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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ---------------------- TO ----------------------.
COMMISSION FILE NUMBER 001-12405
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MAGNA GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 37-0996453
(STATE OR OTHER JURISDICTION OF INCORPORATION
OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE MAGNA PLACE
1401 SOUTH BRENTWOOD BOULEVARD
ST. LOUIS, MISSOURI 63144-1401
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (314) 963-2500
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SECURITIES REGISTERED PURSUANT TO
SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
COMMON STOCK, $2.00 PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
7% CONVERTIBLE SUBORDINATED CAPITAL NOTES DUE 1999
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 27, 1998:
Common Stock, $2.00 par value: $1,806,435,767.
There is no established public trading market for the Registrant's Class B
Voting Preferred Stock, which entitles the holder to one vote per share and of
which non-affiliates hold all 1,981 outstanding shares.
The number of shares outstanding of Registrant's Common Stock, as of
February 27, 1998, was:
Common Stock, $2.00 par value: 32,665,817 shares outstanding.
--------------------------
DOCUMENTS INCORPORATED BY REFERENCE
As provided herein, portions of the documents below are incorporated herein
by reference:
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DOCUMENT PART-FORM 10-K
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Proxy Statement for the 1998 Annual Meeting of Stockholders..... Part III
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MAGNA GROUP, INC.
FORM 10-K
TABLE OF CONTENTS
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PAGE
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Part I
Item 1--Business........................................ 2
Item 2--Properties...................................... 9
Item 3--Legal Proceedings............................... 9
Item 4--Submission of Matters to a Vote of Security
Holders......................................... 9
Part II
Item 5--Market for Common Stock and Related Stockholder
Matters......................................... 9
Item 6--Selected Financial Data......................... 10
Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations... 11
Item 7A--Quantitative and Qualitative Disclosures About
Market Risk.................................... 33
Item 8--Financial Statements and Supplementary Data..... 34
Item 9--Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.......... 62
Part III
Item 10--Directors and Executive Officers............... 62
Item 11--Executive Compensation......................... 62
Item 12--Security Ownership of Certain Beneficial
Owners and Management.......................... 62
Item 13--Certain Relationships and Related
Transactions................................... 62
Part IV
Item 14--Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................. 62
Signatures............................................... 63
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MAGNA GROUP, INC.
PART I
ITEM 1. BUSINESS
GENERAL
Magna Group, Inc. ("Magna" or "Registrant") is a bank holding company
whose business consists primarily of the ownership, supervision and control of a
national banking association, located in the states of Illinois, Iowa and
Missouri. Magna also owns certain other non-banking subsidiaries including
brokerage and insurance subsidiaries.
Magna was incorporated under the laws of the State of Delaware in 1974.
Since 1974, Magna has grown from three locations and assets of approximately
$127 million to 139 locations and assets of approximately $7.1 billion at
December 31, 1997. This expansion was a result of both internal growth and an
active acquisition program.
Magna is a legal entity separate and distinct from its subsidiaries. Magna
provides its subsidiaries with advice, counsel and specialized services in
various fields of banking policy and operations. Such services include general
administration, asset/liability management, accounting and financial reporting,
internal auditing, lending policies and procedures, purchasing, advertising and
public relations, product development, legal services, data processing and bank
operations, and personnel recruitment and training. Magna and its affiliates had
2,361 full-time and 343 part-time employees at December 31, 1997.
PENDING ACQUISITION OF CHARTER FINANCIAL, INC.
On November 19, 1997, Magna entered into a definitive agreement to acquire
Charter Financial, Inc. and its wholly-owned thrift subsidiary Charter Bank,
S.B. (collectively, "Charter"), headquartered in Sparta, Illinois. The
acquisition is expected to be completed in the second quarter of 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction."
PENDING MERGER WITH UNION PLANTERS CORPORATION
On February 22, 1998, Magna entered into a definitive agreement with Union
Planters Corporation ("Union Planters") providing for the acquisition of Magna
by Union Planters. The acquisition, which is subject to, among other things, the
approvals of the stockholders of both companies and appropriate regulatory
agencies, provides for a tax-free exchange of 0.9686 of a share of Union
Planters common stock for each share of Magna common stock. Holders of Magna's
preferred stock will receive cash for each share of preferred stock, in an
amount equal to the par value thereof. The acquisition is expected to be
completed in the third quarter of 1998.
AFFILIATE BANK AND MARKET AREAS
As of March 12, 1998, Magna owns, indirectly, all of the voting capital
stock of one national bank, which operates from 139 locations in Illinois, Iowa
and Missouri (the "Affiliate Bank").
On March 1, 1997, Magna acquired Homeland Bankshares Corporation, Waterloo,
Iowa ("Homeland"), thereby increasing the scope of its banking franchise to
include the state of Iowa. Total assets of Homeland at the date of acquisition
were approximately $1.3 billion. Homeland's one national bank, three Iowa state
banks and one federal savings bank, acquired by Magna with its acquisition of
Homeland, were merged with and into the Affiliate Bank in July 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Introduction."
On September 26, 1997, the operations of Magna's trust company were
consolidated with those of the Affiliate Bank.
The operations of the Affiliate Bank are presently divided into 19 regions.
The number of locations contained within such regions is as set forth below:
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NUMBER OF
REGION LOCATIONS
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Bloomington............. 3
Carbondale.............. 5
Cedar Rapids/Iowa City.. 2
Cedar Valley............ 14
Centralia............... 7
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NUMBER OF
REGION LOCATIONS
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Columbia................ 5
Decatur................. 4
Des Moines.............. 3
Indianola............... 5
Lincoln................. 3
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NUMBER OF
REGION LOCATIONS
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Madison................. 8
Monticello.............. 1
Oelwein................. 4
Peoria.................. 7
Riverbend............... 6
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NUMBER OF
REGION LOCATIONS
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Springfield............. 2
St. Charles............. 11
St. Clair............... 21
St. Louis............... 28
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Total Locations..... 139
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ITEM 1. BUSINESS--CONTINUED
PRODUCTS AND SERVICES
The Affiliate Bank operates as a community bank and concentrates on
relationship-oriented financial service activities, including business, consumer
and real estate loans; credit cards; and checking, savings and time deposits.
The Affiliate Bank's deposit base consists primarily of core deposits from
within the communities which it serves, and lending activity is targeted to
consumers and small-to-midsized businesses in the Affiliate Bank's immediate
geographic areas. Customers of Magna's Affiliate Bank can conveniently access a
broad range of investment and insurance services through the subsidiaries of MGI
Group, Inc.
The Affiliate Bank serves as a correspondent bank for approximately 277
banks, primarily in Illinois, Iowa and Missouri. Correspondent banking services
include the processing of checks and collection items, overline loan assistance,
investment safekeeping, assistance with operations and electronic funds
transfer.
The Affiliate Bank provides various trust services including, the
administration of decedants' estates, trusts under wills, trusts under
agreements, escrow agencies, guardianships, farm management and appraisal and
related activities. At December 31, 1997, the Affiliate Bank had custodial
assets and assets under management of approximately $2.9 billion.
Banking is highly competitive in the market areas which Magna serves. The
Affiliate Bank competes to varying degrees with numerous locally-owned
commercial banks, major regional and money center banks and non-bank
competitors. Non-bank competitors include savings and loan associations, credit
unions, securities firms, money market funds, insurance companies, automobile
finance companies, mortgage lending companies and credit card companies.
Competition continues to intensify as non-bank entities broaden their
marketing and financial services and as multibank holding companies continue to
acquire banks and open new facilities in the market areas served by the
Affiliate Bank. Nationwide interstate banking laws may further increase
competition. See "Supervision and Regulation--Interstate Banking."
NON-BANK AFFILIATES
The subsidiaries of MGI Group, Inc. and InBank Group, Inc. provide non-bank
financial products and services (e.g. life insurance, annuities, stocks, bonds
and investment advice) to customers of the Affiliate Bank and to customers of
unaffiliated banks, respectively. The geographic extent of the trade territories
served by the subsidiaries of MGI Group, Inc. and InBank Group, Inc. is
dependent upon the market areas served by the Affiliate Bank and the
unaffiliated banks, respectively.
SUPERVISION AND REGULATION
GENERAL. As a bank holding company, Magna is subject to regulation under the
Bank Holding Company Act of 1956, as amended (the "BHCA"), by the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). Bank
holding companies are required to file reports with the Federal Reserve Board
and to provide such additional information as the Federal Reserve Board may
require. Magna's Affiliate Bank is regulated primarily by the Office of the
Comptroller of the Currency ("OCC").
The BHCA requires every bank holding company to obtain the prior approval of
the Federal Reserve Board before it may (i) acquire substantially all of the
assets of any bank, (ii) acquire more than five percent of the voting stock of a
bank or bank holding company which is not already majority owned, or (iii) merge
or consolidate with another bank holding company.
Under the BHCA, a bank holding company is prohibited, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
five percent of the voting shares of any company which is not a bank and from
engaging in business other than that of banking, managing and controlling banks
or performing services for its banking subsidiaries. However, the BHCA
authorizes the Federal Reserve Board to permit bank holding companies to engage
in activities which are so closely related to banking or managing or controlling
banks as to be a proper incident thereto.
CERTAIN TRANSACTIONS WITH AFFILIATES. There are various legal restrictions
on the extent to which a bank holding company and certain of its non-bank
subsidiaries can borrow or otherwise obtain credit from its bank subsidiaries.
In general, these restrictions require that any such extensions of credit must
be on non-preferential terms and secured by designated amounts of specified
collateral and are limited, as to any one of the holding company or non-bank
subsidiaries,
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ITEM 1. BUSINESS--CONTINUED
to 10% of the lending bank's capital stock and surplus, and as to the holding
company and all such non-bank subsidiaries in the aggregate, to 20% of such
capital stock and surplus.
Any capital loans by Magna to the Affiliate Bank would be subordinate in
right of payment to deposits and certain other indebtedness of the Affiliate
Bank. The right of Magna, and the right of Magna's creditors and stockholders,
to participate in any distribution of the assets or earnings of the Affiliate
Bank is necessarily subject to the prior claims of creditors of the Affiliate
Bank, except to the extent that claims of Magna in its capacity as creditor may
be recognized.
FIRREA AND FDICIA. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), enacted primarily to deal with problems in
the savings and loan industry, also affected commercial banking organizations.
FIRREA mandates public disclosure by commercial banks of their Community
Reinvestment Act ratings and mortgage lending records, establishes enhanced
enforcement measures which are available for bank regulators to use against
commercial banks and bankers and imposes cross liability on insured institutions
under common control with any insured institution to which the Federal Deposit
Insurance Corporation ("FDIC") gives financial assistance. FIRREA also permits
bank holding companies to acquire savings and loan associations, subject to the
approval of the Federal Reserve Board.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") increased funding for the FDIC's bank insurance fund, and
established standards for, and restrictions on, activities of depository
institutions based upon capital status and supervisory evaluation by Federal
banking regulators. Under FDICIA, depository institutions are placed in one of
five capital categories, for which the Federal banking agencies have established
specific capital ratio levels. Pursuant to the agencies' regulations, an
institution is considered "well capitalized" if it has a total risk-based
capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%
and a leverage capital ratio of at least 5%. In addition, regardless of a bank's
capital level, a bank is not considered "well capitalized" if it is subject to
a cease and desist order, formal agreement, capital directive or prompt
corrective action directive that requires it to achieve or maintain a higher
level of capital. An institution is considered "adequately capitalized" if it
has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital
ratio of at least 4% and a leverage capital ratio of at least 4%. Institutions
with capital levels below those necessary to qualify as "adequately
capitalized" are deemed to be either "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized," depending on their
specific capital levels.
FDICIA, through its prompt corrective action system, imposes significant
operational and management restrictions on depository institutions that are not
considered at least "adequately capitalized." Under FDICIA's prompt corrective
action system, a depository institution in the "undercapitalized" category
must submit a capital restoration plan guaranteed by its parent company. The
liability of the parent company under any such guarantee is limited to the
lesser of 5% of the depository institution's assets at the time it became
"undercapitalized," or the amount needed to comply with the plan. A depository
institution in the "undercapitalized" category also is subject to limitations
in numerous areas including, but not limited to: asset growth; acquisitions;
branching; new business lines; acceptance of brokered deposits; and borrowings
from the Federal Reserve. Progressively more burdensome restrictions are applied
to institutions in the "undercapitalized" category that fail to submit or
implement a capital plan and to institutions that are in the "significantly
undercapitalized" or "critically undercapitalized" categories. A depository
institution's primary Federal banking agency is authorized to downgrade the
institution's capital category to the next lower category upon a determination
that the institution is in an unsafe or unsound condition or is engaged in an
unsafe or unsound practice. An unsafe or unsound practice can include receipt by
the institution of a rating on its most recent examination of three or worse.
The capital category assigned to a depository institution also affects its
deposit insurance assessment rate. See "FDIC Assessments."
FDICIA and the regulations issued thereunder also have: (i) limited the use
of brokered deposits to "well capitalized" institutions, and "adequately
capitalized" institutions that have received waivers from the FDIC; (ii)
established restrictions on the permissible investments and activities of
FDIC-insured state chartered depository institutions and their subsidiaries;
(iii) implemented uniform real estate lending rules; (iv) prescribed standards
to limit the risks posed by credit exposure between depository institutions; (v)
revised risk-based capital rules to include components for measuring the risk
posed by interest rate changes; (vi) amended various consumer banking laws;
(vii) increased restrictions on loans to an institution's insiders; (viii)
established standards in a number of areas to assure safety and soundness; and
(ix) implemented additional requirements for institutions that have $500 million
or more in total assets with respect to annual independent audits, audit
committees and management reports related to financial statements, internal
controls and compliance with designated laws and regulations.
CAPITAL ADEQUACY. The Federal Reserve Board has issued standards for
measuring capital adequacy for bank holding companies. These standards are
designed to provide risk-responsive capital guidelines and to incorporate a
consistent
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ITEM 1. BUSINESS--CONTINUED
framework for use by financial institutions operating in major international
financial markets. The banking regulators have issued standards for depository
institutions that are similar to, but not identical with, the standards for bank
holding companies.
In general, the risk-related standards require depository institutions and
bank holding companies to maintain capital based on "risk-adjusted" assets so
that categories of assets with potentially higher credit risk will require more
capital backing than categories with lower credit risk. In addition, depository
institutions and bank holding companies are required to maintain capital to
support off-balance sheet activities such as loan commitments.
Under the risk-based capital standard, the minimum consolidated ratio of
total capital to risk-adjusted assets (including certain off-balance sheet
items, such as standby letters of credit) required by the Federal Reserve Board
for bank holding companies is currently 8%. At least one-half of the total
capital must be comprised of common equity, retained earnings, qualifying
noncumulative perpetual preferred stock, a limited amount of qualifying
cumulative perpetual preferred stock and minority interest in the equity
accounts of consolidated subsidiaries, plus certain items such as goodwill and
certain other intangible assets ("Tier 1 Capital"). The remainder may consist
of qualifying hybrid capital instruments, perpetual debt, mandatory convertible
debt securities, a limited amount of subordinated debt, preferred stock that
does not qualify as Tier 1 Capital and a limited amount of loan and lease loss
reserves.
In addition to the risk-based capital standard, the Federal Reserve Board
has established minimum leverage ratio guidelines for bank holding companies.
These guidelines provide for a minimum ratio of Tier 1 capital to adjusted
average total assets less goodwill and certain other intangibles (the "Leverage
Ratio") of 3% for bank holding companies that meet certain specified criteria,
including having the highest regulatory rating. Other bank holding companies
generally are required to maintain a Leverage Ratio of at least 4% to 5%.
The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions are expected to maintain strong capital
positions substantially above the minimum supervisory levels without significant
reliance on intangible assets. Furthermore, the Federal Reserve Board has
indicated that it will consider a "tangible Tier 1 capital leverage ratio"
(deducting all intangibles) and other indicia of capital strength in evaluating
proposals for expansion or new activities.
Banking agencies have recently adopted final regulations that mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation will be made as part of the institution's regular safety and
soundness examination. Banking agencies also have recently adopted final
regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of a bank's capital adequacy. Concurrently, banking agencies have
proposed a methodology for evaluating interest rate risk. After gaining
experience with the proposed measurement process, these banking agencies intend
to propose further regulations to establish an explicit risk-based capital
charge for interest rate risk.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Capital" and "Notes to Consolidated Financial
Statements--15 Regulatory Matters."
LIMITATIONS ON DIVIDENDS. Magna is a legal entity separate and distinct from
its banking and other subsidiaries. The principal source of funds to Magna on a
parent company only basis consists of dividends and management fees from the
Affiliate Bank. Various laws and regulations limit the amount of dividends and
management fees the Affiliate Bank can pay to Magna without regulatory approval.
The approval of the OCC is required for any dividend by a national bank if
the total of all dividends declared by the bank in any calendar year would
exceed the total of its net profits, as defined by the OCC, for such year
combined with its retained net profits for the preceding two years, less any
required transfers to surplus or a fund for the retirement of any preferred
stock. In addition, a national bank may not pay a dividend in an amount greater
than its net profits then on hand, after deducting losses and bad debts. All
debts due to a national bank on which interest is due and unpaid for a period of
six months, unless the same are well secured and in the process of collection,
are considered bad debts.
During the fourth quarter of 1996, the Affiliate Bank requested and received
approval from the OCC to pay to Magna a special dividend sufficient for Magna to
fund the cash portion of the Homeland acquisition. As it would otherwise have
been prevented from paying subsequent, future dividends, the Affiliate Bank also
requested and received approval from the
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ITEM 1. BUSINESS--CONTINUED
OCC to pay dividends in 1997 of up to 50% of its then-current period earnings,
while maintaining its status as a "well capitalized" financial institution. In
the fourth quarter of 1997, the Affiliate Bank again requested and received
approval from the OCC to continue, during 1998, the payment of dividends, on the
same terms and conditions as were applicable in 1997. Payment of cash dividends
by the Affiliate Bank beyond December 31, 1998 may require additional regulatory
approval.
The payment of dividends and management fees by the Affiliate Bank also may
be affected by other factors, such as the maintenance of adequate capital for
the Affiliate Bank.
In addition to the foregoing, applicable regulatory authorities are
authorized to prohibit the payment of dividends when such payment would
constitute an unsafe and unsound banking practice. The Federal Reserve Board has
indicated that it generally would be an unsafe and unsound banking practice to
pay dividends except out of current operating earnings. As previously indicated,
Federal regulatory authorities have adopted standards for the maintenance of
capital. Adherence to such standards may further limit the ability to pay
dividends. FDICIA prohibits the payment of dividends or management fees by
"undercapitalized" financial institutions and even by "well capitalized"
institutions where the payment of dividends and management fees would render
them "undercapitalized."
Under Federal Reserve Board policy, Magna is expected to act as a source of
financial strength to the Affiliate Bank and to commit resources to support the
Affiliate Bank in circumstances where it might not choose to do so absent such
policy.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Capital; Dividends and Resource Commitments; and Credit
Facility."
FDIC ASSESSMENTS. Magna's Affiliate Bank is subject to FDIC deposit
insurance assessments. Under FDICIA, the FDIC has adopted a risk-based premium
schedule. Under this schedule, each financial institution is assigned to one of
three capital groups--well capitalized, adequately capitalized or
undercapitalized--and further assigned to one of three subgroups within a
capital group, on the basis of supervisory evaluations by the institution's
primary Federal and, if applicable, state supervisors and on the basis of other
information relevant to the institution's financial condition and the risk posed
to the applicable insurance fund. The actual assessment rate applicable to a
particular institution will, therefore, depend in part upon the risk assessment
classification so assigned to the institution by the FDIC.
FIRREA required the FDIC to establish separate deposit insurance funds--the
Bank Insurance Fund ("BIF") for banks and the Savings Association Insurance
Fund ("SAIF") for savings associations. The law also required the FDIC to set
deposit insurance assessments at such levels as would cause the BIF and the SAIF
to reach their "designated reserve ratios" of 1.25% of the deposits insured by
them within a reasonable period of time. Due to the low costs of resolving bank
insolvencies, the BIF reached its designated reserve ratio in May 1995. As a
result, in November 1995, the FDIC lowered deposit insurance assessment rates
for all banks by revising the range to 4 cents to 31 cents for every $100 of
deposits. In addition, effective January 1, 1996, due to the fact that the BIF
had reached its designated reserve ratio, the FDIC eliminated deposit insurance
assessments (except for the minimum $2,000 payment required by law) for banks
that were well capitalized and well managed. The deposit insurance assessment
rate for all other banks ranged from 3 cents to 27 cents for every $100 of
deposits. As of January 1, 1996, the SAIF had not reached the designated reserve
ratio.
The Deposit Insurance Funds Act of 1996 (the "Funds Act"), enacted as part
of the Omnibus Appropriations Bill on September 30, 1996, required the FDIC to
take immediate steps to recapitalize the SAIF and to change the basis on which
funds are raised to make the scheduled payments on the FICO bonds issued in 1987
to replenish the Federal Savings and Loan Insurance Corporation. The new
legislation, combined with regulations issued by the FDIC immediately after
enactment of the Funds Act, provided for a special assessment in the amount of
65.7 basis points per $100 of insured deposits on SAIF-insured deposits held by
depository institutions on March 31, 1995 (the special assessment was required
by the Funds Act to recapitalize the SAIF to the designated reserve ratio of
1.25% of the deposits insured by SAIF). Payments of this assessment were made in
November 1996, but were accrued by financial institutions in the third calendar
quarter of 1996. Institutions that had deposits insured by both the BIF and the
SAIF ("Oakar Banks") were required to pay the special assessment on 80% of
their "adjusted attributable deposit amounts" ("AADA"). In addition, for
purposes of future regular deposit insurance assessments, the AADA on which
Oakar Banks pay assessments to SAIF was also reduced by 20%. Commencing January
1, 1997, BIF insured institutions became responsible for a portion of the annual
carrying costs of the FICO bonds. Such institutions are assessed at 80% of the
rate applicable to SAIF-insured institutions until December 31, 1999. Effective
January 1, 1997, the Funds Act also reduced ongoing SAIF deposit insurance
assessment rates
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ITEM 1. BUSINESS--CONTINUED
to a range from 6.4 cents to 23 cents (from previous rates of 23 cents to 31
cents) per $100 of insured deposits and increased ongoing BIF deposit insurance
assessment rates to a range from zero to 1.3 cents per $100 of insured deposits.
Additionally, pursuant to the Funds Act, if the reserves in BIF at the end of
any semiannual assessment period exceed 1.25% of insured deposits, the FDIC is
required to refund the excess to the BIF-insured institutions.
The Funds Act contemplates the merger of the SAIF and BIF by 1999, provided
the consolidation/merger of federal bank and thrift charters under applicable
law and regulation has been achieved by that time. Until such time, however,
depository institutions will continue to be prohibited from shifting deposits
from SAIF insurance coverage to BIF insurance coverage in an attempt to avoid
the higher SAIF assessments. The FDIC has issued regulations to guard against
the shifting of deposits from SAIF to BIF.
FIRREA contains a "cross-guarantee" provision that could result in insured
depository institutions owned by Magna being assessed for losses incurred by the
FDIC in connection with the failure of, or assistance provided by the FDIC to
avert the failure of, any other insured depository institution controlled by
Magna. Under FIRREA, failure to meet certain capital guidelines could subject a
banking institution to a variety of enforcement remedies available to Federal
regulatory authorities, including the termination of deposit insurance by the
FDIC.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Noninterest Expense."
INTERSTATE BANKING. In September 1994, legislation was enacted that is
expected to continue to have a significant effect in restructuring the banking
industry in the United States of America. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 facilitates the interstate expansion and
consolidation of banking organizations (i) by permitting bank holding companies
that are adequately capitalized and managed to acquire banks located in states
outside their home states regardless of whether such acquisitions are authorized
under the law of the host state, (ii) by permitting national and state banks
located in different states to merge across state lines, with the approval of
the appropriate federal banking agency, unless the home state of either bank had
passed legislation prior to June 1, 1997 (the effective date of the Act) that
prohibited interstate mergers (and only Texas and Montana did so), (iii) by
permitting banks to establish new branches on an interstate basis provided that
such action is specifically authorized by the law of the host state, (iv) by
permitting foreign banks to establish, with approval of the regulators in the
United States of America, branches outside their home states to the same extent
that national or state banks located in the home state would be authorized to do
so, and (v) by permitting banks to receive deposits, renew time deposits, close
loans, service loans and receive payments on loans and other obligations as
agent for any bank or thrift affiliate, whether the affiliate is located in the
same state or a different state. One effect of this legislation has been to
permit Magna to acquire banks located in any state and to permit bank holding
companies located in any state to acquire banks and bank holding companies
located in Illinois, Iowa and Missouri. Overall, this legislation is
likely to continue to have the effects of increasing competition and promoting
consolidation in the banking industry.
RECENT LEGISLATION. The Funds Act contains a variety of regulatory relief
measures, which modify or eliminate some of the more onerous requirements
imposed under Federal banking laws. Among the measures are provisions reducing
certain regulatory burdens imposed on bank holding companies. For example, the
Funds Act eliminates the requirement that bank holding companies seeking to
acquire control of a thrift file an application with the OTS and for approval to
become a unitary savings and loan holding company as a result of such
acquisition. The Funds Act also provides that a bank holding company owning or
controlling a thrift will no longer be subject to the supervision and regulation
of the OTS. The OTS will continue to supervise and regulate all thrifts acquired
in such transactions.
There have also been a number of recent legislative and regulatory proposals
designed to strengthen and improve the overall financial stability of the
banking system of the United States of America and to provide for other changes
in the bank regulatory structure, including proposals to reduce regulatory
burdens on banking organizations and to expand the nature of the products and
services banks and bank holding companies may offer. At this time, it is not
possible to predict whether or in what form these proposals may be adopted in
the future, and, if adopted, what effect they will have on Magna.
MONETARY POLICY AND ECONOMIC CONDITIONS. The earnings of Magna are affected
not only by general economic conditions but also by the policies of various
governmental regulatory authorities. The Federal Reserve Board regulates the
supply of bank credit in order to influence general economic conditions,
primarily through open market operations in U.S. Government obligations, varying
the discount rate on bank borrowings, varying reserve requirements against
member and insured bank deposits and restricting certain borrowings by such
banks and their affiliates.
7
<PAGE> 9
ITEM 1. BUSINESS--CONTINUED
EXECUTIVE OFFICERS
The following list sets forth, as of March 12, 1998, the names, ages and
positions held by the executive officers of Magna. There is no family
relationship between any of the named individuals.
<TABLE>
<CAPTION>
NAME AGE ALL POSITIONS HELD WITH REGISTRANT
---- --- ----------------------------------
<S> <C> <C>
G. Thomas Andes 55 Chairman of the Board and Chief Executive Officer of Magna since December 1994. President
and Chief Operating Officer of Magna since 1991. Prior thereto, Mr. Andes served as Vice
Chairman of the Board of Magna from 1982 to 1991.
Ronald A. Buerges 36 Senior Executive Vice President of Magna since November 1997. Prior thereto, Mr. Buerges
served as Executive Vice President and Chief Financial Officer of Magna from April 1996 to
November 1997, Acting Chief Financial Officer of Magna from November 1995 to April 1996
and as Senior Vice President, Corporate Finance of Magna from 1993 to 1995. Prior to his
employment by Magna, Mr. Buerges had been a Senior Manager with the accounting firm of
Ernst & Young (now known as Ernst & Young LLP). Mr. Buerges was employed by Ernst & Young
from 1983 to 1993.
Linda K. Fabel 54 Executive Vice President, Retail Banking of Magna since April 1994. Prior thereto, Ms.
Fabel served as Executive Vice President, Management Information Systems of Magna from
1991 to April 1994. Prior to her employment by Magna, Ms. Fabel served in a variety of
senior capacities with IBM Corporation, including General Manager of IBM's St. Louis
trading area during 1991 and Regional Manager from 1990 to 1991.
Gary D. Hemmer 44 Executive Vice President, Financial Markets of Magna since November 1997. Prior thereto,
Mr. Hemmer served as Executive Vice President, Administration of Magna from April 1994 to
November 1997, Executive Vice President, Retail Banking and Administration of Magna from
1991 to April 1994 and as Vice President, Administration of Magna from 1986 to 1991.
Robert S. Kahler 46 Executive Vice President and Chief Financial Officer of Magna since November 1997. Prior
thereto, Mr. Kahler served as Executive Vice President, Financial Markets of Magna from
March 1997 to November 1997. Prior to his employment by Magna, Mr. Kahler served as
Executive Vice President and Chief Financial Officer of Homeland.
Bradford W. Koeneman 40 Executive Vice President, Investor Relations/Marketing of Magna since November 1997. Prior
to his employment by Magna, Mr. Koeneman served in both the equities and fixed income
divisions of Goldman, Sachs & Co., beginning in 1987 and was named Vice President in 1991.
Robert J. Mathias 45 Executive Vice President, Credit Administration of Magna since February 1997. Prior
thereto, Mr. Mathias served in a variety of senior capacities with The Boatmen's National
Bank of St. Louis; most recently as its Executive Vice President and Division Manager of
Corporate Banking.
Robert M. Olson, Jr. 42 Executive Vice President, Operations and Technology of Magna since May 1994. Prior
thereto, Mr. Olson had been a managing director of J. D. Carreker and Associates, Inc., a
management consulting and technology firm, from 1991 to May 1994. Before joining J. D.
Carreker and Associates, Inc. in 1991, Mr. Olson was with Security Pacific, where he held
senior positions with the cash management department of the bank, as well as with the
holding company's automation company.
</TABLE>
8
<PAGE> 10
ITEM 2. PROPERTIES
Magna's executive offices are located in a ten-story commercial office
building in St. Louis County, Missouri, known as Magna Place. Magna has leased
approximately 50,000 square feet of Magna Place under a long-term lease from an
unaffiliated party.
In 1995, Magna opened its operations facility in Belleville, Illinois, which
enabled Magna to centralize further certain back-office functions. The facility
consists of a two-story, 170,000 square foot building, which houses various
operational and lending support functions. The overall project involved a
capital expenditure of approximately $16.5 million.
Magna's subsidiaries own and lease certain other facilities in Illinois,
Iowa and Missouri. All of these properties are considered to be in good
condition, are adequately insured and are considered adequate to meet the needs
of the particular user.
See "Notes to Consolidated Financial Statements--9 Premises and
Equipment."
ITEM 3. LEGAL PROCEEDINGS
Various claims and lawsuits, incidental to the ordinary course of business,
are pending against Magna and its subsidiaries. In the opinion of management,
after consultation with legal counsel, resolution of these matters is not
expected to have a material effect on Magna's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal year
covered by this Report to a vote of Magna's security holders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Magna common stock has been traded on the New York Stock Exchange under the
trading symbol "MGR" since November 20, 1996. Prior to that date, Magna common
stock was traded on The Nasdaq Stock Market. At December 31, 1997, there were
approximately 9,823 stockholders of record.
<TABLE>
<CAPTION>
MARKET TRADE PRICES
CALENDAR -------------------------------- DIVIDENDS
QUARTER HIGH LOW CLOSE PER SHARE
- -------- ------ ------ ------ ---------
<S> <C> <C> <C> <C>
1996
First................................. $24.00 $21.88 $23.13 $ .22
Second................................ 24.50 21.75 24.00 .22
Third................................. 28.13 22.00 28.00 .22
Fourth................................ 31.25 26.00 29.50 .22
-----
Total............................. .88
=====
1997
First................................. 35.38 28.50 28.50 .25
Second................................ 34.75 28.63 34.75 .25
Third................................. 41.00 33.19 39.44 .25
Fourth................................ 46.75 37.13 45.75 .25
-----
Total............................. 1.00
=====
</TABLE>
Magna's Board of Directors intends to continue the policy of paying cash
dividends on a quarterly basis. Future dividends will be at the discretion of
the Board of Directors and will be dependent upon Magna's earnings, financial
condition and other factors, including applicable governmental regulations. As a
bank holding company, Magna's ability to pay dividends is primarily a function
of the dividend payments and management fees received by it from its Affiliate
Bank. See "Business--Limitations on Dividends" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Capital;
Dividends and Resource Commitments; and Credit Facility."
9
<PAGE> 11
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
FIVE YEAR SELECTED FINANCIAL DATA
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
EARNINGS
Interest income............................ $ 490,164 $ 387,835 $ 347,168 $ 289,561 $ 244,288
Interest expense........................... 251,136 193,748 164,317 116,742 99,025
---------- ---------- ---------- ---------- ----------
Net interest income.................... 239,028 194,087 182,851 172,819 145,263
Provision for loan losses.................. 28,947 10,280 9,992 4,900 9,589
---------- ---------- ---------- ---------- ----------
Net interest income after provision for
loan losses.......................... 210,081 183,807 172,859 167,919 135,674
Noninterest income......................... 71,282 50,358 47,863 47,503 45,840
Noninterest expense........................ 172,637 138,386 146,217 150,213 131,321
---------- ---------- ---------- ---------- ----------
Income before income taxes............. 108,726 95,779 74,505 65,209 50,193
Income tax expense......................... 36,051 32,640 23,283 20,179 12,706
---------- ---------- ---------- ---------- ----------
Net income............................. $ 72,675 $ 63,139 $ 51,222 $ 45,030 $ 37,487
========== ========== ========== ========== ==========
PER COMMON SHARE
Basic net income........................... $ 2.26 $ 2.24 $ 1.85 $ 1.70 $ 1.54
Diluted net income......................... 2.21 2.19 1.81 1.66 1.51
Dividends declared......................... 1.00 .88 .80 .76 .72
Book value................................. 19.06 17.15 15.93 13.49 14.02
BALANCE SHEET DATA
Total assets............................... $7,074,969 $5,458,709 $4,947,499 $4,638,502 $4,128,462
Securities................................. 1,988,622 1,655,907 1,364,864 1,217,174 1,213,673
Total loans................................ 4,483,812 3,415,309 3,202,766 2,968,201 2,564,466
Reserve for loan losses.................... 59,439 45,382 42,623 43,991 40,065
Total deposits............................. 5,435,995 4,197,776 3,888,266 3,672,755 3,494,825
Long-term debt............................. 92,056 77,577 93,071 104,453 32,062
Stockholders' equity....................... 626,353 483,961 446,044 371,312 360,649
Average common shares outstanding:
Basic.................................. 32,090 28,183 27,704 26,498 24,369
Diluted................................ 33,749 29,819 28,736 27,577 25,459
Common shares outstanding.................. 32,862 28,210 27,998 27,512 25,729
SELECTED RATIOS
Return on average assets................... 1.09% 1.20% 1.09% 1.05% 1.02%
Return on average equity................... 12.29 13.75 12.57 12.41 11.25
Net interest margin........................ 3.97 4.01 4.30 4.49 4.45
Efficiency ratio........................... 55.10 55.63 62.11 66.69 67.98
Net loan charge-offs to average loans...... .65 .25 .37 .14 .59
Loan reserve to total loans................ 1.33 1.33 1.33 1.48 1.56
Loan reserve to nonperforming loans........ 128.30 166.19 138.30 119.21 78.49
Nonperforming loan ratio................... 1.03 .80 .96 1.24 1.99
Nonperforming assets to total loans and
foreclosed property...................... 1.08 .88 1.12 1.48 2.37
Tier 1 capital to average assets........... 7.24 8.45 8.73 8.57 8.67
Tier 1 capital to risk-adjusted assets..... 11.09 12.97 13.06 12.79 12.81
Total capital to risk-adjusted assets...... 12.32 14.18 14.29 14.07 14.10
Dividend payout ratio...................... 44.25 39.29 43.24 44.71 46.75
</TABLE>
10
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following presentation describes Magna's results of operations,
financial condition, asset quality, capital resources and liquidity during the
three year period ended December 31, 1997. This discussion should be read in
conjunction with the Consolidated Financial Statements of Magna and the notes
thereto which are included elsewhere in this report.
Management's discussion and analysis of financial condition and results of
operations contains certain forward looking statements with respect to the
financial condition, results of operations and business of Magna. These forward
looking statements involve certain risks and uncertainties. For example, by
accepting deposits at fixed rates, at different times and for different terms
and lending funds at fixed rates for fixed periods, a bank accepts the risk that
the cost of funds may rise and the use of the funds may be at a fixed rate.
Similarly, the cost of funds may fall, but a bank may have committed by virtue
of the term of a deposit to pay what becomes an above market rate. Investments
may decline in value in a rising interest rate environment. Loans, and the
reserve for loan losses, have the risk that the borrower will not repay all
funds in a timely manner as well as the risk of total loss. Collateral may or
may not have the value attributed to it. The loan loss reserve, while believed
adequate, may prove inadequate if one or more large borrowers, or numerous
mid-range borrowers, or a combination of both, experience financial difficulty
for individual, national or international reasons. Because the business of
banking is highly regulated, decisions of governmental authorities, such as the
rate of deposit insurance, can have a major effect on operating results.
Unanticipated events, associated with Year 2000 compliance, relating to work on
developments or modifications to computer systems and to software, including
work performed by suppliers or vendors, could affect Magna's future financial
condition and operating results. All of these uncertainties, as well as others,
are present in a banking operation and stockholders are cautioned that
management's view of the future on which it prices its products, evaluates
collateral, sets loan reserves and estimates costs of operation and regulation
may prove to be other than as anticipated.
On November 19, 1997, Magna entered into a definitive agreement to acquire
Charter. The agreement provides for the issuance of up to 2,649,259 shares of
Magna common stock. Charter, with assets of approximately $382 million as of
December 31, 1997, is headquartered in Sparta, Illinois. The acquisition is
expected to be accounted for as a purchase and is expected to be completed in
the second quarter of 1998.
On March 1, 1997, Magna completed the acquisition of Homeland. A total of
5,038,161 shares of Magna common stock were issued and approximately $92 million
in cash was paid in connection with the acquisition, which was accounted for as
a purchase. Total assets of Homeland, as of the acquisition date, were
approximately $1.3 billion.
On February 29, 1996, Magna completed the acquisition of River Bend
Bancshares, Inc. ("River Bend"). A total of 550,207 shares of Magna common
stock were issued and approximately $12.4 million in cash was paid in connection
with the acquisition, which was accounted for as a purchase. Total assets of
River Bend, as of the acquisition date, were approximately $160 million.
FINANCIAL OVERVIEW
Net income for 1997 was $72.7 million compared with $63.1 million in 1996
and $51.2 million in 1995, representing a 15.1% increase in net income for 1997
as compared to 1996 and a 23.3% increase for 1996 as compared to 1995. Basic net
income per share for 1997 increased to $2.26 per share from $2.24 in 1996 and
$1.85 in 1995. Diluted net income per share for 1997 increased to $2.21 per
share from $2.19 in 1996 and $1.81 in 1995. These results represent a return on
average assets of 1.09% in 1997, 1.20% in 1996 and 1.09% in 1995.
Magna's improved earnings during 1997 over 1996 reflected a 23.2% increase
in net interest income and a 41.6% increase in noninterest income, partially
offset by a 24.8% increase in noninterest expense and a higher provision for
loan losses. Operating results of Homeland are included since the acquisition
date and are material to Magna's financial condition and results of operations.
The increase in net income for 1997 was primarily attributable to the operating
results contributed by Homeland. Improved earnings during the year were
partially offset by an additional $12.5 million provision for loan losses
recorded in the first quarter. The additional provision
11
<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
resulted from management's assessment of the loan portfolio and in particular to
cover potential loss exposure associated with commercial loans to a single
borrower.
Total assets at year-end 1997 increased to $7.1 billion compared with $5.5
billion at year-end 1996 primarily from the Homeland acquisition, along with
internal growth in the volume of loans and investment securities. These
increases were funded by an increase in deposits, particularly time deposits, as
well as an increase in repurchase agreements.
Nonperforming assets increased 59.8% to $48.3 million at year-end 1997 from
$30.2 million at year-end 1996. The ratio of nonperforming assets to total
assets increased to .68% at year-end 1997 from .55% at year-end 1996. The ratio
of nonperforming assets to total loans and foreclosed property increased to
1.08% at year-end 1997 from .88% at year-end 1996. Nonperforming loans increased
to $46.3 million at year-end 1997 from $27.3 million at year-end 1996. This
increase in nonperforming loans led to an increase in the ratio of nonperforming
loans to total loans of 1.03% at year-end 1997 from .80% at year-end 1996.
In January 1995, Magna announced a common stock repurchase program
authorizing the repurchase of up to 5% of its outstanding shares of common
stock, representing approximately 1,375,000 shares. During 1996, Magna
repurchased 745,000 shares which were subsequently reissued in connection with
the Homeland acquisition. After the acquisition date of Homeland, Magna
repurchased 630,000 shares issued in connection with that acquisition. In June
1997, Magna announced a common stock repurchase program authorizing the
repurchase of 1,700,000 shares. As of December 31, 1997, no shares have been
repurchased in connection with that program. In November 1997, Magna announced
its intention to repurchase approximately 2,650,000 shares expected to be issued
in connection with the Charter acquisition. As of December 31, 1997, Magna had
repurchased approximately 308,000 of those authorized shares.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Tax-equivalent net interest income increased $47.4 million, or 23.8%, to
$246.6 million in 1997 from $199.2 in 1996. Tax-equivalent net interest income
in 1995 was $187.9 million. The increases in 1997 and 1996 were primarily
attributable to higher levels of earning assets offset by reduced net interest
margins. The increase in the level of earning assets in 1997 resulted from the
Homeland acquisition, increased loan demand and growth in the volume of
investment securities.
Net interest income is presented on a "tax-equivalent" basis to adjust for
the tax-exempt status of earnings from certain loans and investment securities,
principally the obligations of states and municipalities.
Table 1 sets forth Magna's average balance sheets for the last five years,
the percentage of each principal category of assets, liabilities and
stockholders' equity to total assets, the interest income and expense associated
with such categories of interest earning assets and interest bearing
liabilities, and the average yields and rates on such categories. Net interest
income is the largest component of earnings and is affected by the volume of the
sources and uses of funds, the respective rates earned and paid on those funds
and the mix of those funds. Table 2 sets forth the volume and rate variances
that affected net interest income.
12
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
<TABLE>
TABLE 1--DISTRIBUTION OF AVERAGE ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY
AND INTEREST RATE INFORMATION
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1997
-----------------------------------------------
PERCENT INTEREST AVERAGE
AVERAGE OF TOTAL INCOME/ YIELD/
BALANCE ASSETS EXPENSE RATE
------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans<F1><F2>...................... $4,288,851 64.16% $373,145 8.70%
Taxable securities................. 1,639,557 24.53 103,130 6.29
Non-taxable securities<F2>......... 203,534 3.05 16,845 8.28
Federal funds sold and
repurchase agreements............ 85,134 1.27 4,646 5.46
---------- ------ -------- ----
Total interest earning assets.......... 6,217,076 93.01 497,766 8.01
---------- ------ -------- ----
Noninterest earning assets:
Cash and due from banks............ 178,933 2.68
Premises and equipment............. 106,413 1.59
Other assets....................... 236,377 3.53
Reserve for loan losses............ (54,371) (.81)
---------- ------
Total Assets............... $6,684,428 100.00%
========== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits... $ 616,767 9.23% 9,717 1.58
Savings and market rate deposits... 972,597 14.55 28,856 2.97
Time deposits...................... 2,903,007 43.43 165,688 5.71
Short-term borrowings.............. 794,327 11.88 40,700 5.12
Long-term debt..................... 83,655 1.25 6,175 7.38
---------- ------ -------- ----
Total interest bearing liabilities..... 5,370,353 80.34 251,136 4.68
---------- ------ -------- ----
Noninterest bearing liabilities:
Demand deposits.................... 636,921 9.53
Other liabilities.................. 85,810 1.28
---------- ------
Total Liabilities.......... 6,093,084 91.15
Stockholders' Equity....... 591,344 8.85
---------- ------
Total Liabilities and
Stockholders' Equity......... $6,684,428 100.00%
========== ======
Net interest income.................... $246,630
========
Interest rate spread................... 3.33%
====
Net interest margin.................... 3.97%
====
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1996
----------------------------------------------
PERCENT INTEREST AVERAGE
AVERAGE OF TOTAL INCOME/ YIELD/
BALANCE ASSETS EXPENSE RATE
------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans<F1><F2>...................... $3,322,542 62.93% $286,980 8.64%
Taxable securities................. 1,486,680 28.16 93,029 6.26
Non-taxable securities<F2>......... 115,835 2.20 10,437 9.01
Federal funds sold and
repurchase agreements............ 45,218 .86 2,514 5.56
---------- ------- -------- ----
Total interest earning assets.......... 4,970,275 94.15 392,960 7.91
---------- ------- -------- ----
Noninterest earning assets:
Cash and due from banks............ 136,084 2.58
Premises and equipment............. 82,844 1.57
Other assets....................... 134,793 2.55
Reserve for loan losses............ (44,628) (.85)
---------- -------
Total Assets............... $5,279,368 100.00%
========== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits... $ 532,615 10.09% 9,256 1.74
Savings and market rate deposits... 831,381 15.75 24,635 2.96
Time deposits...................... 2,193,105 41.54 124,297 5.67
Short-term borrowings.............. 595,615 11.28 28,812 4.84
Long-term debt..................... 87,840 1.66 6,748 7.68
---------- ------- -------- ----
Total interest bearing liabilities..... 4,240,556 80.32 193,748 4.57
---------- ------- -------- ----
Noninterest bearing liabilities:
Demand deposits.................... 514,427 9.74
Other liabilities.................. 65,160 1.24
---------- -------
Total Liabilities.......... 4,820,143 91.30
Stockholders' Equity....... 459,225 8.70
---------- -------
Total Liabilities and
Stockholders' Equity......... $5,279,368 100.00%
========== =======
Net interest income.................... $199,212
========
Interest rate spread................... 3.34%
====
Net interest margin.................... 4.01%
====
<FN>
- ----------
<F1> For purposes of these computations, nonaccrual loans are included in the
daily average loan amounts outstanding; interest on nonaccrual loans is
recorded when received.
<F2> Information presented on a tax-equivalent basis assuming a tax rate of 35%
for 1997, 1996, 1995, 1994 and 1993. The tax-equivalent adjustment amounted
to approximately $7,602, $5,125, $5,067, $5,070 and $5,451 for 1997, 1996,
1995, 1994 and 1993, respectively.
13
<PAGE> 15
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1995
-----------------------------------------------
PERCENT INTEREST AVERAGE
AVERAGE OF TOTAL INCOME/ YIELD/
BALANCE ASSETS EXPENSE RATE
------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans<F1><F2>...................... $3,088,168 65.63% $267,809 8.67%
Taxable securities................. 1,145,976 24.35 71,853 6.27
Non-taxable securities<F2>......... 108,450 2.31 10,670 9.84
Federal funds sold and
repurchase agreements............ 31,391 .67 1,903 6.06
---------- ------ -------- ----
Total interest earning assets.......... 4,373,985 92.96 352,235 8.05
---------- ------ -------- ----
Noninterest earning assets:
Cash and due from banks............ 163,781 3.48
Premises and equipment............. 79,212 1.68
Other assets....................... 131,782 2.80
Reserve for loan losses............ (43,426) (.92)
---------- ------
Total Assets............... $4,705,334 100.00%
========== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits... $ 520,785 11.07% 9,547 1.83
Savings and market rate deposits... 845,458 17.97 25,179 2.98
Time deposits...................... 1,884,164 40.04 103,299 5.48
Short-term borrowings.............. 391,789 8.32 20,233 5.16
Long-term debt..................... 79,828 1.70 6,059 7.59
---------- ------ -------- ----
Total interest bearing liabilities..... 3,722,024 79.10 164,317 4.41
---------- ------ -------- ----
Noninterest bearing liabilities:
Demand deposits.................... 515,461 10.96
Other liabilities.................. 60,319 1.28
---------- ------
Total Liabilities.......... 4,297,804 91.34
Stockholders' Equity....... 407,530 8.66
---------- ------
Total Liabilities and
Stockholders' Equity......... $4,705,334 100.00%
========== ======
Net interest income.................... $187,918
========
Interest rate spread................... 3.64%
====
Net interest margin.................... 4.30%
====
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1994
-----------------------------------------------
PERCENT INTEREST AVERAGE
AVERAGE OF TOTAL INCOME/ YIELD/
BALANCE ASSETS EXPENSE RATE
------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans<F1><F2>...................... $2,723,878 63.63% $221,051 8.12%
Taxable securities................. 1,118,965 26.14 61,970 5.54
Non-taxable securities<F2>......... 108,068 2.53 11,046 10.22
Federal funds sold and
repurchase agreements............ 11,611 .27 564 4.86
---------- ------ -------- -----
Total interest earning assets.......... 3,962,522 92.57 294,631 7.44
---------- ------ -------- -----
Noninterest earning assets:
Cash and due from banks............ 152,206 3.56
Premises and equipment............. 69,568 1.63
Other assets....................... 137,594 3.21
Reserve for loan losses............ (41,347) (.97)
---------- ------
Total Assets............... $4,280,543 100.00%
========== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits... $ 536,857 12.54% 10,345 1.93
Savings and market rate deposits... 1,003,872 23.45 26,818 2.67
Time deposits...................... 1,490,847 34.83 63,521 4.26
Short-term borrowings.............. 230,638 5.39 9,202 3.99
Long-term debt..................... 96,289 2.25 6,856 7.12
---------- ------ -------- -----
Total interest bearing liabilities..... 3,358,503 78.46 116,742 3.48
---------- ------ -------- -----
Noninterest bearing liabilities:
Demand deposits.................... 506,889 11.84
Other liabilities.................. 52,369 1.22
---------- ------
Total Liabilities.......... 3,917,761 91.52
Stockholders' Equity....... 362,782 8.48
---------- ------
Total Liabilities and
Stockholders' Equity......... $4,280,543 100.00%
========== ======
Net interest income.................... $177,889
========
Interest rate spread................... 3.96%
=====
Net interest margin.................... 4.49%
=====
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1993
-----------------------------------------------
PERCENT INTEREST AVERAGE
AVERAGE OF TOTAL INCOME/ YIELD/
BALANCE ASSETS EXPENSE RATE
------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Loans<F1><F2>...................... $2,286,299 62.19% $186,997 8.18%
Taxable securities................. 963,988 26.22 50,290 5.22
Non-taxable securities<F2>......... 103,636 2.82 11,486 11.08
Federal funds sold and
repurchase agreements............ 32,793 .90 966 2.95
---------- ------ -------- -----
Total interest earning assets.......... 3,386,716 92.13 249,739 7.37
---------- ------ -------- -----
Noninterest earning assets:
Cash and due from banks............ 145,640 3.96
Premises and equipment............. 66,621 1.81
Other assets....................... 116,240 3.16
Reserve for loan losses............ (39,135) (1.06)
---------- ------
Total Assets............... $3,676,082 100.00%
========== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits... $ 452,471 12.31% 9,521 2.10
Savings and market rate deposits... 887,617 24.15 24,809 2.80
Time deposits...................... 1,358,336 36.95 57,792 4.25
Short-term borrowings.............. 110,782 3.02 3,111 2.81
Long-term debt..................... 33,136 .90 3,792 11.44
---------- ------ -------- -----
Total interest bearing liabilities..... 2,842,342 77.33 99,025 3.48
---------- ------ -------- -----
Noninterest bearing liabilities:
Demand deposits.................... 451,935 12.29
Other liabilities.................. 48,590 1.32
---------- ------
Total Liabilities.......... 3,342,867 90.94
Stockholders' Equity....... 333,215 9.06
---------- ------
Total Liabilities and
Stockholders' Equity......... $3,676,082 100.00%
========== ======
Net interest income.................... $150,714
========
Interest rate spread................... 3.89%
=====
Net interest margin.................... 4.45%
=====
<FN>
- ----------
<F1> For purposes of these computations, nonaccrual loans are included in the
daily average loan amounts outstanding; interest on nonaccrual loans is
recorded when received.
<F2> Information presented on a tax-equivalent basis assuming a tax rate of 35%
for 1997, 1996, 1995, 1994 and 1993. The tax-equivalent adjustment amounted
to approximately $7,602, $5,125, $5,067, $5,070 and $5,451 for 1997, 1996,
1995, 1994 and 1993, respectively.
</TABLE>
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
<TABLE>
TABLE 2--VOLUME AND RATE VARIANCE
<CAPTION>
1997 COMPARED WITH 1996 1996 COMPARED WITH 1995
INCREASE (DECREASE) DUE TO<F1> INCREASE (DECREASE) DUE TO<F1>
---------------------------------- ---------------------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Loans<F2>.................................... $84,109 $2,056 $86,165 $20,148 $ (977) $19,171
Taxable securities........................... 9,651 450 10,101 21,305 (129) 21,176
Non-taxable securities<F2>................... 7,212 (804) 6,408 430 (663) (233)
Federal funds sold and repurchase
agreements................................. 2,141 (9) 2,132 769 (158) 611
------- ------ ------- ------- ------- -------
Total interest earning assets.................... 103,113 1,693 104,806 42,652 (1,927) 40,725
------- ------ ------- ------- ------- -------
Interest paid on:
Interest bearing demand deposits............. 1,103 (642) 461 205 (496) (291)
Savings and market rate deposits............. 4,139 82 4,221 (388) (156) (544)
Time deposits................................ 40,508 883 41,391 17,333 3,665 20,998
Short-term borrowings........................ 10,131 1,757 11,888 9,906 (1,327) 8,579
Long-term debt............................... (314) (259) (573) 616 73 689
------- ------ ------- ------- ------- -------
Total interest bearing liabilities............... 55,567 1,821 57,388 27,672 1,759 29,431
------- ------ ------- ------- ------- -------
Net interest income.............................. $47,546 $ (128) $47,418 $14,980 $(3,686) $11,294
======= ====== ======= ======= ======= =======
<FN>
- ---------
<F1> The change in interest due to both rate and volume has been allocated to
rate and volume changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
<F2> Presented on a tax-equivalent basis assuming a tax rate of 35% for 1997 and
1996. The tax-equivalent adjustment relating to the change in interest
income was an increase of $2,477 for 1997 compared with 1996 and an
increase of $58 for 1996 compared with 1995.
</TABLE>
During 1997, the average volume of interest earning assets increased $1.2
billion compared with 1996, resulting in an increase in tax-equivalent interest
income of $103.1 million. These increases were principally attributable to
increases in the volume of loans and investment securities. Changes in yields on
the average volume of interest earning assets increased tax-equivalent interest
income by $1.7 million. The tax-equivalent yield on the loan portfolio remained
relatively stable for 1997 when compared to 1996 even though the prime lending
rate increased slightly during the year. Certain of the loans in the commercial
and real estate loan portfolios reprice upward or downward as the prime rate
changes and generally reprice to the same extent. The yield on taxable
securities also remained stable while the yield on tax-exempt securities
decreased 73 basis points in 1997. The decrease in the yield on tax-exempt
securities occurred as certain holdings either matured or were called for
redemption. Proceeds from these securities were generally reinvested at lower
yields associated with the interest rate environment that existed at that time.
Average noninterest earning assets include cash and due from bank balances,
premises and equipment and other assets, reduced by the reserve for loan losses.
Average cash and due from bank balances increased by $43 million and the average
balances of premises and equipment grew by $24 million in 1997 due to the
Homeland acquisition. As a percentage of total average assets, average cash and
due from bank balances and average premises and equipment remained stable when
comparing 1997 to 1996. The increase in the average balance of other assets, was
principally the result of approximately $100 million of goodwill arising from
the Homeland acquisition.
The average volume of interest bearing liabilities increased $1.1 billion in
1997 compared with 1996, and included increases of $935 million in average
interest bearing deposits and $199 million in average short-term borrowings. The
increase in average interest bearing deposits was primarily attributable to $830
million of deposits from Homeland. The increase in average short-term borrowings
is discussed under "Borrowings" and represents a significant funding source
for the increased levels of loans and investment securities. The average rate
paid on total interest bearing liabilities increased 11 basis points during
1997, principally due to competition in the marketplace to secure deposits and
cash management accounts. Interest expense increased $1.8 million as a result of
the
15
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
increased rate paid on interest bearing liabilities. Increases in rates paid on
time deposits and short-term borrowings were offset by decreased rates paid on
interest bearing demand deposits and long-term debt.
During 1997, Magna's net interest margin was 3.97% compared with 4.01% and
4.30% in 1996 and 1995, respectively. Changes in the net interest margin depend,
primarily, on three factors and the interaction between them: 1) the net
interest spread, which is the difference between the yield on earning assets and
the rate paid on interest bearing liabilities; 2) the yield earned on assets
funded by funding sources that are interest free such as noninterest bearing
demand deposits; and 3) the percentage of earning assets funded by interest free
funding sources. The reduction in the net interest margin was principally due to
greater reliance on time deposits versus transaction accounts, as well as
continued competitive pricing for both loans and deposits in the markets that
Magna serves.
PROVISION FOR LOAN LOSSES
The provision for loan losses reflects management's judgment of the cost
associated with credit risks inherent in the loan portfolio. The provision for
loan losses represents the amount necessary to adjust the allowance for loan
losses to the level that management considers appropriate. Factors which
influence management's determination of the provision for loan losses include,
among other things, current and projected economic conditions, historical loss
trends, a review of individual loans and changes in the character and size of
the portfolio. Magna has established comprehensive credit policies and risk
rating processes that address the individual risk and return characteristics
associated with loans in the portfolio. The provision for loan losses charged to
expense in 1997 increased to $28.9 million compared with $10.3 and $10.0 million
in 1996 and 1995, respectively. The increase in the provision in 1997 was
primarily due to the additional provision described under "Financial
Overview." The modest increase in the provision in 1996 was related to overall
growth in the loan portfolio. Activity in the reserve for loan losses and
nonperforming loan data are presented and discussed under "Asset Quality."
NONINTEREST INCOME
Excluding net securities gains, noninterest income for 1997 was $68.7
million compared with $49.5 million and $47.5 million in 1996 and 1995,
respectively. Total noninterest income as a percentage of average assets was
1.07%, .95% and 1.02% for 1997, 1996 and 1995, respectively. Total noninterest
income, excluding net securities gains, to operating income was 21.79%, 19.92%
and 20.18% for 1997, 1996 and 1995, respectively.
Table 3 sets forth information pertaining to the major components of
noninterest income.
<TABLE>
TABLE 3--NONINTEREST INCOME
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service charges on deposits..................... $26,104 $23,443 $22,487
Trust services.................................. 12,643 9,382 8,638
Credit card services............................ 7,227 6,013 5,801
Brokerage and investment services............... 5,773 3,341 2,361
Securities gains, net........................... 2,584 817 356
Other........................................... 16,951 7,362 8,220
------- ------- -------
Total noninterest income........................ $71,282 $50,358 $47,863
======= ======= =======
</TABLE>
The largest component of noninterest income, service charges on deposit
accounts, consists of fees on both interest bearing and noninterest bearing
accounts and charges for other items, including insufficient funds, overdrafts
and stop payment requests. Service charges on deposits increased in 1997
primarily due to the Homeland acquisition, increased levels of fee income
associated with automated teller machines ("ATMs") and increased service
charges associated with Magna's corporate cash management products.
The increase in income from trust services during 1997 was primarily due to
the Homeland acquisition coupled with an increase in the market value of trust
assets on which certain fees are based and on new business
16
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
development. Magna's trust division had custodial assets and assets under
management of $2.9 billion, $2.0 billion and $1.9 billion at December 31, 1997,
1996 and 1995, respectively. Of the $900 million increase in custodial assets
and assets under management for 1997, $500 million resulted from the Homeland
acquisition.
Credit card services income primarily consists of fees charged to merchants
for processing credit card transactions and interchange fees received on
transactions of Magna's cardholders. The increase in credit card services income
during 1997 partially resulted from revenues generated by the second quarter
1997 addition of the "debit" card to Magna's product line and from the
Homeland acquisition.
Brokerage and investment services income is comprised of commissions derived
from the sale of stocks, bonds, mutual funds, annuities and other investment
vehicles which are offered by Magna's brokerage operations. During 1997,
brokerage and investment services income increased $2.4 million, or 72.8%. The
increase in brokerage and investment services income principally resulted from
enhanced product lines, expanded sales efforts, additional sales
representatives, favorable market conditions and an increased market territory
attributable to the Homeland acquisition.
Net securities gains in 1997 totaled $2.6 million compared to $817,000 and
$356,000 in 1996 and 1995, respectively. The increase in net securities gains
for 1997 was the result of management's decision to reconfigure certain segments
of the available-for-sale portion of the investment portfolio.
Other noninterest income includes such items as interchange fees on ATM
transactions, income from foreclosed properties, fees from mortgage banking
operations, safe deposit box rental fees and other miscellaneous fees. Other
noninterest income in 1997 included net gains of $2.0 million derived from the
required liquidation of certain assets as a result of the consolidation of
Magna's trust subsidiary into the Affiliate Bank and a net gain of $528,000
derived from the sale of two banking operations. The trust consolidation and the
banking facility sales are expected to provide Magna with greater cost savings
in the future. In addition to the items above, other noninterest income
increased during 1997 compared to 1996 primarily as a result of the Homeland
acquisition.
NONINTEREST EXPENSE
Noninterest expense increased $34.3 million, or 24.8%, to $172.6 million in
1997 compared with $138.4 million and $146.2 million in 1996 and 1995,
respectively. The increase in 1997 from 1996 was primarily attributable to the
Homeland acquisition. The decrease in 1996 from 1995 was mainly due to
reductions in employee compensation and other benefits coupled with a decrease
in FDIC insurance premiums. The efficiency ratio, a key indicator of the control
of noninterest expense, improved throughout 1997. The efficiency ratio for the
year ended December 31, 1997 improved to 55.1% from 55.6% and 62.1% for the
years ended December 31, 1996 and 1995, respectively. Noninterest expense as a
percentage of average assets was 2.58%, 2.62% and 3.11% for 1997, 1996 and 1995,
respectively.
Table 4 sets forth information regarding the major components of noninterest
expense.
<TABLE>
TABLE 4--NONINTEREST EXPENSE
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Employee compensation and other benefits.... $ 88,311 $ 69,142 $ 72,993
Net occupancy............................... 19,327 17,980 17,677
Equipment................................... 9,767 8,731 8,967
FDIC insurance premiums..................... 808 554 4,342
Goodwill and other intangibles.............. 8,763 2,923 2,241
Other....................................... 45,661 39,056 39,997
-------- -------- --------
Total noninterest expense................... $172,637 $138,386 $146,217
======== ======== ========
</TABLE>
Employee compensation and other benefits is the largest component of
noninterest expense representing approximately 51% of total operating costs. The
increase in employee compensation and other benefits for 1997
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
compared to 1996 reflected the cost of normal merit increases and the employee
compensation and benefits associated with the Homeland acquisition. The decrease
in employee compensation and other benefits for 1996 compared to 1995 was
attributable to staff reductions that occurred during the first quarter of 1996.
These reductions occurred as Magna continued to achieve efficiencies in
back-office operations and as a result of the merger of Magna's banking
subsidiaries in the fourth quarter of 1995. The reduction in employee
compensation and other benefits resulting from these staff reductions was
partially offset by normal merit increases, and compensation and benefits
attributable to the 1996 acquisition of River Bend. As a "super community
bank," Magna continues to monitor staffing levels to generate cost efficiencies
that do not compromise the quality of customer service.
Net occupancy and equipment expenses increased $2.4 million, or 8.9% in
1997, compared to 1996. The increase in these expenses during 1997 was mainly
due to the Homeland acquisition. Net occupancy and equipment expenses in 1996
remained stable compared to 1995.
FDIC insurance premiums include assessments levied in connection with the
BIF and the SAIF. The 1996 FDIC insurance premiums of $554,000 included a
special assessment which was mandated by federal legislation enacted on
September 30, 1996. This legislation called for financial institutions to pay a
one time special assessment on SAIF insured deposit levels as of March 31, 1995.
This one time special assessment recorded by Magna amounted to $411,000. The
1996 legislation which mandated the assessment for SAIF insured deposits also
reduced ongoing SAIF deposit insurance assessment rates from $.230 to $.064 per
$100 of insured deposits and increased ongoing BIF deposit insurance assessment
rates from zero to $.013 per $100 of insured deposits beginning January 1, 1997.
Excluding the effects of the special assessment, the change in the insurance
assessment rate structure, along with increased levels of insured deposits
resulting from the Homeland acquisition, were the primary factors contributing
to the increase in FDIC insurance premiums for 1997 compared to 1996. The
reduction in FDIC insurance premiums from 1995 to 1996 was the result of a
reduction in the BIF deposit insurance assessment rate which was announced in
the third quarter of 1995. Substantially all of Magna's deposits are insured by
the BIF.
Goodwill and other intangibles primarily includes amortization of goodwill
and core deposit intangibles associated with acquisitions. The increase in these
expenses in 1997 compared to 1996 was the result of additional goodwill
amortization of $5.5 million associated with the Homeland acquisition.
Other noninterest expense includes such items as legal and professional
fees, advertising costs, postage costs and certain credit card program expenses.
Other noninterest expense increased during 1997 compared to 1996 primarily as a
result of the Homeland acquisition.
Magna recorded income tax expense of $36.1 million in 1997, compared with
$32.6 million in 1996 and $23.3 million in 1995. Income tax expense in 1997 and
1995 included a $500,000 and a $935,000 non-recurring benefit, respectively. The
1997 benefit resulted from the resolution of certain tax uncertainties, and the
1995 benefit resulted from the elimination of valuation allowances on certain
federal and state net operating loss carryforwards. Magna's effective income tax
rate was 33.2% in 1997, 34.1% in 1996 and 31.3% in 1995. Excluding the effects
of the non-recurring tax benefit, the decrease in the effective tax rate for
1997 occurred primarily from the implementation of a preferential corporate
structure, resulting in reduced multi-state taxation.
As required under Financial Accounting Standards No. 109 (FAS No. 109),
"Accounting for Income Taxes," management evaluates, on a continuing basis,
the realizability of Magna's deferred tax assets and the need for an offsetting
valuation allowance. Accordingly, changes to the valuation allowance could
affect Magna's effective tax rate in future periods.
During the next few years, noninterest expense will include expenses related
to the Year 2000 issue. The Year 2000 issue is the result of computer systems
processing dates in application software and data files based on two digits for
the year of a transaction rather than a full four digits. Such systems may not
be capable of properly processing dates in the year 2000 and may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in system failures or miscalculations. Magna has conducted a comprehensive
review of its computer and other operating systems which could be affected by
the Year 2000 issue and, in accordance with
18
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
stated bank regulatory requirements, has developed implementation plans to
resolve potential problems prior to the year 2000. Magna has also initiated
formal communications with its significant vendors to determine the extent to
which Magna's interface systems are vulnerable to those third parties' failure
to remediate their own Year 2000 issues. Management believes that all systems
necessary to manage Magna's business, effectively, will be replaced, modified or
upgraded. However, if such modifications are not made, or are not completed
timely, the Year 2000 issue could have a material impact on the operations of
Magna.
Based upon its implementation plan, Magna expects to spend approximately
$3-4 million to replace, modify or upgrade its systems to enable proper
processing of transactions relating to the year 2000 and beyond. A substantial
portion of the estimated expenditures will be incurred in connection with the
replacement of existing hardware and software, rather then as a result of
modifying existing hardware and software. The estimated expenditures do not
include employee compensation and benefits associated with the internal task
force that is dedicated to the Year 2000 issue. The exact timing and amount of
such expenditures depends upon the progress of individual systems and
applications conversion and testing.
FINANCIAL CONDITION
GENERAL
Total assets at year-end 1997 increased $1.6 billion, or 29.6%, to $7.1
billion compared with $5.5 billion at year-end 1996. This increase in total
assets primarily resulted from an increase in the volume of loans and investment
securities along with assets totaling $1.3 billion received in the Homeland
acquisition.
LOANS
Total average loans represented 69.0%, 66.8% and 70.6% of average interest
earning assets during 1997, 1996 and 1995, respectively. Loans, net of unearned
income, increased 31.3% to $4.5 billion at year-end 1997 from $3.4 billion at
year-end 1996. The growth in 1997 was primarily attributable to $922 million of
loans obtained in the Homeland acquisition, along with loan growth stimulated by
more aggressive sales efforts in a highly competitive market environment.
Table 5 presents the composition of the loan portfolio by type of borrower
and major loan category and the percentage of each to the total portfolio for
the periods presented.
<TABLE>
TABLE 5--LOANS
<CAPTION>
DECEMBER 31
--------------------------------------------------------------------------
1997 1996 1995
------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMMERCIAL BORROWERS:
Commercial, financial
and agricultural... $ 807,720 18.0% $ 648,881 19.0% $ 593,664 18.5%
Commercial real
estate............. 1,420,521 31.7 1,156,402 33.9 996,464 31.1
Real estate
construction....... 272,151 6.1 150,157 4.4 156,978 4.9
---------- ----- ---------- ----- ---------- -----
Total commercial..... 2,500,392 55.8 1,955,440 57.3 1,747,106 54.5
---------- ----- ---------- ----- ---------- -----
CONSUMER BORROWERS:
1-4 family
residential real
estate............. 1,271,432 28.3 942,053 27.6 934,826 29.2
Other consumer loans,
net of unearned
income............. 711,988 15.9 517,816 15.1 520,834 16.3
---------- ----- ---------- ----- ---------- -----
Total consumer....... 1,983,420 44.2 1,459,869 42.7 1,455,660 45.5
---------- ----- ---------- ----- ---------- -----
Total loans.......... $4,483,812 100.0% $3,415,309 100.0% $3,202,766 100.0%
========== ===== ========== ===== ========== =====
<CAPTION>
DECEMBER 31
----------------------------------------------
1994 1993
------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
COMMERCIAL BORROWERS:
Commercial, financial
and agricultural... $ 492,538 16.6% $ 468,161 18.3%
Commercial real
estate............. 932,553 31.4 858,898 33.5
Real estate
construction....... 130,734 4.4 103,672 4.0
---------- ----- ---------- -----
Total commercial..... 1,555,825 52.4 1,430,731 55.8
---------- ----- ---------- -----
CONSUMER BORROWERS:
1-4 family
residential real
estate............. 903,082 30.4 748,936 29.2
Other consumer loans,
net of unearned
income............. 509,294 17.2 384,799 15.0
---------- ----- ---------- -----
Total consumer....... 1,412,376 47.6 1,133,735 44.2
---------- ----- ---------- -----
Total loans.......... $2,968,201 100.0% $2,564,466 100.0%
========== ===== ========== =====
</TABLE>
19
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
Magna's commercial, financial and agricultural loan portfolio is diversified
and includes loans secured by non-real estate collateral to manufacturers,
distributors, retailers, service providers, investors and agricultural
producers. Emphasis is generally placed upon middle-market and community
businesses with known local management and financial stability.
The commercial real estate loan portfolio consists largely of mortgage loans
secured by commercial properties located in the communities served by Magna's
banking centers. These loans are generally made to fund the acquisition of
buildings and real estate for commercial, industrial, office and retail use. A
significant portion of the commercial real estate loan portfolio is comprised of
traditional commercial loans with real estate taken as additional collateral.
Tax-exempt industrial revenue loans represent a small part of the commercial
real estate portfolio.
The real estate construction loan portfolio consists of 1-4 family
residential construction, commercial construction for retail centers, medical
and business offices, warehouse facilities and multi-family (5 or more families)
residential developments.
Residential mortgage loans are predominantly extended for owner-occupied
residential properties. These loans typically are secured by first mortgages on
the properties financed and are generally limited to 80% of the appraised value
of the properties. The amortization periods for the loans in this category
generally do not exceed 30 years with interest being calculated on a fixed or
floating rate basis. This category also includes home equity lines of credit and
closed-end second mortgage loans. Closed-end second mortgage loans generally
bear a fixed rate of interest over a three to five year term with a five to
fifteen year amortization, while home equity lines of credit generally have an
interest rate indexed to the prime rate.
The consumer loan portfolio consists of both secured and unsecured loans to
individuals for various personal reasons such as automobile financing, home
improvements and recreational and educational purposes. Consumer loans are
typically structured with fixed interest rates and full amortization of
principal and interest within three to five years. In addition, this category
includes revolving credit products such as checking overdraft protection and
MasterCard and Visa credit cards. Magna continues to realize significant growth
in its indirect consumer loan program, which targets buyers of automobiles and
other recreational vehicles through local dealerships. The volume of loans
generated from this program averaged $28.8 million per month during 1997
compared to $19.4 million per month in 1996 and $16.6 in 1995, respectively. The
increase in volume from 1996 primarily resulted from efforts to expand the
market area associated with this line of business.
Magna Finance, a division of the Affiliate Bank, formed to originate
nontraditional direct and indirect loan products, continued to grow and evolve
in 1997. The division's focus during the last two quarters of 1997 was to build
a foundation for growth in 1998 and beyond with particular attention to the
formulation of asset quality guidelines. Underwriting criteria will permit the
flexibility of funding loans suitable for portfolio generating interest income
and for sale generating fee income.
Tax-equivalent yields on the average total loan portfolio have remained
relatively stable during the past three years. The general level of consumer
interest rates increased slightly during the early part of 1997 but trended
downward during the last half of the year. While the general level of interest
rates trended downward during the last half of 1997, Magna's loan portfolio
yields tend to follow trends in the prime lending rate, which increased slightly
during the first quarter and remained stable for the remainder of the year. At
December 31, 1997, 20.3% of Magna's total loan portfolio had interest rates
which were immediately adjustable, and an additional 33.3% were repriceable
within a one year time frame. Interest rates earned during 1996 remained
relatively constant throughout the year.
20
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
Table 6 sets forth the amount of loans outstanding as of December 31, 1997
which, based on remaining scheduled repayments of principal, are due in the
periods indicated. In addition, the amounts due after one year are classified
according to sensitivity to changes in interest rates.
<TABLE>
TABLE 6--MATURITIES AND SENSITIVITIES OF LOANS
<CAPTION>
DECEMBER 31, 1997
MATURING
--------------------------------------------------------------------
AFTER ONE
IN ONE THROUGH AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ ---------- ---------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial and agricultural............ $431,647 $ 344,651 $ 31,422 $ 807,720
Commercial real estate............................ 281,073 745,463 393,985 1,420,521
Real estate construction.......................... 118,475 118,577 35,099 272,151
1-4 family residential real estate................ 92,247 341,440 837,745 1,271,432
Other consumer loans, net of unearned income...... 76,417 592,904 42,667 711,988
-------- ---------- ---------- ----------
Total loans....................................... $999,859 $2,143,035 $1,340,918 $4,483,812
======== ========== ========== ==========
<CAPTION>
INTEREST SENSITIVITY
-----------------------------------------------------------------------
FLOATING OR
FIXED ADJUSTABLE
INTEREST RATES INTEREST RATES
-------------- --------------
<S> <C> <C>
Due after one year................................ $2,186,828 $1,297,125
========== ==========
</TABLE>
SECURITIES
Investments in securities increased $332.7 million, or 20.1%, to $2.0
billion at December 31, 1997. The increase in investment securities primarily
resulted from purchases, net of sales and maturities, in the available-for-sale
category along with $163.2 million of investment securities received through the
acquisition of Homeland. Due in part to an increase in the amount of collateral
required for cash management repurchase agreement accounts, it was necessary to
increase investment securities. Additional information regarding Magna's cash
management repurchase agreement accounts is presented and discussed under
"Borrowings." The investment portfolio is structured to maximize the return on
invested funds within acceptable interest rate risk guidelines and to meet
pledging requirements, while giving consideration to loan demand, credit risk,
future liquidity needs and the expectations for trends in interest rates.
Magna manages the quality and risk of investments through its Funds
Management Committee which determines the composition of and monitors the
overall investment portfolio, in accordance with its Funds Management Policy,
which is approved by Magna's Board of Directors. Among other things, the Funds
Management Policy establishes guidelines for the level, type, quality and mix of
investments. With respect to securities purchased by the Affiliate Bank, such
policy does not permit, without the specific approval of the Funds Management
Committee, purchases of obligations of states, political subdivisions of the
United States of America or corporate bonds rated by either Moody's Rating
Service or Standard and Poor's Rating Service below "A".
Magna classifies investments in securities as available-for-sale,
held-to-maturity or trading based upon, among other things, management's
assessment of changes in interest rate risks and Magna's financial position and
liquidity, including its overall asset/liability management strategy.
As a result of the effects of marking to market the available-for-sale
investment securities, stockholders' equity at December 31, 1997, reflected net
unrealized gains of $3.1 million, net of $2.1 million in deferred income taxes,
compared to net unrealized losses at December 31, 1996, of $2.4 million, net of
$1.6 million in deferred income taxes. This change was the result of decreases
in the overall interest rate environment at year-end 1997 compared to year-end
1996. Approximately 15% of Magna's available-for-sale portfolio consists of U.
S. Treasury securities and securities issued by U. S. Government agencies. An
additional 72% consists of mortgage backed securities, of which approximately
91% are backed by U. S. Government agencies.
21
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
Available-for-sale securities increased $349.8 million, or 23.3%, to $1.9
billion at December 31, 1997 from $1.5 billion at December 31, 1996.
Approximately 93% of securities contained within Magna's investment securities
portfolio, together with the majority of new securities purchased, are
classified in the available-for-sale category. Held-to-maturity securities
decreased $17.0 million, or 11.0%, at December 31, 1997 from year-end 1996. The
majority of this decrease relates to maturities of U. S. Treasury and U. S.
Government agency securities, the proceeds of which were redeployed into the
available-for-sale portfolio.
Tables 7 and 8 set forth the composition of the held-to-maturity and the
available-for-sale securities portfolios, respectively, for the last three
years.
<TABLE>
TABLE 7--HELD-TO-MATURITY SECURITIES
<CAPTION>
DECEMBER 31
------------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury & U.S. Government
agencies & corporations............. $ 26,806 $ 40,338 $ 48,088
State and municipal................... 107,120 110,627 74,396
Other................................. 3,764 3,764 3,764
-------- -------- --------
Total................................. $137,690 $154,729 $126,248
======== ======== ========
</TABLE>
<TABLE>
TABLE 8--AVAILABLE-FOR-SALE SECURITIES
<CAPTION>
DECEMBER 31
------------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury & U.S. Government
agencies & corporations............. $ 267,717 $ 767,423 $ 563,154
State and municipal................... 173,461 23,392 33,491
Mortgage backed....................... 1,339,588 679,494 585,995
Other................................. 70,166 30,869 55,976
---------- ---------- ----------
Total................................. $1,850,932 $1,501,178 $1,238,616
========== ========== ==========
</TABLE>
22
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
Table 9 sets forth the maturities and the weighted average yields of each
category of held-to-maturity and available-for-sale securities at December 31,
1997 based upon expected maturities of such securities.
<TABLE>
TABLE 9--MATURITIES AND YIELDS OF SECURITIES
<CAPTION>
DECEMBER 31, 1997
MATURING
-----------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
IN ONE THROUGH THROUGH AFTER
YEAR OR LESS FIVE YEARS TEN YEARS TEN YEARS
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES:
U.S. Treasury & U.S.
Government agencies &
corporations................ $ -- --% $ 26,806 5.23% $ -- --% $ -- --%
State and municipal<F1>....... 2,468 7.28 45,893 9.19 37,750 8.68 21,009 8.80
Other......................... 3,764 9.50 -- -- -- -- -- --
-------- ---- ---------- ---- -------- ---- -------- ----
Total held-to-maturity........ 6,232 8.61 72,699 7.73 37,750 8.68 21,009 8.80
-------- ---- ---------- ---- -------- ---- -------- ----
AVAILABLE-FOR-SALE SECURITIES:
U.S. Treasury & U.S.
Government agencies &
corporations................ 160,365 5.11 95,313 6.11 12,039 6.04 -- --
State and municipal<F1>....... 17,661 8.30 19,480 7.53 9,007 7.98 127,313 8.20
Mortgage backed............... 125,651 6.33 1,154,970 6.69 58,967 6.78 -- --
Other......................... 27,756 5.93 258 7.75 266 7.00 41,886 6.26
-------- ---- ---------- ---- -------- ---- -------- ----
Total available-for-sale...... 331,433 5.81 1,270,021 6.66 80,279 6.80 169,199 7.70
-------- ---- ---------- ---- -------- ---- -------- ----
Total securities.............. $337,665 5.86% $1,342,720 6.72% $118,029 7.41% $190,208 7.83%
======== ==== ========== ==== ======== ==== ======== ====
<FN>
- ----------
<F1> Yields presented on a tax-equivalent basis assuming a tax rate of 35%.
</TABLE>
The weighted average yield on the taxable securities portfolio remained
level at 6.29% for 1997 compared to 6.26% and 6.27% for 1996 and 1995,
respectively.
Average non-taxable securities totaled $204 million in 1997 compared to $116
million and $108 million in 1996 and 1995, respectively. The weighted average
tax-equivalent yield was 8.28%, 9.01% and 9.84% during 1997, 1996 and 1995,
respectively. All of the non-taxable securities held qualified for favorable tax
treatment under the interest expense disallowance rules of the Internal Revenue
Code of 1986, as amended. At year-end 1997, approximately 29% of the non-taxable
securities portfolio was invested in municipal bond issues originated within the
communities in which Magna's banking centers are located.
Available-for-sale securities included gross unrealized gains of
approximately $12.0 million and gross unrealized losses of approximately $6.9
million at December 31, 1997. The estimated market value of the securities
classified as held-to-maturity was $141 million, reflecting gross unrealized
gains of $4.5 million and gross unrealized losses of $1.0 million at year-end
1997. Magna's securities portfolio includes mortgage backed securities with a
market value of approximately $1.3 billion, representing 67.2% of the market
value of Magna's securities portfolio. The weighted average maturity of the
securities portfolio was 3.8 and 3.5 years at December 31, 1997 and 1996,
respectively.
There were no outstanding trading account securities at year-end 1997 or
1996. Trading account activities were not significant to Magna's results of
operations in any year presented.
Average money market investments, consisting of federal funds sold and
interest bearing due from bank balances, were less than 2% of interest earning
assets during 1997, 1996 and 1995. Federal funds sold, the principal component
of money market investments, consist of sales of funds in excess of the
Affiliate Bank's reserve requirement to other financial institutions and
generally have a maturity of one day. The average yield on market investments
remained relatively stable during 1997 after decreasing 50 basis points in 1996
when compared to 1995.
23
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
DEPOSITS
Interest earning assets are funded by Magna from a variety of different
sources. Each source is monitored continuously to maintain an appropriate spread
between the yields on earning assets and rates paid for funding sources. Core
deposits originating within the various communities served by Magna's banking
centers continue to be Magna's most reliable and most important source of funds.
Total deposits increased 29.5%, or $1.2 billion, to $5.4 billion at December
31, 1997 from $4.2 billion at December 31, 1996, and represented approximately
77% of total assets at such dates. The majority of the increase in deposits was
derived from the acquisition of Homeland's deposits which aggregated $945.7
million. Noninterest bearing demand deposits increased $135.7 million at
year-end 1997 compared to year-end 1996. The increase was primarily derived from
the Homeland acquisition. The increase in all categories of interest bearing
deposits, particularly time deposits, was reflective of the Homeland acquisition
coupled with Magna's ongoing sales efforts and competitive pricing. Magna
continues to feature its 9-month, 21-month and 30-month certificates of deposit.
In addition, time deposits of $100,000 or more increased approximately $251
million at December 31, 1997 compared to year-end 1996. Aggressive sales efforts
to obtain public fund deposits continued in 1997 as Magna strives to expand its
overall banking relationships with public entities.
Table 10 sets forth the composition of the deposit portfolio for the periods
presented.
<TABLE>
TABLE 10--DEPOSITS
<CAPTION>
DECEMBER 31
-----------------------------------------------------
1997 1996
---------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest bearing demand
deposits......................... $ 711,163 13.1% $ 575,504 13.7%
Interest bearing demand deposits... 623,844 11.5 542,268 12.9
Savings and market rate deposits... 966,727 17.8 811,077 19.3
Time deposits less than $100,000... 2,395,001 44.0 1,780,188 42.4
Time deposits $100,000 or more..... 739,260 13.6 488,739 11.7
---------- ----- ---------- -----
Total deposits..................... $5,435,995 100.0% $4,197,776 100.0%
========== ===== ========== =====
</TABLE>
Average total deposits increased $1.1 billion during 1997 and $306 million
during 1996. The increase in 1997 was primarily attributable to the deposits
received in connection with the acquisition of Homeland with the remainder due
to normal growth from operations. The increase in 1996 was partially
attributable to the deposits received in connection with the acquisition of
River Bend along with normal growth from operations. The noninterest bearing
component of the deposit portfolio increased $122.5 million, or 23.8%, when
comparing average balances for 1997 with 1996. This increase and the increase in
average interest bearing deposits of $935.3 million from year-end 1996 resulted
primarily from the Homeland acquisition.
24
<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
Table 11 sets forth the major categories of average deposits and the
weighted average interest rates paid on such categories for the last three
years.
<TABLE>
TABLE 11--AVERAGE DEPOSITS AND INTEREST RATES
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
1997 1996 1995
-------------------- --------------------- ---------------------
AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE
------- ---- ------- ---- ------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits........... $ 636,921 -- % $ 514,427 -- % $ 515,461 -- %
Interest bearing demand deposits.............. 616,767 1.58 532,615 1.74 520,785 1.83
Savings and market rate deposits.............. 972,597 2.97 831,381 2.96 845,458 2.98
Time deposits................................. 2,903,007 5.71 2,193,105 5.67 1,884,164 5.48
---------- ---- ---------- ---- ---------- ----
Total deposits................................ $5,129,292 3.98% $4,071,528 3.89% $3,765,868 3.67%
========== ==== ========== ==== ========== ====
</TABLE>
Table 12 sets forth the amount and maturities of time deposits of $100,000
or more at year-end 1997.
<TABLE>
TABLE 12--MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
TIME OTHER
CERTIFICATES TIME
OF DEPOSIT DEPOSITS TOTAL
------------ -------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
3 months or less............................. $256,871 $ 9,158 $266,029
Over 3 through 6 months...................... 180,022 20,208 200,230
Over 6 through 12 months..................... 129,347 4,160 133,507
Over 12 months............................... 139,494 -- 139,494
-------- ------- --------
Total........................................ $705,734 $33,526 $739,260
======== ======= ========
</TABLE>
25
<PAGE> 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
BORROWINGS
Total borrowings amounted to $938 million at year-end 1997, an increase of
$226 million from $712 million at year-end 1996. Table 13 sets forth the
composition of borrowings for the periods presented.
<TABLE>
TABLE 13--BORROWINGS
<CAPTION>
DECEMBER 31
--------------------------------------------------
1997 1996
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Short-term borrowings:
Parent company:
8-3/4% Convertible Subordinated Debentures......................... $ 14,102 1.5% $ -- --%
-------- ----- -------- -----
14,102 1.5 -- --
Banking subsidiary:
Federal funds purchased............................................ 92,200 9.8 25,500 3.6
Repurchase agreements.............................................. 642,301 68.5 508,948 71.5
Federal Home Loan Bank advances.................................... 85,000 9.1 88,500 12.4
Other.............................................................. 12,000 1.3 10,987 1.6
-------- ----- -------- -----
831,501 88.7 633,935 89.1
-------- ----- -------- -----
Total short-term borrowings:........................................... 845,603 90.2 633,935 89.1
-------- ----- -------- -----
Long-term debt:
Parent company:
7% Convertible Subordinated Capital Notes.......................... 10,440 1.1 12,541 1.8
8-3/4% Convertible Subordinated Debentures......................... -- -- 14,872 2.1
-------- ----- -------- -----
10,440 1.1 27,413 3.9
Banking subsidiary:
Federal Home Loan Bank advances.................................... 81,461 8.7 50,000 7.0
Other.............................................................. 155 -- 164 --
-------- ----- -------- -----
81,616 8.7 50,164 7.0
-------- ----- -------- -----
Total long-term debt................................................... 92,056 9.8 77,577 10.9
-------- ----- -------- -----
Total borrowings....................................................... $937,659 100.0% $711,512 100.0%
======== ===== ======== =====
</TABLE>
During 1997 average long-term debt decreased approximately $4 million from
1996, which decrease was principally the result of the reclassification of
certain debt instruments from long-term debt to other short-term borrowings as a
result of their forthcoming 1998 maturities. The effects of these
reclassifications were offset by the addition of several long-term Federal Home
Loan Bank advances which have varying interest rates and maturity dates.
The weighted average rate of interest on long-term debt was 7.38% in 1997,
7.68% in 1996 and 7.59% in 1995. The decrease in the weighted average rate of
interest for 1997 compared with 1996 was reflective of the downward trend in the
interest rate environment during that time. The overall interest rate
environment during 1996 was stable when compared to 1995.
Average short-term borrowings, consisting primarily of federal funds
purchased and repurchase agreements, increased $199 million and $204 million
during 1997 and 1996, respectively. These borrowings serve as an alternative
source of funds to deposit funding sources. Approximately $150 million of the
increase in average short-term borrowings in 1997 was in the form of repurchase
agreements, particularly those related to cash management accounts. The average
balance of cash management account balances increased to $507.2 million during
1997 compared to $372.2 million in 1996. Such accounts involve the daily
transfer of excess funds from noninterest bearing deposit accounts into interest
bearing cash management repurchase agreement accounts. Magna continues to
aggressively market its cash management product to its commercial depositors and
has also
26
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
established a similar product to be offered to individual depositors. Although
classified as a form of short-term borrowing, management views cash management
repurchase agreement accounts as a stable source of funds. The remainder of the
increase in average short-term borrowings in 1997 was primarily due to an
increase in federal funds purchased, the proceeds of which were used to fund
increases in certain earning assets, particularly investment securities. Federal
funds purchased are sources of funds utilized primarily by the Affiliate Bank,
which purchases excess funds from a network of approximately 277 correspondent
banks. Repurchase agreements, other than cash management repurchase agreements,
generally represent an alternative to short-term certificates of deposit offered
to Magna's commercial customers. The weighted average rate of interest paid for
short-term borrowings was 5.12%, 4.84% and 5.16% in 1997, 1996 and 1995,
respectively.
Table 14 sets forth a summary of information pertaining to short-term
borrowings for the periods presented.
<TABLE>
TABLE 14--SHORT-TERM BORROWINGS
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ---- ------ ---- ------ ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
At December 31:
Federal funds purchased............................. $ 92,200 5.65% $ 25,500 5.50% $ 41,790 5.75%
Repurchase agreements............................... 642,301 5.30 508,948 5.47 368,861 4.77
Other............................................... 111,102 6.81 99,487 5.27 50,000 4.91
-------- ---- -------- ---- -------- ----
Total............................................... $845,603 5.54% $633,935 5.44% $460,651 4.87%
======== ==== ======== ==== ======== ====
For the year ended December 31:
Average daily balance:
Federal funds purchased............................. $ 98,975 5.54% $ 55,410 5.42% $ 58,202 5.95%
Repurchase agreements............................... 607,352 4.93 456,965 4.70 320,409 5.04
Other............................................... 88,000 5.99 83,240 5.20 13,178 4.73
-------- ---- -------- ---- -------- ----
Total............................................... $794,327 5.12% $595,615 4.84% $391,789 5.16%
======== ==== ======== ==== ======== ====
Maximum month-end balance:
Federal funds purchased............................. $212,000 NA $155,435 NA $147,190 NA
Repurchase agreements............................... 654,693 NA 521,794 NA 369,996 NA
Other............................................... 111,662 NA 102,259 NA 50,000 NA
<FN>
- ---------
NA--Not applicable
</TABLE>
ASSET QUALITY
Magna's asset quality management program includes the establishment of
investment and credit policies, the continued evaluation of the quality and
trends of material assets and the prompt implementation of appropriate actions
in view of the results of such evaluation. The objective of Magna's asset
quality management program, particularly with regard to loans, is to manage
credit exposure, a significant risk faced by all financial institutions, and to
support the growth of a profitable and high quality loan portfolio.
Magna manages loan quality and risk through initial loan analysis and
approval, monthly monitoring of portfolio performance and prompt follow-up on
problem credits. Management is provided with extensive information on risk
levels, trends, delinquencies, portfolio concentrations and internal ratings
which are used in the portfolio analysis. Magna's ongoing loan analysis process
proactively identifies, monitors and works with borrowers for whom there are
indications of future repayment difficulties. Magna's asset quality division
monitors all nonperforming assets, intervenes on significant credits that have
been classified and is responsible for reducing the level of problem assets
through the implementation of workout plans.
Magna's lending philosophy is to invest in loans in the communities served
by its banking centers so that it can effectively monitor and control credit
risk. The majority of the loan portfolio is comprised of retail loans and
credits to small-to-midsized businesses. The loan portfolio does not include any
loans to foreign countries or highly leveraged transaction loans.
27
<PAGE> 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
Table 15 sets forth a summary of nonperforming assets and related ratios for
the periods presented.
<TABLE>
TABLE 15--NONPERFORMING ASSETS
<CAPTION>
DECEMBER 31
------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans............................................ $29,733 $17,133 $24,564 $27,184 $39,073
Loans past due 90 days or more.............................. 16,366 10,175 6,198 8,060 9,520
Restructured loans.......................................... 230 -- 58 1,658 2,453
------- ------- ------- ------- -------
Total nonperforming loans................................... 46,329 27,308 30,820 36,902 51,046
Foreclosed property......................................... 1,950 2,906 5,009 7,206 9,889
------- ------- ------- ------- -------
Total nonperforming assets.................................. $48,279 $30,214 $35,829 $44,108 $60,935
======= ======= ======= ======= =======
Nonperforming loans to total loans.......................... 1.03% .80% .96% 1.24% 1.99%
Nonperforming assets to total loans and foreclosed
property.................................................. 1.08% .88% 1.12% 1.48% 2.37%
Nonperforming assets to total assets........................ .68% .55% .72% .95% 1.48%
</TABLE>
Nonperforming loans increased 69.7% and nonperforming assets increased 59.8%
in 1997 compared to 1996. These increases are primarily due to the $7.8 million
residual balance of commercial loans to a single borrower which were subject to
a charge-off in the first quarter of 1997, the acquisition of nonperforming
loans from Homeland, and the addition of three commercial and two commercial
real estate loans which totaled $5.5 million. Management is in varying stages of
workout or liquidation of these nonperforming loans. The level of foreclosed
property was reduced 32.9% in 1997 due to Magna's ongoing loss control efforts.
Management does not anticipate any significant losses upon disposition of the
remaining foreclosed properties.
Table 16 sets forth the composition of Magna's loan portfolio and
nonperforming assets in such loan categories at December 31, 1997 and 1996.
<TABLE>
TABLE 16--LOAN PORTFOLIO AND NONPERFORMING ASSETS COMPOSITION
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------------------------------------------
LOANS AND LOANS AND
FORECLOSED NONPERFORMING FORECLOSED NONPERFORMING
PROPERTY ASSETS PROPERTY ASSETS
---------- ------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
COMMERCIAL BORROWERS:
Commercial, financial and agricultural................. $ 807,720 $17,526 $ 648,881 $ 6,684
Commercial real estate................................. 1,420,521 9,528 1,156,402 7,229
Real estate construction............................... 272,151 2,937 150,157 730
---------- ------- ---------- -------
Total commercial....................................... 2,500,392 29,991 1,955,440 14,643
CONSUMER BORROWERS:
1-4 family residential real estate..................... 1,271,432 13,178 942,053 9,971
Other consumer loans, net of unearned income........... 711,988 3,160 517,816 2,694
---------- ------- ---------- -------
Total consumer......................................... 1,983,420 16,338 1,459,869 12,665
---------- ------- ---------- -------
Total loans............................................ 4,483,812 46,329 3,415,309 27,308
Foreclosed property.................................... 1,950 1,950 2,906 2,906
---------- ------- ---------- -------
Total.................................................. $4,485,762 $48,279 $3,418,215 $30,214
========== ======= ========== =======
</TABLE>
Management continues to place emphasis on improving asset quality and
utilization of loan workout and remediation strategies. At December 31, 1997,
there were no material commitments to lend additional funds to borrowers whose
loans were accounted for as nonaccrual, 90 days or more past due, or
restructured.
It is the policy of Magna to discontinue the accrual of interest on loans
when principal or interest is due and has remained unpaid for 90 days or more,
unless the loan is well secured and in the process of collection. Magna would
have recorded interest income of $3.6 million for 1997 if the loans accounted
for as nonaccrual at year-end
28
<PAGE> 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
1997 had been current in accordance with their original terms and had been
outstanding throughout the period or since origination if held for part of the
period. The amount of interest included in interest income for 1997 relating to
these loans was negligible.
Certain loans may require frequent management attention and are reviewed on
a monthly or more frequent basis. Although payments on these loans may be
current or less than 90 days past due, the borrowers presently have or have had
a history of financial difficulties and management has concern as to the
borrowers' ability to comply with present loan repayment terms. Management
believes such loans present more than normal risk of collectibility. As such,
these loans may result in classification at some future point in time as
nonperforming. At December 31, 1997, such loans amounted to $13.8 million. Table
17 sets forth information pertaining to Magna's provision for loan losses
charged to operations, the activity in and an analysis of the reserve for loan
losses for the last five years.
<TABLE>
TABLE 17--RESERVE FOR LOAN LOSSES
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year.................................. $45,382 $42,623 $43,991 $40,065 $38,194
Loans charged off:
Commercial, financial and agricultural........................ 21,549 4,414 7,065 3,649 5,635
Real estate:
Commercial................................................ 1,879 2,059 3,425 2,995 5,660
Residential............................................... 935 1,550 1,805 1,580 1,850
Construction.............................................. 48 318 142 118 581
------- ------- ------- ------- -------
Total real estate..................................... 2,862 3,927 5,372 4,693 8,091
------- ------- ------- ------- -------
Consumer...................................................... 7,540 4,715 3,963 3,146 3,816
------- ------- ------- ------- -------
Total charge-offs..................................... 31,951 13,056 16,400 11,488 17,542
------- ------- ------- ------- -------
Recoveries of loans previously charged off:
Commercial, financial and agricultural........................ 1,728 2,607 1,870 4,488 1,576
Real estate:
Commercial................................................ 216 515 1,257 1,334 687
Residential............................................... 222 398 683 293 208
Construction.............................................. 344 23 128 471 78
------- ------- ------- ------- -------
Total real estate..................................... 782 936 2,068 2,098 973
------- ------- ------- ------- -------
Consumer...................................................... 1,405 1,102 1,102 1,187 1,420
------- ------- ------- ------- -------
Total recoveries...................................... 3,915 4,645 5,040 7,773 3,969
------- ------- ------- ------- -------
Net loans charged off................................. 28,036 8,411 11,360 3,715 13,573
------- ------- ------- ------- -------
Provision for loan losses..................................... 28,947 10,280 9,992 4,900 9,589
Reserve of acquired institutions.............................. 13,146 890 -- 2,741 5,855
------- ------- ------- ------- -------
Balance at end of year........................................ $59,439 $45,382 $42,623 $43,991 $40,065
======= ======= ======= ======= =======
Net loan charge-offs as a percent of average total loans...... .65% .25% .37% .14% .59%
Reserve for loan losses as a percent of total loans........... 1.33% 1.33% 1.33% 1.48% 1.56%
Reserve for loan losses as a percent of nonperforming loans... 128.30% 166.19% 138.30% 119.21% 78.49%
</TABLE>
During 1997, Magna recorded net charge-offs of $28.0 million compared to net
charge-offs of $8.4 million in 1996. This increase is primarily a result of a
$14.5 million charge-off taken in the first quarter of 1997 on commercial loans
to a single borrower. Net charge-offs in the commercial, financial and
agricultural segment, which includes the aforementioned charge-off on loans to a
single borrower, totaled $19.8 million compared to net charge-offs of $1.8
million in 1996. Charge-offs and recoveries in all other loan categories were
comprised of a wide variety of borrowers. Net loan charge-offs as a percent of
average total loans increased to .65% in 1997 compared to .25% in 1996.
29
<PAGE> 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
The reserve for loan losses at December 31, 1997, increased approximately
$14.1 million from year-end 1996. This increase is due to the $13.1 million
reserve derived from the Homeland acquisition and the increased level of the
provision for loan losses. The reserve to nonperforming loans ratio was 128.30%
at December 31, 1997, compared to 166.19% at December 31, 1996. Management
believes that the reserve for loan losses at December 31, 1997 was adequate to
provide for possible losses inherent in the loan portfolio. However, no
assurance can be given that subsequent changes in economic conditions, risk
elements and other factors will not require changes in the level of the reserve
for loan losses.
Table 18 sets forth the allocation of the reserve for loan losses by loan
category and the percent of loans in each category to total loans for the last
five years.
<TABLE>
TABLE 18--ALLOCATION OF THE RESERVE FOR LOAN LOSSES
<CAPTION>
DECEMBER 31
----------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN
EACH EACH EACH
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
RESERVE LOANS RESERVE LOANS RESERVE LOANS
------- ---------- ------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commercial,
financial and
agricultural... $22,281 18.0% $13,453 19.0% $12,183 18.5%
Real estate:
Commercial.... 17,082 31.7 15,263 33.9 14,259 31.1
Residential... 5,534 28.3 4,346 27.6 4,817 29.2
Construction.. 1,500 6.1 1,000 4.4 1,100 4.9
------- ----- ------- ----- ------- -----
Total real
estate..... 24,116 66.1 20,609 65.9 20,176 65.2
------- ----- ------- ----- ------- -----
Consumer........ 7,906 15.9 6,250 15.1 5,754 16.3
Not allocated... 5,136 NA 5,070 NA 4,510 NA
------- ----- ------- ----- ------- -----
Total........... $59,439 100.0% $45,382 100.0% $42,623 100.0%
======= ===== ======= ===== ======= =====
<CAPTION>
DECEMBER 31
------------------------------------------------
1994 1993
--------------------- ----------------------
PERCENT OF PERCENT OF
LOANS IN LOANS IN
EACH EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
RESERVE LOANS RESERVE LOANS
------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial,
financial and
agricultural... $11,458 16.6% $11,563 18.3%
Real estate:
Commercial.... 14,265 31.4 13,419 33.5
Residential... 4,781 30.4 3,104 29.2
Construction.. 1,093 4.4 1,244 4.0
------- ----- ------- -----
Total real
estate..... 20,139 66.2 17,767 66.7
------- ----- ------- -----
Consumer........ 5,729 17.2 5,054 15.0
Not allocated... 6,665 NA 5,681 NA
------- ----- ------- -----
Total........... $43,991 100.0% $40,065 100.0%
======= ===== ======= =====
<FN>
- ----------
NA--Not applicable
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL
Financial institutions are required to maintain ratios of capital to assets
in accordance with guidelines promulgated by the federal banking regulators. See
"Notes to Consolidated Financial Statements--15 Regulatory Matters" for
additional information concerning Magna's regulatory capital measures.
DIVIDENDS AND RESOURCE COMMITMENTS
The primary source of funds to Magna, on a parent company only basis,
consists of dividends and management fees paid by the Affiliate Bank, whose
ability to pay such dividends and management fees is subject to limitations
under various laws and regulations. Because of such limitations, during the
fourth quarter of 1996, the Affiliate Bank requested and received approval from
the OCC to pay to Magna a special dividend sufficient for Magna to fund the cash
portion of the Homeland acquisition. The Affiliate Bank also requested and
received approval from the OCC to pay dividends in 1997 of up to 50% of its
then-current period earnings, subject to the Affiliate Bank maintaining its
status as a "well capitalized" financial institution. In the fourth quarter of
1997, the Affiliate Bank again requested and received approval from the OCC to
continue, through 1998, payments of dividends in the same manner and under the
same conditions as were applicable in 1997. Payment of cash dividends by the
Affiliate Bank beyond December 31, 1998 may require additional regulatory
approval.
Management believes that the earnings of the Affiliate Bank will be
sufficient to provide capital to fund asset growth and to permit the
distribution of cash dividends to Magna sufficient to meet Magna's operating and
debt service requirements both on a long-term and short-term basis. See "Notes
to Consolidated Financial
30
<PAGE> 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
Statements--23 Parent Company Condensed Financial Statements" for additional
information with respect to the parent company only sources and uses of funds
during the three year period ended December 31, 1997.
Other than the commitment of funds to be used for the repurchase of shares
of its common stock in connection with the Charter acquisition, Magna had no
commitments for any significant capital expenditures at December 31, 1997.
CREDIT FACILITY
On December 30, 1996, Magna entered into a three year, unsecured revolving
credit facility (the "Credit Facility") with a syndicate of unaffiliated
banks, which provided, at December 31, 1997, for borrowings by Magna of up to
$100 million. Under the terms of the Credit Facility, Magna may elect to convert
the principal balance of any outstanding revolving loans into term loans for a
term ending no later than December 30, 2002.
The Credit Facility contains specific covenants which, among other things,
limit dividend payments, restrict the sale of assets by Magna under certain
circumstances and provide for possible acceleration of the repayment terms upon
the merger of Magna or its subsidiaries with and into unaffiliated entities. The
Credit Facility also contains certain financial covenants, including the
maintenance by Magna of a maximum nonperforming assets to total equity capital
ratio, minimum return on average assets ratio, maximum funded debt to total
equity capital ratio, minimum levels of total equity capital and requires that
Magna cause the Affiliate Bank to, at a minimum, remain "adequately
capitalized," as defined by the federal banking regulators.
FUNDS MANAGEMENT
Magna's Funds Management Committee monitors and manages Magna's exposure to
adverse movements in interest rates. Through policies approved by Magna's Board
of Directors, the Funds Management Committee coordinates Magna's acquisition of
and redeployment of funds, consistent with maintaining acceptable levels of
changes in net interest income. The Funds Management Committee is comprised of
executive management from all major functional areas of Magna.
Magna primarily relies upon a simulation model to project changes in net
interest income over a one year time frame in various interest rate
environments. Modeling techniques encompass contractual maturity, index-driven
repricing characteristics and prepayment assumptions covering interest rate
increases or decreases of 200 basis points. Projected activity, by major product
line, is factored into the model as anticipated within the various interest rate
scenarios. Additionally, the model incorporates key assumptions involving
Magna's ability to control and direct deposit rates, particularly on
non-maturity categories.
The Funds Management Committee accepts and manages interest rate risk as an
opportunity for increased profitability and stockholder value within prudent
tolerance levels essential to Magna's safety. Techniques to manage the level of
interest rate risk utilized by Magna include selling existing assets,
influencing the term of deposits through pricing strategies, use of wholesale
funding to direct maturity structure, and investments in more complex financial
instruments. Although Magna has the authority to utilize interest rate swaps,
caps and floors to manage interest rate risk, no outstanding positions existed
at December 31, 1997 and Magna does not intend to utilize such instruments at
the present time.
Asset liquidity at the Affiliate Bank is provided principally through
maturities of loans, securities and other interest earning assets. However,
these assets are not viewed as a continually reliable source of liquidity
because of the impact of volatile interest rates and other outside influences on
marketability. The most important source of liquidity for the Affiliate Bank is
liability liquidity. Liability liquidity is defined by Magna as the ability to
generate new funds and to renew maturing liabilities in a variety of markets and
economic environments. The most important factor in assuring liability liquidity
is the maintenance of confidence in Magna by suppliers of funds. This confidence
is based on performance and reputation. Management believes the reputation of
Magna, as well as its financial strength and long-term community-based core
deposit customer relationships, will enable it to generate funds to meet its
future funding requirements.
Table 19 provides, in dollar denominated balances, information regarding
Magna's financial instruments that are sensitive to changes in interest rates at
December 31, 1997. Expected cash flow takes into consideration anticipated
prepayments as well as scheduled principal amortization. Magna's assets and
liabilities having no stated maturity are considered to be long-term in nature
and are reported in the "thereafter" column.
31
<PAGE> 33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
<TABLE>
TABLE 19--INTEREST SENSITIVITY/MARKET RISK ANALYSIS
<CAPTION>
PERIOD OF EXPECTED REPRICING OPPORTUNITY AND YIELD
YEAR ENDED DECEMBER 31
----------------------------------------------------
1998 1999 2000 2001
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans secured by mortgages:
Fixed:
Amount....................... $ 729,003 $ 342,729 $ 362,299 $169,288
Rate......................... 8.38% 8.29% 8.27% 7.94%
Adjustable:
Amount....................... 966,763 221,761 134,658 --
Rate......................... 8.76 7.29 8.05 --
Other loans and leases:
Fixed:
Amount....................... 393,054 252,999 307,881 19,798
Rate......................... 8.55 9.26 8.79 9.11
Adjustable:
Amount....................... 544,879 -- -- --
Rate......................... 9.20 -- -- --
Mortgage backed securities:
Fixed:
Amount....................... 125,197 268,535 248,636 409,731
Rate......................... 6.33 6.58 6.73 6.72
Adjustable:
Amount....................... 5,722 -- -- --
Rate......................... 5.81 -- -- --
Other investment securities:
Fixed:
Amount....................... 191,196 81,362 60,375 28,003
Rate......................... 5.26 6.06 5.70 5.83
Adjustable:
Amount....................... 38,286 -- -- --
Rate......................... 5.61 -- -- --
Other interest earning assets:
Fixed:
Amount....................... 386 189 -- 96
Rate......................... 8.61 8.78 -- 8.35
Adjustable:
Amount....................... 47,531 -- -- --
Rate......................... 5.53 -- -- --
---------- ---------- ---------- --------
Total interest earning assets:
Amount....................... $3,042,017 $1,167,575 $1,113,849 $626,916
========== ========== ========== ========
Rate......................... 8.30% 7.76% 7.90% 7.09%
========== ========== ========== ========
INTEREST BEARING LIABILITIES:
Time deposits:
Fixed:
Amount....................... $2,178,887 $ 587,963 $ 219,704 $ 46,656
Rate......................... 5.68% 5.96% 5.99% 6.37%
Adjustable:
Amount....................... 74,496 -- -- --
Rate......................... 5.30 -- -- --
Other interest bearing deposits:
Fixed:
Amount....................... -- -- -- --
Rate......................... -- -- -- --
Borrowings:
Fixed:
Amount....................... 109,849 14,498 52,088 10,366
Rate......................... 6.90 6.75 5.99 5.92
Adjustable:
Amount....................... 730,768 -- -- --
Rate......................... 4.96 -- -- --
---------- ---------- ---------- --------
Total interest bearing liabilities:
Amount....................... $3,094,000 $ 602,461 $ 271,792 $ 57,022
========== ========== ========== ========
Rate......................... 5.54% 5.98% 5.99% 6.29%
========== ========== ========== ========
<CAPTION>
PERIOD OF EXPECTED REPRICING OPPORTUNITY AND YIELD
YEAR ENDED DECEMBER 31
---------------------------------------------------
FAIR
2002 THEREAFTER TOTAL VALUE
-------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans secured by mortgages:
Fixed:
Amount....................... $ 34,977 $ 2,626 $1,640,922 $1,648,497
Rate......................... 7.22% 8.52% 8.27%
Adjustable:
Amount....................... -- -- 1,323,182 1,325,514
Rate......................... -- -- 8.42
Other loans and leases:
Fixed:
Amount....................... 1,090 7 974,829 990,791
Rate......................... 8.67 9.50 8.82
Adjustable:
Amount....................... -- -- 544,879 544,879
Rate......................... -- -- 9.20
Mortgage backed securities:
Fixed:
Amount....................... 225,677 56,090 1,333,866 1,333,866
Rate......................... 6.71 6.83 6.66
Adjustable:
Amount....................... -- -- 5,722 5,722
Rate......................... -- -- 5.81
Other investment securities:
Fixed:
Amount....................... 12,751 237,061 610,748 614,240
Rate......................... 5.76 5.60 5.58
Adjustable:
Amount....................... -- -- 38,286 38,286
Rate......................... -- -- 5.61
Other interest earning assets:
Fixed:
Amount....................... -- -- 671 671
Rate......................... -- -- 8.62
Adjustable:
Amount....................... -- -- 47,531 47,531
Rate......................... -- -- 5.53
-------- ---------- ---------- ----------
Total interest earning assets:
Amount....................... $274,495 $ 295,784 $6,520,636 $6,549,997
======== ========== ========== ==========
Rate......................... 6.74% 5.86% 7.84%
======== ========== ==========
INTEREST BEARING LIABILITIES:
Time deposits:
Fixed:
Amount....................... $ 19,006 $ 7,549 $3,059,765 $3,005,951
Rate......................... 6.09% 5.88% 5.77%
Adjustable:
Amount....................... -- -- 74,496 74,496
Rate......................... -- -- 5.30
Other interest bearing deposits:
Fixed:
Amount....................... -- 1,590,571 1,590,571 1,590,571
Rate......................... -- 2.38 2.38
Borrowings:
Fixed:
Amount....................... 94 19,996 206,891 207,339
Rate......................... 6.55 6.20 6.54
Adjustable:
Amount....................... -- -- 730,768 730,768
Rate......................... -- -- 4.96
-------- ---------- ---------- ----------
Total interest bearing liabilities:
Amount....................... $ 19,100 $1,618,116 $5,662,491 $5,609,125
======== ========== ========== ==========
Rate......................... 6.09% 2.44% 4.74%
======== ========== ==========
</TABLE>
32
<PAGE> 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS--CONTINUED
<TABLE>
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1997
Interest income..................................................... $107,062 $124,711 $128,093 $130,298
Interest expense.................................................... 53,832 63,369 66,154 67,781
Net interest income................................................. 53,230 61,342 61,939 62,517
Provision for loan losses........................................... 15,152 3,277 4,477 6,041
Noninterest income.................................................. 13,954 17,208 19,237 20,883
Noninterest expense................................................. 38,417 45,164 44,733 44,323
Income tax expense.................................................. 4,177 10,290 10,723 10,861
-------- -------- -------- --------
Net income.......................................................... $ 9,438 $ 19,819 $ 21,243 $ 22,175
======== ======== ======== ========
Per common share
Net income:
Basic....................................................... $ .32 $ .60 $ .65 $ .68
Diluted..................................................... .31 .59 .63 .66
Dividends....................................................... .25 .25 .25 .25
1996
Interest income..................................................... $ 92,768 $ 96,944 $ 98,562 $ 99,561
Interest expense.................................................... 45,643 47,662 49,836 50,607
Net interest income................................................. 47,125 49,282 48,726 48,954
Provision for loan losses........................................... 2,483 2,799 2,499 2,499
Noninterest income.................................................. 12,222 12,572 12,522 13,042
Noninterest expense................................................. 34,874 34,780 34,515 34,217
Income tax expense.................................................. 7,647 8,416 8,208 8,369
-------- -------- -------- --------
Net income.......................................................... $ 14,343 $ 15,859 $ 16,026 $ 16,911
======== ======== ======== ========
Per common share
Net income:
Basic....................................................... $ .51 $ .56 $ .57 $ .60
Diluted..................................................... .50 .54 .56 .59
Dividends....................................................... .22 .22 .22 .22
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Funds Management."
33
<PAGE> 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.......... $370,904 $285,151 $266,146
Securities:
Taxable......................... 103,130 93,029 71,853
Tax-exempt...................... 11,484 7,141 7,266
-------- -------- --------
114,614 100,170 79,119
Other, principally federal funds
sold.............................. 4,646 2,514 1,903
-------- -------- --------
Total Interest Income....... 490,164 387,835 347,168
INTEREST EXPENSE
Deposits............................ 204,261 158,188 138,025
Federal funds purchased............. 5,480 3,006 3,463
Repurchase agreements............... 29,945 21,481 16,147
Other short-term borrowings......... 5,275 4,325 623
Long-term debt...................... 6,175 6,748 6,059
-------- -------- --------
Total Interest Expense...... 251,136 193,748 164,317
-------- -------- --------
NET INTEREST INCOME..................... 239,028 194,087 182,851
Provision for Loan Losses............... 28,947 10,280 9,992
-------- -------- --------
Net Interest Income After
Provision for Loan
Losses.................... 210,081 183,807 172,859
NONINTEREST INCOME
Service charges on deposits......... 26,104 23,443 22,487
Trust services...................... 12,643 9,382 8,638
Credit card services................ 7,227 6,013 5,801
Brokerage and investment services... 5,773 3,341 2,361
Securities gains, net............... 2,584 817 356
Other............................... 16,951 7,362 8,220
-------- -------- --------
Total Noninterest Income.... 71,282 50,358 47,863
NONINTEREST EXPENSE
Employee compensation and other
benefits.......................... 88,311 69,142 72,993
Net occupancy....................... 19,327 17,980 17,677
Equipment........................... 9,767 8,731 8,967
FDIC insurance premiums............. 808 554 4,342
Goodwill and other intangibles...... 8,763 2,923 2,241
Other............................... 45,661 39,056 39,997
-------- -------- --------
Total Noninterest Expense... 172,637 138,386 146,217
-------- -------- --------
INCOME BEFORE INCOME TAXES.............. 108,726 95,779 74,505
Income Tax Expense...................... 36,051 32,640 23,283
-------- -------- --------
NET INCOME.............................. $ 72,675 $ 63,139 $ 51,222
======== ======== ========
AVERAGE SHARES OUTSTANDING
Basic............................... 32,090 28,183 27,704
Diluted............................. 33,749 29,819 28,736
PER SHARE DATA
Net income:
Basic........................... $2.26 $2.24 $1.85
Diluted......................... 2.21 2.19 1.81
Dividends declared.................. 1.00 .88 .80
See accompanying notes.
</TABLE>
34
<PAGE> 36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31
-----------------------
1997 1996
---- ----
(IN THOUSANDS, EXCEPT SHARES)
<S> <C> <C>
ASSETS
Cash and due from banks............. $ 247,932 $ 180,412
Federal funds sold.................. 48,202 34,068
Securities:
Held-to-maturity (estimated
market value of $141,182 and
$156,993, respectively)....... 137,690 154,729
Available-for-sale (at estimated
market value)................. 1,850,932 1,501,178
Loans, net of unearned income....... 4,483,812 3,415,309
Reserve for loan losses......... (59,439) (45,382)
---------- ----------
Net Loans................... 4,424,373 3,369,927
Premises and equipment.............. 118,587 81,815
Accrued interest receivable......... 46,736 39,387
Goodwill and other intangibles...... 121,817 29,310
Foreclosed property................. 1,950 2,906
Other assets........................ 76,750 64,977
---------- ----------
Total Assets................ $7,074,969 $5,458,709
========== ==========
LIABILITIES
Deposits:
Noninterest bearing............. $ 711,163 $ 575,504
Interest bearing................ 4,724,832 3,622,272
---------- ----------
Total Deposits.............. 5,435,995 4,197,776
Federal funds purchased............. 92,200 25,500
Repurchase agreements............... 642,301 508,948
Other short-term borrowings......... 111,102 99,487
Long-term debt...................... 92,056 77,577
Other liabilities................... 74,962 65,460
---------- ----------
Total Liabilities........... 6,448,616 4,974,748
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY
Preferred stock..................... 40 40
Common stock, $2 par value--
80,000,000 shares authorized;
33,799,995 and 28,954,500 shares
issued, respectively.............. 67,600 57,909
Capital surplus..................... 336,544 230,258
Retained earnings................... 256,611 215,744
Treasury stock--937,900 and 745,000
shares, respectively, at cost..... (32,703) (17,605)
Unearned restricted stock awards.... (4,835) --
Net unrealized gains (losses) on
securities........................ 3,096 (2,385)
---------- ----------
Total Stockholders'
Equity.................... 626,353 483,961
---------- ----------
Total Liabilities and
Stockholders' Equity...... $7,074,969 $5,458,709
========== ==========
See accompanying notes.
</TABLE>
35
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------- ----------------- CAPITAL RETAINED
SHARES AMOUNT SHARES AMOUNT SURPLUS EARNINGS
------ ------ ------ ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995.... 2 $41 27,512 $55,025 $203,693 $148,417
Net income.................. 51,222
Cash dividends declared..... (22,201)
Issuance of common stock:
Conversion of capital
notes.................... 111 221 1,671
Various stock issuance
plans.................... 375 750 6,224
Change in net unrealized
gains (losses) on
securities.................
--- --- ------ ------- -------- --------
BALANCE AT DECEMBER 31, 1995.. 2 41 27,998 55,996 211,588 177,438
Net income.................. 63,139
Cash dividends declared..... (24,833)
Issuance of common stock:
Conversion of capital
notes and debentures..... 144 287 2,371
Acquisitions.............. 550 1,100 10,867
Various stock issuance
plans.................... 263 526 5,432
Purchase of class B stock... (1)
Change in net unrealized
gains (losses) on
securities.................
Purchase of treasury
stock......................
--- --- ------ ------- -------- --------
BALANCE AT DECEMBER 31, 1996.. 2 40 28,955 57,909 230,258 215,744
Net income.................. 72,675
Cash dividends declared..... (31,808)
Issuance of common stock:
Conversion of capital
notes and debentures..... 185 370 3,215
Acquisitions.............. 4,293 8,586 92,876
Various stock issuance
plans.................... 367 735 10,195
Change in net unrealized
gains (losses) on
securities.................
Amortization of restricted
stock awards...............
Purchase of treasury
stock......................
--- --- ------ ------- -------- --------
BALANCE AT DECEMBER 31, 1997.. 2 $40 33,800 $67,600 $336,544 $256,611
=== === ====== ======= ======== ========
<CAPTION>
NET
UNEARNED UNREALIZED TOTAL
TREASURY STOCK RESTRICTED GAINS STOCK-
---------------- STOCK (LOSSES) ON HOLDERS'
SHARES AMOUNT AWARDS SECURITIES EQUITY
------ ------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995.... -- $ -- $ -- $(35,864) $371,312
Net income.................. 51,222
Cash dividends declared..... (22,201)
Issuance of common stock:
Conversion of capital
notes.................... 1,892
Various stock issuance
plans.................... 6,974
Change in net unrealized
gains (losses) on
securities................. 36,845 36,845
---- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 1995.. -- -- -- 981 446,044
Net income.................. 63,139
Cash dividends declared..... (24,833)
Issuance of common stock:
Conversion of capital
notes and debentures..... 2,658
Acquisitions.............. 11,967
Various stock issuance
plans.................... 5,958
Purchase of class B stock... (1)
Change in net unrealized
gains (losses) on
securities................. (3,366) (3,366)
Purchase of treasury
stock...................... (745) (17,605) (17,605)
---- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 1996.. (745) (17,605) -- (2,385) 483,961
Net income.................. 72,675
Cash dividends declared..... (31,808)
Issuance of common stock:
Conversion of capital
notes and debentures..... 3,585
Acquisitions.............. 745 17,605 119,067
Various stock issuance
plans.................... (5,611) 5,319
Change in net unrealized
gains (losses) on
securities................. 5,481 5,481
Amortization of restricted
stock awards............... 776 776
Purchase of treasury
stock...................... (938) (32,703) (32,703)
---- -------- ------- -------- --------
BALANCE AT DECEMBER 31, 1997.. (938) $(32,703) $(4,835) $ 3,096 $626,353
==== ======== ======= ======== ========
See accompanying notes.
</TABLE>
36
<PAGE> 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................... $ 72,675 $ 63,139 $ 51,222
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses....... 28,947 10,280 9,992
Provision for losses on
foreclosed property........... 320 341 931
Depreciation, amortization and
accretion..................... 22,619 13,735 12,405
Amortization of securities
premiums and accretion of
discounts..................... 2,798 (385) 287
Deferred income tax expense..... 4 1,352 2,154
Securities gains, net........... (2,584) (817) (356)
Gain on sale of other assets.... (2,015) -- --
Gain on sale of branch
offices....................... (528) -- --
Increase in other assets........ (13,466) (10,627) (13,621)
Increase (decrease) in other
liabilities................... (6,646) 5,964 7,706
----------- --------- ---------
Net Cash Provided by Operating
Activities............................ 102,124 82,982 70,720
INVESTING ACTIVITIES
Proceeds from maturities of
held-to-maturity securities....... 19,001 12,421 19,676
Proceeds from sales of
held-to-maturity securities....... -- 89 7,194
Purchases of held-to-maturity
securities........................ (1,397) (30,405) (16,169)
Proceeds from maturities of
available-for-sale securities..... 897,469 450,713 252,189
Proceeds from sales of
available-for-sale securities..... 600,963 117,639 93,948
Purchases of available-for-sale
securities........................ (1,675,906) (756,637) (442,886)
Net increase in loans............... (178,993) (179,030) (249,968)
Proceeds from sales of foreclosed
property.......................... 5,921 8,535 9,775
Purchases of premises and
equipment......................... (20,699) (7,063) (18,164)
Cash and cash equivalents of
acquired institutions, net of cash
paid.............................. (18,989) (2,233) --
Sale of branch offices.............. (8,550) -- --
----------- --------- ---------
Net Cash Used in Investing Activities... (381,180) (385,971) (344,405)
FINANCING ACTIVITIES
Net increase in deposits............ 302,316 173,700 215,810
Cash dividends...................... (31,808) (24,833) (22,201)
Net increase (decrease) in federal
funds purchased................... 13,850 (16,290) (88,080)
Net increase in repurchase
agreements........................ 133,467 139,272 42,216
Net increase (decrease) in other
short-term borrowings............. (81,292) 10,063 35,000
Proceeds from the issuance of
long-term debt.................... 50,000 25,000 25,000
Payments of long-term debt.......... (285) (8) (64)
Purchases of treasury stock......... (32,703) (17,605) --
Other, net.......................... 7,165 5,957 6,287
----------- --------- ---------
Net Cash Provided by Financing
Activities............................ 360,710 295,256 213,968
----------- --------- ---------
Increase (Decrease) in Cash and Cash
Equivalents....................... 81,654 (7,733) (59,717)
Cash and Cash Equivalents at Beginning
of Year............................... 214,480 222,213 281,930
----------- --------- ---------
Cash and Cash Equivalents at End of
Year.................................. $ 296,134 $ 214,480 $ 222,213
=========== ========= =========
See accompanying notes.
</TABLE>
37
<PAGE> 39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1 ORGANIZATION
Magna Group, Inc. ("Magna"), a Delaware corporation, was organized in 1974
and is a registered bank holding company under the Federal Bank Holding Company
Act of 1956, as amended. Magna owns, indirectly, all of the capital stock of
Magna Bank, National Association (the "Affiliate Bank"), a national banking
association which operates 139 community banking locations serving Illinois,
Iowa and Missouri. Magna also owns certain brokerage, insurance and investment
subsidiaries.
As discussed in Note 3 to the Consolidated Financial Statements, Magna
anticipates completing the acquisition of Charter Financial, Inc. ("Charter")
in the second quarter of 1998. Charter is a thrift holding company, operating
eight community banking locations in Illinois.
Magna primarily serves consumers and small-to-midsized businesses in its
market as a "super community bank," a company whose business centers on a
customer-focused community banking orientation, has cost efficiencies that do
not compromise quality and offers a broad product line that permits a
full-service customer relationship.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Magna and its subsidiaries conform
to generally accepted accounting principles. A description of the more
significant of those policies follows.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Magna and its
subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation. Certain amounts for 1996 and 1995 were reclassified
to conform with statement presentation for 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
SECURITIES
Magna categorizes each security within its portfolio into one of three
permitted classifications at the time of purchase and reevaluates such
designation as of each balance sheet date.
Held-to-maturity securities are those which Magna has the ability and
positive intent to hold to maturity. Such securities are carried at cost,
adjusted for amortization of premiums and accretion of discounts. The adjusted
cost of specific securities is used to compute gains and losses on sales or
redemptions.
Available-for-sale securities include all debt securities not classified as
held-to-maturity or trading and marketable equity securities not classified as
trading. Available-for-sale securities are stated at estimated market value.
Unrealized holding gains and losses are reported, net of taxes, as a separate
component of stockholders' equity until realized. Realized gains and losses are
computed based on cost, adjusted for amortization of premiums and accretion of
discounts and are included in other noninterest income.
Trading securities, including options used in trading activities, are
purchased with the intent for resale within a short period of time in
anticipation of short-term market movements, and are stated at estimated market
value. Gains and losses, both realized and unrealized, on trading securities are
included in other noninterest income.
Dividends and interest income on all securities are included in interest
income.
38
<PAGE> 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
LOANS
Interest income on loans is accrued and credited to income based on the
principal amount outstanding. The accrual of interest income generally is
discontinued when a loan becomes 90 days past due as to principal or interest
unless, in management's judgment, the loan is well secured and in the process of
collection. When interest accruals are discontinued, unpaid interest credited to
income in the current year is reversed, and interest accrued in prior years is
charged to the reserve for loan losses. Interest income on these loans is
reported on the cash basis as it is collected.
RESERVE FOR LOAN LOSSES
The reserve for loan losses is increased by provisions for losses charged to
expense and reduced by loans charged off, net of recoveries. The reserve is
maintained at a level considered adequate to provide for potential loan losses
based on management's evaluation of the anticipated impact on the loan portfolio
of current economic conditions, changes in the character and size of the
portfolio, past loan loss experience, potential loan losses on loans to specific
customers or industries, and other pertinent factors that management believes
require current recognition in estimating possible loan losses.
Specific reserves are established for any impaired commercial, commercial
real estate and real estate construction loans for which the recorded investment
in the loan exceeds the measured value of the loan. Loans subject to impairment
valuation are defined as nonaccrual loans exclusive of smaller balance
homogeneous loans such as home equity, credit cards, installment and 1-4 family
residential loans. The value of the loan is determined based on the present
value of expected future cash flows, the market price of the loan or the fair
value of the underlying collateral, if the loan is collateral dependent.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are principally computed using
straight-line methods over the estimated useful lives of the assets.
INTANGIBLE ASSETS
Intangible assets consist principally of goodwill, which represents the
excess of cost over fair value of net assets acquired in business combinations
accounted for under the purchase method. Intangible assets are amortized on a
straight-line basis over the estimated period to be benefited, ranging from 8 to
15 years. The carrying value of goodwill is reviewed periodically for
impairment.
FORECLOSED PROPERTY
Foreclosed property consists of assets acquired through foreclosure or deed
in lieu of foreclosure. Foreclosed property is valued at the lower of cost or
estimated market value, net of estimated sale expenses. Any loss incurred at the
time of acquisition or reclassification is charged to the reserve for loan
losses. Losses resulting from disposition or periodic reevaluation of foreclosed
property are charged to expense in the current period.
TRUST ASSETS
Assets held by the Affiliate Bank in fiduciary or agency capacities are not
included in the consolidated financial statements. Trust services income is
reported on the accrual method.
INTEREST RATE SWAPS
Magna periodically enters into interest rate swap agreements as part of its
overall asset/liability management strategy. Such agreements effectively modify
the interest characteristics of certain loans, investments or deposit
liabilities. These agreements involve the exchange of floating and fixed rate
interest amounts over the life of the agreement without an exchange of the
underlying principal amount. The differential to be paid or received is accrued
as interest rates change and recognized as an adjustment to interest income or
interest expense as appropriate. The related amount payable or receivable from
counterparties is included in other assets or other
39
<PAGE> 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
liabilities. Deferred gains on terminated interest rate swap agreements are
included in other liabilities and are amortized over the remaining original life
of the terminated agreement. Magna had no interest rate swaps at December 31,
1997.
INCOME TAXES
Income taxes are recorded under the asset and liability method in which
deferred income taxes are recognized as a result of temporary differences
between the financial reporting basis and the tax basis of the assets and
liabilities of Magna.
Magna and its subsidiaries file a consolidated federal income tax return.
Each subsidiary provides for income taxes on a separate return basis, and remits
to Magna amounts determined to be currently payable.
NET INCOME PER SHARE
Basic net income per share is computed by dividing net income after
deducting preferred stock dividends, by the weighted average number of
outstanding common shares, net of unearned restricted common shares issued.
Diluted net income per share is computed by increasing average common shares and
common share equivalents by the assumed conversion into common stock of all
outstanding convertible debt instruments and assumed exercise of stock options.
Net income for diluted net income per share is adjusted for interest expense and
amortization of origination costs, net of related tax effects, on the
convertible debt instruments and preferred stock dividends. Such items are
excluded from the computation when their effects would be antidilutive.
STOCK BASED COMPENSATION
Magna grants stock options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. Magna
also grants restricted stock for a fixed number of shares, at no cost, to
certain officers and key employees. Magna accounts for stock option and
restricted stock grants in accordance with Accounting Principles Board Opinion
No. 25 (APB 25), "Accounting for Stock Issued to Employees," and, accordingly,
recognizes no compensation expense for the stock option grants but does
recognize compensation expense related to restricted stock grants.
CASH FLOW INFORMATION
For purposes of the statements of cash flows, Magna considers cash and
demand deposits at other financial institutions and federal funds sold with
maturities not exceeding 90 days to be cash equivalents. Cash paid for interest
and income taxes, as well as significant non-cash investing activities, were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest.................................... $245,154 $192,801 $156,828
Income taxes................................ 33,085 31,830 17,977
Loans transferred to foreclosed property.... 4,645 5,698 8,363
</TABLE>
3 CHANGES IN ACCOUNTING METHODS
On January 1, 1996, Magna adopted Financial Accounting Standards No. 122
(FAS No. 122), "Accounting for Mortgage Servicing Rights." FAS No. 122
requires capitalization of purchased mortgage servicing rights, as well as
internally originated servicing rights. These mortgage servicing rights are
amortized over the estimated servicing period of the related loans. The adoption
of the standard had no material impact on Magna's financial position or results
of operations.
In 1996, Magna adopted the provisions of Financial Accounting Standards No.
123 (FAS No. 123), "Accounting for Stock Based Compensation." FAS No. 123
prescribes accounting and reporting standards for all stock based compensation
plans, including employee stock options, restricted stock, employee stock
purchase plans and stock appreciation rights. The standard encourages companies
to adopt the fair value method for
40
<PAGE> 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
expense recognition in connection with stock based compensation plans but
permits entities to follow existing rules as provided under APB 25. Magna has
elected to follow APB 25 which provides for the intrinsic value method for
expense recognition.
During 1996, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 125 (FAS No. 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
requires an entity to recognize financial and servicing assets it controls and
the liabilities it has incurred and to derecognize financial assets when control
has been surrendered in accordance with the criteria provided in the standard.
Magna began applying the new rules effective January 1, 1997, other than those
deferred by Financial Accounting Standards No. 127 (FAS No. 127), "Deferral of
the Effective Date of Certain Provisions of FAS Statement No. 125--An amendment
of FAS Statement No. 125," which will be applied beginning in the first quarter
of 1998. The adoption of FAS No. 125 had no material impact on Magna's financial
position or results of operations in 1997. Based on current circumstances, Magna
believes the application of those provisions deferred by FAS No. 127, also will
have no significant impact on Magna's financial position or results of
operations.
Financial Accounting Standards No. 128 (FAS No. 128), "Earnings per Share"
was effective for Magna December 31, 1997. FAS No. 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the FAS No. 128
requirements.
Financial Accounting Standards No. 129 (FAS No. 129), "Disclosure of
Information About Capital Structure" was effective for Magna December 31, 1997.
FAS No. 129 requires the disclosure of certain information about a company's
capital structure. The adoption of FAS No. 129 had no impact on Magna's
disclosures regarding its capital structure.
In 1997, the Financial Accounting Standards Board issued Statement No. 130
(FAS No. 130), "Reporting Comprehensive Income." FAS No. 130 establishes new
rules for the reporting and display of comprehensive income and its components.
Magna will adopt the provisions of FAS No. 130 in the first quarter of 1998, and
there will be no impact on Magna's net income or stockholders' equity.
In 1997, the Financial Accounting Standards Board issued Statement No. 131
(FAS No. 131), "Disclosures about Segments of an Enterprise and Related
Information." FAS No. 131 changes the basis on which companies report
information about operating segments in annual financial statements and requires
new disclosures regarding operating segments in interim financial statements.
Because the provisions of this standard relate only to informational
disclosures, the adoption of FAS No. 131, which will occur in the first quarter
of 1998, will have no impact on Magna's financial position or results of
operations.
4 ACQUISITIONS
In the fourth quarter of 1997, Magna entered into a definitive agreement to
acquire Charter. The agreement provides for the issuance of up to 2,649,259
shares of common stock of Magna, which is based on an exchange ratio of .5751
shares of Magna's common stock for each share of Charter common stock. Charter,
with assets of approximately $382,000 as of December 31, 1997, is headquartered
in Sparta, Illinois. The acquisition is expected to be accounted for as a
purchase and is expected to be completed in the second quarter of 1998.
In the first quarter of 1997, Magna completed the acquisition of Homeland
Bankshares Corporation ("Homeland"). A total of 5,038,161 shares of common
stock of Magna were issued and approximately $92,000 in cash was paid in
connection with the acquisition, which was accounted for as a purchase. At
acquisition, Homeland had approximately $1,300,000 in assets.
The following unaudited pro forma financial information contains the results
of operations for the years ended December 31, 1997 and 1996, assuming the
acquisition of Homeland had occurred on January 1, 1996. The pro
41
<PAGE> 43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
forma amounts are not necessarily indicative of the financial results that would
have actually occurred had the acquisition taken place on January 1, 1996, nor
are they necessarily indicative of future consolidated operations of Magna.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net interest income.............. $246,378 $238,142
Net income....................... 71,548 68,634
Net income per share:
Basic........................ $2.18 $2.10
Diluted...................... 2.13 2.06
</TABLE>
In the first quarter of 1996, Magna completed the acquisition of River Bend
Bancshares, Inc. ("River Bend"). A total of 550,207 shares of common stock of
Magna were issued and approximately $12,400 in cash was paid in connection with
the acquisition, which was accounted for as a purchase. At acquisition, River
Bend had approximately $160,000 in assets.
5 RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Affiliate Bank is required to maintain average reserve balances with the
Federal Reserve Bank. The average amount of those reserve balances for the years
ended December 31, 1997 and 1996 was approximately $50,333 and $48,403,
respectively.
6 SECURITIES
The carrying value, gross unrealized gains and losses and estimated market
value of held-to-maturity securities at December 31 were as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government agencies......................... $ 26,806 $ -- $ 627 $ 26,179
State and municipal................................................ 107,120 4,517 398 111,239
Other.............................................................. 3,764 -- -- 3,764
-------- ------ ------ --------
$137,690 $4,517 $1,025 $141,182
======== ====== ====== ========
<CAPTION>
1996
----------------------------------------------------------
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
-------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government agencies......................... $ 40,338 $ -- $1,482 $ 38,856
State and municipal................................................ 110,627 3,954 208 114,373
Other.............................................................. 3,764 -- -- 3,764
-------- ------ ------ --------
$154,729 $3,954 $1,690 $156,993
======== ====== ====== ========
</TABLE>
42
<PAGE> 44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The amortized cost, gross unrealized gains and losses and estimated market
value of available-for-sale securities at December 31 were as follows:
<TABLE>
<CAPTION>
1997
------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government agencies..................... $ 267,925 $ 938 $1,146 $ 267,717
State and municipal............................................ 168,118 5,355 12 173,461
Mortgage backed................................................ 1,339,599 5,707 5,718 1,339,588
Other.......................................................... 70,142 24 -- 70,166
---------- ------- ------ ----------
$1,845,784 $12,024 $6,876 $1,850,932
========== ======= ====== ==========
<CAPTION>
1996
-------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government agencies..................... $ 771,459 $1,347 $ 5,383 $ 767,423
State and municipal............................................ 23,020 413 41 23,392
Mortgage backed................................................ 680,537 3,419 4,462 679,494
Other.......................................................... 30,150 1,059 340 30,869
---------- ------ ------- ----------
$1,505,166 $6,238 $10,226 $1,501,178
========== ====== ======= ==========
</TABLE>
The carrying value and estimated market value of held-to-maturity securities
at December 31, 1997, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
ESTIMATED
CARRYING MARKET
VALUE VALUE
-------- --------
<S> <C> <C>
Due in 1 year or less........................................... $ 6,232 $ 6,242
Due after 1 year through 5 years................................ 72,699 73,705
Due after 5 years through 10 years.............................. 37,750 39,517
Due after 10 years.............................................. 21,009 21,718
-------- --------
$137,690 $141,182
======== ========
</TABLE>
Securities with carrying values of $1,505,296 and $1,308,940 at December 31,
1997 and 1996, respectively, were pledged to secure public deposits and for
other purposes.
The amortized cost and estimated market value of available-for-sale
securities at December 31, 1997, by contractual maturity, are shown below.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
---------- ----------
<S> <C> <C>
Due in 1 year or less....................................... $ 206,352 $ 205,782
Due after 1 year through 5 years............................ 114,370 115,051
Due after 5 years through 10 years.......................... 21,046 21,312
Due after 10 years.......................................... 164,417 169,199
Mortgage backed securities.................................. 1,339,599 1,339,588
---------- ----------
$1,845,784 $1,850,932
========== ==========
</TABLE>
43
<PAGE> 45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
In December 1995, Magna implemented provisions of the Financial Accounting
Standards Board Special Report (FAS Special Report), "A Guide to Implementation
of Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities." Upon adoption, and in accordance with the provisions of the FAS
Special Report, Magna reassessed its securities classifications and, based on
this reassessment, reclassified securities with a book value of approximately
$135,963 from held-to-maturity to available-for-sale. Upon transfer, market
value exceeded carrying value by approximately $2,830, resulting in an after-tax
increase to stockholders' equity of approximately $1,698. The transfer had no
effect on 1995 earnings. There were no securities classified as held-to-maturity
during 1997 or 1996 that were transferred to available-for-sale securities.
Magna did not sell any held-to-maturity securities during 1997. During the
years ended December 31, 1996 and 1995, Magna sold held-to-maturity securities
with carrying values of $89 and $7,195, respectively. Such securities were sold
as a result of management's decision to liquidate certain "odd-lot" holdings
and to assimilate the portfolios of entities that were acquired in previous
years.
The following table presents the components of net securities gains:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Securities gains on:
Held-to-maturity securities......... $ -- $ 9 $ 103
Available-for-sale securities....... 3,618 1,602 1,357
------ ------ ------
Total securities gains.......... 3,618 1,611 1,460
Securities losses on:
Held-to-maturity securities......... -- -- 104
Available-for-sale securities....... 1,034 794 1,000
------ ------ ------
Total securities losses......... 1,034 794 1,104
------ ------ ------
$2,584 $ 817 $ 356
====== ====== ======
</TABLE>
7 LOANS
Loans were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1996
---- ----
<S> <C> <C>
Commercial, financial and
agricultural.......................... $ 807,720 $ 648,881
Real estate:
Commercial.......................... 1,420,521 1,156,402
Residential......................... 1,271,432 942,053
Construction........................ 272,151 150,157
---------- ----------
2,964,104 2,248,612
---------- ----------
Consumer, net of unearned income........ 711,988 517,816
---------- ----------
$4,483,812 $3,415,309
========== ==========
</TABLE>
At December 31, 1997 and 1996, the aggregate principal balances of loans on
which interest was not being accrued were $29,733 and $17,133, respectively. In
addition, the aggregate principal balances on which the yield or repayment terms
had been changed due to declining financial condition of borrowers was $230 at
December 31, 1997. Magna had no such principal balances at December 31, 1996.
During 1997 and 1996, the interest income that would have been recorded in the
consolidated statements of income under the original terms of such nonaccrual
44
<PAGE> 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
and restructured loans was approximately $3,588 and $1,709, and the interest
income actually recorded was approximately $13 and $294, respectively.
At December 31, 1997 and 1996, the recorded investment in loans that were
considered impaired under FAS No. 114 totaled approximately $22,603 and $12,316,
respectively. At December 31, 1997, the allowance for loan losses included
approximately $4,240 allocated to $11,520 of impaired loans compared to an
allowance for loan loss allocation of $2,899 to $5,145 of impaired loans at
December 31, 1996. No specific reserves were allocated to the remaining $11,083
and $7,171 of impaired loans at December 31, 1997 and 1996, respectively. In
1997 and 1996, impaired loans averaged approximately $21,199 and $14,271,
respectively, and cash basis interest recognized on these loans during the time
they were impaired was not significant.
Included in loans at December 31, 1997 and 1996 were loans made to directors
and executive officers of Magna and its principal subsidiaries or to entities in
which such individuals had a beneficial interest. Following is a summary of
activity in such loans for the year ended December 31, 1997:
<TABLE>
<S> <C>
Balance at January 1, 1997........................................ $ 66,571
New loans......................................................... 15,518
Repayments........................................................ (12,929)
Net change from changes in director and executive officer
status.......................................................... 1,463
--------
Balance at December 31, 1997...................................... $ 70,623
========
</TABLE>
Such loans were made in the ordinary course of business at normal credit
terms, including interest rates and collateral, prevailing at the time for
comparable transactions with unrelated parties, and do not involve more than
normal risk of collection.
At December 31, 1997, Magna had approximately $175,162 of residential real
estate loans pledged as collateral for Federal Home Loan Bank advances. Magna
had no loans pledged for any purpose at December 31, 1996.
8 RESERVE FOR LOAN LOSSES
Changes in the reserve for loan losses were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year............ $ 45,382 $ 42,623 $ 43,991
Loans charged off....................... (31,951) (13,056) (16,400)
Recoveries of previous loan charge
offs.................................. 3,915 4,645 5,040
-------- -------- --------
Net loans charged off................... (28,036) (8,411) (11,360)
Provision for loan losses............... 28,947 10,280 9,992
Reserves of acquired institutions....... 13,146 890 --
-------- -------- --------
Balance at end of year.................. $ 59,439 $ 45,382 $ 42,623
======== ======== ========
</TABLE>
45
<PAGE> 47
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
9 PREMISES AND EQUIPMENT
Premises and equipment were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1996
---- ----
<S> <C> <C>
Land.................................... $ 18,634 $ 12,775
Buildings............................... 104,820 83,570
Furniture and equipment................. 61,265 52,631
-------- --------
184,719 148,976
Less accumulated depreciation and
amortization.......................... 66,132 67,161
-------- --------
$118,587 $ 81,815
======== ========
</TABLE>
Total depreciation and amortization expense charged to operations amounted
to $9,907, $9,119 and $8,876 in 1997, 1996 and 1995, respectively.
Magna and its subsidiaries lease certain premises and equipment under
operating lease agreements which expire at various dates through 2070, with
certain lease agreements containing renewal options. Minimum rental commitments
under all leases for the years 1998 through 2002 and thereafter were $6,385,
$6,245, $5,384, $4,154, $4,939 and $25,461, respectively. Rent expense in 1997,
1996 and 1995 was $5,538, $5,800 and $5,682, respectively.
10 DEPOSITS
Deposits were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1997 1996
---- ----
<S> <C> <C>
Demand deposits......................... $ 711,163 $ 575,504
Interest bearing demand and other
transaction accounts.................. 623,844 542,268
Savings and market rate deposits........ 966,727 811,077
Time deposits less than $100,000........ 2,395,001 1,780,188
Time deposits $100,000 or more.......... 739,260 488,739
---------- ----------
$5,435,995 $4,197,776
========== ==========
</TABLE>
The maturities of time deposits at December 31, 1997, for the years 1998
through 2002 were $2,265,903, $588,354, $224,466, $29,869 and $20,711,
respectively.
11 REPURCHASE AGREEMENTS
Repurchase agreements totaled $642,301 and $508,948 at December 31, 1997 and
1996, respectively. The average daily balances for repurchase agreements were
$607,352 and $456,965 during 1997 and 1996, respectively. The maximum balance at
any month-end was $654,693 and $521,794 during 1997 and 1996, respectively.
46
<PAGE> 48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
12 OTHER SHORT-TERM BORROWINGS
Other short-term borrowings were comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
---- ----
<S> <C> <C>
Parent company:
8-3/4% Convertible Subordinated Debentures maturing in 1998 (net of $662
discount, based on effective interest rate of 14.65%)..................... $ 14,102 $ --
-------- -------
14,102 --
Banking subsidiary:
Federal Home Loan Bank advances:
maturing in 1997, interest rate of 5.25%................................ -- 15,000
maturing in 1997, interest rate of 5.27%................................ -- 8,500
maturing in 1997, interest rate of 6.59%................................ -- 15,000
maturing in 1998, interest rate of 5.80%................................ 20,000 --
maturing in 1998, interest rate of 5.91%................................ 25,000 --
maturing in 2000, callable on a quarterly basis by the issuer,
interest rate of 4.91%................................................ -- 50,000
maturing in 2000, callable on a quarterly basis by the issuer,
interest rate of 5.58%................................................ 40,000 --
Treasury tax and loan note option account................................... 12,000 10,987
-------- -------
97,000 99,487
-------- -------
$111,102 $99,487
======== =======
</TABLE>
47
<PAGE> 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
13 LONG-TERM DEBT
Long-term debt was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
---- ----
<S> <C> <C>
Parent company:
7% Convertible Subordinated Capital Notes maturing in 1999.................. $10,440 $12,541
8-3/4% Convertible Subordinated Debentures maturing in 1998
(net of $1,504 discount, based on effective interest rate of 14.65%)...... -- 14,872
------- -------
10,440 27,413
Banking subsidiary:
Federal Home Loan Bank advances:
maturing in 1998, interest rate of 5.91%................................ -- 25,000
maturing in 2000, interest rate of 5.99%................................ 50,000 --
maturing in 2000, interest rate of 5.79%................................ 1,200 --
maturing in 2001, interest rate of 5.91%................................ 10,000 10,000
maturing in 2003, interest rate of 6.09%................................ 3,186 15,000
maturing in 2003, interest rate of 6.20%................................ 15,000 --
maturing in 2004, interest rate of 6.59%................................ 525 --
maturing in 2004, interest rate of 7.21%................................ 350 --
maturing in 2004, interest rate of 7.33%................................ 420 --
maturing in 2005, interest rate of 6.65%................................ 300 --
maturing in 2009, interest rate of 7.58%................................ 480 --
Other....................................................................... 155 164
------- -------
81,616 50,164
------- -------
$92,056 $77,577
======= =======
</TABLE>
The 7% Convertible Subordinated Capital Notes and the 8-3/4% Convertible
Subordinated Debentures are convertible into shares of Magna's common stock at a
conversion price of $17.48 and $24.88 per share, respectively, subject to
adjustment in certain circumstances. The Notes and Debentures are redeemable, in
whole or in part, at the option of Magna, subject to certain conditions, and are
subordinated to all senior debt of Magna. The Notes are redeemable at the option
of the holder, subject to certain limitations. At maturity, the noteholders and
debentureholders will receive either common stock or cash, at the discretion of
Magna, equal to the principal amount of the Notes or Debentures, respectively.
The combined maturities of long-term debt at December 31, 1997, for the
years 1998 through 2002 were $74, $10,519, $51,284, $10,089 and $94,
respectively.
On December 30, 1996, Magna entered into a three year, unsecured revolving
credit facility (the "Credit Facility") with a syndicate of unaffiliated
banks, which provided, at December 31, 1997, for borrowings by Magna of up to
$100,000. Under the terms of the Credit Facility, Magna may elect to convert the
outstanding principal balance of any outstanding revolving loans into term loans
for a term ending no later than December 30, 2002.
The Credit Facility contains specific covenants which, among other things,
limit dividend payments, restrict the sale of assets by Magna under certain
circumstances, provide for possible acceleration of the repayment terms upon the
merger of Magna or its subsidiaries with and into unaffiliated entities and
require the maintenance of certain financial ratios. At December 31, 1997, there
were no amounts outstanding under the Credit Facility.
48
<PAGE> 50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
14 CAPITAL STOCK
PREFERRED STOCK
At December 31, 1997 and 1996, there were 49,500 shares authorized and 1,996
shares outstanding, of Magna's 7.5% cumulative Class B, voting, $20 par value
preferred stock. At December 31, 1997 and 1996, 1,000,000 shares of no par value
preferred stock and 1,000,000 shares of Class C, non-voting, $.10 par value
preferred stock, were authorized with no shares of either category issued.
400,000 shares of the no par value preferred stock have been designated and were
reserved for issuance upon exercise of the preferred stock purchase rights.
COMMON STOCK
At December 31, 1997, 5,194,066 shares of common stock were reserved for
issuance in connection with conversion of the Convertible Subordinated Capital
Notes and Convertible Subordinated Debentures, Magna's stock-based compensation
plans, Magna's dividend reinvestment plan and Magna's employee stock purchase
plan.
PREFERRED STOCK PURCHASE RIGHTS
One preferred stock purchase right (a "Magna Right") is attached to each
share of common stock issued and outstanding or to be issued prior to certain
designated events. Each Magna Right becomes exercisable only under certain
circumstances and expires in 1998 unless first exercised, redeemed or converted.
The Magna Rights are designed to protect the interests of Magna and its
stockholders against coercive takeover tactics. The purpose of the Magna Rights
is to encourage potential acquirers to negotiate with Magna's Board of Directors
prior to attempting a takeover and to give the Board leverage in negotiating, on
behalf of all stockholders, the terms of any proposed takeover. See "Notes to
Consolidated Financial Statements--24 Pending Merger with Union Planters
Corporation."
15 REGULATORY MATTERS
Magna and the Affiliate Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can result in certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on Magna's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework of prompt corrective
action, Magna and the Affiliate Bank must meet specific capital guidelines that
involve quantitative measures of assets, liabilities and certain off-balance
sheet items 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 Magna and the Affiliate Bank to maintain minimum amounts and ratios of
Total and Tier 1 capital (as defined in the regulations) to risk-weighted assets
(as defined) and of Tier 1 capital to average assets (as defined). Management
believes that, as of December 31, 1997, Magna and the Affiliate Bank met all
capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the federal
banking agencies categorized the Affiliate Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Affiliate Bank must maintain minimum Total and Tier 1 capital
to risk-weighted assets and Tier 1 capital to average assets ratios as set forth
in the table below. There are no conditions or events since that notification
that management believes have changed the Affiliate Bank's category.
49
<PAGE> 51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The following table summarizes the actual capital amounts and ratios for
Magna and the Affiliate Bank, as well as those required to be categorized as
adequately capitalized and well capitalized.
<TABLE>
<CAPTION>
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to risk-weighted assets):
Consolidated........................... $557,104 12.32% >= $361,820 >= 8.00% NA NA
Affiliate Bank......................... 542,496 12.09 >= 358,902 >= 8.00 >= $448,628 >= 10.00%
Tier 1 Capital (to risk-weighted assets):
Consolidated........................... 502,291 11.09 >= 181,092 >= 4.00 NA NA
Affiliate Bank......................... 487,612 10.86 >= 179,633 >= 4.00 >= 269,450 >= 6.00
Tier 1 Capital (to average assets):
Consolidated........................... 502,291 7.24 >= 277,480 >= 4.00 NA NA
Affiliate Bank......................... 487,612 7.07 >= 275,757 >= 4.00 >= 344,697 >= 5.00
As of December 31, 1996
Total Capital (to risk-weighted assets):
Consolidated........................... 499,558 14.18 >= 281,816 >= 8.00 NA NA
Affiliate Bank......................... 371,316 10.65 >= 278,836 >= 8.00 >= 348,545 >= 10.00
Tier 1 Capital (to risk-weighted assets):
Consolidated........................... 457,221 12.97 >= 141,030 >= 4.00 NA NA
Affiliate Bank......................... 328,958 9.43 >= 139,540 >= 4.00 >= 209,310 >= 6.00
Tier 1 Capital (to average assets):
Consolidated........................... 457,221 8.45 >= 216,372 >= 4.00 NA NA
Affiliate Bank......................... 328,958 6.12 >= 215,037 >= 4.00 >= 268,796 >= 5.00
</TABLE>
16 RESTRICTED NET ASSETS
Certain restrictions exist regarding the ability of the Affiliate Bank to
transfer funds to Magna in the form of cash dividends, loans or advances. During
the fourth quarter of 1996, the Affiliate Bank received, as required, prior
regulatory approval to pay a cash dividend to Magna sufficient to fund the cash
portion of the Homeland acquisition. This dividend exceeded the maximum
available without prior regulatory approval. The Affiliate Bank received
regulatory approval to pay dividends to Magna in 1997 and 1998 which would not
exceed fifty percent of the then-current period earnings. Payment of these
dividends is subject to the Affiliate Bank maintaining its status as a "well
capitalized" institution, as defined by regulatory authorities as set forth in
Note 15 to the Consolidated Financial Statements. Payment of cash dividends, by
the Affiliate Bank, beyond December 31, 1998 may require additional regulatory
approval.
17 INCOME TAXES
The components of income tax expense are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current taxes........................... $36,047 $31,288 $21,129
Deferred taxes.......................... 4 1,352 2,154
------- ------- -------
Income tax expense...................... $36,051 $32,640 $23,283
======= ======= =======
</TABLE>
50
<PAGE> 52
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Included in income taxes were tax expenses of $904, $286 and $124 in 1997,
1996 and 1995, respectively, related to net securities gains.
Reconciliations between income tax expense and the amount computed by
applying the statutory federal tax rate of 35% to income before income taxes are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate applied to income before
income taxes.......................... $38,054 $33,523 $26,077
Effects of:
Tax-exempt income................... (4,942) (3,331) (3,293)
Goodwill amortization............... 2,512 522 281
State tax, net of federal benefit... 1,433 2,277 1,680
Adjustment to valuation allowance... -- -- (935)
Other, net.......................... (1,006) (351) (527)
------- ------- -------
Income tax expense...................... $36,051 $32,640 $23,283
======= ======= =======
</TABLE>
Deferred income taxes reflect the net tax effect of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of Magna's
deferred tax assets and liabilities as of December 31, 1997 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses............. $23,776 $18,153
Foreclosed property................. 19 144
Deferred compensation............... 5,322 4,409
Net operating loss and built-in loss
carryforwards..................... 93 224
Alternative minimum tax credit
carryforwards..................... -- 1,067
Securities market value
adjustment........................ -- 1,603
------- -------
Total deferred tax assets before
valuation allowance........... 29,210 25,600
Valuation allowance for deferred tax
assets............................ (2,269) (2,282)
------- -------
Total deferred tax assets....... 26,941 23,318
------- -------
Deferred tax liabilities:
Premises and equipment.............. 2,260 1,254
Purchase accounting adjustments..... 1,781 2,804
Securities market value
adjustment........................ 2,052 --
Other, net.......................... 3,552 2,193
------- -------
Total deferred tax
liabilities................... 9,645 6,251
------- -------
Net deferred tax assets................. $17,296 $17,067
======= =======
</TABLE>
Magna has a net operating loss carryforward of $236 for federal tax
purposes. The net operating loss carryforward expires primarily in the years
2007 to 2008.
51
<PAGE> 53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
18 EMPLOYEE BENEFITS
PENSION PLAN
Magna and its subsidiaries have a non-contributory, defined benefit
retirement plan that covers all employees who have attained age 21 and completed
one year of service. Benefits are accrued for each year of service based upon
percentages of the designated portions of each participant's annual base
compensation. Magna's policy is to fund contributions annually within the limits
prescribed for deduction for federal income tax purposes. Contributions are
intended to provide for benefits attributed to service to date.
The assets of the pension plan include U.S. Treasury and Government agency
obligations, equity securities, equity and fixed income funds, corporate bonds,
market rate deposit accounts and cash.
The following table sets forth the funded status and amounts recognized in
Magna's balance sheets for the plan.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
($25,662) and ($20,538) at
December 31, 1997 and 1996,
respectively...................... $(26,181) $(20,924)
======== ========
Projected benefit obligation for
services rendered to date......... $(34,383) $(26,869)
Plan assets at fair value, primarily
listed stocks and corporate and
U.S. debt securities.............. 35,044 27,262
-------- --------
Plan assets greater than projected
benefit obligation................ 661 393
Unrecognized net gain from past
experience different from that
assumed and effect of changes in
assumptions....................... (1,993) (830)
Unrecognized net asset at beginning
of year, being recognized over
13.8 years beginning January 1,
1986.............................. (477) (720)
Unrecognized prior service cost..... (1,218) (564)
-------- --------
Accrued pension expense............. $ (3,027) $ (1,721)
======== ========
</TABLE>
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.0% and 5.5%, respectively, for 1997 and
7.25% and 5.5%, respectively, for 1996. The expected long-term rate of return on
plan assets was 8.75% for 1997 and 1996 and 7.5% for 1995.
Net pension expense included the following components:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned during the
year.................................. $ 2,204 $ 2,006 $ 1,595
Interest cost on projected benefit
obligation............................ 2,049 1,833 1,805
Actual return on plan assets............ (5,759) (4,451) (5,171)
Net amortization and deferral........... 2,987 2,076 3,066
------- ------- -------
Net pension expense..................... $ 1,481 $ 1,464 $ 1,295
======= ======= =======
</TABLE>
SUPPLEMENTAL RETIREMENT PLANS
Magna has supplemental retirement plans for certain executive officers that
cover benefits that are in excess of the maximum amounts allowable under Magna's
defined benefit pension plan.
52
<PAGE> 54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
OTHER RETIREMENT PLANS
Magna has a qualified 401(k) retirement plan which covers all employees of
Magna meeting certain age and length of service requirements. Magna also has a
supplemental retirement plan for certain executives who exceed the maximum
amounts of deferral under Magna's 401(k) retirement plan. Magna makes
contributions to these plans in an amount equal to 50% of employee
contributions, subject to certain limitations. Such contributions, in the
aggregate, amounted to $1,681, $1,247 and $1,249 for the years ended December
31, 1997, 1996 and 1995, respectively.
COMPENSATION AGREEMENTS
Magna has entered into agreements with certain executives of Magna and its
subsidiaries which become operative upon a change in control of Magna and
provide for termination benefits as defined. Compensation which might be payable
under these agreements has not been accrued in the financial statements, as a
change in control and events of termination, as defined, have not occurred.
STOCK-BASED COMPENSATION PLANS
Magna has several stock-based compensation plans under which stock options,
restricted stock and performance shares may be granted to key employees. In
addition, Magna sponsors an employee stock purchase plan which allows employees
to purchase shares of Magna's common stock at a discount from market value.
Magna also has stock-based compensation plans for its Board of Directors.
The general provisions of the more significant stock-based compensation
plans are as follows:
Magna's 1992 and 1996 Amended and Restated Long-Term Performance Plans
authorized the issuance of options, appreciation rights, restricted stock and
performance awards to management personnel for up to 900,000 and 1,000,000
shares, respectively, of Magna's common stock, of which no more than 300,000
shares per plan may be issued in the form of restricted stock. All options
granted have ten year terms and vest and become fully exercisable over periods
ranging from six months to two years.
Magna's 1992 and 1996 Amended and Restated Directors' Stock Option Plans
authorized the issuance of options to nonemployee members of the Board of
Directors for up to 100,000 shares per plan, of Magna's common stock. All
options granted have ten year terms and vest and become fully exercisable over
periods ranging from immediately to three years.
Magna's 1987 Stock Option Plan has authorized the grant of options to
management personnel for up to 607,753 shares of Magna's common stock. No future
options will be granted under this plan. All outstanding options have ten year
terms and are fully vested.
Under Magna's restricted stock program, common stock of Magna may be granted
at no cost to certain officers and key employees. Upon issuance, plan
participants are entitled to cash dividends and to vote their respective shares.
Restrictions limit the sale or transfer of the shares during various vesting
periods ranging from one to eight years. Upon issuance of the stock under the
plan, unearned compensation equivalent to the market value at the date of
issuance is charged to stockholders' equity and is subsequently amortized to
expense over the respective vesting periods.
Pro forma information regarding net income and net income per share is
required by FAS No. 123, which also requires that the information be determined
as if Magna had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that standard. The fair value
for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996 and 1995, respectively: risk-free interest rates of 6.1%, 6.5% and 6.0%;
dividend yields of 2.7%, 3.5% and 3.4%; volatility factors of the expected
market price of Magna's common stock of .19, .15 and .16; and weighted-average
expected lives of the awards of 4.6, 4.7 and 5.0 years.
53
<PAGE> 55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
For purposes of pro forma disclosures, the estimated fair value of the
awards is amortized to expense over the awards' vesting period. Magna's pro
forma information follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma net income.................... $71,561 $62,742 $51,153
Pro forma net income per share:
Basic............................... $2.23 $2.23 $1.85
Diluted............................. 2.18 2.17 1.81
</TABLE>
Magna's stock option activity and related information for the years ended
December 31 is summarized in the table below.
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of
year........................ 1,037,107 $21.82 776,838 $19.25 827,759 $16.72
Granted....................... 430,160 35.53 362,678 25.62 221,365 23.62
Exercised..................... (144,640) 19.07 (91,566) 14.94 (234,298) 14.05
Forfeited or expired.......... (14,488) 30.54 (10,843) 22.77 (37,988) 21.73
--------- ------ --------- ------ -------- ------
Outstanding--end of year...... 1,308,139 $26.54 1,037,107 $21.82 776,838 $19.25
========= ====== ========= ====== ======== ======
Exercisable--end of year...... 797,708 $21.83 618,179 $19.47 511,267 $17.36
========= ====== ========= ====== ======== ======
Weighted-average fair value of
options granted during the
year........................ $6.55 $3.69 $3.96
========= ========= ========
<FN>
- --------
Exercise prices for options outstanding as of December 31, 1997 ranged from
$13.63 to $37.75. The weighted-average remaining contractual life of those
options is 8.0 years.
</TABLE>
54
<PAGE> 56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
19 NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Numerator:
Net income.......................... $72,675 $63,139 $51,222
Preferred stock dividends:
Class B voting preferred........ (3) (3) (3)
------- ------- -------
Numerator for basic net income per
share--income available to common
stockholders...................... 72,672 63,136 51,219
------- ------- -------
Effect of dilutive items:
Elimination of interest, net of
related tax effects on:
7% convertible subordinated
capital notes................. 526 646 757
8-3/4% convertible subordinated
debentures.................... 1,366 1,437 --
------- ------- -------
Numerator for diluted net income per
share--income available to common
stockholders after assumed
conversions....................... $74,564 $65,219 $51,976
======= ======= =======
Denominator:
Weighted average common shares
outstanding....................... 32,241 28,248 27,745
Weighted average restricted common
shares--issued but not earned..... (151) (65) (41)
------- ------- -------
Denominator for basic net income per
share............................. 32,090 28,183 27,704
------- ------- -------
Effect of dilutive securities:
Weighted average restricted common
shares--issued but not earned..... 151 65 41
Net effect of stock options......... 239 96 96
Assumed conversion of:
7% convertible subordinated
capital notes................. 636 785 895
8-3/4% convertible subordinated
debentures.................... 633 690 --
------- ------- -------
Dilutive potential common shares.... 1,659 1,636 1,032
Denominator for diluted net income
per share--adjusted
weighted-average shares and
assumed conversions............... 33,749 29,819 28,736
======= ======= =======
Basic net income per share.............. $2.26 $2.24 $1.85
======= ======= =======
Diluted net income per share............ $2.21 $2.19 $1.81
======= ======= =======
</TABLE>
For the year ended December 31, 1995, inclusion of common stock equivalents
for the 8-3/4% convertible subordinated debentures in the computation of
diluted net income per share results in antidilution and therefore, are excluded
from the computation.
20 FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial Accounting Standards No. 107 (FAS No. 107), "Disclosures about
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments, whether or not recognized in the
balance sheet, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. Those techniques
55
<PAGE> 57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Intangible values assigned to customer relationships are not included in
reported fair values. Accordingly, the aggregate fair value amounts presented
may not necessarily represent the underlying value of Magna.
The following methods and assumptions were used by Magna in estimating its
fair value disclosures for financial instruments, which are held for purposes
other than trading:
Cash and Cash Equivalents: The carrying amounts reported in the balance
sheet for cash and due from banks and federal funds sold approximate those
assets' fair values.
Securities: Fair values for held-to-maturity and available-for-sale
securities are based on quoted market prices or dealer quotes, where available.
If quoted market prices are not available for a specific security, fair values
are based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. The
fair values for fixed-rate loans are estimated using discounted cash flow
analyses, applying interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The fair values for nonperforming
loans are estimated using assumptions regarding current assessments of
collectibility and historical loss experience.
Deposits: The fair values disclosed for deposits generally payable on
demand, such as noninterest bearing checking accounts, savings accounts,
interest bearing demand deposit accounts and market rate deposit accounts, are,
by definition, equal to the amount payable on demand at the reporting date. The
carrying amounts for variable-rate, fixed-term market rate deposit accounts and
certificates of deposit approximate their fair values at the reporting date.
Fair values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates of similar remaining maturities to a schedule of
aggregated monthly maturities on time deposits.
Federal Funds Purchased, Repurchase Agreements and Other Short-Term
Borrowings: The carrying amounts of federal funds purchased, repurchase
agreements and other short-term borrowings approximate their fair values at the
reporting date.
Long-Term Debt: The fair value of long-term debt is based on quoted market
prices for similar issues or estimates using discounted cash flow analyses,
based on current incremental borrowing rates for similar types of debt
instruments.
Off-Balance Sheet Financial Instruments: The fair values of loan commitments
and letters of credit are determined using estimated fees currently charged to
enter into similar agreements. The fair values of these instruments were not
significant to Magna's consolidated financial position.
The fair value of interest rate swaps is estimated using dealer quoted
prices which represent the cost to replace all outstanding contracts at current
market rates, taking into consideration the current creditworthiness of the
counterparties. At December 31, 1996, Magna was a party to a $50,000 notional
amount interest rate swap that effectively converted floating rate
available-for-sale securities to fixed rate. The fair value and carrying amount
of this swap reflected an unrealized loss of approximately $200 which was
included in available-for-sale securities at December 31, 1996. Magna had no
interest rate swaps at December 31, 1997.
56
<PAGE> 58
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The carrying amount and estimated fair values of Magna's remaining financial
instruments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------------
1997 1996
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks............. $ 247,932 $ 247,932 $ 180,412 $ 180,412
Federal funds sold.................. 48,202 48,202 34,068 34,068
Held-to-maturity securities......... 137,690 141,182 154,729 156,993
Available-for-sale securities....... 1,850,932 1,850,932 1,501,178 1,501,178
Net loans........................... 4,424,373 4,450,242 3,369,927 3,376,643
Liabilities:
Deposits............................ $5,435,995 $5,382,181 $4,197,776 $4,197,675
Federal funds purchased............. 92,200 92,200 25,500 25,500
Repurchase agreements............... 642,301 642,301 508,948 508,948
Other short-term borrowings......... 111,102 111,102 99,487 99,487
Long-term debt...................... 92,056 92,504 77,577 91,526
</TABLE>
21 FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, Magna offers a variety of financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement and interest rate protection. Generally accepted
accounting principles recognize these transactions as contingent liabilities
and, accordingly, they are not reflected in the accompanying financial
statements.
Letters of Credit: These transactions are used by Magna's customers as a
means of improving their credit standing in transactions with unaffiliated third
parties. Under these agreements, Magna agrees to honor certain financial
commitments in the event that its customers are unable to do so. Net outstanding
standby letters of credit amounted to $49,474 and $39,807 at December 31, 1997
and 1996, respectively. Commercial letters of credit outstanding amounted to
$377 and $478 at December 31, 1997 and 1996, respectively.
Management conducts regular reviews of these instruments on an individual
customer basis, and the results are considered in assessing the adequacy of
Magna's reserve for loan losses. Management does not anticipate any material
losses as a result of the letters of credit.
Loan Commitments: At December 31, 1997 and 1996, Magna had commitments
outstanding to extend credit totaling approximately $873,870 and $645,932,
respectively. These commitments generally require the customers to maintain
certain credit standards. Magna evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary, is
based on management's credit evaluation of the counterparty and generally
consists of certificates of deposit, marketable securities or deeds of trust, in
addition to various other forms of collateral such as accounts receivable,
inventory and fixed assets.
22 LEGAL PROCEEDINGS
Various claims and lawsuits, incidental to the ordinary course of business,
are pending against Magna and its subsidiaries. In the opinion of management,
after consultation with legal counsel, resolution of these matters is not
expected to have a material effect on Magna's financial statements.
57
<PAGE> 59
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
23 PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Following are the condensed financial statements of Magna Group, Inc.
(Parent Company Only) for the periods indicated:
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
DECEMBER 31
---------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks............. $ 18,068 $127,921
Held-to-maturity securities......... 3,764 3,764
Available-for-sale securities....... 236 236
Investment in subsidiaries.......... 616,507 360,418
Premises and equipment.............. 4,069 4,060
Other assets........................ 18,129 18,151
-------- --------
Total Assets................ $660,773 $514,550
======== ========
LIABILITIES
Short-term borrowings............... $ 14,102 $ --
Long-term debt...................... 10,440 27,413
Other liabilities................... 9,878 3,176
-------- --------
Total Liabilities........... 34,420 30,589
TOTAL STOCKHOLDERS' EQUITY.............. 626,353 483,961
-------- --------
Total Liabilities and
Stockholders' Equity...... $660,773 $514,550
======== ========
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries......... $37,662 $ 167,865 $32,856
Management fees from subsidiaries... 37,938 34,407 39,509
Other income........................ 2,220 1,670 967
------- --------- -------
77,820 203,942 73,332
EXPENSE
Interest............................ 2,861 3,142 3,215
Other expenses...................... 42,952 40,127 43,266
------- --------- -------
45,813 43,269 46,481
Income before income tax benefit and
equity in undistributed
(overdistributed) income of
subsidiaries...................... 32,007 160,673 26,851
INCOME TAX BENEFIT...................... 2,749 2,745 2,822
------- --------- -------
34,756 163,418 29,673
Equity in undistributed
(overdistributed) income of
subsidiaries...................... 37,919 (100,279) 21,549
------- --------- -------
NET INCOME.............................. $72,675 $ 63,139 $51,222
======= ========= =======
</TABLE>
58
<PAGE> 60
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................... $ 72,675 $ 63,139 $ 51,222
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, amortization and
accretion..................... 4,332 3,252 2,574
Deferred income tax benefit..... (969) (421) (726)
Equity in (undistributed)
overdistributed income of
subsidiaries.................. (37,919) 100,279 (21,549)
Increase in other assets........ (6,133) (2,871) (4,532)
Increase (decrease) in other
liabilities................... 5,269 (2,739) 519
--------- -------- --------
Net Cash Provided by Operating
Activities............................ 37,255 160,639 27,508
INVESTING ACTIVITIES
Purchases of premises and
equipment......................... (1,488) (1,471) (1,737)
Cash paid for acquired
institution....................... (92,037) (12,444) --
--------- -------- --------
Net Cash Used in Investing Activities... (93,525) (13,915) (1,737)
FINANCING ACTIVITIES
Cash dividends...................... (31,808) (24,833) (22,201)
Purchases of treasury stock......... (32,703) (17,605) --
Other, net.......................... 10,928 5,957 6,974
--------- -------- --------
Net Cash Used in Financing Activities... (53,583) (36,481) (15,227)
--------- -------- --------
Increase (Decrease) in Cash and Cash
Equivalents....................... (109,853) 110,243 10,544
Cash and Cash Equivalents at Beginning
of Year............................... 127,921 17,678 7,134
--------- -------- --------
Cash and Cash Equivalents at End of
Year.................................. $ 18,068 $127,921 $ 17,678
========= ======== ========
</TABLE>
Cash paid for interest and income taxes, as well as significant non-cash
financing activities, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest............................ $ 2,152 $2,458 $ 2,598
Income tax payments (refunds)....... (9,711) 928 (2,615)
Capital notes and debentures
converted into 184,915, 143,739
and 110,567 shares of common
stock, respectively............... 3,613 2,689 1,933
</TABLE>
59
<PAGE> 61
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
24 PENDING MERGER WITH UNION PLANTERS CORPORATION
On February 22, 1998, Magna and Union Planters Corporation ("Union
Planters") signed a definitive agreement for the acquisition of Magna by Union
Planters. Union Planters is a Memphis-based multi-state bank holding company
with $18,100,000 in assets as of December 31, 1997. Under the terms of the
agreement, each share of Magna's common stock will be converted into .9686 of a
share of Union Planters' common stock. The acquisition is subject to certain
regulatory approvals and to the approvals of the stockholders of both Magna and
Union Planters. The acquisition is expected to be accounted for as a pooling-
of-interests and is expected to be completed in the third quarter of 1998.
Also on February 22, 1998, Magna and the Affiliate Bank entered into a first
amendment (the "Amendment") to that certain Rights Agreement dated November
11, 1988, under which the Magna Rights are authorized. The Amendment provided
that the execution of the definitive agreement and certain related documents
between Magna and Union Planters and the consummation of the acquisition, would
not cause the Magna Rights to detach from the common shares and become
exercisable. The Amendment also provided that the Rights Agreement, as amended,
would expire immediately prior to the effective time of the acquisition.
60
<PAGE> 62
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA--CONTINUED
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
MAGNA GROUP, INC.
We have audited the accompanying consolidated balance sheets of Magna Group,
Inc. ("Magna") as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of Magna'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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Magna at
December 31, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
St. Louis, Missouri
January 21, 1998
Except for Note 24, as to which the date is February 22, 1998
61
<PAGE> 63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information regarding the directors of Magna will be contained in Magna's
Proxy Statement for the 1998 Annual Meeting of Stockholders under the caption
"Election of Directors of Magna" and is incorporated herein by reference.
Information regarding executive officers of Magna is contained in Part I
hereof under the caption "Executive Officers."
Information regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934 will be contained in Magna's Proxy Statement for the 1998
Annual Meeting of Stockholders under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance," and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will be contained in Magna's
Proxy Statement for the 1998 Annual Meeting of Stockholders under the captions
"Compensation of Directors of Magna" and "Compensation of Executive Officers
of Magna," and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management will be contained in Magna's Proxy Statement for the 1998 Annual
Meeting of Stockholders under the captions "Voting Securities of Magna and
Principal Holders Thereof" and "Security Ownership of Management of Magna,"
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions will be
contained in Magna's Proxy Statement for the 1998 Annual Meeting of Stockholders
under the caption "Certain Relationships and Related Transactions" and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: The following financial statements of
Magna are included in Item 8 of this Report:
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
(2) Financial Statement Schedules: All schedules applicable to
Magna are included in the Consolidated Financial Statements
or the notes thereto
(3) Exhibits:
See Exhibit Index on page 65 of this Report
(b) Reports on Form 8-K: No reports on Form 8-K were filed by
Magna during the fourth quarter of the fiscal year covered by
this Report.
62
<PAGE> 64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MAGNA GROUP, INC.
Date: March 18, 1998
By /s/ G. THOMAS ANDES
----------------------------
G. Thomas Andes
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of Magna Group, Inc., hereby
severally and individually constitute and appoint G. Thomas Andes, Robert S.
Kahler and Carolyn B. Ryseff, and each of them, the true and lawful attorneys
and agents of each of us to execute in the name, place and stead of each of us
(individually and in any capacity stated below) any and all amendments to this
Annual Report on Form 10-K and all instruments necessary or advisable in
connection therewith and to file the same with the Securities and Exchange
Commission, each of said attorneys and agents to have the power to act with or
without the others and to have full power and authority to do and perform in the
name and on behalf of each of the undersigned every act whatsoever necessary or
advisable to be done in the premises as fully and to all intents and purposes as
any of the undersigned might or could do in person, and we hereby ratify and
confirm our signatures as they may be signed by our said attorneys and agents or
each of them to any and all such amendments and instruments.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ G. THOMAS ANDES Chairman of the Board, Chief Executive March 18, 1998
- ------------------------------------------ Officer and Director (Principal Executive
G. Thomas Andes Officer)
/s/ ROBERT S. KAHLER Executive Vice President and Chief Financial March 18, 1998
- ------------------------------------------ Officer (Principal Financial and Accounting
Robert S. Kahler Officer)
Director
- ------------------------------------------
James A. Auffenberg, Jr.
Director
- ------------------------------------------
Wayne T. Ewing
/s/ DONALD P. GALLOP Director March 18, 1998
- ------------------------------------------
Donald P. Gallop
/s/ RANDALL E. GANIM Director March 18, 1998
- ------------------------------------------
Randall E. Ganim
63
<PAGE> 65
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ C.E. HEILIGENSTEIN Director March 18, 1998
- ------------------------------------------
C.E. Heiligenstein
Director
- ------------------------------------------
John G. Helmkamp, Jr.
/s/ CARL G. HOGAN, SR. Director March 18, 1998
- ------------------------------------------
Carl G. Hogan, Sr.
Director
- ------------------------------------------
Franklin A. Jacobs
/s/ S. LEE KLING Director March 18, 1998
- ------------------------------------------
S. Lee Kling
Director
- ------------------------------------------
Ralph F. Korte
/s/ ROGER J. LOWERY Director March 18, 1998
- ------------------------------------------
Roger J. Lowery
/s/ WILLIAM A. PECK Director March 18, 1998
- ------------------------------------------
William A. Peck
/s/ ERL A. SCHMIESING Director March 18, 1998
- ------------------------------------------
Erl A. Schmiesing
/s/ DOUGLAS K. SHULL Director March 18, 1998
- ------------------------------------------
Douglas K. Shull
Director
- ------------------------------------------
Frank R. Trulaske
/s/ GEORGE T. WILKINS, JR. Director March 18, 1998
- ------------------------------------------
George T. Wilkins, Jr.
</TABLE>
64
<PAGE> 66
<TABLE>
EXHIBIT INDEX
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of February 22, 1998, by and
between Magna and Union Planters (filed as Exhibit 2.1 to Magna's Current Report
on Form 8-K, dated February 27, 1998 (File No. 001-12405) and incorporated herein
by reference)
2.2 Form of Affiliate Agreement, dated as of February 22, 1998, by and between Union
Planters and the affiliates of Magna (filed as Exhibit 2.2 to Magna's Current
Report on Form 8-K, dated February 27, 1998 (File No. 001-12405) and
incorporated herein by reference)
2.3 Stock Option Agreement, dated as of February 22, 1998, by and between Magna and
Union Planters (filed as Exhibit 2.3 to Magna's Current Report on Form 8-K,
dated February 27, 1998 (File No. 001-12405) and incorporated herein by
reference)
3.1 Restated Certificate of Incorporation (filed as Exhibit 3.1 to Magna's Quarterly
Report on Form 10-Q for the period ended June 30, 1997 (File No. 001-12405) and
incorporated herein by reference)
3.2 By-laws, as amended (filed as Exhibit 3.2 to Magna's Quarterly Report on Form
10-Q for the period ended June 30, 1997 (File No. 001-12405) and incorporated
herein by reference)
4.1 Form of Indenture, including form of Note, between Magna and Mark Twain Bank, as
trustee, dated August 1, 1987 for the 7% Convertible Subordinated Capital Notes
due 1999 (filed as Exhibit 1 to Magna's Registration Statement on Form 8-A dated
June 15, 1988 (File No. 001-12405) and incorporated herein by reference)
4.2 Indenture dated as of November 1, 1986 between Landmark Bancshares Corporation
(hereinafter "Landmark") and Centerre Trust Company of St. Louis, regarding
the issuance of $17,250,000 principal amount of Landmark's 8-3/4% Convertible
Subordinated Debentures due November 1, 1998 (filed as Exhibit 4(c) to
Landmark's Annual Report on Form 10-K for the year ended December 31, 1986 (File
No. 1-8810) and incorporated herein by reference)
4.3 First Supplemental Indenture dated December 20, 1991 among Magna, Magna Acquisi-
tion Corporation and Boatmen's National Bank of St. Louis as successor to
Centerre Trust Company of St. Louis, Trustee, assuming the obligations of
Landmark under the Indenture dated November 1, 1986 (filed as Exhibit 4.2 to
Magna's Current Report on Form 8-K dated December 20, 1991 (File No. 001-12405)
and incorporated herein by reference)
4.4 Rights Agreement, including form of Right Certificate, dated as of November 11,
1988 between Magna and Magna Trust Company, Trustee (filed as Exhibits 1 and 2
to Magna's Registration Statement on Form 8-A dated November 11, 1988 (File No.
001-12405) and incorporated herein by reference)
4.5 Amendment to Rights Agreement (filed as Exhibit 2.1 to Magna's Form 8-A/A Amend-
ment to Registration Statement on Form 8-A (File No. 001-12405) and incorporated
herein by reference)
10.1 Agreement and Plan of Reorganization, dated as of August 30, 1996, by and
between Magna and Homeland (filed as Exhibit 2 to Magna's Current Report on Form
8-K (File No. 001-12405) dated August 30, 1996 and incorporated herein by
reference)
10.2 Stock Option Agreement, dated August 30, 1996, between Magna and Homeland (filed
as Exhibit 99.1 to Magna's Current Report on Form 8-K (File No. 001-12405) dated
August 30, 1996 and incorporated herein by reference)
10.3 Amendment to Agreement and Plan of Reorganization, dated as of November 19,
1996, by and between Magna and Homeland (filed as Exhibit 2.3 to Magna's
Registration Statement on Form S-4 (Reg. No. 333-17797) and incorporated herein
by reference)
65
<PAGE> 67
EXHIBIT INDEX--(CONTINUED)
10.4 Form of Stock Option Agreement under Landmark's 1982 Capital Accumulation Plan,
assumed by Magna as to outstanding obligations pursuant to the acquisition of
Landmark (filed as Exhibit 10.1 to Magna's Annual Report on Form 10-K for the
year ended December 31, 1991 (File No. 001-12405) and incorporated herein by
reference)<F*>
10.5 Form of Stock Option Agreement under Landmark's 1986 Non-Qualified Stock Option
Plan, assumed by Magna as to outstanding obligations pursuant to the acquisition
of Landmark (filed as Exhibit 10.2 to Magna's Annual Report on Form 10-K for the
year ended December 31, 1991 (File No. 001-12405) and incorporated herein by
reference)<F*>
10.6 1987 Stock Option Plan of Magna (filed as Exhibit 10.2 to Magna's Registration
Statement on Form S-4 (Reg. No. 33-15463) and incorporated herein by refer-
ence)<F*>
10.7 Landmark's Amended and Restated Supplemental Retirement Plan (filed as Exhibit
10(ff) to Landmark's Annual Report on Form 10-K for the year ended December 31,
1989 (File No. 1-8810) and incorporated herein by reference)<F*>
10.8 Amended and Restated Employment Agreement between Magna and G. Thomas Andes
effective January 1, 1995 and amended and restated June 6, 1996 and as of May
27, 1997 (filed as Exhibit 10.1 to Magna's Quarterly Report on Form 10-Q for the
period ended June 30, 1997 (File No. 001-12405) and incorporated herein by
reference)<F*>
10.9 Agreement effective March 1, 1997 between Magna and Linda K. Fabel (filed as
Exhibit 10.9 to Magna's Annual Report on Form 10-K for the year ended December
31, 1996 (File No. 001-12405) and incorporated herein by reference)<F*>
10.10 Agreement effective March 1, 1997 between Magna and Robert J. Mathias (filed as
Exhibit 10.10 to Magna's Annual Report on Form 10-K for the year ended December
31, 1996 (File No. 001-12405) and incorporated herein by reference)<F*>
10.11 Agreement effective March 1, 1997 between Magna and Gary D. Hemmer (filed as
Exhibit 10.11 to Magna's Annual Report on Form 10-K for the year ended December
31, 1996 (File No. 001-12405) and incorporated herein by reference)<F*>
10.12 Agreement dated January 8, 1998 between Magna and Ronald A. Buerges<F*>
10.13 Agreement effective March 1, 1997 between Magna and Robert M. Olson, Jr. (filed
as Exhibit 10.13 to Magna's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 001-12405) and incorporated herein by reference)<F*>
10.14 Agreement dated October 20, 1997, between Magna and Robert S. Kahler (filed as
Exhibit 10.2 to Magna's Quarterly Report on Form 10-Q for the period ended
September 30, 1997 (File No. 001-12405) and incorporated herein by
reference)<F*>
10.15 Agreement dated October 17, 1997, between Magna and Bradford W. Koeneman (filed
as Exhibit 10.3 to Magna's Quarterly Report on Form 10-Q for the period ended
September 30, 1997 (File No. 001-12405) and incorporated herein by
reference)<F*>
10.16 Supplemental Senior Executive Retirement Plan of Magna dated May 27, 1997 (filed
as Exhibit 10.2 to Magna's Quarterly Report on Form 10-Q for the period ended
June 30, 1997 (File No. 001-12405) and incorporated herein by reference)<F*>
10.17 Supplemental Executive Retirement Plan of Magna dated October 1997 (filed as Ex-
hibit 10.1 to Magna's Quarterly Report on Form 10-Q for the period ended
September 30, 1997 (File No. 001-12405) and incorporated herein by
reference)<F*>
10.18 Second Amendment to Second Restated Employment Agreement between Magna and S.
Lee Kling (filed as Exhibit 10.24 to Magna's Quarterly Report on Form 10-Q for
the period ended June 30, 1994 (File No. 001-12405) and incorporated herein by
reference)<F*>
10.19 Second Restated Employment Agreement dated as of October 20, 1990, as amended by
Letter Agreement dated August 29, 1991, between Landmark and S. Lee Kling (filed
as Exhibit 10.9 to Magna's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 001-12405) and incorporated herein by reference)<F*>
66
<PAGE> 68
EXHIBIT INDEX--(CONTINUED)
10.20 Directors' Survivor Benefit Plan (filed as Exhibit 10.11 to Magna's Annual
Report on Form 10-K for the year ended December 31, 1991 (File No. 001-12405)
and incorporated herein by reference)<F*>
10.21 Directors' Deferred Compensation Plan (filed as Exhibit 10.12 to Magna's Annual
Report on Form 10-K for the year ended December 31, 1991 (File No. 001-12405)
and incorporated herein by reference)<F*>
10.22 Board of Directors Retirement Plan of Magna (filed as Exhibit 10.16 to Magna's
Annual Report on Form 10-K for the year ended December 31, 1994 (File No.
001-12405) and incorporated herein by reference)<F*>
10.23 Magna Directors' Deferred Plan (filed as Exhibit 10.1 to Magna's Quarterly
Report on Form 10-Q for the period ended September 30, 1996 (File No. 001-12405)
and incorporated herein by reference)<F*>
10.24 Magna Directors' Deferred Compensation Plan (filed as Exhibit 10.2 to Magna's
Quarterly Report on Form 10-Q for the period ended September 30, 1996 (File No.
001-12405) and incorporated herein by reference)<F*>
10.25 First Amendment to Magna Board of Directors Retirement Plan (filed as Exhibit
10.3 to Magna's Quarterly Report on Form 10-Q for the period ended September 30,
1996 (File No. 001-12405) and incorporated herein by reference)<F*>
10.26 Executive Supplemental Deferral Plan (filed as Exhibit 10.12 to Magna's Annual
Report on Form 10-K for the year ended December 31, 1987 (File No. 001-12405)
and incorporated herein by reference)<F*>
10.27 Form of Director Indemnification Agreement dated as of May 30, 1991 between
Landmark and Donald P. Gallop, Carl G. Hogan, Sr., Franklin A. Jacobs and Ralph
F. Korte, respectively, and Consent dated May 24, 1991 of Magna to Director
Indemnification Agreements dated May 30, 1991 assuming Landmark's obligations
thereunder upon effectiveness of the acquisition (filed as Exhibit 10.14 to
Magna's Annual Report on Form 10-K for the year ended December 31, 1991 (File
No. 001-12405) and incorporated herein by reference)<F*>
10.28 Magna Amended and Restated Directors' Stock Option Plan (filed as Exhibit 10.33
to Magna's Registration Statement on Form S-4 (Reg. No. 333-17797) and
incorporated herein by reference)<F*>
10.29 Magna Amended and Restated 1996 Directors' Stock Option Plan (filed as Exhibit
10.34 to Magna's Registration Statement on Form S-4 (Reg. No. 333-17797) and
incorporated herein by reference)<F*>
10.30 Magna Amended and Restated 1992 Long Term Performance Plan (filed as Exhibit
10.35 to Magna's Registration Statement on Form S-4 (Reg. No. 333-17797) and
incorporated herein by reference)<F*>
10.31 Magna Amended and Restated 1996 Long Term Performance Plan (filed as Exhibit
10.36 to Magna's Registration Statement on Form S-4 (Reg. No. 333-17797) and
incorporated herein by reference)<F*>
10.32 Amendment to Supplemental Executive Retirement Plan of Magna (filed as Exhibit
10.25 to Magna's Quarterly Report on Form 10-Q for the period ended June 30,
1994 (File No. 001-12405) and incorporated herein by reference)<F*>
10.33 Supplemental Executive Retirement Plan of Magna (filed as Exhibit 10.15 to
Magna's Annual Report on Form 10-K for the year ended December 31, 1993 (File
No. 001-12405) and incorporated herein by reference)<F*>
10.34 Magna Executive Incentive Compensation Plan (MEICP) 1998<F*>
67
<PAGE> 69
EXHIBIT INDEX--(CONTINUED)
10.35 Amended and Restated Retirement and Consulting Agreement dated December 30, 1994
between Magna and William S. Badgley (filed as Exhibit 10.24 to Magna's Annual
Report on Form 10-K for the year ended December 31, 1994 (File No. 001-12405)
and incorporated herein by reference)
10.36 Lease between Magna as successor in interest to Landmark, and St. Louis
Brentwood Associates, L.P., dated December 19, 1986, relating to Magna Place, as
amended by the First Amendment dated November 17, 1987, the Addendum dated
February 1, 1990 and the Letter Agreement dated January 9, 1992 (filed as
Exhibit 10.17 to Magna's Annual Report on Form 10-K for the year ended December
31, 1991 (File No. 001-12405) and incorporated herein by reference)
10.37 Amendment to Lease Agreement between Magna, as successor in interest to Landmark
and St. Louis Brentwood Associates, L.P., dated August 28, 1997, relating to
Magna Place.
10.38 Stock Purchase Agreement dated March 27, 1992, by and among Capital Bancorpora-
tion, Inc., Magna and Landmark Acquisition Corporation, and amendment thereto
(filed as Exhibit 2.1 to Magna's Registration Statement on Form S-3 (Reg. No.
33-48918) and incorporated herein by reference)
10.39 Supplemental Agreement dated February 29, 1996, between Magna and John G.
Helmkamp, Jr. (filed as Exhibit 10.26 to Magna's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No. 001-12405) and incorporated herein by
reference)<F*>
10.40 Severance Agreement dated March 5, 1997 between Magna and Erl A. Schmiesing
(filed as Exhibit 10.35 to Magna's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 001-12405) and incorporated herein by reference)<F*>
10.41 Loan Agreement dated as of December 30, 1996, between Magna and unaffiliated
lender (filed as Exhibit 10.36 to Magna's Annual Report on Form 10-K for the
year ended December 31, 1996 (File No. 001-12405) and incorporated herein by
reference)
10.42 First Amendment to Loan Agreement dated as of March 5, 1997 among Magna and
unaffiliated lenders (filed as Exhibit 10.37 to Magna's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 001-12405) and incorporated
herein by reference)
11.1 Computation of Net Income Per Share (shown in "Notes to Consolidated Financial
Statements--19 Net Income Per Share" and incorporated herein by reference)
21.1 Subsidiaries of Magna Group, Inc.
23.1 Consent of Independent Auditors
24.1 Power of Attorney (included on signature page hereto)
27.1 Financial Data Schedule
<FN>
- --------
<F*>Management contract or compensatory plan
</TABLE>
68
<PAGE> 1
MAGNA GROUP, INC.
AGREEMENT
---------
This agreement ("Agreement") has been entered into this
8th day of January, 1998, by and between Magna Group, Inc., a Delaware
corporation ("Company"), and Ronald A. Buerges, an individual ("Executive").
RECITALS
The Board of Directors of the Company (the "Board"), has
determined that it is in the best interests of the Company and its
stockholders to reinforce and encourage the continued attention and
dedication of the Executive to the Company as a member of the Company's
management (including, if applicable, management of a wholly owned
subsidiary) and to assure that the Company will have the continued dedication
of the Executive, notwithstanding the possibility, threat or occurrence of a
Change in Control (as defined below) of the Company. The Board desires to
provide for the continued employment of the Executive on the terms hereof,
and the Executive is willing to commit to continue to serve the Company.
Additionally, the Board believes it is imperative to diminish the inevitable
distraction of the Executive by virtue of the personal uncertainties and
risks created by a pending or threatened Change in Control, to encourage the
Executive's full attention and dedication to the Company currently and in the
event of any threatened or pending Change in Control, and to provide the
Executive with compensation and benefits arrangements upon the breach of this
Agreement by the Employer or upon a termination of employment after a Change
in Control which ensure that the compensation and benefits expectations of
the Executive will be satisfied and which are competitive with those of other
corporations. Therefore, in order to accomplish these objectives, the Board
has caused the Company to enter into this Agreement.
IT IS AGREED AS FOLLOWS:
SECTION 1: DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. For purposes of this Agreement, the following
words and phrases, whether or not capitalized, shall have the meanings
specified below, unless the context plainly requires a different meaning.
1.1(a) "ANNUAL BASE SALARY" means the dollar amount
approved by the Company Director Compensation
Committee or the Company Chief Executive
Officer.
1.1(b) "BOARD" means the Board of Directors of the
Company.
1.1(c) "CHANGE IN CONTROL" means a change in control
of the Company of a nature that would be
required to be reported in response to Item 6(e)
of Schedule 14A of Regulation 14A promulgated
under the Exchange Act; provided that, for
purposes of this Agreement, a Change in Control
shall be deemed to have occurred if (i) any
Person (other than the Company) is or becomes
the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act),
<PAGE> 2
directly or indirectly, of securities of the
Company which represent 20% or more of the
combined voting power of the Company's then
outstanding securities; (ii) during any period of
two (2) consecutive years, individuals who at the
beginning of such period constitute the Board
cease for any reason to constitute at least a
majority thereof, unless the election, or the
nomination for election, by the Company's
stockholders, of each new director is approved by
a vote of at least two-thirds (2/3) of the
directors then still in office who were directors
at the beginning of the period but excluding any
individual whose initial assumption of office
occurs as a result of either an actual or
threatened election contest (as such term is used
in Rule 14a-11 of Regulation 14A promulgated under
the Exchange Act) or other actual or threatened
solicitation of proxies or consents by or on
behalf of a person other than the Board; (iii)
there is consummated any consolidation or merger
of the Company in which the Company is not the
continuing or surviving corporation or pursuant to
which shares of the Company's Common Stock is
converted into cash, securities, or other
property, other than a merger of the Company in
which the holders of the Company's Common Stock
immediately prior to the merger have the same
proportionate ownership of common stock of the
surviving corporation immediately after the
merger; (iv) there is consummated any
consolidation or merger of the Company in which
the Company is the continuing or surviving
corporation in which the holders of the
Company's Common Stock immediately prior to the
merger do not own fifty percent (50%) or more of
the stock of the surviving corporation
immediately after the merger; (v) there is
consummated any sale, lease, exchange, or other
transfer (in one transaction or a series of
related transactions) of all, or substantially
all, of the assets of the Company, or (vi) the
stockholders of the Company approve any plan or
proposal for the liquidation or dissolution of
the Company.
1.1(d) "CHANGE IN CONTROL DATE" shall mean the date
of the Change in Control. If a Change in
Control occurs and if the Executive's employment
with the Company is terminated prior to the date
on which the Change in Control occurs, and if it
is reasonably demonstrated by the Executive that
such termination of employment (i) was at the
request of a third party who has taken steps
reasonably calculated to effect a Change in
Control or (ii) otherwise arose in connection
with or anticipation of a Change in Control,
then for all purposes of this Agreement, the
"Change in Control Date" shall mean the date
immediately prior to the date of such
termination of employment, and a Change in
Control shall be deemed to have occurred on the
Change in Control Date.
1.1(e) "CODE" shall mean the Internal Revenue Code of
1986, as amended.
1.1(f) "COMPANY" means Magna Group, Inc., a Delaware
corporation.
1.1(g) "EFFECTIVE DATE" shall mean January 1, 1998.
1.1(h) "EXCHANGE ACT" means the Securities Exchange
Act of 1934, as amended.
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<PAGE> 3
1.1(i) "INCENTIVE BONUS" shall mean the incentive
bonus provided through any incentive
compensation plan, which is generally available
to other peer executives of the Company, awarded
to the Executive for the year preceding
termination. To the extent such incentive bonus
is paid in shares of restricted stock, Incentive
Bonus shall include the value of such shares on
their award date without any discount; provided,
however, such restricted shares shall include
only those awarded in lieu of compensation
payable as determined by the Compensation
Committee of the Board.
1.1(j) "PERSON" means any "person" within the meaning
of Sections 13(d) and 14(d) of the Exchange Act.
1.1(k) "TERM" means the period that begins on the
Effective Date and ends on the earlier of: (i)
the Date of Termination as defined in
Section 3.7, or (ii) the close of business on
December 31 of any calendar year during which
notice is given, by December 1 of such year, by
either party (as provided in Section 7) of such
party's intent not to renew this Agreement.
1.2 GENDER AND NUMBER. When appropriate, pronouns in this
Agreement used in the masculine gender include the feminine gender, words in
the singular include the plural, and words in the plural include the
singular.
1.3 HEADINGS. All headings in this Agreement are included
solely for ease of reference and do not bear on the interpretation of the
text. Accordingly, as used in this Agreement, the terms "Article" and
"Section" mean the text that accompanies the specified Article or Section of
the Agreement.
1.4 APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the state of Missouri, without
reference to its conflict of law principles.
SECTION 2: TERMS AND CONDITIONS OF EMPLOYMENT.
2.1 EMPLOYMENT. If the Executive is in the employ of the
Company (or in the employ of a wholly owned subsidiary) on a Change in
Control Date, then the Executive shall thereafter remain in the employ of the
Company (or in the employ of a wholly owned subsidiary) in accordance with
the terms and provisions of this Agreement.
2.2 POSITIONS AND DUTIES.
2.2(a) Following a Change in Control Date, the
Executive shall continue to serve in the Executive's then current
capacity, subject to the reasonable directions of the Board. The
Executive shall thereafter devote the Executive's full working
time and attention to such business and affairs of the Company
and/or any subsidiary of the Company as directed by the Board, as
may be compatible with the Executive's titles and positions. In
addition, the Executive's position (including status, offices,
titles and reporting requirements), authority, duties and
responsibilities shall be at least commensurate in all material
respects with those assigned to, or held and exercised by, the
Executive immediately preceding a Change in Control Date.
-3-
<PAGE> 4
2.2(b) Following a Change in Control Date and
thereafter throughout the Term of this Agreement (but excluding
any periods of vacation and sick leave to which the Executive is
entitled), the Executive shall devote reasonable attention and
time during normal business hours to the business and affairs of
the Company and shall use the Executive's reasonable best efforts
to perform faithfully and efficiently such responsibilities as are
assigned to the Executive under or in accordance with this
Agreement; provided that, it shall not be a violation of this
paragraph for the Executive to (i) serve on corporate, civic or
charitable boards or committees, (ii) deliver lectures or fulfill
speaking engagements, or (iii) manage personal investments, so
long as such activities do not significantly interfere with the
performance of the Executive's responsibilities as an employee of
the Company in accordance with this Agreement or violate the
Company's conflict of interest policy as in effect immediately
prior to the Effective Date.
2.3 SITUS OF EMPLOYMENT. Following a Change in Control Date and
thereafter throughout the Term of this Agreement, the Executive's services
shall be performed at the location where the Executive was employed
immediately preceding the Change in Control Date.
2.4 COMPENSATION. For any calendar year including and
following a Change in Control Date, the Executive shall receive an Annual
Base Salary equal to the Annual Base Salary being received immediately prior
to a Change in Control Date, which shall be paid in equal or substantially
equal monthly installments. The Annual Base Salary payable to the Executive
shall be reviewed thereafter at least annually but need not be adjusted
upward as a result of such review and shall not be reduced after any increase
thereof.
SECTION 3: TERMINATION OF AGREEMENT.
3.1 DEATH. This Agreement shall terminate automatically upon
the Executive's death during the Term of this Agreement.
3.2 DISABILITY. If, following a Change in Control Date, the
Company determines in good faith that the Disability of the Executive has
occurred during the Term of this Agreement (pursuant to the definition of
Disability set forth below), it may give to the Executive written notice in
accordance with Section 8.1 of its intention to terminate the Executive's
employment. In such event, the Executive's employment with the Company shall
terminate effective on the thirtieth (30th) day after receipt of such notice
by the Executive (the "Disability Effective Date"), provided that, within the
thirty (30) days after such receipt, the Executive shall not have returned to
full-time performance of the Executive's duties. For purposes of this
Agreement, "Disability" shall mean that the Executive has been unable to
perform the services required of the Executive hereunder on a full-time basis
for a period of one hundred eighty (180) consecutive business days by reason
of a physical and/or mental condition. "Disability" shall be deemed to exist
when certified by a physician selected by the Company or its insurers and
acceptable to the Executive or the Executive's legal representative (such
agreement as to acceptability not to be withheld unreasonably). The
Executive will submit to such medical or psychiatric examinations and tests
as such physician deems necessary to make any such Disability determination.
3.3 PRIOR TO CHANGE IN CONTROL. Executive is employed at will.
Any notice of termination by Executive or Company shall be given in
accordance with Section 3.6 of the Agreement.
-4-
<PAGE> 5
3.4 FOLLOWING A CHANGE IN CONTROL - TERMINATION BY COMPANY FOR
CAUSE. Following a Change in Control Date, the Company may terminate the
Executive's employment during the Term of this Agreement for "Cause," which
shall mean termination based upon: (i) the Executive's willful and continued
failure to substantially perform the Executive's duties with the Company
(other than as a result of incapacity due to physical or mental condition),
after a demand for substantial performance is delivered to the Executive by
the Chief Executive Officer of the Company or the Chairman of the
Compensation Committee of the Board, which specifically identifies the manner
in which the Executive has not substantially performed the Executive's
duties, (ii) the Executive's willful commission of misconduct which is
materially injurious to the Company, monetarily or otherwise, or (iii) the
Executive's material breach of any provision of this Agreement. For purposes
of this paragraph, no act, or failure to act on the Executive's part shall be
considered "willful" unless done, or omitted to be done, without good faith
and without reasonable belief that the act or omission was in the best
interest of the Company. Notwithstanding the foregoing, the Executive shall
not be deemed to have been terminated for Cause unless and until (i) the
Executive receives a Notice of Termination (as defined in Section 3.6) from
the Chief Executive Officer of the Company or the Chairman of the
Compensation Committee of the Board, (ii) the Executive is given the
opportunity, with counsel to be heard before the Board, and (iii) the Board
finds, in its good faith opinion, the Executive was guilty of the conduct set
forth in the Notice of Termination.
3.5 FOLLOWING A CHANGE IN CONTROL - TERMINATION BY EXECUTIVE
FOR GOOD REASON. Following a Change in Control Date, the Executive may
terminate the Executive's employment with the Company for "Good Reason,"
which shall mean termination based upon:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including status, offices, titles and reporting requirements),
authority, duties or responsibilities as contemplated by
Section 2.2(a) or any other action by the Company which results in
a material diminution in such position, authority, duties or
responsibilities, excluding for this purpose any action not taken
in bad faith and which is remedied by the Company promptly after
receipt of notice thereof given by the Executive;
(ii) the failure by the Company to continue in effect any
benefit or compensation plan, stock ownership plan, life insurance
plan, health and accident plan or disability plan to which the
Executive is entitled, the taking of any action by the Company
which would adversely affect the Executive's participation in, or
materially reduce the Executive's benefits such plans, or deprive
the Executive of any material fringe benefit enjoyed by the
Executive or the failure by the Company to provide the Executive
with the number of paid vacation days to which the Executive is
entitled.
(iii) the Company's requiring the Executive to be based at
any office or location other than that described in Section 2.3;
(iv) a material breach by the Company of any provision of
this Agreement;
(v) any failure by the Company to renew this Agreement so
that the Term ends prior to the second anniversary of the Change
in Control Date or any purported termination by the Company of the
Executive's employment otherwise than as expressly permitted by
this Agreement;
-5-
<PAGE> 6
(vi) within a period ending at the close of business on
the date two (2) years after the Change in Control Date, any
failure by the Company to comply with and satisfy Section 6.2 on
or after the Change in Control Date; or
(vii) within a period ending at the close of business on
the date one (1) year after the Change in Control Date, the
Executive, in the Executive's sole and absolute discretion,
determines and notifies the Company in writing, that the Executive
does not wish to continue employment with the Company.
For purposes of this Section any good faith determination of "Good Reason"
made by the Executive shall be conclusive.
3.6 NOTICE OF TERMINATION. Any termination by the Company, or
by the Executive, shall be communicated by Notice of Termination to the other
party, given in accordance with Section 8.1. For purposes of this Agreement,
a "Notice of Termination" means a written notice which (i) indicates the
specific termination provision in this Agreement relied upon, (ii) to the
extent applicable, sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated, and (iii) if the Date of
Termination (as defined below) is other than the date of receipt of such
notice, specifies the termination date (which date shall be not more than
fifteen (15) days after the giving of such notice). The failure by the
Executive or the Company to set forth in the Notice of Termination any fact
or circumstance which contributes to a showing of Good Reason or Cause shall
not waive any right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstance in
enforcing the Executive's or the Company's rights hereunder.
3.7 DATE OF TERMINATION. "Date of Termination" means (i) if
the Executive's employment is terminated by the Company with or without
Cause, or by the Executive for Good Reason or otherwise, the Date of
Termination shall be the date of receipt of the Notice of Termination or any
later date specified therein, as the case may be, or (ii) if the Executive's
employment is terminated by reason of death or Disability, the Date of
Termination shall be the date of death of the Executive or the Disability
Effective Date, as the case may be.
SECTION 4: CERTAIN BENEFITS UPON TERMINATION OF EMPLOYMENT.
4.1 TERMINATION WITHOUT CAUSE PRIOR TO A CHANGE IN CONTROL.
If, prior to a Change in Control, during the Term of this Agreement the
Company shall terminate the Executive's employment without Cause, then on the
tenth (10th) business day following the Date of Termination, the Company
shall pay to the Executive the sum of (1) the Executive's Annual Base Salary
prorated through the Date of Termination to the extent not previously paid,
and (2) any accrued vacation pay to the extent not previously paid.
4.2 TERMINATION AFTER A CHANGE IN CONTROL. If a Change in
Control occurs during the Term of this Agreement and within two (2) years
after such Change in Control: (i) the Company shall terminate the Executive's
employment without Cause, or (ii) the Executive shall terminate employment
with the Company for Good Reason, then the Executive shall be entitled to the
benefits provided below:
-6-
<PAGE> 7
4.2(a) "Accrued Obligations": On the tenth (10th)
business day following the Date of Termination, the Company shall
pay to the Executive the sum of (1) the Executive's Annual Base
Salary prorated through the Date of Termination to the extent not
previously paid, and (2) any accrued vacation pay to the extent
not previously paid.
4.2(b) "Severance Amount": On the tenth (10th)
business day following the Date of Termination, the Company shall
pay to the Executive as severance pay a lump sum cash payment in
an amount equal to 2 1/2 (two and one-half) times the sum of the
Executive's Annual Base Salary in effect on the Date of
Termination and the Executive's Incentive Bonus.
4.2(c) "Stock Options": To the extent not otherwise
provided for under the terms of any of the Company's stock option
agreements, all such stock options shall become fully exercisable
as of the Date of Termination and, except for "incentive stock
options" within the meaning of Code Section 422 granted prior to
the date hereof, shall remain fully exercisable in accordance with
their terms.
4.2(d) "Other Benefits": To the extent not previously
paid or provided, the Company shall timely pay or provide to the
Executive and/or the Executive's family any other amounts or
benefits required to be paid or provided for which the Executive
and/or the Executive's family is eligible to receive pursuant to
this Agreement and under any plan, program, policy or practice or
contract or agreement of the Company as those provided generally
to other peer executives and their families during the ninety (90)
day period immediately preceding the Effective Date or, if more
favorable to the Executive, as those provided generally after the
Effective Date to other peer executives of the Company and their
families.
4.2(e) "Excess Parachute Payment": Anything in this
Agreement to the contrary notwithstanding, in the event that an
independent accountant shall determine that any payment or
distribution by the Company to or for the benefit of Executive
(whether paid or payable or distributed or distributable pursuant
to the terms of this Agreement or otherwise) (a "Payment") would
be nondeductible by the Company for Federal income tax purposes
because of Code Section 280G or would constitute an "excess
parachute payment" (as defined in Code Section 280G), then the
aggregate present value of amounts payable or distributable to or
for the benefit of Executive pursuant to this Agreement (such
payments or distributions pursuant to this Agreement are
hereinafter referred to as "Agreement Payments") shall be reduced
(but not below zero) to the Reduced Amount. For purposes of this
paragraph, the "Reduced Amount" shall be an amount expressed in
present value which maximizes the aggregate present value of
Agreement Payments without causing any Payment to be nondeductible
by the Company because of Code Section 280G or without causing any
portion of the Payment to be subject to the excise tax imposed by
Code Section 4999.
If the independent accountant determines that any Payment would be
nondeductible by the Company because of Code Section 280G or that
any portion of the Payment will be subject to the excise tax
imposed by Code Section 4999, the Company shall promptly give
Executive notice to that effect and a copy of the detailed
calculation thereof and of the Reduced Amount. The Executive may
then elect, in the Executive's sole discretion, which
-7-
<PAGE> 8
and how much of the Agreement Payments shall be eliminated or
reduced (as long as after such election the aggregate present value
of the Agreement Payments equals the Reduced Amount), and shall
advise the Company in writing of the Executive's election within ten
(10) days of the Executive's receipt of such notice. If no such
election is made by Executive within such ten-day period, the
Company may elect which and how much of the Agreement Payments
shall be eliminated or reduced (as long as after such election the
aggregate present value of the Agreement Payments equals the
Reduced Amount) and shall notify the Executive promptly of such
election. For purposes of this paragraph, present value shall be
determined in accordance with Code Section 280G(d)(4). All
determinations made by the independent accountant under this
paragraph shall be binding upon the Company and the Executive and
shall be made within sixty (60) days of a termination of
employment of the Executive. As promptly as practicable following
such determination and the elections hereunder, the Company shall
pay to or distribute to or for the benefit of the Executive such
amounts as are then due to the Executive under this Agreement and
shall promptly pay to or distribute for the benefit of the
Executive in the future such amounts as become due to the
Executive under this Agreement.
As a result of the uncertainty in the application of Code
Sections 280G and 4999 at the time of the initial determination by
the independent accountant hereunder, it is possible that
Agreements Payments will be made by the Company which should not
have been made ("Overpayment") or that additional Agreement
Payments which have not been made by the Company should have been
made ("Underpayment"), in each case, consistent with the
calculation of the Reduced Amount hereunder. In the event that
the independent accountant, based upon the assertion of a
deficiency by the Internal Revenue Service against the Company or
the Executive which the independent accountant believes has a high
probability of success, determines that an Overpayment has been
made, any such Overpayment shall be treated for all purposes as a
loan to the Executive which the Executive shall repay to the
Company together with interest at the applicable Federal rate
provided for in Code Section 7872(f)(2); provided, however, that
no amount shall be payable by the Executive to the Company if and
to the extent such payment would not reduce the amount which is
subject to taxation under Code Section 4999 or if the period of
limitations for assessment of tax under Code Section 4999 against
the Executive shall have expired. If the Executive is required to
repay an amount under this Section, the Executive shall repay such
amount over a period of time not to exceed one (1) year for each
twenty-five thousand dollars ($25,000) which the Executive must
repay to the Company. In the event that the independent
accountant, based upon controlling precedent, determines that an
Underpayment has occurred, any such Underpayment shall be promptly
paid by the Company to or for the benefit of the Executive
together with interest at the applicable Federal rate provided for
in Code Section 7872(f)(2)(A).
4.3 DEATH. If the Executive's employment is terminated by
reason of the Executive's death during the Term of this Agreement (either
prior or subsequent to a Change in Control), this Agreement shall terminate
without further obligations to the Executive's legal representatives under
this Agreement, other than for payment of Accrued Obligations (as defined in
Section 4.1) (which shall be paid to the Executive's estate or beneficiary,
as applicable, in a lump sum in cash within ten (10) days of the Date of
Termination).
-8-
<PAGE> 9
4.4 DISABILITY. If the Executive's employment is terminated by
reason of the Executive's Disability during the Term of this Agreement
(either prior or subsequent to a Change in Control), this Agreement shall
terminate without further obligations to the Executive, other than for
payment of Accrued Obligations (as defined in Section 4.1) (which shall be
paid to the Executive in a lump sum in cash within ten (10) days of the Date
of Termination).
4.5 TERMINATION FOR CAUSE; EXECUTIVE'S TERMINATION OTHER THAN
FOR GOOD REASON AFTER A CHANGE IN CONTROL. If the Executive's employment
shall be terminated for Cause during the Term of this Agreement (either prior
to or subsequent to a Change in Control), this Agreement shall terminate
without further obligations to the Executive other than the obligation to pay
to the Executive Accrued Obligations (as defined in Section 4.1). If the
Executive terminates employment with the Company during the Term of this
Agreement, (other than for Good Reason after a Change in Control) this
Agreement shall terminate without further obligations to the Executive, other
than for Accrued Obligations (as defined in Section 4.1). In such case, all
Accrued Obligations shall be paid to the Executive in a lump sum cash payment
within thirty (30) days of the Date of Termination. If the Executive's
employment shall terminate for the reasons stated in this Section, the
provisions of Section 5 shall continue to apply.
4.6 NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall
prevent or limit the Executive's continuing or future participation in any
plan, program, policy or practice provided by the Company and for which the
Executive may qualify, nor shall anything herein limit or otherwise affect
such rights as the Executive may have under any contract or agreement with
the Company. Amounts which are vested benefits of which the Executive is
otherwise entitled to receive under any plan, policy, practice or program of,
or any contract or agreement with, the Company at or subsequent to the Date
of Termination, shall be payable in accordance with such plan, policy,
practice or program or contract or agreement except as explicitly modified by
this Agreement.
4.7 FULL SETTLEMENT. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action which the Company may
have against the Executive or others. In no event shall the Executive be
obligated to seek other employment or take any other action by way of
mitigation of the amounts payable to the Executive under any of the
provisions of this Agreement and such amounts shall not be reduced whether or
not the Executive obtains other employment. The Company agrees, only on and
after a Change in Control Date to pay promptly as incurred, to the full
extent permitted by law, all legal fees and expenses which the Executive may
reasonable incur as a result of any contest (regardless of the outcome
thereof) by the Company, the Executive or others of the validity or
enforceability of, or liability under, any provision of this Agreement or any
guarantee of performance thereof (including as a result of any contest by the
Executive regarding the amount of any payment pursuant to this Agreement),
plus in each case interest on any delayed payment at the applicable Federal
rate provided for in Code Section 7872(f)(2)(A).
4.8 RESOLUTION OF DISPUTES. If there shall be any dispute
between the Company and the Executive (i) in the event of any termination of
the Executive's employment by the Company, whether such termination was for
Cause, or (ii) in the event of any termination of employment by the
Executive, whether Good Reason existed, then, unless and until there is a
final, nonappealable judgment by a court of competent jurisdiction declaring
that such termination was for Cause or that the determination by the
Executive of the existence of Good Reason was not made in good faith, the
Company shall, only on and after a Change in Control Date pay all amounts,
and provide all benefits, to the Executive and/or the
-9-
<PAGE> 10
Executive's family or other beneficiaries, as the case may be, that the Company
would be required to pay or provide pursuant to Section 4.2 as though such
termination were by the Company without Cause or by the Executive with Good
Reason; provided, however, that the Company shall not be required to pay any
disputed amounts pursuant to this paragraph except upon receipt of an
undertaking by or on behalf of the Executive to repay all such amounts to which
the Executive is ultimately adjudged by such court not to be entitled.
SECTION 5: CONFIDENTIAL INFORMATION.
CONFIDENTIAL INFORMATION. The Executive shall hold in a
fiduciary capacity for the benefit of the Company all secret or confidential
information, knowledge or data relating to the Company or any of its
affiliated companies, and their respective businesses, which shall have been
obtained by the Executive during the Executive's employment by the Company
and which shall not be or become public knowledge (other than by acts by the
Executive or representatives of the Executive in violation of this
Agreement). After termination of the Executive's employment with the
Company, the Executive shall not, without the prior written consent of the
Company, or as may otherwise be required by law or legal process, communicate
or divulge any such information, knowledge or data to anyone other than the
Company and those designated by it. In no event shall an asserted violation
of the provisions of this Section constitute a basis for deferring or
withholding any amounts otherwise payable to the Executive under this
Agreement.
SECTION 6: SUCCESSORS.
6.1 SUCCESSORS OF EXECUTIVE. This Agreement is personal to the
Executive and, without the prior written consent of the Company, amounts
receivable hereunder shall not be assignable by the Executive otherwise than
by will or the laws of descent and distribution. This Agreement shall inure
to the benefit of and be enforceable by the Executive's legal
representatives.
6.2 SUCCESSORS OF COMPANY. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to assume expressly and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain
such agreement upon the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to terminate the
Agreement at the Executive's option on or after the Change in Control Date
for Good Reason. As used in this Agreement, "Company" shall mean the Company
as hereinbefore defined and any successor to its business and/or assets which
assumes and agrees to perform this Agreement by operation of law, or
otherwise.
SECTION 7: TERMS OF AGREEMENT.
This Agreement will automatically renew for annual one-year periods
beginning on January 1 of each year and ending on the following December 31;
provided that, the last annual period shall be the twelve (12) month period
beginning on January 1 and ending on the following December 31 during which
written notice is given by December 1, by either party, of such party's
intent not to renew this
-10-
<PAGE> 11
Agreement. If notice is given by either party after December 1 of any year, but
prior to January 1 of the next succeeding year, then the last renewal period
shall be the twelve (12) month period which begins on the January 1 following
the date notice is given and ending the following December 31. Notwithstanding
the foregoing, in the event a Change in Control shall have occurred, this
Agreement shall terminate two (2) years after a Change in Control Date.
SECTION 8: MISCELLANEOUS.
8.1 NOTICE. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses as set forth below; provided that all notices to the
Company shall be directed to the attention of the Chairman of the Board of
the Company with a copy to the Secretary of the Company, or to such other
address as one party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only
upon receipt.
Notice to Executive:
-------------------
Ronald A. Buerges
55 Oak Hill Drive, #15
Belleville, IL 62223
Notice to Company:
-----------------
Magna Group, Inc.
1401 South Brentwood Blvd
St. Louis, Missouri 63144
8.2 VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement.
8.3 WITHHOLDING. The Company may withhold from any amounts
payable under this Agreement such Federal, state or local taxes as shall be
required to be withheld pursuant to any applicable law or regulation.
8.4 WAIVER. The Executive's or the Company's failure to insist
upon strict compliance with any provision hereof or any other provision of
this Agreement or the failure to assert any right the Executive or the
Company may have hereunder, including, without limitation, the right of the
Executive to terminate employment for Good Reason pursuant to Section 3.5
shall not be deemed to be a waiver of such provision or right or any other
provision or right of this Agreement.
8.5 EFFECT ON OTHER EMPLOYMENT AGREEMENTS. The terms of this
Agreement shall supersede all other employment or other agreements with
respect to severance entered into by and between the Executive and the
Company, or the Executive and any other employer, and this Agreement shall
constitute the sole agreement pursuant to which the Company shall have an
obligation to the Executive upon the termination of the Executive's
relationship with the Company or any subsidiary.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the Executive and the Company, pursuant to
the authorization from its Board, have caused this Agreement to be executed
in its name on its behalf, all as of the day and year first above written.
/s/ Ronald A. Buerges
---------------------------------------------
Executive
MAGNA GROUP, INC.
By /s/ G. Thomas Andes
-------------------------------------------
Name: G. Thomas Andes
Title: Chairman of the Board, President and
Chief Executive Officer
-12-
<PAGE> 1
[LOGO] MAGNA
GROUP, INC.
MAGNA EXECUTIVE INCENTIVE COMPENSATION PLAN
(MEICP)
1998
<PAGE> 2
1. PURPOSE OF THE PLAN
-------------------
The purpose of the Magna Executive Incentive Compensation
Plan (MEICP) is to maximize the efficiency and effectiveness
of Magna Group, Inc. operations by providing significant,
incentive compensation opportunities to certain key
executives. The Plan is intended to:
/ / Attract, retain and motivate key executives;
/ / Link compensation to performance;
/ / Shift part of future compensation expense from
fixed to variable; and
/ / Reinforce Company and Subsidiary objectives.
This Plan is designed to provide significant incentive
compensation opportunities and presumes a market
competitive base salary program. Incentive Awards made
under the Plan are in addition to Base Salary and Base
Salary adjustments awarded to maintain market
competitiveness.
2. DEFINITIONS, GENDER AND NUMBER
------------------------------
2.1 Definitions
-----------
Whenever used herein, the following terms shall have
their respective meanings set forth below:
A. "BOARD" means the Board of Directors of Magna
Group, Inc. or any Committee thereof as designated
by the Board.
B. "CHIEF EXECUTIVE OFFICER" or "CEO" means the Chief
Executive Officer of Magna Group, Inc.
C. "COMPANY" means the Magna Group, Inc.
D. "EARNINGS PER SHARE (EPS)" means primary earnings
available to common shareholders, after deducting
preferred stock dividend requirements, divided by
the average number of common share and common share
equivalents outstanding.
E. "INCENTIVE AWARD" is the cash bonus, expressed as a
percentage of Base Salary, received by Participants
in this Plan when expected performance results are
attained. Awards shall be calculated as provided
in Paragraph 7 of the Plan.
F. "NET INCOME" is the final, bottom line profit from
all sources, after taxes and all adjustments,
during the period.
<PAGE> 3
G. "PARTICIPANT" means an executive of Magna Group,
Inc. or one of the Subsidiary organizations who is
eligible to participate in the Plan.
H. "PERFORMANCE PERCENTAGE" means the percentage of
each Participant's portion of the total award to be
received from performance of the Company and the
Individual. The Performance Percentage is assigned
to each Participant by the CEO and approved by the
Board prior to the beginning of each Plan Year.
I. "PLAN" means this Magna Executive Incentive
Compensation Plan, as amended periodically by the
Board.
J. "RESPONSIBILITY FACTOR PERCENTAGE" is an assigned
responsibility factor expressed as a percentage to
represent a Participant's level of responsibility.
The Responsibility Factor Percentage is assigned to
each Participant by the CEO and approved by the
Board prior to the beginning of each Plan Year.
K. "BASE SALARY" means the base rate of compensation
paid to a Participant by the Company for the year
and excludes all other forms of compensation such
as benefits, pension contributions and other cash
payments.
L. "SUBSIDIARY" means a wholly-owned subsidiary entity
of Magna Group, Inc.
M. "YEAR" or "PLAN YEAR" means the Company's fiscal
year.
2.2 Gender and Number
-----------------
Except when otherwise indicated by the context, words in
the masculine gender, when used in the Plan, shall
include the feminine gender, the singular shall include
the plural, and the plural shall include the singular.
3. ADMINISTRATION
--------------
The Plan is administered by the Board. The Board has the
sole authority to:
/ / Approve Plan Participants.
/ / Approve Participant Incentive Awards as
determined under the Plan.
/ / Approve the Responsibility Factor Percentage
for each Participant.
/ / Approve the projected Company and Subsidiary
performance levels.
/ / Approve the Entity Designation Percentage for
each Participant.
<PAGE> 4
The Board also has the sole authority to make any
decisions to administer the Plan or otherwise operate the
Plan, establish any rules or regulations relating to the
Plan and to make any other determinations necessary to
administer the Plan. All modifications or amendments to
the Plan shall be approved by the Board. All actions,
determinations and decisions made by the Board will be
final, conclusive and binding upon all parties concerned.
Any action or recommendation by the Board will be based
on a majority of those members verbally expressing their
vote at a meeting, or in writing without a meeting. Any
officer may not participate in any way in any decisions
affecting his personal Incentive Award. Individuals
serving as Board members will not be liable in any way to
any Participant or his designated beneficiaries as a
result of decisions rendered in the proper administration
of the Plan.
4. PARTICIPATION
-------------
In addition to the CEO, Participants in the Plan are
those executives who have a major impact on the overall
operations of the Company and/or Subsidiary. The Board
may add or delete Participants from the Plan at any time.
Participants who terminate due to death, disability, or
retirement during a Plan Year, will have their
participation for the year of termination determined on
an individual basis by the Board. All other Participants
who terminate during that year will forfeit their awards
for the entire year.
Individuals employed in the Plan Year will have their
participation for the year determined on an individual
basis by the Board.
Participants who have responsibility changes during the
year or who enter or exit the Plan will have their award
adjusted on a pro rata basis determined by the time spent
in each position of responsibility.
Participants are to be approved by the Board prior to the
beginning of the Year during which they are a
Participant.
<PAGE> 5
5. RESPONSIBILITY FACTOR PERCENTAGE
--------------------------------
Each Participant will be assigned a Responsibility Factor
Percentage for calculation of the Incentive Award. This
percentage will be based on each Participant's level of
responsibility and potential impact on corporate
profitability. Assignment of the Responsibility Factor
Percentage will be approved by the Board prior to the
beginning of each Plan Year. A guideline for the
Responsibility Factor Percentages by Participant class
appear below.
<TABLE>
<CAPTION>
Level Participants % of Salary
---- ------------ -----------
<C> <S> <C>
I. Chairman and Chief Executive Officer. . . . . . . . . 75
II. Senior Executive Vice President . . . . . . . . . . . 60
III. Executive Vice Presidents (Division Manager). . . . . 55
IV. Other Executive Vice Presidents . . . . . . . . . . . 45
V. Community Presidents. . . . . . . . . . . . . . . . .
Deposits Over 1 Billion . . . . . . . . . . . . . . 40
Deposits Over $500M-$999M . . . . . . . . . . . . . 35
Deposits Over $100M - $499M . . . . . . . . . . . . 30
Deposits Under $100M. . . . . . . . . . . . . . . . 25
VI. Regional Loan Managers. . . . . . . . . . . . . . . . 40
VII. Subsidiary/Division Presidents . . . . . . . . . . . 35
VIII. Other Selected Executives . . . . . . . . . . . . . . 20-30
IX. New Participants . . . . . . . . . . . . . . . . . . 10
</TABLE>
If a Participant changes positions during the year, the
Responsibility Factor Percentage will remain unchanged.
The Community Presidents Responsibility factor will be
determined by data associated with deposit size of their
respective region based upon the month to date averages as
of November of the previous year.
6. PERFORMANCE PERCENTAGE
----------------------
A Participant's annual Incentive Award is determined based
on two factors: 1) Company Performance and 2) Individual
Performance. Magna Trust Company and MGI-Investments
participants have an additional factor based upon their
Subsidiary Performance.
Each Participant is assigned Entity Designation
Percentages which determine the portion of his Incentive
Award which is derived from Company Performance,
Subsidiary Performance and Individual Performance. The
assignments for 1998 are shown on the following page.
<PAGE> 6
<TABLE>
Percentage of Incentive Award Determined by:
<CAPTION>
Company Individual Subsidiary
Performance Performance Performance
----------- ----------- -----------
<S> <C> <C> <C>
I. Chairman, CEO, 80 20
and EVP's
II. Corporate Officers 80 20
III. Magna Staff Officers 80 20
IV. Magna Trust Company, 20 20 60
Magna Investments, Magna
Finance, Magna Student Loans
</TABLE>
Entity Designation Percentages shall be reviewed annually
and updated prior to the beginning of the Plan Year.
Performance goals for the Company and Subsidiaries are
based upon the earnings projections as approved by the
Board, which may be adjusted during the Plan Year at the
Board's discretion. Company Performance is based on EPS.
Performance indices shall be prepared to establish the
award levels corresponding to various performance levels.
The CEO will have the responsibility of recommending
several Individual Performance goals for each Executive
Vice President. Each Executive Vice President will, in
turn, recommend several Individual Performance goals for
his officers who are Participants.
All Individual Performance goals will be reviewed for
approval by the Board and communicated to the Participants
in order to allow them sufficient time to focus on these
objectives.
7. CALCULATION OF INCENTIVE AWARD
------------------------------
The Incentive Award is equivalent to the Company
Performance Percentage plus the Individual Performance
Percentage times the Participant's Responsibility Factor
Percentage times the Participant's Base Salary for the
Plan Year.
At the discretion of the CEO, each Participant's
calculated award may be reduced or increased by maximum
of twenty percent (20%) of the award amount to reflect the
quantity and quality of Individual Effort.
<PAGE> 7
However, no Incentive Awards will be paid if the Company does
not achieve a minimum performance level, defined as 95% of the
EPS target.
8. PAYMENT OF AWARD
----------------
Incentive Awards shall be payable as soon as practicable after
the end of the Plan Year, following verification of the
accuracy of all awards by the Company's external auditor and
approval of the Board. Participants will receive payment in
two forms: 75% of the Incentive Award will be paid in cash and
25% of the Incentive Award will be paid in restricted shares
of Magna common stock. The number of shares will be based on
the average closing price of stock the last 20 trading days of
the plan year. However, if the number of shares to be
distributed to an individual is determined to be less than 10,
the full award will be paid in cash. Dividends and voting
rights will be passed through to Participants immediately;
however, Participants may not sell the shares for five years,
when the restrictions lapse. Magna Group, Inc. is not liable
for payment of any interest upon any Incentive Award.
9. TERMINATION OF EMPLOYMENT
-------------------------
In the event that a Participant shall cease to be employed by
the Company or any Subsidiary during the Plan Year for any
reason other than death, disability or retirement, then such
Participant shall forfeit all rights to receive Incentive
Awards that would otherwise be calculated for the Plan Year.
In the event a Participant terminates by reason of death,
disability or retirement, his participation and Incentive
Award calculation shall be determined in the discretion of the
Board. The Board shall also determine what terminations shall
constitute disability or retirement.
10. MISCELLANEOUS PROVISIONS
------------------------
A. The granting of Incentive Awards to Participants under
the provisions of the Plan represents only an interest to
receive compensation. Nothing in the Plan shall be
deemed to give any Participant or any person or entity
claiming under or through him, any contract or right to
participate in the benefits of the Plan. Furthermore,
the Plan grants no right to, or interest in, either
express or implied, any equity position or ownership in
the Company or any Subsidiary.
B. The Plan is not a contract of employment. Accordingly,
neither the establishment of the Plan nor the awarding of
any Incentive Awards under the Plan shall interfere with
or limit in any way the right of the Company, or
Subsidiary, as the case may be, to terminate any
Participant's employment, nor confer upon any Participant
any right to continue in the employ of the Company or
Subsidiary.
C. The Board may at any time terminate the Plan, and from
time to time may amend or modify it, provided that no
such action shall adversely affect any
<PAGE> 8
right or obligation with respect to any Incentive Awards
theretofore granted.
D. A Participant's rights, benefits, and interest under the
Plan shall not be subject to alienation, assignment,
transfer, garnishment, execution or levy of any kind.
E. Payments under the Plan shall be subject to applicable
federal, state, and local tax withholding requirements.
F. The Plan shall be unfunded. The Company shall not be
required to segregate any assets to pay Incentive Awards.
Any liability of the Company to pay any Participant with
respect to Incentive Awards shall be based solely upon
the written provisions of this Plan; no such obligation
shall be deemed to be secured by any pledge or
encumbrance on any property of the Company.
IN WITNESS WHEREOF, the Company has caused this Plan to be
executed in its name and behalf on this 17th day of December,
1997 by its officers thereunto duly authorized.
MAGNA GROUP, INC.
By: /s/ G. Thomas Andes
--------------------------------
Chairman of the Board
and Chief Executive Officer
<PAGE> 9
ADDENDUM
ANNUAL AWARD CALCULATION
------------------------
A Participant's Incentive Award is determined by the achievement of
annual goals subject to organizational and environmental
constraints. At the beginning of the Plan Year each Participant
will develop mutually acceptable goals with the executive to whom
he reports.
A. COMPANY PERFORMANCE PERCENTAGE
------------------------------
The Company goal will be established at the beginning of the
Plan year and communicated to the management team.
Company performance awards will be based on EPS. A
performance index will be established and award levels will be
determined by straight-line interpolation between minimum and
maximum performance levels.
B. INDIVIDUAL PERFORMANCE PERCENTAGE
---------------------------------
The CEO will have the responsibility of recommending several
Individual Performance goals for each Executive Vice
President. Each Executive Vice President will, in turn,
recommend several Individual Performance goals for his
officers who are Participants.
All Individual Performance goals will be reviewed for approval
by the Board and communicated to the Participants in order to
allow them sufficient time to focus on these objectives.
As soon as practical after the end of the Plan Year,
Individual Performance will be reviewed by the responsible
executive to evaluate the level at which individual goals were
met. In the case of the CEO, the Board will evaluate
performance.
The evaluator will take into account the accomplishment of
goals involving capital to asset ratio, loan delinquencies and
loan loss reserve positions, non-interest income and non-
interest expense accomplishments, staff utilization,
organizational development, management succession planning,
employee relations and others, as well as how effectively
unforeseen difficulties and unexpected opportunities which
developed during the year were addressed. Individual
performance should be reviewed at least annually, but more
frequently if appropriate.
C. INCENTIVE AWARD CALCULATION
---------------------------
Incentive Awards are calculated for each Participant in the
following manner:
<PAGE> 10
Step 1 Performance %
------ -------------
Add the award percentages determined by evaluating
Company, Subsidiary and Individual Performance:
(Company Performance Index X Participant %) +
(Subsidiary Performance Index X Participant %) +
(Individual Performance Index X Participant %) = Award %
(expressed as a decimal fraction)
Step 2 Responsibility Factor
------ ---------------------
Multiply the Award % (expressed as a decimal fraction)
times the Responsibility Factor (expressed as a decimal
-----
fraction) times the Base Salary to calculate the
-----
Incentive Award.
------- X --------------------- X $----------- = $---------
Award % Responsibility Factor Base Salary Award
<PAGE> 1
AMENDMENT, EXTENSION AND RENEWAL OF LEASE
This Amendment, Extension and Renewal of Lease (the "AGREEMENT") is made
and entered into as of the 28th day of August, 1997, by and between ST. LOUIS
BRENTWOOD ASSOCIATES, L.P. (hereinafter referred to as "LANDLORD") and MAGNA
GROUP, INC. (hereinafter referred to as "TENANT").
WITNESSETH:
WHEREAS, St. Louis Brentwood Associates, Ltd., as Landlord, and Landmark
Bancshares Corporation, as Tenant, entered into a certain Landmark Place Lease
with Landmark Bancshares Corporation dated December 19, 1986 (the "Original
Lease") for certain premises in the Building at 1401 South Brentwood Blvd.,
St. Louis, Missouri 63144, now known as Magna Place and previously known as
Landmark Place; and
WHEREAS, the Original Lease was amended by (i) First Amendment dated
November 17, 1987, (ii) Addendum dated February 1, 1990, and (iii) Letter
dated January 9, 1992 (the Original Lease as heretofore amended is referred
to herein as the "Lease"); and
WHEREAS, Landlord and Tenant have agreed to extend the term of the
Lease and amend the Lease in certain respects.
NOW, THEREFORE, in consideration of the premises and promises hereinafter
set forth, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. All of the terms and provisions of the Lease prior to this Agreement
shall remain in full force and effect except:
(A) The initial term of the Lease as referenced in Paragraph 1.6 of
the Original Lease (the "Term") is hereby extended to the 4th day of February,
2009.
(B) Starting January 1, 1998, and on January 1 of each year of the
Term thereafter, the Annual Base Rent per rentable square foot will be:
January 1, 1998 $24.90
January 1, 1999 $25.40
January 1, 2000 $25.90
January 1, 2001 $26.40
January 1, 2002 $26.90
January 1, 2003 $27.40
January 1, 2004 $27.90
January 1, 2005 $28.40
January 1, 2006 $28.90
January 1, 2007 $29.40
January 1, 2008 $29.90
January 1, 2009 $30.40
<PAGE> 2
(C) In the event of any Change in Control of Tenant as hereinafter
defined or any assignment of the lease by Tenant whether made directly or
indirectly or by operation of law (the "EVENT"), Tenant agrees to pay to
Landlord a fee in the sum of $300,000 (the "Event Fee") on or before the
date the Event occurs and, from and after the date the Event occurs, the
Annual Base Rent per rentable square foot set forth in Paragraph 1(B) above
for the remainder of the then-existing calendar year and each subsequent
calendar year shall immediately be increased by the sum of $1.00 (the "Event
Increase").
As used herein, a "Change in Control of Tenant" means and
shall be deemed to have occurred if:
(a) Any "PERSON" (as such term is defined in Section 3(a)(9)
of the Securities Exchange Act of 1934 [the "Exchange Act"] in effect on the
date hereof and including, without limitation, the manner in which such term
is used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) becomes the
"BENEFICIAL OWNER" (as defined in Rule 13d-3 promulgated under the Exchange
Act in effect on the date hereof) directly or indirectly of securities of
the Tenant representing fifty percent or more of the combined voting power of
the Tenant's then outstanding securities, other than any such person that
holds such beneficial ownership as of the date hereof; or
(b) The shareholders of the Tenant approve a merger or
consolidation of the Tenant with any other corporation, other than a merger
or consolidation which would result in the voting securities of the Tenant
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent of the total voting power represented
by the voting securities of the Tenant or such surviving entity outstanding
immediately after such merger of consolidation; or
(c) The shareholders of the Tenant or the Tenant approve a
plan of complete liquidation or an agreement for the sale of disposition (in
one transaction or in a series of transactions) of all or substantially all
of the Tenant's assets.
2. Notwithstanding anything to the contrary set forth in the Lease,
the occurrence of any Change in Control of Tenant described in Paragraph
1(C)(a), Paragraph (C)(b) and/or in Paragraph 1(C)(c) above shall not be
deemed a breach of any provision of the Lease regardless of whether an
assignment of the Lease is executed in connection therewith and regardless
of whether an assignment of the Lease is caused by operation of law and
Landlord hereby agrees that any such assignment shall not require its consent.
3. Landlord and Tenant will each pay all of its own costs, expenses,
fees, and charges relating to the discussions, negotiations, and preparation
of documents including this Agreement, including the costs, expenses, fees,
and charges for their respective attorneys and advisors.
2
<PAGE> 3
4. Landlord and Tenant hereby agree that the terms, conditions,
agreements and other covenants set forth herein supersede all terms and
conditions set forth in that certain letter of intent from Landlord to
Tenant dated August 7, 1997 and signed by Tenant on August 7, 1997 (such
letter of intent formally addressed to Mr. G. Thomas Andes, Chairman of the
Board and Chief Executive Officer of Magna Group, Inc.) and such letter of
intent shall be null and void and of no further force and effect.
5. Landlord and Tenant hereby acknowledge to each other that, as
of the date of the signing of this Agreement, the Lease as amended is in
full force and effect, and there are no defaults thereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the day and year first above written.
LANDLORD: ST. LOUIS BRENTWOOD ASSOCIATES, L.P.
By: St. Louis Brentwood Company, L.P.,
Its General Partner
By: /s/ Lewis A. Levey
--------------------------------
Lewis A. Levey
Managing General Partner
TENANT: MAGNA GROUP, INC.
By: /s/ G. Thomas Andes
-----------------------------------
Name: G. Thomas Andes
-----------------------------------
Title: Chairman and CEO
-----------------------------------
3
<PAGE> 1
<TABLE>
SUBSIDIARIES OF MAGNA GROUP, INC.
<CAPTION>
SUBSIDIARY JURISDICTION OF ORGANIZATION
---------- ----------------------------
<S> <C>
Magna Bank, National Association United States of America
Magna Data Services, Inc. Illinois
Carboro Ltd. Turks & Caicos Islands
Landmark Acquisition Corporation Missouri
Landmark TCI Ltd. Turks & Caicos Islands
MGI Group, Inc. Missouri
Magna Investments, Inc. Missouri
Magna Insurance Agency, Inc. Missouri
InBank Group, Inc. Missouri
InBank Investments, Inc. Missouri
InBank Insurance Agency, Inc. Missouri
Brentco, Inc. Missouri
Quatre Corp. Missouri
REDC, Inc. Missouri
Mega Insurance Agency, Inc. Missouri
MGR, Inc. Delaware
MHC Holding Company No. 1 Delaware
MHC Holding Company No. 2 Delaware
MHC Holding Company No. 3 Delaware
MHC Holding Company No. 4 Delaware
MHC Holding Company No. 5 Delaware
MICB, Inc. Delaware
MGR Real Estate Investment Trust Delaware
HBC Acquisition Sub, Inc. Iowa
Charter Acquisition Sub, Inc. Delaware
</TABLE>
One hundred percent of the capital stock or common equity interest of each
of the above listed subsidiaries is owned directly by Magna or indirectly
through wholly-owned subsidiaries of Magna, with the exception of MGR Real
Estate Investment Trust, of which Magna owns 100% of the common certificates and
80% of the preferred certificates issued by the trust.
<PAGE> 1
Consent of Independent Auditors
We consent to the use of our report dated January 21, 1998 (except Note 24,
as to which the date is February 22, 1998) in this Annual Report (Form 10-K)
of Magna Group, Inc. for the year ended December 31, 1997.
We also consent to the incorporation by reference into each registration
statement listed below of our report dated January 21, 1998 (except Note 24,
as to which the date is February 22, 1998) with respect to the consolidated
financial statements of Magna Group, Inc. included in the Annual Report
(Form 10-K) for the year ended December 31, 1997.
<TABLE>
<CAPTION>
Form Number
- ---- ------
<S> <C> <C>
S-8 333-02123 Magna Group, Inc. Amended and Restated 1996 Directors'
Stock Option Plan
S-8 333-02125 Magna Group, Inc. Amended and Restated 1996 Long Term
Performance Plan
S-8 33-59087 The Magna Group, Inc. Employee Stock Purchase Plan
S-3 333-26849 The Magna Group, Inc. 1997 Dividend Reinvestment and Stock
Purchase Plan
S-8 2-98250 Magna Group, Inc. Savings and Stock Investment Plan
S-8 33-61460 Magna Group, Inc. Amended and Restated 1992 Long Term
Performance Plan
S-8 33-61464 Magna Group, Inc. Amended and Restated Directors' Stock
Option Plan
S-8 33-24297 Magna Group, Inc. 1987 Stock Option Plan
S-8 33-47010 Landmark Bancshares Corporation 1982 Capital Accumulation
Plan and 1986 Nonqualified Stock Option Plan
</TABLE>
/s/ Ernst & Young, LLP
St. Louis, Missouri
March 17, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the Magna
Group, Inc. Annual Report on Form 10-K for the year ended December 31, 1997,
and is qualified in its entirety by reference to such report.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 247,932
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 48,202
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,850,932
<INVESTMENTS-CARRYING> 137,690
<INVESTMENTS-MARKET> 141,182
<LOANS> 4,483,812
<ALLOWANCE> 59,439
<TOTAL-ASSETS> 7,074,969
<DEPOSITS> 5,435,995
<SHORT-TERM> 845,603
<LIABILITIES-OTHER> 74,962
<LONG-TERM> 92,056
0
40
<COMMON> 67,600
<OTHER-SE> 558,713
<TOTAL-LIABILITIES-AND-EQUITY> 7,074,969
<INTEREST-LOAN> 370,904
<INTEREST-INVEST> 114,614
<INTEREST-OTHER> 4,646
<INTEREST-TOTAL> 490,164
<INTEREST-DEPOSIT> 204,261
<INTEREST-EXPENSE> 251,136
<INTEREST-INCOME-NET> 239,028
<LOAN-LOSSES> 28,947
<SECURITIES-GAINS> 2,584
<EXPENSE-OTHER> 172,637
<INCOME-PRETAX> 108,726
<INCOME-PRE-EXTRAORDINARY> 108,726
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72,675
<EPS-PRIMARY> 2.26
<EPS-DILUTED> 2.21
<YIELD-ACTUAL> 3.97
<LOANS-NON> 29,733
<LOANS-PAST> 16,366
<LOANS-TROUBLED> 230
<LOANS-PROBLEM> 13,849
<ALLOWANCE-OPEN> 45,382<F1>
<CHARGE-OFFS> 31,951
<RECOVERIES> 3,915
<ALLOWANCE-CLOSE> 59,439
<ALLOWANCE-DOMESTIC> 59,439
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,136
<FN>
<F1>Information does not include the March 1, 1997 balance of $13,146 in the
allowance for loan losses attributable to Homeland Bankshares Corporation
which was acquired by Magna Group, Inc. on that date in a transaction
accounted for under the purchase method.
</TABLE>
