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 June 30, 1996
[ ] 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
Registrant's common stock as of the latest practicable date: As
of August 12, 1996, the Registrant had outstanding 4,709,970
shares of common stock, $1.00 par value per share.
HEARTLAND FINANCIAL USA, INC.
Form 10-Q Quarterly Report
Table of Contents
Part I
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Part II
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of
Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Form 10-Q Signature Page
HEARTLAND FINANCIAL USA, INC. CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)
6/30/96 12/31/95
------- --------
ASSETS
Cash and due from banks $ 23,791 $ 31,305
Federal funds sold 32,800 23,500
--------- ---------
Cash and cash equivalents 56,591 54,805
Time deposits in other
financial institutions 151 145
Securities:
Available for sale-at market
(cost of $166,902 for 1996
and $141,680 for 1995) 166,678 145,857
Held to maturity-at cost (approximate
market value of $1,950 for 1996 and
$2,503 for 1995) 1,870 2,369
Loans and leases:
Held for sale 1,128 790
Held to maturity 460,570 454,115
Allowance for possible loan and
lease losses (6,089) (5,580)
--------- ---------
Loans and leases, net 455,609 449,325
Premises, furniture and equipment, net 13,284 12,519
Other real estate, net 527 640
Other assets 15,374 11,653
--------- ---------
TOTAL ASSETS $710,084 $677,313
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 43,278 $ 49,283
Savings 230,121 210,853
Time 279,143 274,451
--------- ---------
Total deposits 552,542 534,587
Short-term borrowings 44,307 23,241
Accrued expenses and other liabilities 7,485 9,579
Other borrowings 40,400 45,400
--------- ---------
TOTAL LIABILITIES 644,734 612,807
-------- --------
STOCKHOLDERS' EQUITY:
Common stock (par value $1 per share;
authorized, 7,000,000 shares;
issued, 4,853,626 and 2,426,813
shares at June 30, 1996, and
December 31, 1995, respectively) 4,854 2,427
Capital surplus 13,123 13,090
Retained earnings 49,948 49,171
Net unrealized gain (loss) on
securities available for sale (141) 2,620
Treasury stock at cost
(140,060 and 166,652 shares
at June 30, 1996, and
December 31, 1995, respectively) (2,434) (2,802)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 65,350 64,506
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $710,084 $677,313
========= =========
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
Three Months Ended Six Months Ended
6/30/96 6/30/95 6/30/96 6/30/95
------- ------- ------- -------
INTEREST INCOME:
Interest and fees
on loans and leases $ 10,048 $ 9,771 $ 19,934 $ 18,772
Interest on investment
securities:
Taxable 2,260 2,047 4,348 4,071
Nontaxable 334 473 689 950
Interest on trading
account securities 0 0 0 10
Interest on federal
funds sold 199 92 412 123
Interest on interest-
bearing deposits in
other financial
institutions 36 33 111 43
-------- -------- -------- --------
TOTAL INTEREST INCOME 12,877 12,416 25,494 23,969
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 5,765 5,532 11,482 10,613
Interest on short-
term borrowings 494 308 910 654
Interest on other
borrowings 597 588 1,271 942
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 6,856 6,428 13,663 12,209
-------- -------- -------- --------
NET INTEREST INCOME 6,021 5,988 11,831 11,760
Provision for possible
loan and lease losses 228 217 975 435
-------- -------- -------- --------
NET INTEREST INCOME
AFTER PROVISION FOR
POSSIBLE LOAN AND
LEASE LOSSES 5,793 5,771 10,856 11,325
-------- -------- -------- --------
OTHER INCOME:
Service charges 588 508 1,154 997
Trust fees 465 383 895 768
Brokerage commissions 59 34 94 71
Insurance commissions 165 180 319 339
Investment securities
gains, net 76 8 1,398 84
Gain on sale of loans 16 9 44 14
Other 111 38 222 113
-------- -------- -------- --------
TOTAL OTHER INCOME 1,480 1,160 4,126 2,386
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee
benefits 2,762 2,470 5,556 5,004
Occupancy 297 226 580 498
Equipment 335 351 652 697
Outside services 319 349 574 600
FDIC assessment 52 288 102 575
Advertising 206 165 556 339
Other operating expense 720 672 1,416 1,301
-------- -------- -------- --------
TOTAL OTHER EXPENSES 4,691 4,521 9,436 9,014
-------- -------- -------- --------
INCOME BEFORE TAXES 2,582 2,410 5,546 4,697
Income taxes 712 691 1,398 1,288
-------- -------- -------- --------
NET INCOME $ 1,870 $ 1,719 $ 4,148 $ 3,409
======== ======== ======== ========
NET INCOME AVAILABLE
FOR COMMON STOCK $ 1,870 $ 1,719 $ 4,148 $ 3,409
======== ======== ======== ========
NET INCOME PER
COMMON SHARE $ .40 $ .36 $ .88 $ .71
DIVIDENDS DECLARED
PER COMMON SHARE $ .10 $ .08 $ .20 $ .15
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,718,887 4,824,100 4,713,667 4,832,146
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended
6/30/96 6/30/95
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 4,272 $ 7,340
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits (6) -
Proceeds from the sale of investment
securities available for sale 5,987 25,979
Proceeds from the sale of mortgage-
backed securities available for sale - 8,352
Proceeds from the maturity of and
principal paydowns on investment
securities held to maturity 498 5,651
Proceeds from the maturity of and
principal paydowns on investment
securities available for sale 23,203 13,397
Proceeds from the maturity of and
principal paydowns on mortgage-
backed securities held to maturity - 389
Proceeds from the maturity of and
principal paydowns on mortgage-
backed securities available for sale 6,254 3,050
Purchase of investment securities
available for sale (32,766) (35,689)
Purchase of mortgage-backed
securities available for sale (26,156) 0
Purchase of interest in low-income
housing project (2,865) (2,892)
Net increase in loans and leases (8,760) (33,008)
Capital expenditures (1,552) (354)
Proceeds on sale of fixed assets 2 51
Proceeds on sale of repossessed assets 197 110
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (35,964) (14,964)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits and savings accounts 13,263 (11,977)
Net increase in time deposit accounts 4,692 5,596
Net increase in other borrowings - 19,838
Net increase (decrease) in
short-term borrowings 16,066 (7,636)
Purchase of treasury stock (330) (567)
Proceeds from sale of treasury stock 731 233
Dividends (944) (1,646)
--------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 33,478 3,841
--------- ---------
Net increase (decrease) in cash
and cash equivalents 1,786 (3,783)
Cash and cash equivalents at
beginning of year 54,805 35,656
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 56,591 $ 31,873
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 1,723 $ 513
Cash paid for interest $ 13,758 $ 11,882
Investment securities transferred
from available for sale to public
charitable trust $ 220 $ -
Other borrowings transferred to
short-term borrowings $ 5,000 $ -
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, 1995,
included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 29, 1996. Accordingly, footnote
disclosure which would substantially duplicate the disclosure
contained in the audited consolidated financial statements has
been omitted.
The financial information of Heartland Financial USA, Inc. (the
"Company") included herein is prepared pursuant to the rules and
regulations for reporting on Form 10-Q. Such information
reflects all adjustments (consisting of normal recurring
adjustments) which are, in the opinion of management, necessary
for a fair presentation of results for the interim periods. The
results of the interim period ended June 30, 1996, are not
necessarily indicative of the results expected for the year
ending December 31, 1996.
On March 4, 1996, the Company's Board of Directors declared a two-
for-one stock split in the form of a 100% stock dividend to
stockholders of record on March 14, 1996, payable on March 29,
1996. Accordingly, all per share data have been restated to
reflect the stock split.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's results of operations depend primarily on net
interest income, which is the difference between interest income
from interest earning assets and interest expense on interest
bearing liabilities. Noninterest income, which includes service
charges, fees and gains on loans and trust income, also affects
the Company's results of operations. The Company's principal
operating expenses, aside from interest expense, consist of
compensation and employee benefits, occupancy and equipment costs
and provision for loan and lease losses.
Net income totaled $1,870,000 or $.40 per common share for the
quarter ended June 30, 1996, an increase of $151,000 (8.78%) from
the June 30, 1995, total of $1,719,000 or $.36 per common share.
Income for the six months ended June 30, 1996, was $4,148,000 or
$.88 per common share as compared to $3,409,000 or $.71 for the
same period in 1995. Net income recorded during the first quarter
of 1996 included a gain of $1,174,000 on the sale of stock held
in the investment portfolio at First Community Bank, FSB ("FCB"),
one of the Company's bank subsidiaries. This gain impacted per
common share earnings by $.16 for the six month period ended June
30, 1996. The writedown of a $469,000 loan at FCB was also
recorded during the first quarter of 1996 and impacted per common
share earnings by $.10 for the six month period ended June 30,
1996.
Net Interest Income
Net interest income remained stable at $6,021,000 and $5,988,000
for the three month periods ended June 30, 1996 and 1995,
respectively. Net interest income increased slightly to
$11,831,000 for the six month period ended June 30, 1996, and
$11,760,000 for the same period in 1995. Net interest income to
average earning assets on a fully tax equivalent basis was 3.92%
for the three month and 3.89% for the six month periods ended
June 30, 1996, as compared to 4.21% for the three month and 4.24%
for the six month periods ended June 30, 1995. This reduction
was primarily attributable to a shift from higher yielding loans
to lower yielding securities as a result of decreased loan
demand.
Noninterest Income
Noninterest income was $1,480,000 for the three months ended June
30, 1996, and $1,160,000 for the same period in 1995, an increase
of $320,000 (27.59%). Total noninterest income for the six
months ended June 30, 1996, was $4,126,000 compared to $2,386,000
for the same period ended June 30, 1995, a 72.93% increase. The
largest component of this $1,740,000 increase was the $1,314,000
change in investment security gains from $84,000 during the first
six months of 1995 to $1,398,000 during the same period in 1996.
Of these gains, $1,174,000 resulted from the sale of Federal Home
Loan Mortgage Corporation Common Stock held in the investment
portfolio at FCB. As interest rates declined during 1994, this
stock experienced substantial appreciation and, in anticipation
of rising interest rates in 1996, management decided to sell the
stock to reduce the interest rate risk within the investment
portfolio.
Service charges increased $80,000 (15.75%) from $508,000 for the
three month period ended June 30, 1995, to $588,000 for the same
period in 1996. Service charges totaled $1,154,000 and $997,000
for the six month periods ended June 30, 1996 and June 30, 1995,
respectively, an increase of $157,000 (15.75%). The addition of
new merchants in the credit card processing area was primarily
responsible for these increases.
Trust fees totaled $465,000 and $383,000 for the three months
ended June 30, 1996 and June 30, 1995, respectively, an increase
of $82,000 (21.41%). Trust fees increased $127,000 (16.54%) for
the six months ended June 30, 1996, compared to the same period
in 1995. These increases were primarily attributable to growth
in assets under management due to investment performance and the
development of new trust relationships through continued
marketing efforts. Total trust assets under management grew
$76,696,000 (26.50%) from $289,391,000 at December 31, 1995, to
$366,087,000 at June 30, 1996. Trust assets under management as
of June 30, 1996, included temporary investments of $15,000,000.
Brokerage commissions grew $25,000 (73.53%) for the three month
and $23,000 (32.39%) for the six month periods ended June 30,
1996 when compared to the same periods in 1995. These increases
reflect personnel changes in the brokerage area. For the three
month period ended June 30, 1996 and 1995, brokerage commissions
totaled $59,000 and $34,000, respectively. For the six month
period ended June 30, 1996, brokerage commissions were $94,000
compared to $71,000 for the same period in 1995.
During the three month period ended June 30, 1996, insurance
commissions decreased $15,000 (8.33%) to $165,000 as compared to
$180,000 for the same period in 1995. For the six month periods
ending June 30, 1996 and 1995, insurance commissions decreased
$20,000 (5.90%) from $339,000 to $319,000.
Gains on sales of loans totaled $16,000 and $9,000 for the three
month periods ended June 30, 1996 and 1995, respectively, an
increase of $7,000 (77.78%). Gains on sales of loans increased
$30,000 (214.29%) from $14,000 for the six months ended June 30,
1995, to $44,000 for the same period ended June 30, 1996. These
increases were due to consumers' renewed interest in fixed rate
fifteen- and thirty-year real estate loans which the Company
sells into the secondary market while retaining servicing of the
loans.
Other income increased $73,000 (192.11%) from $38,000 for the
three month period ended June 30, 1995, to $111,000 for the same
period in 1996. For the six month periods ended June 30, 1996
and 1995, other income was $222,000 and $113,000, respectively,
an increase of $109,000 (96.46%). The majority of these increases
in other income were attributable to increases in the cash
surrender value of life insurance policies on officers of the
Company.
Noninterest Expense
Noninterest expense increased from $4,521,000 for the three
months ended June 30, 1995, to $4,691,000 for the same period in
1996, an increase of $170,000 (3.76%). For the six month period
ended June 30, 1996, noninterest expense was $9,436,000 compared
to $9,014,000 for the same period in 1995, an increase of
$422,000 (4.68%). Salaries and employee benefits, the largest
component of noninterest expense, increased $292,000 (11.82%) for
the three month and $552,000 (11.03%) for the six month periods
under comparison. These increases were primarily the result of
the opening of the Company's de novo bank operation, Riverside
Community Bank ("RCB"), in Rockford, Illinois.
Occupancy expense increased $71,000 (31.42%) from $226,000 during
the three month period ended June 30, 1995 to $297,000 for the
same period in 1996. For the six month period ended June 30,
1996, occupancy expense was $580,000 compared to $498,000 for the
same period in 1995, an increase of $82,000 (16.47%). The
majority of these increases resulted from the rental of temporary
facilities for RCB. Furniture and equipment expense decreased
$16,000 (4.56%) and $45,000 (6.46%) for the three and six month
periods, respectively, ending June 30, 1996 when compared to the
same periods in 1995.
Fees paid for outside services also decreased slightly during the
three and six month periods ended on June 30, 1996 as compared
with the same periods in 1995 at $30,000 (8.60%) and $26,000
(4.33%), respectively.
FDIC insurance premium expense decreased $236,000 (81.94%) to
$52,000 for the three month period ended June 30, 1996, compared
to $288,000 for the same period in 1995. For the six month
period ended June 30, 1996, FDIC insurance premium expense
decreased $473,000 (82.26%) to $102,000 from $575,000 for the
same period in 1995. These decreases were the result of a change
in the premium on deposits charged to members of the Bank
Insurance Fund from .23% to .04% of deposits and subsequently to
$2,000 per year for well-capitalized banks. Three of the
Company's four banks were affected by this reduction. FCB, a
federal savings bank, is a member of the Savings Association
Insurance Fund which did not have a reduction in the premium on
deposits.
For the three month period ended June 30, 1996, advertising and
public relations expense increased $41,000 (24.85%) from $165,000
in 1995 to $206,000 in 1996. This increase was the result of
marketing efforts in Rockford, Illinois to promote the opening of
RCB. Advertising and public relations expense experienced the
largest single percentage increase within the noninterest expense
category during the six month period ended June 30, 1996, rising
$217,000 (64.01%) to $556,000 from $339,000. The primary
component of this increase was the contribution of stock from
FCB's investment portfolio to a public charitable trust at a cost
basis of $220,000 with an associated market value of $820,000.
Other operating expenses increased $48,000 (7.14%) from $672,000
for the three month period ended June 30, 1995, to $720,000 for
the same period in 1996. For the six month periods ended June
30, 1996 and 1995, other operating expenses were $1,416,000 and
$1,301,000, respectively, an increase of $115,000 (8.84%). These
increases were attributable to expenses incurred due to growth
within the merchant credit card processing area and the opening
of RCB.
Income Tax Expense
Income tax expense for the first six months of 1996 increased
8.54% over the same period in 1995, primarily as a result of
corresponding increases in pre-tax earnings. The Company's
effective tax rate declined from 27.42% for the six month period
ended June 30, 1995, to 25.21% for same period in 1996. This
change was the result of additional tax credits associated with
the investment in low-income housing projects and the previously
discussed contribution of appreciated property to a public
charitable trust.
FINANCIAL CONDITION
Loans and Provision for Loan and Lease Losses
Net loans and leases remained stable at $455,609,000 at June 30,
1996, when compared to the December 31, 1995, total of
$449,325,000. Commercial loans experienced modest growth of
$2,910,000 (1.52%) during the first six months of 1996, with
outstanding loans of $191,866,000 at December 31, 1995,
increasing to $194,776,000 at June 30, 1996. Real estate loans
were $159,357,000 at June 30, 1996, a slight increase of
$1,033,000 (.65%) over the December 31, 1995, balance of
$158,324,000. Agricultural loans remained relatively constant at
$58,970,000 at June 30, 1996, as compared to the December 31,
1995 increasing balance of $59,089,000. Consumer loans
experienced the most significant growth of $4,194,000 (10.76%)
with outstanding loans increasing to $43,182,000 at June 30,
1996, from $38,988,000 at December 31, 1995. Due to reduced
demand for lease financing during the first six months and to
scheduled paydowns, the Company's lease financing balances
declined $1,134,000 (13.29%) to a total of $7,396,000 at June 30,
1996.
The adequacy of the allowance for loan and lease losses is
determined by management using factors that include the overall
composition of the loan portfolio, types of loans, past loss
experience, loan delinquencies, and potential losses on
substandard and doubtful credits. The adequacy of the allowance
for loan and lease losses is monitored by the loan review staff,
senior management and the Board of Directors. The maintenance of
the allowance for loan and lease losses at an amount in excess of
four and one-half times nonperforming loans and leases is due to
a number of factors including the following: i) the economies of
the Company's primary market areas have been stable since 1989
and the growth of the allowance is intended to anticipate the
cyclical nature of most economies; ii) an increase in the amount
of nonperforming loans; and iii) an increase in the amount of
charge-offs for the first time since 1992.
The Company's provision for loan and lease losses was $228,000
for the three months ended June 30, 1996, compared to $217,000
for the same period in 1995, an increase of $11,000 (5.07%).
For the six months ended June 30, 1996, the provision for loan
and lease losses was $975,000 compared to $435,000 for the same
period in 1995, an increase of $540,000 (124.14%). Net charge-
offs were $466,000 and $108,000 during the first six months of
1996 and 1995, respectively. Included in the first six months of
1996 chargeoffs was the $469,000 writedown on a loan at FCB. The
allowance for loan and lease losses as a percentage of total
loans was 1.32% as of June 30, 1996, 1.23% as of December 31,
1995, and 1.20% as of June 30, 1995.
Nonperforming loans, defined as nonaccrual loans and loans past
due ninety days or more, increased from $1,203,000 at December
31, 1995, to $1,350,000 at June 30, 1996, an increase of $147,000
(12.22%).
Other real estate owned totaled $527,000 at June 30, 1996, a
decrease of $113,000 (17.66%), from the December 31, 1995, total
of $640,000.
Securities
The dual objectives of the investment portfolio are to provide
the Company with sources of both liquidity and earnings.
Investment securities represented $168,548,000 or 23.74% of total
assets at June 30, 1996, as compared to $148,226,000 or 21.88% at
December 31, 1995. This $20,322,000 (13.71%) change resulted
from the decreased demand for loans.
The available for sale securities portfolio of $145,857,000 at
December 31, 1995, increased $20,821,000 (14.27%) to $166,678,000
at June 30, 1996. Specifically, U.S. treasury and agency
securities increased $8,980,000 (15.22%) to $67,986,000 at June
30, 1996, from the December 31, 1995, total of $59,006,000.
Mortgage-backed securities increased $19,085,000 (48.37%) to
$58,538,000 at June 30, 1996 from $39,453,000 at December 31,
1995. Municipal obligation securities decreased $2,134,000
(10.45%) to $18,279,000 at June 30, 1996, due to maturities and
scheduled calls. Other securities totaled $14,610,000 at June
30, 1996, a decrease of $5,251,000 (26.44%), from the December
31, 1995, total of $19,861,000 and included equity securities,
corporate bonds and bankers acceptances.
Amortized cost of securities held to maturity was $1,870,000 at
June 30, 1996, a decrease of $499,000 (21.06%) from the December
31, 1995, total of $2,369,000. This decrease was due to
scheduled maturities and calls.
Deposits and Borrowed Funds
Total deposits were $552,542,000 at June 30, 1996, an increase of
$17,955,000 (3.36%) from the December 31, 1995, total of
$534,587,000. Demand deposits experienced a decrease of
$6,005,000 (12.18%), ending the period at $43,278,000. Much of
this reduction was due to normal seasonal fluctuations in demand
deposit accounts. Savings accounts increased $19,268,000 (9.14%)
to $230,121,000 at June 30, 1996. The majority of this increase
was related to isolated accounts. Certificates of deposit were
$279,143,000 at June 30, 1996, reflecting a modest $4,692,000
(1.71%) increase over the December 31, 1995, total of
$274,451,000.
Short-term borrowings generally include federal funds purchased,
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. As of June 30, 1996, the balance in
this account had increased to $44,307,000 from the December 31,
1995, total of $23,241,000. This $21,066,000 (90.64%) increase
was primarily attributable to growth in securities sold under
agreement to repurchase and the transfer of $5,000,000 in FHLB
borrowings from other borrowings to short-term borrowings due to
approaching maturities.
Other borrowings includes the Company's long-term FHLB funding
which decreased to $40,400,000 at June 30, 1996, from the
December 31, 1995, total of $45,400,000 due to the transfer of
$5,000,000 to short-term borrowings. Total long-term FHLB
advances had a melded remaining term of 3.53 years at an average
rate of 5.85% as of June 30, 1996.
Capital Resources
Bank regulatory bodies have adopted capital standards by which
all bank holding companies will be evaluated. Under the risk-
based method of measurement, the resulting ratio is dependent
upon not only the level of capital and assets, but the
composition of assets and capital and the amount of off-balance
sheet commitments. The Company's capital ratios were as follows
for the dates indicated:
CAPITAL RATIOS
(Dollars in thousands)
June 30, 1996 December 31, 1995
Amount Ratio Amount Ratio
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 64,499 13.41% $ 60,780 13.28%
Tier 1 capital minimum
requirement 19,243 4.00% 18,302 9.00%
Excess $ 45,256 9.41 42,478 9.28%
Total capital $ 70,312 14.62% $ 66,165 4.46%
Total capital minimum
requirement 38,487 8.00% 36,603 8.00%
Excess $ 31,825 6.62% $ 29,562 6.46%
Total risk adjusted assets $481,085 $457,539
Leverage Capital Ratios:(2)
Tier 1 capital $ 64,499 9.38% $ 60,780 9.47%
Tier 1 capital minimum
requirement(3) $ 34,379 5.00% $ 32,083 5.00%
Excess $ 30,120 4.38% $ 28,697 4.47%
Average adjusted assets
(less goodwill) $687,580 $641,650
(1)Based on the risk-based capital guidelines of the Federal
Reserve, a bank holding company is required to maintain a
Tier 1 capital to risk-adjusted assets ratio of 4.00% and
total capital to risk-adjusted assets ratio of 8.00%.
(2)The leverage ratio is defined as the ratio of Tier 1 capital
to average adjusted assets.
(3)Management of the Company has established a minimum target
leverage ratio of 5.00%. Based on Federal Reserve
guidelines, a bank holding company generally is required to
maintain a leverage ratio of 3.00% plus an additional cushion
of at least 100 to 200 basis points.
Commitments for capital expenditures are an important factor in
evaluating capital adequacy. Construction of the $1,800,000
permanent facility for RCB is near completion. Bank staff will
begin occupying the facility in August and grand opening
celebrations are scheduled during September.
An $800,000 branch facility is nearing completion on Keokuk's
northwest side in direct response to potential growth
opportunities. FCB is scheduled to occupy this facility in late
August.
Construction of a $2,200,000 bank facility in Galena, Illinois
began during the third quarter of 1995 with anticipated
completion by the end of this year. This project will allow
Galena State Bank and Trust Company to consolidate operations
into one bank building and provide better accessibility and
parking for bank customers.
Heartland entered into a license and service agreement for the
installation of Fiserv's Comprehensive Banking Systems software
with an approximate project cost of $730,000. Conversion is
scheduled for the fall of 1996 and spring of 1997 and will
provide Heartland the technology to remain competitive.
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.
Liquidity
Liquidity measures the ability of the Company to meet maturing
obligations and its existing commitments, to withstand
fluctuations in deposit levels, to fund its operations and to
provide for customers' credit needs. The liquidity of the
Company principally depends on cash flows from operating
activities, investment in and maturity of assets, changes in
balances of deposits and borrowings and its ability to borrow
funds in the money or capital markets.
Net cash outflows from investing activities were $35,964,000 and
$14,964,000 during the first six months of 1996 and 1995,
respectively. Net principal disbursed on loans totaled
$8,760,000 during the first quarter of 1996 compared to
$33,008,000 for the same period in 1995. Proceeds from the
maturity and paydowns on securities totaled $29,955,000 and
$22,487,000 for the six month periods ended June 30, 1996 and
1995, respectively. Cash provided from the sales of securities
decreased from $34,331,000 for the first six months of 1995 to
$5,987,000 for the same period in 1996. Cash used for the
purchases of securities was $58,922,000 for the first six months
of 1996 compared to $35,689,000 for the same period in 1995.
Additional purchases of interests in low-income housing projects
totaled $2,865,000 during the first six months of 1996 compared
to $2,892,000 during the first six months of 1995.
Cash inflows from financing activities increased from $3,841,000
for the six month period ended June 30, 1995, to $33,478,000 for
the same period in 1996. The net change in demand deposits and
savings accounts used cash of $11,977,000 during the first six
months of 1995 and provided cash of $13,263,000 during the same
period in 1996. For the six month period ended June 30, 1996, cash
provided by a net increase in time deposit accounts was $4,692,000
compared with $5,596,000 for the same period in 1995. Short-term
borrowings experienced a net decrease of $7,636,000 during the six
month period ended June 30, 1995, compared to a net increase of
$16,066,000 during the same six month period in 1996. Other
borrowings experienced a net increase of $19,838,000 during the
first six months of 1995 and no change during the same period in
1996.
In the event of short term liquidity needs, the Company may
purchase federal funds from correspondent banks. The Company may
also borrow funds from the Federal Reserve Bank of Chicago, but
has not done so during the period covered in this report. The
Company sells securities under agreements to repurchase. These
agreements, which are principally to local businesses, have been
utilized by Dubuque Bank and Trust Company as a funding mechanism
for several years. Finally, the Company's subsidiary banks'
memberships in the FHLB System has given them the ability to
borrow funds from the FHLB of Des Moines and Chicago for short-
and long-term purposes.
Total cash inflows from operating activities exceeded outflows
during the first six months of 1996 by $4,272,000 and $7,340,000
during the first six months of 1995. 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.
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
The Company's annual meeting of stockholders was held on April
22, 1996. At the meeting, Lynn S. Fuller and Evangeline K.
Jansen were elected to serve as Class III directors (term expires
in 1999). Continuing as Class I directors (term expires in 1997)
are Lynn B. Fuller and Gregory R. Miller. Continuing as Class II
directors (term expires in 1998) are Mark C. Falb, James A.
Schmid and Robert Woodward. The stockholders approved an
amendment to the Heartland Financial USA, Inc. 1993 Stock Option
Plan to authorize the allocation of an additional 200,000 shares
of the Company's common stock for distribution under the plan.
Also approved by the stockholders was the adoption of the
Heartland Financial USA, Inc. Employee Stock Purchase Plan and
the appointment of KPMG Peat Marwick LLP as the Company's
independent public auditors for the year ending December 31,
1996.
There were 4,719,152 issued and outstanding shares of Common
Stock at the time of the annual meeting. The voting on the above
described items were as follows:
For Withheld
--- --------
Election of Directors
Lynn S. Fuller 4,123,998 41,704
Evangeline K. Jansen 4,121,850 43,852
Broker
For Against Abstain Non-Votes Total
Amendment of
Stock Option
Plan 3,868,622 93,664 1,160 202,256 4,165,702
Adoption of
Employee Stock
Purchase Plan 3,873,052 89,610 784 202,256 4,165,702
Appointment of
KPMG Peat
Marwick LLP 4,150,488 2,400 12,814 0 4,165,702
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
10.38 Contract for Purchase between Galena State Bank and
Trust Company as "Seller" and Charles Schnepf and
Daniel O'Keefe as "Buyers" dated December 4, 1995.
10.39 Purchase Agreement between Galena State Bank and Trust
Company as "Seller" and Hoskins Lumber Company as
"Buyer" dated September 12, 1995.
10.40 Employment Agreement between Heartland Financial USA,
Inc. and James E. Lukas dated April 1, 1996.
10.41 Purchase Agreement between Hoskins Lumber Company as
"Seller" and Galena State Bank and Trust Company as
"Buyer" dated May 17, 1996.
10.42 Exchange Agreement/Exchange Escrow No. 960265 between
Galena State Bank and Trust Company as "Exchangor" and
Attorneys' Title Guaranty Fund, Inc. as "Qualified
Intermediary" dated May 17, 1996.
10.43 License and Service Agreement, Software License
Agreement, and Professional Services Agreement between
Fiserv and Heartland Financial USA, Inc. dated June 21,
1996.
27.1 Financial Data Schedule
Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
HEARTLAND FINANCIAL USA, INC.
(Registrant)
By: /s/ Lynn B. Fuller
-----------------------
Lynn B. Fuller
By: /s/ John K. Schmidt
-----------------------
John K. Schmidt
Dated: August 14, 1996