-----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, TtMCtf/IFgo/HZ+njuxoaHE8+TWv6gw+4PEAAwbNgobxFhCcC0/UzC2FcQ+hdSae Rf8MDLxhYxWCCxaDB6vXnA== 0000920112-99-000006.txt : 19990402 0000920112-99-000006.hdr.sgml : 19990402 ACCESSION NUMBER: 0000920112-99-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K SEC ACT: SEC FILE NUMBER: 000-24724 FILM NUMBER: 99579445 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-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 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) Securities registered pursuant to Section 12(g) of the Act: None (Title of Exchange Class) None (Name of Each Exchange on which Registered) Common Stock $1.00 par value (Title of Class) 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) The index to exhibits follows the signature page. As of March 22, 1999, the Registrant had issued and outstanding 9,518,805 shares of the Registrant's Common Stock. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 22, 1999, was $108,576,625.* Such figures include 733,908 shares of the Registrant's Common Stock held in a fiduciary capacity by the Trust Department of the Dubuque Bank & Trust Company, a wholly-owned subsidiary of the Registrant. *Based on the last reported price of an actual transaction in Registrant's Common Stock on March 22, 1999, and reports of beneficial ownership filed by directors and executive officers of Registrant and by beneficial owners of more than 5% of the outstanding shares of Common Stock of Registrant; however, such determination of shares owned by affiliates does not constitute an admission of affiliate status or beneficial interest in shares of Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders are incorporated by reference into Part III. HEARTLAND FINANCIAL USA, INC. Form 10-K Annual Report Table of Contents Part I Item 1. Business A. General Description B. Recent Developments C. Market Areas D. Competition E. Employees F. Accounting Standards G. Supervision and Regulation H. Governmental Monetary Policy and Economic Conditions Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Part III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K PART I. ITEM 1. BUSINESS A. GENERAL DESCRIPTION Heartland Financial USA, Inc. ("Heartland"), reincorporated in the state of Delaware in 1993, is a multi-bank holding company registered under the Bank Holding Company Act of 1956, as amended ("BHCA"). Heartland has five bank subsidiaries which are located in Dubuque, Iowa, Cottage Grove, Wisconsin, Galena and Rockford, Illinois and Albuquerque, New Mexico and one federal savings bank subsidiary which is located in Keokuk, Iowa (collectively, the "Bank Subsidiaries"). All six Bank Subsidiaries are members of the Federal Deposit Insurance Corporation ("FDIC"). Dubuque Bank and Trust Company ("DB&T") is chartered under the laws of the State of Iowa and has two wholly-owned subsidiaries: DB&T Insurance, Inc. ("DB&T Insurance"), a multi-line insurance agency and DB&T Community Development Corp. ("DB&T Development"), majority owner of a senior housing project. Galena State Bank and Trust Company, Galena, Illinois, ("GSB") and Riverside Community Bank, Rockford,Illinois, ("RCB") are chartered under the laws of the State of Illinois. First Community Bank, FSB ("FCB")is a federal savings association organized under the laws of the United States. FCB has one subsidiary, KFS Services, Inc. Wisconsin Community Bank, previously Cottage Grove State Bank, ("WCB") is chartered under the laws of the State of Wisconsin and has one subsidiary, DBT Investment Corporation ("DBT Investment"), an investment management company. New Mexico Bank & Trust ("NMB") is chartered under the laws of the state of New Mexico. The Bank Subsidiaries operate 19 banking locations in Iowa, Illinois, Wisconsin and New Mexico. Heartland has three non- bank subsidiaries. Citizens Finance Co. ("Citizens") is a consumer finance company. ULTEA, Inc. ("ULTEA") is a fleet leasing company headquartered in Madison, Wisconsin. Keokuk Bancshares, Inc. ("Keokuk") is an investment management company. All subsidiaries are wholly-owned with the exception of NMB, of which Heartland is the 80% owner. The Bank Subsidiaries provide full service retail banking within Dubuque and Lee Counties in Iowa, within Jo Daviess, Hancock and Winnebago Counties in Illinois, within Dane County in Wisconsin and Bernalillo County in New Mexico. Deposit products include checking and other demand deposit accounts, NOW accounts, savings accounts, money market accounts, certificates of deposit, individual retirement accounts and other time deposits. The deposits in the Bank Subsidiaries are insured by the FDIC to the full extent permitted by law. Loans include commercial and industrial, agricultural, real estate mortgage, consumer, home equity, credit cards and lines of credit. Other products and services include VISA debit cards, automatic teller machines, safe deposit boxes and trust services. The principal service of the Bank Subsidiaries consists of making loans to businesses and individuals. These loans are made at the offices of the Bank Subsidiaries. The Bank Subsidiaries also engage in activities that are closely related to banking, including investment brokerage. Although each of the subsidiaries of Heartland operates under the direction of its own Board of Directors, Heartland has standard operating policies regarding asset/liability management, liquidity management, investment management, lending policies and deposit structure management. Heartland has historically centralized certain operations where economies of scale can be achieved. Operating Strategy Corporate policy, strategy and goals are established by the Board of Directors of Heartland (the "Heartland Board"). Pursuant to Heartland's philosophy, operational and administrative policies for the Bank Subsidiaries are also established by the Heartland Board. Within this framework, each of the Bank Subsidiaries focuses on providing personalized services and quality products to its customers to meet the needs of the communities which it serves. Heartland operates its banking subsidiaries as traditional community banks with conveniently located facilities and professional, highly motivated staffs which are active in the communities in which they are located. Heartland focuses on long- term relationships with customers and provides individualized quality service. In addition, within credit and rate of return parameters, Heartland attempts to ensure that each of the Bank Subsidiaries meets the credit needs of its communities and invests in local municipal obligations. Heartland uses a variety of marketing strategies to attract and retain customers, with a particular emphasis on a strong sales culture within the Bank Subsidiaries and an outside officer calling program. Many of Heartland's sales employees work on a salary plus commission basis, thus providing them with a strong incentive to aggressively market Heartland's financial products. Officers of each of the Bank Subsidiaries also regularly call on customers and potential customers of the institutions to maintain and develop deposit and other special service relationships, including cash management, employee benefit plan administration, and trust services. Heartland has an internal data processing division and has attempted to remain at the forefront of the banking industry in new technological innovations. Heartland believes that retaining control of its data processing leads to decreased operating costs and more effective service to its customers. Accordingly, during 1997, all Bank Subsidiaries converted to the Fiserv Comprehensive Banking System program, a national leader in bank software technology. To provide a high level of customer service and to manage effectively its growth, acquisition and operating strategies, Heartland also focuses on continued improvement of the internal operating systems of the Bank Subsidiaries. Acquisition and Expansion Strategy Heartland seeks to diversify both its market area and asset base while increasing profitability through acquisitions and expansion. Heartland's goal is to expand through the acquisition of established financial service organizations, primarily commercial banks or thrifts, to the extent suitable candidates can be identified and acceptable business terms negotiated. Heartland's acquisition strategy has focused primarily on traditional community banks and thrifts located in stable and growing areas of Iowa, Wisconsin, Minnesota and Illinois. Heartland intends to look beyond these geographic areas for acquisition opportunities as evidenced by the de novo bank in Albuquerque, New Mexico. In addition to price and terms, other factors considered by Heartland in determining the desirability of an acquisition candidate include financial condition, earnings potential, quality of management, market area and competitive environment. The Heartland Board may in the future consider establishing branches, loan production offices or other business facilities as a means of expanding its presence in current or new market areas. The Heartland Board may also investigate expansion into other lines of business closely related to banking if it believes these lines could be profitable without undue risk to Heartland and if Heartland can be competitive. Heartland does not currently have any definitive understandings or agreements for any acquisitions material to Heartland. However, Heartland will continue to look for further expansion opportunities. Lending Activities General The Bank Subsidiaries provide a range of commercial and retail lending services to corporations, partnerships and individuals. These credit activities include agricultural, commercial, residential real estate and installment loans, as well as loan participations and lines of credit. The Bank Subsidiaries aggressively market their services to qualified lending customers. Lending officers actively solicit the business of new companies entering their market areas as well as long-standing members of the Bank Subsidiaries' respective business communities. Through professional service and competitive pricing, the Bank Subsidiaries have been successful in attracting new lending customers. Heartland also actively pursues consumer lending opportunities. With convenient locations, advertising and customer communications, the Bank Subsidiaries have been successful in capitalizing on the credit needs of their market areas. Commercial Loans The Bank Subsidiaries have a strong commercial loan base and DB&T, in particular, continues to be a premier commercial lender in the tri-state area of northeast Iowa, northwest Illinois and southwest Wisconsin. The Bank Subsidiaries' areas of emphasis include, but are not limited to, loans to wholesalers, hotel and real estate developers, manufacturers, building contractors, business services companies and retailers. The Bank Subsidiaries provide a wide range of business loans, including lines of credit for working capital and operational purposes and term loans for the acquisition of equipment and real estate. Loans may be made on an unsecured basis where warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. The majority of the Bank Subsidiaries' commercial business loans have floating interest rates or reprice within one year. DB&T has also generated loans which are guaranteed by the U.S. Small Business Administration and has been certified as one of that agency's Preferred Lenders. Management believes that making these guaranteed loans helps its local communities as well as provides Heartland with a source of income and solid future lending relationships as such businesses grow and prosper. DB&T is also currently one of the state of Iowa's top lenders in the "Linked Investment for Tomorrow" program. This state-sponsored program offers interest rate reductions to businesses opened by minorities and those in rural areas. The primary repayment risk for commercial loans is the failure of the business due to economic or financial factors. In most cases, the Bank Subsidiaries have collateralized these loans and/or taken personal guarantees to help assure repayment. As the credit portfolios of the Bank Subsidiaries have continued to grow, several changes have been made in their lending departments resulting in an overall increase in these departments' skill levels. Loan review personnel and commercial lenders interact with their respective Boards of Directors each month. Heartland also utilizes an internal loan review function to analyze credits of the Bank Subsidiaries. Management has attempted to identify problem loans at an early date and to aggressively seek a resolution of these situations. The result has been a significantly below average level of problem loans compared to the Heartland Banks' industry peer groups in recent years. Agricultural Loans DB&T is one of the largest agricultural lenders in the state of Iowa. Agricultural loans continue to be emphasized by both DB&T and GSB due to their concentration of customers in rural markets. Agricultural loans remain balanced, however, in proportion to the rest of Heartland's consolidated loan portfolio. In connection with their agricultural lending, all of the Bank Subsidiaries have remained close to their traditional geographic market areas. The majority of the outstanding agricultural operating and real estate loans are within 60 miles of their main or branch offices. Agricultural loans, many of which are secured by crops, machinery and real estate, are provided to finance capital improvements and farm operations as well as acquisitions of livestock and machinery. The agricultural loan departments work closely with all agricultural customers, including companies and individual farmers, and review the preparation of budgets and cash flow projections for the ensuing crop year. These budgets and cash flow projections are monitored closely during the year and reviewed with agricultural customers at least once a year. In addition, the Bank Subsidiaries work closely with governmental agencies, including the Farmers Home Administration, to assist agricultural customers in obtaining credit enhancement products such as loan guarantees. Real Estate Mortgage Loans Mortgage lending has been a focal point of the Bank Subsidiaries as each of them continues to build real estate lending business. A declining rate environment along with expanded production capabilities combined to increase the number of loan originations as compared to prior years. The majority of home loans generated by the Bank Subsidiaries were sold to government agencies in the secondary mortgage market with servicing rights retained on over one-half of these sales. Management believes that the retention of mortgage servicing provides the Bank Subsidiaries with a relatively steady source of fee income as compared to fees generated solely from mortgage origination operations. Moreover, the retention of such servicing rights allows each of the Bank Subsidiaries to continue to have regular contact with mortgage customers. Consumer Lending The Bank Subsidiaries' consumer lending departments provide all types of consumer loans including motor vehicle, home improvement, home equity, student loans, credit cards, signature loans and small personal credit lines. Consumer loan demand is also serviced through Citizens which currently serves the consumer credit needs of over 2,500 customers in the three state area of Iowa, Illinois and Wisconsin from its Dubuque, Iowa, Madison and Appleton, Wisconsin, and Loves Park, Illinois offices. Trust Departments The trust departments for DB&T, GSB and FCB have been providing trust services to their respective communities for many years. Trust personnel from DB&T also work with RCB and WCB personnel to provide trust services to all bank subsidiaries. Currently, the Bank Subsidiaries have over $496 million of consolidated assets under management and provide a full complement of trust and investment services for individuals and corporations. The trust department of DB&T is nationally recognized as a leading provider of socially responsible investment services and manages investment portfolios for religious and other non-profit organizations located throughout the United States. The Bank Subsidiaries' trust departments are also active in the management of employee benefit and retirement plans in their market areas. The Bank Subsidiaries have targeted their trust departments as primary areas for future growth. Brokerage and Other Services DB&T contracts with a third-party vendor, Focused Investments LLC, an affiliate of Wayne Hummer & Co., to operate independent securities offices within DB&T's main office, Grandview and Kennedy Mall branch offices and GSB's main office. DB&T's Farley office also schedules regular hours for a broker to be available to meet with customers. Focused Investments LLC offers full- service stock and bond trading, direct investments, annuities and mutual funds. DB&T Insurance has continued to grow its personal and commercial insurance lines and the number of independent insurance companies it represents. DB&T Insurance is a multi-line insurance agency in the Dubuque area and offers a complete array of vehicle, property and casualty, life and disability insurance, as well as commercial lines and tax-free annuities. B. MARKET AREAS DB&T is located in Dubuque County,Iowa, which encompasses the city of Dubuque and a number of surrounding rural communities. The city of Dubuque is located in northeastern Iowa, on the Mississippi River, approximately 175 miles west of Chicago, Illinois, and approximately 200 miles northeast of Des Moines, Iowa. It is strategically situated at the intersection of the state borders of Iowa, Illinois and Wisconsin. Based upon the results of the 1990 census, the city of Dubuque had a total population of approximately 61,000. In addition to its main banking office, DB&T has seven branch offices, all of which are located in the Dubuque County area. As a subsidiary of DB&T, DB&T Insurance has substantially the same market area as the parent organization. Citizens also operates within this market area, and, in addition, offices were opened in Madison, Wisconsin, during June, 1996, Appleton, Wisconsin, during August, 1998 and Loves Park, Illinois during February, 1999. GSB is located in Galena, Illinois, which is less than five miles from the Mississippi River, approximately 20 miles east of Dubuque and 155 miles west of Chicago. GSB also has an office in Stockton, Illinois, and as such, services customers in Jo Daviess County, Illinois. Based on the 1990 census, the county had a population of approximately 22,000 people. FCB's main office is in Keokuk, Iowa, which is located in the southeast corner of Iowa near the borders of Iowa, Missouri and Illinois. Due to its location, FCB serves customers in the tri- county region of Lee County, Iowa, Hancock County, Illinois and Clark County, Missouri. Lee, Hancock and Clark Counties have populations of approximately 43,100, 23,900 and 8,500, respectively. FCB has one branch office in Keokuk and another branch in the city of Carthage in Hancock County, Illinois. Keokuk is an industrial community with a population of approximately 13,500. RCB is located on the northeast edge of Rockford, Illinois, which is approximately 75 miles west of Chicago in Winnebago County. Based on the 1990 census, the county had a population of 284,000 and the city of Rockford had a population of 140,000. WCB operates one office from its location in Cottage Grove, Wisconsin, which is approximately 10 miles east of Madison in Dane County. A branch office was opened in Middleton, a suburb of Madison, in February, 1998. According to the 1990 census, the county had a population of 390,000, and the village of Cottage Grove had a population of 1,100. NMB operates one office in the northeast section of Albuquerque, New Mexico in Bernalillo County. Based upon the 1990 census, the county had a population of 480,000 and the city had a population of 385,000. C. COMPETITION Heartland encounters competition in all areas of its business pursuits. In order to compete effectively, to develop its market base, to maintain flexibility and to move in pace with changing economic and social conditions, Heartland continuously refines and develops its products and services. The principal methods of competition in the financial services industry are price, service and convenience. The Bank Subsidiaries' combined market area is highly competitive. Many financial institutions based in the communities surrounding Dubuque, Galena, Rockford, Cottage Grove, Keokuk and Albuquerque actively compete for customers within Heartland's market area. The Bank Subsidiaries also face competition from finance companies, insurance companies, mortgage companies, securities brokerage firms, money market funds, loan production offices and other providers of financial services. Heartland competes for loans principally through the range and quality of the services it provides, interest rates and loan fees. Heartland believes that its long-standing presence in the community and personal service philosophy enhance its ability to compete favorably in attracting and retaining individual and business customers. Heartland actively solicits deposit-oriented clients and competes for deposits by offering customers personal attention, professional service and competitive interest rates. D. EMPLOYEES At December 31, 1998, Heartland employed 396 full-time equivalent employees. Heartland places a high priority on staff development which involves extensive training, including customer service training. New employees are selected on the basis of both technical skills and customer service capabilities. None of Heartland's employees are covered by a collective bargaining agreement with Heartland. Heartland offers a variety of employee benefits and management considers its employee relations to be excellent. E. ACCOUNTING STANDARDS Effect of New Financial Accounting Standards -Heartland adopted SFAS No. 130,"Reporting Comprehensive Income,"on January 1, 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income in the financial statements. Comprehensive income consists of net income and certain amounts reported directly in stockholders' equity, such as the net unrealized gains or losses on available for sale securities. The statement requires only additional disclosures in the consolidated financial statements; it does not affect Heartland's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. SFAS No. 131,"Disclosure About Segments of an Enterprise and Related Information," was effective for Heartland for the year beginning January 1, 1998, and established disclosure requirements for segment operations. The adoption had no effect on Heartland's financial statement disclosures. SFAS No. 132,"Employers' Disclosures About Pensions and Other Postretirement Benefits," was effective for Heartland for the year beginning January 1, 1998, and revises the disclosure requirements for pension and other postretirement benefit plans. The adoption had no effect on Heartland's financial statement disclosures. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," will be effective for Heartland for the year beginning January 1, 2000. Heartland expects to adopt SFAS No. 133 when required. Management does not believe the adoption of SFAS No. 133 will have a material impact on the consolidated financial statements. F. SUPERVISION AND REGULATION General Financial institutions and their holding companies are extensively regulated under federal and state law. As a result, the growth and earnings performance of Heartland can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes and regulations and the policies of various governmental regulatory authorities, including the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the FDIC, the OTS, the Iowa Superintendent of Banking (the "Iowa Superintendent"), the Illinois Commissioner of Banks and Real Estate (the "Illinois Commissioner"), the Division of Banking of the Wisconsin Department of Financial Institutions (the "Wisconsin DFI"), the New Mexico Financial Institutions Division (the "New Mexico Division"), the Internal Revenue Service and state taxing authorities and the Securities and Exchange Commission (the "SEC"). The effect of applicable statutes, regulations and regulatory policies can be significant, and cannot be predicted with a high degree of certainty. Federal and state laws and regulations generally applicable to financial institutions, such as Heartland and its subsidiaries, regulate, among other things, the scope of business, investments, reserves against deposits, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, mergers, consolidations and dividends. The system of supervision and regulation applicable to Heartland and its subsidiaries establishes a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC's deposit insurance funds and the depositors, rather than the shareholders, of financial institutions. The following is a summary of the material elements of the regulatory framework that applies to Heartland and its subsidiaries. It does not describe all of the statutes, regulations and regulatory policies that apply to Heartland and its subsidiaries, nor does it restate all of the requirements of the statutes, regulations and regulatory policies that are described. As such, the following is qualified in its entirety by reference to the applicable statutes, regulations and regulatory policies. Any change in applicable law, regulations or regulatory policies may have a material effect on the business of Heartland and its subsidiaries. Recent Regulatory Developments Pending Legislation Legislation has been introduced in the Congress that would allow bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities. The expanded powers generally would be available to a bank holding company only if the bank holding company and its bank subsidiaries remain well-capitalized and well-managed. Unlike prior financial modernization bills considered by the Congress, the pending legislation does not include provisions eliminating the federal savings association charter and requiring all federal savings associations to convert to banks. At this time, Heartland is unable to predict whether the proposed legislation will be enacted and, therefore, is unable to predict the impact such legislation may have on Heartland and the Bank Subsidiaries. Heartland General Heartland, as the sole shareholder of DB&T, GSB, RCB and WCB and the controlling shareholder of NMB, is a bank holding company. As a bank holding company, Heartland is registered with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act, as amended (the "BHCA"). In accordance with Federal Reserve policy, Heartland is expected to act as a source of financial strength to the Bank Subsidiaries and to commit resources to support the Bank Subsidiaries in circumstances where Heartland might not otherwise do so. Under the BHCA, Heartland is subject to periodic examination by the Federal Reserve. Heartland is also required to file with the Federal Reserve periodic reports of Heartland's operations and such additional information regarding Heartland and its subsidiaries as the Federal Reserve may require. Heartland's ownership of FCB makes Heartland a savings and loan holding company, as defined in the HOLA. Although savings and loan holding companies generally are subject to supervision and regulation by the OTS, companies that, like Heartland, are both bank holding companies and savings and loan holding companies are generally exempt from OTS supervision. Federal law, however, requires the Federal Reserve to consult with the OTS, as appropriate, in establishing the scope of a Federal Reserve examination of any such holding company, to provide the OTS, upon request, with copies of Federal Reserve examination reports and other supervisory information concerning any such holding company, and to cooperate with the OTS in any enforcement action against any such holding company if the conduct at issue involves the company's savings association subsidiary. Investments and Activities Under the BHCA, a bank holding company must obtain Federal Reserve approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after the acquisition, it would own or control more than 5% of the shares of the other bank or bank holding company (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank; or (iii) merging or consolidating with another bank holding company. Subject to certain conditions (including certain deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions, however, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state depository institutions or their holding companies) and state laws which require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. The BHCA also generally prohibits Heartland from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve to be "so closely related to banking ... as to be a proper incident thereto." Under current regulations of the Federal Reserve, Heartland and its non-bank subsidiaries are permitted to engage in a variety of banking- related businesses, including the operation of a thrift, sales and consumer finance, equipment leasing, the operation of a computer service bureau (including software development), and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of non- bank subsidiaries of bank holding companies. Federal law also prohibits any person or company from acquiring "control" of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. "Control" is defined in certain cases as the acquisition of 10% of the outstanding shares of an institution or holding company. Capital Requirements Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses. The Federal Reserve's capital guidelines establish the following minimum regulatory capital requirements for bank holding companies: a risk-based requirement expressed as a percentage of total risk-weighted assets, and a leverage requirement expressed as a percentage of total assets. The risk-based requirement consists of a minimum ratio of total capital to total risk- weighted assets of 8%, at least one-half of which must be Tier 1 capital. The leverage requirement consists of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly rated companies, with a minimum requirement of 4% for all others. For purposes of these capital standards, Tier 1 capital consists primarily of permanent stockholders' equity less intangible assets (other than certain mortgage servicing rights and purchased credit card relationships). Total capital consists primarily of Tier 1 capital plus certain other debt and equity instruments which do not qualify as Tier 1 capital and a portion of the company's allowance for loan and lease losses. The risk-based and leverage standards described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve's capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels. As of December 31, 1998, Heartland had regulatory capital in excess of the Federal Reserve's minimum requirements, with a risk- based capital ratio of 12.13% and a leverage ratio of 8.58%. Dividends The Delaware General Corporation Law (the "DGCL") allows Heartland to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if Heartland has no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Additionally, the Federal Reserve has issued a policy statement with regard to the payment of cash dividends by bank holding companies. The policy statement provides that a bank holding company should not pay cash dividends which exceed its net income or which can only be funded in ways that weaken the bank holding company's financial health, such as by borrowing. The Federal Reserve also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. Federal Securities Regulation Heartland's common stock is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Consequently, Heartland is subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act. The Bank Subsidiaries General DB&T is an Iowa-chartered bank, the deposit accounts of which are insured by the FDIC's Bank Insurance Fund ("BIF"). As a BIF- insured, Iowa-chartered bank, DB&T is subject to the examination, supervision, reporting and enforcement requirements of the Iowa Superintendent, as the chartering authority for Iowa banks, and the FDIC, as administrator of the BIF. GSB and RCB are Illinois-chartered banks, the deposit accounts of which are insured by the BIF of the FDIC. As BIF-insured, Illinois-chartered banks, GSB and RCB are subject to the examination, supervision, reporting and enforcement requirements of the Illinois Commissioner, as the chartering authority for Illinois banks, and the FDIC, as administrator of the BIF. WCB is a Wisconsin-chartered bank, the deposit accounts of which are insured by the BIF of the FDIC. As a BIF-insured, Wisconsin- chartered bank, WCB is subject to the examination, supervision, reporting and enforcement requirements of the Wisconsin DFI, as the chartering authority for Wisconsin banks, and the FDIC, as administrator of the BIF. NMB is a New Mexico-chartered bank, the deposit accounts of which are insured by the BIF of the FDIC. As a BIF-insured, New Mexico- chartered bank, NMB is subject to the examination, supervision, reporting and enforcement requirements of the New Mexico Division, as the chartering authority for New Mexico banks, and the FDIC, as administrator of the BIF. FCB is a federally chartered savings association, the deposits of which are insured by the FDIC's Savings Association Insurance Fund ("SAIF"). As a SAIF-insured, federally chartered savings association, FCB is subject to the examination, supervision, reporting and enforcement requirements of the OTS, as the chartering authority for federal savings associations, and the FDIC as administrator of the SAIF. Deposit Insurance As FDIC-insured institutions, the Bank Subsidiaries are required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their respective levels of capital and results of supervisory evaluations. Institutions classified as well-capitalized (as defined by the FDIC) and considered healthy pay the lowest premium while institutions that are less than adequately capitalized (as defined by the FDIC) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC for each semi-annual assessment period. During the year ended December 31, 1998, both BIF and SAIF assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual assessment period beginning January 1, 1999, both BIF and SAIF assessment rates will continue to range from 0% of deposits to 0.27% of deposits. The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution (i) has engaged or is engaging in unsafe or unsound practices, (ii) is in an unsafe or unsound condition to continue operations or (iii) has violated any applicable law, regulation, order, or any condition imposed in writing by, or written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. Management of Heartland is not aware of any activity or condition that could result in termination of the deposit insurance of the Bank Subsidiaries. FICO Assessments Since 1987, a portion of the deposit insurance assessments paid by SAIF members has been used to cover interest payments due on the outstanding obligations of the Financing Corporation ("FICO"). FICO was created in 1987 to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the SAIF's predecessor insurance fund. As a result of federal legislation enacted in 1996, beginning as of January 1, 1997, both SAIF members and BIF members became subject to assessments to cover the interest payments on outstanding FICO obligations. These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. Until January 1, 2000, the FICO assessments made against BIF members may not exceed 20% of the amount of the FICO assessments made against SAIF members. Between January 1, 2000 and the final maturity of the outstanding FICO obligations in 2019, BIF members and SAIF members will share the cost of the interest on the FICO bonds on a pro rata basis. During the year ended December 31, 1998, the FICO assessment rate for SAIF members ranged between approximately 0.061% of deposits and approximately 0.063% of deposits, while the FICO assessment rate for BIF members ranged between approximately 0.012% of deposits and approximately 0.013% of deposits. During the year ended December 31, 1998, the Bank Subsidiaries paid FICO assessments totaling $118. Supervisory Assessments All Iowa banks, Illinois banks, Wisconsin banks, New Mexico banks and federal savings associations are required to pay supervisory assessments to the Iowa Superintendent, the Illinois Commissioner, the Wisconsin DFI, the New Mexico Division and the OTS, respectively, to fund the operations of such agencies. In general, the amount of such supervisory assessments is based upon each institution's total assets. During the year ended December 31, 1998, the Bank Subsidiaries paid supervisory assessments totaling $42. Capital Requirements The FDIC has established the following minimum capital standards for state-chartered insured non-member banks, such as DB&T, GSB, RCB, WCB and NMB: a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly- rated banks with a minimum requirement of at least 4% for all others, and a risk-based capital requirement consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital. For purposes of these capital standards, Tier 1 capital and total capital consist of substantially the same components as Tier 1 capital and total capital under the Federal Reserve's capital guidelines for bank holding companies (see "--Heartland--Capital Requirements"). Pursuant to the HOLA and OTS regulations, savings associations, such as FCB, are subject to the following minimum capital requirements: a core capital requirement, consisting of a minimum ratio of core capital to total assets of 3%; a tangible capital requirement, consisting of a minimum ratio of tangible capital to total assets of 1.5%; and a risk-based capital requirement, consisting of a minimum ratio of total capital to total risk-weighted assets of 8%, at least one-half of which must consist of core capital. Core capital consists primarily of permanent stockholders' equity less (i) intangible assets other than certain supervisory goodwill, certain mortgage servicing rights and certain purchased credit card relationships and (ii) investments in subsidiaries engaged in activities not permitted for national banks. Tangible capital is substantially the same as core capital except that all intangible assets other than certain mortgage servicing rights must be deducted. Total capital consists primarily of core capital plus certain debt and equity instruments that do not qualify as core capital and a portion of the Bank's allowances for loan and leases losses. The capital requirements described above are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual institutions. For example, the regulations of the FDIC and the OTS provide that additional capital may be required to take adequate account of, among other things, interest rate risk or the risks posed by concentrations of credit or nontraditional activities. During the year ended December 31, 1998, none of the Bank Subsidiaries was required by its primary federal regulator to increase its capital to an amount in excess of the minimum regulatory requirement. As of December 31, 1998, each of the Bank Subsidiaries exceeded its minimum regulatory capital requirements, as follows: Total Risk-Based Leverage Tangible Capital Capital Capital Ratio Ratio Ratio --------- --------- --------- DB&T 10.10 7.38 N/A GSB 13.66 7.76 N/A RCB 11.23 7.03 N/A WCB 13.60 9.14 N/A NMB 45.85 40.62 N/A FCB 13.53 8.36 8.25 The OTS has proposed to amend its regulations to establish a minimum core capital requirement of 3% of total assets for any savings association assigned a composite rating of 1 as of the association's most recent OTS examination, with a minimum core capital requirement of 4% of total assets for all other savings associations. It is not anticipated that the adoption of this proposal would affect FCB's ability to comply with the OTS capital requirements. Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions. The extent of the regulators' powers depends on whether the institution in question is "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized," in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators' corrective powers include: requiring the institution to submit a capital restoration plan; limiting the institution's asset growth and restricting its activities; requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired; restricting transactions between the institution and its affiliates; restricting the interest rate the institution may pay on deposits; ordering a new election of directors of the institution; requiring that senior executive officers or directors be dismissed; prohibiting the institution from accepting deposits from correspondent banks; requiring the institution to divest certain subsidiaries; prohibiting the payment of principal or interest on subordinated debt; and ultimately, appointing a receiver for the institution. As of December 31, 1998, each of the Bank Subsidiaries was "well capitalized," as defined by applicable regulations. Additionally, institutions insured by the FDIC may be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of commonly controlled FDIC insured depository institutions or any assistance provided by the FDIC to commonly controlled FDIC insured depository institutions in danger of default. Because Heartland owns more than 25% of the outstanding stock of each of the Bank Subsidiaries, the Bank Subsidiaries are deemed to be commonly controlled. Dividends In general, under applicable state law, DB&T, GSB, RCB, WCB and NMB may not pay dividends in excess of their undivided profits. OTS regulations impose limitations upon all capital distributions by savings associations, including cash dividends. Under the OTS rule that is presently in effect, an institution that exceeds all applicable capital requirements both before and after the proposed capital distribution (a "Tier 1 Institution") may, after prior notice to, but without the approval of, the OTS, make capital distributions during a calendar year in an aggregate amount of up to the higher of (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (i.e., the amounts of its capital in excess of its capital requirements) at the beginning of the calendar year, or (ii) 75% of its net income over the most recent preceding four quarter period. Any additional capital distributions would require prior OTS approval. As of December 31, 1998, FCB was a Tier 1 Institution. The OTS has amended its regulations governing capital distributions (including cash dividends) by savings associations. The amended rule, which takes effect April 1, 1999, will require prior OTS approval for any capital distribution by a savings association that is not eligible for expedited processing under the OTS's application processing regulations. In order to qualify for expedited processing, a savings association must: (i) have a composite examination rating of 1 or 2; (ii) have a Community Reinvestment Act rating of satisfactory or better; (iii) have a compliance rating of 1 or 2; (iv) meet all applicable regulatory capital requirements; and (v) not have been notified by the OTS that it is a problem association or an association in troubled condition. Savings associations that qualify for expedited processing will be required to obtain OTS approval prior to making a capital distribution if: (a) the amount of the proposed capital distribution, when aggregated with all other capital distributions during the same calendar year, will exceed an amount equal to the association's year-to-date net income plus its retained net income for the preceding two years; (b) after giving effect to the distribution, the association will not be at least "adequately capitalized" (as defined by OTS regulation); or (c) the distribution would violate a prohibition contained in an applicable statute, regulation or agreement with the OTS or the FDIC or violate a condition imposed in connection with an OTS-approved application or notice. The amended regulation will continue to require that the OTS be given prior notice of certain types of capital distributions, including any capital distribution by a savings association that, like FCB, is a subsidiary of a holding company, or by a savings association that, after giving effect to the distribution, would not be "well- capitalized" (as defined by OTS regulation). The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, each of the Bank Subsidiaries exceeded its minimum capital requirements under applicable guidelines as of December 31, 1998. Further, under applicable regulations of the OTS, FCB may not pay dividends in an amount which would reduce its capital below the amount required for the liquidation account established in connection with FCB's conversion from the mutual to the stock form of ownership in 1991. As of December 31, 1998, approximately $33 million was available to be paid as dividends to Heartland by the Bank Subsidiaries. Notwithstanding the availability of funds for dividends, however, the banking regulators may prohibit the payment of any dividends by the Bank Subsidiaries if such payment is deemed to constitute an unsafe or unsound practice. Insider Transactions The Bank Subsidiaries are subject to certain restrictions imposed by federal law on extensions of credit to Heartland and its subsidiaries, on investments in the stock or other securities of Heartland and its subsidiaries and the acceptance of the stock or other securities of Heartland or its subsidiaries as collateral for loans. Certain limitations and reporting requirements are also placed on extensions of credit by the Bank Subsidiaries to their respective directors and officers, to directors and officers of Heartland and its subsidiaries, to principal stockholders of Heartland, and to "related interests" of such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any person becoming a director or officer of Heartland or one of its subsidiaries or a principal stockholder of Heartland may obtain credit from banks with which one of the Bank Subsidiaries maintains a correspondent relationship. Safety and Soundness Standards The federal banking agencies have adopted guidelines which establish operational and managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. In addition, in October 1998, the federal banking regulators issued safety and soundness standards for achieving Year 2000 compliance, including standards for developing and managing Year 2000 project plans, testing remediation efforts and planning for contingencies. In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the institution's primary federal regulator may require the institution to submit a plan for achieving and maintaining 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. 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. Noncompliance with the standards established by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators, including cease and desist orders and civil money penalty assessments. Branching Authority Iowa law strictly regulates the establishment of bank offices. Under the Iowa Banking Act, an Iowa state bank, such as DB&T, may not establish a bank office outside the boundaries of the counties contiguous to or cornering upon the county in which the principal place of business of the bank is located. Further, Iowa law prohibits an Iowa bank from establishing de novo branches in a municipality other than the municipality in which the bank's principal place of business is located, if another bank already operates one or more offices in the municipality in which the de novo branch is to be located. The number of offices an Iowa bank may establish in a particular municipality is also limited depending upon the municipality's population. Illinois banks, such as GSB and RCB, have authority under Illinois law to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals. Likewise, under the laws of Wisconsin and New Mexico, Wisconsin banks and New Mexico banks, respectively, have statewide branching authority, subject to regulatory approval. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), both state and national banks are allowed to establish interstate branch networks through acquisitions of other banks, subject to certain conditions, including certain limitations on the aggregate amount of deposits that may be held by the surviving bank and all of its insured depository institution affiliates. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of- state bank in its entirety) is allowed by the Riegle-Neal Act only if specifically authorized by state law. The legislation allowed individual states to "opt-out" of certain provisions of the Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997. The laws of Iowa, Illinois, Wisconsin and New Mexico permit interstate bank mergers, subject to certain conditions, including a prohibition against interstate mergers involving an Iowa, Illinois, Wisconsin or New Mexico bank, respectively, that has been in existence and continuous operation for fewer than five years. Federally chartered savings associations which qualify as "domestic building and loan associations," as defined in the Internal Revenue Code, or meet the qualified thrift lender test (see "-The Bank -- Qualified Thrift Lender Test") have the authority, subject to receipt of OTS approval, to establish or acquire branch offices anywhere in the United States. If a federal savings association fails to qualify as a "domestic building and loan association," as defined in the Internal Revenue Code, and fails to meet the qualified thrift lender test the association may branch only to the extent permitted for national banks located in the savings association's home state. As of December 31, 1998, First Community qualified as a "domestic building and loan association," as defined in the Internal Revenue Code and met the qualified thrift lender test. State Bank Activities Under federal law and FDIC regulations, FDIC insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines the activity would not pose a significant risk to the deposit insurance fund of which the bank is a member. These restrictions have not had, and are not currently expected to have, a material impact on the operations of DB&T, GSB, RCB, WCB or NMB. Qualified Thrift Lender Test The HOLA requires every savings association to satisfy a "qualified thrift lender" ("QTL") test. Under the HOLA, a savings association will be deemed to meet the QTL test if it either (i) maintains at least 65% of its "portfolio assets" in "qualified thrift investments" on a monthly basis in nine out of every 12 months or (ii) qualifies as a "domestic building and loan association," as defined in the Internal Revenue Code. For purposes of the QTL test, "qualified thrift investments" consist of mortgage loans, mortgage-backed securities, education loans, small business loans, credit card loans and certain other housing and consumer-related loans and investments. "Portfolio assets" consist of a savings association's total assets less goodwill and other intangible assets, the association's business properties and a limited amount of the liquid assets maintained by the association pursuant to the liquidity requirements of the HOLA and OTS regulations (see "--The Bank--Liquidity Requirements"). A savings association that fails to meet the QTL test must either convert to a bank charter or operate under certain restrictions on its operations and activities. Additionally, within one year following the loss of QTL status, the holding company for the savings association will be required to register as, and will be deemed to be, a bank holding company. A savings association that fails the QTL test may requalify as a QTL but it may do so only once. As of December 31, 1998, FCB satisfied the QTL test, with a ratio of qualified thrift investments to portfolio assets of 83.87%, and qualified as a "domestic building and loan association," as defined in the Internal Revenue Code. Liquidity Requirements OTS regulations currently require each savings association to maintain, for each calendar quarter, an average daily balance of liquid assets (including cash, certain time deposits, bankers' acceptances, and specified United States Government, state or federal agency obligations) equal to at least 4% of either (i) its liquidity base (i.e., its net withdrawable accounts plus borrowings repayable in 12 months or less) as of the end of the preceding calendar quarter or (ii) the average daily balance of its liquidity base during the preceding calendar quarter. This liquidity requirement may be changed from time to time by the OTS to an amount within a range of 4% to 10% of the liquidity base, depending upon economic conditions and the deposit flows of savings associations. The OTS may also require a savings association to maintain a higher level of liquidity than the minimum 4% requirement if the OTS deems necessary to ensure the safe and sound operation of the association. Penalties may be imposed for failure to meet liquidity ratio requirements. At December 31, 1998, FCB was in compliance with OTS liquidity requirements, with a liquidity ratio of 10.43%. Federal Reserve System Federal Reserve regulations, as presently in effect, require depository institutions to maintain non-interest earning reserves against their transaction accounts (primarily NOW and regular checking accounts), as follows: for transaction accounts aggregating $46.5 million or less, the reserve requirement is 3% of total transaction accounts; and for transaction accounts aggregating in excess of $46.5 million, the reserve requirement is $1.395 million plus 10% of the aggregate amount of total transaction accounts in excess of $46.5 million. The first $4.9 million of otherwise reservable balances are exempted from the reserve requirements. These reserve requirements are subject to annual adjustment by the Federal Reserve. The Bank Subsidiaries are in compliance with the foregoing requirements. The balances used to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy the liquidity requirements to which FCB is subject under the HOLA and OTS regulations. G. GOVERNMENTAL MONETARY POLICY AND ECONOMIC CONDITIONS The earnings of Heartland are affected by the policies of regulatory authorities, including the Federal Reserve System whose monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Because of changing conditions in the economy and in the money markets, as a result of actions by monetary and fiscal authorities, interest rates, credit availability and deposit levels may change due to circumstances beyond the control of Heartland. Future policies of the Federal Reserve System and other authorities cannot be predicted, nor can their effect on future earnings be predicted. ITEM 2. PROPERTIES The principal offices of Heartland are located in DB&T's main office at 1398 Central Avenue, Dubuque, Iowa 52001. This office is owned by DB&T and consists of a three-story glazed terra cotta building constructed in 1922. The main office building currently comprises approximately 59,500 square feet, all of which is occupied by DB&T and Heartland. Construction of a three-story addition of approximately 32,000 square feet was completed in 1994. DB&T has a total of seven branch offices in addition to its main office. Five of these offices are located in the city of Dubuque, and three branches are located in the surrounding Iowa communities of Epworth, Farley and Holy Cross. DB&T owns all of its branch offices without material encumbrances, except its branch located at Kennedy Mall. DB&T owns the buildings but leases the land under long term agreements at its Kennedy Mall branch and Main Street office location. The DB&T subsidiaries, operate out of the main office. Citizens' Dubuque office is located in the Main Street Office location of DB&T. The Madison office for Citizens is located in a leased building at 1771 Thierer Road, Madison, Wisconsin 53707, and the Appleton office is located in a leased building at 740 West Northland Avenue, Appleton, Wisconsin 54914. The Loves Park office is located in a leased building at 6345 North Second Street, Loves Park, Illinois 61132. GSB's main office is located at 971 Gear Street on the west side of Galena, Illinois. Construction of this new 18,000 square foot brick banking facility was completed in 1996. A drive-up facility is also located in downtown Galena. One branch office is located in Stockton, Illinois, which is located approximately 24 miles east of Galena. Each of these offices is owned without material encumbrances. The main office of FCB is located at 4th and Concert Street, Keokuk, Iowa 52632. The property was purchased by FCB in 1983 and consists of a one-story brick building constructed in 1951. This building comprises approximately 6,000 square feet, all of which is occupied by FCB. During 1996, FCB opened a 2,100 square foot branch on the northwest side of Keokuk. FCB also has one branch office located in Carthage, Illinois, which is located approximately 15 miles east of Keokuk, Iowa. The one-story wooden frame building constructed in 1976 comprises approximately 3,000 square feet, all of which is occupied by FCB. Each of these offices are owned without material encumbrances. RCB operates from an 8,000 square foot one-story brick building located at 6700 East Riverside Boulevard, Rockford, Illinois 61114. The main office of WCB is located at 580 N. Main Street, Cottage Grove, Wisconsin 53527. The property was constructed by WCB in 1972 and consists of a one-story stucco building. This building comprises approximately 6,000 square feet, all of which is occupied by WCB. A branch facility was purchased in Middleton, Wisconsin in 1997. This branch facility is a one-story wood building totaling 2,500 square feet, all of which is occupied by WCB and is owned without material encumbrances. NMB operates from its leased facility, an 8,665 square foot facility at Suite 100, 6501 Americas Parkway NE, Albuquerque, New Mexico 87110. ULTEA leases a 1900 square foot facility at 2976 Triverton Pike, Madison, Wisconsin 53711. During 1998, Heartland acquired all of the assets and assumed certain liabilities of Arrow Motors, Inc., a Wisconsin corporation, doing business as Lease Associates Group ("LAG"). With the purchase of LAG, ULTEA operates a second leased facility of 3000 square feet at 1433 West Silver Springs Drive, Milwaukee, Wisconsin 53209. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which Heartland or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1998 to a vote of security holders. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Heartland's Common Stock was held by approximately 800 shareholders of record as of March 22, 1999, and is traded in the over-the-counter market. The following table shows, for the periods indicated, the range of reported prices per share of Heartland's Common Stock in the over-the-counter market. These quotations represent inter-dealer prices without retail markups, markdowns or commissions and do not necessarily represent actual transactions. Heartland Common Stock Actual Calendar Quarter High Low 1997: First $12 $13 3/16 Second 12 5/8 13 21/32 Third 12 1/2 15 1/4 Fourth 13 15 1998: First $14 5/16 $16 Second 14 16 7/8 Third 15 3/4 19 Fourth 16 3/4 19 Cash dividends have been declared by Heartland quarterly during the past two years ending December 31, 1998. The following table sets forth the cash dividends per share paid on Heartland's Common Stock for the past two years: Calendar Quarter 1998 1997 First $.075 $.065 Second .075 .065 Third .08 .065 Fourth .08 .065 ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share data) For the Years Ended December 31, 1998 1997 1996 -------------------------------- STATEMENT OF INCOME DATA Interest income $ 64,517 $ 59,261 $ 51,886 Interest expense 36,304 31,767 27,644 -------- -------- -------- Net interest income 28,213 24,494 24,242 Provision for loan and lease losses 951 1,179 1,408 -------- -------- -------- Net interest income after provision for loan and lease losses 27,262 26,215 22,834 Noninterest income 17,297 8,565 7,364 Noninterest expense 31,781 22,927 19,507 Provision for income taxes 3,757 3,338 2,685 -------- -------- -------- Net income $ 9,021 $ 8,515 $ 8,006 ======== ======== ======== PER COMMON SHARE DATA (1) Net income-basic $ 0.95 $ 0.90 $ 0.85 Net income-diluted 0.94 $ 0.89 0.84 Cash dividends 0.31 .26 .20 Dividend payout ratio 32.48% 28.96% 23.53% Book value $ 8.84 $ 8.19 $ 7.42 Weighted average shares outstanding 9,463,313 9,476,342 9,430,018 BALANCE SHEET DATA Investments and federal funds sold $259,964 $234,666 $183,966 Total loans and leases, net of unearned 590,133 556,406 484,085 Allowance for loan and lease losses 7,945 7,362 6,191 Total assets 953,785 852,060 736,552 Total deposits 717,877 623,532 558,343 Long-term obligations 57,623 43,023 42,506 Stockholders' equity 84,270 77,772 70,259 EARNINGS PERFORMANCE DATA Return on average total assets 1.01% 1.09% 1.16% Return on average stockholders' equity 11.26 11.59 12.00 Net interest margin ratio (2) 3.58 3.89 3.98 ASSET QUALITY RATIOS Nonperforming assets to total assets 0.28% 0.34% 0.34% Nonperforming loans and leases to total loans and leases 0.30 0.37 0.41 Net loan and lease charge-offs to average loans and leases 0.07 0.08 0.17 Allowance for loan and lease losses to total loans and leases 1.35 1.32 1.28 Allowance for loan and lease losses to nonperforming loans and leases 453.74 362.30 313.63 CAPITAL RATIOS Average equity to average assets 9.01% 9.39% 9.66% Total capital to risk-adjusted assets 12.13 12.71 14.28 Tier 1 leverage 8.58 8.76 9.54 SELECTED FINANCIAL DATA (Dollars in thousands, except per share data) For the Years Ended December 31, 1995 1994 -------------------- STATEMENT OF INCOME DATA Interest income $49,149 $ 43,373 Interest expense 25,529 20,128 -------- -------- Net interest income 23,620 23,245 Provision for loan and lease losses 820 811 -------- -------- Net interest income after provision for loan and lease losses 22,800 22,434 Noninterest income 4,981 4,965 Noninterest expense 17,323 17,244 Provision for income taxes 2,884 3,015 -------- --------- Net income $ 7,574 $ 7,140 ======== ======== PER COMMON SHARE DATA (1) Net income-basic $ 0.79 $ 0.74 Net income-diluted 0.78 0.74 Cash dividends .15 .13 Dividend payout ratio 19.03% 17.99% Book value $ 6.88 $ 5.88 Weighted average shares outstanding 9,610,368 9,691,296 BALANCE SHEET DATA Investments and federal funds sold $171,726 $162,968 Total loans and leases, net of unearned 454,905 422,216 Allowance for loan and lease losses 5,580 5,124 Total assets 677,313 626,490 Total deposits 534,587 513,239 Long-term obligations 45,400 23,562 Stockholders' equity 64,506 56,930 EARNINGS PERFORMANCE DATA Return on average total assets 1.18% 1.18% Return on average stockholders' equity 12.28 12.82 Net interest margin ratio (2) 4.13 4.32 ASSET QUALITY RATIOS Nonperforming assets to total assets 0.28% 0.17% Nonperforming loans and leases to total loans and leases 0.26 0.21 Net loan and lease charge-offs to average loans and leases Allowance for loan and lease losses 0.08 0.03 to total loans and leases 1.23 1.21 Allowance for loan and lease losses to nonperforming loans and leases 463.84 580.95 CAPITAL RATIOS Average equity to average assets 9.59% 9.22% Total capital to risk-adjusted assets 14.46 15.04 Tier 1 leverage 9.47 9.32 (1) Per share data has been restated to reflect the two-for-one stock split effected in the form of a stock dividend on June 30, 1998. (2) Tax equivalent using a 34% tax rate. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS (Dollars in thousands) The following presents management's discussion and analysis of the consolidated financial condition and results of operations of Heartland Financial USA, Inc. ("Heartland") as of the dates and for the periods indicated. This discussion should be read in conjunction with the Selected Financial Data, Heartland's Consolidated Financial Statements and the Notes thereto and other financial data appearing elsewhere in this report. The consolidated financial statements include the accounts of Heartland and its subsidiaries: Dubuque Bank and Trust Company ("DB&T"); Galena State Bank and Trust Company ("GSB"); Riverside Community Bank ("RCB"); Wisconsin Community Bank ("WCB"); New Mexico Bank & Trust ("NMB"); First Community Bank, FSB ("FCB"); Citizens Finance Co. ("Citizens"); ULTEA, Inc. ("ULTEA"); DB&T Insurance, Inc.; DB&T Community Development Corp.; DBT Investment Corporation and Keokuk Bancshares, Inc. (dba KBS Investment Corp.). All of Heartland's subsidiaries are wholly-owned except for NMB, of which Heartland is an 80% owner. 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. Heartland 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 purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of Heartland are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. Heartland'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 Heartland and the 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 Heartland'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 Heartland and its business, including additional factors that could materially affect Heartland's financial results, is included in Heartland's filings with the Securities and Exchange Commission. OVERVIEW Heartland recorded its eighth consecutive year of increased annual earnings during 1998, up $506 or 5.94% from 1997. On a basic per common share basis, the 1998 earnings increased 5.56%. Return on common equity was 11.26% and return on assets was 1.01% for 1998 compared to 11.59% and 1.09% for 1997, respectively. Net income increased $509 or 6.36% in 1997 from 1996. On a basic per common share basis, 1997 net income increased 5.88% from 1996. Return on common equity was 11.59% and return on assets was 1.09% for 1997 compared to 12.00% and 1.16%, respectively, for 1996. These sustained increases in earnings are particularly gratifying given the additional overhead expended to develop the growth initiatives which Heartland had underway during the previous two years. Total assets grew $101,725 or 11.94% to $953,785 at December 31, 1998, and $115,508 or 15.68% to $852,060 at December 31, 1997. At the same time, total deposits increased $94,345 or 15.13% during 1998 and $65,189 or 11.68% during 1997. Loans and leases were up $33,727 or 6.06% at December 31, 1998, and $72,321 or 14.94% at December 31, 1997. The initiatives undertaken to generate this growth and sustain earnings included: The spring 1998 de novo expansion into Albuquerque, New Mexico with NMB. Expansion into the vehicle leasing and fleet management business with the purchase of ULTEA in late 1996 and Lease Associates Group ("LAG") in the summer of 1998. The 1997 acquisition of WCB and its early 1998 opening of a branch facility in Middleton, Wisconsin. The conversion of all Heartland banks to new banking software in early 1997. Enhancement of banking operations at RCB, Heartland's 1995 de novo banking operation in Rockford, Illinois. RESULTS OF OPERATIONS NET INTEREST INCOME Net interest income is the difference between interest income earned on earning assets and interest expense paid on interest bearing liabilities. As such, net interest income is affected by changes in the volume and yields on earning assets and the volume and rates paid on interest bearing liabilities. Net interest margin is the ratio of tax equivalent net interest income to average earning assets. Net interest income on a fully tax equivalent basis was $28,999, $28,280 and $25,476 for 1998, 1997 and 1996, respectively, an increase of 2.54% for 1998 and 11.01% for 1997. Expressed as a percentage of average earning assets, Heartland's net interest margin decreased to 3.58% in 1998 and 3.89% in 1997, compared to 3.98% in 1996. These decreases occurred for several reasons: As a result of the acquisitions of ULTEA and LAG, additional interest expense was incurred on debt utilized to fund the vehicles under operating leases while the income derived from these leases is recorded as noninterest income. A decline and flattening of the yield curve resulted in an acceleration of paydowns in the mortgage-backed securities and loan portfolio and pressure from loan customers to lower rates charged on their balances. The return on Heartland's securities portfolio declined as several higher-yielding securities matured or were called and the average life of the portfolio was reduced as prepayments accelerated on the mortgage-backed securities portfolio. Growth in noninterest bearing deposits remained relatively flat during 1997. Heartland continues to manage its balance sheet on a proactive basis. The following table sets forth certain information relating to Heartland's average consolidated balance sheets and reflects the yield on average earning assets and the cost of average interest bearing liabilities for the years indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities. Average balances are derived from daily balances, and nonaccrual loans are included in each respective loan category. ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) For the Year Ended December 31, 1998 Average Balance Interest Rate ------- -------- ---- EARNING ASSETS Securities: Taxable $196,206 $ 11,515 5.87% Nontaxable (1) 20,507 1,716 8.37 --------- --------- ------ Total securities 216,713 13,231 6.11 --------- --------- ------ Interest bearing deposits 8,313 386 4.64 Federal funds sold 29,830 1,582 5.30 --------- --------- ------ Loans and leases: Commercial and commercial real estate (1) 249,326 21,523 8.63 Residential mortgage 162,545 12,854 7.91 Agricultural and agricultural real estate (1) 75,685 6,751 8.92 Consumer 66,138 6,702 10.13 Direct financing leases, net 8,367 625 7.47 Fees on loans - 1,649 - Less: allowance for loan and lease losses (7,944) - - --------- --------- ------ Net loans and leases 554,117 50,104 9.04 --------- --------- ------ Total earning assets 808,973 65,303 8.07 --------- --------- ------ NONEARNING ASSETS Total nonearning assets 80,317 - - --------- --------- ------ TOTAL ASSETS $889,290 $ 65,303 7.34% ========= ========= ====== INTEREST BEARING LIABILITIES Interest bearing deposits: Savings accounts $266,282 $ 9,512 3.57% Time, $100,000 and over 51,283 2,905 5.66 Other time deposits 282,142 16,228 5.75 Short-term borrowings 78,484 4,076 5.19 Other borrowings 56,137 3,583 6.38 --------- --------- ------ Total interest bearing liabilities 734,328 36,304 4.94 --------- --------- ------ NONINTEREST BEARING LIABILITIES Noninterest bearing deposits 60,514 - - Accrued interest and other liabilities 14,343 - - --------- --------- ------ Total noninterest bearing liabilities 74,857 - - --------- --------- ------ Stockholders' Equity 80,105 - - --------- --------- ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $889,290 $ 36,304 4.08% ========= ========= ====== Net interest income (1) $ 28,999 ========= Net interest income to total earning assets (1) 3.58% ====== Interest bearing liabilities to earning assets 90.77% ========= (1) Tax equivalent basis is calculated using an effective tax rate of 34%. ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) For the Year Ended December 31, 1997 Average Balance Interest Rate ------- -------- ---- EARNING ASSETS Securities: Taxable $169,086 $ 10,393 6.15% Nontaxable (1) 19,700 1,773 9.00 --------- --------- ------ Total securities 188,786 12,166 6.44 --------- --------- ------ Interest bearing deposits 2,972 98 3.30 Federal funds sold 12,570 681 5.42 --------- --------- ------ Loans and leases: Commercial and commercial real estate (1) 222,157 19,683 8.86 Residential mortgage 178,362 14,083 7.90 Agricultural and agricultural real estate (1) 66,294 6,037 9.11 Consumer 55,218 5,672 10.27 Direct financing leases, net 6,739 501 7.43 Fees on loans - 1,126 - Less: allowance for loan and lease losses (6,998) - - --------- --------- ------ Net loans and leases 521,772 47,102 9.03 --------- --------- ------ Total earning assets 726,100 60,047 8.27 --------- --------- ------ NONEARNING ASSETS Total nonearning assets 56,596 - - --------- --------- ------ TOTAL ASSETS $782,696 $ 60,047 7.67% ========= ========= ====== INTEREST BEARING LIABILITIES Interest bearing deposits: Savings accounts $237,730 $ 8,317 3.50% Time, $100,000 and over 34,913 1,961 5.62 Other time deposits 268,201 15,487 5.77 Short-term borrowings 70,313 3,740 5.32 Other borrowings 36,406 2,262 6.21 --------- --------- ------ Total interest bearing liabilities 647,563 31,767 4.91 --------- --------- ------ NONINTEREST BEARING LIABILITIES Noninterest bearing deposits 51,770 - - Accrued interest and other liabilities 9,906 - - --------- --------- ------ Total noninterest bearing liabilities 61,676 - - --------- --------- ------ Stockholders' Equity 73,457 - - --------- --------- ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $782,696 $ 31,767 4.06% ========= ========= ====== Net interest income (1) $ 28,280 ========= Net interest income to total earning assets (1) 3.89% ====== Interest bearing liabilities to earning assets 89.18% ========= (1) Tax equivalent basis is calculated using an effective tax rate of 34%. ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES (1) For the Year Ended December 31, 1996 Average Balance Interest Rate ------- -------- ---- EARNING ASSETS Securities: Taxable $136,107 $ 8,392 6.17% Nontaxable (1) 31,005 3,108 10.02 --------- --------- ------ Total securities 167,112 11,500 6.88 --------- --------- ------ Interest bearing deposits 4,332 163 3.76 Federal funds sold 11,532 610 5.29 --------- --------- ------ Loans and leases: Commercial and commercial real estate (1) 195,372 17,058 8.73 Residential mortgage 160,511 12,637 7.87 Agricultural and agricultural real estate (1) 58,975 5,377 9.12 Consumer 41,302 4,250 10.29 Direct financing leases, net 7,502 549 7.32 Fees on loans - 976 - Less: allowance for loan and lease losses (6,026) - - --------- --------- ------ Net loans and leases 457,636 40,847 8.93 --------- --------- ------ Total earning assets 640,612 53,120 8.29 --------- --------- ------ NONEARNING ASSETS Total nonearning assets 50,473 - - --------- --------- ------ TOTAL ASSETS $691,085 $ 53,120 7.69% ========= ========= ====== INTEREST BEARING LIABILITIES Interest bearing deposits: Savings accounts $214,401 $ 7,474 3.49% Time, $100,000 and over 37,806 2,131 5.64 Other time deposits 239,300 13,585 5.68 Short-term borrowings 37,100 1,943 5.24 Other borrowings 41,936 2,511 5.99 --------- --------- ------ Total interest bearing liabilities 570,543 27,644 4.85 --------- --------- ------ NONINTEREST BEARING LIABILITIES Noninterest bearing deposits 45,205 - - Accrued interest and other liabilities 8,606 - - --------- --------- ------ Total noninterest bearing liabilities 53,811 - - --------- --------- ------ Stockholders' Equity 66,731 - - --------- --------- ------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $691,085 $ 27,644 4.00% ========= ========= ====== Net interest income (1) $ 25,476 ========= Net interest income to total earning assets (1) 3.98% ====== Interest bearing liabilities to earning assets 89.06% ========= (1) Tax equivalent basis is calculated using an effective tax rate of 34%. The following table allocates the changes in net interest income to differences in either average balances or average rates for earning assets and interest bearing liabilities. The changes have been allocated proportionately to the change due to volume and change due to rate. Interest income is measured on a tax equivalent basis using a 34% tax rate. ANALYSIS OF CHANGES IN NET INTEREST INCOME For the Year Ended December 31, 1998 Compared to 1997 Change Due to Volume Rate Net ----------------------- EARNING ASSETS/INTEREST INCOME Securities Taxable $1,668 $ (546) $1,122 Nontaxable 72 (129) (57) Interest bearing deposits 176 112 288 Federal funds sold 935 (34) 901 Loans and leases 2,920 82 3,002 ------- ------- ------- TOTAL EARNING ASSETS 5,771 (515) 5,256 LIABILITIES/INTEREST EXPENSE Interest bearing deposits Savings accounts 999 196 1,195 Time, $100,000 and over 919 25 944 Other time deposits 805 (64) 741 Short-term borrowings 435 (99) 336 Other borrowings 1,226 95 1,321 ------- ------- ------- TOTAL INTEREST BEARING LIABILITIES 4,384 153 4,537 ------- ------- ------- NET INTEREST INCOME $1,387 $ (668) $ 719 ======= ======= ======= ANALYSIS OF CHANGES IN NET INTEREST INCOME For the Year Ended December 31, 1997 Compared to 1996 Change Due to Volume Rate Net ----------------------- EARNING ASSETS/INTEREST INCOME Securities Taxable $2,033 $ (32) $2,001 Nontaxable (1,133) (202) (1,335) Interest bearing deposits (51) (14) (65) Federal funds sold 55 16 71 Loans and leases 5,725 530 6,255 ------- ------- ------- TOTAL EARNING ASSETS 6,629 298 6,927 LIABILITIES/INTEREST EXPENSE Interest bearing deposits Savings accounts 813 30 843 Time, $100,000 and over (163) (7) (170) Other time deposits 1,641 261 1,902 Short-term borrowings 1,739 58 1,797 Other borrowings (331) 82 (249) ------- ------- ------- TOTAL INTEREST BEARING LIABILITIES 3,699 424 4,123 ------- ------- ------- NET INTEREST INCOME $2,930 $ (126) $2,804 ======= ======= ======= ANALYSIS OF CHANGES IN NET INTEREST INCOME For the Year Ended December 31, 1996 Compared to 1995 Change Due to Volume Rate Net ----------------------- EARNING ASSETS/INTEREST INCOME Securities Taxable $1,260 $ (430) $ 830 Nontaxable 574 (137) 437 Interest bearing deposits 48 (1) 47 Federal funds sold (71) (59) (130) Loans and leases 1,456 230 1,686 ------- ------- ------- TOTAL EARNING ASSETS 3,267 (397) 2,870 LIABILITIES/INTEREST EXPENSE Interest bearing deposits Savings accounts 286 (150) 136 Time, $100,000 and over 425 48 473 Other time deposits 296 256 552 Short-term borrowings 883 (176) 707 Other borrowings 285 (38) 247 ------- ------- ------- TOTAL INTEREST BEARING LIABILITIES 2,175 (60) 2,115 ------- ------- ------- NET INTEREST INCOME $1,092 $(337) $ 755 ======= ======= ======= PROVISION FOR LOAN AND LEASE LOSSES The provision for loan and lease losses decreased $328 or 25.65% during 1998 and $129 or 9.16% during 1997. During 1996, additional provision resulted from a $469 writedown in the commercial loan portfolio at FCB on a pool of leases purchased from the Bennett Funding Group. During 1998, provision was reduced as a result of a $357 recovery on this same pool of leases. The allowance for loan and lease losses as a percentage of total loans and leases increased to 1.35% at December 31, 1998, from 1.32% at December 31, 1997 and 1.28% at December 31, 1996. NONINTEREST INCOME For the Years Ended December 31, 1998 1997 1996 ------------------------ Service charges and fees $ 3,013 $ 2,723 $ 2,437 Trust fees 2,284 2,009 1,810 Brokerage commissions 413 324 212 Insurance commissions 751 563 650 Securities gains, net 1,897 1,446 1,889 Rental income on operating leases 7,428 811 - Gains on sale of loans 1,212 373 131 Other noninterest income 299 316 235 -------- -------- -------- Total noninterest income $17,297 $ 8,565 $ 7,364 ======== ======== ======== The above table shows Heartland's noninterest income for the years indicated. Total noninterest income increased $8,732 or 101.95% during 1998, as compared to an increase of $1,201 or 16.31% during 1997. Expansion into the vehicle leasing and fleet management business was responsible for the significant growth in noninterest income during both years. Rental income on operating leases accounted for 75.78% and 67.53% of the change in 1998 and 1997, respectively. ULTEA's first full year of operation as a Heartland subsidiary occurred in 1997. During the third quarter of 1998, LAG was acquired and subsequently merged into ULTEA. Gains on sale of loans increased $839 or 224.93% during 1998 and $242 or 184.73% during 1997. Heartland experienced refinancing activity in its real estate mortgage loan portfolio, especially during 1998, as a result of decreasing interest rates. The majority of these new fixed rate 15- and 30-year real estate loans were sold into the secondary market. Securities gains increased $451 or 31.19% during 1998 compared to 1997 and were attributable to the strong performance of Heartland's equity portfolio. During 1997, securities gains decreased $443 or 23.45% compared to 1996. A gain of $1,174 on the sale of Federal Home Loan Mortgage Corporation common stock held in the investment portfolio at FCB was recorded in 1996. Heartland was able to sustain a portion of those gains during 1997 due to its equity portfolio performance. Emphasis during the past several years on enhancing revenues from services provided to customers has influenced the growth of fee income. Service charges, trust fees and brokerage commissions all increased by more than 10% during each of the past two years. NONINTEREST EXPENSE For the Years Ended December 31, 1998 1997 1996 ------------------------ Salaries and employee benefits $15,218 $13,070 $11,035 Occupancy, net 1,695 1,354 1,268 Furniture and equipment 1,998 1,537 1,236 Outside services 1,416 1,439 1,155 FDIC deposit insurance assessment 118 116 746 Advertising 1,150 826 996 Depreciation on equipment under operating leases 5,296 584 - Other noninterest expense 4,890 4,001 3,071 -------- -------- -------- Total noninterest expense $31,781 $22,927 $19,507 ======== ======== ======== Efficiency ratio (1) 71.58% 64.77% 63.03% ======== ======== ======== (1) Noninterest expense divided by the sum of net interest income and noninterest income less securities gains. The above table shows Heartland's noninterest expense for the years indicated. Noninterest expense increased $8,854 or 38.62% in 1998 as compared to 1997. Total 1997 noninterest expense represented an increase of $3,420 or 17.53% from the 1996 total. The largest component of the increase in noninterest expense during 1998 was related to the addition of LAG to the ULTEA operations, as depreciation on equipment under operating leases increased $4,712 or 806.85%. During 1997, the depreciation on equipment under operating leases accounted for $584 of the change in noninterest expense. Exclusive of depreciation on equipment under operating leases, the change in noninterest expense during 1998 was $4,142 or 18.54%. Salaries and employee benefits expense continued to experience increases during both 1998 and 1997, growing $2,148 or 16.43% and $2,035 or 18.44%, respectively. In addition to the normal merit and cost of living raises, these increases were attributable to Heartland's continued expansion efforts, particularly the additions of NMB, WCB and ULTEA. In addition to the increases experienced in salaries and employee benefits, the expansion efforts underway during the past two years have resulted in additional occupancy, furniture and equipment and advertising/public relations costs. These expenses increased $1,126 or 30.29% during 1998 and $217 or 6.20% during 1997. Exclusive of a one-time contribution of stock from FCB's securities portfolio to a public charitable trust at a cost basis of $220 during 1996, these costs increased $437 or 13.32% during 1997. Other noninterest expenses grew $889 or 22.22% during 1998 compared to an increase of $930 or 30.28% during 1997. 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. Federal Deposit Insurance Corporation ("FDIC") premium expense decreased $630 (84.45%) during 1997 compared to 1996. The one- time special assessment on all savings associations to capitalize the Savings Association Insurance Fund ("SAIF") amounted to $545 at FCB and was recorded during 1996. Also contributing to this change was the reduction in FDIC premium expense on January 1, 1997, at FCB when the assessment for SAIF members dropped from .23% to .065% of deposits. INCOME TAXES Income tax expense increased $419 or 12.55% for 1998 and $653 or 24.32% for 1997. The effective tax rate increased from 25.11% in 1996, to 28.16% in 1997 and 29.40% in 1998. Reductions in tax- exempt income contributed to these increases. FINANCIAL CONDITION LENDING ACTIVITIES Heartland's major source of income is interest on loans and leases. The table below presents the composition of Heartland's loan portfolio at the end of the years indicated. LOAN PORTFOLIO December 31, 1998 1997 Amount Percent Amount Percent ------ ------- ------ ------- Commercial and commercial real estate $277,765 46.88% $242,868 43.46% Residential mortgage 156,415 26.40 175,268 31.37 Agricultural and agricultural real estate 77,211 13.03 69,302 12.40 Consumer 72,642 12.26 64,223 11.49 Lease financing, net 8,508 1.43 7,171 1.28 -------- ------- -------- ------- Gross loans and leases 592,541 100.00% 558,832 100.00% ======= ======= Unearned discount (2,136) (2,077) Deferred loan fees (272) (349) --------- --------- Total loans and leases 590,133 556,406 Allowance for loan and lease losses (7,945) (7,362) --------- --------- Loans and leases, net $582,188 $549,044 ========= ========= LOAN PORTFOLIO December 31, 1996 1995 Amount Percent Amount Percent ------ ------- ------ ------- Commercial and commercial real estate $206,523 42.46% $191,866 42.00% Residential mortgage 166,999 34.33 158,324 34.66 Agricultural and agricultural real estate 57,526 11.83 59,089 12.94 Consumer 48,361 9.94 38,988 8.54 Lease financing, net 7,042 1.44 8,530 1.86 -------- ------- -------- ------- Gross loans and leases 486,451 100.00% 456,797 100.00% ======= ======= Unearned discount (1,962) (1,510) Deferred loan fees (404) (382) --------- --------- Total loans and leases 484,085 454,905 Allowance for loan and lease losses (6,191) (5,580) --------- --------- Loans and leases, net $477,894 $449,325 ========= ========= LOAN PORTFOLIO December 31, 1994 Amount Percent ------ ------- Commercial and commercial real estate $170,998 40.32% Residential mortgage 150,147 35.41 Agricultural and agricultural real estate 56,736 13.38 Consumer 36,068 8.51 Lease financing, net 10,076 2.38 -------- ------- Gross loans and leases 424,025 100.00% ======= Unearned discount (1,438) Deferred loan fees (371) --------- Total loans and leases 422,216 Allowance for loan and lease losses (5,124) --------- Loans and leases, net $417,092 ========= The table below sets forth the remaining maturities by loan and lease category. MATURITY AND RATE SENSITIVITY OF LOANS AND LEASES (1) December 31, 1998 Over 1 Year Through 5 Years One Year Fixed Floating or less Rate Rate ------------------------------ Commercial and commercial real estate $115,214 $102,354 $ 29,232 Residential mortgage 62,947 22,622 28,761 Agricultural and agricultural real estate 35,278 28,707 6,163 Consumer 18,618 35,961 7,514 Lease financing, net 2,571 5,737 - -------- -------- -------- Total $234,628 $195,381 $ 71,670 ======== ======== ======== Over 5 Years Fixed Floating Rate Rate Total ------------------------------- Commercial and commercial real estate $ 7,838 $ 23,127 $277,765 Residential mortgage 12,891 29,194 156,415 Agricultural and agricultural real estate 2,279 4,784 77,211 Consumer 3,706 6,843 72,642 Lease financing, net 200 - 8,508 -------- -------- -------- Total $ 26,914 $ 63,948 $592,541 ======== ======== ======== (1) Maturities based upon contractual dates. Net loans and leases grew $33,144 or 6.04% from December 31, 1997, to December 31, 1998, compared to $71,150 or 14.89% from December 31, 1996, to December 31, 1997. The opening of NMB accounted for $28,829 or 86.98% of the growth during 1998 while the WCB acquisition accounted for $22,906 or 32.19% of the growth during 1997. During both years, the largest dollar growth occurred in commercial and commercial real estate loans, which increased $34,897 or 14.37% during 1998 and $36,345 or 17.60% during 1997. NMB made up $22,860 or 65.51% of the 1998 growth while WCB accounted for $10,789 or 29.68% of the 1997 growth in this loan category. Consumer loan outstandings grew $8,419 or 13.11% during 1998. Loans at NMB made up $2,721 or 32.32% of this change. Exclusive of the WCB loan portfolio, consumer loan outstandings grew $11,474 or 23.73% during 1997. These increases were attributed to significant growth in consumer lines of credit and dealer paper. Agricultural and agricultural real estate loans experienced $7,909 or 11.41% growth during 1998. This same loan category, exclusive of WCB, grew $10,569 or 18.37% during 1997. These increases reflected the solid reputation and expertise DB&T has developed in agricultural lending, combined with continued calling efforts. Residential mortgage loan outstandings, the only loan category to experience a decrease during 1998, declined $18,853 or 10.76%. This decrease occurred as customers chose fixed rate 15- and 30- year mortgages which the subsidiary banks elected to sell into the secondary market. In 1997, exclusive of WCB, Heartland's total outstanding residential mortgage loans increased $1,406 or .84%. Although the risk of nonpayment for any reason exists with respect to all loans, specific risks are associated with each type of loan. The primary risks associated with commercial and agricultural loans are the quality of the borrower's management and the impact of national and regional economic factors. Risks associated with real estate loans include fluctuating land values and concentrations of loans in a specific type of real estate. Consumer loans also have risks associated with concentrations of loans in a single type of loan and the risk of a borrower's unemployment as a result of deteriorating economic conditions. Heartland monitors its loan concentrations and does not believe it has concentrations in any specific industry other than agriculture. Heartland's strategy with respect to the management of these types of risks, whether loan demand is weak or strong, is to encourage the Heartland banks to follow tested and prudent loan policies and underwriting practices which include: (i) granting loans on a sound and collectible basis; (ii) investing funds profitably for the benefit of stockholders and the protection of depositors; (iii) serving the needs of the community and each bank's general market area while obtaining a balance between maximum yield and minimum risk; (iv) ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan; (v) administering loan policies through a Board of Directors and an officers' loan committee; (vi) developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each loan category; and (vii) ensuring that each loan is properly documented and, if appropriate, guaranteed by government agencies and that insurance coverage is adequate. NONPERFORMING LOANS AND LEASES AND OTHER NONPERFORMING ASSETS The table below sets forth the amounts of nonperforming loans and leases and other nonperforming assets on the dates indicated. NONPERFORMING ASSETS December 31, 1998 1997 1996 1995 1994 ---------------------------------- Nonaccrual loans and leases $1,324 $1,819 $1,697 $ 977 $ 748 Loan and leases contractually past due 90 days or more 426 187 247 226 134 Restructured loans and leases - 26 30 - - ------ ------ ------ ------ ------ Total nonperforming loans and leases 1,750 2,032 1,974 1,203 882 Other real estate 857 774 532 640 134 Other repossessed assets 77 124 21 51 39 ------ ------ ------ ------ ------ Total nonperforming assets $2,684 $2,930 $2,527 $1,894 $1,055 ====== ====== ====== ====== ====== Nonperforming loans and leases to total loans and leases 0.30% 0.37% 0.41% 0.26% 0.21% Nonperforming assets to total loans and leases plus repossessed property 0.45% 0.53% 0.52% 0.42% 0.25% Nonperforming assets to total assets 0.28% 0.34% 0.34% 0.28% 0.17% Under Heartland's internal loan review program, a loan review officer is responsible for reviewing existing loans and leases, identifying potential problem loans and leases and monitoring the adequacy of the allowance for possible loan and lease losses at each of the Heartland banks. Heartland constantly monitors and continues to develop systems to oversee the quality of its loan portfolio. One integral part is a loan rating system which assigns a rating on each loan and lease within the portfolio based on the borrower's repayment ability, collateral position and repayment history. This emphasis on quality is reflected in Heartland's credit quality figures which compare very favorably to peer data in the September 1998 Bank Holding Company Performance Report published by the Federal Reserve Board for bank holding companies with assets of $500 million to $1 billion. In this report, the peer group reported nonperforming assets to total assets of .49% and .50% for September 30, 1998, and December 31, 1997, respectively. Heartland's ratios at December 31, 1998 and 1997, were .28% and .34%, respectively. ALLOWANCE FOR LOAN AND LEASE LOSSES The adequacy of the allowance for loan and lease losses is determined by an internally-developed system which equally weighs formulas established by the Office of the Comptroller of the Currency and the Bank Administration Institute, in addition to Heartland's historical charge-offs. This system addresses loan portfolio composition, loan and lease delinquencies, potential and existing internally classified credits and other factors that, in management's judgment, deserve evaluation in estimating loan and lease losses. 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 Heartland Board of Directors. Heartland increased its allowance for loan and lease losses during 1998 and 1997 due to a number of factors considered by the Heartland Loan Review Committee, including the following: (i) a continued increase in higher-risk consumer and more-complex commercial and agricultural loans from relatively lower-risk residential real estate loans; (ii) the entrance into new markets in which Heartland had little or no previous lending experience; and (iii) the economies in Heartland'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 December 31, 1998. While management uses available information to provide for loan and lease losses, the ultimate collectibility of a substantial portion of the loan portfolio and the need for future additions to the allowance will be based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan and lease losses carried by the Heartland subsidiaries. Such agencies may require Heartland to make additional provisions to the allowance based upon their judgment about information available to them at the time of their examinations. The table below summarizes activity in the allowance for loan and lease losses for the years indicated, including amounts of loans and leases charged off, amounts of recoveries, additions to the allowance charged to income and the ratio of net charge-offs to average loans and leases outstanding. ANALYSIS OF ALLOWANCE FOR LOAN AND LEASE LOSSES December 31, 1998 1997 1996 1995 1994 -------------------------------------- Allowance at beginning of year $7,362 $6,191 $5,580 $5,124 $4,433 Charge-offs: Commercial and commercial real estate 289 93 578 108 94 Residential mortgage 20 21 23 6 16 Agricultural and agricultural real estate 41 21 2 - - Consumer 473 449 323 381 244 Lease financing - - - - - ------ ------ ------ ------ ------ Total charge-offs 823 584 926 495 354 ------ ------ ------ ------ ------ Recoveries: Commercial and commercial real estate 372 36 16 22 27 Residential mortgage - 8 1 15 5 Agricultural and agricultural real estate 1 2 45 8 43 Consumer 82 99 67 86 148 Lease financing - - - - - ------ ------ ------ ------ ------ Total recoveries 455 145 129 131 223 ------ ------ ------ ------ ------ Net charge-offs 368 439 797 364 131 Provision for loan and lease losses 951 1,279 1,408 820 811 Additions related to acquisitions - 331 - - - Keokuk merger adjustments - - - - 11 ------ ------ ------ ------ ------ Allowance at end of period $7,945 $7,362 $6,191 $5,580 $5,124 ====== ====== ====== ====== ====== Net charge-offs to average loans and leases 0.07% 0.08% 0.17% 0.08% 0.03% ====== ====== ====== ====== ====== The table below shows Heartland's allocation of the allowance for loan and lease losses by types of loans and leases and the amount of unallocated reserves. ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES As of December 31, 1998 1997 --------------------------------------- Loan/ Loan/ Lease Lease Category Category to Gross to Gross Loans & Loans & Amount Leases Amount Leases ------ --------- ------ --------- Commercial and commercial real estate $2,180 46.88% $1,889 43.46% Residential mortgage 697 26.40 725 31.37 Agricultural and agricultural real estate 583 13.03 577 12.40 Consumer 1,096 12.26 1,044 11.49 Lease financing(1) 44 1.43 30 1.28 Unallocated 3,345 - 3,097 - ------- ------- ------- ------- $7,945 100.00% $7,362 100.00% ======= ======= ======= ======= ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES As of December 31, 1996 1995 --------------------------------------- Loan/ Loan/ Lease Lease Category Category to Gross to Gross Loans & Loans & Amount Leases Amount Leases ------ --------- ------ --------- Commercial and commercial real estate $1,568 42.46% $1,430 42.00% Residential mortgage 590 34.33 500 34.66 Agricultural and agricultural real estate 480 11.83 518 12.94 Consumer 818 9.94 618 8.54 Lease financing(1) 28 1.44 34 1.86 Unallocated 2,707 - 2,480 - ------- ------- ------- ------- $6,191 100.00% $5,580 100.00% ======= ======= ======= ======= ALLOCATION OF ALLOWANCE FOR LOAN AND LEASE LOSSES As of December 31, 1994 -------------------------- Loan/ Lease Category to Gross Loans & Amount Leases ------- -------- Commercial and commercial real estate $1,321 40.32% Residential mortgage 501 35.41 Agricultural and agricultural real estate 423 13.38 Consumer 593 8.51 Lease financing(1) 45 2.38 Unallocated 2,241 - ------- ------- $5,124 100.00% ======= ======= SECURITIES The primary objective of the securities portfolio continues to be to provide the Heartland bank subsidiaries with a source of liquidity given their high loan-to-deposit ratios. Securities represented 25.42% of total assets at December 31, 1998, as compared to 23.68% at December 31, 1997 and 24.98% at December 31, 1996. To maximize the return on the portfolio, as treasury securities matured during 1998 and 1997, many of the replacement purchases were made in U.S. government agencies and fixed-rate collateralized mortgage obligations ("CMO's"). During 1998 and 1997, the portion of the securities portfolio held in U.S. treasuries decreased to .71% and 6.62%, respectively, compared to 7.67% at December 31, 1996. Heartland continued to purchase tightly structured tranches in well-seasoned CMO's to reduce its exposure to prepayments. These investments closely resemble treasury securities in their repayment predictability and accordingly are less volatile to interest rate fluctuations, while still providing an increased spread when compared to U.S. treasuries with similar maturities. The state tax-exempt nature on selected U.S. government agencies made them attractive purchases for Heartland's Illinois bank subsidiaries. The tables below presents the composition and maturities of the securities portfolio by major category. SECURITIES PORTFOLIO COMPOSITION December 31, 1998 1997 1996 ----------------------------------------------- % of % of % of Portfolio Portfolio Portfolio Amount Amount Amount ------------------------------------------------- U. S. Treasury securities $ 1,709 0.71% $ 13,342 6.62% $ 14,117 7.67% U. S. government agencies 77,361 31.90 64,360 31.90 61,332 33.34 Mortgage-backed securities 128,317 52.92 87,015 43.13 75,017 40.78 States and political subdivisions 21,536 8.88 20,702 10.26 18,812 10.23 Other securities 13,565 5.59 16,329 8.09 14,688 7.98 -------- ------ ------- ------ -------- ------ Total $242,488 100.00% $201,748 100.00% $183,966 100.00% ======== ======= ======== ======= ======== ======= SECURITIES PORTFOLIO COMPOSITION Held to Maturity Available for Sale % of % of December 31, 1998 Amount Portfolio Amount Portfolio --------------------------------------- U.S. Treasury securities $ - -% $ 1,709 0.71% U.S. government agencies - - 77,361 31.90 Mortgage-backed securities - - 128,317 52.92 States and political subdivisions 2,718 1.12 18,818 7.76 Other securities - - 13,565 5.59 ------ ------- -------- ------- Total $2,718 1.12% $239,770 98.88% ====== ======= ======== ======= SECURITIES PORTFOLIO COMPOSITION Total % of December 31, 1998 Amount Portfolio ------------------- U.S. Treasury securities $ 1,709 0.71% U.S. government agencies 77,361 31.90 Mortgage-backed securities 128,317 52.92 States and political subdivisions 21,536 8.88 Other securities 13,565 5.59 -------- ------- Total $242,488 100.00% ======== ======= SECURITIES PORTFOLIO COMPOSITION Held to Maturity Available for Sale % of % of December 31, 1997 Amount Portfolio Amount Portfolio --------------------------------------- U.S. Treasury securities $ - -% $ 13,342 6.62% U.S. government agencies 598 .30 63,762 31.60 Mortgage-backed securities 325 .16 86,690 42.97 States and political subdivisions 2,956 1.46 17,746 8.80 Other securities - - 16,329 8.09 ------ ------- -------- ------- Total $3,879 1.92% $197,869 98.08% ====== ======= ======== ======= SECURITIES PORTFOLIO COMPOSITION Total % of December 31, 1997 Amount Portfolio ------------------- U.S. Treasury securities $ 13,342 6.62% U.S. government agencies 64,360 31.90 Mortgage-backed securities 87,015 43.13 States and political subdivisions 20,702 10.26 Other securities 16,329 8.09 -------- ------- Total $201,748 100.00% ======== ======= SECURITIES PORTFOLIO MATURITIES After One But Within One Year Within Five Years --------------- ----------------- December 31, 1998 Amount Yield Amount Yield ------------------------------------ U.S. Treasury securities $ 1,709 6.41% $ - 0.00% U.S. government agencies 15,549 6.03 61,794 5.55 Mortgage-backed securities 58,863 6.92 60,718 6.79 States and political subdivisions (1) 45 9.99 6,107 8.67 Other securities 612 8.48 1,881 5.65 -------- ------- ------- ------- Total $ 76,778 6.74% $130,500 6.28% ======== ======= ======== ======= SECURITIES PORTFOLIO MATURITIES After Five But Within Ten Years After Ten Years ---------------- ----------------- Amount Yield Amount Yield ------------------------------------ U.S. Treasury securities $ - -% $ - -% U.S. government agencies - - 18 10.25 Mortgage-backed securities - - 8,736 8.17 States and political subdivisions (1) 6,184 7.99 9,200 7.27 Other securities - - - - ------- ------- ------- ------ Total $ 6,184 7.99% $17,954 7.71% ======= ======= ======= ====== SECURITIES PORTFOLIO MATURITIES Total Amount Yield ------------------- U.S. Treasury securities $ 1,709 6.41% U.S. government agencies 77,361 5.65 Mortgage-backed securities 128,317 6.94 States and political subdivisions (1) 21,536 7.88 Other securities 2,493 6.35 -------- ------- Total $231,416 6.59% ======== ======= (1) Rates on obligations of states and political subdivisions have been adjusted to tax equivalent yields using a 34% income tax rate. DEPOSITS AND BORROWED FUNDS Heartland has a relatively stable core deposit base drawn from within its market areas. Total average deposits increased $67,607 or 11.41% from the total average deposits during 1997. All the subsidiary banks, with the exception of FCB, were able to grow average deposits by more than seven percent during 1998 with the de novo community banks of RCB and NMB making up $22,335 or 33.04% of this growth. Exclusive of WCB, total average deposits increased $27,578 or 5.14% during 1997. This was an improvement over the $22,818 or 4.44% increase experienced during 1996 and was primarily attributable to strong growth at GSB and RCB. Average noninterest bearing deposits grew $8,744 or 16.89% during 1998 and $2,575 or 5.70%, exclusive of WCB, during 1997. Average interest bearing deposits increased $58,863 or 10.88% during 1998 and $25,003 or 5.09%, exclusive of WCB, during 1997. In order to attract additional customers, all of the subsidiary banks have continued to enhance their deposit product lines. The mix of individual account balances to total deposits has remained very constant over each of the past three years. The table below sets forth the distribution of Heartland's average deposit account balances and the average interest rates paid on each category of deposits for the years indicated. AVERAGE DEPOSITS For the year ended December 31, 1998 Percent Average of Balance Deposits Rate ------------------------ Demand deposits $ 60,514 9.17% 0.00% Savings accounts 266,282 40.33 3.57 Time deposits less than $100,000 282,142 42.73 5.75 Time deposits of $100,000 or more 51,283 7.77 5.66 -------- ------- Total deposits $660,221 100.00% ======== ======= AVERAGE DEPOSITS For the year ended December 31, 1997 Percent Average of Balance Deposits Rate ------------------------ Demand deposits $ 51,770 8.74% 0.00% Savings accounts 237,730 40.12 3.50 Time deposits less than $100,000 268,201 45.25 5.77 Time deposits of $100,000 or more 34,913 5.89 5.62 -------- ------- Total deposits $592,614 100.00% ======== ======= AVERAGE DEPOSITS For the year ended December 31, 1996 Percent Average of Balance Deposits Rate ------------------------ Demand deposits $ 45,205 8.42% 0.00% Savings accounts 214,401 39.95 3.49 Time deposits less than $100,000 239,300 44.59 5.68 Time deposits of $100,000 or more 37,806 7.04 5.64 -------- ------- Total deposits $536,712 100.00% ======== ======= The following table sets forth the amount and maturities of time deposits of $100,000 or more at December 31, 1998. Time Deposits $100,000 and Over December 31, 1998 ------------ 3 months or less $17,769 Over 3 months through 6 months 14,686 Over 6 months through 12 months 12,428 Over 12 months 17,410 ------- $62,293 ======= All of the Heartland banks, except for WCB and NMB, own stock in the Federal Home Loan Bank ("FHLB") of Des Moines and of Chicago, enabling them to borrow funds from their respective FHLB for short- or long-term purposes under a variety of programs. Total FHLB borrowings at December 31, 1998 and 1997, were $40,618 and $64,400, respectively. During 1997, Heartland used additional FHLB advances as loan demand exceeded deposit growth. As deposit growth exceeded loan demand during the course of 1998, no additional advances were taken and total advances declined as borrowings matured. Heartland also utilizes securities sold under agreements to repurchase as a source of funds. All the bank subsidiaries provide repurchase agreements to their customers as a cash management tool, sweeping excess funds from demand deposit accounts into these agreements. This source of funding does not increase the bank's reserve requirements, nor does it create an expense relating to FDIC premiums on deposits. Although the aggregate balance of repurchase agreements is subject to variation, the account relationships represented by these balances are principally local and have been maintained for relatively long periods of time. On October 31, 1997, Heartland entered into a four year, unsecured revolving credit agreement with an unaffiliated bank. The total borrowings under this credit line were $16,200 and $3,500 at December 31, 1998 and 1997, respectively. This credit line was established to provide working capital to the nonbanking subsidiaries and to meet general corporate commitments, including the $12,050 capital investment in NMB. The following table reflects short-term borrowings which in the aggregate have average balances during the period greater than 30% of stockholders equity at the end of the period. SHORT-TERM BORROWINGS At or for the Year Ended December 31, 1998 1997 1996 ------------------------ Balance at end of period $ 75,920 $96,239 $56,358 Maximum month-end amount outstanding 102,313 96,239 56,358 Average month-end amount outstanding 80,277 73,170 42,025 Weighted average interest rate at year-end 5.00% 5.49% 5.75% Weighted average interest rate for the year ended 5.19 5.32% 5.24% CAPITAL RESOURCES Heartland's risk-based capital ratios, which take into account the different credit risks among banks' assets, have remained strong over the past three years. Tier 1 and total risk-based capital ratios were 11.05% and 12.13%, respectively, on December 31, 1998, compared with 11.54% and 12.71% at December 31, 1997, and 13.10% and 14.28% for December 31, 1996. At December 31, 1998, Heartland's leverage ratio, the ratio of Tier 1 capital to total average assets, was 8.58% compared to 8.76% and 9.54% at December 31, 1997 and 1996, respectively. Commitments for capital expenditures are an important factor in evaluating capital adequacy. Heartland completed the acquisition of WCB on March 1, 1997. Cash payments remaining under the agreement are $823 in 1999, $594 in 2000 and $584 in 2001, plus interest at rates of 7.00% to 7.50%. On July 17, 1998, Heartland completed the acquisition and merger into ULTEA of Arrow Motors Inc., a Wisconsin corporation doing business as LAG. In conjunction with this merger, Heartland agreed to three equal cash payments of $643 in 1999, 2000 and 2001, plus interest at 7.50%. In February, 1999, WCB entered into an office purchase and assumption agreement with Bank One Wisconsin to acquire their Monroe bank. Pending regulatory approval and the satisfaction of certain conditions, the transaction is anticipated to close in July with a cash payment of $11,487 and an additional capital investment of approximately $7,000. NMB has committed to the purchase of a $1,000 facility in north- central Albuquerque with an anticipated closing date of April, 1999. Additionally, NMB contracted for the construction of a $1,700 facility in Rio Rancho, a suburb northeast of Albuquerque, with a targeted completion date of June, 1999. Expansion efforts are also underway at RCB, as it committed to the construction of a $1,300 facility in southeast Rockford. Completion of this branch is targeted for June, 1999. Heartland continues to explore other 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. Heartland's capital ratios are detailed in the table below. RISK-BASED CAPITAL RATIOS(1) December 31, 1998 1997 1996 Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------- Capital Ratios: Tier 1 capital $ 81,149 11.05% $ 71,713 11.54% $ 67,701 13.10% Tier 1 capital minimum requirement 29,379 4.00 24,854 4.00 20,667 4.00 -------- ------ -------- ------ -------- ----- Excess $ 51,770 7.05% $ 46,859 7.54% $ 47,034 9.10% ======== ====== ======== ====== ======== ====== Total capital $ 89,093 12.13% $ 78,995 12.71% $ 73,777 14.28% Total capital minimum requirement 58,757 8.00 49,707 8.00 41,334 8.00 -------- ------ -------- ------ -------- ----- Excess $ 30,336 4.13% $ 29,288 4.71% $ 32,443 6.28% ======== ====== ======== ====== ======== ====== Total risk- adjusted assets $734,463 $621,338 $516,678 ======== ======== ======== (1) Based on the risk-based capital guidelines of the Federal Reserve, a bank holding company is required to maintain a Tier 1 to risk-adjusted assets ratio of 4.00% and total to risk-adjusted assets ratio of 8.00%. LEVERAGE RATIOS(1) December 31, 1998 1997 1996 Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------ Capital Ratios: Tier 1 capital $ 81,149 8.58% $ 71,713 8.76% $ 67,701 9.54% Tier 1 capital minimum requirement(2) 37,810 4.00 32,729 4.00 28,375 4.00 -------- ------ -------- ------ -------- ----- Excess $ 43,339 4.58% $ 38,984 4.76% $ 39,326 5.54% ======== ====== ======== ====== ======== ===== Average adjusted assets $945,242 $818,232 $709,387 ======== ======== ======== (1)The leverage ratio is defined as the ratio of Tier 1 capital to average total assets. (2)Management of Heartland 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 an additional cushion of at least 100 basis points. LIQUIDITY Liquidity refers to Heartland's ability to maintain a cash flow which is adequate to meet maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund operations and to provide for customers' credit needs. Heartland's usual and primary sources of funding have been deposits, loan and mortgage-backed security principal repayments, sales of loans, cash flow generated from operations and FHLB borrowings. Heartland's short-term borrowing balances are dependent on commercial cash management and smaller correspondent bank relationships and, as such, will normally fluctuate. Heartland believes these balances, on average, to be stable sources of funds; however, it intends to rely on deposit growth and additional FHLB borrowings in the future. 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. Heartland's revolving credit agreement provides for total borrowings of up to $20,000 at any one time. The agreement contains specific covenants which, among other things, limit dividend payments and restrict the sale of assets by Heartland under certain circumstances. Also contained within the agreement are certain financial covenants, including the maintenance 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. At December 31, 1998, Heartland was in compliance with the above covenants. MARKET RISK MANAGEMENT Market risk is the risk of loss arising from adverse changes in market prices and rates. Heartland's market risk is comprised primarily of interest rate risk resulting from its core banking activities of lending and deposit gathering. Interest rate risk measures the impact on earnings from changes in interest rates and the effect on current fair market values of Heartland's assets, liabilities and off-balance sheet contracts. The objective is to measure this risk and manage the balance sheet to avoid unacceptable potential for economic loss. Heartland management continually develops and applies strategies to mitigate market risk. Exposure to market risk is reviewed on a regular basis by the asset/liability committees at the banks and, on a consolidated basis, by the Heartland Board of Directors. Monthly, management utilizes both the standard balance sheet GAP report and an independently developed income statement GAP report to analyze the effect of changes in interest rates on net interest income and to manage interest rate risk. Also utilized periodically during the year is an interest rate sensitivity analysis which simulates changes in net interest income in response to various interest rate scenarios. This analysis considers current portfolio rates, existing maturities, repricing opportunities and market interest rates, in addition to prepayments and growth under different interest rate assumptions. Through the use of these tools Heartland has determined that the balance sheet is structured such that changes in net interest margin in response to changes in interest rates would be minimal, all other factors being held constant. Management does not believe that Heartland's primary market risk exposures and how those exposures were managed in 1998 have changed when compared to 1997. Derivative financial instruments include futures, forwards, interest rate swaps, option contracts and other financial instruments with similar characteristics. Heartland was not a party to these types of derivatives at December 31, 1998. However, Heartland does enter into financial instruments with off- balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower. Standby letters of credit are conditional commitments issued by Heartland to guarantee the performance of a customer to a third party up to a stated amount and with specified terms and conditions. These commitments to extend credit and standby letters of credit are not recorded on the balance sheet until the instrument is exercised. The table below summarizes the scheduled maturities of market risk sensitive assets and liabilities as of December 31, 1998. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK TABLE OF MARKET RISK-SENSITIVE INSTRUMENTS December 31, 1998 MATURING IN: 1999 2000 2001 2002 ------------------------------------ ASSETS Federal funds sold $ 17,476 $ - $ - $ - Time deposits in other financial institutions 542 4,679 876 - Securities 76,778 68,954 22,588 25,948 Loans and leases: Fixed rate loans 140,991 65,080 67,017 32,558 Variable rate loans 91,229 37,334 17,601 9,886 -------- -------- -------- -------- Loans and leases, net 232,220 102,414 84,618 42,444 -------- -------- -------- -------- Total Market Risk- Sensitive Assets $327,016 $176,047 $108,082 $ 68,392 ======== ======== ======== ======== LIABILITIES Savings $292,852 $ - $ - $ - Time deposits Fixed rate time certificates less than $100,000 145,662 88,870 23,438 11,944 Variable rate time certificates less than $100,000 139 5,247 - - -------- -------- -------- -------- Time deposits less than $100,000 145,801 94,117 23,438 11,944 Time deposits of $100,000 or more 44,883 14,824 800 919 Federal funds purchased, securities sold under repurchase agreements and other short-term borrowings 75,920 - - - Other borrowings: Fixed rate borrowings - 18,664 7,654 5,005 Variable rate borrowings - - 16,200 2,000 -------- -------- -------- -------- Other borrowings - 18,664 23,854 7,005 -------- -------- -------- -------- Total Market Risk- Sensitive Liabilities $559,456 $127,605 $ 48,092 $ 19,868 ======== ======== ======== ======== Average Estimated Interest Fair MATURING IN: 2003 Thereafter Total Rate Value ------------------------------------------ ASSETS Federal funds sold $ - $ - $ 17,476 5.10% $ 17,476 Time deposits in other financial institutions - 30 6,127 5.54 6,127 Securities 13,011 35,209 242,488 6.59 242,641 Loans and leases: Fixed rate loans 30,726 26,914 363,286 8.51 365,899 Variable rate loans 6,849 63,948 226,847 8.03 228,286 -------- -------- -------- -------- Loans and leases, net 37,575 90,862 590,133 594,185 -------- -------- -------- -------- Total Market Risk- Sensitive Assets $ 50,586 $126,101 $856,224 $860,429 ======== ======== ======== ======== LIABILITIES Savings $ - $ - $292,852 3.34% $292,852 Time deposits Fixed rate time certificates less than $100,000 16,434 127 286,475 5.68 289,887 Variable rate time certificates less than $100,000 - - 5,386 5.37 5,388 -------- -------- -------- -------- Time deposits less than $100,000 16,434 127 291,861 295,275 Time deposits of $100,000 or more 867 - 62,293 5.53 62,769 Federal funds purchased, securities sold under repurchase agreements and other short-term borrowings - - 75,920 5.00 75,920 Other borrowings: Fixed rate borrowings 1,505 6,595 39,423 6.19 40,672 Variable rate borrowings - - 18,200 5.54 18,200 -------- -------- -------- -------- Other borrowings 1,505 6,595 57,623 58,872 -------- -------- -------- -------- Total Market Risk Sensitive Liabilities $ 18,806 $ 6,722 $780,549 $785,688 ======== ======== ======== ======== EFFECTS OF INFLATION Consolidated financial data included in this report has been prepared in accordance with generally accepted accounting principles. Presently, these principles require reporting of financial position and operating results in terms of historical dollars. Changes in the relative value of money due to inflation or recession are generally not considered. In management's opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not change at the same rate or in the same magnitude as the inflation rate. Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as on changes in monetary and fiscal policies. A financial institution's ability to be relatively unaffected by changes in interest rates is a good indicator of its capability to perform in today's volatile economic environment. Heartland seeks to insulate itself from interest rate volatility by ensuring that rate-sensitive assets and rate-sensitive liabilities respond to changes in interest rates in a similar time frame and to a similar degree. YEAR 2000 Heartland began to identify and react to issues related to the Year 2000 in 1996. A Year 2000 project team, comprised of individuals from key areas throughout Heartland, 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 Heartland's operations, and to continue to monitor Year 2000 related concerns. Following the guidelines established by the Federal Financial Institutions Examination Council, a Year 2000 Plan was developed for Heartland 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. Heartland relies on software purchased from third- party vendors rather than internally-generated software. All mission-critical software has been tested and found to be Year 2000 compliant. Testing was done on a test computer rented specifically for this purpose, which was connected to Heartland's existing equipment in a manner similar to the production computer. The Year 2000 project team has also developed a communication plan that updates the directors, management and employees on Heartland's Year 2000 status. A customer awareness program was implemented in late 1998 and will continue throughout 1999. In addition, a separate plan was developed to manage the Year 2000 risks posed by commercial borrowing customers. This plan identified material loan customers, assessed their preparedness, evaluated their credit risk to Heartland, 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 has begun 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. Testing of this plan is scheduled for completion by April 30, 1999. In conjunction with the development of this contingency plan, the team continues to monitor Year 2000 progress by the public utility providers. As the utility companies complete their testing in 1999, Heartland will decide the appropriateness of purchasing or leasing a backup generator for its main facility. The generator would provide an alternative source of power for a limited time period. Also being assessed as part of the contingency plan is the adequacy of Heartland's sources of liquidity to meet any cash demands the bank subsidiaries' customers may place on them during the fourth quarter of 1999. Management anticipates that the total out-of-pocket expenditures required for bringing the systems into compliance for the Year 2000 will be approximately $360 of which $60 remains to be expended during 1999. 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, has been provided for in Heartland's Year 2000 budget. Although management feels confident that all necessary upgrades have been identified, 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, Heartland has not had any material delay regarding its information systems projects. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (Dollars in thousands, except per share data) Notes 1998 1997 ----- -------- -------- ASSETS Cash and due from banks 3 $ 25,355 $ 24,267 Federal funds sold 17,476 32,918 -------- -------- Cash and cash equivalents 42,831 57,185 Time deposits in other financial institutions 6,127 194 Securities: 4 Available for sale-at market (cost of $236,417 for 1998 and $193,805 for 1997) 239,770 197,869 Held to maturity-at cost (approximate market value of $2,871 for 1998 and $3,999 for 1997) 2,718 3,879 Loans and leases: 5 Held for sale 10,985 10,437 Held to maturity 579,148 545,969 Allowance for possible loan and lease losses 6 (7,945) (7,362) -------- -------- Loans and leases, net 582,188 549,044 Assets under operating leases 34,622 3,750 Premises, furniture and equipment, net 7 19,780 17,184 Other real estate, net 857 774 Other assets 24,892 22,181 -------- -------- TOTAL ASSETS $953,785 $852,060 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Deposits: 8 Demand $ 70,871 $ 60,950 Savings 292,852 252,292 Time 354,154 310,290 -------- -------- Total deposits 717,877 623,532 Short-term borrowings 9 75,920 96,239 Accrued expenses and other liabilities 18,095 11,494 Other borrowings 11 57,623 43,023 -------- -------- TOTAL LIABILITIES 869,515 774,288 -------- -------- STOCKHOLDERS' EQUITY: 13,14,16 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 December 31, 1998, and 4,853,626 at December 31, 1997) 9,707 4,854 Capital surplus 10,131 13,706 Retained earnings 65,007 58,914 Accumulated other comprehensive income 2,107 2,545 Treasury stock at cost (172,173 and 106,251 shares at December 31, 1998, and December 31, 1997, respectively) (2,682) (2,247) -------- -------- TOTAL STOCKHOLDERS' EQUITY 84,270 77,772 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $953,785 $852,060 ======== ======== See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) Notes 1998 1997 1996 ----- -------- -------- -------- INTEREST INCOME: Interest and fees on loans and leases 5 $49,901 $46,919 $40,670 Interest on securities: Taxable 11,515 10,393 8,392 Nontaxable 1,133 1,170 2,051 Interest on federal funds sold 1,582 681 610 Interest on interest bearing deposits in other financial institutions 386 98 163 -------- -------- -------- TOTAL INTEREST INCOME 64,517 59,261 51,886 -------- -------- -------- INTEREST EXPENSE: Interest on deposits 8 28,645 25,765 23,190 Interest on short-term borrowings 4,076 3,740 1,943 Interest on other borrowings 3,583 2,262 2,511 -------- -------- -------- TOTAL INTEREST EXPENSE 36,304 31,767 27,644 -------- -------- -------- NET INTEREST INCOME 28,213 27,494 24,242 Provision for possible loan and lease losses 6 951 1,279 1,408 -------- -------- -------- Net interest income after provision for possible loan and lease losses 27,262 26,215 22,834 -------- -------- -------- OTHER INCOME: Service charges and fees 3,013 2,723 2,437 Trust fees 2,284 2,009 1,810 Brokerage commissions 413 324 212 Insurance commissions 751 563 650 Securities gains, net 1,897 1,446 1,889 Rental income on operating leases 7,428 811 - Gains on sale of loans 1,212 373 131 Other 299 316 235 -------- -------- -------- TOTAL OTHER INCOME 17,297 8,565 7,364 -------- -------- -------- OTHER EXPENSES: Salaries and employee benefits 12 15,218 13,070 11,035 Occupancy 13 1,695 1,354 1,268 Furniture and equipment 1,998 1,537 1,236 Depreciation on equipment under operating leases 5,296 584 - Outside services 1,416 1,439 1,155 FDIC deposit insurance assessment 118 116 746 Advertising 1,150 826 996 Other operating expenses 4,890 4,001 3,071 -------- -------- -------- TOTAL OTHER EXPENSES 31,781 22,927 19,507 -------- -------- -------- Income before income taxes 12,778 11,853 10,691 Income taxes 10 3,757 3,338 2,685 -------- -------- -------- NET INCOME $ 9,021 $ 8,515 $ 8,006 ======== ======== ======== EARNINGS PER COMMON SHARE-BASIC $ 0.95 $ 0.90 $ 0.85 ======== ======== ======== EARNINGS PER COMMON SHARE- DILUTED 1 $ 0.94 $ 0.89 $ 0.84 ======== ======== ======== CASH DIVIDENDS DECLARED PER COMMON SHARE $ 0.31 $ 0.26 $ 0.20 ======== ======== ======== See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME For the years ended December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) Common Capital Retained Stock Surplus Earnings ------- ------- -------- Balance at January 1, 1996 $ 2,427 $13,090 $49,171 Net Income - 1996 8,006 Unrealized loss on securities available for sale Reclassification adjustment for gains realized in net income Income taxes Comprehensive income Cash dividends declared:(1) Common, $.20 per share (1,886) Two-for-one stock split 2,427 (2,427) Purchase of 32,446 shares of common stock Sale of 64,943 shares of common stock 276 ------- ------- ------- Balance at December 31, 1996 4,854 13,366 52,864 Net Income - 1997 8,515 Unrealized gain on securities available for sale Reclassification adjustment for gains realized in net income Income taxes Comprehensive income Cash dividends declared:(1) Common, $.26 per share (2,465) Purchase of 32,835 shares of common stock Sale of 44,650 shares of common stock 340 ------- ------- ------- BALANCE AT DECEMBER 31, 1997 4,854 13,706 58,914 Net Income - 1998 9,021 Unrealized gain on securities available for sale Reclassification adjustment for gains realized in net income Income taxes Comprehensive income Cash dividends declared: Common, $.31 per share (2,928) Two-for-one stock split 4,853 (4,853) Purchase of 166,970 shares of common stock Sale of 328,857 shares of common stock 1,278 ------- ------- ------- BALANCE AT DECEMBER 31, 1998 $ 9,707 $14,984 $60,154 ======= ======= ======= Accumulated Other Comprehensive Treasury Income Stock Total ------------- -------- ----- Balance at January 1, 1996 $ 2,620 $(2,802) $64,506 Net Income - 1996 8,006 Unrealized loss on securities available for sale (70) (70) Reclassification adjustment for gains realized in net income (1,889) (1,889) Income taxes 666 666 ------- Comprehensive income 6,713 Cash dividends declared:(1) Common, $.20 per share (1,886) Two-for-one stock split - Purchase of 32,446 shares of common stock (759) (759) Sale of 64,943 shares of common stock 1,409 1,685 ------- ------- ------- Balance at December 31, 1996 1,327 (2,152) 70,259 Net Income - 1997 8,515 Unrealized gain on securities available for sale 3,291 3,291 Reclassification adjustment for gains realized in net income (1,446) (1,446) Income taxes (627) (627) ------- Comprehensive income 9,733 Cash dividends declared:(1) Common, $.26 per share (2,465) Purchase of 32,835 shares of common stock (865) (865) Sale of 44,650 shares of common stock 770 1,110 ------- ------- ------- Balance at December 31, 1997 2,545 (2,247) 77,772 Net Income - 1998 9,021 Unrealized gain on securities available for sale 1,233 1,233 Reclassification adjustment for gains realized in net income (1,897) (1,897) Income taxes 226 226 ------- Comprehensive income 8,583 Cash dividends declared: Common, $.31 per share (2,928) Two-for-one stock split - Purchase of 166,970 shares of common stock (4,431) (4,431) Sale of 328,857 shares of common stock 3,996 5,274 ------- ------- ------- BALANCE AT DECEMBER 31, 1998 $ 2,107 $(2,682) $84,270 ======= ======= ======= (1) Restated to reflect the two-for-one stock split effected in the form of a stock dividend on June 30, 1998. See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1998, 1997 and 1996 (Dollars in thousands, except per share data) 1998 1997 1996 ---- ---- ---- Cash Flows from Operating Activities: Net income $ 9,021 $ 8,515 $ 8,006 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,856 2,635 1,341 Provision for possible loan and lease losses 951 1,279 1,408 Provision for income taxes (488) 114 (393) Net amortization/(accretion) of premium/(discount) on securities 875 (292) (769) Securities gains, net (1,897) (1,446) (1,889) Loans originated for sale (139,554) (44,035) (23,408) Proceeds on sales of loans 142,328 49,563 27,672 Net gain on sales of loans (1,212) (373) (131) Increase in accrued interest receivable (620) (354) (530) Increase in accrued interest payable 623 449 186 Other, net 470 (2,265) (1,196) ------- ------- ------- Net cash provided by operating activities 18,353 13,790 10,297 ------- ------- ------- Cash Flows from Investing Activities: Purchase of time deposits (5,934) (33) (122) Proceeds on maturities of time deposits - 201 100 Proceeds from the sale of securities available for sale 27,928 20,053 22,747 Proceeds from the sale of mortgage-backed securities available for sale 2,276 3,980 1,621 Proceeds from the maturity of and principal paydowns on securities held to maturity 837 2,732 717 Proceeds from the maturity of and principal paydowns on securities available for sale 41,902 13,647 36,384 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 53,040 13,175 11,767 Purchase of securities held to maturity - - (500) Purchase of securities available for sale (70,211) (24,485) (58,841) Purchase of mortgage-backed securities available for sale (96,543) (30,612) (49,170) Purchase of interest in low- income housing project - - (2,865) Net increase in loans and leases (36,262) (55,546) (33,384) Increase in assets under operating leases (12,161) (3,259) - Capital expenditures (4,365) (2,522) (5,589) Net cash and cash equivalents (paid)/received in acquisition of subsidiaries 2,730 670 (43) Net cash received from minority interest stockholders 2,950 - - Proceeds on sale of fixed assets 8 1 2 Proceeds on sale of repossessed assets 831 7 208 ------- ------- ------- Net cash used by investing activities (92,631) (61,991) (76,968) Cash Flows from Financing Activities: Net increase in demand deposits and savings accounts 50,481 17,137 19,663 Net increase in time deposit accounts 43,864 15,182 4,093 Net increase in other borrowings 15,250 23,886 4,500 Net increase (decrease) in short-term borrowings (42,979) 11,483 25,039 Purchase of treasury stock (4,431) (865) (759) Proceeds from sale of treasury stock 669 948 1,296 Dividends (2,930) (2,465) (1,886) ------- ------- ------- Net cash provided by financing activities 59,924 65,306 51,946 ------- ------- ------- Net increase (decrease) in cash and cash equivalents (14,354) 17,105 (14,725) Cash and cash equivalents at beginning of year 57,185 40,080 54,805 ------- ------- ------- Cash and cash equivalents at end of period $42,831 $57,185 $40,080 ======= ======= ======= Supplemental disclosures: Cash paid for income/franchise taxes $ 3,303 $ 3,090 $ 3,065 Cash paid for interest $35,681 $31,318 $27,458 Securities contributed to public charitable trust - - 220 Other borrowings transferred to short-term borrowings $15,323 $25,500 8,000 See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) ONE SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations-Heartland Financial USA, Inc. ("Heartland") is a multi-bank holding company primarily operating full-service retail banking offices in Dubuque and Lee Counties in Iowa; Jo Daviess, Hancock and Winnebago Counties in Illinois; Dane County in Wisconsin and Bernalillo County in New Mexico, serving communities in and around those counties. The principal services of Heartland, through its subsidiaries, are FDIC-insured deposit accounts and related services, and loans to businesses and individuals. The loans consist primarily of commercial and commercial real estate and residential real estate. Principles of Presentation-The consolidated financial statements include the accounts of Heartland and its subsidiaries: Dubuque Bank and Trust Company ("DB&T"); Galena State Bank and Trust Company ("GSB"); Riverside Community Bank ("RCB"); Wisconsin Community Bank ("WCB"), previously Cottage Grove State Bank); New Mexico Bank & Trust ("NMB"); First Community Bank, FSB ("FCB"); Citizens Finance Co.("Citizens"); ULTEA, Inc. ("ULTEA"); DB&T Insurance, Inc.; DB&T Community Development Corp.; DBT Investment Corporation; and Keokuk Bancshares, Inc. dba KBS Investment Corp. All subsidiaries are wholly-owned with the exception of NMB of which Heartland is the 80% owner. All significant intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and with general practice within the banking industry. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for possible loan and lease losses. Securities-All securities consist of debt or marketable equity securities. Securities Available for Sale-Available for sale securities consist of those securities not classified as held to maturity or trading, which management intends to hold for indefinite periods of time or that may be sold in response to changes in interest rates, prepayments or other similar factors. Such securities are stated at fair value with any unrealized gain or loss, net of applicable income tax, reported as a separate component of stockholders' equity. Security premiums and discounts are amortized/accreted using the interest method over the period from the purchase date to the maturity or call date of the related security. Gains or losses from the sale of available for sale securities are determined based upon the adjusted cost of the specific security sold. Securities Held to Maturity-Securities which Heartland has the ability and positive intent to hold to maturity are classified as held to maturity. Such securities are stated at amortized cost, adjusted for premiums and discounts that are amortized/accreted using the interest method over the period from the purchase date to the maturity date of the related security. Loans and Leases-Interest on loans is accrued and credited to income based primarily on the principal balance outstanding. Income from leases is recorded in decreasing amounts over the term of the contract resulting in a level rate of return on the lease investment. The policy of Heartland is to discontinue the accrual of interest income on any loan or lease when, in the opinion of management, there is a reasonable doubt as to the timely collection of the interest and principal. When interest accruals are deemed uncollectible, interest credited to income in the current year is reversed and interest accrued in prior years is charged to the allowance for possible loan and lease losses. Nonaccrual loans and leases are returned to an accrual status when, in the opinion of management, the financial position of the borrower indicates that there is no longer any reasonable doubt as to the timely payment of interest and principal. Under Heartland's credit policies, all nonaccrual and restructured loans are defined as impaired loans. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate, except where more practical, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. Net nonrefundable loan and lease origination fees and certain direct costs associated with the lending process are deferred and recognized as a yield adjustment over the life of the related loan or lease. Loans held for sale are stated at the lower of individual cost or estimated fair value. Loans are sold on a nonrecourse basis with either servicing released or retained, and gains and losses are recognized based on the difference between sales proceeds and the carrying value of the loan. Mortgage loan servicing rights retained on loans sold to others, which are not material to the financial position or results of operation, are not included in the accompanying consolidated financial statements. The unpaid principal balances of these loans as of December 31, 1998 and 1997, were $154,089 and $109,203, respectively. Custodial escrow balances maintained in connection with the loan servicing portfolio were approximately $894 and $667 as of December 31, 1998 and 1997, respectively. Allowance for Possible Loan and Lease Losses-The allowance for possible loan and lease losses is maintained at a level estimated by management to provide for known and inherent risks in the loan and lease portfolios. The allowance is based upon a continuing review of past loan and lease loss experience, current economic conditions, volume growth, the underlying collateral value of the loans and leases and other relevant factors. Loans and leases which are deemed uncollectible are charged off and deducted from the allowance. Provisions for possible loan and lease losses and recoveries on previously charged-off loans and leases are added to the allowance. Premises, Furniture and Equipment-Premises, furniture and equipment are stated at cost less accumulated depreciation. The provision for depreciation of premises, furniture and equipment is determined by straight-line and accelerated methods over the estimated useful lives of 18 to 39 years for buildings, 15 years for land improvements and 3 to 7 years for furniture and equipment. Other Real Estate-Other real estate represents property acquired through foreclosures and settlements of loans. Property acquired is carried at the lower of the principal amount of the loan outstanding at the time of acquisition, plus any acquisition costs, or the estimated fair value of the property, less cost to dispose. The excess, if any, of such costs at the time acquired over the fair value is charged against the allowance for possible loan and lease losses. Subsequent write downs estimated on the basis of later evaluations, gains or losses on sales and net expenses incurred in maintaining such properties are charged to operations. Goodwill-Goodwill represents the excess of the purchase price of acquired subsidiaries' net assets over their fair value. Goodwill is amortized over periods from 15 to 25 years on the straight- line basis. On a periodic basis, Heartland reviews goodwill for events or circumstances that may indicate a change in the recoverability of the underlying basis. Income Taxes-Heartland and its subsidiaries file a consolidated federal income tax return. For state tax purposes, DB&T, GSB, RCB, FCB, WCB and NMB ("Banks")file income or franchise tax returns as required. The other entities file corporate income or franchise tax returns as required by the various states. Heartland has a tax allocation agreement which provides that each subsidiary of the consolidated group pay a tax liability to, or receive a tax refund from Heartland, computed as if the subsidiary had filed a separate return. Heartland recognizes certain income and expenses in different time periods for financial reporting and income tax purposes. The provision for deferred income taxes is based on an asset and liability approach and represents the change in deferred income tax accounts during the year, including the effect of enacted tax rate changes. Deferred tax assets are recognized if their expected realization is "more likely than not". Treasury Stock-Treasury stock is accounted for by the cost method, whereby shares of common stock reacquired are recorded at their purchase price. Trust Department Assets-Property held for customers in fiduciary or agency capacities is not included in the accompanying consolidated balance sheets, as such items are not assets of the Banks. Earnings Per Share - Basic earning per share, pursuant to Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", is determined using net income and weighted average common shares outstanding. Diluted earnings per share, as defined by SFAS No. 128, is computed by dividing net income by the weighted average common shares outstanding plus the assumed incremental common shares issued upon exercise of stock options. Amounts used in the determination of basic and diluted earnings per share for the years ended December 31, 1998, 1997, and 1996 are shown in the table below. 1998 1997 1996 ------ ------ ------- Net income $9,021 $8,515 $8,006 ====== ====== ====== Weighted average common shares outstanding 9,463 9,476 9,430 Assumed incremental common shares issued upon exercise of stock options 148 143 122 ------ ------ ------ Weighted average common shares for diluted earnings per share 9,611 9,619 9,552 ====== ====== ====== Cash Flows-For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. Effect of New Financial Accounting Standards - Heartland adopted SFAS No. 130,"Reporting Comprehensive Income,"on January 1, 1998. SFAS No. 130 establishes standards for the reporting and display of comprehensive income in the financial statements. Comprehensive income consists of net income and certain amounts reported directly in stockholders' equity, such as the net unrealized gains or losses on available for sale securities. The statement requires only additional disclosures in the consolidated financial statements; it does not affect Heartland's financial position or results of operations. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. SFAS No. 131,"Disclosure About Segments of an Enterprise and Related Information," was effective for Heartland for the year beginning January 1, 1998, and established disclosure requirements for segment operations. The adoption had no effect on Heartland's financial statement disclosures. SFAS No. 132,"Employers' Disclosures About Pensions and Other Postretirement Benefits," was effective for Heartland for the year beginning January 1, 1998, and revises the disclosure requirements for pension and other postretirement benefit plans. The adoption had no effect on Heartland's financial statement disclosures. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," will be effective for Heartland for the year beginning January 1, 2000. Heartland expects to adopt SFAS No. 133 when required. Management does not believe the adoption of SFAS No. 133 will have a material impact on the consolidated financial statements. TWO ACQUISITIONS Heartland regularly explores opportunities for acquisitions of financial institutions and related businesses. Generally, management does not make a public announcement about an acquisition opportunity until a definitive agreement has been signed. On February 10, 1999, WCB entered into an office purchase and assumption agreement with Bank One Wisconsin to acquire their Monroe bank ("Monroe"). This transaction will require a cash payment of $11,487 which will be funded by Heartland's revolving credit line. Monroe will become a branch of WCB, headquartered in Cottage Grove, Wisconsin. The transaction is subject to regulatory approval and is expected to close in the third quarter of 1999. This transaction will be accounted for as a purchase. On July 17, 1998, Heartland 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, Heartland'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 and is being amortized using the straight-line method over 25 years. 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. During 1997, Heartland entered into an agreement with a group of New Mexico business leaders to establish a new bank in Albuquerque. NMB opened on May 4, 1998, and Heartland funded the remaining $10,850 of the $12,050 initial capital investment through the use of the revolving credit line. On March 1, 1997, Heartland acquired Cottage Grove State Bank (subsequently named WCB), a $39,287 Wisconsin state bank located in Cottage Grove, Wisconsin, at a cost of $7,890. The stockholders of Cottage Grove State Bank, at the date of acquisition, received cash of $4,892 and the remaining balance in contracts payable over two, three or four years, at their discretion, bearing rates of 7.00% and 7.50%. The amount paid in excess of the equity of WCB allocated to securities and office property and equipment was $138 and $672, respectively. The amounts are being amortized over the remaining lives of the assets using the methods and lives as described in note one. The remaining purchase price paid in excess of the fair value of net assets acquired was $2,465 and is being amortized using the straight-line method over 25 years. This transaction was accounted for as a purchase; accordingly, WCB's results of operations were included in the consolidated financial statements from the acquisition date. Pro forma unaudited operating results, giving effect to the WCB acquisition as if it had occurred at the beginning of the years ended December 31, 1997 and 1996 are as follows: 1997 1996 ---- ---- Interest income $59,749 $54,758 Interest expense 32,037 29,214 Provision for loan losses 1,334 1,492 Noninterest income 8,606 7,623 Noninterest expense 23,075 20,527 ------- ------- Income before income taxes 11,909 11,148 Income taxes 3,374 2,913 ------- ------- Net income $ 8,535 $ 8,235 ======= ======= Earnings per common share-basic $ .90 $ .87 ======= ======= THREE CASH AND DUE FROM BANKS The Banks are required to maintain certain average cash reserve balances as a member of the Federal Reserve System. The reserve balance requirements at December 31, 1998 and 1997 were $1,257 and $1,420 respectively. FOUR SECURITIES The amortized cost, gross unrealized gains and losses and estimated fair values of held to maturity and available for sale securities as of December 31, 1998 and 1997, are summarized as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- --------- -------- 1998 Securities held to maturity: Obligations of states and political subdivisions $ 2,718 $ 153 $ - $ 2,871 -------- -------- -------- -------- Total $ 2,718 $ 153 $ - $ 2,871 ======== ======== ======== ======== Securities available for sale: U.S. Treasury securities $ 1,701 $ 8 $ - $ 1,709 U.S. government corporations and agencies 76,471 1,005 (115) 77,361 Mortgage-backed securities 127,732 817 (232) 128,317 Obligations of states and political subdivisions 17,281 1,542 (5) 18,818 Corporate debt securities 2,454 40 (1) 2,493 -------- -------- --------- -------- Total debt securities 225,639 3,412 (353) 228,698 Equity securities 10,778 647 (353) 11,072 -------- -------- --------- -------- Total $236,417 $ 4,059 $ (706) $239,770 ======== ======== ========= ======== Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- --------- --------- 1997 Securities held to maturity: U. S. government corporations and agencies $ 598 $ 2 $ - $ 600 Mortgage-backed securities 325 - - 325 Obligations of states and political subdivisions 2,956 119 (1) 3,074 -------- -------- -------- -------- Total $ 3,879 $ 121 $ (1) $ 3,999 ======== ======== ======== ======== Securities available for sale: U.S. Treasury securities $ 13,232 $ 110 $ - $ 13,342 U.S. government corporations and agencies 63,649 177 (64) 63,762 Mortgage-backed securities 86,010 813 (133) 86,690 Obligations of states and political subdivisions 16,741 1,054 (49) 17,746 Corporate debt securities 700 24 - 724 -------- -------- --------- -------- Total debt securities 180,332 2,178 (246) 182,264 Mutual funds 548 - (36) 512 Equity securities 12,925 2,199 (31) 15,093 -------- -------- --------- -------- Total $193,805 $ 4,377 $ (313) $197,869 ======== ======== ========= ======== The amortized cost and estimated fair value of debt securities held to maturity and available for sale at December 31, 1998, by estimated maturity, are as follows. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without penalties. Estimated Amortized Fair Cost Value --------- --------- Securities held to maturity: Due in 1 year or less $ 45 $ 46 Due in 1 to 5 years 1,476 1,516 Due in 5 to 10 years 852 925 Due after 10 years 345 384 -------- -------- Total $ 2,718 $ 2,871 ======== ======== Securities available for sale: Due in 1 year or less $ 76,384 $ 76,733 Due in 1 to 5 years 127,862 129,024 Due in 5 to 10 years 5,111 5,332 Due after 10 years 16,282 17,609 -------- -------- Total $225,639 $228,698 ======== ======== As of December 31, 1998, securities with a market value of $111,819 were pledged to secure public and trust deposits, short- term borrowings and for other purposes as required by law. Gross gains and losses related to sales of securities for the years ended December 31, 1998, 1997 and 1996, are summarized as follows: 1998 1997 1996 -------- -------- -------- Securities sold: Proceeds from sales $30,204 $24,033 $24,368 Gross security gains 1,945 1,526 2,240 Gross security losses 48 80 351 FIVE LOANS AND LEASES Loans and leases as of December 31, 1998 and 1997, were as follows: 1998 1997 ------ ------ Loans: Commercial and commercial real estate $277,765 $242,868 Residential mortgage 156,415 175,268 Agricultural and agricultural real estate 77,211 69,302 Consumer 72,642 64,223 -------- -------- Loans, gross 584,033 551,661 Unearned discount (2,136) (2,077) Deferred loan fees (272) (349) -------- -------- Loans, net 581,625 549,235 -------- -------- Direct financing leases: Gross rents receivable 7,281 6,240 Estimated residual value 2,514 2,097 Unearned income (1,287) (1,166) -------- -------- Direct financing leases, net 8,508 7,171 -------- -------- Allowance for possible loan and lease losses (7,945) (7,362) -------- -------- Loans and leases, net $582,188 $549,044 ======== ======== Direct financing leases receivable are generally short-term equipment leases. Future minimum lease payments as of December 31, 1998, were as follows: 1999 $2,898; 2000, $2,032; 2001, $1,928; 2002, $1,548; 2003, $973 and thereafter, $416. As DB&T is the largest subsidiary of Heartland, the majority of the loan portfolio is concentrated in northeast Iowa, northwest Illinois and southwest Wisconsin. Loans and leases on a nonaccrual status amounted to $1,324 and $1,819 at December 31, 1998 and 1997, respectively. The allowance for loan and lease losses related to these nonaccrual loans was $176 and $208, respectively. Nonaccrual loans of $314 and $1,163 were not subject to a related allowance for loan and lease losses at December 31, 1998 and 1997, respectively, because of the net realizable value of loan collateral, guarantees and other factors. The average balances of nonaccrual loans for the years ended December 31, 1998, 1997 and 1996 were $1,437, $1,585 and $1,212, respectively. For the years ended December 31, 1998, 1997 and 1996, interest income which would have been recorded under the original terms of these loans and leases amounted to approximately $59, $87 and $108, respectively and interest income actually recorded amounted to approximately $10, $9 and $7, respectively. Loans are made in the normal course of business to directors, officers and principal holders of equity securities of Heartland. The terms of these loans, including interest rates and collateral, are similar to those prevailing for comparable transactions and do not involve more than a normal risk of collectibility. Changes in such loans during the year ended December 31, 1998, were as follows: 1998 -------- Balance at beginning of year $15,415 New loans 5,910 Repayments 9,815 -------- Balance at end of year $11,510 ======== SIX ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES Changes in the allowance for possible loan and lease losses for the years ended December 31, 1998, 1997 and 1996, were as follows: 1998 1997 1996 ------ ------ ------ Balance at beginning of year $7,362 $6,191 $5,580 Provision for possible loan and lease losses 951 1,279 1,408 Recoveries on loans and leases previously charged off 455 145 129 Loans and leases charged off (823) (584) (926) Additions related to acquisitions - 331 - ------ ------ ------ Balance at end of year $7,945 $7,362 $6,191 ====== ====== ====== SEVEN PREMISES, FURNITURE AND EQUIPMENT Premises, furniture and equipment as of December 31, 1998 and 1997, were as follows: 1998 1997 ------- ------- Land and land improvements $ 3,366 $ 2,107 Buildings and building improvements 15,787 15,366 Furniture and equipment 12,349 9,831 ------- ------- Total 31,502 27,304 Less accumulated depreciation (11,722) (10,120) ------- ------- Premises, furniture and equipment, net $19,780 $17,184 ======= ======= Depreciation expense on premises, furniture and equipment was $1,730 for 1998, $1,443 for 1997 and $1,121 for 1996. EIGHT DEPOSITS The aggregate amount of time certificates of deposit in denominations of one hundred thousand dollars or more as of December 31, 1998 and 1997, were $62,293 and $38,885, respectively. At December 31, 1998, the scheduled maturities of time certificates of deposit were as follows: 1998 --------- 1999 $190,684 2000 108,941 2001 24,238 2002 12,863 2003 thereafter 17,428 -------- Total $354,154 ======== Interest expense on deposits for the years ended December 31, 1998, 1997 and 1996, was as follows: 1998 1997 1996 ------ ------ ------ Savings and insured money market accounts $ 9,512 $ 8,317 $ 7,474 Time certificates of deposit in denominations of $100 or more 2,905 1,961 2,131 Other time deposits 16,228 15,487 13,585 ------- ------- ------- Interest expense on deposits $28,645 $25,765 $23,190 ======= ======= ======= NINE SHORT-TERM BORROWINGS Short-term borrowings as of December 31, 1998 and 1997, were as follows: 1998 1997 ------- ------- Securities sold under agreements to repurchase $36,716 $45,328 Federal funds purchased 13,175 6,550 Federal Home Loan Bank ("FHLB") advances 14,504 27,500 U.S. Treasury demand note 3,636 15,728 Notes payable on leased assets 6,423 310 Contracts payable to previous owners of LAG for acquisition 643 - Contracts payable to previous stockholders of WCB for acquisition 823 823 ------- ------- Total $75,920 $96,239 ======= ======= See Note 11 related to collateral pledged for FHLB advances. All repurchase agreements as of December 31, 1998 and 1997, were due within six months. Average and maximum balances and rates on aggregate short-term borrowings outstanding during the years ended December 31, 1998, 1997 and 1996, were as follows: 1998 1997 1996 -------- ------- ------- Maximum month-end balance $102,313 $96,239 $56,358 Average month-end balance 80,277 73,170 42,025 Weighted average interest rate for the year 5.19% 5.32% 5.24% Weighted average interest rate at year-end 5.00 5.49 5.75 TEN INCOME TAXES Income taxes for the years ended December 31, 1998, 1997 and 1996, were as follows: Current Deferred Total ------------------------- 1998: Federal $2,900 $ 300 $3,200 State 577 (20) 557 ------ ------ ------ Total $3,477 $ 280 $3,757 ====== ====== ====== 1997: Federal $2,977 $ (47) $2,930 State 428 (20) 408 ------ ------ ------ Total $3,405 $ (67) $3,338 ====== ====== ====== 1996: Federal $2,291 $ (42) $2,249 State 500 (64) 436 ------ ------ ------ Total $2,791 $ (106) $2,685 ====== ====== ====== Temporary differences between the amounts reported in the financial statements and the tax basis of assets and liabilities result in deferred taxes. No valuation allowance was required for deferred tax assets. Based upon Heartland's level of historical taxable income and anticipated future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that Heartland will realize the benefits of these deductible differences. Deferred tax liabilities and assets for the years ended December 31, 1998 and 1997, were as follows: 1998 1997 ------ ------ Deferred tax assets: Allowance for possible loan and lease losses $ 2,997 $ 2,710 Deferred compensation 244 240 Securities 136 - Net operating loss 468 225 ------- ------- Gross deferred tax assets $ 3,845 $ 3,175 ------- ------- Deferred tax liabilities: Unrealized gain on securities available for sale $(1,246) $(1,519) Fixed assets (4,470) (1,440) Leases (1,360) (1,360) Tax bad debt reserves (697) (830) Securities - (145) Prepaid expenses (165) (120) Other (30) (35) ------- ------- Gross deferred tax liabilities $(7,968) $(5,449) ------- ------- Net deferred tax (liability) $(4,123) $(2,274) ======== ======== The actual income taxes differ from the expected amounts (computed by applying the U.S. federal corporate tax rate of 35% for 1998, 1997 and 1996, to income before income taxes) as follows: 1998 1997 1996 -------------------------- Computed "expected" amount $4,472 $4,149 $3,742 Increase (decrease) resulting from: Nontaxable interest income (511) (510) (560) State income taxes, net of federal tax benefit 360 260 280 Appreciated property contributed - - (230) Graduated income tax rates (100) (100) (110) Tax credits (440) (440) (440) Other (24) (21) 3 ------ ------ ------ Income taxes $3,757 $3,338 $2,685 ====== ====== ====== Effective tax rates 29.4% 28.2% 25.1% ====== ====== ======= Heartland has investments in certain low-income housing projects totaling $6,104 and $6,028 as of December 31, 1998 and 1997, respectively, which are included in other assets in the consolidated financial statements. These investments are expected to generate federal income tax credits of approximately $440 per year through 2005. ELEVEN OTHER BORROWINGS Other borrowings at December 31, 1998 and 1997, were as follows: 1998 1997 ------- ------- Advances from the FHLB; weighted average maturity dates at December 31, 1998 and 1997, were July, 2002 and August, 2001, respectively; and weighted average interest rates were 6.12% and 6.06%, respectively $26,114 $36,900 Notes payable on leased assets with interest rates varying from 5.87% to 9.50% 12,845 622 Revolving credit line 16,200 3,500 Contracts payable to previous stock- holders of LAG for acquisition due over a three-year schedule at 7.50% through July, 2001. 1,286 - Contracts payable to previous stock- holders of WCB for acquisition due in annual payments over two-, three- or four-year schedules at interest rates of 7.00% to 7.50% through March, 2001 1,178 2,001 ------- ------ Total $57,623 $43,023 ======= ======= DB&T, GSB, FCB and RCB are members of the FHLB of Des Moines or of Chicago. The advances from the FHLB are collateralized by the Banks' investment in FHLB stock of $3,659 and $6,431 at December 31, 1998, and December 31, 1997, respectively. Additional collateral is provided by the Banks' one-to-four unit residential mortgages totaling $116,520 at December 31, 1998, and $142,777 at December 31, 1997. On October 31, 1997, Heartland entered into a four-year, unsecured revolving credit line with an unaffiliated bank, which provides for variable-rate borrowings of up to $20,000. Under the terms of this agreement, Heartland must maintain a minimum return on average assets, maximum nonperforming assets to total loans ratio, maximum funded debt to total equity capital ratio and each of Heartland's banking subsidiaries must remain well capitalized. Future payments at December 31, 1998, for all other borrowings were as follows: 2000 $ 18,664 2001 23,854 2002 7,005 2003 1,505 Thereafter 6,595 -------- Total $ 57,623 ======== TWELVE EMPLOYEE BENEFIT PLANS Heartland sponsors retirement plans covering substantially all employees. Contributions to the plans are subject to approval by the Heartland Board of Directors, and the Heartland subsidiaries fund and record as an expense all approved contributions. Costs charged to operating expenses were $435 for 1998, $418 for 1997 and $382 for 1996. Heartland also has a non-contributory, defined contribution pension plan covering substantially all employees. Annual contributions are based upon 5% of qualified compensation as defined in the plan. Costs charged to operating expense were $435 for 1998, $418 for 1997 and $382 for 1996. Heartland also has an employee savings plan covering substantially all employees. Under the employee savings plan, the Heartland subsidiaries make matching contributions of up to 2% of the participants' wages. Costs charged to operating expenses were $161 for 1998, $150 for 1997 and $140 for 1996. THIRTEEN COMMITMENTS AND CONTINGENT LIABILITIES Heartland leases certain land and facilities under operating leases. Minimum future rental commitments at December 31, 1998, for all non-cancelable leases were as follows: 1999 $264 2000 90 2001 60 2002 22 2003 22 Thereafter 89 ---- Total $547 ==== Rental expense for premises and equipment leased under operating leases was $268 for 1998, $78 for 1997 and $128 for 1996. In the normal course of business, the Banks make various commitments and incur certain contingent liabilities that are not presented in the accompanying consolidated financial statements. The commitments and contingent liabilities include various guarantees, commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Banks evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based upon management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Standby letters of credit and financial guarantees written are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. At December 31, 1998 and 1997, commitments to extend credit aggregated $229,332 and $140,677 and standby letters of credit aggregated $6,230 and $5,267, respectively. Heartland does not anticipate any material loss as a result of the commitments and contingent liabilities. FOURTEEN STOCK PLANS Heartland's Stock Option Plan ("Plan") is administered by the Compensation Committee ("Committee") of the Board of Directors whose members determine to whom options will be granted and the terms of each option. Under the Plan, 1,200,000 common shares have been reserved for issuance. Directors and key policy-making employees are eligible for participation in the Plan. Options may be granted that are either intended to be "incentive stock options" as defined under Section 422 of the Internal Revenue Code or not intended to be incentive stock options ("non- qualified stock options"). The exercise price of stock options granted will be established by the Committee, but the exercise price for the incentive stock options may not be less than the fair market value of the shares on the date that the option is granted. Each option granted is exercisable in full at any time or from time to time, subject to vesting provisions, as determined by the Committee and as provided in the option agreement, but such time may not exceed ten years from the grant date. At December 31, 1998 and 1997 respectively, there were 468,519 and 628,006 shares available for issuance under the Plan. Under the Plan, stock appreciation rights ("SARS") may also be granted alone or in tandem with or with reference to a related stock option, in which event the grantee, at the exercise date, has the option to exercise the option or the SARS, but not both. SARS entitle the holder to receive in cash or stock, as determined by the Committee, an amount per share equal to the excess of the fair market value of the stock on the date of exercise over the fair value at the date the SARS or related options were granted. SARS may be exercisable for up to ten years after the date of grant. No SARS have been granted under the Plan. A summary of the status of the Plan as of December 31, 1998, 1997 and 1996, and changes during the years ended follows: 1998 1997 1996 Weighted- Weighted- Weighted- Average Average Average Shares Exercise Shares Exercise Shares Exercise (000) Price (000) Price (000) Price ------ -------- ------ -------- ------ --------- Outstanding at beginning of year 522 $ 9 392 $ 8 248 $ 8 Granted 196 15 146 12 222 9 Exercised (28) 15 (4) 13 (47) 11 Forfeited (36) 16 (12) 13 (31) 11 ---- ---- --- Outstanding at end of year 654 $10 522 $ 9 392 $ 8 ==== === === Options exercisable at end of year 6 $12 6 $12 6 $12 Weighted-average fair value of options granted during the year $3.65 $3.83 $2.07 As of December 31, 1998 and 1997, options outstanding had exercise prices ranging from $8 to $14.75 per share and a weighted-average remaining contractual life of 7.40 and 8.00 years, respectively. The fair value of stock options granted was determined utilizing the Black Scholes Valuation model. Significant assumptions include: 1998 1997 1996 ------ ------ ------ Risk-free interest rate 5.75% 6.30% 5.68% Expected option life 10 Years 10 Years 10 Years Expected volatility 24.27% 24.27% 28.62% Expected dividends 1.76% 2.17% 2.29% Heartland applies APB Opinion No. 25 in accounting for its Plan and, accordingly, no compensation cost for its stock options has been recognized in the financial statements. Had Heartland determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123 "Accounting for Stock-Based Compensation", Heartland's net income would have been reduced to the pro forma amounts indicated below: 1998 1997 1996 ---- ---- ---- Net income as reported $9,021 $8,515 $8,006 Pro forma 8,745 8,317 7,853 Earnings per share-basic as reported $ .95 $ .90 $ .85 Pro forma .92 .88 .83 Earnings per share-diluted as reported $ .94 $ .89 $ .84 Pro forma .91 .86 .82 Pro forma net income reflects only options granted in 1998, 1997, 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation is reflected over the options' vesting period, and compensation cost for options granted prior to January 1, 1995, is not considered. In 1996, Heartland adopted the Heartland Employee Stock Purchase Plan ("ESPP"), which permits all eligible employees to purchase shares of Heartland common stock at a price of not less than 85% of the fair market value on the determination date (as determined by the Committee). A maximum of 400,000 shares is available for sale under the ESPP. For the years ended December 31, 1998 and 1997, Heartland approved a price of 100% of fair market value at December 31, 1997 and December 31, 1996, respectively. At December 31, 1998 and 1997, respectively, 15,333 and 19,146 shares were purchased under the ESPP at no charge to Heartland's earnings. During each of the years ended December 31, 1998, 1997 and 1996, Heartland acquired shares for use in the executive stock purchase plan, the Plan and the ESPP. Shares acquired totaled 290,924, 65,670 and 74,618 for 1998, 1997 and 1996, respectively. In 1991, Heartland adopted a stock purchase plan which provides executive officers of Heartland and the Banks the opportunity to purchase up to a cumulative total of 400,000 common shares of Heartland stock. Under this plan, Heartland may issue treasury shares at a price equal to the price paid when acquired as treasury shares. Cumulative shares sold through December 31, 1997 under the plan were 399,800. Total compensation expense associated with this plan was $267 and $42 for 1997 and 1996, respectively. No additional shares are anticipated to be issued under this plan. A summary of the activity in the executive restricted stock purchase plan for the years ended December 31, 1997 and 1996 follows: 1997 1996 ------- ------- Granted 55,268 139,076 Exercised 55,068 83,808 Forfeited 200 55,268 Average Offering Price $ 8.10 $ 8.10 FIFTEEN FAIR VALUE OF FINANCIAL INSTRUMENTS Following are disclosures of the estimated fair value of Heartland's financial instruments. The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts Heartland could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. December 31, December 31, 1998 1997 ------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------- Financial Assets: Cash and cash equivalents $ 42,831 $ 42,831 $ 57,185 $ 57,185 Time deposits in other banks 6,127 6,127 194 194 Securities available for sale 239,770 239,770 197,869 197,869 Securities held to maturity 2,718 2,871 3,879 3,999 Loans and leases, net of unearned 590,133 594,185 556,406 558,515 Financial Liabilities: Demand deposits $ 70,871 $ 70,871 $ 60,950 $ 60,950 Savings deposits 292,852 292,852 252,292 252,292 Time deposits 354,154 358,044 310,290 310,869 Short-term borrowings 75,920 75,920 96,239 96,239 Other borrowings 57,623 58,872 43,023 43,288 Cash and Cash Equivalents and Time Deposits in Other Banks - The carrying amount is a reasonable estimate of fair value. Securities - For securities either held to maturity or available for sale, fair value equals quoted market price if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans and Leases - The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of loans held for sale is estimated using quoted market prices. Deposits - The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Short-term and Other Borrowings - Rates currently available to the Banks for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Commitments to Extend Credit, Unused Lines of Credit and Standby Letters of Credit - Based upon management's analysis of the off balance sheet financial instruments, there are no significant unrealized gains or losses associated with these financial instruments based upon our review of the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. SIXTEEN REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS ON SUBSIDIARY DIVIDENDS The Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Banks' financial statements. The regulations prescribe specific capital adequacy guidelines that involve quantitative measures of a bank's assets, liabilities and certain off balance sheet items as calculated under regulatory accounting practices. Capital classification is also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998 and 1997, that the Banks met all capital adequacy requirements to which they were subject. As of December 31, 1998, the most recent notification from the FDIC categorized each of the Banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category. The Banks' actual capital amounts and ratios are also presented in the table below. To Be Well Capitalized Under Prompt For Capital Corrective Adequacy Action Actual Purposes Provisions -------------- -------------- -------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- ------- ----- As of December 31, 1998 Total Capital (to Risk- Weighted Assets) Consolidated $89,093 12.13% $58,757 >8.0% N/A DB&T 44,380 10.10 35,144 >8.0 $43,930 >10.0% GSB 10,850 13.66 6,353 >8.0 7,941 >10.0 FCB 9,385 13.53 5,551 >8.0 6,939 >10.0 RCB 4,818 11.23 3,431 >8.0 4,288 >10.0 WCB 4,774 13.60 2,809 >8.0 3,511 >10.0 NMB 14,901 45.85 2,600 >8.0 3,250 >10.0 Tier 1 Capital (to Risk- Weighted Assets) Consolidated $81,149 11.05% $29,379 >4.0% N/A DB&T 39,960 9.10 17,572 >4.0 $26,358 >6.0% GSB 9,857 12.41 3,177 >4.0 4,765 >6.0 FCB 8,516 12.27 2,776 >4.0 4,163 >6.0 RCB 4,398 10.26 1,715 >4.0 2,573 >6.0 WCB 4,358 12.41 1,405 >4.0 2,107 >6.0 NMB 14,535 44.72 1,300 >4.0 1,950 >6.0 Tier 1 Capital (to Average Assets) Consolidated $81,149 8.58% $37,810 >4.0% N/A DB&T 39,960 7.38 21,670 >4.0 $27,088 >5.0% GSB 9,857 7.76 5,082 >4.0 6,353 >5.0 FCB 8,516 8.36 4,073 >4.0 5,092 >5.0 RCB 4,398 7.03 2,502 >4.0 3,127 >5.0 WCB 4,358 9.14 1,908 >4.0 2,385 >5.0 NMB 14,535 40.62 1,431 >4.0 1,789 >5.0 To Be Well Capitalized Under Prompt For Capital Corrective Adequacy Action Actual Purposes Provisions -------------- -------------- -------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- ------- ----- ------- ----- As of December 31, 1997 Total Capital (to Risk- Weighted Assets) Consolidated $78,995 12.71% $49,707 >8.0% N/A DB&T 43,180 10.92 31,629 >8.0 $39,537 >10.0% GSB 9,526 13.09 5,821 >8.0 7,276 >10.0 FCB 9,068 11.05 6,563 >8.0 8,204 >10.0 RCB 3,710 12.04 2,465 >8.0 3,081 >10.0 WCB 4,855 18.32 2,120 >8.0 2,650 >10.0 Tier 1 Capital (to Risk- Weighted Assets) Consolidated $71,713 11.54% $24,854 >4.0% N/A DB&T 38,754 9.80 15,815 >4.0 $23,722 > 6.0% GSB 8,615 11.84 2,910 >4.0 4,366 > 6.0 FCB 8,197 9.99 3,282 >4.0 4,922 > 6.0 RCB 3,354 10.89 1,232 >4.0 1,849 > 6.0 WCB 4,524 17.07 1,060 >4.0 1,590 > 6.0 Tier 1 Capital (to Average Assets) Consolidated $71,713 8.76% $32,729 >4.0% N/A DB&T 38,754 7.81 19,841 >4.0 $24,801 > 5.0% GSB 8,615 7.06 4,883 >4.0 6,103 > 5.0 FCB 8,197 7.53 4,355 >4.0 5,444 > 5.0 RCB 3,354 7.79 1,723 >4.0 2,153 > 5.0 WCB 4,524 11.11 1,628 >4.0 2,035 > 5.0 The ability of Heartland to pay dividends to its stockholders is dependent upon dividends paid by its subsidiaries. The Banks are subject to certain statutory and regulatory restrictions on the amount they may pay in dividends. To maintain acceptable capital ratios in the Banks, certain portions of their retained earnings are not available for the payment of dividends. Retained earnings which could be available for the payment of dividends to Heartland totaled approximately $33,220 as of December 31, 1998, under the most restrictive minimum capital requirements. SEVENTEEN PARENT COMPANY ONLY FINANCIAL INFORMATION Condensed financial information for Heartland Financial USA, Inc. is as follows: Balance Sheets December 31, 1998 1997 --------- --------- Assets: Cash and interest bearing deposits $ 695 $ 716 Investment in subsidiaries 100,585 80,584 Other assets 1,442 1,703 Due from subsidiaries - 1,350 --------- --------- Total $102,722 $ 84,353 ========= ========= Liabilities and stockholders' equity: Liabilities: Contracts payable for acquisition of WCB $ 2,001 $ 2,824 Notes payable 16,200 3,500 Accrued expenses and other liabilities 251 257 --------- --------- Total liabilities 18,452 6,581 --------- --------- Stockholders' equity: Common stock 9,707 4,854 Capital surplus 10,131 13,706 Retained earnings 65,007 58,914 Accumulated other comprehensive income 2,107 2,545 Treasury stock (2,682) (2,247) --------- --------- Total stockholders' equity 84,270 77,772 --------- --------- Total $102,722 $ 84,353 ========= ========= Income Statements for the Years Ended December 31, 1998 1997 1996 ------ ------ ------ Operating revenues: Dividends from subsidiaries $7,413 $2,621 $5,611 Other 173 10 4 ------ ------ ------ Total operating revenues 7,586 2,631 5,615 ------ ------ ------ Operating expenses: Interest 1,115 208 - Outside services 151 219 197 Other operating expenses 442 350 443 ------ ------ ------ Total operating expenses 1,708 777 640 ------ ------ ------ Equity in undistributed earnings 2,684 6,398 2,815 ------ ------ ------ Income before income tax benefit 8,562 8,252 7,790 Income tax benefit 459 263 216 ------ ------ ------ Net income $9,021 $8,515 $8,006 ====== ====== ====== Statements of Cash Flows For the Years Ended December 31, 1998 1997 1996 ------ ------ ------ Cash flows from operating activities: Net income $ 9,021 $ 8,515 $ 8,006 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of subsidiaries (2,684) (6,398) (2,815) (Increase) decrease in due from subsidiaries 1,350 (1,135) (215) Increase (decrease) in other liabilities (6) 167 (54) (Increase) decrease in other assets 261 (1,499) (178) ------- ------- ------- Net cash provided (used) by operating activities 7,942 (350) 4,744 ------- ------- ------- Cash flows from investing activities: Capital injections for subsidiaries (13,152) (2,855) (543) Payments for purchase of subsidiaries - (7,890) - Retirement of subsidiary stock - 4,500 - Other 4 - - ------- ------- ------- Net cash used by investing activities (13,148) (6,245) (543) ------- ------- ------- Cash flows from financing activities: Payments on other borrowings (7,018) (1,042) - Proceeds from contracts payable - 3,865 - Proceeds from notes payable 18,895 3,500 - Cash dividends paid (2,930) (2,465) (1,886) Purchase of treasury stock (4,431) (865) (759) Sale of treasury stock 669 1,110 1,296 ------- ------- ------- Net cash provided (used) by financing activities 5,185 4,103 (1,349) ------- ------- ------- Net increase (decrease) in cash and cash equivalents (21) (2,492) 2,852 Cash and cash equivalents at beginning of year 716 3,208 356 ------- ------- ------- Cash and cash equivalents at end of year $ 695 $ 716 $ 3,208 ======= ======= ======= Representations of Management Management is responsible for the contents of the consolidated financial statements and other information contained in other sections of this annual report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles appropriate to reflect, in all material respects, the substance of events and transactions that should be included. The consolidated financial statements reflect management's judgments and estimates as to the effects of events and transactions that are accounted for or disclosed. The company maintains accounting and reporting systems, supported by an internal accounting control system, which are adequate to provide reasonable assurance that transactions are authorized, assets are safeguarded, and reliable consolidated financial statements are prepared, recognizing the cost and expected benefits of internal accounting controls. A staff of internal auditors conducts ongoing reviews of accounting practices and internal accounting controls. The consolidated financial statements as of December 31, 1998, 1997 and 1996, of Heartland Financial USA, Inc. and its subsidiaries: Dubuque Bank and Trust Company; Galena State Bank and Trust Company; Riverside Community Bank; Wisconsin Community Bank; New Mexico Bank & Trust; First Community Bank, FSB; DB&T Insurance, Inc.; DB&T Community Development Corp.; Citizens Finance Co.; ULTEA, Inc.; Keokuk Bancshares, Inc. (dba KBS Investment Corp); and DBT Investment Corporation were audited by independent certified public accountants. Their role is to render independent professional opinions of the fairness of the consolidated financial statements based upon performance of procedures they deem appropriate under generally accepted auditing standards. The Audit Committees of the Boards of Directors of member banks meet periodically with the internal auditors to review matters relating to internal accounting controls and the nature, extent and results of audit efforts. The internal auditors and independent certified public accountants have free access to the Audit Committees. /s/ Lynn B. Fuller Lynn B. Fuller President, Heartland Financial USA, Inc; President and CEO, Dubuque Bank and Trust Company /s/ John K. Schmidt John K. Schmidt Executive Vice President and CFO, Heartland Financial USA, Inc.; Senior Vice President and CFO, Dubuque Bank and Trust Company INDEPENDENT AUDITORS' REPORT The Board of Directors Heartland Financial USA, Inc.: We have audited the accompanying consolidated balance sheets of Heartland Financial USA, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heartland Financial USA, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Des Moines, IA January 21, 1999 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information in the Heartland Proxy Statement for the 1999 annual meeting of stockholders dated April 5, 1999, (the "1999" Proxy Statement") under the caption "Election of Directors" and under the caption "Security Ownership of Directors and Executive Officers and Certain Beneficial Owners" is incorporated by reference. The information regarding executive officers is included pursuant to Instruction 3 to Item 401 (b) and (c) of Regulation S-K and is noted below. EXECUTIVE OFFICERS The term of office for the executive officers of Heartland is from the date of election until the next annual organizational meeting of the Board of Directors. The names and ages of the executive officers of Heartland as of December 31, 1998, offices held by these officers on that date and other positions held with Heartland and its subsidiaries are set forth below. Position with Heartland and Subsidiaries Name Age and Principal Occupation Lynn B. Fuller 49 Director and President of Heartland; Director, President and Chief Executive Officer of DB&T; Director of GSB, FCB, WCB, NMB, Keokuk, DB&T Insurance, Citizens, DBT Investment and DB&T Development; President of DB&T Insurance, DB&T Development and Citizens; Chairman and Director of RCB; Chairman and Director of ULTEA. Lynn S. Fuller 74 Chairman of the Board and Chief Executive Officer of Heartland; Director and Vice Chairman of the Board of DB&T; Director of DB&T Insurance, Citizens and DB&T Development James A. Schmid 75 Vice Chairman of the Board of Heartland; Chairman of the Board of DB&T; Director of DB&T Insurance, Citizens and DB&T Development John K. Schmidt 39 Executive Vice President and Chief Financial Officer of Heartland; Senior Vice President and Chief Financial Officer of DB&T; Treasurer of DB&T Insurance and Citizens; Director of DBT Investment; Vice President and Assistant Secretary of ULTEA Kenneth J. Erickson 47 Senior Vice President of Heartland; Senior Vice President, Lending of DB&T; Senior Vice President of Cit- izens; Director of ULTEA Edward H. Everts 47 Senior Vice President, Heartland; Senior Vice President of Operations and Retail Banking of DB&T Douglas J. Horstmann 45 Senior Vice President, Lending of Heartland; Senior Vice President, Lending of DB&T; Executive Vice President of DB&T Development Paul J. Peckosh 53 Senior Vice President, Trust of DB&T Mr. Lynn B. Fuller is the son of Mr. Lynn S. Fuller. There are no other family relationships among any of the directors or executive officers of Heartland. Lynn B. Fuller has been a director of Heartland and of DB&T since 1984 and has been President of Heartland and DB&T since 1987. He has been a director of GSB since its acquisition by Heartland in 1992 and of Keokuk and FCB since the merger in 1994. Mr. Fuller joined DB&T in 1971 as a consumer loan officer and was named DB&T's Executive Vice President and Chief Executive Officer in 1985. He was named Chairman and Director of RCB in conjunction with the opening of the de novo operation in 1995, Director of WCB in conjunction with the purchase of Cottage Grove State Bank in 1997 and Director of NMB in conjunction with the opening of the de novo bank in 1998. Lynn S. Fuller has been a director of Heartland since its formation in 1981 and of DB&T since 1964. Mr. Fuller began his banking career in 1946 in Minnesota, and he returned to Iowa in 1949 to serve as Executive Vice President and Cashier of Jackson State Savings Bank in Maquoketa. Mr. Fuller joined DB&T in 1964. He was later named President of DB&T and held this position until 1987. Mr. Fuller remains as the Chairman of the Board and Chief Executive Officer of Heartland. James A. Schmid has been a director of Heartland since its formation in 1981 and of DB&T since 1966. Mr. Schmid also currently serves as the Vice Chairman of Heartland and as the Chairman of the Board of DB&T. John K. Schmidt has been Heartland's Executive Vice President and Chief Financial Officer since 1991. He has been employed by DB&T since September, 1984 and became DB&T's Vice President, Finance in 1986, and Senior Vice President and Chief Financial Officer in January, 1991. Mr. Schmidt is a certified public accountant and worked at KPMG Peat Marwick in Des Moines, Iowa, from 1982 until joining DB&T. Kenneth J. Erickson has been Senior Vice President of Heartland since 1992 and Senior Vice President, Lending of DB&T since 1989. Mr. Erickson joined DB&T in 1975 and was appointed Vice President, Commercial Loans in 1985. Edward H. Everts was appointed as Senior Vice President of Heartland in 1996. Mr. Everts joined DB&T as Senior Vice President, Operations and Retail Banking in 1992. Prior to his service with DB&T, Mr. Everts was Vice President and Lead Retail Banking Manager of First Bank, Duluth, Minnesota. Douglas J. Horstmann has been Senior Vice President, Lending, of DB&T since 1989. Mr. Horstmann joined DB&T in 1980 and was appointed Vice President, Commercial Loans in 1985. Prior to joining DB&T, Mr. Horstmann was an examiner for the Iowa Division of Banking. Paul J. Peckosh has been Senior Vice President, Trust, of DB&T since 1991. Mr. Peckosh joined DB&T in 1975 as Assistant Vice President, Trust and was appointed Vice President, Trust in 1980. Mr. Peckosh is an attorney and graduated from the Marquette University of Law School in 1970. ITEM 11. EXECUTIVE COMPENSATION The information in the 1999 Proxy Statement, under the caption "Executive Compensation" is incorporated by reference, except for the information contained under the heading "Compensation Committee Report on Executive Compensation" and "Stockholder Return Performance Presentation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in the 1999 Proxy Statement, under the caption "Security Ownership of Certain Beneficial Owners and Management" is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information in the 1999 Proxy Statement under the caption "Transactions with Management" is incorporated by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The documents filed as a part of this report are listed below: 3. Exhibits The exhibits required by Item 601 of Regulation S-K are included along with this Form 10-K and are listed on the "Index of Exhibits" immediately following the signature page. (b) Reports of Form 8-K: There were no reports on Form 8-K filed during the last quarter of the period covered by this report. SIGNATURES Pursuant to the requirements of Section 13 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 on March 16, 1999. Heartland Financial USA, Inc. By: /s/ Lynn S. Fuller /s/ John K. Schmidt ------------------------ ------------------------ Lynn S. Fuller John K. Schmidt Chairman and Executive Vice President Principal Executive Officer and Principal Financial and Accounting Officer Date: March 16, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 16, 1999. /s/ Lynn B. Fuller /s/ Lynn S. Fuller - ----------------------------- ----------------------------- Lynn B. Fuller Lynn S. Fuller President and Director Chairman, CEO and Director /s/ James A. Schmid /s/ Mark C. Falb - ----------------------------- ----------------------------- James A. Schmid Mark C. Falb Vice Chairman and Director Director /s/ Gregory R. Miller /s/ Evangeline K. Jansen - ----------------------------- ----------------------------- Gregory R. Miller Evangeline K. Jansen Director and Director Executive Vice President /s/ Robert Woodward - ----------------------------- Robert Woodward Director 3. Exhibits 3.1 Certificate of Incorporation of Heartland Financial USA, Inc. (Filed as Exhibit 3.1 to Registrant's Form S-4 for the fiscal year ended December 31, 1993, and incorporated by reference herein.) 3.2 Bylaws of Heartland Financial USA, Inc. (Filed as Exhibit 3.2 to Registrant's Form S-4 for the fiscal year ended December 31, 1993, and incorporated by reference herein.) 4.1 Specimen Stock Certificate of Heartland Financial USA, Inc. (Exhibit 4.1 to the Registration Statement on Form S-4 filed with the Commission May 4, 1994, as amended (SEC File No. 33- 76228) 10.1 Heartland Financial USA, Inc. 1993 Stock Option Plan (Filed as Exhibit 10.1 to Registrant's Form S-4 for the fiscal year ended December 31, 1993, and incorporated by reference herein.) 10.2 Heartland Financial USA, Inc. Executive Restricted Stock Purchase Plan (Filed as Exhibit 10.2 to Registrant's Form S-4 for the fiscal year ended December 31, 1993, and incorporated by reference herein.) 10.3 Dubuque Bank and Trust Management Incentive Compensation Plan (Filed as Exhibit 10.3 to Registrant's Form S-4 for the fiscal year ended December 31, 1993, and incorporated by reference herein.) 10.4 Heartland Financial Money Purchase Pension Plan and Defined Contribution Master Plan and Trust Agreement dated January 1, 1995. (Filed as Exhibit 10.21 to Registrant's Form 10-K for the fiscal year ended December 31, 1995, and incorporated by reference herein.) 10.5 Dubuque Bank and Trust Company Executive Death Benefit Program Plan Revisions, Enrollment Booklet, and Universal Life Split-Dollar Agreement effective December 1, 1995, and similar agreement are in place at Galena State Bank and Trust Company, First Community Bank, FSB, Riverside Community Bank, Wisconsin Community Bank, New Mexico Bank & Trust and ULTEA. (Filed as Exhibit 10.25 to Registrant's Form 10-K for the fiscal year ended December 31, 1995, and incorporated by reference herein.) 10.6 Investment Center Agreement between Focused Investment LLC and Heartland Financial USA, Inc. dated August 1, 1995. (Filed as Exhibit 10.30 to Registrant's Form 10-K for the fiscal year ended December 31, 1995, and incorporated by reference herein.) 10.7 Heartland Financial USA, Inc. Employee Stock Purchase Plan effective January 1, 1996. (Filed in conjunction with Form S-8 on June 18, 1996, and incorporated by reference herein.) 10.8 License and Service Agreement, Software License Agreement, and Professional Services Agreement between Fiserv and Heartland Financial USA, Inc. dated June 21, 1996. (Filed as Exhibit 10.43 to Registrant's form 10Q for the quarter ended June 30, 1996, and incorporated by reference herein.) 10.9 The Stock Purchase Agreement between Heartland Financial USA, Inc. and the stockholders of Cottage Grove State Bank dated November 8, 1996. (Filed as Exhibit 10.36 to Registrant's Form 10K for the fiscal year ended December 31, 1996, and incorporated by reference herein.) 10.10 Stockholder Agreement between Heartland Financial USA, Inc. and Investors in the Proposed New Mexico Bank dated November 5, 1997. (Filed as Exhibit 10.23 to Registrant's Form 10K for the fiscal year ended December 31, 1997, and incorporated by reference herein.) 10.11 Change of Control Agreements including Golden Parachute Payment Adjustments and Restrictive Covenants between Heartland Financial USA, Inc. and Executive Officers dated January 1, 1999. 10.12 Change of Control Agreements between Heartland Financial USA, Inc. and Executive Officers dated January 1, 1999. 10.13 Heartland Financial USA, Inc. Health Care Plan dated January 1, 1999. 10.14 Letter Agreement between Wisconsin Community Bank and Bank One Wisconsin dated February 9, 1999. 10.15 Office Purchase and Assumption Agreement by and between Bank One Wisconsin and Wisconsin Community Bank dated February 9, 1999, excluding Schedules A through S. 11. Statement re Computation of Per Share Earnings 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG Peat Marwick LLP 27.1 Financial Data Schedule 99.1 1999 Proxy Statement (only such parts as are incorporated by reference into this Form 10-K) EX-10 2 CHANGE OF CONTROL AGREEMENT Exhibit 10.11 CHANGE OF CONTROL AGREEMENT THIS CHANGE OF CONTROL AGREEMENT (this "Agreement") is made as of the 1st day of January, 1999, (the "Effective Date") by and between HEARTLAND FINANCIAL USA, INC., an Iowa corporation, (the "Company") and (See Attachment to Exhibit 10.11)(the "Employee"). RECITALS A. The Employee is currently serving as an employee of the Company or one of its Affiliates. B. The Company desires to continue to employ the Employee as an employee of the Company or one of its Affiliates and the Employer is willing to continue such employment. C. The Company recognizes that circumstances may arise in which a change of control of the Company through acquisition or otherwise may occur thereby causing uncertainty of employment without regard to the competence or past contributions of the Employee, which uncertainty may result in the loss of valuable services of the Employee, and the Company and the Employee wish to provide reasonable security to the Employee against changes in the employment relationship in the event of any such change of control. NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter contained, it is covenanted and agreed by and between the parties hereto as follows: 1. Payment of Severance Amount. If the Employee's employment by the Company, or any Affiliate or successor of the Company, shall be subject to a Termination within the Covered Period, then the Company shall pay the Employee an amount equal to the applicable Severance Amount, payable within fifteen (15) days after the Employee's termination that is related to the Change of Control. 2. Definitions. As used throughout this Agreement, all of the terms defined in this paragraph 2 shall have the meanings given below. A. An "Affiliate" shall mean any entity which owns or controls, is owned by or is under common ownership or control with, the Company. B. "Base Annual Salary" shall mean the amount equal to the sum of (i) the greater of Employee's then-current annual salary or the Employee's annual salary as of the date one (1) day prior to the Change of Control; (ii) the average of the three (3) most recent bonuses paid to the Employee; and (iii) the average of the three (3) most recent contributions made by the Company on behalf of the Employee to the Company's tax-qualified retirement plans (which, as of the date hereof, includes the profit sharing plan, the money purchase pension plan and the 401(k) plan). C. A "Change of Control" shall mean: (i) the consummation of the acquisition by any person (as such term is defined in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of fifty-one percent (51%) or more of the combined voting power of the then outstanding Voting Securities of the Company; or (ii) the individuals who, as of the date hereof, are members of the Board of Directors of the Company (the "Board") cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the stockholders, of any new director was approved by a vote of a majority of the Board, and such new director shall, for purposes of this Agreement, be considered as a member of the Board; or (iii) approval by stockholders of the Company of: (1) a merger or consolidation if the stockholders, immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than fifty- one percent (51%) of the combined voting power of the then outstanding Voting Securities of the entity resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the Voting Securities of the Company outstanding immediately before such merger or consolidation; or (2) a complete liquidation or dissolution or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because fifty-one percent (51%) or more of the combined voting power of the then outstanding securities of the Company are acquired by: (1) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity; or (2) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders in the same proportion as their ownership of stock immediately prior to such acquisition. D. "Covered Period" shall mean the period beginning six (6) months prior to a Change of Control and ending twelve (12) months after a Change of Control. E. "Termination" shall mean termination of the Employee's employment either: (i) by the Company or its successor, as the case may be, during the Covered Period, other than a Termination for Cause or any termination as a result of death, disability, or normal retirement pursuant to a retirement plan to which the Employee was subject prior to any Change of Control; or (ii) by the Employee, for any reason, during the period beginning ten (10) days prior to a Change of Control and ending ten (10) days after a Change of Control. F. "Severance Amount" shall mean the sum of all amounts earned or accrued through the Termination Date, including Base Annual Salary, deferred compensation plan accruals and vacation pay, plus (See Attachment to Exhibit 10.11) times the Employee's Base Annual Salary. G. "Termination for Cause" shall mean only a termination by the Company as a result of the Employee's fraud, misappropriation of or intentional material damage to the property or business of the Company (including its Affiliates), substantial and material failure by the Employee to fulfill the duties and responsibilities of his or her regular position and/or comply with the Company's or its Affiliates' policies, rules or regulations, or the Employee's conviction of a felony. H. "Termination Date" shall mean the date of employment termination indicated in the written notice provided by the Company or the Employee to the other. I. "Voting Securities" shall mean any securities which ordinarily possess the power to vote in the election of directors without the happening of any pre-condition or contingency. 3. Golden Parachute Payment Adjustment. It is the intention of the parties that the Severance Amount payments under this Agreement shall not constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and any regulations thereunder. If the independent accountants acting as auditors for the Company on the date of a Change of Control (or another accounting firm designated by the parties) determine, in consultation with legal counsel acceptable to the parties, that any amount payable to the Employee by the Company under this Agreement, or any other plan or agreement under which the Employee participates or is a party, would constitute an excess parachute payment within the meaning of Section 280G of the Code and be subject to the "excise tax" imposed by Section 4999 of the Code, then the Company shall pay to the Employee the amount of such excise tax and all federal and state income or other taxes with respect to the payment of the amount of such excise tax, including all such taxes with respect to any such additional amount. If at a later date, the Internal Revenue Service assesses a deficiency against the Employee for the excise tax which is greater than that which was determined at the time such amounts were paid, the Company shall pay to the Employee the amount of such excise tax plus any interest, penalties and professional fees or expenses, incurred by the Employee as a result of such assessment, including all such taxes with respect to any such additional amount. The highest marginal tax rate applicable to individuals at the time of payment of such amounts will be used for purposes of determining the federal and state income and other taxes with respect thereto. The Company shall withhold from any amounts paid under this Agreement the amount of any excise tax or other federal, state or local taxes then required to be withheld. Computations of the amount of any supplemental compensation paid under this subparagraph shall be made by the independent public accountants then regularly retained by the Company, in consultation with legal counsel acceptable to the parties. The Company shall pay all accountant and legal counsel fees and expenses. 4. Medical and Dental Benefits. If the Employee's employment by the Company or any Affiliate or successor of the Company shall be subject to a Termination within the Covered Period, then to the extent that the Employee or any of the Employee's dependents may be covered under the terms of any medical and dental plans of the Company (or any Affiliate) for active employees immediately prior to the termination, the Company will provide the Employee and those dependents with equivalent coverages for a period not to exceed twenty-four (24) months from the Termination Date. The coverages may be procured directly by the Company (or any Affiliate, if appropriate) apart from, and outside of the terms of the plans themselves; provided that the Employee and the Employee's dependents comply with all of the conditions of the medical or dental plans. In the event the Employee or any of the Employee's dependents become eligible for coverage under the terms of any other medical and/or dental plan of a subsequent employer which plan benefits are comparable to Company (or any Affiliate) plan benefits, coverage under Company (or any Affiliate) plans will cease for the eligible Employee and/or dependent. The Employee and Employee's dependents must notify the Company (or any Affiliate) of any subsequent employment and provide information regarding medical and/or dental coverage available. In the event the Company (or any Affiliate) discovers that the Employee and/or dependent has become employed and not provided the above notification, all payments and benefits under this Agreement will cease. 5. Out-Placement Counseling. If the Employee's employment by the Company or any Affiliate or successor of the Company shall be subject to a Termination within the Covered Period, the Company will provide out-placement counseling assistance in the form of reimbursement of the expenses incurred for such assistance within the twelve (12) month period following the Termination Date, such reimbursement amount not to exceed one-quarter (1/4) of the Employee's Base Annual Salary on the Termination Date. 6. A. Restrictive Covenant. The Company and the Employee have jointly reviewed the customer lists and operations of the Company and have agreed that the primary service area of the lending and deposit taking functions of the Company in which the Employee has actively participated extends to an area encompassing a fifty (50) mile radius from the main office of Dubuque Bank and Trust Company (DB&T). Therefore, as an essential ingredient of and in consideration of this Agreement and the payment of the Severance Amount, the Employee hereby agrees that, except with the express prior written consent of the Company, for a period of two (2) years after the termination of the Employee's employment with the Company (the "Restrictive Period"), he will not directly or indirectly compete with the business of the Company, including, but not by way of limitation, by directly or indirectly owning, managing, operating, controlling, financing, or by directly or indirectly serving as an employee, officer or director of or consultant to, or by soliciting or inducing, or attempting to solicit or induce, any employee or agent of the Company to terminate employment and become employed by any person, firm, partnership, corporation, trust or other entity which owns or operates, a bank, savings and loan association, credit union or similar financial institution (a "Financial Institution") within a fifty (50) mile radius of DB&T's main office (the "Restrictive Covenant"). If the Employee violates the Restrictive Covenant and the Company brings legal action for injunctive or other relief, the Company shall not, as a result of the time involved in obtaining such relief, be deprived of the benefit of the full period of the Restrictive Covenant. Accordingly, the Restrictive Covenant shall be deemed to have the duration specified in this paragraph computed from the date the relief is granted but reduced by the time between the period when the Restrictive Period began to run and the date of the first violation of the Restrictive Covenant by the Employee. The foregoing Restrictive Covenant shall not prohibit the Employee from owning directly or indirectly capital stock or similar securities which do not represent more than one percent (1%) of the outstanding capital stock of any Financial Institution listed on a securities exchange or quoted on the National Association of Securities Dealers Automated Quotation System. Notwithstanding the above, the Restrictive Covenant will be unenforceable in the event the Company terminates the employment of the Employee for other than Cause at or after the end of the Covered Period. B. Remedies for Breach of Restrictive Covenant. The Employee acknowledges that the restrictions contained in this paragraph are reasonable and necessary for the protection of the legitimate business interests of the Company, that any violation of these restrictions would cause substantial injury to the Company and such interests, that the Company would not have entered into this Agreement with the Employee without receiving the additional consideration offered by the Employee in binding himself to these restrictions and that such restrictions were a material inducement to the Company to enter into this Agreement. In the event of any violation or threatened violation of these restrictions, the Company, in addition to and not in limitation of, any other rights, remedies or damages available to the Company under this Agreement or otherwise at law or in equity, shall be entitled to preliminary and permanent injunctive relief to prevent or restrain any such violation by the Employee and any and all persons directly or indirectly acting for or with him, as the case may be. 7. Notices. Notices and all other communications under this Agreement shall be in writing and shall be deemed given when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company to: Heartland Financial USA, Inc. Attention: President 14th and Central Avenue Box 778 Dubuque, Iowa 52004 If to the Employee to: (See Attachment to Exhibit 10.11) or to such other address as either party may furnish to the other in writing, except that notices of changes of address shall be effective only upon receipt. 8. Applicable Law. This Agreement is entered into under, and shall be governed for all purposes by, the laws of the state of Iowa. 9. Severability. If a court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or enforceability of any other provision of this Agreement and all other provisions shall remain in full force and effect. 10. Withholding of Taxes. The Company may withhold from any benefits payable under this Agreement all federal, state, city or other taxes as may be required pursuant to any law, governmental regulation or ruling. 11. Not an Employment Agreement. Nothing in this Agreement shall give the Employee any rights (or impose any obligations) to continued employment by the Company or any Affiliate or successor of the Company, nor shall it give the Company any rights (or impose any obligations) for the continued performance of duties by the Employee for the Company or any Affiliate or successor of the Company. 12. No Assignment. The Employee's rights to receive payments or benefits under this Agreement shall not be assignable or transferable whether by pledge, creation of a security interest or otherwise, other than a transfer by will or by the laws of descent or distribution. In the event of any attempted assignment or transfer contrary to this paragraph, the Company shall have no liability to pay any amount so attempted to be assigned or transferred. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 13. Successors. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns (including, without limitation, any company into or with which the Company may merge or consolidate). The Company agrees that it will not effect the sale or other disposition of all or substantially all of its assets unless either (a) the person or entity acquiring the assets, or a substantial portion of the assets, shall expressly assume by an instrument in writing all duties and obligations of the Company under this Agreement, or (b) the Company shall provide, through the establishment of a separate reserve, for the payment in full of all amounts which are or may reasonably be expected to become payable to the Employee under this Agreement. 14. Legal Fees. All reasonable legal fees and related expenses (including the costs of experts, evidence and counsel) paid or incurred by the Employee pursuant to any dispute or question of interpretation relating this Agreement shall be paid or reimbursed by the Company if the Employee is successful on the merits pursuant to a legal judgment, arbitration or settlement. 15. Term. This Agreement shall remain in effect through December 31, 2001. In the event of a Change of Control during the term of this Agreement, this Agreement shall remain in effect for the Covered Period. 16. Amendment. This Agreement may not be amended or modified except by written agreement signed by the Employee and the Company. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first written. HEARTLAND FINANCIAL USA, INC. By: /s/ Lynn S. Fuller /s/ Employee -------------------- -------------------- Lynn S. Fuller (See Attachment to Chairman of the Board and CEO Exhibit 10.11) ATTACHMENT TO EXHIBIT 10.11 TIMES EMPLOYEE PAY ADDRESS - --------------------- ------- ----------------------- 1. Lynn B. Fuller four (4) 960 Prince Phillip Drive Dubuque, IA 52003-7886 2. John K. Schmidt three (3) 837 Spires Drive Dubuque, IA 52001-3191 3. Kenneth J. Erickson three (3) 11122 Hidden Springs Ct. Dubuque, IA 52003-9659 EX-10 3 CHANGE OF CONTROL AGREEMENT Exhibit 10.12 CHANGE OF CONTROL AGREEMENT THIS CHANGE OF CONTROL AGREEMENT (this "Agreement") is made as of the 1st day of January, 1999, (the "Effective Date") by and between HEARTLAND FINANCIAL USA, INC., an Iowa corporation, (the "Company") and (See Attachment to Exhibit 10.12)(the "Employee"). RECITALS A. The Employee is currently serving as an employee of the Company or one of its Affiliates. B. The Company desires to continue to employ the Employee as an employee of the Company or one of its Affiliates and the Employer is willing to continue such employment. C. The Company recognizes that circumstances may arise in which a change of control of the Company through acquisition or otherwise may occur thereby causing uncertainty of employment without regard to the competence or past contributions of the Employee, which uncertainty may result in the loss of valuable services of the Employee, and the Company and the Employee wish to provide reasonable security to the Employee against changes in the employment relationship in the event of any such change of control. NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter contained, it is covenanted and agreed by and between the parties hereto as follows: 1. Payment of Severance Amount. If the Employee's employment by the Company, or any Affiliate or successor of the Company, shall be subject to a Termination within the Covered Period, then the Company shall pay the Employee an amount equal to the applicable Severance Amount, payable within fifteen (15) days after the Employee's termination that is related to the Change of Control. 2. Definitions. As used throughout this Agreement, all of the terms defined in this paragraph 2 shall have the meanings given below. A. An "Affiliate" shall mean any entity which owns or controls, is owned by or is under common ownership or control with, the Company. B. "Base Annual Salary" shall mean the amount equal to the sum of (i) the greater of Employee's then-current annual salary or the Employee's annual salary as of the date one (1) day prior to the Change of Control; (ii) the average of the three (3) most recent bonuses paid to the Employee; and (iii) the average of the three (3) most recent contributions made by the Company on behalf of the Employee to the Company's tax-qualified retirement plans (which, as of the date hereof, includes the profit sharing plan, the money purchase pension plan and the 401(k) plan). C. A "Change of Control" shall mean: (i) the consummation of the acquisition by any person (as such term is defined in Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of fifty-one percent (51%) or more of the combined voting power of the then outstanding Voting Securities of the Company; or (ii) the individuals who, as of the date hereof, are members of the Board of Directors of the Company (the "Board") cease for any reason to constitute a majority of the Board, unless the election, or nomination for election by the stockholders, of any new director was approved by a vote of a majority of the Board, and such new director shall, for purposes of this Agreement, be considered as a member of the Board; or (iii) approval by stockholders of the Company of: (1) a merger or consolidation if the stockholders, immediately before such merger or consolidation, do not, as a result of such merger or consolidation, own, directly or indirectly, more than fifty- one percent (51%) of the combined voting power of the then outstanding Voting Securities of the entity resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the Voting Securities of the Company outstanding immediately before such merger or consolidation; or (2) a complete liquidation or dissolution or an agreement for the sale or other disposition of all or substantially all of the assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because fifty-one percent (51%) or more of the combined voting power of the then outstanding securities of the Company are acquired by: (1) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained for employees of the entity; or (2) any corporation which, immediately prior to such acquisition, is owned directly or indirectly by the stockholders in the same proportion as their ownership of stock immediately prior to such acquisition. D. "Covered Period" shall mean the period beginning six (6) months prior to a Change of Control and ending twelve (12) months after a Change of Control. E. "Termination" shall mean termination of the Employee's employment either: (i) by the Company or its successor, as the case may be, during the Covered Period, other than a Termination for Cause or any termination as a result of death, disability, or normal retirement pursuant to a retirement plan to which the Employee was subject prior to any Change of Control; or (ii) by the Employee, for any reason, during the period beginning ten (10) days prior to a Change of Control and ending ten (10) days after a Change of Control. F. "Severance Amount" shall mean the sum of all amounts earned or accrued through the Termination Date, including Base Annual Salary, deferred compensation plan accruals and vacation pay, plus (See Attachment to Exhibit 10.12) times the Employee's Base Annual Salary. G. "Termination for Cause" shall mean only a termination by the Company as a result of the Employee's fraud, misappropriation of or intentional material damage to the property or business of the Company (including its Affiliates), substantial and material failure by the Employee to fulfill the duties and responsibilities of his or her regular position and/or comply with the Company's or its Affiliates' policies, rules or regulations, or the Employee's conviction of a felony. H. "Termination Date" shall mean the date of employment termination indicated in the written notice provided by the Company or the Employee to the other. I. "Voting Securities" shall mean any securities which ordinarily possess the power to vote in the election of directors without the happening of any pre-condition or contingency. 3. Medical and Dental Benefits. If the Employee's employment by the Company or any Affiliate or successor of the Company shall be subject to a Termination within the Covered Period, then to the extent that the Employee or any of the Employee's dependents may be covered under the terms of any medical and dental plans of the Company (or any Affiliate) for active employees immediately prior to the termination, the Company will provide the Employee and those dependents with equivalent coverages for a period not to exceed twelve (12) months from the Termination Date. The coverages may be procured directly by the Company (or any Affiliate, if appropriate) apart from, and outside of the terms of the plans themselves; provided that the Employee and the Employee's dependents comply with all of the conditions of the medical or dental plans. In the event the Employee or any of the Employee's dependents become eligible for coverage under the terms of any other medical and/or dental plan of a subsequent employer which plan benefits are comparable to Company (or any Affiliate) plan benefits, coverage under Company (or any Affiliate) plans will cease for the eligible Employee and/or dependent. The Employee and Employee's dependents must notify the Company (or any Affiliate) of any subsequent employment and provide information regarding medical and/or dental coverage available. In the event the Company (or any Affiliate) discovers that the Employee and/or dependent has become employed and not provided the above notification, all payments and benefits under this Agreement will cease. 4. Out-Placement Counseling. If the Employee's employment by the Company or any Affiliate or successor of the Company shall be subject to a Termination within the Covered Period, the Company will provide out-placement counseling assistance in the form of reimbursement of the expenses incurred for such assistance within the twelve (12) month period following the Termination Date, such reimbursement amount not to exceed one-quarter (1/4) of the Employee's Base Annual Salary on the Termination Date. 5. Notices. Notices and all other communications under this Agreement shall be in writing and shall be deemed given when mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Company to: Heartland Financial USA, Inc. Attention: President 14th and Central Avenue Box 778 Dubuque, Iowa 52004 If to the Employee to: (See Attachment to Exhibit 10.12) or to such other address as either party may furnish to the other in writing, except that notices of changes of address shall be effective only upon receipt. 6. Applicable Law. This Agreement is entered into under, and shall be governed for all purposes by, the laws of the state of Iowa. 7. Severability. If a court of competent jurisdiction determines that any provision of this Agreement is invalid or unenforceable, then the invalidity or unenforceability of that provision shall not affect the validity or enforceability of any other provision of this Agreement and all other provisions shall remain in full force and effect. 8. Withholding of Taxes. The Company may withhold from any benefits payable under this Agreement all federal, state, city or other taxes as may be required pursuant to any law, governmental regulation or ruling. 9. Not an Employment Agreement. Nothing in this Agreement shall give the Employee any rights (or impose any obligations) to continued employment by the Company or any Affiliate or successor of the Company, nor shall it give the Company any rights (or impose any obligations) for the continued performance of duties by the Employee for the Company or any Affiliate or successor of the Company. 10. No Assignment. The Employee's rights to receive payments or benefits under this Agreement shall not be assignable or transferable whether by pledge, creation of a security interest or otherwise, other than a transfer by will or by the laws of descent or distribution. In the event of any attempted assignment or transfer contrary to this paragraph, the Company shall have no liability to pay any amount so attempted to be assigned or transferred. This Agreement shall inure to the benefit of and be enforceable by the Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. 11. Successors. This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns (including, without limitation, any company into or with which the Company may merge or consolidate). The Company agrees that it will not effect the sale or other disposition of all or substantially all of its assets unless either (a) the person or entity acquiring the assets, or a substantial portion of the assets, shall expressly assume by an instrument in writing all duties and obligations of the Company under this Agreement, or (b) the Company shall provide, through the establishment of a separate reserve, for the payment in full of all amounts which are or may reasonably be expected to become payable to the Employee under this Agreement. 12. Legal Fees. All reasonable legal fees and related expenses (including the costs of experts, evidence and counsel) paid or incurred by the Employee pursuant to any dispute or question of interpretation relating this Agreement shall be paid or reimbursed by the Company if the Employee is successful on the merits pursuant to a legal judgment, arbitration or settlement. 13. Term. This Agreement shall remain in effect through December 31, 2001. In the event of a Change of Control during the term of this Agreement, this Agreement shall remain in effect for the Covered Period. 14. Amendment. This Agreement may not be amended or modified except by written agreement signed by the Employee and the Company. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year first written. HEARTLAND FINANCIAL USA, INC. By: /s/ Lynn S. Fuller /s/ Employee ---------------------- -------------------- Lynn S. Fuller (See Attachment to Chairman of the Board and CEO Exhibit 10.12) ATTACHMENT TO EXHIBIT 10.12 TIMES EMPLOYEE PAY ADDRESS - --------------------- ------- ----------------------- 1. Edward H. Everts two (2) 1105 Richards Road Dubuque, IA 52003 2. Paul J. Peckosh one (1) 1090 Langworthy Street Dubuque, IA 52003-7316 3. Douglas J. Horstmann one (1) 2418 Beacon Hill Drive Dubuque, IA 52003 EX-10 4 HEALTH PLAN Exhibit 10.13 PLAN DOCUMENT HEARTLAND FINANCIAL USA, INC. HEALTH CARE PLAN Plan: 501 Heartland Financial USA, Inc. hereby establishes a program of benefits constituting an "Employee Welfare Benefit Plan" under the Employee Retirement Income Security Act of 1976 (ERISA), as amended. By signing below, Heartland Financial USA, Inc. agrees to be bound by the terms of the plan. HEARTLAND FINANCIAL USA, INC. By: /s/ Nancy Wilson ------------------------ Authorized Representative Witnessed: Date: January 4, 1999 By: /s/ Annette Arnold -------------------- ------------------------ DISCLAIMER OF CLAIMS PROCESSOR We have prepared these documents for your review and consideration, but we are not legal counsel, nor are we in the business of practicing law. As your plan's fiduciaries and/or trustees, you are fully responsible for all legal issues which concern the plan. If you are not an expert in this area, you may wish to consult an attorney to assist you in reviewing this plan. TABLE OF CONTENTS SECTION PAGE PLAN DESCRIPTION PLAN SUMMARY MANAGED CARE Utilization Review Agent Utilization Review Penalty for Non-Certification Continued Stay Review COMPREHENSIVE MEDICAL EXPENSE BENEFITS The Deductible Family Deductible Feature Deductible Carry-over Provision Medical Eligible Expenses COMPREHENSIVE DENTAL EXPENSE BENEFITS The Deductible Dental Eligible Expenses Limitations PRESCRIPTION DRUG EXPENSE BENEFIT GENERAL LIMITATIONS PRE-EXISTING CONDITIONS ELIGIBILITY OF COVERAGE Employee Eligibility and Effective Date Dependent Eligibility and Effective Date LATE ENROLLMENT Special Enrollment TERMINATION OF COVERAGE Employee Termination Dependent Termination EXTENSION OF BENEFITS Family and Medical Leave Act Provision Uniformed Services Employment And Reemployment Rights Act (USERRA) COBRA Extension of Benefits COORDINATION OF BENEFITS SUBROGATION RIGHTS UNDER ERISA GENERAL PROVISIONS DEFINITIONS PLAN DESCRIPTION Purpose The Plan Document details the benefits, rights, and privileges of Covered Individuals (as later defined), in a fund established by Heartland Financial USA, Inc. and referred to as the "Plan." The Plan Document explains the times when the Plan will pay or reimburse all or a portion of Covered Expenses. Effective Date The effective date of the Plan is January 1, 1999. Claims Processor The Claims Processor of the Plan is Self Insured Services Company (SISCO). Name Of Plan Heartland Financial USA, Inc. Health Care Plan Name And Address Of Plan Sponsor Heartland Financial USA, Inc. 1398 Central Avenue Dubuque, IA 52001 Name And Address of Claims Processor Self Insured Services Company (SISCO) P.O. Box 389 Dubuque, IA 52004-0389 (800) 457-4726 Name And Address Of Review Organization HEALTHCORP P.O. Box 1475 Dubuque, IA 52004-1475 (800) 583-5888 Employer I.D. Number 42-1405748 Plan Number 501 Type Of Benefit Provided Medical and Dental Expense Coverage Agent For Legal Service Heartland Financial USA, Inc. Funding Of The Plan Heartland Financial USA, Inc. and Employee Contributions Medium For Providing Benefits The benefits are administered in accordance with the Plan Document by the Claims Processor. Fiscal Year Of The Plan Beginning January 1st and ends December 31st. Named Fiduciary And Plan Administrator The Named Fiduciary and Plan Administrator is Heartland Financial USA, Inc., who will have the authority to control and manage the operation and administration of the Plan. The Named Administrator may delegate responsibilities for the operation and administration of the Plan. The Company will have the authority to amend the Plan, to determine its policies, to appoint and remove other supervisors, fix their compensation (if any), and exercise general administrative authority over them. The Administrator has the sole authority and responsibility to review and make final decisions on all claims to benefit hereunder. Contributions To The Plan The amount of contributions to the Plan are to be made on the following basis: The Company reserves the right to increase or decrease Employee or Dependent contributions from time to time. Notwithstanding any other provision of the Plan, the Company's obligation to pay claims otherwise allowable under the terms of the Plan will be limited to its obligation to make contributions to the Plan as set forth in the preceding sentence. Payment of said claims in accordance with these procedures will discharge completely the Company's obligation with respect to such payments. In the event that the Company terminates the Plan, then as of the effective date of termination, the Company and Covered Employees will have no further obligation to make additional contributions to the Plan. Plan Modification And Amendments Subject to any negotiated agreements, the Company may modify, amend, or discontinue the Plan without the consent of or notice to Employees. Any changes made shall be binding on each Employee and on any other Covered Individuals. This right to make amendments shall extend to amending the coverage (if any) granted to retirees covered under the Plan, including the right to terminate such coverage (if any) entirely. Termination Of Plan The Company reserves the right at any time to terminate the Plan by a written instrument to that effect. All previous contributions by the Company will continue to be issued for the purpose of paying benefits under the provisions of this Plan with respect to claims arising before such termination, or will be used for the purpose of providing similar health benefits to Covered Employees, until all contributions are exhausted. Plan Is Not A Contract The Plan Document constitutes the entire Plan. The Plan will not be deemed to constitute a contract of employment or give any Employee of the Company the right to be retained in the service of the Company or to interfere with the right of the Company to discharge or otherwise terminate the employment of any Employee. Claim Procedure In accordance with Section 503 of ERISA, the Company will provide adequate notice in writing to any Covered Employees whose claim for benefits under this Plan has been denied, setting forth the specific reasons for such denial and written in a manner calculated to be understood by the Employee. Further, the Company will afford a reasonable opportunity to any Employee, whose claim for benefits has been denied, for a full and fair review of the decision denying the claim by the person designated by the Company for that purpose. Protection Against Creditors No benefit payment under this Plan will be subject in any way to alienation, sale, transfer, pledge, attachment, garnishment, execution, or encumbrance of any kind, and any attempt to accomplish the same will be void. If the Company will find that such an attempt has been made with respect to any payment due or to become due to any Covered Employee, the Company in its sole discretion may terminate the interest of such Covered Employee or former Covered Employee in such payment, and in such case will apply the amount of such payment to or for the benefit of such Covered Employee or former Covered Employee, his spouse, parent, adult child, guardian of a minor child, brother or sister, or other relative of a Dependent of such Covered Employee or former Covered Employee, as the Company may determine, and any such application will be a complete discharge of all liability with respect to such benefit payment. Indemnification Of Employees Except as otherwise provided in ERISA, no director, officer, or Employee of the Company or of the Claims Processor will incur any personal liability for the breach of any responsibility, obligation, or duty in connection with any act done or omitted to be done in good faith in the administration or management of the Plan and will be indemnified and held harmless by the Company from and against any such personal liability, including all expenses reasonably incurred in his defense if the Company fails to provide such defense. The Company may purchase insurance to cover the potential liability of directors, officers, and Employees serving in a fiduciary capacity with respect to the Plan, and the Plan, itself, at its expense, may insure itself against loss by misdeeds or omissions of Plan Fiduciaries, provided such insurance permits recourse by the insurer against such Fiduciaries. The Company may also purchase insurance to cover the exposure of its directors, officers, and Employees by reason of such right of recourse. PLAN SUMMARY FOR HEARTLAND FINANCIAL USA, INC. Eligibility Provisions EFFECTIVE DATE OF PLAN January 1, 1999 ELIGIBLE CLASS All Employees who work for the Company for at least seventeen and one-half (17.5) hours per week on a regular basis. REQUIRED PERIOD OF SERVICE An individual will be eligible on the first of the month coincident with or next following ninety (90) days of continuous, Active Work. CONTRIBUTION The Plan may be evaluated from time to time to determine the amount of Employee contribution (if any) required. MANAGED CARE Hospital Pre-Admission Certification The Plan requires that all non-emergency inpatient hospitalizations be pre-certified by the Review Organization prior to the hospitalization; all emergency inpatient hospitalizations must be reported within forty-eight (48) hours of admission. If an in- Hospital stay is not pre-certified by the Review Organization, benefits related to the hospitalization may be payable at 50%. (The penalty does not apply to the Annual Deductible or Out-of- Pocket Maximum.) In regard to maternity or new born infant admissions, the health Plan may not restrict benefits for any Hospital length of stay in connection with childbirth for the mother or newborn child to less than 48 hours following a normal vaginal delivery, or less than 96 hours following a cesarean section, or require that a provider obtain authorization from the plan for prescribing a length of stay not in excess of the above periods. However, Federal law generally does not prohibit the mother's or newborn's attending provider, after consulting with the mother, from discharging the mother or her newborn earlier than 48 hours (or 96 hours as applicable). Continued Stay Review If the Review Organization determines at any time during an inpatient hospitalization that inpatient care is no longer Medically Necessary, there will be no coverage for expenses incurred thereafter because the patient elects to remain hospitalized. Outpatient Management Pre-Certification The Plan requires that scheduled diagnostic tests (such as an MRI or CT Scan) as well as any scheduled procedure at a Hospital, clinic and/or Physician's office, freestanding diagnostic or treatment facility, freestanding surgical center or Hospital-based surgical center or mobile units offering these services be pre-certified by the Review Organization prior to receiving treatment. Scheduled procedures do include both surgical and diagnostic procedures as well as various therapies to include radiation, chemotherapy and rehabilitation. It does not include routine laboratory work, routine office procedures, or emergency room visits. If the service is not pre-certified, eligible charges related to the service may be payable at 50%. (The penalty does not apply to the Annual Deductible or Out-of-Pocket Maximum) Mental Health/Substance Abuse Treatment Pre- Certification The Plan requires that any Outpatient Mental Health/Substance Abuse treatment in excess of five (5) visits be pre- certified by the Review Organization prior to receiving treatment. If the Mental Health/Substance Abuse procedure is not pre-certified, eligible charges related to the Mental Health/Substance Abuse procedure may be payable at 50%. (The penalty does not apply to the Annual Deductible or Out-of-Pocket Maximum) Hospital Bill Auditing The Plan will reimburse the participant 25% of an error on a hospital bill. (The employee must be the initial person discovering the error.) COMPREHENSIVE MEDICAL EXPENSE BENEFITS Annual Individual Deductible $250 Annual Family Deductible (All Family members combined) $500 Annual Out-of-Pocket Maximum Including the Deductible (Does not include the benefit reduction for failure to comply with the Managed Care measures of the Plan,ineligible charges, coinsurance for Mental Nervous/Substance Abuse services, coinsurance for infertility services, coinsurance for prescriptions, or any amount over the usual, customary, and reasonable procedure rate.) Individual: $750 Family: $1,500 (All Family members combined) Benefit Percentage for Mental Nervous/Substance Abuse Services 50% after the Annual Deductible Benefit Percentage for Well- Child Care up to Age 13 100% after the Annual Deductible Benefit Percentage for Routine Exams for In- dividuals Age 13 and Over If a Covered Individual avails himself of the services of a Preferred Provider, benefits will be payable at 90% after the Annual Deductible. If a Covered Individual does not avail himself of the services of a Preferred Provider, benefits will be payable at 80% after the Annual Deductible. Benefit Percentage for Out- Patient Department Services (co-pay waived if admitted) If a Covered Individual avails himself of the services of a Preferred Provider, benefits will be payable at 90% after a $50 co-pay and the Annual Deductible. If a Covered Individual does not avail himself of the services of a Preferred Provider, benefits will be payable at 80% after a $50 co-pay and the Annual Deductible. Benefit Percentage for Prescription Drugs (Effective February 1, 1999 Participants will be required to pay only 50% at the Pharmacy) 50%, no Deductible required (If a name brand drug is purchased when a generic is available, the participant is responsible for the price difference.) Benefit Percentage for All Other Eligible Medical Expenses If a Covered Individual avails himself of the services of a Preferred Provider, benefits will be payable at 90% after the Annual Deductible. If a Covered Individual does not avail himself of the services of a Preferred Provider, benefits will be payable at 80% after the Annual Deductible. PLAN LIMITATIONS & MAXIMUMS UCR All charges are subject to the usual, customary, and reasonable (UCR) fee for the area in which the service or supply is received. Hospital Room & Board Limitation Semi-private rate; if a facility has only private rooms or a private room is medically necessary, the private room rate will be allowed. Intensive Care Unit Limitation Actual ICU rate Skilled Nursing Facility Room & Board Limitation Semi-private rate Maximum Lifetime Benefit for All Medical Expenses (Includes all other lifetime maximums). $2,000,000 Maximum Lifetime Benefit for Respite Care Inpatient: 15 days Outpatient: 15 days Maximum Lifetime Benefit for Services and Supplies Related to Infertility $15,000 Maximum Lifetime Benefit for TMJ (Temporomandibular Joint Disorder) $15,000 Maximum Lifetime Benefit for Substance Abuse Expenses $50,000 Maximum Annual Benefit for Inpatient Mental Health and/or Substance Abuse Treatment Expenses Combined 30 days per Calendar Year, age 19 and under 60 days per Calendar Year, age 19 and over Maximum Annual Benefit for Outpatient Mental Health and/or Substance Abuse Treatment Expenses 30 days per Calendar Year Maximum Annual Benefit for Skilled Nursing Facility Expenses 60 days per Calendar Year Maximum Annual Benefit for Home Health Care Services 100 visits per Calendar Year Maximum Benefit for Family Counseling Under Hospice Care Benefit $200 per Hospice Period DENTAL EXPENSE BENEFITS Plan I Annual Individual Deductible $25 Annual Family Deductible (Three Individuals) $75 Benefit Percentage for Dental Expenses Class I (Diagnostic and Preventive Services) 100%, no Deductible required Class II (Basic Restorative Services) 80% after the Annual Deductible Class III (Major Restorative Services) 80% after the Annual Deductible Class IV (Dentures and bridges) 50% after the Annual Deductible Class V (Gum and bone disease -surgical) 50% after the Annual Deductible Class VI (Orthodontia) 50% after the Annual Deductible, up to the Lifetime Maximum Maximum Annual Benefit per Individual Classes I, II, III, IV and V Combined $1,000 per individual per Calendar Year Maximum Lifetime Benefit Class VI $1,500 per individual Maximum Benefit for Sealants $120 (limited to dependent children up to age 15) DENTAL EXPENSE BENEFITS Plan II Annual Individual Deductible $25 Annual Family Deductible (Three Individuals) $75 Benefit Percentage for Dental Expenses Class I (Diagnostic and Preventive Services) 100%, no Deductible required Class II (Basic Restorative Services) 80% after the Annual Deductible Class III (Major Restorative Services) 80% after the Annual Deductible Maximum Annual Benefit Classes I, II and III $1,000 per individual per Calendar Year Maximum Benefit for Sealants $120 (limited to dependent children up to age 15) MANAGED CARE Utilization Review Agent The Utilization Review Agent for this Plan is: HEALTHCORP P.O. Box 1475 Dubuque, Iowa 52004-1475 1-800-583-5888 Utilization Review This Plan has a mandatory utilization review requirement called "pre-certification". Pre-certification is required for all scheduled Hospital admissions and Outpatient services (as outlined in the Plan Summary). For emergency admissions to the Hospital, the covered individual must notify the utilization review agent within 48 hours of the admission. Pre-certification of Outpatient mental health and/or substance abuse services is required if the services exceed five (5) session. Pre- certification determines that services received are Medically Necessary. Pre-certification does not guarantee that proposed Hospital admissions, Surgical Procedure, or Outpatient procedures are covered under the Plan. The Covered Individual must inform the provider that he participates in a program which has pre-certification requirements. In order to obtain pre-certification: 1. Notify the appropriate Utilization Review Agent of the upcoming Hospital stay no later than twenty-four (24) hours prior to the admission to the Hospital. 2. Notice can be given by: (a) the Hospital; (b) admitting Physician; (c) Covered Individual; or (d) a Family member of the Covered Individual, but it is ultimately the responsibility of the Covered Individual to make sure a Hospital admission, Surgical Procedure, or Outpatient procedure has been pre-certified. 3. The Utilization Review Agent must be provided with information necessary to make a decision as to the Medical Necessity of the admission. When the Utilization Review Agent provides pre-certification to the Covered Individual, the Utilization Review Agent will assign a certain number of inpatient Hospital days for the stay. If any days are not Medically Necessary, and the Covered Individual chooses to remain beyond the Medically Necessary length of stay, the Covered Individual shall be liable for all Hospital charges beyond the Medically Necessary length of stay. Penalty for Non-Certification If pre-certification is not obtained in connection with inpatient hospitalization, home health care, Hospice care, or private duty nursing, the services may be reduced by 50%. The additional penalty will be figured before the Deductible and coinsurance are applied. The penalty is not considered a covered expense. Continued Stay Review If the review organization determines at any time during the inpatient hospitalization that it is not Medically Necessary for the Covered Individual to remain an inpatient and the Covered Individual elects to remain hospitalized, no benefits shall be payable in relation to any day of hospitalization following the date the review organization determines that inpatient hospitalization is no longer Medically Necessary. Hospital Bill Auditing The Plan will reimburse the Participant 25% of an error on a hospital bill. If you discover an error on a hospital bill that results in savings to the Health Plan, you will be given 25% of the savings. To be eligible you must be the first to discover the error and notify the claims payer of the error. You will need to document the error by supplying a copy of both the incorrect billing and the corrected billing. COMPREHENSIVE MEDICAL EXPENSE BENEFITS Upon receipt of proof of loss, the Plan will pay the benefit percentage listed in the Plan Summary for Eligible Expenses incurred in each benefit period. The amount payable in no event shall exceed the Maximum Lifetime Benefit stated in the Plan Summary. The Deductible The Deductible is the amount of covered medical expenses which must be paid before Comprehensive Medical Expense Benefits are payable. The amount of the Deductible is shown in the Plan Summary. Each Family member is subject to the Deductible up to the Family maximum as shown in the Plan Summary. Family Deductible Feature If the Family Deductible limit, as shown in the Plan Summary, is incurred by covered Family members during the Calendar Year, no further Deductibles will be required on any members for the rest of the year. Deductible Carry-over Provision The medical Deductible applies only once in any Calendar Year even though there may be several different injuries or diseases. So that Comprehensive Medical Benefit payments will not be subject to a medical Deductible late in one Calendar Year and soon again in the next following year, any expenses applied against the medical Deductible in the last three (3) months of a Calendar Year will reduce the medical Deductible for the next Calendar Year. Common Accident Provision If two or more covered members of a Family sustain bodily injuries in the same accident, only one applicable annual individual medical Deductible amount will be applied for all accident related charges. Allocation And Apportionment Of Benefits The Company reserves the right to allocate the Deductible amount to any eligible charges and to apportion the benefits to the Covered Individual and any assignees. Such allocation and apportionment shall be conclusive and shall be binding upon the Covered Individual and all assignees. Medical Eligible Expenses Medical Eligible Expenses are the following expenses listed below that are incurred while coverage is in force for the Covered Individual. If, however, any of the listed expenses are excluded from coverage because of a reason described in the General Limitations section, those expenses will not be considered medical Eligible Expenses. The Plan will make payment for eligible medical expenses subject to the co-payment percentage and maximum amounts shown in the Plan Summary. Hospital Expenses Hospital expenses are the charges made by a Hospital in its own behalf. Such charges include: 1. Semi-private room and board. If a facility has only private rooms, 90% of the private rate will be allowed. If a private room is Medically Necessary due to the diagnosed condition, the private-room rate will be allowable. 2. Necessary Hospital services other than room and board as furnished by the Hospital. 3. Special care units, including burn care units, cardiac care units, delivery rooms, intensive care units, isolation rooms, operating rooms and recovery rooms. Skilled Nursing Facility Expenses Eligible Skilled Nursing Facility expenses under this benefit must start within fourteen (14) days of discharge from a hospital stay of at least three (3) days and will be limited up to the maximums listed in the Plan Summary. Eligible services include: 1. Room and Board, including any charges made by the facility as a condition of occupancy or on a regular daily or weekly basis, such as general nursing services. The daily room and board charges allowed will not exceed the average semi- private rate. 2. Medical services customarily provided by the Skilled Nursing Facility, with the exception of private-duty or special nursing services and Physician fees. 3. Drugs, biologicals, solutions, dressings and casts furnished for use during the convalescent period, but no other supplies. Hospice Expenses A Hospice means a health care program providing services to terminally ill patients. The following services and supplies provided by a Hospice are covered: 1. Nursing care by a Registered Nurse (R.N.), or by a Licensed Practical Nurse (L.P.N.), a vocational nurse, or a public health nurse who is under the direct supervision of a Registered Nurse. 2. Physical therapy, occupational therapy and speech therapy, when rendered by a licensed therapist. 3. Medical supplies, including drugs and biologicals, and the use of medical appliances. 4. Physicians' services. 5. Services, supplies, and treatments deemed Medically Necessary and ordered by a licensed Physician. 6. Bereavement counseling up to the maximum listed in the Plan Summary. Respite Care Expenses Respite care offers rest and relief help for the Family caring for a terminally ill patient. Respite services must be received in increments of at least five (5) consecutive days and are limited to a lifetime maximum of fifteen (15) Outpatient days and fifteen (15) inpatient days of respite care. Eligible inpatient respite care can take place in a Hospital, Skilled Nursing Facility or nursing home. Home Health Care Expenses Home health care expenses are the charges made by a Home Health Care Agency, for the following services and supplies which are ordered by a Physician and furnished to a Family member in his home in accordance with a Home Health Care Plan. 1. Part-time or intermittent nursing care provided by a Registered Nurse (R.N.), or by a Licensed Practical Nurse (L.P.N.), a vocational nurse, or a public health nurse who is under the direct supervision of a Registered Nurse. 2. Part-time or intermittent home health aide services which consist primarily of caring for the patient, and is under the supervision of an R.N. or L.P.N. 3. Medical supplies, drugs, and medicines prescribed by a Physician, and laboratory services provided by or on behalf of a Hospital, but only to the extent that such charges would have been covered if the Family member had remained in the Hospital or a Skilled Nursing Facility. 4. Charges for physical, speech or occupational therapy. 5. Charges for parenteral or enteral nutrition. 6. Charges for inhalation therapy. 7. Medical social services. Home Health Care Expenses will not be covered if they are: 1. For services or supplies not specified in the Home Health Care Plan. 2. For services by a member of the Employee's or Dependent's Family or household. 3. For services for a period during which an Employee or Dependent is not under the continuing care of a Physician. 4. For transportation services. Each visit, up to eight (8) hours, by a Registered Nurse (R.N.) or Licensed Practical Nurse (L.P.N.) to provide nursing care, by a therapist to provide physical, occupational or speech therapy, and each visit of up to eight (8) hours by a home health aide shall be considered as one home health care visit. Organ Transplant Expenses Benefits are available to a Covered Individual who is a recipient or donor for Medically Necessary covered services relating to bone marrow, liver, heart, lung (single and double), combination heart/lung, pancreas, pancreas/kidney, kidney, cornea and any other non-experimental transplant. Eligible services include, but are not limited to: testing to determine transplant feasibility and donor compatibility; charges related to the transplant itself, as well as follow-up care to include: diagnostic x-ray and lab; procedures to determine rejection or success of transplant, to include: Physician, lab, x-ray or Hospital charges, and anti-rejection drugs. Organ transplant expenses are those charges for services and supplies in connection with non-experimental transplant procedures, subject to the following criteria: 1. Except for transplant of a cornea, the recipient must be in danger of death in the event the organ transplant is not performed. 2. There must be a reasonable expectation of survival if he were to receive the transplant. 3. Charges incurred by the donor are only payable if the donor has no other coverage available, i.e. group health plan, a government program, or a research program. 4. Pre-approval is required. The following will not be eligible for coverage under this benefit: 1. Expenses associated with the purchase of any organ. 2. Charges in connection with mechanical organs or a transplant involving a mechanical organ; except charges in relation to mechanical organs which may be necessary on a temporary short-term basis until a suitable donor organ is available will be eligible under the Plan. 3. Services or supplies furnished in connection with the transportation of a living donor. Physician Services The Plan will allow Physician charges according to usual, customary, and reasonable (UCR) guidelines for medical care and/or surgical treatments, including office or home visits, Hospital Inpatient or Outpatient care, clinic care, and surgical opinion consultations. Payment for multiple surgical procedures (not including the primary surgical procedure) performed at the same time may be reduced to 50% of the UCR amount. If the multiple surgical procedure is determined incidental, benefits will be denied. Covered Expenses In Or Out Of The Hospital 1. Fees for private-duty nursing when such services are: 1) provided by Registered Nurses (R.N.'s) or Licensed Practical Nurses (L.P.N.'s) in the Covered Individual's home; 2) prescribed by a Physician for the treatment of an Illness or Injury when the Covered Individual is homebound; and 3) not more costly than alternative services that would be effective for diagnosis and treatment of the Covered Individual's condition. 2. Treatment or services rendered by a licensed Physical Therapist in a home setting or at a facility or institution which has the primary purpose of providing medical care for an Illness or Injury. Charges for restorative or rehabilitative physical therapy due to an Illness or Injury, or due to surgery performed because of an Illness or Injury will be eligible. Pre-certification is required if therapy exceeds six (6) visits. 3. Charges for Medically Necessary local air or ground ambulance service to and from the nearest, local adequate Hospital or nursing facility where emergency care or treatment is rendered, or to the nearest facility equipped to furnish necessary medical treatment if not available at a local Hospital. This Plan will only cover ambulance transportation when: 1) no other method of transportation is appropriate; 2) the services necessary to treat the Illness or Injury are not available in the Hospital or nursing facility where the Covered Individual is an inpatient; and/or 3) the Hospital or nursing facility where the ambulance takes the Covered Individual is the nearest with adequate facilities. 4. Charges for x-rays, microscopic tests, and laboratory tests. 5. Charges for radiation therapy or treatment, and chemotherapy. 6. Charges for the processing and administration of blood or blood components, including charges for the processing and storage of autologous blood. 7. Charges for oxygen and other gases, and their administration. 8. Charges for electrocardiograms, electroencephalograms, pneumoencephalogram, basal metabolism tests, allergy tests, or similar well-established diagnostic tests generally approved by Physicians throughout the United States. 9. Charges for the cost and administration of anesthetic in conjunction with a covered surgical or medical procedure. 10. Charges for dressings, sutures, casts, splints, crutches, braces, or other necessary medical supplies, with the exception of dental braces, orthopedic shoes, arch supports, elastic stockings, trusses, lumbar braces, garter belts and similar items which can be purchased without a prescription. 11. Charges for the rental, up to the purchase price, of a wheelchair, Hospital bed, iron lung, or other durable medical equipment required for Medically Necessary temporary therapeutic use, or the purchase of this equipment if economically justified, whichever is less. It is recommended that the Covered Individual obtain pre- approval of the purchase. 12. Charges for prosthetic appliances used to replace a missing natural body part, and charges for repairs of such an appliance. Replacement of a prosthetic appliance will be covered when due to a pathological change, or if it has been more than five (5) years since the last placement of such an item, unless replacement is needed as a result of unintentional damage of the appliance, and it cannot be made serviceable by repairs. Pre-authorization of a replacement is recommended. 13. Charges made by an ambulatory surgical center or minor emergency medical clinic when treatment has been rendered. 14. Charges for dialysis as an inpatient or at a Medicare-approved Outpatient dialysis center. 15. Charges for allergens and allergy injections. 16. Charges for drugs requiring the written prescription of a licensed Physician. Such drugs, with the exception of oral contraceptives, must be necessary for the treatment of an Illness or Injury. The Plan also covers insulin, insulin supplies and syringes. 17. Outpatient cardiac rehabilitation programs to provide supervised monitored exercise sessions following heart surgery or a heart attack. The program must be completed, or the individual must have a Physician's written release from the program, to receive benefits. 18. Charges for restorative or rehabilitative speech therapy by a licensed Speech Therapist due to an Illness or Injury, or due to surgery performed because of an Illness or Injury. Pre-certification is required if therapy exceeds six (6) visits. 19. Charges for restorative or rehabilitative occupational therapy by a licensed Occupational Therapist due to an Illness or Injury, or due to surgery performed because of an Illness or Injury. Pre-certification is required if therapy exceeds six (6) visits. 20. Eligible Pregnancy related expenses for an Employee or a Dependent, including Medically Necessary amniocentesis tests, are considered the same as any other medical condition under the Plan. 21. Charges in relation to a tubal ligation or vasectomy, but only for the initial surgery. Benefits do not include the reversal of a tubal ligation or vasectomy. 22. Charges for routine child Well-Care up to age thirteen (13) Eligible Expenses include those for physical exams, immunizations, except mass immunizations required for travel, and laboratory services. 23. Exam and laboratory charges in relation to a routine annual pap test. 24. Charges for routine physicals for persons age thirteen (13) and over, up to the maximums listed in the Plan Summary. Eligible Expenses will include those for the office exam, immunizations, and any routine diagnostic x-ray and laboratory services normally associated with a routine exam. 25. Charges for dental services provided by a Dentist when Medically Necessary, and limited to services provided for the repair of damage to the jaw or sound natural teeth as the direct result of, and completed within six (6) months of an accidental Injury. Injury as a result of chewing or biting will not be considered an accidental Injury. This will not in any event be deemed to include charges for treatment for the repair or replacement of a denture. 26. Charges for the following oral surgery whether performed by a Dentist or a medical doctor will be considered as eligible medical expenses: a. Correction of congenital abnormalities of the jaw. b. Reduction or manipulation of fractures of facial bones. c. Excision of lesions of the mandible, mouth, lips or tongue. d. Incision of the accessory sinuses, mouth, salivary glands or ducts. e. Manipulation of dislocations of the jaw. f. Surgical extraction of impacted teeth. 27. Charges for services and supplies in relation to diabetes self- management programs. Such services must be Medically Necessary and prescribed by a Physician. A Covered Individual will be limited to two (2) programs per Lifetime. 28. Charges for services in connection with surgical treatment of morbid obesity will be considered Eligible Expenses, subject to the following conditions: a. A second concurring surgical opinion is required prior to the surgical procedure; and b. Pre-authorization is required. Coverage is subject to the following guidelines: a. Body weight must be at least 200% of the optimal weight b. The Covered Individual must have been considered morbidly obese by a Physician for at least five (5) years prior to the date surgical treatment is sought. c. Non-surgical methods of weight reduction must have been attempted under a Physician's supervision for at least a three (3) year period immediately prior to the date surgical treatment is sought. 29. Charges in relation to individual and group psychiatric care (treatment of a psychiatric condition, alcoholism, substance abuse or drug addiction) are limited to the co- payment percentage of covered expenses in excess of the Deductible up to the maximums as shown in the Plan Summary. A psychiatric condition includes but is not limited to anorexia nervosa and bulimia, schizophrenia, and depressive disorders including but not limited to manic depressive. 30. Hospital and Physician charges in relation to the routine care of a newborn. 31. Charges by a Social Worker or Certified Counselor, but only when the Social Worker or Certified Counselor is under the supervision of an M.D., D.O., or Ph.D. 32. Charges for home infusion therapy, including the administration of nutrients, antibiotics, and other drugs and fluids intravenously or through a feeding tube. 33. Charges for injectable contraceptives. 34. Charges in relation to TMJ (temporomandibular joint disorder) subject to the maximum listed in the Plan Summary. 35. Charges for one wig or hair piece per year for hair loss due to chemotherapy or other treatment of a medical condition or injury. 36. Charges in relation to the diagnosis and/or treatment of infertility, including drug-induced stimulation of ovulation, artificial insemination, in vitro fertilization, or any infertility procedures currently excluded as investigational when they become recognized as acceptable medical practices, up to the maximums listed in the Plan Summary. Prior approval is recommended to confirm benefits. Benefits are never available for the collection or purchase of donor semen (sperm) or oocytes (eggs); services of a surrogate parent; freezing of sperm, oocytes, or embryos; or reversal of sterilization. 37. Charges for medically necessary mammoplasty following a medically necessary mastectomy. Services include reconstruction of the breast on which the mastectomy has been performed and reconstruction of the other breast to produce symmetrical appearance. Breast prostheses and surgical brassieres are also eligible under the Plan. Reduction mammoplasty will be covered if medical necessity is established and upon approval of the Utilization Review Agent. COMPREHENSIVE DENTAL EXPENSE BENEFITS Subject to the General Limitations and Exclusions of this Plan, reasonable charges incurred for the following dental expenses will be covered in accordance with the percentage of coverage, Deductible amounts and maximums in the Plan Summary. A pre-treatment review is recommended on all charges that will result in a payment of $100 or more unless it can be shown that treatment was made on an emergency basis. The Deductible The Deductible is the amount of covered dental expenses which must be paid before Comprehensive Dental Expense Benefits are payable. The amount of the Deductible is shown in the Plan Summary. Each Family member is subject to the Deductible up to the Family maximum as shown in the Plan Summary. Dental Eligible Expenses The term "Covered Dental Expenses" means the expenses incurred by or on behalf of a Covered Individual for charges made by a Dentist for the performance of dental service provided for in the Plan Summary when the dental service is performed by or under the direction of a Dentist, is essential for the necessary care of the teeth, and begins while the Covered Individual is covered for Dental Benefits. If the actual performance of a dental service begins on a date other than the date the service was recommended or determined to be necessary, the dental service will be considered to begin on the date the actual performance of the service begins. For an appliance or modification of an appliance, an expense is considered incurred at the time the impression is made. For a crown, bridge, or gold restoration, an expense is considered incurred at the time the tooth or teeth are prepared. For root canal therapy, an expense is considered incurred at the time the pulp chamber is opened. All other expenses are considered incurred at the time a service is rendered or a supply furnished. Covered dental expenses do not include any expenses that are in excess of the reasonable and customary amount. CLASS I - Diagnostic & Preventive Services 1. Oral examinations and routine cleaning (prophylaxis) of teeth, but not more than once every six (6) consecutive months. 2. Fluoride applied to the teeth, but not more than once every six (6) months. 3. Dental x-rays: a. Full mouth (single or multiple films), but not more than once every three (3) years; b. Bitewing x-rays, but not more than once every twelve (12) months c. Periapical, occlusal and extra oral x-rays when dentally necessary and appropriate. 4. Periodontal prophylaxis. CLASS II - Basic Restorative Services 1. Oral surgery, including pre- and post-operative care and local anesthetic and analgesic. 2. Extraction of teeth. 3. Regular cavity fillings, including amalgam, synthetic porcelains, composite and plastic fillings and stainless steel restorations. If you choose tooth-colored (composite) fillings to restore back teeth, benefits will be limited to the amount paid for a silver filling, and the difference will be your responsibility. 4. General anesthesia and intravenous sedation in connection with oral surgery when billed by the operating Dentist. 5. Emergency treatment to relieve pain. CLASS III - Major Restorative Services 1. Gold fillings and crown or jacket restorations are covered only when the tooth, as a result of extensive carries or fracture, cannot be restored with other filling material. 2. Non-surgical treatment of gum disease. 3. Root canal fillings (any x-ray, test, lab exam or follow- up care is part of the allowance for root canal therapy and not a separate dental service.) 4. Topical application of sealants for unmarried dependent children up to age fifteen (15). Maximum benefit of $120 while covered under this Plan. CLASS IV - Dentures and Bridges 1. Bridges. 2. Partial and complete dentures. CLASS V - Gum and Bone Disease (Surgical) Surgical procedures necessary for treatment of diseases of the gums and bone supporting the teeth. CLASS VI - Orthodontia Services for the straightening of teeth. Eligible charges must meet all of the following conditions: 1. An active appliance for that orthodontic procedure is inserted while the person is a covered person for the benefits of this coverage. 2. The orthodontic procedure is needed to correct: 1) vertical or horizontal overlap of upper teeth over lower teeth of at least four millimeters; 2) faulty alignment of the upper and lower arches with each other by at least the width of one tooth section (one cusp); or 3) crossbite. 3. The service or supply is made part of an orthodontic treatment plan that, before the orthodontic procedure is performed, has been submitted for Predetermination of Benefits. Alternate Benefit Provision When more that one dental service could provide suitable treatment based on common dental standards, the Claims Processor will determine the dental service on which payment will be based and the expenses that will be included as covered expenses. Limitations 1. Charges for anesthesia billed separately from the related procedure or analgesia other than general anesthesia administered in connection with oral surgery. 2. Charges for services or supplies to correct congenital deformities, such as a cleft palate. 3. Charges for services or supplies which have the primary purpose of improving the appearance of the teeth, rather than restoring or improving dental form or function. Some examples include: laminate and veneers. 4. Charges for infection control procedures (sepsis control - rubber gloves, gowns, etc.) when billed separately from actual dental treatment. 5. Charges for services or supplies provided by a Dentist who is a Close Relative. 6. Charges for dental implants. 7. Charges for services or supplies you are not legally obligated to pay for and for which you would not be charged in the absence of this certificate. 8. Charges for the replacement of lost or stolen appliances. 9. Charges for services or supplies that you are entitled to claim from any governmental program even if you waived or failed to claim rights to such services, benefits, or damages. 10. Charges for services or supplies not specifically listed as a covered expense. 11. Charges for services or supplies for appliances, including nightguards for the treatment of gum and bone disease or to limit tooth grinding or jaw clenching. 12. Charges for services or supplies for crowns placed for the primary purpose of periodontal splinting, altering vertical dimension, or restoring the closing of the upper and lower teeth (occlusion). 13. Charges for prescription drugs. 14. Charges for repair or replacement of any orthodontic appliance. 15. Charges for any service or supply that could have been compensated under Workers' Compensation laws, including any services or supplies applied toward the satisfaction of any Deductible under your employer's Workers' Compensation coverage. 16. Charges for services or supplies for any treatment plan when you receive the services or supplies after the date of termination of coverage under this Plan. 17. Charges for replacement of a bridge, crown or denture within five (5) years after the date it was originally installed unless: 1) such replacement is made necessary by the placement of an original opposing full denture or the necessary extraction of natural teeth; or 2) the bridge, crown or denture, while in the mouth, has been damaged beyond repaid as a result of an injury received while a person is covered for these benefits. 18. Charges for replacement of a bridge, crown, or denture which is or can be made useable according to common dental standards. 19. Charges for porcelain or acrylic veneers of crowns or pontics on or replacing the upper and lower first, second, and third molars. 20. Charges for bite registrations; precision or semi- precision attachments; or splinting. 21. Charges for instruction for plaque control, oral hygiene and diet. 22. Charges that are covered by the Medical Plan offered by the Company. 23. Charges for services and supplies received from a hospital. Dental Late Enrollment If an Employee applies for coverage more than thirty-one (31) days following the date the Employee was first eligible for coverage or after termination of coverage at the Employee's request, he will be required to furnish evident of good dental health to again be eligible for benefits. Evidence of good health will be furnished, if necessary, at the expense of the Employee. PRESCRIPTION DRUG EXPENSE BENEFIT The Plan will pay the usual and customary charge of prescription drugs, less the copayment listed in the Plan Summary which is payable by the Covered Individual for each prescription and each refill of a prescription. The prescription copayment is not eligible for benefits under the medical benefits portion of this Plan. The Prescription Drug Program will not cover the cost of administration of any drug. Under this program, the following drugs are never considered a prescription/refill, regardless of use or diagnosis: 1. Any drug for which reimbursement is available under any other group program or government program. 2. Drugs dispensed from or by any Hospital, Extended Care Facility, clinic, or other institution to an inpatient or outpatient; such drugs are covered by the medical portion of the Plan. 3. Drugs dispensed by other than a retail pharmacy. 4. Drugs that do not require a written prescription of a licensed physician (with the exception of insulin and the syringes or needles for its administration). The charge for more than a thirty-four (34) day supply shall not be covered by the Plan unless the prescription is listed as a maintenance drug and eligible to be dispensed in greater number (100-day supply) under the Prescription Drug Agreement. Also excluded are: 1. Devices or appliances (except for needles and syringes necessary for the administration of insulin). 2. Refills of a prescription that is more than one (1) year old. 3. Nutritional supplements, cosmetic or growth hormone treatments, or drugs or supplies associated with weight reduction. 4. Over the counter medications (including chemstrips, glucostix, lancets) 5. Drugs dispensed while in a nursing home, hospital, etc. 6. Smoking cessation drugs. 7. Prescriptions for sexual dysfunction. GENERAL LIMITATIONS The following exclusions and limitations apply to expenses incurred by all Covered Individuals: 1. Charges incurred prior to the effective date of coverage under the Plan or after coverage is terminated, unless Extension of Benefits applies. 2. Charges as a result of active participation in war or any act of war, whether declared or undeclared, or caused during service in the armed forces of any country. 3. No benefits or expenses will be paid or reimbursed to or for any Covered Individual for any injury, illness, occupational disease, or other loss which arises out of and in the course of employment, and for which the Covered Individual is reimbursed or entitled to reimbursement under any federal or state law, including a workers' compensation law or similar law. However, this exclusion will not apply in the case of a self-employed individual if the law does not require the Covered Individual to obtain coverage under a workers' compensation law or similar law, and that individual chooses not to obtain such coverage. If the Covered Individual does purchase the workers' compensation coverage or similar coverage, there will be no coverage under this Plan. 4. Charges while confined in a Hospital owned or operated by the United States government or any agency thereof, or charges for services, treatments or supplies furnished by the United States government or any agency thereof, unless such benefits are mandated under federal law and/or regulation. 5. Charges for which the Covered Individual is not (in the absence of this coverage) legally obligated to pay, or for which a charge would not ordinarily be made in the absence of this coverage. 6. Charges incurred due to an Illness or Injury resulting from the Covered Individual's voluntary participation in a criminal act (such as burglary, robbery, assault, criminal trespass, participation in a riot or civil disturbance), or while the Covered Individual is engaged in an illegal occupation. 7. Charges for services or supplies which constitute personal comfort or beautification items; for television or telephone use; for nutritional supplements; or in connection with custodial care, education or training, or expenses actually incurred by other persons. 8. Charges in connection with the care or treatment of or surgery performed for a cosmetic procedure. This exclusion will not apply when such treatment is rendered to correct a condition resulting from an accidental Injury sustained while coverage is in effect, or when rendered to correct a congenital anomaly (i.e., a birth defect) of a Covered Dependent. Pre-authorization is recommended. 9. Charges incurred in connection with services and supplies which are not necessary for treatment of the Injury or Illness, or are in excess of reasonable and customary charges, or are not recommended and approved by a Physician, or are not recognized by the American Medical Association as generally accepted and Medically Necessary for the diagnosis and/or treatment of an active Illness or Injury; or charges for procedures, surgical or otherwise, which are specifically listed by the American Medical Association as having no medical value. 10. Charges incurred for routine medical examinations or care, routine health checkups, or immunizations related to school, employment, insurance or travel, except as specifically shown as a covered expense elsewhere in the Plan 11. Charges related to or in connection with the reversal of a sterilization procedure. 12. Charges incurred in connection with routine eye refractions, the purchase or fitting of eyeglasses, contact lenses, or such similar aid devices except the initial purchase of contact lenses or glasses following cataract surgery. 13. Charges for hearing aids and the exam or fitting thereof. 14. Charges for orthopedic shoes, arch supports, or any such similar device, or exam for the prescription or fitting thereof; or charges for splints or braces for non-medical purposes (i.e., supports worn primarily during participation in sports or similar physical activities). 15. Charges for dental services not specifically included in benefits described in this Plan; or for Hospital charges in relation to dental care, except those services which are certified by a medical doctor to be Medically Necessary to safeguard the life and health of the Covered Individual due to the existence of a non-dental physical condition. Pre-authorization is recommended. 16. Charges for inpatient concurrent services of Physicians, unless there is a clinical necessity for supplemental skills and the two or more Physicians attend the patient for separate conditions during the same Hospital admission. 17. Charges for abortion unless Medically Necessary to safeguard the life of the mother. 18. Charges for services rendered by a Physician, nurse, or licensed therapist if such Physician, nurse, or licensed therapist is a Close Relative of the Covered Individual, or resides in the same household of the Covered Individual. 19. If a Covered Individual receives medical treatment outside of the United States or its territories, benefits shall be provided for those charges to the extent that the services rendered are included as covered expenses in the Plan, and provided the Covered Individual did not travel to such a location for the sole purpose of obtaining medical services, drugs, or supplies. Additionally, charges for such treatment may not exceed the limits specified herein as reasonable and customary in the area of residence of the Covered Individual in the United States. Fees and charges exceeding reasonable and customary shall be disallowed as ineligible charges. Charges equal to or less than reasonable and customary shall be considered. In no event shall benefit payment exceed that actual amount charged. 20. Charges for hospitalization when such confinement occurs primarily for physiotherapy, hydrotherapy, convalescent or rest care, or any routine physical examinations or tests not connected with the actual Illness or Injury. 21. Physicians fees for any treatment or service which is not rendered by and in the physical presence of a Physician. 22. Charges for professional nursing services if rendered by other than a Registered Nurse (R.N.) or Licensed Practical Nurse (L.P.N.), unless such care was vital as a safeguard of the Covered Individual's life, and unless such care is specifically listed as a covered expense elsewhere in the Plan. In addition, the Plan will not cover certified Registered Nurses in independent practice (other than an anesthetist). This exclusion does not apply to private duty nurses as addressed elsewhere in this Plan. 23. Charges for Experimental procedures, drugs, or research studies, or for any services or supplies not considered legal in the United States or not recognized by the American Medical Association or the American College of Surgeons and/or the United States Food & Drug Administration. Experimental or investigational services. This includes: a. care, procedures, treatment protocol or technology which: i. is not widely accepted as safe, effective and appropriate for the Injury or Sickness throughout the recognized medical profession and established medical societies in the United States; or ii. is Experimental, in the research or investigational stage or conducted as part of research protocol, or has not been proved by statistically significant randomized clinical trials to establish increase survival or improvement in the quality of life over other conventional therapies. b. drugs, tests, and technology which: i. the FDA has not approved for general use; ii. are considered Experimental; iii. are for investigational use; or iv. are approved for a specific medical condition but are applied to another condition. The Plan will rely on the Data project of the American Medical Association, the National Institute of Health, the U.S. Food and Drug Administration, The National Cancer Institute, Office of Health Technology Assessment, the Health Care Financing Administration of the U.S. Department of Health and Human Services, and Congressional Office of Technology Assessment in determining investigational or experimental services. 24. Charges related to counseling for persons suffering from gender identification problems, or services or supplies related to the performance of gender transformation procedures. 25. Charges for services or supplies for recreational or educational therapy or forms of non-medical self-help or self-cure. 26. Charges for services or supplies furnished for weight reduction or in connection with morbid obesity; except as specifically shown as a covered expense elsewhere in the Plan. This includes dietary supplements, foods, equipment, laboratory testing, exams and prescription drugs, regardless of whether or not weight reduction is medically appropriate. 27. Charges for services or supplies for marital and/or Family counseling or training services. 28. Charges for hypnotherapy, biofeedback, or sleep therapy. 29. Charges for the purchase or rental of air conditioners, humidifiers, dehumidifiers, air purifiers, exercise equipment and other such equipment. 30. Charges for travel or lodging costs. 31. Charges for acupuncture. 32. Charges for penile prosthesis/implants and any charges relating thereto. 33. Charges in relation to chelation therapy except in the treatment of heavy metal poisoning. 34. Charges for routine foot care, such as removal of corns, calluses, or trimming of toenails; except the services necessary in the treatment of a peripheral-vascular disease when recommended by a medical doctor or doctor of osteopathy. 35. Charges in relation to radial keratotomy, corneal modulation, refractive keratoplasty or any similar procedure. 36. Charges in relation to intentionally self-inflicted Injury or self-induced Illness, whether sane or insane. 37. Charges for nutritional supplements, subcutaneous implants such as Norplant, drugs or supplies associated with smoking cessation, and drugs for sexual dysfunction. 38. Charges in relation to complications of a non-covered procedure. 39. Charges related to maxillary or mandibular implants. 40. Charges related to the testing and treatment of communication delay, motor development delay, growth development delay, learning disabilities or disorders, except the diagnosis and treatment of attention deficit disorder will be considered Eligible Expenses under the Plan. 41. Charges for scheduled delivery for childbirth at home. 42. Charges for vocational rehabilitation. 43. Charges for chiropractic services. 44. Charges for orthoptic training unless prescribed by a physician and performed by a licensed orthoptic technician or optometrist. 45. Charges for accidental bodily Injury sustained or Illness contracted as a result of alcohol or drug abuse. PRE-EXISTING CONDITIONS For a Covered Individual who enrolls in this Plan within thirty- one (31) days after the date of his eligibility for coverage, or for a Covered Individual who enrolls in the Plan under the Special Enrollment, claims in relation to or resulting from Pre-Existing Conditions (A disease, Injury, or Illness of a Covered Individual for which the Covered Individual has been under the care of a licensed Physician or has received medical care, services, or supplies within the six (6) month period immediately preceding: 1) for new hires, his date of employment; or 2) for Special Enrollees his enrollment date with the Company) will be excluded from coverage under the Plan until the Covered Individual: 1) for new hires, has been employed by the Company for a period of twelve (12) consecutive months; or 2) for Special Enrollees, has been enrolled for coverage under the Plan for a period of twelve (12) consecutive months, in which case the pre-existing conditions limitation will no longer apply, and all eligible charges incurred thereafter will be considered under the Plan. For a Covered Individual who enrolls in this Plan more than thirty-one (31) days after the date of his eligibility for coverage, claims in relation to or resulting from Pre-Existing Conditions (A disease, Injury, or Illness, of a Covered Individual for which the Covered Individual has been under the care of a licensed Physician or has received medical care, services, or supplies within the six (6) month period immediately preceding his effective date of coverage) are excluded from coverage under the Plan until the Covered Individual has been enrolled under the Plan for a period of twelve (12) consecutive months, in which case the pre-existing conditions limitation will no longer apply, and all eligible charges incurred thereafter will be considered under the Plan. Exceptions to the Pre-Existing Condition Limitation: 1. The Plan's pre-existing condition exclusion does not apply to pregnancy, or to a newborn, an adopted child under age eighteen (18), or a child placed for adoption under age eighteen (18), if the child becomes covered within thirty (30) days of birth, adoption or placement for adoption. 2. The Pre-Existing Condition Limitation will be waived wholly or in part in the event an individual was insured previously by Creditable Coverage, and providing there was no break in such coverage longer than sixty-three (63) days immediately prior to: 1) for new hires, his date of employment; or 2) for Special and Late Enrollees, the date of enrollment in this Plan. Any time periods used to satisfy the individual's Pre-Existing Condition Limitation under the prior plan will be credited towards the satisfaction of this Plan's Pre-Existing Conditions Limitation, to the extent that such time was satisfied under the prior plan. For the purposes of this Plan, "Creditable Coverage" means, with respect to an individual, coverage of the individual provided under any of the following: a. Part A or Part B of Title XVIII of the Social Security Act (Medicare); b. A group health plan; c. An individual health insurance policy that provides benefits similar to or exceeding benefits provided under a basic health benefit plan; d. Title XIX of the Social Security Act, other than coverage consisting solely of benefits under section 1928 (Medicaid); e. Chapter 55 of Title 10, United States Code (military-sponsored health care); f. A State health benefits risk pool; g. A health plan offered under chapter 89 of Title 5, United States Code (FEHBP); h. A public health plan (as defined in the regulations); or A medical care program of the Indian Health Service or of a tribal organization; or i. A health benefit plan under section 5(e) of the Peace Corps Act (22 U.S.C. 2504(e)). ELIGIBILITY OF COVERAGE Employee Eligibility and Effective Date An Employee is eligible for coverage under the Plan when the Employee: 1. Is employed by the Company on a regular, full/part-time basis as specified in the Plan Summary; and 2. Is actively at work; and 3. Has satisfied the Required Period of Service as specified in the Plan Summary; and 4. Is within the classification (if any) shown in the Plan Summary. If the Employee has met the above eligibility requirements on or before on the effective date of this Plan, the date of eligibility shall be the effective date of the Plan. If the Employee meets the above eligibility requirements after the effective date of the Plan, the date of eligibility shall be the first day of the month following the day he first meets those eligibility requirements. Employee Coverage under the Plan shall become effective on the date of the Employee's eligibility, provided he has made written application for such coverage on or before such date. If an Employee applies for coverage within thirty-one (31) days after his date of eligibility, his coverage shall be retroactive to the date of initial eligibility. All Employee Coverage under the Plan shall commence at 12:01 A.M. Standard Time, on the date such coverage is effective, provided such Employee is able to be actively at work at such time. If the Employee is not actively at work on the date this Employee Coverage would otherwise take effect, but would have been able to actively work at 12:01 A.M. Standard Time had such work commenced at that time, such Employee shall be eligible for coverage on that date. If an eligible Employee is not able to be actively at work on the date this Employee Coverage would otherwise become effective, for reasons other than those related to a health condition, his coverage shall become effective on the day he returns to active work. An Employee who chooses not to keep his coverage in effect during a period of an approved leave of absence which qualifies under the Family and Medical Leave Act will be eligible to enroll for the same type of coverage (single or Family) which was in effect at the time of the leave of absence immediately upon return to work. Each Employee will become eligible for Dependent Coverage on the latest of the following: 1. The date he becomes eligible for participant coverage 2. The date on which he first acquires a Dependent. 3. The date he first comes within the classification (if any) for Dependent Coverage, as stated in the Plan Summary. If both the husband and wife are employed by the Company and both are eligible for Dependent Coverage, either the husband or wife, but not both, may elect Dependent Coverage for their eligible dependents. Dependent Eligibility and Effective Date A Dependent will be considered eligible for coverage on the date the Employee becomes eligible for Dependent Coverage, subject to all limitations and requirements of this Plan. Each Employee who makes such written request for Dependent Coverage on a form approved by the Company, shall, subject to the further provisions of this section, become covered for Dependent Coverage as follows: 1. If the Employee makes such written request on or before the date he becomes eligible for Dependent Coverage, he shall become covered, with respect to those persons who are then his dependents, on the date he becomes covered for participant coverage. 2. A newborn child of an Employee will be covered from the moment of birth providing Dependent Coverage is in effect at that time. If Dependent Coverage is not in effect, the Employee will have thirty (30) days from the date of the birth to make application for Dependent Coverage and coverage will be retroactive to the date of the birth. 3. An adoptive child of an Employee will be covered from the date the child is placed in the physical custody of the Employee and the Employee is legally responsible for medical expenses incurred by said child if Dependent Coverage is in effect on that date. If Dependent Coverage is not in effect, the Employee has thirty (30) days from this date to make application for Dependent Coverage and coverage will be retroactive to the date of physical custody. 4. If a Dependent is acquired other than at the time of his birth due to a court order, decree, or marriage, coverage for this new Dependent will be effective on the date of such court order, decree, or marriage if Dependent Coverage is in effect under the Plan at that time. If the Employee does not have Dependent Coverage in effect under the Plan at the time of the court order, decree, or marriage and requests such coverage and properly enrolls this new Dependent within the thirty (30) day period immediately following the date of the court order, decree, or marriage, Dependent Coverage will be retroactive to the date of the court order, decree, or marriage. 5. A newly eligible Dependent that meets the definition of a Full- Time Student will be covered from the date of eligibility providing Dependent Coverage is in effect at that time and providing written request for coverage is made within the thirty (30) day period immediately following the first day of eligibility of the Dependent. If Dependent Coverage is not in effect at that time, the Employee has thirty (30) days from the date of the Dependent's eligibility to make such written request and coverage will be retroactive to the date the Dependent became a Full-Time Student. LATE ENROLLMENT Enrollment for coverage is required within thirty-one (31) days for new Employees and thirty (30) days for other eligibility as stated, of the date an individual would otherwise be eligible. If enrollment is not completed within that time, or if a covered Employee's and/or Dependent's coverage terminates because of failure to make a contribution when due, such person will be considered a late enrollee. Some late enrollments may be made under the following Special Enrollment provision, however, if the Special Enrollment provisions do not apply, a late enrollee will only be eligible to enroll during the Annual enrollment period designated by the Company. The Pre-Existing Condition limitation of this Plan will apply to all late enrollees who do not qualify to enroll under the Special Enrollment provision. Special Enrollment Eligible individuals may be entitled to enroll in the Plan at a time other than during the Annual enrollment period. Special enrollment rights may be triggered upon the occurrence of two types of events - upon the loss of other health coverage and upon the addition of a new dependent. When a triggering event occurs, an eligible individual who does not enroll in the Plan within the thirty (30) day deadlines explained below, will lose special enrollment rights for that event. 1. First Type of Event a. Loss of Other Health Coverage. Eligible Employees and their Dependents who, at the time they were offered coverage under the Plan were eligible for the coverage and declined it because of other health coverage, are entitled to enroll in the plan when the other coverage ends. b. Other Coverage is COBRA Coverage. If the other coverage is COBRA coverage, the eligible Employee must exhaust COBRA coverage to be eligible for special enrollment in the Plan. Exhaustion of COBRA coverage means that COBRA coverage ends for any reason other than failure to pay contributions on time or for cause. c. Other Coverage is Not COBRA Coverage. If the other coverage is not COBRA coverage, the Employee must lose the other coverage as a result of loss of eligibility for the coverage or termination of employment. d. Deadline for Special Enrollment Period. The eligible Employee is required to request special enrollment in the Plan not later than thirty (30) days (i) after the exhaustion of the other coverage; (ii) after the termination of the other coverage as a result of the loss of eligibility for the other coverage; or (iii) following the termination of employer contributions toward that other coverage. If the Plan Administrator does not receive the eligible Employee's completed request for enrollment within this deadline, the eligible Employee and his or her dependents lose special enrollment rights for that event. e. Effective Date of Enrollment. Enrollment in the Plan under the Special Enrollment provision will be effective not later than the first day of the first calendar month beginning after the date the Plan Administrator receives your completed request for enrollment. 2. Second Type of Event a. Addition of a Dependent. An eligible Employee's marriage, or the birth or adoption of his or her child, triggers special enrollment rights. b. Non-Participating Employee May Also Enroll. The addition of a new Dependent triggers enrollment rights for an eligible Employee even if he or she does not participate in the Plan at the time of the event. For example, upon the birth of an eligible Employee's child, the eligible Employee (assuming that he or she did not previously enroll), his or her spouse, and his or her Newborn child may all enroll because of the child's birth. The same rule applies to the eligible Employee's marriage or adoption of a child if the eligible Employee had not previously enrolled in the Plan. c. Deadline for Special Enrollment Period. An eligible Employee must request special enrollment within thirty (30) days of marriage, or birth, adoption or placement for adoption of his or her child. If the Plan Administrator does not receive the eligible Employee's completed request for enrollment within this deadline, he or his Dependents lose special enrollment rights for that event. d. Effective Date of Enrollment. The date of enrollment for coverage will be the date of the event. Pre-existing Condition Exclusion and Special Enrollees. Special enrollees and their Dependents will not be treated as late enrollees. The Plan will apply a Pre-Existing Condition exclusion period of twelve (12) months to a special enrollee. The Plan will not apply a Pre-Existing Condition exclusion to Pregnancy, or to a Newborn or adopted child who is enrolled under the special enrollment provisions. TERMINATION OF COVERAGE Employee Termination Employee Coverage will automatically terminate immediately upon the earliest of the following dates, except as provided in any Extension of Benefits provision: 1. The last day of the month in which the Employee terminates employment. 2. The last day of the month in which the Employee ceases to be in a class of participants eligible for coverage. 3. The date ending the period for which the last contribution is made if the Employee fails to make any required contributions when due. 4. The date the Plan is terminated; or with respect to any participant benefit of the Plan, the date of termination of such benefit. 5. The date the Employee enters military duty. 6. The date of the Employee's death. Dependent Termination Dependent Coverage will automatically terminate immediately upon the earliest of the following dates, except as provided in any Extension of Benefits provision: 1. The last day of the month in which the Dependent ceases to be an eligible Dependent as defined in the Plan. 2. The date of termination of the Employee's coverage under the Plan. 3. The last day of the month in which the Employee ceases to be in a class of participants eligible for Dependent Coverage. 4. The date for which the last contribution is made if the Employee fails to make any required contributions when due. 5. The date the Plan is terminated; or with respect to any Dependent's benefit of the Plan, the date of termination of such benefit. 6. The date the Dependent enters military duty. 7. The date the Dependent becomes covered under this Plan as an individual participant. 8. The last day of the month in which a dependent child attains the age specified in the definition of dependent. 9. The last day of the month in which the Employee's death occurs. EXTENSION OF BENEFITS Family and Medical Leave Act Provision All provisions under the Plan are intended to be in compliance with the Family and Medical Leave Act of 1993 (FMLA). To the extent the FMLA applies to the Company, group health benefits may be maintained during certain leaves of absence at the level and under the conditions that would have been present as if employment had not been interrupted. Employee eligibility requirements, the obligations of the employer and employee concerning conditions of leave, and notification and reporting requirements are specified in the FMLA. Any plan provisions which conflict with the FMLA are superseded by the FMLA to the extent such provisions conflict with the FMLA. A Participant with questions concerning any rights and/or obligations should contact the Plan Administrator or his employer. Uniformed Services Employment And Reemployment Rights Act (USERRA) It is the intent of the Plan to adhere to the continuation of coverage provisions of The Uniformed Services Employment and Reemployment Rights Act (USERRA) effective October 14, 1994. An individual who would like complete information regarding his rights under USERRA, should contact the Company. Extension of Benefits due to Lay Off If termination of active employment is due to lay off, coverage will continue for a period of not longer than three (3) months provided required contributions are made. This extension of benefits runs concurrent with COBRA. Extension of Benefits for Leave of Absence If a participants coverage terminates due to an approved leave of absence, coverage will continue for a period of not longer than six (6) months provided required contributions are made. This extension of benefits runs concurrent with COBRA. Disability Extension of Benefits If a Covered Individual is totally disabled on the date this Plan terminates or the employee terminates his employment, benefits will continue as long as total disability continues up to a maximum of twelve (12) months. These benefits are extended only for the condition that totally disabled the Employee or Dependent. COBRA Extension of Benefits It is the intent of the Plan to adhere to the continuation of coverage provision of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), its interpretations, and as amended from time to time. COORDINATION OF BENEFITS The Coordination of Benefits provision is intended to prevent the payment of benefits which exceed expenses. It applies when the Employee or any eligible Dependent who is covered by this Plan is also covered by any other plan or plans. When more than one coverage exists, one plan normally pays its benefits in full and the other plans pay a reduced benefit. This Plan will always pay either its benefits in full, or a reduced amount which when added to the benefits payable by the other plan or plans will not exceed 100% of allowable expenses. Only the amount paid by the Plan will be charged against the Plan maximums. The Coordination of Benefits provision applies whether or not a claim is filed under the other plan or plans. If needed, authorization must be given this Plan to obtain information as to benefits or services available from the other plan or plans, or to recover overpayment. All benefits contained in the Plan are subject to this provision. Definitions The term "plan" as used herein will mean any plan providing benefits or services for or by reason of medical, vision, or dental treatment, and such benefits or services are provided by: 1. Group insurance or any other arrangement for coverage for Covered Individuals in a group whether on an insured or uninsured basis, including but not limited to: a. Hospital indemnity benefits. b. Hospital reimbursement-type plans which permit the Covered individual to elect indemnity at the time of claims. 2. Hospital or medical service organizations on a group basis, group practice, and other group pre-payment plans. 3. Hospital or medical service organizations on an individual basis having a provision similar in effect to this provision. 4. A licensed Health Maintenance Organization (H.M.O.). 5. Any coverage for students which is sponsored by or provided through a school or other educational institution. 6. Any coverage under a governmental program, and any coverage required or provided by any statute. 7. Group automobile insurance. 8. Individual automobile insurance coverage on an automobile leased or owned by the Company. 9. Individual automobile insurance coverage based upon the principles of "No-Fault" coverage. The term "plan" will be construed separately with respect to each policy, contract, or other arrangement for benefits or services, and separately with respect to that portion of any such policy, contract, or other arrangement which reserves the right to take the benefits or services of other plans into consideration in determining its benefits and that portion which does not. The term "allowable expenses" means any necessary item of expense, the charge for which is reasonable, regular, and customary, at least a portion of which is covered under at least one of the plans covering the person for whom claim is made. When a plan provides benefits in the form of services rather than cash payments, then the reasonable cash value of each service rendered will be deemed to be both an allowable expense and a benefit paid. The term "claim determination period" means a Calendar Year or that portion of a Calendar Year during which the Covered Individual for whom claim is made has been covered under this Plan. Coordination Procedures Notwithstanding the other provisions of this Plan, benefits that would be payable under this Plan will be reduced so that the sum of benefits and all benefits payable under all other plans will not exceed the total of allowable expenses incurred during any claim determination period with respect to a Covered Individual eligible for: 1. Benefits either as an insured person or participant or as a Dependent under any other plan which has no provision similar in effect to this provision, or 2. Dependent benefits under this Plan for a Covered Individual who is also eligible for benefits: a. As an insured person or participant under any other plan, or b. As a dependent covered under another group plan. 3. Employee benefits under this Plan for an Employee who is also eligible for benefits as an insured person or participant under any other plan and has been covered continuously for a longer period of time under such other plan. Order Of Benefit Determination Each plan makes its claim payment according to where it falls in this order, if Medicare is not involved: 1. If a plan contains no provision for coordination of benefits, then it pays before all other plans. 2. The plan which covers the claimant as an Employee or named insured pays as though no other plan existed; remaining recognized charges are paid under a plan which covers the claimant as a Dependent. 3. If the claimant is a Dependent child, the plan of the parent whose birthday occurs first in the Calendar Year shall pay first. However, if his parents are divorced, then: a. The plan of the parent with custody pays first, unless a court order or decree specifies the other parent to have financial responsibility; in which case, that parent's plan would pay first. b. The plan of a stepparent with whom he lives pays second (if applicable). c. The plan of the parent without custody pays third. 4. If a person is covered under a group plan due to continuation of COBRA coverage, the plan covering this individual as an active Employee or a Dependent of an active Employee shall be primary. 5. If the order set out above does not apply in a particular case, then the plan which has covered the claimant for the longest period of time will pay first. The Company has the right: 1. To obtain or share information with an insurance company or other organization regarding Coordination of Benefits without the claimant's consent. 2. To require that the claimant provide the Company with information on such other plans so that this provision may be implemented. 3. To pay the amount due under this Plan to an insurer or other organization if this is necessary, in the Company's opinion, to satisfy the terms of this provision. Facility Of Payment Whenever payments which should have been made under this Plan in accordance with this provision have been made under any other plan or plans, the Company will have the right, exercisable alone and in its sole discretion, to pay to any insurance company or other organization or person making such other payments any amounts it will determine in order to satisfy the intent of this provision, and amounts so paid will be deemed to be benefits paid under this Plan and to the extent of such payments, the Company will be fully discharged from liability under this Plan. The benefits that are payable will be charged against any applicable maximum payment or benefit of this Plan rather than the amount payable in the absence of this provision. Right To Receive And Release Necessary Information For the purposes of determining the applicability of and implementing the terms of this provision of the Plan or any similar provision of any other plans, the Company may, without the consent of or notice to any person, release to or obtain from any insurance company or other organization or person any information, with respect to any person, which the Company deems to be necessary for such purposes. Any person claiming benefits under this Plan shall furnish to the Company such information as may be necessary to implement this provision. Effect Of Medicare It is the intent of the Plan to adhere to the laws of DEFRA, TEFRA, and COBRA as currently constituted and as amended from time to time. Any Employee or Dependent eligible for Medicare should contact the Claims Processor for current rulings. If any Covered Individual eligible for Medicare fails to enroll therefor, benefits will be paid by the Plan as though he had enrolled. SUBROGATION This Plan may withhold payment of benefits until such time that liability is legally determined. This Plan does not provide benefits to the extent that there is other coverage under non- group medical payments (including auto) or medical expense type coverage to the extent of that coverage. This Plan will be reimbursed for all benefit payments made as the result of injuries or illnesses which are caused by the actions of a third party and which give rise to a court ordered financial award or out-of-court settlement to a Covered Individual from a third party tort-feasor, person or entity. This Plan will provide benefits, otherwise payable under this Plan, to or on behalf of the Covered Individual only on the following terms and conditions: 1. In the event of any payment under this Plan, the Plan shall be subrogated to all of the Covered Individual's rights of recovery against any person or organization and the Covered Individual shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. The Covered Individual shall do nothing after loss to prejudice such rights. The Covered Individual shall agree to cooperate with the Plan and/or any representatives of the Plan in completing such forms and in giving such information surrounding any accident as the Plan or its representatives deem necessary to fully investigate the incident. 2. The Plan is also granted a right of reimbursement from the proceeds of any settlement, judgment or other payment obtained by the Covered Individual. This right of reimbursement is cumulative with and not exclusive of the subrogation right granted in 1 above, but only to the extent of the benefits paid by the Plan. 3. The Plan, by payment of any proceeds is granted a lien on the proceeds of any settlement, judgment or other payment received by the Covered Individual, and the Covered Individual consents to said lien and agrees to take whatever steps are necessary to help the Plan Administrator secure such lien. 4. The subrogation and reimbursement rights and liens apply to any recoveries made by the Covered Individual as a result of the injuries sustained or Illness suffered, including but not limited to the following: a. Payments made directly by the third party tort-feasor or any insurance company on behalf of the third party tort- feasor or any other payments on behalf of the third party tort-feasor. b. Any payments or settlements or judgments or arbitration awards paid by an insurance company under an uninsured or underinsured motorist coverage, whether on behalf of the Covered Individual or other person. c. Any other payments from any source designed or intended to compensate a Covered Individual for injuries sustained or Illness suffered as the result of negligence or alleged negligence of a third party. d. Any workers compensation award or settlement. 5. No adult Covered Individual may assign any rights that it may have to recover medical expenses from any tort-feasor or other person or entity to any minor child or children of said adult Covered Individual without the express prior written consent of the Plan. The Plan's right to recover (whether by subrogation or reimbursement) shall apply to decedent's, minor's and incompetent or disabled person's settlements or recoveries. 6. No Covered Individual shall make any settlement which specifically excludes or attempts to exclude the medical expenses paid by the Plan. 7. The proceeds of any settlement, judgment or other payment recovered by or on behalf of the Covered Individual shall be allocated first to full reimbursement of the Plan and, after the Plan has been fully reimbursed, then to expenses and compensation of the Covered Individual, notwithstanding any so-called "Made-Whole Doctrine", "Rimes Doctrine" or any other law which would compensate the Covered Individual, in whole or in part, before reimbursing a subrogee. 8. No Covered Individual shall incur any expenses on behalf of the Plan, including but not limited to court costs or attorney's fees, without the prior express written consent of the Plan. The Plan's rights to full reimbursement shall not be reduced because of any so-called "Fund Doctrine", "Common Fund Doctrine", or any other law which implies the Plan's agreement or otherwise requires the Plan to pay, or to accept as a reimbursement in kind, any amount or share of attorney's fees or other services or expenses incurred by the Covered Individual in obtaining a judgment, settlement or other payment from a third party. 9. The Plan shall recover the full amount of benefits paid without regard to any claim of fault on the part of the Covered Individual, whether under comparative negligence or otherwise. 10. The benefits under this Plan are secondary to any coverage under no-fault or similar insurance. RIGHTS UNDER ERISA Employee Retirement Income Security Act of 1974 (ERISA) provides that all plan participants shall be entitled to: Examine, without charge, at the Plan Sponsor's office and at other specified locations, such as work sites, all plan documents, including insurance contracts, collective bargaining agreements and copies of all documents filed by the plan with the U. S. Department of Labor, such as detailed annual reports and plan descriptions. Obtain copies of all plan documents and other plan information upon written request to the Plan Sponsor. The Plan Sponsor may make a reasonable charge for the copies. Receive a summary of the plan's annual financial report, SAR. The Plan Sponsor is required by law to furnish each participant with a copy of this summary financial report. In addition to creating rights for plan participants, ERISA imposes duties upon the people who are responsible for the operation of this Plan. The people who operate this Plan, called "Fiduciaries" of the Plan, have a duty to do so prudently and in the interest of all Plan Employees. No one, including the employer, may fire or otherwise discriminate against a participant in any way to prevent the participant from obtaining a benefit or exercising his rights under ERISA. If a claim for a benefit is denied, in whole or in part, the participant may receive a written explanation of the reason for the denial. He has the right to have the Plan Sponsor review and reconsider the claim. He must submit a request for review in writing within sixty (60) days of receiving denial of the claim. The request should contain the reasons for appeal and copies of any pertinent information. Under ERISA, there are steps a participant can take to enforce the above rights. For instance, if he requests materials from the plan and does not receive them within thirty (30) days, he may file suit in a federal court. In such a case, the court may require the Plan Sponsor to provide the materials and pay him up to $100 a day until he receives the materials, unless the materials were not sent because of reasons beyond the control of the Plan Sponsor. If a claim for benefits is denied or ignored, in whole or in part, the participant may file suit in a state or federal court. If it should happen that the plan Fiduciaries misuse the plan's money or if a participant is discriminated against for asserting his rights, he may seek assistance from the U. S. Department of Labor, or may file suit in a federal court. The court will decide who should pay court costs and legal fees. If he is successful, the court may order the person sued to pay these costs and fees. If he loses, the court may order him to pay these costs and fees (for example, if it finds the claim to be frivolous). If you have any questions about this statement or about your rights under ERISA, you should contact the nearest office of the Pension and Welfare Benefits Administration, U.S. Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, Pension and Welfare Benefit Administration, U.S. Department of Labor, 200 Constitution Avenue NW, Washington, DC 20210. GENERAL PROVISIONS Notice Of Claim Written notice of claim should be submitted to the Claims Processor within ninety (90) days after the occurrence. All claims must be filed within one (1) year and ninety (90) days of the event on which claim is based or payment will be denied. Written notice of claim given by or on behalf of the Covered Individual to the Claims Processor, with information sufficient to identify the Covered Individual, will be considered notice. Failure to furnish proof within the time provided in the Plan will not invalidate or reduce any claim if it will be shown not to have been reasonably possible to furnish such proof and that such proof was furnished as soon as reasonably possible. Claim Review Procedure The Claims Processor will process your claims no later than 90 days after receiving them. In some cases, an additional 90 days may be needed and you will be notified of this during the first 90 day period. If your claim is denied (in whole or in part), you will receive a written explanation of the denial. Should your claim be denied (or if 180 days have elapsed since it was filed and you have not received a written decision), you may have your claim reviewed. To do so, you must request a review no later than 60 days after the denial (or after the end of the 180 day period) by writing to the Plan Administrator. Once you have requested this review, you may submit additional pertinent information and comments on your claim to Plan Administrator as long as you do so within 30 days of the date you asked for the review. Also during this 30 day period, you may review any documents held by the Claims Processor, if you make a request in writing to do so. Within 60 days of receiving your request for review, the Plan Administrator will send you its decision on the claim. In unusual situations, an additional 60 days may be needed for the review and you will be notified of this during the first 60 day period. In any case, by law, no more than 120 days can be taken for a review even at your request. Claim Forms Claim forms for filing notice of claim may be obtained from the office of the Claims Processor. Proof Of Loss The Plan Administrator will have the right and opportunity to have examined any individual whose Injury or Sickness is the basis of a claim hereunder when and as often as it may reasonably require during the pendency of a claim, and also the right and opportunity to make an autopsy in case of death (where such autopsy is not forbidden by law). Free Choice Of Physician The Covered Individual will have free choice of any legally qualified Physician or surgeon, and the Physician-patient relationship will be maintained. Payment Of Claims All Plan benefits are payable to the Employee, or subject to any written direction of the Employee. All or a portion of any indemnities provided by the Plan on account of Hospital, nursing, medical or surgical services may, at the Employee's option and unless the Employee requests otherwise in writing not later than the time of filing proof of such loss, be paid directly to the Hospital or person rendering such services; however, if any such benefit remains unpaid at the death of the Employee or if the participant is a minor or is, in the opinion of the Plan Administrator, legally incapable of giving a valid receipt and discharge for any payment, the Plan Administrator may, at its option, pay such benefits to any one or more of the following relatives of the Employee: wife, husband, mother, father, child or children, brother or brothers, sister or sisters. Any payment so made will constitute a complete discharge of the Plan's obligation to the extent of such payment, and the Plan will not be required to see the application of the money so paid. Assignment Benefits may not be assigned except by consent of the Company, other than to providers of medical services and according to the provisions set forth in the Plan Document. Rights Of Recovery Whenever payments have been made by the Company with respect to allowable expenses in excess of the maximum amount of payment necessary to satisfy the intent of this Plan, the Company will have the right, exercisable alone and in its sole discretion, to recover such excess payments. Changes In Coverage Classification If coverage classifications are designated in the Plan Summary, any change in the amount of coverage available to a Covered Individual occasioned by a change in the Employee's classification will become effective automatically on the classification change date; however, if the Employee is not actively at work within the eligible class on the date the amount of his coverage would otherwise increase, such increase will not become effective until the next following day on which he is actively at work within the eligible class. In the case of a Dependent, such increase will not become effective automatically if on that date the Dependent is confined in a Hospital or elsewhere. Such increase will become effective, however, on the day the Dependent is released to resume the normal activities of a person of like age and sex. This limitation will not apply to a newborn who is Hospital-confined solely because of this birth. If, however, a change in the coverage classification of a Covered Individual which would decrease the Maximum Benefit applicable to the Covered Individual becomes effective in accordance with the terms of the Plan, such decrease will apply immediately with respect to the Comprehensive Medical Expense Benefits applicable to the Covered Individual, except that if the Covered Individual is totally disabled on the date of change, the decrease will not apply to the benefits payable for eligible charges incurred during the subsequent period of continuous total disability within the benefit period in which the change occurs and due solely to the Illness or Injury which caused the total disability. WORKERS' COMPENSATION NOT AFFECTED This Plan is not in lieu of and does not affect any requirement for coverage by workers' compensation insurance. LEGAL PROCEEDINGS No action at law or in equity will be brought to recover on the Plan prior to the expiration of sixty (60) days after proof of loss has been filed in accordance with the requirements of the Plan, nor will such action be brought at all unless brought within three (3) years from the expiration of the time within which proof of loss is required by the Plan. CONFORMITY WITH GOVERNING LAW If any provision of this Plan is contrary to any law to which it is subject, such provision is hereby amended to conform thereto. TIME LIMITATION If any time limitation of the Plan with respect to giving notice of claim or furnishing proof of loss, or the bringing of an action at law or in equity is less than that permitted under the guidelines of ERISA and/or any federally mandated law, such limitation is hereby extended to agree with the minimum period permitted by such law. STATEMENTS All statements made by the Company or by a Covered Individual will, in the absence of fraud, be considered representations and not warranties, and no statements made for the purpose of obtaining benefits under this document will be used in any contest to avoid or reduce the benefits provided by the document unless contained in a written application for benefits and a copy of the instrument containing such representation is or has been furnished to the Covered Individual. Any Covered Individual who knowingly and with intent to defraud the Plan, files a statement of claim containing any materially false information, or conceals for the purpose of misleading, information concerning any material fact, commits a fraudulent act. The Covered Individual may be subject to prosecution by the United States Department of Labor. Fraudulently claiming benefits may be punishable by a substantial fine, imprisonment, or both. MISCELLANEOUS Section titles are for convenience of reference only, and are not to be considered in interpreting the Plan. Pronouns used in this Plan Document shall include both masculine and feminine gender unless the context indicates otherwise. Likewise, words used shall be construed as though they were in the plural or singular number, according to the context. No failure to enforce any provision of this Plan will affect the right thereafter to enforce such provision, nor will such failure affect its right to enforce any other provision of this Plan. If an inadvertent error should occur due to interpretation of mandated benefits, relevant laws and regulations before the final regulations are issued, the Plan, Plan Administrator, Agent for the Service of Legal Process, Trustee, Claims Processor, and Company will be held harmless for such an error; and in no way will such an error be construed as a precedent-setting event. Payment for expenses in relation to services which are generally accepted as cost-containment measures in large claim management cases that are not normally covered under this Plan will be reimbursable upon recommendation of the Claims Processor and written approval by the Plan Administrator. DEFINITIONS ACCIDENTAL INJURY A condition which is the result of bodily Injury caused by an external force; or a condition caused as the result of an incident which is precipitated by an act of unusual circumstances likely to result in unexpected consequences; this incident must be of a sufficient departure from the claimant's normal and ordinary lifestyle or routine; the condition must be an instantaneous one, rather than one which continues, progresses or develops. ACTIVELY AT WORK An Employee is considered to be actively at work when performing, in the customary manner, all of the regular duties of his occupation with the Company. An Employee shall be deemed actively at work on each day of a regular paid vacation, or if he is absent solely due to injury or illness. ALLOWABLE EXPENSES Any Medically Necessary, usual, reasonable and customary expense, incurred while you are eligible for benefits under this Plan. AMBULATORY SURGICAL CENTER An institution or facility, either free-standing or as part of a Hospital, with permanent facilities, equipped and operated for the primary purpose of performing surgical procedures and to which a patient is admitted to and discharged from within a twenty-four (24) hour period. An office maintained by a Physician for the practice of medicine or Dentistry or for the primary purpose of performing terminations of pregnancy shall not be considered to be an ambulatory surgical center. AMENDMENT A formal document that changes the provisions of the Plan Document, duly signed by the authorized person or persons as designated by the Plan Administrator ANNUAL Periodic, based on a Calendar Year. BENEFIT PERCENTAGE That portion of Eligible Expenses to be paid by the Plan in accordance with the coverage provisions as stated in the Plan. It is the basis used to determine any out-of-pocket expenses in excess of the annual Deductible which are to be paid by the Employee. BENEFIT PERIOD A time period of one Calendar Year. Such benefit period will terminate on the earliest of the following dates: 1. The last day of the one-year period so established; 2. The day the Maximum Lifetime Benefit applicable to the Covered Individual becomes payable; or 3. The day the Covered Individual ceases to be covered for Medical Expense Benefits. CALENDAR YEAR A period of time commencing on January 1 and ending on December 31 of the same given year CERTIFIED COUNSELOR An individual qualified by education, training, and experience to provide counseling in relation to emotional disorders, psychiatric conditions, or substance abuse under the supervision of an M.D., D.O., or Ph.D. COMPANY Heartland Financial USA, Inc. CLAIM DETERMINATION PERIOD A Calendar Year or that portion of a Calendar Year during which the individual for whom claim is made has been covered under this Plan. CLAIMS PROCESSOR The person or firm employed by the Company to provide consulting services to the Company in connection with the operation of the Plan and any other functions, including the processing and payment of claims. CLOSE RELATIVE The spouse, parent, or child of the Covered Individual. COBRA The Consolidated Omnibus Budget Reconciliation Act of 1985, as amended. CONFINEMENT A continuous stay in the Hospital(s) or extended care facility(ies) or combination thereof, due to a Sickness or Injury diagnosed by a Physician. CO-PAYMENT PERCENTAGE That figure shown as a percentage in the Plan Summary used to compute the amount of benefit payable when the Plan states that a percentage is payable. COSMETIC PROCEDURE A procedure performed to: - - change the texture or appearance of the skin; or - - change the relative size or position of any part of the body; when such surgery is performed primarily for psychological purposes or for improvement of appearance rather than for restoration or improvement of a bodily function. COVERED INDIVIDUAL Any Employee or Dependent of an Employee meeting the eligibility requirements for coverage as specified in this Plan, and properly enrolled in the Plan. CUSTODIAL CARE That type of care or service, wherever furnished and by whatever name called, which is designed primarily to assist a Covered Individual, whether or not totally disabled, in the activities of daily living. Such activities include, but are not limited to: bathing, dressing, feeding, preparation of special diets, assistance in walking or in getting in and out of bed, and supervision over medication which can normally be self-administered. DEDUCTIBLE A specified dollar amount of covered expenses which must be incurred during a benefit period before any other covered expenses can be considered for payment according to the applicable benefit percentage. DEFRA The Deficit Reduction Act of 1984, as amended. DENTIST An individual who is duly licensed to practice Dentistry or perform oral surgery in the state where the dental service is performed and who is operating within the scope of his license. For the purpose of this definition, a Physician will be considered to be a Dentist when he performs any of the dental services described herein and is operating within the scope of his license. DEPENDENT The term "Dependent" means: A. The Employee's legal spouse, including common law spouse, who is a resident of the same country in which the Employee resides. Such spouse must have met all requirements of a valid marriage contract of the State in which the marriage of such parties was performed. For the purposes of this definition, "spouse" shall not mean a domestic partner. B. The Employee's child who meets all the following: 1. Requirements a. Is a resident of the same country in which the Employee resides. b. Is unmarried. c. Is a natural child, stepchild, legally adopted child, foster child, a child placed in the Employee's physical custody whom the Employee intends to adopt, a child for whom the Employee and/or the Employee's spouse has been named legal guardian, or a child for whom the Employee is legally financially responsible. d. The Employee must have primary physical custody of the child; and e. The child must be dependent on the Employee/Employee's spouse for over 50% of his support. f. Is less than nineteen (19) years of age. 2. Waivers a. Requirements 1d., custody, and 1e., support, may be waived in the event the Employee/Employee's spouse is required to provide coverage due to a Qualified Medical Child Support Order (QMCSO), court order or divorce decree. b. Requirements 1d., custody, and 1e., support will be waived for those Dependents who satisfy the definition of dependent in every other way and who were covered under the health plan provided through the Company on the day immediately preceding the effective date of this Plan. c. Requirement 1f., dependent age limit, may be waived if: i. The child is less than age twenty-five (25) and is a regular full-time student at an accredited educational institution. ii. The child is mentally retarded or physically handicapped, provided that the child is incapable of self- sustaining employment and is dependent upon the Employee and the Employee's spouse (or former spouse) for support and maintenance. The child must have been covered under this Plan prior to reaching the age limitation. Proof of incapacity may be requested from time to time. Those situations specifically excluded from the definition of a Dependent are: 1. A spouse who is legally separated or divorced from the Employee. 2. A child who is married. 3. Any person on active military duty. 4. Any Dependent covered under this Plan as an individual Employee. 5. Any person who is covered as a Dependent by another Employee of the Company. DEPENDENT COVERAGE Eligibility under the terms of the Plan for benefits payable as a consequence of Eligible Expenses incurred for an Illness or Injury of a Dependent. DURABLE MEDICAL EQUIPMENT Equipment which is able to withstand repeated uses, primarily and customarily used to serve a medical purpose, and not generally useful to a person in the absence of Illness or Injury. EDUCATIONAL INSTITUTION An institution accredited in the current publication of accredited institutions of higher education including vocational technical schools. ELIGIBLE EXPENSE Any Medically Necessary treatment, services, or supplies that are not specifically excluded from coverage elsewhere in this Plan. ELIGIBLE PROVIDER Eligible Providers shall include the following legally licensed or duly certified health care providers to the extent that same, within the scope of the license, are permitted to perform services which are considered Eligible Expenses under the Plan: - - Ambulatory Surgical Center - - Audiologist (MS degree) - - Birthing Center - - Certified Counselor under the supervision of an M.D., D.O., or Ph.D. - - Certified Registered Nurse Anesthetist - - Clinic - - Dentist - - Dialysis Center - - Home Health Agency - - Hospice - - Hospital - - Laboratory - - Licensed Practical Nurse - - Medical Supply Purveyor - - Midwife - - Nurse Practitioner - - Occupational Therapist - - Ophthalmologist - - Optometrist - - Oral Surgeon - - Osteopath - - Outpatient Psychiatric Treatment Facility - - Outpatient Substance Abuse Treatment Facility - - Pharmacy/Pharmacist - - Physical Therapist - - Physician (M.D.) - - Physician's Assistant - - Podiatrist - - Professional ambulance service - - Psychiatrist - - Psychologist - - Registered Dietitian - - Registered Nurse - - Skilled Nursing Facility - - Social Worker under the supervision of an M.D., D.O., or Ph.D. - - Speech Therapist "Eligible Provider" shall not include the Covered Individual or any close relative of the Covered Individual. EMPLOYEE An active employee of the Company receiving compensation from the Company for services rendered to the Company. Employee means a person who is in an employer-employee relationship with the Company and who is classified by the Company as a regular employee. The term "employee" shall not include any individual classified by the Company as an independent contractor, a consultant, an individual performing services for the Company who has entered into an independent contractor or consultant agreement with the Company (even if a court, the Internal Revenue Service, or any other entity determines that such individual is a common-law employee) or a leased employee as defined in Section 414(n) of the Code. The term employee does not include any employee covered by a collective bargaining agreement that does not provide for coverage under the Plan, provided that health care benefits were the subject of good faith bargaining between the employee's bargaining representative and the Company. The term employee does not include an employee classified by the Company as a temporary employee. EMPLOYEE COVERAGE Coverage hereunder providing benefits payable as a consequence of an Injury or Illness of an Employee. ERISA The Employee Retirement Income Security Act of 1974, as amended. EXPENSES INCURRED The day expenses or services are rendered. EXPERIMENTAL Any medical procedure, equipment, treatment, or course of treatment, or drug or medicine that is limited to research, not proven in an objective manner to have therapeutic value or benefit, restricted to use at medical facilities capable of carrying out scientific studies, or is of questionable medical effectiveness. To determine whether a procedure is experimental the Company will consider, among other things, commissioned studies, opinions, and references to or by the American Medical Association, the Federal Drug Administration, the Department of Health and Human Services, the National Institutes of Health, the Council of Medical Specialty Societies and any other association or federal program or agency that has the authority to approve medical testing or treatment. FAMILY A Covered Employee and his eligible Dependents. FULL-TIME STUDENT An Employee's Dependent child who is enrolled in and regularly attending an accredited educational institution for the minimum number of credit hours required by that institution in order to maintain full-time student status. HOME HEALTH CARE AGENCY A Medicare-approved public or private agency or organization that specializes in providing medical care and treatment in the home. Such a provider must be primarily engaged in and duly licensed by the appropriate licensing authority (if such licensing is required) to provide skilled nursing services and other therapeutic services. It must have policies established by a professional group associated with the agency or organization including at least one Physician and at least one Registered Nurse (R.N.) to govern the services provided, and it must provide for full-time supervision of such services by a Physician or Registered Nurse. Its staff must maintain a complete medical record on each individual and it must have a full-time administrator. HOME HEALTH CARE PLAN A program for continued care and treatment of the Covered Individual, established and approved in writing by the Covered Individual's attending Physician. The attending Physician must certify that the proper treatment of the Illness or Injury would require continued confinement as a resident inpatient in a Hospital or extended care facility in the absence of the services and supplies provided as part of the Home Health Care Plan. HOSPICE A health care program providing a coordinated set of services rendered at home, in Outpatient settings, or in institutional settings for Covered Individuals suffering from a condition that has a terminal prognosis. A Hospice must have an interdisciplinary group of personnel which includes at least one Physician and one Registered Nurse, and its staff must maintain central clinical records on all patients. A Hospice must meet the standards of the National Hospice Organization (NHO) and applicable state licensing. HOSPICE BENEFIT PERIOD A specified amount of time during which the Covered Individual undergoes treatment by a Hospice. Such time period begins on the date the attending Physician of a Covered Individual certifies a diagnosis of terminally ill, and the Covered Individual is accepted into a Hospice program. The period shall end the earlier of six (6) months from this date or at the death of the Covered Individual. A new benefit period may begin if the attending Physician certifies that the patient is still terminally ill; however, additional proof may be required before such a new benefit period can begin. HOSPITAL An institution which meets all of the following conditions: 1. It is engaged primarily in providing medical care and treatment to an ill or injured person on an inpatient basis at the patient's expense. 2. It is constituted, licensed, and operated in accordance with the laws of jurisdiction in which it is located which pertain to hospitals. 3. It maintains on its premises all the facilities necessary to provide for the diagnosis and medical and surgical treatment of an Illness or an Injury. 4. Such treatment is provided for compensation by or under the supervision of Physicians, with continuous twenty-four (24) hour nursing services by Registered Nurses (R.N.'s). 5. It is accredited by the Joint Commission on the Accreditation of Health Care Organizations (JCAHCO). The JCAHCO accreditation limitation may be waived at the discretion of the Plan if the only Hospital in the immediate area is not JCAHCO approved. 6. It is a provider of services under Medicare. 7. It is not, other than incidentally, a place for rest, a place for the aged, or a nursing home. The definition of "Hospital" will also include an institution qualified for the treatment of psychiatric problems, substance abuse, or tuberculosis that does not have surgical facilities and/or is not approved by Medicare, provided that such institution satisfies the definition of Hospital in all other respects. HOSPITAL MISCELLANEOUS EXPENSES The actual charges made by a Hospital in its own behalf for services and supplies rendered to the Covered Individual which are Medically Necessary for the treatment of such Covered Indi vidual. Hospital miscellaneous expenses do not include charges for room and board or for professional services (including intensive nursing care by whatever name called), regardless of whether the services are rendered under the direction of the Hospital or otherwise. ILLNESS A bodily disorder, disease, physical Sickness, mental infirmity, or functional nervous disorder of a Covered Individual. A recurrent Illness will be considered one Illness. Concurrent Illnesses will be considered one Illness unless the concurrent Illnesses are totally unrelated. All such disorders existing simultaneously which are due to the same or related causes shall be considered one Illness. INJURY The term "Injury" shall mean only accidental bodily Injury caused by an external force, occurring while the Plan is in effect. All injuries to one person from one accident shall be considered an "Injury." INPATIENT CARE Hospital room and board and general nursing care for a person confined in a Hospital or extended care facility as a bed patient. INTENSIVE CARE UNIT (ICU) An area within a Hospital which is reserved, equipped, and staffed by the Hospital for the treatment and care of critically ill patients who require extraordinary, continuous, and intensive nursing care for the preservation of life. LICENSED PRACTICAL NURSE (L.P.N.) An individual who has received specialized nursing training and practical nursing experience, and is duly licensed to perform such nursing services by the state or regulatory agency responsible for such licensing in the state in which that individual performs such services. LIFETIME The term "lifetime," which is used in connection with benefit maximums and limitations, means the period during which the person is covered under this Plan, whether or not coverage is continuous. Under no circumstances does "lifetime" mean during the lifetime of the Covered Individual. MEDICALLY NECESSARY The service a patient receives which is recommended by a Physician and is required to treat the symptoms of a certain Illness or Injury. Although the service may be prescribed by Physician, it does not mean the service is Medically Necessary. The care or treatment 1) must be consistent with the diagnosis and prescribed course of treatment for the Covered Individual's condition; 2) must be required for reasons other than the convenience of the Covered Individual or the attending Physician; 3) is generally accepted as an appropriate form of care for the condition being treated; and 4) is likely to result in physical improvement of the patient's condition with is unlikely to ever occur if the treatment is not administered. MEDICARE The medical care benefits provided under Title XVIII of the Social Security Act of 1965, as subsequently amended. MINOR EMERGENCY MEDICAL CLINIC A free-standing facility which is engaged primarily in providing minor emergency and episodic medical care to a Covered Individual. A board-certified Physician, a Registered Nurse, and a registered x-ray technician must be in attendance at all times that the clinic is open. The clinic's facilities must include x-ray and laboratory equipment and a life support system. For the purposes of this Plan, a clinic meeting these requirements will be considered to be a minor emergency medical clinic, by whatever actual name it may be called; however, a clinic located on or in conjunction with or in any way made a part of a regular Hospital shall be excluded from the terms of this definition. NAMED FIDUCIARY Heartland Financial USA, Inc., which has the authority to control and manage the operation and administration of the Plan. NEWBORN An infant from the date of birth until the mother is discharged from the Hospital. OCCUPATIONAL THERAPIST A licensed practitioner who treats, primarily, the loss of motor function of skeletal muscles by educating the patient to use other muscles and/or artificial devices to enable them to perform acceptably in any particular occupation or the ordinary tasks of daily living. ORTHOTIC APPLIANCE An external device intended to correct any defect in form or function of the human body. OUTPATIENT The classification of a Covered Individual when that Covered Individual received medical care, treatment, services, or supplies at a clinic, a Physician's office, a Hospital if not a registered bed patient at that Hospital, an Outpatient psychiatric facility, or an Outpatient alcoholism treatment facility. OUTPATIENT PSYCHIATRIC TREATMENT FACILITY An administratively distinct governmental, public, private or independent unit or part of such unit that provides Outpatient mental health services and which provides for a psychiatrist who has regularly scheduled hours in the facility, and who assumes the overall responsibility for coordinating the care of all patients. OUTPATIENT SUBSTANCE ABUSE TREATMENT FACILITY An institution which provides a program for diagnosis, evaluation, and effective treatment of alcoholism and/or substance abuse; provides detoxification services needed with its effective treatment program; provides infirmary-level medical services that may be required; is at all times supervised by a staff of Physicians; prepares and maintains a written plan of treatment for each patient, based on the patient's medical, psychological, and social needs and supervised by a Physician; and meets licensing standards. OUTPATIENT SURGERY Outpatient surgery includes, but is not limited to, the following types of procedures performed in a hospital or surgi-center: 1. Operative or cutting procedures for the treatment of an illness or injury; 2. The treatment of fractures and dislocations; or 3. PT/OT therapy required after a surgical procedure; or 4. Endoscopic or diagnostic procedures such as biopsies, cystoscopy, bronchoscopy, and angiocardiography. PHYSICAL THERAPY A licensed practitioner who treats patients by means of electro-, hydro-, aero-, and mechano-therapy, massage and therapeutic exercises. Where there is no licensure law, the physical therapist must be certified by the appropriate professional body. PHYSICIAN A legally licensed medical or dental doctor or surgeon, osteopath, podiatrist, optometrist, or registered clinical psychologist to the extent that same, within the scope of his license, is permitted to perform services provided in this Plan. A Physician shall not include the Covered Individual or any Close Relative of the Covered Individual. PLAN The term "Plan" means without qualification the Plan outlined herein. PLAN ADMINISTRATOR The Company, which is responsible for the management of the Plan. The Plan Administrator may employ persons or firms to process claims and perform other Plan-connected services. PLAN SPONSOR Heartland Financial USA, Inc. PRE-EXISTING CONDITION A disease, Injury, or Illness of a Covered Individual for which the Covered Individual has been under the care of a licensed Physician or has received medical care, services, or supplies within the six (6) month period immediately preceding his employment date or effective date of coverage, whichever is applicable. Medical care, services, or supplies shall include, but shall not be limited to, medication, therapy, x-ray or lab tests, counseling, or any other treatment recommended by a licensed provider of medical care or services. PREGNANCY That physical state which results in childbirth, abortion, or miscarriage, and any medical complications arising out of or resulting from such state. PRESCRIPTION All drugs that are required under Federal law to bear the label, "Caution: Federal law prohibits dispensing without prescription," or any substitute required label, and injectable insulin (whether or not by prescription), as long as the drug was prescribed by a licensed Physician. PRIMARY PLAN A plan whose allowable benefits are not reduced by those of another plan. PRONOUNS Any references to "You, Yours, or Yourself" means the eligible Employee and Covered Dependents. "He, His, Him" refers to either sex; not to be discriminatory, but to avoid "he/she" type wording. PSYCHIATRIC CARE The term "psychiatric care," also known as psychoanalytic care, means treatment for a mental Illness or disorder, a functional nervous disorder, alcoholism, or drug addiction. A psychiatric condition includes but is not limited to anorexia nervosa and bulimia, schizophrenia, and depressive disorders including but not limited to manic depressive. PSYCHOLOGIST A registered clinical psychologist. A psychologist who specializes in the evaluation and treatment of mental Illness who is registered with the appropriate state registering body or, in a state where statutory licensure exists, holds a valid credential for such practice or, if practicing in a state where statutory licensure does not exist, meets the following qualifications: has a doctoral degree from an accredited university, college, or professional school and has two years of supervised experience in health services of which at least one year is post-doctoral and one year in an organized health services program; or, holds a graduate degree from an accredited university or college and has not less than six years as a psychologist with at least two years of supervised experience in health services. QUALIFIED MEDICAL CHILD SUPPORT ORDER (QMCSO) In order to meet the definition of a Qualified Medical Child Support Order (QMCSO), a court order or divorce decree must contain all of the following information: 1. The Employee's name and last known address. 2. The Dependent's full name and address. 3. A reasonable description of the coverage to be provided or the manner in which coverage will be established, i.e. through the employer. 4. The period for which coverage must be provided. 5. The order or decree must specifically name the Company as a source of coverage. REGISTERED NURSE (R.N.) An individual who has received specialized nursing training and is authorized to use the designation of "R.N.," and who is duly licensed by the state or regulatory agency responsible for such licensing in the state in which the individual performs such nursing services. REVIEW ORGANIZATION The organization contracting with the Company to perform cost containment services. ROOM AND BOARD All charges, by whatever name called, which are made by a Hospital, Hospice, or extended care facility as a condition of occupancy. Such charges do not include the professional services of Physicians nor intensive nursing care (by whatever name called). SEMI-PRIVATE A class of accommodations in a Hospital or extended care facility in which at least two patient beds are available per room. SICKNESS Physical Sickness; disease; mental, emotional or nervous disorders; and pregnancy. Recurrent, related or concurrent Sicknesses are considered as one "Sickness," unless a concurrent Sickness is totally unrelated to the other Sickness. SKILLED NURSING FACILITY An institution, or distinct part thereof, operated pursuant to law, and one which meets all of the following conditions: 1. It is licensed to provide and is engaged in providing, on an inpatient basis for persons convalescing from Injury or Illness, professional nursing services rendered by a Registered Nurse (R.N.) or by a Licensed Practical Nurse (L.P.N.) under the direction of a Registered Nurse and physical restoration services to assist patients to reach a degree of body functioning to permit self-care in essential daily living activities. 2. Its services are provided for compensation from its patients and under the full-time supervision of a Physician or Registered Nurse. 3. It provides 24-hour per day nursing services by licensed nurses, under the direction of a full-time Registered Nurse. 4. Its staff maintains a complete medical record on each patient. 5. It has an effective utilization review plan. 6. It is not, other than incidentally, a place for rest, the aged, drug addicts, alcoholics, mentally handicapped, custodial or educational care, or care of mental disorders. 7. It is approved and licensed by Medicare This term shall apply to expenses incurred in an institution referring to itself as a Skilled Nursing Facility, Extended Care Facility, or any such other similar nomenclature. SOCIAL WORKER An individual who is qualified through education, training, and experience to provide services in relation to the treatment of emotional disorders, psychiatric conditions, or substance abuse when employed by, or under the supervision of an M.D., D.O., or Ph.D. SPEECH THERAPIST An individual who is skilled in the treatment of communication and swallowing disorders due to Illness, Injury or birth defect, who is a member of the American Speech and Hearing Association and has a Certificate of Clinical Competence and who is licensed in the state in which services are provided. SURGICAL PROCEDURES Cutting, suturing, treatment of burns, correction of fractures, reduction of dislocation, manipulation of joints under general anesthesia, electrocauterization, tapping (paracentesis), application of plaster casts, administration of pneumothorax, endoscopy, or injection of sclerosing solution by a licensed Physician. TEFRA The Tax Equity and Fiscal Responsibility Act of 1982, as amended from time to time. THERAPY SERVICES Services or supplies used for the treatment of an Illness or Injury to promote the recovery of a Covered Individual. Therapy services are covered to the extent specified in the Plan and may include: 1. Chemotherapy - the treatment of malignant disease by chemical or biological antineoplastic agents. 2. Dialysis Treatments - the treatment of acute or chronic kidney disease which may include the supportive use of an artificial kidney machine. 3. Occupational Therapy - treatment of a physically disabled person by means of constructive activities designed and adapted to promote the restoration of the person's ability to satisfactorily accomplish the ordinary tasks of daily living and those required by the person's particular occupational role. 4. Physical Therapy - the treatment by physical means, electrotherapy, hydrotherapy, heat, or similar modalities, physical agents, bio-mechanical and neuro-physiological principles, and devices to relieve pain, restore maximum function, and prevent disability following disease, Injury, or loss of body part. 5. Radiation Therapy - the treatment of disease by X-ray, radium, or radioactive isotopes. 6. Respiration Therapy - introduction of dry or moist gases into the lungs for treatment purposes. 7. Speech Therapy - treatment of communication and swallowing disorders due to an Illness, Injury or birth defect. TMJ "TMJ" means temporomandibular joint syndrome and all related complications or conditions. TOTAL DISABILITY (TOTALLY DISABLED) A physical state of a Covered Individual resulting from an Illness or Injury which wholly prevents: 1. An Employee from engaging in his regular or customary occupation and from performing any and all work for compensation or profit. 2. A Dependent from performing the normal activities of a person of like age and sex and in good health. USUAL, CUSTOMARY, AND REASONABLE (UCR) The term "usual, customary, and reasonable" refers to the designation of a charge as being the usual charge made by a Physician or other provider of services, supplies, medications, or equipment that does not exceed the general level of charges made by other providers rendering or furnishing such care or treatment within the same area. The term "area" in this definition means a county or such other area as is necessary to obtain a representative cross section of such charges. Due consideration will be given to the nature and severity of the condition being treated and any medical complications or unusual circumstances which require additional time, skill, or expertise. WELL-CARE The term "well-care" means medical treatment, services, or supplies rendered solely for the purpose of health maintenance and not for the treatment of an Illness or Injury. EX-10 5 LETTER AGREEMENT Exhibit 10.14 February 9, 1999 Mr. Thomas Wilkinson President and Chief Executive Officer Wisconsin Community Bank 580 N. Main St. Cottage Grove, Wisconsin 53527 Dear Mr. Wilkinson, This Letter Agreement (the "Agreement") will evidence our mutual understanding and agreement regarding the following referenced matters in conjunction with the purchase of various branch offices and other assets, and the assumption of certain deposit and other liabilities, of Bank One Wisconsin, ("SELLER" herein) by Wisconsin Community Bank ("BUYER" herein) pursuant to a certain Office Purchase and Assumption Agreement by and between BUYER and SELLER of even date herewith (and, as may be amended by the parties, the "P&A Agreement" herein). Except as otherwise noted, capitalized terms set forth herein shall have the same meaning as set forth in the P&A Agreement. Section references contained herein shall refer to the corresponding sections of the P&A Agreement. SELLER and BUYER hereby agree as follows: 1. Section 1.4(a)(iii) of the P&A Agreement is hereby amended to read in its entirety as follows: (iii) A percentage applied to the aggregate "Core Deposits" (as hereinafter defined) of the Office as of the close of business on the Closing Date calculated as set forth in Exhibit A attached hereto and incorporated herein by reference. The term "Core Deposits" shall mean the aggregate balance of all Deposit Liabilities of the Office (which aggregate balance shall include all interest included on such Deposit Liabilities as of the close of business on the Closing Date, whether or not such interest is actually posted to the account on the Closing Date) but shall exclude deposits of governmental or political subdivisions, if any. The amount calculated as set forth herein as of the close of business on the Closing Date is hereinafter called the "Acquisition Consideration;" and 2. Section 3.1(u) of the P&A Agreement is hereby amended to provide that the "knowledge" of BANK ONE shall mean the actual knowledge of the Area Manager of BANK ONE with responsibility for the Office. 3. Section 7.2(c) of the P&A Agreement is hereby amended to add the following: Anything to the contrary herein notwithstanding, BUYER shall not be liable to reimburse BANK ONE for costs incurred by BANK ONE in conjunction with training of Transferred Employees in accordance with this section. 4. Section 8.3 of the P&A Agreement is hereby amended to add the following: BANK ONE shall indemnify and hold harmless BUYER from and against any liability to third-party borrowers which i) is actually incurred by BUYER and which ii) arises as a direct result of liability to third-party borrowers as a result of acts or conduct of BANK ONE in conjunction with the management of the Office Loans prior to the Closing (the "Office Loan Indemnification" herein). The Office Loan Indemnification shall be subject to the contingencies pertaining to notice and the ability of BANK ONE to assume the defense of such claims otherwise relating to indemnification by BANK ONE under the P&A Agreement and set forth in section 8.3 thereof. Further, the Office Loan Indemnification shall apply solely to the liability of BUYER to third-party borrowers for losses incurred as a direct result of the foregoing referenced actions against BUYER as provided herein which: i) relate solely to the Office Loan, ii) are commenced prior to the first anniversary of the Closing Date, iii) exceed the sum of $12,500 for each such claim, and iii) in an aggregate amount do not exceed the sum of $500,000.00. The Office Loan Indemnification obligations of BANK ONE hereunder shall not include any liability or loss; i) arising out of actions taken by BUYER with respect to the Office Loans, ii) for matters that would otherwise enable BUYER to exercise its right to "put back" the Office Loans to BANK ONE under the terms of the Agreement irrespective of the fact that the underlying claim is made by BUYER after expiration of the Option Exercise Date, or iii) arising with respect to matters pertaining to credit quality. Nothing contained herein shall be construed as expanding the rights of BUYER with respect to the "put option" as otherwise set forth in Schedule S to the P&A Agreement. 5. Section 8.8 is hereby amended to provide that BANK ONE shall remove its signs located at the Office at its own expense and shall repair any damages to the Office resulting from such removal. 6. Section 10.8(c) is hereby amended to provide as follows: The term "Permitted Exceptions" shall mean, with respect to the Owned Real Estate, (i) those five standard exceptions appearing as Schedule B items in a standard ALTA owners or leasehold title insurance policy, and any other exceptions, restrictions, easements, rights of way, and encumbrances referenced in the Title Commitment delivered by BANK ONE to BUYER under section 2.1(b) of this Agreement to which BUYER does not unreasonably object; (ii) statutory liens for current taxes or assessments not yet due, or if due not yet delinquent, or the validity of which is being contested in good faith by appropriate proceedings; and (iii) such other exceptions as are approved by BUYER in writing. 7. Section 10.15 is hereby amended to add the following; Anything to the contrary herein not withstanding, BANK ONE shall not retain the Deposit in the event that i) BANK ONE elects to terminate the Agreement pursuant to Section 9.2(g) of the Agreement or ii) in the event that BUYER is denied necessary regulatory approvals for the transactions contemplated by the Agreement unless such denial is based upon lack of capital adequacy, competitive concerns, or Y2-k concerns. Except as otherwise expressly provided herein, nothing contained in this Agreement shall be deemed to modify, amend, or otherwise impact the duties and obligations of SELLER and BUYER under the terms of the P&A Agreement. Except as otherwise expressly contemplated by this Agreement, in the event of a conflict between the terms of this Agreement and the P&A Agreement the terms of the P&A Agreement shall govern. The terms and conditions of this Agreement shall be subject to the confidentiality requirements of Section 8.01 of the P&A Agreement. Please indicate your acknowledgment and agreement with the foregoing by signing in the space provided below and retaining one originally signed copy for your files while returning one originally signed copy to the undersigned. Thank you. Bank One Wisconsin By: /s/ William E. Read --------------------- Its: President & CEO Acknowledged and agreed to as of the date above written. Wisconsin Community Bank By: /s/ Thomas Wilkinson --------------------- Its: President & CEO EX-10 6 P&A AGREEMENT Exhibit 10.15 Office Purchase and Assumption Agreement by and between Bank One Wisconsin 111 East Wisconsin Ave., Milwaukee, Wisconsin 53202 and Wisconsin Community Bank 580 N. Main St., Cottage Grove, Wisconsin 53527 Dated as of the 9TH day of February, 1999 TABLE OF CONTENTS Page 1. PURCHASE AND ASSUMPTION 1.1 Purchase and Sale of Assets 1.2 Transfer of Assets 1.3 Acceptance and Assumption 1.4 Payment of Funds 2. CONDUCT OF THE PARTIES PRIOR TO CLOSING 2.1 Covenants of BANK ONE 2.2 Covenants of BUYER 2.3 Covenants of All Parties 3. REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of BANK ONE 3.2 Representations and Warranties of BUYER 4. ACTIONS RESPECTING EMPLOYEES AND PENSIONS AND EMPLOYEE BENEFIT PLANS 4.1 Employment of Employees 4.2 Terms and Conditions of Employment 4.3 Compliance with Law 4.4 Actions to be Taken by BANK ONE 5. CONDITIONS PRECEDENT TO CLOSING 5.1 Conditions to BANK ONE's Obligations 5.2 Conditions to BUYER's Obligations 5.3 Non-Satisfactions of Conditions Precedent 5.4 Waivers of Conditions Precedent 6. CLOSING 6.1 Closing and Closing Date 6.2 BANK ONE's Actions at Closing 6.3 BUYER's Actions at the Closing 6.4 Methods of Payment 6.5 Availability of Closing Documents 6.6 Effectiveness of Closing 7. CERTAIN TRANSITIONAL MATTERS 7.1 Transitional Action by BUYER 7.2 Transitional Actions by BANK ONE 7.3 Overdrafts and Transitional Action 7.4 ATMs and Debit Cards 7.5 Environmental Matters 7.6 Effect of Transitional Action 8. GENERAL COVENANTS AND INDEMNIFICATION 8.1 Confidentiality Obligations of BUYER 8.2 Confidentiality Obligations of BANK ONE 8.3 Indemnification by BANK ONE 8.4 Indemnification by BUYER 8.5 Solicitation of Customers by BUYER Prior to Closing 8.6 Solicitation of Customers by BANK ONE After the Closing 8.7 Further Assurances 8.8 Operation of the Offices 8.9 Information After Closing 8.10 Individual Retirement Accounts 8.11 Covenant Not to Compete 8.12 Non-solicitation of Employees 9. TERMINATION 9.1 Termination by Mutual Agreement 9.2 Termination by BANK ONE 9.3 Termination by BUYER 9.4 Effect of Termination 10. MISCELLANEOUS PROVISIONS 10.1 Expenses 10.2 Certificates 10.3 Termination of Representations and Warranties 10.4 Waivers 10.5 Notices 10.6 Parties in Interest:Assignment; Amendment 10.7 Headings 10.8 Terminology 10.9 Flexible Structure 10.10 Press Releases 10.11 Entire Agreement 10.12 Governing Law 10.13 Counterparts 10.14 Tax Matters 10.15 Good Faith Deposit 10.16 Interim Transactions SIGNATURES SCHEDULES: (Schedules are not included in this filing) Schedule A - Description of Owned Real Estate Schedule B - Description of Leased Real Estate and Third Party Lease Schedule C - Furniture, Fixtures and Equipment Schedule D - Assumed Contracts Schedule E - List of Leases, Safekeeping Items and Agreements Schedule F - Form of Assignment and Assumption of Lease and Estoppel Certificate Schedule G - RESERVED Schedule H - RESERVED Schedule I - Form of Certification of BUYER Schedule J - Form of Opinion of Counsel for BUYER Schedule K - Form of Certification of BANK ONE Schedule L - Form of Opinion of Counsel for BANK ONE Schedule M - Form of Assignment of Office Loans, Notes, Agreements and Pledge Schedule N - Form of Instrument of Assumption Schedule O - Form of Assignment, Transfer and Appointment of Successor Custodian for IRAs Schedule P - Form of Preliminary Closing Statement Schedule Q - Form of Final Settlement Statement Schedule R - Listing of Employees of Offices Schedule S - Put Provisions for Office Loans OFFICE PURCHASE AND ASSUMPTION AGREEMENT This Office Purchase and Assumption Agreement (the "Agreement" herein), made and entered into this 9TH day of February, 1999, by and between Wisconsin Community Bank , a Wisconsin banking corporation with its principal office at 580 N. Main St., Cottage Grove, Wisconsin ( the "BUYER" herein) and Bank One Wisconsin, a Wisconsin banking corporation with its principal office at 111 East Wisconsin Ave., Milwaukee, Wisconsin 53202 ("BANK ONE" herein). WHEREAS, BUYER desires to purchase and assume from BANK ONE, and BANK ONE desires to sell and assign to BUYER, certain assets and liabilities associated with offices of BANK ONE as hereinafter described; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, BUYER and BANK ONE hereby agree as follows: 1. PURCHASE AND ASSUMPTION. 1.1 Purchase and Sale of Assets. At the Closing, as defined in Section 6.1 hereof (the "Closing"), BUYER shall purchase and acquire, and BANK ONE shall sell and assign, the real estate and other assets described in Section 1.2 hereof (collectively, the "Assets") all of which are used in and/or relate to business conducted by BANK ONE at its branch offices known as and located at the sites described in Schedules A and B attached hereto and incorporated herein by reference, pursuant to the terms and conditions set forth herein and subject to exceptions, if any, set forth herein. The foregoing offices are hereinafter sometimes collectively referred to as the "Offices" and each, individually, sometimes as an "Office." The transactions contemplated by this Agreement and the purchase of assets and assumption of liabilities provided for herein is sometimes referred to herein as the "Acquisition." Except as otherwise expressly provided herein, the sale of the Assets is without warranty or guarantee, express or implied, on an "as-is, where-is" basis, and without recourse. Except as otherwise expressly provided herein, the Assets are sold without any representation or warranty whatsoever by BANK ONE. 1.2 Transfer of Assets. Subject to the terms and conditions of this Agreement, BANK ONE shall assign, transfer, convey and deliver to BUYER, on and as of the Closing on the Closing Date, as defined in Section 6.1 hereof, the Assets, which shall include the following: (a) Owned Real Estate. All of BANK ONE's right, title and interest in and to the real estate described in attached Schedule A on which an Office is situated, together with all of BANK ONE's rights in and to all improvements thereon; and all easements rights, privileges and appurtenances associated therewith (the "Owned Real Estate"). Schedule A shall specifically identify the Owned Real Estate by street address, legal description and/or tax parcel number; and shall not be deemed to include any adjacent properties unless clearly set forth in Schedule A at the time of execution of this Agreement.); (b) Leased Real Estate. A good and valid leasehold estate in the real estate described in attached Schedule B and created by certain lease agreement(s) (individually and collectively the "Third Party Lease") relating to the referenced Offices (the "Leased Real Estate"), specifically identified by street address, legal description and/or tax parcel numbers in Schedule B attached hereto and incorporated herein by reference; (c) Furniture and Equipment. All of BANK ONE's right, title and interest in and to the furniture, fixtures and equipment located at the Offices as of the Closing Date (the "Fixed Assets"), a preliminary listing of which is contained in Schedule C attached hereto and incorporated herein by reference, specifically excluding, among other items, teller calculators and other teller and platform equipment and systems, CRTs, controllers and printers, signs and stands, printed supplies and documents and other materials bearing any BANK ONE or affiliate name and/or logo, network communications equipment and related devices, any artwork, ATM surrounds, and marketing fixtures. A final listing of specific items included in the Fixed Assets will be provided to BUYER prior to the Closing. (d) Safe Deposit Business. All right, title and interest of BANK ONE in and to the safe deposit business (subject to the allocation of safe deposit rental payments as provided in Section 1.3(c)(ii) hereof) conducted at the Offices as of the close of business on the Closing Date; (e) Cash on Hand. All cash on hand at the Offices as of the close of business on the Closing Date including vault cash, petty cash, ATM cash and tellers' cash; (f) Prepaid Expenses. All prepaid expenses recorded or otherwise reflected on the books of BANK ONE as at October 31, 1998, or incurred in the ordinary course of business thereafter, as being attributable to the Offices as of the close of business on the day immediately preceding the Closing Date, but only to the extent attributable to the Assets sold, assigned or transferred to BUYER by BANK ONE pursuant to this Agreement and only to the extent arising by reason of BUYER's use or ownership of such Assets after the close of business on the Closing Date. Any and all prepaid expenses incurred by BANK ONE with respect to the Offices subsequent to October 31, 1998, shall be subject to the prior written consent of BUYER; (g) Office Loans. All right, title and interest in and to all those loans and/or letters of credit which, as of the close of business on the Closing Date, are (i) secured in whole or in part by Deposit Accounts (as hereinafter defined) attributable to an Office (the "Deposit Account Loans"), (ii) commercial or other loans or letters of credit attributable to an Office (if any, the "Other Loans") or (iii) automatically created as the result of an overdraft of a Deposit Account pursuant to an overdraft protection program offered by BANK ONE (except for those overdraft protection loans which are charged to credit card accounts not transferred to the BUYER hereunder, the "Overdraft Loans"). The Deposit Account Loans, Other Loans, and Overdraft Loans sold and assigned to BUYER hereunder will be identified as of the Closing Date and listed in Schedule H attached hereto and incorporated herein by reference (hereinafter referred to individually and collectively as the "Office Loans"). Transfer of the Office Loans will be subject to the terms and conditions set forth in Schedule S attached hereto and incorporated herein by reference. Except as otherwise expressly provided herein, the transfer of the Office Loans will be made without recourse, without any representation, warranty, or guarantee of any kind, express or implied, and without any reserve for loan losses; (h) Records of the Offices. All records and documents related to the Assets transferred or liabilities assumed by BUYER as may exist and are available and maintained at the Offices (in whatever form or medium then maintained by BANK ONE) including, but not limited to, those relating to (i) the Deposit Accounts and (ii) the promissory notes and documents and instruments evidencing the Liens ( as defined in Schedule S annexed hereto and made a part hereof) relating to the Office Loans; and(i) Contracts or Agreements. All of BANK ONE's right, title and interest in and to the maintenance and service agreements related to the Offices, as listed on Schedule D annexed hereto and made a part hereof (the "Assumed Contracts"), provided the same are assignable without cost to BANK ONE. 1.3 Acceptance and Assumption. Subject to the terms and conditions of this Agreement, on and as of the Closing on the Closing Date, BUYER shall: (a) Assets. Receive and accept all of the Assets assigned, transferred, conveyed and delivered to BUYER by BANK ONE pursuant to this Agreement, including those identified in Section 1.2 above. (b) Deposit Liabilities. Assume and thereafter discharge, pay in full and perform all of BANK ONE's obligations and duties relating to the "Deposit Liabilities" (as hereinafter defined). The term "Deposit Liabilities" is defined herein as all of BANK ONE's obligations, duties and liabilities of every type and character relating to all deposit accounts, other than (i) KEOGH accounts and (ii) deposit accounts securing any loan of BANK ONE which is not an Office Loan, for which BUYER assumes no liability, which, as reflected on the books of BANK ONE as of the close of business on the Closing Date, are attributable to the Offices. The deposit accounts referred to in the immediately preceding sentence (hereinafter the "Deposit Accounts") include, without limitation, passbook, statement savings, checking, Money Market, and NOW accounts, Individual Retirement Accounts for which BANK ONE has not received, on or before the Closing Date, the written advice from the account holder of such account holder's objection or failure to accept BUYER as successor custodian ("IRA's") and certificates of deposit. The "obligations, duties and liabilities" referred to in the immediately preceding sentence include, without limitation, the obligation to pay and otherwise process all Deposit Accounts in accordance with applicable law and their respective contractual terms and the duty to supply all applicable reporting forms for periods following the Closing Date including, without limitation, IRS Form 1099 reports relating to the Deposit Accounts to be filed and provided after the Closing Date relating to interest accrued after the Closing Date. With regard to each IRA included within the Deposit Accounts, BUYER shall also assume the appropriate plan pertaining thereto and the trustee or custodial arrangement in connection therewith. (c) Liabilities Under Leases/Safe Deposit Business. Assume and thereafter fully and timely perform and discharge, in accordance with their respective terms, all of the liabilities and obligations of BANK ONE arising after the Closing Date with respect to: (i) all leases listed on Schedules B and E to this Agreement (including safe deposit leases if any) and sold, assigned or transferred to BUYER by BANK ONE pursuant to this Agreement; (ii) the safe deposit business of the Offices including, but not limited to, the maintenance of all necessary facilities for the use of safe deposit boxes by the renters thereof during the periods for which such persons have paid rent therefor in advance to BANK ONE, subject to the agreed allocation of such rents, which allocation shall be satisfied in full by BANK ONE paying to BUYER, in the manner specified in Section 6.4 hereof, the amount of rental payment received by BANK ONE for each such safe deposit box attributable to and prorated to reflect the period from and after the Closing Date, subject to the provisions of the applicable leases or other agreements relating to such boxes; and (iii) all safekeeping items and agreements listed on Schedule E to this Agreement and delivered to BUYER by BANK ONE pursuant to this Agreement, including, but not limited to, all applicable safekeeping agreements, memoranda, or receipts so delivered to BUYER by BANK ONE hereunder. (d) Other Liabilities. Fully and timely perform and discharge, as the same may be or become due, the Assumed Contracts, the Third Party Lease for the Leased Real Estate, obligations pertaining to the Office Loans, and all additional liabilities, obligations and deferred expenses of BANK ONE as of the date of this Agreement, which are reflected on the books of BANK ONE as being attributable to an Office as of the close of business on the Closing Date but only to the extent attributable to the Assets sold, assigned or transferred to BUYER by BANK ONE pursuant to this Agreement and only to the extent arising by reason of BUYER's use or ownership of such Assets after the close of business on the Closing Date. No additional material liabilities and obligations of BANK ONE incurred subsequent to the date of this Agreement shall be assumed by BUYER unless the prior written consent of BUYER has been obtained prior to the incursion of the material liability or obligation by BANK ONE. (e) Other Obligations. Fully and timely perform its obligations relative to employees of the Offices, if any, as set forth hereinafter. 1.4 Payment of Funds. Subject to the terms and conditions hereof, at the Closing: (a) Consideration. In consideration of BUYER's assumption of the Deposit Liabilities and its other agreements herein, BANK ONE shall make available and transfer to BUYER, in the manner specified in Section 6.4 hereof, funds equal to the aggregate balance of all Deposit Accounts (including interest posted or accrued to such accounts as of the close of business on the Closing Date) plus the deferred expenses identified in Section 1.3(d) hereof prorated as of the close of business on the Closing Date less an amount equal to the sum of: The amount of cash on hand at the Offices transferred to BUYER as of the close of business on the Closing Date; and (i) the net aggregate book value of the Offices, valued as of the last day of the month ending immediately prior to the month in which the Closing Date occurs; and (ii) the net aggregate book value of the furniture, fixtures and equipment being transferred to BUYER, valued as of the last day of the month ending immediately prior to the month in which the Closing Date occurs; and (iii) 11.13% of the aggregate "Core Deposits" (as hereinafter defined) of the Offices as of the close of business on the Closing Date. The term "Core Deposits" shall mean the aggregate balance of all Deposit Liabilities of the Offices (which aggregate balance shall include all interest accrued on such Deposit Liabilities as of the close of business on the Closing Date, whether or not such interest is actually posted to the account on the Closing Date). The amount calculated as set forth herein as of the close of business on the Closing Date is hereinafter called the "Acquisition Consideration;" and (iv) the amount of prepaid expenses described in Section 1.2(f) of this Agreement, prorated as of the close of business on the day immediately preceding the Closing Date; and (v) the book value of the Office Loans together with accrued and unpaid interest thereon and any and all late fees and other fees relating thereto computed as of the close of business on the Closing Date; and (vi) the sum of $10,000.00 for each ATM or CBCT located at the Offices; and (vii) reimbursement for training expenses as provided in Section 7.2(c) herein. In the event that the sum of items (i) through (vii) above should be in excess of the aggregate amount to be transferred by BANK ONE pursuant to the first paragraph of this Section 1.4(a), the full amount of such excess shall constitute an amount due from BUYER to BANK ONE, and shall be paid to BANK ONE at the Closing in the manner specified in Section 6.4 hereof. The parties shall execute a Preliminary Settlement Statement at the Closing and a Final Settlement Statement post-closing in accordance with section 6.4 herein, in substantially the same form as set forth in Schedules P and Q attached hereto and incorporated herein. (b) Reimbursement and Proration of Certain Expenses. All other expenses (i) due and payable at times after the Closing Date for periods prior to the close of business on the Closing Date or (ii) paid prior to the close of business on the Closing Date for periods following the Closing Date, including the prepaid expenses described in Section 1.2(f) hereof and deferred expenses described in Section 1.3(d) hereof, including without limitation, real estate taxes and assessments which are a lien but not yet due and payable, utility payments, payments due on leases assigned, payments due on assigned service and maintenance contracts and similar expenses relating to the Offices shall be prorated between BANK ONE and BUYER as of the close of business on the day immediately preceding the Closing Date, provided, however, that all real estate taxes and assessments, to the extent payable by Seller and/or Buyer, shall be prorated at the Closing on the basis of the most recently certified real estate taxes and assessments, and all utility payments and lease payments shall be prorated on the basis of the best information available at Closing. Any security deposits relating to the Leased Real Estate shall be credited to the Seller at Closing. With respect to premiums paid to the FDIC for deposit insurance for the Deposit Liabilities, it shall be assumed that all the Deposit Liabilities are insured under the Bank Insurance Fund; the proration of FDIC insurance premiums will be based on the amount of the Deposit Liabilities as of the close of business on the Closing Date and the number of days during any period for which BANK ONE has prepaid premiums to the FDIC but during which BUYER has held or will hold the Deposit Liabilities. For prorations, if any, which cannot be reasonably calculated as of the Closing, a post-closing adjustment shall be made in the manner specified in Section 6.4 hereof. (c) Expenses Relating to Real Property and other Assets. The transfer (or conveyance) fees relating to the Owned Real Estate and the costs, fees and expenses of all title commitments, title guaranties and title examinations relating to the procurement of the Title Commitments related to the Owned Real Estate and the Leased Real Estate referred to in Sections 2.1(b) and 5.2(g) herein, shall be allocated to, and shall be borne, solely and exclusively by BANK ONE. The costs, fees and expenses relating to the premiums, including any endorsements for extended coverage, for all title insurance policies (net of the costs of all title commitments, guaranties and examinations), recording costs and other similar costs, fees and expenses, if any, relating to the sale and transfer of the Owned Real Estate or the transfer of BANK ONE's interest in the Leased Real Estate including, but not limited to, any conveyance fees, taxes, recording costs and other similar fees and expenses relating to the sale and transfer of any other Assets, shall be allocated to, and shall be borne, solely and exclusively, by BUYER. To the extent BUYER requests BANK ONE or its attorneys to seek certain title endorsements or removal of exceptions noted on the title commitments, BUYER shall reimburse BANK ONE at Closing for its attorney fees related thereto. In no event shall BANK ONE be required to undertake any negotiations with the title insurance companies for any matters that relate to the scope of title insurance coverage or the Permitted Exceptions. BANK ONE shall reimburse BUYER at the Closing for all the costs, fees and expenses allocated to BANK ONE pursuant to this Section 1.4(c) but paid by BUYER, and BUYER shall reimburse BANK ONE at the Closing for all of the costs, fees and expenses allocated to BUYER pursuant to this Section 1.4(c) but paid by BANK ONE in the manner specified in Section 6.4 herein. If this transaction does not close by virtue of a breach of this Agreement, the breaching party shall be responsible for and shall, as appropriate, reimburse the other party for its expenses as set forth herein. If this transaction does not close for any other reason, each party shall reimburse the other party upon termination of this Agreement for such party's share of expenses so that each party shall pay the same share of expenses as it would have paid at Closing. (d) Insurance Premium Refunds. With respect to the Insured Office Loans as defined in Section 7.2(j) herein, BANK ONE shall provide a credit to BUYER in a sum equal to 10.5% of the unearned premiums relating to the Insured Office Loans to compensate BUYER, in advance, for estimated refunds otherwise payable to BANK ONE in conjunction with future payoffs of such Insured Office Loans prior to maturity (the "Premium Settlement Payment" herein). Such Premium Settlement Payment shall be calculated as of the Closing Date and shall appear as a credit to BUYER in the Final Settlement Statement referenced in Section.6.4 herein. 2. CONDUCT OF THE PARTIES PRIOR TO CLOSING. 2.1 Covenants of BANK ONE. BANK ONE hereby covenants to BUYER that, from the date hereof until the Closing, it will do or cause the following to occur: (a) Operation of the Offices. BANK ONE shall continue to operate the Offices in a manner substantially equivalent to that manner and system of operation employed immediately prior to the date of this Agreement; provided, however, that it is contemplated by the parties that, prior to Closing, BANK ONE will be terminating certain programs which are currently in effect which allow depositors to access Deposit Accounts through electronic means. Notwithstanding the foregoing and except as may be required to obtain the required authorizations referred to in Section 2.3 of this Agreement, between the date of this Agreement and the Closing Date, and except as may be otherwise required by a regulatory authority, BANK ONE shall not, without the prior consent of BUYER, which consent shall not be unreasonably withheld: (i) cause any Office to engage or participate in any material transaction or incur or sustain any obligation which, in the aggregate, is material to its business, condition or operations except in the ordinary course of business; (ii) cause any Office to transfer to BANK ONE's other operations any material amount of Assets, except for (a) supplies, if any, which have unique function in the business of BANK ONE and its affiliates and ordinarily would not be useful to BUYER, (b) cash and other normal intrabank transfers which may be transferred in the ordinary course of business in accordance with normal banking practices and (c) signs, or those parts thereof, bearing the BANK ONE or affiliate name and/or logo or that of a BANK ONE contractor; (iii) cause the Offices to transfer to BANK ONE's other operations any deposits other than deposits securing loans made by BANK ONE which are not Office Loans and deposits owned in whole or in part by employees of BANK ONE or its affiliates who are not Transferred Employees as defined in Section 4.1 of this Agreement, except in the ordinary course of business at the unsolicited request of depositors or cause any of BANK ONE's other operations to transfer to the Offices any deposits, except in the ordinary course of business at the unsolicited request of depositors; provided, however, that BANK ONE shall be permitted to make such transfers of any deposits to or from the Offices as are in the normal course of business and do not violate the foregoing restrictions; (iv) invest in any Fixed Assets on behalf of any Office, except for commitments made on or before the date of this Agreement which are disclosed to BUYER on Schedule C of this Agreement and for replacements of furniture, furnishings and equipment and normal maintenance and refurbishing purchased or made in the ordinary course of Office business; (v) enter into or amend any continuing contract (other than Deposit Liabilities, Office Loans, and Safe Deposit agreements) relating to the Offices, which cannot be terminated without cause and without payment of any amounts as a penalty, bonus, premium or other compensation for termination, or which is not made in the ordinary course of Office business; (vi) hire (other than to replace a departing employee and/or to bring the number of employees at the Offices to normal staffing levels), transfer, reassign or terminate any employee of the Offices, increase the compensation of any employee of the Offices, or promote any of the employees of the Offices except pursuant to and consistent with customary BANK ONE procedures and policies; or (vii) make any material change to its customary policies for setting rates on deposits offered at the Offices. (b) Title Commitments for Real Estate. BANK ONE shall deliver to BUYER, at BANK ONE's expense, with respect to the Owned Real Estate and Leased Real Estate, no later than thirty (30) days after the date of this Agreement, a commitment or commitments (the "Title Commitments") having an effective date as near as feasible to the date of delivery of such Title Commitments, from a title insurance company designated by BANK ONE and reasonably satisfactory to BUYER, to issue to BUYER as soon as practicable after the Closing Date, as applicable, an American Land Title Association (ALTA) owners (Form B, 1970, Rev 1984) and/or leasehold title insurance (1975 Form) policies having an effective date as of the Closing Date, covering the Owned Real Estate and the Leased Real Estate, in an amount equal to the most recently available certified tax assessed value for the Owned Real Estate and the amount of the leasehold interest, based on the remaining rental payments due under the balance of the remaining term of the lease, to be transferred to BUYER pursuant to the Third Party Leases, subject to the exceptions specified in the Title Commitments. If title to all or part of the Owned Real Estate or Lease Real Estate is unmarketable or is subject to any defect, lien, encumbrance, easement, condition, restriction or encroachment other than the Permitted Exceptions as defined in Section 10.08(c) herein, then BUYER shall provide written notice thereof to BANK ONE. BANK ONE shall have thirty days after written notice thereof from BUYER, to elect to remedy or remove any such defect, lien, encumbrance, easement, condition, restriction or encroachment but, if BANK ONE does not, BUYER may elect to attempt to cure or remove such defect or encumbrance or other matter, for a period of thirty days thereafter. If such defect or encumbrance or other matter is not cured, then, in addition to any other rights which BUYER may have hereunder, BUYER shall have the right with respect to the relevant Office (i) to declare this Agreement terminated by written notice to BANK ONE, (ii) to negotiate, at BUYER'S cost, with the title company for certain endorsements to the standard insurance coverage to address any such defects or encumbrances, or (iii) to waive any objection to such defect or encumbrance or other matter in which event such defect, encumbrance, or other matter shall be deemed to be a Permitted Exception. The Owned Real Estate is being sold by BANK ONE to BUYER hereunder free and clear of all liens, claims, encumbrances and rights of tenants in possession except for the Permitted Exceptions, and the conveyance by Limited Warranty Deed to be delivered by BANK ONE pursuant hereto shall be subject only to the Permitted Exceptions. BANK ONE also shall execute and deliver to BUYER at the time of Closing such affidavits and other instruments, if any, as the title insurance company issuing the Title Commitments may require to delete the standard exceptions appearing as "Schedule B" items in a standard ALTA owners or leasehold owners title insurance policy, other than those which may only be deleted by a survey. BANK ONE also shall execute and deliver a so-called FIRPTA affidavit at Closing. BUYER shall obtain duly certified surveys for the Owned Real Estate and the Leased Real Estate with a metes and bounds legal description, depicting all easements, rights-of-way, set-back lines, and any encumbrances appearing on the title commitment, and BANK ONE hereby grants to BUYER and its surveyors, agents and contractors right of access to the Owned Real Estate and Leased Real Estate, with the prior consent of the landlord obtained by BUYER, for the purpose of performing the surveys. The cost of such surveys shall be shared equally by BANK ONE and BUYER at Closing. The legal descriptions contained in the surveys shall be used in the Limited Warranty Deeds to convey the Owned Real Estate and for title insurance for both the Owned Real Estate and the Leased Real Estate. BUYER shall obtain surveys within 15 days after the effective date of this Agreement and copies of the same shall be furnished to BANK ONE and the title companies. (c) Required Authorizations. BANK ONE shall obtain and procure all necessary internal corporate approvals and authorizations, if any, required by BANK ONE to enable it to fully perform all obligations imposed on it hereunder which must be performed by it at or prior to the Closing. (d) Creation of Liens and Encumbrances. With respect to the Owned Real Estate, BANK ONE shall not create or allow any liens, imperfections in title, charges, easements, restrictions or encumbrances other than the Permitted Exceptions. (e) Condemnation. If prior to Closing all or any portion of the Owned Real Estate or Leased Real Estate is taken or is made subject to eminent domain or other governmental acquisition proceedings, then BANK ONE shall promptly notify BUYER thereof, and BUYER may either complete the Closing and receive the proceeds paid or payable on account of such acquisition proceedings, or terminate this Agreement as to such Office and related assets and liabilities. If BUYER terminates this Agreement, both parties shall thereupon be relieved from all further obligations hereunder as to such Office and related assets and liabilities. (f) Insurance Proceeds, Casualty and Condemnation Payments. BANK ONE shall maintain adequate insurance on all the Assets consisting of Owned Real Estate, Leased Real Estate and Fixed Assets. In the event of any damage, destruction or condemnation affecting such Assets between the date hereof and the time of the Closing, BANK ONE shall deliver to BUYER any insurance proceeds and other payments, to the extent of the applicable amount set forth in Section 1.4(a)(ii) or (iii) hereof with respect to Owned Real Estate and the replacement cost with respect to the Fixed Assets, as the case may be, received (or with respect to insurance proceeds, which would be received assuming BANK ONE's insurance policy had no deductible) by BANK ONE as a result thereof unless, in the case of damage or destruction, BANK ONE has repaired or replaced the damaged or destroyed property. (g) IRA Accounts. Not later than thirty days prior to the expected Closing Date, BANK ONE shall, at BANK ONE's expense, mail notice of BANK ONE's resignation as Custodian and the appointment of BUYER as the Successor Custodian, effective upon Closing, of each Individual Retirement Account maintained at the Offices. The notice shall include such other information that is mutually agreed upon by BANK ONE and BUYER. (h) Assignment of Leases. BANK ONE shall use its reasonable good faith efforts to obtain any written consent of any such landlord as shall be necessary for the effective assignment of the Third Party Lease and assumption thereof by BUYER as of the Closing Date. The assignment and assumption by BUYER of the Third Party Lease shall be substantially the form of Schedule F attached hereto and incorporated herein. In the event such necessary consent to assignments is not obtained or other arrangements satisfactory to BANK ONE made by ______ __, 199__, BANK ONE may, at its sole option, terminate its duties and obligations under this Agreement as to such Office and related assets and liabilities. 2.2 Covenants of BUYER. BUYER hereby covenants to BANK ONE that, from the date hereof until the Closing, it will do or cause the following to occur: (a) Regulatory Applications. BUYER shall prepare and submit for filing, at no expense to BANK ONE, any and all applications, filings, and registrations with, and notifications to, all federal and state authorities required on the part of BUYER or any shareholder or affiliate of BUYER for the Acquisition to be consummated at the Closing as contemplated in Section 6.01 herein and for BUYER to operate the Offices following the Closing. BUYER shall provide BANK ONE with a draft copy of each application, filing, registration, and notification for BANK ONE's approval prior to filing, which approval by BANK ONE will not be unreasonably withheld or delayed. Such applications will be submitted to BANK ONE in draft form within thirty (30) days from the date of this Agreement and filed by BUYER without delay following BANK ONE's approval of such applications; provided, however, that in no event will such applications be filed later than sixty (60) days from the date of this Agreement. Thereafter, BUYER shall pursue all such applications, filings, registrations, and notifications diligently and in good faith, and shall file such supplements, amendments, and additional information in connection therewith as may be reasonably necessary for the Acquisition to be consummated at such Closing and for BUYER to operate the Offices following the Closing. BUYER shall deliver to BANK ONE evidence of the filing of each and all of such applications, filings, registrations and notifications (except for any confidential portions thereof), and any supplement, amendment or item of additional information in connection therewith (except for any confidential portions thereof). BUYER shall also deliver to BANK ONE a copy of each material notice, order, opinion and other item of correspondence received by BUYER from such federal and state authorities (except for any confidential portions thereof) and shall advise BANK ONE, at BANK ONE's request, of developments and progress with respect to such matters. (b) Required Authorizations. BUYER shall obtain and procure all necessary corporate and other approvals and authorizations, if any, required on its part to enable it to fully perform all obligations imposed on it hereunder which must be performed by it at or prior to the Closing. (c) Satisfaction of Conditions. BUYER shall not voluntarily undertake any course of action inconsistent with the satisfaction of the requirements or the conditions applicable to it, or its agreements, undertakings, obligations, or covenants set forth in this Agreement, and it shall promptly do all such reasonable acts and take all such reasonable measures as may be appropriate to enable it to perform as early as possible the agreements, undertakings, obligations, and covenants herein provided to be performed by it, and to enable the conditions precedent to BANK ONE's obligations to consummate the Closing of the Acquisition to be fully satisfied. Additionally, BUYER shall not knowingly, directly or through any existing or future subsidiary or affiliate, take any action that would be in conflict with, or result in the denial, delay, termination, or withdrawal of, any of the regulatory approvals referred to in this Agreement. (d) Cooperation Regarding Leased Real Estate. BUYER shall, at BANK ONE's request in connection with BANK ONE's obtaining the consents specified in Section 2.1(h), advise, in writing, the lessor of Leased Real Estate, of BUYER's intent to assume and comply with the terms of the Third Party Lease (as to matters arising from and after the Closing Date). 2.3 Covenants of All Parties. BANK ONE hereby covenants to BUYER, and BUYER hereby covenants to BANK ONE that, from the date hereof until the Closing, such party shall cooperate fully with the other party in attempting to obtain all consents, approvals, permits, or authorizations which are required to be obtained pursuant to any federal or state law, or any federal or state regulation thereunder, for or in connection with the transactions described and contemplated in this Agreement. 3. REPRESENTATIONS AND WARRANTIES. 3.1 Representations and Warranties of BANK ONE. BANK ONE represents and warrants to BUYER as follows: (a) Good Standing and Power of BANK ONE. BANK ONE is a national banking corporation duly organized, validly existing, and in good standing under the laws of the State of Wisconsin with corporate power to own its properties and to carry on its business as presently conducted. BANK ONE is an insured bank as defined in the Federal Deposit Insurance Act and applicable regulations thereunder. (b) Authorization of Agreement. The execution and delivery of this Agreement, and the transactions contemplated hereby, have been duly authorized by all necessary corporate action on the part of BANK ONE, and this Agreement is a valid and binding obligation of BANK ONE. (c) Effective Agreement. Subject to the receipt of any and all necessary regulatory approvals and required consents, the execution, delivery, and performance of this Agreement by BANK ONE and the consummation of the transactions contemplated hereby, will not conflict with, result in the breach of, constitute a violation or default, result in the acceleration of payment or other obligations, or create a lien, charge or encumbrance, under any of the provisions of Articles of Incorporation or By-Laws of BANK ONE, under any judgment, decree or order, under any law, rule, or regulation of any government or agency thereof, or under any material contract, material agreement or material instrument to which BANK ONE is subject, where such conflict, breach, violation, default, acceleration or lien would have a material adverse effect on the Assets or BANK ONE's ability to perform its obligations hereunder. (d) Title to Real Estate And Other Assets. Except for the Owned Real Estate and Leased Real Estate, BANK ONE or an affiliate is the sole owner of each of the Assets free and clear of any mortgage, lien, encumbrance or restrictions of any kind or nature. As to the Owned Real Estate, BANK ONE or an affiliate is the sole owner of a fee simple interest in, and has good and marketable title to, such Owned Real Estate, free and clear of all liens, claims, encumbrances and rights of tenants in possession except for the Permitted Exceptions and shall convey, or cause to be conveyed, such real estate to BUYER by delivery at the Closing of a limited warranty deed conveying such title subject only to the Permitted Exceptions. BANK ONE or an affiliate has a valid leasehold interest in the Leased Real Estate pursuant, and subject to, the Third Party Lease and has the use of the Leased Real Estate pursuant to the Third Party Lease, which will be assigned to BUYER by delivery of an assignment conveying such leasehold interest to BUYER at the Closing. (e) Zoning Variations. As of the date of this Agreement, BANK ONE has no knowledge of receipt of, or contemplation of any intent to provide, BANK ONE with any written notice from any governmental authority of any uncorrected violations of zoning and/or building codes relating to the Owned Real Estate or Leased Real Estate. (f) Condemnation Proceedings. BANK ONE has received no written notice of any pending or threatened, nor is it aware of any contemplated, condemnation proceeding affecting or relating to the Offices. (g) Taxes. All federal, state and local payroll, withholding, property, sales, use and transfer taxes, if any, which are due and payable by BANK ONE relating to the Offices prior to the date of Closing shall be paid in full as of the Closing Date or BANK ONE shall have made appropriate provision for such payment in accordance with ordinary business practices. Any claims for refunds of taxes which have been paid by BANK ONE shall remain the property of BANK ONE. (h) Operations Lawful. To the knowledge of BANK ONE, the conduct of banking business at the Offices is in compliance in all material respects with all federal, state, county and municipal laws, ordinances and regulations applicable to conduct of such business. (i) Third-Party Claims. There are no actions, suits or proceedings, pending or, to BANK ONE's knowledge, threatened against or affecting BANK ONE which, if determined adversely to BANK ONE, could have a material adverse effect on the aggregate value of the banking business and Assets of the Offices. (j) Insurance. BANK ONE maintains such insurance on the Offices and the Fixed Assets to be purchased by or assigned to BUYER as may be required or as is customary in the business of banking. (k) Labor Relations. No employee located at any of the Offices is represented, for purposes of collective bargaining, by a labor organization of any type. BANK ONE has no knowledge of any efforts during the past three years to unionize or organize any employees at any Office, and no material claim related to employees at the Offices under the Fair Labor Standards Act, National Labor Relations Act, Civil Rights of 1964, Walsh-Healy Act, Davis Bacon Act, Civil Rights of Act of 1866, Age Discrimination in Employment Act, Equal Pay Act of 1963, Executive Order No. 11246, Federal Unemployment Tax Act, Vietnam Era Veterans Readjustment Act, Occupational Safety and Health Act, Americans with Disabilities Act or any state or local employment related law, order, ordinance or regulation, no unfair labor practice, discrimination or wage-and-hour claim is pending or, to the best of BANK ONE's knowledge, threatened against or with respect to BANK ONE. (l) Governmental Notices. BANK ONE has not received notice from any federal or state governmental agency indicating that it would oppose or not grant or issue its consent or approval, if required, with respect to the transactions contemplated by this Agreement. (m) Environmental. To the knowledge of BANK ONE, there are no actions, proceedings or investigations pending before any environmental regulatory body, federal or state court with respect to or threatened against or affecting BANK ONE in respect of any Office under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), or under the any federal, state, local or municipal environmental statute, ordinance or regulation in respect thereof and in connection with any release of any toxic or "hazardous substance," pollutant or contaminant into the "environment," nor, to the best knowledge of the executive officers of BANK ONE, is there any reasonable basis for the institution of any such actions or proceedings or investigations which is probable of assertion, nor are there any such actions or proceedings or investigations in which BANK ONE is a plaintiff or complainant. To the knowledge of BANK ONE, BANK ONE is not responsible in any material respect under any applicable environmental law for any release by BANK ONE or for any release by an other "Person" at or in the vicinity of any Office of a hazardous or toxic substance, contaminant or pollutant caused by the spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing of hazardous wastes or other chemical substances, pollutants or contaminants into the environment, nor is BANK ONE responsible for any material costs (as a result of the acts or omissions of BANK ONE, or, to the actual knowledge of the executive officers of BANK ONE, as a result of the acts or omissions of any other "person") of any remedial action including, without limitation, costs arising out of security fencing, alternative water supplies, temporary evacuation and housing and other emergency assistance undertaken by any environmental regulatory body having jurisdiction over BANK ONE to prevent or minimize any actual or threatened release by BANK ONE on premises any hazardous wastes or other chemical substances, pollutants and contaminants into the environment which would endanger the public health or the environment. All terms contained in quotation marks in this paragraph and the paragraph immediately following shall have the meaning ascribed to such terms as defined in all federal, state and local statutes, regulations or ordinances. (n) Access to Real Estate. To the knowledge of BANK ONE, no fact or condition exists which would result in the termination or impairment of access to the Owned Real Estate from adjoining public or private streets or ways or which could result in discontinuation of necessary sewer, water, electric, gas, telephone, or other utilities or services and sewage, sanitation, plumbing, refuse disposal, and similar facilities servicing the Owned Real Estate are in full compliance with applicable governmental regulations. (o) Mechanic's Liens. BANK ONE has paid or will pay in full all bills and invoices for labor and material of any kind arising from the ownership, operation, management, repair, maintenance, or leasing as tenant of the Owned Real Estate and the Leased Real Estate, and no actual or potential mechanic's lien or other claims are outstanding or available to any party in connection with the ownership, operation, management, repair, maintenance, or leasing as tenant of said properties. (p) Deposit. Attached as Schedule G hereto is a true and accurate schedule of all Deposit Accounts (including individual retirement accounts) domiciled at the Offices, prepared as of a date within thirty (30) days prior to the date of this Agreement, listing by Office and by category the amount of all deposits and the interest rates and maturity dates associated with such deposits, and indicating the deposits that constitute Core Deposits. (q) Office Loans. Attached hereto as Schedule H is a true and accurate schedule of all Office Loans, including accrued and unpaid interest thereon and any and all late fees and other fees relating thereto, computed as of a date within thirty (30) days prior to the date of this Agreement, excluding, however, such Office Loans which are more than 60 days past due for payment of principal or interest. (r) Personal Property. Schedule C is a preliminary listing of Fixed Assets owned by BANK ONE and located at the Offices, which is subject to non-material change prior to the Closing Date. A final listing of Fixed Assets will be provided to BUYER by BANK ONE prior to the Closing Date. (s) Assumed Contracts and Third Party Lease. Schedule D is a true and accurate schedule of all Assumed Contracts related to the Offices. Each Assumed Contract is valid and subsisting and in full force and effect in accordance with its terms. (t) FIRPTA. BANK ONE is not a "foreign person" within the meaning of the Internal Revenue Code 1445. (u) For purposes of this section 3.1, the "knowledge" of BANK ONE shall mean the actual knowledge of the President of BANK ONE. 3.2 Representations and Warranties of BUYER. BUYER represents and warrants to BANK ONE as follows: (a) Good Standing and Power of BUYER. BUYER is a Wisconsin banking corporation duly organized, validly existing, and in good standing under the laws of the State of Wisconsin with corporate power to own its properties and to carry on its business as presently conducted. BUYER is an insured bank, as defined in the Federal Deposit Insurance Act and applicable regulations thereunder. (b) Authorization of Agreement. The execution and delivery of this Agreement, and the transactions contemplated hereby, have been duly authorized by all necessary corporate action on the part of BUYER, and this Agreement is a valid and binding obligation of BUYER. (c) Effective Agreement. Subject to the receipt of any and all necessary regulatory approvals, the execution, delivery, and performance of this Agreement by BUYER, and the consummation of the transactions contemplated hereby, will not conflict with, result in the breach of, constitute a violation or default, result in the acceleration of payment or other obligations, or create a lien, charge or encumbrance, under any of the provisions of the Articles of Association or By-Laws of BUYER, under any judgment, decree or order, under any law, rule or regulation of any government or agency thereof, or under any material agreement, material contract or material instrument to which BUYER is subject, where such conflict, breach, violation, default, acceleration or lien would have a material adverse effect on BUYER's ability to perform its obligations hereunder. 4. ACTIONS RESPECTING EMPLOYEES AND PENSIONS AND EMPLOYEE BENEFIT PLANS. 4.1 Employment of Employees. (a) BUYER shall extend offers of employment, as of the Closing Date, to such employees of the Offices listed in Schedule R as may be employed by BANK ONE at the Offices as of the Closing Date (including, without limitation, those employees who on the Closing Date are on family and medical leave, military leave, or personal or pregnancy leave and who elect to return to work not later than one (1) year following the Closing Date; individually and collectively the "Leave Employees" herein) for positions entailing responsibilities in effect at BANK ONE as of the Closing Date, and for a base salary not less than that paid by BANK ONE as of the Closing Date. Employees accepting employment with BUYER, including but not limited to the Leave Employees, are referred to herein individually and collectively as the "Transferred Employees". In the event that BUYER shall transfer (except in a comparable position and for comparable compensation to an office not more than 35 miles from the Office at which the Transferred Employee is employed as of the Closing Date, or at the request of the Transferred Employee), terminate employment of, or reduce the base salary of, a Transferred Employee (the "Terminated Employee") between the Closing Date and the date which is one (1) year from the Closing Date, other than for cause, BUYER shall pay to the Terminated Employee a sum equal to the greater of that which the Terminated Employee would have received on the date of such transfer, termination, or reduction in salary under the severance plan of BANK ONE applicable to the Terminated Employee as of the date hereof and set forth in Schedule R or the severance plan of BUYER otherwise applicable to the Terminated Employee as of the date of such transfer, termination, or reduction in base salary. Such payment shall be due and owing the Terminated Employee on the date of such transfer, termination, or reduction in salary. Nothing contained in this Agreement shall restrict or prohibit Buyer and any Transferred Employee from entering into an agreement satisfactory to both Buyer and the Transferred Employee providing for resolution of matters set forth in this section. (b) BANK ONE will cooperate with BUYER, to the extent reasonably requested and legally permissible, to provide BUYER with information about the employees of the Offices including, without limitation, providing BUYER with the personnel files of those employees of the Offices who provide BANK ONE with their written consent thereto, and a means to meet with the subject employees. BUYER hereby agrees to indemnify and to hold BANK ONE and its affiliates and its and their officers, directors, agents, and employees harmless from and against any and all liability, loss, cost, and expense, however arising, as a result of release of information and/or files concerning the referenced employees. 4.2 Terms and Conditions of Employment. Except as otherwise provided explicitly in this Agreement, the terms of employment for each Transferred Employee shall be determined solely by BUYER's policies, procedures, and programs; provided, however, that BUYER agrees that each Transferred Employee shall be provided employment subject to the following terms and conditions; (a) Base salary shall be at least equivalent to the rate of base salary paid by BANK ONE to such Transferred Employee as of the close of business on the day prior to the Closing Date. (b) Except as otherwise specifically provided herein, Transferred Employees shall be provided employee benefits that are no less favorable in the aggregate than those provided to similarly situated employees of BUYER. BUYER shall provide such Transferred Employees with credit for the Transferred Employee's period of service with BANK ONE (including any service credited from predecessors by merger or acquisition to BANK ONE) towards the calculation of eligibility and vesting for such purposes as vacation, sick days, personal days, severance and other benefits, and participation and vesting in BUYER's qualified pension and/or profit sharing 401(k) plans, as such plans may exist (but not for purposes of funding of accrued pension or profit sharing plans for such Transferred Employees with respect to any period prior to the Closing Date). (c) Each Transferred Employee shall be eligible to participate in the medical, dental, or other welfare plans of BUYER, as such plans may exist, on and after the Closing Date, and any pre-existing conditions provisions of such plans shall be waived with respect to any such Transferred Employees. (d) With respect to any Transferred Employee who is also a Leave Employee, upon conclusion of his or her short-term disability or temporary leave of absence, subject to the terms and conditions of the BUYER's plans and policies and applicable law, each Transferred Employee on such leave shall receive the salary and vacation benefits in effect when he or she went on leave, shall otherwise be treated as a Transferred Employee, and, to the extent practicable, shall be offered by the BUYER the same or a substantially equivalent position to his or her position with BANK ONE prior to having gone on leave. (e) Except as provided herein, BANK ONE shall pay, discharge, and be responsible for (i) all salary and wages arising out of employment of the Transferred Employees through the Closing Date, and (ii) any employee benefits arising under BANK ONE's employee benefit plans and employee programs prior to the Closing Date (but not including sick days and personal days accrued but unused by the Transferred Employee through the Closing Date and medical benefits, if any, to Transferred Employees who retire after the Closing Date), including benefits with respect to claims incurred prior to the Closing Date but reported after the Closing Date and benefits inuring to Leave Employees prior to any election by such Leave Employees to return to work with BUYER. From and after the Closing Date, BUYER shall pay, discharge, and be responsible for all salary, wages, and benefits arising out of or relating to the employment of the Transferred Employees by BUYER from and after the Closing Date, including, without limitation, all claims for welfare benefits plans incurred on or after the Closing Date. Claims are incurred as of the date services are provided notwithstanding when the injury or illness may have occurred. To the extent permitted under BUYER's applicable 401(k) plan, BANK ONE and BUYER shall cooperate in arranging for the transfer to BUYER's 401(k) plan, as soon as practicable after the Closing Date and in a manner that satisfies sections 414(l) and 411(d)(6) of the Internal Revenue Code, as amended, of those accounts held under BANK ONE's 401(k) plan on behalf of Transferred Employees. 4.3 Compliance with Law. BUYER agrees that it shall comply with any and all applicable requirements, if any, under the Worker Adjustment and Retraining Notification Act in connection with the transaction contemplated by this Agreement. BUYER hereby agrees to indemnify and to hold BANK ONE and its affiliates and its and their officers, directors, agents, and employees harmless from and against any and all liability, loss, cost, and expense, however arising, as a result of the failure of BUYER to comply with its obligations as set forth in this section. 4.4 Actions to be Taken by BANK ONE. BANK ONE covenants to BUYER that it will do or cause the following to occur: (a) Solicitation of Transferred Employees. Except with the written consent of BUYER, for a period of twelve months following the Closing Date, BANK ONE will not directly solicit Transferred Employees as prospective officers or employees of BANK ONE; provided, however, that BANK ONE shall not be prohibited or restricted from hiring a Transferred Employee if such Transferred Employee contacts BANK ONE or an affiliate or the parent organization of BANK ONE to seek hiring or retention, whether in response to general advertising or otherwise, or if a Transferred Employee is terminated by BUYER. (b) Employee Benefit Programs. BANK ONE's obligations to employees of the Offices, including Transferred Employees, will be as set forth in established policies of BANK ONE CORPORATION and/or BANK ONE, and BANK ONE shall continue its employee benefit programs in full force and effect as benefit programs for Transferred Employees through the Closing Date. After the Closing, BANK ONE shall retain the responsibility and liability for the funding and payment of all claims incurred under such employee benefit programs through the Closing Date. BUYER shall have no obligation or liability to compensate Transferred Employees for benefits of any kind earned, accrued, promised and/or provided to Transferred Employees as employees of BANK ONE, except with respect to eligibility and vesting as set forth in Section 4.02, above. (c) Employees of the Offices. BANK ONE shall not, without BUYER's prior written consent (i) increase the aggregate full-time equivalent size of the work force at the Offices above the aggregate normal staffing levels designated by BANK ONE for the Offices at the date hereof, (ii) terminate any Transferred Employee prior to the Closing Date, unless such person is terminated for cause as determined at the sole discretion of BANK ONE or otherwise pursuant to existing BANK ONE policies or procedures, or (iii) increase the compensation of any Transferred Employee except pursuant to existing BANK ONE policies and procedures. The obligations of BANK ONE and BUYER pursuant to this Section 4.1 through 4.4 shall survive the Closing. 5. CONDITIONS PRECEDENT TO CLOSING. 5.1 Conditions to BANK ONE's Obligations. The obligations of BANK ONE to consummate the Acquisition are subject to the satisfaction, or the waiver in writing by BANK ONE to the extent permitted by applicable law, of the following conditions at or prior to the Closing: (a) Prior Regulatory Approval. All filings and registrations with, and notifications to, all federal and state authorities required for consummation of the Acquisition shall have been made, all approvals and authorizations of all federal and state authorities required for consummation of the Acquisition shall have been received and shall be in full force and effect, and all applicable waiting periods shall have passed. (b) Corporate Action. The Board of Directors of BUYER shall have taken all corporate action necessary by it to effectuate this Agreement and the Acquisition and BUYER shall have furnished BANK ONE with a certified copy of each such resolution adopted by the Board of Directors of BUYER evidencing the same. (c) Representations and Warranties. The representations and warranties of BUYER set forth in this Agreement shall be true and correct in all material respects on the Closing Date with the same effect as though all such representations and warranties had been made on and as of such date, and BUYER shall have delivered to BANK ONE a Certificate to that effect, dated as of the Closing Date to the effect specified in Schedule I to this Agreement. (d) Covenants. Each and all of the covenants and agreements of BUYER to be performed or complied with at or prior to Closing pursuant to this Agreement shall have been duly performed or complied with in all material respects by BUYER, or waived by BANK ONE, and BUYER shall have delivered to BANK ONE a Certificate to that effect, dated as of the Closing Date to the effect specified in Schedule I to this Agreement. (e) No Proceeding or Prohibition. At the time of the Closing, there shall not be any litigation, investigation, inquiry, or proceeding pending or threatened in or by any court or agency of any government or by any third party which in the judgment of the executive officers of BANK ONE, with the advice of counsel, presents a bona fide claim to restrain, enjoin, or prohibit consummation of the transaction contemplated by this Agreement or which might result in rescission in connection with such transactions; and BANK ONE shall have been furnished with a Certificate, substantially in the form as specified in Schedule I to this Agreement, dated as of the Closing Date and signed by the Chairman, President, or an Executive Vice President and Secretary or Assistant Secretary of BUYER, to the effect that no such litigation, investigation, inquiry, or proceeding is pending or, to the best of their knowledge, threatened. (f) Opinion of Counsel. BUYER shall have delivered to BANK ONE an opinion, dated as of the Closing Date, of legal counsel reasonably satisfactory to BANK ONE and its counsel, in form and substance reasonably satisfactory to BANK ONE and its counsel, to the effect specified in Schedule J to this Agreement. (g) Receipt of Consents of Third Parties. BANK ONE shall have received, in form and substance satisfactory to BANK ONE, any and all consents, approvals or waivers of third parties as BANK ONE, in its sole discretion, may deem necessary or appropriate to enable it to consummate the transactions contemplated by this Agreement without additional cost, expense, or liability to BANK ONE or its affiliates. 5.2 Conditions to BUYER's Obligations. The obligations of BUYER to consummate the Acquisition are subject to the satisfaction, or the waiver in writing by BUYER to the extent permitted by applicable law, of the following conditions at or prior to the Closing: (a) Prior Regulatory Approval. All filings and registrations with, and notifications to, all federal and state authorities required for consummation of the Acquisition and operation of the Offices by BUYER shall have been made, all approvals and authorizations of all federal and state authorities required for consummation of the Acquisition and operation of the Offices by BUYER shall have been received and shall be in full force and effect, and all applicable waiting periods shall have passed. (b) Corporate Action. The Board of Directors of BANK ONE shall have taken all corporate action necessary to effectuate this Agreement and the Acquisition; and BANK ONE shall have furnished BUYER with a certified copy of each such resolution adopted by the Board of Directors of BANK ONE evidencing the same. (c) Representations and Warranties. The representations and warranties of BANK ONE set forth in this Agreement shall be true and correct in all material respects on the Closing Date with the same effect as though all such representations and warranties had been made on and as of such date (unless a different date is specifically indicated in such representations and warranties), and BANK ONE shall have delivered to BUYER a Certificate to that effect, dated as of the Closing Date to the effect specified in Schedule K to this Agreement. (d) Covenants. Each and all of the covenants and agreements of BANK ONE to be performed or complied with pursuant to this Agreement shall have been duly performed or complied with in all material respects by BANK ONE, or waived by BUYER, and BANK ONE shall have delivered to BUYER a Certificate to that effect, dated as of the Closing Date to the effect specified in Schedule K to this Agreement. (e) No Proceedings or Prohibitions. At the time of the Closing, there shall not be any litigation, investigation, inquiry, or proceeding pending or threatened in or by any court or agency of any government or by any third party which in the judgment of the executive officers of BUYER, with the advice of counsel, presents a bona fide claim to restrain, enjoin, or prohibit consummation of the transactions contemplated by this Agreement or which might result in rescission in connection with such transactions; and BUYER shall have been furnished with a Certificate, in substantially the form specified in Schedule K to this Agreement, dated as of the Closing Date and signed by the Chairman, President, or Vice President, and the Secretary or Assistant Secretary of BANK ONE, to the effect that no such litigation, investigation, inquiry, or proceeding is pending or threatened to the best of their knowledge. (f) Opinion of Counsel. BANK ONE shall have delivered to BUYER an opinion, dated as of the Closing Date, of legal counsel reasonably satisfactory to BUYER and its counsel, in form and substance reasonably satisfactory to BUYER and its counsel, to the effect specified in Schedule L to this Agreement. (g) Real Property. The Title Commitment (as defined in Section 2.1(b) herein) shall have been delivered to BUYER, and updated to or as close as practicable to (but in no event more than five (5) business days prior to) the Closing Date, in accordance with the terms of such Section, and such updated Title Commitment shall not include any special exceptions other than those set forth in the original Title Commitment and any other Permitted Exceptions. (h) Fixed Assets. There shall have been no material alteration in or adjustment to the Fixed Assets. For purposes of this subsection (h), it will not be considered to be a material alteration or adjustment to the Fixed Assets if (i) there is damage or destruction to the Fixed Assets as contemplated by Section 2.1(f) herein and BANK ONE complies with said Section 2.1(f), (ii) BANK ONE makes additions to the Fixed Assets with the prior written consent of BUYER or (iii) BANK ONE makes additions to the Fixed Assets without BUYER's consent in order to correct emergency situations which are threatening to impair BANK ONE's operations at an Office. 5.3 Non-Satisfactions of Conditions Precedent. The non- occurrence or delay of the Closing of the Acquisition by reason of the failure of timely satisfaction of all conditions precedent to the obligations of any party hereto to consummate the Acquisition shall in no way relieve such party of any liability to the other party hereto, nor be deemed a release or waiver of any claims the other party hereto may have against such party, if and to the extent the failure of timely satisfaction of such conditions precedent is attributable to the actions or inactions of such party. 5.4 Waivers of Conditions Precedent. The conditions specified in Sections 5.1 and 5.2 herein shall be deemed satisfied or, to the extent not satisfied, waived if the Closing occurs unless such failure of satisfaction is reserved in a writing executed by BUYER and BANK ONE at or prior to the Closing. 6. CLOSING. 6.1 Closing and Closing Date. The Acquisition contemplated by this Agreement shall be consummated and closed (the "Closing") at such location as shall be mutually agreed upon by BUYER and BANK ONE, on a date to be mutually agreed upon by BUYER and BANK ONE which date is after all required regulatory approvals have been obtained and all applicable regulatory waiting periods associated therewith have expired. The precise date on which the Closing shall occur (the "Closing Date") shall be confirmed by the parties in writing not less than five (5) days after receiving all required regulatory approvals. 6.2 BANK ONE's Actions at Closing. At the Closing (unless another time is specifically stated in Section 6.4 hereof), BANK ONE shall, with respect to the Offices: (a) deliver to BUYER at the Offices such of the Assets purchased hereunder as shall be capable of physical delivery, including, without limitation, all assets comprising the safe deposit box business, if any, of the Offices; and (b) execute, acknowledge and deliver to BUYER all such limited warranty deeds (qualified, as necessary, to reflect all Permitted Exceptions), endorsements, assignments, bills of sale, and other instruments of conveyance, assignment, and transfer as shall reasonably be necessary or advisable to consummate the sale, assignment, and transfer of the Assets sold or assigned to BUYER hereunder and such other documents as the title company may reasonably require; the originals of all blueprints, construction plans, specifications and plat relating to the Owned Real Estate, which are now in BANK ONE's possession or which BANK ONE has reasonable access to; and such other documents or instruments as may be reasonably required by BUYER, required by other provisions of this Agreement, or reasonably necessary to effectuate the Closing ; (c) execute, acknowledge and deliver to BUYER a duly executed and recordable assignment to BUYER of the Third Party Lease and a consent to assignment from the landlord of the Third Party Lease all in substantially the form as set forth in Schedule F attached hereto and incorporated herein by reference; (d) assign, transfer, and make available to BUYER such of the following records as exist and are available and maintained at the Offices (in whatever form or medium then maintained by BANK ONE) pertaining to the Deposit Liabilities and Office Loans: (i) signature cards and IRA plan and account documents (which will be provided on separate CD-ROMs and delivered directly to BUYER from SELLER's image storage vendor. BUYER shall contract directly with such vendor, at BUYER's expense, to obtain paper copies of electronically stored documents); and (ii) other orders, contracts, and agreements between BANK ONE and depositors of the Offices and borrowers with respect to Office Loans, and records of similar character (which may be provided, at the option of BANK ONE, in electronic format on CD-ROM or otherwise) excepting, specifically; a) W8, and W9 forms which BUYER may obtain from customers, b) internally generated CTR forms, and c) retail loan credit information (for which no paper-based documents are maintained by BANK ONE); and (iii) a trial balance listing of records of account. (e) assign, transfer, and deliver to BUYER such safe deposit and safekeeping files and records (in whatever form or medium then maintained by BANK ONE) pertaining to the safe deposit business of the Offices transferred to BUYER hereunder as exist and are available, together with the contents of the safe deposit boxes maintained at the Offices, as the same exist as of the close of business on the day immediately preceding the Closing Date (subject to the terms and conditions of the leases or other agreements relating to the same) and all securities and other records, if any, held by the Offices for their customers as of the close of business on the day immediately preceding the Closing Date (subject to the terms and conditions of the agreements or receipts relating to the same); and (f) make available and transfer to BUYER on the Closing Date and prior to the conclusion of the Closing any funds required to be paid to BUYER pursuant to the terms of this Agreement; and (g) execute, acknowledge and deliver to BUYER all Certificates and other documents required to be delivered to BUYER by BANK ONE at the Closing pursuant to the terms of this Agreement; and (h) assign by endorsement substantially in a form as provided in Schedule M attached hereto, transfer and deliver to BUYER the contract, promissory note or other evidence of indebtedness related to the Office Loans together with the loan file and records (in whatever form or medium then maintained by BANK ONE) pertaining to such Office Loans; and (i) assign to BUYER all BANK ONE's rights in and to the Assumed Contracts which are assignable and which constitute part of the Assets. 6.3 BUYER's Actions at the Closing. At the Closing (unless another time is specifically stated in Section 6.4 hereof), BUYER shall, with respect to the Offices: (a) execute, acknowledge, and deliver to BANK ONE, to evidence the assumption of the liabilities and obligations of BANK ONE by BUYER hereunder, an instrument of assumption in the form set forth in Schedule N to this Agreement, and BANK ONE shall then accept, execute, and acknowledge such instrument. Copies of such instrument may be recorded in the public records at the option of either party hereto. The execution and acknowledgment of such instrument shall not be deemed to be a waiver of any rights or obligations of any party to this Agreement; (b) receive, accept and acknowledge delivery of all Assets, and all records and documentation relating thereto, sold, assigned, transferred, conveyed or delivered to BUYER by BANK ONE hereunder and BUYER shall be responsible for coordinating with the title companies to effectuate the recording of limited warranty deeds on or after Closing and securing GAP insurance coverage in the event the limited warranty deeds are recorded post-closing, at BUYER'S sole cost and expense; and (c) execute and deliver to BANK ONE such written receipts for the Assets, properties, records, and other materials assigned, transferred, conveyed, or delivered to BUYER hereunder as BANK ONE may reasonably have requested at or before the Closing; (d) pay to BANK ONE on the Closing Date and prior to the conclusion of the Closing any funds required to be paid to BANK ONE at the Closing pursuant to the terms of this Agreement; (e) execute, acknowledge and deliver to BANK ONE all Certificates and other documents required to be delivered to BANK ONE by BUYER at the Closing pursuant to the terms hereof; (f) execute, acknowledge and deliver to BANK ONE an agreement wherein BUYER assumes obligations with respect to the Third Party Lease and Assumed Contracts and the IRA's for all periods following the Closing Date with respect thereto; and (g) execute, acknowledge and deliver the Letter of Credit Indemnity Agreement, pertaining to letters of credit included in the Office Loans, in the form as attached to Schedule S herein. 6.4 Methods of Payment. Subject to the adjustment procedures set forth in this Section 6.4, the transfer of the funds, if any, due to BUYER or to BANK ONE, as the case may be, as set forth pursuant to the terms of Section 1.4(a) hereof, shall be made on the Closing Date in immediately available United States Federal Funds. At least two business days prior to the Closing, BANK ONE and BUYER shall provide written notice to one another indicating the account and bank to which such funds shall be wire transferred. In order to facilitate the Closing, the parties agree: (i) that the amount of funds transferred on the Closing Date, pursuant to Section 1.4(a) hereof, shall be computed based upon (a) the aggregate book value plus accrued interest of the Office Loans as of the close of business on a day to be agreed between the parties, not more than seven (7) business days preceding the Closing Date, (b) cash on hand at the Offices as of the close of business on a day to be agreed between the parties, not more than seven (7) business days preceding the Closing Date, and (c) the aggregate balance of all Deposit Accounts (including interest posted or accrued to such accounts and Individual Retirement Accounts which have become IRAs as a result of the written appointment of BUYER as the successor custodian and the failure of the account holders to object to such appointment) as of the close of business on a day to be agreed between the parties, not more than seven (7) business days preceding the Closing Date, and the parties shall execute a Preliminary Closing Statement in substantially the form set forth in Schedule P attached. Furthermore, within ten (10) business days after the Closing, the parties shall make appropriate post closing adjustments, consistent with the provisions of Section 1.4 hereof, based upon actual Deposit Accounts as of the Closing Date, Office Loans as of the Closing Date, and cash transactions which took place on the Closing Date or which took place prior to the Closing Date but which were not reflected in the Preliminary Closing Statement, and shall execute the Final Settlement Statement in substantially the form set forth in Schedule Q attached. In addition, prorations of prepaid and deferred income and expenses that cannot be reasonably calculated at the Closing shall be settled and paid based on actual amounts and calculations as soon as possible after the Closing. 6.5 Availability of Closing Documents. The documents proposed to be used and delivered at the Closing shall be made available for examination by the respective parties not later than 12:00 noon, Ohio time, on the tenth Business Day prior to the Closing Date. 6.6 Effectiveness of Closing. Upon the satisfactory completion of the Closing, which does not include and shall not require completion of the adjustment and proration arrangements set forth in Section 6.4, the Acquisition shall be deemed to be effective and the Closing shall be deemed to have occurred. 7. CERTAIN TRANSITIONAL MATTERS. 7.1 Transitional Action by BUYER. After the Closing, unless another time is otherwise indicated: (a) BUYER shall: (i) pay in accordance with the law and customary banking practices and applicable Deposit Account contract terms, all properly drawn and presented checks, negotiable orders of withdrawal, drafts, debits, and withdrawal orders presented to BUYER by mail, over the counter, through electronic media, or through the check clearing system of the banking industry, by depositors of the Deposit Accounts assumed by BUYER hereunder, whether drawn on checks, negotiable orders or withdrawal, drafts, or withdrawal order forms provided by BUYER or BANK ONE; and (ii) in all other respects discharge, in the usual course of the banking business, the duties and obligations of BANK ONE with respect to the balances due and owing to the depositors whose Deposit Accounts are assumed by BUYER hereunder; provided, however, that any obligations of BUYER pursuant to this Section 7.1 to honor checks, negotiable orders of withdrawal, drafts, and withdrawal orders on forms provided by BANK ONE and carrying its imprint (including its name and transit routing number) shall not apply to any checks, drafts, withdrawal orders, or returned items (i) presented to BUYER more than one hundred eighty (180) days following the Closing Date, or (ii) on which a stop payment has been requested by the deposit customer. BUYER shall submit and file any required reports on IRS Form 1099 with respect to interest accrued on Deposit Liabilities after the Closing Date. The provisions of this subsection 7.1(a) shall in no way limit BUYER's duties or obligations arising under Section 1.3(b) hereof. (b) BUYER shall, not earlier than the time of procurement of all regulatory approvals required for consummation of the transaction contemplated by this Agreement nor later than ten days prior to the Closing Date, notify all depositors of the Offices by letter, acceptable to BANK ONE, produced in, if appropriate, several similar, but different forms calculated to provide necessary and specific information to the owners of particular types of accounts, of BUYER's pending assumption of the Deposit Liabilities hereunder, and, in appropriate instances, notify depositors that on and after the Closing Date certain BANK ONE deposit-related services and/or BANK ONE's debit card and automatic teller machine services impacted by the transactions contemplated by this Agreement, will be terminated. As an enclosure to such notices, BUYER may furnish appropriate depositors with brochures, forms and other written materials related or necessary to the assumption of the Deposit Accounts by BUYER and the conversion of said accounts to BUYER accounts, including the provision of checks to appropriate depositors using the forms of BUYER with instructions to such depositors to utilize such BUYER checks on and after the Closing Date and thereafter to destroy any unused checks on BANK ONE's forms. The expenses of the printing, processing and mailing of such letter notices and providing new BUYER checks and other forms and written materials to appropriate customers shall be borne by BUYER. Before Closing, except as provided in this paragraph, BUYER will not contact BANK ONE's customers except as may occur in connection with advertising or solicitations directed to the public generally or in the course of obtaining the requisite regulatory approvals of the transaction. Anything to the contrary herein notwithstanding, BUYER shall provide, at no cost to BANK ONE, any and all notices, communications, and filings which may be required by law, regulation, or otherwise, relating to any changes in terms and other matters relating to the Deposit Accounts and the Office Loans occurring subsequent to the Closing Date. Any and all such notices, communications, and filings which may be required to be provided prior to the Closing Date shall be submitted on a timely basis for review by BANK ONE and shall be subject to the written approval of BANK ONE prior to delivery to any third party. BUYER shall provide, at its sole cost and expense and at no cost or expense to BANK ONE, that any and all customer and other notices, communications, and filings provided by BUYER hereunder, including the substance and timing of same, fully comply with the requirements of applicable law and regulation. (c) BUYER shall promptly pay to BANK ONE an amount equivalent to the amount of any checks, negotiable orders of withdrawal, drafts, withdrawal orders, or returned items (net of the applicable Acquisition Consideration paid by BUYER with respect to the Deposit Liabilities represented by any such instrument) credited as of the close of business on the Closing Date to a Deposit Account assumed by BUYER hereunder which are returned uncollected to BANK ONE after the Closing Date. The foregoing shall include an amount equivalent to holds placed upon such deposit account for items cashed by BANK ONE as of the close of business on the Closing Date. (d) All tasks and obligations concerning the provision of data processing services to or for the Offices after the Closing, other than those specifically set forth in, and to the extent assumed by BANK ONE pursuant to, Section 7.2(b) herein, if any, are the sole and exclusive responsibility of, and shall be performed solely and exclusively by, BUYER. (e) BUYER shall, not later than the close of business on the business day immediately following the Closing Date, supply suitable government-backed securities as security for any deposits of governmental units included among the Deposit Liabilities for which BANK ONE had provided similar security. (f) BUYER shall, as soon as practicable but not more than 10 business days after the Closing Date, prepare and transmit at BUYER's expense to each of the obligors on Office Loans transferred to BUYER pursuant to this Agreement a notice to the effect that the loan has been transferred and directing that payment be made to BUYER at the address specified by BUYER, with BUYER's name as payee on any checks or other instruments used to make payments, and, with respect to such loan on which a payment notice or coupon book has been issued, to issue a new notice or coupon book reflecting the name and an address of BUYER as the person to whom and place at which payments are to be made. BUYER shall submit and file any required reports on IRS Form 1098 with respect to interest collected on Office Loans for the full calendar year in which the Closing Date occurs including interest collected during the period prior to the Closing Date. (g) If the balance due on any Office Loan transferred to BUYER pursuant to this Agreement has been reduced by BANK ONE as a result of a payment by check or draft received prior to the close of business on the Closing Date, which item is returned unpaid to BANK ONE after the day immediately preceding the Closing Date, the asset value represented by the loan transferred shall be correspondingly increased and an amount in cash equal to such increase shall be promptly paid by BUYER to BANK ONE. (h) BUYER shall use its best efforts to cooperate with BANK ONE in assuring an orderly transition of ownership of the Assets and responsibility for the liabilities, including the Deposit Liabilities, assumed by BUYER hereunder. (i) BUYER hereby grants to BANK ONE and its contractors access to the Offices until 8:00 A.M. local time on the day following the Closing Date or such other later date and time as the parties may agree, at no cost or expense to BANK ONE, for conduct of activities consistent with this Agreement in conjunction with the transactions contemplated hereby. (j) The duties and obligations of Buyer in this section 7.1 shall survive the Closing. 7.2 Transitional Actions by BANK ONE. After the Closing, unless another time is otherwise indicated: (a) BANK ONE shall use its best efforts to cooperate with BUYER in assuring an orderly transition of ownership of the Assets and responsibility for the liabilities, including the Deposit Liabilities, assumed by BUYER hereunder. BANK ONE shall provide final statements as of the Closing Date, in conjunction with appropriate Deposit Liabilities, with interest and service charges pro-rated to close of business on the Closing Date. BANK ONE shall submit and file any required reports on IRS Form 1099 with respect to interest paid on Deposit Liabilities through the Closing Date. BANK ONE shall provide to BUYER information regarding interest collected on Office Loans during the calendar year in which the Closing Date occurs, up to and including the Closing Date. (b) BANK ONE's sole and exclusive responsibilities concerning the provision of data processing services to or for the Deposit Accounts of the Offices after the Closing Date, if any, shall be as set forth in this Section 7.2(b). As soon as practicable following the date of this Agreement, BANK ONE shall provide BUYER with applicable product functions and specifications relating to the data processing support required for the Deposit Accounts, Office Loans, and safe deposit business (if such data processing support currently is provided with respect to such business) maintained at the Offices (such Deposit Accounts, Office Loans and safe deposit business, if applicable, hereinafter called the "Accounts"). As soon as practicable following the date of this Agreement, BANK ONE shall provide to BUYER file formats relating to the Accounts and up to three (3) sets of test tapes related to the Accounts in generic form which are machine readable on IBM (or IBM compatible) equipment or which shall be on eighteen track 3480 cartridges (non-compressed data) or on nine channel 6250 B.P.I. EBCDIC formatted tape. By not later than 3:00 P.M. local Columbus, Ohio, time on the day immediately following the Closing Date, BANK ONE shall make the foregoing documents and materials available for pick-up by BUYER at Columbus, Ohio. BUYER shall review and analyze such materials including, but not limited to, the file formats and tapes, and shall advise BANK ONE in writing of any defects or concerns relating thereto not later than 10 business days following receipt thereof. (c) Prior to the Closing Date, BANK ONE shall cooperate with BUYER, at BUYER's expense and at no expense to BANK ONE, in making Transferred Employees available at reasonable times for whatever program of training BUYER deems advisable; provided, however, that BUYER shall conduct such training program in a manner that does not materially interfere with or prevent the performance of the normal duties and activities of such Transferred Employees. BUYER shall make request of BANK ONE for training opportunities prior to the Closing Date, and shall reimburse BANK ONE at the Closing for any and all costs relating to such training including, but not limited to, regular and overtime salary for Transferred Employees involved in training for the period of such training, travel costs, and all expenses incurred by BANK ONE or such Transferred Employees in conjunction with the training. Such requests, which shall specify the time, duration and place of such training, must be approved by BANK ONE. (d) BANK ONE shall cooperate with BUYER, at no expense to BANK ONE, to make provision for the installation of teller and platform equipment in the Offices subject to approval by BANK ONE; provided, however, that BUYER shall arrange for the installation and placement of such equipment at such times and in a manner that does not significantly interfere with the normal business activities and operation of BANK ONE or the Offices. (e) BANK ONE shall resign as custodian of each IRA account maintained at the Offices and assign the custodianship of such accounts to BUYER upon Closing subject to receipt of applicable customer consents and other provisions of this Agreement including the provisions of section 8.10 hereof. (f) BANK ONE shall terminate its ATM/debit card service effective as of close of business on the business day preceding the Closing Date or such other date and time as BANK ONE and BUYER may agree. Such terminations will be preceded by the notice described in Section 7.1(b) herein. BANK ONE shall have no obligation with respect to conversion or change over with respect to direct deposit or payroll and retirement payments service relating to the Deposit Accounts following the Closing and, further, BUYER shall assume all responsibility and liability with respect thereto following the Closing. BANK ONE will continue to redirect and/or pass through relevant ACH transactions on Deposit Accounts for a period of ninety (90) days following the Closing Date. (g) As of the opening of business on the first business day after the Closing Date, BANK ONE and BUYER shall provide the appropriate Federal Reserve Bank (the "FRB") with all information necessary in order to expedite the clearing and sorting of all checks, drafts, instruments and other commercial paper relative to the Deposit Liabilities and/or the Office Loans (hereinafter collectively referred to as "Paper Items"). BUYER shall bear all charges and costs imposed by the Federal Reserve in connection with the reassignment of account number ranges for sorting the Paper Items. In the event the Federal Reserve and/or any other regional or local clearinghouse for negotiable instruments fails, refuses or is unable to direct sort such Paper Items for delivery to BUYER with the result that such Paper Items are presented to BANK ONE, by not later than 3:00 p.m. local time on each business day following the Closing and continuing for ninety (90) days after the Closing, BANK ONE will make available to BUYER for pick up from BANK ONE's offices or the offices of BANK ONE's agent and/or processor at Indianapolis, Indiana, all of the Paper Items which are received by BANK ONE from the FRB and/or any regional or local clearinghouse during the morning of each such business day on an "as-received basis." At the same time BANK ONE shall also make available to BUYER information and records, including but not limited to systems printouts, concerning such Paper Items and concerning incoming Automated Clearing House items ("ACH items") as well as outstanding Automatic Teller Machine ("ATM") transactions. Such information and records, including but not limited to systems printouts, will utilize the most recent account number designated by BANK ONE for each of the Deposit Accounts and/or the Office Loans. BUYER shall initiate appropriate Notification of Change requests relating to appropriate routing matters at the sole expense of BUYER within 30 days following the Closing Date. Each business day BANK ONE will endeavor to see that the sum of (a) the actual Paper Items provided to BUYER plus (b) all ACH items and ATM transactions captured by BANK ONE in its information and records balance with the sum of (c) the information and records, including but not limited to systems printouts, provided by BANK ONE relative to the Paper Items plus (d) the information and records, including but not limited to systems printouts, provided relative to the ACH items and ATM transactions affecting the Deposit Accounts and/or the Office Loans. Except as otherwise expressly provided herein, BANK ONE shall provide the foregoing at no charge to BUYER for a period not to exceed thirty (30) days from the Closing Date except that BUYER shall pay any charges assessed to BANK ONE by the FRB, a national or local clearinghouse and/or BANK ONE's agent and/or processor to the extent such assessments relate to the Deposit Accounts. BUYER shall be responsible for pick up of the data to be provided by BANK ONE and shall compensate BANK ONE for activity subsequent to the referenced 30 day period as follows; $50.00 per day and $.25 per item for days 31 through 60, and $100.00 per day and $.50 per item for days 61 through 90. Any request for extension of the 90 day period shall be submitted in writing by BUYER to BANK ONE not later than 10 business days prior to the expiration of such 90 day period or any extensions thereof and shall be subject to approval by BANK ONE at its sole discretion. Fees for activity subsequent to the 90 day period shall be as determined by BANK ONE. Fees for activity subsequent to the initial 30 day period shall be assessed on a daily basis and included in the daily cash settlement. Except as otherwise expressly provided herein, BUYER shall be responsible for processing any and all ACH returns, received subsequent to the Closing, directly through the appropriate Federal Reserve Bank. BANK ONE and BUYER shall arrange for appropriate daily settlement between the parties in order that the transmission of all monies associated with the matters set forth in this Section 7.2(g) might be effected promptly. BANK ONE shall not be liable to BUYER for any failure to provide the data required by this Section 7.2(g) to the extent any such failure results from causes beyond BANK ONE's control including war, strike or other labor disputes, acts of God, errors or failures of the FRB, and/or a participating regional or local clearinghouse, or equipment failure or other emergency wherein BANK ONE and/or its agent processor has been unable to process inclearings from the FRB or such clearinghouse. (h) BANK ONE shall, not earlier than the time of procurement of all regulatory approvals required for consummation of the transaction contemplated by this Agreement nor later than twenty days prior to the Closing Date, notify all depositors of the Offices and all borrowers of any Office Loan by letter acceptable to BUYER, produced in, if appropriate, several similar, but different forms calculated to provide necessary and specific information to the owners of particular types of accounts and/or loans, of BUYER's pending assumption of the Deposit Liabilities and acquisition of the Office Loans hereunder, and, in appropriate instances, notify depositors that on and after the Closing Date certain BANK ONE deposit-related services and/or BANK ONE's debit card and automatic teller machine services, will be terminated. The expenses of the printing, processing and mailing of such letter notices shall be borne by BANK ONE. Anything to the contrary herein notwithstanding, nothing in this Agreement shall be deemed to constitute an assumption by BANK ONE of the duties and obligations of BUYER with respect to the provision of applicable notices, communications, and filings relating to changes in the terms of any Deposit Accounts or Office Loans as set forth in this Agreement. (i) For a period of sixty (60) days after the Closing Date, BANK ONE will forward to BUYER, within two (2) business days of receipt, loan payments received by BANK ONE with respect to the Office Loans. BUYER will forward, within two (2) business days of receipt payments received by BUYER with respect to any loans not assigned to BUYER under this Agreement. BUYER and BANK ONE further agree to refer customers to the offices of the other when such customers present payments over the counter to the party not holding their respective loan. BUYER shall reimburse BANK ONE within 30 days of notice by BANK ONE to BUYER for any payments tendered by borrowers which were credited to the outstanding balance of any Office Loan prior to the Closing Date and which are subsequently returned or otherwise withdrawn for any reason and BANK ONE shall assign to BUYER any rights of BANK ONE to recovery of such payments as against the relevant borrower. (j) BANK ONE shall forward notice to appropriate carriers for single premium prepaid life and A&H/Disability insurance related to the Office Loans (the "Insured Office Loans" herein) of BUYER's acquisition of the Insured Office Loans within thirty (30) days following the Closing Date. Such notice shall identify BUYER as the new obligee of the Insured Office Loans and shall direct the insurance carriers to forward any premium refunds otherwise payable to BANK ONE with respect to the Insured Office Loans following the Closing (the "Premium Refunds" herein) to BUYER. In the event that, following the Closing, any such Insured Office Loans are paid in full prior to maturity and BUYER receives a Premium Refund, BUYER shall credit the account of such Insured Office Loan customer with the appropriate portion of any such Premium Refund. The Premium Settlement Payment by BANK ONE shall constitute the only obligation of BANK ONE to BUYER with respect to matters pertaining to Premium Refunds, and BUYER shall be responsible for any and all payments or credits due or owing the Insured Office Loan customers with respect to payment in full of the Insured Office Loans prior to maturity. The Premium Settlement Payment defined in Section 1.04(d) herein shall be calculated as of the Closing Date and based upon BANK ONE's average commission rate of 35% and average early payoff experience of 30% on loans with such insurance coverage. In the event that an Insured Office Loan is put back to BANK ONE under the terms of Schedule S of this Agreement BUYER shall, at the time of such put back, pay to BANK ONE the amount of the Premium Settlement Payment attributable to such Insured Office Loan. (k) The duties and obligations of the parties in this section 7.2 shall survive the Closing. 7.3 Overdrafts and Transitional Action. Overdrafts on the Deposit Accounts will be the responsibility and risk of BUYER. 7.4 ATMs and Debit Cards. (a) BANK ONE shall provide to BUYER no later than sixty (60) days prior to the Closing Date, a test tape, along with a file format or file layout and a production tape thirty (30) days before the Closing Date, containing customer name, card number, withdrawal limits, the Deposit Accounts activated by, accessible to or committed to such cards issue dates and/or open dates, last transaction dates, and expiration dates as to all ATM and debit cards issued to customers of the BANK ONE Offices, and shall notify the appropriate processor to deactivate the operation of the BANK ONE ATM and debit cards completely or to deactivate or disconnect the Deposit Accounts from such BANK ONE ATM and debit cards no later than the business day cutoff on the date prior to the Closing Date so that all activity generated by the BANK ONE ATM and debit cards shall have settled prior to the Closing Date. All transactions and activity related to the BANK ONE ATM and debit cards following the Closing Date which are received or forwarded to BANK ONE will be accepted and forwarded by BANK ONE to BUYER along with all corresponding funds. BANK ONE thereafter agrees to immediately notify its processor to deactivate such ATM and debit cards and to forward all transactions related thereto directly to BUYER. (b) BANK ONE agrees to deactivate the ATMs located at the Offices on or before the business day cutoff on the day prior to the Closing Date. Thereafter, BUYER shall reconfigure the ATMs to its standards for activation after the business day cutoff on the Closing Date. (c) BUYER and BANK ONE agree to cooperate with each other to assure that all transactions originated through the ATM or originated with the ATM Cards prior to or on the Closing Date shall be for the account of BANK ONE and all transactions originated after the Closing Date shall be for the account of BUYER. A post closing adjustment shall be made in the manner set forth in Section 6.4 hereof to reflect all such transactions which cannot be reasonably calculated as of the Closing. 7.5 Environmental Matters. (a) BANK ONE has provided to BUYER, and BUYER hereby acknowledges receipt of, copies of Phase I environmental site assessments (the "Phase I Assessments" herein) for all Owned Real Estate. (b) If such Phase I Assessments reasonably indicated the necessity or desirability of further investigation to determine whether or not an Environmental Hazard exists at such Owned Real Estate, BUYER shall notify BANK ONE in writing, not later than ten (10) days after the signing of this Agreement, of BUYER's desire to have an environmental consultant selected by BANK ONE (the "Environmental Consultant"), to the extent reasonable and appropriate, conduct Phase II environmental site assessments ( the "Phase II Assessments" herein). Any such further investigation or testing shall be conducted in such a manner so as not to interfere with the normal operation of the Office(s) involved. All such Phase II Assessments shall be treated as information subject to Section 8.01 of this Agreement, shall be completed not less than thirty (30) days after the signing of this Agreement, and shall be conducted at no cost or expense to BANK ONE. Further, BUYER shall indemnify and hold harmless BANK ONE and its affiliates and its and their employees, officers, directors, agents, tenants, and landlords from and against any and all liability, loss, cost, and expense, however arising, including attorney fees, as a direct or indirect result of any injuries to persons or property occurring in conjunction with conduct of the Phase II Assessments. (c) BANK ONE shall have a period of 10 business days from receipt of such notice to elect, at its sole option, to consent to conduct of the Phase II Assessment or to terminate this Agreement with respect to the relevant Office which is the proposed subject of the Phase II Assessment (the "Removed Office") and any and all assets and liabilities associated therewith. In the event of such termination, if the Removed Office is the only Office which is the subject of this Agreement this Agreement shall be deemed terminated in accordance with Section 9.1 herein and the Deposit described in Section 10.15 shall be refunded to BUYER. In the event of such termination where the Removed Office is not the only Office which is the subject of this Agreement, this Agreement shall remain in full force and effect except that the Removed Office and any and all assets and liabilities associated therewith shall be deemed not the subject of this Agreement and eliminated therefrom. (d) In the event that the Phase II Assessment is conducted and the Environmental Consultant discovers an Environmental Hazard during any such Phase II Assessment at any single parcel of Owned Real Estate, the remediation of which, in the reasonable judgment of the Environmental Consultant, is or would be the responsibility of BANK ONE, or BUYER should it acquire such Owned Real Estate, and will result in projected remediation costs of $100,000 or more for such single parcel of Owned Real Estate, BUYER shall lease from BANK ONE such single parcel of Owned Real Estate pursuant to a Lease Agreement which shall provide as follows: (i) Such Lease Agreement shall be for a term of two(2) years from the Closing Date, with no obligation or right to renew (it being the intention of BANK ONE that BUYER locate an alternative branch site during such two years unless remediation occurs pursuant to this Section 7.5), at a rental equal to a fair market rental value; (ii) BANK ONE may sell such Owned Real Estate to any person at any time during the term of such Lease Agreement, subject to such Lease Agreement, for a price; (iii) During the term of such Lease Agreement, in the event that BANK ONE shall deliver to BUYER a report of a qualified environmental engineer or consultant certifying that the Environmental Hazard, at or on any such parcel of Owned Real Estate which is the subject of the Lease Agreement, has been remediated to the extent reasonably required under applicable Environmental Laws, BUYER shall be required to purchase such parcel of Owned Real Estate at the net book value as of the close of business of the month-end day most recently preceding the Closing Date; and (iv) Other terms and conditions of the Lease Agreement shall be typical to branch leases in the relevant market of the subject Owned Real Estate and as negotiated between BANK ONE and BUYER. If the projected remediation cost is less than $100,000 for any single parcel of Owned Real Estate, BUYER shall acquire such parcel and such cost shall be borne by BUYER without indemnity, price adjustment, or set off under this Agreement, and BUYER shall be deemed to have waived any and all claims against BANK ONE and its affiliates and its and their officers, directors, employees, or arising directly or indirectly as a result of the Environmental Hazards. (e) BUYER agrees that it and the Environmental Consultant shall conduct any Phase II Assessments or other investigations pursuant to this Section with reasonable care and subject to customary practices among environmental consultants and engineers, including, without limitation, following completion thereof, the restoration of any site to the extent practicable to its condition prior to such site assessment or investigation and the removal of all monitoring wells. (f) Any lease of a parcel of Owned Real Estate pursuant to this Section 7.5 shall in no way affect the transfer of any related assets or liabilities, other than such parcel of Owned Real Estate, to the BUYER at the Closing. (g) For purposes of this Section 7.5, the term "Environmental Law" shall mean any Federal or state law, statute, rule, regulation, code, order, judgment, decree, injunction, or agreement with any Federal or state governmental authority, (x) relating to the protection, preservation, or restoration of the environment (including, without limitation, air, water, vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource) or to human health or safety or (y) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of hazardous substances, in each case as amended and now in effect. Environmental Laws include, without limitation, the Clean Air Act (42 U.S.C. section 7401 et seq.); the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. section 9601 et seq.); the Federal Water Pollution Control Act (33 U.S.C. section 1251 et seq.); the Occupational Safety and Health Act (29 U.S.C. section 651 et seq.); provided, however, that the definition of "Environmental Law" shall not include any Federal or state law, statute, rule, regulation, code, order, judgment, decree, injunction or agreement with any governmental authority relating to asbestos or asbestos-containing materials. (h) For purposes of this Section 7.5, the term "Environmental Hazard" shall mean the presence of any Hazardous Substance in violation of, and reasonably likely to require material remediation costs under, applicable Environmental Laws; provided, however, that the definition of Environmental Hazard shall not include asbestos and asbestos-containing materials. (i) For purposes of this Section 7.5, the term "Hazardous Substance" shall mean any substance, whether liquid, solid, or gas, (a) listed, identified or designated as hazardous or toxic to a level which requires remediation under any Environmental Law; (b) which, applying criteria specified in any Environmental Law, is hazardous or toxic; or (c) the use or disposal of which is regulated under Environmental Law. 7.6 Effect of Transitional Action. Except as and to the extent expressly set forth in this Article 7, nothing contained in this Article 7 shall be construed to be an abridgment or nullification of the rights, customs and established practices under applicable banking laws and regulations as they affect any of the matters addressed in this Article 7. 8. GENERAL COVENANTS AND INDEMNIFICATION. 8.1 Confidentiality Obligations of BUYER. From and after the date hereof, BUYER and its affiliates and parent company shall treat all information received from BANK ONE concerning the business, assets, operations, and financial condition of BANK ONE and its affiliates and its and their customers (including without limitation the Offices), as confidential, unless and to the extent that BUYER can demonstrate that such information was already known to BUYER and its affiliates, if any, or in the public domain or received from a third person not known by BUYER to be under any obligation to BANK ONE; and BUYER shall not use any such information (so required to be treated as confidential) for any purpose except in furtherance of the transactions contemplated hereby. Upon the termination of this Agreement, BUYER shall, and shall cause its affiliates, if any, to, promptly return all documents and workpapers containing, and all copies of, any such information (so required to be treated as confidential) received from or on behalf of BANK ONE in connection with the transactions contemplated hereby. The covenants of BUYER contained in this Section 8.1 are of the essence and shall survive any termination of this Agreement, but shall terminate at the Closing, if it occurs, with respect to any information that is limited solely to the activities and transactions of the Offices; provided, however, that neither BUYER nor any of its affiliates shall be deemed to have violated the covenants set forth in this Section 8.1 if BUYER shall in good faith disclose any of such confidential information in compliance with any legal process, order or decree issued by any court or agency of government of competent jurisdiction. It is expressly acknowledged by BANK ONE that all information provided to BUYER related to this purchase and assumption transaction may be provided to BUYER's affiliates as necessary for the purpose of consummating the transaction which is the subject of this Agreement. The covenants and obligations of BUYER hereunder shall survive the Closing and any earlier termination of this Agreement. 8.2 Confidentiality Obligations of BANK ONE. From and after the date hereof, BANK ONE, its affiliates and its parent corporation shall treat all information received from BUYER concerning BUYER's business, assets, operations, and financial condition as confidential, unless and to the extent BANK ONE can demonstrate that such information was already known to BANK ONE or its affiliates or in the public domain, and BANK ONE shall not use any such information (so required to be treated as confidential) for any purpose except in furtherance of the transactions contemplated hereby. Upon the termination of this Agreement, BANK ONE shall promptly return all documents and workpapers containing, and all copies of, any such information (so required to be treated as confidential) received from or on behalf of BUYER in connection with the transactions contemplated hereby. The covenants of BANK ONE contained in this Section 8.2 are of the essence and shall survive any termination of this Agreement; provided, however, that BANK ONE nor any of its affiliates shall be deemed to have violated the covenants set forth in this Section 8.2 if BANK ONE shall in good faith disclose any of such confidential information in compliance with any legal process, order or decree issued by any court or agency of government of competent jurisdiction. It is expressly acknowledged by BUYER that all information provided to BANK ONE related to this purchase and assumption transaction may be provided to BANK ONE CORPORATION and BANK ONE's affiliates for the purpose of consummating the transaction which is the subject of this Agreement. The covenants and obligations of BANK ONE hereunder shall survive the Closing and any earlier termination of this Agreement. 8.3 Indemnification by BANK ONE. From and after the Closing Date, BANK ONE shall indemnify, hold harmless, and defend BUYER from and against all losses and liabilities, including reasonable attorneys' fees and expenses, arising out of any actions, suits, or proceedings commenced prior to the Closing (other than proceedings to prevent or limit the consummation of the Acquisition) relating to operations at the Offices and/or the Deposit Liabilities of the Offices; and BANK ONE shall further indemnify, hold harmless, and defend BUYER from and against all losses and liabilities, including reasonable attorneys' fees and expenses, arising out of any actions, suits, or proceedings commenced on or after the Closing to the extent the same relate to operations at the Offices and/or the Deposit Liabilities prior to the Closing. The obligations of BANK ONE under this Section 8.3 shall be contingent upon BUYER giving BANK ONE written notice (i) of receipt by BUYER of any process and/or pleadings in or relating to any actions, suits, or proceedings of the kinds described in this Section 8.3, including copies thereof, and (ii) of the assertion of any claim or demand relating to the operation of the Offices and/or the Deposit Liabilities or Office Loans prior to the Closing, including, to the extent known to BUYER, the identity of the person(s) or entity(ies) asserting such claim or making such demand and the nature thereof, and including copies of any correspondence or other writings relating thereto. The rights of BUYER under this section shall not apply to any suits, judgments, demands, set-offs, or other claims arising directly or indirectly in conjunction with the Office Loans or other Assets transferred in accordance with this Agreement except claims for personal injury arising from injuries occurring at the Offices prior to the Closing. All notices required by the preceding sentence shall be given within fifteen days of the receipt by BUYER of any such process or pleadings or any oral or written notice of the assertion of any such claims or demands. BANK ONE shall have the right to take over BUYER's defense in any such actions, suits, or proceedings through counsel selected by BANK ONE, to compromise and/or settle the same and to prosecute any available appeals or reviews of any adverse judgment or ruling that may be entered therein. The covenants and obligations of BANK ONE hereunder shall survive the Closing and any earlier termination of this Agreement. 8.4 Indemnification by BUYER. From and after the Closing Date, BUYER shall indemnify, hold harmless and defend BANK ONE from and against all claims, losses, liabilities, demands and obligations, including without limitation reasonable attorneys' fees and operating expenses which BANK ONE may receive, suffer, or incur in connection with (i) any losses incurred by BANK ONE related to BANK ONE's compliance with instructions from BUYER made pursuant to Section 7.4 of this Agreement and not related to any negligence or malfeasance on the part of BANK ONE and (ii) operations and transactions occurring after the Closing and which involve the Assets transferred, the Deposit Liabilities or Office Loans and the other obligations and liabilities assumed pursuant to this Agreement. The obligations of BUYER under this Section 8.4 shall be contingent upon BANK ONE giving BUYER written notice (i) of the receipt by BANK ONE of any process and/or pleadings in or relating to any actions, suits or proceedings of the kinds described in this Section 8.4, including copies thereof, and (ii) of the assertion of any claim or demand relating to the Assets transferred to and/or the Deposit Liabilities or Office Loans and the other obligations and liabilities assumed by BUYER on or after the Closing, including, to the extent known to BANK ONE, the identity of the person(s) or entity(ies) asserting such claim or making such demand and the nature thereof, and including copies of any correspondence or other writings relating thereto. All notices required by the preceding sentence shall be given within fifteen (15) days of the receipt by BANK ONE of any such process or pleadings or any oral or written notice of the assertion of any such claims or demands. BUYER shall have the right to take over BANK ONE's defense in any such actions, suits, or proceedings through counsel selected by BUYER, to compromise and/or settle the same and to prosecute any available appeals or review of any adverse judgment or ruling that may be entered therein. The covenants and obligations of BUYER hereunder shall survive the Closing and any earlier termination of this Agreement. 8.5 Solicitation of Customers by BUYER Prior to Closing. At any time prior to the Closing Date, BUYER will not, and will not permit any of its affiliates, if any, to conduct any marketing, media or customer solicitation campaign which is targeted to induce customers whose Deposit Account liabilities are to be assumed or Office Loans are to be acquired by BUYER pursuant to this Agreement to discontinue their account or business relationships with BANK ONE or its affiliates. Additionally, at any time prior to the Closing, BUYER shall not, with respect to its offices in the same market as the Offices, offer to pay on any transaction accounts or any new or renewal savings accounts or certificates of deposits, rates of interest greater than those offered or then being paid on similar accounts for like term and amount by other offices of BUYER located in the referenced market. Among other matters, it is the intent of this provision to prevent BUYER from paying or offering to pay a rate of interest on any deposit accounts in excess of that rate paid for like accounts at other offices of BUYER within the market of the Offices prior to execution of this Agreement. 8.6 Solicitation of Customers by BANK ONE After the Closing. From the date of this Agreement and for one (1) year following the Closing Date, BANK ONE will not knowingly directly solicit a) deposit accounts from customers whose Deposit Liabilities and/or Office Loans are assumed or acquired by BUYER pursuant to this Agreement, or b) refinancing of Office Loans from borrowers whose Office Loans are being acquired by BUYER hereunder, except as may occur in connection with (i) advertising or solicitations directed to the public generally, (ii) solicitations outside the designated market area of the Offices and (iii) customers or borrowers with a banking or other relationship with BANK ONE or its affiliates at offices other than the Offices, or who have or maintain more than one place of business. The covenants and obligations of BANK ONE hereunder shall survive the Closing. 8.7 Further Assurances. From and after the date hereof, each party hereto agrees to execute and deliver such instruments and to take such other actions as the other party hereto may reasonably request in order to carry out and implement this Agreement. Without limiting the foregoing, BANK ONE agrees to execute and deliver such deeds, bills of sale, acknowledgments, and other instruments of conveyance and transfer as, in the reasonable judgment of BUYER, shall be necessary and appropriate to vest in BUYER the legal and equitable title to the Assets of BANK ONE being conveyed to BUYER hereunder. Further, BUYER, at its sole cost and expense, shall prepare and shall file, or shall cause to be prepared and filed, with any appropriate third parties, any and all documents and notices which are necessary and proper to transfer to BUYER any security interests and other rights of BANK ONE in and to collateral securing the Office Loans not later than the earlier to occur of exclusion of the relevant Office Loan from the "put" provisions set forth in Schedule S hereof or the Option Exercise Date as defined in Schedule S hereof. BANK ONE shall cooperate with BUYER in executing any necessary and proper documents and notices as may be appropriate in furtherance of the foregoing covenant and consistent with the terms of this Agreement provided, however, that nothing contained herein shall relieve BUYER of its obligations as set forth herein. The covenants and obligations of the parties hereunder shall survive the Closing. 8.8 Operation of the Offices. Except as otherwise expressly provided in this Agreement, after the Closing Date neither BANK ONE, its subsidiaries, affiliates or parent corporation shall be obligated to provide for any managerial, financial, business, or other services to the Offices, including without limitation any personnel, employee benefit, data processing, accounting, risk management, or other services or assistance that may have been provided to the Offices prior to the close of business on the Closing Date, and BUYER shall take such action as may in its judgment appear to be necessary or advisable to provide for the ongoing operation and management of, and the provision of services and assistance to, the Offices after the Closing Date. Upon the Closing, BUYER shall change the legal name of the Offices and, except for any documents or materials in possession of the customers of the Offices (including but not limited to deposit tickets and checks), shall not use and shall cause the Offices to cease using any signs, stationery, advertising, documents, or printed or written materials that refer to the Offices by any name that includes the words "BANK ONE" or "BANK ONE" or the name of any affiliate of BANK ONE CORPORATION. Preceding the Closing, BANK ONE shall cooperate with any reasonable requests of BUYER directed to obtaining specifications for the procurement of new signs of BUYER's choosing for installation by BUYER of new signs immediately following the close of business on the Closing Date; provided, however, that BUYER's receipt of all sign specifications shall be obtained by BUYER in a manner that does not significantly interfere with the normal business activities and operations of the Offices and shall be at the sole and exclusive expense of BUYER. As indicated in, and as limited by, Section 1.2(c), BANK ONE will retain its signs located at the Offices. If removed by BUYER in conjunction with its installation of new signs, BUYER shall obtain BANK ONE's approval for such removal and shall insure that said signs are removed without damage to same. It is understood by the parties hereto that, with the exception of the signs, all mounting facilities for the signs shall be considered as Fixed Assets for purposes of this Agreement. The covenants and obligations of the parties hereunder shall survive the Closing. 8.9 Information After Closing. For a period of seven (7) years following the Closing, upon written request of BANK ONE to BUYER or BUYER to BANK ONE, as the case may be, such requested party shall provide the requesting party with reasonable access to, or copies of, information and records relating to the Offices which are then in the possession or control of the requested party reasonably necessary to permit the requesting party or any of its subsidiaries or affiliates to comply with or contest any applicable legal, tax, banking, accounting, or regulatory policies or requirements, or any legal or regulatory proceeding thereunder or requests related to customer relationships at the Offices prior to Closing. In the event of any such requests, the requesting party shall reimburse the requested party for the reasonable costs of the requested party related to such request. The covenants and obligations of the parties hereunder shall survive the Closing. 8.10 Individual Retirement Accounts. All Individual Retirement Accounts related to the Offices that shall not have become IRAs by the close of business on the 30th day following the Closing shall not be assigned by BANK ONE to BUYER or assumed by BUYER. BANK ONE may thereafter, at its option, elect to retain such Individual Retirement Accounts, advise the account holders that it has withdrawn its resignation as custodian or transfer the amount in such Individual Retirement Accounts to the account holders. 8.11 Covenant Not to Compete. From and after the Closing and for a period of two (2) years following the Closing Date, BANK ONE shall not, and shall not enter into any agreement to, acquire, lease, purchase, own, operate or use any building, office or other facility or premises located within a three (3) mile radius of any Office for the purpose of operating a full service branch and making loans, accepting deposits or cashing checks; provided, however, that the foregoing prohibition shall not apply to: i) performance by BANK ONE or any current or future affiliate or successor of BANK ONE of any of the foregoing activities utilizing ATMs, CBCTs, ALMs, cash dispensing machines, remote service facilities, terminals, or similar devices, or through continued operation of existing offices, or ii) performance by BANK ONE or any current or future affiliate or successor of BANK ONE of the foregoing activities as a result of a merger or other combination with, or acquisition of or by, BANK ONE, BANK ONE CORPORATION, or an affiliate thereof with any third party following the Closing Date. The covenants and obligations of BANK ONE hereunder shall survive the Closing. 8.12 Non-solicitation of Employees. BUYER agrees that for a period of twelve (12) months from the date of this Agreement, or for a period of twelve (12) months from such date as this Agreement may be terminated pursuant to Section 9 hereof, neither BUYER nor any of its subsidiaries or affiliates will; (a) directly or indirectly solicit for employment or employ any persons who are employees in the retail group of BANK ONE CORPORATION, BANK ONE or their subsidiaries or affiliates on the date hereof or; (b) directly or indirectly solicit for employment or employ any other persons who are employees of BANK ONE CORPORATION, BANK ONE or their subsidiaries or affiliates on the date hereof and with whom BUYER has had contact or who became known to BUYER solely in conjunction with any phase of the transaction contemplated hereby, whether prior to execution of this Agreement or subsequent thereto. As used solely in this subsection 8.12(b), the term "solicit" shall not be deemed to include general advertisements or general solicitations that are not targeted or directed specifically to individuals who are employees of BANK ONE or its subsidiaries or affiliates. Subject to the prohibitions contained in subsection 8.12(a), nothing in this section 8.12(b) shall prohibit BUYER or BUYER's affiliates or subsidiaries from hiring a person covered by this subsection 8.12(b) who contacts BUYER on their own initiative (and not in response to solicitation by BUYER in violation of this section) or a person covered by this subsection 8.12(b) who is no longer in the employ of BANK ONE CORPORATION, BANK ONE or its subsidiaries or affiliates at the time of such solicitation. The covenants and obligations of BUYER hereunder shall survive the Closing or any earlier termination of this Agreement. 9. TERMINATION. 9.1 Termination by Mutual Agreement. This Agreement may be terminated and the transactions contemplated hereby may be abandoned by mutual consent of the parties authorized by a vote of a majority of the Board of Directors (or by the vote of the Executive Committee of such Board, if so empowered) of each of BANK ONE and BUYER. 9.2 Termination by BANK ONE. This Agreement may be terminated and the transactions contemplated hereby abandoned by a vote of a majority of the Board of Directors (or by the vote of the Executive Committee of such Board, if so empowered) of BANK ONE: (a) in the event of a material breach by BUYER of this Agreement; or (b) in the event any of the conditions precedent specified in Section 5.1 of this Agreement has not been met as of the date required by this Agreement and, if not so met, has not been waived by BANK ONE; or (c) in the event any regulatory approval for the consummation of the Acquisition is denied by the applicable regulatory authority or in the event that at any time prior to the Closing Date it shall become reasonably certain to BANK ONE, with the advice of counsel, that a regulatory approval required for consummation of the Acquisition will not be obtained within a time reasonably satisfactory to BANK ONE; or (d) on or after a date which is 180 calendar days following the date of this Agreement, (the "Termination Date") if the Closing has not then occurred unless the failure to consummate by such date is due to a breach of this Agreement by BANK ONE; or (e) at the option of BANK ONE in the event that BUYER enters into an agreement or agreements, or intends to enter into an agreement or agreements, providing for the merger, acquisition, or sale of substantially all of the assets of BUYER or its parent company such as would require prior regulatory approval under the Change in Bank Control Act, as amended, or the Bank Holding Company Act of 1956, as amended, or similar law or regulation. (f) at the option of BANK ONE in the event that there is a material adverse change in the financial condition or results of operation of BUYER, or pending or threatened litigation or claims with respect to the transactions contemplated by this Agreement which, in the opinion of BANK ONE, may hinder or delay the ability of the parties to consummate the transactions contemplated by this Agreement. (g) at the option of BANK ONE in the event that consents to the transactions contemplated by this Agreement from such third parties as BANK ONE may reasonably deem necessary or appropriate are not available prior to the Closing Date without additional cost or expense to BANK ONE, or in the event that releases of BANK ONE by such third parties as BANK ONE may reasonably deem necessary or appropriate are not available prior to the Closing Date without additional cost or expense to BANK ONE. 9.3 Termination by BUYER. This Agreement may be terminated and the transactions contemplated hereby abandoned by a vote of a majority of the Board of Directors (or by the vote of the Executive Committee of such Board, if so empowered) of BUYER: (a) in the event of a material breach by BANK ONE of this Agreement; or (b) in the event any of the conditions precedent specified in Section 5.2 of this Agreement has not been met as of the date required by this Agreement and, if not so met, has not been waived by BUYER; or in the event any regulatory approval required for consummation of the Acquisition is denied by the applicable regulatory authority or in the event that at any time prior to the Closing Date it shall become reasonably certain to BUYER, with the advice of counsel, that a regulatory approval required for consummation of the Acquisition will not be obtained; or (c) on or after the Termination Date if the Closing has not then occurred unless the failure to consummate by such time is due to a breach of this Agreement by BUYER. 9.4 Effect of Termination. The termination of this Agreement pursuant to Sections 9.2 or 9.3 of this Article 9 shall not release any party hereto from any liability or obligation to the other party hereto arising from (i) a breach of any provision of this Agreement occurring prior to the termination hereof or (ii) the failure of timely satisfaction of conditions precedent to the obligations of a party to the extent that such failure of timely satisfaction is attributable to the actions or inactions of such party. 10. MISCELLANEOUS PROVISIONS. 10.1 Expenses. Except as and to the extent specifically allocated otherwise herein, each of the parties hereto shall bear its own expenses, whether or not the transactions contemplated hereby are consummated. 10.2 Certificates. All statements contained in any certificate ("Certificate") delivered by or on behalf of BANK ONE or BUYER pursuant to this Agreement or in connection with the transactions contemplated hereby shall be deemed to be representations and warranties of the party delivering the Certificate hereunder. Each such Certificate shall be executed on behalf of the party delivering the Certificate by duly authorized officers of such party. 10.3 Termination of Representations and Warranties. The respective representations and warranties of BANK ONE and BUYER contained or referred to in this Agreement or in any Certificate, schedule, or other instrument delivered or to be delivered pursuant to this Agreement shall terminate at the Closing, except for: (a) those representations and warranties contained in any warranty deeds delivered by BANK ONE to BUYER at the Closing; (b) those representations and warranties contained in any bill of sale relating to the Assets delivered by BANK ONE to BUYER at Closing; (c) those representations and warranties contained in any instrument of assumption or in any Certificate in the forms of Schedule I and Schedule N, respectively, attached hereto and delivered by BUYER to BANK ONE at the Closing; (d) those representations and warranties contained in any Certificate in the form of Schedule K attached hereto, delivered by BANK ONE to BUYER at the Closing; and (e) those representations and warranties of BANK ONE contained in Section 3.1(o) of this Agreement. 10.4 Waivers. Each party hereto, by written instrument signed by duly authorized officers of such party, may extend the time for the performance of any of the obligations or other acts of the other party hereto and may waive, but only as affects the party signing such instrument: (a) any inaccuracies in the representations or warranties of the other party contained or referred to in this Agreement or in any document delivered pursuant hereto; (b) compliance with any of the covenants or agreements of the other party contained in this Agreement; (c) the performance (including performance to the satisfaction of a party or its counsel) by the other party of such of its obligations set out herein; and (d) satisfaction of any condition to the obligations of the waiving party pursuant to this Agreement. 10.5 Notices. All notices and other communications hereunder may be made by mail, hand-delivery or by courier service and notice shall be deemed to have been given when received; provided, however, if notices and other communications are made by nationally recognized overnight courier service for overnight delivery, such notice shall be deemed to have been given one business day after being forwarded to such a nationally recognized overnight courier service for overnight delivery. If to BANK ONE: Bank One Wisconsin 111 East Wisconsin Ave. Milwaukee, Wisconsin 53202 With a copy to: BANK ONE CORPORATION Attention: Jeffery E. Smith, Esq. 100 East Broad Street 18th Floor Columbus, Ohio 43271-0158 If to BUYER: Wisconsin Community Bank c/o Heartland Financial USA, Inc. 1398 Central Ave. Dubuque, Iowa 52004 Attention: Mr. John K. Schmidt With a copy to: Judith K. Muncy Barack Ferrazzano Kirschbaum Perlman & Nagelberg 333 West Wacker Drive, Suite 2700 Chicago, Illinois 60606 or such other person or address as any such party may designate by notice to the other parties, and shall be deemed to have been given as of the date received. 10.6 Parties in Interest: Assignment; Amendment. The rights and obligations of each individual banking association which is a party hereto shall be exclusively and individually binding upon, and shall inure exclusively and individually to the benefit of, that banking association and its respective permitted successors and assigns. Representations, warranties, and covenants of BANK ONE contained herein shall be deemed made by the appropriate respective banking association which is the owner of the respective asset or obligor of the respective liability related thereto and shall not be deemed made by or on behalf of any banking association for any other banking association. This Agreement is binding upon and is for the benefit of the parties hereto and their respective successors, legal representatives, and assigns, and no person who is not a party hereto (or a permitted successor or assignee of such party) shall have any rights or benefits under this Agreement, either as a third party beneficiary or otherwise. This Agreement cannot be assigned by BUYER by action of law or otherwise, and this Agreement cannot be amended or modified, except by a written agreement executed by the parties hereto or their respective permitted successors and assigns. 10.7 Headings. The headings, table of contents, and index to defined terms (if any) used in this Agreement are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. 10.8 Terminology. The specific terms of art that are defined in various provisions of this Agreement shall apply throughout this Agreement (including without limitation each schedule hereto), unless expressly indicated otherwise. In addition, the following terms and phrases shall have the meanings set forth for purposes of this Agreement (including such schedule): (a) The term "business day" shall mean any day other than a Saturday, Sunday, or a day on which either BANK ONE or BUYER is closed in accordance with applicable law or regulation. Any action, notice, or right which is to be taken or given or which is to be exercised or lapse on or by a given date which is not a business day may be taken, given, or exercised, and shall not lapse, until the next business day following. (b) The term "affiliate" shall mean, with respect to any person, any other person directly or indirectly controlling, controlled by or under common control with such person. (c) The term "Permitted Exceptions" shall mean, with respect to the Owned Real Estate and the Leased Real Estate, (i) those five standard exceptions appearing as Schedule B items in a standard ALTA owners or leasehold title insurance policy, and any other exceptions, restrictions, easements, rights of way, and encumbrances referenced in the Title Commitment delivered by BANK ONE to BUYER as indicated in Section 2.1(c) of this Agreement; (ii) statutory liens for current taxes or assessments not yet due, or if due not yet delinquent, or the validity of which is being contested in good faith by appropriate proceedings; (iii) such other liens, imperfections in title, charges, easements, restrictions, and encumbrances (but in all cases of Owned Real Estate excluding those which secure borrowed money) which, individually and in the aggregate, do not materially detract from the value of, or materially interfere with the present use of, any property subject thereto or affected thereby; and (iv) such other exceptions as are approved by BUYER in writing. (d) The term "person" shall mean any individual, corporation partnership, limited liability company, association, trust, or other entity, whether business, personal, or otherwise. (e) Unless expressly indicated otherwise in a particular context, the terms "herein," "hereunder," "hereto," "hereof," and similar references refer to this Agreement in its entirety and not to specific articles, sections, schedules, or subsections of this Agreement. Unless expressly indicated otherwise in a particular context, references in this Agreement to enumerated articles, sections, and subsections refer to designated portions of this Agreement (but do not refer to portions of any schedule unless such Schedule is specifically referenced) and do not refer to any other document. (f) The term "subsidiary" shall mean a corporation, partnership, limited liability company, joint venture, or other business organization more than 50% of the voting securities or interests in which are beneficially owned or controlled by the indicated parent of such entity. 10.9 Flexible Structure. References in this Agreement to federal or state laws or regulations, jurisdictions, or chartering or regulatory authorities shall be interpreted broadly to allow maximum flexibility in consummating the transactions contemplated hereby in light of changing business, economic, and regulatory conditions. Without limiting the foregoing, in the event BANK ONE and BUYER agree in writing to alter the legal structure of the Acquisition contemplated by this Agreement references in this Agreement to such laws, regulations, jurisdictions, and authorities shall be deemed to be altered to reflect the laws, regulations, jurisdictions, and authorities that are applicable in light of such change. 10.10 Press Releases. BANK ONE or BUYER, as the case may be, shall approve, in writing prior to issuance, the form and substance of any press release or other public disclosure relating to any matters relating to this Agreement issued by the other. Nothing contained herein shall restrict or prohibit BUYER or BANK ONE from issuance of press releases or public disclosures which, based on the advice of counsel, are required by applicable law or regulation and limited to information necessary for compliance with same. 10.11 Entire Agreement. This Agreement supersedes any and all oral or written agreements and understandings heretofore made relating to the subject matter hereof and contains the entire agreement of the parties relating to the subject matter hereof. All schedules, exhibits, and appendices to this Agreement are incorporated into this Agreement by reference and made a part hereof. 10.12 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Ohio and the laws of the United States, as well as regulations issued by relevant agencies thereof. 10.13 Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.14 Tax Matters. BUYER and BANK ONE agree that they will file applicable tax returns and other related schedules and documents related to their respective interests based on the allocations in this Agreement. 10.15 Good Faith Deposit. BUYER and BANK ONE acknowledge the deposit by BUYER of the sum of $75,000.00 for each Office which is the subject of this Agreement (in aggregate, the "Deposit" herein). BUYER agrees that BANK ONE may retain the Deposit in the event that BUYER fails to consummate the transactions contemplated herein by the date set forth in Section 9.2(d) herein through no material fault of BANK ONE, in the event that BANK ONE elects to terminate the transactions contemplated by this Agreement pursuant to the provisions of Section 9.2 herein, and/or in the event of a breach by BUYER of any of its duties and obligations hereunder. Any such retention shall not be deemed to constitute liquidated damages or a waiver by BANK ONE of any rights in law or in equity arising out of a breach by BUYER of the terms and conditions of this Agreement. Subject to the foregoing, the Deposit shall be credited to the account of BUYER upon the Closing of the transactions contemplated hereunder in accordance with the terms hereof. 10.16 Interim Transactions. BUYER represents and warrants that it has not and, subsequent to execution of this Agreement and prior to the Closing will not, enter into any contract, agreement, or understanding providing for the sale, transfer, or assignment to any third party of any assets or liabilities which are the subject of this Agreement without the prior written consent of BANK ONE which may be withheld at its sole discretion. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers thereunto duly authorized, all as of the date first above written. Bank One Wisconsin ATTEST: /s/ Andrew Jester By:/s/ William E. Read - -------------------------- --------------------- Vice President & Secretary Its: President & CEO Wisconsin Community Bank ATTEST: /s/ Clarke W. Kepplinger By:/s/ Thomas Wilkinson - -------------------------- --------------------- Its: President & CEO EX-11 7 PER SHARE STATEMENT Exhibit 11 EARNINGS PER SHARE Net income for the year ended December 31, 1998 $9,021,000 ========== Weighted average common shares outstanding 9,463,313 Assumed incremental common shares issued upon exercise of stock options 148,025 ---------- Weighted average common shares for diluted earnings per share 9,611,338 ========== Earnings per common share - basic $ .95 ===== Earnings per common share - diluted $ .94 ===== EX-21 8 SUBSIDIARIES LIST EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT 1. Galena State Bank and Trust Company, an Illinois state bank with its main office located in Galena, Illinois 2. Dubuque Bank and Trust Company, an Iowa state bank with its main office located in Dubuque, Iowa 2.a. DB&T Insurance, Inc. 2.b. DB&T Community Development Corp. 3. Keokuk Bancshares, Inc. (dba KBS Investment Corp.) 4 First Community Bank, FSB, a federal savings bank with its main office located in Keokuk, Iowa 4.a. KFS Services, Inc. 5. Riverside Community Bank, an Illinois state bank with its main office located in Rockford, Illinois 6. Citizens Finance Co. 7. ULTEA 8. Wisconsin Community Bank, an Wisconsin bank with its main office located in Cottage Grove, Wisconsin 8.a. DBT Investment Corporation 9. New Mexico Bank & Trust, a New Mexico state bank with its main office located in Albuquerque, New Mexico EX-23 9 AUDITORS CONSENT Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Stockholders Heartland Financial USA, Inc. We consent to incorporation by reference in the Registration Statement on Form S-8 for the 1993 Stock Option Plan of Heartland Financial USA, Inc. of our report dated on January 21, 1999, relating to the consolidated balance sheets of Heartland Financial USA, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998 which report appears in the December 31, 1998 annual report on Form 10-K of Heartland Financial USA, Inc. and subsidiaries. /s/ KPMG Peat Marwick LLP Des Moines, Iowa March 26, 1999 EX-27 10 FDS 98 SCHEDULE
9 0000920112 HEARTLAND FINANCIAL USA, INC. 1,000 12-MOS DEC-31-1998 DEC-31-1998 23,220 8,262 17,476 000 239,770 2,718 2,871 590,133 (7,945) 953,785 717,877 75,920 18,095 57,623 000 000 9,707 74,563 953,785 49,901 12,648 1,968 64,517 28,645 36,304 28,213 951 1,897 31,781 12,778 9,021 000 000 9,021 .95 .94 3.58 1,324 426 000 000 7,362 (823) 455 7,945 4,573 000 3,372
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