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 September 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 November 13, 1997 the Registrant had outstanding
4,744,169 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)
9/30/97 12/31/96
------- --------
ASSETS
Cash and due from banks $ 24,359 $ 40,080
Federal funds sold 8,046 -
--------- ---------
Cash and cash equivalents 32,405 40,080
Time deposits in other
financial institutions 194 167
Securities:
Available for sale-at market
(cost of $179,106 for 1997
and $179,697 for 1996) 183,080 181,815
Held to maturity-at cost (approximate
market value of $5,990 for 1997 and
$2,245 for 1996) 5,875 2,151
Loans and leases:
Held for sale 3,763 2,412
Held to maturity 549,772 481,673
Allowance for possible loan and
lease losses (7,304) (6,191)
--------- ---------
Loans and leases, net 546,231 477,894
Premises, furniture and equipment, net 18,528 16,715
Other real estate, net 774 532
Other assets 22,415 17,198
--------- ---------
TOTAL ASSETS $809,502 $736,552
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 53,324 $ 55,482
Savings 242,775 224,317
Time 306,855 278,544
--------- ---------
Total deposits 602,954 558,343
Short-term borrowings 92,103 56,358
Accrued expenses and other liabilities 10,912 9,086
Other borrowings 27,928 42,506
--------- ---------
TOTAL LIABILITIES 733,897 666,293
--------- ---------
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 September
30, 1997, and December 31, 1996) 4,854 4,854
Capital surplus 13,638 13,366
Retained earnings 56,846 52,864
Net unrealized gain on
securities available for sale 2,488 1,327
Treasury stock at cost
(109,457 and 118,066 shares
at September 30, 1997, and
December 31, 1996, respectively) (2,221) (2,152)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 75,605 70,259
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $809,502 $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 Nine Months Ended
9/30/97 9/30/96 9/30/97 9/30/96
------- ------- ------- -------
INTEREST INCOME:
Interest and fees
on loans and leases $ 12,235 $ 10,226 $ 34,661 $ 30,160
Interest on securities:
Taxable 2,561 2,360 7,701 6,708
Nontaxable 289 317 875 1,006
Interest on federal
funds sold 229 96 378 508
Interest on interest-
bearing deposits in
other financial
institutions 12 16 69 127
-------- -------- -------- --------
TOTAL INTEREST INCOME 15,326 13,015 43,684 38,509
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 6,649 5,760 19,063 17,242
Interest on short-
term borrowings 1,023 528 2,557 1,438
Interest on other
borrowings 488 604 1,690 1,875
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 8,160 6,892 23,310 20,555
-------- -------- -------- --------
NET INTEREST INCOME 7,166 6,123 20,374 17,954
Provision for possible
loan and lease losses 298 212 993 1,187
-------- -------- -------- --------
NET INTEREST INCOME
AFTER PROVISION FOR
POSSIBLE LOAN AND
LEASE LOSSES 6,868 5,911 19,381 16,767
-------- -------- -------- --------
OTHER INCOME:
Service charges 702 629 2,023 1,783
Trust fees 472 462 1,451 1,325
Brokerage commissions 91 47 226 141
Insurance commissions 109 167 395 486
Investment securities
gains, net 4ll 182 818 1,580
Rental income on operating
leases 215 - 509 -
Gain on sale of loans 124 24 207 68
Other 86 41 202 176
-------- -------- -------- --------
TOTAL OTHER INCOME 2,210 1,552 5,831 5,559
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee
benefits 3,504 2,827 9,748 8,323
Occupancy 333 333 1,067 913
Equipment 504 330 1,363 982
Depreciation on equipment
under operating leases 155 - 367 -
Outside services 329 323 1,070 865
FDIC assessment 35 598 87 700
Advertising 185 195 624 751
Other operating expenses 994 755 2,746 2,144
-------- -------- -------- --------
TOTAL OTHER EXPENSES 6,039 5,361 17,072 14,678
-------- -------- -------- --------
INCOME BEFORE INCOME
TAXES 3,039 2,102 8,140 7,648
Income taxes 780 580 2,308 1,978
-------- -------- -------- --------
NET INCOME $ 2,259 $ 1,522 $ 5,832 $ 5,670
======== ======== ======== ========
NET INCOME PER
COMMON SHARE $ .48 . 32 1.23 $ 1.20
CASH DIVIDENDS DECLARED
PER COMMON SHARE $ .13 $ .10 $ .39 $ .30
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 4,739,783 4,711,650 4,736,902 4,712,989
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine Months Ended
9/30/97 9/30/96
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 8,454 $ 5,876
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits (33) (6)
Redemption of time deposits 202 -
Proceeds from the sale of
securities available for sale 18,135 11,088
Proceeds from the sale of mortgage-
backed securities available for sale 4,032 582
Proceeds from the maturity of and
principal paydowns on securities
held to maturity 1,845 507
Proceeds from the maturity of and
principal paydowns on securities
available for sale 8,585 25,016
Proceeds from the maturity of and
principal paydowns on mortgage-
backed securities available for sale 9,381 9,316
Purchase of securities held to maturity (500)
Purchase of securities available
for sale (15,857) (37,455)
Purchase of mortgage-backed
securities available for sale (16,411) (35,678)
Purchase of subsidiary bank 670 -
Purchase of interest in low-income
housing project - (2,865)
Net increase in loans and leases (50,845) (25,075)
Capital expenditures (2,202) (3,558)
Proceeds on sale of fixed assets 1 2
Proceeds on sale of repossessed assets 7 208
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (42,490) (58,418)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits and savings accounts (6) 9,575
Net increase in time deposit accounts 11,747 1,531
Net increase in other borrowings 7,791 -
Net increase in short-term borrowings 8,347 23,355
Purchase of treasury stock (668) (556)
Proceeds from sale of treasury stock 998 1,126
Dividends (1,848) (1,416)
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 26,361 33,615
--------- ---------
Net decrease in cash
and cash equivalents (7,675) (18,927)
Cash and cash equivalents at
beginning of year 40,080 54,805
--------- ---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 32,405 $ 35,878
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 2,554 $ 2,443
========= =========
Cash paid for interest $ 22,782 $ 20,604
========= =========
Securities contributed to public
charitable trust $ 220
=========
Other borrowings transferred to
short-term borrowings $ 21,000 $ 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 September 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.
Net income for the quarter ended September 30, 1997, was
$2,259,000, up $737,000 or 48.42% from the $1,522,000 recorded
during the same period in 1996. Included in the 1996 earnings
was the one-time special assessment to capitalize the Savings
Association Insurance Fund ("SAIF") which amounted to $545,000 at
First Community Bank, FSB ("FCB"), the Company's only savings
association subsidiary. On a per common share basis, earnings
for the third quarter increased to $.48 in 1997 from $.32 in
1996. Return on common equity was 12.11% for the third quarter
of 1997 compared to 9.11% for the same period in 1996.
For the nine month period ended September 30, 1997, net income
increased $162,000 or 2.86% to $5,832,000, or $1.23 per common
share, from the $5,670,000, or $1.20 per common share, recorded
during the same period in 1996. Earnings during 1997 have
increased despite additional overhead costs associated with the
conversion to new banking software, the Wisconsin acquisitions of
Cottage Grove State Bank("CGSB") in March 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. Return on common equity for the first nine months of
1997 was 10.74% as compared to 11.48% for the same period in
1996.
NET INTEREST INCOME
Net interest income to average earning assets on a fully tax
equivalent basis was 3.95% for the three month periods ended
September 30, 1997 and 1996. For the nine month periods ended
September 30, net interest income to average earning assets on a
fully tax equivalent basis increased to 3.93% during 1997 as
compared to 3.91% 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 and reduce rates charged on loan balances.
For the three and nine month periods ended September 30, 1997,
net interest income increased $1,043,000 (17.03%) and $2,420,000
(13.48%), respectively, when compared to the same periods in
1996. These increases were primarily attributable to growth
within the loan portfolio along with the acquisition of CGSB.
NONINTEREST INCOME
Noninterest income increased $658,000 (42.40%) for the third
quarter of 1997 when compared to the same period in 1996. The
largest components of this increase were $229,000 of additional
investment securities gains and $215,000 in rental income on
operating leases recorded at ULTEA, the Company's fleet leasing
company headquartered in Madison, Wisconsin. For the first nine
months of 1997, noninterest income increased $272,000 (4.89%)
when compared to the same period in 1996. Rental income on
operating leases at ULTEA totaled $509,000 during the first nine
months of 1997, partially mitigating the $762,000 (48.23%)
decrease in investment securities gains. During 1996, these
gains included a $1,174,000 gain on 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.
One of the major components of noninterest income is service
charges, which increased $73,000 (11.61%) and $240,000 (13.46%)
for the three and nine month periods ended September 30, 1997,
respectively, compared to the same periods in 1996. This growth
reflected 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 $10,000 (2.16%) for the quarter ended
September 30, 1997, compared to the same period in 1996. For the
nine month period ended September 30, 1997, trust fees increased
$126,000 (9.51%) when compared to the same period in 1996. These
increases were attributable to growth in assets under management
due primarily to investment performance. Total trust assets
under management grew from $366,158,000 at December 31, 1996, to
$421,356,000 at September 30, 1997.
For the three and nine month periods ended September 30, 1997,
brokerage commissions grew $44,000 (93.62%) and $85,000 (60.28%),
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.
Insurance commissions decreased $58,000 (34.73%) during the third
quarter of 1997 compared to the same quarter in 1996. For the
nine month period ended September 30, 1997, insurance commissions
decreased $91,000 (18.72%) when compared to the same period in
1996. This decline was the result of reduced demand by customers
for annuity products and lower rates charged for commercial lines
business by the insurance companies for which the Company acts as
agent.
Gains on the sale of loans increased $100,000 (416.67%) for the
three month and $139,000 (204.41%) for the nine month periods
ended September 30, 1997, when compared to the same periods in
1996. The majority of these increases were due to consumers'
renewed interest in fixed rate fifteen- and thirty-year real
estate loans during the third quarter of 1997, which the Company
sells into the secondary market while retaining servicing of the
loans. Also contributing to this increase was the enhancement of
real estate mortgage operations at RCB.
During the third quarter of 1997, other income increased $45,000
(109.76%) from the same quarter of 1996. For the first nine
months of 1997, other income grew $26,000 (14.77%) when compared
to the same period in 1996. These increases were the result of
additional emphasis the Company has placed on enhancing revenues
by providing nontraditional bank products to customers.
NONINTEREST EXPENSE
Noninterest expense increased $678,000 (12.65%) for the three
months ended September 30, 1997, when compared to the same period
in 1996. For the nine month period ended September 30, 1997,
noninterest expense increased $2,394,000 (16.31%) over the same
period in 1996. 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 $155,000 for the three month
period and $367,000 for the nine month period ended September 30,
1997.
Salaries and employee benefits, the largest component of
noninterest expense, increased $677,000 (23.95%) for the quarter
ended September 30, 1997, when compared to the same period in
1996. For the first nine months of 1997, salaries and employee
benefits expense increased $1,425,000 (17.12%) over the same
period in 1996. 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. Also recorded during the third
quarter of 1997 was compensation expense associated with the
final distribution of stock under the Company's Executive
Restricted Stock Purchase Plan.
Occupancy expenses for the nine month period ended September 30,
1997, increased $154,000 (16.87%) when compared to the same
period in 1996. This increased expense resulted from additional
costs associated with new facilities at several of the Company's
subsidiaries.
For the three and nine month periods ended September 30, 1997,
equipment expenses increased $174,000 (52.73%) and $381,000
(38.80%), respectively, when compared to the same periods in
1996. Additional equipment expenses related to the new
facilities at several of the Company's subsidiaries and the
conversion to Fiserv's Comprehensive Banking Systems software
were the major components of these increases. The Company
elected to maintain the data processing function in-house to
provide its subsidiary banks with enhanced technology and
flexibility.
For the first nine months of 1997, fees for outside services
increased $205,000 (23.70%) when compared with the same period in
1996. Expenses relating to the data processing conversion were
the major contributor to the growth in this area.
FDIC insurance premium expense decreased $563,000 (94.15%) during
the third quarter of 1997 when compared to the third quarter of
1996. The one-time special assessment to capitalize the SAIF,
which amounted to $545,000 at FCB, was recorded during the third
quarter of 1996. For the first nine months of 1997, FDIC
insurance premium expense decreased $613,000 (87.57%) when
compared to the same period in 1996. Like all savings
associations that are members of the SAIF, FCB experienced a
reduction in the deposit insurance assessments charged from .23%
to .065% of deposits effective January 1, 1997.
Advertising and public relations expense experienced a $10,000
(5.13%)decrease for the third quarter of 1997 compared to the
same quarter of 1996. For the nine month period ended September
30, 1997, advertising and public relations expense decreased
$127,000 (16.91%) when compared to the same period in 1996. This
decrease was primarily due to 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. During 1997, additional
advertising expenses were incurred to publicize the retail
products at the subsidiary banks.
An increase of $239,000 (31.66%) and $602,000 (28.08%) occurred
in other operating expenses for the three and nine month periods
ended September 30, 1997, compared to the same periods in 1996.
Again, the majority of these increases was attributable to the
acquisition of CGSB and additional expenses incurred due to the
data processing conversion.
The Company utilizes and is dependent upon data processing
systems and software to conduct its business. The data
processing systems and software include those developed and
maintained by the Company's third-party data processing vendor
and purchased software which is run on in-house computer
networks. In 1997, the Company initiated a review and assessment
of all hardware and software to confirm that it will function
properly in the year 2000. To date, those vendors which have
been contacted have indicated that their hardware or software is
or will be Year 2000 compliant by the end of 1998. Noninterest
expense includes the cost of such projects and the Company does
not expect these costs to have a material impact on earnings in
the future.
INCOME TAX EXPENSE
Income tax expense for the third quarter of 1997 increased
$200,000 (34.48%) over the same period in 1996. For the first
nine months of 1997, income tax expense increased $330,000
(16.68%) when compared to the same period in 1996. The Company's
effective tax rate increased from 25.86% for the nine month
period ended September 30, 1996, to 28.35% 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 during 1997 contributed to the lower effective
tax rate in 1996.
FINANCIAL CONDITION
LOANS AND PROVISION FOR LOAN AND LEASE LOSSES
Net loans and leases grew $68,337,000 (14.30%) from December 31,
1996, to September 30, 1997. The acquisition of CGSB accounted
for $23,440,000 (34.30%) of the growth experienced. Excluding
the CGSB loan portfolio, agricultural and consumer loan
outstandings experienced the most significant growth during the
first nine months of 1997. Agricultural and agricultural real
estate loan outstandings, exclusive of CGSB, increased
$13,755,000 (23.91%) from December 31, 1996, to September 30,
1997. Consumer loan outstandings grew $10,359,000 (21.42%) and
commercial and commercial real estate loan outstandings grew
$17,589,000 (8.52%), exclusive of CGSB, 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 Company's 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 for some time 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 September 30, 1997. The allowance for
loan and lease losses was increased $1,113,000 (17.98%) during
the first nine months of 1997, $331,000 of which was attributable
to the acquisition of CGSB.
The Company's provision for loan and lease losses was $298,000
for the three months ended September 30, 1997, compared to
$212,000 for the same period in 1996. Net charge-offs were
$145,000 during the third quarter of 1997 compared to $61,000
during the third quarter of 1996. The provision for loan and
lease losses was $993,000 for the nine months ended September 30,
1997, compared to $1,187,000 for the same period in 1996. Net
charge-offs were $211,000 during the first nine months of 1997
compared to net charge-offs of $527,000 during the same period of
1996. Included in the first nine 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 1.32% as of
September 30, 1997, 1.28% as of December 31, 1996, and 1.31% as
of September 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 $2,234,000 at September 30,
1997, an increase of $260,000 (13.17%). As a percentage of total
loans and leases, nonperforming loans were .40% at September 30,
1997, .41% at December 31, 1996, and .39% at September 30, 1996.
SECURITIES
The dual objectives of the securities portfolio are to provide
the Company with sources of both liquidity and earnings.
Securities represented 23.34% of total assets at September 30,
1997, as compared to 24.98% at December 31, 1996. Exclusive of
CGSB securities of $12,749,000 at September 30, 1997, the
securities portfolio experienced a $7,760,000 (4.22%) decrease.
This reduction resulted from the Company's shift of assets from
the investment portfolio to the loan portfolio.
DEPOSITS AND BORROWED FUNDS
Exclusive of CGSB deposits which totaled $33,849,000 at September
30, 1997, total deposits increased less than 2.00% during the
first nine months of 1997. Demand deposits experienced a
decrease of $7,144,000 (12.88%), exclusive of the $4,986,000 at
CGSB, during this period. Much of this reduction can be
attributed to normal seasonal fluctuations. Savings accounts,
exclusive of $11,930,000 at CGSB, experienced an increase of
$6,528,000 (2.91%) during the first nine months of 1997.
Certificates of deposit increased $11,378,000 (4.08%) over the
December 31, 1996, total, exclusive of CGSB certificates of
deposit which totaled $16,933,000 at September 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
September 30, 1997, the balance in this account had increased
$35,745,000 (63.42%) from December 31, 1996, primarily due to the
transfer of $21,000,000 in FHLB borrowings from other borrowings
to short-term borrowings due to approaching maturities and the
growth in securities sold under agreement to repurchase These
repurchase agreements are used as a cash management tool by the
Company's larger commercial customers.
Other borrowings decreased $14,578,000 (34.30%) during the first
nine months of 1997 and included the Company's long-term FHLB
funding. The transfer of $21,000,000 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 3.80 years at a
weighted average rate of 6.18% at September 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 $ 69,584 11.66% $ 67,701 13.10%
Tier 1 capital minimum
requirement 23,879 4.00% 20,667 4.00%
-------- ------ -------- ------
Excess $ 45,705 7.66% 47,034 9.10%
======== ====== ======== ======
Total capital $ 76,783 12.86% $ 73,777 14.28%
Total capital minimum
requirement 47,758 8.00% 41,334 8.00%
-------- ------ -------- ------
Excess $ 29,025 4.86% $ 32,443 6.28%
======== ====== ======== ======
Total risk adjusted
assets $596,969 $516,678
======== ========
Leverage Capital Ratios:(2)
Tier 1 capital $ 69,584 8.78% $ 67,701 9.81%
Tier 1 capital minimum
requirement(3) 31,695 4.00% 27,594 4.00%
-------- ------ -------- ------
Excess $ 37,889 4.78% $ 40,107 5.81%
======== ====== ======== ======
Average adjusted assets
(less goodwill) $792,381 $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.
In November of 1997, the Company entered into an agreement with a
group of local investors to establish a de novo bank in
Albuquerque, New Mexico. It is currently anticipated that this
new bank, which will serve to diversify the Company's geographic
risk, will open during the first quarter of 1998.
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 $15,928,000
during the first nine months of 1997 compared to the same period
in 1996. Net principal disbursed on loans increased $25,770,000
for the period under comparison while net purchases of securities
decreased $36,834,000.
Net cash inflows from financing activities decreased $7,254,000 for
the nine month period ended September 30, 1997, compared to the
same period in 1996. Cash provided by a net change in borrowings
decreased by $7,217,000 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 $2,578,000
for the first nine 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.
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
Chief Financial Officer
Dated: November 13, 1997