SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
Commission file number: 0-14507
HOMELAND BANKSHARES CORPORATION
Incorporated in Iowa I.R.S. Employer Identification
No. 42-1168487
229 EAST PARK AVENUE, WATERLOO, IOWA 50704-5300
Telephone number: (319) 291-5260
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of November 13, 1995:
5,738,713 SHARES COMMON STOCK, $12.50 PAR VALUE
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS.
------------------------------
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, December 31,
(Dollars in thousands, except per share data) 1995 1994
-------------------------------------------------------------------
ASSETS
Cash and due from banks $51,621 $ 46,692
Federal funds sold 14,300 14,700
Securities
Available for sale 161,563 161,096
Held to maturity (market value $97,093
in 1995 and $119,190 in 1994) 96,031 121,354
Total securities 257,594 282,450
-------------------------------------------------------------------
Loans
Commercial, financial, and agricultural 188,324 175,623
Commercial real estate 212,505 207,495
Consumer real estate 318,496 286,085
Consumer 135,914 123,593
-------------------------------------------------------------------
Total loans 855,239 792,796
Allowance for loan losses (8,954) (9,082)
-------------------------------------------------------------------
Net loans 846,285 783,714
Premises and equipment 24,478 24,676
Intangible assets 19,008 20,620
Other assets 19,347 17,781
-------------------------------------------------------------------
Total assets $1,232,633 $1,190,633
===================================================================
LIABILITIES
Deposits
Noninterest bearing demand $ 112,332 $ 118,949
Interest bearing demand 101,099 110,749
Money market 170,084 171,746
Savings 65,321 68,254
Time 493,398 479,662
-------------------------------------------------------------------
Total deposits 942,234 949,360
Federal funds purchased 48,575 27,425
Other short-term borrowings 63,271 84,320
Accrued expenses and other liabilities 12,093 12,336
Long-term borrowings 42,525 2,450
-------------------------------------------------------------------
Total liabilities 1,108,698 1,075,891
-------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock, $12.50 par value; 25,000,000
shares authorized; 5,738,713 shares
issued and outstanding 71,734 71,734
Additional paid-in capital 227 227
Retained earnings 52,289 46,068
Net unrealized loss on securities available
for sale (315) (3,287)
-------------------------------------------------------------------
Total stockholders' equity 123,935 114,742
-------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,232,633 $1,190,633
===================================================================
See notes to consolidated financial statements
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED, NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands, except
per share data) 1995 1994 1995 1994
-------------------------------------------------------------------------
Interest income
Loans $19,172 $15,939 $54,988 $36,190
Taxable securities 3,640 4,132 11,395 10,546
Tax-exempt securities 481 667 1,556 2,072
Federal funds sold 111 302 474 1,242
Other short-term investments --- 7 --- 134
--------------------------------------------------------------------------
Total interest income 23,404 21,047 68,413 50,184
--------------------------------------------------------------------------
Interest expense
Deposits 9,053 7,770 26,899 18,434
Short-term borrowings 1,643 1,070 5,213 1,922
Long-term borrowings 623 98 874 116
--------------------------------------------------------------------------
Total interest expense 11,319 8,938 32,986 20,472
--------------------------------------------------------------------------
Net interest income 12,085 12,109 35,427 29,712
Provision for loan losses 229 40 612 45
--------------------------------------------------------------------------
Net interest income after provision
for loan losses 11,856 12,069 34,815 29,667
--------------------------------------------------------------------------
Noninterest income
Data processing services 660 621 1,926 1,910
Trust services 661 391 1,819 1,839
Deposit account service charges 820 800 2,295 2,002
Securities gains (losses) --- (20) 31 (19)
Other 952 593 2,611 1,610
--------------------------------------------------------------------------
Total noninterest income 3,093 2,385 8,682 7,342
--------------------------------------------------------------------------
Noninterest expenses
Personnel 4,724 4,916 14,185 12,156
Occupancy 681 679 1,918 1,829
Equipment 572 598 1,763 1,698
Supplies 255 215 918 596
Advertising and promotion 411 471 1,363 1,167
Professional fees 253 349 750 687
FDIC insurance 104 568 1,168 1,424
Intangible amortization 537 560 1,612 925
Other real estate owned (8 (117) (154) (463)
Other 1,353 1,207 3,807 2,988
--------------------------------------------------------------------------
Total noninterest expenses 8,882 9,446 27,330 23,007
--------------------------------------------------------------------------
Income before income taxes 6,067 5,008 16,167 14,002
Income tax expense 2,425 1,864 6,215 4,959
--------------------------------------------------------------------------
NET INCOME $3,642 $3,144 $9,952 $9,043
==========================================================================
NET INCOME PER SHARE $ .63 $ .55 $ 1.73 $ 1.58
==========================================================================
AVERAGE NUMBER OF SHARES
OUTSTANDING 5,747,843 5,743,095 5,741,888 5,729,441
==========================================================================
See notes to consolidated financial statements
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands) 1995 1994
-------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 9,952 $ 9,043
Adjustments to reconcile net income to net
cash provided by (used for) operating activities
Amortization and accretion 1,721 347
Depreciation 1,484 1,417
Provision for loan losses 612 45
Provision for deferred income taxes 663 (283)
Net gain on securities
Available for sale (21) 20
Held to maturity (10) (1)
Net gain on sales of other assets (39) (80)
Decrease (increase) in other assets (3,915) 735
Decrease in accrued expenses and other
liabilities (906) (3,218)
-------------------------------------------------------------------
Net cash provided by operating activities 9,541 8,025
-------------------------------------------------------------------
INVESTING ACTIVITIES
Cash and cash equivalents acquired; net of payment
for purchase of financial institution --- (41,932)
Divestiture of branch offices, net of cash and
cash equivalents (46,853)
Proceeds from sales of securities
Available for sale 142 25,841
Held to maturity --- ---
Proceeds from maturities and calls of securities
Available for sale 43,543 20,972
Held to maturity 33,570 35,934
Purchases of securities
Available for sale (48,948) (12,826)
Held to maturity (616) (6,172)
Net increase in loans (62,016) (82,243)
Purchases of premises and equipment (1,496) (1,844)
Proceeds from sales of other assets 1,490 562
-------------------------------------------------------------------
Net cash used for investing activities (34,331) (108,561)
-------------------------------------------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in deposits (7,126) 2,521
Net increase (decrease) in federal funds
purchased 21,150 (9,850)
Net increase (decrease) in other short-term
borrowings (21,049) 91,728
Proceeds from long-term borrowings 40,300 2,450
Repayments of long-term borrowings (225) (3,000)
Payments of cash dividends (3,731) (3,603)
Proceeds from stock options --- 975
-------------------------------------------------------------------
Net cash provided by financing activities 29,319 81,221
Net change in cash and cash equivalents 4,529 (19,315)
Cash and cash equivalents at beginning
of period 61,392 93,121
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 65,921 $ 73,806
===================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid
Interest $ 33,091 $ 21,949
Income taxes 4,841 5,700
Noncash investing and financing activities
Loans transferred to foreclosed property 1,244 198
Sales of foreclosed property financed by
Homeland 149 33
Acquisitions accounted for by a purchase
transaction
Cash paid (including acquisition costs) --- 47,881
Liabilities assumed --- 308,198
Fair value of assets acquired --- 356,079
Divestiture of branch offices
Cash paid --- 46,853
Liabilities assumed by purchaser --- 56,698
Fair value of assets sold --- 9,845
===================================================================
See notes to consolidated financial statements
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(Unaudited)
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED SECURITIES
(Dollars in thousands, except per share data) STOCK CAPITAL EARNINGS LOSS TOTAL
-------------------------------------------------------------------------------------------------------------
Balance at January 1, 1995 $ 71,734 $ 227 $46,068 $ (3,287) $ 114,742
Net income --- --- 9,952 --- 9,952
Cash dividends - $.65 per share --- --- (3,731) --- (3,731)
Net unrealized gain on securities available
for sale --- --- --- 2,972 2,972
-------------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 $ 71,734 $ 227 $52,289 $ (315) $ 123,935
=============================================================================================================
Balance at January 1, 1994 $ 70,984 $ 2 $38,615 $ --- $ 109,601
Net income --- --- 9,043 --- 9,043
Cash dividends - $.63 per share --- --- (3,603) --- (3,603)
Common stock issued under stock option plans 750 225 --- --- 975
Net unrealized loss on securities available
for sale --- --- --- (2,133) (2,133)
-------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 $ 71,734 $ 227 $44,055 $ (2,133) $ 113,883
=============================================================================================================
<FN>
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited consolidated financial statements: The accompanying interim
consolidated financial statements are unaudited. In the opinion of
management, all adjustments consisting of normal recurring accruals
considered necessary for fair presentation have been included. Certain
balances previously reported have been reclassified to conform with 1995
financial statement presentation. Further information may be obtained by
reference to the consolidated financial statements and accompanying footnotes
included in the Homeland Bankshares Corporation ("Homeland") 1994
Annual Report.
Cash and cash equivalents: Cash equivalents include amounts due from
banks and federal funds sold.
Securities: Securities available for sale are reported at fair value,
with the unrealized gains and losses excluded from earnings and reported as a
separate component of stockholders' equity. Securities available for sale
may be sold for management of general liquidity needs, response to market
interest rate fluctuations, implementation of asset-liability management
strategy, funding increased loan demand, changes in securities prepayment
risk, or other similar factors. Realized gains and losses on sales are
computed on a specific identification basis and are shown separately as a
component of noninterest income. Securities held to maturity are stated at
cost, net of premium amortization and discount accretion, and consist of debt
securities for which Homeland has the positive intent and the ability to hold
to maturity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans: SFAS No. 114 "Accounting by Creditors for Impairment of a Loan,"
was adopted January 1, 1995. Under this statement, loans considered to be
impaired are reduced to the present value of expected future cash flows or to
the fair value of collateral, by allocating a portion of the allowance for
loan losses to such loans. If these allocations cause the allowance for loan
losses to require an increase, such increase is reported as provision for
loan losses. Adopting this standard resulted in no increase to either the
allowance for loan losses or the provision for loan losses.
The carrying values of impaired loans are periodically adjusted to reflect
cash payments, revised estimates of future cash flows, and increases in the
present value of expected cash flows due to the passage of time. Cash
payments are reported as reductions in carrying value, while increases or
decreases due to changes in estimates of future payments and due to the
passage of time are reported as provision for loan losses.
Intangible assets: Goodwill and core deposit intangibles arise from
purchase transactions. Goodwill is amortized on a straight-line basis over a
15 year period. Core deposit intangibles are amortized on a straight-line
basis over the estimated lives of deposits which average approximately
7 years. At September 30, 1995 and 1994, the unamortized balances of
goodwill were $13,283,000 and $14,370,000 and core deposit intangibles were
$5,725,000 and $6,787,000, respectively.
Net income per share: Net income per share calculations are based on the
weighted average number of common shares outstanding, adjusted for stock
splits and common stock equivalents arising from the assumed exercise of
outstanding stock options.
2. ACQUISITION
On June 1, 1994, Homeland acquired all of the outstanding common stock of
MidAmerica Financial Corporation ("MidAmerica"). The acquisition was
accounted for as a purchase transaction with the results of MidAmerica's
operations subsequent to the acquisition date included in Homeland's
consolidated financial statements.
The following unaudited pro forma financial information contains the
results of operations for the nine month periods ended September 30, 1995 and
1994 assuming the acquisition of MidAmerica had occurred on January 1, 1994.
The pro forma amounts are not necessarily indicative of the financial results
that would have actually occurred had the acquisition taken place on January
1, 1994, nor are they necessarily indicative of future consolidated
operations of Homeland.
NINE MONTHS ENDED
SEPTEMBER 30,
(Dollars in thousands, except per share data) 1995 1994
----------------------------------------------------------------------------
Total revenues $77,095 $70,182
Net interest income 35,427 34,619
Provision for loan losses 612 175
Net income 9,952 9,186
Net income per share $1.73 $1.60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. SECURITIES
AVAILABLE FOR SALE GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
-------------------------------------------------------------------------------------------------------
U.S. Treasury $ 27,414 $ 128 $ (273) $ 27,269
U.S. Government agencies 13,702 118 (94) 13,726
U.S. Government agencies mortgage-backed 72,639 588 (857) 72,370
Student loan participation certificates 31,118 --- --- 31,118
Corporate mortgage-backed 4,285 --- (103) 4,182
Other 12,898 --- --- 12,898
--------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 $ 162,056 $ 834 $ (1,327) $ 161,563
=======================================================================================================
U.S. Treasury $ 32,512 $ 1 $ (1,234) $ 31,279
U.S. Government agencies 8,441 --- (302) 8,139
U.S. Government agencies mortgage-backed 81,668 2 (3,434) 78,236
Student loan participation certificates 30,105 --- --- 30,105
Corporate mortgage-backed 4,781 --- (208) 4,573
Other 8,764 --- --- 8,764
--------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 166,271 $ 3 $ (5,178) $ 161,096
=======================================================================================================
HELD TO MATURITY GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
-------------------------------------------------------------------------------------------------------
U.S. Treasury $ 49,008 $ 173 $ (261) $ 48,920
U.S. Government agencies 10,525 153 (4) 10,674
States and political subdivisions 34,791 1,081 (83) 35,789
Corporate 1,707 3 (---) 1,710
-------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1995 $ 96,031 $ 1,410 $ (348) $ 97,093
========================================================================================================
U.S. Treasury $ 54,216 $ --- $ (1,740) $ 52,476
U.S. Government agencies 22,747 30 (141) 22,636
States and political subdivisions 42,436 735 (1,026) 42,145
Corporate 1,955 --- (22) 1,933
--------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 $ 121,354 $ 765 $ (2,929) $ 119,190
========================================================================================================
REALIZED GAINS AND LOSSES THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 1995 1994 1995 1994
-------------------------------------------------------------------------------------------------------
Gross realized gains $ --- $ 33 $ 31 $ 39
Gross realized losses --- 53 --- 58
--------------------------------------------------------------------------------------------------------
Total $ --- $ ($20) $ 31 $ (19)
========================================================================================================
Realized gains and losses consisted entirely of net gains related to calls of
securities prior to their maturity or sales of securities from the available
for sale category.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
4. ALLOWANCE FOR LOAN LOSSES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Dollars in thousands) 1995 1994 1995 1994
-----------------------------------------------------------------------------
Balance at beginning of period $8,950 $9,110 $ 9,082 $ 7,315
Allowance of purchased financial
institution --- --- --- 1,600
Provision for loan losses 229 40 612 45
Loan loss recoveries 168 213 354 1,309
Loans charged off (393) (373) (1,094) (1,279)
-----------------------------------------------------------------------------
Balance at end of period $8,954 $8,990 $ 8,954 $ 8,990
=============================================================================
The average investment in impaired loans for the nine months ended September
30, 1995 was $2,265,000. No interest income was recognized on impaired loans
during this period. Information regarding impaired loans at September 30,
1995 was as follows:
(Dollars in thousands)
---------------------------------------------------------------------------
Balance of impaired loans $ 625
Less portion for which no allowance for loan
losses was allocated (---)
---------------------------------------------------------------------------
Portion of impaired loan balance for which an allowance for loan
losses was allocated $ 625
===========================================================================
Portion of allowance for loan losses allocated to the impaired
loan balance $ 13
===========================================================================
5. SHORT-TERM BORROWINGS
At September 30, 1995, other short-term borrowings consisted of $57
million of advances from the Federal Home Loan Bank ("FHLB") and $6 million
in U.S. Treasury tax depository accounts. The FHLB advances were secured by
certain U.S. Government securities, FHLB stock, and a blanket pledge of
eligible consumer real estate loans, with a weighted average interest rate of
6.5%.
6. LONG-TERM BORROWINGS
Long-term borrowings consisted of $42,525,000 advances from the Federal
Home Loan Bank to Homeland subsidiaries with an average fixed interest rate
of 5.8%. These advances were secured by eligible consumer real estate loans
and FHLB stock and were scheduled to mature as follows at
September 30, 1995:
(Dollars in thousands)
----------------------------------------------------------------------------
1996 $ 225
1997 40,225
1998 225
1999 225
2000 225
Thereafter 1,400
----------------------------------------------------------------------------
Balance at end of period $42,525
============================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
HOMELAND BANKSHARES CORPORATION
FINANCIAL HIGHLIGHTS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in thousands, except per share data) 1995 1994 % Change 1995 1994 % Change
------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
Net interest income $12,085 $12,109 (.2)% $35,427 $29,712 19.2%
Provision for loan losses 229 40 NM 612 45 NM
Noninterest income 3,093 2,385 29.7 8,682 7,342 18.3
Noninterest expenses 8,882 9,446 (6.0) 27,330 23,007 18.8
Income tax expense 2,425 1,864 30.1 6,215 4,959 25.3
Net income 3,642 3,144 15.8 9,952 9,043 10.1
PER SHARE DATA
Net income $.63 $.55 14.5% $1.73 $1.58 9.5%
Cash dividends .22 .21 4.8 .65 .63 3.2
Book value 21.60 19.84 8.9 21.60 19.84 8.9
Market price 29.75 24.25 22.7 29.75 24.25 22.7
END OF PERIOD BALANCES
Loans $855,239 $768,935 11.2% $855,239 $768,935 11.2%
Deposits 942,234 934,339 .8 942,234 934,339 .8
Stockholders' equity 123,935 113,883 8.8 123,935 113,883 8.8
Total assets 1,232,633 1,200,021 2.7 1,232,633 1,200,021 2.7
Nonperforming assets 5,623 7,832 -28.2 5,623 7,832 -28.2
AVERAGE BALANCES
Loans $844,709 $746,427 13.2% $821,003 $589,182 39.3%
Deposits 931,317 972,029 (4.2) 942,329 832,621 13.2
Stockholders' equity 122,572 115,897 5.8 119,315 113,078 5.5
Total assets 1,218,116 1,196,967 1.8 1,208,674 1,020,360 18.5
Total earning assets 1,120,866 1,090,167 2.8 1,110,110 932,138 19.1
FINANCIAL RATIOS
Return on average total assets 1.19% 1.04% 1.10% 1.18%
Return on average stockholders' equity 11.79 10.76 11.15 10.69
Net interest margin 4.36 4.52 4.36 4.40
Efficiency ratio 57.67 64.50 61.30 61.70
Stockholders' equity to total assets 10.05 9.49 10.05 9.49
Leverage capital ratio 8.77 8.07 8.77 8.07
<FN>
Note: The comparability of this financial information is significantly affected by the acquisition of MidAmerica Financial
Corporation on June 1, 1994 which was accounted for as a purchase transaction.
EARNINGS ANALYSIS
PERFORMANCE SUMMARY
Homeland Bankshares Corporation's net earnings for the first nine months
of 1995 were $9,952,000, an increase of 10.1% over $9,043,000 for the same
period in 1994. Earnings per share were $1.73 and $1.58 for the nine-month
periods ended September 30, 1995 and 1994, respectively. Net interest income
was $5.7 million higher for the first nine months of 1995 than the same
period in 1994, but increased noninterest expenses and loan loss provision
modified the overall increase in consolidated net earnings. Net earnings for
the 1995 and 1994 third quarters were $3,642,000 and $3,144,000,
respectively, a 15.8% increase. Earnings per share were $.63 and $.55 for
the same three-month periods. 1995 earnings were boosted by FDIC deposit
insurance refunds which contributed after-tax income of $270,000 or $.05 per
share.
Comparisons of 1995 results of operations with 1994 are significantly
affected by the addition of MidAmerica Financial Corporation ("MidAmerica")
which was acquired by Homeland on June 1, 1994. The acquisition was
accounted for as a purchase, and therefore, the results of operations of
MidAmerica are only included subsequent to the acquisition date.
Homeland's year-to-date return on average assets was 1.10% in 1995,
compared to 1.18% in 1994. For the three months ended September 30, this
same ratio was 1.19% in 1995 and 1.04% in 1994. The nine-month returns on
average stockholders' equity as of September 30, 1995 and 1994 were 11.15%
and 10.69%, respectively, with ratios of 11.79% and 10.76% for the respective
third quarters.
SFAS No. 122 "Accounting for Mortgage Servicing Rights" was issued in May
1995 with an effective date for fiscal years beginning after December 15,
1995. This statement amends SFAS No. 65 by establishing a new standard for
capitalizing mortgage servicing rights. Under SFAS No. 122, the accounting
principles for mortgage servicing rights are the same for mortgages
originated by the servicer as for those acquired through purchase
transactions. Accordingly, under the new statement, a bank would record an
asset for mortgage servicing rights when it sold mortgages and retained the
servicing. Management believes that the effect of the statement on
Homeland's financial statements will not be material.
SFAS No. 123 "Accounting for Stock-Based Compensation" was issued in
October 1995 with an effective date for fiscal years beginning after December
15, 1995. This statement established financial accounting and reporting
standards for stock-based employee compensation plans applying a fair value
based method to measure the compensation cost. Management believes that the
effect of the statement on Homeland's financial statements will not be
material.
NET INTEREST INCOME
Net interest income increased by $5,715,000 or 19.2% for the nine months
of 1995 compared to the same period in 1994, primarily generated by an
increase in earning assets over the past year. The increase in earning
assets was caused by substantial loan growth, both from internal loan volume
increases and from the June 1994 MidAmerica acquisition. Net interest income
reported on a taxable-equivalent basis increased by $5,514,000 for the same
period. For the three month periods ended September 30, 1995 and 1994, net
interest income declined slightly as higher interest income generated from
loan growth was nullified by funding cost increases.
NET INTEREST SPREAD AND MARGIN
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
(Taxable-equivalent basis) 1995 1994 1995 1994
---------------------------------------------------------------------------
Yield on earning assets 8.37% 7.77% 8.33% 7.34%
Rate on interest bearing
liabilities 4.63 3.73 4.58 3.49
---------------------------------------------------------------------------
NET INTEREST SPREAD 3.74 4.04 3.75 3.85
Noninterest bearing funds
contribution .62 .48 .61 .55
---------------------------------------------------------------------------
NET INTEREST MARGIN 4.36% 4.52% 4.36% 4.40%
===========================================================================
Both net interest spread and net interest margin remained unchanged from
the second quarter of 1995, at 3.74% and 4.36%, respectively. Net interest
spread and margin continued to be slightly lower in 1995 than in 1994, as
indicated in the table above. Rising market interest rates have increased
earning asset yields, however, a shift in deposits to higher interest-bearing
accounts has restrained net interest spread and margin during 1995.
NONINTEREST INCOME
Total noninterest income for the first nine months of 1995 was up over the
same period in 1994 by $1,340,000, or 18.3%. Student loan origination fee
income generated by the Homeland Student Loan Company totaled $793,000
through September 30, 1995, compared to $148,000 for the same period of 1994.
Also, income generated from the gains on sales of fixed-rate real estate
loans sold on the secondary market was $302,000 higher at September 30, 1995
than it was at September 30, 1994. Trust services income during the third
quarter of 1995 of $661,000 were $38,000 higher than second quarter 1995
trust income.
NONINTEREST EXPENSES
Total noninterest expenses increased by $4,323,000 for the first nine
months of 1995 compared to the same period in 1994, however, noninterest
expenses for the 1995 third quarter were lower than the 1994 third quarter by
$564,000. Contributing to the noninterest expense reduction in the third
quarter was a $192,000 decline in personnel costs, and FDIC insurance refunds
totaling $431,000. Proposed federal legislation for recapitalizing the
Savings Association Insurance Fund (SAIF) currently calls for a one-time
special assessment of $.85 per $100 of SAIF deposits, which could result in
an estimated expense of approximately $2,200,000, payable in 1996.
Expenses associated with Homeland's corporate name change in 1995 totaled
approximately $550,000. In addition, supplies costs have also been higher
than normal in 1995 as supplies inventories were replenished with items
displaying the new name and logo. Amortization of intangible assets
increased by $687,000 for the first nine months of 1995 from 1994. Net gains
related to other real estate owned properties declined from the prior year
which also contributed to the increase in noninterest expenses during the
nine months ended September 30, 1995.
The significant FDIC insurance refund helped reduce Homeland's efficiency
ratio to 57.7% for the third quarter of 1995, improving that ratio for the
fourth consecutive quarter. The efficiency ratio for year-to-date 1995 was
61.3% compared to 61.7% the prior year-to-date. The efficiency ratio
represents adjusted operating expenses as a percentage of fully-taxable
equivalent net interest income and adjusted noninterest income.
CREDIT RISK MANAGEMENT
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
Sept. 30, Dec. 31, Sept. 30,
(Dollars in thousands) 1995 1994 1994
--------------------------------------------------------------------------
Loans past due 90 days or more $2,829(1)<F1> $1,622 $2,204
Nonaccrual loans 2,068 5,443 5,306
Foreclosed property 726 356 322
--------------------------------------------------------------------------
Total nonperforming assets $5,623 $7,421 $7,832
==========================================================================
Total nonperforming assets as a percentage
of total loans and foreclosed property .66% .94% 1.02%
==========================================================================
Restructured loans $327 $296 $437
==========================================================================
[FN]
<F1>
(1) Included in loans past due 90 days or more were $1,684,000 of government
sponsored student loans for which there is minimal risk of loss.
Complementing Homeland's loan volume growth has been a steady decline in
the amount of nonperforming assets. Nonperforming assets were $5.6 million
at September 30, 1995, a 28.2% decline from one year ago. Expressed as a
percentage of total loans and foreclosed property, nonperforming assets
improved to an unprecedented level of .66% at September 30, 1995, compared to
.94% at year-end 1994. Nonaccrual loans have been reduced to less than half
the amount that existed at year-end 1994.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation reserve for estimated losses
inherent in the loan portfolio. Actual credit losses, net of recoveries, are
deducted from the allowance for loan losses when they occur. Factors
considered in the evaluation of the allowance level include estimated future
losses from loan agreements and obligations, deterioration in credit
concentrations or pledged collateral, and historical loss experience, as well
as trends in portfolio volume, composition, delinquencies, and nonaccruals.
Management assesses the adequacy of the allowance for loan losses of each
subsidiary bank every quarter.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" was
adopted January 1, 1995. Under this standard, loans considered to be
impaired were reduced to the present value of expected future cash flows or
to the fair value of collateral by allocating a portion of the allowance for
loan losses to such loans. If these allocations cause the allowance for loan
losses to require increase, such increase was reported as provision for loan
losses. Adopting this standard resulted in no increase to either the
allowance for loan losses or the provision for loan losses.
The balance in the reserve for loan losses was $9.0 million at September
30, 1995, representing 1.05% of total loans and 159% of nonperforming assets.
The prior year allowance stood at 1.17% of total loans and 115% of
nonperforming assets.
Net loan charge offs totaled $740,000 during the first nine months of
1995. This compares to net recoveries of $30,000 for the same period in
1994. The provision for loan losses was $612,000 compared to $45,000 for the
first three quarters of 1995 and 1994, respectively. Net loan charge offs
and provision for the 1995 third quarter alone were $225,000 and $229,000,
respectively.
CAPITAL RESOURCES
Homeland's stockholders' equity totaled $123.9 million at September 30,
1995, an 8.8% increase from September 30, 1994. Out of net income of $9.9
million during the first nine months of 1995, Homeland retained $6.2 million
after paying dividends to stockholders of $3.7 million. The net unrealized
loss on securities available for sale, net of deferred income taxes, was
$315,000 at September 30, 1995, compared to a $3.3 million net unrealized
loss at year-end 1994. Declining market interest rates during 1995 were
responsible for the securities portfolio market value improvement.
The stockholders' equity-to-asset ratio was 10.05% at September 30, 1995
compared to 9.49% the prior year. The core risk-based capital ratio was
13.11% at September 30, 1995, with a total risk-based capital ratio of
14.19%, both ratios exceeding the respective regulatory levels of 6.00% and
10.00% required for "well-capitalized" financial institutions. The leverage
capital ratio was 8.77%, substantially higher than the "well-capitalized"
requirement of 5.00%.
Homeland's book values per share were $21.60 and $19.84 at September 30,
1995 and 1994, respectively. The closing market trade price of Homeland's
common stock was $29.75 per share at September 30, 1995, which represented a
price-to-earnings ratio of 12.9.
ASSET-LIABILITY MANAGEMENT
Asset-liability management encompasses both the maintenance of adequate
liquidity and the management of interest rate sensitivity. Liquidity
management involves planning to meet anticipated funding needs. Interest
rate sensitivity management attempts to provide the optimal level of net
interest income, while managing exposure to risks associated with interest
rate movements.
LIQUIDITY
Core deposits have historically provided Homeland with a major source of
stable and relatively low-cost funding. Secondary sources of liquidity
include federal funds sold, maturing securities and loans, and borrowed
funds. Also, Homeland banks have established lines of credit for short-term
borrowings for the management of daily liquidity needs.
The loan-to-deposit ratio increased from 83.5% at December 31, 1994 to
90.8% at September 30, 1995. Net loans increased by $62.6 million during the
first nine months of 1995, while deposits declined by $7.2 million during the
same time period. The increase in loans was funded with maturing securities
proceeds and borrowed funds.
INTEREST RATE SENSITIVITY
Interest rate sensitivity has traditionally been measured by gap analysis,
which represents the difference between assets and liabilities that reprice
in certain time periods. This method, while useful, has a number of
limitations as it is a static point-in-time measurement and does not take
into account the varying degrees of sensitivity to interest rates within the
balance sheet. As shown in the table following, on a static-gap basis, the
cumulative ratio of interest sensitive assets to interest sensitive
liabilities in a one-year time frame was 1.13, and as a percentage of total
assets was 5.87%. Because of inherent limitations of gap analysis, Homeland
uses an earnings simulation model to more realistically measure its
sensitivity to changing interest rates. Management monitors the rate
sensitivity and liquidity positions on an ongoing basis and, when necessary,
appropriate action is taken to minimize any adverse effects of rapid interest
rate movements or any unexpected liquidity concerns.
INTEREST RATE SENSITIVITY ANALYSIS
SEPTEMBER 30, 1995
--------------------------------------------------------------------------------
AFTER ONE AFTER THREE
WITHIN THROUGH THROUGH
ONE THREE TWELVE TOTAL AFTER ONE
(Dollars in thousands) MONTH MONTHS MONTHS ONE YEAR YEAR TOTAL
-----------------------------------------------------------------------------------------------------------------------------
Interest earning assets
Federal funds sold $ 14,300 $ --- $ --- $ 14,300 $ --- $ 14,300
Securities 33,954 31,360 36,257 101,571 156,023 257,594
Loans 224,515 83,163 207,837 515,515 339,724 855,239
-----------------------------------------------------------------------------------------------------------------------------
Total interest earning assets 272,769 114,523 244,094 631,386 495,747 1,127,133
-----------------------------------------------------------------------------------------------------------------------------
Sources of funds
Interest bearing demand deposits(1)<F2> 20,219 --- --- 20,219 80,880 101,099
Money market deposits(1)<F2> 121,716 --- --- 121,716 48,368 170,084
Savings deposits(1)<F2> 13,064 --- --- 13,064 52,257 65,321
Time deposits 43,883 48,555 199,484 291,922 201,476 493,398
Federal funds purchased 48,575 --- --- 48,575 --- 48,575
Other short-term borrowings 63,271 --- --- 63,271 --- 63,271
Long-term borrowings --- --- 225 225 42,300 42,525
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Total rate sensitive liabilities 310,728 48,555 199,709 558,992 425,281 984,273
Demand deposits, net of cash and
due from banks --- --- --- --- 60,711 60,711
Other, net --- --- --- --- 82,149 82,149
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Total sources of funds 310,728 48,555 199,709 558,992 568,141 1,127,133
-----------------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ (37,959) $ 65,968 $ 44,385 $ 72,394 $ (72,394) $ ---
=============================================================================================================================
Cumulative gap $ (37,959) $ 28,009 $ 72,394 $ 72,394
Cumulative gap as a percentage
of total assets -3.11% 2.24% 5.87% 5.87%
Cumulative ratio of interest sensitive
assets to interest sensitive liabilities .88 1.08 1.13 1.13
=============================================================================================================================
<FN>
<F2>(1) On the basis of historical studies, deposits determined to be less sensitive to changes in market interest rates are
included in the "after one year" category.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
======= ------------------
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
======= ----------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
======= --------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
======= ----------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION.
======= ------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
======= ---------------------------------
(a) EXHIBITS: Index to Exhibits - Page 16.
Exhibit 10.5 Supplemental Retirement Income Plan dated June 20,
1995.
Exhibit 10.5(a) Supplemental Retirement Income Agreement with Erl A.
Schmiesing dated July 3, 1995.
Exhibit 10.5(b) Supplemental Retirement Income Agreement with Robert S.
Kahler dated July 3, 1995.
Exhibit 10.5(c) Supplemental Retirement Income Agreement with Gregory
L. O'Hara dated July 3, 1995.
Exhibit 10.5(d) Supplemental Retirement Income Agreement with Josef M.
Vich dated July 3, 1995.
Exhibit 11 Statement Re Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K:
No reports were filed on Form 8-K during the quarter ended September
30, 1995.
*** SIGNATURES ***
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOMELAND BANKSHARES CORPORATION
-------------------------------
(Registrant)
Date November 13, 1995 /s/Erl A. Schmiesing
-----------------------------------
Erl A. Schmiesing, Chairman, President & CEO
(Principal Executive Officer)
Date November 13, 1995 /s/Robert S. Kahler
-----------------------------------
Robert S. Kahler, EVP & CFO
(Principal Financial and Accounting Officer)
-----------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
INDEX TO EXHIBITS
TO FORM 10-Q QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
----------------------------
HOMELAND BANKSHARES CORPORATION
229 EAST PARK AVENUE
WATERLOO, IOWA 50704-5300
EXHIBIT NO. ITEM PAGE
----------- ----------------------------------------------------------
10.5 Supplemental Retirement Income Plan dated June 20, 1995. 17
10.5(a) Supplemental Retirement Income Agreement with Erl A. Schmiesing
dated July 3, 1995. 18
10.5(b) Supplemental Retirement Income Agreement with Robert S. Kahler
dated July 3, 1995. 19
10.5(c) Supplemental Retirement Income Agreement with Gregory L. O'Hara
dated July 3, 1995. 20
10.5(d) Supplemental Retirement Income Agreement with Josef M. Vich
dated July 3, 1995. 21
11 Statement Re Computation of Earnings Per Share 22
27 Financial Data Schedule 23
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