SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period __________ to __________
Commission File Number: 0-24724
HEARTLAND FINANCIAL USA, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
42-1405748
(I.R.S. employer identification number)
1398 Central Avenue, Dubuque, Iowa 52001
(Address of principal executive offices Zip Code)
(319) 589-2100
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
classes of Registrant's common stock as of the latest practicable
date: As of May 11, 2000, the Registrant had outstanding
9,625,666 shares of common stock, $1.00 par value per share.
HEARTLAND FINANCIAL USA, INC.
Form 10-Q Quarterly Report
Table of Contents
Part I
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Part II
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Form 10-Q Signature Page
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
3/31/00 12/31/99
(Unaudited)
----------- ----------
ASSETS
Cash and due from banks $ 34,559 $ 34,078
Federal funds sold 6,650 1,875
----------- -----------
Cash and cash equivalents 41,209 35,953
Time deposits in other
financial institutions 5,091 6,084
Securities:
Available for sale-at market
(cost of $226,370 for 2000 and
$211,782 for 1999) 222,917 209,381
Held to maturity-at cost
(approximate market value of $2,961
for 2000 and $2,264 for 1999) 2,902 2,196
Loans and leases:
Held for sale 18,941 16,636
Held to maturity 932,085 818,510
Allowance for loan and lease losses (12,495) (10,844)
----------- -----------
Loans and leases, net 938,531 824,302
Assets under operating leases 35,045 35,495
Premises, furniture and equipment, net 29,342 26,995
Goodwill and core deposit premium, net 22,455 13,997
Other real estate, net 493 585
Other assets 31,078 29,159
----------- -----------
TOTAL ASSETS $1,329,063 $1,184,147
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 109,609 $ 91,391
Savings 398,990 367,413
Time 473,912 410,855
----------- -----------
Total deposits 982,511 869,659
Short-term borrowings 160,924 132,300
Accrued expenses and other liabilities 18,614 18,958
Other borrowings 79,124 76,657
----------- -----------
TOTAL LIABILITIES 1,241,173 1,097,574
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share;
authorized, 200,000 shares) - -
Common stock (par value $1 per share;
authorized, 12,000,000 shares; issued,
9,905,783 shares at March 31, 2000,
and 9,707,252 December 31, 1999) 9,906 9,707
Capital surplus 18,819 15,339
Retained earnings 66,308 65,132
Accumulated other comprehensive loss (2,141) (1,511)
Treasury stock at cost
(278,318 and 120,478 shares at March
31, 2000, and December 31, 1999,
respectively) (5,002) (2,094)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 87,890 86,573
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,329,063 $1,184,147
=========== ===========
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)
Three Months Ended
3/31/00 3/31/99
-------- --------
INTEREST INCOME:
Interest and fees on loans and leases $ 20,184 $ 12,281
Interest on securities:
Taxable 3,114 3,020
Nontaxable 425 292
Interest on federal funds sold 49 53
Interest on interest bearing deposits
in other financial institutions 101 101
-------- --------
TOTAL INTEREST INCOME 23,873 16,287
-------- --------
INTEREST EXPENSE:
Interest on deposits 9,565 7,192
Interest on short-term borrowings 2,138 1,014
Interest on other borrowings 1,461 880
-------- --------
TOTAL INTEREST EXPENSE 13,164 9,086
-------- --------
NET INTEREST INCOME 10,709 7,201
Provision for loan and lease losses 819 534
-------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN AND LEASE LOSSES 9,890 6,667
-------- --------
OTHER INCOME:
Service charges and fees 1,155 866
Trust fees 714 594
Brokerage commissions 245 105
Insurance commissions 192 202
Securities gains, net 243 523
Rental income on operating leases 3,652 3,623
Gain on sale of loans 40 407
Other noninterest income 212 206
-------- --------
TOTAL OTHER INCOME 6,453 6,526
-------- --------
OTHER EXPENSES:
Salaries and employee benefits 5,916 4,417
Occupancy 756 463
Furniture and equipment 726 531
Depreciation on equipment under
operating leases 2,738 2,640
Outside services 761 449
FDIC deposit insurance assessment 68 31
Advertising 359 263
Goodwill and core deposit premium
amortization 454 62
Other operating expenses 1,732 1,277
-------- --------
TOTAL OTHER EXPENSES 13,510 10,133
-------- --------
INCOME BEFORE INCOME TAXES 2,833 3,060
Income taxes 789 921
-------- --------
NET INCOME $ 2,044 $ 2,139
======== ========
EARNINGS PER COMMON SHARE-BASIC $ 0.21 $ 0.22
EARNINGS PER COMMON SHARE-DILUTED 0.21 0.22
CASH DIVIDENDS DECLARED
PER COMMON SHARE $ 0.09 $ 0.08
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands, except per share data)
Common Capital Retained
Stock Surplus Earnings
------- ------- --------
Balance at January 1, 1999 $ 9,707 $14,984 $60,154
Net Income - - 2,139
Unrealized loss on securities
available for sale - - -
Reclassification adjustment for
gains realized in income - - -
Income taxes - - -
Comprehensive income
Cash dividends declared:
Common, $.08 per share - - (761)
Purchase of 16,301 shares
of common stock - - -
Sale of 27 shares of common stock - - -
------- ------- -------
Balance at March 31, 1999 $ 9,707 $14,984 $61,532
======= ======= =======
Balance at January 1, 2000 $ 9,707 $15,339 $65,132
Net Income - - 2,044
Unrealized loss on securities
available for sale - - -
Reclassification adjustment for
gains realized in income - - -
Income taxes - - -
Comprehensive income
Cash dividends declared:
Common, $.09 per share - - (868)
Issue of 198,531 shares of
common stock 199 3,396
Purchase of 278,318 shares
of common stock - - -
Sale of 120,478 shares
of common stock - 84 -
------- ------- -------
Balance at March 31, 2000 $ 9,906 $18,819 $66,308
======= ======= =======
Accumulated
Other
Comprehensive Treasury
Income Stock Total
------------- -------- -----
Balance at January 1, 1999 $ 2,107 $(2,682) $84,270
Net Income - - 2,139
Unrealized loss on securities
available for sale (1,298) - (1,298)
Reclassification adjustment for
gains realized in income (523) - (523)
Income taxes 619 - 619
-------
Comprehensive income 937
Cash dividends declared:
Common, $.08 per share - - (761)
Purchase of 16,301 shares
of common stock - (300) (300)
Sale of 27 shares of common stock - 1 1
------- ------- -------
Balance at March 31, 1999 $ 905 $(2,981) $84,147
======= ======= =======
Balance at January 1, 2000 $(1,511) $(2,094) $86,573
Net Income - - 2,044
Unrealized loss on securities
available for sale (711) - (711)
Reclassification adjustment for
gains realized in income (243) - (243)
Income taxes 324 - 324
-------
Comprehensive income 1,414
Cash dividends declared:
Common, $.09 per share - - (868)
Issue of 198,531 shares
of common stock - - 3,595
Purchase of 278,318 shares
of common stock - (5,002) (5,002)
Sale of 120,478 shares
of common stock - 2,094 2,178
------- ------- -------
Balance at March 31, 2000 $(2,141) $(5,002) $87,890
======= ======= =======
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Three Months Ended
3/31/00 3/31/99
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,044 $ 2,139
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 4,034 3,326
Provision for loan and lease losses 819 534
Provision for income taxes 128 818
Net amortization/(accretion) of
premium/(discount) on securities (10) 539
Securities gains, net (243) (523)
Loans originated for sale (7,168) (26,621)
Proceeds on sales of loans 3,369 26,586
Net gain on sales of loans (40) (407)
Increase in accrued interest receivable (917) (468)
Decrease in accrued interest payable (135) (37)
Other, net 1,248 (3,127)
--------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 3,129 2,759
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits - (4)
Proceeds on maturities of time
deposits 993 -
Proceeds from the sale of
securities available for sale 23,748 9,340
Proceeds from the maturity of and
principal paydowns on securities
held to maturity 975 -
Proceeds from the maturity of and
principal paydowns on securities
available for sale 14,626 37,839
Purchase of securities available
for sale (37,585) (47,193)
Net increase in loans and leases (44,541) (54,645)
Increase in assets under operating
leases (3,188) (3,674)
Capital expenditures (1,150) (867)
Net cash and cash equivalents
received in acquisition of
subsidiaries 18,603 -
Proceeds on sale of OREO and other
repossessed assets - 136
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (27,519) (59,068)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits and savings accounts (11,306) 14,370
Net increase in time deposit accounts 26,625 3,333
Proceeds from other borrowings 4,964 2,500
Repayments on other borrowings (58) (328)
Net increase in short-term borrowings 15,291 22,594
Purchase of treasury stock (5,002) (300)
Proceeds from sale of treasury stock - 233
Dividends (868) (761)
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 29,646 41,641
--------- ---------
Net increase (decrease) in cash and
cash equivalents 5,256 (14,668)
Cash and cash equivalents at
beginning of year 35,953 42,831
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 41,209 $ 28,163
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 106 $ 73
========= =========
Cash paid for interest $ 12,963 $ 9,123
========= =========
Other borrowings transferred to
short-term borrowings $ 2,439 $ 5,595
========= =========
Acquisitions:
Assets acquired $119,858 $ -
========= =========
Cash paid for purchase of stock $(14,364) $ -
Cash acquired 32,967 -
--------- ---------
Net cash received in acquisitions $ 18,603 $ -
========= =========
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1: BASIS OF PRESENTATION
The interim unaudited consolidated financial statements contained
herein should be read in conjunction with the audited
consolidated financial statements and accompanying notes to the
financial statements for the fiscal year ended December 31, 1999,
included in Heartland Financial USA, Inc.'s (the "Company") Form
10-K filed with the Securities and Exchange Commission on March
30, 2000. Accordingly, footnote disclosure which would
substantially duplicate the disclosure contained in the audited
consolidated financial statements has been omitted.
The financial information of the Company included herein is
prepared pursuant to the rules and regulations for reporting on
Form 10-Q. Such information reflects all adjustments (consisting
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of results for the
interim periods. The results of the interim period ended March
31, 2000, are not necessarily indicative of the results expected
for the year ending December 31, 2000.
Basic earnings per share is determined using net income and
weighted average common shares outstanding. Diluted earnings per
share is computed by dividing net income by the weighted average
common shares and assumed incremental common shares issued.
Amounts used in the determination of basic and diluted earnings
per share for the three month periods ended March 31, 2000 and
1999, are shown in the tables below:
Three Months Ended
3/31/00 3/31/99
------- -------
Net Income $ 2,044 $ 2,139
======= =======
Weighted average common shares
outstanding for basic earnings per
share (000's) 9,634 9,519
Assumed incremental common shares issued
upon exercise of stock options (000's) 155 190
------- -------
Weighted average common shares for
diluted earnings per share (000's) 9,789 9,709
======= =======
NOTE 2. ACQUISITIONS
On January 1, 2000, the Company completed its acquisition of
National Bancshares, Inc. ("NBI"), the one-bank holding company
of First National Bank of Clovis ("FNB") in New Mexico. FNB has
four locations in the New Mexico communities of Clovis and
Melrose, with $120,113 in assets and $97,533 in deposits at
December 31, 1999. The total purchase price for NBI was $23,103,
of which $5,774 was paid in common stock of the Company to NBI's
Employee Stock Ownership Plan (the "ESOP") and $3,820 in notes
payable over three or five years, at the stockholders'
discretion, bearing interest at 7.00%. As provided in the merger
agreement, participants in the ESOP elected to receive a cash
payment totaling $4,619 for 255,180 of the 319,009 shares of the
Company's common stock originally issued to them. The Company
merged FNB into its New Mexico bank subsidiary, New Mexico Bank &
Trust ("NMB") immediately after the closing of the NBI
acquisition. As a result of this affiliate bank merger, the
Company's ownership in NMB increased from its initial 80% to
approximately 88%. The acquisition of NBI has been accounted for
as a purchase; accordingly, the results of operations of FNB are
included in the financial statements from the acquisition date.
The resultant acquired deposit base intangible and goodwill of
approximately $8,323 will be amortized over a period of 10 to 25
years. The pro forma effect of the acquisition was not material
to the financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
This report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. 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 laws, monetary and fiscal policies of the
U.S. Government, including policies of the U.S. Treasury and the
Federal Reserve Board, accounting principles, policies and
guidelines, 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,
Heartland's ability to develop and maintain secure and reliable
electronic systems and implement new technologies. 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.
GENERAL
Heartland's results of operations depend primarily on net
interest income, which is the difference between interest income
from interest earning assets and interest expense on interest
bearing liabilities. Noninterest income, which includes service
charges, fees and gains on loans, rental income on operating
leases and trust income, also affects Heartland's results of
operations. Heartland's principal operating expenses, aside from
interest expense, consist of compensation and employee benefits,
occupancy and equipment costs, depreciation on equipment under
operating leases and provision for loan and lease losses.
During the first quarter of 2000, Heartland continued to
experience growth, as total assets increased $144.916 million or
12.24% to $1.329 billion since year end 1999. The loan portfolio
grew $115.880 million or 13.88% to $951.026 million since year
end 1999. Of these increases, $120.113 million in total assets
and $67.601 million in total loans was attributable to an
increase in Heartland's New Mexico operations through the
acquisition of the First National Bank of Clovis ("FNB"), which
was completed on January 1 of this year. These increases are
consistent with Heartland's growth strategies.
For the first quarter of 2000, net income totaled $2.044 million
or $.21 on a basic per common share basis, return on common
equity was 9.41% and return on assets was .63%. For the same
period in 1999, earnings totaled $2.139 million or $.22 on a
basic per common share basis, return on equity was 10.28% and
return on assets was .91%. This decline in earnings was
primarily the result of an increased loan loss provision
associated with strong loan growth. Additionally, earnings were
affected by expenses incurred to pursue growth initiatives in new
and existing markets, combined with a reduction in the amount of
gain on sale of loans and securities gains.
Exclusive of amortization on merger-related intangibles, earnings
during the first quarter of 2000 increased $225 thousand or
10.22% over the first quarter of 1999. Basic earnings per share,
exclusive of this same amortization expense, increased to $.25
from the $.23 recorded during the same quarter in 1999.
NET INTEREST INCOME
Net interest margin expressed as a percentage of average earning
assets increased to 3.84% during the first quarter of 2000
compared to 3.51% for the same quarter in 1999. This improvement
was the result of a shift in the composition of the balance
sheet, as the percentage of loans to total assets increased from
64% at March 31, 1999, to 71% at March 31, 2000. Also
contributing to this increase was the rise in rates during the
second half of 1999 and first quarter of 2000.
For the three month period ended March 31, 2000, interest income
increased $7.586 million or 46.58% when compared to the same
period in 1999. This increase was primarily attributable to the
significant growth in loans and rise in rates.
Net interest income was further enhanced as Heartland was able to
keep the increase in interest expense below the growth in
interest income. For the three month period ended March 31,
2000, interest expense increased $4.078 million or 44.88% when
compared to the same period in 1999.
PROVISION FOR LOAN AND LEASE LOSSES
Heartland's provision for loan and lease losses increased $285
thousand for the three month period ended March 31, 2000,
compared to the same period in 1999. In part, this increase was
recorded in response to the significant loan growth experienced
by Heartland and was made to provide, in Heartland's opinion, an
adequate allowance for loan and lease losses. The adequacy of
the allowance for loan and lease losses is determined by
management using factors that include the overall composition of
the loan portfolio, general economic conditions, types of loans,
past loss experience, loan delinquencies, and potential
substandard and doubtful credits. For additional details on the
specific factors considered during this quarter refer to the
loans and provision for loan and lease losses section of this
report.
NONINTEREST INCOME
Noninterest income decreased $73 thousand or 1.12% during the
quarter ended on March 31, 2000, compared to the same period in
1999. Securities gains and gains on sale of loans were the only
two categories to experience a decline during the periods under
comparison. Securities gains were $280 thousand or 53.54% below
the amount recorded during the first quarter of 1999.
Gains on sale of loans decreased by $367 thousand or 90.17% for
the periods under comparison. The volume of mortgage loans sold
into the secondary market during the first quarter of 2000 was
significantly below those sold during the same period in 1999.
As rates moved upward, customers frequently elected to take three-
and five-year adjustable rate mortgage loans, which Heartland
elected to retain in its loan portfolio.
A large portion of the decrease in securities gains and gains on
sale of loans was offset by an increase in the amount of service
charges and fees collected during the periods under comparison.
Emphasis during the past several years on enhancing revenues from
services provided to customers has resulted in significant growth
in service charges, trust fees and brokerage commissions. In
total, these fees grew by $549 thousand or 35.08% during the
quarters under comparison. Service charges and fees increased
$289 thousand or 33.37%, trust fees increased $120 thousand or
20.20% and brokerage commissions grew $140 thousand or 133.33%.
NONINTEREST EXPENSE
During the first quarter of 2000, noninterest expense grew $3.377
million or 33.33% when compared to the same quarter of 1999. The
following expansion efforts contributed significantly to this
growth in noninterest expense:
- - New Mexico Bank and Trust ("NMB"), Heartland's de novo bank
subsidiary established in Albuquerque, New Mexico in May of
1998, opened three additional branches during the second and
third quarters of 1999. On January 1, 2000, the acquisition
and subsequent merger of FNB into NMB was completed, which
nearly doubled NMB's asset size. At the end of the quarter,
NMB's total assets had reached $212 million.
- - During 1999, Wisconsin Community Bank ("WCB") opened offices
in Sheboygan, Green Bay and Eau Claire, Wisconsin and
acquired Bank One's Monroe branch in July. As of the end of
the first quarter of 2000, total assets at this entity had
grown to $193 million from $58 million at March 31, 1999.
- - Riverside Community Bank opened its first branch location in
July of 1999 and its second branch location this March in
Rockford, Illinois.
Salaries and employee benefits, the largest component of
noninterest expense, increased $1.499 million or 33.94% for the
quarters under comparison. This increase was primarily
attributable to the expansion efforts and to normal merit
increases. The number of full-time equivalent employees
increased from 417 at March 31, 1999, to 535 at March 31, 2000.
INCOME TAX EXPENSE
Income tax expense for the first quarter of 2000 decreased $132
thousand or 14.33% when compared to the same period in 1999.
This decrease was primarily the result of a corresponding
decrease in pre-tax earnings. Heartland's effective tax rate
decreased to 27.85% during the first quarter of 2000 compared to
30.10% for the first quarter of 1999, in part, as a result of an
increase in the amount of tax-exempt income recorded during 2000.
FINANCIAL CONDITION
LOANS AND PROVISION FOR LOAN AND LEASE LOSSES
Commercial and commercial real estate loans made up $53.535
million or 46.20% of the $115.880 million increase in Heartland's
loan portfolio during the first three months of 2000. The
acquisition of FNB was responsible for $26.454 million or 49.41%
of this growth. The remaining $27.081 million change in
commercial loans outstanding was primarily the result of
aggressive calling efforts. The other loan category to
experience significant growth, agricultural loans outstanding,
grew $32.539 million or 35.01%, since December 31, 1999. The FNB
acquisition was responsible for all the agricultural loan growth
as nearly half FNB's loans are in the agricultural sector.
The table below presents the composition of the Company's loan
portfolio as of March 31, 2000, and December 31, 1999.
LOAN PORTFOLIO March 31, December 31,
2000 1999
Amount Percent Amount Percent
------ ------- ------ -------
Commercial and commercial
real estate $502,526 52.63% $448,991 53.53%
Residential mortgage 191,869 20.10 180,347 21.50
Agricultural and
agricultural real estate 125,475 13.14 92,936 11.08
Consumer 121,372 12.71 103,608 12.35
Lease financing, net 13,524 1.42 12,886 1.54
-------- ------- -------- -------
Gross loans and leases 954,766 100.00% 838,768 100.00%
======= =======
Unearned discount (3,247) (3,169)
Deferred loan fees (493) (453)
-------- --------
Total loans and leases 951,026 835,146
Allowance for loan and
lease losses (12,495) (10,844)
-------- --------
Loans and leases, net $938,531 $824,302
======== ========
The adequacy of the allowance for loan and lease losses is
determined by management using factors that include the overall
composition of the loan portfolio, general economic conditions,
types of loans, past loss experience, loan delinquencies, and
potential substandard and doubtful credits. The adequacy of the
allowance for loan and lease losses is monitored on an ongoing
basis by the loan review staff, senior management and the Board
of Directors. Factors considered by Heartland's loan review
committee included the following: i) a continued increase in
higher-risk consumer and more-complex commercial loans as
compared to relatively lower-risk residential real estate loans;
ii) the entrance into new markets in which Heartland had little
or no previous lending experience; iii) uncertainties within the
agricultural markets; and iv) the economies of Heartland's
primary market areas have been stable for some time and 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 March 31, 2000. The allowance for loan and lease
losses increased by $1.651 million or 15.23% during the first
three months of 2000, primarily as a result of the FNB
acquisition which accounted for $1.142 million or 69.17% of this
change. The remaining growth resulted, in part, from expansion
of the loan portfolio. The allowance for loan and lease losses
at March 31, 2000, was 1.31% of loans and 251% of nonperforming
loans, compared to 1.30% of loans and 657% of nonperforming loans
at year end 1999.
Nonperforming loans increased to .52% of total loans and leases
at March 31, 2000, compared to .20% of total loans and leases at
December 31, 1999. The FNB acquisition was responsible for
$2.807 million of the $3.324 million increase in nonperforming
loans.
During the first quarter of 2000, Heartland recorded net charge
offs of $310 thousand compared to $21 thousand for the same
period in 1999. The FNB acquisition was responsible for $299
thousand or 96.45% of the net charge-offs during the first
quarter of 2000. Heartland's loan review area is in the process
of familiarizing itself with FNB's market and loan portfolio.
SECURITIES
The primary objective of the securities portfolio continues to be
to provide Heartland's bank subsidiaries with a source of
liquidity given their high loan-to-deposit ratios. Securities
represented 16.99% of total assets at March 31, 2000, as compared
to 17.87% at December 31, 1999. A reduction in the amount of
securities held in Heartland's portfolio has continued into the
year 2000 as growth in the loan portfolio continued to outpace
deposit growth.
The composition of the portfolio is managed to maximize the
return on the portfolio while considering the impact it has on
Heartland's asset/liability position and liquidity needs. The
U.S. Treasury securities held in the portfolio at March 31, 2000,
were a result of the FNB acquisition. Except for the U.S.
Treasury securities, the composition of the portfolio had not
changed significantly since year-end 1999. The table below
presents the composition of the securities portfolio by major
category as of March 31, 2000, and December 31, 1999.
SECURITIES PORTFOLIO
March 31, December 31,
2000 1999
Amount Percent Amount Percent
------ ------- ------ -------
U.S. Treasury securities $ 15,928 7.06% $ - -%
U.S. government agencies 88,814 39.33 90,536 42.79
Mortgage-backed securities 69,261 30.67 75,637 35.75
States and political
subdivisions 31,576 13.98 25,904 12.24
Other securities 20,240 8.96 19,500 9.22
-------- ------- -------- -------
Total securities $225,819 100.00% $211,577 100.00%
======== ======= ======== =======
DEPOSITS AND BORROWED FUNDS
Total deposits experienced an increase of $112.852 million or
12.98% during the first three months of 2000. The FNB acquisition
comprised $97.533 million or 86.43% of this increase. Exclusive
of the FNB acquisition, the only deposit category to experience
growth during the first three months of 2000 was certificates of
deposit, which increased $26.625 million or 6.48%.
Short-term borrowings generally include federal funds purchased,
treasury tax and loan note options, securities sold under
agreement to repurchase and short-term Federal Home Loan Bank
("FHLB") advances. These funding alternatives are utilized in
varying degrees depending on their pricing and availability.
Over the three month period ended March 31, 2000, the amount of
short-term borrowings had increased $28.624 million or 21.64%.
The repurchase agreement balances at FNB were responsible for
$11.841 million or 41.37% of this change. Also, Heartland
utilized additional short-term borrowings as loan growth outpaced
deposit growth during the first quarter of 2000.
Other borrowings increased $2.467 million or 3.22% during the
first three months of 2000. Included in these borrowings are long-
term FHLB advances which totaled $18.101 million on March 31,
2000, with a weighted average remaining term of 5 years and a
weighted average rate of 6.16%.
CAPITAL RESOURCES
Bank regulatory agencies have adopted capital standards by which
all bank holding companies will be evaluated. Under the risk-
based method of measurement, the resulting ratio is dependent
upon not only the level of capital and assets, but the
composition of assets and capital and the amount of off-balance
sheet commitments. Heartland's capital ratios were as follows
for the dates indicated:
CAPITAL RATIOS
(Dollars in thousands)
March 31, December 31,
2000 1999
Amount Ratio Amount Ratio
------ ----- ------ -----
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 94,782 8.78% $ 101,665 10.56%
Tier 1 capital minimum
requirement 43,190 4.00% 38,517 4.00%
---------- ------ ---------- ------
Excess $ 51,592 4.78% $ 63,148 6.56%
========== ====== ========== ======
Total capital $ 107,277 9.94% $ 112,508 11.68%
Total capital minimum
requirement 86,380 8.00% 77,035 8.00%
---------- ------ ---------- ------
Excess $ 20,897 1.94% $ 35,473 3.68%
========== ====== ========== ======
Total risk-adjusted assets $1,079,750 $ 962,933
========== ==========
Leverage Capital Ratios:(2)
Tier 1 capital $ 94,782 7.41% $ 101,665 8.85%
Tier 1 capital minimum
requirement(3) 51,152 4.00% 45,965 4.00%
---------- ------ ---------- ------
Excess $ 43,630 3.41% $ 55,700 4.85%
========== ====== ========== ======
Average adjusted assets
(less goodwill) $1,278,809 $1,149,147
========== ==========
(1) Based on the risk-based capital guidelines of the Federal
Reserve, a bank holding company is required to maintain a
Tier 1 capital to risk-adjusted assets ratio of 4.00% and
total capital to risk-adjusted assets ratio of 8.00%.
(2) The leverage ratio is defined as the ratio of Tier 1 capital
to average adjusted assets.
(3) Management of 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 additional capital of
at least 100 basis points.
Commitments for capital expenditures are an important factor in
evaluating capital adequacy. As a result of the acquisition of
WCB in March of 1997, remaining cash payments to previous
stockholders total $584 thousand in 2001, plus interest at rates
of 7.00% to 7.50%. The acquisition and merger of Lease Associates
Group into ULTEA, Inc., Heartland's vehicle leasing and fleet
management company, in July of 1998 included an agreement to make
three equal remaining cash payments to the previous principal
stockholder of $643 thousand in 2000 and 2001, plus interest at
7.50%.
This January, Heartland completed its acquisition of National
Bancshares, Inc. ("NBI"), the one-bank holding company of FNB.
The total purchase price for NBI was $23.103 million, of which
$5.774 million was paid in common stock of Heartland to NBI's
Employee Stock Ownership Plan (the "ESOP") and $3.820 million in
notes payable over three or five years, at the stockholders'
discretion, bearing interest at 7.00%. The requisite cash
payments under these notes payable total $855 thousand in 2001
and 2002, and $637 thousand in 2003 and 2004, plus interest. As
provided in the merger agreement, participants in the ESOP
elected to receive a cash payment totaling $4.619 million for
255,180 of the 319,009 shares of Heartland common stock
originally issued to them. Immediately following the closing of
the NBI acquisition, FNB was merged into NMB. As a result of this
affiliate bank merger, Heartland's ownership in NMB increased to
approximately 88%.
Under Heartland's credit agreement with an unaffiliated bank, the
term loan is payable quarterly in $1 million installments
beginning March 31, 2000, with the final payment of $10 million
payable on December 31, 2003.
In October of 1999, Heartland completed an offering of $25
million of 9.60% cumulative capital securities. All of the
securities qualified as Tier 1 capital for regulatory purposes as
of March 31, 2000. Subsequent acquisitions accounted for under
the purchase method of accounting could cause a portion of these
securities to not qualify as Tier 1 capital, as regulations do
not allow the amount of these securities included in Tier 1
capital to exceed 25% of total Tier 1 capital.
Heartland continues to explore opportunities to expand its
umbrella of independent community banks through mergers and
acquisitions as well as de novo and branching opportunities. As
evidenced by the recent expansion into New Mexico, Heartland is
seeking to operate in high growth areas, even if they are outside
of its traditional Midwest market areas. Future expenditures
relating to these efforts are not estimable at this time.
LIQUIDITY
Liquidity measures the ability of Heartland to meet maturing
obligations and its existing commitments, to withstand
fluctuations in deposit levels, to fund its operations and to
provide for customers' credit needs. The liquidity of Heartland
principally depends on cash flows from operating activities,
investment in and maturity of assets, changes in balances of
deposits and borrowings and its ability to borrow funds in the
money or capital markets.
Net cash outflows from investing activities decreased $31.549
million during the first three months of 2000 compared to the
same period in 1999. The FNB acquisition was responsible for
58.97% of this change as it provided net cash and cash
equivalents of $18.603 million during the first quarter of 2000.
The net increase in loans and leases was $44.541 million during
the first three months of 2000 compared to $54.645 million during
the same period in 1999, a $10.104 million change. During the
first three months of 2000, proceeds from the sale and maturity
of securities decreased $7.830 million compared to the same
period in 1999. Likewise, the purchases of securities decreased
$9.608 million for the periods under comparison.
Financing activities provided net cash of $41.641 million during
the first three months of 2000 compared to $29.646 million during
the same period in 1999. A net increase in deposit accounts
provided cash of $15.319 million during the first three months of
2000 compared to $17.703 million during the same period in 1999.
The category reflecting the most significant change during the
periods under comparison was short-term borrowings which provided
cash of $15.291 million in 2000 and $22.594 million in 1999.
Total cash inflows from operating activities increased $370
thousand for the first three months of 2000 compared to the same
period in 1999. Management of investing and financing
activities, and market conditions, determine the level and the
stability of net interest cash flows. Management attempts to
mitigate the impact of changes in market interest rates to the
extent possible, so that balance sheet growth is the principal
determinant of growth in net interest cash flows.
In the event of short-term liquidity needs, the bank subsidiaries
may purchase federal funds from each other or from correspondent
banks and may also borrow from the Federal Reserve Bank.
Additionally, 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, as of March 31, 2000,
provided an additional borrowing capacity of $2.500 million.
This agreement contains specific covenants which, among other
things, limit dividend payments and restrict the sale of assets
by the Heartland under certain circumstances. Also contained
within the agreement are certain financial covenants, including
the maintenance by Heartland 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
March 31, 2000, Heartland was substantially in compliance with
all the covenants contained in this credit agreement.
RECENT REGULATORY DEVELOPMENTS
On November 12, 1999, President Clinton signed legislation that
will allow bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in
securities and insurance activities. Under the Gramm-Leach-Bliley
Act (the "Act"), a bank holding company that elects to become a
financial holding company may engage in any activity that the
Board of Governors of the Federal Reserve System (the "Federal
Reserve"), in consultation with the Secretary of the Treasury,
determines by regulation or order is financial in nature,
incidental to any such financial activity, or complementary to
any such financial activity and does not pose a substantial risk
to the safety or soundness of depository institutions or the
financial system generally. The Act specifies certain activities
that are deemed to be financial in nature, including lending,
exchanging, transferring, investing for others, or safeguarding
money or securities; underwriting and selling insurance;
providing financial, investment, or economic advisory services;
underwriting, dealing in or making a market in, securities; and
any activity currently permitted for bank holding companies by
the Federal Reserve under section 4(c)(8) of the Bank Holding
Company Act. A bank holding company may elect to be treated as a
financial holding company only if all depository institution
subsidiaries of the holding company are well-capitalized, well-
managed and have at least a satisfactory rating under the
Community Reinvestment Act.
National banks are also authorized by the Act to engage, through
"financial subsidiaries", in any activity that is permissible for
financial holding companies (as described above) and any activity
that the Secretary of the Treasury, in consultation with the
Federal Reserve, determines is financial in nature or incidental
to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate
investment activities (unless otherwise expressly permitted by
law), (iii) insurance company portfolio investments and (iv)
merchant banking. The authority of a national bank to invest in a
financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be
well-managed and well-capitalized (after deducting from capital
the bank's outstanding investments in financial subsidiaries).
The Act provides that state banks may invest in financial
subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same
conditions that apply to national banks.
Various bank regulatory agencies have begun issuing regulations
as mandated by the Act. The Federal Reserve has issued an
interim regulation establishing procedures for bank holding
companies to elect to become financial holding companies. In
addition, the Federal Reserve has issued interim regulations
listing the financial activities permissible for financial
holding companies and describing the parameters under which
financial holding companies may engage in securities and merchant
banking activities. The Federal Deposit Insurance Corporation
has issued an interim regulation regarding the parameters under
which state nonmember banks may conduct activities through
subsidiaries that national banks may conduct only in financial
subsidiaries. In addition, all federal bank regulatory agencies
have jointly issued a proposed regulation that would implement
the privacy provisions of the Act. At this time, it is not
possible to predict the impact the Act and its implementing
regulations may have on Heartland. As of the date of this
filing, Heartland has not applied for or received approval to
operate as a financial holding company. In addition, Heartland's
bank subsidiaries have not applied for or received approval to
establish financial subsidiaries.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
(Dollars in thousands)
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. 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.
Management does not believe that Heartland's primary market risk
exposures and how those exposures have been managed to-date in
2000 changed significantly when compared to 1999.
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company or its subsidiaries is a party other than ordinary
routine litigation incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27.1 Financial Data Schedule
Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
HEARTLAND FINANCIAL USA, INC.
(Registrant)
Principal Executive Officer
/s/ Lynn B. Fuller
-----------------------
By: Lynn B. Fuller
President
Principal Financial and
Accounting Officer
/s/ John K. Schmidt
-----------------------
By: John K. Schmidt
Executive Vice President
and Chief Financial Officer
Dated: May 12, 2000