Submitted pursuant to Rule 901(d) of Regulation S-T
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, 1997
[ ] 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 August 8, 1997 the Registrant had outstanding
4,751,972 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)
6/30/97 12/31/96
------- --------
ASSETS
Cash and due from banks $ 22,477 $ 40,080
Federal funds sold 9,268 -
--------- ---------
Cash and cash equivalents 31,745 40,080
Time deposits in other
financial institutions 289 167
Securities:
Available for sale-at market
(cost of $174,876 for 1997
and $179,697 for 1996) 177,496 181,815
Held to maturity-at cost (approximate
market value of $5,926 for 1997 and
$2,245 for 1996) 5,832 2,151
Loans and leases:
Held for sale 2,128 2,412
Held to maturity 537,133 481,673
Allowance for possible loan and
lease losses (7,151) (6,191)
--------- ---------
Loans and leases, net 532,110 477,894
Premises, furniture and equipment, net 18,312 16,715
Other real estate, net 645 532
Other assets 20,570 17,198
--------- ---------
TOTAL ASSETS $786,999 $736,552
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 54,160 $ 55,482
Savings 237,197 224,317
Time 303,706 278,544
--------- ---------
Total deposits 595,063 558,343
Short-term borrowings 76,041 56,358
Accrued expenses and other liabilities 9,084 9,086
Other borrowings 34,175 42,506
--------- ---------
TOTAL LIABILITIES 714,363 666,293
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share;
authorized, 200,000 shares) - -
Common stock (par value $1 per share;
authorized, 7,000,000 shares;
issued, 4,853,626 shares at
June 30, 1997, and December 31, 1996) 4,854 4,854
Capital surplus 13,411 13,366
Retained earnings 55,204 52,864
Net unrealized gain on
securities available for sale 1,640 1,327
Treasury stock at cost
(128,364 and 118,066 shares
at June 30, 1997, and
December 31, 1996, respectively) (2,473) (2,152)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 72,636 70,259
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $786,999 $736,552
========= =========
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 Six Months Ended
6/30/97 6/30/96 6/30/97 6/30/96
------- ------- ------- -------
INTEREST INCOME:
Interest and fees
on loans and leases $ 11,686 $ 10,048 $ 22,426 $ 19,934
Interest on securities:
Taxable 2,549 2,260 5,140 4,348
Nontaxable 299 334 586 689
Interest on federal
funds sold 88 199 149 412
Interest on interest-
bearing deposits in
other financial
institutions 38 36 57 111
-------- -------- -------- --------
TOTAL INTEREST INCOME 14,660 12,877 28,358 25,494
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 6,418 5,765 12,414 11,482
Interest on short-
term borrowings 887 494 1,534 910
Interest on other
borrowings 565 597 1,202 1,271
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 7,870 6,856 15,150 13,663
-------- -------- -------- --------
NET INTEREST INCOME 6,790 6,021 13,208 11,831
Provision for possible
loan and lease losses 374 228 695 975
-------- -------- -------- --------
NET INTEREST INCOME
AFTER PROVISION FOR
POSSIBLE LOAN AND
LEASE LOSSES 6,416 5,793 12,513 10,856
-------- -------- -------- --------
OTHER INCOME:
Service charges 654 588 1,321 1,154
Trust fees 508 449 979 863
Brokerage commissions 72 59 135 94
Insurance commissions 147 165 286 319
Investment securities
gains, net 114 76 407 1,398
Rental income on operating
leases 169 - 294 -
Gain on sale of loans 42 16 83 44
Other 66 67 116 134
-------- -------- -------- --------
TOTAL OTHER INCOME 1,772 1,420 3,621 4,006
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee
benefits 3,210 2,718 6,244 5,468
Occupancy 381 297 734 580
Equipment 479 335 859 652
Depreciation on equipment
under operating leases 122 - 212 -
Outside services 366 303 741 542
FDIC assessment 32 52 52 102
Advertising 275 206 439 556
Other operating expenses 914 720 1,752 1,416
-------- -------- -------- --------
TOTAL OTHER EXPENSES 5,779 4,631 11,033 9,316
-------- -------- -------- --------
INCOME BEFORE INCOME
TAXES 2,409 2,582 5,101 5,546
Income taxes 754 712 1,528 1,398
-------- -------- -------- --------
NET INCOME $ 1,655 $ 1,870 $ 3,573 $ 4,148
======== ======== ======== ========
NET INCOME PER
COMMON SHARE $ .35 $ .40 $ .75 $ .88
CASH DIVIDENDS DECLARED
PER COMMON SHARE $ .13 $ .10 $ .26 $ .20
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,734,134 4,718,887 4,735,445 4,713,667
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended
6/30/97 6/30/96
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 5,262 $ 4,272
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits (33) (6)
Redemption of time deposits 106 -
Proceeds from the sale of
securities available for sale 16,746 5,987
Proceeds from the sale of mortgage-
backed securities available for sale 3,620 -
Proceeds from the maturity of and
principal paydowns on
securities held to maturity 759 498
Proceeds from the maturity of and
principal paydowns on
securities available for sale 6,643 23,203
Proceeds from the maturity of and
principal paydowns on mortgage-
backed securities available for sale 5,739 6,254
Purchase of securities available
for sale (18,013) (32,766)
Purchase of mortgage-backed
securities available for sale (2,035) (26,156)
Purchase of subsidiary bank 670 -
Purchase of interest in low-income
housing project - (2,865)
Net increase in loans and leases (35,084) (8,760)
Capital expenditures (1,512) (1,552)
Proceeds on sale of fixed assets 1 2
Proceeds on sale of repossessed assets 4 197
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (22,389) (35,964)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits and savings accounts (4,748) 13,263
Net increase in time deposit accounts 8,598 4,692
Net increase in other borrowings 7,538 -
Net increase (decrease) in
short-term borrowings (1,215) 16,066
Purchase of treasury stock (445) (330)
Proceeds from sale of treasury stock 296 731
Dividends (1,232) (944)
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 8,792 33,478
--------- ---------
Net increase (decrease) in cash
and cash equivalents (8,335) 1,786
Cash and cash equivalents at
beginning of year 40,080 54,805
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 31,745 $56,591
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 1,870 $ 1,723
========= =========
Cash paid for interest $ 13,074 $ 13,758
========= =========
Securities transferred contributed
to public charitable trust $ 220
=========
Other borrowings transferred to
short-term borrowings $ 18,000 $ 5,000
========= =========
Fair value of assets acquired $ 42,418
Cash and cash equivalents acquired (4,695)
Liabilities assumed (34,528)
Issuance of notes payable (3,865)
---------
(Increase) decrease in cash and
cash equivalents from acquisition
of bank $ (670)
=========
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, 1996,
included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 29, 1997. 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, 1997, are not
necessarily indicative of the results expected for the year
ending December 31, 1997.
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 share and per share data have been
restated to reflect the stock split.
NOTE 2: ACQUISITIONS
On March 1, 1997, the Company acquired Cottage Grove State Bank,
a Wisconsin state bank located in Cottage Grove, Wisconsin, with
total assets of $39 million. The total cost of the acquisition
was $7,890,000. The excess of the purchase price over the fair
value of net assets acquired was $3,015,000. The transaction was
accounted for as a purchase; accordingly, the results of
operations, which were not material, were included in the
Consolidated Financial Statements (unaudited) from the
acquisition date.
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. The Company 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 the purposes of these
safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally
identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The
Company'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 the Company and its subsidiaries include, but
are not limited to, changes in: interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S.
Treasury and the Federal Reserve Board, the quality or
composition of the loan or investment portfolios, demand for loan
products, deposit flows, competition, demand for financial
services in the Company's market area and accounting principles,
policies and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue
reliance should not be placed on such statements. Further
information concerning the Company and its business, including
additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the
Securities and Exchange Commission.
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.
Operating earnings of $3,315,000 for the first six months of
1997, were down 4.80% from the $3,482,000 recorded during the
same period in 1996. Included in the 1996 earnings were two
significant events: a gain of $1,174,000 on the sale of stock
from the securities portfolio at First Community Bank, FSB
("FCB") and a $469,000 writedown in its loan portfolio.
Exclusive of nonrecurring items, per common share earnings for
the first six months of the year decreased from $.74 in 1996 to
$.70 in 1997. Total earnings of $3,573,000, or $.75 per common
share, for the first six months of 1997 decreased 13.86% from the
$4,148,000, or $.88 per common share, recorded in 1996.
Net income for the quarter ended June 30, 1997, was $1,655,000,
down 11.50% from the $1,870,000 earned in the same quarter of
1996. On a per common share basis, the second quarter earnings
decreased from $.40 in 1996 to $.35 in 1997. Operating results
were negatively impacted by increased overhead costs associated
with the conversion to new banking software, the Wisconsin
acquisitions of Cottage Grove State Bank ("CGSB") in March of
this year and ULTEA last December, and the operation of Riverside
Community Bank ("RCB"), the Company's Rockford, Illinois de novo
bank started in October, 1995. These initiatives are helping to
insure the Company's long-term viability and are expected to
contribute to profitability in the future.
NET INTEREST INCOME
Net interest income to average earning assets on a fully tax
equivalent basis was 3.89% for the three month period ended June
30, 1997, as compared to 3.92% for the same period in 1996. For
the six month period ended June 30, 1997, net interest income to
average earning assets on a fully tax equivalent basis was 3.91%
as compared to 3.89% for the same period in 1996. Consistent
with experience throughout the industry, the Company continues to
experience pressure from its customers to increase rates paid on
deposits without the corresponding increase on rates charged on
loan balances.
For the three and six month periods ended June 30, 1997, net
interest income increased $769,000 (12.77%) and $1,377,000
(11.64%), respectively, when compared to the same periods in
1996. These increases were primarily attributable to growth
within the loan portfolio and continued emphasis on controlling
the Company's cost of funds along with the acquisition of CGSB.
NONINTEREST INCOME
Noninterest income increased $352,000 (24.79%) for the second
quarter of 1997 when compared to the same period in 1996. The
largest component of this increase was the $169,000 rental income
on operating leases recorded at ULTEA, the Company's fleet
leasing company headquartered in Madison, Wisconsin. For the
first half of 1997, noninterest income decreased $385,000 (9.61%)
when compared to the same period in 1996. The largest component
of this decrease was the $991,000 (70.89%) change in investment
securities gains. Of these gains, $1,174,000 resulted from the
sale of Federal Home Loan Mortgage Corporation common stock held
in the securities portfolio at FCB. As interest rates declined
during 1994, this stock experienced tremendous appreciation and,
in anticipation of rising interest rates in 1996, management
elected to sell the stock to reduce the interest rate risk within
the investment portfolio. During the first six months of 1997,
rental income on operating leases at ULTEA totaled $294,000,
partially mitigating the significant decrease in securities
gains.
One of the major components of noninterest income is service
charges which increased $66,000 (11.22%) and $167,000 (14.47%)
for the first three and six months of 1997, respectively,
compared to the same periods in 1996. This growth reflects the
addition of new merchants in the credit card processing area and
the addition of CGSB to the Company's family of community banks.
Trust fees increased $59,000 (13.14%) for the quarter ended June
30, 1997, compared to the same period in 1996. For the six month
period ended June 30, 1997, trust fees increased $116,000
(13.44%) when compared to the same period in 1996. These
increases were attributable to growth in assets under management
due to investment performance. Total trust assets under
management grew from $366,158,000 at December 31, 1996, to
$378,805,000 at March 31, 1997 and $397,404,000 at June 30, 1997.
For the three and six month periods ended June 30, 1997,
brokerage commissions grew $13,000 (22.03%) and $41,000 (43.62%),
respectively, as compared to the same periods in 1996. Two sales
personnel lost in 1995 were replaced during the spring of 1996.
Also, the Company continues to devote efforts to the integration
of the brokerage area into the retail division.
Gains on the sale of loans increased $26,000 (162.50%) for the
three month and $39,000 (88.64%) for the six month period ended
June 30, 1997, when compared to the same periods in 1996. The
majority of these increases were due to the enhancement of real
estate mortgage operations at RCB.
NONINTEREST EXPENSE
Noninterest expense increased $1,148,000 (24.79%) for the three
months ended June 30, 1997, when compared to the same period in
1996. For the six month period ended June 30, 1997, noninterest
expense increased $1,717,000 (18.43%). With the exception of
FDIC insurance premium and advertising expenses, all areas within
the noninterest expense category experienced increases. Expenses
relative to the operations of ULTEA and CGSB were not included in
the Company's earnings until December, 1996, and March, 1997,
respectively. With the addition of ULTEA, the Company recorded
depreciation on equipment under operating leases of $122,000 for
the three month period and $212,000 for the six month period
ended June 30, 1997.
Salaries and employee benefits, the largest component of
noninterest expense, increased $492,000 (18.10%) for the quarter
ended June 30, 1997, when compared to the same period in 1996.
For the first half of 1997, salaries and employee benefits
expense increased $776,000 (14.19%). Along with the additions of
personnel through the acquisitions of CGSB and ULTEA, these
increases were the result of added personnel at RCB to expand its
mortgage banking services and at Citizens Finance Co. to expand
its consumer finance operations into new market areas.
Occupancy expenses for the three and six month periods ended June
30, 1997, increased $84,000 (28.28%) and $154,000 (26.55%),
respectively, when compared to the same periods in 1996. These
increased costs represented additional costs associated with new
facilities at several of the Company's subsidiaries.
For the three and six month periods ended June 30, 1997,
equipment expenses increased $144,000 (42.99%) and $207,000
(31.75%), respectively, when compared to the same periods in
1996. In addition to increased costs related to the new
facilities at several of the Company's subsidiaries, these costs
were also impacted by the conversion to Fiserv's Comprehensive
Banking Systems software. The Company elected to maintain the
data processing function in-house to provide its subsidiary banks
with enhanced technology and flexibility.
Fees paid for outside services grew $63,000 (20.79%) for the
second quarter of 1997 over the same period in 1996. For the
first half of 1997, these fees increased $199,000 (36.72%) when
compared with the same period in 1996. Expenses relating to the
data processing conversion contributed to the growth in this
area.
FDIC insurance premium expense decreased $20,000 (38.46%) when
comparing the second quarter of 1997 to the second quarter of
1996. For the first half of 1997, FDIC insurance premium
expense decreased $50,000 (49.02%) when compared to the same
period in 1996. These decreases were the result of a reduction
in the deposit insurance assessments charged to members of the
Savings Association Insurance Fund ("SAIF") from .23% to .065% of
deposits effective January 1, 1997. FCB, as a SAIF member,
experienced this reduction.
Advertising and public relations expense experienced a $69,000
(33.50%) increase for the second quarter of 1997 compared to the
same quarter of 1996. This increase resulted from efforts to
publicize the retail products at the subsidiary banks. For the
six month period ended June 30, 1997, advertising and public
relations expense decreased $117,000 (21.04%) when compared to
the same period in 1996. The primary component of this decrease
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 during the first quarter of
1996.
An increase of $194,000 (26.94%) and $336,000 (23.73%) occurred
in other operating expenses for the three and six month periods
ended June 30, 1997, compared to the same periods in 1996.
Again, the majority of this increase was attributable to software
expenses incurred due to the data processing conversion.
INCOME TAX EXPENSE
Income tax expense for the second three months of 1997 increased
$42,000 (5.90%) over the same period in 1996. For the first half
of 1997, income tax expense increased $130,000 (9.30%) when
compared to the same period in 1996. The Company's effective tax
rate increased from 25.21% for the six month period ended June
30, 1996, to 29.95% for the same period in 1997. Along with the
previously discussed contribution of appreciated property to a
public charitable trust, a reduction in tax-exempt income also
contributed to the lower effective tax rate in 1996.
FINANCIAL CONDITION
LOANS AND PROVISION FOR LOAN AND LEASE LOSSES
Net loans and leases grew $54,216,000 (11.34%) from December 31,
1996, to June 30, 1997. The acquisition of CGSB accounted for
$23,063,000 (42.54%) of the growth experienced. Excluding the
CGSB loan portfolio, agricultural and consumer loan outstandings
experienced the most significant growth during the first half of
1997. Agricultural loans and agricultural real estate loans,
exclusive of CGSB, increased $8,422,000 (14.64%) from December
31, 1996, to June 30, 1997. Consumer loan outstandings,
exclusive of CGSB, grew $7,664,000 (15.85%) during the same
period.
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 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 the Heartland Loan Review Committee included the
following: i) a continued increase in higher-risk consumer and
more-complex commercial and agricultural loans from relatively
lower-risk real estate loans; ii) 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; and iii) an increase in the amount of nonaccrual
loans. 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 June 30, 1997. The allowance for loan and lease
losses was increased $960,000 (15.51%) during the first half of
1997, $331,000 of which was attributable to the acquisition of
CGSB.
The Company's provision for loan and lease losses was $374,000
for the three months ended June 30, 1997, compared to $228,000
for the same period in 1996. Net charge-offs were $76,000 during
the second quarter of 1997 compared to $31,000 during the second
quarter of 1996. The provision for loan and lease losses was
$695,000 for the six months ended June 30, 1997, compared to
$975,000 for the same period in 1996. Net charge-offs were
$66,000 during the first half of 1997 compared to net charge-offs
of $466,000 during the same period of 1996. Included in the
first six months of 1996 charge-offs was the $469,000 writedown
of a loan at FCB. The allowance for loan and lease losses as a
percentage of total loans was 1.33% as of June 30, 1997, 1.28% as
of December 31, 1996, and 1.32% as of June 30, 1996.
Nonperforming loans, defined as nonaccrual loans, restructured
loans and loans past due ninety days or more, increased from
$1,974,000 at December 31, 1996, to $2,065,000 at June 30, 1997,
an increase of $91,000 (4.61%). As a percentage of total loans
and leases, nonperforming loans were .38% at June 30, 1997, and
.41% on December 31, 1996.
SECURITIES
The dual objectives of the securities portfolio are to provide
the Company with sources of both liquidity and earnings.
Securities represented 23.29% of total assets at June 30, 1997,
as compared to 24.98% at December 31, 1996. Exclusive of CGSB
securities of $10,516,000 at June 30, 1997, the securities
portfolio experienced a $11,154,000 (6.06%) decrease. This
reduction is representative of the Company's shift of assets from
the investment portfolio to the loan portfolio.
DEPOSITS AND BORROWED FUNDS
Exclusive of CGSB deposits totaling $32,938,000 at June 30, 1997,
total deposits increased less than 1.00% during the first half of
1997. Demand deposits experienced a decrease of $6,381,000
(11.50%), exclusive of the $5,059,000 at CGSB. Much of this
reduction can be attributed to normal seasonal fluctuations.
Savings accounts, exclusive of $10,866,000 at CGSB, experienced a
slight increase of $2,014,000 (.90%). Certificates of deposit
increased $8,150,000 (2.93%) over the December 31, 1996, total,
exclusive of CGSB certificates of deposit totaling $17,012,000 at
June 30, 1997. This increase was the result of rate specials in
isolated maturities which were utilized to fund growth in loan
outstandings.
Short-term borrowings generally include federal funds purchased,
securities sold under agreement to repurchase, treasury tax and
loan note options 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, 1997, the balance in this account had increased $19,683,000
(34.92%) primarily due to the transfer of $18,000,000 in FHLB
borrowings from other borrowings to short-term borrowings due to
approaching maturities.
Other borrowings decreased $8,331,000 (19.60%) during the first
half of 1997 and included the Company's long-term FHLB funding.
The transfer of $18,000,000 to short-term borrowings was offset
by additional FHLB advances and the issuance of notes payable to
the stockholders of CGSB. Total long-term FHLB advances had a
weighted average remaining term of 3.44 years at a weighted
average rate of 6.03% at June 30, 1997.
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)
6/30/97 12/31/96
Amount Ratio Amount Ratio
------ ----- ------ -----
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 67,388 11.72% $ 67,701 13.10%
Tier 1 capital minimum
requirement 23,027 4.00% 20,667 4.00%
-------- ------ -------- ------
Excess $ 44,361 7.72% $ 47,034 9.10%
======== ====== ======== ======
Total capital $ 74,537 12.96% $ 73,777 14.28%
Total capital minimum
requirement 46,054 8.00% 41,334 8.00%
-------- ------ -------- ------
Excess $ 28,483 4.96% $ 32,443 6.28%
======== ====== ======== ======
Total risk adjusted
assets $575,673 $516,678
======== ========
Leverage Capital Ratios:(2)
Tier 1 capital $ 67,388 8.71% $ 67,701 9.81%
Tier 1 capital minimum
requirement(3) 38,672 5.00% 27,594 4.00%
-------- ------ -------- ------
Excess $ 28,716 3.71% $ 40,107 5.81%
======== ====== ======== ======
Average adjusted assets
(less goodwill) $773,446 $689,854
======== ========
(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 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. 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. 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 decreased $13,575,000
during the first six months of 1997 compared to the same period
in 1996. Net principal disbursed on loans increased $26,324,000
for the period under comparison while net purchases of securities
decreased $38,874,000.
Net cash inflows from financing activities decreased $24,686,000
for the six month period ended June 30, 1997, compared to the same
period in 1996. Cash provided by a net change in deposits declined
$14,105,000 while cash provided by a net change in borrowings
decreased by $9,743,000 during the periods under comparison.
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 periods covered in this report.
Finally, the subsidiary banks' FHLB memberships give them the
ability to borrow funds for short- and long-term purposes under a
variety of programs.
Total cash inflows from operating activities increased $990,000
for the first six months of 1997 compared to the same period in
1996. 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
The Committee on Banking and Financial Services of the U. S.
House of Representatives has approved legislation that would
allow bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in
securities and insurance activities. The expanded powers
generally would be available to a bank holding company only if
the bank holding company and its bank subsidiaries remain well-
capitalized and well-managed, and if each of the depository
institution subsidiaries of the bank holding company had received
at least a "satisfactory" rating under the Community Reinvestment
Act. The proposed legislation would also impose various
restrictions on transactions between the depository institution
subsidiaries of bank holding companies and their nonbank
affiliates. These restrictions are intended to protect the
depository institutions from the risks of the new nonbanking
activities permitted to such affiliates.
The proposed legislation would also eliminate the federal thrift
charter by requiring each federal thrift to convert to a national
or state bank within two years following enactment of the
legislation. Any federal thrift that failed to convert to a bank
within such two year period would, by operation of law, become a
national bank as of the second anniversary of the enactment of
the legislation. Under the proposed legislation, state thrift
institutions would be regulated for purposes of federal law as
state banks.
At this time, the Company is unable to predict whether any of the
pending bills will be enacted and, therefore, is unable to
predict the impact the pending legislation will have on the
Company and its subsidiaries.
Additionally, legislation has been enacted in Illinois that would
allow Illinois banks, effective October 1, 1997, to engage in
insurance activities, subject to various conditions, including
requirements for the manner in which insurance products are
marketed to bank customers and requirements that banks selling
insurance provide certain disclosures to customers. Iowa law
currently allows DB&T to engage in insurance activities through
its subsidiary, DB&T Insurance, Inc. Legislation has also been
enacted in Illinois that would prohibit out-of-state banks from
acquiring an Illinois bank unless the Illinois bank has been in
existence and continuously operated for a period of at least five
years. As of June 30, 1997, however, this legislation had not
yet been signed by the Governor. While the Company currently has
no plans to do so, if the proposed legislation is enacted as
proposed, the Company would be unable to merge RCB into DB&T
until the fourth quarter of 2000.
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 May 21,
1997. At the meeting, Lynn B. Fuller and Gregory R. Miller were
elected to serve as Class I directors (term expires in 2000).
Continuing as Class II directors (term expires in 1998) are Mark
C. Falb, James A. Schmid and Robert Woodward. Continuing as
Class III directors (term expires in 1999) are Lynn S. Fuller and
Evangeline K. Jansen. The stockholders also approved the
appointment of KPMG Peat Marwick LLP as the Company's independent
public auditors for the year ending December 31, 1997.
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 B. Fuller 4,077,432 265
Gregory R. Miller 4,077,432 265
Broker
For Against Abstain Non-Votes Total
Appointment of
KPMG Peat
Marwick LLP 4,075,927 1,400 370 0 4,077,697
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
Chief Financial Officer
Dated: August 14, 1997