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, 1998
[ ] 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 12, 1998 the Registrant had outstanding
9,557,550 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
(Dollars in thousands, except per share data)
6/30/98 12/31/97
(Unaudited)
------- --------
ASSETS
Cash and due from banks $ 29,165 $ 24,267
Federal funds sold 42,863 32,918
--------- ---------
Cash and cash equivalents 72,028 57,185
Time deposits in other
financial institutions 194 194
Securities:
Available for sale-at market (cost
of $201,784 for 1998 and $193,805
for 1997) 204,426 197,869
Held to maturity-at cost (approximate
market value of $3,255 for 1998 and
$3,999 for 1997) 3,148 3,879
Loans and leases:
Held for sale 9,360 10,437
Held to maturity 549,294 545,969
Allowance for possible loan and
lease losses (8,100) (7,362)
--------- ---------
Loans and leases, net 550,554 549,044
Premises, furniture and equipment, net 19,374 17,204
Other real estate, net 1,117 774
Other assets 29,196 25,911
--------- ---------
TOTAL ASSETS $880,037 $852,060
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Demand $ 59,873 $ 60,950
Savings 274,907 252,292
Time 325,771 310,290
--------- ---------
Total deposits 660,551 623,532
Short-term borrowings 75,342 96,239
Accrued expenses and other liabilities 13,653 11,494
Other borrowings 53,992 43,023
--------- ---------
TOTAL LIABILITIES 803,538 774,288
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock (par value $1 per share;
authorized, 200,000 shares) - -
Common stock (par value $1 per share;
authorized, 12,000,000 shares; issued,
9,707,252 shares at June 30, 1998, and
4,853,626 at December 31, 1997(1) 9,707 4,854
Capital surplus 8,877 13,706
Retained earnings 62,083 58,914
Accumulated other comprehensive income-
net unrealized gain on securities
available for sale 1,691 2,545
Treasury stock at cost (455,618 and
106,251 shares at June 30, 1998, and
December 31, 1997, respectively)(1) (5,859) (2,247)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 76,499 77,772
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $880,037 $852,060
========= =========
(1) The June 30, 1998, numbers reflect the two-for-one stock
split effected in the form of a stock dividend payable on July
27, 1998, to stockholders of record on June 30, 1998.
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
6/30/98 6/30/97 6/30/98 6/30/97
------- ------- ------- -------
INTEREST INCOME:
Interest and fees on
loans and leases $ 12,402 $ 11,686 $ 24,609 $ 22,426
Interest on securities:
Taxable 2,726 2,549 5,542 5,140
Nontaxable 283 299 576 586
Interest on federal
funds sold 356 88 729 149
Interest on interest
bearing deposits in
other financial
institutions 86 38 143 57
-------- -------- -------- --------
TOTAL INTEREST INCOME 15,853 14,660 31,599 28,358
-------- -------- -------- --------
INTEREST EXPENSE:
Interest on deposits 6,905 6,418 13,575 12,414
Interest on short-term
borrowings 939 887 2,127 1,534
Interest on other
borrowings 845 565 1,543 1,202
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 8,689 7,870 17,245 15,150
-------- -------- -------- --------
NET INTEREST INCOME 7,164 6,790 14,354 13,208
Provision for possible
loan and lease losses 235 374 585 695
-------- -------- -------- --------
NET INTEREST INCOME
AFTER PROVISION FOR
POSSIBLE LOAN AND
LEASE LOSSES 6,929 6,416 13,769 12,513
-------- -------- -------- --------
OTHER INCOME:
Service charges and fees 713 654 1,411 1,321
Trust fees 544 508 1,040 979
Brokerage commissions 114 72 186 135
Insurance commissions 149 147 402 286
Securities gains, net 424 114 1,085 407
Rental income on
operating leases 567 169 965 294
Gains on sale of loans 302 42 575 83
Other noninterest income 88 66 185 116
-------- -------- -------- --------
TOTAL OTHER INCOME 2,901 1,772 5,849 3,621
-------- -------- -------- --------
OTHER EXPENSES:
Salaries and employee
benefits 3,712 3,210 7,274 6,244
Occupancy 422 381 799 734
Furniture and equipment 323 414 818 752
Outside services 374 366 634 741
FDIC deposit insurance
assessment 29 32 61 52
Advertising 322 275 497 439
Depreciation on equipment
under operating leases 410 122 694 212
Other noninterest expense 1,282 979 2,310 1,859
-------- -------- -------- --------
TOTAL OTHER EXPENSES 6,874 5,779 13,087 11,033
-------- -------- -------- --------
INCOME BEFORE INCOME
TAXES 2,956 2,409 6,531 5,101
Income taxes 865 754 1,959 1,528
-------- -------- -------- --------
NET INCOME $ 2,091 $ 1,655 $ 4,572 $ 3,573
======== ======== ======== ========
EARNINGS PER COMMON
SHARE-BASIC (1) $ .22 .17 $ .49 $ .38
EARNINGS PER COMMON
SHARE-DILUTED (1) $ .22 $ .17 $ .48 $ .37
CASH DIVIDENDS DECLARED
PER COMMON SHARE (1) $ .075 $ .065 $ .15 $ .13
(1) Restated to reflect the two-for-one stock split effected in
the form of a stock dividend on June 30, 1998.
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
Three Months Ended Six Months Ended
6/30/98 6/30/97 6/30/98 6/30/97
------- ------- ------- -------
NET INCOME $2,091 $1,655 $4,572 $3,573
Other comprehensive income,
net of tax:
Unrealized gains (losses)
on securities available
for sale:
Unrealized holding gains
(losses) arising during
the period (172) 1,069 (138) 582
Less: reclassification
adjustment for gains
included in net income (280) (75) (716) (269)
------- ------- ------- -------
Other comprehensive income (452) 994 (854) 313
------- ------- ------- -------
COMPREHENSIVE INCOME $1,639 $2,649 $3,718 $3,886
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
HEARTLAND FINANCIAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Six Months Ended
6/30/98 6/30/97
------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 9,981 $ 6,310
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits - (33)
Proceeds on maturities of time deposits - 106
Proceeds from the sale of securities
available for sale 15,244 16,746
Proceeds from the sale of mortgage-
backed securities available for sale 2,276 3,620
Proceeds from the maturity of and
principal paydowns on securities held
to maturity 435 759
Proceeds from the maturity of and
principal paydowns on securities
available for sale 24,091 6,643
Proceeds from the maturity of and
principal paydowns on mortgage-
backed securities held to maturity 319 -
Proceeds from the maturity of and
principal paydowns on mortgage-
backed securities available for sale 22,073 5,739
Purchase of securities available for
sale (28,076) (18,013)
Purchase of mortgage-backed securities
available for sale (40,343) (2,035)
Net increase in loans and leases (7,239) (35,084)
Net increase in assets under operating
leases (3,063) (1,048)
Capital expenditures (2,965) (1,512)
Net cash and cash equivalents received
in acquisition of subsidiaries - 670
Proceeds on sale of fixed assets 8 1
Proceeds on sale of repossessed assets 4 4
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (17,236) (23,437)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand
deposits and savings accounts 21,538 (4,748)
Net increase in time deposit accounts 15,481 8,598
Net increase in other borrowings 18,292 7,538
Net decrease in short-term borrowings (28,220) (1,215)
Purchase of treasury stock (3,654) (445)
Proceeds from sale of treasury stock 66 296
Dividends (1,405) (1,232)
--------- ---------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 22,098 8,792
--------- ---------
Net increase (decrease) in cash
and cash equivalents 14,843 (8,335)
Cash and cash equivalents at
beginning of year 57,185 40,080
--------- ---------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 72,028 $ 31,745
========= =========
Supplemental disclosures:
Cash paid for income/franchise taxes $ 1,314 $ 1,870
========= =========
Cash paid for interest $ 17,192 $ 13,074
========= =========
Other borrowings transferred to
short-term borrowings $ 7,323 $ 18,000
========= =========
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, 1997,
included in the Company's Form 10-K filed with the Securities and
Exchange Commission on March 31, 1998. The December 31, 1997,
balance sheet has been derived from the audited financial
statements as of that date. 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 June 30, 1998, are not
necessarily indicative of the results expected for the year
ending December 31, 1998.
On June 16, 1998, 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 June 30, 1998, payable on July 27,
1998. Accordingly, all share and per share data have been
restated to reflect the stock split.
Basic earnings per share is determined using net income and
weighted average common shares outstanding. Diluted earnings per
share is computed by dividing net income by the weighted average
common shares and assumed incremental common shares issued.
Amounts used in the determination of basic and diluted earnings
per share for the three and six month periods ended June 30, 1998
and 1997, are shown in the tables below:
Three Months Ended
6/30/98 6/30/97
--------- ---------
Net Income $ 2,091 $ 1,655
========= =========
Weighted average common shares
outstanding 9,360,744 9,468,268
Assumed incremental common shares
issued upon exercise of stock options 132,390 131,554
--------- ---------
Weighted average common shares for
diluted earnings per share 9,493,134 9,599,822
========= =========
Six Months Ended
6/30/98 6/30/97
--------- ---------
Net Income $ 4,572 $ 3,573
========= =========
Weighted average common shares
outstanding 9,416,092 9,470,876
Assumed incremental common shares issued
upon exercise of stock options 130,780 130,404
--------- ---------
Weighted average common shares for
diluted earnings per share 9,546,872 9,601,280
========= =========
NOTE 2: ACQUISITIONS
On July 17, 1998, the Company acquired all of the assets and
assumed certain liabilities of Arrow Motors Inc., a Wisconsin
corporation doing business as Lease Associates Group ("LAG") in
Milwaukee. With $28,000 in total assets, LAG was merged into
ULTEA, the Company's wholly-owned fleet leasing subsidiary. The
stockholders of LAG, at the acquisition date, received 287,644
shares of Heartland common stock and the remaining balance of
$1,929 in a promissory note payable over three years bearing a
rate of 7.50%. The excess of the purchase price over the fair
value of net assets acquired was $632. The transaction was
accounted for as a purchase transaction and, accordingly, the
results of operations will be included in the Consolidated
Financial Statements from the acquisition date. The pro forma
effect of the acquisition was not material to the financial
statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT
This report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. 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.
Total earnings of $2,091,000 for the second quarter of 1998 were
up $436,000 (26.34%) from the $1,655,000 recorded during the
second quarter of 1997. On a basic per common share basis, the
second quarter earnings increased from $.17 in 1997 to $.22 in
1998. Return on common equity for the second quarter of 1998 was
10.77% as compared to 9.24% for the same quarter in 1997. Return
on assets increased to .98% from .85% for the same periods under
comparison.
Net income for the first six months of 1998 increased $999,000
(27.96%) to $4,572,000 from the $3,573,000 posted during the
first six months of 1997. On a basic per common share basis,
earnings for the six months increased from $.38 in 1997 to $.49
in 1998. Return on common equity for the first half of 1998
increased to 11.79% from 10.06% in 1997. Return on assets was
1.08% for the first half of 1998 as compared to .95% for the same
period in 1997.
Growth of the Company's asset base and expansion of noninterest
income were responsible for increased earnings during the second
quarter and first six months of 1998 compared to the same periods
in 1997. Total assets grew $93,000,000 (11.82%) from
$787,000,000 on June 30, 1997, to $880,000,000 on June 30, 1998,
particularly as a result of expansion efforts in Rockford,
Illinois; Madison, Wisconsin; and Albuquerque, New Mexico. Major
contributors in the noninterest income area were securities
gains, rental income on operating leases and gains on sale of
loans.
The strong growth in noninterest income was partially offset by
an increase in noninterest expense during the periods under
comparison. Wisconsin Community Bank's opening of a new branch
location in Middleton, Wisconsin, along with the establishment of
a de novo banking operation in Albuquerque, New Mexico, were the
largest contributors to the growth in noninterest expense.
NET INTEREST INCOME
For the three and six month periods ended June 30, 1998, net
interest income increased $374,000 (5.51%) and $1,146,000
(8.68%), respectively, when compared to the same periods in 1997.
These increases were primarily attributable to the significant
growth in total assets.
The net interest margin expressed as a percentage of total assets
decreased to 3.74% for the second quarter of 1998 compared to
3.89% for the same period in 1997 and 3.82% for the first quarter
of 1998. This decrease resulted from the rate compression
experienced as a result of the flat yield curve.
NONINTEREST INCOME
Noninterest income increased $1,129,000 (63.71%) for the second
quarter of 1998 compared to the same period in 1997. On a
comparable year-to-date basis, noninterest income grew $2,228,000
(61.53%).
Securities gains increased by $310,000 (271.93%) during the three
month period and $678,000 (166.58%) during the six month period
ended June 30, 1998, compared to the same periods in 1997. The
strong performance of the Company's equity portfolio was
responsible for these continued gains.
During the three and six month periods ended on June 30, 1998,
rental income on operating leases grew $398,000 (235.50%) and
$671,000 (228.23%), respectively, compared to the same periods in
1997. The operations of ULTEA, the Company's fleet leasing
subsidiary, were responsible for these increases. The first
quarter of 1997 was ULTEA's first full quarter of operations as a
subsidiary of the Company.
Gains on sale of loans increased $260,000 (619.05%) and $492,000
(592.77%) during the second quarter and first six months of 1998,
respectively, as compared to the same periods in 1997. The
Company continued to experience refinancing activity in its real
estate mortgage loan portfolio as a result of decreasing interest
rates. The majority of these new fixed rate fifteen- and thirty-
year real estate loans were sold into the secondary market, while
the servicing of these loans was retained by the Company.
Insurance commissions increased $116,000 (40.56%) during the
first six months of 1998 over the same period in 1997 primarily
due to additional sales of annuity products as a result of
enhancements in this product line.
NONINTEREST EXPENSE
Noninterest expense increased $1,095,000 (18.95%) for the second
quarter of 1998 when compared to the same period in 1997. On a
comparable year-to-date basis, noninterest expense increased
$2,054,000 (18.62%).
Salaries and employee benefits, the largest component of
noninterest expense, increased $502,000 (15.64%) for the second
quarter of 1998 when compared to the same period in 1997. For
the first half of 1998, salaries and employee benefits expense
increased $1,030,000 (16.50%). This increase partially resulted
from the acquisition of Wisconsin Community Bank on March 1,
1997, and its subsequent opening of a branch facility in
Middleton, Wisconsin, in February of this year. Also
contributing to this increase were personnel additions related to
the opening in May of the Company's most recent de novo community
bank, New Mexico Bank and Trust located in Albuquerque, New
Mexico.
Fees paid for outside services declined $107,000 (14.44%) for the
first half of 1998 over the same period in 1997. The elimination
of data processing fees at First Community Bank was responsible
for the majority of this decrease.
During the three and six month periods ended on June 30, 1998,
depreciation on equipment under operating leases grew $288,000
(236.07%) and $482,000 (227.36%), respectively, compared to the
same periods in 1997. This increase was consistent with the
$5,493,000 (286.93%) growth ULTEA experienced in equipment under
operating leases for the twelve month period ended June 30, 1998.
Other noninterest expenses grew $303,000 (30.95%) during the
second quarter of 1998 compared to the same period in 1997. On a
year-to-date comparable basis, other noninterest expenses
increased $451,000 (24.26%). Maintenance expense and
amortization on software have contributed to this increase
primarily due to the conversion of the bank subsidiaries to
Fiserv's Comprehensive Banking Systems during the spring of 1997.
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 Heartland's third-party data processing vendor and
purchased software which is run on personal computer networks.
Early this year, Heartland completed an assessment and work plan
to assure that all hardware and software utilized by the
Heartland subsidiaries will function properly in the Year 2000.
To date, the Company has not been advised by any of its primary
vendors that they do not have plans in place to address and
correct their Year 2000 problems; however, no assurance can be
given as to the adequacy of such plans or to the timeliness of
their implementation. Detailed testing plans, including
contingencies, for all mission critical functions are scheduled
for implementation early this fall. Additionally, alarms,
elevators, heating and cooling systems and other computer-
controlled mechanical devices on which the Company relies are in
the process of being evaluated. Those found not compliant will
be modified or replaced with a compliant product. Costs
associated with the Year 2000 project include internal staff time
as well as consulting, equipment upgrade and software enhancement
expenses. At the present time, management has not identified any
situations that it anticipates will require material expenditures
to become fully compliant. The Year 2000 project costs, which
management continuously reviews, could vary significantly based
upon the results of testing and other factors.
Management is also aware of the potential adverse impact failures
by depositors and borrowers to adequately address their Year 2000
problems could have on the Company. To raise awareness to the
Year 2000 risks, substantially all key customers have been
contacted regarding this issue. Account officers continually
assess progress made by their key customers and any additional
exposure to the Company will be reflected by increased provisions
to the allowance for loan and lease losses.
INCOME TAX EXPENSE
Income tax expense for the second three months of 1998 increased
$111,000 (14.72%) over the same period in 1997. For the first
half of 1998, income tax expense increased $431,000 (28.21%) when
compared to the same period in 1997. These increases are
primarily the result of corresponding growth in pre-tax earnings.
The Company's effective tax rate remained flat at 29.99% for the
first half of 1998 compared to 29.96% for the same period in
1997.
FINANCIAL CONDITION
LOANS AND PROVISION FOR LOAN AND LEASE LOSSES
Net loans and leases remained stable during the first six months
of 1998, increasing $1,510,000 (.28%). Agricultural loan
outstandings experienced the most significant growth, increasing
$7,766,000 (11.21%) from December 31, 1997, to June 30, 1998.
Residential mortgage outstandings, the only category to
experience a decrease during the first half of 1998, declined
$15,403,000 (8.79%) as customers elected to take fixed rate
fifteen- and thirty-year mortgages which the bank subsidiaries
sold into the secondary market.
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; and 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. 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, 1998. The
allowance for loan and lease losses was increased $738,000
(10.02%)during the first half of 1998, of which $313,000 resulted
from a recovery on a previously charged off loan at First
Community Bank. As a percentage of total loans and leases, the
allowance for loan and lease losses was 1.45% on June 30, 1998,
1.32% on December 31, 1997, and 1.33% on June 30, 1997.
The Company's provision for possible loan and lease losses
decreased $139,000 (37.17%) and $110,000 (15.83%) for the three
and six month periods ended June 30, 1998, respectively, compared
to the same periods in 1997. During the first half of 1998, the
Company recorded net recoveries of $153,000 compared to net
charge offs of $66,000 recorded during the first half of 1997.
Nonperforming loans, defined as nonaccrual loans, restructured
loans and loans past due ninety days or more, decreased from
$2,032,000 at December 31, 1997, to $1,758,000 at June 30, 1998,
a $274,000 (13.48%) change. As a percentage of total loans and
leases, nonperforming loans were .31% at June 30, 1998, and .37%
on December 31, 1997.
SECURITIES
The dual objectives of the securities portfolio are to provide
the Company with sources of both liquidity and earnings.
Securities represented 23.59% of total assets at June 30, 1998,
as compared to 23.68% at December 31, 1997. During the first
half of 1998, the portion of the securities portfolio held in
mortgage-backed securities was increased to 50.53% from 43.68%.
To maximize the return on the portfolio, management decided to
increase its investment in fixed-rate collateralized mortgage
obligations ("CMO's"). To reduce its exposure to prepayments,
the Company purchased tightly structured tranches in well-
seasoned CMO's.
DEPOSITS AND BORROWED FUNDS
Total deposits grew $37,019,000 (5.94%) during the first six
months of 1998. Demand deposits experienced a decrease of
$1,077,000 (1.77%). Savings deposits increased $22,615,000
(8.96%) and certificates of deposit increased $15,481,000
(4.99%). These increases were primarily attributable to strong
growth at the Company's lead bank, Dubuque Bank and Trust, and
the de novo community banks of Riverside Community Bank and New
Mexico Bank and Trust.
Short-term borrowings generally include federal funds purchased,
treasury tax and loan note options, securities sold under
agreement to repurchase and short-term Federal Home Loan Bank
("FHLB") advances. These funding alternatives are utilized in
varying degrees depending on their pricing and availability.
Over the six month period ended June 30, 1998, the amount of
short-term borrowings decreased $20,897,000 (21.71%). This
change was primarily the result of the maturity of $20,000,000 in
FHLB advances, which was partially offset by the transfer of
$6,500,000 in FHLB borrowings from other borrowings due to
approaching maturities. Also contributing to the decrease was a
reduction in the amount of repurchase agreements requested by the
corporate cash management customers.
Other borrowings increased $10,969,000 (25.50%) during the first
half of 1998. Borrowings under Heartland's unsecured revolving
credit line were increased from $3,500,000 at December 31, 1997,
to $19,500,000 at June 30, 1998. These borrowings were used to
provide working capital to the nonbanking subsidiaries and to
meet general corporate commitments, including the $12,000,000
capital investment in New Mexico Bank and Trust. Also
contributing to this change was the $4,500,000 decrease in long-
term FHLB borrowings during the first six months of 1998 as a
result of the transfer of $6,500,000 to short-term borrowings and
an additional advance of $2,000,000. The Company's long-term
FHLB advances totaled $32,400,000 on June 30, 1998, at a weighted
average remaining term of 3.99 years and a weighted average rate
of 6.04%.
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)
6/30/98 12/31/97
Amount Ratio Amount Ratio
------ ----- ------ -----
Risk-Based Capital Ratios:(1)
Tier 1 capital $ 71,431 11.14% $ 71,713 11.54%
Tier 1 capital minimum
requirement 25,643 4.00% 24,854 4.00%
-------- ------ -------- ------
Excess $ 45,788 7.14% $ 46,859 7.54%
======== ====== ======== ======
Total capital $ 79,445 12.39% $ 78,995 12.71%
Total capital minimum
requirement 51,286 8.00% 49,707 8.00%
-------- ------ -------- ------
Excess $ 28,159 4.39% $ 29,288 4.71%
======== ====== ======== ======
Total risk adjusted assets $641,071 $621,338
======== ========
Leverage Capital Ratios:(2)
Tier 1 capital $ 71,431 8.36% $ 71,713 8.76%
Tier 1 capital minimum
requirement(3) 34,185 4.00% 32,729 4.00%
-------- ------ -------- ------
Excess $ 37,246 4.36% $ 38,984 4.76%
======== ====== ======== ======
Average adjusted assets
(less goodwill) $854,636 $818,232
======== ========
(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. As a result of the acquisition of
Wisconsin Community Bank, the Company has cash payments remaining
under the agreement of $823,000 in 1999, $594,000 in 2000 and
$584,000 in 2001, plus interest at rates of 7.00% to 7.50%.
On July 17, 1998, the Company completed the acquisition and
merger into ULTEA of Arrow Motors Inc., a Wisconsin corporation
doing business as Lease Associates Group. In conjunction with
this merger, the Company agreed to three equal cash payments of
$643,000 in 1999, 2000 and 2001, plus interest at 7.50%.
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 $6,201,000
during the first six months of 1998 compared to the same period
in 1997. Net principal disbursed on loans decreased $27,845,000
for the periods under comparison while net purchases of
securities increased $17,440,000.
Net cash inflows from financing activities increased $13,306,000
for the six month period ended June 30, 1998, compared to the same
period in 1997. Cash provided by a net change in deposits
increased $33,169,000 while cash provided by a net change in
borrowings decreased by $16,251,000 during the periods under
comparison.
Total cash inflows from operating activities increased $3,671,000
for the first half of 1998 compared to the same period of 1997.
Management of investing and financing activities, and market
conditions, determine the level and the stability of net interest
cash flows. Management attempts to mitigate the impact of
changes in market interest rates to the extent possible, so that
balance sheet growth is the principal determinant of growth in
net interest cash flows.
In the event of short term liquidity needs, the bank subsidiaries
may purchase federal funds from each other or from correspondent
banks. The bank subsidiaries may also borrow funds from the
Federal Reserve Bank, but have not done so during the periods
covered in this report. Also, the subsidiary banks' FHLB
memberships give them the ability to borrow funds for short- and
long-term purposes under a variety of programs.
The Company's revolving credit agreement provides for total
borrowings of up to $20,000,000 at any one time. The agreement
contains specific covenants which, among other things, limit
dividend payments and restrict the sale of assets by the Company
under certain circumstances. Also contained within the agreement
are certain financial covenants, including the maintenance by the
Company of a maximum nonperforming assets to total loans ratio,
minimum return on average assets ratio, maximum funded debt to
total equity capital ratio, and requires that each of the bank
subsidiaries remain well capitalized, as defined from time to
time by the federal banking regulators.
RECENT REGULATORY DEVELOPMENTS
The federal banking regulators have issued several statements
providing guidance to financial institutions on the steps the
regulators expect financial institutions to take to become Year
2000 compliant. Each of the federal banking regulators is also
examining the financial institutions under its jurisdiction to
assess each institution's compliance with the outstanding
guidance. If an institution's progress in addressing the Year
2000 problem is deemed by its primary federal regulator to be
less than satisfactory, the institution will be required to enter
into a memorandum of understanding with the regulator which will,
among other things, require the institution to promptly develop
and submit an acceptable plan for becoming Year 2000 compliant
and to provide periodic reports describing the institution's
progress in implementing the plan. Failure to satisfactorily
address the Year 2000 problem may also expose a financial
institution to other forms of enforcement action that its primary
federal regulator deems appropriate to address the deficiencies
in the institution's Year 2000 remediation program. Each of the
bank subsidiaries have been examined by their primary federal
regulator relative to the Year 2000 problem and none have been
required to enter into a memorandum of understanding with their
regulator.
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 20,
1998. At the meeting, Mark C. Falb, James A. Schmid and Robert
Woodward were elected to serve as Class II directors (term
expires in 2001). Continuing as Class III directors (term
expires in 1999) are Lynn S. Fuller and Evangeline K. Jansen.
Continuing as Class I directors (term expires in 2000) are Lynn
B. Fuller and Gregory R. Miller. The stockholders also approved
the amendment to the Certificate of Incorporation increasing the
number of authorized shares of the Company's Common Stock, $1.00
par value, from 7,000,000 to 12,000,000. In addition, the
stockholders approved the appointment of KPMG Peat Marwick LLP as
the Company's independent public accountants for the year ending
December 31, 1998.
There were 4,728,107 issued and outstanding shares of Common
Stock entitled to vote at the annual meeting. The voting results
on the above described items were as follows:
For Withheld
--- --------
Election of Directors
Mark C. Falb 4,253,876 198
James A. Schmid 4,252,676 1,398
Robert Woodward 4,253,876 198
Broker
For Against Abstain Non-Votes Total
Amendment to 4,183,256 55,567 15,251 0 4,728,107
Certificate of
Incorporation
Appointment of 4,242,611 1,240 10,223 0 4,728,107
KPMG Peat
Marwick LLP
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 13, 1998