SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended September 30,2000
[ ] 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 November 13, 2000, the Registrant had outstanding
9,615,410 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)
9/30/00 12/31/99
(Unaudited)
----------- ----------
ASSETS
Cash and due from banks $ 36,362 $ 34,078
Federal funds sold 11,475 1,875
----------- -----------
Cash and cash equivalents 47,837 35,953
Time deposits in other
financial institutions 4,879 6,084
Securities:
Available for sale-at market
(cost of $217,409 for 2000 and
$211,782 for 1999) 216,225 209,381
Held to maturity-at cost
(approximate market value of $2,163
for 2000 and $2,264 for 1999) 2,112 2,196
Loans and leases:
Held for sale 17,179 16,636
Held to maturity 1,017,898 818,510
Allowance for loan and
lease losses (13,540) (10,844)
----------- -----------
Loans and leases, net 1,021,537 824,302
Assets under operating leases 34,504 35,495
Premises, furniture and equipment, net 29,895 26,995
Goodwill and core deposit intangible, net 21,113 13,997
Other real estate, net 649 585
Other assets 35,308 29,159
----------- -----------
TOTAL ASSETS $1,414,059 $1,184,147
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 154,334 $ 91,391
Savings 370,004 367,413
Time 529,444 410,855
----------- -----------
Total deposits 1,053,782 869,659
Short-term borrowings 172,830 132,300
Accrued expenses and other liabilities 22,663 18,958
Other borrowings 72,639 76,657
----------- -----------
TOTAL LIABILITIES 1,321,914 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 September 30, 2000,
and 9,707,252 at December 31, 1999) 9,906 9,707
Capital surplus 18,819 15,339
Retained earnings 69,362 65,132
Accumulated other comprehensive loss (761) (1,511)
Treasury stock at cost
(290,373 and 120,478 shares at
September 30, 2000, and December 31,
1999, respectively) (5,181) (2,094)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 92,145 86,573
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,414,059 $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 Nine Months Ended
9/30/00 9/30/99 9/30/00 9/30/99
------- ------- ------- -------
INTEREST INCOME:
Interest and fees on
loans and leases $ 23,286 $ 16,189 $ 65,431 $ 43,215
Interest on securities:
Taxable 2,895 2,695 8,952 8,519
Nontaxable 462 307 1,349 905
Interest on federal
funds sold 283 138 431 217
Interest on interest
bearing deposits in
other financial
institutions 104 137 286 349
-------- -------- -------- --------
TOTAL INTEREST INCOME 27,030 19,466 76,449 53,205
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 11,108 7,978 31,001 22,475
Interest on short-term
borrowings 2,774 1,721 7,465 4,025
Interest on other
borrowings 1,750 907 4,736 2,662
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 15,632 10,606 43,202 29,162
-------- -------- -------- --------
NET INTEREST INCOME 11,398 8,860 33,247 24,043
Provision for loan and
lease losses 779 680 2,605 1,976
-------- -------- -------- --------
NET INTEREST INCOME
AFTER PROVISION FOR
LOAN AND LEASE LOSSES 10,619 8,180 30,642 22,067
-------- -------- -------- --------
OTHER INCOME:
Service charges and fees 1,433 1,054 3,904 2,822
Trust fees 761 736 2,268 1,961
Brokerage commissions 160 183 651 431
Insurance commissions 197 231 583 628
Securities gains, net 203 45 435 762
Gains on sale of loans 182 171 326 921
Rental income on
operating leases 3,736 3,695 11,090 10,993
Impairment loss on
equity securities (11) - (244) -
Other 271 243 784 664
-------- -------- -------- --------
TOTAL OTHER INCOME 6,932 6,358 19,797 19,182
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee
benefits 6,016 5,006 17,949 13,920
Occupancy 738 603 2,221 1,533
Furniture and equipment 755 616 2,213 1,709
Outside services 643 608 1,983 1,612
FDIC deposit insurance
assessment 53 32 181 93
Advertising 382 405 1,168 1,054
Depreciation on equipment
under operating leases 2,807 2,755 8,315 8,078
Goodwill and core deposit
intangible amortization 453 192 1,360 316
Other operating expenses 1,876 1,585 5,319 4,202
-------- -------- -------- --------
TOTAL OTHER EXPENSES 13,723 11,802 40,709 32,517
-------- -------- -------- --------
INCOME BEFORE INCOME
TAXES 3,828 2,736 9,730 8,732
Income taxes 1,231 731 2,900 2,515
-------- -------- -------- --------
NET INCOME $ 2,597 $ 2,005 $ 6,830 $ 6,217
======== ======== ======== ========
EARNINGS PER COMMON
SHARE-BASIC $ 0.27 $ 0.21 $ 0.71 $ 0.65
EARNINGS PER COMMON
SHARE-DILUTED $ 0.27 $ 0.20 $ 0.70 $ 0.64
CASH DIVIDENDS DECLARED
PER COMMON SHARE $ 0.09 $ 0.09 $ 0.27 $ 0.25
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-First nine months
1999 - - 6,217
Unrealized loss on securities
available for sale - - -
Reclassification adjustment for
gains realized in net income - - -
Income taxes - - -
Comprehensive income
Cash dividends declared:
Common, $.25 per share - - (2,385)
Purchase of 29,375 shares
of common stock for treasury - - -
Sale of 79,079 shares
of common stock - 297 -
------- ------- -------
Balance at September 30, 1999 $ 9,707 $15,281 $63,986
======= ======= =======
Balance at January 1, 2000 $ 9,707 $15,339 $65,132
Net Income-First nine months
2000 - - 6,830
Unrealized loss on securities
available for sale - - -
Reclassification adjustment for
gains realized in net income - - -
Income taxes - - -
Comprehensive income
Cash dividends declared:
Common, $.27 per share - - (2,600)
Issuance of 319,010 shares of
common stock 199 3,480 -
Purchase of 290,374 shares
of common stock for treasury - - -
------- ------- -------
Balance at June 30, 2000 $ 9,906 $18,819 $69,362
======= ======= =======
Accumulated
Other
Comprehensive Treasury
Income(Loss) Stock Total
------------- -------- -----
Balance at January 1, 1999 $ 2,107 $(2,682) $84,270
Net Income-First nine months
1999 - - 6,217
Unrealized loss on securities
available for sale (3,981) - (3,981)
Reclassification adjustment for
gains realized in net income (717) - (717)
Income taxes 1,597 - 1,597
-------
Comprehensive income 3,116
Cash dividends declared:
Common, $.25 per share - - (2,385)
Purchase of 29,375 shares
of common stock for treasury - (547) (547)
Sale of 79,079 shares
of common stock - 1,166 1,463
------- ------- -------
Balance at September 30, 1999 $ (994) $(2,063) $85,917
======= ======= =======
Balance at January 1, 2000 $(1,511) $(2,094) $86,573
Net Income-First nine months
2000 - - 6,830
Unrealized loss on securities
available for sale 1,571 - 1,571
Reclassification adjustment for
gains realized in net income (435) - (435)
Income taxes (386) - (386)
-------
Comprehensive income 7,580
Cash dividends declared:
Common, $.27 per share - - (2,600)
Issuance of 319,010 shares of
common stock - 2,094 5,773
Purchase of 290,374 shares
of common stock for treasury - (5,181) (5,181)
------- ------- -------
Balance at September 30, 2000 $ (761) $(5,181) $92,145
======= ======= =======
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine Months Ended
9/30/00 9/30/99
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,830 $ 6,217
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation and amortization 12,053 10,336
Provision for loan and lease
losses 2,605 1,976
Provision for deferred income taxes 54 (128)
Net amortization/(accretion) of
premium/(discount) on investment
securities (21) 1,260
Securities gains, net (435) (762)
Loans originated for sale (27,342) (70,219)
Proceeds on sales of loans 22,783 64,694
Net gain on sales of loans (326) (921)
Increase in accrued interest
receivable (4,262) (1,482)
Increase (decrease) in accrued
payable 1,246 (44)
Loss on impairment of equity security 244 -
Other, net 983 (3,425)
--------- ---------
NET CASH PROVIDED FROM OPERATING
ACTIVITIES 14,412 7,502
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits (600) (24)
Proceeds on maturities of time
deposits 1,805 -
Proceeds from the sale of securities
available for sale 33,723 13,538
Proceeds from the maturity of and
principal paydowns on securities
held to maturity 3,065 85
Proceeds from the maturity of and
principal paydowns on securities
available for sale 38,869 86,033
Purchase of securities available
for sale (64,184) (66,089)
Net increase in loans and leases (127,996) (159,098)
Increase in assets under operating
leases (9,306) (8,897)
Net cash and cash equivalents received
in acquisition of subsidiary 18,603 43,682
Net cash and cash equivalents received
in acquisition of trust assets - (528)
Capital expenditures (2,441) (6,177)
Proceeds on sale of fixed assets - 13
Proceeds on sale of OREO and other
repossessed assets 474 463
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (107,988) (96,999)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits and
savings accounts 7,650 32,008
Net increase in time deposit accounts 82,157 1,222
Proceeds from other borrowings 15,457 7,014
Repayment on other borrowings (19,000) -
Net increase in short-term borrowings 26,197 48,808
Purchase of treasury stock (5,181) (547)
Proceeds from sale of treasury stock - 1,463
Proceeds from the sale of minority
interest 780 57
Dividends (2,600) (2,385)
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 105,460 87,640
--------- ---------
Net increase (decrease) in cash
and cash equivalents 11,884 (1,857)
Cash and cash equivalents at
beginning of year 35,953 42,831
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 47,837 $ 40,974
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 2,662 $ 2,563
========= =========
Cash paid for interest $ 41,956 $ 29,206
========= =========
Acquisitions:
Assets acquired $119,837 $ 40,472
========= =========
Cash paid for purchase of stock $(14,364) $ -
Cash acquired 32,967 43,682
--------- ---------
Net cash received in acquisitions $ 18,603 $ 43,682
========= =========
Noncash investing and financing
activities:
Notes issued in acquisitions $ 3,820 $ -
========= =========
Common stock issued in acquisitions $ 5,773 $ -
========= =========
Other borrowings transferred to
short-term borrowings $ 3,439 $ 8,595
========= =========
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 that 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) that are, in the opinion of
management, necessary for a fair presentation of results for the
interim periods. The results of the interim periods ended
September 30, 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 and six month periods ended September 30,
2000 and 1999, are shown in the tables below:
Three Months Ended
9/30/00 9/30/99
------- -------
Net Income $ 2,597 $ 2,005
======= =======
Weighted average common shares
outstanding for basic earnings per
share (000's) 9,620 9,588
Assumed incremental common shares issued
upon exercise of stock options (000's) 126 207
------- -------
Weighted average common shares for
diluted earnings per share (000's) 9,746 9,795
======= =======
Nine Months Ended
9/30/00 9/30/99
------- -------
Net Income $ 6,830 $ 6,217
======= =======
Weighted average common shares
outstanding for basic earnings per
share (000's) 9,632 9,547
Assumed incremental common shares issued
upon exercise of stock options (000's) 137 196
------- -------
Weighted average common shares for
diluted earnings per share (000's) 9,769 9,743
======= =======
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 $5,773 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 consolidated financial statements from the
acquisition date. The resultant acquired deposit base intangible
and goodwill of approximately $8,473 will be amortized over a
period of 10 to 25 years. The pro forma effect of the acquisition
was not material to the consolidated financial statements.
NOTE 3. OTHER BORROWINGS
On September 28, 2000, the Company entered into a credit
agreement with two unaffiliated banks to replace an existing term
credit line as well as to increase availability under the
revolving credit lines. Under the new unsecured revolving credit
lines, the Company may borrow up to $50,000 at any one time. At
September 30, 2000, $41,000 was outstanding on the revolving
credit lines with the total classified as short-term borrowings.
The additional $10,000 credit line was established primarily to
provide additional working capital to the nonbanking subsidiaries
and to meet general corporate commitments. Under the terms of
this agreement, the Company must maintain a minimum return on
average assets, maximum nonperforming assets to total loans ratio
and maximum funded debt to total equity capital ratio. In
addition, the Company and each of its banking subsidiaries must
remain well capitalized.
NOTE 4. EFFECT OF NEW FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Standards ("FAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities. In
July 1999, the FASB issued FAS No. 137, Deferral of the Effective
Date of FASB Statement No. 133, which defers the effective date
for implementation of FAS No. 133 to no later than January 1,
2001, for the Company's financial statements. Management will
implement the FAS No. 133 when effective and believes the
adoption will not have a material impact on the Company's
consolidated 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, provision for loan and lease losses and
amortization of merger-related intangibles.
Over the past two years, significant resources have been invested
into the expansion of Heartland's franchise. The third quarter
results are an excellent validation of Heartland's community
banking approach. Earnings increased $592 thousand or 30% for
the third quarter of 2000. Net income totaled $2.6 million, or
$.27 on a basic per common share basis, for the third quarter of
2000 compared to $2.0 million, or $.21 on a basic per common
share basis, during the same quarter in 1999. Return on common
equity was 11.44%, and return on assets was .74% for the third
quarter of 2000. For the same period in 1999, return on equity
was 9.23% and return on assets was .73%.
Exclusive of amortization of merger-related intangibles, earnings
during the third quarter of 2000 increased $758 thousand or 34%
over the same quarter of 1999. Basic earnings per share,
exclusive of this same amortization expense, increased to $.31
from the $.23 recorded during the same quarter of 1999.
For the nine month period ended on September 30, 2000, earnings
increased $613 thousand or nearly 10% when compared to the same
period in 1999. Basic earnings per share grew to $.71 from the
$.65 recorded during 1999. Return on common equity was 10.30%
and return on assets was .68% for the first nine months of 2000,
compared to 9.75% and .82%, respectively, for the same period in
1999. Exclusive of the amortization on merger-related
intangibles, earnings increased $1.4 million or 21% for the
periods under comparison. Basic earnings per share, exclusive of
this same amortization expense, increased to $.82 in 2000 from
$.68 in 1999.
Total assets reached $1.4 billion at September 30, 2000, an
increase of 19% since December 31, 1999. Loans and leases grew
to $1.0 billion and deposits reached $1.1 billion at the end of
the quarter, an increase of 24% and 21%, respectively, since
December 31, 1999. Of these increases, $120.1 million in total
assets, $67.6 million in total loans and $97.5 million in total
deposits were 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. By the end of the year, Heartland anticipates becoming the
largest bank holding company headquartered in the state of Iowa
as merger activity occurs across the state.
NET INTEREST INCOME
Net interest margin expressed as a percentage of average earning
assets increased to 3.75% during the third quarter of 2000
compared to 3.69% for the same quarter in 1999. A shift in the
composition of the balance sheet contributed to this improvement
as the percentage of loans to total assets increased from 70% to
73% and the percentage of demand deposits to total deposits
increased from 11% to 15% for the twelve-month period ended on
September 30, 2000. Rather than purchases of securities,
management has continued to emphasize investments in higher-
yielding loans and has increased marketing efforts to attract
additional non-interest bearing demand deposits.
In dollars, net interest income on a tax-equivalent basis rose by
$2.6 million or 29% for the quarters under comparison and $9.4
million or 38% for the nine months under comparison. For the
three and nine month periods ended September 30, 2000, tax-
equivalent interest income increased $7.6 million or 39% and
$23.5 million or 44%, respectively, when compared to the same
periods in 1999. These increases were primarily attributable to
the growth in loans.
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 and nine month periods ended
September 30, 2000, interest expense increased $5.0 million or
47% and $14.0 million or 48%, respectively, when compared to the
same periods in 1999. These increases were primarily
attributable to the rise in rates and growth in borrowings and
deposits, which were used to fund the loan growth experienced.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses increased $99 thousand or
15% and $629 thousand or 32% for the three and nine month periods
ended September 30, 2000, respectively, compared to the same
periods in 1999. In part, these increases were recorded in
response to the loan growth experienced and an increase in
nonperforming loans and were 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.
OTHER INCOME
Other income increased $574 thousand or 9% during the quarter
ended on September 30, 2000, compared to the same period in 1999.
Securities gains and service charges were the major contributors
to this increase. On a year-to-date comparative basis, other
income experienced an increase of $615 thousand or 3%. This
change was partially the result of an impairment loss on equity
securities recorded during the second quarter of 2000. Also
experiencing a decline during the year-to-date period under
comparison was securities gains and gains on sale of loans.
The impairment loss on equity securities totaled $244 thousand at
the end of the third quarter of 2000, the majority of which was
recorded during the second quarter. This loss resulted from the
announcement that Safety Kleen Corp. had filed bankruptcy under
chapter 11. Heartland's investment subsidiary held 20,000 shares
of Safety Kleen's common stock in its equity portfolio. The
carrying value of this stock on Heartland's balance sheet as of
September 30, 2000, was $4 thousand.
Securities gains for the third quarter of 2000 were $158 thousand
or 351% above the amount recorded during the third quarter of
1999. On a year-to-date comparison, securities gains decreased
$327 thousand or 43%.
Gains on sale of loans decreased by $595 thousand or 65% for the
nine month period under comparison. The volume of mortgage loans
sold into the secondary market during the first half 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. During the third
quarter of 2000, customers began to again elect fifteen- and
thirty-year mortgage loans, which Heartland usually sells into
the secondary market.
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 year-to-date period 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 $1.6 million or 31%
during the nine month period under comparison. Service charges
and fees increased $1.1 million or 38%, trust fees increased $307
thousand or 16% and brokerage commissions increased $220 thousand
or 51%.
OTHER EXPENSE
During the third quarter of 2000, Heartland was able to hold the
increase in other expense to $1.9 million or 16% when compared to
the same quarter of 1999. For the first nine months of 2000,
other expense grew $8.2 million or 25% when compared to the same
period in 1999.
The following expansion efforts have contributed significantly to
the growth in other 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 $247 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 third quarter of 2000, total assets at this entity had
grown to $196 million from $175 million at September 30,
1999, and $54 million at December 31, 1998.
- - Riverside Community Bank ("RCB") opened its first branch
location in July of 1999 and its second branch location this
March in Rockford, Illinois. By September 30, 2000, total
assets at RCB had grown to $93 million compared to $69
million just one year earlier.
Salaries and employee benefits, the largest component of
noninterest expense, increased $1.0 million or 20% for the
quarter under comparison. On a year-to-date basis, salaries and
employee benefits grew $4.0 million or 29%. These increases were
primarily attributable to the expansion efforts and to normal
merit increases. The number of full-time equivalent employees
increased from 476 at September 30, 1999, to 546 at September 30,
2000.
As a result of the acquisitions made during the past year,
goodwill and core deposit intangible amortization has increased
substantially. This amortization of merger-related intangibles
increased $261 thousand or 136% for the quarter under comparison
and $1.0 million or 330% for the nine month period under
comparison.
Other expenses increased $291 thousand or 18% for the quarter
under comparison and $1.1 million or 27% for the nine month
period under comparison due primarily to the expansion efforts
underway. Some of the expenses included within this category
that experienced growth during 2000 as a result of the expansion
efforts were postage, supplies, telephone charges and fees
relating to the processing of credit cards for merchants.
INCOME TAX EXPENSE
Corresponding to the growth in earnings, income tax expense for
the third quarter of 2000 increased $500 thousand or 68% when
compared to the same period in 1999. On a nine month comparative
basis, income tax expense increased $385 thousand or 15%.
Heartland's effective tax rate increased to 32.2% during the
third quarter of 2000 compared to 26.7% for the third quarter of
1999. For the nine month periods ended September 30, 2000 and
1999, the effective tax rate was 29.8% and 28.8%, respectively.
These increases were, in part, a result of the amount of
additional merger-related amortization expense recorded during
2000 that is not deductible for federal income tax purposes.
FINANCIAL CONDITION
LOANS AND PROVISION FOR LOAN AND LEASE LOSSES
Commercial and commercial real estate loans made up $93.2 million
or 47% of the $199.9 million increase in Heartland's loan
portfolio during the first nine months of 2000. The acquisition
of FNB was responsible for $26.4 million or 28% of this growth.
The remaining $66.8 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 $46.0 million or
50%, since December 31, 1999. The FNB acquisition was
responsible for $33.0 million or 72% of the agricultural loan
growth as nearly half of FNB's loans are in the agricultural
sector.
The table below presents the composition of Heartland's loan
portfolio as of September 30, 2000, and December 31, 1999.
LOAN PORTFOLIO (Dollars in thousands)
September 30, December 31,
2000 1999
Amount Percent Amount Percent
------ ------- ------ -------
Commercial and commercial
real estate $ 542,231 52.19% $448,991 53.53%
Residential mortgage 214,989 20.70 180,347 21.50
Agricultural and
agricultural real estate 138,942 13.37 92,936 11.08
Consumer 126,985 12.22 103,608 12.35
Lease financing, net 15,738 1.52 12,886 1.54
---------- ------- -------- -------
Gross loans and leases 1,038,885 100.00% 838,768 100.00%
======= =======
Unearned discount (3,303) (3,169)
Deferred loan fees (505) (453)
---------- --------
Total loans and leases 1,035,077 835,146
Allowance for loan and
lease losses (13,540) (10,844)
----------- ---------
Loans and leases, net $1,021,537 $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) an increase in
nonperforming loans and iv) uncertainties within the agricultural
markets. There can be no assurances that the allowance for loan
and lease losses will be adequate to cover all losses, but
management believes that the allowance for loan and lease losses
was adequate at September 30, 2000. The allowance for loan and
lease losses increased by $2.7 million or 25% during the first
nine months of 2000, primarily as a result of the FNB acquisition
which accounted for $1.1 million or 41% of this change. The
remaining growth occurred, in part, as a result of the expansion
of the loan portfolio. The allowance for loan and lease losses
at September 30, 2000, was 1.31% of loans and 300% of
nonperforming loans, compared to 1.30% of loans and 657% of
nonperforming loans at year-end 1999.
Nonperforming loans, defined as nonaccrual loans, restructured
loans and loans past due ninety days or more, increased to .44%
of total loans and leases at September 30, 2000, compared to .20%
of total loans and leases at December 31, 1999. The $2.8 million
increase in nonperforming loans was primarily the result of a few
large agricultural customers in the Clovis, New Mexico market.
During the first nine months of 2000, Heartland recorded net
charge offs of $1.0 million compared to $180 thousand for the
same period in 1999. The FNB acquisition was responsible for
$614 thousand or 61% of the net charge-offs during the first nine
months of 2000. Heartland's loan review area continues in the
process of familiarizing itself with FNB's market and loan
portfolio.
SECURITIES
The composition of Heartland's securities 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. Securities represented 15% of total assets at September
30, 2000, as compared to 18% at December 31, 1999. The U.S.
Treasury securities held in the portfolio at September 30, 2000,
were a result of the FNB acquisition. The table below presents
the composition of the securities portfolio by major category as
of September 30, 2000, and December 31, 1999.
SECURITIES PORTFOLIO (Dollars in thousands)
September 30, December 31,
2000 1999
Amount Percent Amount Percent
------ ------- ------ -------
U.S. Treasury securities $ 4,997 2.29% $ - -%
U.S. government agencies 103,769 47.53 90,536 42.79
Mortgage-backed securities 55,919 25.61 75,637 35.75
States and political
subdivisions 32,761 15.00 25,904 12.24
Other securities 20,891 9.57 19,500 9.22
-------- ------- -------- -------
Total securities $218,337 100.00% $211,577 100.00%
======== ======= ======== =======
DEPOSITS AND BORROWED FUNDS
Total deposits experienced an increase of $184.1 million or 21%
during the first nine months of 2000. The FNB acquisition
comprised $97.5 million or 53% of this increase. Exclusive of
the FNB acquisition, demand deposits grew $42.7 million or 47%
during the first nine months of 2000 and certificates of deposit
grew $79.4 million or 19%. During this same period, savings
deposits experienced a decline of $35.5 million or 10%, exclusive
of the FNB acquisition. Growth in demand deposits was primarily
attributable to efforts at NMB in Albuquerque, New Mexico,
Heartland's most recent de novo community bank. The change in
savings and certificate of deposit accounts occurred as interest
rates rose over the past year and deposit customers became more
interested in certificate of deposit products and less interested
in savings products.
On September 28, 2000, Heartland entered into a credit agreement
with two unaffiliated banks to replace an existing term credit
line as well as to increase availability under a revolving credit
line. Under the new unsecured revolving credit lines, Heartland
may borrow up to $50.0 million at any one time. At September 30,
2000, $41.0 million was outstanding on the revolving credit lines
with the total classified as short-term borrowings. The
additional $10.0 million credit line was established primarily to
provide additional working capital to the nonbanking subsidiaries
and to meet general corporate commitments.
In addition to outstanding debt on the revolving credit lines,
short-term borrowings also included 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 additional funding alternatives are
utilized in varying degrees by the bank subsidiaries depending on
pricing and availability. Over the nine month period ended
September 30, 2000, the amount of short-term borrowings increased
$40.5 million or 31%, primarily as a result of the restructuring
of Heartland's debt from a term note to a revolving credit line.
Other borrowings decreased $4.0 million or 5% during the first
nine months of 2000. The portion of the $23.0 million payoff on
the term note that was classified as other borrowings was $19.0
million. This reduction in other borrowings was offset by the
$14.0 million in additional long-term FHLB advances at the bank
subsidiaries to fund a portion of the loan growth experienced.
Long-term FHLB advances totaled $30.1 million on September 30,
2000, with a weighted average remaining term of 3.3 years and a
weighted average rate of 6.54%.
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)
September 30, December 31,
2000 1999
Amount Ratio Amount Ratio
------ ----- ------ -----
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 99,779 8.68% $ 101,664 10.56%
Tier 1 capital minimum
requirement 45,990 4.00% 38,517 4.00%
---------- ------ ---------- ------
Excess $ 53,789 4.68% $ 63,147 6.56%
========== ====== ========== ======
Total capital $ 113,318 9.86% $ 112,508 11.68%
Total capital minimum
requirement 91,980 8.00% 77,035 8.00%
---------- ------ ---------- ------
Excess $ 21,338 1.86% $ 35,473 3.68%
========== ====== ========== ======
Total risk-adjusted assets $1,149,753 $ 962,933
========== ==========
Leverage Capital Ratios:(2)
Tier 1 capital $ 99,779 7.27% $ 101,664 8.85%
Tier 1 capital minimum
requirement(3) 54,906 4.00% 45,965 4.00%
---------- ------ ---------- ------
Excess $ 44,873 3.27% $ 55,699 4.85%
========== ====== ========== ======
Average adjusted assets
(less goodwill) $1,372,660 $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%. As part of the July, 1998 acquisition and
merger of Lease Associates Group into ULTEA, Inc., Heartland's
vehicle leasing and fleet management company, there is one
remaining cash payment to the previous principal stockholder of
$643 thousand in 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 $23.1 million, of which $5.8
million was paid in common stock of Heartland to NBI's Employee
Stock Ownership Plan (the "ESOP") and $3.8 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 $4.6 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%.
In June, Heartland began offering a portion of its shares of
NMB's common stock to interested investors. As of September 30,
2000, a total of 600 shares had been sold. Heartland will not
allow its ownership in NMB to fall below 80% and all minority
stockholders must enter into a stock transfer agreement before
shares will be issued to them. This stock transfer agreement
imposes certain restrictions on the investor's sale, transfer or
other disposition of their shares and requires Heartland to
repurchase the shares from the investor on April 9, 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 September 30, 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.
Future expenditures relating to these efforts are not estimable
at this time.
OTHER DEVELOPMENTS
Current president and chief executive officer, Lynn B. Fuller,
was elected to serve as chairman of the board at Heartland's
regular board meeting held in July, 2000. After many years of
dedicated service, former chairman Lynn S. Fuller retired from
Heartland's board of directors this July. Mr. Fuller will
continue to serve as vice chairman on the board of directors of
Dubuque Bank and Trust Company, Heartland's flagship bank
headquartered in Dubuque, Iowa. Filling Mr. Fuller's unexpired
term on Heartland's board of directors is James F. Conlan, a
partner with the international law firm of Sidley & Austin of
Chicago, Illinois.
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 increased $11.0
million during the first nine months of 2000 compared to the same
period in 1999. Acquisitions provided net cash and cash
equivalents of $18.6 million during the first nine months of 2000
and $43.7 million during the same period in 1999, a decrease of
$25.1 million. The net increase in loans and leases was $128.0
million during the first nine months of 2000 compared to $159.1
million during the same period in 1999, a $31.1 million change.
During the first nine months of 2000, proceeds from the sale and
maturity of securities decreased $24.0 million compared to the
same period in 1999. Likewise, the purchases of securities
decreased $1.9 million for the periods under comparison.
Financing activities provided net cash of $105.5 million during the
first nine months of 2000 compared to $87.6 million during the same
period in 1999. A net increase in deposit accounts provided cash
of $89.8 million during the first nine months of 2000 compared to
$33.2 million during the same period in 1999, a $56.6 million
change. The other category reflecting the most significant change
during the periods under comparison was short-term borrowings which
provided cash of $26.2 million in 2000 and $48.8 million in 1999, a
change of $22.6 million.
Total cash inflows from operating activities increased $6.9
million for the first nine 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 agreements, as of September 30,
2000, provided an additional borrowing capacity of $9.0 million.
These agreements contain specific covenants which, among other
things, limit dividend payments and restrict the sale of assets
by Heartland under certain circumstances. Also contained within
the agreements are certain financial covenants, including the
maintenance by Heartland of a maximum nonperforming assets to
total loans ratio, minimum return on average assets ratio and
maximum funded debt to total equity capital ratio. In addition,
Heartland and each of its bank subsidiaries must remain well
capitalized, as defined from time to time by the federal banking
regulators. At September 30, 2000, Heartland was in compliance
with the covenants contained in this credit agreement.
Recent Regulatory Developments
The Gramm-Leach-Bliley Act (the "Act"), which was enacted in
November, 1999, allows eligible bank holding companies to engage
in a wider range of nonbanking activities, including greater
authority to engage in securities and insurance activities. Under
the Act, an eligible 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. National banks are also authorized by
the Act to engage, through "financial subsidiaries", in certain
activity that is permissible for financial holding companies (as
described above) and certain 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.
Although various bank regulatory agencies have issued regulations
as mandated by the Act, except for the jointly issued privacy
regulations, the Act and its implementing regulations have had
little impact on the daily operations of Heartland and its
subsidiary banks and, at this time, it is not possible to predict
the impact the Act and its implementing regulations may have on
Heartland or its subsidiary banks. 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
subsidiary banks have not applied for or received approval to
establish any financial subsidiaries. Less than 10% of all bank
holding companies have elected to become financial holding
companies.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
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
10.19 Second Amended and Restated Credit Agreement between
Heartland Financial USA, Inc. and The Northern Trust
Company dated September 28, 2000
10.20 See Exhibit 10.19 for substantially the same form of a
Credit Agreement between Heartland Financial USA, Inc.
and Harris Trust and Savings Bank dated September 28,
2000, except that the lender is Harris Trust and
Savings Bank and the commitment is $20 million
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: November 13, 2000