<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): MARCH 1, 1997
MAGNA GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1-12405 37-0996453
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification
organization) Number)
ONE MAGNA PLACE
1401 SOUTH BRENTWOOD BOULEVARD
ST. LOUIS, MISSOURI 63144-1401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 963-2500
================================================================================
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On March 4, 1997, the Registrant filed a Current Report on Form
8-K and reported under Item 5 the completion of its acquisition of Homeland
Bankshares Corporation, Waterloo, Iowa ("Homeland"). This Current Report on
Form 8-K/A amends such previous filing to report the acquisition of Homeland
under Item 2.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired
Consolidated Balance Sheets of Homeland as of December 31,
1996 and 1995
Consolidated Statements of Income of Homeland for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows of Homeland for the
years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders' Equity
of Homeland for the years ended December 31, 1996, 1995 and
1994
(b) Pro Forma Financial Information
Unaudited Pro Forma Combined Consolidated Balance Sheet of
the Registrant as of December 31, 1996
Unaudited Pro Forma Combined Consolidated Statement of
Income of the Registrant for the Twelve Months ended
December 31, 1996
(c) Exhibits
None
* * *
2
<PAGE> 3
[letterhead of Deloitte & Touche LLP]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Homeland Bankshares Corporation
Waterloo, Iowa
We have audited the accompanying consolidated balance sheets of Homeland
Bankshares Corporation and its subsidiaries (Homeland) as of December 31, 1996
and 1995, and the related consolidated statements of income, cash flows, and
changes in stockholders' equity for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of
Homeland's management. Our responsibility is to express an opinion on these
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, such consolidated financial statements present fairly, in all
material respects, the financial position of Homeland as of December 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, on January 21,
1997, the stockholders of Homeland approved the proposed merger of Homeland with
Magna Group, Inc.
/s/ Deloitte & Touche LLP
January 21, 1997
- ---------------
Deloitte Touche
Tohmatsu
International
- ---------------
3
<PAGE> 4
<TABLE>
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
(Dollars in thousands, except per share data) 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 59,266 $ 46,072
Federal funds sold 29,475 73,850
- -----------------------------------------------------------------------------
Total cash and cash equivalents 88,741 119,922
Securities available for sale, amortized cost
$170,550 ($216,565 in 1995) 171,122 217,556
Loans
Commercial, financial, and agricultural 181,274 178,662
Commercial real estate 264,528 213,957
Consumer real estate 342,651 318,461
Consumer 135,167 133,709
- -----------------------------------------------------------------------------
Total loans 923,620 844,789
Allowance for loan losses (9,432) (8,603)
- -----------------------------------------------------------------------------
Net loans 914,188 836,186
Premises and equipment 24,041 24,609
Intangible assets 16,558 18,471
Other assets 13,875 16,163
- -----------------------------------------------------------------------------
Total assets $1,228,525 $1,232,907
=============================================================================
LIABILITIES
Deposits
Noninterest bearing demand $ 138,647 $ 123,902
Interest bearing demand 104,298 106,447
Money market 163,560 174,000
Savings 64,451 68,477
Time 500,796 489,893
- -----------------------------------------------------------------------------
Total deposits 971,752 962,719
Federal funds purchased 47,100 70,225
Other short-term borrowings 18,193 15,587
Accrued expenses and other liabilities 10,486 13,130
Long-term borrowings 46,947 43,925
- -----------------------------------------------------------------------------
Total liabilities 1,094,478 1,105,586
- -----------------------------------------------------------------------------
Commitments and Contingencies (Notes 3, 6, 8,
9, 15, and 16)
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 62,396 54,697
Net unrealized gain on securities available for
sale, net of income taxes 359 622
- -----------------------------------------------------------------------------
Total stockholders' equity 134,047 127,321
- -----------------------------------------------------------------------------
Total liabilities and stockholders' equity $1,228,525 $1,232,907
=============================================================================
See notes to consolidated financial statements
</TABLE>
4
<PAGE> 5
<TABLE>
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
YEARS ENDED DECEMBER 31,
(Dollars in thousands, except per share data) 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans $77,906 $74,098 $52,913
Taxable securities 10,262 14,520 14,390
Tax-exempt securities 1,666 2,015 2,725
Federal funds sold 2,160 1,847 1,915
Other short-term investments --- --- 153
- -----------------------------------------------------------------------------------------
Total interest income 91,994 92,480 72,096
- -----------------------------------------------------------------------------------------
Interest expense
Deposits 35,019 36,239 26,484
Short-term borrowings 4,276 7,060 3,795
Long-term borrowings 2,766 1,505 161
- -----------------------------------------------------------------------------------------
Total interest expense 42,061 44,804 30,440
- -----------------------------------------------------------------------------------------
Net interest income 49,933 47,676 41,656
Provision for loan losses 2,315 941 296
- -----------------------------------------------------------------------------------------
Net interest income after provision for loan losses 47,618 46,735 41,360
- -----------------------------------------------------------------------------------------
Noninterest income
Data processing services 2,368 2,511 2,529
Trust services 2,460 2,450 2,228
Student loan servicing fees 1,094 1,086 272
Deposit account service charges 3,483 3,094 2,733
Securities gains (losses) 44 31 (17)
Other 2,689 2,493 1,931
- -----------------------------------------------------------------------------------------
Total noninterest income 12,138 11,665 9,676
- -----------------------------------------------------------------------------------------
Noninterest expenses
Personnel 19,798 18,998 16,655
Occupancy 2,937 2,712 2,479
Equipment 2,440 2,367 2,358
Supplies 977 1,111 889
Advertising and promotion 1,485 1,741 1,716
FDIC insurance 2,230 1,381 1,971
Intangible amortization 2,163 2,149 1,462
Other real estate owned (75) (276) (566)
Other 5,224 6,167 5,368
- -----------------------------------------------------------------------------------------
Total noninterest expenses 37,179 36,350 32,332
- -----------------------------------------------------------------------------------------
Income before income taxes 22,577 22,050 18,704
Income tax expense 8,758 8,429 6,443
- -----------------------------------------------------------------------------------------
Net income $13,819 $13,621 $12,261
=========================================================================================
Net income per share $ 2.41 $ 2.37 $ 2.14
=========================================================================================
Average number of shares outstanding 5,724,315 5,744,836 5,732,133
=========================================================================================
See notes to consolidated financial statements
</TABLE>
5
<PAGE> 6
<TABLE>
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
(Dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 13,819 $ 13,621 $ 12,261
Adjustments to reconcile net income to net
cash provided by (used for) operating activities
Amortization and accretion 3,081 2,525 741
Depreciation 1,991 1,972 1,927
Provision for loan losses 2,315 941 296
Provision for deferred income taxes (321) 958 (44)
Net loss (gain) on securities
Available for sale (44) (21) 20
Held to maturity --- (10) (3)
Net gain on sales of other assets (243) (154) (632)
Decrease (increase) in other assets 2,453 (1,398) 2,198
Decrease in accrued expenses and other liabilities (2,323) (164) (4,210)
- ------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,728 18,270 12,554
- ------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Cash and cash equivalents acquired, net of payment
for purchase of financial institution --- --- (41,932)
Divestiture of branch offices, net of cash and cash
equivalents --- --- (46,853)
Proceeds from sales of securities
Available for sale 515 149 25,841
Held to maturity --- --- ---
Proceeds from maturities and calls of securities
Available for sale 86,907 78,403 55,650
Held to maturity --- 47,774 48,603
Purchases of securities
Available for sale (39,057) (56,649) (50,152)
Held to maturity --- (616) (9,066)
Net increase in loans (83,841) (52,300) (95,839)
Purchases of premises and equipment (2,119) (2,205) (2,391)
Proceeds from sales of other assets 980 1,754 1,286
- ------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities (36,615) 16,310 (114,853)
- ------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase in deposits 9,033 13,359 17,542
Net increase (decrease) in federal funds purchased (23,125) 42,800 (12,575)
Net increase (decrease) in other short-term borrowings 2,606 (68,733) 69,986
Proceeds from long-term borrowings 3,300 41,700 2,450
Repayments of long-term borrowings (278) (225) (3,000)
Payments of cash dividends (5,206) (4,992) (4,808)
Proceeds from stock options 1,514 41 975
Common stock purchased (3,138) --- ---
- ------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (15,294) 23,950 70,570
- ------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (31,181) 58,530 (31,729)
Cash and cash equivalents at beginning of year 119,922 61,392 93,121
- ------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 88,741 $119,922 $ 61,392
==========================================================================================
See notes to consolidated financial statements
</TABLE>
6
<PAGE> 7
<TABLE>
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<CAPTION>
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED SECURITIES
(Dollars in thousands, except per share data) STOCK CAPITAL EARNINGS GAIN (LOSS) TOTAL
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $70,984 $ 2 $38,615 $ 778 $110,379
Net income --- --- 12,261 --- 12,261
Cash dividends - $.84 per share --- --- (4,808) --- (4,808)
Common stock issued under stock option plans 750 225 --- --- 975
Net unrealized loss on securities available for sale --- --- --- (4,065) (4,065)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 71,734 227 46,068 (3,287) 114,742
Net income --- --- 13,621 --- 13,621
Cash dividends - $.87 per share --- --- (4,992) --- (4,992)
Common stock issued under stock option plans 22 19 --- --- 41
Reclassification of securities from held to
maturity to available for sale --- --- --- 597 597
Net unrealized gain on securities available for sale --- --- --- 3,312 3,312
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 71,756 246 54,697 622 127,321
Net income --- --- 13,819 --- 13,819
Cash dividends - $.91 per share --- --- (5,206) --- (5,206)
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 --- --- --- (263) (263)
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $71,292 $ --- $62,396 $ 359 $134,047
======================================================================================================================
See notes to consolidated financial statements
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Homeland Bankshares Corporation ("Homeland") is a diversified financial
services company. Homeland owns and operates four commercial banks and one
savings and loan association that provide a wide variety of financial
services through a network of 33 locations in Iowa. Homeland also provides
data processing and correspondent banking services to more than 160 financial
institutions in Iowa and bordering states.
The accounting and financial reporting policies of Homeland and its
subsidiaries conform with generally accepted accounting principles and
prevailing practices within the financial services industry. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of Homeland and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Certain balances for 1995 and 1994 have been reclassified to conform with
1996 consolidated financial statement presentation.
7
<PAGE> 8
CASH AND CASH EQUIVALENTS: Cash equivalents include amounts due from
banks and federal funds sold. For cash flow statement purposes, management
considers all securities, including those with original maturities of three
months or less, to be part of operating or investing activities rather than
cash equivalents.
SECURITIES: Securities available for sale are reported at fair value, with
the unrealized gains and losses reported as a separate component of
stockholders' equity. Such securities 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.
Effective January 1, 1994, Homeland adopted Statement of Financial Accounting
Standards ("SFAS") No. 115 ("Statement 115"), which resulted in a net
increase to stockholders' equity of $778,000, net of deferred income taxes.
In November 1995, the Financial Accounting Standards Board issued
implementation guidance for Statement 115. Accordingly, on December 31,
1995, Homeland reclassified securities with an amortized cost of $79,680,000
and net unrealized gains of $952,000 from held to maturity to available for
sale.
LOANS: Loans are stated at the principal amounts outstanding with interest
income recognized based upon those outstanding loan balances. Loans are
generally placed on nonaccrual status when principal or interest has been in
default for a period of 90 days or more, or when collection of the loan
principal or the related interest is otherwise considered doubtful. At the
time a loan is placed on nonaccrual status, accrued interest receivable is
reversed against interest income of the current period. Loans are returned
to accrual status when factors indicating doubtful collectability no longer
exist.
SFAS No. 114 and SFAS No. 118 (collectively, "Statement 114"), were adopted
January 1, 1995. Under Statement 114, loans considered to be impaired are
reduced to the present value of expected future cash flows or to the fair
value of collateral, by allocating a portion of the allowance for loan losses
to such loans. If these allocations cause the allowance for loan losses to
require an increase, such increase is reported as provision for loan losses.
Adopting these standards resulted in no initial increase to either the
allowance for loan losses or the provision for loan losses. Residential
mortgage loans and consumer loans are excluded from Statement 114 as they are
evaluated collectively for impairment since they are homogeneous and
generally carry smaller individual balances.
The carrying values of impaired loans are periodically adjusted to reflect
cash payments, revised estimates of future cash flows, and increases in the
present value of expected cash flows due to the passage of time. Cash
payments are reported as reductions in carrying value, while increases or
decreases due to changes in estimates of future payments and due to the
passage of time are reported as provision for loan losses.
Effective January 1, 1996, Homeland adopted SFAS No. 122 ("Statement 122").
This statement amends SFAS No. 65 by establishing a new standard for
capitalizing mortgage servicing rights. Under Statement 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.
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 every quarter. However, actual losses could differ
significantly from the amounts estimated by management.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is charged to operating expense
primarily on the straight-line method over the estimated useful lives of the
assets. Maintenance and repairs are expensed as incurred while major
additions and improvements are capitalized.
FORECLOSED PROPERTY: Foreclosed properties consist primarily of real
estate acquired as a result of customer loan defaults that are carried at the
lower of the recorded investments in the defaulted loans or at fair value
less estimated selling costs. Losses arising at the time of acquisition of
the properties are charged to the allowance for loan losses. Gains and
losses resulting from the sale or subsequent writedown of other real estate
and income and expenses related to the operation of other real estate are
recorded as current period expenses.
8
<PAGE> 9
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 December 31, 1996 and
1995, accumulated intangible amortization was $7,617,000 and $5,453,000,
respectively.
Effective January 1, 1996, Homeland adopted SFAS No. 121. 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.
TRUST ASSETS: Assets held by Homeland's subsidiaries in fiduciary or
agency capacities are not included in the consolidated financial statements.
Trust services fee income is reported on the accrual method.
INCOME TAXES: Homeland files a consolidated federal income tax return, and
income tax expense is generally allocated as if each affiliate files a
separate income tax return. Deferred tax assets and liabilities are recorded
based on differences between the financial statement and tax basis of assets
and liabilities and income tax rates currently in effect.
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 for common stock equivalents arising from the assumed exercise of
outstanding stock options.
SFAS No. 123 ("Statement 123") was effective for Homeland beginning January
1, 1996. Statement 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 ("Opinion 25"), which recognizes compensation cost
based on the intrinsic value of the equity instrument awarded. Homeland will
continue to apply Opinion 25 to its stock based compensation awards to
employees.
INDUSTRY SEGMENT REPORTING: Homeland operates principally in a single
business segment offering general commercial banking services.
NEWLY-ISSUED ACCOUNTING STANDARDS: SFAS No. 125 was issued in June
1996 to be effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996. This
statement 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.
9
<PAGE> 10
<TABLE>
2. SUPPLEMENTAL CASH FLOW INFORMATION
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid
Interest $42,898 $44,512 $ 31,687
Income taxes 8,863 7,353 7,295
Noncash investing and financing activities
Securities reclassified to available for sale category --- 79,680 1,777
Loans transferred to foreclosed property 784 1,347 325
Sales of foreclosed property financed by Homeland 195 199 108
Acquisitions accounted for as purchase transactions
Cash paid (including acquisition costs) --- --- 47,881
Liabilities assumed --- --- 308,198
Fair value of assets acquired --- --- 356,079
Divestiture of branch offices
Cash paid --- --- 46,853
Liabilities assumed by purchaser --- --- 56,698
Fair value of assets sold --- --- 9,845
</TABLE>
3. MERGERS AND ACQUISITIONS
PENDING MERGER WITH MAGNA GROUP, INC.
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 $5.46 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 57% stock and 43% cash, subject
to certain limitations. All necessary approvals of banking regulators have
been received. On January 21, 1997, the stockholders of Homeland approved
the merger. The merger transaction is expected to be consummated on March 1,
1997.
ACQUISITION
On June 1, 1994, Homeland acquired Homeland Savings Bank, FSB and its parent
company, the former MidAmerica Financial Corporation ("MidAmerica"), at a
cash purchase price of approximately $50.9 million. The acquisition was
accounted for as a purchase transaction with the results of MidAmerica's
operations subsequent to the acquisition date included in Homeland's
consolidated financial statements.
Included in other liabilities at December 31, 1995 was $3,000,000, which was
withheld from the purchase proceeds of MidAmerica to secure the payment of
certain claims asserted within 24 months of the acquisition date. These
funds were distributed, less any reductions, together with interest on the
average balance at the annual compound rate of 4%, to the former shareholders
of MidAmerica on June 1, 1996.
The following unaudited pro forma financial information contains the results
of operations for the year ended December 31, 1994, assuming the acquisition
of MidAmerica had occurred on January 1, 1994. The pro forma amounts are not
necessarily indicative of the financial results that would have actually
occurred had the acquisition taken place on January 1, 1994, nor are they
necessarily indicative of future consolidated operations of Homeland.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1994
- ------------------------------------------------------------------
<S> <C>
Total revenues $93,402
Net interest income 45,712
Provision for loan losses 426
Net income 11,694
Net income per share 2.04
</TABLE>
10
<PAGE> 11
4. SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
(Dollars in thousands) COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 36,742 $ 110 $ (89) $ 36,763
U.S. Government agencies 13,110 69 (34) 13,145
U.S. Government agencies mortgage-backed 61,067 450 (341) 61,176
Student loan participation certificates 21,538 --- --- 21,538
States and political subdivisions 27,188 555 (79) 27,664
Corporate mortgage-backed 2,737 --- (69) 2,668
Other 8,168 --- --- 8,168
- ----------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $170,550 $1,184 $ (612) $171,122
====================================================================================================
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>
At December 31, 1996, fair values of U.S. Government Agency mortgage-backed
securities included $35,974,000 of collateralized mortgage obligations.
These securities have expected average lives of 1 to 4 years and utilize
defensive sequential payment structures to shelter cash flow streams.
Student loan participation certificates are backed by government sponsored
student loans and are issued through trust arrangements. At December 31,
1996 and 1995, there were no privately issued securities which aggregated
more than 10% of Homeland's stockholders' equity.
<TABLE>
REALIZED GAINS AND LOSSES
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $44 $31 $ 41
Gross realized losses -- -- (58)
- ----------------------------------------------------------------------
Total gains (losses) $44 $31 $(17)
======================================================================
</TABLE>
The amortized cost and fair value of securities at December 31, 1996, are
shown below by expected maturity. Expected maturities differ from
contractual maturities because issuers may have the right to call or prepay
obligations. Expected maturities for mortgage-backed securities are
determined by using industry derived prepayment assumptions.
<TABLE>
EXPECTED MATURITIES
<CAPTION>
AMORTIZED FAIR
(Dollars in thousands) COST VALUE
- ------------------------------------------------------------------
<S> <C> <C>
Within one year $ 76,724 $ 76,697
After one through five years 70,993 71,320
After five through ten years 13,410 13,636
After ten years 9,423 9,469
- ------------------------------------------------------------------
Total $170,550 $171,122
==================================================================
</TABLE>
11
<PAGE> 12
5. LOANS
<TABLE>
ALLOWANCE FOR LOAN LOSSES
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 8,603 $ 9,082 $ 7,315
Allowance of purchased financial institution --- --- 1,600
Provision for loan losses 2,315 941 296
Loan loss recoveries 2,410 554 1,438
Loans charged off (3,896) (1,974) (1,567)
- ----------------------------------------------------------------------------------------
Balance at end of year $ 9,432 $ 8,603 $ 9,082
=========================================================================================
</TABLE>
IMPAIRED LOANS
Impairment of loans has been recognized in conformity with SFAS Nos. 114. No
interest income related to such loans has been recognized.
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance of impaired loans $1,398 $ 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 $1,398 $ 664
===============================================================================================
Portion of allowance for loan losses allocated to the impaired
loan balance $ 67 $ 52
===============================================================================================
Average investment in impaired loans during the period $ 556 $2,057
===============================================================================================
</TABLE>
CREDIT RISK
At December 31, 1996 and 1995, Homeland had nonaccrual loans of $2,176,000
and $1,852,000, and restructured loans of $258,000 and $307,000,
respectively. Total interest income that would have been recorded under the
original terms of these loans was $211,000 in 1996 and $247,000 in 1995.
Actual interest income recorded from these loans was $89,000 in 1996 and
$142,000 in 1995. At December 31, 1996, there were no material commitments
to lend additional funds to customers whose loans were classified as
nonaccrual or restructured.
Significant portions of Homeland's loan portfolio consisted of consumer real
estate loans, and loans related to agriculture, the primary industry in
Homeland's market area. In addition, a substantial amount of credit extended
to banks include overnight federal funds sold and term bank stock loans.
Certain directors and executive officers of Homeland and its subsidiaries are
customers of Homeland banks in the ordinary course of business. Activity of
aggregate loans exceeding $60,000 to such directors, executive officers, and
their business interests during 1996 was as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ---------------------------------------------------
<S> <C>
Balance at beginning of year $15,930
New loans 5,950
Repayments (3,362)
Other changes (3,189)
- ---------------------------------------------------
Balance at end of year $15,329
===================================================
</TABLE>
Other changes include the addition of loans to new directors and executive
officers net of the reduction of loans to persons who no longer meet the
related party criteria.
12
<PAGE> 13
6. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------
<S> <C> <C>
Land $ 4,955 $ 4,808
Buildings and improvements 23,699 23,270
Furniture and equipment 12,429 12,132
- --------------------------------------------------------------------------
Total cost 41,083 40,210
Accumulated depreciation (17,042) (15,601)
- --------------------------------------------------------------------------
Total $ 24,041 $ 24,609
==========================================================================
</TABLE>
Homeland has noncancelable operating leases covering certain premises and
equipment. Total rent expense was $429,000 in 1996, $417,000 in 1995, and
$297,000 in 1994. Minimum future commitments for leases in effect at
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------
<S> <C>
1997 $233
1998 147
1999 102
2000 65
2001 28
Thereafter ---
- ------------------------------------------
Total $575
==========================================
</TABLE>
7. FEDERAL FUNDS PURCHASED
The outstanding balances for federal funds purchased as of December 31, 1996,
1995, and 1994, and the weighted average interest rates paid during each of
the years then ended and at each year-end were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Ending balance $47,100 $ 70,225 $27,425
Highest month-end balance 82,175 105,850 64,475
Average daily balance 62,303 60,513 39,534
Weighted average interest rate
Paid during year 5.21% 5.93% 4.20%
At year-end 6.04 5.63 5.62
</TABLE>
8. OTHER SHORT-TERM BORROWINGS
At December 31, 1996, other short-term borrowings consisted of $10 million of
advances from the Federal Home Loan Bank ("FHLB") and $8.2 million in U.S.
Treasury tax depository accounts. The short-term FHLB advances were secured
by certain U.S. Government securities, FHLB stock, and a blanket pledge of
eligible consumer real estate loans, with a weighted average interest rate at
year-end of 6.10%. During 1996, the highest month-end balance of FHLB
advances was $45 million, and the average daily balance was $13 million, with
an average interest rate during 1996 of 6.03%. In the normal course of
business, Homeland banks have established lines of credit for overnight
borrowings for the management of daily liquidity needs. At December 31,
1996, these unused lines of credit aggregated $221 million.
13
<PAGE> 14
9. LONG-TERM BORROWINGS
At December 31, 1996, long-term borrowings consisted of FHLB advances to
Homeland subsidiaries with an average fixed interest rate of 5.79%. The
long-term advances were secured by eligible consumer real estate loans and
FHLB stock and were scheduled to mature as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ------------------------------------------------------
<S> <C>
1997 $40,486
1998 290
1999 294
2000 1,499
2001 303
Thereafter 4,075
- ------------------------------------------------------
Total $46,947
======================================================
</TABLE>
10. STOCKHOLDERS' EQUITY
Homeland is 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 financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
Homeland 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 capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require maintaining minimum amounts and ratios of total and Tier I capital to
risk-weighted assets and of Tier I capital to average assets. Management
believes, as of December 31, 1996, that Homeland meets all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC
categorized Homeland as well-capitalized under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized Homeland
must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the
institution's category. Homeland actual capital amounts and ratios are also
presented in the table below.
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -----------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital to Risk Weighted Assets
Homeland Bankshares Corporation $126,457 14.93% 67,800 8.00% 84,700 10.00%
Homeland Bank, N.A. 45,767 11.32 32,400 8.00 40,500 10.00
Homeland Savings Bank 31,580 12.54 20,200 8.00 25,200 10.00
Tier I Capital to Risk Weighted Assets
Homeland Bankshares Corporation 117,130 13.83 33,900 4.00 50,800 6.00
Homeland Bank, N.A. 41,657 10.30 16,200 4.00 24,300 6.00
Homeland Savings Bank 29,701 11.80 10,100 4.00 15,100 6.00
Tier I Capital to Average Assets
Homeland Bankshares Corporation 117,130 9.70 48,300 4.00 60,400 5.00
Homeland Bank, N.A. 41,657 6.94 24,000 4.00 30,000 5.00
Homeland Savings Bank 29,701 7.78 15,300 4.00 19,100 5.00
14
<PAGE> 15
<CAPTION>
10. STOCKHOLDERS' EQUITY (CONTINUED)
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- -----------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1995:
Total Capital to Risk Weighted Assets
Homeland Bankshares Corporation $116,438 14.84% 62,800 8.00% 78,500 10.00%
Homeland Bank, N.A. 43,239 11.96 28,900 8.00 36,200 10.00
Homeland Savings Bank 31,029 13.92 17,900 8.00 22,300 10.00
Tier I Capital to Risk Weighted Assets
Homeland Bankshares Corporation 108,114 13.78 31,400 4.00 47,100 6.00
Homeland Bank, N.A. 40,399 11.18 14,500 4.00 21,700 6.00
Homeland Savings Bank 29,229 13.11 8,900 4.00 13,400 6.00
Tier I Capital to Average Assets
Homeland Bankshares Corporation 108,114 8.63 50,200 4.00 62,700 5.00
Homeland Bank, N.A. 40,399 6.92 23,400 4.00 29,200 5.00
Homeland Savings Bank 29,229 8.00 14,700 4.00 18,400 5.00
</TABLE>
11. SAIF ASSESSMENT
Homeland's 1996 net earnings included a nonrecurring charge for a special
assessment by the FDIC which was mandated by federal legislation and
recognized in the third quarter of 1996. This legislation called for all
financial institutions with deposits insured by the FDIC under the Savings
Association Insurance Fund ("SAIF") to pay an assessment at the rate of
$0.657 per $100 on SAIF insured deposit levels as of March 31, 1995.
Homeland's 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 1996 was $14,878,000 or
$2.60 per share.
15
<PAGE> 16
12. INCOME TAXES
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $7,875 $6,554 $5,520
State 1,204 917 967
- ---------------------------------------------------------------------------------
Total current 9,079 7,471 6,487
- ---------------------------------------------------------------------------------
Deferred
Federal (341) 809 45
State 20 149 (89)
- ---------------------------------------------------------------------------------
Total deferred (321) 958 (44)
- ---------------------------------------------------------------------------------
Total income tax expense $8,758 $8,429 $6,443
=================================================================================
</TABLE>
Included in total income taxes were income tax expenses (credits) of $16,000,
$12,000, and $(7,000) for 1996, 1995, and 1994, respectively, relating to
securities transactions.
The tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and deferred income tax liabilities at
December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets
Loan losses $1,435 $1,131
Employee benefits 33 60
Other 343 390
- ---------------------------------------------------------------------------------
Total deferred income tax assets 1,811 1,581
- ---------------------------------------------------------------------------------
Deferred income tax liabilities
Premises and equipment 326 381
Purchase price allocations 1,311 1,404
Net unrealized gain on securities available for sale 213 367
Securities discount accretion 347 282
Other 5 13
- ---------------------------------------------------------------------------------
Total deferred income tax liabilities 2,202 2,447
- ---------------------------------------------------------------------------------
Net deferred income tax liabilities $ (391) $ (866)
=================================================================================
</TABLE>
The base year bad debt income tax reserve, defined as income tax reserves
arising in tax years beginning before December 31, 1987, was $4,308,000 at
December 31, 1996. In accordance with SFAS No. 109, no deferred income tax
liability has been recognized on this amount as management does not
anticipate that this bad debt income tax reserve will become taxable in the
foreseeable future.
The effective income tax rate differs from the federal statutory income tax
rate in effect each year as a result of the following items:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
Increase (decrease) from
Tax-exempt interest income (3.0) (3.6) (5.6)
State income taxes 3.5 3.2 3.1
Amortization of intangibles 3.4 3.4 2.7
Other (.1) .2 (.8)
- --------------------------------------------------------------------------------
Effective income tax rate 38.8% 38.2% 34.4%
================================================================================
</TABLE>
16
<PAGE> 17
13. EMPLOYEE BENEFIT PLANS
PENSION PLAN
Homeland has a qualified defined benefit pension plan covering all eligible
full-time employees. Benefits under this plan are based on years of service
and compensation during the years immediately preceding retirement. The
plan's primary assets include mutual funds, fixed income mortgages, and cash
equivalents. Homeland's funding policy is based on an actuarially determined
cost method allowable under Internal Revenue Service regulations. Homeland's
contributions to the pension plan for 1996, 1995, and 1994 were $482,000,
$609,000, and $400,000, respectively.
The components of net pension expense consisted of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 429 $ 444 $ 314
Interest cost on projected benefit obligation 234 216 184
Actual loss (return) on plan assets (65) (428) 21
Net amortization and deferral (181) 241 (229)
- ----------------------------------------------------------------------------------------------
Net pension expense $ 417 $ 473 $ 290
==============================================================================================
</TABLE>
Homeland reviews the actuarial assumptions annually and provides adjustments
based on current economic conditions and plan characteristics. Although the
actual return on plan assets is shown, the expected long-term rate of return
used in determining net periodic pension expense was 8% for all periods
presented. The difference between the actual return and expected return is
included in net amortization and deferral. For all periods presented, the
actuarial present value of benefits was determined using a discount rate of
7%, and the rate of compensation increase used to measure the projected
benefit obligation was 5%.
The funded status of the pension plan at December 31, 1996 and 1995 was as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefit obligation $(2,658) $(2,469)
Nonvested benefit obligation (251) (158)
- --------------------------------------------------------------------------------
Accumulated benefit obligation (2,909) (2,627)
Effect of projected future compensation increases (1,038) (1,059)
- -------------------------------------------------------------------------------
Projected benefit obligation (3,947) (3,686)
Plan assets at fair value 3,327 3,488
- -------------------------------------------------------------------------------
Plan assets less than the projected benefit obligation (620) (198)
Unrecognized net transition liability being
recognized over employee service lives 99 107
Unrecognized net loss from past experience
different from that assumed 950 447
Unrecognized prior service cost 94 102
- -------------------------------------------------------------------------------
Prepaid pension expense $ 523 $ 458
===============================================================================
</TABLE>
PROFIT SHARING PLAN
Homeland has a qualified profit sharing plan covering all eligible full-time
employees. Contributions to the plan are made when certain consolidated
profit conditions are achieved. Additionally, beginning in 1995, employees
may participate by contributing a percentage of their salary, a portion of
which is matched by Homeland. Total expenses for the profit sharing plan
were $1,259,000, $894,000, and $826,000 in 1996, 1995, and 1994,
respectively.
17
<PAGE> 18
13. EMPLOYEE BENEFIT PLANS (CONTINUED)
STOCK OPTION PLANS
Homeland has incentive stock option plans under which 406,250 shares of
common stock have been reserved for issuance to officers of Homeland and its
subsidiaries. Stock option plans are granted by the board of directors of
Homeland for issuance at the market value of the common stock determined as
of the date of grant. Shares reserved for issuance under the stock option
plans, option prices, and shares available for future option grants have been
adjusted for stock splits. Stock option activity during 1996, 1995, and 1994
was as follows:
<TABLE>
<CAPTION>
Shares Price
- ------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1994 60,800 $ 16.25
Granted 82,000 23.25
Exercised (59,967) 16.25
Canceled (5,933) 16.25-23.25
- ------------------------------------------------------------------------------
Outstanding at December 31, 1994 76,900 23.25
Granted --- ---
Exercised (1,800) 23.25
Canceled (9,000) 23.25
- ------------------------------------------------------------------------------
Outstanding at December 31, 1995 66,100 23.25
Granted 15,000 28.00
Exercised (65,100) 23.25
Canceled (1,000) 23.25
- ------------------------------------------------------------------------------
Outstanding at December 31, 1996 15,000 $ 28.00
==============================================================================
</TABLE>
Since the inception of the incentive stock option plans, options have been
granted and exercised for 389,879 shares. At December 31, 1996, all 15,000
outstanding stock options were exercisable in April 1997, and 1,371 shares
were available for future option grants until the plan governing these shares
expires on May 4, 1997.
OTHER PLANS
During 1996, Homeland offered an early retirement program to certain eligible
employees. Expenses associated with this program were $327,000.
During 1995, Homeland implemented a supplemental retirement income plan for
certain key executives and purchased life insurance policies to actuarially
finance all future liabilities of the plan. Total expense related to the
plan was $176,000 in 1996 and $79,000 in 1995.
18
<PAGE> 19
14. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
Estimated fair value disclosures are reported in accordance with SFAS No.
107, "Disclosures About Fair Value of Financial Instruments." The estimated
fair value of securities is based primarily upon quoted market prices within
an active market. For the remaining financial instruments, the estimated
fair values presented are management's estimates of the amount at which the
instrument could be exchanged in a current transaction between willing
parties, based upon estimates using present value and other valuation
methods. As these estimates are significantly affected by the assumptions
used, estimated fair values may not be comparable between entities, nor would
they be realizable in an immediate liquidation of the instruments. SFAS No.
107 excludes certain items from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented are not intended to represent, and
do not represent, the underlying value of Homeland. The carrying values and
estimated fair values of Homeland's financial instruments at December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------ ---------------------------
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
(Dollars in thousands) VALUE VALUE Value Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 88,741 $ 88,741 $119,922 $119,922
Securities 171,122 171,122 217,556 217,556
Net loans 914,188 924,032 836,186 843,705
LIABILITIES
Deposits 971,752 972,114 962,719 968,288
Federal funds purchased 47,100 47,100 70,225 70,225
Other short-term borrowings 18,193 18,193 15,587 15,587
Long-term borrowings 46,947 46,884 43,925 43,965
</TABLE>
CASH AND CASH EQUIVALENTS: The carrying value approximates estimated
fair value.
SECURITIES: The estimated fair value of securities is based on quoted
market prices where available. Where not available, fair values are based on
quoted market prices of similar securities, adjusted for any differences in
credit ratings or maturities.
NET LOANS: The estimated fair value of loans is calculated by discounting
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and maturities, adjusted for
credit and prepayment risks.
DEPOSITS: The estimated fair value of demand, money market, and savings
deposits is the amount payable on demand at the reporting date. The fair
value of time deposits is estimated using a discounted cash flow calculation
that applies rates currently offered for deposits of similar remaining
maturities.
FEDERAL FUNDS PURCHASED AND OTHER SHORT-TERM BORROWINGS: The
carrying value of federal funds purchased and other short-term borrowings
approximate the estimated fair value.
LONG-TERM BORROWINGS: The fair value of long-term borrowings is
estimated using rates currently available for debt with similar terms and
remaining maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS: The estimated fair value of
commitments to extend credit and standby letters of credit are estimated
using the fees currently charged to enter into similar agreements. Neither
the fees earned during the year or the off-balance instruments' fair value at
year-end are material.
19
<PAGE> 20
15. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Homeland engages in off-balance sheet activities to meet the financing needs
of customers. Such activities consist principally of commitments to extend
credit and standby letters of credit. Exposure to credit losses is
represented by the contractual amounts of the commitments to extend credit or
standby letters of credit, and credit losses may be incurred when a customer
fails to perform in accordance with the contractual terms. Homeland uses the
same credit standards in making commitments and conditional obligations as it
uses for making loans. Collateral may be obtained if deemed necessary by
management's credit evaluation. Collateral held varies, but generally may
include receivables, inventory, equipment, or real estate. The contractual
amounts of these financial instruments at December 31, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit
Conditional business lines $162,681 $139,307
Credit card lines 23,751 23,989
Home equity lines 37,571 28,994
Other commitments 34,398 32,271
Standby letters of credit 11,995 16,805
</TABLE>
Commitments to extend credit are contractual agreements to lend money to
customers for a specific period of time provided there is no violation of any
condition established in the contract. Such commitments may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
Standby letters of credit are issued on behalf of bank customers in
connection with contracts between the customers and third parties. Under a
standby letter of credit, the bank assures that the third party will not
suffer a loss if the customer fails to meet the contractual obligation.
Those guarantees are primarily issued to support public and private borrowing
arrangements such as bond financing and similar transactions.
16. CONTINGENCIES AND STATUTORY RESTRICTIONS
In the normal course of business, Homeland and its subsidiaries are
periodically involved in legal proceedings. Management is of the opinion,
after review with legal counsel, that there are no such actions at December
31, 1996, that will have a material effect upon the consolidated financial
statements.
The subsidiaries of Homeland are required to maintain reserve balances at the
Federal Reserve Bank based upon deposit levels and other factors. The
average balances of reserves required to be maintained were $11,661,000 in
1996 and $11,105,000 in 1995.
At December 31, 1996, securities with amortized cost of $41,803,000 were
pledged to secure public deposits and for other purposes as required or
permitted by law.
Dividends received from Homeland's subsidiaries are the primary source of
funds available to Homeland for payment of dividends to its shareholders.
State and federal banking regulations require minimum capital levels to be
maintained and impose certain restrictions on the amount of dividends that
subsidiaries may pay in any given year. At December 31, 1996, stockholders'
equity of Homeland's subsidiaries totaled $123,389,000, of which
approximately $13,000,000 was available for the payment of dividends to
Homeland in accordance with these regulatory requirements.
In connection with the merger of Homeland with Magna, Homeland is obligated
to pay at the merger consummation date approximately $1,400,000 to The
Chicago Corporation for financial advisory and investment banking services.
20
<PAGE> 21
17. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
<TABLE>
BALANCE SHEETS
<CAPTION>
DECEMBER 31,
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,036 $ 7,622
Investments in subsidiaries 123,389 122,327
Deferred income taxes 152 98
Other assets 975 608
- --------------------------------------------------------------------
Total assets $134,552 $130,655
====================================================================
LIABILITIES
Deferred compensation $ 238 $ 251
Supplemental retirement plan 226 79
Other liabilities 41 3,004
- --------------------------------------------------------------------
Total liabilities 505 3,334
- --------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 71,292 71,756
Additional paid-in capital --- 246
Retained earnings 62,396 54,697
Net unrealized gain on securities
available for sale, net of income taxes 359 622
- --------------------------------------------------------------------
Total stockholders' equity 134,047 127,321
- --------------------------------------------------------------------
Total liabilities and stockholders' equity $134,552 $130,655
====================================================================
</TABLE>
<TABLE>
STATEMENTS OF INCOME
<CAPTION>
YEARS ENDED DECEMBER 31,
(Dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries $13,200 $11,200 $ 44,250
Interest from subsidiaries 442 130 46
Other interest --- 113 153
Management fees from subsidiaries 564 583 401
- ----------------------------------------------------------------------------------
Total income 14,206 12,026 44,850
- ----------------------------------------------------------------------------------
EXPENSES
Interest --- --- 48
Personnel 936 693 511
Advertising and promotion 83 102 104
Professional fees 358 186 488
Other 62 133 93
- ----------------------------------------------------------------------------------
Total expenses 1,439 1,114 1,244
- ----------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed income of subsidiaries 12,767 10,912 43,606
Income tax expense (credit) 23 84 (13)
- ----------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiaries 12,744 10,828 43,619
Equity in undistributed income of
subsidiaries 1,075 2,793 (31,358)
- ----------------------------------------------------------------------------------
Net income $13,819 $13,621 $ 12,261
==================================================================================
</TABLE>
21
<PAGE> 22
17. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
(Dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $13,819 $13,621 $ 12,261
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed income of
subsidiaries (1,075) (2,793) 31,358
Provision for deferred income taxes (54) 3 57
Decrease (increase) in other assets (367) 59 (36)
Increase (decrease) in deferred
compensation 134 (26) (18)
Increase in other liabilities 37 68 15
- --------------------------------------------------------------------------------
Net cash provided by operating activities 12,494 10,932 43,637
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of securities
available for sale --- 6,000 ---
Purchases of securities available for sale --- (4,500) (1,500)
Purchase of financial institution (3,250) --- (47,881)
- --------------------------------------------------------------------------------
Net cash provided by (used for) investing
activities (3,250) 1,500 (49,381)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Payments of cash dividends (5,206) (4,992) (4,808)
Proceeds from stock options exercised 1,514 41 975
Common stock purchased (3,138) --- ---
- --------------------------------------------------------------------------------
Net cash used for financing activities (6,830) (4,951) (3,833)
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 2,414 7,481 (9,577)
Cash and cash equivalents at beginning
of year 7,622 141 9,718
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $10,036 $ 7,622 $ 141
================================================================================
</TABLE>
<TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid (received)
Interest $--- $--- $ 48
Income taxes 246 (32) 125
</TABLE>
22
<PAGE> 23
<TABLE>
MAGNA GROUP, INC.
PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
REFLECTING THE ACQUISITION OF HOMELAND BANKSHARES CORPORATION
DECEMBER 31, 1996
(UNAUDITED; IN THOUSANDS)
<CAPTION>
PRO FORMA MAGNA/
ADJUSTMENTS<F1> HOMELAND
MAGNA HOMELAND --------------------- PRO FORMA
ASSETS HISTORICAL HISTORICAL DEBIT CREDIT COMBINED
---------- ---------- ----- ------ ---------
<S> <C> <C> <C> <C> <C>
Cash and due from banks $ 180,412 $ 59,266 $ 239,678
Federal funds sold 34,068 29,475 63,543
Held-to-maturity securities 154,729 - 154,729
Available-for-sale securities 1,501,178 171,122 1,672,300
Loans, net of unearned income 3,415,309 923,620 4,338,929
Reserve for loan losses (45,382) (9,432) (54,814)
---------- ---------- ----------
Net Loans 3,369,927 914,188 4,284,115
Premises and equipment 81,815 24,041 4,208<F2> 673<F3> 109,391
Goodwill and other intangibles 29,310 16,558 98,627<F4> 12,160<F5>
4,398<F6> 127,937
Other assets 107,270 13,875 35<F7> 121,180
---------- ---------- ----------
TOTAL ASSETS $5,458,709 $1,228,525 $6,772,873
========== ========== ==========
LIABILITIES
Deposits:
Noninterest bearing $ 575,504 $ 138,647 $ 714,151
Interest bearing 3,622,272 833,105 4,455,377
---------- ---------- ----------
Total Deposits 4,197,776 971,752 5,169,528
Federal funds purchased 25,500 47,100 108,457<F8> 181,057
Repurchase agreements 508,948 - 508,948
Other short-term borrowings 99,487 18,193 40,200<F9> 157,880
Long-term debt 77,577 46,947 40,200<F9> 84,324
Other liabilities 65,460 10,486 5,823<F10> 81,769
---------- ---------- ----------
TOTAL LIABILITIES 4,974,748 1,094,478 6,183,506
STOCKHOLDERS' EQUITY
Preferred stock 40 - 40
Common stock 57,909 71,292 71,292<F11> 8,586<F12> 66,495
Surplus 230,258 - 93,465<F13> 323,723
Retained earnings 215,744 62,396 62,396<F14> 215,744
Treasury stock (17,605) - 14,250<F15> 17,605<F16> (14,250)
Net unrealized gains (losses) on securities (2,385) 359 359<F17> (2,385)
---------- ---------- ----------
TOTAL STOCKHOLDERS' EQUITY 483,961 134,047 589,367
---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $5,458,709 $1,228,525 $6,772,873
========== ========== ==========
<FN>
See Notes to Pro Forma Combined Consolidated Balance Sheet.
23
<PAGE> 24
<CAPTION>
MAGNA GROUP, INC.
NOTES TO PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED; DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
<F1> The purchase price and allocation of purchase price are as follows:
Consideration to be paid to Homeland shareholders:
Cash $ 92,036
Magna Common Stock (5,038,161 shares @ $23.75) 119,657
Acquisition fees paid to advisors 2,170
--------
Total purchase price $213,863
========
The $23.75 share value reflects the average closing price of Magna
Common Stock during the 30 consecutive trading days prior to the
signing of the definitive agreement to acquire Homeland.
The purchase price has been allocated as follows:
Historical net book value of Homeland $134,047
Adjustments to fair value of Homeland assets and liabilities:
Premises and equipment (see notes 2 and 3) 3,535
Other liabilities (see note 10) (5,823)
Deferred income taxes (see note 7) 35 (2,253)
------
Adjustment to goodwill and other intangibles (see notes 4, 5 and 6) 82,069
--------
Total purchase price $213,863
========
<S>
<F2> Write-up of certain Homeland fixed assets to fair value.
<F3> Write-off of certain Homeland fixed assets not compatible with Magna systems.
<F4> Reflects goodwill resulting from the acquisition of Homeland by Magna. This
goodwill will be amortized over a period of 15 years.
<F5> Write-off of unamortized goodwill previously recorded on the books of
subsidiary banks of Homeland.
<F6> Write-off of unamortized deposit base intangibles previously recorded
on the books of subsidiary banks of Homeland.
<F7> Reflects net deffered taxes related to: write-up of fixed assets to
fair value; write-off of fixed assets not compatible with Magna Systems;
various accruals including vacation pay liability; accrual for
possible payments required in connection with change of control
agreements held by certain Homeland executives; accrual for present
value of future benefits connected with Homeland's Supplemental
Retirement Income Plan; and accrual for acquisition fees to be paid to
advisors.
<F8> Reflects the purchase of federal funds to provide cash for payment to
Homeland shareholders, payment of cash for legal and professional fees
connected with the Homeland acquisition and payment of cash to
repurchase approximately 600,000 shares of Magna common stock.
<F9> Reflects the reclassification of certain Homeland debt instruments
from long-term debt to other short-term borrowings consistent with
the practices of Magna. These debt instruments were originally
long-term and are now being reclassified as a result of their
1997 maturities.
24
<PAGE> 25
MAGNA GROUP, INC.
NOTES TO PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
(UNAUDITED; DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<F10> Establish various accruals including vacation pay for employees of Homeland
in conformity with Magna policy; possible payments required in connection
with change of control agreements held by certain Homeland executives;
present value of future benefits connected with Homeland's Supplemental
Retirement Income Plan; and acquisition fees to be paid to advisors.
<F11> Elimination of 5,703,378 shares of Homeland Common Stock.
<F12> Issuance of 4,293,161 shares of Magna Common Stock.
<F13> Adjustment to Magna capital to reflect acquisition of Homeland.
<F14> Elimination of Homeland retained earnings.
<F15> Reflects the repurchase of 600,000 shares of Magna Common Stock
issued in connection with the acquisition of Homeland.
<F16> Reflects the issuance of 745,000 shares of Magna Common Stock held in
treasury.
<F17> Elimination of Homeland net unrealized gain on available-for-sale
securities.
</TABLE>
25
<PAGE> 26
<TABLE>
MAGNA GROUP, INC.
PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME
TWELVE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED; IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
MAGNA/
HOMELAND
MAGNA HOMELAND PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $285,151 $77,906 $363,057
Securities:
Taxable 93,029 10,262 103,291
Tax-exempt 7,141 1,666 8,807
-------- ------- -------- --------
100,170 11,928 0 112,098
Other interest income 2,514 2,160 4,674
-------- ------- -------- --------
TOTAL INTEREST INCOME 387,835 91,994 0 479,829
Interest Expense:
Deposits 158,188 35,019 193,207
Federal funds purchased 3,006 3,249 5,878 <F1> 12,133
Repurchase agreements 21,481 - 21,481
Other short-term borrowings 4,325 1,027 2,325 <F2> 7,677
Long-term debt 6,748 2,766 (2,325)<F2> 7,189
-------- ------- -------- --------
TOTAL INTEREST EXPENSE 193,748 42,061 5,878 241,687
-------- ------- -------- --------
NET INTEREST INCOME 194,087 49,933 (5,878) 238,142
Provision for Loan Losses 10,280 2,315 12,595
-------- ------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 183,807 47,618 (5,878) 225,547
Noninterest Income:
Service charges on deposits 23,443 3,483 26,926
Trust 9,382 2,460 11,842
Securities gains, net 817 44 861
Other 16,716 6,151 22,867
-------- ------- --------
50,358 12,138 62,496
Noninterest Expense:
Employee compensation and other benefits 69,142 19,798 88,940
Net occupancy 17,980 2,937 140 <F3> 21,057
Equipment 8,731 2,440 11,171
FDIC insurance premiums 554 2,230 2,784
Other 41,979 9,774 4,412 <F4> 56,165
-------- ------- -------- --------
138,386 37,179 4,552 180,117
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES 95,779 22,577 (10,430) 107,926
Income Tax Expense 32,640 8,758 (2,106)<F5> 39,292
-------- ------- -------- --------
NET INCOME $ 63,139 $13,819 $ (8,324) $ 68,634
======== ======= ======== ========
Primary net income per share $2.22 $2.41 $2.09
======== ======= ========
Fully diluted net income per share $2.18 $2.41 $2.05
======== ======= ========
<FN>
See Notes to Pro Forma Combined Consolidated Statement of Income.
26
<PAGE> 27
<CAPTION>
MAGNA GROUP, INC.
NOTES TO PRO FORMA COMBINED CONSOLIDATED STATEMENT OF INCOME
TWELVE MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED; DOLLARS IN THOUSANDS)
<F1> Reflects interest expense on purchase of federal funds used to provide
cash for payment to Homeland shareholders, payment of cash for legal
and professional fees connected with the Homeland acquisition and
payment of cash to repurchase approximately 600,000 shares of Magna
Common Stock.
<F2> Reflects interest reclassification associated with certain Homeland
debt instruments reclassified from long-term debt to other short-term
borrowings as a result of their 1997 maturities.
<F3> Reflects amortization expense of purchase accounting adjustment
associated with the write-up of certain Homeland fixed assets to
fair value.
<F4> Reflects amortization expense of incremental intangibles as follows:
<CAPTION>
Twelve Months
Ended
December 31, 1996
<S> <C>
Goodwill amortization expense resulting from the acquisition of
Homeland (based on a life of 15 years) $6,575
Less: Historical amortization expense on Homeland's goodwill and
deposit base intangibles written off in connection with the
allocation of the purchase price 2,163
------
$4,412
======
<F5> Income tax expense on pro forma adjustments, excluding incremental
goodwill amortization expense, is reflected using a tax rate of 35%.
</TABLE>
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: May 1, 1997
MAGNA GROUP, INC.
By: /s/ Ronald A. Buerges
--------------------------------------------
Ronald A. Buerges, Executive Vice President
and Chief Financial Officer
28
<PAGE> 29
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
None
29
