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, 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 November 14, 1996, the Registrant had outstanding 4,721,082
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)
(Dollars in thousands, except per share data)
9/30/96 12/31/95
------- --------
ASSETS
Cash and due from banks $ 35,878 $ 31,305
Federal funds sold 0 23,500
--------- ---------
Cash and cash equivalents 35,878 54,805
Time deposits in other
financial institutions 151 145
Securities:
Available for sale-at market
(cost of $170,874 for 1996
and $141,680 for 1995) 171,857 145,857
Held to maturity-at cost (approximate
market value of $1,950 for 1996 and
$2,444 for 1995) 2,360 2,369
Loans and leases:
Held for sale 1,219 790
Held to maturity 476,111 454,115
Allowance for possible loan and
lease losses (6,240) (5,580)
--------- ---------
Loans and leases, net 471,090 449,325
Premises, furniture and equipment, net 15,157 12,519
Other real estate, net 524 640
Other assets 15,976 11,653
--------- ---------
TOTAL ASSETS $712,993 $677,313
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 59,014 $ 49,283
Savings 210,697 210,853
Time 275,982 274,451
--------- ---------
Total deposits 545,693 534,587
Short-term borrowings 51,596 23,241
Accrued expenses and other liabilities 7,978 9,579
Other borrowings 40,400 45,400
--------- ---------
TOTAL LIABILITIES 645,667 612,807
-------- --------
STOCKHOLDERS' EQUITY:
Common stock (par value $1 per share;
authorized, 7,000,000 shares;
issued, 4,853,626 and 2,426,813
shares at September 30, 1996, and
December 31, 1995, respectively) 4,854 2,427
Capital surplus 13,200 13,090
Retained earnings 50,999 49,171
Net unrealized gain (loss) on
securities available for sale 616 2,620
Treasury stock at cost
(132,544 and 166,652 shares
at September 30, 1996, and
December 31, 1995, respectively) (2,343) (2,802)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 67,326 64,506
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $712,993 $677,313
========= =========
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
9/30/96 9/30/95 9/30/96 9/30/95
------- ------- ------- -------
INTEREST INCOME:
Interest and fees
on loans and leases $ 10,226 $ 10,061 $ 30,160 $ 28,833
Interest on investment
securities:
Taxable 2,360 1,702 6,708 5,773
Nontaxable 317 437 1,006 1,387
Interest on trading
account securities 0 0 0 10
Interest on federal
funds sold 96 164 508 287
Interest on interest-
bearing deposits in
other financial
institutions 16 12 127 55
-------- -------- -------- --------
TOTAL INTEREST INCOME 13,015 12,376 38,509 36,345
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 5,760 5,594 17,242 16,207
Interest on short-
term borrowings 528 227 1,438 881
Interest on other
borrowings 604 669 1,875 1,611
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 6,892 6,490 20,555 18,699
-------- -------- -------- --------
NET INTEREST INCOME 6,123 5,886 17,954 17,646
Provision for possible
loan and lease losses 212 239 1,187 674
-------- -------- -------- --------
NET INTEREST INCOME
AFTER PROVISION FOR
POSSIBLE LOAN AND
LEASE LOSSES 5,911 5,647 16,767 16,972
-------- -------- -------- --------
OTHER INCOME:
Service charges 629 545 1,783 1,542
Trust fees 479 347 1,374 1,115
Brokerage commissions 47 33 141 104
Insurance commissions 167 140 486 479
Investment securities
gains, net 182 205 1,580 289
Gain on sale of loans 24 35 68 49
Other 85 245 307 358
-------- -------- -------- --------
TOTAL OTHER INCOME 1,613 1,550 5,739 3,936
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee
benefits 2,858 2,479 8,414 7,483
Occupancy 333 274 913 772
Equipment 330 346 982 1,043
Outside services 340 275 914 875
FDIC assessment 598 21 700 596
Advertising 195 190 751 529
Other operating expense 768 659 2,184 1,960
-------- -------- -------- --------
TOTAL OTHER EXPENSES 5,422 4,244 14,858 13,258
-------- -------- -------- --------
INCOME BEFORE TAXES 2,102 2,953 7,648 7,650
Income taxes 580 878 1,978 2,166
-------- -------- -------- --------
NET INCOME $ 1,522 2,075 $ 5,670 $ 5,484
======== ======== ======== ========
NET INCOME PER
COMMON SHARE $ .32 .43 $ 1.20 $ 1.14
DIVIDENDS DECLARED
PER COMMON SHARE $ .10 $ .08 $ .30 $ .23
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,711,650 4,824,100 4,712,989 4,825,542
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine Months Ended
9/30/96 9/30/95
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 5,876 $ 11,650
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits (6) (2,002)
Proceeds from the sale of investment
securities available for sale 11,088 27,055
Proceeds from the sale of mortgage-
backed securities available for sale 582 8,352
Proceeds from the maturity of and
principal paydowns on investment
securities held to maturity 507 6,771
Proceeds from the maturity of and
principal paydowns on investment
securities available for sale 25,016 15,003
Proceeds from the maturity of and
principal paydowns on mortgage-
backed securities held to maturity - 596
Proceeds from the maturity of and
principal paydowns on mortgage-
backed securities available for sale 9,316 5,067
Purchase of investment securities
held to maturity (500) -
Purchase of investment securities
available for sale (37,455) (38,310)
Purchase of mortgage-backed
securities available for sale (35,678) (3,639)
Purchase of interest in low-income
housing project (2,865) (2,892)
Net increase in loans and leases (25,075) (41,757)
Capital expenditures (3,558) (1,395)
Proceeds on sale of fixed assets 2 51
Proceeds on sale of repossessed assets 208 120
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (58,418) (26,980)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits
and savings accounts 9,575 1,521
Net increase in time deposit accounts 1,531 13,177
Net increase in other borrowings - 18,338
Net increase (decrease) in
short-term borrowings 23,355 (5,058)
Purchase of treasury stock (556) (816)
Proceeds from sale of treasury stock 1,126 233
Dividends (1,416) (2,007)
--------- ---------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 33,615 25,388
--------- ---------
Net increase (decrease) in cash
and cash equivalents (18,927) 10,058
Cash and cash equivalents at
beginning of year 54,805 35,656
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 35,878 $ 45,714
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 2,443 $ 1,215
Cash paid for interest $ 20,604 $ 18,149
Investment securities contributed
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 periods ended September 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 for the nine months ended September 30, 1996 was
$5,670,000, an increase of $186,000 (3.39%) from the $5,484,000
earned during the same period in 1995. On a per common share
basis, earnings for the nine months ended September 30, 1996
increased $.06 (5.26%) to $1.20 from the $1.14 recorded in 1995.
Third quarter earnings for the period ended September 30, 1996
were $1,522,000 as compared to $2,075,000 earned during the same
quarter in 1995. This $553,000 (26.65%) decrease in third
quarter earnings was primarily the result of recently passed
legislation which imposed a one-time special assessment on all
savings associations to capitalize the Savings Association
Insurance Fund("SAIF"). See "Recent Regulatory Developments". The
charge amounted to $545,000 at First Community Bank, FSB ("FCB"),
the Company's only savings association subsidiary. Also, third
quarter earnings during 1995 included a $270,000 refund received
from the Federal Deposit Insurance Corporation ("FDIC") at two of
the Company's member banks, Dubuque Bank and Trust Company
("DB&T") and Galena State Bank and Trust Company ("GSB").
Exclusive of these nonrecurring events, third quarter earnings
per share remained stable at $.40 during 1996 and 1995.
Net Interest Income
Net interest income increased $237,000 (4.03%) to $6,123,000 for
the three month period ended September 30, 1996 from $5,886,000
during the same period in 1995. For the nine month period ended
September 30, 1996, net interest income increased slightly to
$17,954,000 from the $17,646,000 recorded during the same period
in 1995. Net interest income to average earning assets on a
fully tax equivalent basis was 3.95% for the three month and
3.91% for the nine month periods ended September 30, 1996, as
compared to 4.08% for the three month and 4.19% for the nine
month periods ended September 30, 1995. These reductions were
primarily attributable to higher funding costs, reduced loan
demand, and lower reinvestment rates on investment portfolio
additions.
Noninterest Income
Noninterest income was $1,613,000 for the three months ended
September 30, 1996, and $1,550,000 for the same period in 1995,
an increase of $63,000 (4.06%). Total noninterest income for the
nine months ended September 30, 1996, was $5,739,000 compared to
$3,936,000 for the same period ended September 30, 1995, a 45.81%
increase. The largest component of this $1,803,000 increase was
the $1,291,000 change in investment security gains from $289,000
during the first nine months of 1995 to $1,580,000 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 $84,000 (15.41%) from $545,000 for the
three month period ended September 30, 1995, to $629,000 for the
same period in 1996. Service charges totaled $1,783,000 and
$1,542,000 for the nine month periods ended September 30, 1996
and September 30, 1995, respectively, an increase of $241,000
(15.63%). The addition of new merchants in the credit card
processing area was primarily responsible for these increases.
Trust fees totaled $479,000 and $347,000 for the three months
ended September 30, 1996 and September 30, 1995, respectively, an
increase of $132,000 (38.04%). Trust fees increased $259,000
(23.23%) for the nine months ended September 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 $75,997,000 (26.26%) from
$289,391,000 at December 31, 1995, to $365,388,000 at September
30, 1996.
Brokerage commissions grew $14,000 (42.42%) for the three month
and $37,000 (35.58%) for the nine month periods ended September
30, 1996 when compared to the same periods in 1995. These
increases reflected personnel changes in the brokerage area. For
the three month period ended September 30, 1996 and 1995,
brokerage commissions totaled $47,000 and $33,000, respectively.
For the nine month period ended September 30, 1996, brokerage
commissions were $141,000 compared to $104,000 for the same
period in 1995.
During the three month period ended September 30, 1996, insurance
commissions increased $27,000 (19.29%) to $167,000 as compared to
$140,000 for the same period in 1995. For the nine month periods
ending September 30, 1996 and 1995, insurance commissions
remained stable at $486,000 and $479,000, respectively.
Gains on sales of loans totaled $24,000 and $35,000 for the three
month periods ended September 30, 1996 and 1995, respectively, a
decrease of $11,000 (31.43%) due primarily to reduced consumer
demand for real estate loans during the third quarter of 1996.
Gains on sales of loans increased $19,000 (38.78%) from $49,000
for the nine months ended September 30, 1995, to $68,000 for the
same period ended September 30, 1996. This increase was due to
consumers' renewed interest in fixed rate fifteen- and thirty-
year real estate loans during the first six months of 1996, which
the Company sells into the secondary market while retaining
servicing of the loans.
Other income decreased $160,000 (65.31%) from $245,000 for the
three month period ended September 30, 1995, to $85,000 for the
same period in 1996. Included in the total for 1995 was an
increase in the cash surrender value of life insurance policies
on officers of the Company, the majority of which will be
recorded during the fourth quarter of 1996. For the nine month
periods ended September 30, 1996 and 1995, other income was
$307,000 and $358,000, respectively, a decrease of $51,000
(14.25%).
Noninterest Expense
Noninterest expense increased from $4,244,000 for the three
months ended September 30, 1995, to $5,422,000 for the same
period in 1996, an increase of $1,178,000 (27.76%). For the nine
month period ended September 30, 1996, noninterest expense was
$14,858,000 compared to $13,258,000 for the same period in 1995,
an increase of $1,600,000 (12.07%). Salaries and employee
benefits, the largest component of noninterest expense, increased
$379,000 (15.29%) for the three month and $931,000 (12.44%) for
the nine month periods under comparison. These increases were
primarily the result of normal salary increases and the opening
of the Company's de novo bank operation, Riverside Community Bank
("RCB"), in Rockford, Illinois in October, 1995.
Occupancy expense increased $59,000 (21.53%) from $274,000 during
the three month period ended September 30, 1995 to $333,000 for
the same period in 1996. For the nine month period ended
September 30, 1996, occupancy expense was $913,000 compared to
$772,000 for the same period in 1995, an increase of $141,000
(18.26%). The majority of these increases resulted from the
rental of temporary facilities for RCB.
Furniture and equipment expense decreased $16,000 (4.62%) and
$61,000 (5.85%) for the three and nine month periods,
respectively, ending September 30, 1996 when compared to the same
periods in 1995.
Fees paid for outside services increased $65,000 (23.64%) during
the three month period ended on September 30, 1996 as compared
with the same period in 1995. For the nine month period ended on
September 30, 1996, fees for outside services increased $39,000
(4.46%) from $875,000 for the same period in 1995 to $914,000.
FDIC insurance premium expense increased $577,000 to $598,000 for
the three month period ended September 30, 1996, compared to
$21,000 for the same period in 1995. The one-time special
assessment on all savings associations to capitalize the SAIF
amounted to $545,000 at FCB and was recorded during the third
quarter of 1996. Recorded during the third quarter of 1995 were
the refunds of FDIC insurance premiums at DB&T and GSB totaling
$270,000. For the nine month period ended September 30, 1996,
FDIC insurance premium expense increased $104,000 (17.45%) to
$700,000 from $596,000 for the same period in 1995. Also
affecting the change in FDIC premium expense for the periods
under comparison is the reduction in the premium charged to
members of the Bank Insurance Fund ("BIF") 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 which took affect in September of 1995. FCB, as a
member of SAIF, will experience a reduction in FDIC premium
expense on January 1, 1997, when the assessment will drop from
.23% to .065% of deposits.
For the three month period ended September 30, advertising and
public relations expense remained stable at $195,000 for 1996 and
$190,000 for 1995. During the nine month period ended September
30, 1996, advertising and public relations expense experienced
the largest single percentage increase within the noninterest
expense category rising $222,000 (41.97%) to $751,000 from the
$529,000 incurred during the same period in 1995. 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 $109,000 (16.54%) from
$659,000 for the three month period ended September 30, 1995, to
$768,000 for the same period in 1996. For the nine month periods
ended September 30, 1996 and 1995, other operating expenses were
$2,184,000 and $1,960,000, respectively, an increase of $224,000
(11.43%). 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 nine months of 1996 decreased
8.68% over the same period in 1995. The Company's effective tax
rate declined from 28.31% for the nine month period ended
September 30, 1995, to 25.86% for same period in 1996. This
change was the result of additional tax credits associated with
the additional 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 increased $21,765,000 (4.84%) to
$471,090,000 at September 30, 1996, when compared to the December
31, 1995, total of $449,325,000. Commercial loans experienced
growth of $7,404,000 (3.86%) during the first nine months of
1996, with outstanding loans of $191,866,000 at December 31,
1995, increasing to $199,270,000 at September 30, 1996. Real
estate loans were $167,614,000 at September 30, 1996, an increase
of $9,290,000 (5.87%) over the December 31, 1995, balance of
$158,324,000. Agricultural loans increased $692,000 (1.17%) from
$59,089,000 at December 31, 1995, to $59,781,000 at September 30,
1996. Consumer loans experienced the most significant growth in
outstanding loan balances, increasing to $45,819,000 at September
30, 1996, from $38,988,000 at December 31, 1995, an increase of
$6,831,000 (17.52%). Increased activity in consumer lines of
credit, additional marketing efforts and the expansion of the
Company's finance subsidiary into Madison, Wisconsin contributed
to this growth. The Company's lease financing balances declined
$1,342,000 (15.73%) to a total of $7,188,000 at September 30,
1996 from $8,530,000 at December 31, 1995, due to reduced demand
for lease financing and scheduled paydowns.
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
three 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 $212,000
for the three months ended September 30, 1996, compared to
$239,000 for the same period in 1995, a decrease of $27,000
(11.30%). For the nine months ended September 30, 1996, the
provision for loan and lease losses was $1,187,000 compared to
$674,000 for the same period in 1995, an increase of $513,000
(76.11%). Net charge-offs were $527,000 and $181,000 during the
first nine months of 1996 and 1995, respectively. Included in
the first nine months of 1996 charge-offs was the $469,000
writedown on a purchased lease pool at FCB. The allowance for
loan and lease losses as a percentage of total loans was 1.31% as
of September 30, 1996, 1.23% as of December 31, 1995, and 1.22%
as of September 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 $1,877,000 at September 30, 1996, an increase of
$674,000 (56.03%).
Other real estate owned totaled $524,000 at September 30, 1996, a
decrease of $116,000 (18.12%), 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 $174,217,000 or 24.43% of total
assets at September 30, 1996, as compared to $148,226,000 or
21.88% at December 31, 1995. This $25,991,000 (17.54%) change
resulted from management's decision to invest excess funds.
The available for sale securities portfolio of $145,857,000 at
December 31, 1995, increased $26,000,000 (17.83%) to $171,857,000
at September 30, 1996. Specifically, U.S. treasury and agency
securities increased $12,605,000 (21.36%) to $71,611,000 at
September 30, 1996, from the December 31, 1995, total of
$59,006,000. Mortgage-backed securities increased $25,284,000
(64.09%) to $64,737,000 at September 30, 1996 from $39,453,000 at
December 31, 1995. Mutual funds decreased $3,110,000
(43.66%)from $7,124,000 at December 31, 1995, to $4,014,000 at
September 30, 1996. Municipal obligation securities decreased
$2,555,000 (12.52%) to $17,858,000 at September 30, 1996, due to
maturities and scheduled calls. Other securities totaled
$13,637,000 at September 30, 1996, a decrease of $6,224,000
(31.34%), 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 remained relatively
stable at $2,360,000 on September 30, 1996, when compared to the
December 31, 1995, total of $2,369,000.
Deposits and Borrowed Funds
Total deposits were $545,693,000 at September 30, 1996, an
increase of $11,106,000 (2.08%) from the December 31, 1995, total
of $534,587,000. Demand deposits experienced an increase of
$9,731,000 (19.75%), ending the period at $59,014,000. Savings
accounts remained stable at $210,697,000 on September 30, 1996,
when compared to the December 31, 1995, total of $210,853,000.
Certificates of deposit were $275,982,000 at September 30, 1996,
reflecting a slight $1,531,000 (.56%) 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, short-term Federal
Home Loan Bank ("FHLB") advances and treasury tax and loan note
options. These funding alternatives are utilized in varying
degrees depending on their pricing and availability. As of
September 30, 1996, the balance in this account had increased to
$51,596,000 from the December 31, 1995, total of $23,241,000.
This $28,355,000 (122.00%) increase was primarily attributable to
the variability of treasury tax and loan note options and growth
in securities sold under agreement to repurchase, which are used
as a cash management tool by the Company's larger commercial
customers.
Other borrowings includes the Company's long-term FHLB funding
which decreased to $40,400,000 at September 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 3.27 years at an average
rate of 5.85% as of September 30, 1996.
Capital Resources
Bank regulatory agencies have adopted capital standards by which
all bank holding companies will be evaluated. Under the risk-
based method of measurement, the resulting ratio is dependent
upon not only the level of capital and assets, but the
composition of assets and capital and the amount of off-balance
sheet commitments. The Company's capital ratios were as follows
for the dates indicated:
CAPITAL RATIOS
(Dollars in thousands)
September 30, 1996 December 31, 1995
Amount Ratio Amount Ratio
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 65,741 13.12% $ 60,780 13.28%
Tier 1 capital minimum
requirement 20,038 4.00% 18,302 9.00%
Excess $ 45,703 9.12% 42,478 9.28%
Total capital $ 71,860 14.35% $ 66,165 4.46%
Total capital minimum
requirement 40,075 8.00% 36,603 8.00%
Excess $ 31,785 6.35% $ 29,562 6.46%
Total risk adjusted assets $500,939 $457,539
Leverage Capital Ratios:(2)
Tier 1 capital $ 65,741 9.55% $ 60,780 9.47%
Tier 1 capital minimum
requirement(3) $ 34,409 5.00% $ 32,083 5.00%
Excess $ 31,332 4.55% $ 28,697 4.47%
Average adjusted assets
(less goodwill) $688,177 $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 a $2,500,000 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.
During the second quarter of 1996, the Company 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. The conversion process began in
October of this year and is scheduled for completion in the
spring of 1997, providing Heartland the enhanced technology
necessary to remain competitive.
The Company continues to explore opportunities to expand its
umbrella of independent community banks through mergers and
acquisitions as well as de novo and branching opportunities. On
November 12, 1996, the Company entered into a definitive
agreement with the stockholders of Cottage Grove State Bank in
Cottage Grove, Wisconsin. The agreement requires a cash payment
of $7,875,000 with a closing date no later than March 1, 1997.
Additional expenditures relating to expansion 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 $58,418,000 and
$26,980,000 during the first nine months of 1996 and 1995,
respectively. Net principal disbursed on loans totaled
$25,075,000 during the first nine months of 1996 compared to
$41,757,000 for the same period in 1995. Proceeds from the
maturity and paydowns on securities totaled $34,839,000 and
$27,437,000 for the nine month periods ended September 30, 1996
and 1995, respectively. Cash provided from the sales of
securities decreased from $35,407,000 for the first nine months
of 1995 to $11,670,000 for the same period in 1996. Cash used
for the purchases of securities was $73,633,000 for the first
nine months of 1996 compared to $41,949,000 for the same period
in 1995. Additional purchases of interests in low-income housing
projects totaled $2,865,000 during the first nine months of 1996
compared to $2,892,000 during the first nine months of 1995.
Cash inflows from financing activities increased from $25,388,000
for the nine month period ended September 30, 1995, to $33,615,000
for the same period in 1996. The net change in demand deposits and
savings accounts provided cash of $1,521,000 during the first nine
months of 1995 and $9,575,000 during the same period in 1996. For
the nine month period ended September 30, 1996, cash provided by a
net increase in time deposit accounts was $1,531,000 compared with
$13,177,000 for the same period in 1995. Short-term borrowings
used cash of $5,058,000 during the nine month period ended
September 30, 1995, compared to providing cash of $23,355,000
during the same nine month period in 1996. Other borrowings
experienced a net increase of $18,338,000 during the first nine
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 DB&T 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 nine months of 1996 by $5,876,000 and
$11,650,000 during the first nine 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.
Recent Regulatory Developments
On September 30, 1996, President Clinton signed into law the
"Economic Growth and Regulatory Paperwork Reduction Act of 1996"
(the "Regulatory Reduction Act"). Subtitle G of the Regulatory
Reduction Act consists of the "Deposit Insurance Funds Act of
1996" (the "DIFA"). The DIFA provides for a one-time special
assessment on each depository institution holding deposits
subject to assessment by the FDIC for the SAIF in an amount
which, in the aggregate, will increase the designated reserve
ratio of the SAIF (i.e., the ratio of the insurance reserves of
the SAIF to total SAIF-insured deposits) to 1.25% on October 1,
1996. Subject to certain exceptions, the special assessment is
payable in full on November 27, 1996. One of the Company's bank
subsidiaries, FCB, is a SAIF member subject to the special
assessment.
Under the DIFA, the amount of the special assessment payable by
an institution is to be determined on the basis of the amount of
SAIF-assessable deposits held by the institution on March 31,
1995, or acquired by the institution after March 31, 1995 from
another institution which held the deposits as of that date but
is no longer in existence on November 27, 1996. The DIFA
provides for a 20% discount in calculating the SAIF-assessable
deposits of certain "Oakar" banks (i.e., BIF member banks that
hold deposits acquired from a SAIF member that are deemed to
remain SAIF insured) and certain "Sasser" banks (i.e., banks
that converted from thrift to bank charters but remain SAIF
members). The DIFA also exempts certain institutions from
payment of the special assessment (including institutions that
are undercapitalized or that would become undercapitalized as a
result of payment of the special assessment), and allows an
institution to pay the special assessment in two installments if
there is a significant risk that by paying the special assessment
in a lump sum, the institution or its holding company would be in
default under or in violation of terms or conditions of debt
obligations or preferred stock issued by the institution or its
holding company and outstanding on September 13, 1995.
On October 8, 1996, the FDIC adopted a final regulation
implementing the SAIF special assessment. In that regulation,
the FDIC set the special assessment rate at 0.657% of SAIF-
assessable deposits held on March 31, 1995. The FDIC has
notified FCB that the dollar amount of the special assessment
payable by FCB is estimated to be $545,000. As a result of the
special assessment, FCB has taken this amount as a charge against
earnings for the quarter ended September 30, 1996. As discussed
below, however, the recapitalization of the SAIF resulting from
the special assessment should significantly reduce FCB's ongoing
deposit insurance expense.
In light of the recapitalization of the SAIF pursuant to the
special assessment authorized by the DIFA, the FDIC, on October
8, 1996, issued a proposed rule that would reduce regular semi-
annual SAIF assessments from the current range of 0.23% - 0.31%
of deposits to a range of 0% - 0.27% of deposits. Under the
proposal, the new rates would be effective October 1, 1996 for
Oakar and Sasser banks, but would not take affect for other SAIF-
assessable institutions until January 1, 1997. From October 1,
1996 through December 31, 1996, SAIF-assessable institutions
other than Oakar and Sasser banks would, under the proposal, be
assessed at rates ranging from 0.18% to 0.27% of deposits, which
represents the amount the FDIC calculates as necessary to cover
the interest due for that period on outstanding obligations of
the Financing Corporation (the "FICO"), discussed below. Because
SAIF-assessable institutions have already been assessed at
current rates (i.e., 0.23% - 0.31% of deposits) for the semi-
annual period ending December 31, 1996, the proposal contemplates
that the FDIC will refund the amount collected from such
institutions for the period from October 1, 1996 through December
31, 1996 which exceeds the amount due for that period under the
reduced assessment schedule. Assuming the proposal is adopted as
proposed, and assuming FCB retains its current risk
classification under the FDIC's risk-based assessment system, the
deposit insurance assessments payable by FCB will be reduced
significantly effective January 1, 1997, to the same level
currently paid by FCB's BIF-member competitors and the Company's
other bank subsidiaries.
Prior to the enactment of the DIFA, a substantial amount of the
SAIF assessment revenue was used to pay the interest due on bonds
issued by the FICO, the entity created in 1987 to finance the
recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. Pursuant to
the DIFA, the interest due on outstanding FICO bonds will be
covered by assessments against both SAIF and BIF member
institutions beginning January 1, 1997. Between January 1, 1997
and December 31, 1999, FICO assessments against BIF-member
institutions cannot exceed 20% of the FICO assessments charged
SAIF-member institutions. From January 1, 2000 until the FICO
bonds mature in 2019, FICO assessments will be shared by all FDIC-
insured institutions on a pro rata basis. The FDIC estimates
that the FICO assessments for the period January 1, 1997 through
December 31, 1999 will be approximately 0.013% of deposits for
BIF members versus approximately 0.064% of deposits for SAIF
members, and will be less than 0.025% of deposits thereafter.
The DIFA also provides for a merger of the BIF and the SAIF on
January 1, 1999, provided there are no state or federally
chartered, FDIC-insured savings associations existing on that
date. To facilitate the merger of the BIF and the SAIF, the DIFA
directs the Treasury Department to conduct a study on the
development of a common charter and to submit a report, along
with appropriate legislative recommendations, to the Congress by
March 31, 1997.
In addition to the DIFA, the Regulatory Reduction Act includes a
number of statutory changes designed to eliminate duplicative,
redundant or unnecessary regulatory requirements. Among other
things, the Regulatory Reduction Act establishes streamlined
notice procedures for the commencement of new nonbanking
activities by bank holding companies, and generally exempts bank
holding companies that own one or more savings associations (such
as the Company) from regulation by the OTS as savings and loan
holding companies; establishes time frames within which the FDIC
must act on applications by state banks to engage in activities
which, although permitted for the state bank under applicable
state law, are not permissible activities for national banks, and
excludes ATM closures and certain branch office relocations from
the prior notice requirements applicable to branch closings.
Further, the Regulatory Reduction Act removes the percentage of
assets limitations on the aggregate amount of credit card and
education loans that may be made by a savings association, such
as FCB; increases from 10% to 20% of total assets the aggregate
amount of commercial loans that a savings association may make,
provided that any amount in excess of 10% of total assets
represents small business loans; allows education, small
business and credit card loans to be counted in full in
determining a savings association's compliance with the qualified
thrift lender ("QTL") test; and provides that a savings
association may be deemed to meet the QTL test if it qualifies as
a domestic building and loan association under the Internal
Revenue Code. The Regulatory Reduction Act also clarifies the
liability of a financial institution, when acting as a lender or
in a fiduciary capacity, under the federal environmental clean-up
laws. Although the full impact of the Regulatory Reduction Act on
the operations of the Company and its subsidiaries cannot be
determined at this time, management believes that the legislation
will reduce compliance costs to some extent and allow the Company
and its subsidiaries somewhat greater operating flexibility.
On August 10, 1996, President Clinton signed into law the Small
Business Job Protection Act of 1996 (the "Job Protection Act").
Among other things, the Job Protection Act eliminates the percent-
of-taxable-income ("PTI") method for computing additions to a
savings association's tax bad debt reserves for tax years
beginning after December 31, 1995, and requires all savings
associations that have used the PTI method to recapture, over a
six year period, all or a portion of their tax bad debt reserves
added since the last taxable year beginning before January 1,
1988. The Job Protection Act allows a savings association to
postpone the recapture of bad debt reserves for up to two years
if the institution meets a minimum level of mortgage lending
activity during those years. As a result of these provisions of
the Job Protection Act, FCB will determine additions to its tax
bad debt reserves using the same method as a commercial bank of
comparable size, and, if FCB were to decide to convert to a
commercial bank charter, the changes in the tax bad debt
recapture rules enacted in the Job Protection Act should make
such conversion less costly.
PART II
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the
Company or its subsidiaries is a party other than ordinary
routine litigation incidental to their respective businesses.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27.1 Financial Data Schedule
Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
HEARTLAND FINANCIAL USA, INC.
(Registrant)
By: /s/ Lynn B. Fuller
-----------------------
Lynn B. Fuller
President
By: /s/ John K. Schmidt
-----------------------
John K. Schmidt
Executive Vice President and
Chief Financial Officer
Dated: November 14, 1996