of its liquidation. Such amounts ascribe no value to intangible assets or to the going concern value of the enterprise. The following methods and assumptions were used by the Company in estimating fair value disclosures: Cash and cash equivalents - Due to the short-term nature of these financial instruments, carrying value approximates fair value. Investment securities and mortgage-backed securities - Fair values are based on quoted market prices or dealer quotes. Where such quotes are not available, fair value is estimated using quoted market prices for similar securities, or in limited instances discounted cash flow analyses. Stock in the Federal Home Loan Bank is valued at cost, which represents redemption value and approximates fair value. Interest rate exchange, cap, floor, and collar agreements - The fair values of these agreements, are estimated by comparing the contractual rates the Company is paying or receiving to market rates quoted on new agreements with similar maturities by counterparties of similar creditworthiness. Loans - The fair value of loans is estimated by discounting future cash flows at market interest rates for loans of similar credit risk, terms, and maturities, taking into consideration repricing characteristics and prepayment risk. Office properties and equipment - The fair value of office properties is estimated based upon in-house appraised values for the Company's properties. The net book value of office equipment is assumed to approximate its fair value. Other assets and liabilities - The estimated fair value of other assets, which includes intangibles, and real estate owned, and other liabilities represents the sum of all contractual financial receivables or obligations adjusted for the tax effects. Deposits with defined maturities - The fair value of certificates of deposit accounts is based on the discounted values of contractual cash flows using rates currently offered in the marketplace for accounts of similar remaining maturities. Deposits without defined maturities - For the purposes of calculating "Net Market Value," no consideration is given to the economic value of the Bank's long-term relationships with its depositors. For deposit liabilities without defined maturities, fair value is assumed to be the amount payable on demand at the reporting date. By ignoring what is commonly referred to as a core deposit intangible, no consideration is given to the present value of the Company's expected future profitability derived from those customer relationships. However, such value as calculated by the Company is disclosed, net of applicable income taxes, under the heading "Non-Financial Instruments." The aforementioned value has been calculated by comparing the rates paid on deposits to a rate paid on a wholesale borrowing having a maturity equal to the expected maturity of the deposits reduced by the cost to service and insure such deposits. Securities sold under agreements to repurchase - Fair values are based on the discounted value of contractual cash flows using dealer quoted rates for agreements of similar terms and maturities. Advances from Federal Home Loan Bank - The fair value of advances from the Federal Home Loan Bank (FHLB) is based on discounted values of contractual cash flows using rates currently offered in the marketplace for instruments with similar terms and maturities. Other borrowings - Fair values are based on quoted market prices, dealer quotes, or on the discounted values of contractual cash flows using market derived spreads. 62 65 Commitments to extend credit - The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. Income taxes - The estimated income tax effects arising from the differences between fair values and tax bases of financial instruments is calculated and included in the fair value disclosure of other assets or other liabilities. The effect of the restoration to taxable income of the Bank's bad debt reserves for income tax purposes resulting from the unlikely event of liquidation has not been included. (4) SECURITIES AVAILABLE FOR SALE The amortized cost and market value of securities available for sale at December 31, 1996 are summarized as follows:
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 ========= ====== ======= =========
63 66 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. Gross realized gains on the sale of or early redemption by the issuer of securities available for sale totaled $27.8 million, $25.0 million, and $15.4 million for 1996, 1995, and 1994, respectively. Gross realized losses on such securities totaled $18.6 million, $1.1 million, and $43.6 million for 1996, 1995, and 1994, respectively. 64 67 (5) SECURITIES HELD TO MATURITY In December 1996, the Company reclassified its entire investment and mortgage-backed securities portfolios from held to maturity to available for sale. The securities transferred consisted of investment securities with approximate amortized cost and market values of $114.3 million and $114.9 million, respectively, and mortgage-backed securities with approximate amortized cost and market values of $3.1 billion. This action was taken to provide the Company maximum flexibility to manage its portfolio. The amortized cost and market value of securities held to maturity at December 31, 1995 are summarized as follows:
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. 65 68 (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. 66 69 The Company services mortgage loans for its own account and also services mortgage loans for third-party investors under loan servicing agreements. Pursuant to these agreements, the Company typically collects from the borrower monthly payments of principal and interest on mortgage loans and additional amounts towards payment of real estate taxes and insurance. The Company retains its servicing fee from such payments and remits the balance of the principal and interest payments to the investors in the mortgage loans or associated mortgage-backed securities. At December 31, 1996 and 1995, the Company serviced 116,882 mortgage loans totaling $8.4 billion and 78,698 mortgage loans totaling $5.0 billion, respectively. Of these amounts, $3.5 billion and $3.0 billion were serviced on the Company's own behalf at December 31, 1996 and 1995, respectively. Activity in mortgage servicing rights originated and purchased, which is recorded in other assets in the accompanying consolidated balance sheets, is summarized as follows:
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 ======== ======= =======
67 70 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. 68 71 (10) INTANGIBLE ASSETS Intangible assets and fair value in excess of cost of net assets acquired (negative goodwill), included in other assets and other liabilities, respectively, in the accompanying consolidated balance sheets are summarized as follows:
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% ========= ===== ==== ========= ===== ====
69 72 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 ====== ====== ========= =========
70 73 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
71 74 (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. 72 75 (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. 73 76 The risks generally associated with interest rate exchange agreements are also the same as for interest rate cap, floor, and collar agreements. Such risks are the risk that the counterparty in the agreement may default ("credit risk"), the risk that at the time of any such default, interest rates may have moved favorably from the perspective of the nondefaulting party ("market risk") and the risk that interest accrued and due to the Company previously reflected in the consolidated balance sheets may not be received as a result of the default. The Company's interest rate exchange agreements and interest rate cap and floor agreements have been entered into with nationally recognized commercial and investment banking firms or the FHLB. As such, the Company does not anticipate nonperformance by the counterparties. Financial futures contracts are subject to similar market risks as interest rate exchange agreements; however, credit risk is substantially mitigated due to the requirement that participants settle changes in the value of their positions daily. The Company cancelled all of its interest rate exchange agreements during the third quarter of 1996, accordingly there are no such agreements outstanding at December 31, 1996. Interest rate exchange agreements at December 31, 1995 are summarized as follows:
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) ========== ==== ==== ==========
74 77 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 ========== =========== ==== ======== ========
75 78 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). 76 79 At December 31, 1996, unamortized fees related to the purchase of interest rate cap, floor, and collar agreements totaled $85.6 million. The annual amortization of the unamortized fees is summarized as follows (in thousands):
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 77 80 $18.0 million (on a fully-diluted per share basis, an increase of $0.48 for 1994 and a decrease of $0.43 for 1995). This restatement was one of the timing of recognition of gains and losses in the Statement of Operations and had no impact on total stockholders' equity at any date since both the financial futures contracts and the related mortgage-backed securities had been previously marked to market through stockholders' equity at each reporting period. Subsequent to December 31, 1995, the Company terminated all of its financial futures positions and maintained its interest rate risk management position by principally redesignating existing interest rate exchange agreements to the available for sale portfolio. Such interest rate exchange agreements were utilized prior to the redesignation to manage the interest rate risk of short-term wholesale borrowings. (16) NET GAIN (LOSS) FROM FINANCIAL INSTRUMENTS Net gain (loss) from financial instruments is summarized as follows:
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. 78 81 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. 79 82 (18) STOCKHOLDERS' EQUITY Preferred Stock Each share of the Company's preferred stock is convertible, at the option of the holder, into 3.75 shares of the Company's common stock, par value $.01 per share. The preferred stock is redeemable, at the option of the Company, in whole at any time or in part, from time to time, on or after May 16, 1997 at $50 per share, plus accrued and unpaid dividends. As part of the merger agreement with Mercantile Bancorporation Inc. (See Note 24), the Company is required to redeem its preferred stock on May 16, 1997. Stock Repurchase Program On December 15, 1994, the Board of Directors of Roosevelt Financial Group, Inc. authorized the Company to acquire up to 1,750,000 shares of its own common stock, subject to market conditions, prior to December 31, 1997. The stock repurchased is to be held in treasury in order to fund, from time to time, the Company's benefit programs. Shares of stock repurchased may also be retired, from time to time, if not needed for other corporate purposes. Through December 31, 1996, 281,500 shares of common stock of the Company have been repurchased pursuant to the stock repurchase program at a weighted average price of $15.98 per share. On January 2, 1997, the Board of Directors of the Company authorized an expansion of the capacity of the above-mentioned stock repurchase plan by an additional 5,529,880 shares. This expansion, when coupled with the remaining authorization prior to the expansion (1,468,500 shares), resulted in a total authorization of 6,998,380 shares, the number of shares that the Company has agreed to use its reasonable best efforts, subject to prudent business practices, to acquire in open market transactions prior to the closing date of its planned merger with Mercantile Bancorporation Inc. (See Note 24). Subsequent to December 31, 1996 and through February 13, 1997, an additional 1,600,000 shares have been repurchased at a weighted average price of $21.08 per share (unaudited). (19) REGULATORY CAPITAL REQUIREMENTS AND OTHER MATTERS The Company and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines, the Company and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and the subsidiary banks' capital amounts and classifications are also subject to quantitative judgements by the regulators about components, risk-weightings and other factors. Management believes, as of December 31, 1996 the Company and the subsidiary banks' meet all capital adequacy requirements. The subsidiary banks are also subject to the regulatory framework for prompt corrective action. The most recent notification from the regulatory agencies categorized the banks as well capitalized. To be categorized as well capitalized, the banks must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since the dates of the aforementioned notifications that management believes have changed the banks' category. 80 83 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. 81 84 (20) STOCK OPTION AND INCENTIVE PLAN The 1986 Stock Option and Incentive Plan (Plan) was adopted to enable the Company to attract and retain key personnel. The Plan, which terminated January 29, 1997, provided for the granting of incentive stock options, nonqualified stock options, restricted stock awards, and stock appreciation rights. The Plan authorized the issuance of up to 4,500,000 shares of the Company's common stock. The 1994 Non-Employee Director Stock Option Plan authorizes the issuance of up to 150,000 shares of the Company's common stock. The Company accounts for stock-based compensation under the Plan in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and, accordingly, recognizes no compensation expense as the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Upon adoption in 1996, the Company elected the pro forma disclosure alternative provided in SFAS 123 versus the recognition provisions. Information on the Company's stock options are summarized as follows:
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. 82 85 Had compensation cost for the Company's stock-based compensation plans been determined consistent with the recognition provisions of SFAS 123, net income and earnings per share would have been as follows:
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. 83 86 (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 ====== ======= =======
84 87
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. 85 88 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no Current Report on Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change in accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information concerning directors of the Registrant is incorporated herein by reference from the Company's definitive Proxy Statement/Prospectus for the 1996 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the close of the fiscal year. The compensation report and performance graph included in the Proxy Statement/Prospectus pursuant to Items 402 (k) and 402 (l) of Regulation S-K are specifically not incorporated by reference herein. Information concerning executive officers of the Registrant is provided herein under Item 1 of Part I. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated herein by reference from the Company's definitive Proxy Statement/Prospectus for the 1996 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the close of the fiscal year. The compensation report and performance graph included in the Proxy Statement/Prospectus pursuant to Items 402 (k) and 402 (l) of Regulation S-K are specifically not incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the Company's definitive Proxy Statement/Prospectus for the 1996 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the close of the fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and transactions is incorporated herein by reference from the Company's definitive Proxy Statement/Prospectus for the 1996 Annual Meeting of Stockholders, a copy of which will be filed not later than 120 days after the close of the fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) (1) Financial Statements: - -------- The Index to Consolidated Financial Statements appears at Item 8, Financial Statements and Supplementary Data. (a) (2) Financial Statement Schedules: - -------- All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements. 86 89 (a) (3) Exhibits: - --------
SEQUENTIALLY PAGE NUMBER WHERE ATTACHED EXHIBITS REGULATION ARE LOCATED S-K EXHIBIT IN THIS FORM NUMBER DOCUMENT 10-K REPORT - ----------- -------- ------------ 2 Plan of acquisition, reorganization, arrangement, liquidation or succession Not applicable Filed as Exhibit's to the Registrant's Current Report on Form 8-K reporting the event of December 22, 1996 and incorporated herein by reference. 3 Certificate of Incorporation. Filed as Exhibit 4.1 to the Registrant's Registration Statement No. 33-79308 and incorporated herein by reference. Not applicable Bylaws. Filed as Exhibit 3.2 to the Registrant's Registration Statement No. 33-20337 incorporated herein by reference. Not applicable 4 Instruments defining the rights of security holders, including indentures: Specimen common stock certificate. Filed as Exhibit 4 to the Registrant's Registration Statement No. 33-20337 incorporated herein by reference. Not applicable Form of Certificate of Designation of 6 1/2% Non-Cumulative Convertible Preferred Stock, Series A. Filed as Exhibit 4.3 to the Registrant's Registration Statement No. 33-76738 and incorporated herein by reference. Not applicable Specimen stock certificate of 6 1/2% Non-Cumulative Convertible Preferred Stock, Series A. Filed as Exhibit 4.4 to the Registrant's Registration Statement No. 33-76738 and incorporated herein by reference. Not applicable Form of Certificate of Designation of 6 1/2% Non-Cumulative Convertible Preferred Stock, Series F. Filed as Exhibit 4.15 to the Registrant's Registration Statement No. 33-79308 and incorporated herein by reference. Not applicable Specimen stock certificate of 6 1/2% Non-Cumulative Convertible Preferred Stock, Series F. Filed as Exhibit 4.16 to the Registrant's Registration Statement No. 33-79308 and incorporated herein by reference. Not applicable 87 90 9 Voting trust agreement Not applicable 10 Material Contracts: 1988 Non-Employee Directors Retirement Pension Plan. Filed as Exhibit 4.9 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988 and incorporated herein by reference. Not applicable 1994 Non-Employee Director Stock Option Plan. Filed as Exhibit 4.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. Not applicable Roosevelt Bank Supplemental Pension Plan. Filed as Exhibit 4.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. Not applicable Roosevelt Bank Management Deferred Compensation Plan. Filed as Exhibit 4.10 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated herein by reference. Not applicable Roosevelt Financial Group, Inc. Retirement Pension Plan for Outside Directors Page Employment Agreement between the Registrant, Mercantile Bancorporation Inc. and Stanley J. Bradshaw Exhibit 10.1 Transition Employment Agreement between the Registrant, Mercantile Bancorporation Inc. and Anat Bird Exhibit 10.2 Transition Employment Agreement between the Registrant, Mercantile Bancorporation Inc. and Gary W. Douglass Exhibit 10.3 11 Statements re computation of per share earnings Exhibit 11 12 Statements re computation of ratios Not applicable 13 Annual report to security holders Not applicable 16 Letter re changes in certifying accountant Not applicable 88 91 18 Letter re changes in accounting principles Not applicable 21 Subsidiaries of the registrant Exhibit 21 22 Published report regarding matters submitted to vote of security holders Not applicable 23 Consents of experts Exhibit 23 24 Power of attorney Not applicable 27 Financial Data Schedule Exhibit 27 99 Additional exhibits Not applicable In accordance with Item 601 (b) (2) (iii) of Regulation S-K, Registrant hereby agrees to furnish a copy of any omitted schedule to the agreement to the SEC upon request.
89 92 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Chesterfield, County of St. Louis, State of Missouri, on the day of March, 1996. ROOSEVELT FINANCIAL GROUP, INC. By /s/ Stanley J. Bradshaw ------------------------------------- Stanley J. Bradshaw Director, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date - ------------------------------------------------------------------- ---- /s/ Stanley Bradshaw Director, President March 4, 1997 - ---------------------------------------------------- and Chief Executive Stanley J. Bradshaw Officer /s/ Anat Bird Director, Senior Executive March 4, 1997 - ---------------------------------------------------- Vice President and Chief Anat Bird Operating Officer /s/ Gary W. Douglass Executive Vice President March 4, 1997 - ---------------------------------------------------- and Chief Financial Officer Gary W. Douglass /s/ Clarence M. Turley, Jr. Director March 4, 1997 - ---------------------------------------------------- Clarence M. Turley, Jr. /s/ Hiram S. Liggett, Jr. Director March 4, 1997 - ---------------------------------------------------- Hiram S. Liggett, Jr. /s/Patricia M. Gammon Director March 4, 1997 - ---------------------------------------------------- Patricia M. Gammon /s/ Alvin D. Vitt Director March 4, 1997 - ---------------------------------------------------- Alvin D. Vitt
90 EX-10.1 2 EMPLOYMENT AGREEMENT OF STANLEY J. BRADSHAW 1 EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of this 22 day of December, 1996, by and between Roosevelt Financial Group, Inc. -- -------- (the "Company"), Mercantile Bancorporation, Inc. ("Mercantile") and Stanley J. Bradshaw (the "Employee"). WHEREAS, the Company has entered into an Agreement and Plan of Reorganization of even date herewith (the "Definitive Agreement") with Mercantile, pursuant to which Mercantile will acquire (the "Acquisition") the Company and its wholly-owned subsidiary, Roosevelt Bank (the "Bank"); WHEREAS, the Acquisition represents a significant acquisition for Mercantile; WHEREAS, Mercantile has expressed a desire to retain the Employee as a member of its Management Executive Committee and a belief that it is essential for Mercantile to retain the Employee for the future management and growth of the assets acquired in the Acquisition, and Mercantile has expressed the intention that the Employee shall have a key role with respect to Mercantile's strategic activities in the future; WHEREAS, it is a condition of Mercantile's entering into the Definitive Agreement that Mercantile be assured that the Employee will be available for long term service with Mercantile after the Acquisition; WHEREAS, it is appropriate to provide the Employee with a material inducement to enter into this Agreement by which he will undergo a change in status and undertake both to continue his chief executive responsibilities with respect to the Bank and expanded duties with respect to Mercantile's banking operations in the St. Louis, Missouri, area; and WHEREAS, the board of directors of the Company and the Executive Committee of the board of directors of Mercantile have approved and authorized the execution of this Agreement with the Employee; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows: 1. Definitions. ----------- (a) The term "Consolidated Subsidiaries" means any subsidiary or subsidiaries of the Company (or its successors) that are part of the consolidated group of the Company (or its successors) for federal income tax reporting. (b) The term "Date of Termination" means the date upon which the Employee's employment with the Bank ceases, as specified in a notice of termination pursuant to Section 8 of this Agreement. 2 (c) The term "Effective Time" means immediately prior to the consummation of the Acquisition as provided in the Definitive Agreement. (d) The term "Effective Date" means the date on which the Acquisition is consummated as provided in the Definitive Agreement. (e) The term "Involuntary Termination" means the termination of the employment of Employee (i) by the Bank without his express written consent; or (ii) by the Employee by reason of a material diminution of or interference with his duties, responsibilities or benefits, including (without limitation) any of the following actions unless consented to in writing by the Employee: (1) a requirement that the Employee be based at any place other than Chesterfield, Missouri, or within 50 miles thereof, except for reasonable travel on Company or Bank business; (2) a material demotion of the Employee; or (3) a reduction in the Employee's salary or a material adverse change in the Employee's perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Bank or the Company. The term "Involuntary Termination" does not include Termination for Cause or termination of employment due to death or permanent disability, or suspension or temporary or permanent prohibition from participation in the conduct of the affairs of a depository institution under Section 8 of the Federal Deposit Insurance Act. (f) The terms "Termination for Cause" and "Terminated For Cause" mean termination of the employment of the Employee with the Bank because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform material stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or (except as provided below) material breach of any provision of this Agreement. No act or failure to act by the Employee shall be considered willful unless the Employee acted or failed to act with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. 2. Term. The term of this Agreement shall be a period of three years ---- commencing on the Effective Time, subject to earlier termination as provided herein (the "Employment Period"). 3. Employment. The Employee is currently employed as Chief Executive ---------- Officer of the Bank. From and after the Effective Date, during the Employment Period, the Employee shall serve as President and Chief Executive Officer of the Bank, pending integration of the Bank with and into Mercantile's banking and/or other affiliates, and thereafter as head of Mercantile's St. Louis-based mortgage banking operations. As such, the Employee shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, and shall have such other powers and duties as the Chief Executive Officer of Mercantile may prescribe from time to time. The Employee shall also serve as a member of the Management Executive Committee of Mercantile. The Employee shall report solely to the chief executive officer of Mercantile. The Employee shall devote his best efforts and reasonable time and attention to the business and affairs of the Bank and/or other Consolidated Subsidiaries to the extent necessary to discharge his responsibilities hereunder. The Employee may (i) serve on 2 3 corporate or charitable boards or committees, and (ii) manage personal investments, so long as such activities do not interfere materially with performance of his responsibilities hereunder. 4. Cash Compensation. ----------------- (a) Salary. Mercantile agrees to pay, or cause the Bank or ------ appropriate other Consolidated Subsidiaries to pay, the Employee during the term of this Agreement a base salary (the "Annual Base Salary") the annualized amount of which shall be not less than FOUR HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($425,000). The Annual Base Salary shall be paid no less frequently than monthly and shall be subject to customary tax withholding. (b) Annual Bonus. During the Employment Period, in addition to Annual ------------ Base Salary, the Employee will be eligible to receive, (I) for each fiscal year of Mercantile during which the Employee is employed, an annual bonus (the "Annual Bonus") in an amount to be determined by Mercantile's board of directors, but in no event shall the amount of the Annual Bonus during the first fiscal year during which the Employee is employed (the "First Fiscal Year") be less than the product of (x) .55 and (y) the Annual Base Salary (the "Minimum Bonus") and (II) for that portion of any fiscal year of Mercantile other than the First Fiscal Year during which the Employee is employed for less than twelve full months, an amount equal to the product of (x) the Annual Bonus paid to the Employee during the Employment Period, and (y) a fraction, the numerator of which is the number of days in such fiscal year during which the Employee is employed by Mercantile, and the denominator of which is 365. Each such Annual Bonus shall be paid in cash in a manner and at a time in accordance with Mercantile's customary practices with respect to other peer employees of Mercantile. (c) Expenses. The Employee shall be entitled to receive prompt -------- reimbursement for all reasonable expenses incurred by the Employee in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of Mercantile, provided that ------------- the Employee accounts for such expenses as required under such policies and procedures. 5. Benefits. -------- (a) Participation in Benefit Plans. The Employee shall be entitled to ------------------------------ participate, to the same extent as executive officers of Mercantile and the Consolidated Subsidiaries generally, in all qualified and nonqualified plans of Mercantile and the Consolidated Subsidiaries relating to pension, retirement, thrift, profit-sharing, savings, group or other life insurance, hospitalization, medical and dental coverage, travel and accident insurance, education, and other retirement or employee benefits or combinations thereof. In addition, the Employee shall be entitled to be considered for benefits under all of the stock and stock option related plans in which the executive officers of Mercantile are eligible or become eligible to participate. (b) Fringe Benefits. The Employee shall be eligible to participate in, --------------- and receive benefits under, any other fringe benefit plans or perquisites which are or may become generally available to the executive officers of Mercantile, including but not limited to supplemental retirement, incentive compensation, supplemental medical or life insurance plans, physical examinations, and tax preparation services. 3 4 (c) Restricted Stock. At the Effective Time, the Company shall grant ---------------- to the Employee 100,000 shares of restricted stock of the Company, which shares shall vest annually in equal portions over a period of three years following the Effective Date, provided that vesting shall accelerate so that ------------- all shares vest immediately in the event that the Employee dies or becomes permanently disabled during such period but vesting shall not accelerate in the event of a change in control of Mercantile. (d) Credit For Prior Service. Following the Acquisition, the Employee ------------------------ shall receive full credit for prior service with the Company and the Bank under employee benefit plans of Mercantile, all as more fully set out in Section 5.08 of the Definitive Agreements for all purposes other than determining the amount of benefit accruals under any defined benefit plans of Mercantile. 6. Vacations; Leave. The Employee shall be entitled to annual paid ---------------- vacation in accordance with the policies established by the board of directors of Mercantile and the board of directors of the Bank for executive officers, and to voluntary leaves of absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors may determine in its discretion. 7. Termination of Employment. ------------------------- (a) Involuntary Termination. If the Employee experiences an ----------------------- Involuntary Termination at any time, (i) Mercantile shall pay to the Employee: A. The sum of (1) the Employee's Annual Base Salary through the Date of Termination to the extent not theretofore paid ("Accrued Salary") and (2) the product of (x) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year of Mercantile consisting of less than twelve full months or during which the Employee was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any, or, in the event that a fiscal year of Mercantile has not been completed during the Employment Period as of the Date of Termination, the Minimum Bonus, and (y) a fraction, the numerator of which is the number of days in the current fiscal year of Mercantile through the Date of Termination, and the denominator of which is 365 (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"); and B. The greater of (1) the amount equal to the product of (i) the number of months remaining in the Employment Period on the Date of Termination (the "Continuation Period"), divided by twelve and (ii) the sum of (x) the Employee's Annual Base Salary and (y) the Annual Bonus paid or payable (but not less than the Minimum Bonus) for the most recently completed fiscal year of Mercantile during the Employment Period (the "Recent Annual Bonus"), or, in the event that a fiscal year has not been completed during the Employment Period as of the Date of Termination, the Minimum Bonus, and (2) the amount equal to the sum of (x) the Employee's Annual Base Salary and (y) the Recent Annual Bonus, payable, in each case, in 24 equal semi-monthly installments (the "Termination Payment"); and 4 5 (ii) For the greater of (1) twelve months or (2) the number of months remaining in the Employment Period on the Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy (the "Benefit Continuation Period"), Mercantile shall after the Employee's Date of Termination continue benefits to the Employee at least equal to those which would have been provided to him in accordance with the plans, programs, practices and policies described in Section 5(a) of this Agreement if the Employee's employment had not been terminated; provided, --------- however, that if the Employee become reemployed with another employer and is - ------------- eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Employee for retiree benefits pursuant to such plans, practices, programs, and policies, the Employee shall be considered to have remained employed during the Benefit Continuation Period and to have returned on the last day of such period; and (iii) The Employee shall be deemed to be a continuing employee of Mercantile for purposes of the vesting of the restricted stock referred to in Section 5(d) of this Agreement until the third anniversary of the Effective Date. (b) Termination for Cause. In the event of Termination for Cause, --------------------- Mercantile shall have no further obligation to the Employee under this Agreement after the Date of Termination. In the event of a simultaneous Termination for Cause and voluntary termination of employment or resignation by the Employee, the Employee shall be considered to have been Terminated for Cause. (c) Voluntary Termination. The Employee may terminate his employment --------------------- voluntarily at any time by a notice pursuant to Section 8 of this Agreement. In the event that the Employee voluntarily terminates his employment, Mercantile shall be obligated to the Employee for the amount of his Annual Base Salary and benefits only through the Date of Termination, at the time such payments are due, and Mercantile shall have no further obligation to the Employee. (d) Death. In the event of the death of the Employee while employed ----- under this Agreement and prior to any termination of employment, Mercantile shall pay to the Employee's estate, or such person as the Employee may have previously designated in writing, an amount of cash equal to the product of SIX HUNDRED FIFTY-EIGHT THOUSAND SEVEN HUNDRED FIFTY DOLLARS ($658,750) multiplied by a fraction with a numerator equal to the number of days elapsed prior to the date of death during the calendar year in which death occurs and a denominator of 365, reduced by (ii) the amount of Annual Base Salary and bonus paid to the Employee prior to the date of death during such calendar year. 8. Notice of Termination. In the event that Mercantile desires to --------------------- terminate the employment of the Employee during the term of this Agreement, Mercantile shall deliver to the Employee a written notice of termination, stating whether such termination constitutes Termination for Cause or Involuntary Termination, setting forth in reasonable detail the facts and circumstances that are the basis for the termination, and specifying the date upon which 5 6 employment shall terminate, which date shall be at least 30 days after the date upon which the notice is delivered, except in the case of Termination for Cause. In the event that the Employee determines in good faith that he has experienced an Involuntary Termination of his employment, he shall send a written notice to Mercantile stating the circumstances that constitute such Involuntary Termination and the date upon which his employment shall have ceased due to such Involuntary Termination. In the event that the Employee desires to effect a Voluntary Termination, he shall deliver a written notice to Mercantile, stating the date upon which employment shall terminate, which date shall be at least 30 days after the date upon which the notice is delivered, unless the parties agree to a date sooner. 9. Attorneys Fees. From and after the Effective Date during the Employment -------------- Period, Mercantile shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) when and as incurred by the Employees as a result of (i) the Employee's contesting or disputing any termination of employment, or (ii) the Employee's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by Mercantile under which the Employee is or may be entitled to receive benefits; provided that Mercantile's obligation to pay ------------- such fees and expenses is subject to the Employee's prevailing with respect to the matters in dispute in any action initiated by the Employee or the Employee's having been determined to have acted reasonably and in good faith with respect to any action initiated by Mercantile. 10. No Assignments; Mercantile as Successor. --------------------------------------- (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, --------- however, that Mercantile shall require any successor or assignee (whether - ------------- direct or indirect, by purchase, merger, consolidation or otherwise) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Mercantile would have been required to perform it if no such succession or assignment had taken place. Failure of Mercantile to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation and benefits from Mercantile in the same amount and on the same terms as the compensation pursuant to Section 7(b) hereof. For purposes of implementing the provisions of this Section 10(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. (c) Upon the consummation of the Acquisition, for all purposes under this Agreement, the Company shall be deemed to be Mercantile and the Consolidated Subsidiaries shall be those of Mercantile. 6 7 11. Certain Reduction of Payments by Mercantile. ------------------------------------------- (a) For purposes of this Section 11, (i) a "Payment" shall mean any payment or distribution in the nature of compensation to or for the benefit of the Employee, whether paid or payable pursuant to this Agreement or otherwise; (ii) "Separation Payment" shall mean a Payment paid or payable pursuant to this Agreement (disregarding this Section); (iii) "Net After Tax Receipt" shall mean the Present Value of a Payment net of all taxes imposed on the Employee with respect thereto under Sections 1 and 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), determined by applying the highest marginal rate under Section 1 of the Code which applied to the Employee's taxable income for the immediately preceding taxable year; (iv) "Present Value" shall mean such value determined in accordance with Section 280G(d)(4) of the Code; and (v) "Reduced Amount" shall mean the greatest aggregate amount of Separation Payments which (a) is less than the sum of all Separation Payments and (b) results in aggregate Net After Tax Receipts which are equal to or greater than the Net After Tax Receipts which would result if the Employee were paid the sum of all Separation Payments. (b) Anything in this Agreement to the contrary notwithstanding, in the event KPMG Peat Marwick LLP or such other nationally recognized certified public accounting firm designated by the Employee (the "Accounting Firm") shall determine that receipt of all Payments would subject the Employee to tax under Section 4999 of the Code, it shall determine whether some amount of Separation Payments would meet the definition of a "Reduced Amount." If the Accounting Firm determines that there is a Reduced Amount, the aggregate Separation Payments shall be reduced to such Reduced Amount. All fees payable to the Accounting Firm shall be paid solely by Mercantile. (c) If the Accounting Firm determines that aggregate Separation Payments should be reduced to the Reduced Amount, Mercantile shall promptly give the Employee notice to that effect and a copy of the detailed calculation thereof, and the Employee may then elect, in his sole discretion, which and how much of the Separation Payments shall be eliminated or reduced (as long as after election the Present Value of the aggregate Separation Payments equals the Reduced Amount), and shall advise Mercantile in writing of his election within ten days of his receipt of notice. If no such election is made by the Employee within such ten-day period, Mercantile may elect which of such Separation Payments shall be eliminated or reduced (as long as after such election the Present Value of the aggregate Separation Payments equals the Reduced Amount) and shall notify the Employee promptly of such election. All determinations made by the Accounting Firm under this Section 11 shall be binding upon Mercantile and the Employee and shall be made within 60 days of a termination of employment of the Employee. As promptly as practicable following such determination, Mercantile shall pay to or distribute for the benefit of the Employee such Separation Payments as are then due to the Employee under this Agreement and shall promptly pay to or distribute for the benefit of the Employee in the future such Separation Payments as become due to the Employee under this Agreement. (d) While it is the intention of Mercantile to reduce the amounts payable or distributable to the Employee hereunder only if the aggregate Net After Tax Receipts to an Employee would thereby be increased, as a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that amounts will have been paid or distributed by Mercantile to or for 7 8 the benefit of the Employee pursuant to this Agreement which should not have been so paid or distributed ("Overpayment") or that additional amounts which will have not been paid or distributed by Mercantile to or for the benefit of the Employee pursuant to this Agreement could have been so paid or distributed ("Underpayment"), in each case consistent with the calculation of the Reduced Amount hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against Mercantile or the Employee which deficiency the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by Mercantile to or for the benefit of the Employee shall be treated for all purposes as a loan to the Employee which the Employee shall repay to Mercantile together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no - ----------------------- amount shall be payable by the Employee to Mercantile if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by Mercantile to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 12. Confidential Information. The Employee shall hold in a fiduciary ------------------------ capacity for the benefit of Mercantile and the Bank all secret or confidential information, knowledge or data ("Confidential Information") relating to Mercantile or the Bank or any of their affiliated companies, and their respective businesses, which shall have been obtained by the Employee during the Employee's employment by Mercantile or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Employee or representatives of the Employee in violation of this Agreement). After termination of the Employee's employment, the Employee shall not, without the prior written consent of Mercantile or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than Mercantile and those designated by it. In no event shall an asserted violation of the provisions of this Section 9 constitute a basis for deferring or withholding any amounts otherwise payable to the Employee under this Agreement. Confidential Information shall not include information, knowledge or data which (i) is in the Employee's possession at the date of this Agreement which she has no reason to believe is subject to any confidentiality agreement or other obligation of confidentiality to Mercantile or another party, (ii) is or becomes generally available to the public other than as a result of unauthorized disclosure by Mercantile or a Consolidated Subsidiary thereof, or representative of either, (iii) is or becomes available to Mercantile from a source other than Mercantile, provided that the Employee ------------- does not know or have reason to believe that such source is bound by a confidentiality agreement or other obligation of confidentiality to Mercantile, (iv) is independently developed by the Employee without reference to any information obtained from Mercantile, or (v) is required to disclosed by law. 13. Covenant Not To Engage In Competitive or Other Detrimental Activities. --------------------------------------------------------------------- (a) The Employee covenants that from and after the Effective Date he will not compete with Mercantile, the Bank and/or their affiliates and further covenants that he will not take any action which is detrimental to Mercantile, the Bank and/or their affiliated companies 8 9 (i) during the Employment Period, and (ii) if the Employee's employment terminates for any reason (other than the Employee's death) or no reason during the Employment Period, until the later of (i) the third anniversary of the Effective Date or (ii) the first anniversary of the Date of Termination. (b) For purposes of paragraph (a) of this Section 13, the Employee shall be deemed to be competing with Mercantile, Bank and/or their affiliated companies at any time if the Employee accepts employment with, or serves as an agent, employee, or director of, or a consultant to, a competitor of Mercantile, Bank and/or their affiliated companies, or during such time the Employee acquires or has an interest (direct or indirect) in any firm, corporation or enterprise engaged in a business which is in competition with Mercantile, Bank and/or their affiliated companies, or at any time, either during employment or thereafter, the Employee divulges any information concerning Mercantile, Bank and/or their affiliated companies which is or could be of aid to any such competitor. The mere ownership of a less than a 3% debt and/or equity interest in a competing company whose stock is publicly held shall not be considered as having the prohibited interest in a competitor, and neither shall the mere ownership of a less than a 10% debt and/or equity interest in a competing company whose stock is not publicly held. For purposes of this Agreement, any commercial bank, savings and loan association, securities broker or dealer, or other business or financial institution that is principally engaged in the business of offering any service at the time offered by Mercantile, Bank and/or their affiliated companies, and which conducts business in any locations encompassed within the areas circumscribed by circles, of which the radii are 50 miles and the mid-points are the geographic centers of any community in which Mercantile and/or its affiliated companies conduct business operations shall be deemed to be a competitor. (c) Should Mercantile reasonable and in good faith believe that the Employee has violated any of the foregoing provisions, it shall give the Employee written notice to such effect, stating the reasons(s) for its belief, and pending a final determination as to whether there has been a violation may, without penalty or risk of claim for actual or punitive damages, suspend payment of any further amount which might otherwise become payable hereunder after thirty (30) days of giving such notice. Mercantile shall, in an expeditious manner, determine from all information available to it whether the Employee violated any of the foregoing covenants, and if Mercantile in good faith concludes that the Employee has violated this Agreement, the Employee shall not be entitled to any further payment hereunder. (d) The Employee represents, acknowledges and agrees (i) that his experience and capabilities are such that he can obtain employment in activities which do not violate such agreement and that the enforcement by way of injunction of the agreement not to compete will not prevent the Employee from earning a livelihood, (ii) that Mercantile and Bank do not have an adequate remedy at law for a breach or threatened breach by the Employee of the covenants in this Section and may obtain injunctive and other equitable relief, in addition to receiving its actual damages and any other remedies that may be available to it hereunder or at law or by statute, (iii) that the covenants herein contained are reasonable and necessary for the proper protection of Mercantile, and (iv) that if any provision or part of any such covenant is invalidated, the remainder shall nevertheless continue to be valid and fully enforceable, and if a court determines that the term of the covenant is too long or the area covered thereby too great, 9 10 so that the covenant as written is unenforceable, the covenant shall be modified to encompass the longest duration and largest geographic area that the court deems enforceable under the law. 14. Notice. For the purposes of this Agreement, notices and all other ------ communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to the Company at its home office, to the attention of the Board of Directors with a copy to the Secretary of Mercantile, or, if to the Employee, to such home or other address as the Employee has most recently provided in writing to Mercantile. 15. Amendments. No amendments or additions to this Agreement shall be ---------- binding unless in writing and signed by both parties, except as herein otherwise provided. 16. Headings. The headings used in this Agreement are included solely for -------- convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 17. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 18. Governing Law. This Agreement shall be governed by the laws of the ------------- State of Missouri. 19. Arbitration. Any dispute or controversy arising under or in connection ----------- with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 10 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. Attest: Roosevelt Financial Group, Inc. /s/ /s/ - -------------------------- ----------------------------------- Secretary By: Its: Attest: Mercantile Bancorporation Inc. /s/ /s/ - -------------------------- ----------------------------------- Secretary By: Its: Employee /s/ Stanley J. Bradshaw ----------------------------------- Stanley J. Bradshaw EX-10.2 3 EMPLOYMENT AGREEMENT OF ANAT BIRD 1 TRANSITION EMPLOYMENT AGREEMENT ------------------------------- THIS TRANSITION EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of this 22 day of December, 1996, by and between Roosevelt -- -------- Financial Group, Inc. (the "Company"), Mercantile Bancorporation, Inc. ("Mercantile") and Anat Bird (the "Employee"). WHEREAS, the Company has entered into an Agreement and Plan of Reorganization of even date herewith (the "Definitive Agreement") with Mercantile, pursuant to which Mercantile will acquire (the "Acquisition") the Company and its wholly-owned subsidiary, Roosevelt Bank (the "Bank"); WHEREAS, it is essential for the integration of the Bank's operations into Mercantile's banking operations that the Employee continue to serve during a transition period to perform such executive duties as are necessary to ensure a successful integration; and WHEREAS, recognizing that the Employee may not have long-term opportunities with the Bank following the Acquisition, and that during such transition period, the Employee is likely to serve in a different capacity than prior to the Acquisition, it is necessary and appropriate to provide an incentive to the Employee to provide services during such transition period, WHEREAS, the Employee is willing to enter into this Agreement and to provide services during such transition period, and WHEREAS, the board of directors of the Company and the Executive Committee of the board of directors of Mercantile have approved and authorized the execution of this Agreement with the Employee; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows: 1. Definitions. ----------- (a) The term "Consolidated Subsidiaries" means any subsidiary or subsidiaries of the Company (or its successors) that are part of the consolidated group of the Company (or its successors) for federal income tax reporting. (b) The term "Date of Termination" means the date upon which the Employee's employment with the Bank ceases, as specified in a notice of termination pursuant to Section 7 of this Agreement. (c) The term "Effective Date" means the effective date of the Acquisition as provided in the Definitive Agreement. (d) The term "Involuntary Termination" means the termination of the employment of Employee (i) by the Bank without her express written consent; or (ii) by the Employee by 2 reason of any of the following actions unless consented to in writing by the Employee: (1) a requirement that the Employee be based at any place other than Chesterfield, Missouri, or within 50 miles thereof, except for reasonable travel on Company or Bank business; (2) a reduction in the Employee's salary or a material adverse change in the Employee's perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Bank or the Company; or (3) a requirement that the Employee provide services of a nature that is not consistent with the level of executive responsibilities carried out by the Employee prior to the Acquisition, provided that, following the Acquisition, changes to the ------------- Employee's title and lines of responsibility shall not constitute "Involuntary Termination" so long as the Employee retains a rank and a level of executive duties and functions similar to those she held prior to the Acquisition. The term "Involuntary Termination" does not include Termination for Cause or termination of employment due to death or permanent disability, or suspension or temporary or permanent prohibition from participation in the conduct of the affairs of a depository institution under Section 8 of the Federal Deposit Insurance Act. (e) The terms "Termination for Cause" and "Terminated For Cause" mean termination of the employment of the Employee with the Bank because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform material stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or (except as provided below) material breach of any provision of this Agreement. No act or failure to act by the Employee shall be considered willful unless the Employee acted or failed to act with an absence of good faith and without a reasonable belief that her action or failure to act was in the best interest of the Company. 2. Employment. ---------- (a) Mercantile agrees to continue the Employee in its employ, and the Employee hereby agrees to remain in the employ of Mercantile subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the first anniversary of such date (the "Employment Period"). (b) The Employee is, and, during the Employment Period, shall be employed as chief operating officer of the Bank pending integration of the Bank with and into another banking subsidiary of Mercantile and thereafter in another senior management position with Mercantile. As such, the Employee shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, and/or other services relating to the integration of the Bank's operations into Mercantile's banking operations as superior officers or the board of directors of Mercantile or the board of directors of the Bank may prescribe from time to time, provided that such other services shall be of an executive level ------------- consistent with the Employee's executive responsibilities prior to the Acquisition. The Employee shall also render services to any subsidiary or subsidiaries of Mercantile or the Bank as requested by Mercantile or the Bank from time to time consistent with her executive position. The Employee shall devote her best efforts and reasonable time and attention to the business and affairs of Mercantile and the Bank to the extent necessary to discharge her responsibilities hereunder. The Employee may (i) serve on corporate or charitable boards or committees, (ii) manage personal investments, 2 3 and (iii) engage in any activities engaged in by the Employee prior to the Acquisition, including but not limited to giving speeches, facilitating seminars and meetings and writing books and articles, so long as such activities do not interfere materially with performance of her responsibilities hereunder and are approved in advance by Mercantile, which approval shall not be unreasonably withheld. 3. Cash Compensation. ----------------- (a) Base Salary. The Company agrees to pay the Employee during the ----------- Employment Period an annual base salary (the "Annual Base Salary") of not less than TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000). The Annual Base Salary shall be paid no less frequently than monthly and shall be subject to customary tax withholding. (b) Annual Bonus. During the Employment Period, in addition to ------------ Annual Base Salary, the Employee shall be entitled to receive, (I) for each fiscal year of Mercantile during which the Employee is employed, an annual bonus (the "Annual Bonus") in an amount to be determined by Mercantile's board of directors, but in no event shall the amount of the Annual Bonus during the first fiscal year during which the Employee is employed (the "First Fiscal Year") be less than the product of (x) .30 and (y) the Annual Base Salary (the "Minimum Bonus") and (II) for that portion of any fiscal year of Mercantile other than the First Fiscal Year during which the Employee is employed for less than twelve full months, an amount equal to the product of (x) the Annual Bonus paid to the Employee during the Employment Period, and (y) a fraction the numerator of which is the number of days in such fiscal year during which the Employee is employed by Mercantile and the denominator of which is 365. Each such Annual Bonus shall be paid in cash in a manner and at a time in accordance with Mercantile's customary practices with respect to other peer employees of Mercantile. (c) Special Bonus. To induce the Employee to continue in the employ ------------- of the Company from and after the date hereof through and including the date immediately preceding the Effective Date, the Company agrees to pay to the Employee the sum of FIVE HUNDRED THOUSAND DOLLARS ($500,000) in cash on such date. (d) Expenses. The Employee shall be entitled to receive prompt -------- reimbursement for all reasonable expenses incurred by the Employee in performing services under this Agreement in accordance with the policies and procedures applicable to the executive officers of the Company and the Bank, provided that the Employee accounts for such expenses as required under ------------- such policies and procedures. 4. Benefit Plans. ------------- (a) Participation. The Employee shall be entitled to participate, ------------- to the same extent as senior officers of Mercantile generally, in all qualified and nonqualified plans of Mercantile relating to pension, retirement, thrift, profit-sharing, savings, group or other life insurance, hospitalization, medical and dental coverage, travel and accident insurance, education, cash bonuses, and other retirement or employee benefits or combinations thereof. In addition, the Employee shall be entitled to be considered for benefits under all of the stock and stock 3 4 option related plans in which senior officers of Mercantile are eligible or become eligible to participate. (b) Credit for Prior Service. Following the Acquisition, the ------------------------ Employee shall receive full credit for prior service with the Company and the Bank under Employee Benefit Plans of Mercantile, all as more fully set out in Section 5.08 of the Definitive Agreement, for purposes other than determining the amount of benefit accruals under any defined benefit plans of Mercantile. 5. Vacations; Leave. The Employee shall be entitled to annual paid ---------------- vacation in accordance with the policies established by the board of directors of the Company and the board of directors of the Bank for executive officers, and to voluntary leaves of absence, with or without pay, from time to time at such times and upon such conditions as the board of directors may determine in its discretion. 6. Termination of Employment. ------------------------- (a) Involuntary Termination. In the event of Involuntary Termination at any time following the Effective Date, the Company (or any of the Consolidated Subsidiaries on the Company's behalf) shall (i) pay to the Employee the aggregate of the following amounts: A. The sum of (1) the Employee's Annual Base Salary through the Date of Termination to the extent not theretofore paid ("Accrued Salary") and (2) the product of (x) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year of Mercantile consisting of less than twelve full months or during which the Employee was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any, or, in the event that a fiscal year of Mercantile has not been completed during the Employment Period as of the Date of Termination, the Minimum Bonus, and (y) a fraction, the numerator of which is the number of days in the current fiscal year of Mercantile through the Date of Termination, and the denominator of which is 365 (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"); and B. An amount equal to the sum of (x) the Employee's Annual Base Salary and (y) the Minimum Bonus, payable, in each case, in 24 equal semi- monthly installments (the "Termination Payment"); and (ii) Provide for the Employee for the twelve month period following the Date of Termination (the "Benefit Continuation Period"), Mercantile shall continue benefits to the Employee at least equal to those which would have been provided to her in accordance with the plans, programs, practices and policies described in Section 4(a) of this Agreement if the Employee's employment had not been terminated; provided, however, that if the Employee ----------------------- becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Employee for retiree benefits pursuant to such plans, practices, programs and 4 5 policies, the Employee shall be considered to have remained employed during the Benefit Continuation Period and to have retired on the last day of such period (the "Other Benefits"). (b) Termination for Cause. In the event of Termination for Cause, --------------------- the Company shall have no further obligation to the Employee under this Agreement after the Date of Termination. In the event of a simultaneous Termination for Cause and voluntary termination of employment or resignation by the Employee, the Employee shall be considered to have been Terminated for Cause. (c) Voluntary Termination. The Employee may terminate her --------------------- employment voluntarily at any time by a notice pursuant to Section 7 of this Agreement. In the event that the Employee voluntarily terminates her employment prior to the first anniversary of the Effective Date, Mercantile shall be obligated to the Employee for the amount of the Accrued Obligations through the Date of Termination, at the time such payments are due, and Mercantile shall have no further obligation to the Employee. In the event that the Employee voluntarily terminates her employment on or after the first anniversary of the Effective Date this Agreement shall terminate without further obligations to the Employee, other than for payment of Accrued Obligations, the Termination Payment and the timely payment or provision of Other Benefits, payable in 24 equal, semi-monthly installments. (d) Death. In the event of the death of the Employee while ----- employed under this Agreement and prior to any termination of employment, Mercantile shall pay to the Employee's estate, or such person as the Employee may have previously designated in writing, an amount of cash equal to (i) the product of THREE HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($325,000) multiplied by a fraction with a numerator equal to the number of days elapsed prior to the date of death during the calendar year in which death occurs and a denominator of 365, reduced by (ii) the amount of Annual Base Salary and cash bonus paid to the Employee during such year prior to the date of death. 7. Notice of Termination. In the event that Mercantile desires to --------------------- terminate the employment of the Employee during the term of this Agreement, Mercantile shall deliver to the Employee a written notice of termination, stating whether such termination constitutes Termination for Cause or Involuntary Termination, setting forth in reasonable detail the facts and circumstances that are the basis for the termination, and specifying the date upon which employment shall terminate, which date shall be at least 30 days after the date upon which the notice is delivered, except in the case of Termination for Cause. In the event that the Employee determines in good faith that she has experienced an Involuntary Termination of her employment, she shall send a written notice to Mercantile stating the circumstances that constitute such Involuntary Termination and the date upon which her employment shall have ceased due to such Involuntary Termination. In the event that the Employee desires to effect a Voluntary Termination, she shall deliver a written notice to Mercantile, stating the date upon which employment shall terminate, which date shall be at least 30 days after the date upon which the notice is delivered, unless the parties agree to a date sooner. 8. Attorneys Fees. From and after the Effective Date during the -------------- Employment Period, Mercantile shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) when and as incurred by the Employee as a result of (i) the Employee's contesting 5 6 or disputing any termination of employment, or (ii) the Employee's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained by the Company (or its successors) or the Consolidated Subsidiaries under which the Employee is or may be entitled to receive benefits; provided that Mercantile's obligation to pay such fees ------------- and expenses is subject to the Employee's prevailing with respect to the matters in dispute in any action initiated by the Employee or the Employee's having been determined to have acted reasonably and in good faith with respect to any action initiated by Mercantile. 9. No Assignments; Mercantile as Successor. --------------------------------------- (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that Mercantile shall require any successor or assignee (whether direct or indirect, by purchase, merger, consolidation or otherwise) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Mercantile would have been required to perform it if no such succession or assignment had taken place. Failure of Mercantile to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Employee to compensation and benefits from Mercantile in the same amount and on the same terms as the compensation pursuant to Section 6 hereof. For purposes of implementing the provisions of this Section 9(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. (c) Upon the consummation of the Acquisition, for all purposes under this Agreement, the Company shall be deemed to be Mercantile and the Consolidated Subsidiaries shall be those of Mercantile. 10. Certain Reduction of Payments by Mercantile. ------------------------------------------- (a) For purposes of this Section 10, (i) a "Payment" shall mean any payment or distribution in the nature of compensation to or for the benefit of the Employee, whether paid or payable pursuant to this Agreement or otherwise; (ii) "Separation Payment" shall mean a Payment paid or payable pursuant to this Agreement (disregarding this Section); (iii) "Net After Tax Receipt" shall mean the Present Value of a Payment net of all taxes imposed on the Employee with respect thereto under Sections 1 and 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), determined by applying the highest marginal rate under Section 1 of the Code which applied to the Employee's taxable income for the immediately preceding taxable year; (iv) "Present Value" shall mean such value determined in accordance with Section 280G(d)(4) of the Code; and (v) "Reduced Amount" shall mean the greatest aggregate amount of Separation Payments which (a) is less than the sum of all Separation Payments and (b) results in aggregate Net After Tax Receipts which are equal to or greater than the Net After Tax Receipts which would result if the Employee were paid the sum of all Separation Payments. 6 7 (b) Anything in this Agreement to the contrary notwithstanding, in the event KPMG Peat Marwick LLP or such other nationally recognized certified public accounting firm designated by the Employee (the "Accounting Firm") shall determine that receipt of all Payments would subject the Employee to tax under Section 4999 of the Code, it shall determine whether some amount of Separation Payments would meet the definition of a "Reduced Amount." If the Accounting Firm determines that there is a Reduced Amount, the aggregate Separation Payments shall be reduced to such Reduced Amount. All fees payable to the Accounting Firm shall be paid solely by Mercantile. (c) If the Accounting Firm determines that aggregate Separation Payments should be reduced to the Reduced Amount, Mercantile shall promptly give the Employee notice to that effect and a copy of the detailed calculation thereof, and the Employee may then elect, in her sole discretion, which and how much of the Separation Payments shall be eliminated or reduced (as long as after election the present value of the aggregate Separation Payments equals the Reduced Amount), and shall advise Mercantile in writing of her election within ten days of her receipt of notice. If no such election is made by the Employee within such ten-day period, Mercantile may elect which of such Separation Payments shall be eliminated or reduced (as long as after such election the present value of the aggregate Separation Payments equals the Reduced Amount) and shall notify the Employee promptly as such election. All determinations made by the Accounting Firm under this Section shall be binding upon Mercantile and the Employee and shall be made within 60 days of a termination of employment of the Employee. As promptly as practicable following such determination, Mercantile shall pay to or distribute for the benefit of the Employee such Separation Payments as are then due to the Employee under this Agreement and shall promptly pay to or distribute for the benefit of the Employee in the future such Separation Payments as become due to the Employee under this Agreement. (d) While it is the intention of Mercantile to reduce the amounts payable or distributable to the Employee hereunder only if the aggregate Net After Tax Receipts to an Employee would thereby be increased, as a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that amounts will have been paid or distributed by Mercantile to or for the benefit of the Employee pursuant to this Agreement which should not have been so paid or distributed ("Overpayment") or that additional amounts which will have not been paid or distributed by Mercantile to or for the benefit of the Employee pursuant to this Agreement could have been so paid or distributed ("Underpayment"), in each case consistent with the calculation of the Reduced Amount hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against Mercantile or the Employee which deficiency the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by Mercantile to or for the benefit of the Employee shall be treated for all purposes as a loan to the Employee which the Employee shall repay to Mercantile together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to Mercantile if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment 7 8 shall be promptly paid by Mercantile to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 11. Confidential Information. The Employee shall hold in a fiduciary ------------------------ capacity for the benefit of Mercantile and Bank all secret or confidential information, knowledge or data relating to Mercantile or Bank or any of their affiliated companies, and their respective businesses, which shall have been obtained by the Employee during the Employee's employment by Mercantile or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Employee or representatives of the Employee in violation of this Agreement). After termination of the Employee's employment, the Employee shall not, without the prior written consent of Mercantile or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than Mercantile and those designated by it. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Employee under this Agreement. Confidential Information shall not include information, knowledge or data which (i) is in the Employee's possession at the date of this Agreement which she has no reason to believe is subject to any confidentiality agreement or other obligation of confidentiality to Mercantile or another party, (ii) is or becomes generally available to the public other than as a result of unauthorized disclosure by Mercantile or a Consolidated Subsidiary thereof, or representative of either, (iii) is or becomes available to Mercantile from a source other than Mercantile, provided that the Employee does not know or ------------- have reason to believe that such source is bound by a confidentiality agreement or other obligation of confidentiality to Mercantile, (iv) is dependently developed by the Employee without reference to any information obtained from Mercantile, or (v) is required to disclose by law. 12. Covenant Not To Engage in Competitive or Other Detrimental Activities. --------------------------------------------------------------------- (a) The Employee covenants that from and after the Effective Date she will not compete with Mercantile, Bank and/or their affiliates and further covenants that she will not take any action which is detrimental to Mercantile, Bank and/or their affiliated companies (i) during the Employment Period, and (ii) if the Employee's employment terminates for any reason (other than the Employee's death) or no reason during the Employment Period, for a period of one year beginning on the Date of Termination. (b) For purposes of paragraph (a) of this Section 12, the Employee shall be deemed to be competing with Mercantile, Bank and/or their affiliated companies at any time if the Employee accepts employment with, or serves as an agent, employee, or director of, or a consultant to, a competitor of Mercantile, Bank and/or their affiliated companies, or during such time the Employee acquires or has an interest (direct or indirect) in any firm, corporation or enterprise engaged in a business which is in competition with Mercantile, Bank and/or their affiliated companies, or at any time, either during employment or thereafter, the Employee divulges any information concerning Mercantile, Bank and/or their affiliated companies which is or could be of aid to any such competitor. The mere ownership of a less than a 3% debt and/or equity interest in a competing company whose stock is publicly held shall not be considered as having the prohibited interest in a competitor, and neither shall the mere ownership of a less than a 10% debt and/or equity interest in a competing company whose stock is not publicly held. For purposes of this Agreement, any commercial bank, savings and loan 8 9 association, securities broker or dealer, or other business or financial institution that is principally engaged in the business of offering any service at the time offered by Mercantile, Bank and/or their affiliated companies, and which conducts business in any locations encompassed within the areas circumscribed by circles, of which the radii are 50 miles and the mid-points are the geographic centers of any community in which Mercantile and/or its affiliated companies conduct business operations shall be deemed to be a competitor. (c) Should Mercantile reasonably and in good faith believe that the Employee has violated any of the foregoing provisions, it shall give the Employee written notice to such effect, stating the reasons(s) for its belief, and pending a final determination as to whether there has been a violation may, without penalty or risk of claim for actual or punitive damages, suspend payment of any further amount which might otherwise become payable hereunder after thirty (30) days of giving such notice. Mercantile shall, in an expeditious manner, determine from all information available to it whether the Employee violated any of the foregoing covenants, and if Mercantile in good faith concludes that the Employee has violated this Agreement, the Employee shall not be entitled to any further payment hereunder. (d) The Employee represents, acknowledges and agrees (i) that her experience and capabilities are such that she can obtain employment in activities which do not violate such agreement and that the enforcement by way of injunction of the agreement not to compete will not prevent the Employee from earning a livelihood, (ii) that Mercantile and Bank do not have an adequate remedy at law for a breach or threatened breach by the Employee of the covenants in this Section and may obtain injunctive and other equitable relief, in addition to receiving its actual damages and any other remedies that may be available to it hereunder or at law or by statute, (iii) that the covenants herein contained are reasonable and necessary for the proper protection of Mercantile, and (iv) that if any provision or part of any such covenant is invalidated, the remainder shall nevertheless continue to be valid and fully enforceable, and if a court determines that the term of the covenant is too long or the area covered thereby too great, so that the covenant as written is unenforceable, the covenant shall be modified to encompass the longest duration and largest geographic area that the court deems enforceable under the law. 13. Notice. For the purposes of this Agreement, notices and all other ------ communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to the Company and/or Mercantile at its home office, to the attention of the board of directors with a copy to the Secretary of the Company and/or Mercantile, or, if to the Employee, to such home or other address as the Employee has most recently provided in writing to the Company. 14. Amendments. No amendments or additions to this Agreement shall ---------- be binding unless in writing and signed by both parties, except as herein otherwise provided. 15. Headings. The headings used in this Agreement are included solely -------- for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 9 10 16. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 17. Governing Law. This Agreement shall be governed by the laws of the ------------- State of Missouri. 18. Arbitration. Any dispute or controversy arising under or in ----------- connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. Attest: Roosevelt Financial Group, Inc. /s/ /s/ - ----------------------------- ------------------------------- Secretary By: Its: Attest: Mercantile Bancorporation, Inc. /s/ /s/ - ----------------------------- ------------------------------- Secretary By: Its: Employee /s/ Anat Bird ------------------------------- Anat Bird 10 EX-10.3 4 EMPLOYMENT AGREEMENT OF GARY W. DOUGLASS 1 TRANSITION EMPLOYMENT AGREEMENT ------------------------------- THIS TRANSITION EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of this 22 day of December, 1996, by and between Roosevelt Financial -- -------- Group, Inc. (the "Company"), Mercantile Bancorporation, Inc. ("Mercantile") and Gary W. Douglass (the "Employee"). WHEREAS, the Company has entered into an Agreement and Plan of Reorganization of even date herewith (the "Definitive Agreement") with Mercantile, pursuant to which Mercantile will acquire (the "Acquisition") the Company and its wholly-owned subsidiary, Roosevelt Bank (the "Bank"): WHEREAS, it is essential for the integration of the Bank's operations into Mercantile's banking operations that the Employee continue to serve during a transition period to perform such executive duties as are necessary to ensure a successful integration; and WHEREAS, recognizing that it is not anticipated that the Employee will have long-term opportunities with the Bank following the Acquisition, and that during such transition period, the Employee is likely to serve in a different capacity than prior to the Acquisition, it is necessary and appropriate to provide an incentive to the Employee to provide services during such transition period. WHEREAS, the Employee is willing to enter into this Agreement and to provide services during such transition period, and WHEREAS, the board of directors of the Company and the Executive Committee of the board of directors of Mercantile has approved and authorized the execution of this Agreement with the Employee; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows: 1. Definitions. ----------- (a) The term "Consolidated Subsidiaries" means any subsidiary or subsidiaries of the Company (or its successors) that are part of the consolidated group of the Company (or its successors) for federal income tax reporting. (b) The term "Date of Termination" means the date upon which the Employee's employment with the Bank ceases, as specified in a notice of termination pursuant to Section 7 of this Agreement. (c) The term "Effective Date" means the effective date of the Acquisition as provided in the Definitive Agreement. (d) The term "Involuntary Termination" means the termination of the employment of Employee (i) by the Bank without his express written consent; or (ii) by the Employee by 2 reason of any of the following actions unless consented to in writing by the Employee: (1) a requirement that the Employee be based at any place other than Chesterfield, Missouri, or within 50 miles thereof, except for reasonable travel on Company or Bank business; (2) a reduction in the Employee's salary or a material adverse change in the Employee's perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Bank or the Company; or (3) a requirement that the Employee provide services of a nature that is not consistent with the level of executive responsibilities carried out by the Employee prior to the Acquisition, provided -------- that, following the Acquisition, changes to the Employee's title and lines of - ---- responsibility shall not constitute "Involuntary Termination" so long as the Employee retains a rank and a level of executive duties and functions similar to those he held prior to the Acquisition. The term "Involuntary Termination" does not include Termination for Cause or termination of employment due to death or permanent disability, or suspension or temporary or permanent prohibition from participation in the conduct of the affairs of a depository institution under Section 8 of the Federal Deposit Insurance Act. (e) The terms "Termination for Cause" and "Terminated For Cause" mean termination of the employment of the Employee with the Bank because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform material stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or (except as provided below) material breach of any provision of this Agreement. No act or failure to act by the Employee shall be considered willful unless the Employee acted or failed to act with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Company. 2. Employment. ---------- (a) Mercantile agrees to continue the Employee in its employ, and the Employee hereby agrees to remain in the employ of Mercantile subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the second anniversary of such date (the "Employment Period") (b) The Employee is, and, during the Employment Period, shall be employed as chief financial officer of the Bank pending integration of Bank with and into banking and/or other subsidiaries of Mercantile and thereafter in another senior management position within Mercantile. As such, the Employee shall render administrative and management services as are customarily performed by persons situated in similar executive capacities, and/or other services relating to the integration of the Bank's operations into Mercantile's banking operations as superior officers or the Board of Directors or the board of directors of the Bank may prescribe from time to time, provided that such other ------------- services shall be of an executive level consistent with the Employee's executive responsibilities prior to the Acquisitions. The Employee shall also render services to any subsidiary or subsidiaries of Mercantile or the Bank as requested by Mercantile or the Bank from time to time consistent with his executive position. The Employee shall devote his best efforts and reasonable time and attention to the business and affairs of Mercantile and the Bank to the extent necessary to discharge his responsibilities hereunder. The Employee may (i) serve on corporate or charitable boards or committees, and (ii) manage 2 3 personal investments, so long as such activities do not interfere materially with performance of his responsibilities hereunder. 3. Cash Compensation. ----------------- (a) Base Salary. The Company agrees to pay the Employee during the ---------- Employment Period an annual base salary (the "Annual Base Salary") of not less than TWO HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($225,000). The Annual Base Salary shall be paid no less frequently than monthly and shall be subject to customary tax withholding. (b) Annual Bonus. During the Employment Period, in addition to Annual ------------ Base Salary, the Employee will be eligible to receive, (I) for each fiscal year of Mercantile during which the Employee is employed, an annual bonus (the "Annual Bonus") in an amount to be determined by Mercantile's board of directors, but in no event shall the amount of the Annual Bonus during the first fiscal year during which the Employee is employed (the "First Fiscal Year") be less than the product of (x) .30 and (y) the Annual Base Salary (the "Minimum Bonus") and (II) for that portion of any fiscal year of Mercantile other than the First Fiscal Year during which the Employee is employed for less than twelve full months, an amount equal to the product of (x) the Annual Bonus paid to the Employee during the Employment Period, and (y) a fraction, the numerator of which is the number of days in such fiscal year during which the Employee is employed by Mercantile, and the denominator of which is 365. Each such Annual Bonus shall be paid in cash in a manner and at a time in accordance with Mercantile's customary practices with respect ot other peer Employees of Mercantile. (c) Special Bonus. To induce the Employee to continue in the employ ------------- of the Company from and after the date hereof through and including the date immediately preceding the Effective Date, the Company agrees to pay to the Employee the sum of $225,000 in cash on such date. (d) Expenses. The Employee shall be entitled to receive prompt -------- reimbursement for all reasonable expenses incurred by the Employee in performing services under this Agreement in accordance with the policies and procedures applicable to the senior officers of Mercantile, provided that the Employee ------------- accounts for such expenses as required under such policies and procedures. 4. Benefit Plans. ------------- (a) Participation. The Employee shall be entitled to participate, ------------- to the same extent as senior officers of Mercantile generally, in all qualified and nonqualified plans of Mercantile relating to pension, retirement, thrift, profit-sharing, savings, group or other life insurance, hospitalization, medical and dental coverage, travel and accident insurance, education, cash bonuses, and other retirement or employee benefits or combinations thereof. In addition, the Employee shall be entitled to be considered for benefits under all of the stock and stock option related plans in which senior officers of Mercantile are eligible or become eligible to participate. (b) Credit for Prior Service. Following the Acquisition, the Employee ------------------------ shall receive full credit for prior service with the Company and the Bank under Employee benefit 3 4 plans of Mercantile, all as more fully set out in Section 5.08 of the Definitive Agreement for all purposes other than determining the amount of benefit accruals under any defined benefit plan of Mercantile. 5. Vacations: Leave. The Employee shall be entitled to annual paid vacation ---------------- in accordance with the policies established by the board of directors of the Company and the board of directors of the Bank for executive officers, and to voluntary leaves of absence, with or without pay, from time to time at such times and upon such conditions as the Board of Directors may determine in its discretion. 6. Termination of Employment. ------------------------- (a) Involuntary Termination. In the event of Involuntary Termination ----------------------- at any time following the Effective Date, the Company (or any of the Consolidated Subsidiaries on the Company's behalf) shall (i) pay to the Employee the aggregate of the following amounts: A. The sum of (1) the Employee's Annual Base Salary through the Date of Termination to the extent not theretofore paid ("Accrued Salary") and (2) the product of (x) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year of Mercantile consisting of less than twelve full months or during which the Employee was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any, or, in the event that a fiscal year of Mercantile has not been completed during the Employment Period as of the Date of Termination, the Minimum Bonus, and (y) a fraction, the numerator of which is the number of days in the current fiscal year of Mercantile through the Date of Termination, and the denominator of which is 365 (the sum of the amounts described in clauses (1) and (2) shall be hereinafter referred to as the "Accrued Obligations"); and B. An amount equal to the sum of (x) the Employee's Annual Base Salary and (y) the Annual Bonus paid or payable for the most recently completed fiscal year of Mercantile during the Employment Period (but not less than the Minimum Bonus), or, in the event that a fiscal year has not been completed during the Employment Period as of the Date of Termination, the Minimum Bonus, payable in 24 equal semi-monthly installments (the "Termination Payment"); and (ii) For the twelve month period following the Date of Termination (the "Benefit Continuation Period"), Mercantile shall continue benefits to the Employee at least equal to those which would have been provided to him in accordance with the plans, programs, practices and policies described in Section 4(a) of this Agreement if the Employee's employment had not been terminated; provided, however, that if the Employee becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Employee for retiree benefits pursuant to such plans, practices, programs and policies, the Employee shall be considered to have remained employed during the Benefit Continuation Period and to have retired on the last day of such period (the "Other Benefits"). 4 5 (b) Termination for Cause. In the event of Termination for Cause, the --------------------- Company shall have no further obligation to the Employee under this Agreement after the Date of Termination. In the event of a simultaneous Termination for Cause and voluntary termination of employment or resignation by the Employee, the Employee shall be considered to have been Terminated for Cause. (c) Voluntary Termination. The Employee may terminate his employment --------------------- voluntarily at any time by a notice pursuant to Section 7 of this Agreement. In the Event that the Employee voluntarily terminates his employment prior to the first anniversary of the Effective Date, Mercantile shall be obligated to the Employee for the amount of the Accrued Obligations through the date of termination, at the time such payments are due, and Mercantile shall have no further obligation to the Employee. In the event that the Employee voluntarily terminates his employment on or after the first anniversary of the Effective Date, this Agreement shall terminate without further obligations to the Employee, other than payment of Accrued Obligations, the Termination Payment and the timely payment or provision of Other Benefits, payable in 24 equal, semi- monthly installments. (d) Death. In the event of the death of the Employee while employed ----- under this Agreement and prior to any termination of employment, Mercantile shall pay to the Employee's estate, or such person as the Employee may have previously designated in writing, an amount of cash equal to (i) the product of TWO HUNDRED NINETY-TWO THOUSAND FIVE HUNDRED DOLLARS ($292,500) multiplied by a fraction with a numerator equal to the number of days elapsed prior to the date of death during the calendar year in which death occurs and a denominator of 365, reduced by (ii) the amount of Annual Base Salary and cash bonus paid to the Employee during such year prior to the date of death. 7. Notice of Termination. In the event that Mercantile desires to terminate --------------------- the employment of the Employee during the term of this Agreement, Mercantile shall deliver to the Employee a written notice of termination, stating whether such termination constitutes Termination for Cause or Involuntary Termination, setting forth in reasonable detail the facts and circumstances that are the basis for the termination, and specifying the date upon which employment shall terminate, which date shall be at least 30 days after the date upon which the notice is delivered, except in the case of Termination for Cause. In the event that the Employee determines in good faith that he has experienced an Involuntary Termination of his employment, he shall send a written notice to Mercantile stating the circumstances that constitute such Involuntary Termination and the date upon which his employment shall have ceased due to such Involuntary Termination. In the event that the Employee desires to effect a Voluntary Termination, he shall deliver a written notice to Mercantile, stating the date upon which employment shall terminate, which date shall be at least 30 days after the date upon which the notice is delivered, unless the parties agree to a date sooner. 8. Attorneys Fees. From and after the Effective Date during the Employment -------------- Period, Mercantile shall pay all legal fees and related expenses (including the costs of experts, evidence and counsel) when and as incurred by the Employee as a result of (i) the Employee's contesting or disputing any termination of employment, or (ii) the Employee's seeking to obtain or enforce any right or benefit provided by this Agreement or by any other plan or arrangement maintained 5 6 by the Company (or its successors) or the Consolidated Subsidiaries under which the Employee is or may be entitled to receive benefits; provided that ------------- Mercantile's obligation to pay such fees and expenses is subject to the Employee's prevailing with respect to the matters in dispute in any action initiated by the Employee or the Employee's having been determined to have acted reasonably and in good faith with respect to any action initiated by Mercantile. 9. No Assignments; Mercantile as Successor. --------------------------------------- (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that Mercantile shall require any successor or assignee (whether direct or indirect, by purchase, merger, consolidation or otherwise) to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Mercantile would have been required to perform it if no such succession or assignment had taken place. Failure of Mercantile to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of the Agreement and shall entitle the Employee to compensation and benefits from Mercantile in the same amount and on the same terms as the compensation pursuant to Section 6 hereof. For purposes of implementing the provisions of this Section 9(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Employee hereunder shall inure to the benefit of and be enforceable by the Employee's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. (c) Upon the consummation of the Acquisition, for all purposes under this Agreement, the Company shall be deemed to be Mercantile and the Consolidated Subsidiaries shall be those of Mercantile. 10. Certain Reduction of Payments by Mercantile. ------------------------------------------- (a) For purposes of this Section 10, (i) a "Payment" shall mean any payment or distribution in the nature of compensation to or for the benefit of the Employee, whether paid or payable pursuant to this Agreement or otherwise; (ii) "Separation Payment" shall mean a Payment paid or payable pursuant to this Agreement (disregarding this Section); (iii) "Net After Tax Receipt" shall mean the Present Value of a Payment net of all taxes imposed on the Employee with respect thereto under Sections 1 and 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), determined by applying the highest marginal rate under Section 1 of the Code which applied to the Employee's taxable income for the immediately preceding taxable year; (iv) "Present Value" shall mean such value determined in accordance with Section 280G(d)(4) of the Code; and (v) "Reduced Amount" shall mean the greatest aggregate amount of Separation Payments which (a) is less than the sum of all Separation Payments and (b) results in aggregate Net After Tax Receipts which are equal to or greater than the Net After Tax Receipts which would result if the Employee were paid the sum of all Separation Payments. (b) Anything in this Agreement to the contrary notwithstanding, in the event KPMG Peat Marwick LLP or such other nationally recognized certified public accounting firm 6 7 designated by the Employee (the "Accounting Firm") shall determine that receipt of all Payments would subject the Employee to tax under Section 4999 of the Code, it shall determine whether some amount of Separation Payments would meet the definition of a "Reduced Amount." If the Accounting Firm determines that there is a Reduced Amount, the aggregate Separation Payments shall be reduced to such Reduced Amount. All fees payable to the Accounting Firm shall be paid solely by Mercantile. (c) If the Accounting Firm determines that aggregate Separation Payments should be reduced to the Reduced Amount, Mercantile shall promptly give the Employee notice to that effect and a copy of the detailed calculation thereof, and the Employee may then elect, in his sole discretion, which and how much of the Separation Payments shall be eliminated or reduced (as long as after election the present value of the aggregate Separation Payments equals the Reduced Amount), and shall advise Mercantile in writing of his election within ten days of his receipt of notice. If no such election is made by the Employee within such ten-day period, Mercantile may elect which of such Separation Payments shall be eliminated or reduced (as long as after such election the present value of the aggregate Separation Payments equals the Reduced Amount) and shall notify the Employee promptly as such election. All determinations made by the Accounting Firm under this Section shall be binding upon Mercantile and the Employee and shall be made within 60 days of a termination of employment of the Employee. As promptly as practicable following such determination, Mercantile shall pay to or distribute for the benefit of the Employee such Separation Payments as are then due to the Employee under this Agreement and shall promptly pay to or distribute for the benefit of the Employee in the future such Separation Payments as become due to the Employee under this Agreement. (d) While it is the intention of Mercantile to reduce the amounts payable or distributable to the Employee hereunder only if the aggregate Net After Tax Receipts to an Employee would thereby be increased, as a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that amounts will have been paid or distributed by Mercantile to or for the benefit of the Employee pursuant to this Agreement which should not have been so paid or distributed ("Overpayment") or that additional amounts which will have not been paid or distributed by Mercantile to or for the benefit of the Employee pursuant to this Agreement could have been so paid or distributed ("Underpayment"), in each case consistent with the calculation of the Reduced Amount hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against Mercantile or the Employee which deficiency the Accounting Firm believes has a high probability of success, determines that an Overpayment has been made, any such Overpayment paid or distributed by Mercantile to or for the benefit of the Employee shall be treated for all purposes as a loan to the Employee which the Employee shall repay to Mercantile together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have been made and no amount shall be payable by the Employee to Mercantile if and to the extent such deemed loan and payment would not either reduce the amount on which the Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by Mercantile to or for the benefit of the Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. 7 8 11. Confidential Information. The Employee shall hold in a fiduciary ------------------------ capacity for the benefit of Mercantile and Bank all secret or confidential information, knowledge or data relating to Mercantile or Bank or any of their affiliated companies, and their respective businesses, which shall have been obtained by the Employee during the Employee's employment by Mercantile or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Employee or representatives of the Employee in violation of this Agreement). After termination of the Employee's employment, the Employee shall not, without the prior written consent of Mercantile or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than Mercantile and those designated by it. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Employee under this Agreement. Confidential Information shall not include information, knowledge or data which (i) is in the Employee's possession at the date of this Agreement which she has no reason to believe is subject to any confidentiality agreement or other obligation of confidentiality to Mercantile or another party, (ii) is or becomes generally available to the public other than as a result of unauthorized disclosure by Mercantile or a Consolidated Subsidiary thereof, or representative of either, (iii) is or becomes available to Mercantile from a source other than Mercantile, provided that the Employee does not know or have reason to believe that such - ------------- source is bound by a confidentiality agreement or other obligation of confidentiality to Mercantile, (iv) is independently developed by the Employee without reference to any information obtained from Mercantile, or (v) is required to disclosed by law. 12. Covenant Not To Engage in Competitive or Other Detrimental Activities. --------------------------------------------------------------------- (a) The Employee covenants that from and after the Effective Date he will not compete with Mercantile, Bank and/or their affiliates and further covenants that he will not take any action which is detrimental to Mercantile, Bank and/or their affiliated companies (i) during the Employment Period, and (ii) if the Employee's employment terminates for any reason (other than the Employee's death) or no reason during the Employment Period, for a period of one year beginning on the Date of Termination. (b) For purposes of paragraph (a) of this Section 10, the Employee shall be deemed to be competing with Mercantile, Bank and/or their affiliated companies at any time if the Employee accepts employment with, or serves as an agent, employee, or director of, or a consultant to, a competitor of Mercantile, Bank and/or their affiliated companies, or during such time the Employee acquires or has an interest (direct or indirect) in any firm, corporation or enterprise engaged in a business which is in competition with Mercantile, Bank and/or their affiliated companies, or at any time, either during employment or thereafter, the Employee divulges any information concerning Mercantile, Bank and/or their affiliated companies which is or could be of aid to any such competitor. The mere ownership of a less than a 3% debt and/or equity interest in a competing company whose stock is publicly held shall not be considered as having the prohibited interest in a competitor, and neither shall the mere ownership of a less than a 10% debt and/or equity interest in a competing company whose stock is not publicly held. For purposes of this Agreement, any commercial bank, savings and loan association, securities broker or dealer, or other business or financial institution that is principally engaged in the business of offering any service at the time offered by Mercantile, Bank and/or their affiliated companies, and which conducts business in any locations 8 9 encompassed within the areas circumscribed by circles, of which the radii are 50 miles and the mid-points are the geographic centers of any community in which Mercantile and/or its affiliated companies conduct business operations shall be deemed to be a competitor. (c) Should Mercantile reasonably and in good faith believe that the Employee has violated any of the foregoing provisions, it shall give the Employee written notice to such effect, stating the reason(s) for its belief, and pending a final determination as to whether there has been a violation may, without penalty or risk of claim for actual or punitive damages, suspend payment of any further amount which might otherwise become payable hereunder after thirty (30) days of giving such notice. Mercantile shall, in an expeditious manner, determine from all information available to it whether the Employee violated any of the foregoing covenants, and if Mercantile in good faith concludes that the Employee has violated this Agreement, the Employee shall not be entitled to any further payment hereunder. (d) The Employee represents, acknowledges and agrees (i) that his experience and capabilities are such that he can obtain employment in activities which do not violate such agreement and that the enforcement by way of injunction of the agreement not to compete will not prevent the Employee from earning a livelihood, (ii) that Mercantile and Bank do not have an adequate remedy at law for a breach or threatened breach by the Employee of the covenants in this Section and may obtain injunctive and other equitable relief, in addition to receiving its actual damages and any other remedies that may be available to it hereunder or at law or by statute, (iii) that the covenants herein contained are reasonable and necessary for the proper protection of mercantile, and (iv) that if any provision or part of any such covenant is invalidated, the remainder shall nevertheless continue to be valid and fully enforceable, and if a court determines that the term of the covenant is too long or the area covered thereby too great, so that the covenant as written is unenforceable, the covenant shall be modified to encompass the longest duration and largest geographic area that the court deems enforceable under the law. 13. Notice. For the purposes of this Agreement, notices and all other ------ communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, to the Company and/or Mercantile at its home office, to the attention of the Board of Directors with a copy to the Secretary of the Company and/Mercantile, or, if to the Employee, to such home or other address as the Employee has most recently provided in writing to the Company or Mercantile. 14. Amendments. No amendments or additions to this Agreement shall be ---------- binding unless in writing and signed by both parties, except as herein otherwise provided. 15. Headings. The headings used in this Agreement are included solely for -------- convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 16. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 9 10 17. Governing Law. This Agreement shall be governed by the laws of the ------------- State of Missouri. 18. Arbitration. Any dispute or controversy arising under or in ----------- connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. Attest: Roosevelt Financial Group, Inc. /s/ - --------------------------------- -------------------------------- Secretary By: Its: Attest: Mercantile Bancorporation, Inc. /s/ /s/ - ---------------------------------- -------------------------------- Secretary By: Its: Employee /s/ Gary W. Douglass -------------------------------- Gary W. Douglass 10 EX-11 5 COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11 ROOSEVELT FINANCIAL GROUP, INC. COMPUTATION OF PER SHARE EARNINGS (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
For the years ended ---------------------------------------------- 1996 1995 1994 ---------- ---------- ---------- COMPUTATION OF PRIMARY EARNINGS PER SHARE: Weighted average number of common shares outstanding 42,391,515 40,312,001 37,547,154 Add common stock equivalents for shares issuable under stock option plan 207,336 308,931 397,779 ---------- ---------- ---------- Weighted average number of shares outstanding adjusted for common stock equivalents 42,698,851 40,620,932 37,943,933 ========== ========== ========== Net income $ 9,662 $ 27,098 $ 41,727 Subtract dividends on convertible preferred stock ( 4,210) ( 4,243) ( 5,184) ------- ------- ------- Net income attributable to common stock $ 5,452 $ 22,855 $ 36,543 ======= ======= ======= Primary earnings per share $0.13 $0.56 $0.96 ===== ===== ===== COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE: Weighted average number of common shares outstanding 42,391,515 40,312,001 38,590,969 Add common stock equivalents for shares issuable under stock option plan 340,277 316,696 414,391 Add assumed conversion of convertible preferred stock into common stock 4,866,492 4,878,750 4,946,250 Subtract assumed conversion of convertible preferred stock if effect of assumed conversion is anti-dilutive (4,866,492) (4,878,750) (4,946,250) ---------- ---------- ---------- Weighted average number of shares outstanding adjusted for common stock equivalents 42,731,792 40,628,697 39,005,360 ========== ========== ========== Net income $ 9,662 $ 27,098 $ 41,727 Subtract dividends on convertible preferred stock if effect of assumed conversion is anti-dilutive (4,210) (4,243) (5,184) ------- ------- ------- Adjusted net income $ 5,452 $ 22,855 $ 36,543 ======= ======= ======= Fully diluted earnings per share $0.13 $0.56 $0.94 ===== ===== ===== Additional shares issuable were derived under the "treasury stock method" using average market price during the period. Additional shares issuable were derived under the "treasury stock method" using the higher of the average market price during the period or the market price at the end of the period.
EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Parent Subsidiary Ownership Organization - ---------------------------------- ------------------------------------ --------- ------------ Roosevelt Financial Group, Inc. Roosevelt Bank 100% Federal Roosevelt Financial Group, Inc. F & H Realty 100% Missouri Roosevelt Financial Group, Inc. Missouri State Bank 100% Missouri Roosevelt Bank RTRAC Leasing, Inc. 100% Missouri Roosevelt Bank Caltrop Corporation 100% Missouri Roosevelt Bank WFS Corporation 100% Missouri Roosevelt Bank Kaysal, Inc. 100% Missouri Roosevelt Bank Sentinel Insurance Agency, Inc. 100% Missouri Roosevelt Bank Claywood Financial 100% Missouri Caltrop Corporation Fortune Homes, Inc. 100% Missouri Caltrop Corporation Consolidated Insurance Services, Inc. 100% Delaware Caltrop Corporation Lakewood Oaks Golf Club, Ltd. 100% Missouri Missouri State Bank Roosevelt Financial Services, Inc. 100% Missouri Roosevelt Financial Services, Inc. Roosevelt Investment Services, Inc. 100% Missouri
EX-23 7 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 3, 1997 EX-27 8 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 26,299 22,343 0 0 3,157,757 0 0 4,321,188 22,719 7,796,412 5,347,071 1,116,851 111,063 724,000 0 64,441 238,297 198,689 7,796,412 303,304 335,199 1,808 640,311 249,820 462,724 177,587 1,262 0 123,409 16,949 11,114 (1,452) 0 9,662 0.13 0.13 2.02 12,224 10,126 53 0 21,855 (2,173) 533 22,719 0 0 18,987
-----END PRIVACY-ENHANCED MESSAGE-----