-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HwQTzpYLv6JXVXuqqbTjzl2Nds6lZ5zQ9vLL1QOvwf37KYFKijNXjzdt2tvZ9itH NNqZCW3CgrJ9E/O0+w48Vw== 0000920112-98-000016.txt : 19981116 0000920112-98-000016.hdr.sgml : 19981116 ACCESSION NUMBER: 0000920112-98-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEARTLAND FINANCIAL USA INC CENTRAL INDEX KEY: 0000920112 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 421405748 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24724 FILM NUMBER: 98747895 BUSINESS ADDRESS: STREET 1: 1398 CENTRAL AVE CITY: DUBUQUE STATE: IA ZIP: 52001 BUSINESS PHONE: 3195892000 MAIL ADDRESS: STREET 1: 1398 CENTRAL AVE CITY: DUBUQUE STATE: IA ZIP: 52001 10-Q 1 10Q FOR 9-30-98 Submitted pursuant to Rule 901(d) of Regulation S-T SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended September 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For transition period __________ to __________ Commission File Number: 0-24724 HEARTLAND FINANCIAL USA, INC. (Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 42-1405748 (I.R.S. employer identification number) 1398 Central Avenue, Dubuque, Iowa 52001 (Address of principal executive offices Zip Code) (319) 589-2100 (Registrant's telephone number, including area code) 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 Indicate the number of shares outstanding of each of the classes of Registrant's common stock as of the latest practicable date: As of November 12, 1998 the Registrant had outstanding 9,517,580 shares of common stock, $1.00 par value per share. HEARTLAND FINANCIAL USA, INC. Form 10-Q Quarterly Report Table of Contents Part I Item 1. Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K Form 10-Q Signature Page HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) 9/30/98 12/31/97 (Unaudited) ------- -------- ASSETS Cash and due from banks $ 29,552 $ 24,267 Federal funds sold 46,649 32,918 --------- --------- Cash and cash equivalents 76,201 57,185 Time deposits in other financial institutions 1,656 194 Securities: Available for sale-at market (cost of $221,317 for 1998 and $193,805 for 1997) 224,528 197,869 Held to maturity-at cost (approximate market value of $3,372 for 1998 and $3,999 for 1997) 3,224 3,879 Loans and leases: Held for sale 8,921 10,437 Held to maturity 549,989 545,969 Allowance for possible loan and lease losses (8,281) (7,362) --------- --------- Loans and leases, net 550,629 549,044 Premises, furniture and equipment, net 19,557 17,204 Other real estate, net 1,070 774 Assets under operating leases 32,448 3,750 Other assets 24,469 22,161 --------- --------- TOTAL ASSETS $933,782 $852,060 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: Demand $ 58,133 $ 60,950 Savings 291,319 252,292 Time 347,378 310,290 --------- --------- Total deposits 696,830 623,532 Short-term borrowings 72,819 96,239 Accrued expenses and other liabilities 16,496 11,494 Other borrowings 65,131 43,023 --------- --------- TOTAL LIABILITIES 851,276 774,288 --------- --------- STOCKHOLDERS' EQUITY: Preferred stock (par value $1 per share; authorized, 200,000 shares) - - Common stock (par value $1 per share; authorized, 12,000,000 shares; issued, 9,707,252 shares at September 30, 1998, and 4,853,626 at December 31, 1997 9,707 4,854 Capital surplus 10,115 13,706 Retained earnings 63,374 58,914 Accumulated other comprehensive income- net unrealized gain on securities available for sale 2,017 2,545 Treasury stock at cost (177,202 and 106,251 shares at September 30, 1998, and December 31, 1997, respectively)(1) (2,707) (2,247) --------- --------- TOTAL STOCKHOLDERS' EQUITY 82,506 77,772 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $933,782 $852,060 ========= ========= See accompanying notes to consolidated financial statements. HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands, except per share data) Three Months Ended Nine Months Ended 9/30/98 9/30/97 9/30/98 9/30/97 ------- ------- ------- ------- INTEREST INCOME: Interest and fees on loans and leases $ 12,503 $ 12,235 $ 37,112 $ 34,661 Interest on securities: Taxable 3,009 2,561 8,551 7,701 Nontaxable 286 289 862 875 Interest on federal funds sold 381 229 1,110 378 Interest on interest bearing deposits in other financial institutions 108 12 251 69 -------- -------- -------- -------- TOTAL INTEREST INCOME 16,287 15,326 47,886 43,684 -------- -------- -------- -------- INTEREST EXPENSE: Interest on deposits 7,425 6,649 21,000 19,063 Interest on short-term borrowings 990 1,023 3,117 2,557 Interest on other borrowings 1,039 488 2,582 1,690 -------- -------- -------- -------- TOTAL INTEREST EXPENSE 9,454 8,160 26,699 23,310 -------- -------- -------- -------- NET INTEREST INCOME 6,833 7,166 21,187 20,374 Provision for possible loan and lease losses 304 298 889 993 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR POSSIBLE LOAN AND LEASE LOSSES 6,529 6,868 20,298 19,381 -------- -------- -------- -------- OTHER INCOME: Service charges and fees 788 702 2,199 2,023 Trust fees 676 472 1,716 1,451 Brokerage commissions 86 91 272 226 Insurance commissions 179 109 581 395 Securities gains, net 535 411 1,620 818 Rental income on operating leases 2,901 215 3,866 509 Gains on sale of loans 272 124 847 207 Other noninterest income 78 86 263 202 -------- -------- -------- -------- TOTAL OTHER INCOME 5,515 2,210 11,364 5,831 -------- -------- -------- -------- OTHER EXPENSES: Salaries and employee benefits 4,050 3,504 11,324 9,748 Occupancy 409 333 1,208 1,067 Furniture and equipment 525 438 1,343 1,040 Outside services 392 329 1,026 1,070 FDIC deposit insurance assessment 28 35 89 87 Advertising 316 185 813 624 Depreciation on equipment under operating leases 2,069 155 2,763 367 Other noninterest expense 1,309 1,060 3,619 3,069 -------- -------- -------- -------- TOTAL OTHER EXPENSES 9,098 6,039 22,185 17,072 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 2,946 3,039 9,477 8,140 Income taxes 892 780 2,851 2,308 -------- -------- -------- -------- NET INCOME $ 2,054 $ 2,259 $ 6,626 $ 5,832 ======== ======== ======== ======== EARNINGS PER COMMON SHARE-BASIC (1) $ .22 .24 $ .70 $ .62 EARNINGS PER COMMON SHARE-DILUTED (1) $ .22 $ .24 $ .70 $ .61 CASH DIVIDENDS DECLARED PER COMMON SHARE (1) $ .08 $ .065 $ .23 $ .195 (1) Restated to reflect the two-for-one stock split effected in the form of a stock dividend payable on July 27, 1998, to stockholders of record on June 30, 1998. See accompanying notes to consolidated financial statements. HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (Dollars in thousands) Three Months Ended Nine Months Ended 9/30/98 9/30/97 9/30/98 9/30/97 ------- ------- ------- ------- NET INCOME $2,054 $2,259 $6,626 $5,832 Other comprehensive income, net of tax: Unrealized gains (losses) on securities available for sale: Unrealized holding gains (losses) arising during the period 679 1,119 541 1,701 Less: reclassification adjustment for gains included in net income (353) (271) (1,069) (540) ------- ------- ------- ------- Other comprehensive income 326 848 (528) 1,161 ------- ------- ------- ------- COMPREHENSIVE INCOME $2,380 $3,107 $6,098 $6,993 ======= ======= ======= ======= See accompanying notes to consolidated financial statements. HEARTLAND FINANCIAL USA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands) Nine Months Ended 9/30/98 9/30/97 ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES $ 13,412 $ 10,436 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of time deposits (1,462) (33) Proceeds on maturities of time deposits - 202 Proceeds from the sale of securities available for sale 23,697 18,135 Proceeds from the sale of mortgage- backed securities available for sale 2,276 4,032 Proceeds from the maturity of and principal paydowns on securities held to maturity 637 1,845 Proceeds from the maturity of and principal paydowns on securities available for sale 31,787 8,585 Proceeds from the maturity of and principal paydowns on mortgage- backed securities held to maturity 343 - Proceeds from the maturity of and principal paydowns on mortgage- backed securities available for sale 38,472 9,381 Purchase of securities available for sale (63,768) (15,857) Purchase of mortgage-backed securities available for sale (56,739) (16,411) Net increase in loans and leases (6,218) (50,845) Net increase in assets under operating leases (7,454) (1,982) Capital expenditures (3,524) (2,202) Net cash and cash equivalents received in acquisition of subsidiaries 2,730 670 Proceeds on sale of other real estate owned 497 - Proceeds on sale of fixed assets 8 1 Proceeds on sale of repossessed assets 85 7 --------- --------- NET CASH USED BY INVESTING ACTIVITIES (38,633) (44,472) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits and savings accounts 36,210 (6) Net increase in time deposit accounts 37,088 11,747 Net increase in other borrowings 19,758 7,791 Net increase (decrease) in short-term borrowings (43,080) 8,347 Purchase of treasury stock (4,163) (668) Proceeds from sale of treasury stock 593 998 Dividends (2,169) (1,848) --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 44,237 26,361 --------- --------- Net increase (decrease) in cash and cash equivalents 19,016 (7,675) Cash and cash equivalents at beginning of year 57,185 40,080 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 76,201 $ 32,405 ========= ========= Supplemental disclosures: Cash paid for income/franchise taxes $ 2,619 $ 2,554 ========= ========= Cash paid for interest $ 26,178 $ 22,782 ========= ========= Other borrowings transferred to short-term borrowings $ 12,323 $ 24,500 ========= ========= See accompanying notes to consolidated financial statements. HEARTLAND FINANCIAL USA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) NOTE 1: BASIS OF PRESENTATION The interim unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the financial statements for the fiscal year ended December 31, 1997, included in the Company's Form 10-K filed with the Securities and Exchange Commission on March 31, 1998. The December 31, 1997, balance sheet has been derived from the audited financial statements as of that date. Accordingly, footnote disclosure which would substantially duplicate the disclosure contained in the audited consolidated financial statements has been omitted. The financial information of Heartland Financial USA, Inc. (the "Company") included herein is prepared pursuant to the rules and regulations for reporting on Form 10-Q. Such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of results for the interim periods. The results of the interim periods ended September 30, 1998, are not necessarily indicative of the results expected for the year ending December 31, 1998. On June 16, 1998, the Company's Board of Directors declared a two- for-one stock split in the form of a 100% stock dividend to stockholders of record on June 30, 1998, payable on July 27, 1998. Accordingly, all per share data have been restated to reflect the stock split. Basic earnings per share is determined using net income and weighted average common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common shares and assumed incremental common shares issued. Amounts used in the determination of basic and diluted earnings per share for the three and nine month periods ended September 30, 1998 and 1997, are shown in the tables below: Three Months Ended 9/30/98 9/30/97 --------- --------- Net Income $ 2,054 $ 2,259 ========= ========= Weighted average common shares outstanding 9,334,328 9,479,566 Assumed incremental common shares issued upon exercise of stock options 157,400 149,432 --------- --------- Weighted average common shares for diluted earnings per share 9,491,728 9,628,998 ========= ========= Nine Months Ended 9/30/98 9/30/97 --------- --------- Net Income $ 6,626 $ 5,832 ========= ========= Weighted average common shares outstanding 9,443,365 9,473,804 Assumed incremental common shares issued upon exercise of stock options 144,388 140,131 --------- --------- Weighted average common shares for diluted earnings per share 9,587,753 9,613,935 ========= ========= NOTE 2: ACQUISITIONS On July 17, 1998, the Company acquired all of the assets and assumed certain liabilities of Arrow Motors Inc., a Wisconsin corporation doing business as Lease Associates Group ("LAG") in Milwaukee. With $28,000 in total assets, LAG was merged into ULTEA, the Company's wholly-owned fleet leasing subsidiary. The stockholders of LAG, at the acquisition date, received 287,644 shares of Heartland common stock and the remaining balance of $1,929 in a promissory note payable over three years bearing a rate of 7.50%. The excess of the purchase price over the fair value of net assets acquired was $632. The transaction was accounted for as a purchase transaction and, accordingly, the results of operations are included in the Consolidated Financial Statements from the acquisition date. The pro forma effect of the acquisition was not material to the financial statements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company and its subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's filings with the Securities and Exchange Commission. GENERAL The Company's results of operations depend primarily on net interest income, which is the difference between interest income from interest earning assets and interest expense on interest bearing liabilities. Noninterest income, which includes service charges, fees and gains on loans and trust income, also affects the Company's results of operations. The Company's principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy and equipment costs and provision for loan and lease losses. Net income of $2,054,000 for the third quarter of 1998 was down $205,000 (9.07%) from the $2,259,000 recorded during the third quarter of 1997. On a basic per common share basis, the third quarter earnings decreased from $.24 in 1997 to $.22 in 1998. Heartland's return on common equity for the third quarter of 1998 was 10.08% as compared to 12.08% for the same quarter in 1997. Return on assets decreased to .90% from 1.13% for the same periods. Total earnings for the first nine months of 1998 increased $794,000 (13.61%) to $6,626,000 from the $5,832,000 recorded during the same period in 1997. Basic per common share earnings for the first nine months of 1998 were $.70, an increase of 13.95% from the same period in 1997. Heartland's return on common equity was 11.21% for the first nine months of 1998 as compared to 10.75% for the same period in 1997. Return on assets remained stable at 1.02% for the nine month period in 1998 compared to 1.01% for the same period in 1997. A reduction in the net interest margin during the third quarter of 1998 compared to the same period in 1997 was the major contributor to the decline in net income for the quarters under comparison. The Company incurred additional interest expense in 1998 as a result of the third-quarter acquisition of Lease Associates Group. On a year-to-date basis, net interest margin expanded due primarily to growth in the Company's asset base. Total assets grew $124,280,000 (15.35%) from $809,502,000 at September 30, 1997, to $933,782,000 at September 30, 1998, particularly as a result of the Lease Associates Group acquisition and expansion efforts in Rockford, Illinois; Madison, Wisconsin; and Albuquerque, New Mexico. Noninterest income increased significantly during the third quarter and first nine months of 1998 compared to the same periods in 1997 due primarily to additional rental income on operating leases. Gains on sale of loans and securities gains were the other major contributors in the noninterest income area. Strong growth in noninterest income was partially offset by increases in noninterest expense for the third quarter and nine- month periods under comparison. Most of these increases resulted from depreciation on equipment under operating leases and the establishment of a de novo operation in Albuquerque, New Mexico in May of 1998. NET INTEREST INCOME The net interest margin expressed as a percentage of total assets decreased to 3.43% for the third quarter of 1998 compared to 3.95% for the same period in 1997 and 3.74% for the second quarter of 1998. For the third quarter of 1998, net interest income decreased $333,000 (4.65%) when compared to the same period in 1997. This decline was primarily the result of the acquisition of Lease Associates Group, which subsequently merged with ULTEA, Inc., the Company's fleet management company. As a result of the merger, the Company incurred additional interest expense on the assumed debt of Lease Associates Group utilized to fund vehicles under operating lease. Additionally, the net interest margin was adversely affected by the rate compression resulting from the flat yield curve and the ensuing acceleration of paydowns in the loan portfolio. Net interest income increased $813,000 (3.99%) for the first nine months of 1998 compared to the same period in 1997. The 15.35% growth in total assets contributed to this change. NONINTEREST INCOME Noninterest income increased $3,305,000 (149.55%) for the third quarter of 1998 compared to the same period in 1997. On a year- to-date basis, noninterest income grew $5,533,000 (94.89%). Rental income on operating leases accounted for 81.27% or $2,686,000 of the increase for the quarter and 60.67% or $3,357,000 of the increase for the year-to-date period. This growth was directly attributable to the acquisition of Lease Associates Group. Securities gains increased by $124,000 (30.17%) during the three month period and $802,000 (98.04%) during the nine month period ended September 30, 1998, compared to the same periods in 1997. The strong performance of the Company's equity portfolio was responsible for these gains. Gains on sale of loans increased $148,000 (119.35%) and $640,000 (309.18%) during the third quarter and first nine months of 1998, respectively, as compared to the same periods in 1997. The Company continued to experience refinancing activity in its real estate mortgage loan portfolio as a result of decreasing interest rates. The majority of these new fixed rate fifteen- and thirty- year real estate loans were sold into the secondary market, while the servicing of these loans was retained by the Company. Trust fees grew $204,000 (43.22%) for the quarter ended September 30, 1998, compared to the same period in 1997. For the nine month period ended September 30, 1998, trust fees increased $265,000 (18.26%). These increases were attributable to growth in assets under management, which increased from $366,158,000 at December 31, 1996, to $434,003,000 at December 31, 1997, and $469,559,000 at September 30, 1998. Strong equity and debt markets, combined with the development of new trust relationships, was responsible for this growth. Insurance commissions increased $186,000 (47.09%) during the first nine months of 1998 over the same period in 1997 primarily due to additional sales of annuity products as a result of enhancements in this product line. NONINTEREST EXPENSE Noninterest expense increased $3,059,000 (50.65%) for the third quarter of 1998 and $5,113,000 (29.95%) for the first nine months of 1998 compared to the same periods in 1997. The largest component of this increase was also related to the operations of Lease Associates Group, as depreciation on equipment under operating leases increased $1,914,000 and $2,396,000 for the three and nine month periods ended September 30, 1998, respectively, as compared to the prior year. Salaries and employee benefits, the largest component of noninterest expense, increased $546,000 (15.58%) for the third quarter of 1998 when compared to the same period in 1997. For the first nine months of 1998, salaries and employee benefits expense increased $1,576,000 (16.17%). Personnel additions related to the opening in May of the Company's most recent de novo community bank, New Mexico Bank and Trust located in Albuquerque, New Mexico, was a major contributor to this increase. The acquisition of Wisconsin Community Bank on March 1, 1997, and its subsequent opening of a branch facility in Middleton, Wisconsin in February of this year, was also partially responsible for the increase. For the nine month period ended September 30, 1998, furniture and equipment expenses increased $303,000 (29.13%) compared to the same period in 1997. The establishment of the de novo operation in Albuquerque, New Mexico was primarily responsible for this growth. Other noninterest expenses grew $249,000 (23.49%) during the third quarter of 1998 compared to the same period in 1997. On a year-to-date comparable basis, other noninterest expenses increased $550,000 (17.92%). Amortization and maintenance expense on software have contributed to this increase primarily due to the conversion of the bank subsidiaries to Fiserv's Comprehensive Banking Systems during the spring of 1997. INCOME TAX EXPENSE Income tax expense for the third quarter of 1998 increased $112,000 (14.36%) over the same period in 1997. For the first nine months of 1998, income tax expense increased $543,000 (23.53%) when compared to the same period in 1997. These increases were primarily the result of corresponding growth in pre-tax earnings. The Company's effective tax rate increased to 30.08% for the first nine months of 1998 compared to 28.35% for the same period in 1997. A reduction in tax-exempt income during 1998 contributed to the higher effective tax rate. FINANCIAL CONDITION LOANS AND PROVISION FOR LOAN AND LEASE LOSSES Net loans and leases remained stable during the first nine months of 1998, increasing $2,504,000 (.45%). Agricultural loan outstandings experienced the most significant growth, increasing $10,787,000 (15.57%) from December 31, 1997, to September 30, 1998 due to aggressive calling efforts. Growth in consumer loan outstandings was $7,363,000 (11.46%) during the same time period, primarily in consumer lines of credit and dealer paper. The only category to experience a decrease during the first nine months of 1998 was residential mortgage loan outstandings, which declined $18,966,000 (10.82%) as customers elected to take fixed rate fifteen- and thirty-year mortgages which the bank subsidiaries sold into the secondary market. The adequacy of the allowance for loan and lease losses is determined by management using factors that include the overall composition of the loan portfolio, types of loans, past loss experience, loan delinquencies, and potential substandard and doubtful credits. The adequacy of the allowance for loan and lease losses is monitored on an ongoing basis by the loan review staff, senior management and the Board of Directors. Factors considered by the Heartland Loan Review Committee included the following: i) a continued increase in higher-risk consumer and more-complex commercial and agricultural loans from relatively lower-risk real estate loans; and ii) the economies of the Company's primary market areas have been stable for some time and the growth of the allowance is intended to anticipate the cyclical nature of most economies. There can be no assurances that the allowance for loan and lease losses will be adequate to cover all losses, but management believes that the allowance for loan and lease losses was adequate at September 30, 1998. The allowance for loan and lease losses was increased $919,000 (12.48%) during the first nine months of 1998, of which $313,000 resulted from a recovery on a previously charged off loan at First Community Bank. As a percentage of total loans and leases, the allowance for loan and lease losses was 1.48% on September 30, 1998, and 1.32% on both December 31, 1997, and September 30, 1997. The Company's provision for possible loan and lease losses increased $6,000 (2.01%) for the three month period and decreased $104,000 (10.47%) for the nine month period ended September 30, 1998, compared to the same periods in 1997. During the first nine months of 1998, the Company recorded net recoveries of $30,000 compared to net charge offs of $211,000 recorded during the first nine months of 1997. Nonperforming loans, defined as nonaccrual loans, restructured loans and loans past due ninety days or more, decreased from $2,032,000 at December 31, 1997, to $1,525,000 at September 30, 1998, a $507,000 (24.95%) reduction. As a percentage of total loans and leases, nonperforming loans were .27% at September 30, 1998, .31% at June 30, 1998 and .37% on December 31, 1997. SECURITIES The dual objectives of the securities portfolio are to provide the Company with sources of both liquidity and earnings. Securities represented 24.39% of total assets at September 30, 1998, as compared to 23.68% at December 31, 1997. During the first nine months of 1998, the portion of the securities portfolio held in U.S. treasuries was decreased to .84% from 6.69%. To maximize the return on the portfolio, management decided to increase its investment in U.S. government agencies and fixed-rate collateralized mortgage obligations ("CMO's"). DEPOSITS AND BORROWED FUNDS Total deposits grew $73,298,000 (11.76%) during the first nine months of 1998. Demand deposits experienced a decrease of $2,817,000 (4.62%). Savings deposits increased $39,027,000 (15.47%) and certificates of deposit increased $37,088,000 (11.95%). These increases were primarily attributable to strong growth at the Company's lead bank, Dubuque Bank and Trust, and the de novo community banks of Riverside Community Bank and New Mexico Bank and Trust. Short-term borrowings generally include federal funds purchased, treasury tax and loan note options, securities sold under agreement to repurchase and short-term Federal Home Loan Bank ("FHLB") advances. These funding alternatives are utilized in varying degrees depending on their pricing and availability. Over the nine month period ended September 30, 1998, the amount of short-term borrowings decreased $23,420,000 (24.34%). This change was primarily the result of the maturity of $26,500,000 in FHLB advances, which was partially offset by the transfer of $11,500,000 in FHLB borrowings from other borrowings due to approaching maturities. As a result of the Lease Associates Group acquisition, the Company assumed additional debt of $22,000,000 of which $7,000,000 was short-term. A reduction in the amount of repurchase agreements requested by the corporate cash management customers at Dubuque Bank and Trust also contributed to the change in short-term borrowings. Other borrowings increased $22,108,000 (51.39%) during the first nine months of 1998. Borrowings under Heartland's unsecured revolving credit line were increased from $3,500,000 at December 31, 1997, to $20,000,000 at September 30, 1998. These borrowings were used to provide working capital to the nonbanking subsidiaries and to meet general corporate commitments, including the $12,000,000 capital investment in New Mexico Bank and Trust. The remaining $15,000,000 of the Lease Associates Group debt was also responsible for the change in other borrowings. Partially offsetting this increase was the $8,000,000 decrease in long-term FHLB borrowings during the first nine months of 1998 as a result of the transfer of $11,500,000 to short-term borrowings and additional advances of $3,500,000. The Company's long-term FHLB advances totaled $28,900,000 on September 30, 1998, at a weighted average remaining term of 4.31 years and a weighted average rate of 6.10%. CAPITAL RESOURCES Bank regulatory agencies have adopted capital standards by which all bank holding companies will be evaluated. Under the risk- based method of measurement, the resulting ratio is dependent upon not only the level of capital and assets, but the composition of assets and capital and the amount of off-balance sheet commitments. The Company's capital ratios were as follows for the dates indicated: CAPITAL RATIOS (Dollars in thousands) 9/30/98 12/31/97 Amount Ratio Amount Ratio ------ ----- ------ ----- Risk-Based Capital Ratios:(1) Tier 1 capital $ 79,418 11.62% $ 71,713 11.54% Tier 1 capital minimum requirement 27,349 4.00% 24,854 4.00% -------- ------ -------- ------ Excess $ 52,069 7.62% $ 46,859 7.54% ======== ====== ======== ====== Total capital $ 87,698 12.83% $ 78,995 12.71% Total capital minimum requirement 54,698 8.00% 49,707 8.00% -------- ------ -------- ------ Excess $ 33,000 4.83% $ 29,288 4.71% ======== ====== ======== ====== Total risk adjusted assets $683,720 $621,338 ======== ======== Leverage Capital Ratios:(2) Tier 1 capital $ 79,418 8.75% $ 71,713 8.76% Tier 1 capital minimum requirement(3) 36,320 4.00% 32,729 4.00% -------- ------ -------- ------ Excess $ 43,098 4.75% $ 38,984 4.76% ======== ====== ======== ====== Average adjusted assets (less goodwill) $908,008 $818,232 ======== ======== (1)Based on the risk-based capital guidelines of the Federal Reserve, a bank holding company is required to maintain a Tier 1 capital to risk-adjusted assets ratio of 4.00% and total capital to risk-adjusted assets ratio of 8.00% (2)The leverage ratio is defined as the ratio of Tier 1 capital to average adjusted assets. (3)Management of the Company has established a minimum target leverage ratio of 4.00%. Based on Federal Reserve guidelines, a bank holding company generally is required to maintain a leverage ratio of 3.00% plus additional capital of at least 100 basis points. Commitments for capital expenditures are an important factor in evaluating capital adequacy. As a result of the acquisition of Wisconsin Community Bank, the Company has cash payments remaining under the purchase agreement of $823,000 in 1999, $594,000 in 2000 and $584,000 in 2001, plus interest at rates of 7.00% to 7.50%. On July 17, 1998, the Company completed the acquisition and merger into ULTEA of Arrow Motors Inc., a Wisconsin corporation doing business as Lease Associates Group. In conjunction with this merger, the Company agreed to three equal cash payments of $643,000 in 1999, 2000 and 2001, plus interest at 7.50%. The Company continues to explore opportunities to expand its umbrella of independent community banks through mergers and acquisitions as well as de novo and branching opportunities. Future expenditures relating to these efforts are not estimable at this time. LIQUIDITY Liquidity measures the ability of the Company to meet maturing obligations and its existing commitments, to withstand fluctuations in deposit levels, to fund its operations and to provide for customers' credit needs. The liquidity of the Company principally depends on cash flows from operating activities, investment in and maturity of assets, changes in balances of deposits and borrowings and its ability to borrow funds in the money or capital markets. Net cash outflows from investing activities decreased $5,839,000 during the first nine months of 1998 compared to the same period in 1997. Net principal disbursed on loans decreased $44,627,000 for the periods under comparison while net purchases of securities increased $33,005,000 and net expenditures for assets under operating leases increased $5,472,000. Net cash inflows from financing activities increased $17,876,000 for the nine month period ended September 30, 1998, compared to the same period in 1997. Cash provided by a net change in deposits increased $61,557,000 while cash used by a net change in borrowings increased $39,460,000 during the periods under comparison. Total cash inflows from operating activities increased $2,976,000 for the first nine months of 1998 compared to the same period of 1997. Management of investing and financing activities, and market conditions, determine the level and the stability of net interest cash flows. Management attempts to mitigate the impact of changes in market interest rates to the extent possible, so that balance sheet growth is the principal determinant of growth in net interest cash flows. In the event of short term liquidity needs, the bank subsidiaries may purchase federal funds from each other or from correspondent banks. The bank subsidiaries may also borrow funds from the Federal Reserve Bank, but have not done so during the periods covered in this report. Also, the subsidiary banks' FHLB memberships give them the ability to borrow funds for short- and long-term purposes under a variety of programs. The Company's revolving credit agreement provides for total borrowings of up to $20,000,000 at any one time. The agreement contains specific covenants which, among other things, limit dividend payments and restrict the sale of assets by the Company under certain circumstances. Also contained within the agreement are certain financial covenants, including the maintenance by the Company of a maximum nonperforming assets to total loans ratio, minimum return on average assets ratio, maximum funded debt to total equity capital ratio, and requires that each of the bank subsidiaries remain well capitalized, as defined from time to time by the federal banking regulators. YEAR 2000 The federal banking regulators have issued guidelines establishing minimum safety and soundness standards for achieving Year 2000 compliance. The guidelines, which took effect October 15, 1998, and apply to all FDIC-insured depository institutions, establish standards for developing and managing Year 2000 project plans, testing remediation efforts and planning for contingencies. The guidelines are based upon guidance previously issued by the agencies under the auspices of the Federal Financial Institutions Examination Council ("FFIEC"), but are not intended to replace or supplant the FFIEC guidance which will continue to apply to all federally-insured depository institutions. The guidelines were issued under section 39 of the Federal Deposit Insurance Act, as amended ("FDIA"), which requires the federal banking regulators to establish standards for the safe and sound operation of federally-insured depository institutions. Under section 39 of the FDIA, if an institution fails to meet any of the standards established in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving compliance. If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Such an order is enforceable in court in the same manner as a cease and desist order. Until the deficiency cited in the regulator's order is cured, the regulator may restrict the institution's rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. In addition to the enforcement procedures established in section 39 of the FDIA, noncompliance with the standards established by the guidelines may also be grounds for other enforcement action by the federal baking regulators, including cease and desist orders and civil money penalty assessments. The Company began to identify issues related to the Year 2000 in 1996. A Year 2000 project team, comprised of individuals from key areas throughout the Company, was formed. The mission of the Year 2000 project team was, and is, to identify issues related to the Year 2000, to initiate remedial measures necessary to eliminate any adverse effects on the Company's operations, and to continue to monitor Year 2000 related concerns. Following the guidelines established by the FFIEC, a Year 2000 Plan was developed for the Company and its subsidiaries. The project team developed a comprehensive, prioritized inventory of all hardware, software, and material third-party providers that may be adversely affected by the Year 2000 date change, and has contacted these vendors requesting their status as it relates to the Year 2000. This inventory includes both information technology ("IT") and non-IT systems, such as heating and cooling systems, alarms, building access systems and elevators, which typically contain embedded technology such as microcontrollers. This inventory is periodically reevaluated to ensure that previously assigned priorities remain accurate and to monitor the progress each vendor is making in resolving its Year 2000 problems. The Company relies on software purchased from third- party vendors rather than internally-generated software. The Company has received Year 2000 compliant versions of all mission- critical software and is currently testing these systems. To date, testing is 80% complete. Testing is being done on a test computer rented specifically for this purpose, which is connected to the Company's existing equipment in a like manner as the production computer. The Company expects to have all mission- critical systems tested prior to December 31, 1998. The Year 2000 project team has also developed a communication plan that updates the Board of Directors, management, and employees on the Company's Year 2000 status, and has begun to develop a customer awareness program. In addition, the Company has developed a separate plan to manage the Year 2000 risks posed by commercial borrowing customers. This plan has identified material loan customers, assessed their preparedness, evaluated their credit risk to the Company, and implemented appropriate controls to mitigate the risk. Surveys of customer preparedness have been used to identify the customer risk and will be used on all new credits going forward. In accordance with regulatory guidelines, the project team is preparing a comprehensive contingency plan in the event that Year 2000 related failures are experienced. The plan will list the various strategies and resources available to restore core business processes. Because of discussions that have taken place regarding contingencies, the Company has determined that a backup generator is required for Year 2000 concerns, as well as, basic business recovery issues. Currently, the Company is determining the size and configuration necessary for the purchase of a generator in 1999. In the case of utility providers, the Company has not identified any practical, long-term alternatives to relying on these companies for basic utility service. The generator will provide an alternative for the mission-critical systems for a limited time period. Management anticipates that the total out-of-pocket expenditures required for bringing the systems into compliance for the Year 2000 will be approximately $360,000. Management believes that these required expenditures will not have a material adverse impact on operations, cash flow, or financial condition. This amount, including costs for upgrading equipment specifically for the purpose of Year 2000 compliance, staff expense for testing and contingency development, and certain administrative expenditures, have been provided for in the Company's Year 2000 budget. Although management feels confident that the Company has identified all necessary upgrades, and budgeted accordingly, no assurance can be made that Year 2000 compliance can be achieved without additional unanticipated expenditures. It is not possible at this time to quantify the estimated future costs due to possible business disruption caused by vendors, suppliers, customers or even the possible loss of electric power or phone service; however, such costs could be substantial. As a result of the Year 2000 project, the Company has not had any material delay regarding its information systems projects. PART II ITEM 1. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K Exhibits 27.1 Financial Data Schedule Reports on Form 8-K None 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 there unto duly authorized. HEARTLAND FINANCIAL USA, INC. (Registrant) By: /s/ Lynn B. Fuller ----------------------- Lynn B. Fuller President By: /s/ John K. Schmidt ----------------------- John K. Schmidt Executive Vice President Chief Financial Officer Dated: November 13, 1998 EX-27 2 SEPTEMBER 1998 FDS
9 0000920112 HEARTLAND FINANCIAL USA, INC. 1,000 3-MOS 9-MOS DEC-31-1998 DEC-31-1998 SEP-30-1998 SEP-30-1998 24,234 24,234 6,974 6,974 46,649 46,649 000 000 224,528 224,528 3,224 3,224 3,372 3,372 558,910 558,910 (8,281) (8,281) 933,782 933,782 696,830 696,830 72,819 72,819 16,496 16,496 65,131 65,131 000 000 000 000 9,707 9,707 72,799 72,799 933,782 933,782 12,503 37,112 3,295 9,413 489 1,361 16,287 47,886 7,425 21,000 9,454 26,699 6,833 21,187 304 889 535 1,620 9,098 22,185 2,946 9,477 2,054 6,626 000 000 000 000 2,054 6,626 .22 .70 .22 .70 3.43 3.66 1,251 1,251 256 256 18 18 000 000 8,100 7,362 (180) (390) 57 420 8,281 8,281 4,326 4,326 000 000 3,955 3,955
EX-27 3 RESTATED FDS FOR SEPTEMBER 1997
9 0000920112 HEARTLAND FINANCIAL USA, INC. 1,000 3-MOS 9-MOS DEC-31-1997 DEC-31-1997 SEP-30-1997 SEP-30-1997 19,338 19,338 5,215 5,215 8,046 8,046 000 000 183,080 183,080 5,875 5,875 5,990 5,990 553,535 553,535 (7,304) (7,304) 809,502 809,502 602,954 602,954 92,103 92,103 10,912 10,912 27,928 27,928 000 000 000 000 4,854 4,854 70,751 70,751 809,502 809,502 12,235 34,661 2,850 8,576 241 447 15,326 43,684 6,649 19,063 8,160 23,310 7,166 20,374 298 993 411 818 6,039 17,072 3,039 8,140 2,259 5,832 000 000 000 000 2,259 5,832 .24 .70 .24 .70 3.95 3.93 1,525 1,525 709 709 000 000 000 000 7,151 6,191 (161) (335) 16 124 7,304 7,304 4,111 4,111 000 000 3,193 3,193 RESTATED TO CORRECT ERROR RESTATED TO REFLECT IMPLEMENTATION OF FAS 128, EARNINGS PER SHARE AND TWO-FOR-ONE STOCK SPLIT
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