U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
Commission file number: 0-14507
HOMELAND BANKSHARES CORPORATION
Incorporated in Iowa I.R.S. Employer Identification
No. 42-1168487
229 EAST PARK AVENUE, WATERLOO, IOWA 50704-5300
TELEPHONE NUMBER: (319) 291-5260
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of November 4, 1996:
5,703,378 SHARES COMMON STOCK, $12.50 PAR VALUE
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS.
- ------------------------------
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, December 31,
(Dollars in thousands, except per share data) 1996 1995
- ---------------------------------------------------------------------
ASSETS
Cash and due from banks $ 55,547 $ 46,072
Federal funds sold 17,400 73,850
- ---------------------------------------------------------------------
Total cash and cash equivalents 72,947 119,922
Securities available for sale (amortized
cost $190,889 in 1996 and $216,565
in 1995) 190,759 217,556
Loans
Commercial, financial, and agricultural 179,341 178,662
Commercial real estate 247,724 213,957
Consumer real estate 330,520 318,461
Consumer 137,580 133,709
- ---------------------------------------------------------------------
Total loans 895,165 844,789
Allowance for loan losses (9,278) (8,603)
- ---------------------------------------------------------------------
Net loans 885,887 836,186
Premises and equipment 24,506 24,609
Intangible assets 17,102 18,471
Other assets 15,742 16,163
- ---------------------------------------------------------------------
Total assets $1,206,943 $1,232,907
=====================================================================
LIABILITIES
Deposits
Noninterest bearing demand $ 121,109 $ 123,902
Interest bearing demand 103,320 106,447
Money market 166,850 174,000
Savings 62,549 68,477
Time 484,158 489,893
- ---------------------------------------------------------------------
Total deposits 937,986 962,719
Federal funds purchased 26,575 70,225
Other short-term borrowings 53,744 15,587
Accrued expenses and other liabilities 10,604 13,130
Long-term borrowings 46,962 43,925
- ---------------------------------------------------------------------
Total liabilities 1,075,871 1,105,586
- ---------------------------------------------------------------------
Commitments and Contingencies (Notes 4 and 5)
STOCKHOLDERS' EQUITY
Common stock, $12.50 par value; 25,000,000
shares authorized; 5,703,378 shares issued
and outstanding (5,740,513 in 1995) 71,292 71,756
Additional paid-in capital --- 246
Retained earnings 59,863 54,697
Net unrealized gain (loss) on securities
available for sale, net of income taxes (83) 622
- ---------------------------------------------------------------------
Total stockholders' equity 131,072 127,321
- ---------------------------------------------------------------------
Total liabilities and stockholders' equity $1,206,943 $1,232,907
=====================================================================
See notes to consolidated financial statements
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED, NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands,
except per share data) 1996 1995 1996 1995
- -------------------------------------------------------------------------
Interest income
Loans $19,695 $19,172 $57,956 $54,988
Taxable securities 2,605 3,640 7,954 11,395
Tax-exempt securities 400 481 1,287 1,556
Federal funds sold 211 111 1,526 474
- -------------------------------------------------------------------------
Total interest income 22,911 23,404 68,723 68,413
- -------------------------------------------------------------------------
Interest expense
Deposits 8,681 9,053 26,115 26,899
Short-term borrowings 970 1,643 3,144 5,213
Long-term borrowings 694 623 2,071 874
- -------------------------------------------------------------------------
Total interest expense 10,345 11,319 31,330 32,986
- -------------------------------------------------------------------------
Net interest income 12,566 12,085 37,393 35,427
Provision for loan losses 734 229 1,705 612
- -------------------------------------------------------------------------
Net interest income after provision
for loan losses 11,832 11,856 35,688 34,815
- -------------------------------------------------------------------------
Noninterest income
Data processing services 575 660 1,809 1,926
Trust services 642 661 1,859 1,819
Student loan servicing fees 225 285 831 793
Deposit account service charges 891 820 2,594 2,295
Securities gains --- --- 17 31
Other 651 667 2,099 1,818
- -------------------------------------------------------------------------
Total noninterest income 2,984 3,093 9,209 8,682
- -------------------------------------------------------------------------
Noninterest expenses
Personnel 4,797 4,724 14,837 14,185
Occupancy 736 681 2,317 1,918
Equipment 629 572 1,874 1,763
Supplies 268 255 763 918
Advertising and promotion 384 411 1,188 1,363
FDIC insurance 1,833 104 2,128 1,168
Intangible amortization 544 537 1,619 1,612
Other real estate owned (30) (8) (63) (154)
Other 1,324 1,606 3,958 4,557
- -------------------------------------------------------------------------
Total noninterest expenses 10,485 8,882 28,621 27,330
- -------------------------------------------------------------------------
Income before income taxes 4,331 6,067 16,276 16,167
Income tax expense 1,689 2,425 6,301 6,215
- -------------------------------------------------------------------------
NET INCOME $ 2,642 $ 3,642 $ 9,975 $9,952
=========================================================================
NET INCOME PER SHARE $ .46 $ .63 $ 1.74 $ 1.73
=========================================================================
AVERAGE NUMBER OF SHARES
OUTSTANDING 5,706,590 5,747,843 5,729,777 5,741,888
=========================================================================
See notes to consolidated financial statements
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 9,975 $ 9,952
Adjustments to reconcile net income to net
cash provided by operating activities
Amortization and accretion 2,390 1,721
Depreciation 1,509 1,484
Provision for loan losses 1,705 612
Provision for deferred income taxes (721) 663
Net gain on securities
Available for sale (17) (21)
Held to maturity --- (10)
Net gain on sales of other assets (158) (39)
(Increase) decrease in other assets 569 (3,915)
Decrease in accrued expenses and other
liabilities (1,805) (906)
- -------------------------------------------------------------------
Net cash provided by operating activities 13,447 9,541
- -------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available
for sale 44 142
Proceeds from maturities and calls of securities
Available for sale 61,135 43,543
Held to maturity --- 33,570
Purchases of securities
Available for sale (33,096) (48,948)
Held to maturity --- (616)
Net increase in loans (54,640) (62,016)
Purchases of premises and equipment (1,921) (1,496)
Proceeds from sales of other assets 764 1,490
- -------------------------------------------------------------------
Net cash used for investing activities (27,714) (34,331)
- -------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in deposits (24,733) (7,126)
Net increase (decrease) in federal funds
purchased (43,650) 21,150
Net increase (decrease) in other short-term
borrowings 38,157 (21,049)
Proceeds from long-term borrowings 3,300 40,300
Repayments of long-term borrowings (263) (225)
Payments of cash dividends (3,895) (3,731)
Proceeds from stock options 1,514 ---
Purchase of common stock (3,138) ---
- -------------------------------------------------------------------
Net cash provided by (used for) financing
activities (32,708) 29,319
- -------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (46,975) 4,529
Cash and cash equivalents at beginning of
period 119,922 61,392
- -------------------------------------------------------------------
Cash and cash equivalents at end of period $ 72,947 $ 65,921
===================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid
Interest $ 32,411 $ 33,091
Income taxes 7,161 4,841
Noncash investing and financing activities
Loans transferred to foreclosed property 497 1,244
Sales of foreclosed property financed by
Homeland 170 149
===================================================================
See notes to consolidated financial statements
<TABLE>
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
<CAPTION>
NET
ADDITIONAL UNREALIZED
(Dollars in thousands, COMMON PAID-IN RETAINED SECURITIES
except per share data) STOCK CAPITAL EARNINGS GAIN (LOSS) TOTAL
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $71,756 $ 246 $54,697 $ 622 $127,321
Net income --- --- 9,975 --- 9,975
Cash dividends - $.68 per share --- --- (3,895) --- (3,895)
Common stock issued under stock option plans 814 700 --- --- 1,514
Common stock purchased (1,278) (946) (914) --- (3,138)
Net unrealized loss on securities
available for sale --- --- --- (705) (705)
- -------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 $71,292 $ --- $59,863 $ (83) $131,072
=================================================================================================
Balance at January 1, 1995 $71,734 $ 227 $46,068 $ (3,287) $114,742
Net income --- --- 9,952 --- 9,952
Cash dividends - $.65 per share --- --- (3,731) --- (3,731)
Net unrealized gain on securities available
for sale --- --- --- 2,972 2,972
- -------------------------------------------------------------------------------------------------
Balance at September 30, 1995 $71,734 $ 227 $52,289 $ (315) $123,935
=================================================================================================
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited consolidated financial statements: The accompanying interim
consolidated financial statements are unaudited. In the opinion of management,
all adjustments consisting of normal recurring accruals considered necessary for
fair presentation have been included. Certain balances previously reported have
been reclassified to conform with 1996 financial statement presentation.
Further information may be obtained by reference to the consolidated financial
statements and accompanying footnotes included in the Homeland Bankshares
Corporation ("Homeland") 1995 Annual Report on Form 10-K.
Securities available for sale: Securities available for sale are reported
at fair value, with the unrealized gains and losses reported as a separate
component of stockholders' equity. Securities available for sale may be sold
for management of general liquidity needs, response to market interest rate
fluctuations, implementation of asset-liability management strategy, funding
increased loan demand, changes in securities prepayment risk, or other similar
factors. Realized gains and losses on sales are computed on a specific
identification basis and are shown separately as a component of noninterest
income.
Intangible assets: Goodwill and core deposit intangibles arise from net
assets acquired in purchase transactions. Purchased assets and liabilities are
recorded at their estimated fair values on the acquisition dates. Intangible
assets are reviewed for possible impairment when events or changed circumstances
may indicate that the carrying amount of the assets may not be recoverable.
Goodwill is amortized on a straight-line basis over 15 years. Core deposit
intangibles are amortized on a straight-line basis over an average estimated
life of approximately 7 years. At September 30, 1996 and 1995, accumulated
intangible amortization was $7,072,000 and $4,916,000, respectively.
Net income per share: Net income per share calculations are based on the
weighted average number of common shares outstanding, adjusted for stock splits
and common stock equivalents arising from the assumed exercise of outstanding
stock options.
Recently-adopted accounting standards: Effective January 1, 1996, Homeland
adopted Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This statement specifies when certain long-lived assets should
be reviewed for impairment and how to measure and report an impairment loss.
The effect of the statement on Homeland's consolidated financial statements was
not material.
Effective January 1, 1996, Homeland adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." This statement amends SFAS No. 65 by establishing a
new standard for capitalizing mortgage servicing rights. Under SFAS No. 122,
the accounting principles for mortgage servicing rights are the same for
mortgages originated by the servicer as for those acquired through purchase
transactions. Accordingly, under the new statement, a bank would record an
asset for mortgage servicing rights when it sold mortgages and retained the
servicing. The effect of the statement on Homeland's consolidated financial
statements was not material.
SFAS No. 123, "Accounting for Stock-Based Compensation," was effective for
Homeland beginning January 1, 1996. SFAS No. 123 requires expanded disclosures
of stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. Homeland will continue to
apply APB Opinion No. 25 to its stock based compensation awards to employees.
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," was issued in June 1996 to be effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. SFAS No. 125 provides consistent standards
for distinguishing transfers of financial assets that are sales, from transfers
that are secured borrowings. Management believes that the effect of the
statement on Homeland's consolidated financial statements will not be material.
2. SECURITIES AVAILABLE FOR SALE
REALIZED GAINS AND LOSSES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 1996 1995 1996 1995
----------------------------------------------------------------------
Gross realized gains $ --- $ --- $ 17 $ 31
Gross realized losses --- --- --- ---
----------------------------------------------------------------------
Total $ --- $ --- $ 17 $ 31
======================================================================
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 46,487 $ 114 $ (217) $ 46,384
U.S. Government agencies 18,404 72 (74) 18,402
U.S. Government agencies mortgage-backed 62,768 346 (721) 62,393
Student loan participation certificates 23,074 --- --- 23,074
States and political subdivisions 28,867 566 (122) 29,311
Corporate mortgage-backed 3,121 --- (94) 3,027
Other 8,168 --- --- 8,168
-------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1996 $190,889 $1,098 $(1,228) $190,759
=====================================================================================
U.S. Treasury $ 64,275 $ 341 $ (328) $ 64,288
U.S. Government agencies 21,532 277 (38) 21,771
U.S. Government agencies mortgage-backed 69,267 560 (459) 69,368
Student loan participation certificates 16,708 --- --- 16,708
States and political subdivisions 33,316 881 (102) 34,095
Corporate 427 --- --- 427
Corporate mortgage-backed 4,047 --- (141) 3,906
Other 6,993 --- --- 6,993
-------------------------------------------------------------------------------------
Balance at December 31, 1995 $216,565 $2,059 $(1,068) $217,556
=====================================================================================
</TABLE>
3. ALLOWANCE FOR LOAN LOSSES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 1996 1995 1996 1995
-------------------------------------------------------------------------
Balance at beginning of period $ 8,913 $ 8,950 $ 8,603 $ 9,082
Provision for loan losses 734 229 1,705 612
Loan loss recoveries 579 168 1,869 354
Loans charged off (948) (393) (2,899) (1,094)
-------------------------------------------------------------------------
Balance at end of period $ 9,278 $ 8,954 $ 9,278 $ 8,954
=========================================================================
Impairment of loans has been recognized in conformity with SFAS Nos. 114
and 118. No interest income related to such loans has been recognized.
SEPT. 30, Dec. 31,
(Dollars in thousands) 1996 1995
-------------------------------------------------------------------------
Balance of impaired loans $ 1,522 $ 664
Less portion for which no allowance for
loan losses was allocated (---) (---)
-------------------------------------------------------------------------
Portion of impaired loan balance for which
an allowance for loan losses was allocated $ 1,522 $ 664
=========================================================================
Portion of allowance for loan losses allocated
to the impaired loan balance $ 82 $ 52
=========================================================================
Average investment in impaired loans during
the period $ 413 $ 2,057
=========================================================================
4. SHORT-TERM BORROWINGS
At September 30, 1996, other short-term borrowings consisted of $45 million
of advances from the Federal Home Loan Bank ("FHLB") and $9 million in U.S.
Treasury tax depository accounts. The short-term FHLB advances were secured by
certain U.S. Government securities, FHLB stock, and eligible consumer real
estate loans, with a weighted average interest rate of 6.1%.
In the normal course of business, Homeland banks have established lines of
credit for overnight borrowings for the management of daily liquidity needs. At
September 30, 1996, these unused lines of credit aggregated $151 million.
5. LONG-TERM BORROWINGS
At September 30, 1996, long-term borrowings consisted of FHLB advances to
Homeland subsidiaries with an average fixed interest rate of 5.8%. The long-
term advances were secured by eligible consumer real estate loans and FHLB
stock, and were scheduled to mature as follows:
(Dollars in thousands)
- ----------------------------------------------------------------
1996 $ 273
1997 40,486
1998 290
1999 294
2000 1,498
Thereafter 4,121
- ----------------------------------------------------------------
Balance at end of period $46,962
================================================================
6. STOCKHOLDERS' EQUITY
On March 20, 1996, the Board of Directors authorized the continuation of
Homeland's common stock buyback program by approving the repurchase of up to
500,000 shares of Homeland common stock through stock market transactions until
March 31, 1997. For the nine months ended September 30, 1996, Homeland
repurchased approximately 102,000 shares at a total cost of $3,138,000.
7. PENDING MERGER
On August 30, 1996, Homeland and Magna Group, Inc. ("Magna") signed a
definitive agreement for the acquisition of Homeland by Magna. Magna is a St.
Louis-based community bank holding company with $5.38 billion in assets. Based
on a deposit market share, Magna is the third largest banking institution in the
St. Louis Metropolitan area and ranks as the 80th largest bank holding company
in the nation. Under the terms of the agreement, Magna will issue 5,038,934
shares of Magna common stock and $91,966,970 in cash in exchange for all of the
outstanding shares of Homeland's common stock. Each share of Homeland's common
stock may be exchanged for a value in Magna common stock or cash equal to the
sum of (x) the product of the value of one share of Magna common stock (as
determined in the definitive agreement) multiplied by 0.8835 plus (y) $16.125.
Homeland stockholders may elect to receive all Magna common stock, all cash, or
a mixture of stock and cash, subject to certain limitations. The transaction is
subject to the approvals of banking regulators and the stockholders of Homeland,
and is expected to be completed in the first quarter of 1997.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
<TABLE>
HOMELAND BANKSHARES CORPORATION
FINANCIAL HIGHLIGHTS
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
Dollars in thousands, SEPTEMBER 30, SEPTEMBER 30,
except per share data) 1996 1995 % Change 1996 1995 % Change
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS(1)
Net interest income $12,566 $12,085 4.0% $37,393 $35,427 5.5%
Provision for loan losses 734 229 220.5 1,705 612 178.6
Noninterest income 2,984 3,093 -3.5 9,209 8,682 6.1
Noninterest expenses 10,485 8,882 18.0 28,621 27,330 4.7
Income tax expense 1,689 2,425 -30.4 6,301 6,215 1.4
Net income 2,642 3,642 -27.5 9,975 9,952 .2
PER SHARE DATA(2)
Net income $.46 $.63 -27.0% $1.74 $1.73 .6%
Cash dividends .23 .22 4.5 .68 .65 4.6
Book value 22.98 21.60 6.4 22.98 21.60 6.4
Tangible book value 19.98 18.28 9.3 19.98 18.28 9.3
Market price 38.00 29.75 27.7 38.00 29.75 27.7
END OF PERIOD BALANCES
Loans $895,165 $855,239 4.7% $895,165 $855,239 4.7%
Deposits 937,986 942,234 -.5 937,986 942,234 -.5
Stockholders' equity 131,072 123,935 5.8 131,072 123,935 5.8
Total assets 1,206,943 1,232,633 -2.1 1,206,943 1,232,633 -2.1
Nonperforming assets 3,629 5,623 -35.5 3,629 5,623 -35.5
AVERAGE BALANCES
Loans $887,921 $844,709 5.1% $870,211 $821,003 6.0%
Deposits 936,288 931,317 .5 941,594 942,329 -.1
Stockholders' equity 131,234 122,572 7.1 130,021 119,315 9.0
Total assets 1,198,010 1,218,116 -1.7 1,211,588 1,208,674 .2
Total earning assets 1,102,875 1,120,866 -1.6 1,115,726 1,110,110 .5
FINANCIAL RATIOS(3)
Return on average total assets .88% 1.19% 1.10% 1.10%
Return on average stockholders' equity 8.01 11.79 10.25 11.15
Net interest margin 4.60 4.36 4.55 4.36
Efficiency ratio 63.31 54.19 57.32 57.71
Stockholders' equity to total assets 10.86 10.05 10.86 10.05
Leverage capital ratio 9.66 8.77 9.66 8.77
EXCLUDING THE ONE-TIME SPECIAL SAIF ASSESSMENT OF $1,689 ($1,059 AFTER TAX):
(1) OPERATING RESULTS
Noninterest expenses $8,796 $8,882 -1.0% $26,932 $27,330 -1.5%
Income tax expense 2,319 2,425 -4.4 6,931 6,215 11.5
Net income 3,701 3,642 1.6 11,034 9,952 10.9
(2) PER SHARE DATA
Net income $.65 $.63 3.2% $1.93 $1.73 11.6%
(3) FINANCIAL RATIOS
Return on average total assets 1.23% 1.19% 1.22% 1.10%
Return on average stockholders' equity 11.22 11.79 11.34 11.15
Efficiency ratio 52.59 54.19 53.74 57.71
</TABLE>
EARNINGS ANALYSIS
PERFORMANCE SUMMARY
Homeland Bankshares Corporation net earnings totaled $9,975,000 million
through the third quarter of 1996, or $1.74 per share. Net earnings for the
third quarter alone were $2,642,000 million or $.46 per share. These earnings
included a nonrecurring charge for a special assessment by the FDIC which was
mandated by federal legislation on September 30, 1996. This legislation called
for all financial institutions with deposits insured by the FDIC under the
Savings Association Insurance Fund ("SAIF") to pay a special one-time assessment
at the rate of approximately $0.657 per $100 on SAIF insured deposit levels as
of March 31, 1995. Homeland's SAIF assessment was $1,689,000, net of an income
tax benefit of $630,000, which reduced 1996 net income by $1,059,000, or $.19
per share.
Excluding the special one-time charge, net income for the nine months of
1996 was $11,034,000 or $1.93 per share, compared to the same period of 1995
which totaled $9,952,000 or $1.73 per share. This represents a net earnings
increase of 10.9% and a per share increase of 11.6%. Quarterly earnings,
excluding the special SAIF assessment, reached a record high of $3,701,000 or
$.65 per share, compared to 1995 third quarter net income of $3,642,000 or $.63
per share.
Homeland's nine-month return on average assets and return on average equity
were 1.22% and 11.34%, respectively, excluding the SAIF charges. Prior year
returns for the same nine-month period were 1.10% and 11.15%, respectively.
Return on average assets and return on average equity for the third quarter of
1996 were 1.23% and 11.22%, respectively, with the SAIF assessment excluded.
On August 30, 1996, Homeland and Magna Group, Inc. ("Magna") signed a
definitive agreement for the acquisition of Homeland by Magna. Magna is a St.
Louis-based community bank holding company with $5.38 billion in assets. Based
on a deposit market share, Magna is the third largest banking institution in the
St. Louis Metropolitan area and ranks as the 80th largest bank holding company
in the nation. Under the terms of the agreement, Magna will issue 5,038,934
shares of Magna common stock and $91,966,970 in cash in exchange for all of the
outstanding shares of Homeland's common stock. Each share of Homeland's common
stock may be exchanged for a value in Magna common stock or cash equal to the
sum of (x) the product of the value of one share of Magna common stock (as
determined in the definitive agreement) multiplied by 0.8835 plus (y) $16.125.
Homeland stockholders may elect to receive all Magna common stock, all cash, or
a mixture of stock and cash, subject to certain limitations. The transaction is
subject to the approvals of banking regulators and the stockholders of Homeland,
and is expected to be completed in the first quarter of 1997.
NET INTEREST INCOME
Net interest income is the excess of the interest and fees received on
interest earning assets over the interest expense paid on interest bearing
liabilities, while taxable-equivalent net interest income includes an adjustment
to ensure that interest income on taxable and nontaxable assets is comparable.
Net interest income totaled $37,393,000 through September 30, 1996 and
$35,427,000 for the same period of 1995. Taxable-equivalent net interest income
was $38,028,000 and $36,183,000 for the nine months ended September 30, 1996 and
1995, respectively. Net interest income for the 1996 third quarter was $481,000
higher than in 1995, and $444,000 higher on a taxable-equivalent basis.
Homeland has experienced growth in net interest income from a combination of
earning assets growth and effective management of overall interest rate
sensitivity and liquidity.
NET INTEREST SPREAD AND MARGIN
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Taxable-equivalent basis) 1996 1995 1996 1995
- ------------------------------------------------------------------------------
Yield on earning assets 8.34% 8.37% 8.30% 8.33%
Rate on interest bearing liabilities 4.40 4.63 4.41 4.58
- ------------------------------------------------------------------------------
NET INTEREST SPREAD 3.94 3.74 3.89 3.75
Noninterest bearing funds contribution .66 .62 .66 .61
- ------------------------------------------------------------------------------
NET INTEREST MARGIN 4.60% 4.36% 4.55% 4.36%
==============================================================================
Net interest spread improved by 14 basis points for the nine months of 1996,
compared to the nine months of 1995, while net interest margin improved by 19
basis points for the same period. The higher net interest margin resulted from
the growth in loan volume over the past year, combined with a reduction in the
cost of funds. Net interest spread and margin for the three-month periods ended
September 30, 1996 and 1995 also showed improvements of 20 basis points and 24
basis points, respectively.
NONINTEREST INCOME
Noninterest income was up by $527,000 or 6.1% for the first nine months of
1996 compared to the same period of 1995. Contributing to the 1996 revenue
growth were increases of 2.2% in trust services income, 4.8% in student loan
servicing fees, and 13.0% in deposit account service charges. A 6.1% decline
in data processing services revenue partially offset these increases in
noninterest income.
Total noninterest income for the third quarters of 1996 and 1995 was
$2,984,000 and $3,093,000, respectively, a 3.5% decrease. Deposit account
service charges increased by 8.7% to $891,000 from $820,000; however, declines
in data processing, trust, and student loan servicing fees reduced the
noninterest income.
NONINTEREST EXPENSES
Noninterest expenses totaled $28,621,000 for the nine-month period and
$10,485,000 for the third quarter of 1996. Prior year expenses for the 1995
year-to-date and third quarter were $27,330,000 and $8,882,000, respectively.
Noninterest expenses in 1996 were inflated by the special one-time FDIC SAIF
assessment which was recognized in the third quarter. Excluding this
nonrecurring charge, noninterest expenses were $26,932,000 and $8,796,000 for
the nine-month and three-month periods ended September 30, 1996.
Personnel costs, typically the largest component of noninterest expense,
showed a $652,000 or 4.6% increase for the first nine months of 1996 compared to
the same period of 1995. Included in this increase were expenses of $329,000
associated with an early retirement program offered to certain eligible
employees. Management estimates that the early retirement program should result
in personnel cost savings of approximately $450,000 per year starting in 1997.
The remainder of the increase was primarily due to higher health insurance
premiums and other employee benefit costs.
The federal enactment which mandated the assessment for SAIF insured deposits
also reduced the ongoing SAIF deposit insurance rate for financial institutions
from $0.230 to $0.064 per $100 beginning January 1, 1997. Management estimates
that the new premium rates will reduce future deposit insurance expenses by
approximately $400,000 per year starting in 1997.
A common measure of effective management of cost control is the efficiency
ratio which represents adjusted operating expenses as a percentage of
noninterest income and net interest income on a fully taxable-equivalent basis.
Homeland's year-to-date efficiency ratio improved to 57.32% compared to 57.71%
during the same period of 1995. Excluding the SAIF expenses from the 1996
noninterest expenses, the efficiency ratio was 53.74% for the nine months and
52.59% for the quarter. Homeland continues to benefit from ongoing efforts to
centralize and consolidate banking operations to offer more efficient and
cost-effective customer services.
CREDIT RISK MANAGEMENT
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
SEPT. 30, Dec. 31, Sept. 30,
(Dollars in thousands) 1996 1995 1995
- --------------------------------------------------------------------
Loans past due 90 days or more(1) $ 991 $2,766 $2,829
Nonaccrual loans 2,419 1,852 2,068
Foreclosed property 219 325 726
- --------------------------------------------------------------------
Total nonperforming assets $3,629 $4,943 $5,623
====================================================================
Total nonperforming assets as a percentage
of total loans and foreclosed property .41% .58% .66%
====================================================================
Restructured loans $272 $307 $327
====================================================================
(1) Includes government sponsored student loans totaling $1.6 million at
December 31, 1995 and September 30, 1995, for which there is minimal risk of
loss.
Homeland's nonperforming assets were reduced to .41% of total loans and
foreclosed property at September 30, 1996. Total nonperforming assets were
$3.6 million at September 30, 1996, compared to $5.6 million the prior year,
representing a 36% improvement. Homeland has consistently maintained a quality
loan portfolio, reflecting the company's community-based lending policies.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation reserve for estimated losses
inherent in the loan portfolio. Actual credit losses, net of recoveries, are
deducted from the allowance for loan losses when they occur. Factors considered
in the evaluation of the allowance level include estimated future losses from
loan agreements and obligations, deterioration in credit concentrations or
pledged collateral, and historical loss experience, as well as trends in
portfolio volume, composition, delinquencies, and nonaccruals. Management
assesses the adequacy of the allowance for loan losses of each subsidiary bank
every quarter. However, actual losses could differ significantly from the
amounts estimated by management.
The allowance for loan losses stood at $9.3 million at September 30, 1996,
representing 1.04% of total loans and 256% of nonperforming assets. The prior
year allowance stood at 1.05% of total loans and 159% of nonperforming assets.
Net loan charge offs totaled $1,030,000 during the first nine months of 1996.
This compares to $740,000 for the equivalent period of 1995. The provisions for
loan losses were $1,705,000 and $612,000, respectively, for the first three
quarters of 1996 and 1995. Net loan charge offs and loan loss provision for the
1996 third quarter were $369,000 and $734,000, respectively. Despite the
continued decline in nonperforming assets discussed earlier, Homeland's internal
assessment of the adequacy of the allowance for loan losses indicated a need for
an increased provision for loan losses in 1996.
CAPITAL RESOURCES
CAPITAL RATIOS REGULATORY
CAPITAL REQUIREMENTS
-------------------------
SEPT. 30, Sept. 30, WELL MINIMUM
1996 1995 CAPITALIZED REQUIREMENT
- --------------------------------------------------------------------------------
Tier I risk-based capital 13.87% 13.11% 6.00% 4.00%
Total risk-based capital 14.99 14.19 10.00 8.00
Leverage capital 9.66 8.77 5.00 4.00
Banking is an extensively regulated industry. To maintain the shareholders'
and customers' security, banking regulatory agencies have set forth capital
requirements based upon the relative risk of different assets held by banks.
Homelands' capital ratios have consistently exceeded the "well-capitalized"
regulatory capital requirements for financial institutions.
Homeland's stockholders' equity totaled $131.1 million at September 30, 1996,
a 5.8% increase from September 30, 1995. Out of net income of $10.0 million
during the first nine months of 1996, Homeland retained $6.1 million after
paying dividends to stockholders of $3.9 million. The net unrealized loss on
securities available for sale, net of deferred income taxes, was $83,000 at
September 30, 1996, compared to a $315,000 net unrealized loss at September 30,
1995.
The stockholders' equity-to-asset ratio was 10.86% at September 30, 1996,
compared to 10.05% the prior year. Homeland's book values per share were $22.98
and $21.60 at September 30, 1996 and 1995, respectively. The closing market
trade price of Homeland's common stock was $38.00 per share at September 30,
1996.
Homeland had no commitments for any significant capital expenditures at
September 30, 1996, and currently carries no long-term debt at the parent
company.
ASSET-LIABILITY MANAGEMENT
Asset-liability management encompasses both the maintenance of adequate
liquidity and the management of interest rate sensitivity. Liquidity management
involves planning to meet anticipated funding needs. Interest rate sensitivity
management attempts to provide the optimal level of net interest income, while
managing exposure to risks associated with interest rate movements.
LIQUIDITY
Core deposits have historically provided Homeland with a major source of
stable and relatively low-cost funding. Secondary sources of liquidity include
federal funds sold, maturing securities and loans, securities available for
sale, and borrowed funds. In the normal course of business, Homeland banks have
established short-term lines of credit for the management of daily liquidity
needs.
Cash and cash equivalents were provided by $13.4 million of operating
activities. Investing activities used $27.7 million and financing activities
used $32.7 million during the nine months of 1996. Total cash and cash
equivalents were $72.9 million at September 30, 1996, compared to $65.9 million
at September 30, 1995.
INTEREST RATE SENSITIVITY
Interest rate sensitivity has traditionally been measured by gap analysis,
which represents the difference between assets and liabilities that reprice in
certain time periods. This method, while useful, has a number of limitations as
it is a static point-in-time measurement and does not take into account the
varying degrees of sensitivity to interest rates within the balance sheet. As
shown in the table following, on a static-gap basis, the cumulative ratio of
interest sensitive assets to interest sensitive liabilities in a one-year time
frame was 1.07, and as a percentage of total assets was 3.34%.
Because of inherent limitations of gap analysis, Homeland periodically uses
an earnings simulation model to more realistically measure its sensitivity to
changing interest rates. Management monitors the rate sensitivity and liquidity
positions on an ongoing basis and, when necessary, appropriate action is taken
to minimize any adverse effects of rapid interest rate movements or any
unexpected liquidity concerns.
<TABLE>
INTEREST RATE SENSITIVITY ANALYSIS
<CAPTION>
SEPTEMBER 30, 1996
------------------------------------------------------------
AFTER ONE AFTER THREE
WITHIN THROUGH THROUGH
ONE THREE TWELVE TOTAL AFTER ONE
(Dollars in thousands) MONTH MONTHS MONTHS ONE YEAR YEAR TOTAL
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
Federal funds sold $ 17,400 $ --- $ --- $ 17,400 $ --- $ 17,400
Securities 39,295 11,849 52,683 103,827 86,932 190,759
Loans 222,378 46,648 217,077 486,103 409,062 895,165
- --------------------------------------------------------------------------------------------------------
Total interest earning assets 279,073 58,497 269,760 607,330 495,994 1,103,324
- --------------------------------------------------------------------------------------------------------
Sources of funds
Interest bearing demand deposits(1) 20,664 --- --- 20,664 82,656 103,320
Money market deposits(1) 129,867 --- --- 129,867 36,983 166,850
Savings deposits(1) 12,510 --- --- 12,510 50,039 62,549
Time deposits 50,139 47,857 185,390 283,386 200,772 484,158
Federal funds purchased 26,575 --- --- 26,575 --- 26,575
Other short-term borrowings 43,744 --- 10,000 53,744 --- 53,744
Long-term borrowings 5 10 40,270 40,285 6,677 46,962
- --------------------------------------------------------------------------------------------------------
Total rate sensitive liabilities 283,504 47,867 235,660 567,031 377,127 944,158
Demand deposits, net of cash and
due from banks --- --- --- --- 65,562 65,562
Other, net --- --- --- --- 93,604 93,604
- --------------------------------------------------------------------------------------------------------
Total sources of funds 283,504 47,867 235,660 567,031 536,293 1,103,324
- --------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ (4,431) $ 10,630 $ 34,100 $ 40,299 $(40,299) $ ---
========================================================================================================
Cumulative gap $ (4,431) $ 6,199 $ 40,299 $ 40,299
Cumulative gap as a percentage
of total assets -.37% .51% 3.34% 3.34%
Cumulative ratio of interest sensitive
assets to interest sensitive liabilities .98 1.02 1.07 1.07
========================================================================================================
<FN>
<F1> (1) On the basis of historical studies, deposits determined to be less sensitive
to changes in market interest rates are included in the "after one year"
category. </FN>
</TABLE>
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS.
======= ------------------
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
======= ---------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
======= -------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
======= ---------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION.
======= -----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
======= --------------------------------
(a) EXHIBITS: Index to Exhibits - Page 17.
Exhibit 2 Agreement and Plan of Reorganization dated August 30, 1996,
between Magna Group, Inc. and Homeland Bankshares Corpora-
tion is incorporated herein by reference to Exhibit 2 to
the company's Current Report on Form 8-K dated August 30,
1996, and filed September 10, 1996.
Exhibit 11 Statement Re Computation of Earnings Per Share.
Exhibit 27 Financial Data Schedule
Exhibit 99 Stock Option Agreement dated August 30, 1996, between
Magna Group, Inc. and Homeland Bankshares Corporation is
incorporated herein by reference to Exhibit 99.1 to the
company's Current Report on Form 8-K dated August 30,
1996, and filed September 10, 1996.
(b) REPORTS ON FORM 8-K:
Form 8-K dated August 30, 1996, was filed with the Commission on September
10, 1996, and reported the following information under "Item 5 - Other
Events":
On August 30, 1996, Homeland Bankshares Corporation ("Homeland") and Magna
Group, Inc. ("Magna") entered into a definitive Agreement and Plan of
Reorganization (the "Merger Agreement"), which provides, among other
things, for the merger ("Merger") of Homeland with and into a newly-formed
wholly-owned subsidiary of Magna.
Under the terms of the Agreement and subject to certain adjustments as
provided therein, Magna will issue 5,038,934 shares of Magna $2.00 par
value common stock and $91,966,970 in cash in exchange for all of the
outstanding shares of Homeland's $12.50 par value common stock. Each
share of Homeland's common stock may be exchanged for approximately 1.55
shares of Magna common stock or a comparable amount in cash. Homeland
stockholders may elect to receive all Magna common stock, all cash, or a
mixture of stock and cash, subject to certain limitations.
Also, on August 30, 1996, as a condition to Magna entering into the Merger
Agreement, Homeland entered into a Stock Option Agreement (the "Stock
Option Agreement") pursuant to which Magna was granted an option to
purchase, under certain circumstances, 1,134,972 shares of Homeland common
stock (19.9% of the number of such shares then outstanding), at an
exercise price of $34.00 per share.
*** SIGNATURES ***
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOMELAND BANKSHARES CORPORATION
-------------------------------
(Registrant)
Date November 4, 1996 /s/ Erl A. Schmiesing
--------------------- --------------------------------------------
Erl A. Schmiesing, Chairman, President & CEO
(Principal Executive Officer)
Date November 4, 1996 /s/ Robert S. Kahler
--------------------- --------------------------------------------
Robert S. Kahler, Executive Vice President & CFO
(Principal Financial and Accounting Officer)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
INDEX TO EXHIBITS
TO FORM 10-Q QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------------------
HOMELAND BANKSHARES CORPORATION
229 EAST PARK AVENUE
WATERLOO, IOWA 50704-5300
EXHIBIT NO. ITEM PAGE
- ----------- ---------------------------------------------------------- ----
2 Agreement and Plan of Reorganization dated August 30, 1996,
between Magna Group, Inc. and Homeland Bankshares Corporation
is incorporated herein by reference to Exhibit 2 to the
company's Current Report on Form 8-K dated August 30, 1996,
and filed September 10, 1996.
11 Statement Re Computation of Earnings Per Share 18
27 Financial Data Schedule 19
99 Stock Option Agreement dated August 30, 1996, between Magna
Group, Inc. and Homeland Bankshares Corporation is incorporated
herein by reference to Exhibit 99.1 to the company's Current
Report on Form 8-K dated August 30, 1996, and filed September
10, 1996.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
HOMELAND BANKSHARES CORPORATION EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME: $2,641,644 $3,642,227 $9,974,691 $9,951,532
========== ========== ========== ==========
PRIMARY EARNINGS PER SHARE:
Weighted average shares outstanding 5,703,378 5,738,713 5,723,802 5,738,713
Net effect of the assumed exercise of
stock options based on the treasury
stock method using average market
price 3,212 9,130 5,975 3,175
---------- ---------- ---------- ----------
5,706,590 5,747,843 5,729,777 5,741,888
========== ========== ========== ==========
Primary earnings per share $ .46 $ .63 $ 1.74 $ 1.73
========== ========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE:
Weighted average shares outstanding 5,703,378 5,738,713 5,723,802 5,738,713
Net effect of the assumed exercise of
stock options based on the treasury
stock method using average market
price or market price at the end of
the period, whichever is higher 4,161 15,738 6,963 6,544
---------- ---------- ---------- ----------
5,707,539 5,754,451 5,730,765 5,745,257
========== ========== ========== ==========
Fully diluted earnings per share $ .46 $ .63 $ 1.74 $ 1.73
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Homeland
Bankshares Corporation's 1996 Third Quarter Form 10-Q and is qualified in its
entirety by reference to such Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 55,547
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 190,759
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 895,165
<ALLOWANCE> 9,278
<TOTAL-ASSETS> 1,206,943
<DEPOSITS> 937,986
<SHORT-TERM> 80,319
<LIABILITIES-OTHER> 10,604
<LONG-TERM> 46,962
<COMMON> 71,292
0
0
<OTHER-SE> 59,780
<TOTAL-LIABILITIES-AND-EQUITY> 1,206,943
<INTEREST-LOAN> 57,956
<INTEREST-INVEST> 9,241
<INTEREST-OTHER> 1,526
<INTEREST-TOTAL> 68,723
<INTEREST-DEPOSIT> 26,115
<INTEREST-EXPENSE> 31,330
<INTEREST-INCOME-NET> 37,393
<LOAN-LOSSES> 1,705
<SECURITIES-GAINS> 17
<EXPENSE-OTHER> 28,621
<INCOME-PRETAX> 16,276
<INCOME-PRE-EXTRAORDINARY> 9,975
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,975
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.74
<YIELD-ACTUAL> 4.55
<LOANS-NON> 2,419
<LOANS-PAST> 991
<LOANS-TROUBLED> 272
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,603
<CHARGE-OFFS> 2,899
<RECOVERIES> 1,869
<ALLOWANCE-CLOSE> 9,278
<ALLOWANCE-DOMESTIC> 9,278
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
