U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
Commission file number: 0-14507
HOMELAND BANKSHARES CORPORATION
Incorporated in Iowa I.R.S. Employer Identification
No. 42-1168487
229 EAST PARK AVENUE, WATERLOO, IOWA 50704-5300
TELEPHONE NUMBER: (319) 291-5260
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of August 2, 1996:
5,703,378 SHARES COMMON STOCK, $12.50 PAR VALUE
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS.
- ------------------------------
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JUNE 30, December 31,
(Dollars in thousands, except per share data) 1996 1995
- --------------------------------------------------------------------
ASSETS
Cash and due from banks $ 51,618 $ 46,072
Federal funds sold 12,700 73,850
- -------------------------------------------------------------------
Total cash and cash equivalents 64,318 119,922
Securities available for sale
(amortized cost $201,867 in 1996
and $216,565 in 1995) 201,361 217,556
Loans
Commercial, financial, and agricultural 188,362 178,662
Commercial real estate 238,276 213,957
Consumer real estate 319,427 318,461
Consumer 138,292 133,709
- -------------------------------------------------------------------
Total loans 884,357 844,789
Allowance for loan losses (8,913) (8,603)
- -------------------------------------------------------------------
Net loans 875,444 836,186
Premises and equipment 24,623 24,609
Intangible assets 17,396 18,471
Other assets 16,613 16,163
- -------------------------------------------------------------------
Total assets $1,199,755 $1,232,907
===================================================================
LIABILITIES
Deposits
Noninterest bearing demand $ 118,638 $ 123,902
Interest bearing demand 97,973 106,447
Money market 168,547 174,000
Savings 65,637 68,477
Time 496,732 489,893
- -------------------------------------------------------------------
Total deposits 947,527 962,719
Federal funds purchased 44,575 70,225
Other short-term borrowings 19,000 15,587
Accrued expenses and other liabilities 12,169 13,130
Long-term borrowings 46,976 43,925
- -------------------------------------------------------------------
Total liabilities 1,070,247 1,105,586
- -------------------------------------------------------------------
Commitments and Contingencies (Notes 4 and 5)
STOCKHOLDERS' EQUITY
Common stock, $12.50 par value; 25,000,000
shares authorized; 5,703,378 shares issued
and outstanding (5,740,513 in 1995) 71,292 71,756
Additional paid-in capital --- 246
Retained earnings 58,533 54,697
Net unrealized gain (loss) on securities
available for sale, net of income taxes (317) 622
- -------------------------------------------------------------------
Total stockholders' equity 129,508 127,321
- -------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,199,755 $1,232,907
===================================================================
See notes to consolidated financial statements
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED, SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Dollars in thousands,
except per share data) 1996 1995 1996 1995
- ------------------------------------------------------------------------
Interest income
Loans $19,252 $18,403 $38,261 $35,816
Taxable securities 2,635 3,846 5,349 7,755
Tax-exempt securities 439 516 887 1,075
Federal funds sold 515 137 1,315 363
- -------------------------------------------------------------------------
Total interest income 22,841 22,902 45,812 45,009
- -------------------------------------------------------------------------
Interest expense
Deposits 8,724 9,025 17,434 17,846
Short-term borrowings 1,008 1,838 2,174 3,570
Long-term borrowings 690 207 1,377 251
- -------------------------------------------------------------------------
Total interest expense 10,422 11,070 20,985 21,667
- -------------------------------------------------------------------------
Net interest income 12,419 11,832 24,827 23,342
Provision for loan losses 561 269 971 383
- -------------------------------------------------------------------------
Net interest income after provision
for loan losses 11,858 11,563 23,856 22,959
- -------------------------------------------------------------------------
Noninterest income
Data processing services 604 616 1,234 1,266
Trust services 618 623 1,217 1,158
Student loan servicing fees 287 264 606 508
Deposit account service charges 854 771 1,703 1,475
Securities gains 3 3 17 31
Other 788 671 1,448 1,151
- -------------------------------------------------------------------------
Total noninterest income 3,154 2,948 6,225 5,589
- -------------------------------------------------------------------------
Noninterest expenses
Personnel 4,965 4,868 10,040 9,461
Occupancy 908 692 1,581 1,237
Equipment 610 562 1,245 1,191
Supplies 249 248 495 663
Advertising and promotion 408 392 804 952
FDIC insurance 145 532 295 1,064
Intangible amortization 538 538 1,075 1,075
Other real estate owned (35) (94) (33) (146)
Other 1,290 1,503 2,634 2,951
- -------------------------------------------------------------------------
Total noninterest expenses 9,078 9,241 18,136 18,448
- -------------------------------------------------------------------------
Income before income taxes 5,934 5,270 11,945 10,100
Income tax expense 2,246 2,036 4,612 3,790
- -------------------------------------------------------------------------
NET INCOME $3,688 $3,234 $7,333 $ 6,310
=========================================================================
NET INCOME PER SHARE $ .65 $ .56 $ 1.28 $ 1.10
=========================================================================
AVERAGE NUMBER OF SHARES
OUTSTANDING 5,730,094 5,739,111 5,741,372 5,738,912
=========================================================================
See notes to consolidated financial statements
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
(Dollars in thousands) 1996 1995
- -------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 7,333 $ 6,310
Adjustments to reconcile net income to net
cash provided by operating activities
Amortization and accretion 1,657 1,019
Depreciation 987 999
Provision for loan losses 971 383
Provision for deferred income taxes (615) 592
Net gain on securities
Available for sale (17) (21)
Held to maturity --- (10)
Net gain on sales of other assets (92) (78)
(Increase) decrease in other assets 108 (2,334)
Decrease in accrued expenses and other
liabilities (346) (1,858)
- -------------------------------------------------------------------
Net cash provided by operating activities 9,986 5,002
- -------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from sales of securities available
for sale 44 135
Proceeds from maturities and calls of securities
Available for sale 39,134 24,044
Held to maturity --- 27,001
Purchases of securities
Available for sale (24,523) (38,769)
Held to maturity --- (616)
Net increase in loans (40,709) (45,582)
Purchases of premises and equipment (1,446) (1,140)
Proceeds from sales of other assets 495 147
- -------------------------------------------------------------------
Net cash used for investing activities (27,005) (34,780)
- -------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in deposits (15,192) (16,454)
Net increase (decrease) in federal funds
purchased (25,650) 36,750
Net increase (decrease) in other short-term
borrowings 3,413 (30,320)
Proceeds from long-term borrowings 3,300 40,000
Repayments of long-term borrowings (249) (225)
Payments of cash dividends (2,583) (2,468)
Proceeds from stock options 1,514 ---
Purchase of common stock (3,138) ---
- -------------------------------------------------------------------
Net cash provided by (used for) financing
activities (38,585) 27,283
- -------------------------------------------------------------------
Net decrease in cash and cash equivalents (55,604) (2,495)
Cash and cash equivalents at beginning of
period 119,922 61,392
- -------------------------------------------------------------------
Cash and cash equivalents at end of period $ 64,318 $ 58,897
===================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid
Interest $ 21,833 $ 22,050
Income taxes 4,786 3,111
Noncash investing and financing activities
Loans transferred to (from) foreclosed
property 334 (32)
Sales of foreclosed property financed by
Homeland 157 56
===================================================================
See notes to consolidated financial statements
HOMELAND BANKSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
NET
ADDITIONAL UNREALIZED
(Dollars in thousands, COMMON PAID-IN RETAINED SECURITIES
except per share data) STOCK CAPITAL EARNINGS GAIN (LOSS) TOTAL
- ---------------------------------------------------------------------------------------
Balance at January 1, 1996 $71,756 $ 246 $54,697 $ 622 $127,321
Net income --- --- 7,333 --- 7,333
Cash dividends - $.45 per share --- --- (2,583) --- (2,583)
Common stock issued under stock
option plans 814 700 --- --- 1,514
Common stock purchased (1,278) (946) (914) --- (3,138)
Net unrealized loss on securities
available for sale --- --- --- (939) (939)
- ---------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 $71,292 $ --- $58,533 $ (317) $129,508
=======================================================================================
Balance at January 1, 1995 $71,734 $ 227 $46,068 $(3,287) $114,742
Net income --- --- 6,310 --- 6,310
Cash dividends - $.43 per share --- --- (2,468) --- (2,468)
Net unrealized gain on securities
available for sale --- --- --- 3,031 3,031
- ---------------------------------------------------------------------------------------
Balance at June 30, 1995 $71,734 $ 227 $49,910 $ (256) $121,615
=======================================================================================
<FN>
See notes to consolidated financial statements
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited consolidated financial statements: The accompanying interim
consolidated financial statements are unaudited. In the opinion of management,
all adjustments consisting of normal recurring accruals considered necessary for
fair presentation have been included. Certain balances previously reported have
been reclassified to conform with 1996 financial statement presentation.
Further information may be obtained by reference to the consolidated financial
statements and accompanying footnotes included in the Homeland Bankshares
Corporation ("Homeland") 1995 Annual Report on Form 10-K.
Securities available for sale: Securities available for sale are reported
at fair value, with the unrealized gains and losses reported as a separate
component of stockholders' equity. Securities available for sale may be sold
for management of general liquidity needs, response to market interest rate
fluctuations, implementation of asset-liability management strategy, funding
increased loan demand, changes in securities prepayment risk, or other similar
factors. Realized gains and losses on sales are computed on a specific
identification basis and are shown separately as a component of noninterest
income.
Intangible assets: Goodwill and core deposit intangibles arise from net
assets acquired in purchase transactions. Purchased assets and liabilities are
recorded at their estimated fair values on the acquisition dates. Intangible
assets are reviewed for possible impairment when events or changed circumstances
may indicate that the carrying amount of the assets may not be recoverable.
Goodwill is amortized on a straight-line basis over 15 years. Core deposit
intangibles are amortized on a straight-line basis over an average estimated
life of approximately 7 years. At June 30, 1996 and 1995, accumulated
intangible amortization was $6,528,000 and $4,379,000, respectively.
Net income per share: Net income per share calculations are based on the
weighted average number of common shares outstanding, adjusted for stock splits
and common stock equivalents arising from the assumed exercise of outstanding
stock options.
Recently-adopted accounting standards: Effective January 1, 1996, Homeland
adopted Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This statement specifies when certain long-lived assets should
be reviewed for impairment and how to measure and report an impairment loss.
The effect of the statement on Homeland's consolidated financial statements was
not material.
Effective January 1, 1996, Homeland adopted SFAS No. 122, "Accounting for
Mortgage Servicing Rights." This statement amends SFAS No. 65 by establishing a
new standard for capitalizing mortgage servicing rights. Under SFAS No. 122,
the accounting principles for mortgage servicing rights are the same for
mortgages originated by the servicer as for those acquired through purchase
transactions. Accordingly, under the new statement, a bank would record an
asset for mortgage servicing rights when it sold mortgages and retained the
servicing. The effect of the statement on Homeland's consolidated financial
statements was not material.
SFAS No. 123, "Accounting for Stock-Based Compensation," was effective for
Homeland beginning January 1, 1996. SFAS No. 123 requires expanded disclosures
of stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. Homeland will continue to
apply APB Opinion No. 25 to its stock based compensation awards to employees.
2. SECURITIES AVAILABLE FOR SALE
REALIZED GAINS AND LOSSES THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Dollars in thousands) 1996 1995 1996 1995
-----------------------------------------------------------------------
Gross realized gains $ 3 $ 3 $ 17 $ 31
Gross realized losses --- --- --- ---
-----------------------------------------------------------------------
Total $ 3 $ 3 $ 17 $ 31
=======================================================================
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars in thousands) COST GAINS LOSSES VALUE
------------------------------------------------------------------------------------------------------
U.S. Treasury $ 57,620 $ 144 $ (332) $ 57,432
U.S. Government agencies 18,402 96 (98) 18,400
U.S. Government agencies mortgage-backed 64,091 333 (900) 63,524
Student loan participation certificates 19,997 --- --- 19,997
States and political subdivisions 30,008 566 (192) 30,382
Corporate mortgage-backed 3,581 --- (123) 3,458
Other 8,168 --- --- 8,168
------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 1996 $ 201,867 $ 1,139 $ (1,645) $ 201,361
======================================================================================================
U.S. Treasury $ 64,275 $ 341 $ (328) $ 64,288
U.S. Government agencies 21,532 277 (38) 21,771
U.S. Government agencies mortgage-backed 69,267 560 (459) 69,368
Student loan participation certificates 16,708 --- --- 16,708
States and political subdivisions 33,316 881 (102) 34,095
Corporate 427 --- --- 427
Corporate mortgage-backed 4,047 --- (141) 3,906
Other 6,993 --- --- 6,993
------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 216,565 $ 2,059 $ (1,068) $ 217,556
======================================================================================================
3. ALLOWANCE FOR LOAN LOSSES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Dollars in thousands) 1996 1995 1996 1995
------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 9,093 $ 8,857 $ 8,603 $ 9,082
Provision for loan losses 561 269 971 383
Loan loss recoveries 476 83 1,290 186
Loans charged off (1,217) (259) (1,951) (701)
------------------------------------------------------------------------------------------------------
Balance at end of period $ 8,913 $ 8,950 $ 8,913 $ 8,950
======================================================================================================
Impairment of loans has been recognized in conformity with SFAS Nos. 114
and 118. No interest income related to such loans has been recognized.
JUNE 30, DEC. 31,
(Dollars in thousands) 1996 1995
--------------------------------------------------------------
Balance of impaired loans $ 128 $ 664
Less portion for which no allowance for loan
losses was allocated (---) (---)
--------------------------------------------------------------
Portion of impaired loan balance for which an
allowance for loan losses was allocated $ 128 $ 664
==============================================================
Portion of allowance for loan losses allocated
to the impaired loan balance $ 19 $ 52
==============================================================
Average investment in impaired loans during
the period $ 498 $2,057
==============================================================
4. SHORT-TERM BORROWINGS
At June 30, 1996, other short-term borrowings consisted of $10 million of
advances from the Federal Home Loan Bank ("FHLB") and $9 million in U.S.
Treasury tax depository accounts. The short-term FHLB advances were secured by
certain U.S. Government securities, FHLB stock, and eligible consumer real
estate loans, with a weighted average interest rate of 5.8%.
In the normal course of business, Homeland banks have established lines of
credit for overnight borrowings for the management of daily liquidity needs. At
June 30, 1996, these unused lines of credit aggregated $212 million.
5. LONG-TERM BORROWINGS
At June 30, 1996, long-term borrowings consisted of FHLB advances to
Homeland subsidiaries with an average fixed interest rate of 5.8%. The long-
term advances were secured by certain U.S. Government securities, eligible
consumer real estate loans, and FHLB stock, and were scheduled to mature as
follows:
(Dollars in thousands)
- ----------------------------------------------------------------
1996 $ 273
1997 40,486
1998 290
1999 294
2000 1,498
Thereafter 4,135
- ----------------------------------------------------------------
Balance at end of period $46,976
================================================================
6. STOCKHOLDERS' EQUITY
On March 20, 1996, the Board of Directors authorized the continuation of
Homeland's common stock buyback program by approving the repurchase of up to
500,000 shares of Homeland common stock through stock market transactions until
March 31, 1997. For the six months ended June 30, 1996, Homeland repurchased
approximately 102,000 shares at a total cost of $3,138,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
HOMELAND BANKSHARES CORPORATION
FINANCIAL HIGHLIGHTS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(Dollars in thousands, except per share data) 1996 1995 % Change 1996 1995 % Change
- ------------------------------------------------------------------------------------------------------------
OPERATING RESULTS
Net interest income $12,419 $11,832 5.0% $24,827 $23,342 6.4%
Provision for loan losses 561 269 108.6 971 383 153.5
Noninterest income 3,154 2,948 7.0 6,225 5,589 11.4
Noninterest expenses 9,078 9,241 -1.8 18,136 18,448 -1.7
Income tax expense 2,246 2,036 10.3 4,612 3,790 21.7
Net income 3,688 3,234 14.0 7,333 6,310 16.2
PER SHARE DATA
Net income $.65 $.56 16.1% $1.28 $1.10 16.4%
Cash dividends .23 .22 4.5 .45 .43 4.7
Book value 22.71 21.19 7.2 22.71 21.19 7.2
Tangible book value 19.66 17.79 10.5 19.66 17.79 10.5
Market price 33.75 24.00 40.6 33.75 24.00 40.6%
END OF PERIOD BALANCES
Loans $884,357 $839,248 5.4% $884,357 $839,248 5.4%
Deposits 947,527 932,906 1.6 947,527 932,906 1.6
Stockholders' equity 129,508 121,615 6.5 129,508 121,615 6.5
Total assets 1,199,755 1,225,399 -2.1 1,199,755 1,225,399 -2.1
Nonperforming assets 3,693 6,297 -41.4 3,693 6,297 -41.4
AVERAGE BALANCES
Loans $873,994 $821,557 6.4% $861,258 $808,953 6.5%
Deposits 947,430 942,811 .5 944,276 947,926 -.4
Stockholders' equity 129,848 119,498 8.7 129,408 117,660 10.0
Total assets 1,216,874 1,208,088 .7 1,218,452 1,203,875 1.2
Total earning assets 1,119,529 1,111,223 .7 1,122,222 1,104,641 1.6
FINANCIAL RATIOS
Return on average total assets 1.22% 1.07% 1.21% 1.06%
Return on average stockholders' equity 11.42 10.86 11.40 10.81
Net interest margin 4.54 4.36 4.53 4.36
Efficiency ratio 54.31 62.13 54.32 63.20
Stockholders' equity to total assets 10.79 9.92 10.79 9.92
Leverage capital ratio 9.37 8.60 9.37 8.60
EARNINGS ANALYSIS
PERFORMANCE SUMMARY
Homeland Bankshares Corporation increased its net earnings by $1.0 million
to reach $7.3 million for the first half of 1996 compared to the same period in
1995, representing a 16.2% increase. Net income per share also improved to
$1.28 from $1.10 for the same six-month periods. Second quarter net income was
14.0% higher, improving to $3.7 million for 1996, compared to $3.2 million for
1995. Per share earnings were $.65 and $.56 for the three-month periods ended
June 30, 1996 and 1995, respectively.
Year-to-date earnings in 1996 have profited from a higher net interest
margin and from improvements in operating efficiencies. Net interest margin for
the first six months of 1996 was 4.53%, 17 basis points higher than the same
period of 1995. Homeland's efficiency ratio has shown consistent improvement
over the last several years, to 54.3% at June 30, 1996 compared to 63.2% one
year ago. Increased noninterest income combined with lower noninterest
expenses, partially attributable to the reduced FDIC insurance premiums, reduced
the effect of an increased provision for loan losses to boost consolidated net
income for 1996.
Return on average assets was 1.21% and 1.06% for the first six months of
1996 and 1995, respectively. The return on average stockholders' equity was
11.40% and 10.81% for the same periods. The second quarter 1996 return on
average assets was 1.22% with a 11.42% return on average equity. Book value per
share was $22.71 with a market price of $33.75 at June 30, 1996.
NET INTEREST INCOME
Net interest income is the excess of the interest and fees received on
interest earning assets over the interest expense paid on interest bearing
liabilities, while taxable-equivalent net interest income includes an adjustment
to ensure that interest income on taxable and nontaxable assets is comparable.
Net interest income totaled $24,827,000 through June 30, 1996 and $23,342,000
for the same period of 1995. Taxable-equivalent net interest income was
$25,263,000 and $23,862,000 for the six months ended June 30, 1996 and 1995,
respectively. Net interest income for the 1996 second quarter was $587,000
higher than in 1995, and $560,000 higher on a taxable-equivalent basis.
Homeland has experienced growth in net interest income from a combination of
earning assets growth and effective management of overall interest rate
sensitivity and liquidity.
NET INTEREST SPREAD AND MARGIN
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Taxable-equivalent basis) 1996 1995 1996 1995
- --------------------------------------------------------------------------------
Yield on earning assets 8.28% 8.36% 8.29% 8.31%
Rate on interest bearing liabilities 4.40 4.62 4.42 4.56
- --------------------------------------------------------------------------------
NET INTEREST SPREAD 3.88 3.74 3.87 3.75
Noninterest bearing funds contribution .66 .62 .66 .61
- --------------------------------------------------------------------------------
NET INTEREST MARGIN 4.54% 4.36% 4.53% 4.36%
================================================================================
Net interest spread improved by 12 basis points for the first half of 1996,
compared to the first half of 1995, while net interest margin improved by 17
basis points for the same period. The higher net interest margin resulted from
the growth in loan volume over the past year, combined with a reduction in the
cost of funds. Net interest spread and margin for the three-month periods ended
June 30, 1996 and 1995 also showed improvements of 14 basis points and 18 basis
points, respectively.
NONINTEREST INCOME
Noninterest income was up by $636,000 or 11.4% for the first six months of
1996 compared to the same period of 1995. As a percentage of average assets,
year-to-date noninterest income increased to 1.03% in 1996 from .94% in 1995.
Contributing to the 1996 earnings improvement were increases of 5.1% in trust
services revenue, 19.3% in student loan servicing fees, and 15.5% in deposit
account service charges. Data processing service revenue showed a slight
decrease from the 1995 period.
Total noninterest income for the second quarters of 1996 and 1995 was
$3,154,000 and $2,948,000, respectively, a 7.0% increase. The largest share of
the higher 1996 second quarter increase was from deposit account service charge
increases. Other contributing factors were higher revenue levels generated from
the servicing of student loans and real estate loans.
NONINTEREST EXPENSES
Homeland's noninterest expenses as a percentage of average assets was 2.99%
compared to 3.09% for the six months ended June 30, 1996 and 1995, respectively.
Total noninterest expenses declined by $312,000 for the first six months of 1996
compared to the equivalent period in 1995. Expenses associated with the 1995
corporate name change had boosted noninterest expenses for the first half of
1995 by approximately $460,000. Excluding those one-time costs, total
noninterest expenses for the first half of 1996 compared to the same period of
1995 increased by less than 1%.
Personnel costs, typically the largest component of noninterest expense,
showed a $579,000 or 6.1% increase for the first six months of 1996 compared to
the same period of 1995. The majority of the increase was due to higher health
insurance premiums and other employee benefit costs.
The reduction in the FDIC deposit insurance premiums for commercial banks
from $.23 per $100 of deposits prior to June 1, 1995 to virtually zero after
January 1, 1996, contributed $769,000 to Homeland's decline in noninterest
expenses in the first half of 1996 compared to the 1995 first half.
A common measure of effective management of cost control is the efficiency
ratio which represents adjusted operating expenses as a percentage of
noninterest income and net interest income on a fully taxable-equivalent basis.
Homeland's efficiency ratio was 54.32% for the 1996 first half, improved from
1995's efficiency ratio of 63.20% for the same period. Systems conversions,
departmental consolidations, and centralization of banking functions is an
ongoing process designed to improve operating efficiencies as well as customer
services.
CREDIT RISK MANAGEMENT
NONPERFORMING ASSETS AND RESTRUCTURED LOANS
JUNE 30, Dec. 31, June 30,
(Dollars in thousands) 1996 1995 1995
- --------------------------------------------------------------------
Loans past due 90 days or more(1) $2,444 $2,766 $2,284
Nonaccrual loans 1,068 1,852 3,425
Foreclosed property 181 325 588
- --------------------------------------------------------------------
Total nonperforming assets $3,693 $4,943 $6,297
====================================================================
Total nonperforming assets as a percentage
of total loans and foreclosed property .42% .58% .75%
====================================================================
Restructured loans $286 $307 $346
====================================================================
(1) Includes government sponsored student loans totaling $2.0 million at June
30, 1996, $2.2 million at December 31, 1995, and $1.7 million at June 30, 1995,
for which there is minimal risk of loss.
Homeland's nonperforming assets were reduced to the lowest level in the
company's history, totaling .42% of total loans and foreclosed property at June
30, 1996. Total nonperforming assets were $3.7 million at June 30, 1996,
compared to $6.3 million the prior year, representing a 41% improvement.
Homeland's asset quality is a reflection of the company's community-based
banking focus and conservative lending policies.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation reserve for estimated losses
inherent in the loan portfolio. Actual credit losses, net of recoveries, are
deducted from the allowance for loan losses when they occur. Factors considered
in the evaluation of the allowance level include estimated future losses from
loan agreements and obligations, deterioration in credit concentrations or
pledged collateral, and historical loss experience, as well as trends in
portfolio volume, composition, delinquencies, and nonaccruals. Management
assesses the adequacy of the allowance for loan losses of each subsidiary bank
every quarter. However, actual losses could differ significantly from the
amounts estimated by management.
The allowance for loan losses stood at $8.9 million at June 30, 1996,
representing 1.01% of total loans and 241% of nonperforming assets. The prior
year allowance stood at 1.07% of total loans and 142% of nonperforming assets.
Net loan charge offs totaled $661,000 during the first six months of 1996.
This compares to $515,000 for the equivalent period of 1995. The provisions for
loan losses were $971,000 and $383,000 respectively, for the first two quarters
of 1996 and 1995. The higher provision in 1996 was necessitated by loan growth
during the past twelve months. Net loan charge offs and loan loss provision for
the 1996 second quarter were $741,000 and $561,000, respectively.
CAPITAL RESOURCES
CAPITAL RATIOS REGULATORY
CAPITAL REQUIREMENTS
------------------------
JUNE 30, June 30, WELL MINIMUM
1996 1995 CAPITALIZED REQUIREMENT
- -------------------------------------------------------------------------
Tier I risk-based capital 13.99% 12.96% 6.00% 4.00%
Total risk-based capital 15.05 14.04 10.00 8.00
Leverage capital 9.37 8.60 5.00 4.00
Banking is an extensively regulated industry. To maintain the shareholders'
and customers' security, banking regulatory agencies have set forth capital
requirements based upon the relative risk of different assets held by banks.
Homelands' capital ratios have consistently exceeded the "well-capitalized"
regulatory capital requirements for financial institutions.
Homeland's stockholders' equity totaled $129.5 million at June 30, 1996, a
6.5% increase from June 30, 1995. Out of net income of $7.3 million during the
first six months of 1996, Homeland retained $4.7 million after paying dividends
to stockholders of $2.6 million. The net unrealized loss on securities
available for sale, net of deferred income taxes, was $317,000 at June 30, 1996,
compared to a $256,000 net unrealized loss at June 30, 1995.
The stockholders' equity-to-asset ratio was 10.79% at June 30, 1996 compared
to 9.92% the prior year. Homeland's book values per share were $22.71 and
$21.19 at June 30, 1996 and 1995, respectively. The market trade price of
Homeland's common stock was $33.75 per share at June 30, 1996.
Homeland had no commitments for any significant capital expenditures at June
30, 1996, and currently carries no long-term debt at the parent company.
ASSET-LIABILITY MANAGEMENT
Asset-liability management encompasses both the maintenance of adequate
liquidity and the management of interest rate sensitivity. Liquidity management
involves planning to meet anticipated funding needs. Interest rate sensitivity
management attempts to provide the optimal level of net interest income, while
managing exposure to risks associated with interest rate movements.
LIQUIDITY
Core deposits have historically provided Homeland with a major source of
stable and relatively low-cost funding. Secondary sources of liquidity include
federal funds sold, maturing securities and loans, securities available for
sale, and borrowed funds. In the normal course of business, Homeland banks have
established short-term lines of credit for the management of daily liquidity
needs.
Cash and cash equivalents were provided by $10.0 million of operating
activities. Investing activities used $27.0 million and financing activities
used $38.6 million during the first half of 1996. Total cash and cash
equivalents were $64.3 million at June 30, 1996, compared to $58.9 million at
June 30, 1995.
INTEREST RATE SENSITIVITY
Interest rate sensitivity has traditionally been measured by gap analysis,
which represents the difference between assets and liabilities that reprice in
certain time periods. This method, while useful, has a number of limitations as
it is a static point-in-time measurement and does not take into account the
varying degrees of sensitivity to interest rates within the balance sheet. As
shown in the table following, on a static-gap basis, the cumulative ratio of
interest sensitive assets to interest sensitive liabilities in a one-year time
frame was 1.05, and as a percentage of total assets was 2.17%.
Because of inherent limitations of gap analysis, Homeland periodically uses
an earnings simulation model to more realistically measure its sensitivity to
changing interest rates. Management monitors the rate sensitivity and liquidity
positions on an ongoing basis and, when necessary, appropriate action is taken
to minimize any adverse effects of rapid interest rate movements or any
unexpected liquidity concerns.
INTEREST RATE SENSITIVITY ANALYSIS
JUNE 30, 1996
----------------------------------------------------------------------
AFTER ONE AFTER THREE
WITHIN THROUGH THROUGH
ONE THREE TWELVE TOTAL AFTER ONE
(Dollars in thousands) MONTH MONTHS MONTHS ONE YEAR YEAR TOTAL
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Interest earning assets
Federal funds sold $ 12,700 $ --- $ --- $ 12,700 $ --- $ 12,700
Securities 30,692 11,623 45,722 88,037 113,324 201,361
Loans 234,857 50,457 199,653 484,967 399,390 884,357
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Total interest earning assets 278,249 62,080 245,375 585,704 512,714 1,098,418
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Sources of funds
Interest bearing demand deposits(1) 19,595 --- --- 19,595 78,378 97,973
Money market deposits(1) 125,478 --- --- 125,478 43,069 168,547
Savings deposits(1) 13,127 --- --- 13,127 52,510 65,637
Time deposits 53,794 56,425 187,483 297,702 199,030 496,732
Federal funds purchased 44,575 --- --- 44,575 --- 44,575
Other short-term borrowings 19,000 --- --- 19,000 --- 19,000
Long-term borrowings 5 10 40,119 40,134 6,842 46,976
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Total rate sensitive liabilities 275,574 56,435 227,602 559,611 379,829 939,440
Demand deposits, net of cash and
due from banks --- --- --- --- 67,020 67,020
Other, net --- --- --- --- 91,958 91,958
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Total sources of funds 275,574 56,435 227,602 559,611 538,807 1,098,418
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Interest sensitivity gap $ 2,675 $ 5,645 $ 17,773 $ 26,093 $ (26,093) $ ---
=========================================================================================================
Cumulative gap $ 2,675 $ 8,320 $ 26,093 $ 26,093
Cumulative gap as a percentage
of total assets .22% .69% 2.17% 2.17%
Cumulative ratio of interest sensitive
assets to interest sensitive
liabilities 1.01 1.03 1.05 1.05
=====================================================================================================
<FN>
<F1>(1) On the basis of historical studies, deposits determined to be less sensitive
to changes in market interest rates are included in the "after one year"
category. </FN>
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 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 June 30,
1996.
*** 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 August 2, 1996 /s/ Erl A. Schmiesing
-------------------- ----------------------------------------------
Erl A. Schmiesing, Chairman, President & CEO
(Principal Executive Officer)
Date August 2, 1996 /s/ Robert S. Kahler
-------------------- -------------------------------------------------
Robert S. Kahler, Executive Vice President & CFO
(Principal Financial and Accounting Officer)
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
INDEX TO EXHIBITS
TO FORM 10-Q QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
-------------------------------
HOMELAND BANKSHARES CORPORATION
229 EAST PARK AVENUE
WATERLOO, IOWA 50704-5300
EXHIBIT NO. ITEM PAGE
- ----------- --------------------------------------------------------- ----
11 Statement Re Computation of Earnings Per Share 17
27 Financial Data Schedule 18
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